About That Budget

Last week I wrote about societal aversion toward living on a budget and the integral role a budget plays in wealth accumulation, regardless of how much money you make. But it occurred to me that I should follow up with a post that provides some guidance on how to create a manageable budget that reflects your lifestyle.

Many people attempt to create a budget, and as soon as they pull out a year’s worth of bank statements and credit card bills, they are overwhelmed with despair, consumed with defeat, and convinced their financial life is too complicated to fall within a traditional budget. But guess what? Regardless of what your mom told you as a child, you’re not that special. Everyone has the capacity to create a meaningful budget that guides financial decisions throughout the year. To that end, here are four things to focus on when creating one:

Identify Fixed Expenses

Fixed expenses will generally comprise a majority of your budget, so they should create significant traction in the budgeting process. This category includes home mortgage, car note, student loans, cable/internet bill, subscriptions, etc. These items should be relatively easy to spot after simply comparing your current month to prior month bank and credit card statements.

Estimate Trends for Variable Expenses

Other bills, even if they recur monthly, may vary each billing cycle. For example, most utilities fluctuate depending on the time of year, but look back to a few different months throughout the year, and come up with an average. As for other expenses that vary year-to-year, such as medical bills, think about the last two years. If you rarely have any medical expenses, then don’t budget for any. However, the caveat for eliminating this type of expense from your budget is the assumption that you have a healthy savings reserve for unexpected expenses.

Use Account Aggregation Software

If you are using an Excel file to track your monthly expenses, unless you’re one of those people who enjoy creating spreadsheets, you will never update it or know if you are staying on track. It is much easier to use an app such as Mint or Expensify that aggregates your bank and credit card accounts, categorizes expenses, and alerts you when you are over budget. There are inherent security risks in providing personal financial information to these sites, but prudent users should be able to enjoy their benefits. As an alternative, some budget apps, such as YouNeedABudget.com, do not require account info. Instead, they allow you to upload statements into a Dropbox file.

Don’t Create a “Perfect” Budget

Perfection is the enemy of completion. A budget is meant to be a guide, not an oracle for predicting a year’s worth of expenses. So don’t approach it with the expectation of absolute precision, and don’t tackle so much detail that each expense becomes its own category. Start with just ten categories and let that guide you for a year. Then the following year, you will have twelve months of history to help you increase accuracy, so each year the process gets easier and more accurate.

Living on a budget isn’t an end to eating out or enjoying your hard earned money. It’s a plan to make sure you are spending money on things that actually make you happy and improve your quality of living. So focus on these four ideas, and create a budget that reflects your lifestyle and keeps you on track with your financial goals.

Disclosure:

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

On a Budget with a Bugatti

People are so averse to creating a budget that financial advisors across the country have tacitly agreed to change what we call them. Now we create “spending plans” to avoid the stigma. But why are budgets so stigmatized? In part, people don’t want to limit what they spend on themselves. And that aversion seems logical – If you buy something that brings you pleasure, you don’t want to feel bad about it. But there is something even more subtly nefarious at play. People don’t want to be “on a budget” because it seems too pedestrian; it implies that they cannot afford to live a comfortable lifestyle and must limit their spending.

But not all budgets have to be a scorched earth, living-on-rice-and-beans misery. Budgets help you reach a goal, even if that goal is the purchase of a Bugatti or winter home in Miami. The best kind of budget is created with your current lifestyle in mind, harnessing your financial strengths and leveraging them to maximize your wealth. Essentially, the purpose of a budget is to identify and eliminate expenses that add nothing to your lifestyle and prohibit you from building wealth. The best budgets increase savings, lower debt, while also increasing your standard of living.

The point of a good budget is to make you think before you spend money, not to prohibit spending entirely. It allows you to consider whether or not a given purchase falls within your financial plan. Buying and consuming in an impulsive manner isn’t healthy for anyone. If it becomes habit, not only will you become a selfishly entitled and miserable person to be around, it will also have a dramatic effect on maximizing wealth accumulation. The prototypical over spender maxes out multiple credit cards and lives well outside their means. In this case, a budget is necessary to fix a huge financial problem. But the principal still holds true with those who can spend money capriciously but shouldn’t.

For instance, if you absolutely love watches and adding to your collection truly makes you happy, then if it falls within your spending plan, you should absolutely not feel bad about spending whatever amount you and your spouse have determined is reasonable. But if you couldn’t care less about watches and only want one because a golfing buddy just bought one, then save the money for something that you will actually enjoy. Don’t waste money on an impulse; you know you’re going to spend money on your true passions, so savings and investments will always be shortchanged. In the end, you won’t be any happier, but you will be poorer.

So if you don’t have a spending plan in place, no matter how much money you make, you are missing opportunities to maximize your wealth and increase happiness. Talk to a financial advisor about establishing one that will help you fulfill your financial potential.

Disclosure:

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

How to Take the Fear Out of Self-Employment

Just kidding—you can't. It’s terrifying. But it is also very liberating and empowering. Small businesses live and die by cash flow, and if the bank balance descends below your comfort zone, it can cause some sleepless nights. On the other hand, your income is no longer contingent on salary increases and bonuses that are mostly out of your control. You can run your business however you see fit and create a commensurate income based on your success.

I bought a CPA firm when I was 25 and never looked back. I enjoy the independence and find that the fear fades in comparison to opportunities self-employment provides. Granted, my professional background does gives me a leg up on most small business owners. My two firms (LeFleur Financial and Corkern & Norris) are centered around helping others manage their financial lives, which includes individuals and the small businesses they run. So let me level the playing field and give my top four suggestions when making the move to work for yourself.

Watch Your Cash

Before you take the plunge and start your own business, make sure you have enough money saved to support your basic living expenses for at least six months. This amount may include rent or mortgage payments, car note, groceries, utilities, gas, etc. Or if you are married and your spouse has sufficient income, it’s even better to budget and live on their income exclusively. Expenses come up unexpectedly when you are starting out, so even if you are generating revenue, it may be going right back out to cover the costs of doing business.

Also, it is always better to use cash over credit, but if you are going to get a loan or line of credit, it is much better to ask for cash before you actually need it. You are more likely to get the loan and receive more favorable terms. I’m not advocating starting a business on credit, but there is a right way to go about financing your operation.

Get Set Up Right

No legitimate business should be a sole proprietorship, which is essentially a business run without any legal structure. The business is you, and you are the business. So if the business gets sued, then you get sued. It is way too easy to set up an LLC or corporation that creates a legal separation between you and your business not to. While they are sometimes a hassle to have prepared, these documents are extremely important to shield you from unnecessary liability.

You may also want to consult your tax professional to help you choose which kind of entity. By far the most common is an LLC, but there are economic and tax effects that should be considered in making this decision, especially if you are in business with one or more other individuals. And don’t forget about your insurance needs. If you are offering professional services like I do, you will need errors and omissions coverage. Other types of coverage are general liability, property, and workers' compensation.

Consider Taxes and Retirement

Depending on the structure and type of business you run, you will probably have to pay self-employment taxes on top of federal income taxes when you start working for yourself. This fact takes many people by surprise because while you may currently see the FICA and Social Security amounts that are taken from each of your paychecks, what you don’t see is the matching amount that your employer pays. So this tax is essentially doubled when you work for yourself because you have to match your own contributions.

However, when you own a business, many things you used to pay for personally can now be justifiably paid by the business. You should consult your tax professional on specific cases, but generally you can deduct your cell phone, many meals, mileage or even depreciation on a vehicle, trips that are partially business but also some vacation, etc.  If justified and documented, these types of expenses can be paid by your company to decrease your tax liability.

When you start a company, you also have to say goodbye to your employer-sponsored retirement plan that may even make matching contributions on your behalf. But if you are profitable, you can set up a retirement account for your company that could allow you to contribute much more than you were previously allowed. Especially if you are the only “employee” of the company, you can take advantage of a SEP or SIMPLE plan that has low administrative hurdles and allows you to sock away a large amount for retirement and further reduce your tax liability.

Evaluate an Existing Business

There are two primary reasons it would make sense to buy an existing business:  First, the current owner is getting older and no longer needs the money. The sale would help fund retirement, and he is ready to get out of the business. Second, the business is not currently making nearly as much money as it should because the current owner has poor management skills. So you either know the company is doing well and are willing to pay for it, or you see specific areas for improvement that would quickly turn the business around and know you’re getting a bargain.

Either way, you want to see the last three-to-five years of financial statements, bank statements, and tax returns to make sure you fully understand the company’s financial position. You should also have knowledge of business and industry trends, what is happening locally and globally as well as if there is any seasonality to revenue streams.

Working for yourself is scary, and it is not something everyone should pursue. But if the freedom and empowerment appeal to you more than the fear of failure, then you should absolutely give it a shot, and these suggestions should save you some trouble and money along the way.

Disclosure:

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

Smart Retirement Planning for Millennials

When you are just starting your career, it is difficult to think ahead to retirement. And if you are fortunate enough to have a job that makes decent money, chances are you work so much that you want to spend it on yourself when you finally get a break. As a result, there is a general lack of motivation for funding a healthy retirement plan, but those who are smart can do two simple things to put them way ahead of the curve.

First:  Get your employer match

Free money doesn’t exist, but the closest thing to it is an employer match for your work sponsored retirement plan. When you first started your job, you probably filled out a form regarding this plan, but your main concern at the time was probably how it would affect your net paycheck. What you didn’t realize is that your employer may match a portion of your contributions.

A typical arrangement would be a 50% match of employee contributions up to 3% of salary. So if you make $100,000 and elect to contribute 10% ($10,000), your employer would match the lower of 50% of your contributions ($5,000) or 3% of your salary ($3,000). So in addition to your $10,000 contribution, your employer would put in another $3,000. However, if you put in nothing or even less than 6%, you are leaving money on the table that your employer would have put into your retirement account. You earned it, so you might as well get it.

Second:  Don’t forget about Roth IRA contributions

Just because you have access to a retirement account at work doesn’t mean that you cannot or should not contribute to a Roth IRA. And if you don’t have access to an employer sponsored retirement plan, then you definitely should. The current maximum that you can contribute to an IRA in a year is $5,500, or if you are married, then you can each contribute for a total of $11,000. The primary limitation is your income, but if you are married and have gross income of less than $183,000 ($116,000 single), then you can contribute the full amount. Above these benchmarks, Roth contributions will be limited, but you should take advantage of whatever contributions you can make.

Disclosure:

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.

How to Manage a Financial Windfall

“What would you do if you won the lottery?” It’s a common question asked by people who really just want to tell you their answer, which usually involves some combination of Italian luxury goods, exclusive real estate, and daily freedom between the hours of 9 and 5. As they say, you’re more likely to get struck by lightning, but many people do find themselves in a similar situation, struggling to manage a financial windfall after receiving a divorce settlement, inheritance, life insurance payout, or proceeds for the sale of a business.

In all of these situations, it is important to remember the emotional component. Whether a marriage has ended, a family member has passed away, or a life’s work has been monetized, each event is life changing in more than just the financial sense. When you receive a windfall, it generally signifies that you have recently lost something too:  a marriage, loved one, or business. So it is important to take time and adjust to the new normal. In other words, do not make any big decisions (read:  purchases) before you have taken time to process.

Your first priority is to seek professional advice. If you are used to handling only a fraction of the funds you now have available, you will need guidance on setting priorities and establishing a game plan to maximize your new-found wealth. Look for someone paid on a “fee only” basis and not through sales commissions on financial products to ensure that you are actually receiving objective advice. This advisor will help set objectives like paying off debt, saving for retirement, and funding kids’ education.

Keep in mind, however, that you get your share, but Uncle Sam may also get his. Taxes do not apply to the receipt of inheritance, life insurance payouts, or divorce settlements. But they make a huge difference in alimony or during sale of a business. One strategy for reducing taxes on the sale of a business is seller financing. Setting up an installment sale for your business will allow you to defer recognition and resulting taxes on some of the gain. This technique is especially useful if it will keep you out of the highest bracket (39.6%) and spread your gain out evenly over a number of years.

A financial windfall also engenders a desire to give back to your church, community, or alma mater. This reaction is healthy and good, but you also want to have a plan for how much and when. It is easy to start writing checks whenever there is money in the bank and it is “for a good cause.” But you need to decide in advance what organizations are important to you, how much you want to set aside for them, and when you will be contributing. You want to have the greatest impact on the organizations most important to you and also create the greatest tax benefit for you. That attitude may sound selfish, especially in regard to giving, but this way of thinking is all a part of prudent financial planning.

Disclosure:

Josh Norris is an Investment Advisory Representative of LeFleur Financial. Josh can be reached at josh@LeFleurFinancial.com.