How to Avoid Probate in Canada

How to Avoid Probate in Canada.

Probate is the legal process of collecting and distributing a person's assets after his or her death. As attorney fees, court costs, probate fees, or taxes can be expensive, many choose to plan their estate in order to avoid probate. Avoiding probate generally means ensuring that certain assets do not become a part of your probate estate. To prevent assets from becoming a part of your estate and avoid probate in Canada, follow the steps below.

Steps.
1. Name beneficiaries on your life insurance policies. Life insurance is paid directly to the named beneficiary, so the funds never become a part of the probate estate, therefore not subject to probate taxes and fees. You may also wish to name a secondary beneficiary, in case the primary beneficiary predeceases you.
2. Hold your assets in cash and/or bearer certificates. Assets held in cash or bearer certificates, such as stock, may be excluded from the probate estate, reducing the amount of fees and taxes charged to it. A bearer certificate is a financial instrument, such as a check payable to ‘cash', which may be redeemed by any party possessing it.
3. Add a Pay on Death (“POD”) or Transfer on Death (“TOD”) designation to your accounts. This can only be done in the USA. Canada does not have such a law for non-registered investment accounts. Only registered accounts such as an RRSP, RRIF, TFSA accounts can have named beneficiaries. Joint ownership is the only way to avoid probate for non-registered accounts.
A POD or TOD designation allows you to decide to whom the property will transfer or be paid upon your death. As it will be paid or transferred directly to the designated party, it will not be subject to probate taxes. To name a POD or TOD, contact the bank or investment firm where the account is held. The procedure will vary from company to company and will most often involve filling out and returning a simple form.
4. Title your assets to a joint owner. Assets, which are held jointly with rights of survivorship, pass directly to the surviving joint owner, and never become subject to probate. Joint ownership is not right in all circumstances. You may wish to consider the following, before naming a joint owner of any of your assets.
A joint owner can clean out your accounts or otherwise encumber your property. Once a party owns an interest in your property, he or she may take out loans against it, or in the case of a bank or investment account, empty it. This can be done without your knowledge or consent.
You will need the cooperation of the joint owner in order to sell or mortgage the property. Once you name a joint owner, he or she will need to consent to any sale of the property, or any mortgage taken against it.
Naming a joint owner, when he or she is not the only beneficiary of the estate, may cause discontentment between heirs. The other beneficiaries may believe that the joint owner was only meant to hold the property in trust for all of the beneficiaries, and a dispute as to who should inherit the property can easily arise.
There may be tax consequences, such as capital gains property transfer tax, when naming joint owners of certain property. You may want to consult with a Certified General Account (“CGA”) or tax attorney before doing anything that may affect your obligation to pay taxes.
Just as a joint owner has a claim to the joint property, so does his or her creditors. Titling your property with another as a joint owner may subject it to the claims of the joint owner's creditors and/or his or her spouse.
5. Give gifts. Gifting your property now will reduce the value of the estate at your death, thereby reducing the amount of taxes and/or fees due. Be aware that certain legal requirements and/or obligations may apply when making inter-vivos gifts or to those made while you are alive, for the purpose of reducing probate taxes. These considerations include:
You must actually give up control of the gift to the giftee. For example, if you make a gift of an antique piece of furniture, you must deliver the piece to the giftee, and discontinue your possession of it. Another example is if you bestow a bank account upon another, you must add their name and remove yours from the title.
There may be tax consequences for the one who receives the gift. For example, if the fair market value (“FMV”) of the gift exceeds its cost, the accrued gain may be taxable as a capital gain. The Canadian Revenue Agency (“CRA”) defines FMV as “the highest price, expressed in dollars, that a property would bring in an open and unrestricted market, between a willing buyer and a willing seller who are both knowledgeable, informed, and prudent, and who are acting independently of each other.”
Property tax transfer and other fees may be due when gifting real estate to another. You may wish to consult with a CGA, tax attorney, or probate lawyer before transferring any real property to another party, in order to ensure that your legal and financial rights are protected.
6. Set up a trust. A trust allows you to title your property to it, to be held by an appointed trustee, on your behalf. You may appoint yourself as trustee if you choose. The trust will provide for the distribution of the property after your death. Since the property is owned by the trust, it never becomes a part of your probate estate and is not subject to probate taxes.
7. Title assets to your company. If you have outstanding debt other than a mortgage, that debt will not be subtracted from your assets when the value of your estate at the time of your death is determined. This will increase the value of your estate, causing a higher probate tax to apply. Transferring the loan and the asset purchased with it to a limited company will reduce the gross value of your estate, which in turn will reduce the amount of probate tax due.
8. Make two wills. Parties who hold certain assets may decide to make two wills. A Primary Will, which deals with those assets that are required to be subject to probate, and a Secondary Will, which provides direction as to the distribution of all other assets. While this is not a widely known practice, the Court in Ontario recently approved of this estate planning approach in Granovsky Estate v. Ontario.

Community Q&A.

Question : If a partial distribution was made as a part of the deceased mother's will and the son dies before final distribution, how is the balance handled?
Answer :  In most cases, the balance will be given to the next person listed in the document.
Question : Can a person's RRIF be allocated in a will to someone prior to death and avoid having to be a part of any probate?
Answer :  Registered accounts with named beneficiaries are not subject to probate calculation as it is not part of a taxable estate. If the named beneficiary is "Estate," then it will be subject to probate.
Question : Without a named beneficiary, does life insurance and RRSP go to the probate?
Answer :  Yes, without a named beneficiary any life insurance or RRSPs become part of the deceased's estate and are therefore subject to Estate Administration Tax.
Question : A wife, as beneficiary of a life insurance policy, predeceases the husband. Upon the husband's death, how can their children receive the proceeds of the policy?
Answer :  You must put the children down now as contingent beneficiaries. Contact the insurance provider of the policy.
Question : How do I avoid probate in Canada if everything the deceased has is cash in a bank?
Answer :  You will be able to avoid probate, but you will need to be cautious about how the cash is divided up afterwards. A huge addition of cash will probably put you in a different tax bracket, and you will have to pay more income tax as a result. You will need to find out what the tax burden will be on the amount you receive, if it's purely cash.
Question : What happens when probate is started on a will and then another will is found?
Answer :  The dates the documents were signed will determine the legitimacy. The later one should be the one that is used.
Question : How do I keep my family home from probate? I would like it to continue to be a family home for my children and to let them decide what to do with it in the future.
Answer :  Add their names to the title.Then it will automatically be their property and you will avoid probate, and also, depending on where you live, estate taxes.
Question : Can a financial institution make a claim for the beneficiary's share of an estate?
Answer :  All life insurance products such as deferred annuities or segregated funds are creditor-proof.
Question : Is there a waiver of probate form or a waiver for banks to release bank funds in Canada?
Answer :  In Canada, if the estate size is small, the beneficiary is the spouse and the strength of the relationship of the deceased and the beneficiary is know to be strong by staff of the bank, the financial institution can offer a waiver of probate on a case-by-case basis.
Question : How do I know how much tax I will pay in Ontario?
Answer :  Ontario's official government website has an estate administration tax calculator.

Tips.
If you wish to control when a beneficiary inherits the property, you may want to consider creating a trust instead of naming TODs and PODs.
Talk to your friends and family about how you wish for your personal property to be distributed upon your death. If you really want a specific person to have an item, and are unsure if your loved one's will abide by your wishes, simply give it to them now.

Warnings.

Naming a joint account owner on an account will allow the joint owner to withdraw all of your money or cause a lien to be placed on the account if they are sued and a judgment is entered against them. Naming a POD or TOD may be the safest way to ensure that your property passes to whom you wish, without giving up interest in it until after your death.
Before taking an action, which may affect your legal or financial rights and/or obligations, you should consult with a qualified barrister.
Avoiding probate is not right for everyone. You may wish to consult with a barrister in order to determine if taking steps to avoid probate is appropriate in your particular situation.

June 02, 2020

How to Manage Business Finances

How to Manage Business Finances.

Effective and efficient management of finances is critical to the growth and success of any small business. The easiest way to do this is to hire a dedicated accountant or bookkeeper right away. If you don't have the resources to hire a professional, take advantage of bookkeeping and other financial software to track your cash flow and generate reports. That way you can stay on top of your profits and act quickly to minimize losses.



Method 1 Taking Payments and Paying Expenses.

1. Create a budget and review it regularly. A budget is essential if you want your business to be profitable. Categorize your business's regular expenses to determine how much income your business needs to generate.

Creating multiple budgets can be helpful. For example, you may want to create one with a bare minimum of sales, so you know how to allocate the money when there isn't much coming in.

Use your budget to plan for the growth of your business, such as hiring a new employee or expanding your advertising and marketing.

2. Open a separate business bank account. Even if you're running your business as a sole proprietorship, you still want to keep your business finances separate from your personal finances. Mixing your assets together can cause problems if you're audited, or sued by a business creditor.

Don't take money from your business bank account to pay for personal expenses. If you need money from the business, label it appropriately as a draw from the business and transfer the money to your personal bank account first.

3. Decide what types of payment you'll accept. Having a variety of payment options is a convenience for your customers. Each method of payment has its own costs and risks that you'll want to take into account.

Cash is the simplest method of payment, but presents security risks. If you're going to take cash, have a secure safe and plan on making regular bank deposits.

If you want to take credit or debit cards, look into the different services to find the one that best suits your needs and your overall budget. You typically have to pay a subscription fee for the service, plus a fee per transaction. You may want to require a minimum purchase amount for credit or debit cards.

4. Standardize payment terms. You should have a policy in place that establishes rules for payment of your products or services. Apply those rules to all customers, rather than creating payment terms for individual clients on a piecemeal basis.

Universal payment terms will make your bookkeeping easier, and can smooth your collections process. If you apply the same terms across the board, you also don't have to worry about remembering the arrangements you made with each individual customer.



Method 2 Tracking Overall Cash Flow.

1. Choose your accounting method. To manage your business finances, you must choose either the cash or accrual accounting method and use it consistently. With the cash method, you record sales and expenses when money actually changes hands. For the accrual method, on the other hand, you record sales and expenses when they take place, rather than when money changes hands.

For example, suppose you are a construction contractor and you receive an invoice. If you were using the cash method, you would record the expense in your books when you actually paid the invoice. However, if you were using the accrual method you would record it the day you received it, even if you didn't pay it for several days or weeks.

Cash accounting works better if you have a small business that deals primarily with point-of-sale transactions. If you deal with larger contracts that aren't paid all at once, the accrual method may be a better option for you.

2. Record all sales and expenses. Set up a system so that all sales and expenses are put on the books the day they occur, following the accounting method you've chosen. Only doing the books on a monthly or quarterly basis may result in errors.

If you have a store, you can use a point of sale system to track sales and produce reports that you can easily use to reconcile your books each day.

When you have employees or other partners buying things for the business, make sure you get those receipts as soon as possible so you can keep your books up to date.

3. Purchase bookkeeping software. There are a number of bookkeeping programs, such as QuickBooks, that you can purchase and use to manage your business finances. Most of these programs are arranged so that you pay a monthly subscription fee to use the service.

When you use a subscription, software-as-a-service platform, your data is stored in the cloud so that you don't have to worry as much about security or data loss.

These programs can be connected to your business bank accounts, credit cards, and other systems so that much of the information is entered into your books automatically.

4. Hire an accountant if you need help. If you don't have accounting and bookkeeping education and experience, you may want to hire someone who does. Particularly if you've borrowed money to start up your business, a professional can help you avoid potentially costly mistakes.

Check with the local licensing or regulatory authority to make sure any financial professional you want to hire has all the necessary education and certifications, and that their licenses are active and free of any disciplinary actions.

If you can't afford to have someone working for your business full-time, you may be able to consult with an accountant periodically, or use a bookkeeper occasionally to go over your books and correct any errors.



Method 3 Generating Financial Reports.

1. Download bookkeeping software to simplify report creation. When you use bookkeeping software, you also have the ability to generate the financial reports you need with the click of a button. However, the reports created are only as good as the information you put into the software.

Go over your sales and expenses before you generate your final reports. Reconcile your books with your receipts and bank account statements to make sure the information is correct.

Once you're satisfied with the information, click through to create your reports. You'll typically be prompted to enter the dates you want the report to cover, and the specific information you want included.

2. Create quarterly profit and loss (P&L) reports. Your P&L reports are among the most important tools for assessing and growing your business. Many bookkeeping programs will generate these reports for you if you input the parameters of the report you want.

Your P&L starts with your total sales. You then subtract from those sales the cost of the products or services sold to get your gross profit.

Take your gross profit and subtract other expenses, such as rent or utilities, from that number. You'll be left with your net profit for the time period.

P&L reports are especially important if you anticipate needing small business loans or other outside funding.

3. Prepare quarterly business financial statements. In addition to your P&L, there are several other statements, such as your cash flow statement and your balance sheet, that help you determine where money is flowing in and out of your business.

Your cash flow statement reports the increase or decrease of money flowing into your business. You can quickly see the amount of cash on hand and what you did with it, as well as where that money came from (whether from sales or other sources, such as a loan).

The balance sheet summarizes your business's assets and liabilities. It will be particularly helpful if you have a business credit card, or if you've taken out a small business loan to help fund the start up of your business.

4. Update your projections based on your actual cash flow. Your business plan likely includes cash flow and profit projections several years into the future. As you operate your business, you'll want to check periodically and make sure these projections are still accurate given your business's actual performance.

Look at your business plan and update it twice a year. You also want to update it any time you're applying for a small business loan or courting investors, so they have the most up-to-date information to make their decision.

Depending on how your actual performance compares to your initial expectations, you also may want to adjust some of your business goals and plans for growth or expansion.



Method 4 Filing Business Taxes.

1. Get a separate tax ID number for your business. Even if you're running your business as a sole proprietorship, a separate tax ID number for your business will help keep your business and personal finances separate.

If you have a US business, you can get an employer identification number (EIN) easily online at the IRS's website. Simply go to https://sa.www4.irs.gov/modiein/individual/index.jsp and begin your application.

In other countries, consult a tax professional or business attorney to find out what you need to do to correctly document your business for tax purposes.

2. Choose your tax year. For tax purposes, you can use the calendar year, or any 12-month period that starts on a specific date. In most cases, it's easiest to use the calendar year. When you choose your tax year, you have to use it consistently as long as you remain in business. Typically, you can't change it later.

Most businesses use the calendar year as their tax year. If you're thinking about using a different 12-month period, you may want to consult an attorney or tax professional first.

3. Maintain records of deductible expenses. When you run your own business, you have the ability to deduct many of your business-related expenses on your taxes. These deductions lower your profits and decrease your business's tax liability.

Generally, anything you buy to conduct business will be at least partially deductible. The expense must be reasonable. If you're unsure about something, save the receipts and discuss it with a qualified tax professional.

Expenses such as rent and utilities for commercial space, computers, and office supplies are examples of business expenses that typically are deductible.

4. Use depreciation for more costly assets and fixtures. If you buy something to use in your business that you anticipate using for many years, you typically can't deduct the entire cost at once. Rather, you deduct a portion of it for several years.

The amount and length of time you can claim depreciation depends on how the expense is categorized and the length of its useful life. These are defined by the government.

If you have a significant amount of purchases that are subject to depreciation, it's a good idea to have a tax professional do your taxes so you can make sure you're depreciating them using the right method and getting the maximum possible deduction.

5. Check tax and licensing obligations with your state or local government. State and local governments also may tax businesses, or require you to maintain certifications or licenses if you want to operate your business.

Your local small business association or chamber of commerce typically will have information on the licenses required to operate a small business in your area.

Visit the website of your state or local government tax authority to find out what taxes you must pay as a business owner. For example, if you have employees you typically are required to pay for worker's compensation insurance.

6. Set up the correct withholding for any employees. If you hire regular employees and pay them salary or hourly wages, you must withhold federal taxes and Social Security from their paychecks. You also may need to withhold for state taxes.

Many small businesses contract with a payroll service to take care of their withholding and the issuing of paychecks for them. Talk to business owners in your area to find out how they handle payroll.

7. Pay quarterly estimated taxes. As a business owner, you typically must pay taxes on a quarterly basis and then reconcile on the business tax return at the end of the year. Your state may have estimated tax filing requirements as well.

Depending on the nature of your business, you also may have to collect state or local sales tax for all purchases.

8. Use a tax preparation service to simplify the process. Many companies that offer bookkeeping services also have tax preparation services. Connecting the accounts together can save you a lot of hassle because they will automatically categorize your deductions and estimate quarterly tax payments for you.

As with bookkeeping services, tax preparation services are only as good as the information you put into them. If you're unsure about whether something qualifies as a deduction, talk to a qualified tax professional.

February 10, 2020

how to manage business finances

How to Manage Business Finances.

Effective and efficient management of finances is critical to the growth and success of any small business. The easiest way to do this is to hire a dedicated accountant or bookkeeper right away. If you don't have the resources to hire a professional, take advantage of bookkeeping and other financial software to track your cash flow and generate reports. That way you can stay on top of your profits and act quickly to minimize losses.



Method 1 Taking Payments and Paying Expenses.

1. Create a budget and review it regularly. A budget is essential if you want your business to be profitable. Categorize your business's regular expenses to determine how much income your business needs to generate.

Creating multiple budgets can be helpful. For example, you may want to create one with a bare minimum of sales, so you know how to allocate the money when there isn't much coming in.

Use your budget to plan for the growth of your business, such as hiring a new employee or expanding your advertising and marketing.

2. Open a separate business bank account. Even if you're running your business as a sole proprietorship, you still want to keep your business finances separate from your personal finances. Mixing your assets together can cause problems if you're audited, or sued by a business creditor.

Don't take money from your business bank account to pay for personal expenses. If you need money from the business, label it appropriately as a draw from the business and transfer the money to your personal bank account first.

3. Decide what types of payment you'll accept. Having a variety of payment options is a convenience for your customers. Each method of payment has its own costs and risks that you'll want to take into account.

Cash is the simplest method of payment, but presents security risks. If you're going to take cash, have a secure safe and plan on making regular bank deposits.

If you want to take credit or debit cards, look into the different services to find the one that best suits your needs and your overall budget. You typically have to pay a subscription fee for the service, plus a fee per transaction. You may want to require a minimum purchase amount for credit or debit cards.

4. Standardize payment terms. You should have a policy in place that establishes rules for payment of your products or services. Apply those rules to all customers, rather than creating payment terms for individual clients on a piecemeal basis.

Universal payment terms will make your bookkeeping easier, and can smooth your collections process. If you apply the same terms across the board, you also don't have to worry about remembering the arrangements you made with each individual customer.



Method 2 Tracking Overall Cash Flow.

1. Choose your accounting method. To manage your business finances, you must choose either the cash or accrual accounting method and use it consistently. With the cash method, you record sales and expenses when money actually changes hands. For the accrual method, on the other hand, you record sales and expenses when they take place, rather than when money changes hands.

For example, suppose you are a construction contractor and you receive an invoice. If you were using the cash method, you would record the expense in your books when you actually paid the invoice. However, if you were using the accrual method you would record it the day you received it, even if you didn't pay it for several days or weeks.

Cash accounting works better if you have a small business that deals primarily with point-of-sale transactions. If you deal with larger contracts that aren't paid all at once, the accrual method may be a better option for you.

2. Record all sales and expenses. Set up a system so that all sales and expenses are put on the books the day they occur, following the accounting method you've chosen. Only doing the books on a monthly or quarterly basis may result in errors.

If you have a store, you can use a point of sale system to track sales and produce reports that you can easily use to reconcile your books each day.

When you have employees or other partners buying things for the business, make sure you get those receipts as soon as possible so you can keep your books up to date.

3. Purchase bookkeeping software. There are a number of bookkeeping programs, such as QuickBooks, that you can purchase and use to manage your business finances. Most of these programs are arranged so that you pay a monthly subscription fee to use the service.

When you use a subscription, software-as-a-service platform, your data is stored in the cloud so that you don't have to worry as much about security or data loss.

These programs can be connected to your business bank accounts, credit cards, and other systems so that much of the information is entered into your books automatically.

4. Hire an accountant if you need help. If you don't have accounting and bookkeeping education and experience, you may want to hire someone who does. Particularly if you've borrowed money to start up your business, a professional can help you avoid potentially costly mistakes.

Check with the local licensing or regulatory authority to make sure any financial professional you want to hire has all the necessary education and certifications, and that their licenses are active and free of any disciplinary actions.

If you can't afford to have someone working for your business full-time, you may be able to consult with an accountant periodically, or use a bookkeeper occasionally to go over your books and correct any errors.



Method 3 Generating Financial Reports.

1. Download bookkeeping software to simplify report creation. When you use bookkeeping software, you also have the ability to generate the financial reports you need with the click of a button. However, the reports created are only as good as the information you put into the software.

Go over your sales and expenses before you generate your final reports. Reconcile your books with your receipts and bank account statements to make sure the information is correct.

Once you're satisfied with the information, click through to create your reports. You'll typically be prompted to enter the dates you want the report to cover, and the specific information you want included.

2. Create quarterly profit and loss (P&L) reports. Your P&L reports are among the most important tools for assessing and growing your business. Many bookkeeping programs will generate these reports for you if you input the parameters of the report you want.

Your P&L starts with your total sales. You then subtract from those sales the cost of the products or services sold to get your gross profit.

Take your gross profit and subtract other expenses, such as rent or utilities, from that number. You'll be left with your net profit for the time period.

P&L reports are especially important if you anticipate needing small business loans or other outside funding.

3. Prepare quarterly business financial statements. In addition to your P&L, there are several other statements, such as your cash flow statement and your balance sheet, that help you determine where money is flowing in and out of your business.

Your cash flow statement reports the increase or decrease of money flowing into your business. You can quickly see the amount of cash on hand and what you did with it, as well as where that money came from (whether from sales or other sources, such as a loan).

The balance sheet summarizes your business's assets and liabilities. It will be particularly helpful if you have a business credit card, or if you've taken out a small business loan to help fund the start up of your business.

4. Update your projections based on your actual cash flow. Your business plan likely includes cash flow and profit projections several years into the future. As you operate your business, you'll want to check periodically and make sure these projections are still accurate given your business's actual performance.

Look at your business plan and update it twice a year. You also want to update it any time you're applying for a small business loan or courting investors, so they have the most up-to-date information to make their decision.

Depending on how your actual performance compares to your initial expectations, you also may want to adjust some of your business goals and plans for growth or expansion.



Method 4 Filing Business Taxes.

1. Get a separate tax ID number for your business. Even if you're running your business as a sole proprietorship, a separate tax ID number for your business will help keep your business and personal finances separate.

If you have a US business, you can get an employer identification number (EIN) easily online at the IRS's website. Simply go to https://sa.www4.irs.gov/modiein/individual/index.jsp and begin your application.

In other countries, consult a tax professional or business attorney to find out what you need to do to correctly document your business for tax purposes.

2. Choose your tax year. For tax purposes, you can use the calendar year, or any 12-month period that starts on a specific date. In most cases, it's easiest to use the calendar year. When you choose your tax year, you have to use it consistently as long as you remain in business. Typically, you can't change it later.

Most businesses use the calendar year as their tax year. If you're thinking about using a different 12-month period, you may want to consult an attorney or tax professional first.

3. Maintain records of deductible expenses. When you run your own business, you have the ability to deduct many of your business-related expenses on your taxes. These deductions lower your profits and decrease your business's tax liability.

Generally, anything you buy to conduct business will be at least partially deductible. The expense must be reasonable. If you're unsure about something, save the receipts and discuss it with a qualified tax professional.

Expenses such as rent and utilities for commercial space, computers, and office supplies are examples of business expenses that typically are deductible.

4. Use depreciation for more costly assets and fixtures. If you buy something to use in your business that you anticipate using for many years, you typically can't deduct the entire cost at once. Rather, you deduct a portion of it for several years.

The amount and length of time you can claim depreciation depends on how the expense is categorized and the length of its useful life. These are defined by the government.

If you have a significant amount of purchases that are subject to depreciation, it's a good idea to have a tax professional do your taxes so you can make sure you're depreciating them using the right method and getting the maximum possible deduction.

5. Check tax and licensing obligations with your state or local government. State and local governments also may tax businesses, or require you to maintain certifications or licenses if you want to operate your business.

Your local small business association or chamber of commerce typically will have information on the licenses required to operate a small business in your area.

Visit the website of your state or local government tax authority to find out what taxes you must pay as a business owner. For example, if you have employees you typically are required to pay for worker's compensation insurance.

6. Set up the correct withholding for any employees. If you hire regular employees and pay them salary or hourly wages, you must withhold federal taxes and Social Security from their paychecks. You also may need to withhold for state taxes.

Many small businesses contract with a payroll service to take care of their withholding and the issuing of paychecks for them. Talk to business owners in your area to find out how they handle payroll.

7. Pay quarterly estimated taxes. As a business owner, you typically must pay taxes on a quarterly basis and then reconcile on the business tax return at the end of the year. Your state may have estimated tax filing requirements as well.

Depending on the nature of your business, you also may have to collect state or local sales tax for all purchases.

8. Use a tax preparation service to simplify the process. Many companies that offer bookkeeping services also have tax preparation services. Connecting the accounts together can save you a lot of hassle because they will automatically categorize your deductions and estimate quarterly tax payments for you.

As with bookkeeping services, tax preparation services are only as good as the information you put into them. If you're unsure about whether something qualifies as a deduction, talk to a qualified tax professional.

February 08, 2020

How to Protect Your Finances Against Market Crashes

How to Protect Your Finances Against Market Crashes.

Economic expansions don't last forever, and eventually, the country will enter another recession. When it does, you need to protect your investments so that you can weather the storm. Assess how exposed you are to stocks and decide whether to diversify your portfolio with safer investments. Also clean up your balance sheet by reducing your debts, which will allow you to survive the recession that accompanies a stock market crash.

Method 1 Changing Your Investments.

1. Check your current investment allocation. You might have no idea what your retirement fund is currently invested in. If not, log into your account and print out the current allocation of investments, which should include the following:

stocks or stock mutual funds, bonds,real estate,money market accounts.

2. Identify why you fear a market crash. The economy goes up and down with some regularity, and when the market crashes stocks suddenly become cheaper to buy. For this reason, you might not want to diversify your portfolio. Instead, you can leave your investments as they are.

However, you might want to reduce your exposure to risk if you are nearing your retirement age or have just entered retirement. A major stock market crash could seriously cut the amount of money you have to live on.

Your tolerance for risk might also have changed. If so, then you can diversify your portfolio so that you are comfortable with your investment mix.

It’s impossible to predict exactly when the next recession will hit, so you shouldn’t move money in and out of the stock market hoping to get out just before things turn south. For example, it looked like the U.S. stock market was about to crash in late 2015. Since then, the Dow Jones Industrial Average has increased more than 20%.

3. Consider holding money in a savings account. The easiest way to protect your investments is to get out of stocks and move the money to savings accounts. Consider the following options:

High-yield online savings accounts. These accounts will only earn about 1-2% annually, but this amount is higher than most banks offer. Your cash is liquid, so you can access it if needed. Furthermore, your deposit will be protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 USD.

Money market accounts. These accounts are like bank accounts but with potentially higher returns. You can write checks against the money market account. Open with your bank or with a company like Scottrade or TD Ameritrade.

Certificates of Deposit. Banks and credit unions sell "CDs," which you can buy for a set sum. You are prohibited from accessing the money until the CD matures, but you will earn interest on the investment.

4. Invest in bonds. Bonds are debt. Companies, as well as governments, issue bonds to raise money, and bonds are a safer investment than stock. Consider putting more of your investment into bonds, such as the following:

Municipal bonds. State and local governments issue bonds to raise money, and in return the bonds are exempted from income taxes. You can typically earn 3% annually on bonds. They are a low-risk investment, unless the city government is on the verge of bankruptcy.

U.S. savings bonds. These bonds are very safe. With a Series I bond, you get a fixed interest rate, and your return is linked to inflation. With the Series EE bond, you earn an automatic rate of return each month.

Treasury Inflation Protected Securities (TIPS). The U.S. government offers a fixed interest rate as well as inflation protection that’s triggered every time inflation increases.

Image titled Protect Your Finances Against Market Crashes Step 5

5. Consider annuities. An annuity is a contract with an insurer or financial services company. You make a lump sum payment, and in return you are provided with a fixed sum of money for a specific amount of time. There are several varieties of annuities, which can protect your investments in case of a market crash. For example, fixed-indexed annuities can protect your principal.

Annuities are safer than stocks, but they do have some risks. For example, the company you bought the annuity from could go bankrupt. In that situation, you will no longer be paid. You can protect yourself by doing thorough research and only buying an annuity from a company with the highest rating.

The value of an annuity can also erode with inflation, though you can buy annuities that will protect against inflation.

6. Find safer stocks. Not all companies are the same, and some are safer investments in a down economy than others. For example, you might want to get rid of low-grade stock, such as companies with a lot of debt or businesses in speculative fields like biotech that have not yet produced strong profits. In a market crash, the value of these companies will decline.

Instead, look to high-quality stocks which tend to hold up better. These companies have stable earnings and low debt.

Also consider stocks that pay dividends. Check if you can invest in a dividend exchange-traded fund.

7. Change your contributions. If you’re not yet in retirement, you should consider changing the allocation of your retirement contributions for the last few years before you stop working. Direct your contributions toward safer investments, such as those discussed above.

Changing your contributions will not change the allocation of investments already in your portfolio, so consider diversifying it.

8. Diversify your portfolio. When the market is good, riskier investments such as stocks perform well. But when the market crashes, you can expect stocks to perform poorly. Accordingly, you might want to diversity your portfolio and move some money out of stocks.

How much to move is up to you. However, you don’t have to get out of stocks entirely. Instead, you could reduce stocks to 30% of your portfolio, and have the other 70% in bonds or another safe investment. In a market crash, your losses will remain in the single digits, and you can move back into stocks after the market improves.

If you don’t know what to do, meet with a financial planner who can help you assess your risk tolerance and come up with a plan suited to your needs.

Method 2 Reducing Your Debt.

1. Identify all of your debts. In a market crash, you’ll need as much cash as possible to pay for living expenses. Accordingly, you want to decrease your debt load as much as possible now. Begin by identifying every debt you have, including any of the following:

student loan debt, credit card debt, home mortgage,car loan,personal loans.

2. Prioritize your debts. You need to make the minimum monthly payments on all debts. However, you should direct extra money to the debts you want to pay off the most. Accordingly, sit down and prioritize your debts.

For example, if you lose your job, then you can often delay payments on student loans, using either forbearance or deferment. Accordingly, you might not want to pay down your student loans first but instead focus on credit cards, which probably have a higher interest rate.

However, some debts are tied to an asset. For example, you can lose your car or home if you don’t make payment. Paying these debts off early could be a wise choice.

3. Create a budget. To free up money to contribute to debt payments, you’ll need to budget. Identify the following:

Your fixed expenses. These are bills that don’t change much month to month. Generally, fixed expenses are also for necessities, such as your rent or mortgage, health insurance premiums, car payments, and other debts.

Your discretionary spending. You can track your discretionary spending over the course of one or two months. Write down what you buy every day and note the price. Alternately, you can buy everything with a debit or credit card and then look at your monthly statement.

Reduce discretionary spending. You need your income to exceed your discretionary spending. To free up as much money as possible, reduce discretionary spending to the bare minimum by giving up gym memberships and cable TV. You can also cut out vacations, entertainment expenses, and meals in restaurants.

4. Refinance your mortgage. Mortgage rates are still low. If you have a high APR, then consider refinancing into a loan with a lower one. Avoid spending the money that you save and instead funnel it toward debt repayment.

To investigate a mortgage refinance, contact your current lender to check what rate they can offer you. Then compare their rates to others on the market.

5. Tackle credit card debt. You want a stable balance sheet when the market crashes, so you should reduce your debts as much as possible. In particular, you should pay down high-interest credit card debt. Identify a method of repayment so that you can wipe out these debts as soon as possible:

Debt avalanche. You pay the minimum monthly payment on all credit cards. Then you contribute extra money to the debt with the highest interest rate. Once you pay off that card, focus on the debt with the second highest interest rate.

Debt snowball. Another method is to pay the minimum on your monthly debts but then use extra to pay off the card with the smallest balance first. The debt snowball method is more expensive than the debt avalanche, but it can give you momentum.

Debt snowflake. This method is ideal for people who can’t budget extra money to pay down debt. Instead, you try to save a little bit of money every day and make multiple monthly payments to slowly chip away at your debt.

Method 3 Preparing for Emergencies.

1. Build an emergency fund. You’ll need money in case you lose your job or if any kind of emergency springs up. Generally, you should save at least six months of expenses. If possible, save up to twelve months of expenses.

Put money toward your emergency fund every month, even if that means you pay off debts more slowly.

If you are a retiree, then you should try to have two years of expenses saved. When the market declines, you should live off your savings instead of drawing income from your investments.

2. Buy insurance. Insurance protects you from any unforeseen accidents that will hammer you financially. In an economic downturn, you’ll need all the money you can get, and insurance will provided valuable protection in case an accident strikes. Consider the following types of insurance:

Health insurance. If your employer doesn’t offer it, you can buy it on the government exchanges. Depending on your income, you might quality for a premium subsidy and/or help with out-of-pocket expenses.

Automobile insurance. Your insurance will pay if you injure someone in an accident. Depending on the insurance, you might also be covered if someone without coverage injures you.

Disability insurance. If you are disabled before you reach retirement, you’ll need income to support you. Your employer probably offers disability insurance. If not, you can shop on your own.

Life Insurance. You can replace the income of a working spouse with a life insurance policy. Life insurance is particularly important if you have young children. Calculate how much life insurance you need at lifehappens.org.

Homeowner’s insurance. Your homeowner’s policy covers injuries that occur on your property, as well as any structural damage caused by natural disasters and other accidents.

3. Assess the stability of your job. In a market crash, many jobs will be wiped out as employers are forced to lay off workers. You need to assess whether your job is stable enough to survive a recession, or whether you should plan on getting a different job.

Look at how many people your employer laid off during the last recession. Were only a few let go? If so, your job might be secure. However, if your employer engaged in mass layoffs, then there’s no reason to assume it won’t happen again.

You can also pick up some freelance or part-time work now. That way, if the market crashes, you’ll still have some income coming in.

Tips.

Consult with a personal financial counselor to help plan, protect, and control how your finances and money in the future.

January 18, 2020

how to protect your finances against market crashes

How to Protect Your Finances Against Market Crashes.

Economic expansions don't last forever, and eventually, the country will enter another recession. When it does, you need to protect your investments so that you can weather the storm. Assess how exposed you are to stocks and decide whether to diversify your portfolio with safer investments. Also clean up your balance sheet by reducing your debts, which will allow you to survive the recession that accompanies a stock market crash.

Method 1 Changing Your Investments.

1. Check your current investment allocation. You might have no idea what your retirement fund is currently invested in. If not, log into your account and print out the current allocation of investments, which should include the following:

stocks or stock mutual funds, bonds,real estate,money market accounts.

2. Identify why you fear a market crash. The economy goes up and down with some regularity, and when the market crashes stocks suddenly become cheaper to buy. For this reason, you might not want to diversify your portfolio. Instead, you can leave your investments as they are.

However, you might want to reduce your exposure to risk if you are nearing your retirement age or have just entered retirement. A major stock market crash could seriously cut the amount of money you have to live on.

Your tolerance for risk might also have changed. If so, then you can diversify your portfolio so that you are comfortable with your investment mix.

It’s impossible to predict exactly when the next recession will hit, so you shouldn’t move money in and out of the stock market hoping to get out just before things turn south. For example, it looked like the U.S. stock market was about to crash in late 2015. Since then, the Dow Jones Industrial Average has increased more than 20%.

3. Consider holding money in a savings account. The easiest way to protect your investments is to get out of stocks and move the money to savings accounts. Consider the following options:

High-yield online savings accounts. These accounts will only earn about 1-2% annually, but this amount is higher than most banks offer. Your cash is liquid, so you can access it if needed. Furthermore, your deposit will be protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 USD.

Money market accounts. These accounts are like bank accounts but with potentially higher returns. You can write checks against the money market account. Open with your bank or with a company like Scottrade or TD Ameritrade.

Certificates of Deposit. Banks and credit unions sell "CDs," which you can buy for a set sum. You are prohibited from accessing the money until the CD matures, but you will earn interest on the investment.

4. Invest in bonds. Bonds are debt. Companies, as well as governments, issue bonds to raise money, and bonds are a safer investment than stock. Consider putting more of your investment into bonds, such as the following:

Municipal bonds. State and local governments issue bonds to raise money, and in return the bonds are exempted from income taxes. You can typically earn 3% annually on bonds. They are a low-risk investment, unless the city government is on the verge of bankruptcy.

U.S. savings bonds. These bonds are very safe. With a Series I bond, you get a fixed interest rate, and your return is linked to inflation. With the Series EE bond, you earn an automatic rate of return each month.

Treasury Inflation Protected Securities (TIPS). The U.S. government offers a fixed interest rate as well as inflation protection that’s triggered every time inflation increases.

Image titled Protect Your Finances Against Market Crashes Step 5

5. Consider annuities. An annuity is a contract with an insurer or financial services company. You make a lump sum payment, and in return you are provided with a fixed sum of money for a specific amount of time. There are several varieties of annuities, which can protect your investments in case of a market crash. For example, fixed-indexed annuities can protect your principal.

Annuities are safer than stocks, but they do have some risks. For example, the company you bought the annuity from could go bankrupt. In that situation, you will no longer be paid. You can protect yourself by doing thorough research and only buying an annuity from a company with the highest rating.

The value of an annuity can also erode with inflation, though you can buy annuities that will protect against inflation.

6. Find safer stocks. Not all companies are the same, and some are safer investments in a down economy than others. For example, you might want to get rid of low-grade stock, such as companies with a lot of debt or businesses in speculative fields like biotech that have not yet produced strong profits. In a market crash, the value of these companies will decline.

Instead, look to high-quality stocks which tend to hold up better. These companies have stable earnings and low debt.

Also consider stocks that pay dividends. Check if you can invest in a dividend exchange-traded fund.

7. Change your contributions. If you’re not yet in retirement, you should consider changing the allocation of your retirement contributions for the last few years before you stop working. Direct your contributions toward safer investments, such as those discussed above.

Changing your contributions will not change the allocation of investments already in your portfolio, so consider diversifying it.

8. Diversify your portfolio. When the market is good, riskier investments such as stocks perform well. But when the market crashes, you can expect stocks to perform poorly. Accordingly, you might want to diversity your portfolio and move some money out of stocks.

How much to move is up to you. However, you don’t have to get out of stocks entirely. Instead, you could reduce stocks to 30% of your portfolio, and have the other 70% in bonds or another safe investment. In a market crash, your losses will remain in the single digits, and you can move back into stocks after the market improves.

If you don’t know what to do, meet with a financial planner who can help you assess your risk tolerance and come up with a plan suited to your needs.

Method 2 Reducing Your Debt.

1. Identify all of your debts. In a market crash, you’ll need as much cash as possible to pay for living expenses. Accordingly, you want to decrease your debt load as much as possible now. Begin by identifying every debt you have, including any of the following:

student loan debt, credit card debt, home mortgage,car loan,personal loans.

2. Prioritize your debts. You need to make the minimum monthly payments on all debts. However, you should direct extra money to the debts you want to pay off the most. Accordingly, sit down and prioritize your debts.

For example, if you lose your job, then you can often delay payments on student loans, using either forbearance or deferment. Accordingly, you might not want to pay down your student loans first but instead focus on credit cards, which probably have a higher interest rate.

However, some debts are tied to an asset. For example, you can lose your car or home if you don’t make payment. Paying these debts off early could be a wise choice.

3. Create a budget. To free up money to contribute to debt payments, you’ll need to budget. Identify the following:

Your fixed expenses. These are bills that don’t change much month to month. Generally, fixed expenses are also for necessities, such as your rent or mortgage, health insurance premiums, car payments, and other debts.

Your discretionary spending. You can track your discretionary spending over the course of one or two months. Write down what you buy every day and note the price. Alternately, you can buy everything with a debit or credit card and then look at your monthly statement.

Reduce discretionary spending. You need your income to exceed your discretionary spending. To free up as much money as possible, reduce discretionary spending to the bare minimum by giving up gym memberships and cable TV. You can also cut out vacations, entertainment expenses, and meals in restaurants.

4. Refinance your mortgage. Mortgage rates are still low. If you have a high APR, then consider refinancing into a loan with a lower one. Avoid spending the money that you save and instead funnel it toward debt repayment.

To investigate a mortgage refinance, contact your current lender to check what rate they can offer you. Then compare their rates to others on the market.

5. Tackle credit card debt. You want a stable balance sheet when the market crashes, so you should reduce your debts as much as possible. In particular, you should pay down high-interest credit card debt. Identify a method of repayment so that you can wipe out these debts as soon as possible:

Debt avalanche. You pay the minimum monthly payment on all credit cards. Then you contribute extra money to the debt with the highest interest rate. Once you pay off that card, focus on the debt with the second highest interest rate.

Debt snowball. Another method is to pay the minimum on your monthly debts but then use extra to pay off the card with the smallest balance first. The debt snowball method is more expensive than the debt avalanche, but it can give you momentum.

Debt snowflake. This method is ideal for people who can’t budget extra money to pay down debt. Instead, you try to save a little bit of money every day and make multiple monthly payments to slowly chip away at your debt.

Method 3 Preparing for Emergencies.

1. Build an emergency fund. You’ll need money in case you lose your job or if any kind of emergency springs up. Generally, you should save at least six months of expenses. If possible, save up to twelve months of expenses.

Put money toward your emergency fund every month, even if that means you pay off debts more slowly.

If you are a retiree, then you should try to have two years of expenses saved. When the market declines, you should live off your savings instead of drawing income from your investments.

2. Buy insurance. Insurance protects you from any unforeseen accidents that will hammer you financially. In an economic downturn, you’ll need all the money you can get, and insurance will provided valuable protection in case an accident strikes. Consider the following types of insurance:

Health insurance. If your employer doesn’t offer it, you can buy it on the government exchanges. Depending on your income, you might quality for a premium subsidy and/or help with out-of-pocket expenses.

Automobile insurance. Your insurance will pay if you injure someone in an accident. Depending on the insurance, you might also be covered if someone without coverage injures you.

Disability insurance. If you are disabled before you reach retirement, you’ll need income to support you. Your employer probably offers disability insurance. If not, you can shop on your own.

Life Insurance. You can replace the income of a working spouse with a life insurance policy. Life insurance is particularly important if you have young children. Calculate how much life insurance you need at lifehappens.org.

Homeowner’s insurance. Your homeowner’s policy covers injuries that occur on your property, as well as any structural damage caused by natural disasters and other accidents.

3. Assess the stability of your job. In a market crash, many jobs will be wiped out as employers are forced to lay off workers. You need to assess whether your job is stable enough to survive a recession, or whether you should plan on getting a different job.

Look at how many people your employer laid off during the last recession. Were only a few let go? If so, your job might be secure. However, if your employer engaged in mass layoffs, then there’s no reason to assume it won’t happen again.

You can also pick up some freelance or part-time work now. That way, if the market crashes, you’ll still have some income coming in.

Tips.

Consult with a personal financial counselor to help plan, protect, and control how your finances and money in the future.

January 18, 2020

How to Understand Personal Finance Basics

How to Understand Personal Finance Basics.

Understanding your personal finances can be very overwhelming, particularly if you’re just starting out. It is tough to know how best to handle your money, how to go about paying off debt, and where and when to invest. By following some basic steps for doing these things, as well as saving for emergencies and retirement and insuring the assets you’ve worked hard to obtain, you can begin to understand your personal finances and become more confident in your ability to make good decisions regarding them.





Learning How to Create a Budget.



Gather your financial statements and information. Creating a budget is one of the most important aspects of personal finance. A solid budget allows you to plan for how you’ll spend the money you bring in each month and illustrates your spending patterns. To begin, gather all the financial information you can, including bank statements, pay stubs, credit card bills, utility bills, investment account statements, and any other information you can think of.

Most people make monthly budgets so your goal is to figure out how much you make in a month and what your monthly expenses are. The more detail you can provide, the better your budget will be.



Record your monthly income. After gathering all of your financial data, separate out your sources of income. Record the amount of income you bring home in a month. Be sure to include any side jobs you have.

If your income varies from month to month, it may be helpful to figure out your average monthly income for the last six months or so.



List your fixed monthly expenses. Next, look over your financial documents and record any fixed expenses you have, or those that are essential and do not change much from month to month.

Fixed expenses can include things like mortgage payments or rent, credit card payments, car payments, and essential utilities like electric, water, and sewage.



List your variable monthly expenses. You also need to record your variable monthly expenses, which are items for which the amount of money you spend each month varies. These expenses are not necessarily essential and are likely where you will make adjustments to your spending in your budget.

Variable expenses can include things like groceries, gasoline, gym memberships, and eating out.



Total your monthly income and expenses. Once you have recorded all of your income and expenses, both fixed and variable, total each category. Ultimately, you want your income to be larger than your expenses. If it is, you can then decide where it is best for you to spend your excess income. If your expenses are more than your income, you will need to make adjustments to your budget to cut your spending or increase your income.



Adjust your variable expenses to hit your goal. If your budget shows you are spending more than you are earning in income, look at your variable expenses to find places you can cut back on spending, since these items are usually non-essential.

For example, if you are eating out four nights a week, you may have to cut this back to two nights a week. This will free up money you can put toward essential expenses like college loans or credit card debt.

In addition, you may be paying unnecessary monthly fees, like overdraft or late fees. If you are spending money on these types of fees, work on making your payments on time and keeping a bit of a cushion in your bank account.

Alternatively, you can work on earning more instead of spending less. Evaluate whether or not you can pick up a few extra hours of work a week, work overtime, or work any side jobs to increase the amount of money you’re bringing in each month.



Review your budget every month. At the end of each month, take some time and review your spending over the past month. Did you stick to your budget? If not, where did you veer off course? Pinpointing where you are exceeding your budget will help you figure out what kind of spending you need to pay attention to most. Reviewing your budget can also be encouraging if you find you are sticking to it. You may find that it’s extremely motivating seeing the amount of money you saved by cutting back the number of days you eat out a week, for example.













Strategizing to Pay Down Debt..



Pay more than the minimum amount due each month. Even following a strict budget doesn’t mean you can totally avoid debt. Large purchases, like cars, school, and houses often require you to take out a significant loan. In addition, it can be easy to rack up credit card debt quickly. One of the personal finance basics you must understand is how to take care of this debt as quickly as possible. The first step to doing this is to pay more than the minimum payment as often as you can.

For example, say the minimum payment on your car loan is $50 a month. Paying even $60 a month toward this loan can help you pay it off sooner and cut down on the amount you pay in finance charges over time. The more you can pay above the minimum, the better.



Transfer credit card balances with high annual percentage rates. If you have a credit card for which you are paying a high annual percentage rate (APR), it might be a good idea to look into transferring this balance to a credit card that offers a lower APR or no APR for a certain amount of time. This way, your entire payment will be applied to your balance, not interest.

Read the fine print before transferring a balance. Most cards charge a transfer fee (3% of the balance, for example) and only offer 0% APR for a limited amount of time (12 or 18 months, for example). Make sure you understand the terms of your new agreement and shop around for the best option before transferring your balance.



Calculate the amount of debt on each credit card. If you have multiple credit cards, compare the amount of debt you have on each one. You can use this information in two different ways:

Some people believe paying off the credit card with the smallest balance first is best. The idea here is that getting the smaller amount of debt paid off will motivate you and allow you to focus on your remaining debt.

Alternatively, some people believe you should focus on paying off the largest balance because you will be paying the most in interest on this balance. To do this, you would try to make more than the minimum payment on this balance, while paying only the minimum on your smaller balance.

If possible, the best solution is to pay more than the minimum simultaneously on each balance.



Dedicate excess funds toward paying off debt. Once you are able to follow your monthly budget, dedicate any extra funds you have at the end of the month toward paying down your debt. It can be tempting to use this money to treat yourself to a fancy dinner or a new TV, but remember your long-term goals before doing this. In the long run, paying down debt will serve you better than treating yourself to something unnecessary.



Consolidate your debt. If you have multiple credit card accounts, student loans, a mortgage, a car loan, or any combination of these debts, consolidating them into one payment may help you manage them more easily. Typically, when you consolidate debt, you’ll get a debt consolidation loan. These loans usually have a lower interest rate and require lower monthly payments.

While consolidating your debt can make it easier to manage, it may also increase the amount you’ll pay in the long run because it extends your payments over a longer period of time.

If your credit score is not good, you may need a co-signer to be able to get a debt consolidation loan.

You can also consolidate your credit card debt by transferring all of your balances to a 0% APR credit card. If you think you can pay off your debt within 12 to 18 months, this might be a good option. However, if you think it will take you significantly longer to pay it off, this might not be a good option because the 0% APR is usually only good for 12 to 18 months.



Refinance your loans. Refinancing is generally a good option if your financial situation has improved since taking out your loan. Similar to consolidating your debt, refinancing your loans also consolidates your debts and may allow you to make lower monthly payments on your loans. Refinancing might also allow you to shorten the term of your loan to pay off your debts more quickly. In addition, depending on your financial situation, you may also be eligible for a lower interest rate.





Choose a student loan repayment plan. If you can afford it, the standard repayment plan is your best option for repaying federal loans. A standard plan requires you to pay the same amount every month over a ten year period. If you can’t afford the payments on a standard plan, however, the government offers two alternative categories of plans—income-driven and basic.

Income-driven repayment plans extend the terms of your loan to 20 or 25 years and require you to pay a certain percentage of your income toward your loan each month, rather than a fixed monthly payment. In addition, any amount still owed at the end of your loan term is forgiven.

Basic plans include standard, graduated, and extended repayment options. Standard is the best option if you can afford it, but graduated or extended plans may be right in some situations. Graduated plans start you off with low payments and gradually increase them over time. This plan can be good if you expect to make more money over the years. Extended plans extend the terms of your loan to 25 years, allowing you to make smaller payments each month, but pay more in interest over time.











Saving for Emergencies and Retirement.



Set up automatic deposits. It can be tough to commit to putting money into your savings account every month, but it is important to do so to ensure you have enough money for emergencies and for your future. If possible, make automatic payments into a saving account each month.

For example, set your bank account so it automatically transfers $50 from your checking account to savings account at least once a month.

Or, if your paycheck gets deposited directly into your account, you can usually set it up so that a certain portion (either a dollar amount or a percentage) is deposited straight into your savings account. Most professionals recommend putting 10 to 20 percent of your income towards savings each month.



Contribute to a retirement savings plan. You should start saving for retirement as soon as possible to ensure you’ll have enough money to live comfortably when you are done working. The amount you need to contribute to this savings account monthly depends on a number of different factors, like when you start saving, how much you are starting with, and whether or not you’re going to receive any kind of employer contribution.

Many employers offer a 401k, or a retirement savings plan, of some kind to their employees. A lot of companies will also match a percentage of the employee’s contributions into this account over time. If your employer offers a plan of this sort, start contributing to it as soon as you can, even if it is just a small amount.

If you are self-employed or your employer does not offer any kind of retirement savings plan, you can set up your own plan through investment websites or many banks.

Consult a financial advisor to figure out how much you should be putting away for retirement to reach your goals.[19]



Build an emergency fund. In addition to saving for retirement, you also need to save for emergencies, like losing a job, costly car repairs, or unexpected medical expenses. You can use your bank’s savings account for this emergency fund.

Financial professionals recommend you have enough in your savings account to cover a month and a half of living expenses for each person you claim as a dependent. For example, if you are married with one child, you should have enough to cover four and a half months of living expenses.











Investing for Beginners.



Invest in a Target Date Fund (TDF). Figuring out where to invest your money is one of the hardest parts of personal finance basics. Essentially, you want to invest in a variety of stocks, bonds, and treasuries—but which ones? Target Date Funds make this a little easier for you. A TDF is basically a hands-off retirement account. You enter the age you want to retire and the TDF will automatically spread the money you put into this account across a wide variety of stocks, bonds, and treasuries.

Some of the recommended companies through which to do this are Vanguard, Fidelity, and T. Rowe Price.



Diversify your investments. If you choose a more hands-on approach to investing, it is important to diversify your portfolio to reduce risk. Diversifying means that you choose a variety of stocks, bonds, and treasuries in which to invest. You should make sure your investments are spread over a number of different companies and industries. This way, if one company or industry suffers a financial downturn, you will only lose a portion of your investment, not the whole thing.



Invest in your 401k. As mentioned above, investing in a 401k provided by your company is a good idea. There are a couple really good things about this option. First of all, most of the time, the money you put into a 401k is deferred on your taxes until you take it out of the account. Some 401ks are taxed before investing, however, so check with your employer to find out which one you have. Second, your employer will often match the amount of money in your 401k (up to a certain amount) so you are, essentially, getting free money just for investing.

You should invest in a company match 401k even if you are in debt. The return you receive on this type of investing is often more than what your debt is.

The amount of money your company will match often depends how much you invest in your 401k. Usually, you have to hit certain investment thresholds, which will then determine the percentage your company will match.



Invest in a Roth IRA. Another investment opportunity offered by many employers is a Roth IRA. In a Roth IRA, you pay taxes up front on your investment. Investing in a Roth IRA is an especially good idea for young people with low incomes, considering the tax rate will likely increase in their lifetime. This type of investment can be very helpful because it will provide you with a pot of money for your retirement that won’t shrink due to taxes.]















Understanding Why to Insure Your Investments.



Get property insurance. You should invest in property insurance to protect your home, which is often one of your biggest assets. Property insurance is actually required if you have a mortgage. This type of insurance will protect you from having to pay out-of-pocket for any major unforeseen home repairs.

If you rent, it is just as important to invest in renter’s insurance. Your belongings can add up to a significant investment and getting renter’s insurance will help protect you in the event of a burglary, fire, flood, or other disaster.



Buy life insurance. Getting life insurance is especially important if you have a family or are married. Life insurance makes sure your income (or at least part of it) is supplemented in the event that you pass away. This is important because your family could face very tough financial situations if they are unable to make up for the portion of income you brought to the table.



Get health insurance. Health insurance premiums can be a small price to pay if you find yourself sick or seriously injured. Medical bills alone can put you in serious debt if you don’t have some sort of insurance policy. In addition, you’ll likely miss a significant amount of work if you are seriously injured, leaving you no way to pay these bills.

Many employers offer health insurance to their employees at a discounted rate. Usually only full-time employees are eligible to receive health insurance through the company, but some companies may offer it to part-time employees as well.

Buying health insurance independently, without the help of an employer, can be expensive. However, it is worth investing in to make sure you are not crippled by debt in the event you become sick or injured.[28]



Buy automobile insurance. Finally, you should invest in automobile insurance. In fact, it is required of anyone who owns a car in the United States. Auto insurance helps cover the cost to repair your car after an accident and medical bills for you and others involved. A major car accident can put you in debt from car repairs and time off work if you’re injured. It is also possible your assets can be seized to help pay for the other driver’s medical bills if the accident is your fault. Having automobile insurance can help diffuse some of these costs and help keep you out of debt.















Working with a Financial Planner.



Start now. One of the most important things you can do for your personal finances is to start thinking about them and working on them early. It may seem like you have plenty of time to save for retirement, but you can actually lose a lot of money in interest if you wait too long. Make financial planning a regular part of your life—like going to the doctor—and get started as soon as possible.

Get your significant other involved. If you are planning a future together, make sure to include your significant other in your planning. Talking to your partner and including them in the process will ensure you are both on the same page with your spending and saving habits and allow you to develop a plan that meets both of your needs.



Be proactive. Some people assume that everything will work out in the long-run and ignore negative cues about their finances. If you do this, however, you could set yourself up for a major loss. Instead, think about how negative financial situations, like severe drops in the stock market, might affect your financial security and plan alternative options.



Plan out the details. Many people see saving for retirement as a race to reach a certain amount of savings before the date they retire. This approach can be misleading, however. Instead, think about the things you’ll need to pay for, like housing, healthcare, eldercare, hobbies, transportation, and so on. Do your best to figure out how much these products and services will cost you and how you’ll finance them.





Tips.

Figuring out how to handle your personal finances can be very confusing whether you’re a beginner or not. It is a good idea to consult a financial planner to help you decide how to best handle your money.

November 13, 2019

how to understand personal finance basics

How to Understand Personal Finance Basics.

Understanding your personal finances can be very overwhelming, particularly if you’re just starting out. It is tough to know how best to handle your money, how to go about paying off debt, and where and when to invest. By following some basic steps for doing these things, as well as saving for emergencies and retirement and insuring the assets you’ve worked hard to obtain, you can begin to understand your personal finances and become more confident in your ability to make good decisions regarding them.





Learning How to Create a Budget.



Gather your financial statements and information. Creating a budget is one of the most important aspects of personal finance. A solid budget allows you to plan for how you’ll spend the money you bring in each month and illustrates your spending patterns. To begin, gather all the financial information you can, including bank statements, pay stubs, credit card bills, utility bills, investment account statements, and any other information you can think of.

Most people make monthly budgets so your goal is to figure out how much you make in a month and what your monthly expenses are. The more detail you can provide, the better your budget will be.



Record your monthly income. After gathering all of your financial data, separate out your sources of income. Record the amount of income you bring home in a month. Be sure to include any side jobs you have.

If your income varies from month to month, it may be helpful to figure out your average monthly income for the last six months or so.



List your fixed monthly expenses. Next, look over your financial documents and record any fixed expenses you have, or those that are essential and do not change much from month to month.

Fixed expenses can include things like mortgage payments or rent, credit card payments, car payments, and essential utilities like electric, water, and sewage.



List your variable monthly expenses. You also need to record your variable monthly expenses, which are items for which the amount of money you spend each month varies. These expenses are not necessarily essential and are likely where you will make adjustments to your spending in your budget.

Variable expenses can include things like groceries, gasoline, gym memberships, and eating out.



Total your monthly income and expenses. Once you have recorded all of your income and expenses, both fixed and variable, total each category. Ultimately, you want your income to be larger than your expenses. If it is, you can then decide where it is best for you to spend your excess income. If your expenses are more than your income, you will need to make adjustments to your budget to cut your spending or increase your income.



Adjust your variable expenses to hit your goal. If your budget shows you are spending more than you are earning in income, look at your variable expenses to find places you can cut back on spending, since these items are usually non-essential.

For example, if you are eating out four nights a week, you may have to cut this back to two nights a week. This will free up money you can put toward essential expenses like college loans or credit card debt.

In addition, you may be paying unnecessary monthly fees, like overdraft or late fees. If you are spending money on these types of fees, work on making your payments on time and keeping a bit of a cushion in your bank account.

Alternatively, you can work on earning more instead of spending less. Evaluate whether or not you can pick up a few extra hours of work a week, work overtime, or work any side jobs to increase the amount of money you’re bringing in each month.



Review your budget every month. At the end of each month, take some time and review your spending over the past month. Did you stick to your budget? If not, where did you veer off course? Pinpointing where you are exceeding your budget will help you figure out what kind of spending you need to pay attention to most. Reviewing your budget can also be encouraging if you find you are sticking to it. You may find that it’s extremely motivating seeing the amount of money you saved by cutting back the number of days you eat out a week, for example.













Strategizing to Pay Down Debt..



Pay more than the minimum amount due each month. Even following a strict budget doesn’t mean you can totally avoid debt. Large purchases, like cars, school, and houses often require you to take out a significant loan. In addition, it can be easy to rack up credit card debt quickly. One of the personal finance basics you must understand is how to take care of this debt as quickly as possible. The first step to doing this is to pay more than the minimum payment as often as you can.

For example, say the minimum payment on your car loan is $50 a month. Paying even $60 a month toward this loan can help you pay it off sooner and cut down on the amount you pay in finance charges over time. The more you can pay above the minimum, the better.



Transfer credit card balances with high annual percentage rates. If you have a credit card for which you are paying a high annual percentage rate (APR), it might be a good idea to look into transferring this balance to a credit card that offers a lower APR or no APR for a certain amount of time. This way, your entire payment will be applied to your balance, not interest.

Read the fine print before transferring a balance. Most cards charge a transfer fee (3% of the balance, for example) and only offer 0% APR for a limited amount of time (12 or 18 months, for example). Make sure you understand the terms of your new agreement and shop around for the best option before transferring your balance.



Calculate the amount of debt on each credit card. If you have multiple credit cards, compare the amount of debt you have on each one. You can use this information in two different ways:

Some people believe paying off the credit card with the smallest balance first is best. The idea here is that getting the smaller amount of debt paid off will motivate you and allow you to focus on your remaining debt.

Alternatively, some people believe you should focus on paying off the largest balance because you will be paying the most in interest on this balance. To do this, you would try to make more than the minimum payment on this balance, while paying only the minimum on your smaller balance.

If possible, the best solution is to pay more than the minimum simultaneously on each balance.



Dedicate excess funds toward paying off debt. Once you are able to follow your monthly budget, dedicate any extra funds you have at the end of the month toward paying down your debt. It can be tempting to use this money to treat yourself to a fancy dinner or a new TV, but remember your long-term goals before doing this. In the long run, paying down debt will serve you better than treating yourself to something unnecessary.



Consolidate your debt. If you have multiple credit card accounts, student loans, a mortgage, a car loan, or any combination of these debts, consolidating them into one payment may help you manage them more easily. Typically, when you consolidate debt, you’ll get a debt consolidation loan. These loans usually have a lower interest rate and require lower monthly payments.

While consolidating your debt can make it easier to manage, it may also increase the amount you’ll pay in the long run because it extends your payments over a longer period of time.

If your credit score is not good, you may need a co-signer to be able to get a debt consolidation loan.

You can also consolidate your credit card debt by transferring all of your balances to a 0% APR credit card. If you think you can pay off your debt within 12 to 18 months, this might be a good option. However, if you think it will take you significantly longer to pay it off, this might not be a good option because the 0% APR is usually only good for 12 to 18 months.



Refinance your loans. Refinancing is generally a good option if your financial situation has improved since taking out your loan. Similar to consolidating your debt, refinancing your loans also consolidates your debts and may allow you to make lower monthly payments on your loans. Refinancing might also allow you to shorten the term of your loan to pay off your debts more quickly. In addition, depending on your financial situation, you may also be eligible for a lower interest rate.





Choose a student loan repayment plan. If you can afford it, the standard repayment plan is your best option for repaying federal loans. A standard plan requires you to pay the same amount every month over a ten year period. If you can’t afford the payments on a standard plan, however, the government offers two alternative categories of plans—income-driven and basic.

Income-driven repayment plans extend the terms of your loan to 20 or 25 years and require you to pay a certain percentage of your income toward your loan each month, rather than a fixed monthly payment. In addition, any amount still owed at the end of your loan term is forgiven.

Basic plans include standard, graduated, and extended repayment options. Standard is the best option if you can afford it, but graduated or extended plans may be right in some situations. Graduated plans start you off with low payments and gradually increase them over time. This plan can be good if you expect to make more money over the years. Extended plans extend the terms of your loan to 25 years, allowing you to make smaller payments each month, but pay more in interest over time.











Saving for Emergencies and Retirement.



Set up automatic deposits. It can be tough to commit to putting money into your savings account every month, but it is important to do so to ensure you have enough money for emergencies and for your future. If possible, make automatic payments into a saving account each month.

For example, set your bank account so it automatically transfers $50 from your checking account to savings account at least once a month.

Or, if your paycheck gets deposited directly into your account, you can usually set it up so that a certain portion (either a dollar amount or a percentage) is deposited straight into your savings account. Most professionals recommend putting 10 to 20 percent of your income towards savings each month.



Contribute to a retirement savings plan. You should start saving for retirement as soon as possible to ensure you’ll have enough money to live comfortably when you are done working. The amount you need to contribute to this savings account monthly depends on a number of different factors, like when you start saving, how much you are starting with, and whether or not you’re going to receive any kind of employer contribution.

Many employers offer a 401k, or a retirement savings plan, of some kind to their employees. A lot of companies will also match a percentage of the employee’s contributions into this account over time. If your employer offers a plan of this sort, start contributing to it as soon as you can, even if it is just a small amount.

If you are self-employed or your employer does not offer any kind of retirement savings plan, you can set up your own plan through investment websites or many banks.

Consult a financial advisor to figure out how much you should be putting away for retirement to reach your goals.[19]



Build an emergency fund. In addition to saving for retirement, you also need to save for emergencies, like losing a job, costly car repairs, or unexpected medical expenses. You can use your bank’s savings account for this emergency fund.

Financial professionals recommend you have enough in your savings account to cover a month and a half of living expenses for each person you claim as a dependent. For example, if you are married with one child, you should have enough to cover four and a half months of living expenses.











Investing for Beginners.



Invest in a Target Date Fund (TDF). Figuring out where to invest your money is one of the hardest parts of personal finance basics. Essentially, you want to invest in a variety of stocks, bonds, and treasuries—but which ones? Target Date Funds make this a little easier for you. A TDF is basically a hands-off retirement account. You enter the age you want to retire and the TDF will automatically spread the money you put into this account across a wide variety of stocks, bonds, and treasuries.

Some of the recommended companies through which to do this are Vanguard, Fidelity, and T. Rowe Price.



Diversify your investments. If you choose a more hands-on approach to investing, it is important to diversify your portfolio to reduce risk. Diversifying means that you choose a variety of stocks, bonds, and treasuries in which to invest. You should make sure your investments are spread over a number of different companies and industries. This way, if one company or industry suffers a financial downturn, you will only lose a portion of your investment, not the whole thing.



Invest in your 401k. As mentioned above, investing in a 401k provided by your company is a good idea. There are a couple really good things about this option. First of all, most of the time, the money you put into a 401k is deferred on your taxes until you take it out of the account. Some 401ks are taxed before investing, however, so check with your employer to find out which one you have. Second, your employer will often match the amount of money in your 401k (up to a certain amount) so you are, essentially, getting free money just for investing.

You should invest in a company match 401k even if you are in debt. The return you receive on this type of investing is often more than what your debt is.

The amount of money your company will match often depends how much you invest in your 401k. Usually, you have to hit certain investment thresholds, which will then determine the percentage your company will match.



Invest in a Roth IRA. Another investment opportunity offered by many employers is a Roth IRA. In a Roth IRA, you pay taxes up front on your investment. Investing in a Roth IRA is an especially good idea for young people with low incomes, considering the tax rate will likely increase in their lifetime. This type of investment can be very helpful because it will provide you with a pot of money for your retirement that won’t shrink due to taxes.]















Understanding Why to Insure Your Investments.



Get property insurance. You should invest in property insurance to protect your home, which is often one of your biggest assets. Property insurance is actually required if you have a mortgage. This type of insurance will protect you from having to pay out-of-pocket for any major unforeseen home repairs.

If you rent, it is just as important to invest in renter’s insurance. Your belongings can add up to a significant investment and getting renter’s insurance will help protect you in the event of a burglary, fire, flood, or other disaster.



Buy life insurance. Getting life insurance is especially important if you have a family or are married. Life insurance makes sure your income (or at least part of it) is supplemented in the event that you pass away. This is important because your family could face very tough financial situations if they are unable to make up for the portion of income you brought to the table.



Get health insurance. Health insurance premiums can be a small price to pay if you find yourself sick or seriously injured. Medical bills alone can put you in serious debt if you don’t have some sort of insurance policy. In addition, you’ll likely miss a significant amount of work if you are seriously injured, leaving you no way to pay these bills.

Many employers offer health insurance to their employees at a discounted rate. Usually only full-time employees are eligible to receive health insurance through the company, but some companies may offer it to part-time employees as well.

Buying health insurance independently, without the help of an employer, can be expensive. However, it is worth investing in to make sure you are not crippled by debt in the event you become sick or injured.[28]



Buy automobile insurance. Finally, you should invest in automobile insurance. In fact, it is required of anyone who owns a car in the United States. Auto insurance helps cover the cost to repair your car after an accident and medical bills for you and others involved. A major car accident can put you in debt from car repairs and time off work if you’re injured. It is also possible your assets can be seized to help pay for the other driver’s medical bills if the accident is your fault. Having automobile insurance can help diffuse some of these costs and help keep you out of debt.















Working with a Financial Planner.



Start now. One of the most important things you can do for your personal finances is to start thinking about them and working on them early. It may seem like you have plenty of time to save for retirement, but you can actually lose a lot of money in interest if you wait too long. Make financial planning a regular part of your life—like going to the doctor—and get started as soon as possible.

Get your significant other involved. If you are planning a future together, make sure to include your significant other in your planning. Talking to your partner and including them in the process will ensure you are both on the same page with your spending and saving habits and allow you to develop a plan that meets both of your needs.



Be proactive. Some people assume that everything will work out in the long-run and ignore negative cues about their finances. If you do this, however, you could set yourself up for a major loss. Instead, think about how negative financial situations, like severe drops in the stock market, might affect your financial security and plan alternative options.



Plan out the details. Many people see saving for retirement as a race to reach a certain amount of savings before the date they retire. This approach can be misleading, however. Instead, think about the things you’ll need to pay for, like housing, healthcare, eldercare, hobbies, transportation, and so on. Do your best to figure out how much these products and services will cost you and how you’ll finance them.





Tips.

Figuring out how to handle your personal finances can be very confusing whether you’re a beginner or not. It is a good idea to consult a financial planner to help you decide how to best handle your money.

November 10, 2019