Start a side business for those sweet tax advantages.

Let's face it – the tax code is set up to favor entrepreneurs.  There's no reason you can't take advantage of that.

Ever wonder why the rich get richer?  There are many reasons, one of which is the way the tax code is set up to encourage certain behaviors, such as owning a business.

Let's say you earn $100 as an employee.  Before you get access to your money, taxes come out.  To keep it simple, we'll say you pay about 20% in taxes.  So, earn $100 as an employee, pay $20 in taxes, get $80 in spendable (or saveable!) money.

Now let's imagine you earned that same $100 as an entrepreneur, either in a full time business or in your side hustle.  Step 1, earn $100.  Step 2, spend money.  We'll say you spent the same $80 that you spent as an employee, and that your spending was on things the tax man say it's ok to spend on as business expenses, such as an internet connection and a cell phone.  You are left with the $20, which flows through to your personal return as profit.  It's now personal income.  You still pay 20% in taxes, but you are paying 20% of the money that is left.  So that's 20% of $20, or $4.  That leaves you $16 you can spend personally.

$16 in personal spending plus $80 in business spending gives you $96 you can spend when you earn as an entrepreneur.

Now I was an English major and barely made it through that one required math class in college, but even I know spending $96 is way more fun than spending $80.

Yes, I am oversimplifying this.  Different brackets of your personal income are taxes at different rates.  Some businesses (like C corporations) do pay tax themselves rather than passing profits through to the personal return.  And you can't buy just anything with pre-tax money – the expenses have to be the sort of expenses the IRS says are legit. But I'm trying to make a point here.  And that point is that if all your income is coming in from a paycheck from an employer, you are paying the maximum in taxes on that income, and missing out on some sweet tax advantages.

Do you have a hobby where you are already spending a good amount of what would count as business expenses if that hobby were a business?  Could you shift some of your personal expenses (such as that internet connection and cell phone bill) over to that business? Have you helped people out with this skill, had them offer to pay you for your time, and declined the payment, thinking it is just a hobby?  Would you consider charging people for what you do and making it a business?  If so, you should look into turning that hobby into a business.

Now, some of you may think you can do this without any intention of getting clients.  I'm not recommending that.  The IRS has some rules about the distinctions between a hobby and a business you should definitely research.  But if you are looking for a side hustle and already have the skills and knowledge, why not test the market and see if there's demand for what you are offering?

Often clients think their side hustle has to be in what they do for their full-time job or in something they hate (so it feels like work).  But you can take a skill you've already developed, an interest you already have, even if it is something so fun you've been doing it for free, and if people will pay you more for it than what it costs you to do it, BOOM, you have a profitable business.

Obligatory disclosure – I'm not a CPA, and you aren't my client, so talk to your team of advisors before you take action.

You can't get help if you are hiding.

If you watch old episodes of I Love Lucy, you'll see Lucy and Ricky sleeping in separate beds.   Thanks to the sexual revolution in the 1960s, we now share nearly everything about our sex lives.  It's time to have a financial revolution and start sharing our financial lives as well.

Somehow money ended up being the last taboo topic in America.  But does this really serve us?

By keeping our paycheck secret from our coworkers, we allow managers to pay us differently from our peers without having to explain the reasons.  Does Jack make more than Sue because he's taken on additional responsibility, been in the job longer, and gotten additional career-related credentials on his own time?  Or is it because the boss thinks he needs more, because the boss is stuck in old thinking about who the breadwinner in the household probably is?  When everything is hidden, it allows bad practices to continue without being challenged.

Imagine if we knew what our co-workers made, and even more juicy, how that compares to what the CEO made.  In fact, the Dodd-Frank reforms required companies to start reporting the ratio between the pay of their median employee and the CEO.  Perhaps this will be the start of a trend toward greater disclosure and sharing, thereby breaking the last taboo.

Let's start turning to our friends and family for financial advice the way we turn to them for career and relationship advice.  We'd be able to kick around ideas, brainstorm solutions, and share what we've learned.  Instead, many of us hide our finances, pretending everything is fine when in fact we are surviving, not thriving.

Some of you do share what's going on in your financial life, either publicly or with the people in your life you trust most.  Many bloggers post statistics of what their earnings were for the month, and many personal finance folks share the value of their investment portfolio or their net worth.   These fearless folks are putting it all out there.  I think one of the bravest is Gwen from Fiery Millennials, who keeps her readers up to date on her relationships, career, spending, and net worth with her status reports.  

Last Saturday night we had friends over that I've met through the Financial Independence community.  The talk ranged across a variety of topics – movies, music, and money among them.  Not of us had all the answers, and each of us had different areas of expertise.  But it was fun to weave finances into the conversation the way we should – as just another area of life we are figuring out – rather than ignoring it completely as if we never think about it.

What would change in your life if you started talking more about money?

What You Focus On Expands, So Focus On Building Wealth

Society tells us to focus on the physical possessions we have that can be touched and used and felt and observed by others.  What car do we want?  What house should we buy?  What new clothes do we need?  But all of that is focusing on the wrong thing if we want to build wealth.

What we focus on expands, so if you want to become wealthy, you should focus on your net worth.  I recommend clients make a net worth statement and update it periodically so they can chart their progress.

Your net worth statement is easy to produce.  Using a piece of paper, Excel, or a similiar application, list out everything you own.  Your house, your car, your personal property (that's banker talk for the current value of your stuff), your checking and savings accounts, and any investments you may have, such as a work retirement plan.  Subtotal all those numbers to give you the total of what you OWN.

Next, write out everything you owe.  Your mortgage and home equity line, your car note, any personal loans you have, your student loans, and your credit cards. Subtotal these numbers to give the total of what you OWE.

Take the total of what you own and subtract the total of what you owe.  That's your net worth.  That represents the sum total of what you've managed to keep out of what you've earned to date.

Depending upon how big that number is and how long you've been working, this may be quite a depressing exercise.  Some of you will owe more than you own, giving you a negative net worth.  This means you've spent more money than you've earned in your life to date.  Some of you may find your net worth is zero, even though you feel successful.  If all that stuff belongs to the bank, you really don't own anything.  Sorry to be the one to tell you.

But cheer up!  Your net worth is just the result of the consequences of the choices you made in the past.  You were doing the best you could given your level of financial education and what you were focused on.  If you change your thoughts, you will change your actions, which will give you different results in the future.

I suggest all my clients set a goal to become a millionaire.  While it may sound ridiculously big to you now, you can absolutely get there in your lifetime.  In fact, you kind of have to if you don't have a pension through your work.  You'll need that big pile of cash producing passive income to replace the income you now earn from working if you ever want to be one of those attractive old people frolicking on the beach that you see in ads for investment companies.

You don't have to save a million dollars – the market and compound interest will do the heaving lifting for you once you start investing.  If you are just getting started, your main focus should be on paying down debt and building an emergency fund.  But keep that goal in the back of your mind, stay focused on what you can do to build your net worth, and before you know it, you'll be a member of the millionaires club. 

Can You See The Abundance?

My dad loves nature and began his career as a forester, so I see trees differently than most people.  The trees are telling me now about the abundance coming in our immediate future.  Can you see the promise of future prosperity around you?

 As a kid, any family drive in the car or stroll around the back yard involved a conversation about trees.  What kind of trees were growing where and why, what each type of tree was good for, and how to identify them both up close and at a distance.  My mind had been so well-trained for it I actually took dendrology as my required science class in college.  So when I drive past a section of woods, I don't just see the forest, I see the trees.

This time of year in Atlanta the fruit trees are all in bloom.  There are wild cherry trees in the woods here, as well as some wild pear trees that have escaped from more domesticated ancestors.  There are burned out homesteads where the only evidence of their civilized past are daffodils along the path from the street to the house where the sidewalk used to be and the gnarled remains of an old fruit tree in the front yard.  South of here are the fields of peach trees.  I haven't driven past, but I'd bet they are blooming as well.

If you know what you are looking for, those flowers are signals.  “Come back this summer,” they say, “and there will be fruit here.”  How is it that people will go hungry this summer as fruit rots on the ground around these trees?  Because if you don't know what you are looking at, you literally will not see it.  You may not notice the flowering tree at all.  If you do, you may not tie that to the idea of summer fruit.  You see the same thing I do, but your brain misses what it means, because your brain isn't looking for fruit outside.  If you want fruit, your brain takes you to the grocery store.

At our house in Smyrna, there was an apple tree in the front yard.  Every year we had our own mini apple festival, baking apple pies and apple tarts, but it was always more than we could take advantage of.  In the years we lived there, I only had one family knock on the door to ask if we minded if they picked apples.  Of course we were happy to share, as we had more than we needed.

Just as there are flowering fruit trees around you that you aren't seeing, there are business and financial opportunities around each of us that we aren't seeing.  Become a student of business, as I have been a student of trees, and you will begin to see the abundance all around you that today you cannot see.

Client Case Study:  Stuck in a Loop

Most of us have had no formal financial education, and talking about finances with peers is taboo.  So how do we decide how to manage our money?  Most of us follow the patterns our parents modeled for us.

 My client Jamie was in a pattern in her business and personal life of alternating between feast and famine.  During our conversation she realized this was recreating the pattern she’d experienced in childhood, where sometimes her family had money and sometimes they did not. 

Jamie and I are working together on strategies to try to stabilize her business income by putting some clients on retainer, outsourcing the collections process, and taking on smaller, less glamorous projects in between the big gigs.  We are stabilizing her personal income by taking smaller, even amounts out of the business each month and by building up a personal emergency fund.

A good referral for me is your friend, who sometimes picks up the check for the whole table and sometimes complains about being too broke to go out at all.  She wants to talk to me about leveling out variable business income and stabilizing her personal finances as well. 

If you have a friend who’s sometimes broke and sometimes a baller, connect us so we can schedule a free twenty minute call.

*Client name and some details have been changed to protect privacy.

Client Case Study:  Wills

While financial coaching can be a great help for those getting out of debt and establishing a small business, those folks who believe they are doing everything right can benefit as well.

 My client Tom was confident he was doing everything correctly.  He's a 401(k) millionaire who maxes out his retirement account, and he doesn’t believe in consumer debt.  He only agreed to give financial coaching a try to see if there were any blind spots in his approach.

During his session he realized he still had not taken care of his will, which is important since he has two small kids.  Having a will will allow him and his wife to select who will raise their children should anything happen to them rather than leaving this decision to the state.  Tom knows that no one knows his family as well as he does, and he and his wife definitely wanted to make this decision themselves.

I recommended he speak to some friends he has who are lawyers in his local area for recommendations to an estate attorney who could help him get all of his documents in place, such as a will, a trust, power of attorney, and health care documents.  While no one really wants to think about the possibility of an untimely death, Tom agreed if he really wanted to think of himself as the guy who has it all under control he needed to step up and take care of this area as well.

A good referral for me is your coworker, who may think he’s got it all under control.  He wants to talk to me to get a checkup and make sure that’s correct.  Connect us so we can schedule a free twenty minute call.

*Client name and some details have been changed to protect privacy.

Client Case Study:  You Can't Hide from the IRS

For seven years Al Capone was a crime boss in Prohibition-Era Chicago.  But in 1931, Capone was charged with income tax evasion. The moral of the story is that you might be able to evade law enforcement, but you can’t escape the IRS.

My client Anna is a full time student and part time hairdresser.  Two years ago she received a 1099 from her employer, but she wasn’t sure what to do with it, so she did nothing.  Anna didn’t understand that one copy of the 1099 goes to the employee, and a duplicate goes to the IRS.  So they know exactly how much she made that year, and they have a pretty good idea how much of that money is theirs. 

Anna had been getting letters from the IRS, but was unsure of what to do with them, so had been storing them unopened in the glove box of her car.  I convinced her to take them to a CPA so she could see what she owes and work out a payment plan.  If you have a client who is ignoring their financial issues, refer them to me for a free initial call.

*Client name and some details have been changed to protect privacy.

Client Case Study:  Student Loans vs. Emergency Fund

When is paying off debt as fast as possible NOT a great idea?  When you have no emergency fund and are facing a layoff.

 My client Sam* was torn between paying extra off his student loans OR saving that money in case of an emergency.  He was leaning toward  making the big student loan payment, since he had a 401(k) he could tap into for cash if he needed extra funds. 

We discussed the fact that every time he takes cash from his 401(k), he’s increasing his tax bill, losing 10% as a penalty, and reducing his ability to retire one day.  As we talked he realized that if he paid extra money toward his student loans and then got laid off, he then wouldn’t be able to pay the minimum payments if he didn't have cash on hand.  But if he saved that money instead, he’d be able to use that cash to make the payments in case of a layoff. 

And of course there's nothing lost – if Sam isn't affected by the layoff after all, he can make the big payment toward his student loans then.  It would mean a tiny bit more in interest, but that's a small price to pay to know he's covered in case he's affected by the layoff.

If you have a friend who’s trying to decide where to focus financially and needs some help deciding, connect us so we can schedule a free twenty minute call.

*Client name and some details have been changed to protect privacy.