TAX SAVING TIP - OPEN YOUR OWN BUSINESS

Last time we talked about a tax saving tip of opening up a home-based business. Many people are intimidated by doing this, but it's easier than you think. Our preferred way of doing this is to organize an LLC in your state, because the LLC is the easiest entity to maintain as far as paperwork, taxes, etc. Filing Articles of Organization (three pages) with the state allows you to be in business, then you just need to learn some of the tax benefits you get being self-employed.

To learn these benefits and how to use them properly, I suggest three resources:

www.moneymastery.com (you can find a very useful book they published Money: What the Financial Experts Won't Tell You)

http://www.taxreductioninstitute.com/ (Sandy Botkin is a world renowned tax expert)

www.larrycoxcpa.com (my CPA, who has saved me TONS in the past and helped me with taxes for many years)

So, just get started. Make sure to get a competent CPA to help you utilize our tax system to lessen your tax burden if possible and be smarter with your money. This country was built on self-employed entrepreneurs who acted on ideas and changed the world. Figure out your passion in life and turn it into a business. You'll find you love "working" when it's something you love, and if you can save some taxes and make money, why not? Go get it!

HAPPY ANNIVERSARY IRS!

Want some tax saving tips? Need some retirement planning and are worried about taxes? I love those kinds of questions!! Here's the first tax saving tip: start a home-based business. Don't be intimidated, it's not terribly hard, you just need a little guidance, I can show you how. I'm happy to help! What other tax help do you need? I have a team ready to help.

I LOST A FRIEND

So this is a tough one to write. I lost a friend/client a bit ago in a car wreck. She was just over 50, very healthy and had a long life still ahead of her when a freak accident took her. I’ve known her for nine years and I helped her with some financial issues for a little while and had spoken with her by phone about a month ago as she had moved a few hours away.

It’s one of those things when someone passes away, when you automatically do the thinking back of how you could have said something to them to stop them, or to warn them with 20/20 hindsight. It’s tough, and I hate to think about it; she will be missed by so many people, mostly her family, kids and grandkids.

I don’t want this post to come across as morbid, insensitive or opportunistic, but I deal with life insurance and I have to think about death with my clients, who are also my friends and family many times. It’s hard to do, but so necessary! I didn’t have a life insurance plan for my friend as she had it before I met her, and I can only hope she still had it in place. Tragic things like this happen and can devastate a family, and then the financial devastation can prolong that pain, but the financial part is so avoidable. 

If you are married, and especially if you have children, please assess your finances and make sure this simplest of insurance is in place. Even if I’m not the one to help you, get life insurance without hesitating. Quotes only take about three minutes to finish, and term insurance is cheaper than it’s ever been. Just think, to get coverage of $1,000,000 on a 32 year old, fairly healthy male costs $21.81 a month. So cheap, and so easy to protect you and your legacy for your family. Please get it done!

SAMPLE DEBT PLAN

Do you have a debt plan? A week ago I asked for some debt plans from you all, the TFH Community, and I got a huge response! So, we'll start this week with our first debt plan. See if it is anything similar to your situation and maybe it will help? But, first things first, here are the client's debts:

Medical 1:  Balance $25         Payment $25     Interest Rate 0%

Medical 2:  Balance $28         Payment $25     Interest Rate 0%

Medical 3:  Balance $40         Payment $25     Interest Rate 0%

Medical 4:  Balance $71         Payment $25     Interest Rate 0%

Medical 5:  Balance $128        Payment $25     Interest Rate 0%

Medical 6:  Balance $130        Payment $25     Interest Rate 0%

Medical 7:  Balance $195        Payment $25     Interest Rate 0%

Medical 8:  Balance $216        Payment $25     Interest Rate 0%

Medical 9:  Balance $240        Payment $24     Interest Rate 0%

CC1:         Balance $1190       Payment $89    Interest Rate 29.4%

Medical 10: Balance $538.65    Payment $25    Interest Rate 0%

Car1:        Balance $7000       Payment $300   Interest Rate 8%

CC2:         Balance $3000       Payment $127   Interest Rate 25.240%

Medical 11: Balance $866        Payment $25     Interest Rate 0%

Car2:        Balance $2700       Payment $89     Interest Rate 10%

Car31:      Balance $7000       Payment $186    Interest Rate 8.99%

Student 1: Balance $4800       Payment $100    Interest Rate 0%

Furn.1:      Balance $4000      Payment $121    Interest Rate 21.99%

CC3:         Balance $2000      Payment $50      Interest Rate 17%

Car4:        Balance $7000       Payment $146    Interest Rate 8.99%

Mort.1:      Balance $160,000  Payment $1175   Interest Rate 6%

Student 2:  Balance $52,000   Payment $387.70 Interest Rate 6.5%

Mort.2:      Balance $82,000   Payment $160.16 Interest Rate 2.3%

So, let's analyze this quickly. First, their total debt is $282,714.35, with total monthly debt payments totaling $3,204.86. Not terrible, kind of common. If they paid their minimum payments, they would be out of debt in roughly 34 years. Yuck! What problems do you see here? I described it to them in this way: they are being nibbled to death by ducks. So many little medical debts, and it makes it overwhelming! But, look closer.

Only $1,636.85 of this debt is medical. At this point, these friends are overwhelmed, but when we organized it all it wasn't so daunting. Organizing these debts and paying them off IN THIS ORDER is the fastest way to get out of debt. It's a mathematic fact. Many are tempted to put higher interest rate debts first, or mortgages at the very end no matter what, but take emotion out of it, and mathematically this is the fastest, most efficient way, both in terms of least interest paid and time, to DEBT FREEDOM.

If they follow this plan, paying ONLY WHAT THEY ARE PAYING OUT OF POCKET NOW and no more, they will be out of debt (including mortgages) in 11.43 years!!! Put that in perspective. If they were 30 years old, they were looking at being debt free at 64 with no savings; if they follow this plan, at 42 they are debt free, and at 64 they have $1.5 million in the bank. GETTING A REAL DEBT PLAN IN PLACE IS SO CRUCIAL. IT COULD ADD OVER $1 MILLION TO YOUR RETIREMENT! Getting out of debt COMPLETELY takes off the financial shackles and frees you up to live your own life on your own terms. Doesn't it make you want to get your spending under control and find even MORE money a month to knock this debt out?

We'll follow up later on with another debt plan from another member of our community. One thing to note, if these friends simply sell an asset to pay off the medical debts (an asset that will give them $1700 in their pockets) and pay them off in this same order, adding the payments on top of the next debt in line, they shave almost another year off their debt freedom date…

REVERSE MORTGAGE EXPLANATION

I had a request from Peter Jeppson, a great friend of Total Financial Health, LLC, to explain what a reverse mortgage is for one of his clients. Reverse mortgages get a bad rap, and they are admittedly not for everyone, but they can be an EXTREMELY important tool for protecting seniors in some of their financial planning. Here is my explanation:

Peter,

Here is a quick explanation of reverse mortgages, which get a bad rap sometimes, but it’s mostly because people don’t understand them. You can read a good article on them (also called a HECM, home equity conversion mortgage) here:

http://en.wikipedia.org/wiki/Reverse_mortgage

A reverse mortgage replaces a traditional mortgage and provides the client with cash and no payment, either in lump sum or in monthly installments, at the client’s discretion. If someone pulls out a reverse mortgage they do not have to make payments, ever, as long as they are alive. They are typically given to borrowers over 62 years of age. The reason there are no payments is that each month that no payment is made the equity in the home goes down as the absent payment amount is added to the principal balance each month.

Here is an example of one of my recent clients. Client was strapped on monthly payments and owed $140k on a home that appraised at about $250k. They were 72 years old, so they were allowed a reverse mortgage up to 72% (the same percentage as their age) of the value of the home. This allowed for a loan of $180k, netting them almost $30k after closing. So, they had $30k in their pockets and no payment for the rest of their lives. Their payment was $1006 each month, so this gained them just over $12k a year. The $30k could be used for anything; there are no restrictions on it use. There is even a new program (four years old) where you can pull out a HECM and use the proceeds for the purchase of a new primary residence; still no payment on the HECM, ever, unti the client passes away.

There are two drawbacks to HECM loans. First, the up front costs are higher than a traditional mortgage, as is the interest rate. The rate is typically about .5% higher than traditional mortgages; the closing costs are significantly higher because you pay up front mortgage insurance, and yearly mortgage insurance. However, all costs are rolled into the loan so there are no out of pocket costs. Second, a HECM usually does not allow much equity to be passed along to an estate or heirs as you lose equity each month. However, if the client passes away and there is still equity, the estate or heirs can still buy it back from the bank at the principal balance owed at the time. If you think about it, passing a home on to heirs can become burdensome for the estate, because they have to keep up payments on it until it is sold, so this may not be an issue for most clients.

Overall, the overwhelming majority of clients who pull out HECM loans are very satisfied for what it does for them.