Finding Financial Flexibility in Self-Employment

financial flexibility in self-employment

Self-employment is about purpose and flexibility.  Being able to build deep purpose into your work and bring a new way of work into the world.  It also means you can choose who to work with and the way you work with them.

If the goal is to live a purposeful life, doesn’t the journey mean as much as the destination?  

Self-employment gives you that possibility beyond what a normal 9-to-5 can.

What are the top things to know when becoming self employed?

Know yourself.  

Forbes put together a quick hit list of the 13 signs you are meant to be self-employed and I couldn’t agree more.  

Flexibility and control in doing the right work day in and day out?  That is freedom.

During this time of lay-offs in the tech space, it can also mean survival.  Bringing cash in ASAP may be your goal.  Some of us go into self-employment from a place of anxiety or scarcity.

So just like money, self-employment can be freeing or anxiety driven.

How should I approach finances when self-employed?

The main thing about self-employment is you now wear many hats.  You didn’t get into this business to keep track of bookkeeping, invoicing clients, creating contracts, etc.  Once you start to make more and more money, there is a whole extra slew of things to consider for minimizing taxes longer term.

The first step in self-employment is to decide how much you want to be able to make in income to support yourself and a fulfilling life.  Ask:

  • What is my short term income goal?
  • What is my longer term income goal?
  • How many hours a week will I work?
  • How many days/weeks do I want to be out of the office each year?
  • What should my product / services look like?
  • How do others charge for those services?  How much do they charge?
  • Can the above questions align into a successful and sustainable business for me?
  • How long is my current cash runway?

A key tip – we all end up charging too little for our first engagements 🙂 So feel free to charge a price higher than you think is reasonable.

Another note is that your income is taxed differently as a self-employed person.  As a business, you are the employer +  the employee and so more taxes from the employer side will show up in your tax return.  Often, this means less ‘net’ income than working for the same pay rate.   Here is a self-employment tax article explaining the implications.

Should I be a ‘sole proprietor’ or create an LLC?

This is a hot topic – does it make sense to create an LLC for my business?  Well, it couldn’t hurt.  A single owner LLC can still file their taxes like a sole proprietor and include the business income on their personal tax return.  

An LLC is a flexible business entity that can grow with you as your income increases.  Then, you determine how big to grow the business (a bigger team, international presence, etc)

Here is a great article from Wolters Kluwer on the pros and cons of an LLC and how to form one.

Each state is different in how they tax LLCs vs sole proprietors.  For example, California has a Franchise tax with a minimum $800 fee annually.  Build this into your income projections.

Beyond the LLC taxes, you have other reporting requirements.  Reporting vendor payments (For 1099s), annual information reporting (Secretary of State filings), Sales and use tax, and Beneficial Ownership Information ‘BOI’ reporting.  Get to know the rules for your LLC entity to make sure you stay in compliance.

If you don’t have an accountant or bookkeeper, now may be the time to find a good one!

What are the financial benefits of being self-employed?

This is one of my favorite topics as a financial planner!  Oh, the opportunities 🙂

As a self-employed individual, you may be able to make a bigger retirement contribution.

Many professionals in the tech space have the opportunity of a 401(k) contribution, a good employer match, and sometimes an after-tax 401(k) to lean into.  These are pretty wonderful retirement benefits to go up against.

If you make enough income to support yourself and have room for investments, there are many ways to put away more pre-tax dollars.

My personal favorite is a Solo 401(k).  This may not be the right solution for all, so please speak with a professional about your specific situation.   

A Solo 401(k) is like a 401(k), but for self-employed individuals.  You get to be the employer and the employee.  So you can match yourself!   The calculation is a little more complicated than doing whatever you want.  A good estimate may be to use AARPs self-employed 401(k) contribution calculator to visualize what this could mean for you.

Solo 401(k) value:  a simple example

Let’s assume as an employee or a self-employed individual, your goal is to make $220,000 in income.  This lets you enjoy your time, make enough money to cover your expenses, and continue to invest.

As an employee, you would be eligible for a 401(k) contribution up to $23,000 and receive an employer match.  If you maxed out your contribution, and your employer match was 6%, you would put $24,380 towards retirement in a year.

As a self-employed individual, you would be eligible for the same 401(k) contribution of $23,000 and an employer contribution.   With a Solo 401(k), that employer contribution could be up to $41,000 in this example.  That means, in theory, you could put away almost $64,000 towards retirement a year!

Barring the fact you may need some of those funds, this is quite a pre-tax contribution.  This may also reduce your taxes by a considerable amount.  Depending on your situation, it may knock you down a tax bracket or two.

You will be able to continue making contributions as long as you do not have any part-time employees working over 2,000 hours a year for you.  Once you bring on full time employees, the benefit of the Solo 401(k) is no longer available to you.

At that point, you will need to put in a company wide plan if you wish to continue making retirement contributions.  There may be other deferred compensation plans available as well.

Even if you can only enact this strategy for a few years, a Solo 401(k) could be to your advantage.

If you work for an employer and do side consulting, the Solo 401(k) may not be the best option for you.  Check with a professional on what is best for you.

Self-employment is a delicate balance

As I work with self-employed individuals, I find there is an incentive to work a little bit more to bring in a little bit more money …until you hit a burnout.  Then, life tends to show us that a little more work isn’t worth the money.  

I encourage you to decide on that balance ahead of time and stick with it.  Check in with yourself on how you feel about your time worked in the business and time outside the business.

Remember, this business exists to support your life.  If it isn’t making your life better, then why do it?

Self-employment requires a wide range of skill sets including sales, marketing, project management, etc.  If you can get over this hurdle, you will control your work, have more flexibility in your time, and a happier work life.

I wish you the best in your self-employment journey!

P.S. For ongoing clients, we dive deep into the weeds of accounting setup, operations, and taxes.  Setting your business up for success allows you to focus on the work you are meant to do 🙂

If you are interested in learning more, schedule some time to chat with us.

The above discussion is for informational purposes only.  Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

 

Selling your Startup? What the Best Investors Do

Startup Sale

Did you know part of your startup sale can be excluded from federal taxes?

A provision in the tax code helps minimizes taxes for the wealthy investor and startup employee upon a stock sale. It’s called the Qualified Small Business Stock (“QSBS”) exemption.  Most startup employees have no idea they can use this!

This allows a C Corp shareholder to exclude up to 100% of their gain from taxes, if they meet certain parameters.

To qualify for the QSBS exclusion, five criteria must be met (legal jargon to follow):

1. The stock must have been directly acquired via an original issuance from a U.S. C corporation (Sec. 1202(c)(1));
2. Both before and immediately after stock issuance, the C corporation’s tax basis in gross assets did not exceed $50 million (Sec. 1202(d)(1));
3. The C corporation and shareholders must consent to supply documentation regarding QSBS (Sec. 1202(d)(1)(C));
4. The C corporation conducts certain qualified active trades or businesses (Sec. 1202(e)); and
5. The stock must have been held for more than five years (Sec. 1202(b)(2)).

You can find a tax checklist for the requirements HERE.

Many early stage startups will meet these criteria. If you are FinTech, then you may need to do more analysis to see if you can be treated as QSBS. This goes for the other excluded industries as well.

Once you determine the startup is a QSBS, you can exclude part of the gain dependent upon when you bought the stock.

Federal Exclusion of QSBS Gain

Acquisition Period Percent Exclusion (Regular Tax) AMT Add-Back
Before Feb 18, 2009 50 7
Feb 18, 2009–Sept 27, 2010 75 7
Sept 28, 2010 and later 100 0

The remaining capital gain is taxed at a 28% capital gains rate instead of the 15%/20% long-term rate. This may sound like you are worse off, but the benefit comes in the amount of gain you can exclude from the taxable calculation.

Most sales for higher wage earners will trigger AMT. For AMT purposes, 7% of the excluded gain is added back to taxable income for the computation of stock sold before Sept 28, 2010.

You will also need to consider the Net Investment Income (“NII”) tax at 3.8%. This will be applicable under all scenarios when the taxable income threshold is met.

Let’s see how Qualified Small Business Stock works through an example.

Assume you sell your startup and meet the 5 criteria for considering this stock qualified small business stock.
Your regular ordinary income is about $500,000 with your spouse.
Your share of the business gain is $350,000.

Purchase Date: January 3, 2009

Your estimated tax would be calculated as:
$350,000 x 50% exclusion = $175,000 excluded gain
$350,000 – $175,000 = $175,000 taxable gain
$175,000 x 31.8% (28% capital gains rate + 3.8% NII tax) = $55,650 regular tax
$175,000 x 7% AMT add back x 28% capital gains tax = $3,430 additional minimum tax (AMT)

Estimated total tax due on business gain: $59,080
Estimated effective tax % of gain: 16.88%

Purchase Date: January 3, 2010

Your estimated tax would be calculated as:
$350,000 x 75% exclusion = $262,500 excluded gain
$350,000 – $262,500 = $87,500 taxable gain
$87,500 x 31.8% = $27,825 regular tax
$262,500 x 7% AMT add back x 28% = $5,145 additional minimum tax

Estimated total tax due on business gain: $32,970
Estimated effective tax % of gain: 9.42%

Purchase Date: January 3, 2011

Your estimated tax would be calculated as:
$350,000 x 100% exclusion = $350,000 excluded gain
$350,000 – $350,000 = $0 taxable gain
$0 x 31.8% = $0 regular tax
$0 x 7% AMT add back x 28% = $0 additional minimum tax

Estimated total tax due on business gain: $0
Estimated effective tax % of gain: N/A

What if you didn’t claim the Qualified Small Business Stock exclusion?

Your estimated tax would be calculated as:
$350,000 x 20% long-term capital gains rate x 3.8% NII tax = $83,300

Estimated total tax due on business gain: $83,300
Estimated effective tax % of gain: 23.8%

Now that you see the benefits, what do you need to do to claim the QSBS exclusion?

Make sure you have documentation to backup your belief you meet the 5 criteria.

This may include:

  • proof of initial capitalization at your purchase date (i.e. 3rd party valuation documentation – tying to your 83(b) election valuation)
  • proof of stock purchase date (stock certificates or copy of check) and
  • certification from the company that they are a U.S. C Corporation (i.e. IRS Form W-9)

Hire a tax preparer for the year in question. The simplified example above does not include a discussion of how each state may further tax your business gain. They will also make sure they have the documentation to support the QSBS exclusion on file in case of audit.

Where are you in your start-up adventure?

Making the jump from Corporate life to a Startup?
Did you just receive your stock option grant?
Are you thinking about purchasing your vested options?

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.

How to Change your Life with your Bonus

Tech Career

Surprise! You received a little extra cash for the year. What should you do with an unexpected or year-end bonus?

A bonus is an opportunity to start a habit that will change your life for the long-term. Many times, we end up spending bonuses on a present to ourselves for all our hard work. Instead, allocate it toward goals that will pay compounding presents to your future-self!

The top four ways to use your bonus for a present to your future-self are:

  1. Pay down high-interest debt
  2. Fund emergency savings
  3. Fund retirement savings
  4. Invest

Pay down high-interest debt

What defines ‘high-interest debt’? In my mind, this is debt that you don’t pay off on a monthly basis and has a higher interest rate than 8%.

List out your high-interest loans and credit cards, the balances outstanding, and what the interest rates are. Stack the debt by highest interest rate and start hacking away. Doesn’t that feel good?

But here is where the habit part starts. Paying off your debt and keeping it paid off are two different things. If you make the decision to pay off your debt, you should also make the choice to keep it paid off. Take another look at your spending habits and put together a budget to make this good feeling last.

Fund emergency savings

Do you have 3 to 6 months of savings on hand for emergencies only? If you think your credit card limit counts, guess again. Having three to six months worth of savings is vital in today’s economy. You may bounce around from job to job more often or decide you need a sabbatical to check back in with yourself. Not having this money available for breathing space wreaks havoc on your emotional well-being.

Fund retirement savings

Do you have a 401(k)? Are you making the maximum contribution? If not, this is a chance to save for your future self and reduce your taxable income. Cha-ching!

Invest

A lot of articles I read are focused on setting the right tone with budgets and savings. What do you do for your longer term savings goals? Maybe you want to take an international trip in 5 years, provide for your children’s college fund, or invest extra money so you have more options in the future.

Long-term success requires investments in yourself and in the financial markets.

Little tweaks now create huge differences later. The benefits of compounding interest and gains can change your life. Check out our philosophy on long term success HERE.

Schedule a free consultation to see how we can help.

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

3 Steps for Long-Term Budgeting Success

Budgeting Success

Budgeting sometimes feels like a New Year’s goal for weight loss.  “I’m going to stay on top of my budget this year!” “I am going to start tracking my expenses January 1st!”

The truth is, you only have so much time.  Like with weight loss, there is no magic pill but there is a long term sustainable option.  To get to this, I recommend a three stage approach:

Budgeting Step 1:  Manual process – one or two months of inputting every pain-staking expense into a spreadsheet (example here).


This hurts – but only for a short bit!  If you really want to see where every dollar goes, manually categorizing expenses in a spreadsheet is the way to go.  However, a manual process generally isn’t sustainable.  I generally recommend doing this for one or two months to see where your money is going and then switch to a semi-automated or automated format.  

Think of it like visiting the nutritionist or a personal trainer, they want to see a week or two of exactly what you’ve eaten and when.  This helps them, and you, understand your starting point.

Budgeting Step 2:  Semi-Automated process – Mvelopes app or other budgeting app that works for you.  Generally for around 6 months.


Using mvelopes, or a similar service, allows you to connect your bank accounts for automatic feeding in of expenses.  Then you can set categories and assign transactions to those categories.  For categories, you can get into specifics like electricity, water, internet, etc. or have one category of utilities to include these.  I like how easy it is to see where you are with each budgeted category.  I’m using an app right now since having a baby changed our expenses a bit.

Make it fun by setting goals for each expense category and see if you can ‘beat the goal’ by spending less than you budgeted for.

Budgeting Step 3:  Automated process – Mint.com with the ‘Big 3’ categories for long term success.


Category 1:  Home – includes only housing, transportation, utilities and groceries (suggested to be no more than 50% of take-home pay).  These are your semi ‘fixed’ costs – so a lower percentage of take-home pay is even better!

Category 2:  Investments – includes savings, debt payments, and personal investments (suggested to be at least 20% of take-home pay)

Category 3:  Miscellaneous – includes lifestyle choices from gym fees, hobbies, eating out, internet, cable, etc. (suggested to be no more than 30% of take-home pay)

Within Mint.com, you can set ‘rules’ for expenses to automatically flow to these categories.  It will take some time in the beginning, but as you frequent places this will quickly go down to a few updates a month.

Notice yourself spending outside of the budget again? or want to fine tune your budget?  Go back to Step 1 or 2.  This is a sliding step process as you find your needs change.

Budgeting is an important step in building your financial home.

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

What should I know (and ask) before hiring a financial advisor?

In lieu of my usual weekly post, I thought it would be helpful to share some content from The National Association of Personal Financial Advisors (‘NAPFA’).

The financial advising world is full of different ways of making money from clients, with some ways more transparent than others.  Some advisors use commissions from investment sales to primarily pay themselves (sometimes up to 8%!) and others use a percentage of assets (AUM) only.

NAPFA is kind enough to offer resources to the public detailing great questions to ask potential advisors, how to obtain a full picture of your advisors compensation, and what is important about having a fiduciary in your life.

If you are considering a financial advisor, take advantage of these resources HERE.

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.

Building a financial plan is like building a home

Buying a home

As a financial planner, we talk in numbers and make it sound so simple.  If you want X in the future, you have to give up $Y now in spending.  

Are those choices easy to make though?  

Financial plans are based on assumptions, and the outcome of the plan can seem distant and uneasy to grasp.  So I compare it to building a home.

Where will you build? How many bedrooms? Two floors or one? With a pool?  Before you can hire the architect to put together a design, there are a ton of questions to ask yourself.

In the financial plan process we start with defining and thinking about all the angles of your financial life and what you want.

By identifying your current, mid-term, and long-term goals, you set the blueprint for what the house looks like.  You proverbially map out room sizes, doorways, and other details.

With this information, the builders can start their work. Determining how much cement is required for the foundation, how many beams are needed to create the walls based on the floor plan, etc.

Your goals will inform how much in savings and investments you need to make now to complete your goals later.

Once the builder knows how many pieces are required to complete the home, you receive a basic cost outline for the structure.  Can you afford the basics?  Maybe once you’ve seen the outline you decide you don’t really need a second guest room.  How often will you have guests over anyways?

Next comes the interior designer.  You chat about cabinet finishes, wood flooring, and whether brushed bronze door knobs or the standard silver will do.

Knowing the costs now help you prioritize what you value most in the home.  

What do you value about building your own home?  Was it about the location?  Did all the other homes have two bedrooms but your family needed a third bedroom?  

Then, if you get a bonus or raise later, you can decide where to add flexibility.  Maybe you will start with carpet and standard silver door knobs, and then upgrade to wood floors and brushed bronze door knobs.  If it happens, great – but if not, it doesn’t affect your most important value of being in that location.

Every decision you make is a trade-off between current and future expenses.  Future expenses are the savings and investments you make now to be ready for these expenses later.  

You are always making these decisions.  Even not making a decision is a decision in the end.

Financial plans start with knowing your values, identifying your goals, and establishing priorities.  What kind of life do you want to build?  

Schedule a consultation to see how we can help.

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

Signs You Need a Financial Planner

Financial planner Seattle

Financial Planners Help Build Better Experiences

Sometimes it’s hard to tell if you need professional help for a problem or if you can handle it yourself. Whether it’s taking care of a common cold, fixing the sink, changing the oil in your car or doing your own taxes. The same question often arises about finances.

It happens all the time – financial questions pop up that you consider silly or stupid so you feel like you must handle alone and you don’t seek help. This is not the best course. As happens often in life, not reaching out to a professional can delay you reaching your goals and cause you to incur more out-of-pocket expenses and lots of headaches.

Here is the thing: there are no stupid questions when it comes to your finances. Don’t ever sit on the sidelines and fear asking a question or think you’re unqualified to go to a planner. Solid and respectable planners let you know if they can’t help you and refer a professional who can. They also let you know if they think you can plan your finances yourself.

Here are signs you may need a financial planner:

You recently married

To merge or not to merge finances is a huge question: emotions to contend with, forms to update, cash flow to track, debts to pay down, goals to lay out and spending habits and needs to reorganize and prioritize.

Communication during this transition helps you navigate possible questions about taxes, investment allocation updates, selecting benefits, joint roles in management of the household, deciding whether to maintain separate bank accounts and more.

You make a career change

Job or career transitions also bring changes in income and benefits. As a tech employee, you have a little more complexity than the average bear.  Stock compensation can make a huge difference in your overall compensation.  Make sure you maximize your company benefits, leave no retirement accounts behind and ignored, plan appropriately for income fluctuations, take into account future job growth or career prospects and consider the transition’s overall influence on your lifestyle.

You own a business

Whether considering starting your own business or a long-term entrepreneur, you likely need to know how to prioritize goals, pay yourself while keeping the operation running and the best way to manage cash flow on an income that fluctuates monthly.

Not to mention saving for retirement, obtaining health insurance and protecting you and your family against a loss in income from death or disability.

Your family is growing

A baby comes with a slew of considerations: ensuring you have an emergency fund of three to six months’ expenses adjusting your spending for child care, groceries and medical costs and updating your estate plan and insurance coverage in case something happens to you, among many other needed updates.

At the End of the Day

The first step in asking for help always seems the hardest. The assistance and feedback may surprise you when you open up to the idea that you need not handle all financial questions solo.

And it makes the experience much more enjoyable.

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

Top 5 Ways to Prepare for Buying a Home

Amazon recently announced their search for a second headquarters and it got me thinking about buying a home.

The thought of 50,000 new employees in one campus location will definitely spur new home buyers.  Seattle has exploded from the number of mid-westerners and Californians moving to the state for work.  Prices are continuing to rise and for most of us, this may create a panic to buy (FOMO around prices) or anxiety around buying a home.

So how can you make this daunting task a little better? Prepare, prepare, prepare.  Don’t be forced into a rushed situation and know your needs ahead of time.  As they say..

Preparation + Opportunity = Luck

When to Buy

Why am I writing a post on buying a home after Labor Day?  Because buying a home when others are too busy is a great time!

You may not always have a choice on timing, but if you find yourself waiting for a good deal then November to January is a great time to make an offer.  With the holidays and school starting, many families may be busy and buyers can be a little scarce.

In a seller’s market, buying in the off-season may mean more bargaining power.

How to Prepare to Buy

1.  Identify a lender or two you are interested in working with.  These may be credit unions in the area, your current bank, or a referral.

2.  Decide if you need a pre-qualification letter or a pre-approval letter.  Nuanced differences – I know!

Pre-qualification is a step before pre-approval.  This is where you can give a lender an idea of your current status without verification with documents and a hard credit inquiry.  This will give you a general idea of what you can be approved for without dinging your credit

3.  Check out your credit score to make sure everything looks right and no errors exist.  A great site for checking this is Credit Karma.

If you are close to a credit score cut off point (i.e. excellent credit vs good credit) then the rates available to you may change.  Take a look at what is affecting your credit score.  Determine if it makes sense to pay down some of your debt or wait for one of the hard inquiries to fall off your credit report.

4.  Know some of your numbers:

  • If you are renting, what will it cost to end your lease early?
  • What size house are you looking for?

If the loan is considered a ‘jumbo loan‘ then lenders may require you to meet more hurdles.

  • Will you put down 20% of the purchase price?

This will mitigate paying primary mortgage insurance on top of your monthly payment for the loan.

  • What is your housing expense ratio?  Lenders generally look for your expenses to be below 30%.

Calculate an estimate:  Annual salary x 0.28 / 12

Will your mortgage payment, insurance, taxes, and HOA fees be below this amount?

  • What is your debt to income ratio?  Lenders generally look for your debt payments to be below 40%.

Calculate an estimate:  Annual salary x 0.36 / 12  Will your debt payments be below this amount?  This generally includes student loans, car loans, minimum credit card payments, child support/alimony, and other required monthly obligations.

5.  When you are ready to buy a home in the next 60 to 90 days, get your pre-approval letter.  Find out when the pre-approval letter will expire.  When the pre-approval letter expires, more documentations and another hard credit inquiry may be required.

So what do you think?  What other tips for buying a home do you have to share?  

When you are ready to chat with someone about how buying a home fits into your long term financial future, schedule a consultation with me!

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

Our Attention Span and Money

The average attention span and short-term memory recall has declined over the last ten years.  Some say it’s due to our ability to look up anything we need so our brains no longer find it a vital function.

Either way, I have strong memories of 9-11 and the 2008 crash.  I can remember exactly where I was, what the room looked like, who was around me, etc. Why do I remember the bad instances so much more?

Human psychology is so much more focused on the bad due to evolution.  Those who remembered the poison berries another ate lived longer.  Remembering bad moments in great detail allowed us to survive a longer time.

Thanks evolution – you take away my good memories and attention span and leave me with the bad ones?!

So what does this mean for today’s millennials?

We remember what it felt like and what is looked like, but we didn’t know the problems were primarily at home, and not worldwide.

The table below is a great example of how different types of stock (U.S. large stocks, U.S. small stocks, emerging markets, international, real estate, etc) can widely differ in performance from year to year.

Follow the S&P 500 (U.S. large companies stock) for example.  In the late 90s the S&P 500 was on a roll, and then when 2000 hit it became one of the worst performers for the year.  This chart ends in 2014, but I have a feeling if you saw the last 2 years the S&P 500 would be near the top again.

callan-periodic-table-investment-returns

    [link to larger version]

Looking at the changes in this 10 year period of time, I can only imagine how frustrating it must be for new investors.  How can you consistently pick the right asset classes for greatest return?

In my mind, you can’t.  This is why I believe markets are efficient and few investors can outperform, because it is all priced into the stock over time.

This allows me the freedom to ask:  how do I protect and maximize my return while reducing the likeliness of large jumps like the S&P 500 in the above table?  I do this by holding a portfolio of many types of stock.  When one type dips, I have another that may rise in value or help counteract the effect.  Thus providing a more stable return over time.

So what about keeping my money in all cash?  There is no risk to that, right?

I am all for maintaining an emergency fund based on your lifestyle and needs in cash.  I also believe large expenses in the next few years are better left in cash.

However, I do believe there is a strong argument for investing into the stock market to combat long-term inflation.

Remember when you could get gas in the 90s for less than $1.00?  Remember when bread was less than $1.00 and you could scrape together a lunch with the change you found in your parent’s stash?

The changes over the last 20 years are a prime example of what could happen to your cash pile over the next 20-30 years.  In fact, we’ve seen inflation every decade since the 1940s and only over the last three years did it momentarily slow down.[1]

Our memories can be fickle friends and keep us from making good long-term decisions.  Adding to an already emotional topic – money.

If you are interested in talking to someone about growing your wealth, start now and schedule a time for your free 30 minute consultation with me.

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.

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[1] For more information and a great chart, check out InflationData.com, “Average Annual Inflation Rates by Decade” by Tim McMahon on June 18, 2015

This post was inspired by the article in The New York Times, “Praise Is Fleeting, but Brickbats We Recall” by Alina Tugend: March 23, 2012 and the book Moonwalking with Einstein: The Art and Science of Remembering Everything by Joshua Foer

Teaching Kids about Money: 2 Ways to Enhance Learning

kids and money

Originally posted on GeekWire.com

When kids enter the picture, it can be hard to decide when to start educating them about finances. Where do you begin? How do you help them develop an understanding? Do you feel you grasp finances well enough to adequately answer their questions? *Scary*

Recently I re-read Ron Lieber’s The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money.  

This book had a few too many first world problems for my taste, but I did take away some nuggets of wisdom.

One of my favorite stories from the book is a scene right out of My Super Sweet 16 tv series. A community where the bar mitzvahs keep getting pricier and more glamorous with parents spending tens of thousands of dollars on presents for these kids. Years later, one of the parents asked their child what presents he remembered receiving at his party. He said he remembered only two presents out of the hundred received.

Were these forgotten presents worth the money? I can imagine this response may make some reconsider their gifts after hearing this.  Maybe a more meaningful and valued contribution with a smaller price tag. This question did help the child realize that for all the money spent, it didn’t provide any extra value in his life.

If we can take a pause and ask why we want something and what value it will bring to our life, it may help us discover what we really want with our money as a family.

So not only are your kids learning from you, but you are also learning from your kids. Having financial conversations with your kids is a cycle of knowledge and empowerment.  It can also feel overwhelming if parents are uncomfortable talking about finances with their family.

Without these conversations, kids rely on cues from peers on how to think about spending money, and what their financial goals should be.

One of my favorite quotes from the book is “any conversation about money also had to consider the emotional context – the wave of mixed feelings almost all of us experience about the money we have and what others around us spend.”

Ron’s book relays stories about creating an open dialogue with kids around finances in an emotionally charged world.  How can you add their voice to family discussions on what is valued, and why money is spent the way it is? Only through conversations can you increase awareness of the way social media and instant gratification changes our behaviors today.

This is about preparing kids to make good long-term decisions and to further family goals in practicing a life based on living their values.

The following are two further takeaways I plan to use from the book.

When your child asks a question relating to finances, respond eagerly with “Why do you ask?”

This question can help you see into the world of your child. Many questions asked around money originate from perceived differences, or a fear of not having enough. For example, your kid may see the number of toys another kid has and think, “They must be rich, and since I don’t have as many toys, I must be poor.”

By not blurting out a response that cuts the conversation short, we can create a more constructive and meaningful moment.  We can teach our children more about the world around them, and how each family’s values shape the experiences and physical things they decide to spend money on.

You may find it quickly becomes clear whether your own spending priorities match your values as you impart wisdom to your kids.

*the circle of life/money*

Use allowance as a tool, and reconsider tying your child’s allowance to chores

If chores need to be done to keep a home running, why do we tie this to an expectation of compensation through allowance? Ron walks through an alternative way to consider allowances and how allowances might change as a kid grows up.

He believes in beginning an allowance as early as when a kid can count, or when the child is in first grade, at the latest. An allowance can be used as a tool to show budgeting through a three-bucket system (spend, give, and save).  You can also allocate raises over time and facilitate an example of compounding interest.

I appreciate Ron’s approach to early involvement.  Often when I chat with young tech employees starting their first job, many habits are already taking root. Our chat revolves around determining goals and reevaluating which habits are aiding them or causing roadblocks when it comes to money.

The book makes it easy to start early by detailing common questions parents are asked over time, giving creative ways to incorporate savings and budgeting into a kid’s daily life, and describing how to build delayed gratification skills.

Often, things are simple and clear to our kids – either we are doing what we say, or we are not. I encourage you to grab a copy of the book and check it out!

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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.