Your cash is parked in a bank account. Do you know if it’s making or losing you money? Here are some ideas to help you make the most of your banked cash:
Understand your bank accounts. Not all bank accounts are created equal. Interest rates, monthly fees, minimum balances, direct deposit requirements, access to ATMs, other fees and customer service all vary from bank to bank and need to be considered. Start by digging into the details of your accounts. There may be some things you’ve been unnecessarily living with like ATM fees or monthly account charges. Once you have a handle on your current bank, conduct research on what other banks have to offer.
Know your interest rates. As a general rule, the more liquid an account, the lower the interest rate. Checking accounts offer the lowest rates, followed by savings accounts, which yield lower rates than Certificates of Deposits. Maximizing your earnings is as simple as keeping your cash in accounts with higher interest rates. The overall interest rate earned between all your accounts should usually be higher than the inflation rate, which is generally around 2 percent during normal times. But in the midst of high inflation like we are currently experiencing, your combined interest rate may have a difficult time beating the inflation rate.
Make smart moves. There are a couple of things to take into account when making transfers. First, federal law allows for only six transfers from savings and money market accounts per month. If you exceed this number, you’ll be hit with a penalty for each transaction that exceeds six transfers. Second, if you invest in longer-term investments like CDs or bonds, there are penalties for withdrawing funds before the maturity date. So make sure you can live without the funds for the duration of the term.
Stay diligent. Putting together a cash plan is just the start. The key to success is to be persistent. Besides losing out on potential earnings, mismanaging your cash can result in hefty overdraft fees. The more attention you devote to your cash, the more your money will grow.
Keeping your taxes as low as possible requires paying attention to your financial situation throughout the year. Here are some tips for getting a head start on tax planning for your 2022 return:
Check your paycheck withholdings. Now is a good time to check your tax withholdings to make sure you haven’t been paying too much or too little. The IRS has an online tool that will help you calculate how much your current withholdings match what your final tax bill will be. Visit https://apps.irs.gov/app/tax-withholding-estimator.
Action step: To change how much is withheld from your paycheck in taxes, fill out a new Form W-4 and give it to your employer.
Defer earnings. You could potentially cut your tax liability by deferring your 2022 income to a future year via contributions to a retirement account. For 2022, the 401(k) contribution limit is $20,500 ($27,000 if 50 or older); $6,000 for both a traditional and Roth IRA ($7,000 if 50 and older); or $14,000 for a SIMPLE IRA ($17,000 if 50 and older).
Action step: Consider an automatic transfer from either your paycheck or checking account to your retirement account so you won’t have to think about manually making a transfer each month.
Plan withdrawals from retirement accounts to be tax efficient. Your retirement accounts could span multiple account types, such as traditional retirement accounts, Roth accounts, and taxable accounts like brokerage or savings accounts. Because of this you should plan for your withdrawals to be as tax efficient as possible.
Action step: One way to structure withdrawals is to pull from taxable accounts first, and leave Roth account withdrawals for last. Another approach would be to structure proportional withdrawals from all retirement accounts that would lead to a more predictable tax bill each year.
Net capital gains with capital losses. If you have appreciated investments you’re thinking about selling, take a look through the rest of your portfolio to see if you have other assets that you could sell for a loss and use to offset your gains. Using the tax strategy of tax-loss harvesting, you may be able to take advantage of stocks that have underperformed.
Action step: Make an appointment with your investment advisor to look over your portfolio to see if there are any securities you may want to sell by the end of 2022.
Tax planning can potentially result in a lower bill from the IRS if you start taking action now. Please call if you have questions about your tax situation for 2022.
Your business mileage tax deduction just became more valuable for the rest of 2022 after a recent announcement by the IRS.
Starting July 1st, the IRS’s business mileage rate is increasing by 4 cents, to 62.5 cents per mile, while the medical and moving mileage is also increasing by 4 cents, to 22 cents per mile. The previous mileage rates still apply through June 30th.
Here are some tips to make the most of your business’s vehicle expense deduction.
Don’t slack on recordkeeping. You won’t be able to take advantage of the increased mileage rates without proper documentation. The IRS mandates that you track your vehicle expenses as they happen (this is called contemporaneous recordkeeping). You’re not allowed to wait until right before filing your tax return to compile all the necessary information needed to claim a vehicle deduction. Whether it’s a physical notebook you stick in your glove compartment or a mobile phone app, pick a method to track your mileage and actual expenses that’s most convenient for you.
Keep track of both mileage and actual expenses. The IRS generally lets you use one of two different methods to track vehicle expenses – the standard mileage rate method or the actual expense method. But even if you use the standard mileage method you can still deduct other expenses like parking and toll fees. So keep good records.
Consider using standard mileage the first year a vehicle is in service. If you use standard mileage the first year your car is placed in service, you can then choose which expense tracking method to use in subsequent years. If you initially use the actual expense method the first year your car is placed in service, you’re locked in to using actual expenses for the duration of using that car in your business. For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate the first year.
Don’t forget about depreciation! Depreciation can significantly increase your deduction if you use the actual expense method. For heavy SUVs, trucks, and vans with a manufacturer’s gross vehicle weight rating above 6,000 pounds, 100% bonus depreciation is available through the end of the 2022 tax year if the vehicle is used more than 50% for business purposes. Regular depreciation is available for vehicles under 6,000 pounds with annual limits applied.
Please call if you have any questions about maximizing your business’s vehicle expense deduction.
At the end of the year it is easy to compare revenue, gross margin, and profitability to the prior year and to your business plan. Here are a few ideas of other metrics to consider.
Customer acquisition cost. Divide the total amount of money you’ve spent on marketing over a set period by the number of new customers you’ve gained. The result is your cost per new customer, also known as your customer acquisition cost. To get an even better read, divide your marketing costs into two buckets: one you spend on current customers and one for money spent to acquire new ones. Now you have two metrics: customer acquisition cost AND customer retention cost. Compare these figures against prior years to see if you are becoming more efficient.
To go a step further, look at how much each new customer spends on average compared with how much it costs to acquire them. Knowing your rate of return for each customer can help you revise your marketing strategy.
Lead-to-client conversion rate. For many businesses, generating leads is an integral part of the selling process. If this is true for your business, clearly define each step of the sales funnel from lead to purchase. You can judge how successful your sales efforts are over time by calculating how many qualified leads are converted to sales. Remember to use these measures to refine and improve your selling process. Even a tried-and-true conversion process can get tired, but if you are not measuring it you may not know until it is too late.
Website traffic. Use tools such as Google Analytics to find out who is visiting your website, from where, and what they spend the most time on while they’re there. You can learn a lot about your potential customers and your market by keeping notes on how your website traffic changes over time and how it reacts to new content. Just don’t get stuck inside this analysis.
Seasonality. Understand and keep track of the seasonal trends for both sales and number of orders by month in your business. This helps manage human resources and cash flow in both busy and slow periods. Examining these metrics for sales and web traffic can help you prepare inventory and staffing for the busy season. It will also help you time the scheduling of technical upgrades and equipment repairs for expected slow periods. You can also use this information to shift seasonality with marketing offers to make better use of your staff during slow times.
Cash burn rate. Keeping a close watch on your cash flow statement as well as your income and balance sheet is the key to keeping your business running smoothly. Simply subtract how much cash you have at the start of the month from what you have at the end of the month. You can then divide your reserves by your cash burn rate to see how many months you can sustain that rate.
A key to the usefulness of this measurement is maintaining a forward-looking financial forecast for the next 12 months. This will help you take timely actions to avoid a cash crunch, such as cutting costs, improving sales or collecting accounts receivable.
Remember that measurements for measurements sake is just busy work. The key to all of them? They need to provide an actionable result for your business.
Home-based businesses can be financially rewarding and provide a certain amount of flexibility with your day-to-day schedule. Here are some tips to keep your business running at full steam.
Stay on top of accounts receivable. It’s easy to get caught up with fulfilling your business obligations while invoices you’ve sent out go unpaid. Agree to payment terms in advance with new customers and immediately – but politely – communicate with them as soon as they miss a payment deadline. Keep current with regular invoicing and collections.
Keep your bookkeeping records up-to-date. You may not realize you have an unpaid invoice that’s several months old unless your bookkeeping is up-to-date. Keeping accurate books involves more than balancing your bank accounts once a month. In addition to your monitoring your bank accounts, also consistently look at your accounts receivable, accounts payable, any debts (credit card, car loans or other borrowings), and all money you invest in your business. Ask for help if you don’t have enough time to do the bookkeeping yourself, or if you need help properly setting up your bookkeeping software.
Check on permit requirements. Depending on what type of home-based business you have, you may be required to obtain various permits, licenses or other registrations. If you have not already done so, check with your town or city for local requirements. The Small Business Administration is also a good source to research information on permits.
Get insured. Obtain adequate insurance for the type of operation you’ll be running. Besides the insurance required for business activities, you might consider adding a rider to your homeowner’s policy for liability protection should an accident occur on your property.
Stay on top of technology. While you may not need a top of the line computer, be sure that the technology equipment you use can handle the bandwidth of everything you’ll ask it to do, including video calls, software apps and data storage. Also consider scheduling a time for your internet provider to visit your home to make sure everything is in working order and your security protocols are top notch. Have a back-up plan in place for when a device breaks down, including where you’ll go to have it repaired.
Cash in on tax breaks. Take advantage of the tax breaks available to home-based businesses, including deductions for supplies, equipment and vehicle expenses. You may even be able to deduct the cost of your home office, including a pro-rated amount of your real estate taxes and utilities, if certain conditions are met.
Set aside money to pay your taxes. Ask for help to calculate how much of your incoming cash you should be setting aside to pay your federal, state and local taxes. Consider opening a separate bank account to transfer your tax money into.
Please feel free to reach out with any questions or concerns you may have.
In the back of every Form 1040 instruction booklet there’s a section that shows where our federal government gets its money and where it is spent. As taxpayers, it makes sense to know this information. Here is the data for the government’s fiscal year ending September 30, 2019, as reported by the IRS in the 2020 instruction booklet for Form 1040. Please note that this spending is prior to COVID-19 relief bills.
FY Ending 2019
Inflow:
$3.464 trillion
Outflow:
$4.448 trillion
Deficit:
$984 billion
TOTAL INFLOWS
39%
Personal Income Taxes
28%
Social Security, Medicare, Unemployment Taxes
22%
Borrowing to Cover Deficit
6%
Excise, Customs, Estate, Gift and Misc Taxes
5%
Corporate Income Taxes
SPENDING BREAKDOWN
42%
Social Security, Medicare, & other retirement. These programs provide income support for the retired and disabled and medical care for the elderly.
21%
National defense, veterans, and foreign affairs. About 15% of outlays were to equip, modernize, and pay our armed forces and to fund national defense activities; about 4% were for veterans benefits and services; and about 1% were for international activities.
21%
Social programs. About 15% of total outlays were for Medicaid, SNAP (formerly food stamps), TANF, SSI; and 6% for health research and public health programs unemployment compensation, assisted housing, and social services.
8%
Net interest on the national debt (at historically low interest rates).
6%
Physical, human, and community development. These outlays were for agriculture and environment; transportation; aid for education and college assistance; job training; deposit insurance, commerce and housing credit; and space, energy, and general science programs.
2%
Law enforcement and general government.
SOURCE: IRS publication i1040gi, P.110, 2020 Tax Year
What You Need To Know
Deficits of $1 trillion are not sustainable. No matter where you fall on the political spectrum, annual deficits of $1 trillion cannot be sustained. And remember, this information is detailing a pre-pandemic deficit. It may be several more years before the annual deficit gets back down to this level, if at all.
Government borrowing hurts all taxpayers. In 1990, $50,000 worth of Certificates of Deposits (CDs) earned a cool 8% interest, or $4,164, each year. Today, that same $50,000 earns just 0.6%, or $301. What happened to the other $3,863? Your interest income is now helping to cover money borrowed by the government in the form of lower interest rates. Look at 2019…almost ¼ of the money spent by the federal government was borrowed!
Low interest expense risk. Look at the percentage of money spent on interest expense in 2019. It’s 8% with interest rates hovering around zero. So what happens when rates actually start to go up? As a percentage of overall expenditures, interest expense could double to 16%…and potentially go even higher than that.
Make a difference. Whether we should spend more or less is not the issue. It is that spending more than you bring in will cause big problems…eventually. Money doesn’t just magically appear on printing presses. That money has to come from someplace and that someplace is from everyone. So make your voice heard…it’s your money!
