Archives for January 13, 2020

If there’s one piece of financial advice that is touted ad nauseam, it’s that it’s crucial to save as much as you can to prepare for retirement.

There’s a good reason why this advice is thrown around so often. Approximately 45% of baby boomers have no savings at all, according to a report from the Insured Retirement Institute, and of those who do have savings, more than a quarter have less than $100,000 socked away. Considering you may spend several decades in retirement, that money won’t go very far.

It may seem, then, that the logical thing to do if you’re behind on your savings is to start loading your 401(k) or IRA with as much money as possible. In some cases, that’s a smart move. But sometimes, maxing out your retirement fund can do more harm than good.

When saving more isn’t the best idea

In general, saving more for retirement is a smart use of your money. But if you’re neglecting your other financial priorities in the process, you may end up hurting your finances over the long run.

Besides saving for retirement, two important money goals you may have include paying down debt and establishing an emergency fund. If you’re failing to pay down high-interest debt or don’t have a penny set aside in a rainy day fund, it may be a good idea to focus on those goals before you throw all your extra cash into your retirement fund.

High-interest debt is incredibly toxic, and the average credit card interest rate hovers just above 17% per year. Meanwhile, your retirement investments may only be earning a 7% to 10% annual rate of return. Depending on how much debt you have and how much you have saved in your retirement fund, there’s a chance you’re paying more in interest on your debt than you’re earning on your investments. In that case, you’re not doing yourself any favors by focusing more on retirement saving than paying off your debt.

It can also be dangerous to max out your retirement fund if you don’t have any emergency savings. Only 61% of U.S. adults have enough savings to cover a $400 unexpected expense, according to research from the Federal Reserve Bank, which means a lot of Americans are at risk of going into debt or tapping their retirement funds to cover unplanned costs. If you withdraw money from your 401(k) or traditional IRA before age 59.5, you’ll typically face a 10% penalty plus income taxes on the amount you take out. So if you don’t have an emergency fund and you’re hit with an unexpected expense, you may end up undoing some of your hard work if you have to withdraw your savings early.

How to balance your financial priorities

It can be tough to figure out exactly where you should put your money, because all of these goals are important. It is vital to save as much as you can for retirement, yet it’s also crucial to pay down debt and establish a healthy emergency fund. So what order should you focus on these goals?

First, if your employer offers matching 401(k) contributions, save enough to earn the full match. Matching contributions are essentially free money, so do your best to take full advantage of them.

Next, take a look at your different types of debt and determine how much you’re paying in interest. Because high-interest debt is the worst offender, that should be the first type of debt you tackle. Lower-interest types of debt — like a mortgage or student loans — are still important to pay off eventually, but you don’t need to put your other goals on hold to do so.

Then, consider how much you want to have saved in an emergency fund. Most experts recommend saving enough to cover three to six months’ worth of living expenses, but anything is better than nothing. So if you can only afford to save a few dollars each week, that’s still beneficial.

Finally, see how much cash you have left over at the end of each month to put toward your goals (after contributing enough to your 401(k) to earn the full match) and decide how much you want to prioritize each goal. If you’re loaded with thousands of dollars of high-interest debt, for example, you may want to put more money toward that and focus less on retirement and your emergency fund. Or if you have lower-interest debt but zero emergency savings, the focus should be more on establishing an emergency fund and saving for retirement.

Once you have the bulk of your high-interest debt paid off and a few thousand dollars stashed in your rainy day fund, you can go full speed ahead on saving for retirement. At this point, you won’t need to worry about debt interest payments overpowering your earnings or risk an unexpected expense eating away at your savings. Your overall financial situation will be much healthier, and you can save more for retirement while still achieving your other financial goals.

You might think of early retirement as something reserved for the lucky few, but the truth is, it’s open to almost anyone — as long as you follow the five steps listed below. Starting as soon as possible is key, so if you’re serious about retiring early, make sure you’re giving yourself the best possible shot.

1. Create a retirement plan

You should never retire early unless you’re confident that you have enough money to last you the rest of your life. That confidence only comes from developing a retirement plan and meeting its goals. Start by deciding what early retirement means to you. Then, subtract this age from your estimated life expectancy to get an approximate length for your retirement. Understand that you might need to revise this if you find out your initial estimate is unachievable.

Total up your estimated annual expenses in retirement and multiply it by the number of years of your retirement, adding 3% annually for inflation. You can do this on your own, but a retirement calculator makes it much easier. It can also calculate your annual investment rate of return. Use 5% or 6% to be conservative, though your money may grow more quickly than this. Finally, subtract from your total estimated retirement costs any money you expect from Social Security, a 401(k) match, or a pension to estimate how much you should save per month, and overall, to hit your goal.

2. Live below your means

We’d all like to have our cake and eat it too, but this isn’t feasible for most people interested in an early retirement. Saving enough money to exit the workforce early usually means going without some things while you’re younger. That doesn’t mean you have to give up everything fun, but you should prioritize saving ahead of discretionary spending to keep you on track for your goals. 

Create a budget for yourself including all of your monthly expenses. Figure out how much you have left over after paying your bills and hitting your savings goals. This is the money you can spend on other things, if you choose. Look through your budget for areas you can cut back spending, too, like canceling a gym membership you’re not using or making coffee at home instead of buying one at the coffee shop. Put this extra money toward savings if you want to retire even sooner. 

3. Seek out ways to boost your income

If you’re unable to save as much as you’d like and you cannot trim back your budget any further, think about increasing your income. There are several ways you can approach this. You could work overtime if your job allows it. You could also negotiate a raise, seek out employment with a different company in your field, or switch fields altogether. 

Side hustles are also becoming increasingly popular. They give you the flexibility to work when and how you want to and some of them could even turn into full-time jobs if you put enough effort into them. But if you go this route, remember to set aside taxes every month and pay them in quarterly installments to avoid running into trouble with the Internal Revenue Service.

4. Pay off debt

Debt impedes your ability to save for retirement, so you should prioritize paying down your liabilities in conjunction with saving for retirement. Those with high-interest debt, like credit card debt, may want to pay it down before they begin saving for retirement. That’s because the high interest rates you’re paying on your debt could cost you more than your retirement savings are earning over the same period.

Make a list of all your debts and record the outstanding balance and interest rate. You must make the minimum payment on all your debts to avoid late fees, but you should place any extra money you have on the debt with the highest interest rate first if you’d like to pay the least overall. When you’re finally debt-free, you can put all that extra money you now have toward your retirement.

5. Invest as much as you can

Contribute as much as you can to your retirement accounts each year first and foremost. You’re allowed to contribute up to $19,500 to a 401(k) in 2020 and $6,000 to an IRA. Adults 50 and older may contribute up to $26,000 and $7,000, respectively. Maxing out your retirement accounts every year is a good first step if you hope to retire early.

Those who plan to retire before 59 1/2 should also have some money in a taxable brokerage account. With few exceptions, you cannot withdraw money from your retirement accounts until 59 1/2 without paying a penalty, so you need an alternative source of savings to cover you until then. Taxable brokerage accounts don’t offer the same tax benefits as retirement accounts, but they give you complete freedom to invest your money how you choose and to withdraw it whenever you want. 

Follow the five above steps to the best of your ability and re-evaluate your retirement plan once per year to make sure you’re still on track. If you’re not, see if you can save a little more or delay retirement until you have enough money. If you find you’re ahead of schedule, you might even be able to retire earlier than you expected.

For rideshare drivers, tax time used to be a time of trepidation and fear as they realized no one had stashed away money for them, with each paycheck, to pay for the inevitable tax bill. However, two factors have combined that should take away most of the stress from drivers when it comes to taxes.

In the past, independent contractors were not only responsible for putting away enough money to pay their taxes, but on certain taxes they had to pay double what their employed counterparts paid. But a lot of things have changed in recent years for independent-contractor rideshare drivers and taxes.

Why many rideshare drivers won’t pay any tax

Two factors have come together at just about the same time that have taken most of the anxiety out of tax time for rideshare drivers. The two factors are:

• The 2017 tax law changes that became effective in 2018
• Much lower pay for rideshare drivers

In 2017, Congress passed a new tax law that gave favorable treatment to independent contractors and small business owners. It effectively doubled the amount of the standard deduction for single filers to $12,000, and $24,000 for married couples who file jointly.

But wait, there’s more! The new tax law also gives independent contractors a 20% deduction on “pass-through” income. As Uber and Lyft drivers, we technically own our own businesses. And if you own a business, you may qualify as having “pass-through” income.

Pass-through income is income which comes to an individual through a small business they own. That small business can be a sole proprietorship, a partnership or an S Corporation.

A sole proprietorship is usually a small business that is owned by a single individual. Owners of sole proprietorships report their business income on Schedule C of the 1040 tax form. Uber and Lyft drivers who have not setup either a partnership or an S Corporation automatically fall into this category. Most rideshare drivers are in this category.

When you receive income through a sole proprietorship, it’s the income paid to you by companies you have worked for as an independent contractor. So, all income from Uber and Lyft is included in this and subject to the 20% pass-through deduction. That means if you earn a $10,000 profit, you would deduct 20% from that and only pay taxes on $8,000.

The other factor lowering the tax bill for many drivers is the lower pay they receive now than they did a few years ago. Now, it’s entirely possible that the expenses of driving will not only wipe out any taxes drivers may have owed, but they may also create a tax deduction that can be applied against other income drivers might have.

Rideshare can offer a great tax write-off

Many drivers have income from multiple sources, and if they can establish a net loss from one source that loss can be applied against income from other sources. While there are many different things drivers can write off, that’s not what we’re talking about today.

Just as a quick example, let’s say that a driver earns $10,000 in gross income driving for Uber and Lyft. And let’s say this same driver earns another $10,000 in net income (after expenses) from other sources.

But, assume this driver was able to deduct $15,000 from his driving income as driving expenses. This would leave him with a $5,000 loss. And that loss can be applied to and deducted from his $10,000 in net income from other sources. So, instead of paying taxes on $20,000 of income, he’ll only pay taxes on $5,000 in income. And if his income from other sources was also 1099 income, then he’ll get a 20% reduction on that and end up paying taxes on just $4,000 of income.

The IRS’s standard mileage deduction is golden

There is one tax deduction available to rideshare drivers that could wipe out almost all taxable income for many drivers. The tax deduction is the standard mileage deduction the IRS allows drivers to take off their income for any business or commercial driving they do. For 2019, the IRS allowed a rather generous $0.58 per mile deduction for all business miles driven. For 2020, the rate is $0.575 per mile.

This amount adds up fast for rideshare drivers, who can easily drive 1,000 miles in less than a couple of weeks. For every 1,000 rideshare miles driven in 2018, drivers will get a deduction from the income of $580.

For every mile you drive for Uber or Lyft, you can deduct $0.58 from your gross income, thus lowering the amount you’ll owe the IRS.

In fact, in many markets across the United States, it’s more than drivers make per mile when they have a passenger in the car. They are always operating at a “loss” from a tax standpoint — which is great! It means that thanks to rideshare driving, many drivers may not have to pay any taxes at all, even if they have income from other sources. If you’re in a market where you don’t even make $0.58 a mile, you’re going to have a rather large tax write-off at the end of the year.

The best part is that you can claim this deduction not only for the miles you drive when you have a passenger in your car, but for all the miles you drive in your rideshare work. That includes the miles you drive between trips while you’re waiting for a ping. It also means miles you drive empty while you’re on your way to pick a passenger up. Basically, whenever you’re logged into the drive app, you can count every mile you drive toward the deduction.

By the way, the IRS comes up with this $0.58 per mile deduction figure by doing in-depth studies on how much it actually costs to own and operate a four-door, five-passenger sedan. That’s the average they estimate that it costs per mile for vehicles driven in the United States. They include every possible driving-related expense in that figure, down to depreciation. Remember, it’s in the IRS’s interest to keep that figure as low as possible and you can bet that they’ve done just that. So while it may sound high to you, it’s about the most reliable realistic number we have.

The key in all of this is keeping track of your business miles and keeping them separate from your personal miles. The best way to do this is with a mileage tracking app. There are many on the market, and most are free. Just check in your app store by searching on “mileage tracker.” The IRS can get pretty picky about requiring detailed records when you claim expenses like this. So a mileage tracking app that keeps up with all of this for you is essential.

If you think your cost per mile is much less than that $0.58, think again. It’s probably a lot closer to it than you may realize. Although you won’t feel the greatest part of those costs until either you need to have an expensive repair done, you’re involved in an accident or when it comes time to sell your car. But these expenses will catch up with most drivers eventually.

In 2020, taxes will not be the biggest problem for rideshare drivers

Thanks to low pay and the recent tax law changes, taxes will probably not be the worst of your problems this year as a rideshare driver. Low pay will more than likely be the bigger problem. The big question you’ll have to answer is whether or not you are really making anything after expenses.

But the upside to low pay is low taxes. If you’re in a situation where you need to lower your tax load, or if you need a write-off to apply to income from other sources, rideshare driving might be the best way to go in 2020.

RALEIGH, North Carolina — In North Carolina, House lawmakers are debating House Bill 924 which is a new legislation that would require high school students to take and pass a financial literacy course prior to earning their diploma.

The Senate passed their version of the bill earlier this week.

According to the bill’s language, at a “minimum,” the financial literacy course would require students learn about:

• The true cost of credit
• Choosing and managing a credit card
• Borrowing money for an automobile or other large purchase
• Home mortgages
• Credit scoring and credit reports
• Planning and paying for post-secondary education
• Other relevant financial literacy issues

“It’s important,” said Sandy Wheat who runs the North Carolina Council on Economic Education. “People don’t hear it and too many people graduate from the school of hard knocks where money is concerned.”

In April, Wheat taught a class on financial literacy designed to help people better manage their finances. “You have people who are immediately going into the workforce from high school,” she said. “They’re the most vulnerable and the people who need this education the most and the ones who aren’t getting it.”

Should legislation pass, freshman students entering into the 2020-2021 school year would be the first required class to take and pass the course.

“It’s imperative this day and age for kids just to be able to go to the workforce and go into adulthood just knowing how to manage their finances,” said Holly Springs parent Baxter Walker. “I do think it should be a mandatory class that would help to manage debt as they get older.”

Back in 2018, a Fort Bend ISD middle school teacher made it his goal to make sure his students were financially literate.

Shaun Thomas created an after-school program called “Invest In Yourself,” where his middle schoolers learn about credit card debt, retirement savings and how to set up their own savings accounts for college. Students even get stipends for those bank accounts.