Friday, June 26, 2015

What Oscar Wilde Can Teach Us About Saving and Investing

Comparing yourself to other people can create a lot of anxiety. These comparisons can apply to any area of live: Career, marriage, hobbies, fitness. This process can become a vicious cycle: We compare ourselves to other people, we don’t think we measure up- and then we stop trying altogether.

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The author and playwright Oscar Wilde has a great quote: “Be yourself; everyone else is already taken.” The point here is to more forward based on who you are and what you can reasonably accomplish.

This view should apply to savings and investing.

Simply starting

Many people don’t feel that the amount they save for investing is enough. As a result, they don’t save at all. Any amount is better than nothing. And if you’re wondering where you can find dollars to save, consider your trips to Starbucks.

OK, so I didn’t see prices for items on the Starbuck website. However, #HackTheMenu (great name) does provide prices. A Grande Café Latte is $3.65, and the same size regular Coffee is $1.95.

Let’s say that you run by Starbucks for that Café Latte 5 days a week. To save money, you decide to by a coffee four days a week, rather than the Latte. That saves you ($1.70 *4 days = $6.80 a week). In a 4-week month, that’s $27.20. The figure adds to up $326.40 a year.

The magic of compounding

OK, so you’re not convinced that $326 is all that meaningful. Well, what if you invest the money at a 5% return for 10 years? Let’s further assume that you reinvest your earnings each year.

By reinvesting earnings, you take advantage of the magic of compounding. Compounding means the ability to earn interest on interest. Say, for example, that you invest $100 at 5% interest. At the end of year one, you earn $5. To use compounding, you reinvest the $5 at the same interest rate. In year two, you earn 5% on $105, or $5.25. You earned an extra 25 cents by compounding.

Tools on the web

You can find lots of great tools on the web to calculate compounded interest. I like this one from Bankrate. If you plug in $326 compounding at 5% for 10 years, the total is $531. That’s earnings of $205, or a nearly 63% growth rate over 10 years. Not bad….

How long would it take your money to double in value? To find that answer, you can apply the Rule of 72. Simply take your rate of return (5%), and use that number to divide into 72. In other words (72 / 5 = 14.4). In 14.4 years, your money would double.

Start investing- at whatever pace you can. Be yourself. Any amount of investing will pay off for you over the long haul. You’ll feel good about what you’ve accomplished.

What strategies have you used to start saving and investing? I’d love to hear from you.

Ken Boyd
St. Louis Test Preparation
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

Image: Therrry Ehrmann, Oscar Wilde painter portrait_DDc0271 (CC By 2.0)

Thursday, June 25, 2015

Warning Signs That Your Mutual Fund Will Generate A Tax Bill

Planning for your personal tax return becomes more complicated each year. Townhall reports that the federal tax code (CCH Standard Federal Tax Register) is over 73,000 pages long. If you have an unexpected taxable event, the process of planning for your tax liability is even more complicated. A mutual fund may generate more taxable income that you expect.

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Tax deferred vs. currently taxable
For starters, make sure that you understand whether your mutual fund is in a tax-deferred account, or an account that is taxed each year. If you invest through work, you may be using a tax-deferred vehicle, such as a 401(k).

Generally speaking, investments that are defined as retirement plans are tax-deferred. In addition to your 401(k), your IRA account may also grow tax-deferred. Ask your employer or your financial advisor to clarify the tax impact of your mutual fund investment.

Three areas of tax
If your mutual fund is taxable each year, here are three areas that will cause your mutual fund to incur taxes. So, consider these warning signs for each type of tax:

·      Interest: Interest earned on corporate bonds, agency bonds and many government securities is taxable. If you own a bond fund, be aware that interest earned on bonds is taxable.

·      Dividends: Dividends earned on common stock is also taxable. Many stock funds focus on buying high dividend stocks as a part of the fund’s investment objective. If the goal is to own stocks that pay a higher than average dividend, that will generate higher taxable income. Read the summary prospectus for your mutual fund to verify that fund’s investment objective.

·      Realized Capital Gains: Buying and selling securities generates realized capital gains, which are taxable. These gains can be generated for both bonds and stock sales. If your fund sells securities at a loss, the losses are used to offset gains. A fund that ramps up its trading activity will generate more gains and losses. Check your fund’s portfolio turnover rate. The turnover rate indicates how much securities trading the fund is generating.

Fortunately, there are tools that can help you determine the impact of taxes on your mutual fund’s performance. Morningstar is a great site to review mutual fund performance. One statistic they use is Tax Cost Ratio. This ratio measures how much a fund’s annualized return is reduced by taxes. Take a look at the ratio for your fund.

Use these tools to see the warnings signs that you taxable mutual fund may create a tax liability for you. Include any tax liability in your planning for the year. Doing this work upfront will help you plan for next April 15th, and give you some peace of mind.

Have you dealt with a frustrating mutual fund taxation issue? I’d love to hear from you.

Ken Boyd
St. Louis Test Preparation
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
 (amazon author page) 
(cell) (314) 913-6529

Image: Sue Waters CC by SA-2.0

Wednesday, June 24, 2015

Four Homeowners Insurance Mistakes You Don’t Know You’re Making

Damage to your home can be devastating. Even if you have insurance coverage, the process of recovering your valuables, filing a claim and possibly having to move can be traumatic. (Some close friends of mine had a house fire on Christmas Day of 2014. Fortunately, the damage was limited and no one was hurt).

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You can’t eliminate the risk of a house fire or weather-related damage, but you can make sure you understand your coverage. Bankrate explains 4 situations that are not typically covered under a standard homeowners insurance policy:

·        Flooding: This situation may surprise you, since flooding is fairly common. Most people think that flooding is covered in a homeowners policy, but damage due to flooding is not normally covered. Fortunately, the federal government advertises flood insurance coverage options through the site.

·        Mold: The Center for Disease Control and Prevention points out that some people experience breathing problems due to mold. Your homeowners insurance policy will typically offer limited coverage for mold- or exclude coverage completely.

·        Sewer Lines: Many cities are not properly maintaining sewer lines. Sewer lines are at risk of backing up, due to the aging infrastructure. The lines are designed to handle both storm water and raw sewage. A sewer line backup can damage your home’s structure (floors, walls, electrical systems). The backup can also damage furniture and other values in your home.

·        Renters Insurance: A final point for people who rent property. You landlord’s homeowners insurance on your rented property does not cover anything inside the structure. To cover your personal property, ask an insurance agent about a renters insurance policy.

To ensure that you have coverage for these issues, you can add an endorsement to your homeowners policy. Your insurance premiums will be more expensive, but you’ll have coverage.

Your home is likely your biggest investment. Use these tips to have some peace of mind about your home or rented property.

Do you know someone who has had an issue with homeowners insurance? I'd love to hear from you.

Ken Boyd
St. Louis Test Preparation
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
(cell) (314) 913-6529

Image: Karol M  Houses all in a row (CC By 2.0)

Tuesday, June 23, 2015

How to Manage Suppliers (Without Angering Taylor Swift)

There’s nothing more frustrating than to get an order from a client that you cannot fill. Not only do you lose the revenue from the order, you also run the risk that the customer will start doing business with a competitor. If you can’t deliver a product or service when the client shows up, you may lose all future business to the guy down the street.

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The importance of suppliers

Having reliable suppliers is critically important to a business. If you manage a retail clothing shop, for example, you need quality products that your clients want to buy. You need a supplier who can provide the right styles, sizes and colors.

The supplier needs to provide the quantity of product you need- when you need it. Finally, the price you pay should be reasonable.

If you make a product, you may use suppliers to provide components for your product. A shoe manufacturer needs a leather supplier, for example. The same factors apply to a manufacturer. You need the supplier to deliver a quality product on time, and at a reasonable price.

When the product drives the business

In some cases, a few specific products drive sales for the rest of your business. We’ve all seen, for example, a display of shovels and rock salt at the grocery store before a snow storm. The grocery store hopes that you’ll come into the store because you really need a shovel. While you’re there, you’ll remember that you need bread and milk.

The shovels might even be priced as a loss leader. The store may sell the shovel at a loss, hoping that you’ll come into the store to buy other products- products that are sold at a recent profit margin.

Which brings us to Taylor Swift.

Taking a big bite of the Apple

As TimeMagazine explains:

“Apple announced on June 8 that it would launch its own streaming music service…. But its launch would come with three free trial months of service—months during which it would not compensate labels for the music it streamed.”

Once Taylor Swift protested that she was not going to be paid royalties during the three-month trial period, Apple backed down and agreed to pay the fees. Taylor Swift is not only a big draw to users of the music service- she also has influence over other artists. The supplier (Taylor Swift) is driving the business (streaming music service).

Managing suppliers

In the case of Taylor Swift, the customer demand for the product outweighs the price paid for the product (royalties). In other instances, you may determine that more than one supplier can provide the product to you.

A common mistake in business is to “chase” the supplier who offers a cheaper price. There are other considerations besides price:

·      Quality: If the product has defects, it will slow a manufacturer’s production process. If you’re a retailer, you don’t want to sell a defective product that you stock in inventory.

·      Timing: As mentioned above, a supplier must be able to ship you product when you need it. If not, you may lose business. Paying 10% less doesn’t do you any good if the product is shipped late.

·      Variety of Product: A big issue for many businesses is using too many suppliers. One way to address this issue is to find suppliers that offer many of the products you need- one stop shopping for you. If your supplier can meet this requirement, you might be willing to pay more.

Consider all of these factors when looking for suppliers. Meeting the needs to your customers is about more than just price. By using these tips, you can meet your client’s needs and grow your business.

Have you dealt with a difficult supplier situation? I’d love to hear from you.

Ken Boyd
St. Louis Test Preparation
Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies
 (amazon author page) 

(cell) (314) 913-6529

Image:  Spark CBC, microphone, (CC By SA-2.0)