Archive for January, 2008
Yesterday I posted part 1 of my Q&A with personal finance goddesses Manisha Thakor and Sharon Kedar, authors of On My Own Two Feet: A Modern Girl’s Guide to Personal Finance, a book which I cannot recommend highly enough. If I had my way, it would be required reading in every high school, college, and workplace in America. (Who knows how much financial heartache and credit card debt I might have avoided had this book been around when I was in my twenties?)
In today’s post, Manisha and Sharon answer my questions about whether to use cash or credit, managing that blasted quarterly-tax stash, and buying a home as a single, self-employed gal. (You can read part 1 of my interview with Manisha and Sharon here, where we discuss savings and investments.) And if any of you have a personal finance question you’d like Manisha and Sharon to answer, feel free to post it in the comments. They’ll pick five questions to answer on this blog next week.
Q. When it comes to making business purchases for which you have the cash in hand, are you a fan of using ATM cards and checks, or credit cards all the way? I know a lot of freelancers and small business owners try to put all expenses on one credit card to make for cleaner expense records (myself included). Any pitfalls to watch out for?
A. It’s a personal choice — and personally, we prefer using one credit card for all business related expenses provided you always pay off the card on time and in full. Using the credit card can provide an extra layer of protection in case a vendor doesn’t come through with a service (because you can lodge a complaint with the credit card company and stop payment). It also makes for easy record keeping. If the thought of using plastic, however, makes you stay up at night, the world won’t fall apart if you use debit cards or checks.
Q. As a freelance writer, my business overhead is low low low. In the past I’ve had a separate business checking account, but eventually I decided it was a waste of hidden fees and closed it. Is there any reason I should have a business checking account that I’m not thinking of?
A. The main reason to have a separate business checking account if you are self-employed is to help reduce the temptation to spend money you need for work and to keep your record keeping simple. If you’ve got the willpower not to touch money set aside for your work expenses and your record keeping is straightforward, by all means reduce those fees and have just one account.
Q. For years I’ve used a savings account to store the portion of my freelance (1099) income that I need to send to Uncle Sam four times a year for my quarterly estimated tax payments. But I’m starting to think I should be keeping this cash in a money market that has check-writing privileges, where I can earn about 3 percent higher interest. Are there any pitfalls to doing this?
A. So long as the money market is at a reputable financial institution (that means FDIC insured if it’s a bank) or a nationwide presence if it’s a discount brokerage house (like a Vanguard, Fidelity, or Charles Schwab), you’re in good hands!
Q. When I bought a house a couple years back, I had to show the bank three years’ worth of federal tax returns because I was single and self-employed and my income was unpredictable. I remember sitting across the desk from my mortgage broker, wondering if I should have claimed less business expenses on my annual tax returns and maybe taken a little extra work for a year or two before buying the house, just to beef up my business profit margin (and in turn, annual income). Is this a wise strategy for small business owners, especially now that mortgages aren’t as easy to get?
A. It’s a strategy, but we wouldn’t call it wise — we’d call it aggressive. Mortgages that you can’t afford are hard to get these days. But if you are looking to buy a house the “old-fashioned way” — with a 20% down payment, and a 15- or 30-year fixed-rate mortgage — and if you have good credit, you’ll be fine.
Said slightly differently, if you have to contort your finances to get a mortgage, that’s a sign that what needs work is your finances. When you strip away all the media buzz, the truth of the matter is that what’s hard now is to get a mortgage for a house with less than 20% down and/or if you have bad credit. And if that’s your situation, we’d say you’re not ready to buy a house yet. Tough love, but meant to protect the self-employed gal over the long run!
Want more? You can read part 1 of my interview with Manisha and Sharon here. You can buy their fabulous book here. And if you have a personal finance question you’d like Manisha and Sharon to answer next week, post it in the comments. They’ll pick five of the best questions to answer on this site next week.
January 4th, 2008
Seventy percent of Americans live paycheck to paycheck. Sound like anyone you know? Not to worry. My personal finance heroes, Manisha Thakor and Sharon Kedar, authors of On My Own Two Feet: A Modern Girl’s Guide to Personal Finance, are here to answer a few questions about how we can all get our financial rears in gear in the new year, especially those of us who work for ourselves (or aspire to do so).
This is part 1 of my interview with Manisha and Sharon; I’ll post part 2 tomorrow. And if any of you have a personal finance question for Manisha and Sharon, feel free to post it in the comments. They’ll pick five questions to answer on this blog next week.
Q. Many people reading this are likely smarting from their holiday shopping bills. Do you have any suggestions for avoiding a holiday financial hangover in 2008?
A. When you are trying to lose weight, the basic recipe is “eat less, exercise more.” When it comes to staying financially fit in the new year, the same formula applies: spend less, earn more. The best way to avoid a holiday financial hangover in 2008 is to attack both sides of this equation.
In terms of spending less, the obvious place to start is to look through your daily expenses and see where you can cut back. Some not-so-obvious ways to spend less include going shopping in your closet. See if there’s anything you aren’t using that you could sell on eBay. Another idea to spend less is to make sure you actually use those frequent flyer miles or reward points you accumulate; if you don’t have enough for a flight, you can trade them in for merchandise ranging from fluffy bath towels to gardening supplies.
As for earning more, as next year’s holiday season approaches, consider taking on some temporary extra work — retailers, delivery companies (FedEx, UPS, etc.), and catering companies are frequently looking for a little extra help. The combination of the one-two punch of spending less and earning more can have an incredible impact on your overall financial state of mind.
Q. Let’s talk small business. What are your top three personal finance tips for self-employed women?
A. Make sure you have health insurance. One slip on an icy sidewalk and a broken bone could easily set you back $5,000 or more. If money is tight, shop for a high-deductible catastrophic health insurance plan. You can start your search on your own using an aggregator like eHealthInsurance or you can work with a local health insurance broker in your area (you can find one at NAHU.org).
Make sure you have at least a starter $2,000 emergency fund. According to the Consumer Federation of America, the average woman in her twenties and thirties has about $2,000 a year of unexpected expenses yet only $500 in savings. That’s a recipe for stress like you wouldn’t believe. Being self-employed involves enough uncertainty; you don’t also need to be worrying about how you’d pay for a last minute ticket to see a sick relative or a midnight call to the plumber. Our favorite place to stash that fund — savings accounts at online banks like HSBC.com and INGDirect.com.
Know that Money Is the Pink Elephant in the Room. According to the American Payroll Association, 70% of Americans are living paycheck to paycheck. Shockingly, this statistic cuts across income spectrums. As financial guru Dave Ramsey famously says: Act Your Wage! Don’t succumb to peer pressure to live beyond your means. If you feel like money is tight, as often it is when you are starting up a new venture, be honest with your friends and ask them to support your decision to live within your means.
Q. What are the biggest mistakes you see self-employed women making with their personal stash of cash?
A. The biggest mistake we see self-employed women making is not knowing when they should “protect” their cash and when they should “invest” their cash. Our rough rule of thumb is that money you know you need to spend in the next 1 to 5 years should be “protected,” by parking it in an account that generates sufficient interest to offset inflation but doesn’t put your savings at risk. Examples include online savings accounts, money market funds/accounts, and certificates of deposits (CDs).
For money you don’t need to touch for at least 5 years — which for most of us means our retirement money — this is the money you are free to “invest” in riskier options like stocks and bonds. A great keep-it-simple option for this longer term money is target date retirement funds. These are the financial version of the chicken rotisserie “set it and forget it” machine. They have names like “target date 2040″ and “target date 2045,” and the dates correspond to the year in which you will turn 65. The way they work is that a mutual fund company will shift your money between stocks (most aggressive), bonds (moderate risk), and cash (conservative) as you get closer to retirement — so you literally only have to make one decision, to invest your money in the funds. You can get these funds at all the major discount brokerage firms — Vanguard, Fidelity, and Charles Schwab.
Q. Roth, SEP, WTF? Do you have a favorite type of retirement account that you recommend self-employed women open?
A. For the disciplined self-employed woman, our favorite retirement account is the SEP IRA as it enables you to contribute more money than in a simple ROTH. While you don’t get the tax-free status on withdrawals that you would with a ROTH, the ability to set aside a significantly larger chunk of change makes it a classic. However, when it comes to retirement savings, the most important thing is to do it early and often — no matter what type of account you choose!
Q. If a newly self-employed gal isn’t yet bringing home enough bacon to open a retirement fund (let alone pay herself her target salary), should she maybe eat a bit more Ramen and open the fund anyway? Or wait a year or so till she’s more solvent?
A. Eat the Ramen. The money you save early on is the most valuable. Quick quiz: Who has more money at age 65 — the woman who invests $500 a year starting at age 25, or the woman who invest $1,000 a year starting at age 35? Assuming both women’s investments go up 10% a year, the woman who started at age 25 will have $221,000 at age 65 while the woman who started at age 35 (even though she saved more!) will only have $165,000. It’s so important, we’ll say it again: START SAVING NOW are the three most powerful words in personal finance!
Come back tomorrow for part 2 of the Q&A with Manisha and Sharon. And if you have a personal finance question you’d like Manisha and Sharon to answer next week, post it in the comments.
January 3rd, 2008
Happy 2008, people! While the rest of the world has their collective head in the toilet and is making vague promises to whittle down their thighs and/or credit card debt, I imagine you’re pondering how you can make your creative goals for 2008 stick. Allow me to interrupt your list making a moment to share a little exercise that lit some TNT under one the most immobile arses I know — mine. (I promise this isn’t some lame creative visualization exercise where you daydream yourself into becoming the next J.K. Rowling.)
My suggestion: Write a one-page creativity CV (a.k.a. artist resume). That’s right. Create your writing (or filmmaking or illustration or game animation or clothing design) bio. Don’t bother mentioning what you do from 9 to 5 to pay the bills. Just crank out a page listing all your accomplishments in the creative work you’d be doing full time if money were no object and you weren’t already doing something else most of the week to pay off that heap of bills you racked up over the holidays.
Not sure what an artist resume looks like? Here’s one I really like.
Basically, you’re going to list some or all of these:
- Your education and training
- Your creations (stories, books, films, comics, designs, websites, shareware, etc.)
- Awards and accolades you’ve received
- Public appearances (readings, art exhibits, participation on a panel, etc.)
- Any relevant teaching experience you have
- Stuff you’ve done to give back to your community (judging a local fanfic writing contest, showing elementary school kids how to make dioramas, etc.)
- Professional associations you belong to (Glassblowing Babes of Birmingham, etc.)
Don’t worry if your creativity CV is short. Type it up anyway and hang it on your wall, even if the only thing on the page is the header [Your Name], Writer Extraordinaire. Now tell me you don’t want to spend a little more time this week/month/year working on that manuscript or song lyric you put aside back in October of 2005.
I did this exercise a few weeks back while applying for a fellowship of sorts, which involved creating a one-page writing CV. It also involved staring down a cavernous hole on the page where I had expected to find my creative non-fiction achievements.
Yeah, I’d published piles of reported newspaper, magazine, and web articles over the years. And yeah, my book publishing, public speaking, and teaching credits were starting impress even the most skeptical relatives in my family. But the section of my CV highlighting the humor essays and creative non-fiction stories I’d published over the years — the stuff I really, really thrive on doing — was skimpy at best. I mean, I knew I’d been back-burnering a bunch of stories I’ve been itching to write, but that was somewhere in the far recesses of my denial-happy mind. And staring into the void of the “Stories & Essays” section on my CV pretty much hit me like a tsunami.
So I have been making lists, promises, and even a morsel of headway on a couple of stories I’ve put off for far too long. And that’s what I plan to make more time for in 2008, er, just as soon as I get this next big, totally unrelated deadline off my plate.
What about you?
January 1st, 2008
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