You need to learn how to manage what you make and cultivate a culture of saving. Your money should work for you. If you have uncontrollable spending habits, you will end up doing even worse than people who make way less than you. Take your time and research growth markets. Loving what you do will take you closer to the financial freedom you yearn for. You can make a lot of money but lead a miserable life because you do not enjoy your job.
If you follow your passion, all other things will fall into place. The best way to choose a career that you love is by getting into one that utilizes your strengths.
You will be an important asset to the company or your business. If you do not have goals, it will be easy to get lost at sea. Have a clear plan of what you want to achieve and the methods you will use to achieve it. This complete summary of the ideas from Larry Swedroe's book "Wise Investing Made Simple" shows how investing is chock full of myths and incorrect perceptions, wrapped up in an awful lot of hype.
In his book, the author advises the reader to ignore all of that and claims that if you genuinely want to make money, you should become a passive investor. He advises investors to put their investment capital into index or mutual funds which reflect the value of the entire stock market. This summary demonstrates the true key to investing success.
Build Real Wealth! Be proactive in your quest to live the life you dream of. Learn how to understand what you're really buying, and dodge the traps of spruikers and their dreaded up-sell techniques. Understand property, contract and loan types, savings that can be made on taxation, and how to avoid the pitfalls of rental property investment before you make the purchase. Do you have a fam- ily history of health problems? Historically, inflation in the U.
Your calculation would be as follows:. After calculating your inflation-adjusted retirement spending needs, multiply that number by Why do we multiply by 25? Fortunately, that idea is absolute nonsense. You do not need to pick stocks in order to be a successful investor.
And, more likely than not, attempting to pick stocks will only harm your returns. What so many individual investors seem not to understand is the fact that the person on the other side of the transaction is, more likely than not, a professional investor i. Investing in diversified mutual funds frees you from having to constantly watch and worry about a portfolio made up of a handful of stocks, as. So why do so many investors make the mistake of thinking that picking above-average stocks will be easy?
But it sure sells magazines. Odds of success: not so good. Pretty straightforward, right? Big mistake. To recap from Chapter 1: Most mutual funds are run by people picking stocks or other investments that they think will earn above-average returns. Index funds, however, are passively managed. That is, they seek only to match rather than beat the perform- ance of a given index.
For example, index funds could be used to track the performance of:. The goal of most actively managed funds is to earn a return greater than that of their respective indexes.
For example, actively managed U. Interestingly, most investors actually would be better off in index funds. Because—due to the high costs of active management—the majority of actively managed funds fail to outperform their respective indexes. Stan- dard and Poors has been doing this study since , and each of the studies has shown very similar results. Actively managed funds have failed in both up markets and down markets.
The investments included in a given index are generally published openly, thereby making it easy for an index fund to track its respective index. All the fund has to do is buy all of the stocks—or other investments—that are included in the index. As you can imagine, implementing such a strategy can be done at a far lower cost than that charged by the average actively managed fund.
You would have earned a return of 8. The math is indisputable. Wiley, They tested ten possible predictors including past performance, Morningstar ratings, length of manager tenure, and expense ratios. What they found was truly remarkable: Nine of the ten possible predictors were not significantly more successful than guessing randomly.
Want to guess which factor actually works as a reliable predictor of future performance? In other words, your best bet for finding a top-performing fund is simply to choose the lowest- cost fund in that asset class i. Without fail, this leads to. With mutual funds, you don't pay taxes only when you sell the fund. You pay taxes each year on your share of the capital gains realized within the fund's portfolio. Because most active fund managers buy and sell investments so rapidly,1 a large percentage of the gains end up being short-term capital gains.
Some index funds actually charge expense ratios that are close to—or sometimes even above—those charged by actively managed funds. If you find yourself in such a situation, my strategy for picking funds would be as follows:. Before in- vesting in an index fund, take the time to compare its expense ratio to that of other funds tracking the same index.
The next piece of the portfolio construction puzzle is asset allocation: How much of your portfolio should be invested in each asset class i. The two primary factors in the decision are:. As we discussed in Chapter 3, stocks tend to outperform bonds over long periods. Over shorter periods, however, stock market returns are wildly unpredictable. Therefore, simple common sense tells us that the shorter your investment time frame, the smaller the percentage of your portfolio that should be invested in stocks.
A more accurate estimate would be to say that your investment time frame is from now until the day you die. Even one instance of getting out of the market after a sharp decline can be more than enough to eliminate the extra return you were expecting to earn from having a stock-heavy allocation. Ideally, this date will occur well after more than half of your retirement has elapsed. Or, if you know that people in your family are genetically predisposed to very long lives, then perhaps you should increase your stock alloca- tion slightly to account for that.
The solution? Own each or at least many of them. While many international stock markets have outperformed the U. Rather, the pri- mary goal is to increase the diversification in your portfolio, thereby reducing your risk. In total, the U. Because investing internationally introduces an additional type of risk into your portfolio: currency risk. Currency risk is the risk that your return from investing in international stocks will be decreased as a result of the U.
So how much of your portfolio should be invested internationally? The trick is that without knowing how the U. The stock market will have either shot upward, thereby causing your stock allocation to be higher than intended, or it will have experienced a downturn, causing your stock allocation to be lower than intended.
Rebalancing is the act of adjusting your holdings to bring them back in line with your ideal asset allocation. Others argue that rebalancing should be done at regular intervals, regardless of how off balance your portfolio becomes in the interim. That is, the ideal time to sell a portion of your stock holdings and move more heavily into bonds would, of course, be near the completion of a bull market in stocks. As Bernstein reminds us, however, the length of bull and bear markets varies considerably depend- ing upon which historical period and which asset.
For the most part though, bear markets and bull markets tend to last for periods of greater than one year. As a result, rebal- ancing with greater frequency than once per year is likely to be detrimental to performance. One of the most wonderful developments in the field of investing in recent years is the invention of the target retirement fund.
They do this by holding shares of other mutual funds and adjust- ing your stock allocation downward over time as the named retirement date approaches. Unfortunately, as great as the target retire- ment fund concept is, the implementation has left a lot to be desired. For example, many target retire- ment funds invest in high-cost actively managed funds rather than low-cost index funds. Further, some target retirement funds charge an extra level of. If a substantial portion of your assets is held in taxable accounts, regular rebalancing becomes at least somewhat less desirable as it will often involve incurring a taxable capital gain.
Again, Vanguard is one company that seems to have gotten it right. Their target retirement funds hold Vanguard index funds, and they do not charge an extra level of expenses beyond those charged by the underlying funds. Before investing in any target retirement fund, take the time to look at its asset allocation to ensure that it closely matches your own asset allocation goals.
After determining an asset allocation that you feel is appropriate, which index funds should you use to create your portfolio? Really, there are two separate questions to answer:. Given the quantity of indexes in existence, even a brief mention of each of them would be far beyond the scope of this book. The following indexes, how- ever, are some of the most popular ones, and you. It includes of the biggest compa- nies in the U. Wilshire The second most commonly tracked index.
It includes every publicly owned U. Note: It originally included 5, companies, but now it includes many more. If you want to own the entire U. Credits arise from a number of things. Most often, though, they are the result of the taxpayer doing something that Congress has decided is beneficial for the community.
Chapter 1 Simple Summary Deductions generally arise from expenses that you pay. Deductions reduce your taxable income. Every year, you can choose to use either the standard deduction or the sum of all your itemized below the line deductions.
Regardless of whether or not you choose to itemize, you can still use all of your above the line deductions. This makes above the line deductions particularly valuable.
You are entitled to one exemption for you, one for your spouse, and one for each of your dependents. Credits, in contrast to deductions and exemptions, reduce your tax directly as opposed to reducing your taxable income. As such, a credit is always more valuable than a deduction of the same amount. One unpleasant aspect of being self-employed is paying the self-employment tax. In summary, the self-employment tax SE tax is a tax that gets added to your normal income tax. The Reason the Self-Employment Tax Exists At first glance, it seems unfair that entrepreneurs-arguably the most important driving force behind our economy-would be forced to pay an additional tax.
In reality, however, sole proprietors are simply paying this particular tax instead of another one. If you've had a job where you were paid a salary or an hourly wage, you're probably familiar with the concept of part of your income being withheld for taxes. A portion of the amount withheld from an employee's wages goes to pay the social security and Medicare taxes.
When these taxes were originally created, Congress decided that the burden would be shared equally between the employer and the employee. These taxes are calculated as 6. At the same time,.
These taxes are calculated at the same rate as the amount that the employee is responsible for. As such, an amount equal to Given that you are self-employed, you are both the employee and the employer. As such, you are responsible for paying both halves of the social security and Medicare taxes, or We simply call the tax something different; we call it the Self-Employment Tax.
Your earnings from self-employment basically consist of exactly what you'd think: your business revenues minus your business expenses. The tax is calculated as This number is updated annually, so be sure to check what the most recent number is. The Importance of Business Expenses a.
Schedule C Deductions Think back to our discussion of "above the line" vs. One of the wonderful things about being. These business deductions are effectively above the "above the line" deductions. The reason business deductions are so valuable is that they reduce not only your taxable income and as such your regular income tax , but also your earnings from selfemployment, thus reducing your SE tax as well.
However, be aware that the IRS isn't usually very lenient with their definitions of what can be called a business expense. We'll be discussing several important business deductions later.
Generally speaking, if you doubt that something could reasonably be called a business expense, it probably can't. Deduction for One-Half of SE Tax One small piece of good news relating to the SE tax is that you can deduct it, or rather, half of it as an above the line deduction.
Don't panic. That sounds far more confusing than it actually is. In fact, it simply ends up being a single line on your Form Even if you're doing your own taxes, you won't end up having any trouble with this part when it actually comes time to file your return.
After using Schedule SE to calculate your self-employment tax, all you have to do is simply enter one-half of your self-employment tax on line 27 of your Form That's not so tough. Chapter 2 Simple Summary The Self-Employment tax exists simply to take the place of the social security and Medicare taxes that you and your employer would be paying if you had a job as an employee.
Your SE tax is calculated as Business deductions sometimes called Schedule C deductions are more valuable than either above the line or below the line deductions. This is because business deductions reduce your earnings from selfemployment, thereby reducing your regular income tax and your SE tax.
You will get a little bit of the money you pay for SE tax back when you file your taxes for the year. The Federal income tax is what is known as a "pay-asyou-go" tax. This means that people and businesses are required to pay taxes as they earn income throughout the year.
For anybody who is an employee, this is easy. In fact, it's done automatically in the form of withholdings from employees' paychecks. However, things work differently for business owners. When your customers pay you for your products or services, there's obviously no money withheld to go toward income taxes.
The government's solution is to require you to make tax payments at quarterly intervals throughout the year, as compared to the once-per-year filings of most people employees. These quarterly payments are known as estimated tax payments, because the amounts you are paying are based upon an estimate of your total tax liability for the year. Generally speaking, the amount of estimated tax you are required to pay for the year is the smaller of:.
There is an exception for high-income taxpayers. Self-employed taxpayers are required to make four estimated tax payments each year. The due dates are as follows: For the period January 1 - March 31, payment is due April For the period April 1 - May 31, payment is due June For the period June 1 - August 31, payment is due Sept.
For the period September 1- December 31, payment is due January 15 of the following year. Note that this isn't every three months exactly. Don't make the mistake of assuming it's quarterly, or you'll end up making your second payment on July 15, and it will be a month late.
Also, please be aware that this means that on April 15, not only is your annual filing for the previous year due, but your first estimated payment for the current year is due as well. For instance, on April 15, , a self-employed tax-. The one exception to these due dates is for the January 15payment.
A taxpayer can skip the January 15payment if, by January 31, he files his Form and pays his remaining taxes for the year just completed. Consequences of Not Making Estimated Tax Payments It's somewhat surprising how many self-employed taxpayers don't actually make their estimated tax payments, presumably because they either don't know how to make them, or because they don't even know they're required to make them.
Unfortunately for these taxpayers, making estimated tax payments isn't optional if you have self-employment income. The exact percentage used varies as a function of current Treasury Bill rates. In contrast to employee taxpayers who have taxes withheld from every paycheck they receive, selfemployed taxpayers have nothing withheld when they receive payments from clients.
Instead, selfemployed taxpayers are required to make four payments of estimated taxes each year. Estimated tax payments for each year are due on April 15, June 15, September 15, and January 15 of the following year.
As a self-employed taxpayer, you're responsible for meeting all of the regular filing requirements for an individual, as well as filing at least two other schedules. As an aside, when talking about IRS paperwork, a "schedule" is simply an attachment to a "form. Schedule C The first new piece of paperwork that you'll want to become familiar with is Schedule C.
This form, whether you fill it out by hand or use software to help, basically outlines your income and expenses from your business. Schedule C itself is fairly straightforward.
At the top, you fill in general information about your business: its name, address, etc. In the next section, you list your revenues.
The only time this part gets complicated is when you sell a physical product and you have to determine your Cost of Goods Sold. Even then, it's usually a fairly easy calculation done using Part. I11 of Schedule C. For tax purposes, the cost of the products that you sell is not actually considered an expense; it is simply subtracted from your revenues, and the remaining figure is known as your Gross Income.
In the next section, you list your total business deductions by category. For most business expenditures, it's pretty obvious which line they should go on.
We'll be covering several of the different deductions more thoroughly in Chapters One other point of note: If you meet a few specific requirements listed below , you're allowed to file Schedule CEZ instead of the regular Schedule C.
Basically this allows you to lump all of your business expenses together on one line rather than having to break them all out by category. Schedule C-EZ cuts the process down to three simple steps: Revenues, minus expenses, equals profit.
The primary requirements to be eligible for filing Schedule C-EZ are as follows. Just as a reminder, the deductions entered on Schedule C are the "above the above the line" deductions. These are your most valuable deductions because they are subtracted from your income before the Self-Employment tax is calculated, thus increasing their value by Now that you're selfemployed, if you're ever trying to calculate the financial benefit provided by a given deduction, it's important to learn whether it is: a a Schedule C deduction,.
Luckily, it's not terribly complicated. This is where your Self-Employment tax gets calculated. Most business owners are allowed to file the short version of Schedule SE.
Form If you use any depreciable property such as furniture for your business, this is the form you have to fill out to calculate your deduction.
We'll be covering this topic in more detail in Chapter Be aware that Form can be rather difficult. While we'll go over the general concepts of depreciation and knowing what you can deduct when, the actual how-to of filling out Form is somewhat beyond the scope of this guide.
To give you an idea of its complexity: the IRS in the version of the Instructions for Form estimates the amount of time required to fill out the form as 5 hours and 5 minutes. And that doesn't even include the estimated 4 hours and 16 minutes to learn about the tax code that applies to the form!
Form Form is the form on which you would calculate your Home Office Deduction. We'll cover this topic in depth in Chapter 13,and when we do, you'll see that this form is one that can save you a ton of money. In recent years, Congress has made qualifying for the Home Office Deduction much easier.
That said, nobody's made filling out this form any easier. It's a monster for the average taxpayer. You're certainly capable of doing it on your own if you want to, but be sure to save several hours fill it out. Chapter 4 Simple Summary Schedule C is the form on which you detail your business revenues and expenses. If possible see requirements listed above , use Schedule C-EZ.
It will save you lots of time. Schedule SE is the form on which you calculate the amount of Self-Employment tax you owe for the year. Form is the form you will use if you intend to deduct expenditures related to purchases of equipment for your business.
Form is the form used to calculate your Home Office Deduction. Save several hours to complete Form and Form if you plan to do them yourself. However, another less obvious benefit is that you can use your tax knowledge t o figure out the true cost of expenditures you are considering as well as the real in-your-pocket income resulting from revenues you are projecting.
This ability will be of tremendous value when making business decisions. When calculating the tax consequences of a n action, the first thing you need to know is your "marginal tax rate. To understand this concept, you must first understand that the federal income tax is a progressive tax.
This means that that percentage of the tax increases as your taxable income increases. The following are the tax brackets for single taxpayers and taxpayers who are married filing jointly. Again, for most taxpayers, their marginal tax rate is the highest tax bracket that they make it to. As a self-employed taxpayer, however, you now know that you have both business deductions and personal deductions.
For personal deductions, the same analysis applies as for most taxpayers. An advertising campaign, let's say. An illegal bribe perhaps? Not only are they unethical and illegal which we'll ignore for the sake of the example , but they're nondeductible too!
The true cost of a deductible expenditure is equal to the amount of the expenditure minus the tax savings from the resulting deduction. As such, the advertising is the better of the two options. One of the most common misunderstandings of tax law is the notion that, because something is deductible, it's basically free. In other words, some people think that the tax savings from a deduction is equal to the amount of the deduction.
Because you're now armed with a better understanding of the situation, you understand why this belief is completely incorrect. Your tax savings from a deduction is equal to your marginal tax rate times the amount of the deduction.
For personal deductions, your marginal tax rate is equal to the highest tax bracket that your income For business deductions, your marginal tax rate is equal to your personal deduction marginal tax rate, plus An expenditure being deductible sometimes referred to as being a "write off does not mean that it is actually free.
It simply means that you'll get some tax savings from it. This is more or less the same as getting a discount on the expenditure. When running a business, good recordkeeping is essential. As you probably already know, keeping detailed records helps you to more accurately track how well your business is doing.
Records allow you to see what expenses could likely be cut, what expenditures are producing results and should be increased, which customers are your most profitable, and so on. Recordkeeping is also essential for tax purposes. First, it makes the job much easier for the person preparing your taxes, whether you're doing it yourself or getting professional help. You can save yourself a nightmare at tax time by keeping an organized list of your taxable receipts and deductible expenditures.
Equally important is the need to have sufficient records in case of an audit. If you're audited and cannot produce evidence of an expense you claimed as a deduction, the deduction is almost certain to be disallowed. There are several recordkeeping software products i. QuickBooks on the market that are both affordable and fairly easy to use. The financial risk you incur by not keeping records far outweighs the cost of such software.
What Records to Keep The first step, if you haven't done so already, is to get a business checking account. Being able to separate your business expenses from your personal expenses will prove invaluable both for evaluating your success and for doing your taxes. The most important record to keep is a ledger.
This is a record of all of your business transactions. Your personal ledger is the little booklet that accompanies your checks in your checkbook. You can find paper versions of these at business supply stores, but it's strongly recommended to find software to help you with this. However, if you do use a software package to help you, be sure to backup your file regularly. Losing this information due to something as simple as a computer failure would be an absolute shame.
For tax purposes, you will also be required to maintain supporting documents for your ledger. For your income items, these will be things such as invoices, bank deposit slips, and so on. If you run a business with lots of cash sales, an important record to keep is a daily log of the amount of cash received. For expenses, your supporting documents will be receipts, credit card statements, bank statements, invoices, etc. How Long to Keep Your Records For tax purposes, the general rule is that you want to keep records until the applicable "statute of limitationsn runs out.
The statute of limitations is the period during which a you can amend your return to claim a refund, or b the IRS can assess an additional tax. For the most part, this is three years after the date the return was filed or the date the return was due, whichever is later.
There are people who have found it by climbing up the ladder in the company where they work while others have started a business. In the past five-year period, more millionaires have emerged than. Mi lucha vol. How is investing various than conserving? Saving and investing both involve setting aside money for future use, but there are a great deal of distinctions, too.
With stocks, it could take days prior to the profits are settled in your bank account, and offering home can take months or longer. Typically speaking, you can access cash in your savings account anytime.
You canand probably shouldinvest for multiple objectives at as soon as, though your technique might require to be various. Pin down your timeline. Next, determine just how much time you need to reach your objectives. This is called your investment timeline, and it determines how much danger and therefore the types of financial investments you may be able to handle.
So for fairly near-term objectives, like a wedding event you wish to pay for in the next number of years, you might want to stick with a more conservative investing strategy. Enter diversity, or the process of differing your investments to manage danger. There are 2 main ways to diversify your portfolio: Diversifying in between asset classes, like stocks and bonds. Generally, as you get older and closer to retirement or are otherwise nearing the end of your investing timeline, experts advise shifting your property allocation towards owning more bonds.
Time is your biggest ally when it concerns investing. Thanks to intensifyingor when the returns on your cash create their own returns, therefore onthe longer your money is in the market, the longer it needs to grow.
Invest typically. Make it automatic. Automating any recurring job makes it much easier to stick to over the long term. The exact same applies for investing. Investing is a way to possibly increase the amount of cash you have. Expand your investments to manage risk.
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