Personal finance is a necessary part of everyone’s life. It becomes especially important for those who are self employed. Managing credit, budgeting, payroll, taxes and so on. can be overwhelming at times.

As a part of starting a business, it is important to have working capital. Working capital can come from revenue alone however, it often comes in the form of loans or business lines of credit.

With my company we manage our money in a number of different ways. Hopefully those of you who own their own business can comment and add some insight to the art of managing a company’s finances.

First off, I am co-owner of an LLC. It is important to mention this first off because depending on the type of business you own, can have tax consequences that would need to be worked into your company’s financial plan.

To find out more about different types of business structures you can do a quick Google search. I will cover this topic and the tax consequences at a later date.

Managing Revenue:

We mostly use Paypal as our business checking/payroll account. Most revenue comes into this account and we choose to keep it there because Paypal pays us 5% interest on the money we keep in the account. We have business accounts at Chase and Bank of America as well, but the interest rate you get with those accounts is pennies on the dollar in comparison to Paypal. Paypal also offers a debit card which makes it even more convenient to use, especially for the business purchases.

You can use ING or HSBC to get similar interest rates, it is just more convenient for us to use Paypal because most people already use this service.

Another plus of keeping the money in the business Paypal account is that we don’t have to pay income taxes on the revenue that we leave in there. We don’t have to pay taxes until we realize this income, which means to transfer the money to our personal accounts. The tax consequences (or lack there of), are because of the LLC (Limited Liability Corporation).

Managing Debt:

As I mentioned earlier, having debt in the form of business loans or lines of credit are just as much a part of the typical business as regular checking and savings accounts.

Right now, we have a business line of credit through Chase bank. With a business line of credit we can borrow from it and pay it back as we see fit. This means that if I borrow 25k for 6 months, I can pay it off and the 25k would be available again once I pay it down. The dollar amount of the loan doesn’t expire. The rates does vary but not enough to worry about. This is a permanent form of working capital that can be helpful in a tight situation or any start up business. The interest we pay on this loan we can write off as a business expense as well.

We qualified for the loan based on personal credit, income history, total assets and total liabilities.

We also have business credit cards from both B of A and Chase. We don’t use these that often but 0% interest business credit cards aren’t that hard to come by and I would recommend using one if you don’t already. Again, any interest paid on these cards can be written off as business expenses.

Managing Expenses Like Payroll:

We just picked up the latest copy of Quickbooks Pro 2007. We have used previous versions and it meets all of our needs sufficiently. We can manage expenses such as electricity bills, cell phone bills etc, as well as payroll. We don’t have many employees yet and most are freelance anyway. However, once we have 5-10 employees, I will want to use a more sophisticated payroll system. Have you had any good experiences with any particular company?

I believe an absolutely necessary part of any small business owner’s financial plan is having a good CPA (Certified Public Accountant). He/She will be able to save you large amounts of money in both the short and long term.

Another critical part of a business owner’s finances is re-investing, investing, and planning for retirement. I will cover these topics in a future post.

I would like to hear of some successes and failures from you guys along with any recommendations you may have for me. Thanks!

For those of you who have been paying attention to the stock market at all, you know that this was not a kind week to traders. According to Yahoo Finance, the Dow was down a total of 4.23 percent.

If you are an investor, this shouldn’t matter a whole lot. I, like most this week, personally felt the hit that the markets took. However, I am not worried. I invest for the long term and so should you!

There are day traders out there that do well. Most of them also spend every waking second researching and trading. I for one, am not willing or able to do this, therefore day trading doesn’t make sense for me. I am more concerned with being profitable in the long run.

As you know, I have a long time before I plan on retiring or needing the majority of my funds. I want my investments to do at least as well as the markets overall and I want to take on less risk achieving that return.

I invest mostly in highly diversified mutual funds in order to accomplish this. These are growth oriented, and I plan on taking advantage of compound interest to build my nest egg. This is by no means the only way to accomplish diversification or you personal investment goals. Before jumping into an investment or contributing to a retirement account, I strongly recommend speaking with a qualified financial planner. One of my favorite and extremely knowledgeable advisors is Art Dinkin. His customer service oriented business is well known in the industry.

Why Significant or Not So Significant Down Turns in the Markets are NOT a Big Deal

If you look back at the history of the stock market, it’s past performance indicates that the markets will go up and down in the short term but over time will increase. Ideally, which has been true in the past, the longer you hold your money in the market, the higher return you earn.

At JPMorgan Chase, where I am a banker, I constantly meet people who have heard horrible stories of individuals losing money in the “stock market,” or they have possibly lost money themselves. There are very logical reasons that this occurred, in most all of the cases I’ve heard.

Here in Arizona, the real estate market has been great over the past 10 years and people often compare the two to me. In reality, people try to buy their houses in a down market and then sell in an up market. Nobody would sell there house in a down market, if possible, right? They know that if they hold on to the home, eventually the housing market will go back up.

When it comes to their investments in the stock market, more often than not, these very same people who would never sell their house in a down market, willingly unload their shares when a stock drops by 4%. Sound familiar?

For some reason, most of those that I speak with about investing, have this stigma that the stack market is an extremely risky investment. I really don’t agree with this and while past performance is no guaranteed indication of future performance, I for one have seen the results that investing with a diversified portfolio for the long term can achieve!

I am encouraging that everyone who has not seen or talked to a financial advisor within the last year to make an appointment with one by the end of next week!

I would enjoy to hear any feedback or experiences you might have had with investing. Please let me hear it!

I often read financial blogs, magazines, and websites, mostly from curiosity but occasionally for investment potential. Today, I read Mark Cuban’s blog, and found his post about hedge funds to be useful and informative. It doesn’t read like a college algebra text book, but more like a magazine. In other words, it’s an easy read. Finance can be difficult to grasp at times and no one topic has been discussed as of late, quite like hedge funds.

Hedge funds are often thought of as a gold mine, or as an easy way to get rich. Not really. Hedge funds are a way that the mega rich get even richer right? That’s more like it.

Today, hedge funds are a dime a dozen. The trend at the moment is for hedge funds to go public. Seems sort of like a get rich scheme. Too good to be true. Take a couple billion dollars worth of investments of all kinds of securities. Then allow even smaller investors to get in and in the mean time, create huge returns for the large investors. Sounds great.

It used to be the case that hedge funds kept private and those in control of the hedge fund were at liberty to take the huge risks necessary to make the momentous returns promised to shareholders. This way, those of us who happen to be carrying around a spare 10 million dollars ($1 million minimum to invest), in our back pockets, could get the kind of returns we all crave.

As Mark Cuban points out in his latest blog, when hedge funds go public they lose some of the ability to take big risks. Which would mean that from his view, investing in a hedge fund that has gone public is worthless.

I am no where near an expert of hedge funds however, I did think Mr. Cuban’s post was useful. Let me know if any of you have had any experience with hedge funds, I am truly interested in hearing about them. Here are a couple of links to good sites about hedge funds that I found useful.

Hedge Fund Investing 101

Understanding Hedge Funds

HedgeFund Intelligence

Most people are confused on the differences between Traditional and Roth IRA’s and which one is right for them. I will help to clear the proverbial haze. First lets define what an IRA is.

IRA?

An IRA is short for Individual Retirement Account. They are designed to help people save for retirement.

Traditional VS. Roth…

A traditional IRA is one in which the participant makes contribution from his/her income BEFORE taxes are taken out. In 2007 one can make a maximum contribution of 4000 dollars. If you are over 50, then you can make a 500-dollar “catch-up” contribution. However the US Government will only allow one to contribute a total of 15,500 of pre-tax dollars (depending on income). This means that if you are maxing out your 401K contribution (pre-tax) then you CANNOT contribute to your IRA using pre-tax dollars.
A Roth IRA is an account in which a participant makes contributions from income that has already been taxed. The Contribution limit of $4000 is still imposed on Roth IRA’s as well.

When would someone choose a traditional IRA?

Most financial planners would recommend someone who would receive tax benefits from reducing their income to contribute via a traditional IRA. It may be easier to understand the concept by knowing when NOT to contribute to a traditional IRA account. One would NOT want to contribute to a traditional IRA if they will not see a significant increase in the dollar amount of their tax return. Also, if the person is nearing retirement, they should not contribute to a traditional IRA. The logic in contributing to a traditional IRA account is that the person will see more growth because the money was contributed pre-tax. I.E. the money has a longer time to grow and multiply so one would want to contribute as much as possible. When that person starts taking disbursements they will most likely be in a lower tax bracket and therefore will see a tax savings.

When would someone want to choose a Roth IRA?

Roth IRA’s are the correct choice for someone who wants a tax free retirement. The money in the IRA accounts will have already been taxed so the government won’t do it a second time. Someone nearing retirement would want to contribute to an IRA. The other positive aspect of a Roth IRA is that person does not have to start taking distributions from the account when that person has reached 70 and 1/2 years old like they do with the traditional.

What are the Phase-Out Limitations?

Depending on the level of income reported on the person’s tax return, there are reductions to the amount they can contribute.

Single
For those who file as single, they see reductions in the level of contributions starting at $95,000/year and are no longer able to contribute any amount at $110,000.

Married Filing Jointly
Married person’s filing jointly will have a reduced contribution limit for each persons IRA if their adjusted gross income exceeds $150,000. If their adjusted gross income reaches $160,000, each persons contribution limit is zero.

Married Filing Separately and Living Apart
If you are married but file separately and have lived apart from your spouse for the entire tax year, your IRA contribution amount will be reduced if your adjusted gross income is more than $95,000. You Roth IRA contribution limit will be eliminated if your adjusted gross income reaches $110,000.

Married Filing Separately and Living Together
If you are married filing separately and lived with your spouse at any time during the tax year, your Roth IRA contribution amount will be reduced when your adjusted gross income exceeds $0.00 and will be completely eliminated when your adjusted gross income reaches $10,000.

IRS Tax Penalties

Someone who has made any contributions in a traditional IRA account must start taking distributions from that account by the time they reach 70 and 1/2 or they will incur a 50% penalty on the amount they should have taken out. If a person were to make an excess contribution they will incur a 6% penalty. Finally, if some takes a premature distribution they will incur a 10% penalty.

How To Start

I would highly recommend everyone going to see their accountant, attorney, and or financial advisor before contributing. These individuals will provide the best advice and have a clear plan for the client.

There is more to IRA’s, I just wanted to cover the main differences between Roth and Traditional. So please e-mail me if you have ANY questions! I would be more than happy to answer them.

Today, I attended a class as a part of my continuing education at JP Morgan Chase. The subject of the class was investments and retirement planning. One of the presenters was the national sales representative for JP Morgan Funds. I was flat out amazed at not only what he told us but also his presentation. He was both electric and informative.

At one point in the presentation, he covered the financial ups and downs of the US economy, markets, and the corresponding presidents. The US economy has definitely had its good times and bad times. After he drew out this timeline, he asked our class if we knew how much $100 would be worth today, if we had invested it in the market, and recieved around 9% interest every year tax deferred. Of course, no one came close to the correct answer. It was astonishing - the answer was over $2 million dollars!

At an average return of 9% over the course of eighty years, because of compound interest, you would be a millionaire with an initial investment of just $100 dollars. It sounds unbelievable. However, he showed us the math, we checked it and it was correct.

Think of the implications this has. I wish that I could have him present this information to all the young people in the world and all the other people out there who have not started saving, let alone started planning for retirement. It takes discipline and dedication to save for retirement. However, the younger someone starts the more time he/she has to accumulate wealth and the smaller amount the initial contribitions has to be.

There are alway going to be fluctuations in the market. Meaning, the stock market will go through periods of both ups and downs. This is guranteed. It is also a sure thing that the market over time is going to go up. We should all be investing for the long-term.

The national sales representative also explained another important concept when investing: He said, “It is always a good time to invest money into the market.” This is because over time, the market will always increase as a whole. The representative was referring to investing in a balanced portfolio that is fully diversified. Diversification is a crucial topic that I will save for a later post.

Please take this information to heart. Do yourself, your family, and the rest of us a huge favor and take control of your finances!