The tax planning clock is clicking away toward the end of the year.  Is your business ready to take advantage of the tax saving measures available to you? Tax planning is essential for business owners, and should be done on a quarterly basis. However, it’s not too late if you do it before mid-December. Here are some words of wisdom from financial planner, P. Christopher Music.

Well, the year is coming to an end and many business owners are meeting with their accountants and tax advisors to figure out how to reduce that inevitable income tax burden coming in April.  Here are a few strategic ways to keep some more of that money at home.

Business owners are often successful in earning some money beyond the expenses of acquiring it—in short, profit.  The only problem is, the profit is taxed.  So, we work with our tax advisors to lower this burden by strategically spending money in various ways by the end of the year in an attempt to cut off the bleeding.

One of the most popular techniques is to “spend the money since it’s going to be taxed anyway”.  I always get a charge out of this technique since it does not evaluate on what the money is spent.  One of the laws of economics is that money derived from production must be reinvested into production to expand the organization.  In other words, the expense must buy something of value that can further grow in value.

This technique can be summed up in “accelerating expenses”.  Next year the company will have expenses like rent, promotion and marketing, utilities, etc.  Accelerating these expenses only defer the tax owed since you will have to do the same thing next year to avoid the tax.  This has some limited workability, especially if you have volatility in your annual income and can pay the taxes at lower rates in a year with lower income.

There are, however, other options.  One of these options is to use some form of retirement plan.  These can range from a traditional Individual Retirement Account (IRA) where a person can invest up to $5000 ($6000 over age 50), to something called a “Super 401k” that combines various types of retirement plans to allow someone to contribute upwards of $200,000 or more per year.  That’s right.  Now, the benefit of this kind of expense is that it can not only save income taxes in the current year, but it will create an additional asset of value that can be used in the future to create retirement income.

If you have a C corporation, there is a plan called a Section 79 plan (so named after the IRS Code section) that will allow a business owner to purchase cash value life insurance with potentially tax-deductible dollars.  Of course, you have to purchase life insurance on your employees (inexpensive term) and you will only be able to deduct a portion of the annual life premiums, but this may make sense if you qualify for such a plan.  This type of benefit plan would allow the business owner to accumulate assets inside a life insurance policy that can later be used to provide supplemental retirement income.

These are just a couple of options available to business owners besides just spending money “because it will be taxed anyway”.  Use the tools available to lower your taxes and build wealth for the future.

For more information, contact Christopher Music. Wealth Advisory Associates www.wealthadvisoryassociates.com a Registered Investment Advisor, is a comprehensive financial planning firm serving professionals and small business owners nationally. We focus on assisting our clients in achieving a truly affluent lifestyle by using the natural laws of personal economics.

I recently received an email from a visitor to my Money Management Solutions website who wants to learn how to pay off her mortgage quickly without having to attend expensive seminars or buy expensive software to do this trick.

I realized that this was a question a lot of people might have, especially during this current economic crisis. I decided to share my answer here for that reason.

Brenda asked Sandra Simmons:

Is there some sort of “mortgage accelerator” program where your mortgage gets paid off in a fraction of the usual 30 years time? I want to learn how I can do this myself for my mortgages. — Brenda B.

Answer:

Brenda: You can do this yourself by making extra principal payments each month.

Example if your mortgage payment is $2,000:

 If, when you make the payment for 8/1, you include an extra payment for the principal due 9/1 of $302 then you don’t ever have to pay the interest of $1,698 that was due 9/1.

Your next payment due, which you will pay on 9/1, is actually the 10/1 payment.

Then on 9/1, when you make the 10/1 payment, if you also pay the principal payment from the 11/1 payment, then you save that interest. If you do this you will cut your mortgage payoff time in half.

Write on your payment coupon “Extra Principal Payment $302” so there is no question of where you are directing the funds, and keep a copy of the coupon and the check for your records.

If you want to accelerate it even faster, say cut it by 2/3rds, if on 8/1 you make the payment and include the principal amounts for the payments due 9/1 and 10/1, then you don’t pay the interest on the 9/1/and 10/1 payments.

Then on 9/1 when you make the next payment you would pay the payment for 11/1.

Ask your mortgage lender for an amortization statement of your loan so you can actually see the correct principal and interest amounts broken down for each payment. They may not want to give you one so you can’t do this as they lose interest income, but you have a right to have it. Even if you have to pay them for it, it is worth it. Typically they charge $25 – $75 for an amortization statement.

Sandra Simmons is the President of Money Management Solutions, Inc. She specializes in helping business owners and individuals manage their money to achieve financial freedom. Claim your FREE Debt Reduction Solutions Guide.

Lenders might be monitoring your money management behavior via your credit card spending — and certain purchases could cost you.

By BusinessWeek 

Most borrowers know a late payment or high outstanding balance can hurt their credit. But what about frequenting a massage parlor, retreading a tire or visiting a marriage counselor? Such activities count, too, according to a suit filed June 10 by the Federal Trade Commission in Atlanta federal court against card issuer CompuCredit.

Lenders, insurers, and other financial firms use credit scoring systems to make a host of decisions about consumers, including the interest rate on their mortgages, the limits on their credit cards and the monthly premiums for their auto coverage. Some rely heavily on FICO, a three-digit score developed by Minneapolis-based financial firm Fair Isaac, while others use proprietary models developed by statisticians. But companies don’t disclose what’s baked into their formulas, leaving many borrowers to wonder what factors determine their financial fate.

The FTC suit against Atlanta’s CompuCredit for allegedly “deceptive” marketing practices offers a rare look inside the opaque business of credit scoring. It reveals mechanisms that consumer advocates and politicians have long suspected exist — in which purchasing behavior, not just payment history, matters.

Punished For Purchases

The allegations, in part, focus on CompuCredit’s Aspire Visa, a subprime credit card for risky borrowers. The FTC claims that CompuCredit didn’t properly disclose that it monitored spending and cut credit lines if consumers used their cards at certain places. Among them: tire and retreading shops, massage parlors, bars, billiard halls and marriage counseling offices.”The company touted that cardholders could use their credit cards anywhere,” says J. Reilly Dolan, assistant director for financial practices at the FTC. “What they didn’t say was that you could be punished for specific kinds of purchases.” The Federal Deposit Insurance Corp. is also seeking $200 million in penalties from CompuCredit in the matter.

It’s not the first time CompuCredit has come under scrutiny from authorities. In 2006, the credit card issuer and another financial firm agreed to fork over $11 million to consumers and reform their marketing and billing procedures as part of a settlement with then-New York Attorney General Eliot Spitzer, who had launched a probe in 2005 after receiving various consumer complaints.

CompuCredit maintains that the FTC’s lawsuit is without merit, and defends its practices. “Every time a consumer accesses their credit, a new decision to extend a loan is being made,” says Rohit H. Kirpalani, CompuCredit’s general counsel. “These scoring models are commonplace across the industry.”

Video on MSN Money

Protection from credit card companies
If new rules proposed by the Fed are enacted, some of the credit card companies’ favorite sleazy tactics will be taken off the table.

With competition increasing, databases improving and technology advancing, companies can include more factors than ever in their models. And industry experts say financial firms increasingly are looking at consumer behavior, as CompuCredit did.The worry is that companies may tweak the credit scoring systems in unfair or biased ways, weeding out or limiting borrowers based on race, gender or sexual orientation. (In the case of CompuCredit, regulators are taking issue with the lack of disclosure, not specifically its use of behavior-based scoring.)

“We as consumers should become aware that behavior is used to determine our creditworthiness,” says consumer advocate Karen Gross, president of Southern Vermont College. “What CompuCredit portends is the (use) of information to create a more robust and potentially nefarious credit scoring system.”

This story was reported and written by Jessica Silver-Greenberg for BusinessWeek.com.

Published Aug. 8, 2008

If these actions weren’t so downright dangerous, they might be humorous. Are you making these mistakes with your hard-earned cash?

1. They never figure out how much money they actually need each week to do better than just pay their bills. They don’t have a budget set up.

The correct definition of a BUDGET is: the calculation of the amount of money needed for an area [organization or household] to function and achieve its purpose. If you are satisfied to just  pay your bills, and you don’t pay yourself first into some type of savings plan, you will make other people wealthy and you will stay poor.

Every supplier you pay is in business to make a profit. You should run your business and your household the same way: like a business that is expected to make a profit. The income target must include a profit or the enterprise will go broke and fail.

2. They don’t work out ways to make more money than they currently need, and then do whatever it takes to execute the plan.

By UNDER estimating the amount of money needed to do better than just break even, they typically set their income target too low and lose money by living on credit instead of going into action to raise their income. Anyone can find ways to make more money; it is often the “willingness to do whatever it takes” that is the problem.

There are two classes of wealthy people. The large majority of wealthy people are working all the time. They have a purpose they are pursuing, and it isn’t money. Money is a sub-product they expect from their work. Their goals and purposes are the driving force in their lives.

The small minority is often called the “Idle Rich” and they are bored to death. They have seen it all, and done it all twice over and there is no thrill left in life. Think about it. If you had done everything you dreamed of and owned everything you could possible want, and were spending your days sitting by the pool in some swank hotel nursing a beverage with a little umbrella in it, would you wish you had some productive work to do? I’d bet my next few paychecks you would.

3. They habitually spend more money than they make.

Using money to buy the “appearance” of having more money than you actually have is a dangerous activity. I call this type of spender a Gratification Groupie. This can catch up with you quickly and eventually drown you in debt. This causes constant worry about money and makes for lots of sleepless nights. Money truly cannot buy happiness. But doing something productive and worthwhile and knowing you are appreciated for it can make you feel like a million bucks.

Most truly wealthy people are not interested in appearing to be wealthy, they are too busy having fun helping others in life and making more money as a result of that. Rich people always pay themselves first, have cash stashed in several places, are always interested in being productive and expect their productivity to produce more income. They don’t worry about money, and they sleep well at night.

4. They don’t figure out what they need to buy in the future and then set aside a little money each week so they can pay cash for the purchase later.

Buying something with a credit card that you can’t pay off when the statement arrives is committing your future earnings to the credit card company. You are then working for the credit card company as an economic slave.

The correct way to buy things, especially big ticket items, is to set aside a little each week till you have the cash to pay for the item, and then go out and negotiate a big cash discount. The guy with the CASH IS KING!

I recently did this when I bought my current car. I found the exact car I wanted. It was 2 years old, had 21,000 miles on it and was still under warranty. The dealer wanted $29,500 for the car. I got it for $17,500 and got an extended warranty thrown in on the deal. Don’t buy new cars. The second the front tires move off the dealer’s lot onto the street, it becomes a “used car” and loses about 25% of its value.

5. They buy products and services based on WANT rather than on NEED.

Buying decisions should be based on how your purchase of the product or service can help you produce additional income for you. Honestly, do you want the latest cell phone that offers text messaging and email retrieval because your friends have one, or do you need it to be more efficient because you are out of the office traveling to close the next business deal?

6. They don’t put money into a long-term savings plan so they have it for use later in life.

If you are relying on other peoples’ future production to pay you Social Security payments so you can retire, that is really taking a gamble.

Despite the fact the government says the cost of living is going up 3 – 3.5% a year, the truth is that it is going up 8 – 12% a year. You have to make that much more income just to stay even. Why does the government say it is only 3 – 3.5%? Unfortunately for the senior citizens, it’s because they government has to raise Social Security payments each year by the cost of living increase they quote. The Social Security system is already bankrupt and those living on Social Security are headed in that direction by going in the hole 5 – 9% every year. Are YOU planning on retiring on Social Security payments alone?

7. They never develop multiple sources of income. If one source dries up they are in trouble financially.

The old saying “don’t put all your eggs into one basket” holds true today, especially for income sources. Look for products or services that you can add, or business ventures you can get involved in that are ethical, and have a great chance of producing a consistent income. The best type of income is “residual income” where you create something that continues to generate income for you while you are off doing other things.  For example if you wrote a book and sold it on the internet as a download where potential customers could buy it 24 hours a day around the world.

8. They get stressed out about how little interest their bank pays on savings accounts while they are getting killed with much higher interest debt by carrying balances on their credit cards.

If you have substantial credit debt, you are better off using excess cash to reduce the debt and stop the high interest payments instead of trying to earn interest from the bank. As you pay off your debt, you should also keep enough cash on hand to cover a few months of living expenses and the unexpected emergency.

Once the debt is gone, or will be soon, then start investing the excess money where you can get real growth. I use a Certified Financial Planner to invest my money for me so I don’t have to do all the research and trading actions. I let the expert do what he does best while I am busy making more income.

Now don’t get me wrong, I think investing in real estate is great if it provides more cash flow in than what you have to pay out. The truth is that any real estate is a liability as long as you have to make payments on it. Only when it is paid off does it become a true asset.

9. They worry about “the economy” in general.

I’m amazed that people are actually more worried about “the economy” than they are about their business or household failing financially. They worry about what the media is reporting about “the economy” which is something they can’t control, while never looking at how they are can affect the economy of their own business or household, which is something they CAN control.

A rise in unemployment is no reason to worry. Small business creation of new jobs far outweighed the loss of jobs in big corporations, according to the latest ADP report. A failing bank is no reason to panic. Banks get bailouts from the FDIC and other investors. No one is standing by to bail out your failing business or household. That is entirely up to you. So stash some cash in a safe, in a bank, or better yet, a tax deferred retirement plan, and sleep well at night while the bad news about “the economy” rages around you.

10. They expect to survive financially without taking full responsibility for controlling their financial future.

There is a very simple solution to money problems. Cut expenses, increase your income, and correctly manage what income you do get. It’s not only about how much money you make, it’s what you do with your money that determines your financial condition.

Correct money management is something educational institutions don’t teach. People get false information and bad advice about how to handle money. Then they make these silly mistakes, get into trouble, try to solve the problem using credit, create more trouble, and then go looking for debt relief.

Fortunately there is a proven, inexpensive, easy-to-install, easy-to-learn, easy-to-use money management software system that can reverse all the money management mistakes a person has made in the past, and keeps them from making those same mistakes in the future. It is an old-school system that your great grandparents used before the days of credit cards. Very wealthy people know and use this system today.

Sandra Simmons, President of Money Management Solutions, Inc. specializes in helping business owners and individuals manage their money to achieve financial freedom. For more information about her system, claim your complimentary copy of the Debt Reduction Solutions Guide.

© 2008 Sandra S. Simmons. All Rights Reserved.