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Tax Planning for the Self-Employed

Tax Planning for the Self-Employed

Self-employment is the opportunity to be your own boss, to come and go as you please, and oh yes, to establish a lifelong bond with your accountant. If you’re self-employed, you’ll need to pay your own FICA taxes and take charge of your own retirement plan, among other things. Here are some planning tips.

Understand self-employment tax and how it’s calculated

As a starting point, make sure that you understand your federal tax responsibilities. The federal government uses self-employment tax to fund Social Security and Medicare benefits. You must pay this tax if you have more than a minimal amount of self-employment income. If you file a Schedule C as a sole proprietor, independent contractor, or statutory employee, the net profit listed on your Schedule C is self-employment income. It must be included on Schedule SE, which is filed with your federal Form 1040. Schedule SE is used both to calculate self-employment tax and to report the amount of tax owed.

Make your estimated tax payments on time to avoid penalties

Employees generally have income tax, Social Security tax, and Medicare tax withheld from their paychecks. But if you’re self-employed, it’s likely that no one is withholding federal and state taxes from your income. As a result, you’ll need to make quarterly estimated tax payments on your own to cover your federal income tax and self-employment tax liability. You may have to make state estimated tax payments, as well. If you don’t make estimated tax payments, you may be subject to penalties, interest, and a big tax bill at the end of the year.

If you have employees, you’ll have additional periodic tax responsibilities. You’ll have to pay federal employment taxes and report certain information. Be sure to stay on top of your responsibilities.

Employ family members to save taxes

Hiring a family member to work for your business can create tax savings for you; in effect, you shift business income to your relative. Your business can take a deduction for reasonable compensation paid to an employee, which in turn reduces the amount of taxable business income that flows through to you. Be aware, though, that the IRS can question compensation paid to a family member if the amount doesn’t seem reasonable, considering the services actually performed. Also, when hiring a family member who’s a minor, be sure that your business complies with child labor laws.

As a business owner, you’re responsible for paying FICA taxes on wages paid to your employees. The payment of these taxes will be a deductible business expense for tax purposes. However, if your business is a sole proprietorship and you hire your child who is under age 18, the wages that you pay your child won’t be subject to FICA taxes.

As is the case with wages paid to all employees, wages paid to family members are subject to withholding of federal income and employment taxes, as well as certain taxes in some states.

Establish an employer-sponsored retirement plan for tax (and nontax) reasons

Because you’re self-employed, you’ll need to take care of your own retirement needs. You can do this by establishing an employer-sponsored retirement plan. This can provide you with a number of tax and non tax benefits. With such a plan, your business may be allowed an immediate federal income tax deduction for funding the plan. As well, you can generally contribute pretax dollars into a retirement account.

Contributed funds, and any earnings, aren’t subject to federal income tax until withdrawn. As a tradeoff, tax-deferred funds withdrawn from these plans prior to age 59½ are generally subject to a 10 percent premature distribution penalty tax. As well as ordinary income tax, unless an exception applies. You can also choose to establish a 401(k) plan that allows Roth contributions. With Roth contributions, there’s no immediate tax benefit. But, future qualified distributions will be free from federal income tax. You may want to start by considering the following types of retirement plans:

  • Keogh plan
  • Simplified employee pension (SEP)
  • SIMPLE IRA
  • SIMPLE 401(k)
  • Individual (or “solo”) 401(k)

The type of retirement plan that your business should establish depends on your specific circumstances. Explore all of your options and consider the complexity of each plan. And bear in mind that if your business has employees, you may have to provide coverage for them as well. For more information about your retirement plan options, consult a tax professional or see IRS Publication 560.

Take full advantage of all business deductions to lower taxable income

Because deductions lower your taxable income, you should make sure that your business is taking advantage of any business deductions to which it is entitled. You may be able to deduct a variety of business expenses. This includes, rent or home office expenses, and the costs of office equipment, furniture, supplies, and utilities. To be deductible, business expenses must be both ordinary and necessary. If your expenses are incurred partly for business purposes and partly for personal purposes, you can deduct only the business-related portion.

If you’re concerned about lowering your taxable income this year, consider the following possibilities:

  • Deduct the business expenses associated with your motor vehicle, using either the standard mileage allowance or your actual business-related vehicle expenses to calculate your deduction
  • Buy supplies for your business late this year that you would normally order early next year
  • Purchase depreciable business equipment, furnishings, and vehicles this year
  • Deduct the appropriate portion of business meals, travel, and entertainment expenses
  • Write off any bad business debts

Self-employed taxpayers who use the cash method of accounting have the most flexibility to maneuver at year-end. See a tax specialist for more information.

Deduct health-care related expenses

If you qualify, you may be able to benefit from the self-employed health insurance deduction. This would enable you to deduct up to 100 percent of the cost of health insurance that you provide for yourself, your spouse, and your dependents. This deduction is taken on the front of your federal Form 1040 when computing your adjusted gross income, so it’s available whether you itemize or not.

Contributions you make to a health savings account (HSA) are also deductible “above-the-line.” An HSA is a tax-exempt trust or custodial account you can establish in conjunction with a high-deductible health plan to set aside funds for health-care expenses. If you withdraw funds to pay for the qualified medical expenses of you, your spouse, or your dependents, the funds are not included in your adjusted gross income. Distributions from an HSA that are not used to pay for qualified medical expenses are included in your adjusted gross income, and are subject to an additional 20 percent penalty tax unless an exception applies.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Merging Your Money When You Marry

Merging Your Money When You Marry

Getting married is exciting, but it brings many challenges. One such challenge that you and your spouse will have to face is how to merge your finances. Planning carefully and communicating clearly are important, because the financial decisions that you make now can have a lasting impact on your future.

Discuss your financial goals

The first step in mapping out your financial future together is to discuss your financial goals. Start by making a list of your short-term goals (e.g., paying off wedding debt, new car, vacation) and long-term goals (e.g., having children, your children’s college education, retirement). Then, determine which goals are most important to you. Once you’ve identified the goals that are a priority, you can focus your energy on achieving them.

Prepare a budget

Next, you should prepare a budget that lists all of your income and expenses over a certain time period (e.g., monthly, annually). You can designate one spouse to be in charge of managing the budget, or you can take turns keeping records and paying the bills. If both you and your spouse are going to be involved, make sure that you develop a record-keeping system that both of you understand. And remember to keep your records in a joint filing system so that both of you can easily locate important documents.

Begin by listing your sources of income (e.g., salaries and wages, interest, dividends). Then, list your expenses (it may be helpful to review several months of entries in your checkbook and credit card bills). Add them up and compare the two totals. Hopefully, you get a positive number, meaning that you spend less than you earn. If not, review your expenses and see where you can cut down on your spending.

Bank accounts–separate or joint?

At some point, you and your spouse will have to decide whether to combine your bank accounts or keep them separate. Maintaining a joint account does have advantages, such as easier record keeping and lower maintenance fees. However, it’s sometimes more difficult to keep track of how much money is in a joint account when two individuals have access to it. Of course, you could avoid this problem by making sure that you tell each other every time you write a check or withdraw funds from the account. Or, you could always decide to maintain separate accounts.

Credit cards

If you’re thinking about adding your name to your spouse’s credit card accounts, think again. When you and your spouse have joint credit, both of you will become responsible for 100 percent of the credit card debt. In addition, if one of you has poor credit, it will negatively impact the credit rating of the other.

If you or your spouse does not qualify for a card because of poor credit, and you are willing to give your spouse account privileges anyway, you can make your spouse an authorized user of your credit card. An authorized user is not a joint cardholder and is therefore not liable for any amounts charged to the account. Also, the account activity won’t show up on the authorized user’s credit record. But remember, you remain responsible for the account.

Insurance

If you and your spouse have separate health insurance coverage, you’ll want to do a cost/benefit analysis of each plan to see if you should continue to keep your health coverage separate. For example, if your spouse’s health plan has a higher deductible and/or co-payments or fewer benefits than those offered by your plan, he or she may want to join your health plan instead. You’ll also want to compare the rate for one family plan against the cost of two single plans.

It’s a good idea to examine your auto insurance coverage, too. If you and your spouse own separate cars, you may have different auto insurance carriers. Consider pooling your auto insurance policies with one company; many insurance companies will give you a discount if you insure more than one car with them. If one of you has a poor driving record, make sure that changing companies won’t mean paying a higher premium.

Employer-sponsored retirement plans

If both you and your spouse participate in an employer-sponsored retirement plan, you should be aware of each plan’s characteristics. Review each plan together carefully and determine which plan provides the best benefits. If you can afford it, you should each participate to the maximum in your own plan. If your current cash flow is limited, you can make one plan the focus of your retirement strategy. Here are some helpful tips:

  • If both plans match contributions, determine which plan offers the best match and take full advantage of it
  • Compare the vesting schedules for the employer’s matching contributions
  • Compare the investment options offered by each plan. The more options you have, the more likely you are to find an investment mix that suits your needs
  • Find out whether the plans offer loans. If you plan to use any of your contributions for certain expenses you may want to participate in the plan that has a loan provision

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Surviving an Audit

Surviving an Audit

Even the most honest of taxpayers can be left trembling at the thought of an IRS audit. Let’s face it–it’s right up there with public speaking. To survive an audit, you’ve got to arm yourself with information. You should understand what the audit process is all about. You need to understand why your return was audited and what your rights and responsibilities are. Most importantly, how you can appeal the findings.

An audit is not an accusation of wrongdoing

An IRS audit is an impartial review of your tax return to determine its accuracy. It’s not an accusation of wrongdoing. However, you must demonstrate to the IRS that you reported all of your income and were entitled to any credits, deductions, and exemptions in question.

The IRS generally must complete an audit within three years of the time the tax return is filed. Unless, tax fraud or a substantial underreporting of income is involved.

Certain returns run a greater risk of audit

Several factors can lead the IRS to single out your return for an audit. Taxpayers who are self-employed, receive much of their income in tips, or run cash-intensive businesses historically have faced a greater likelihood of audits. The IRS may also pay more attention to professionals such as doctors, lawyers, and accountants. If your itemized deductions in several major categories are greater than the statistical average, you’ll generally have an increased chance of being audited. Other red flags may include a return:

  • That is missing required schedules or forms
  • Signed by a preparer associated with problems in the past
  • Reporting income of at least $200,000

There are three types of audits

If you are to be audited, the IRS will inform you by telephone or letter. There are three types of audits:

  • A correspondence audit: This is typically for minor issues and requires only that you mail certain information to the IRS. Pheraps you forgot to attach a Schedule C to your income tax return. The matter will be closed if the IRS is satisfied with your paperwork.
  • An office audit: Here, you’d typically bring your tax-related records to an IRS office for examination. If you claimed an unusually high deduction for medical expenses, the IRS may want to see your medical bills and canceled checks.
  • A field audit: Here, the auditor generally visits your home or business to verify the accuracy of your tax return. It may be possible for the auditor to visit the office of your representative, instead.

Know your rights regarding the audit

You have several rights when you’re involved in an audit. These include, the right to:

  • A professional and courteous treatment
  • An explanation of the audit process
  • Representation
  • Know why the IRS is asking for information, how the information will be used, and what will happen if the information is not provided
  • Appeal decisions

Audit survival tips

Consider the following when you are audited:

  • Request a postponement to gather your records and put them in order
  • Be sure to read IRS Publication 1 (Taxpayers’ Bill of Rights) before your audit
  • Before your initial interview with the IRS agent, meet with your representative to discuss strategies and expected results
  • Bring to the audit only the documents that are requested in the IRS notice
  • Be thoroughly prepared–if your records clearly substantiate the items claimed on your return, the agent won’t waste time conducting a more in-depth audit
  • Be professional and courteous
  • Do not volunteer information to the IRS agent; if you have a representative, he or she should respond to the agent’s questions
  • Don’t lie
  • Keep detailed records of any materials that you submit to the agent and of any questions asked by the agent
  • Ask to speak to the auditor’s supervisor if you think that the agent is treating you unfairly
  • When you get the examination report, call the auditor if you don’t understand or agree with it
  • If you don’t agree with the audit results, request a conference with a manager, and know your appeal rights

You can appeal if you disagree with the audit result

You can either agree or disagree with the auditor’s findings. If you agree, you’ll complete some paperwork and pay what’s owed. If you disagree with the auditor, the issues in question can be reviewed informally with the auditor’s supervisor. Or, you can appeal to the IRS Appeals Office, which is independent of the local office that conducted the audit. You can appeal the auditor’s findings by sending a protest letter to the IRS within 30 days of receiving the audit report. If you do not reach an agreement with the appeals officer you may be able to take your case to the U.S. Tax Court, U.S. Court of Federal Claims, or U.S. District Court where you live.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Paying For Graduate School

Paying For Graduate School

Maybe you’ve decided that graduate school is the path to advancement in your current job or your ticket to a better career. Or maybe you just want to take a few classes to upgrade your skills. Either way, returning to school as an adult often involves financial sacrifices. How will you pay for it? Personal savings, financial aid, employer-funded tuition, and private loans may be available to you, and education tax credits might help out at tax time.

Calculate the costs

Before you jump into investigating graduate school funding sources, the first thing to do is calculate how much your education will cost. Along with direct billed tuition and fees, make sure to add in collateral expenses that won’t show up on the bill. This includes room, books, commuting costs, day-care expenses, etc. Also, if you plan to give up your job, factor in the time you’ll be without a paycheck and the time it might take you to find a new job. Once you have a cost estimate, it’s time to look for the money. The following are some suggestions on where to look for financial help.

Ask your employer

If you’re currently employed, the first place to look for education funds is your current employer. Unless you’re leaving your job to attend school, find out whether your company offers tuition reimbursement benefits. The first $5,250 of employer-provided educational assistance is tax free. Even if it’s for classes that are unrelated to your current position. If your employer pays more than $5,250 in educational benefits to you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in your income.

If your company does offer tuition reimbursement, make sure to find out if there are strings attached. For example, you may need to certify that you’re not retraining for a new career. Or, you may have to work at the company for a certain number of years after you earn your degree or risk having to pay back your benefits.

Some companies may allow you to take a leave of absence and/or work part-time in order to take classes. If this isn’t a formal policy, ask your manager or human resources supervisor if this is a possibility.

Investigate your financial aid options

The maze of student financial aid programs can seem like another obstacle in your quest to return to school, but the process is understandable if you do some research and ask questions. Start at your school’s financial aid office or at the government’s financial aid website www.ed.gov.

To qualify for federal aid, you’ll need to submit the government’s aid application, the FAFSA. The FAFSA calculates your expected family contribution (EFC), which is the amount of money you are expected to contribute to college costs. As an adult, you’ll be classified as an independent student. This means your income and assets will count in the EFC calculation. Also, if you’re married, your spouse’s income and assets will also count. If you plan to reduce your hours or stop working this year to attend school, your income will obviously be less when school starts. Make sure to bring this to the attention of your school’s financial aid administrator, who is authorized to take special circumstances into account and rebalance aid awards, where appropriate.

Here are some federal and institutional financial aid options for graduate school:

Loans: The two main federal loan programs for graduate students are Direct Loans and Grad PLUS Loans. Graduate students can borrow up to $20,500 per year (or $40,500 for certain medical training) in Direct Loans. This is with a maximum loan limit of $138,500 ($224,000 for medical training), including undergraduate borrowing. Grad PLUS Loans have no annual borrowing limits per year; graduate students can borrow up to the full cost of their education.

To qualify for either loan, students must attend school on at least a half-time basis. The rate is fixed for the life of the loan but resets each July for new loans. Graduate students who are enrolled less than half-time, the federal Perkins Loan, which is dispersed by individual colleges. This loan allows borrowers with financial need to borrow up to $8,000 per year. This is with a maximum loan limit of $60,000, including undergraduate borrowing.

Work-study: The federal work-study program subsidizes jobs for both undergraduate and graduate students. Check with the financial aid office at your particular school for more information on the types of jobs available.

Military aid: The federal government also offers educational benefits for veterans and their dependents. Contact your local veterans office or your school’s financial aid office for more information.

Scholarships and grants: At the graduate level, most scholarships and grants come from schools and are often awarded on the basis of merit, not need. Contact the financial aid office of any school you’re considering to see what scholarships or grants might be available. Many scholarships and grants are awarded at the departmental level. Thus, your chances might depend on what subject you plan to study. In addition, many private organizations offer scholarships for graduate school. There are several websites where you can search for them free of charge.

Take a trip to the bank

If you don’t qualify for federal or institutional financial aid or you need to borrow more than the federal student loan limits, private loans from commercial lenders are an option. However, the rates on private student loans are typically higher than on federal student loans. As well, private lenders typically offer less generous repayment options.

Use personal assets

Do you have savings that could cover a portion of your expenses? Money left over in a 529 plan? Or maybe you could sell some assets? Remember, tapping your retirement funds to pay education expenses should be a last resort. Money you withdraw from retirement accounts will reduce your future nest egg. You may miss out on the potential for tax-deferred growth. Depending on the type of retirement account you tap, you may face tax consequences and penalties for withdrawing money before age 59½.

Review education tax credits and deductions for graduate school

There are several other federal tax incentives that can help ease the financial burden of returning to school.

Lifetime Learning credit — This credit is worth up to $2,000 in 2021 to cover the tuition and fees for higher education courses taken throughout your lifetime. This is whether to acquire or improve job skills. To take the full credit, your MAGI must be below $59,000 (single) or $118,000 (married filing jointly). A partial credit is available to single filers with a MAGI between $59,000 and $69,000. Joint filers with a MAGI between $118,000 and $138,000. Unfortunately, the American Opportunity credit and Lifetime Learning credit can’t be claimed in the same year for the same student. I’s one or the other.

Student loan interest deduction — If you graduate with student loans, you may be able to deduct up to $2,500 of the interest you pay on student loans each year. A partial deduction is available to single filers with a MAGI between $70,000 and $85,000. Joint filers with a MAGI between $140,000 and $170,000.

For more information, consult IRS Publication 970, Tax Benefits for Education.

How will you balance school, career, and life?

You’ve found the money — now you need to find the time. Learning to balance school demands with the rest of your adult responsibilities can be challenging. However, it’s not impossible. Here are some tips:

  • Map out your life goals (again) to confirm that returning to school will help you achieve them.
  • If you’re married, make sure your spouse is an equal partner in household chores and, if applicable, child-rearing responsibilities.
  • If you have older children, explain your new routine and how they can help out.
  • Look for programs designed for adult students (e.g., support groups, tutoring programs, specially trained academic advisors and counselors).
  • Consider going to school part-time, taking classes at night, or signing up for online classes. Each option can save you time and money.
  • When things get tough, try to keep things in perspective by looking at the forest, not the trees. Keep in mind the financial and personal rewards that will come after your education is complete.
  • If you have younger children, arrange day care if necessary — check to see if your school offers it.

If you are thinking of going to graduate school, speak with an advisor

At Sterling Group, we offer complimentary consultations. Contact us today and one of our financial advisors can review what your current future financial plans are.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Credit Traps for the Unwary

Credit Traps for the Unwary

It’s hard to imagine functioning in today’s society without access to credit. However, you need to be careful not to fall victim to some of the pitfalls associated with it.

Revolving credit can make it hard for you to pay off debt

Credit cards allow you to spend money you don’t currently have, and to repay what you’ve spent over time instead of all at once. When you use a card, the balance you owe increases, and your remaining available credit decreases. As you make your payments to reduce your outstanding balance, your available credit once again increases. Thus, your credit revolves around for you to use again.

Since you can spend more than you currently have, you can easily spend more than you can afford. As your balance increases, your minimum monthly payments also increase, and soon you’ll find yourself in over your head–especially if interest rates and a variety of fees are high.

Interest and fees can add to the cost

Credit card debt generally carries a high interest rate. Your minimum monthly payment of the total balance due, may cover little more than the monthly interest charge. Consequently, your minimum payment may only minimally decrease what you already owe. If possible, increase your monthly payment above the minimum required. The higher you can make the payment, the faster you will pay off the debt.

When opening a new account, always check to see how the finance charge is calculated. Here are some of the methods used:

  • Adjusted balance method: Balance due at the beginning of the billing cycle less any payments made during the cycle; excludes new purchases made during the cycle
  • Previous balance method: Balance due at the beginning of the billing cycle
  • Average daily balance method: Total of the balances due each day in the billing cycle divided by the number of days in the cycle; payments made are subtracted as posted to determine daily balances; new purchases may or may not be added in
  • Two-cycle average daily balance method: Same as the average daily balance method, but over two consecutive billing cycles (as of February, 2010, this method is prohibited)

The amount of your finance charge can vary widely from method to method

Because finance charges result in higher interest charges, creditors favor either of the last two methods mentioned above. In an effort to attract your business, many lenders offer very low introductory rates–3.9 percent annually or less. However, these rates generally last no more than three to six months and increase to the current market rate thereafter. Moreover, the introductory rates may apply only to balances you transfer from other cards. They may not apply to new purchases and rarely if ever to cash advances. Finally, if your monthly payment is late, the interest rate may be automatically raised to the current market rate–and sometimes beyond.

If you have two different interest rates on one account, the creditor will post the payments toward the lower interest rate balance, not the higher. To avoid this, use two different cards if possible–one for purchases you will pay off when the bill comes and the second, lower-rate card if you have to carry a balance.

Incurred feeds

You may also incur a wide variety of fees. Creditors may charge you an annual fee to maintain the account. These fees can range from $25 to $50 or more each year. They may also charge fees to transfer balances from other cards. Generally, these processing fees equal 2 to 4 percent of the amount you transfer. Many banks levy a similar surcharge on transactions involving conversions from foreign currencies. If you’re late with your monthly payment, you may be charged a late payment fee. It can be as much as $39 each month you’re overdue. If your account balance rises above your approved credit limit, you will be assessed a monthly overlimit fee until you bring the total balance due under the limit you’re allowed.

When these fees add up, you may find that making your minimum monthly payment won’t bring your balances down. In fact, your balance will increase if your monthly payment isn’t greater than the accumulated interest and fees due. This is because these unpaid charges become a part of the principal you owe. Moreover, your account may then be considered past due and reported as such to the credit bureaus.

If you surf your debt, beware the wake

You may periodically transfer your balance from one introductory offer to the next. This is known as surfing. Done successfully, surfing lets you avoid the higher interest charges that your debt would incur when the original card offer expires. By the time the interest rate on the original card increases, you’ve surfed over to a new offer at another low rate.

Although surfing helps keep your interest charges to a minimum, it’s not without pitfalls. You may be offered a low rate only on balance transfers; if new purchases and cash advances are billed at a higher interest rate, these charges could offset the savings you would otherwise enjoy. Moreover, as creditors move to counteract the surfing trend, many stipulate that if you transfer balances to another card within a certain time after opening your account, you’ll be retroactively charged a higher rate of interest on the amount you transfer. Thus, surfing before this time period is up eliminates the savings.

Finally, if you transfer balances to a new card, close the original account as soon as you’ve paid it off. Write the creditor a letter asking it to inform the credit bureaus that the account was closed at your request. This prevents new potential creditors from denying you credit when they see too many open lines of credit, and it also deters anyone else from fraudulently using an inactive account.

Protect yourself against credit fraud and identity theft

Credit fraud (the illegal use of your accounts) and identity theft (opening new credit using information about you) are two of the fastest-growing crimes today. In many cases, you may not know you’ve been victimized until it’s too late. Here are some indicators of these crimes:

  • A creditor informs you that it received an application in your name
  • You’ve been approved for or denied credit you didn’t apply for
  • You no longer get your credit card statements in the mail
  • Your credit card statements include purchases or cash advances you never made

To minimize the chances of being victimized, take precautions to safeguard your credit account information. Don’t carry credit cards you don’t use often. Be sure to sign your cards, and never sign a blank charge slip. When you use the card, try to keep it within your sight. Save your receipts, and obtain and destroy any carbons. Don’t allow a sales clerk to write your credit card number on a check “for identification.” Finally, never give out your account number over the telephone unless you initiated the call and know the organization to be reputable.

If you are thinking of getting a credit card, or trying to pay off an old one, we can help

Sometimes we can find ourselves a little in over our heads. Set up a complimentary consultation with one of our advisors today. We are more than happy to discuss your options with you and help decide what is best for you right now, and your future.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Teaching Your Child about Money

Teaching Your Child about Money

Ask your five-year old where money comes from, and the answer you’ll probably get is “From a machine!” Even though children don’t always understand where money really comes from, they realize at a young age that they can use it to buy the things they want. So as soon as your child becomes interested in money, start teaching him or her how to handle it wisely. The simple lessons you teach today will give your child a solid foundation for making a lifetime of financial decisions.

Lesson 1: Learning to handle an allowance

An allowance is often a child’s first brush with financial independence. With allowance money in hand, your child can begin saving and budgeting for the things he or she wants.

It’s up to you to decide how much to give your child based on your values and family budget, but a rule of thumb used by many parents is to give a child 50 cents or 1 dollar for every year of age. To come up with the right amount, you might also want to consider what your child will need to pay for out of his or her allowance, and how much of it will go into savings.

Some parents ask their child to earn an allowance by doing chores around the house, while others give their child an allowance with no strings attached. If you’re not sure which approach is better, you might want to compromise. Pay your child a small allowance, and then give him or her the chance to earn extra money by doing chores that fall outside of his or her normal household responsibilities.

If you decide to give your child an allowance, here are some things to keep in mind:

  • Set some parameters. Sit down and talk to your child about the types of purchases you expect him or her to make, and how much of the allowance should go towards savings.
  • Stick to a regular schedule. Give your child the same amount of money on the same day each week.
  • Consider giving an allowance “raise” to reward your child for handling his or her allowance well.

Lesson 2: Opening a bank account

Taking your child to the bank to open an account is a simple way to introduce the concept of saving money. Your child will learn how savings accounts work, and will enjoy trips to the bank to make deposits.

Many banks have programs that provide activities and incentives designed to help children learn financial basics. Here are some other ways you can help your child develop good savings habits:

  • Help your child understand how interest compounds by showing him or her how much “free money” has been earned on deposits.
  • Offer to match whatever your child saves towards a long-term goal.
  • Let your child take a few dollars out of the account occasionally. Young children who see money going into the account but never coming out may quickly lose interest in saving.

Lesson 3: Setting and saving for financial goals

When your children get money from relatives, you want them to save it for college, but they’d rather spend it now. Let’s face it: children don’t always see the value of putting money away for the future. So how can you get your child excited about setting and saving for financial goals? Here are a few ideas:

  • Let your child set his or her own goals (within reason). This will give your child some incentive to save.
  • Encourage your child to divide his or her money up. For instance, your child might want to save some of it towards a long-term goal, share some of it with a charity, and spend some of it right away.
  • Write down each goal, and the amount that must be saved each day, week, or month to reach it. This will help your child learn the difference between short-term and long-term goals.
  • Tape a picture of an item your child wants to a goal chart, bank, or jar. This helps a young child make the connection between setting a goal and saving for it.

Finally, don’t expect a young child to set long-term goals. Young children may lose interest in goals that take longer than a week or two to reach. And if your child fails to reach a goal, chalk it up to experience. Over time, your child will learn to become a more disciplined saver.

Lesson 4: Becoming a smart consumer

Commercials. Peer pressure. The mall. Children are constantly tempted to spend money but aren’t born with the ability to spend it wisely. Your child needs guidance from you to make good buying decisions. Here are a few things you can do to help your child become a smart consumer:

  • Set aside one day a month to take your child shopping. This will encourage your child to save up for something he or she really wants rather than buying something on impulse.
  • Just say no. You can teach your child to think carefully about purchases by explaining that you will not buy him or her something every time you go shopping. Instead, suggest that your child try items out in the store, then put them on a birthday or holiday wish list.
  • Show your child how to compare items based on price and quality. For instance, when you go grocery shopping, teach him or her to find the prices on the items or on the shelves, and explain why you’re choosing to buy one brand rather than another.
  • Let your child make mistakes. If the toy your child insists on buying breaks, or turns out to be less fun than it looked on the commercials, eventually your child will learn to make good choices even when you’re not there to give advice.

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The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.