Tips for Getting Out of Financial Hardship

Tips for Getting Out of Financial Hardship

Unfortunately, with the recession in full effect, a lot of Americans are finding themselves in serious financial hardship.

This article is intended for individuals within the age range of 18-35 years with a dead end job, limited education (HS diploma only), and no special skills or trade who also have high consumer debt that they struggle to make minimum payments on.

The following assumptions are made about the intended users of this article: you have unsuccessfully tried to get a lower APR for your credit cards, and you have unsuccessfully tried to get a raise or a bonus at your current job.

Here is how you can finally get out of financial hardship:

 

  • List all the debt you owe. Find out what payments are necessary to bring your accounts to a ‘current’ status – this is an account that is in good standing and not incurring late fees or other limit fees.

 

  • Register for online access to all your accounts, and set up automatic monthly payments for at least the minimum amount.

 

  • Change your due dates so that they coincide with your pay dates. For example, if you get paid on the 1st and the 15th, make half of your due dates fall around the 5th of the month and the other half around the 20th of the month.

 

  • Use whatever cash you can get to bring your accounts current. Ways of acquiring immediate cash are listed below:

 

  • Ask for a cash donation from family and friends. Be honest with your close friends and family members about your financial hardship, and then ask for any cash they are willing to spare. This is much better than asking for a loan.
  • Use the money from all liquid investments you might have. Liquid investments include checking, savings, MMA or CD accounts. It does not make sense to keep money in these accounts, since the amount they yield is far less than the amount of interest your credits assess.
  • Check for unclaimed money you may have at www.unclaimed.org
  • Sell any underutilized assets you own, such as a second car, tools, or a boat.
  • Temporarily put off donating money to your 401k plan – use this money to help bring your accounts current. Once you are current, continue the contributions to your 401k plan.

 

  • Identify any time-barred debt. If you have unsecured debt that has been delinquent for a period of over 7 years, chances are the debt may have expired or is close to expiring. If this is the case, the creditor cannot legally collect on the debt because the statute of limitation has expired. You may still receive calls from collectors, but the key is to not acknowledge the debt or make a payment because this now resets the clock, giving lenders the legal right to sue you in small claims court.

 

  • After making the minimum payment on all your credit cards, use half of any leftover money to pay off the credit card with the highest interest rate; use the remaining half to build an emergency fund. For example, let’s say your entire minimum payments amount to $2000.00 and you have some extra cash of $500.00: you should use $250.00 to pay the credit with the highest interest rate, and then put the remaining $250.00 in an emergency fund.

 

  • Build an emergency fund of up to 2 months of living expenses, while paying off your debt. A good place to store an emergency fund is in an online savings account. Online saving accounts typically have higher interest rates when compared to traditional brick and mortar banks.

 

  •  Make partial payments as early as possible. Whenever you are unable to pay your credit card in full, try to make the partial payments before your due date. By doing this you will reduce your financial charges.

 

 

  • Once your credit card debts are completely paid off, do NOT close the account. The account age makes up 15% of your credit score so closing an account will negatively impact your score

 

  • Improve your discretionary income and use the additional income to pay down your debt. You can increase your discretionary income by increasing your income and lowering your expenses. The next section discusses this.

 

Once you have exhausted every possible avenue of obtaining immediate cash, the next step is to look for “realistic” ways to make extra money. Notice I use the term “realistic” because it is often mentioned that mystery shopping, paid surveys, and blogging are great part-time moneymakers. Now, I may be wrong here, but I personally do not know anybody who has made extra income from these activities. In fact, most of these advertised jobs turn out to be scams, and if you are one of the lucky people to make any income, the money you make is so small and inconsistent that it is definitely not worth your time. Below I have listed realistic ways to earn extra cash.

 

Realistic Ways to Make Extra Money

  • Become a paid sports official. If you know the rules of sports such as basketball, football or soccer, there are many paid officiating jobs available.
  • Donate plasma.
  • If you are a renter, get a roommate.
  • if you own a home, rent out a room.
  • If you live in a tourist area and have a spare room, become a Bed and Breakfast host.
  • Babysitting, house sitting, and pet sitting.
  • Non-medical home care provider.
  • Dog walking service.
  • If you have a car, give people rides to the airport for a fee or start a courier service.
  • Clean up foreclosed homes.
  • If you have a truck, offer to haul stuff for a fee. If what you’re hauling is made of metal, you can sell to metal scrap collectors.
  • Buy items from Goodwill, Salvation Army, and garage sales and sell them on eBay.   Make sure you do your research to see which items sell well prior to making purchases.
  • Collect items listed in the “free” section of Craigslist and sell on eBay or to metal scrap collectors, whichever is appropriate.
  • Auto detailing.
  • House cleaning.
  • Rent out your garage space to boat owners or individuals in need of a parking space.
  • Become an online tutor.

 

In addition, you can pursue these longer-term solutions:

  • Pursue “in demand” professional certifications. This is a cheaper alternative to pursuing a college degree. The advantages of getting professional certifications are that they are relatively cheap and quick to acquire, and once you’ve completed a certification, it opens up doors to higher-paying jobs. When inquiring about which professional certification to pursue, do your background research to determine whether the certification is actually in demand.

 

  • Claim all your eligible tax deductions and credits. In order to maximize your tax refund or minimize your tax liability, make sure you don’t overlook these common tax credits available to low income tax payers: earned income credit, credit for child and dependent care expenses, child tax credit and educational credits. Another opportunity for single parents with full custody of their child(ren) is to file as Head of Household and not as single.

© Copyright 2010, Ugonna Chukwu, CPA

http://www.pick-an-entity.com

Posted in credit card, debt management, finance, personal finance | Tagged , , , , | 5 Comments

Things NOT to do when in Financial Hardship

When facing financial hardship, it is very common for individuals to make irrational decisions due to stress that further worsen their financial situation.  This is a compiled list of common missteps to avoid:

  • Do not file for bankruptcy.  Even though credit analysts say bankruptcy stays on your credit report for 10 years, the truth is that bankruptcy is more like a lifetime sentence. For instance, if you decide to obtain a bank loan, the lender’s application typically ask if you’ve ever filed for bankruptcy. In most cases, answering yes means your loan application will be disapproved. For those seeking new employment, some employers ask that same question on their application. Filing for bankruptcy makes you toxic to both lenders and employers, so avoid bankruptcy at all costs.

 

  • Avoid debt consolidation agencies. Participating in a debt consolidation program has the same negative impact as filing for bankruptcy, but to a lesser extent. Such programs negatively impact your credit for a period of up to 7 years.   

 

  • Stay away from Payday loans, Pawn loans and Auto Title Loans. The dangers of these types of loans have been well documented in the media. The problem arises when you are unable to fully pay back the loan by its maturity date – then your loan is extended, the interest rate skyrockets to around 400%, and you are caught in a vicious cycle until you are able to pay the loan in full, high interest rate and penalties included.

 

  • Don’t borrow money from friends or relatives.  You’ve seen this before on shows like Judge Judy, where relationships are ruined between family members or friends due someone not being able to repay a loan. Rather than asking for a loan, ask for a cash donation.

 

  • Don’t get a student loan and start a 4-year degree. A typical thing for individuals to do in a recession is apply for student loans and start a 4-year degree. Their beliefs are that, after the completion of a degree, they will be able to get higher-paying jobs. Unfortunately, in this recession, the lucky ones who do go ahead and successfully complete their degrees end up joining the long line of unemployed college graduates. To add insult to injury, these unemployed college graduates are now left with a hefty student loan obligation. A better alternative would be to get “in demand” professional certifications, which are cheaper and often open up doors to higher-paying jobs.

 

  • Do not pay time-barred debt. If you have unsecured debt that has been delinquent for a period of over 7 years, chances are the debt may have expired or is close to expiring. If this is the case, the creditor cannot legally collect on the debt because the statute of limitation has expired. You may still receive calls from collectors, but the key is to not acknowledge the debt or make a payment, or else it will reset the clock. Please check with a lawyer to determine if your debt is time-barred.

    

© Copyright 2010, Ugonna Chukwu, CPA 

 http://www.pick-an-entity.com

Posted in credit card, debt management, finance, personal finance | Tagged , , , | Leave a comment

How To Lower Business Taxes

As tax rates continue to increase, it has become exceedingly more important for business owners to devise tax planning strategies to help reduce the burden of business taxes. In this article, we will highlight proven methods for lowering business taxes.

Set up a retirement plan for yourself. You are not taxed on the income you contribute to your retirement plan. Earnings grow tax-free until withdrawal from the retirement plan.

Some popular retirement plans for the self employed include:

• SEP (2010 Contribution Limit- Cannot exceed the lesser of 25% of an employee’s              compensation, or $49,000).
• Profit-sharing Keogh plan (2010 Contribution Limit- Cannot exceed the lesser of 25% of an employee’s compensation, or $49,000).

• Solo 401(K) plan (2010 Contribution Limit – Cannot exceed $16,500 of your pre-tax income. If you are over the age of 50, you can do the catch up contribution of $5,500, for a total of $22,000. In addition to the $16,500, as the employer you can also make a profit sharing contribution up to 25% of your pay not to exceed $49,000 for 2010.)

• For married business owners, if you have high health insurance, dental insurance premiums and out-of-pocket medical expenses, establish a Section 105 HRA plan, and then hire your spouse as an employee of your business.

• Have your spouse list you and any children you might have as beneficiaries. This then allows you to deduct your hospital insurance and medical bills as business expenses, not as itemized deductions.

• When hiring your spouse, make sure he/she is doing a bona fide job that adds value to your business and make sure he/she is receiving reasonable wages. Keep good records of time and description of duties performed.

• For business owners with children under the age of 18, hiring your children produces great tax savings. Firstly, your child’s compensation is deductible as a business expense. Secondly, the wages of a Child under 18 years old are not subject to Social security or Medicare withholdings. Finally you shift income from your higher tax bracket to your child(ren)’s lower tax bracket. When hiring your child(ren), make sure he/she is doing a bona fide job that adds value to your business and make sure he/she is receiving reasonable wages. Accurate recordkeeping of logged time is essential.

• Rather than writing off purchased equipment over its life, through depreciation, elect to use Section 179 Deduction. Section 179 allows businesses to deduct the full purchase price of qualifying equipment purchased or financed in the year it is purchased.

• For those business owners who anticipate tax rates in the coming year are going to be lower, try deferring income into next year while accelerating deductibles. This will reduce current taxes and defer tax liabilities into the following year.

• Electing to use Section 179 rather than depreciating recently purchased equipment, stocking up on office supplies, purchasing equipment needed in the business are all good year end strategies for accelerating deductibles. You can also elect to apply any unused Net Operating Loss (NOL), or make an extra charitable donation to further reduce your taxable income.

• If your business uses cash based accounting, one way to defer income into the next year, is to invoice your customers at the end of the year, let’s say December 31st by doing this your postponing recognition of revenue into the next year.

• If you anticipate being in a higher tax bracket next year, you do the exact opposite. You accelerate income into the current year to take advantage of the lower tax rates and defer deductibles.

• Write off obsolete, damaged, or worthless inventory or equipment as an expense.

• If you use a portion of your home for business purposes you may be able to take a home office deduction. You must satisfy the requirements (see Form 8829 at IRS.GOV) and the deduction amount cannot exceed income from your business.
Avoid penalties from late payments of taxes, by using the Electronic Federal Tax Payment System (EFTPS). This is a convenient tax payment system provided free by the U.S. Department of Treasury.

Future considerations
• Once your business starts to become more profitable, it will be more beneficial for you to incorporate the business. There are two types of corporations to choose from, these are S-corporation and C-corporation.

You would want to pick an S-corporation if the following apply:
• you still anticipate losses in the future,
• you don’t really have a need for public financing,
• you are not in the highest individual tax bracket ,
• You have substantial capital gains and qualified dividend.

You would want to pick a C-corporation if the following apply:
• You have a need for public financing
• You are in the highest individual tax bracket

For more information on tax planning, please visit www.pick-an-entity.com

Disclaimer

The foregoing is intended for educational purposes only and does not constitute legal or professional advice. Nothing contained herein is intended to be used, or can be used, by any person to avoid penalties that may be assessed under federal or any state law.

© Copyright 2010, Ugonna Chukwu, CPA

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Pick A Business Entity

Selecting the Ideal Business Entity From A Tax Perspective: LLC vs S CORP vs C CORP

Picking the right business entity is a crucial decision every prospective business owner has to make.

The ideal business entity should offer the following:

  • Provide limited liability to business owners
  • Minimize business taxes
  • Means of financing

To simplify this process, we will determine the right business entity from a tax perspective. In other words, the ideal business entity will be the one that produces the lowest business tax.

The three business entities we will choose from are: Limited Liability Company (LLC), S-corporation, and C-corporation.

LLC vs S CORP vs C CORP

The first process of elimination is based on the profitability of the business. If the business is not profitable, then an S corporation or C corporation are NOT suitable options. An LLC will be the right business entity to pick.

In this article, a business is considered profitable if the owner can take out a market salary from the net profits.  

An example to illustrate the profitability test is shown below:

 John is a CPA who owns a tax consulting business called Tax Guru.  If the market salary for a CPA with John’s experience is $60,000 and Tax Guru generates profits of only $40,000, then Tax Guru Fails the profitability test and should be set up as an LLC. Now if Tax Guru had profits equal to or greater than $60,000 it is considered a profitable business, and should be set up as an S Corp or a C corp in order to minimize self employment taxes.

S Corp vs C Corp

We’ve already established from the previous section in this article, that a business must be profitable in order to be set up as an S corp or a C corp.

An S Corporation is suitable if the following apply:  business owner is not in the highest tax bracket, the business owner has a significant amount of qualified dividends and capital gains, the business expects a loss in the future, and the business does not have a need for public financing.

A C Corporation is suitable if the business owner is in the highest tax bracket, or the business has a great need for public financing.

A free web based tool to help pick a business entity is http://www.pick-an-entity.com/

Disclaimer

The foregoing is intended for educational purposes only and does not constitute legal or professional advice. Nothing contained herein is intended to be used, or can be used, by any person to avoid penalties that may be assessed under federal or any state law.

© Copyright 2010, Ugonna Chukwu, CPA

Posted in small Business | Tagged , , , , | Leave a comment