Writing off personal expenses in the company ledger and failing to report cash transactions are common with smaller companies. The fact misappropriated expenses are rarely detected by the IRS has led many business owners to treat this as a condoned business practice.

Such accounting practices however, can backfire when it comes time to sell your business.  This is because the failure to pay taxes may dramatically decrease the value of a business. Now let’s examine the impact that tax problems can have on the sale of a business, as well as what business owners can do now to maximize the price they will receive when the time comes.

Typically, large companies have developed extensive tax policies and procedures, and have capable executives on board to implement the policies. Tax problems arise most often with owner-operated businesses, including family-owned enterprises. Accordingly, this article will focus on small and middle-market companies that are owner operated.

There are two primary methods used to decrease business taxes:

• (1) The under reporting of revenue.
• (2) The over reporting of expenses.

The first, which is most closely associated with businesses involved in cash transactions, occurs when cash is received and not recorded. The second method most often involves charging personal expenses to the business. These expenses range from questionable meal, travel and entertainment charges to expenses that are clearly not permitted, such as charging a spouse’s car, nannies or home remodels to the business. Regardless of which method is employed, the result is the same: earnings are decreased, sometimes dramatically, and taxes are underpaid.

While manipulating a company’s books may result in short-term tax savings, when the business is sold there can be unforeseen consequences.

The consequences can be generally classified into three categories:

• (1) The purchase price for the business will be decreased.
• (2) The buyer may not be able to obtain financing for the transaction, thus putting the entire transaction at risk.
• (3) The owner may be denied the benefit of long-term capital gains tax treatment.

Impact On The Purchase Price

With regard to the reduction in purchase price: For every dollar of tax savings the seller achieves through underpayment of taxes, the seller will receive a much greater reduction in the price paid for the business. This is because when a private business is sold the buyer generally pays a multiple of earnings (or more accurately, EBITDA - earnings before interest, taxes, depreciation and amortization).

The multiple varies by industry and by company attributes. For example, one company might be valued at 3 times earnings while another is valued at 7 times earnings. This means that for every $1 in earnings, the sellers will receive somewhere between $3 and $7. Accordingly, for every $1 that earnings are decreased through accounting manipulations, the purchase price will be decreased by similar multiples. Thus, under this scenario, if a company earns $3 million a year, but the tax returns only reflect $2 million in earnings, the purchase price could be decreased by as much as $7 million.     

In order to avoid this precipitous drop in the purchase price, sellers will often “recast” their financial statements. Typically, a seller will add unreported revenue and add back questionable expenses in order to increase earnings and therefore the price for the business.  However, even if the financials are recast, the seller must be able to support the numbers with accounting records. Often, business owners are not able to provide sufficient records to support their claims, and the buyer will seek to reduce the purchase price. Furthermore, even when recast numbers can be supported with accounting records, buyers often discount the recast earnings, resulting in a lower purchase price. 

Impact On Third Party Financing

One reason that buyers can discount recast earnings is because banks usually will not lend against recast financial statements. Instead, many financial institutions, including the SBA which funds a high percentage of small business acquisitions, will only lend based upon tax returns. Accordingly, if the seller’s tax returns show reduced earnings, then the buyer will not be able to borrow as much from the lender, and will either reduce the purchase price, require the owner to carry a note, or cancel the transaction entirely. As a result, even though the recast numbers are correct, the seller will still receive less for the business, and may not be able to sell the business at all.

Impact On Deal Structure & Tax Benefits

Another problem created by improper tax accounting is that it can adversely affect the structure of a transaction. Businesses are generally acquired through one of two structures, either an asset purchase or a stock purchase. In an asset purchase, the buyer assumes the assets and select liabilities. In a stock purchase, the buyer acquires the stock of the company.

In the event of a stock sale, the seller usually can receive the benefit of long-term capital gains, which typically reduce the taxes that the seller pays. Often, this benefit is significant. On the other hand, for the buyer a stock purchase can have several disadvantages.  One disadvantage is that the buyer can be held liable for all of the seller’s tax liabilities. If tax authorities discover that the seller has not paid all of its taxes, the buyer can be forced to pay them, including penalties and interest. Naturally, when a buyer realizes that a seller has not properly accounted for taxes, and a material liability may exist, the buyer may refuse to structure the deal as a stock purchase. Thus, the seller will not receive the benefit of capital gains tax treatment. In more extreme cases, the buyer will determine that the potential liability outweighs the benefits, and will pass on the deal entirely.  

A business owner who anticipates the future sale of a business can implement a plan to avoid the problems set forth above. First, business owners should institute and adhere to tax policies and procedures for several years, and at a minimum for one year prior to the planned sale of a business. Typically, this will involve setting up a reliable accounting system, often with the guidance of an outside accountant. In addition, a business owner will need to retain skilled bookkeepers to record daily transactions, and an accounting firm to prepare tax returns. In the event that a sale is imminent, the business owner should work closely with a sophisticated investment bank to recast financial statements with due care and consideration in order to accurately reflect the company’s higher earnings.     

Whether or not the sale of business will result in a successful transaction will greatly depend on the degree of planning. If a plan is put in place to handle tax issues, a business owner is more likely to obtain a higher price, minimize risk, obtain a favorable deal structure, and ultimately close the deal.   

Mark Pittman is the managing director of Grandview National Inc., an investment bank that focuses preparing businesses for sale and on the sale of businesses valued at $1 million to $50 million, a market that is underserved by traditional investment banks and business brokers. Mr. Pittman is a former CPA and corporate attorney. All rights reserved, Grandview Holdings, Inc. 6701 Center Drive West, Suite 710 Los Angeles, CA 90045 T: 310.499.4810 F: 310.499.4820. www.gnib.com

Yet again, I have become facinated with this new trend that I have learned about on a Yahoo! article. This is the full article. The crux of the article is the fact that rich people (generally people with millions in the single digits) are using leverage and debt to significantly increase their wealth. It is an interesting concept and it makes a lot of sense. Similar to the people who borrow thousands of dollars in 0% balance transfer offers and then make money off of the interest, this is an example of people that work toward having tons of money in the stock market or other types of investments that pay large percentages, all the while they are paying a 6 or 7 percent interest rate.

Be Rich and Prosper

This is not something that is terribly shocking. In addition to the people who buy more than one real-estate property and then leverage that property to handle the payments/mortgage etc. as a means for paying their debt, people have also started using prosper this way. From the very beginning of using Prosper, the online person-to-person lending site, I’ve seen loan requests for anywhere from 5k to 10k to “re-invest” in prosper. People that are doing this are using their good credit as collateral in order to leverage debt to make more cash. But even a small amount can make good returns. For example, if you can manage to borrow 10K on prosper and then relend it back out and make at least 4% return over and above the original loan interest and collection fees, means that you will make about 400 dollars per year. Doing this is not for everyone though; not everyone is in the right place to finance this kind of activity.

The Danger of Leverage

The problem with leverage however is that it makes it extremely easy to move around heavy amounts of weight (or debt). Without the proper support and backing, it is easy to get into financial trouble. Financial Leverage is derived from the term in physics, leverage. Leverage is what is used when a car is jacked up with a standard pole jack. The nice thing about the car being worked on is that it is easy to do with the car “leveraged” in the air. But accidents can happen, and unless there is a good safety net, it is possible that the “leverage” could give out and crush you.

Similarly in personal finance, if the rent is not paid on a leverage property…if the loans are not paid on prosper, the leverage starts to work against you. And now instead of gaining income you are in fact losing it, paying tons of money over and above your regular expenses. You have to pay for the interest of the money you borrowed and you have to pay the money itself back.

Sub Prime Lending

Of course, now people who got over their heads in real estate, especially using leverage, are now in trouble. But so are the banks who funded the loans in the first place. As a result, much of that debt continues to be shuffled around in the form of bonds and the like among large banks and other financial institutions. Unfortunately, with a pile of dirt that size, there is not a rug big enough to sweep it under or a broom large enough to do the sweeping, even if a rug could be found!

Avoiding the Leverage Trap

Leverage can get everyone into trouble but the surest way to make sure that you are able to use this tool while still being responsible is to maintain a significant portion of your assets in liquid items that are not in danger of large fluxuations in price and ensuring that *if necessary*, those assets can cover the leverage you’re using. If you have 50K in cds and other assets, you might consider only leveraging 10-25k so that you are able to easily cover the leveraged loan if necessary.

In reality, most people misuse leverage. That is exactly what happened with some cases that are becoming so common and popular. Casey Serin of I am facing forclosure ran into this exact issue. With several houses at once, he was in multiple mortgages and was significantly over leveraged. This can be avoided if you ensure that you maintain liquid assets like bank accounts/cds etc in an amount of 2 or 3x what you plan to leverage.

Competition is definitely a factor for such pushes to develop resort casinos in Massachusetts since nearby states like Rhode Island and Connecticut have legalized gambling. Massachusetts has tried to reap even more monetary rewards from its state lottery program by offering increasingly larger games. But the fact remains that casinos do a much better job of parting people from their money.

Casinos are where the money is and therefore, they have become the source of much debate statewide. Common concerns for casino development is the potential issues with regard to other related activies like alcohol, addictions, prostitution, and drugs. Casinos have a reputation of inviting all types of people and the result is that some of the more unsavory activities appear to rise.

In order to combat this concern, it is frequently cited in Massachusetts that the state is facing a serious shortfall with regard to funding for road and bridge maintenance. Casinos’ Impact is pitted against the impact of a rapidly decaying road system as a means to deemphasize the real cost of casino gambling over the long term. But, in the end, the costs and benefits of Casino gambling are real.

Not all of the costs are as straightforward as the common arguments would seem. An article in the Boston Metro describes a recent effort by Harrah’s Entertainment (<a href=”http://finance.google.com/finance?q=harrahs”>HET</a>) to pitch casino gambling in Rhode Island. The pitch targets college students as a potential revenue stream who would use the casino as a place to “have fun when they’re taking a break from studying.”

The problem of gambling at a young age is prolific according to one source. Mr. Whyte, Executive Director of the National Council on Problem Gambling states in the article that “by the time they get to college, most kids have already gambled.” This means that many students have already been exposed and are enjoying gambling.

Gambling is not necessarily a problem that you consider when you consider a teenager who is preparing for college or other post high school life. However, it is clearly something that is worth being aware of. Even many adults have difficulty handling gaming responsibly.

Although many finance gurus will state simply that gambling is not a good idea period, I feel somewhat softer toward gambling. However, it is critical to follow some guidelines when it comes to gambling. These tips apply for both college age students and adults.

1. If you have consumer debts or large bills in the near future, you probably should not be gambling any serious amount of money.

2. You should probably never be wagering anything in a single session that amounts to more than you make in a few hours of working. Furthermore, you should never wager even a single penny that you cannot afford to lose.

3. Entertainment should be your goal when gambling. If you are gambling with the goal of ‘winning’ money, you are likely not doing the right things with your money because you are naive about the reality of gambling.

4. If you are interested in possibly making money, it is probably better to look to find a stock or mutual fund investment that has a good chance of making money; gambling will almost always create significant losses over the long term. Even professional gamblers experience huge losses at times.

5. If you feel like you need help, you should get it.

http://www.responsiblegambling.org/en/index.cfm

Understanding the contents of credit reports have become critical for some two million customers who recently received credit cards from Citibank without explicitly asking for them, according to an article in The Boston Globe, Oct 7, 2007. It is important to understand the distinction. The reason that these cards were sent is because that these customers had older Macy’s card accounts. However, the new cards that they received had different credit limits. In addition, these were general mastercards, with all of the options that they afford: cash advances, convenience of purchasing anywhere MasterCards are accepted, and even the ability to do balance transfers.

According to Samuel Wang, a spokesperson for Citibank, this switch has prompted positive feedback from customers. In addition, according to the article, Wang contends that Citibank took great care to ensure “customers were well informed and provided with the opportunity to decline the substitution.”

Consumer advocates do not feel the same way. Credit.com’s Emily Davidson mentions in the article that the swap probably resulted in a credit check and also would change the aging of the customers’ credit reports. Both of these could have an impact on the scoring of the credit reports for these customers. The third nail in the coffin is the possibly lower credit limits on the new cards which would also potentially lower the customers’ credit scores. This is because a portion of the credit score is based on debt to credit limit ratios which will increase when credit limits are lowered.

Credit card companies exist to make money. That is the hard, cold, simple fact. And they are parts of large, conglomorate, public corporations which are traded on public stock exchanges. These are broad generalizations to make the simple fact clear: the loyalty lies with the shareholder. In this case, this company did this move because they would expect to make money on it. However, it is the unfortunate job of the consumer to stay one step ahead of Credit Card companies and their tactics.

Only by staying aware and maintaining some real interest in your money can you prevent possible events like this from happening to you. Here are some ideas that might help:

1. Read all of your statements and verify that your credit reports are accurate on a regular basis.

2. Keep most of your accounts active. This will help make sure that the account is not changed or modified without your consent. A simple, small charge 1 or 2 times per year even just for a few dollars (paid off in full immediately) should be enough to keep the card active.

3. Pay the bills on time. You might even consider overpaying a little bit if you are using the card regularly. In the end, just like exercising a muscle, your credit should be exercised and taken care of as well.

Source: Card Switch Concerns Users - Boston Globe Oct 7, 2007

Savings Accounts Are History

Savings account rates have taken a hit. ING Direct’s interest rate is back down to about 4.3% APY from 4.5% and the interest rates seem to be coming down. Most of this is anticipated and is therefore factored in to the markets already to some degree, I think. And if that is the case and the market continues to go somewhat sideways over the medium term, it certainly begs questions with regard to the 1-2 year timeframe.

Retirement investing is entirely different than investing for the short or medium term. And the amount and type of funds being invested also make a big difference when deciding if/when/how to invest.

Real Estate Reality

All of those caveats being given however, many people see real estate as a great play right now. In fact someone I know actually wondered whether or not it might make sense to just buy a little bit of land right now if the prices are so depressed and then just sit on it and pay the real estate taxes on it. As always, it depends on the situation. However, for the majority of the people, I really don’t have a good feeling about real estate as an investment vehicle for amateurs at this point.

Like any investment, I really feel like you should truly understand it. Understanding an investment means being completely aware of the downside and the liabilities that might be associated with it (it isn’t always the total sum of money) and then make a decision accordingly. In the end, I feel like for many amateurs (like myself) , the situation is still too rocky for real estate.

The unfortunate thing is that there are many, many, millionaire gurus who tout the power of real estate as a wealth building machine. And it is. I simply cannot deny that. However, it is a wealth-building machine for people who know how to do it. And the fact of the matter is that I don’t know how to do it. Real estate as an asset class may be undervalued at this time, however.

How to Build Wealth

Much wealth comes from the opportunity presented when a valuable asset can be acquired at a significant discount, then held for a period of time, and finally sold at a tidy profit. Real estate may be just such an asset at this time due to the situation with the subprime mortgage crisis. However, it may not be such an asset. If you’re an amateur like me, you don’t know. All I know for sure, is that it bears careful monitoring.

If you are more comfortable with stocks than with Real Estate there are many stocks that you could buy. And if individual stocks are not of interest to you, then you could buy a good mutual fund which includes some diversification or even invests in additional asset classes like REITs or Real Estate Investment Trusts which are like buying a stock of a company that invests in real estate.

The Take Away
The takeaway is that you should continue investing if your goals are medium or long term. Nothing that happens in the short term should deter you from your long term goals and executing on a methodical plan to invest in assets and markets that you understand and think will make money for you.

In the end, I feel that the most dangerous thing is to make a drastic change or decision about investing without really being careful and planning it out beforehand, before major market shifts occur.

Greenspan’s tactics when it came to handling difficult questions are legend. Termed Greenspeak, Alan did an excellent job of reframing, redirecting, and even obfuscating responses to difficult questions.

As chairman of the Fed, Greenspan had the difficult job of explaining huge economics to average people and their elected officials. And it doesn’t come easy when the range of economics for people may be no more than what they buy at the grocery store v.s. someone who understands the global implications of the reductions in copper produced in mines due to warlords and civil wars in African nations.

Greenspan is well known for his interest in Music. This goes back to his days when he started out as studying the clarinet attending Juliard. Greenspan played the clarinet professionally for a time and then became aware that there were good musicians and great musicians. This prompted him to change his profession. Born to a father who worked on Wall Street, it is interesting to note that Greenspan ended up doing the same thing himself, albeit in a roundabout way.

Greenspan continues to speak. In fact, he has received numerous complaints about this fact. People respect Greenspan. During his CNBC interview with Maria Bartilomo he even quipped when asked if another major 20% crash could happen. Greenspan simply refused to answer. He indicated that when he answers hypothetical questions with hypothetical answers, somehow it turns into the fact that he predicted it.

Many people even blame Greenspan for things which are working their way through the economy today. In fact, the current sub-prime mortgage mess is attributed by some, to some degree, to the housing bubble, which many (including Greenspan himself) attribute to Greenspan’s decision to keep interest rates so low for so long. According to Greenspan, the housing bubble was “fundamentally engendered by the decline in real long-term interest rates.”

Understandably, Greenspan is now quite gun shy. And perhaps this is for the best. It is not just his past actions which are currently having an effect. It is even what he says and does in the present. Earlier this year, Greenspan forecast a possible recession in the U.S. before or in early 2008. The next day saw a significant drop in the Dow Jones Industrial Average of more than 400 points, the largest drop since 9/11.

The mystery of why people still rely on Greenspan for vital information is not that difficult to understand. When interviewed with Bartilomo, Greenspan stated that he was technically savvy. He owned a blackberry. When he worked with the Fed, he had a research team of 40-50 people to churn out massive amounts of data. Now, he needed only two or three people to churn out the same data. People know this. And no one thinks that Greenspan has stopped watching the global economy.

Today, Greenspan speaks all over the world for various gatherings of business people and other functions. He is retained by various groups of investors and banks including Deutsche Bank. It seems to me, that regardless of what he sets his mind to, as long as he has his health, he will provide great value and insight to those who listen.

Like any resource, the Massachusetts health care system can be abused. And those who abuse it often do so at the expense of those who don’t. Many people have a good insurance which they pay a portion of the costs where their employer pays the rest. However, these people may or may not use the entire value that they pay into the system each year. For example, if my health premiums total 100 dollars per pay period, that means that I would have to spend 2600 for health care in order for the system to start losing money on me. Fortunately, there are many many more people who don’t use their full amount and they are paying for those who become seriously ill and need coverage. In Massachusetts, this system began to break down because people started using the Emergency Room for standard care.

Understanding the penalties for lack of compliance is vital since it has a direct impact on your state taxes this year if you are a Massachusetts resident. In fact, according to the massachusetts website, “Individuals who cannot show proof of health insurance coverage by Dec. 31, 2007, will lose their personal income tax exemption when filing their 2007 income taxes. The 2006 personal exemption is $3,850 for an individual, which translates into a tax savings of approximately $204 for an individual (5.3 percent of $3,850). ” (sources at end of article) This means that there is a direct impact of thousands of dollars worth of taxable income for those who choose not to participate. This is important because it effectively forces individuals to pay for the healthcare services that are being used, whether they are actually using them directly or not. Importantly, the entire system relies upon accuracy with regard to tax filing and a tax system without loopholes.

Implementation of a system that ensures people have accurate, fair, and active insurance as required by this statute is going to be difficult in the best of scenarios. Even the most straightforward way of handling this via a sent item like a w-4 form that would include a series of information to validate your health insurance information is fraught with issues. Provided that the information is handled in this manner, it becomes another source of possible mistakes. If it is not handled this way, it seems quite possible that alternate implementations would jeopardize the ability to electronically file taxes. Like any new system, the devil’s in the details. And although the idea of taxing people that are currently gaming the system is seductive, it may be more costly and less effective than Massachusetts citizens might like.

Sources:

http://www.mass.gov/?pageID=hicterminal&L=2&L0=Home&L1=Frequently+Asked+Questions+(FAQ)&sid=Qhic&b=terminalcontent&f=for_individuals&csid=Qhic

http://www.mass.gov/?pageID=hicterminal&L=2&L0=Home&L1=Frequently+Asked+Questions+(FAQ)&sid=Qhic&b=terminalcontent&f=for_individuals&csid=Qhic

https://www.macommonwealthcare.com/goalmind/login/external/intro.jsp

Many of these are exact items that I wish I had done myself before I had graduated or gone to school. So here, you can literally learn from my life experiences.

5 Tips For Prosperity as a College Student:

1. Research your intended major in college and the expected job you would like to get out of college. If that job doesn’t allow you to live and get out of debt within 10 years of graduation by making the payoff of that debt the highest priority, I would seriously consider alternatives like State Colleges or reducing your overall debt load by living at home and commuting to a local college if that is an option. Often times, room and board is about 40-50% of the cost of school.

2. For example, if you graduate at age 22 and cannot payoff your loans in 10 years, then your college plan may not be a good idea. (This assumes you would take every spare penny and pay down the debt. It may or may not be what you will or should do. This is merely as a benchmark for making the decision.)

Consider modifying your plan by either paying down your loans while in school by working part-time. Or there might be other ways to reduce the overall loans, but I would urge you to consider some options. This is simply because you then have only 30 years to purchase a home and save for retirement. This also assumes that you are going to want to do some fun stuff at some point and the money for that needs to come from somewhere.

3. Find a job that offers a 401k match and a good health plan where the employer pays a large portion. These should be top perks that you look for. The reason is that health care will continue to skyrocket for the foreseeable future and retirement costs will as well. Once you get a job where there is a match, put at least away to get the full match from the company. You will likely need every penny of this money when it comes to retirement.

4. Watch your cash flow. Try to keep your fixed expenses to no more than 75% of your take home pay. No matter what the situation is, you should make saving 10% of your weekly paycheck into a safe, high-yield savings account a priority. If you manage this, you will still have an extra 15% buffer each month. You might also save this. Consider the savings to be a monthly bill to yourself that is not negotiable. When a real emergency happens (not a sale at best buy), you’ll be glad to have that money.

5. Avoid large purchases that create loans or debt when you first get out of school. If you want to do something fun, only use that extra 15%. The only exception to this is a basic wardrobe that you need for work and a reliable vehicle. The key is to make sure it is something that it is important and necessary in order for you to work and make money. Other items are a luxury at this point. Once you have a savings account of 6 months of expenses, you can begin to save extra money so that you can buy luxury items.

Its important for these students and their parents to be aware of the financial issues that are really facing them. Personal finance is often not just about the present and near term, but also about planning for the future. Below, I will outline the major issues that should be top of mind when planning for financial security as a college student.

I have been writing about the student loan issues and financial aid issues on this website for quite some time (The Student Loan Market, Family Financial Aid Contributions). This is for a few different reasons, each of which should give you some insight as to why it is not only current, but critical for college age students.

1. I feel like this is one of the most under-represented parts of the personal finance arena. School counselors and financial aid representatives are there to help students and parents fill out papers, but not really help them figure out what is best for them financially. Students and parents must do that for themselves.

This affects a huge number of people in the United States. More and more people have college degrees and student loans. We’ve come to a point where having a college degree in many cases is expected, even for basic jobs. In addition, the costs of college have increased to the point where for most students, loans are the rule, not the exception. Simply for these reasons, this requires serious attention and self-education by students and parents.

2. I personally took out a large number of student loans to go to college. While I believe that it was a good decision, I think that I could have been a more savvy consumer and handled the debt better. Many students are the same now as I was nearly 10 years ago when I started going to college. Student loans have not changed much. The process is similar. What has changed is the cost of college. And with higher balances, compound interest is even worse. The dramatic increases make this issue even more critical since more and more debt is being created, which makes this a personal issue for me.

3. In addition to increasing costs and a bigger need for education, other global factors are facing college-age students in the United States as well. All of these factors must be kept in mind during college and also after graduation:

A. It is likely that social benefits like Medicare and Social Security will be either gone or significantly reduced by the time current college students retire. Therefore those costs will need to be accumulated during the working years.

B. The costs of these overall loans in terms of work are higher since people are not able to demand the same amazing salaries that they could in the 80s and 90s. This is due largely to globalization and modernization of other countries in Europe and Asia. This can put more pressure and drives down salaries in the United States. Some argue that the retirement of the baby boomers will create more opportunities for young workers, but I feel that this remains to be seen as many retirement age workers will continue working at least part-time.

C. Oil continues to increase in price. Inflationary pressures continue. This trend will only increase. Even if you disagree with the idea of Peak Oil, (the idea that there will come a time where the oil that we can extract from the earth will take more energy than the oil itself can create), inflation itself will continue. And with the recent drop in interest rates in the United States, we can look forward to higher inflation in the near future.

Although much of the news seems bad, there are two major consolations for students. The first is time. With time comes the ability to get investments working for you and also to plan for the inevitable future. Furthermore, the free-market is powerful. And provided that there is not too much intervention, things will generally work themselves out. But to learn what you should be thinking about as a student, check out part 2.

But in the end, I think that those who are cool, calm, and collected will prevail. The reason that these people are really calm is not what you might think. Many many people say that they can be nice and calm in the face of these dramatic swings in the market. They say this because they know that they are in the stock market for the long term: 10, 20, or maybe even 30 years.

Time horizon is not a reason to be calm in a down swing, however. If you think you are losing money, then I don’t really think it makes much sense to just blithely ride it out. Sometimes, you are losing money. This is when you are seeing the actual value of something become worth less. Money falls out of your wallet and you lose it. This is lost money. Or, you have a car that is worth 10K and you are in an accident without insurance. Now your car is wrecked and is likely worth 1k or less. That is lost money. A dip in the stock market is usually not lost money.

Real value is what determines whether or not you lost money. Personally, I look at stock market investing in this manner. The stock is worth whatever someone is willing to buy it for. Then factor the value of the company represented by the stock. It sounds silly and crude. That’s because it is. I put it this simply to make a point: a 2% drop in the stock market isn’t lost money.

Lost money is money that you lost; its gone already. But to say that you’ve lost money in a stock investment, you must sell the stock. That is losing money. But in the case of a normal investment for retirement, you know that you will be investing for 10, 20, 30 years, so you think there’s no need to worry because the stock will come back up. However, the reality is that not all stocks come back. Many times, stocks go down and stay down.

Understanding the market and watching your investments is critical to successful investing for retirement. It might seem obvious, but the fact is that retirement investing requires patience and watchfulness and cannot be a simple dollar cost average and “forget it” for 30 years.

I don’t advocate active trading for retirement unless you are an experienced, proven investor. I also like index funds, but even with these you must be careful. A basic index fund bought using dollar cost averaging is a great start, but there might also be other ETFs, investment vehicles, risk tolerance, and allocation issues to consider. Depending on your plan, you may not need to watch everything like a hawk, but not paying any attention for years on end seems to be courting disaster. Similarly, putting all of your investments into a single index fund seems risky to me since the custodian of the funds could run into problems.

In the end, it is important to educate yourself, make a sound plan that you stick to, and then remain calm throughout the ups and downs. This attitude comes not just from your time horizon, but also from the security that comes from reviewing your investments and making slight modifications based on life plans, available investments, risk tolerance, and asset allocation. I’m convinced at this point that the people who are going to really lose money during the turmoil of the market are people who either panic because they are afraid or panic because they didn’t educate themselves or make a good plan beforehand.

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As always, I am not a financial adviser and have no formal training in this field. Rather, this article is simply an average investor writing an opinion. Before making any decisions, you should educate yourself and consult a professional.

Managing income for alternate sources is great when the work is producing income. However, when a business requires a large amount of up-front investment, it might be something that will never generate enough income. And don’t be fooled into a situation where you just have to pay x dollars for the schooling or the certification. Often people pay for correspondence courses, online courses, or institutes advertised on t.v. end up with education that does not yield the kind of valuable working opportunities that you are try to capture with alternative income.

Where to Start

Starting with a talent or a hobby that you do well is a good place to begin. Many times when I discuss this with people, I will tell them that they could make a lot of money doing that hobby that they love so much. However, the moment that I say that, it is met with a sigh or some kind of facial expression indicating displeasure. Understandably, people may not want to be committed to a second venture. Sometimes people do the hobby to relax and they feel that this would turn it into a job.

I find that the major misconception with this is that it will always remain a hobby versus becoming a second job. In truth, there are many activities that I do in my spare time that are really jobs. But I try not to think of them or treat them that way. I consider them to be little favors or “gigs”. By thinking of them this way and maintaining good relationships, I can maintain the ‘hobby’ feel for the activity and still reap the financial benefit that is associated with it.

Don’t Forget The Administration

With any kind of financial venture, it is also key to be realistic about the amount of time it will take for the ‘back office’ side. When it comes to the banking, the bookkeeping, the taxes, and even other functions, all of them take additional time. When estimating the time committment of a venture, all of these activities should also be accounted for.

In the end, the key to staying sane is to simply offer to do what you have time to do. And be clear about your time committments up front. Those are the keys to making some great alternative income outside of your 9-5 job, without running yourself ragged.

Combatting expenses can be done through the use of a freedom fund whereby you set aside funds each week or month for categories based on large, medium term expenses. These types of expenses can be anything from that brake job you know you have coming up, to Joey’s wedding and the travel costs to get there, or even Christmas shopping.

Plan Ahead

Planning is the crux of the Freedom Fund. This fund is separate from your Emergency Fund and allows you to keep money separate for real emergencies versus expenses that you knew that you would have in the future but just needed to save up to afford.

The Christmas Club is an old idea that is similar to the Freedom Fund except it was usually only for Christmas. Money was deposited regularly in order to make sure that there was enough money at the end of the year for the Christmas expenses and then it was withdrawn at the end of the year.

Staying On Track

It is a good idea to keep meticulous records of the moneys that are deposited and withdrawn from this account with notes about each transaction. This will help you remember at the end of the year and as time goes by about how you are using the money in these accounts. Hopefully, you will reach your target for your emergency fund and then be able to do something else with that money–either pay off more debt or add to your freedom fund for a luxury expense.

Keeping up with the Joneses can be difficult. Adjusting your deposits to these counts is a must, therefore. Since inflation continues up, a good rule of thumb is to round your deposits up by the amount of inflation (currently around 2.5%) each year and perhaps then go up to the nearest 25 or 50 dollars if making a monthly deposit.

Pay yourself first by always making these deposits and you should find that you are able to keep maintaining your lifestyle without really suffering. Even as inflation rates go down, as they have recently, still try to be aggressive with your saving in both of these funds. You’ll find that you can still be aggressive and also improve your standard of living…so long as you get a yearly raise that is higher than the inflation rate.

Ebb and Flow

Regardless of how much planning you might do, there will always be irregularities. Sometimes, there just won’t be as much of a raise as you expected. Or there might not be an expense that you had foreseen. The important thing throughout all of these unexpected events is that you keep a focus on the plan, but remain reasonable. If you have more expenses, try to earn more. If you are awash with cash and find yourself stressed and pressed for time, then take some time off to relax since you can afford it.

Nothing is certain and with each day our situations can change. Money is not likely to be your only priority, and having skill to manage the emotions that come with the natural ebb and flow of your money situation is key. Focus on things that you can do, expenses you can reduce and additional income you can really earn. Taking action can give you strength to face the aspects of your finances that are beyond your control. And the positive attitude that results is a catalyst for creating more lucrative opportunities going forward.

BlogRush is new content syndication network that can send free, targeted traffic to your personal finance blog (or any blog). This new network was launched by John Reese, a renowned internet marketer and it’s growth rate is already exploding.

Rather than give a full BlogRush review here on HelpYourMoney.com I suggest watching the BlogRush video which explains how this new content syndication network works. You can also read more about BlogRush and see the widget in action on eMonetized.com

In order to be certain of the fact that there is going to be reasonable monthly car insurance payment. In order to be sure of the fact that you are going to get a reasonable rate, you must be pro-active about your insurance rate. There are some additional options that you can use, however, to ensure that you get a better rate.

Comparison Shopping

Much like any other good or service, it is important that everyone is able to comparison shop for their goods and services. There are many websites and telephone services available for car insurance and often the coverage that is provided is the same. Ensure that you see the details of the policies that are being quoted and make sure that that you are aware of the benefits and deductibles on the policies you are comparing. However, even among a few companies, you can often find a difference of 10-40 dollars per month for the exact same policy.

Take a Driving Course

In order to save additional funds, there are often additional steps that can be taken with regard to saving money. For example on my policy there are several options that can be exercised in order to save additional funds in addition to the standard reductions:

- Taking a safe driving course can provide the ability in the minds of my insurer that I will be a safer driver and therefore I can save money this way.
- Proving that your mileage is below a certain threshhold by signing an affedavit and returning to the company; again this makes the insurance company feel that my risk of an accident is lower.
- Along the lines of a lower mileage, I have an option to get a discount if I prove that I use public transportation. Similar to the other example, by proving that I use the car less, this means that I am a lower risk.
- Check your kid’s grades. If you have children and they are driving on your insurance, you might want to copy and send in report cards. This is because in some cases, good grades on your kid’s report cars are able to again show that you are a lower risk, even though you have young drivers on your policy.

Pay It Automatically.

Maintaining that you pay your bill on time is also a good way to ensure that your bill is reduced. In fact, by pre-paying your insurance payment or arranging for an automatic-deduction for your payment can get a lower monthly payment. Again the mindset is that there will be an easier time to ensure that the company gets paid. Maintaining a good history on your account by paying on time is key as well. It is easy to imagine that a negative mark on your account or a late payment will cause you to lose any discounts.

Low Credit Scores = Low Payments?

Keeping your credit score in good shape is also key. This is because a portion of your score may be used in a calculation that derives the amount of risk you are as a driver. You may want to check with your state website to see what information is used when calculating your insurance rates. Therefore, in states where this applies, paying your other bills on time and maintaining your credit scores are also important.

Add Additional Drivers

One major key for insurance is to check with your insurance company and get any additional drivers added. This may cost more, but in the long run, in the event of an accident, you will be covered. And that will be worth the more than the payments in the long run.

 [Digg=http://digg.com/autos/Save_Money_on_Car_Insurance_2/blog]

There are tons of freshman pitfalls that should be watched out for as you enter your first year of college. I am going to focus on the ones that are financial in nature.

The first, and possibly most well-known pitfall is the dreaded freshman fifteen. This refers to the average amount of weight that a freshman would gain that first year at college. Obviously, the reason that this happens is that the lifestyle for freshman changes dramatically when they go to school.

Start Exercising

If you are a normal exercise/gym person already, make sure to keep that up. It can make a huge difference in keeping your metabolism up and more importantly, keeping you balanced so that you do well in your courses that are so expensive.

Avoiding the extra meals is a huge factor as well that contributes to this. So try to skip that second, third, and forth dinner. Your wallet will thank you in the future trust me.

Everything is Plastic

College campuses are bombarded with credit card applications for students. Do not fall into the trap with the giant-sized bag of candy or the funky t-shirt and frisbee that they are handing out on the green. Shy away from that and try to stay off the plastic. It is likely that you barely have the money to make the minimum payments, so you should really avoid wanting to pay interest for four or five years on a pizza you ate as a freshman.

Keep Working

With any luck you’ve been working in High School and you’ve managed to save some money for college, but now that you are in college, you should work harder than ever to keep things going. It is extremely difficult for you to be able to imagine how much college is going to cost you later on. But if you can manage to pay down even a few thousand of your costs up front for school, it can dramatically reduce the amount of money you will owe later on.

Know your Programs

Another common freshman pitfall is the taking of extremely specialized courses in their “Major”. Clearly this is great for some people. But others as freshmen take “African Basket Weaving” because they want to be an African Studies Major and then change their mind when they are sophomores. Then they are stuck and that basket weaving class doesn’t really count for anything.

Learn to Double Dip

For most colleges, there are five ways courses can be counted:

Majors
Minors
Concentrations
General Education Requirements
Total Credits

Colleges generally require a student to fulfill a certain number of courses to graduate. They also require all of the general education requirements be fulfilled. Often this is in the form of a class, but for some schools, it can be using a placement test. Finally, you must usually have at least one major.

However, when I think of college, I find that it is often possible, if not easy, to double up if you are careful. This can allow you to graduate with multiple majors, concentrations, etc. The reason why this is important is that it makes you much more interesting to employers.

If a finance company needs a computer programmer, they are probably going to be more interested in the one with the double major in computer science and economics than the one with just computer science, provided that the candidates are similar in other aspects. Getting a great first and second job can be amazing for your career, so make sure that you really spend your time wisely in college so that your courses can be used even if you change majors.

Spending More than it Makes

Social Security is in trouble. We’ve been hearing about this for years; people have written chapters in books, had articles published in newspapers and magazines, and its likely even been on your local news at one point or another. President Bush proposed a plan to put social security into private accounts.

Bigger Than a Breadbox

The source of the problem with social security is that there will be more people entitled to the benefits once all of the baby boomers retire than there will be people pouring money into the system. Until recently, I thought that this was the only issue with Social Security, but recently by reading some comments on an article, I realized there was another factor.

Immigration

When it comes down to immigration, some think that the issue of Social Security will be resolved because more people will immigrate and therefore pay taxes into the system. Personally, I think that the difficulty for people to legally immigrate is forcing many to remain here on visas etc instead of becoming citizens. However, there is also a large amount of people living here who are not paying into the system.

Many of these concerns were met in a messageboard I read recently on Morningstar.

Indeed, this was a comment to an article on the topic by “yobria”: A new wave of massvie immigration is not going to save entitlement programs. When the demographics shift dramatically you may just find the new majority feels no obligation to help out the older majority.

Yobria continues ” There are very few social problems that are made better by adding more people.”

This seems like common sense to me. But if immigration isn’t the answer, and private accounts didn’t get through due to suspicion and other issues, what is the answer?

What it Means to Test Social Security

Its basic math. You really can’t spend more than you make. Or you can, but you’ll have to issue bonds, t-bills, and perhaps raise taxes in order to do so. But for social security, the other option of reducing benefits is more likely.

Means testing is the fancy term for reducing benefits. By creating some irs-style grid or set of rules, the government could cut off the benefit of social security in some standardized way. It is likely that this could happen for people who are now in their 20s, 30s.

Of course, means testing is not without its issues either. “Varmit77″ writes the following comment, “If, some day, I have to relinquish a portion of social security to compensate for the shortfall that the “buy now-pay later” crowd puts themselves in when I choose to due without today for a better tomorrow, then I will not be happy…”

This sentiment is echoed by Bob in a later comment: “Unfortunately, I think Ben Stein may be correct. In his book Yes, You Can Still Retire Comfortably, he made the following dire prediction:

‘Those who have saved will be made to pay for those who haven’t, which means you need to save even more.’”

What to Do?
Here’s what you can do next:

Social Security statements are generally issued yearly. Make sure your payments into the system are properly recorded when you get your statement.

Make sure you are monitoring the amount that Social Security projects you will have if Social Security remains insolvent. And don’t plan on cost of living increases or any other increases from that amount as you get older. In fact, it may get worse.

Therefore you should be monitoring your retirement situation carefully based on age and be well aware of your financial situation with and without social security income. And the younger you are, the more suspicious you should be about the real benefits you will receive during your golden years.

Find What Motivates You

One thing that always works as a good idea for gifts that I receive is when the gift actually saves me some money. This means that there will be more opportunities for me to spend the discretionary income elsewhere because I won’t have to spend my money on necessities. If you feel the same way, then you may want to read on.

Furthermore, if it is something that you really don’t enjoy shopping for, you can effectively offload both the cost and the chore of the shopping onto one of your potential gift givers. This works well for children and mothers or grandmothers when the children tend to be the subject of perpetual doting on children and love to buy clothes, toys, and other items for their children, nieces, and nephews etc.

Idea: Enlist these folks to buy gifts for the young ones in your life so you don’t have to since they know better what the children want/need anyway.

This becomes their gift to you. This works particularly well during the holidays. Instead of buying you a gift and the child a gift, they simply get the gift and put your name on it. They only need to shop for one person, and you only need to buy a gift for them, not the niece or nephew. Sharing gifts like this can save money and time during the busy shopping season.

Idea: Make sure that you get gifts that save you money.

Plan little shopping trips with people you love before the holidays come, you can make sure that you are able to swap these ideas with them in advance so that they know about the things that you are planning to buy for yourself during the upcoming season and then you get the stuff you want, and would have bought yourself anyway.

Idea: Stock Up on Essentials

One of the most annoying things when it comes to purchases are the essential items that you need large amounts of over the course of the year. Paper products, cleaning supplies, socks, motor oil are all examples of funny, but useful gifts that you might be able to get from someone who is open to your desire to remain frugal and get really practical gifts for the holidays.

During one holiday, I bought my stepfather a large box of expensive cigars. I’m not thrilled that he smokes, but I know that he will smoke them whether I buy them or he buys them, so it is something that he would have purchased, but it is something that he will really enjoy. So if there is something like this that you use regularly, instead of leaving people to guess, simply bring it up in a conversation before the holiday and you will increase your chances of getting this as a gift.

Gift Certificates

Entertainment is the first place that comes to my mind because it is something that I always get, but there are all sorts of excellent gift certificates that you might get in order to keep yourself current and able to afford items throughout the year. Whether it is the need to go out for dinner once in a while with your significant other, or simply the desire to splurge during a weekend shopping trip.

Gift certificates are a great way to let people get you stuff that you can really use, but without having to commit to an actual item now, when you don’t really know what your needs are. This makes sense because needs around the house are somewhat unexpected. But, if you decide to go this route and pick large stores like Home Depot, Wal-Mart, Target or Lowes where you can get all sorts of different items, you have a good chance of being able to actually use the gift certificate for something really useful that will save you money. So if you know it is likely that you will get these for a gift, suggest large stores where you shop for different kinds of items so that you will have a good chance of using the gift certificate.

What it boils down to is priorities. In order to have an emergency fund, it must be an absolute priority for you. Each and every month must include some provision to get some amount of money set aside. Ideally, the traditional wisdom dictates that you save the money that you want to have in retirement, college savings, and emergency money first, before you even consider paying anything else.

Going to Extremes

The pay yourself first wisdom is a mountain that has already been climbed over. Instead of rehashing it, just understand that you cannot always guarantee when an emergency is going to come up. This makes the pay yourself first concept difficult because often, the emergency comes just as you are on the cusp of putting the money away to save.

Rob Peter

The reality is though, in order to save, you must not simply save that money at the beginning of the month no matter what. You must learn that Paul is much nastier than Peter. And you’d better rob Peter to pay Paul. Paul is your emergency fund in this case. Peter is that nice thing that you really want to do later on in the month or purchase you want to make.

Understand Priorities

Each person has things that they’d like to do with their money. It might be nicer clothes, a vacation, home improvements, shopping trips, grocery shopping, paying the electric bill, etc. Any of these types of expenses can come up at various times in the month. But, being able to spot which ones of these can be “robbed” is critical to building an account.

Lower Standards

By determining some “peters” in your budget that you can rob by either ignoring them for this month or skipping them entirely, you will likely find you have more than enough to put some money into some sort of savings account. And by giving more to your savings, you are really helping yourself in the long run by changing your lifestyle.

By changing the amount of “peters” you are paying, you are actually forcing yourself to live more within your means. This is because those emergencies are nasty and often consume 10-20% of our income, its just unexpected and irregular. Everything from tax bills, to car repairs, to last-minute-trips can easily wipe out significant sums.

In an article/board on MSN Money, I heard this about Emergency Funds: “Your investments are the quarterback of your financial security. An EF is the offensive line- you want it strong enough to ensure that most things won’t land you on your back.” This is the truth. The reality of 6 months of living expenses just isn’t possible for most people. This is simply because people live beyond their means.

Living beyond your means–spending more or just as much as you make each month–is a killer. There is no money to save, and furthermore there is likely an amount of outstanding debt that is accumulating interest. The lifestyle of carrying interest is expensive. Step one to getting back into control is to make saving for emergencies a priority.

Quick Tips
Here are a couple of ideas for you if you find it difficult. If your savings date is the first of each month but you tend to “waste” money at the end of the previous month, simply pay your savings early. Paying bills or savings early once you have the money can be a great way to keep budgets on track and put money to good use without wasting it.

Save in smaller chunks. If you know that you need to save 100 dollars per month, but you get paid 2x per month, you might think about saving in two 50 dollar chunks to make it more manageable.

Automatic deductions from your paycheck are another great way to save automatically.

Quote source.

1. Use Natural Light. Oftentimes, I am in the house and it is not that nice outside, I am tempted to close the curtains and turn the lights on. If you do this whenever it is crummy out, it is likely that you are running your lights an extra 30-40 hours per month. This could add up to a significant savings over time.

2. Do full loads of laundry. There’s two reasons that this makes a difference. First, if you are doing small 1/2 loads, you have to use essentially the same amount of electricity to do the washing and the drying as you would for a normal load. Furthermore, you are filling the washing machine 2/3 of the way full anyway. It might as well be entirely full so that you are only using about 1/3 more water to wash the same amount of clothes. If you don’t have enough socks/underwear to wait until you get a full load, you might want to get some more, you will be surprised at the savings of water, electricity and time. It all adds up.

3. Drink water. I’ve written about this tip before, but I think that it is something that is often overlooked by people. It is so easy to pour glass after glass of juice or soda. But when you think about how cheap water is, it just makes sense to drink that instead of these other drinks, at least some of the time.

4. Shut off your computer monitor. People often leave their computer monitors on and this wastes huge amounts of electricity. Your computer might be set as a screensaver and you don’t like the hassle of dealing with turning the computer on and off. Instead of leaving it on, but with a screensaver, use the powersave mode on the monitor or turn the switch off. Your computer can stay on, and you will not cost yourself any time when booting up the computer.

5. Wait after you flush. It sounds silly, but often times, over time, toilets wear out — the components on the inside get worn down and dont work as well. The result is that you migth have a drippy toilet because the inside seal is letting water run. If that is the case, you likely have a huge water bill on your hands. Just fixing my two toilets saved me about 75 dollars on my water bill.

Simple tips like these can be found in all sorts of personal finance websites and blogs. The upside of these tips is that they are easy, small things you can do to save money without really giving anything up. Its generally just about changing your behavior.

When it comes to financing, there is a complex market for student loans and college financing. Despite all of the reading that I have done on the subject, I learned quite a bit about student loans when I read an informative article on the New York Times about understanding the student loan market.

Often times, understanding the type of loan that you have can make a big difference. Subsidized loans are a big plus when it comes to financing because they generally have lower interest rates and have the ability to be consolidated. This means that all of the small loans can be lumped together for a single payment, generally at a very low, tax deductible interest rate.

Unsubsidized loans are not-so-friendly. Often you can be stuck with this option when it comes to financing college. I had to use one for the balance of my last year in college. But really they are nothing more than a glorified credit card.

Co-Signing Woes

When I took the loan, I had very little credit. My mother had to co-sign for this loan and since she had to take money on her own to pay for school (remember that nasty EFC from the beginning of this article), it really felt like she was getting hit twice for my student loan debt. Even though she never had to pay any of this debt and I wasn’t ever late on a payment (thank goodness!), she still had to live with that loan on her credit report for several years until I could transfer it into a loan in my own name. This affected her refinancing on her mortgage and various other financial decisions.

And taking an unsubsidized loan meant that I had a higher interest rate on my money and that the payment was designed to keep me in debt. So be aware of this when you get your first payment. Keep track of your balance and be sure that you are getting a decent chunk of the principal paid each month so that you are making progress on paying these debts off.

Resources

Now that you know about the loan market, you might want to look into some of the federal options for student loans since these tend to be a little nicer than private companies. However, be aware that your school must be affiliated with the program in order to get this kind of funding. Find out if Direct Loans Might not be an option.

And if you are in the market for private student loans, you might want to comparison shop. The idea of LendingTree where people compete for various loans for other items like mortgages has been merged with the Student Loan market at a site called TuitionCoach.

Disclaimer
As always, none of the links in this article or information is certified by Help Your Money. This article is for informational purposes only and is not financial advice. We are not affiliated with any of the companies or organizations mentioned in this article and recommend that you learn as much as you can and consult professionals before making your decisions about college financing since these decisions can shape your financial future for decades to come.