Very few people are familiar with title insurance, and even fewer with its optional component – buyer’s title insurance. There are all kinds of insurance policies, but this one never rears its head until you are either buying or refinancing a home or another type of real estate.
Title insurance is one of those quiet types of insurance coverage, that no one pays much attention to until something goes wrong. If it does, and you have coverage, everything will be fine. If you don’t, you could be stepping into a financial disaster with catastrophic financial consequences.
What is Title Insurance?
Title insurance is a type of insurance that will protect the financial interests of either a property owner or a lender in a piece of real estate. It is meant to protect against title defects, liens and other liabilities. It can also protect against lawsuits by paying off liens or various challenges to the property ownership, or title.
Title insurance is required by a lender any time you finance a real estate transaction. This can mean either a purchase-money mortgage or a refinance. The basic title insurance policy is a lender requirement, and it will protect primarily the lender’s interest in the title. It will also protect your interest as the property owner but only on a secondary basis. That’s where things can get complicated, but we’ll dive deeper into that problem in a minute.
Whenever you engage in any real estate transaction, the lender will require that a title search be performed on the property. The search will investigate the chain of property ownership going back many years, as well as search for the existence of any recorded liens on the property. But as thorough as title searches are, they can miss something here or there.
That’s where title insurance enters the picture. Title insurance insures against the possibility that certain liens or ownership claims may have been missed by the title search. Even if they have, title insurance will insure that the property carries a clear title to ownership of the property, so that it can’t be interfered with as a result of an undiscovered claim.
What is Buyer’s Title Insurance?
As the owner of the property, title insurance has one basic limitation: it primarily protects the lender from undiscovered liens or claims. This is referred to as lender’s title insurance because it specifically names the lender as the primary beneficiary of the policy. Ultimately, you will be protected by the policy as well – at least eventually.
And that’s the basic problem. While the lender’s policy will protect the lender’s interests, your ability to sell, transfer or refinance the property could be delayed until the insurance company and the challenger of the title reach a settlement. How long can that take? It’s an open question and depends largely on laws in your state.
That’s where buyer’s title insurance enters the picture. Buyer’s title insurance will name you as the specific beneficiary of the policy. In the event there is an undiscovered lien or title challenge, your buyer’s title policy will free you to sell, transfer or refinance the property despite the existence of the cloud on title.
Buyer’s title insurance generally costs several hundred dollars, and is payable on a one time basis, but for each loan you take on the property. There are no recurring premium charges.
Why You Should Have It
Since most homebuyers try to minimize the amount of money they have to pay to buy a property, and most people who refinance want to maximize the amount of money they take out of the deal, they typically refuse buyer’s title insurance. It’s a buyer’s option, but not a lender requirement.
At the closing table, the closing attorney or escrow agent will recommend the coverage to the borrower, and it is entirely up to the borrower to take it or waive it.
If you’re given the choice, you should always take it. Dollar for dollar, buyer’s title insurance is one of the most cost-effective types of insurance policies you can buy. Spending just a few hundred dollars at closing could save you – literally – tens of thousands of dollars later.
The Potential Nightmare Without It
Let’s assume that you buy or refinance a house, but refuse the buyer’s title insurance option at closing. Five years later, you decide to sell the property, but a claim against the title comes up. Your lender will be covered because they are the primary beneficiary of the title policy on the property.
You however will not be covered, at least not directly. Because of this, you may be unable to sell the property. The title claim will mean that you will be unable to deliver clear title on the property which will block a legal transfer.
Had you taken buyer’s title insurance, you’d be able to sell the property even if the lien wasn’t immediately satisfied. Your coverage will be your ‘out,’ and enable you to move on without further delay. The insurance company can battle the title challenge through the legal system for however long that might take, but it will no longer be your problem.
Next time you’re sitting at the closing table for a home mortgage, and the closing attorney or escrow agent offers buyer’s title insurance, take it. The few hundred dollars you will pay for it will be some of the best money you ever spent.
Do you have buyer’s title insurance? Did you know about it? Leave your thoughts in the comments section!
You probably understand the importance of investment diversification – spreading your portfolio across various mutually exclusive asset classes.
But when you are investing for your retirement, it’s also important that you build tax diversification into your portfolio as well. This balance is much more important than most retirement investors realize.
You can build tax diversification into your retirement investments by accumulating some money in non-tax sheltered plans and assets.
Tax-Free vs. Tax-Deferred
When you invest money in typical retirement plans, such as 401(k), 403B, and IRA plans, your money grows within your account on a tax-deferred basis. But tax-deferred is not to be confused with tax-free.
When your investments grow on a tax-deferred basis, you are merely putting off – or deferring – the tax liability on the investment gains.
This deferred tax liability is compounded when it comes to most retirement plans. Under a typical plan, not only do your investment gains grow on a tax-deferred basis, but the contributions that you make to the plan are tax-deferred as well. This is to say that the tax benefit you get now from deducting retirement contributions from current income taxes merely transfers the tax liability to a future date.
Both your contributions, and the income and investment gains that they accumulate, will be entirely taxable upon withdrawal. While this is an outstanding strategy for growing your retirement portfolio, it can catch many investors unaware when the time finally does arrive to begin making account withdrawals.
Why You Will Need Non-Taxable Investments
When it comes to retirement planning, the general assumption is that you’ll effectively transfer taxable income from your working years – when your tax bracket is higher – into your retirement years when it will be considerably lower. But that may not necessarily be the case.
1. You may be in a higher tax bracket in your retirement years.
Many people find that both their income and their income tax liability peak when they’re in their 60s and 70s. This can happen if you have investment income, retirement income, Social Security, as well as continued business and employment income.
Your income may be higher than at any other time in your life as result of having multiple income sources.
Complicating this is the fact that tax-deferred retirement plans generally require mandatory distributions beginning at age 70 ½. The law does not allow you to defer income taxes on retirement accounts forever.
2. When you need to make a large withdrawal.
Just as is the case during your working years, there may be times when you’ll need a substantial amount of money for one reason or another, and need to tap your retirement savings for it.
A large withdrawal itself – since it will be 100% taxable – could even put you in a higher tax bracket. You may need the money to cover very large uncovered medical bills or to help your children or other family members. If you do, the withdrawal will also create a tax liability.
3. Income tax rates may be much higher in the future.
Compared to what income tax rates have been in the past, current rates are relatively low. Growing federal budget deficits could result in higher tax rates. It is entirely conceivable that income that was deferred to protect it from a 15% federal income tax liability, could be subject to an even higher rate on withdrawal.
How to Build Tax Diversification into Investments
Any one or even all three of the above scenarios could see you paying more in taxes on withdrawals that you saved on the contributions to tax-deferred plans. But you can diversify around higher tax consequences by using any of the following investment vehicles.
Non-Tax Sheltered Investments
If you have been accumulating money in non-tax sheltered investments, such as a regular investment brokerage account, you will at least have money available in the event that you need to make a large withdrawal to cover a major expense in retirement.
Since these accounts are not tax-deferred, and were not made with tax-deductible contributions, you can withdraw money completely free of income taxes.
Roth IRAs offer the best of both worlds – tax deferral of investment earnings and tax-free withdrawals. As long as the withdrawals are taken after age 59 ½, and the plan has been in effect for a minimum of five years, the money can be withdrawn from the account without tax consequences. This makes Roth IRAs a “must have” for retirement tax diversification planning.
These are not quite as tax friendly as the Roth version, but they can also be used to minimize tax consequences upon withdrawal. When you make nondeductible IRA contributions, that portion of the money can be withdrawn later without being subject to income tax. (Since investment earnings within the account will be tax-deferred, that portion will be subject to tax.)
Real estate is also a tax-deferred investment. You buy a property, and there is no income tax liability on the value of the property until it is sold. But when it’s sold, it’s subject to more favorable long-term capital gains tax rates. You’ll still pay income taxes for sure, but often at a lower rate than you will on withdrawals from fully tax-deferred retirement plans.
Not many people are thinking about municipal bonds in terms of retirement planning these days – the interest rates simply don’t justify it. But at some point in the future when interest rates are higher, they may be worth a second look.
Municipal bonds have the advantage of providing you with a steady and stable income that is completely free from federal income taxes. They are also free of income taxes within the state that issued them, which means that you should favor municipals from your own state.
When you are planning for retirement, keeping all of your assets in 100% tax-deferred investment plans isn’t always the best strategy. Keep at least some money in taxable accounts – and bite the tax bullet now – that way you’ll have more flexibility later.
What are your thoughts on tax diversification in retirement investments? Leave a comment and tell us your strategy!
We have a new year coming, and that means new healthcare costs. The cost of healthcare goes up every year, but since 2010, those costs have slowed. The cost of healthcare has risen an average of 1.3 percent a year from 2010 to 2013, as compared with 1.8 percent from 2007 to 2010 and 3.9 percent per year between 2000 and 2007. I know that my health insurance premium went up by less than usual this last enrollment period.
The fact that healthcare costs are slowing doesn’t mean that you aren’t subject to increases, though. In fact, you are probably acutely aware that healthcare costs continue to impact your pocketbook more each year. Degree doesn’t seem to matter so much.
So, what can you do to reduce your healthcare costs in the new year? Here are some ideas:
For many consumers, health insurance is the largest cost related to healthcare. “Focusing on insurance premiums and potential cost increases, the single best step anyone can take is to visit the Health Insurance Marketplace in their state,” says Jacquline Garry Lampert, the founder of Lake Street Strategies and consultant to YourHealthcareSimplified.org.
Due to the ACA, many states are expanding their Medicaid coverage, and your first step is to see if you are now eligible. You can also check to see if you qualify for tax credits to help reduce your health insurance costs if an employer-sponsored plan is not an option or too expensive. You can find your state’s exchange by starting at HealthCare.gov.
If you qualify for a high-deductible healthcare plan, and you don’t usually have a lot of out-of-pocket expenses, you can save on your monthly premiums by agreeing to pay more up front. Combine your plan with a Health Savings Account, and you can prepare to meet these higher out of pocket costs.
Even if you think you can pay the fine that comes with refusing to get health insurance, it might not be a good idea. “As in a pre-ACA world, going without health insurance leaves one vulnerable to financial ruin as the result of a healthcare crisis,” points out Lampert. “One hospitalization is enough to bankrupt some families.”
“For some Americans, it will be ‘cheaper’ to pay the penalty rather than to buy insurance,” continues Lampert, “but the uninsured will be responsible for the entirety of any healthcare bills they incur, while those with insurance will have more financial protection.”
Other Cost-Saving Ideas
After sorting your health insurance, it’s time to employ other strategies. If your employer offers a Flexible Savings Account, you can save up for costs with pre-tax dollars, making some of your healthcare costs tax-deductible.
You can also save money by looking into generic drugs and checking into co-ops and savings plans that can help you share costs.
Don’t forget that your lifestyle can save you money as well. If you make an effort to live healthier, you are less likely to get sick – this means that you can save since you don’t need to use healthcare services as much. Consider this in your calculations.
What are your best tips for saving money on healthcare costs? Leave a comment!
There are times when you might not be sure what to do with your finances. At that point, it makes sense to call in a professional. Sometimes, a professional can help you get through the thornier issues that you are dealing with.
However, it’s important to note that there are different types of financial advisers, depending on your situation. Think about your circumstances, and what you need, and then choose a financial adviser based on your individual needs:
1. Certified Financial Planner
Those who have met the requirements to become a CFP can help you with long-term planning needs. A CFP can usually help you develop a plan to get out of debt, save for retirement, and meet other goals. Many CFPs can recommend strategies to help you reach your long-term financial goals. If you are looking for a place to start when it comes to getting your finances in order, a CFP can be a great help.
2. Certified Public Accountant
When you have tax questions, a CPA can be a great help. While some financial planners can help you with broad tax strategies, an accountant can help you prepare your tax return and advise you on what you can do right now to reduce your tax liability. I like using a CPA to prepare my taxes, since they have grown in complexity with my business and my investments.
3. Estate Planner
In many cases, an estate planner is someone who has experience with putting together wills, trusts, and powers of attorney. Many estate planners are also attorneys. There is an entire branch of law devoted to estate planning, and working out legal issues related to disposition of an estate.
When you have questions about how to structure your finances so that more of your money passes on the way you want it to, it makes sense to speak with an estate planner.
4. Investment Adviser
Your financial planner can help you figure out an investing strategy to follow, but not all financial planners are registered as investment advisers. Unless your planner has a securities license, they can’t buy investments on your behalf. If you want someone able to manage your portfolio for you, you need an investment adviser, or you need to find out that your financial planner has a securities license.
5. Insurance Agent
You can get your insurance needs covered with the help of an agent. Agents are licensed by the state, and must meet the state’s requirements. It’s important to note that an insurance agent might steer you toward products and services that might not work for you. In some cases, it makes sense to go to a financial planner to determine your needs, and then go to an insurance agent just to complete the transaction.
Who to Pick
In many cases, you’ll actually have a financial team, depending on your needs. I do most of my own financial planning, but I obviously buy insurance through an agent, and I use an accountant to prepare my taxes. I also have an attorney I can turn to for trusted legal information.
Figure out what you need in your life, and then choose financial advisers that meet those needs.
Have you dealt with financial advisors? What experiences have you had? Leave a comment!
Index funds are a lazy investor’s best investment choice. You can invest your money in them, and even if you never research a single stock or try to time even one market turn, you will never, ever under-perform the overall stock market.
This makes index funds the logical choice for most investors. It’s not that most investors are lazy, but more that most of us are not professional investors, and not familiar with what is necessary in order to successfully invest in stocks. When you invest in index funds, you simply don’t need to.
Here’s what you need to know about investing and index funds:
1. Try as you may, you probably can’t beat the market.
The only logical reason to directly manage your own stock market investments is the hope of beating the market. However, it’s unlikely that you’ll be able to accomplish that, at least not on a long-term, consistent basis.
In reality, only about 24% of active fund managers outperform the market over a ten-year period. And those are people who invest in stocks for a living, and on a full-time basis. If most of them can’t beat the market, what chance do you and I have?
By default, if you invest your money in index funds, you will outperform the investment results of 76% of actively managed mutual funds. That’s not a bad deal at all!
2. Index funds are tax-advantaged investments.
One of the little understood benefits of investing in index funds is that they are tax-advantaged investments. That’s nothing like being tax-deferred or tax-free, but what it means is that the investment methodology used results in lower tax liabilities.
This comes about because index fund portfolios are correlated to the composition of the underlying market index. The funds trade stocks within the portfolio only as is necessary to keep it properly aligned with the index. Since most stock indices are relatively stable, that means that index funds don’t trade stocks very often.
That absence of trading means fewer capital gains situations that need to be reported on your income tax return. And when there are capital gains, they are the long-term variety, and subject to lower long-term capital gains tax rates.
Since actively managed funds openly attempt to outperform the market, they tend to trade much more frequently, creating more capital gains and more capital gains tax liabilities. And often those capital gains are short-term, which means they are subject to ordinary income tax rates.
An index fund can grow for decades, while incurring very little income tax liability in any single year. That’s not quite the same as being tax-deferred, but it’s the closest you can get to it.
3. Index funds are one of the lowest cost ways to invest in stocks.
Once again, low turnover within the stock portfolio works in your favor. Because there is very little trading with an index fund, there are also far fewer transaction fees. That translates into higher annual returns.
4. You have better things to do with your time.
One of the very best advantages to index funds actually has nothing to do with investing. Index funds are probably the most passive type of stock market investing available. Your money can be fully invested in stocks, but you don’t need to worry about trading, picking stocks, or even monitoring the performance of the fund. It’s fire-and-forget investing at its finest.
You probably have a career, a business, a budget, and a life to lead, and you’ll be able to do all of those much better and more efficiently if you don’t need to worry about your investment portfolio. Index funds can make that happen. You buy into them, set up an automatic investment plan, then go about the rest of your life.
5. Index funds are the ultimate buy-and-hold investment.
It is precisely because index funds are virtually passive that they are the ultimate buy-and-hold investment, at least as far as equity investments are concerned. When you invest in index funds, you can literally plan on holding them for decades. There is nothing you need to do in-between except sit back, relax, and wait for your investment portfolio to grow.
Alternatively, index funds can also be a great in-and-out vehicle too, although that is not the primary purpose.
Since their performance mirrors the general market, you can use them to buy in after a major decline in the market, and then sell out if you think the market is getting a little bit rich. The advantage they have in this regard is that you don’t have to concern yourself with picking individual stocks, you’re buying into a portfolio that represents the overall market, and will rise as the tide lifts all boats.
Do you agree that index funds are the best investment choice for most investors? Leave a comment!
One of the financial opportunities becoming increasingly popular in the United States is peer-to-peer (P2P) lending. P2P lending exists to help borrowers and lenders find each other. In many cases, P2P lending allows ordinary people access to financial opportunities that they might not normally have.
P2P lending involves lenders (often “regular folks”) offering funds in $25 increments. Borrowers try to raise money a little at a time from several lenders. This way, the borrower receives the money, and lenders can help out . . . without taking a huge risk. Unfortunately for Canadians like me, I found out P2P lending isn’t an available option yet. This is mainly due to having separate provincial securities regulators, instead of one federal regulator like the SEC.
The idea is that you can use services like LendingClub and Prosper to lend money to your peers, and receive a return that is competitive with returns you might see elsewhere. You can also borrow from your peers and get a loan that you might not otherwise qualify for. Whether you are a lender or a borrower, P2P lending might be able to help your finances.
Lending Money to Others: An Increasingly Popular Investment Strategy
If you are looking for better returns on your money, particularly in a low-rate environment like what we have now, P2P lending might be able to help.
You can see reasonable returns when you lend money to others. In many cases, it’s possible to see annualized returns of more than 5%. While 5% or 6% doesn’t seem like a big deal when you compare it to long-term stock market returns, it can still be a viable alternative to bonds. Besides, try finding those types of returns when you go to the local bank and open a savings account or even a CD.
Of course there are risks. You need to understand that you are lending money to someone else. You are hoping that they will repay the principal, as well as some interest. With P2P lending, you set yourself up to risk losing money if the borrower defaults on the loan. Be aware of that before you decide to invest using P2P lending.
With careful screening of borrowers, though, you can reduce your risk. P2P sites rate borrowers’ credit so you can see which are more likely to make on-time payments. Choose those with better credit ratings, and you can improve your chances of being paid. If you want better returns, though, you can invest in notes from borrowers with questionable credit. Take a chance on borrowers with D credit, and you could see much higher returns, as long as there isn’t a default.
One strategy is to take a dumbbell approach with P2P investing. On one side, invest half your portfolio in notes with the highest credit rating. On the other side, balance it out with D, E, and F borrowers. For some investors, this works well.
Borrowing Opportunities with P2P Lending
Maybe you aren’t in a position to lend money to others. Maybe you want a loan, but have been unable to get one from the bank. In those cases, P2P lending might be able to help. Many borrowers find that they can get a debt consolidation loan, business loan, or some other loan for a lower interest rate than what is offered by a bank or credit card.
However, you will need to convince lenders to fund your loan request. As with more traditional lending, your credit score matters. Even though your credit situation matters (and will influence your interest rate), with P2P lending your personal story often matters even more. You need to make a convincing case that you deserve the money and that you are serious about repaying the debt.
Realize that, in many cases, websites that facilitate P2P lending run it as an all-or-nothing funding operation. If you don’t raise what you say you need, you don’t receive any of the money. The would-be lenders who did offer you money will have their funds returned to them; they can invest in another borrower.
You will also need to make your payments as agreed, or risk seeing a hit to your credit score.
Before you jump into P2P lending, carefully consider your options and your situation. I believe it can be a great way to get a nice return on your money but unfortunately I can’t participate in Canada yet. However, those of you in the U.S. can benefit from P2P lending – but you need to make sure it works for you, whether you decide to lend money to others, or whether you decide to borrow.
Have you tried P2P lending? Has it worked out for you? Leave a comment!
Tom Drake is a husband and father, as well as the writer behind the well-known Canadian Finance Blog. He covers budgeting and investing for a mostly Canadian audience, but the topics often apply universally.
Some auto insurance companies try to convince you to pay your premium with a credit card, and will even offer incentives for your cooperation. While I generally oppose the use of credit cards for any purpose where it isn’t absolutely necessary, there’s a strong case to be made for using them to pay your annual car insurance premium.
To be clear, we’re not talking merely about allowing your auto insurance company to make monthly debit charges to your credit card to pay the premium in installments, but to use the card to pay the entire balance with one payment. That’s where the advantages kick in.
1. You might get premium discounts.
Auto insurance companies will usually offer you a discount if you pay your entire premium up front. Or more to the point, you will not have to pay the add-on fee you will have to pay with a monthly installment plan. But some will give you an additional discount if you pay the entire balance up front with your credit card.
My own auto insurance company offered me a 12% discount if I pay the full balance on my credit card. That seems like an awfully generous discount, but it must make sense for the auto insurance companies.
For one thing, paying with a credit card means the company will get the full premium immediately, and that always has value for insurance companies. For another, there’s no waiting for a check to clear, or dealing with the risk of bounced checks. Credit card payments ensure prompt, seamless cash flow to the insurance company.
As impressive as the discount seems to be, it has to be measured against the interest rate carry charges of adding the annual premium to your credit card balance. If the interest rate being charged on your credit card is 12%, the 12% discount offered by the auto insurance company will work in your favor only if you pay the entire balance off in something less than 12 months.
If the balance is still sitting out there in full in one year, taking the discount for the annual payment will begin to work against you.
2. You could get credit card rewards.
Another possible benefit of paying the premium with your credit card is the possibility of earning credit card rewards. This will vary depending upon the rewards program you have with your credit card issuer. Some may permit you to accumulate rewards based on bill payments while others don’t.
The benefit isn’t enormous either. You may be getting a reward equal to no more than 1% or 2% of the amount of the payment made. Still, that can be significant if your annual auto insurance premium is several thousand dollars. And that’s not hard to have if you have multiple drivers and cars listed under the same policy.
3. You’ll have one less bill to pay.
Paying bills is stressful, not the least of which because after you’re done paying this month’s bills, you can rest only in the uncomfortable knowledge that you will be doing the same thing next month, the month after that, and every month for the rest of your life. But by paying the full annual premium at one time, you are eliminating at least one bill from the roll of bills you have to pay every month.
Though paying a large annual premium will cause a disturbance in your budget at the time you make the payment, it will improve your cash flow for the rest of the year. If you are a saver, this won’t be a problem. Having one less bill each month means that much more money to save. When the next annual premium comes due, you’ll be ready with the cash to take care of it – or to pay off the credit card balance right after using it to pay your auto insurance bill.
4. You’ll have no risk of a missed payment.
A soft benefit of paying the premium upfront is that there is virtually zero risk of missing a monthly payment. This can be especially important when it comes to insurance. Insurance is one of those products that can lapse if you don’t make your payments on time. If that happens, there’s a possibility that the insurance company will file a report with the state indicating that you no longer have insurance through their company.
This is easily remedied just by making your payment. But that could expose you to the risk that you may one day be pulled over by a police officer whose records will show that you are not currently carrying proper auto insurance coverage. And then you’ll have the courts to deal with.
Admittedly this is an unlikely scenario, but it is a possibility and it does happen to people all the time. The one-time payment, however, will make this a non-issue in your life.
If you do choose to use a credit card to pay your entire auto insurance premium at one time, just be sure that you pay off the charge as quickly as possible. Obviously it will be best to pay it off as soon as the credit card bill comes due. But as we saw in our 12% example above, you need to calculate at what point monthly interest charges begin costing you more than what you save with the upfront premium discount.
That needs to be your drop dead point, or the point after which using your credit card to pay the premium is no longer working to your advantage.
The entire purpose of paying your auto insurance premium with your credit card is to gain a significant financial advantage. If you are unable to get the full benefit of that, then the entire arrangement is best avoided.
Do you ever pay your entire auto insurance premium using a credit card? Leave a comment with your thoughts!
We often think of starting or having a side business as either an opportunity to earn more money, or as a bridge into full-time self-employment. Both of those possibilities are certainly there, but a side business can also be the best way to prepare for retirement.
Consider what you can accomplish by having a side business . . . .
1. Have an extra income stream to fund your retirement portfolio.
Sure, a side business can generate extra income that can be used to pay off debt, to purchase major assets – like a new car – or even to fund travel and vacations. But you could also create it as a dedicated cash flow specifically for the purpose of providing funding for your retirement portfolio.
The combination of stagnant wages and rising prices has made it very difficult for many households to save money for retirement. A side business could become the primary source of funding for retirement, while your regular job provides for all of your other living expenses. The ability to generate $10,000 or so per year from a side business could mean the difference between a comfortable retirement, and living on Social Security alone.
Also think about how income from a side business could supplement any retirement provisions you are already making. If you already participate in a 401(k) plan at work, you can use income from your side business to fund either a traditional or Roth IRA. The extra income may also enable you to make larger contributions to your company plan. For example, as a result of having the extra income, you may be able increase your contributions to your employer 401(k) plan from 10% of your salary to 20%.
That may not only help you create a better retirement, but it could also open up the possibility of early retirement.
2. Set up retirement accounts based on your side business.
A side business also opens up the possibility of creating additional retirement accounts that are tied to the business itself. Even if you have a 401(k) plan on your regular job, you can set up a solo 401(k) for your side business as well. This will enable you to be funding two separate 401(k) plans at the same time.
And though your employer 401(k) may limit your contributions to a certain percentage of your income, a solo 401(k) for your side business will allow you to make dollar-for-dollar contributions into the plan up to $17,500 per year, or $23,000 if you’re age 50 or older.
Under this scenario, you could conceivably use your entire income from your side business to contribute to your solo 401(k) plan. Adding that to your contributions to your employer plan could cause the value of your combined retirement portfolios to explode in just a few years.
3. Raise retirement capital by selling the business before retirement.
Some business owners are able to retire as a result of selling their businesses for a very large amount of money. That isn’t possible with all businesses, but if you have one that has substantial assets, including intangible assets like copyrights, trademarks or market recognition, you may be able sell your business at a substantial profit.
Selling the business could provide a substantial boost to any retirement savings that you already have. And the return on investment of that capital could provide additional income in retirement.
4. Have an extra source of income in retirement.
Even if you don’t sell your side business before retiring, it can still make a substantial contribution to your retirement plans.
Statistically, few people will have sufficient money at retirement to be able to afford the traditional “full-time” version of retirement. Most will have to supplement their Social Security and investment income with some form of earned income activity. If you already have a side business up and running by the time you retire, you will have the earned income question covered.
You can keep your side business going for as long as you feel able to do so. This can cover the first few years of your retirement, which will not only enable you to continue increasing your retirement portfolio, but it will also help you to avoid withdrawing money for living expenses.
Simply avoiding tapping your retirement portfolio for five years could improve your chances for the comfortable full-on version of retirement. A side business will help you do that.
If you are looking for some sort of angle that will either help you to get your retirement planning going, or supplement the plans you already have, give serious consideration to starting your own side business. It’s one of the best retirement steps you could possibly take.
What are some side business ideas you’ve been thinking of starting? Leave a comment!
One of the major disadvantages in a long-running bull market in stocks is that people start to get a little bit greedy. They want to invest any money they have in an effort to make more money in a market that seems like a sure thing. That can include retirement money, borrowed money, money in the cookie jar – and even the family emergency fund.
On the surface this can seem like a prudent step. You’re attempting the use any money that you have to make more of it. But while it’s perfectly alright to maximize returns, you still have to have some money that is not invested in risky assets of any kind. An emergency fund is the perfect example.
1. An emergency fund isn’t an emergency fund if it’s invested.
It’s one thing to seek a higher interest rate on your emergency fund, but quite another to invest it in equities. Once you do, an emergency fund ceases to be an emergency fund, and becomes a general investment account. That defeats the entire purpose of having it in the first place.
While investing an emergency fund in stocks or mutual funds can seem brilliant when stock prices are rising, it will look downright foolish if the market turns down and the emergency fund is largely depleted without ever having provided for a single emergency.
2. An emergency fund is your last line of financial defense.
A lot of investors are not at all comfortable having money that isn’t earning much more than 1%, especially when the stock market can turn double-digit returns. But an emergency fund isn’t like other accounts. It’s your last line of defense against financial disaster or a career crisis.
An emergency fund is doing its job just sitting in the bank, earning a very low rate of return, and being available just in case. It doesn’t need to do anything more than that in order to serve its purpose. If an investment contains any form of risk whatsoever, it does not belong in your emergency fund.
3. Jobs tend to disappear at the same time investments fall – in a major way.
There’s a more tangible reason to avoid investing your emergency fund in risk-type assets like stocks and mutual funds. Declining stock markets and deteriorating economies usually go hand-in-hand. And when the economy falls, it takes the job market down with it.
Imagine your emergency fund declines by more than 50% – because you had it invested entirely in mutual funds you thought were completely safe – and then finding out that you’re about to be laid off. The thought of that possibility should end any ideas about investing your emergency fund in anything more risky than certificates of deposit or money market funds.
4. At least some of your money must be in completely risk-free vehicles.
No matter how well the stock market is doing, at least some of your money should be in completely risk-free investments. This includes a certain percentage of your actual investment portfolio. You should have at least a small percentage of your portfolio in cash or cash equivalents if for no other reason than the fact that it enables you to buy bargain stocks when the opportunity presents itself.
But you should also hold certain positions outside of your portfolio in cash as well. Proper diversification requires that at least some of your money – even if it is a minority percentage – be invested in mutually exclusive assets. While it is isn’t possible to invest money in assets that will rise when stocks are falling, you can keep money in vehicles that will remain stable when the market drops.
Your emergency fund should be part of that cash-based investment scheme. And it’s not so that can be a source of capital for future investment in stocks, but for the possibility that you may slip on a financial banana peel and need the cash to survive.
5. You’ll make better investment decisions keeping your emergency fund separate from investments.
One of the advantages to a well-stocked emergency fund that is often forgotten in prolonged bull markets is that having it can actually make you a better investor.
An emergency fund provides you with a cash cushion that separates your survival from your investments. If you do run into a problem with either income or a rash of unexpected expenses, your ability to tap your emergency fund will prevent you from liquidating investment assets at inopportune times.
In addition, simply having money sitting in the bank to cover any short-term emergencies will eliminate the panic factor that could cause you to make irrational investment decisions.
Start seeing your emergency fund as a strategic part of your overall investing strategy. It’s the part of your portfolio that you keep fully sheltered from risk, so that you are free to pursue risk-type investing elsewhere in your portfolio.
Have you been tempted to invest your emergency fund? Where do you currently keep your emergency fund? Leave a comment!
Historically, real estate has been one of the very best investment vehicles. Not only has it competed favorably with stocks, but it has probably been the primary way that middle-class people build wealth. But there’s a big difference between being a homeowner and being a successful real estate investor.
The degree to which you can be successful investing in real estate largely depends on your attitude and your understanding of the business before getting in. There are a few guidelines worth understanding before taking the plunge.
1. Never – ever – underestimate what you’re getting into.
Real estate tends to be more complicated as an investment than most people anticipate. And it is certainly more involved than investing in paper assets, such as stocks, bonds or certificates of deposit. Real estate is hands-on; in order to make it work you have to embrace that reality.
Many people mistakenly believe that real estate is an easy investment, simply because they have owned a house before, they’ve read real estate books or attended seminars, or because they see so many people making money in it. But no matter how easy it may look on the surface, never underestimate what you’re getting into by investing in real estate.
Properties can require costly major repairs, tenants can bring lawsuits, and market values can break against you. It’s often difficult to anticipate these problems, let alone deal with them. You have to be aware of the many unique risks in real estate as an investment . . . and go in with the proper attitude and willingness to do whatever it takes.
2. The most fundamental “secret” of successful real estate investing: buy below market.
Through much of the past 30 or 40 years, it’s been possible to make money in real estate just by buying a piece of property and waiting long enough for the value to rise. But today that is no longer the case. As we have discovered in recent years, real estate prices can go down as well as up, and you need to be prepared for that possibility.
The most important factor in being a successful real estate investor is made when you purchase a property. You cannot simply buy a house or building at current market values – you must pay below market price. Not only will this practice give you a built-in profit when you buy, but it will also provide a measure of insulation in the event that property values fall.
This is important whether you are buying a property to rent out, for a short-term flip, or for a long-term hold. The less you pay for a property, the less it will cost you to own and maintain it, and the more profit you will have at the time of sale. None of that will be possible if you simply pay the going market price for property.
3. Don’t count on rising property values to make your investment pay off.
In past decades, real estate investors have made mistakes purchasing properties that soon after fall in value. Prices can fall as well as rise, and you can never know when the market will turn.
You have to think of real estate in much the same way that you would an investment in stocks. You have to get into it at the right time, and buy intelligently, otherwise you might get burned. In addition, each property is a standalone investment, and has to be profitable in its own right. You may not be saved from a bad deal by a rising market.
4. Tenants have legal rights – you need to know what they are.
Ownership rights with rental property are very different than they are with an owner-occupied property. Though you may be the owner of a rental property, you do not have unlimited rights. Your tenants, as occupants of the property, have significant legal rights that may stand in the way of your ability to manage the property exactly the way you want.
For example, you’ll need to comply with state and local laws in regard to both condition and amenities of any rental units. The property must meet safety standards, and you may be required to provide certain amenities, such as a stove and refrigerator, depending upon local law.
In addition, eviction of a tenant – even for non-payment of rent – isn’t always as easy as it seems it should be. For example, if it is a family with children, it may take many months to evict the nonpaying tenant. You may also be required to perform certain maintenance routines in order to maintain the safety of the property. If you don’t, and there is an injury, you could face legal action.
Before buying any property that you intend to rent out, be sure that you are thoroughly familiar with both tenants’ rights and landlord responsibilities under the law.
5. Borrowing money for investment property isn’t as easy as it used to be.
Up until about 2007 it was fairly easy for investors to get mortgage money to buy property. You could buy with as little as 10% down, and sometimes you could do so with limited income documentation and even damaged credit.
That isn’t true anymore. Expect to make a large down payment – at least 20 to 30% of the purchase price – and to be required to fully document your income. You’ll also need substantial reserves after closing, in order to cover the cost of unanticipated repairs and maintenance. Not only will you need the extra cash, but the lender will require that you have it. In lender parlance, this extra cash is referred to as “cash reserves.”
That last point is extremely important, since it is close to impossible to get a second mortgage on a rental property today. Beyond the basic mortgage, you’ll need to largely be self-funding for the future needs of your properties.
Real estate has never been easy as an investment, and that is more true today than ever. Before taking the plunge, be sure that you thoroughly understand the local market, the law as it relates to landlords and tenants, financing options, and realistic expectations for future returns. Oh, and have plenty of money! Real estate investment is no longer possible to do “on a shoe string.”
Are you thinking about investing in real estate? Are you a successful real estate investor? Leave your thoughts in the comments!