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Ripping off charities

It can be hard to do good.  From each client payment, I set aside a specific percentage of the check and put it in a savings account. I’ve found this

How do people rack up those huge college loans?

Recently over lunch and some very good small batch cider, a colleague asked me, How on earth do people rack up these big loans when there’s a limit on federal

Calculating the worth of a job offer

We’ve all heard that we’re moving to a gig economy. I think this used to be known as being a freelancer, but there are some important new wrinkles. If you’re

Financial decisions: I shoulda done better

  It’s taken me a while to realize that not everyone loves financial planning. I mean, when I first started this I assumed all my clients would be deliriously happy

Calculating the worth of a job offer

We’ve all heard that we’re moving to a gig economy. I think this used to be known as being a freelancer, but there are some important new wrinkles. If you’re thinking of accepting or have been offered this type of job, you need to get out your calculator and run some numbers to see what you should actually charge, and what’s a fair offer. BTW, this has come to my attention based on an offer made to my job hunting child—hourly or salary, with the hourly rate being slightly more. The employer making the offer was genuinely surprised when dear daughter turned it down; she said most people prefer the hourly because the rate was higher. No it wasn’t—at least not enough.

Let’s set up a case study for Sally Onherown. Ms. Onherown would expect to make $70,000 in a salaried position. That position would also include health insurance, short term disability insurance, an opportunity to buy into a group policy for long term disability insurance, paid vacation time of 10 days, 7 paid federal holidays, 3 paid sick days, and a 401k to which the employer contributes 3% of salary (provided the employee also contributes 3%). In 2018 there are 261 working days, so Ms. Onherown is making $268.20/day or $33.53 per hour (I’m using 8 hours, though a 9-5 job with a lunch hour is only 7 hours).

Let’s see what Ms. Onherown’s benefits are worth:

Paid vacation

$2,682.00

Paid federal holidays

1,877.40

Paid sick days

804.60

Employer’s 401k contribution

2,100.00

Value of health insurance (based on $424.26/month through ACA for a 20 something)

5,091.12

Short term disability (usually 1-3% of income)

700.00

Long term disability (let’s say you’d pay half of 3%)

1,050.00

Total value of benefits                                                     

$14,305.12

So, in order for a freelance gig to pay as much as a salary, Ms. Onherown would need to be paid at least 20.4% more: $84,305.12, or $40.38 per hour.

But wait, that’s not all. If Ms. Onherown is working out of her own home or apartment, she could deduct some portion of the housing as a home office, and any time she uses her car to travel to a site, the mileage would be deductible. But if all that hourly work is performed at the employer’s site, she loses that. If she has to use her car, she may get a gas allowance, but often these don’t take into account the wear and tear on the car, the cost of purchasing (and financing) a vehicle, the increased cost for car insurance when used for a job, and the inevitably increased maintenance on a heavily used car. And, does Ms. Onherown need to provide any of her own supplies? Depending on the profession, this can really rack up some costs.

While Ms. Onherown could certainly contribute to an IRA, without a match, the amount she could contribute (and the potential reduction of her taxable income) is far lower than the amount she might contribute to an employer 401k. While a single making $70K probably doesn’t have enough to contribute the full $18,500, these jobs are often pitched to married people (as “flexible”)—and if spousal income is sufficient, the couple is losing an important tax saving opportunity.

We’re probably wading into the weeds here, but are those hours guaranteed? Because if the client isn’t available, or there’s not sufficient business, or some time might be taken up with non-billable activities like staff meetings, the hourly person working directly for an organization might end up with far less than 40 billable hours. In fact, many true freelancers are lucky to be able to bill 20 hours per week. If it’s the kind of freelance job where you also need to join professional organizations, pay for professional insurance, do marketing, and supply your own technology (and technology repair and replacement), the costs are much, much higher than my list above.

Many years ago, when I worked at writing grant applications, the Feds used to allow us to include a “reasonable” indirect rate of 31-33% on any proposal to cover just these sorts of costs for personnel. I think that’s a good starting point—add about 1/3 to any salary, and you’ll have a pretty good estimate of what a minimum freelance hourly rate should be.

NOTE: An earlier version of this post used 216 working days instead of 261–an inadvertent transposition. The calculations have been corrected. I regret the error.

 

Financial decisions: I shoulda done better

 

It’s taken me a while to realize that not everyone loves financial planning. I mean, when I first started this I assumed all my clients would be deliriously happy about what a positive future we were going to plan together, and untangling any knots would be fun along the way. I love it, so everyone else should too, right?

It took me years to realize that many people who came to me were scared, embarrassed, or at least nervous. The great thing about working with people is that, in almost all cases, I can help most people make a good plan and feel much better. But I continually listen and try to learn, and after hearing so many stories over the years, I can distill a few principles which I repeat over and over to myself in my own life.

  1. You can never fix the past. In all the (now) hundreds of people I’ve seen, perhaps one or two had no regrets about their financial decisions. That’s not to say there weren’t regrets about other issues. Nevertheless, you have absolutely no way to rewrite your past decisions. Most of them either seemed right back then, or you knew they were wrong but did them anyway for what seemed like the easier or better way at the time. You have absolutely no control over the past at this point.
  1. The only reason to go over your past mistakes is to learn how to do better in the present and future (and to make atonement if necessary). If you can learn from this review how to make better decisions now and going forward, it’s worthwhile.

My first ex-husband has a wonderful phrase he uses to evaluate his public speaking engagements. If he thinks it went badly, he tells himself I was not satisfied with my performance. This is just a wonderful way to characterize a less-than-ideal effort, with no blame and every possibility to learn to improve. And yes, he’s a wonderful speaker.

  1. If it’s not working for you, you have to change. You can’t keep doing the same things and expect different results. Sure, something may be too hard (break it down into smaller steps), not have taken into consideration all factors (then revise until it works) and the ideal outcome may not be possible (but some improvement surely is).
  1. It’s not hopeless unless you’re dead. I’m not speaking of actual physical illness here, I’m talking about money. You may not be able to create exactly what you want (can we ever?) but you can almost always make things at least a little better.
  1. Any change is more likely to succeed if you can set it up so you make the fewest choices possible. It’s much harder to decide to save every month if you have to write the check or make the transfer, than it is if you decide to set up automatic transfers and forget about them thereafter—you’ve only made one choice, not 12.
  1. The older you are, the more creativity it may take. You can go back to school, relocate, get rid of a car—things that may have been unthinkable in years past can actually become liberating and unburdening. You most assuredly do not need all the stuff you have—no American does. Will a yard sale fully fund your retirement savings? No, but a lot of littles can add up to big.

Bottom line: a financial plan isn’t a punishment where you review all your past sins. It’s a way to wrest control from chaos and fine tune your financial engine to hum along at a better velocity.

Ugh! UTMAs and UGMAs

I’m not sure why anyone has these accounts anymore, but they do. I mostly see them during divorces, where one spouse has tried to transfer money to the kids in hopes of keeping it out of the divorce joint property. Technically, these accounts are considered property of the children (not marital), but as with so many other financial issues, it’s largely up to what the attorneys are able to negotiate.

Funding these accounts is a pretty poor idea in most cases, however. What you’re doing is putting all the money in the kid’s name: they’re entitled to it at 18 to do whatever they want with it, and all the earnings are taxed at the parents’ rate. It used to be that as long as earnings stayed below a certain amount, the earnings were taxed at the kid’s rate so it was once a decent strategy to avoid some tax, as long as you could trust your kid not to burn through it by the time they were 18 and two months.

That tax dodge evaporated years ago, but somehow these accounts are still hanging around. Unless you’re trying to shaft your spouse, or have a child actor who’s earned the money themselves but needs some supervision, I don’t think there are many good reasons to have such an account.  They’re considered 100% the property of the child for college financial aid determinations, also.

How can you get the money out of it? The account has to be used for the benefit of the child (once funded, it’s their money), but as long as you can prove that’s how you used it, you’re fine. You’ll have to pay taxes on any gains from the sale of investments, but it’s unlikely the IRS will check up on how the money itself was spent—it’s your kid that could sue you, and hopefully that won’t be a factor.

Once upon a time I had such an account for my daughter, when the taxation was still favorable. I liked it way back then because there was no obligation to spend it on college, and I was certain my brilliant kid would get a full ride scholarship. Ha-ha. Obviously that was before I was a financial planner. We never did accumulate much in college savings in the account, being dunderheads at the time, and I eventually cashed it in to purchase her harp. She hasn’t sued me yet.

Probably the easiest way to clean out the account, besides covering tuition, music lessons, instruments, sports equipment, computers…is to move the money into a 529 plan. If you have significant gains, you’ll have to pay taxes (now playing world’s smallest violin) because 529 deposits have to be in cash. At least the (new) investment will be growing tax free.

If your child has actual earned income, you can also deposit some of the funds into a Roth IRA (up to $5,500/year depending on their earned income). They can withdraw money for college with no early withdrawal penalty, but they will need to pay taxes on any earnings withdrawn. Although they own the account once they’re adults, the tax and withdrawal penalties may slow them up a little. Also, $10,000 can be used as a down payment on a first time home purchase.

For some odd reason, most of these lingering UTMAs are also invested in savings accounts, where they’re earning practically zero for years now. I think they’re just places where people thought they were going to park some cash for college, then mostly forgot about them.  So, if you still have these accounts, resurrect them and put them to work for your kids. College is going to take whatever you can scrape together.

In case you’re wondering what these letters stand for, UTMA is Uniform Transfer to Minors Act and UGMA is Uniform Gift.