Archive for General Financial Planning

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.

 

Don’t make this mistake with your 401K

It’s no secret that I love Roth IRAs. Don’t tune out because you think you make too much money to have one!

Let me count the ways they’re great:

  • No required minimum distribution at 70 ½, so you can leave the money to grow into old age if you wish.
  • Grows tax free and you pay no taxes on any of it when you withdraw after 59 ½.
  • Can always withdraw your contribution tax free.
  • Can be used for medical emergencies and a $10,000 down payment on a first house (but don’t—leave it alone for retirement!)
  • Your heirs will pay no taxes on withdrawal if any is left
  • And the biggest benefit in my opinion—if you need a lump sum in retirement (dental implant, hearing aid, relocation expenses, buying into a continuous care community), you can withdraw it tax free. If you have to withdraw from a traditional IRA or 401K, you’re going to need to withdraw what you need + taxes on the withdrawal, so much less of your money is preserved going forward.

But, you make too much money, you say? Have you checked whether your 401K at work offers a Roth 401K option? Several clients in the past month have told me they don’t have a Roth 401K because they “make too much money”. It’s true that individual Roth IRAs have an income limit of $189,000 joint and $120,000 single, but the limit DOES NOT APPLY to workplace Roth 401ks. These Roth 401ks have exactly the same limits as your current plain vanilla 401k.

One of the biggest drawbacks of an individual Roth IRA is that you have a limited amount you can contribute each year: $5,500 with $1,000 additional after 50. But this is a relatively small amount, so many Roths never get large enough to fund a retirement. NOT SO with Roth 401ks, where you can deposit $18,500, with $6,000 extra after 50. Note: your employer’s match contribution will still go into the regular 401k.

Roth 401ks were relatively uncommon just a few years ago, but now many employers are offering the choice. It’s much underutilized. Sure, you lose the current tax deduction, but in the future, you should save far more in taxes on the appreciated amount. Check out this chart to see if you’d be better off with a Roth or traditional. In almost every instance, a Roth does better. Special alert to new grads: choose the Roth! Then you’ll never get used to the tax deduction.

If you don’t know if your employer offers it, ask. And agitate for the option if you need to. It shouldn’t cost the employer much extra, if anything. And it will really pay off for you.

 

Business travel expenses: A black hole for your budget?

For a year or two after I graduated from grad school, business travel seemed very glamorous. That was until I realized you actually had to work at those cool destinations, and most of the time everything was closed by the time the workday ended. Later in life, I had a husband who traveled frequently for business. In both cases, horrendous travel bills would roll in, and the reimbursements never quite matched the bills incurred. And because I did the bookkeeping, I was never sure how much money we’d actually have after a job, because I hadn’t seen the expenses and he kept terrible records.

If you travel for business, you may have noticed that your company (or contractor, if you’re self-employed) may not be in a terrific rush to process your expense report and issue a check. Particularly in the case of a contractor, your client may see your travel expenses as just part of your overall payment, and that payment may not show up for 60 or 90 days. Depending on your credit card interest rate,  slow pay can eat significantly into your income or profit.

Here are my tips for damage control:

Get an advance.

For some reason, freelancers are very, very reluctant to ask for any money up front. Learn from your plumber or carpenter—no tradesperson buys materials without an advance, or commits time without seed money. I’ve suggested this over and over, and once the client (and my ex) screwed up their courage and asked, they’ve never been denied. Even if you have to do a rush job, they should be able to cut a check and have it waiting when you arrive on site.

Have them do the booking.

If you can’t get an advance or there’s company policy forbidding it (unlikely but possible), see if you can get them to book airfare or a hotel for you, putting it on their credit card. Then they’re bearing the risk of slow payment or no-show, not you.

One credit card only for business travel.

If the card has to be in your name, not the company’s, make sure you segregate that card and use it only for reimbursable business expenses. No, that’s not necessarily obvious—I see people mixing expenses regularly. If you bought your spouse some perfume at the duty-free shop, put it on a different card. That way, absolutely everything on the card should be submitted for reimbursement, or can be easily tracked as a business expense.

Look for the lowest interest rate card you can find, find one that accumulates travel points or offers perks, and pick the closing date as far as possible from when you begin using it (you can request  a change in closing dates). Unless you’re on that bus in the sky every single week, don’t even consider paying for a super-premium card (unless your company or your contract will cover it and you can pass on the cost).

Put a sticker on it that says biz travel only. If you’re using an app, make sure the charges are going to one account only.

 One checking account only for business travel.

This should be opened with your travel advance. If you have to seed it with start-up money, go back and look at your travel cost for the past few years, and divide them by the amount of trips. You need to seed it with at least the average cost of one trip (more, if there are lots of short ones in quick succession).

It’s less common to need cash nowadays, but sooner or later you’re going to pull cash to pay for something, and that record will almost certainly be lost and you won’t be reimbursed. Pull from this account with a debit card and you’ll have that record.

Obviously, pay your business credit card from this, and only this, account.

Process expenses immediately

As in, on the plane home. Every night at the hotel if possible. The longer you leave this go, the worse it gets. Also, it’s very unlikely that you’re going to be reimbursed immediately. You want to be on the soonest reimbursement processing possible, or the closing date and payment due will come faster than your reimbursement. No excuses.

Buy a sturdy accordion file with dividers.

No matter how you strive to keep everything paperless, it still accumulates.  Outfit this file with a stamp or two, an emergency check, hide extra pens, paper, and some post its—all the stuff you don’t have the one time you really need it. Into this file goes any travel documents, every single receipt handed to you, and post-its reminding you of any cash you spent. Now it’s not rattling around in your backpack, messenger bag or brief case.

Stay within your per diem.

You can find a hotel within your allowance—federal government employees do it all the time. Ask for the corporate (or federal rate if you can), the AARP rate, the AAA rate, whatever.  You’re working—this isn’t a vacation and you can live with a moderately priced chain. Save the luxury for your vacation, or when someone else will pick up the much larger tab. If you truly cannot  book within the per diem allowance, you need to talk this over with your corporate travel department and get them on the job.

Offer a discount for swift payment

This only applies to freelancers, of course. But somehow it always works better to say 5% discount

for payment within 15 days of invoice than it does to say 1.5% per month added for late payment.  You’ll never get the penalty interest, but you might get swifter payment. Figure the possibility of a discount into your overall charges if necessary, but it’s cheaper than paying 29.9% annual credit card interest for 90 days.