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Pre-Retirement Planning Guide Younger Adults

3 min read

Pre-Retirement Planning Guide Younger Adults Step 2: Clarify Goals

You’re never too young to start a bucket list. That’s because some things (such as bungee jumping) you probably want to knock out in your twenties. Women may want to have children before their forties – that sort of thing. A bucket list is comprised of all the things you want to do before you “kick the bucket.” It should be a running list that you add to and check off throughout your lifetime.

If you haven’t started a bucket list yet, a good time to do this is during your pre-retirement planning. It might be better to complete some items, such as expensive travel or home renovations, while you’re still working. That way, you can pay for them with your current income rather than take on debt or withdraw excess funds during retirement.

Another reason to develop your bucket list with your pre-retirement plan is to give life after work a greater purpose. Many people don’t think past the joy of simply not having to get up every morning and go to work. For some, the appeal of retirement is to no longer have to deal with exhausting corporate politics. However, if these are the only reasons you’re looking forward to retirement, they will not likely be as fulfilling a couple of years into it.

In fact, many retirees find they miss both the structure of the workday as well as the responsibilities and intellectual stimulation of a job. If you don’t establish additional and specific goals for your retirement years, you may end up bored, watching television most of the day, short on social stimulation, and wondering where the years went.

Some common goals set by retirees include:

  • Volunteering
  • Home renovation/redecoration
  • Gardening
  • Reading/book club
  • Babysitting/spending time with grandchildren
  • Traveling
  • Writing a book/memoir
  • Learning another language
  • Painting/arts & crafts
  • Learning to play an instrument
  • Carpentry
  • Regular socializing with friends/game night
  • Culture (theatre, symphony)
  • Regular exercise routine
  • Mentoring
  • Taking classes

Aim For Local

Not everyone wants to see springtime in Paris, so recognize that your bucket list is unique to you. If you’re running low on bucket list items, think locally and personally. For example, there might be places nearby you haven’t visited in years (or ever), such as a museum, art gallery, zoo, symphony, or opera. Even if you do attend regularly, consider taking your grandchildren with you during retirement to expose them to your passions and develop memories they will hold onto for life.

As you develop your bucket list, think about how activities could achieve additional goals, such as fitness and socialization. Some of the risks of growing older are increased health problems and potential isolation – particularly if you lose a partner or outlive your friends. Constantly expand your social network to include younger folks, particularly neighbors. Helping them out with occasional babysitting or taking care of pets while they are out of town help “pay it forward” for those elder years when you could use a bit of help yourself.

Achieving a successful retirement is all about good planning and preparation. You want to have money to enjoy your life, good health to keep staying active, and friends and loved ones to spend time with. These are the core elements that contribute to a long life, so start planning today by developing goals and seeing them through.

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The Differences Between Conclusion of Value and Calculation of Value

4 min read

The Differences Between Conclusion of Value and Calculation of ValueWhen a business is looking for a valuation, it needs to decide whether to use the calculation of value approach versus the conclusion of value option.

The conclusion of value calculation is a more rigorous and resource-intensive calculation of value. Both approaches are similarly dependable, and despite the calculation of value’s less in-depth approach, business owners can still benefit from this knowledge for their short- and long-term projection needs. However, there are some distinctions between the two approaches. 

Calculation of Value

This method can be conducted annually or once every 24 months. It’s often applied for internal needs, such as the owner looking to retire, selling the business or for critical strategy development. Calculation of value also can be used for planning purposes, such as the settlement stage of a divorce. However, since it’s not an opinion of value, it’s not seen during litigation. 

Calculation of value aims to get the company’s fair market value via comparable companies. It is an approximate value, calculated through either a single figure or a range.

Conclusion of Value

This is more comprehensive and has stricter standards that can meet those required by the IRS, lawsuits, the Department of Labor, potential business buyers, M&A activity, etc. Conclusion of value can take as long as six weeks to complete due to stricter reporting standards.  

It’s up to the discretion of the analyst, and the results can be a single figure or a range. There are three accepted forms of valuation: market, income and asset-based, necessitating additional time. These three approaches are defined further below.

Market-Based Valuation

This looks at charted data of transaction values to calculate a business’ financial worth. This works similar to how those in the real estate industry determine comparable business’ worth, which is based on substantially similar conditions.

Regardless of the type of business, it looks at financial metrics such as the client service model, business location, profitability, percentage of periodic revenue projections, overall revenue, growth rates, mean account sizes, etc.  

Income-Based Valuation

This type of analysis establishes fair value by looking at historical, present and projected future cash flows. It also looks at reasonable projected returns on future investments.  

Valuing investments via the discounted cash flow method (DCF) involves looking at after-tax, discretionary, and/or operating cash flow types. This approach is often utilized with businesses that have no to limited earning growth projections.

The Capitalization of Earnings/Cash Flow Method

This begins with determining the cash flow for a discrete period. Then, the cash flow is divided by the capitalization rate over the same period. The capitalization rate is determined by taking a property’s net operating income and dividing it by the present market value. Looking through a real estate lens, it’s interpreted as the percentage of return an investor is likely to obtain from an investment. It’s often calculated for mature/established businesses that grow at a reasonable/predictable rate.

Excess Earnings Valuation Methodology

This can be defined as looking at how much tangible and intangible assets earn for a company over a discrete period of time. 

Asset-Based Valuation

This values a company by looking at the net value of assets within a company or the post-liability deduction of the fair market value of the company’s total assets. It’s one way to determine how much a company would cost to re-create. 

While each business has its own needs for valuation, be it for internal or external audiences, understanding how to accomplish them and when to use each type is extremely helpful for overall operations.

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Summer Reading List for Personal Finances

3 min read

Summer Reading List for Personal FinancesSince it’s summer and reading lists are at the top of your mind, now’s the perfect time to expand your knowledge of money management and wealth building. So, whether you’re a retiree, a beginning saver, or even a child, we’ve got a book for you.

The Classics

If you haven’t had a chance to dive into these titles, you might want to grab them, starting with The Millionaire Next Door. Authors Thomas J. Stanley and William D. Danko published this in 1996 and learned something critical: most millionaires were those who don’t blatantly flash their wealth but live below their means and save, save, save. Other great books like The Psychology of Money and Same As Ever, both by Morgan Housel, explore how human emotions trigger spending decisions that aren’t always the best for us. (Not surprising, right?) Finally, The Intelligent Investor by Benjamin Graham advocates a “disciplined approach to investing.” He’s someone who you might want to listen to – he was a mentor to Warren Buffet.

New Books

For those who want to align their personal values with their financial decisions, The Social Justice Investor by Andrea Longton is a good read. Her thesis is simple: she reminds us that no matter how big or small, every investment impacts humanity. Another new book by an author who has a big presence on social media, Kyla Scanlon, is In This Economy? How Money and Markets Really Work. Using the model of short, bite-sized clips made famous by TikTok, she presents macroeconomic concepts like interest rates in digestible chunks. Even if you’re not into the socials, you can glean important fiduciary principles in a short time – especially if you have a busy life.

For Young Folks

Check out this powerful title, Stop Acting Rich…and Start Living like a Real Millionaire, also by Thomas J. Stanley. In a nutshell, this is a cautionary tale that details the pitfalls of overspending on a house or other major purchases while also emphasizing that just because you look rich doesn’t mean you are. Another great pick is Financially Stupid People are Everywhere – Don’t Be One of Them by Jason Kelly. This narrative shines the spotlight on dangers that parents might not discuss with their kids, such as consumer debt and large mortgages. It shares how “not to be a sucker.”

For Students and Kiddos

This is a long one: Debt Free U – How I Paid for an Outstanding College Education Without Loans, Scholarships or Mooching Off My Parents by Zac Bissonnette. According to the reviews, the story is motivating and inspiring for high school students and does an excellent job of paying off the title. For younger children, there is Lily Learns About Wants and Needs by Lisa Bullard, who reads it weekly to her kids. In her story, she focuses on gratitude and succeeds in explaining that “budgeting” isn’t negative but a necessity for success. From the sounds of this narrative, other age groups might benefit from it, as well.

These are just a few books you can pack into your suitcase or beach bag this summer. If you don’t finish them, you can take them with you for the rest of the year. Learning how to be smart about your finances never goes out of season.

Sources

Personal-Finance Books to Put on Your Summer Reading List (msn.com)

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So, You’ve Been Audited: Should You Go It Alone or Hire a CPA, EA or Tax Professional?

3 min read

IRS Hire a CPA or Represent yourself?I sincerely hope you have never had to go through an IRS audit – and never have to in the future. But what if that dark day does arrive? Should you go it alone and defend yourself or hire a CPA, EA, or Tax Professional to be on your side?

The temptation to handle this alone is usually prompted by one of two things. First, the notion is that this is not such a big deal. Other times, people think if they handle it themselves, they will save money.

Unfortunately, neither of these are good reasons to defend yourself in a tax audit against the IRS. While the decision to hire a CPA or tax lawyer does depend on the case and the issues at hand, the procedural setting plays an important role as well. The answer is nearly universal that you should hire a CPA, EA, or Tax Professional to defend you – or even a tax lawyer if the situation warrants it (sometimes they are one in the same person).

Why it is a Terrible Idea to Defend Yourself in a Tax Audit

There are several reasons why partnering with a pro is a good idea. Let’s look at each one and why.

  1. Working with your CPA, EA, or Tax Professional, you can go back and forth with your side of the story, dig into the facts, and challenge each other in formulating a response. You essentially have a thinking partner and someone to fact check your side of the situation. Plus, they know how to “handle” the IRS in the messaging of responses.
  2. It is prudent to create some space between you and direct communications with the government. For the same reason, defense attorneys do not want their clients talking directly to the police. It is best if you communicate via your CPA or tax lawyer. Whenever you are in direct communications with the IRS, the chance of making a misstep is greater. Once you have said or written something to the IRS, it is pretty much impossible to backtrack.
  3. CPAs, EAs, or Tax Professionals are experienced in advocating for clients and documentation.
  4. Early representation is a must! One of the biggest mistakes taxpayers subject to an audit make is to start off on their own and then end up in an even worse situation than they started. One of the biggest reasons why an audit can cost a lot is because the taxpayer dug themselves into hole that a CPA, EA, or Tax Professional then later had to get them out of.
  5. Most cases rest on fundamental accounting problems. Someone with expertise and good records can address these problems early and competently. Seeing your own facts and documents through an unbiased and objective lens is not easy for most of us.

Conclusion

Ultimately, the decision to hire a CPA, EA, or Tax Professional to represent you in a tax audit is a personal one. Exactly how necessary this is depends on the facts and circumstances of each individual situation, but it’s almost never a good idea to go it alone. If you ever find yourself in an audit, seriously consider hiring a CPA, EA, or Tax Professional – and do it early in the process.

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How to Develop a Credit Policy

4 min read

How to Develop a Credit PolicyA credit policy explains how a company will manage lines of credit for client accounts and what procedures to follow for severely outstanding invoices. It helps a business promote a robust foundation for its working capital level.

Defining a Credit Policy

Unlike personal credit scores, business scores range from 0 to 100; the scores from the FICO Small Business Scoring Service range from 0 to 300. According to the U.S. Small Business Administration, a first step to establishing business credit is to sign up for a Dun & Bradstreet (DUNS) number for each business location.

There are three components to a company’s credit policy. First, develop an effective system of following up on past-due invoices. Second, define when, how much, and the terms of credit extended to customers. Third, establish how the business underwrites a client’s creditworthiness and put guidelines in place to determine when to increase or decrease lines of credit for clients.

Memorializing a Company’s Credit Policy for External and Internal Uses

The reason why it’s so important to have a credit policy in writing is because 6 in 10 workers in large American business workplaces have found it challenging to get information from their fellow co-workers, according to a report by YouGov and Panopto. This same report found that processes that are not documented result in employees wasting an average of 5.3 hours/week either looking for the right person or waiting for a response.

Internally, it enables employees to understand the policy inside and out, creating more efficient workers. Externally, it sets clear ground rules and reduces the likelihood of mismatched customer expectations.

Considerations Before Writing Out a Credit Policy

Depending on the interest rate environment, clients may have a hard time obtaining financing. If they are able to obtain financing in a high-interest rate environment, it will come with a higher cost for the customer. The business may need to have more stringent policies.

Terms of Sale May Not be One-Size-Fits-All

It is imperative to explain how payment terms work before the company engages with clients. Be it net 15, 30, or 60 days, etc., consider how payment timeframes may incentivize pre-payment or early payment discounts. From there, determine when and how the company takes action to deem when payment is “delinquent,” and when it’s considered uncollectable and finally written off and sold to a debt collector.

Depending on the size/revenue/etc. of the company writing the policy, it is not ideal to treat smaller companies the same as larger/more established companies. For example, giving a company a net 45 term versus a net 30 or net 15 has two available outcomes.

Larger companies may be able to pay faster, but if they are given more time to pay, it can negatively impact the receiving company’s cash flow. And while giving small companies similar terms can create more goodwill, it also can cause a company to take it for granted. This presents the potential to never receive payment for outstanding invoices if the small business faces bankruptcy. Similarly, depending on the type of business and/or sector it’s in, risk should be rated appropriately.

Determine Roles/Responsibilities

Ensure each department and person within each department has a defined role within the credit approval process. The sales department can help craft payment terms to reduce late payments and maximize sales. The credit department can handle reviewing to extend, lower, and increase credit limits. The accounts receivable (AR) department should follow up on late invoices, collect payments, and record incoming payments.    

While there’s no boilerplate form for a business’ credit policy, having a policy in place will help a business navigate its internal and external needs more effectively.

Sources

eBook: Valuing Workplace Knowledge

https://www.sba.gov/business-guide/plan-your-business/establish-business-credit