Posted on

2024 Cost of Living Adjustments

4 min read

2024 Cost of Living AdjustmentsIn one year’s time, the U.S. inflation rate dropped by more than half, from 8.2 percent in September 2022 to 3.7 percent in September of 2023.

If there is a downside to lower inflation, it’s a lower cost of living adjustment (COLA). This year, the inflation rate plummeted from 6.4 percent in January to the current 3.7 percent. While food prices, both grocery and dining out, continue to increase. Between February 2020 and September 2023, grocery store prices rose 25%. That was slightly above the 23% increase in menu prices during the same period. But a number of consumer goods prices had decreased by midsummer, such as:

  • Gasoline (-26.5%)
  • Airline fares (-18.9%)
  • Car and truck rentals (-12.4%)
  • Major appliances (-10.7%)
  • Televisions (-9.9%)

The Problem with Inflation Data

Inflation data can be misleading for a number of reasons. First, while inflation statistics are quoted annually, these are compounded figures. The annual inflation figures for the past three years are as follows:

  • January 2022: 5.9%
  • January 2023: 8.7%
  • January 2024: 3.2%

If you add each year’s annual inflation, it comes to 17.8 percent; however, compounded prices rose by 18.8 percent over the three-year period. Now, imagine the compounding effect of inflation over many more years.

Second, when you hear that there is a decrease in inflation, it is not that prices are lowering; instead, it’s that prices are increasing but at a slower rate. For prices to drop, we would need actual deflation and not just lower inflation.

Finally, you need to remember that whether it is from a Social Security COLA increase or a raise at your job, an increase in income equal to inflation does not keep up with the actual cost of inflation. This is because of taxes. If you get a raise equal to inflation, you take home that amount less taxes, so your wages or Social Security is really not keeping up with inflation.

Take all three of these factors together, and that’s why inflation feels much worse at the grocery store than it appears on paper.

Social Security Benefits

The fluctuating inflation rate doesn’t just impact the prices of consumer goods, it also affects income. Specifically, Social Security benefits are adjusted each year based on changes in the cost of living.

More than 71 million Americans currently receive Social Security and Supplemental Security Income (SSI) benefits. One in four households of people age 65 and older depend on their Social Security check for at least 90 percent of their family income. Therefore, it is very important that COLA adjustments keep up with inflation.

Given that the inflation rate fluctuated between 7.1 percent and 9.1 percent last year, Social Security benefits increased by 8.7 percent in 2023. However, since inflation has dropped significantly in 2023, Social Security benefits will increase by only 3.2 percent in 2024.

To find out how much individual Social Security paychecks will increase, beneficiaries can check the Message Center of their my Social Security account. In early December, recipients will receive notification of their increased payment by mail.

How the Increase is Determined

Be aware that if there is no year-to-year increase in inflation, there is no cost-of-living adjustment for Social Security income. While inflation rates vary, it is pretty uncommon not to have some sort of increase.

Effective January 2024, the average monthly Social Security benefit for a retired worker is $1,907; for a married couple, the combined average is $3,033. The maximum amount of earnings subject to the Social Security tax is scheduled to increase from $160,200 in 2023 to $168,600 in 2024.

Health Savings Accounts

Starting in 2024, the annual contribution limit for an HSA linked to a high-deductible healthcare plan will be $4,150 for individual coverage; $8,300 for a family plan.

2025: Catch-up Contribution

Starting in 2025, people ages 60 to 63 will be able to significantly increase catch-up contributions to certain employer-sponsored retirement plans. The limit will increase to $10,000 – or 50 percent more than the regular catch-up amount – whichever is greater.

2026: Catch-up Contribution Twist

Starting in 2026, catch-up contributions made by people earning more than $145,000 will have to be contributed to an after-tax Roth account. Note that the Roth account requirement applies only to workers whose wages are subject to FICA taxes, so it does not apply to partners, the self-employed, or state and local government employees.

As of this writing, the IRS has not yet released changes to contribution limits for qualified retirement plans in 2024.

 

Posted on

Understanding Operating and Capital Leases

4 min read

What is Operating Capital and Capital LeasesThe first thing to define is what a lease itself is. It’s an agreement or contract where one party, the lessor, allows another individual or business, the lessee, to use their asset in return for payments or different assets. The next step is to define the following types of leases. The two types covered in this article are operating and finance (or capital) leases.

International Financial Reporting Standards (IFRS)

IFRS does not differentiate between operating and capital leases. However, depending on if the loan has certain characteristics of transferring generally accepted rewards and risks, it would resemble what’s otherwise considered a finance lease. When it comes to Canadian Accounting Standards for Private Enterprises (ASPE) and Generally Accepted Accounting Principles (GAAP), the terms capital lease and finance lease can be used interchangeably.

Operating Leases

Operating leases are used when the client wants to rent and not purchase. During and once the lease is up, the lessor is always in possession.

It can be cheaper to rent – and sometimes renting is the only option for small or medium-sized businesses that are unable to purchase assets. Another advantage for businesses is that they can stay competitive by being able to upgrade their assets since they don’t own it. Along with lessees generally only having to pay for asset maintenance costs, operating expenses for the leased assets are likely tax-deductible because they’re considered business costs. Agreements normally last three-quarters of an asset’s estimated economic life, and the present value of lease payments is usually less than 90 percent of an asset’s fair market value.

Finance (Capital) Leases

Once this agreement’s term is up, the lessee owns the formerly leased asset. Unlike an operating lease, it provides the lessee an opportunity to purchase the asset below fair market value through a bargain purchase option. It also differs in that the contract’s term spans a minimum of three-quarters of the asset’s estimated useful life. If the present value of the lease payments is at least 90 percent of the asset’s original cost, it qualifies as this type of loan.

Determining the Loan Type

Looking through the lens of IFRS, one way to decide what type of a lease to enter is to calculate the present value of the smallest lease financial obligations. Taking the following loan terms, we can determine what percentage of the minimum lease payments are of the asset’s fair value when the lease is signed. Here’s an example.

On the first day of the year, a business signed a lease agreement for five years for equipment that has a fair value of $150,000 and has an interest rate of 8.75 percent. A single installment of $33,750 will be paid at the start of each year. The equipment will be returned to the lessor at the end of the lease. The asset’s useful life is five years, with no residual value. The company chooses the straight-line depreciation method.

Since the equipment will be returned to the lessor, the bargain purchase option doesn’t apply. Also, since the economic life is five years and the lease term are the same length, it’s 100 percent, rendering the asset to have no alternative use once the lease is completed. Therefore, we can determine the present value as follows:

Number of Periods (NPER) = 5 annual payments over the loan’s life

Rate = 8.75 annual interest rate

FV = 0 (future value)

PMT = $33,750 (single payment per 12-month period)

Type 1 = (payment is made at the beginning of the year)

Calculated using Excel, the present value is $143,693. This present value divided by the initial cost means that the asset’s fair value when leased is 95.8% ($143,693/$150,000)

Based on this calculation, with the least lease payments’ net present value well above the 90 percent minimum threshold, it would be considered a finance or capital lease.

Posted on

7 Smart Saving Strategies for Retirement

3 min read

How to Save for RetirementNext year, something called Peak 65 is happening. This moniker refers to the fact that more Americans will reach the traditional retirement age of 65 in the same year than at any time in history. Crazy, right? However, many of these people don’t feel like they’ve saved enough to live comfortably after they retire. Here are some ways to maximize your savings and cut costs so you can be prepared and retire with less financial worry.

Use a retirement calculator. This is key. You’ll be able to see if what you have in retirement so far will be enough to actually live on. Here’s the tool. Once you know where you are, you’ll be able to determine your financial goals.

Catch up on retirement savings. If you’re over age 50, you can make something called “catch-up contributions.” You can increase your 401(k) salary deferrals by up to $30,000 and up to $7,500 in your IRA. Look into this ASAP. The more you contribute, the more you’ll close the gap between what you have and what you’ll need.

Put together a sample budget. According to the U.S. Bureau of Labor Statistics, a household run by someone aged 65+ spends on average $4,345 a month, which is about $52,141 a year. Given this fact, it makes sense to take a look at your budget to see where you can cut back. Do you have numerous streaming services or magazine subscriptions? Can you use public transportation instead of driving? Must you buy name brands at the grocery store or would generic suffice? Review several months of expenses and ask yourself these types of questions. You might be surprised at what you discover and how you can save.

Utilize your Health Savings Account (HSA). This is a great tool to help you prep for health care costs when you retire. Once you enroll in Medicare at 65, you can still use your HSA investments, even if you no longer qualify to contribute. But you can get started on this early. Once you’re 55, you can contribute an extra $1,000 to your HSA each year on top of the maximum amount you’re using to catch up.

Consider part-time work. Having some supplemental income is a great idea when you retire. You’ll not only keep busy, which for some is critical, but also generate extra cash. You might even start a small business. What is it that you’ve always wanted to do? What are you passionate about? These questions are worth exploring.

Move to a less expensive city. There are some states that are simply less costly. And when you’re downsizing, which lots of people do when they retire, it makes a difference in your quality of life. For instance, Montana doesn’t have any sales tax, and state taxes are 33 percent less than the U.S. average. Here are a few others to consider.

These are just a few of the things you can do to prepare for one of the most important seasons of your life. No matter when or how you decide to retire, in the long run, it pays to start thinking about it before these years are even on the horizon.

Sources

https://www.bankerslife.com/insights/personal-finance/7-saving-strategies-for-a-secure-retirement/

Posted on

New Business Travel Per Diem Rates Announced for 2023-2024

3 min read

Business Travel Per Diem Rates 2023 2024New per diem rates were recently announced by the IRS and are effective for per diem allowances on or after Oct. 1, 2023. These updated rates include changes for the transportation industry, incidental expenses as well as the high-low substantiation method. Before we dive into the detailed changes impacting per diem rates, let’s revisit the concept of the per diem in general.

To Per Diem or Not to Per Diem

There are two basic ways that employees can be reimbursed for business travel expenses. The first is a direct reimbursement of the actual expenses. The second is the per diem method.

Direct actual expense reimbursement is exactly what it sounds like. For example, a sales employee pays for a plane ticket and meals during a customer visit and then submits an expense report with the receipts as backup. Typically, a company will have a travel and expense policy that limits the expenses allowed – no Michelin star restaurants or first-class flights, for example. Other than this, direct expense reimbursement is simple and straightforward.

The second expense reimbursement method is called the per diem method. The per diem method is basically a pre-package policy of controls for both spending and tax purposes.

Fundamentals of Per Diems

Per diem is Latin for the term for each day. In practice, it is a daily allowance granted to each employee. It covers travel and related business expenses, allowing a fixed amount to cover business travel expenses.

Per diem policies can cover only three types of expenses: lodging, meals, and incidentals (anything else must be directly reimbursed). A per diem policy does not need to cover all three, however. An employer can use the per diem only for meals, for example, and deal with lodging under the direct actual expense reimbursement method. Also, the per diem method cannot cover transportation expenses or mileage reimbursement.

Taxation of Per Diems

Per diems are generally not taxable, and no withholding tax on the payments is necessary. The exception to this is if an employee does not provide or provides incomplete expense report information – or if you give the employee a flat amount that is in excess of the maximum allowance (with the excess being taxable).

Two Types of Per Diems

Per diem rates can be determined in one of two ways: either the standard rate or using the high-low method.

The standard rate is a fixed rate, whereas the high-low method is based on the cost of living being higher or lower in different locales. Under the high-low method, for example, Boston gets a higher reimbursement than Des Moines to account for this.

2023-2024 Rate Updates

The IRS updates the per diem rates every year. The 2023-2024 rates took effect Oct.1, 2023. They are as follows:*

  •        Travel to high-cost locations is $309 ($297 prior year)
  •        Travel to other locations is $214 ($204 prior year)
  •        Incidental expense stay is the same at $5 per day, regardless of location

*Taxpayers in the transportation industry are subject to special rates

Posted on

Two Ways to Measure Revenue Per User

3 min read

Two Ways to Measure Revenue Per UserWhen it comes to measuring revenue, it’s essential that businesses analyze it from a variety of perspectives. While there’s revenue and net income on an income statement to show a company’s quarterly financials, another way to measure it is through ARPU (average revenue per user) and ARPPU (average revenue per paying user).

Defining ARPU

ARPU is the average revenue per customer or per unit. It looks at how much revenue is earned over a particular timeframe (multiple times a month, quarter, half-year, or 12 months) divided by the average patron during the same timeframe. This can be applied to many different types of companies, including social media and software as a service (SaaS). It’s calculated as follows:

ARPU = Total revenue/Average units or subscribers

ARPU = $10,000,000/100,000 = $100

Interpreting ARPU

This is a snapshot of a company’s profitability. It’s a way for companies to track revenue generation over a short or long period. With this information, a company or investor can analyze the business’s past and present performance. It can help determine whether or not the business needs to re-evaluate its operations and product models or if an investor should invest in a company.

When it comes to evaluating an investment, if one company in a specific industry is generating an ARPU of $5 and another company is generating an ARPU of $3, the first company could be a more attractive investment. Similarly, if the trend of a company’s ARPU is increasing, it’s worth looking at how the company’s stock has performed. Additional investment research can determine how the company’s stock price is appreciated.

Average Revenue Per Paying User (ARPPU)

ARPPU is used to determine the average revenue from a company’s paying customers only. To contrast this measurement type, ARPU factors in all users.

Assume the following: A business had revenue of $2 million, an average user base of 1 million, and an ARPU of $2.

If, however, we’re looking at the ARPPU, we need to take out the non-paying user base. If the non-paying user base is determined to be 425,000, the remaining paying base is 575,000. Use the following formula to calculate ARPPU:

ARPPU = Period of Recurring Revenue/Active Paying Users during the same measurement period

ARPPU = $2 million/575,000 = $3.48 per active paying user

Interpreting ARPPU

When the ARPPU is low, this indicates the business’ products or services aren’t well received by customers and those to whom it is marketing. A higher ARPPU indicates a company’s marketing efforts, products, and services are received well by customers. Similar to ARPU, results from ARPPU can be analyzed for trends to see when products or services are well received; and then investigated to determine whether it is influenced by the sales and marketing, customer service, product quality, etc.

Whichever way a business analyzes its sales and revenue generation processes, taking multiple approaches can provide different perspectives to help owners and employees determine when and where to make improvements to its operations.