Guilt-Free Spending

Guilt-Free Spending

 

Just the thought of setting a budget can be enough to send us running for the hills. The other day, I had lunch with a friend who is a fellow career mom. We often swap stories about our busy lives and commiserate about how hard it can sometimes be to balance work and motherhood. Her career has taken off over the last year, but she looked more relaxed than ever. She shared that she and her partner had decided to outsource many of the household responsibilities they had historically struggled to keep on top of and often bickered over. After telling me what an amazing gamechanger this had been for her mental health and her family, her expression quickly changed to one of guilt as she admitted that the services were costing them quite a bit. Despite her increase in income, she felt embarrassed and irresponsible about how they much they were spending on services some would consider unnecessary. To her it sometimes felt as if they had traded their weekly arguments over household tasks with monthly disagreements over money.

I could relate to her experience on both a personal level and a professional one. After assuring her this was a common struggle, I shared tips with her that have helped many of my clients over the years. The traditional guidance for people grappling with feelings of guilt, self-reproach, or insecurity over their finances is to create a strict budget and stick to it. Some people enjoy a disciplined approach to things, but for many of us, avoiding the need for strict budgets can be a primary driver for saving and working hard. Tracking every small expense, feeling guilty about how much you spent last month, questioning partners on their expenditures, and generally feeling restricted—what’s to like? It’s right up there with counting calories, so I understand why people avoid it altogether.

If you’re like many high-income earners and people who have saved well, you might feel that avoiding the need to budget is a right you have earned. After all, you’ve worked hard so you don’t have to count every penny, right? The trouble is that it puts you at risk for not meeting larger goals such as a comfortable retirement, paying down debt, college funding, or making a large purchase; and it can also leave you feeling out of control and dissatisfied. Whether you are a busy professional struggling to figure out why you don’t have more money at the end of every month or you are already retired and unsure how to balance your personal spending with other goals, there is a strategy that can help you feel more in control of your money without having to budget.

 

Pre-Retirement Reverse Budgeting Process:

By taking these steps, you ensure your savings goals are met first, and anything that remains can be spent on whatever you desire, without guilt!

  1. Identify your goals.
  2. Determine how much you need to save on a periodic basis to meet these goals—the easiest way to do this is to work with your financial advisor to create a financial plan.
  3. Set up an automatic savings plan with a combination of payroll deductions and automatic monthly transfers.
  4. Enjoy the freedom to spend what is left as you choose and the peace of mind that comes with knowing you are able to meet your goals!

To make this process work for you, it’s important to start with a cushion in your checking account and to review your checking account at least monthly and before making large purchases to ensure you are maintaining a sufficient balance. If you find yourself running short, you can pull back slightly on small discretionary purchases and build that cushion back up so you aren’t forced to dip into your savings for something other than the goals you have set. We all tend to spend more when we are feeling flush, so checking your bank balance periodically should allow you to reign in non-essential expenses for short periods and return to guilt-free spending in no time. If you find a significant gap, you may need to examine recurring expenses for areas to cut back or reassess your savings goals.

 

Retirement Goal Funding Process:

You worked hard, you saved, and now you are living the retirement dream, but that doesn’t mean you’ve accomplished all your financial goals. Many people in retirement want to leave a certain amount to charity, help their children buy a home or start a business, help their grandkids with college, save for a large purchase such as a second home, or plan ahead for long-term care expenses. When you have a set amount of assets that need to provide for a lifetime of expenses and several other large goals, it can be hard to determine whether you have enough and what you can afford.

It’s also common for retired people to struggle with the transition from saving to spending. If you have been a disciplined saver and enjoyed watching your nest egg grow, the idea of diminishing it can be incredibly stressful. This process has helped many of my clients discover a new sense of financial comfort and freedom.

  1. Identify your goals. What do you anticipate for recurring annual spending? Do you have any legacy goals, plans for long-term care, or larger purchases, gifts, and donations to consider?
  2. Work with your financial advisor to run financial projections that account for investment returns, market volatility, inflation, taxes, etc.
  3. If the projections show you are not able to attain every goal, work through prioritizing and adjusting your goals until your projections show results you are confident in.
  4. The end result should provide you with an annual amount you can confidently spend while giving you peace of mind that you are able to meet your other goals as well!

 

One final, crucial step in the financial planning process is to meet with your advisor periodically to make sure you stay on track to meet your goals and discuss how goals may change for you over time. A great advisor will review your entire financial picture to make your money work its hardest for you and not only maximize your potential for meeting those goals but also encourage you to reach for the stars and live fully along the way. If you’re not already working with an advisor or are looking for someone who can provide this type of comprehensive support, we’re happy to help—schedule a consultation now!

 

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

Do Luxury Cars Need an Active Warranty?

Do Luxury Cars Need an Active Warranty?

 

If you own a luxury car, do you need to have an active warranty on it? That’s a question that has been on many minds lately, particularly those who own or are looking to purchase a high-end vehicle. Here we’ll take a look at what an active warranty is, the pros and cons of having one for your luxury car, and who might benefit from purchasing one. So whether you’re in the market for an exotic sports car or are simply curious about this topic, read on.

 

The Benefits of an Active Warranty

When you invest in a Rolls-Royce Phantom, you’re not just buying a car—you’re making a statement. This is a vehicle that exudes luxury, and its price tag reflects that. But what many people don’t realize is that a Rolls-Royce is also a complex machine, with hundreds of moving parts. That’s why it’s so important to have an active warranty.

An aftermarket warranty can help cover the cost of repairs and services, and it gives you peace of mind knowing that you’re covered in case of any unforeseen problems. So if you’re thinking about buying a luxury car, make sure you factor in the cost of an active warranty. It could end up being the best investment you ever make. Take a look at the different warranty providers; for example, see how CarShield warranty costs differ from other providers.

1. Luxury cars are often expensive and have high maintenance costs

Anyone who has ever owned a luxury car knows that they come with a high price tag. Not only are the initial costs higher than for a standard car, but luxury cars also have much higher maintenance costs. Warranty coverage is generally much more expensive for luxury cars, and repairs can also be quite costly.

In addition, luxury cars often require premium gasoline and may need to be serviced more frequently than standard cars, adding yet more to the overall cost. However, for many people, the high cost is worth it for the prestige and status that comes with owning a luxury car.

2. Warranties can help you protect your investment

Warranties are a great way to protect your wealth. When you purchase a vehicle, you want to be sure it will last for years to come. A warranty can help you do just that. By ensuring that your vehicle is protected against defects and damage, you can rest assured that it will continue to run smoothly for years to come. What’s more, a warranty can also help you avoid costly repairs. In the event that something does go wrong with your vehicle, a warranty can help to cover the cost of the repairs. As such, warranties are an excellent way to protect your wealth and ensure that your vehicle remains in good condition for years to come.

3. There are a variety of warranties to choose from

As you approach retirement, it’s important to start thinking about how you’ll protect your assets. One way to do this is to purchase an aftermarket car warranty for your vehicle. There are a variety of options available, so you can find a plan that fits your needs and budget. It’s important to compare plans and prices before you make a decision, but an aftermarket warranty can be a great way to protect your investment and provide peace of mind.

4. They can help you save money over the life of your car

If you’re like most people, you probably don’t give much thought to car warranties. However, if you’re the owner of a Porsche Panamera, an aftermarket car warranty can be a lifesaver. Porsche is known for its luxury cars, and the Panamera is no exception. With a starting price of $85,000, it’s one of the most expensive cars on the market. And because it’s a Porsche, you can expect to pay more for repairs and maintenance than you would for a less luxurious car.

An aftermarket warranty can help to offset some of these costs. In addition, it can give you confidence knowing that your car is covered in the event of an unexpected breakdown. Whether you’re looking to save money or to protect your investment, an aftermarket car warranty is worth considering.

 

When You Don’t Need an Active Warranty

Anyone who’s ever driven a luxury car knows that they’re a different breed altogether. They’re smoother, sleeker, and generally just better all around. But one of the best things about them is that despite their higher price tag, they don’t require an active warranty. That’s right—you can buy a luxury car and not have to worry about forking over extra money every month for a warranty. And why is that? Because luxury cars are built to last. They’re made with higher quality materials and designed to withstand whatever life throws their way. So go ahead and treat yourself to a luxurious ride. You deserve it!

1. You can afford to pay for repairs yourself

If you don’t mind spending the money and can afford to pay for repairs yourself, you don’t need an aftermarket warranty. For example, if you have an Audi A8, the cost of repairs and maintenance will be much higher than the average car. However, if you have the money for it, you won’t have to worry about paying for repairs down the road. Aftermarket warranties often have a lot of fine print that can exclude certain types of repairs. So, if you can afford to pay for repairs yourself, it’s probably the best option.

2. It’s not worth the extra money

Aftermarket warranties are often not worth the extra money for a number of reasons. First, they tend to be much more expensive than the manufacturer’s warranty. Second, they often have a lot of exclusions and restrictions that make it difficult to actually use the coverage. Finally, many people find that they never actually need to use the coverage. For these reasons, aftermarket warranties are not always worth the extra money.

Financial freedom is important, and there are better ways to spend your money than on an aftermarket warranty. Financial freedom gives you the ability to live your life the way you want to live it, and it is something that everyone should strive for. There are numerous things you can do to achieve financial freedom, and buying an overpriced warranty is not one of them.

3. Luxury cars are built to last

Luxury cars are built with the highest quality materials and components so they can withstand the rigors of daily driving for many years. That’s why luxury car owners don’t need to buy an extended car warranty. The factory warranty will cover any repairs that are needed during the first few years of ownership. After that, the car will continue to run reliably for many more years, with only routine maintenance required to keep it in top condition. So if you’re thinking of buying a luxury car, rest assured that it will provide years of trouble-free driving enjoyment.

4. The claims process is complicated

The extended car warranty claims process is complicated. If you bought a car with an extended warranty, you’re likely to find that the process for filing a claim is much more complicated than you anticipated. In order to get your claim processed, you’ll need to provide a lot of documentation, including proof of purchase and a detailed description of the problem. You’ll also need to be prepared to negotiate with the warranty company, as they will likely try to lowball you on the repairs. However, if you’re persistent, you can get the full value of your extended warranty. Just be prepared for a long and complicated process.

When it comes to luxury cars, there are many things to consider. You need to think about the cost of repairs and maintenance, whether you can afford them, and whether an aftermarket warranty is worth the money. Ultimately, it’s up to you to decide if you need an extended warranty for your Genesis G90. If you’re comfortable with the costs and don’t mind dealing with the complicated claims process, then go ahead and buy a warranty. But if you’re not sure that an aftermarket warranty is right for you, don’t feel pressured into buying one. There are plenty of other ways to protect your investment in a luxury car.

 

 

Written exclusively for Merriman.com by: Georgia Henry. 
Georgia Henry is originally from South Orange, New Jersey. After studying marketing in college and minoring in finance, she discovered her true passion: writing. Georgia loves to ski and has been on many amazing vacations, but her favorite was when she visited the petrified forests. She also enjoys painting and watching Olympic wrestling. In her spare time, she likes to hang out with her cat named Tom Petty.

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

The Building Blocks of Portfolio Risk Management

The Building Blocks of Portfolio Risk Management

 

When markets are rising, risk management seems easy—invest, sit back, and watch your investments grow. Things get a bit trickier when the markets experience volatility and decline. These are the times when you need to understand the amount of risk your investments are subject to and how that risk relates to your financial plan.

 

The first and least tangible measure of risk is qualitative in nature: how much risk are you willing to take? How would you feel, for example, if the markets declined more than 20%? What if the markets fell by more than 40%? Generally, what is the level of decline that you are comfortable with that will encourage you to stay invested and allow for your plan to thrive? Take some time to think about it. While it is easy to come up with a threshold or a hypothetical number, it is different in real time (consider the financial crisis or the markets’ initial response to the COVID outbreak, for example).

 

Once we have a handle on your subjective feelings around risk, there are a variety of tools we use here at Merriman Wealth Management to help our clients manage the quantitative measures of risk.

 

First and most important is answering this question: what is the amount of risk my portfolio can take within the context of my financial plan? This is a super important question. Too often, folks will bifurcate their investment and financial plans. This does not typically lead to successful outcomes. We manage this for clients by calculating statistically valid risk and return measures for our clients’ portfolios—i.e., we expect an all-equity portfolio to return 9.52% net of fees per year with a standard deviation of 20.49. A more moderate 60% equity portfolio would return at 7.95% and 13.06, respectively. Understanding these figures within the context of your accumulation and distribution plans is what matters. The typical recipe is for folks in their early years to take on more risk, as they have time for the markets to recover from declines. In contrast, folks later in life have less time to recover, and a more moderate portfolio is conducive to their plan.

 

The next risk management tool to understand centers around the sequence of returns. While one can craft statistically valid long-term expectations for portfolio risk and return, it is extremely difficult to predict returns in any given year. Consider 2020: who would have thought the markets would have rebounded so swiftly?

 

One thing to keep in mind with respect to sequence risk is what we call “bad timing.” What happens if you retire (switch from accumulating to decumulating) and the markets have two successive bad years? This is a good stress test for your portfolio. Pass this test, and your plan is likely in good shape.

 

The next measure to consider is the longer-term variability of returns. We measure this by running 1,000 different return trials for our clients (Monte Carlo analysis), effectively looking at everything from years of sustained above-average performance to years of sustained below-average performance and everything in between. The results are considered a success if greater than approximately 80% of the trials result in money remaining at the “end” of your plan. 

 

In conclusion, consider the list of questions below as you evaluate the risk metrics of your plan:

  • What are the risk dynamics of my current portfolio, and how do these relate to my financial plan?
  • What is the outcome of my financial plan if I retire and the markets have two successive bad years?
  • How am I accounting for the sequence of returns? What is my plan’s probability of success—will I have money left at the end of my plan?

 

Here at Merriman Wealth Management, we live by our tagline of “Invest Wisely. Live Fully.” If you are a Merriman client, we’ve got you covered. If you are not a Merriman client and would like a holistic review of your financial plan and corresponding risk metrics, let us know, and we would be happy to take you through our complimentary Discovery process.

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Nothing in this presentation in intended to serve as personalized investment, tax, or insurance advice, as such advice depends on your individual facts and circumstances. Past performance is no guarantee of future results.  Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.

Home Repairs: DIY vs Hired Work

Home Repairs: DIY vs Hired Work

 

It’s a tricky decision: hire someone to make home repairs for you or do it yourself.  Some are inclined to tackle their home improvement projects themselves to save money. It can even be satisfying to use your own hands to do a job. However, some home renovation projects are better handled by professional contractors.

Whether you plan on making significant structural changes to your house or just looking to make some upgrades, it would be a wise idea to determine which projects work best as DIY and which ones you need a professional for.

Read on to learn the benefits of DIY home improvement versus hiring a professional for the job. Moreover, you will learn how to decide between the two approaches for specific tasks.

Hopefully, it will give you better insights for your next project.

How to Decide Which Improvement Route to Take?

Deciding whether to take up a home renovation project yourself or seek the help of professional general contractors can be a confusing process. Let’s look at it in two parts.

First, let’s explore when it makes sense to tackle a DIY project to save money and when it is best to hire a professional to do the job. Then we’ll go over the pros and cons of each option.

 

 

When to Take the DIY Approach

You may pursue the DIY approach whenever any of the following conditions are true:

The project is not complicated and is easy to learn.

DIY jobs are not meant for complex projects that require specialized knowledge and fine-tuning. You should leave all of that to a professional. However, if the project is not complicated and you are willing to take the time to learn the basics of the job, you can take the DIY approach for that particular task.

You are not looking for perfection.

There’s a big chance that your remodeling project might not be as good as you anticipated it to be if you do it yourself. Are you okay with that? If yes, you can treat the project as a DIY job and enjoy saving money.

You like working on simple home improvement projects.

If you really enjoy DIY projects, then that will make your decision easy. Do you treat it as more of a hobby than a job? If yes, you should try the DIY route for specific home projects.

 

 

When to Hire Professional Help

Consider hiring a professional whenever one or more of the following conditions are true:

The project requires a building permit.

Numerous jurisdictions require a permit to facilitate electrical work or other structural changes. The ideal process would be to contact your city planner and find out your area’s licensing requirements. Such jobs often require special skills, so hiring a licensed contractor to perform them may be required.

A mistake could have serious consequences.

Some home improvements require a combination of a careful balancing act and expert supervision to ensure that nothing goes wrong. Even if you can find ways to burglar-proof your home, mistakes can keep your house vulnerable and weak.

Therefore, it is best to hire a professional, who often provides insurance for their job, if something goes wrong.

You plan on selling the house.

If you have a clear vision of selling your house in the future, you should seek professional help for most of your home repair work. Why? Because amateur DIY work can often turn off potential buyers and even reduce the value of your home.

If you are interested in learning the craft, you can work as a general contractor under a professional for larger projects like bathroom remodeling or plumbing.

 

 

Pros and Cons of Hired Work

Suppose you have decided to hire a pro after analyzing all the factors. In that case, you must check the professional license of your contractor and then think about the following pros and cons.

Pros

  • High-quality results
  • Keeps you out of any physical danger
  • Keeps the house value intact
  • Ideal for major work

Cons

  • Costs more money
  • Binds you to a strict project schedule

 

 

Pros and Cons of DIY

If you have considered all the essential factors and have decided to go for a DIY approach, keep in mind these pros and cons:

Pros

  • Ideal for smaller jobs
  • Saves money
  • Helps you learn a new skill

Cons

  • Compromised work quality as compared to reputable contractors
  • Can cause physical injuries
  • Not possible for building projects that require permits

 

 

Final Words

Your home is your safe haven. It is necessary to weigh all the pros and cons of both approaches when determining whether to go for a DIY job or hire a professional for your home renovations.

On the one hand, a DIY job is ideal for small projects and can help you potentially save a significant amount of money and raise your skill level.

On the other hand, a licensed professional should always handle complex home repair jobs related to cabinet hardware, hardwood floors, plumbing, and electrical work. It might cost you more money, but it guarantees quality results.

Moreover, it keeps you and your family safe from any physical injuries and keeps the value of your house intact. So, take note of the above approaches before you start on your home improvement projects.

 

 

 

Written exclusively for Merriman.com by: Ben. 

Ben is a Web Operations Executive at InfoTracer who takes a wide view from the whole system. He authors guides on entire security posture, both physical and cyber.

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Merriman. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such.

Common Investor Mistakes During Market Corrections

Common Investor Mistakes During Market Corrections

 

When it comes to investing, market corrections are inevitable. Since 1950, there have been 37 declines in the S&P 500 of 10% or more—or approximately one every two years. Enduring these corrections is the price we pay as long-term investors striving to meet our financial goals. How we act during these time periods is what separates the rookies from the professionals and can dramatically alter how successful we are in achieving those goals.

We all tend to have a higher risk tolerance when markets are performing well. During a review with our financial advisor in the comforts of a home or office, we can easily imagine a world where stocks might be 10% to 20% cheaper on paper and how that may impact our financial goals. However, when we think about future risks in the markets, we tend to underestimate how we will feel in the moment. We lose sight of what else is happening in the world that is causing the markets to decline and how that might impact us personally. This year is no different, and the laundry list of reasons is long:

  • The war in Ukraine is costly
  • Inflation is the highest in 40 years
  • The Federal Reserve is tightening monetary policy
  • The supply chain is a mess
  • Mortgage rates are rising at the same time housing prices are at all-time highs
  • The pandemic is not over
  • Market valuations are too expensive, and we are overdue for a reset

The bottom line is, there is always a reason for why we experience market volatility, and how that impacts us personally can create stress, fear, and anxiety. When we let our emotions take over, we naturally have an urge to do something about it. These emotional reactions can lead to mistakes that can reduce the probability of meeting our finance and investment goals. Below are common mistakes investors make during market corrections and steps we can take to help mitigate costly errors.

 

Mistake #1: Looking at the market daily

When headlines are scary, the daily moves in the stock market are volatile and unpredictable. Checking the market or your portfolio frequently will only heighten any fear and anxiety and may result in poor investing decisions. During difficult markets, it is important to remember that you have an entire team working for you at Merriman. We have designed your portfolio using decades of academic research to weather all types of market environments so you can have peace of mind. We are also here to take on any blame for when things do not go as planned. You should take advantage of the resources at Merriman and schedule a time with your advisor to help refocus on your long-term plan.

 

Mistake #2: Deviating from an investment plan or not having a plan at all

Another reason you have an advisor at Merriman is to create an investment plan that aligns with your goals, return expectations, and risk profile. The plan is a customized, long-term strategy meant to withstand multiple market cycles. If you have the urge to change your plan during a market correction, then have a conversation with your advisor and ask the following questions: Have my long-term goals changed? Am I still on track to meet those goals? If I deviate from my investment plan, how will that impact the probability of successfully meeting my goals? These questions will help reduce any reactionary emotions and shift your mindset back to the big picture.

 

Mistake #3: Trading more frequently or trying to time the bottom

Day trading and market timing strategies are automated systems that utilize algorithms and programmed rules designed to execute trades in milliseconds. This places the human day trader at a significant disadvantage. While the data supports that day trading or attempts to time the market are not additive to long-term returns, market corrections can be an excellent time to be a buyer.
However, it is vital to have an investment plan in place so you are prepared to execute in the moment. As an example, a rebalancing strategy is one method that is highly effective for long-term results. This removes emotions from the equation and allows for a disciplined plan of attack during market downturns.

 

While your feelings play a vital role in determining the right long-term strategy for you, we cannot let emotions dictate our investing decisions, particularly during market corrections. This can lead to short-term mistakes that, left unchecked, can have negative impacts on your retirement goals. A disciplined investing approach based on facts, not emotions, is the winning formula.

 

 

 

Disclosure: All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.  Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be taken as such. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. As always please remember investing involves risk and possible loss of principal capital and past performance does not guarantee future returns; please seek advice from a licensed professional.

Considerations for Being Self-Employed Versus an Employee

Considerations for Being Self-Employed Versus an Employee

 

It’s no question that the pandemic has resulted in major shifts in the workforce. Whether it be the large-scale layoffs in March 2020 or the Great Resignation that more recently impacted personnel changes, we know that millions of Americans have left their jobs due to burn out and/or to pursue starting their own businesses in the hope of finding something that brings more personal fulfillment. In 2021, there were over 5 million new business applications submitted, which is an astonishing 55% jump from 2019.1

If the idea of starting up your own business has been on your mind, you have more than likely asked yourself if it’s the right thing to do financially—or at the very least are curious about all the differences between working for a company or being self-employed. We highlight the pros and cons for both options below.

 

Taxes

First and foremost, taxes are the greatest change when making the switch from employee to self-employed. Most employed individuals are familiar with various line items for federal and state taxes, Social Security, and Medicare amongst many other potential employer-provided benefits (more on those other benefits later). When you’re self-employed, you, of course, still pay federal and state taxes, but in place of the regular line items for Social Security and Medicare, the IRS adds a self-employment tax. Typically, the Social Security and Medicare amounts are figured by employers, but self-employed individuals (or their tax professionals) need to calculate out what their self-employment tax looks like. The self-employment tax rate is 15.3% which consists of two parts: 12.4% for Social Security and 2.9% for Medicare. And, just as employers do, you can deduct the employer portion of your self-employment tax to calculate your adjusted gross income.2

Sticking on the topic of deductions, self-employed individuals can deduct expenses for their business that can reduce taxable income. Things like phone bills, internet bills, home office expenses, business travel, and health insurance are all common examples of deductible items for the self-employed, and these are all things you can’t typically deduct as an employee. While finding deductions can sound fun, it also means a lot more work on the administrative side by tracking each of these items and having proper documentation to help you make sure you’re maximizing your deductions.

 

Savings

As an employee, you can maximize your pre-tax or Roth 401(k) contributions up to the IRS limit of $20,500 or $27,000 for those age 50 and above (2022). When you’re self-employed, you are eligible to make contributions to a solo 401(k) as both the employee and the employer. This means you can contribute up to $20,500 for your employee contribution then contribute up to 25% of your compensation on top of that for the employer match.

With regard to savings, one item that could be considered a small perk of being self-employed is having the freedom to choose which custodian you utilize for your retirement savings.

 

Benefits

Going back to the topic of benefits, employees are usually offered benefits through their employers, such as paid time off, health and life insurance, free/discounted fitness memberships, retirement plan matching or employee stock awards, donation matching, paid family leave, adoption assistance, and sometimes even retailer specific discounts. These benefits can certainly provide peace of mind beyond their monetary value for some and don’t exist when you’re self-employed.

 

Flexibility/Stability

One huge benefit of being self-employed is the amount of flexibility it provides. You can decide to work from home, a local café, or even beachside. You choose your own hours and aren’t limited to the amount of paid time off you’re allotted each year when you feel like taking a vacation. You’re also your own boss, so there’s no risk of having a supervisor managing you and potentially causing friction. On the flip side, there also aren’t any paid holidays or sick days. Without the oversight of a manager and being fully responsibility for the growth of your business, it takes a great amount of motivation and focus to be self-employed, which could also result in longer hours. There may be periods, especially in the early stages, where earnings may be lower or inconsistent, so making sure you’re prepared will be of utmost importance. Being okay with failure before finding success is a common theme amongst entrepreneurs, and remember that what you gain in freedom, you may also lose in security.

Being an employee typically means stable income; however, this also means your livelihood is dependent on your company’s success. The stability of working as an employee can be more than a steady source of income—it can also mean long-term career development and opportunities and more convenient access to building long-term professional relationships.

 

It’s quite clear that there are many considerations for anyone thinking about making career changes, but there’s no reason you should have to think things through on your own. It’s ultimately a personal choice, but we recommend getting in touch with your advisor or clicking here to connect with an advisor at Merriman to discuss what makes sense for you and your lifestyle.

 

 

Sources

1 https://www.today.com/video/american-workers-are-becoming-their-own-bosses-through-the-great-resignation-130454597857

2 https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes

 

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