What self-employed folks need to know about investing for the future

Financial Planning Tips for Freelancers

Self-employed folks don’t get a company 401k or other corporate benefits. How can you make sure you’re prepared for your family’s financial future?

That’s the question I asked licensed financial advisor, Bill Fairley. We spent an hour talking about financial planning for freelancers and taking a few questions from my Facebook group for freelancers. Below is a recap of our discussion along with the original video.

Transcript: Financial Planning Seminar for Freelancers

Welcome & Disclaimer

Carrie Dils:

Welcome everybody again to the financial planning seminar. I have scoured the face of planet Earth for the very best person to bring on and share information about investing for your future and financial planning. His name is Bill Fairley and he’s a licensed financial advisor with WWK Wealth Advisors in Fort Worth, Texas. Bill, thank you so much for agreeing to come on today!

Bill Fairley:

Well you are so welcome and thank you for those kind words, and I tell you, your scouring needs work if I’m the one you came up with. But no, I really do appreciate this Carrie, I really do, and I hope I can help or shed some light on some of the questions I know you have, and maybe some of the folks listening have.

If I may, just two quick kind of disclaimers or caveats, and that is, this. First of all, basic, due to the licensing and due to the industry and the regulations in my industry. I cannot discuss like specific situations for folks or anything like that, I have to kind of keep it at a,, a 30,000 foot level.

So just be aware of that. So if you ask me or if someone asks me a question that I really can’t answer, again due to the regulations in our industry, I’ll certainly mention that and say that.

And the other thing is, since we are going to be talking I think a lot about retirement plans and things like that, I want to stress, and I’ll probably say this more than once during this webinar. That everyone needs to talk to their tax expert, whether they use a CPA or whoever it is before they do anything. Because I’m not a CPA, and I cannot give advice on taxes and stuff, I can just tell you some vehicles to save taxes and that type of thing. But I cannot stress enough that everybody needs to speak with their CPA or whoever they use for their tax stuff.

CD:

All right. That was a good disclaimer, we’re all disclaimed up. And it’s true. Anytime, you want to be able to present helpful information to folks but everybody needs to know that please do check with somebody official in your life before making decisions based on the information you hear.

Investing 101 and Investment Terminology

Okay, so. Bill. Let’s start with the basics of investment.

There’s a lot of terminology, I mean like any industry there’s a lot of terminology that’s specific to investing. Where do you start? What are we even talking about, why are we here?

BF:

Yeah, why are we here. Well I’ll tell you what, and I say this a lot. Our industry’s like so many, we have our own nomenclature and buzzwords, and I think sometimes we do that just to try make us sound smarter you know in some cases. So I’m going to try, you know I like to keep everything as simple as possible. But in general like you said, where do you start in this type of thing.

You know for most people, unless you want to take the time or have the time to really analyze and study stocks and individual stocks and that type of thing. My advice to most folks is look at mutual funds. Everybody’s heard that term, mutual funds. There’s also something called exchange traded funds, they’re very much like mutual funds. And the reason for those are they diversify your investment. And they also again take some of the guesswork out of having to sit there and look at individual stocks and things like that.

But of course, individual stocks are available from an investment standpoint as well, so. So there are a lot of different ways to invest, but I would say in general, mutual funds that type of thing are probably the most common that people use.

CD:

Okay. So let’s talk a little bit about the idea of risk tolerance. And you mentioned earlier, everybody’s situation is going to be different, we’re at different stages in our career, in our life, with our families. You know a lot of that depends on even age specific. So what does it mean when we talk about risk tolerance in investing?

BF:

Yeah, great question. And risk tolerance is certainly a, that’s a buzzword that’s used a lot in our industry, but it is a real thing, and it is something that I think is important for people to understand about themselves. But in general what it means is that risk, what is your tolerance for risk. Because as I explain to people if you have cash in the bank or wherever it is, that’s virtually no risk. I mean you’re not going to lose the money, but you’re certainly not going to make much, certainly what money markets and things are paying right now. So if you want to try make some more money on your investments or on your cash. Anything you do from that point involves some level of risk.

And so there are investments that have lower risk and higher risk, obviously. So what we do, what I do and what a lot of financial advisors do, and you can actually even Google these and do it yourself, and I would recommend that folks try that if they’ve never done it. Are these questionnaires that try to determine what your risk tolerance is. Now some of these questionnaires, I always jokingly say it’s kind of like that old question which would you rather cut off, your right arm or your left arm, you know. There’s not a good answer for that. But they do have a purpose and a reason behind some of these questions. To determine, again, what is your tolerance for the risk. So then that would help you, or if you’re working with someone like me, it’d help me, to determine probably the best and most logical way to invest for you.

So in other words, if your risk tolerance is extremely low. Then you don’t want to be in something that has a chance of really dropping, and that type of thing, a lot of volatility. Does that make sense, is that?

CD:

Yeah. I’m actually, I’m thinking about gambling. I mean in a way, there’s risk in it. So we’re either playing like the penny slots, that’s a low risk.

Or we’re at like the high stakes table, where you can win big, but you got to play big to you’ve got to be willing to lose it.

BF:

Exactly. there is a phenomenon, in our industry and it’s not just in our industry it’s really just a phenomenon in life, that’s been scientifically proven. And that is that the pain of loss is much greater than the euphoria of gain. We’re all unfortunately susceptible to that, and believe me, I can tell you from my own experience in this industry that is true. You have folks that have made lots of money but boy let us have one bad month or bad spell so to speak, or quarter, and their hair’s on fire. If they’re lucky enough to have hair.

And so you know what I mean, that’s a truism, we all have a tendency to obsess over the losses rather than the gains. So that’s another way to look at this from a risk tolerance standpoint. People may say oh yeah, I want to, if you said I want to gamble, I want to roll the dice on some of this stuff. But when you get right down to it, it’s easier to say that, easier said than done as they say. So that’s another reason I think for risk tolerance. The other thing is, and the way I will use risk tolerance with folks, is that it’s a good talking point, when you’re talking to new folks about … so if their risk tolerance comes out really low let’s say. Meaning that they really don’t want to have a lot of volatility and this type of thing. One of the things I need to help folks, educate them on, is that with really low risk investments, your chances of achieving what you’re trying to do, go down as well.

So you just need to understand that. So that’s where someone like me helps or hopefully helps folks determine that sometimes, even though your risk tolerance is low, you’re going to maybe have to accept a little more risk, if whatever the goal is let’s say.

Getting Started Investing (without a Financial Advisor)

CD:

So you just brought up a question for me. When you said like people use somebody like you, people use a financial advisor. But you don’t have to use a financial advisor.

Can you, I guess maybe this is a twofold question. One, how do you even get started investing, without a financial advisor?

At what point is it wise or prudent to bring consult with somebody like you?

BF:

Sure. Great question, and of course my standard answer is you always need to use someone like me. And preferably me. No. No I’m teasing. So here’s the honest answer, and I say this to folks, because I will have folks ask me and say hey, what can you do for me that I can’t do myself? And the truth of the matter is, other than some products out there that only financial advisors can buy let’s say, because of our licensing or whatever the case may be. Other than that. If someone wants to take the time, the effort, and the diligence that’s it’s going to take them to do this, then you probably can do a lot of this yourself.

If someone wants to take the time, the effort, and the diligence that’s it’s going to take them to [invest], then you probably can do a lot of this yourself.

So one of the analogies I use a lot of times is I could learn how to roof my house, let’s say. But I’m not going to. I’m going to hire someone to roof my house. So there are people out there that say yeah, I could do this myself, but I really don’t want to, I’ve got other things to do, I don’t want to mess with this, so I’m going to hire someone to do it. So that’s really what it boils down to. The other aspect of trying to decide whether or not you need to use someone like myself, is it’s kind of twofold as well. The amount of money we’re talking about, and the goals you have for that money let’s say. And then your belief that you’re going to be able to stay on track. You know honestly, that’s what it kind of boils down to.

What I tell a lot of folks honestly is, depending on their age, and depending on where they are in their life, and what their savings are. They probably don’t need someone like me, certainly early on. But at some point they might if their portfolio has grown to a certain level let’s say, or gets a little bit more complex, or their life is just more complex and they don’t want to mess with it. Then at some point they may decide they want to work with a financial advisor. So it’s really just a, it’s a decision everybody just has to make, whether or not they feel like they’re ready for it. And I’m honest with folks to tell them you really don’t need me right now. you don’t. You might at some point, but right now you don’t.

So it’s very much, it’s very individualistic, you know it really is.

Tips on what to look for in an investment

CD:

So what’s the difference, obviously there’s a lot of different products and I know you can’t get into the specifics of recommending anything. But when you look at like a fidelity.com, or Merrill Lynch or these websites where you can go create accounts, put some money in and start doing things like buying mutual funds. What are, any tips on what somebody should look for, when they’re choosing where to, not the actual specific funds, but the, what do you call that, a management house or a…?

BF:

Well, some of those are what they consider wire-houses in our industry and all that. But yes, I get your point. And there are a lot of options out there for you. You mentioned some of them. there’s Vanguard, you’ve mentioned Fidelity, those are some of the bigger names where you can kind of go and create your own accounts and things like that. So you know what, and really and truly most of those websites probably have some type of risk tolerance questionnaire or some way to determine your own risk tolerance. So if you’re starting out and you’re going to do this on your own. I would highly recommend that you go to one of those sites. Maybe go to a couple of them and check it out and see what you like. But they’re all good. Vanguard’s good, Fidelity’s good, they’re all very, very good.

And they have good options on there for you, from a risk tolerance standpoint and everything. So I would recommend that people go on there and kind of check it out. Take some of their quizzes if they have them as far as risk tolerance goes, and then quite frankly, and I don’t know this for a fact because I don’t go on those websites very often. But my guess would be that once you’ve done that, it’s probably going to come back with some kind of recommendation for you, again based on your risk tolerance, based on your age.

Risk tolerance + time horizon = your investment recommendations

The keys are risk tolerance, your time horizon, which means are you are you in your 20s and we’re looking at and you’re saving for retirement, so we’re looking at 40 years, or are you my age, and you don’t have that many more years before potential retirement or something like that. So those are all of the considerations that you have to take into account. And then like I said, most of them will probably give you some recommendation on should you be more growth-oriented, moderate, you know all that type of thing. And they’re good, they really are good for what they do and what they are.

CD:

Good deal, okay.

Well, I took the lazy route, and when I transitioned from full-time with a corporate to full-time freelancing, I already had a 401k. And I already had it with one of those companies.

And so that was just the easy, I already had the account, so it was easy to start doing some other things there.

But this brings up kind of a topic that I want to dig into a little bit. Because I know some people that are listening to this currently have the safety net of full-time employment and some kind of an investment plan, where maybe they’re matching dollar for dollar up to a certain amount, and you’re throwing in your 401k. The idea, there are two things I want to talk about. But first is the idea of transitioning to self-employment, we have no investment plan. Like that’s a scary prospect.

So that’s going to be part two, don’t worry, I’ll remind you of the questions.

What happens to your 401k when you leave your job?

For now, like if they were thinking about leaving, when the moment comes that they leave, they’re going to have to say goodbye to that 401k. What happens to that money?

BF:

It just goes away. No.

CD:

It just actually it auto sends to me. I don’t know how that happened.

BF:

No, those are good questions, and you know what, I’ve been there myself. I’m independent now, my wife is self-employed, she’s been self-employed for many, many years. I have clients that are in both situations they’re employed or they’re now self-employed. So. The first thing I’ll say, just to reiterate, is that if you are working for a company, or you do have access to a 401k. I cannot stress enough how you ought to be participating in that. And especially if the company offers any kind of match. So I tell folks, at least do what you have to do to get that match. Because nothing beats free money. And so you might as well do that. The other part of that is, the beauty of a 401k, as opposed to what you just said as far as you go on your own or freelance or something like that is, it’s that out of sight out of mind situation you know. They just take that out of your check, it’s all pre-tax.

So a lot of times you end up not missing it, because you don’t see it, it’s not there.

So that’s all great. So if you have that situation, if you’re working for a company, then by all means do as much as you can in your 401k. When you separate from a company that has a 401k. There are several options that you normally have. Now this can fluctuate depending on the company, and depending on who handles that 401k. One of your options is, you can leave it there, in most cases. Certainly if it’s like a Fidelity, like you mentioned earlier, or a Vanguard or one of those big houses like that. So that’s an option that you can do. You can, you also have the option to roll that 401k into an IRA. It has to go into an IRA, in other words to preserve the tax deferment.

So that’s an option. Those are really, well and then also you can just take the money out, pay your penalty and pay your taxes and go to Vegas or whatever you want to do with the money. So that’s certainly an option as well. But if you want to preserve that, and continue to have it be retirement, then your two best options are to leave it there or to roll it out. Now there are cases, and there are some companies that you can’t leave it there. I’ve seen that. It’s rare but it does happen, where they’ll give you 90 days to roll it out into an IRA or something like that. So in those cases that’s what you have to do. Otherwise again, in the majority of cases you can leave it there.

So you know there are pluses and minuses to both. So an individual just has to kind of decipher and decide which makes sense for them. And some of that, some of the factors for that are going to be fees. Whether or not you think it’s important to have someone specifically talk to about that account, rather than just calling an 800 number you know. Or, if you want to roll it out into an IRA, and it can be what they call self-directed IRA, you can do that yourself, and then you have more control over it. So that’s an issue for some people too. So there’s just a plethora of things to think about when that comes up. But those are your primary options when you do that.

CD:

Okay, there’s a lot that I want to unpack there. The first is the idea of tax deferment, and the second is the idea of penalty for early withdrawal.

We’re specifically talking about retirement investment, which in the US comes at the age of what, 65 and a half?

BF:

Well 59 and a half is when you no longer have a penalty for taking money out of a retirement account, 59 and a half.

CD:

Okay. So if someone is younger than that, and has money in a retirement plan, like a 401k, or an IRA. And they take money out, because they’re in a pinch or a bind. They’re going to pay some sort of a penalty fee for doing that, and then also pay taxes on whatever is taken out?

BF:

Yeah. The penalty is 10% right off the top, across the board. Doesn’t matter. If you’re under 59 and a half, and it’s an IRA or a 401k, traditional IRA or 401k. Then you’re going to pay a 10% penalty right off the top. And then you’re correct in whatever amount you take out. And we can just make up numbers here, let’s say you take $20,000 out of it, because you’re in a pinch, and sometimes you have to do that. But what you also need to understand is, when you do that, for that tax year. That’s going to have to be declared as well, because IRS gets notifications of all early withdrawals like that. And unfortunately what that’ll be is that’ll be just like you made 20,000 extra dollars that year. So that’s going to do under the income, ordinary income. So yes, you’re going to probably, obviously owe tax on that as well.

So those are the situations you have to think about is it worth it, do you have to do this? Now like I tell a lot of folks, and we’ve all been in this position, sometimes you just have to do what you have to do. And you just have to suck it up so to speak, and just know that’s what you’re going to have to do, and pay. Now there are some provisions, like for instance, if you take money out of an IRA. And you put it back within, I believe it’s 60 days, I believe, it might be 90 but I think it’s 60 days. Then you can, you won’t have to pay the penalty or the taxes on that. But it is a very finite amount of time in which you can do that. And so most people, if they’re having to take it out it’s not a case of being able to put it back in. But there is that provision as well.

CD:

So that’s basically like borrowing against yourself? Or? I mean like do you pay any sort of interests on-

BF:

No, no. You know if it was a situation where, and again I’m just making up a situation, but let’s just say you had to, you needed $20,000 to pay something, but you knew that there was a $20,000 you were waiting for a $20,000 check to come in or something like that. So you knew you could take this out today, and then in a few weeks you’re going to get that $20,000 check and you can put it back in. So then there’s no penalty, there’s no you know. You take your $20,000 out, you do what you have to do with it, then you get the $20,000 check and you put it back in. And everything’s copacetic at that point.

CD:

Okay.

BF:

So yeah there’s, in that case there wouldn’t be … now, something you just brought up though. If you have a 401k, and you’re still working for that company, most 401ks allow you to take a loan against that 401k. So that’s an option to, but again, you have to actually be actively employed at that company with that 401k in order to do that.

CD:

Okay. Well you have managed to use the words plethora and copacetic, all within like a 30 minute period, so that’s great.

BF:

Well you know what honestly, I’ll drop the mic and just walk out, because I’m done. That’s the height of my vocabulary.

The bucket strategy of saving money

CD:

Well I guess kind of the bottom line is there is you want, if it’s truly for retirement savings, unless you just have to, which like you said sometimes there are situations where you do just have to. You don’t want to, it’s not like a savings account, where you just take money, there’s a, you pay to take that money.

BF:

Oh yeah. Yeah. Yeah and here’s, Carrie real quickly what I’ll say about that, because this kind of dovetails into, if I’m actually doing financial planning for folks and stuff, what I usually will illustrate and talk about is, and again this is certainly not original with me by any means. But I always talk about the bucket strategy of money. And so if you’re talking financial planning, the first bucket is what we call the emergency fund, or the cash fund or whatever. So what I will always council and advise people to do is if they don’t have that bucket so to speak, that’s job number one. Let’s fill that bucket up.

In some cases we have an intermediate bucket, and I usually say that’s for things that you know are at least two years out let’s say, but you know it’s an expense coming up. Whatever that may be, college, some something. That’s kind of an intermediate bucket.

So when I’m drawing this out for people, I always put a dotted line between the third bucket, which is the retirement bucket. Because of what you just said. We want to have those first two buckets in order so to speak, so we don’t have to go to that third bucket. Because of the penalty, because of the taxes, but also because hopefully that’s your long term plan, you know what I’m saying, so that’s kind of very rudimentary of just how you want to plan, you know when you’re talking to folks from that standpoint.

CD:

Okay. And I’m going to skip out of order just a little bit because this carries right onto what we’re talking about. If you’re carrying debt, and let’s, it can be a college loan, it could be your mortgage, it could be just you really bought too many shoes on Amazon last month, I don’t know if, I guess you can buy, I don’t know where you buy shoes.

BF:

You can buy anything on Amazon, so.

CD:

But let’s say … I mean the bottom line is, how do you set aside money for those like, those three buckets you just talked about when you’re not only struggling to pay this month’s bills, but you’ve also got some backup, some debt that you’re trying to pay down. Like any strategies, or I don’t even know if that falls in your purview, or if we need to call Dave Ramsey or what.

BF:

Well he’s certainly more the expert on this, and I think everybody’s pretty familiar with his philosophy and his plan, and I don’t disagree with his plan and philosophy at all. So that does in some cases fall under my purview, it really depends on the client or the person. If they want that kind of help and advice or not. But in general, you know what I, you know. We love analogies in this business, and so this is a very trite one, but it is true, and that is that old saying about you can only eat an elephant at one bite at a time. you just can’t eat the whole thing.

So what I try to tell folks is yes. We all have multiple responsibilities or multiple goals and objectives for our money. And what I always council folks is it all comes down to the cash flow. That’s really what it boils down to, even in retirement, it comes down to the cash flow. How much cash are we bringing in and then how much is going out? So, you can’t do it all at one time. and I’ll give you an example. I’ve had young folks come in here and talk to me and I ask them what are your priorities? I always like to find out. And if they’re young and have young children, almost invariably it’ll be well we want to save for college for our kiddos, and then we want to save for this, and then we want to save for retirement and all that. Well you can’t do all of that, unless they’re very fortunate and make a lot of money.

So you have to prioritize, that’s number one. And if you’re in a lot of debt, or you have some debt you want to pay off, then that needs to be one of the top priorities too. So my point is that there’s no right, exactly right or exactly wrong answer here, it’s all very individualized, so I tell folks. kind of jokingly when they come in to see me I say this is a no recrimination zone, because there’s, all of have things we wish we had done, we should have done differently and all that, but you’ve got to start today.

So you have to determine. X number of dollars are coming in, that’s it. That’s all the number of dollars coming in, so what is the best use of those dollars. Well obviously you’ve got to pay your mortgage or your rent, or whatever the case is, your insurance and all that, whatever that is. You’ve got to pay those things. So then is there any left over? Well if there’s some left over, this is where I’m talking about the cash flow, is you determine what’s the best use for that money. Is it to pay off a debt? Well then pay it off, this is what Dave Ramsay says pick one debt and pay that thing off, and then move to the next debt and all that. And there is some truth and utility in that.

And then that can carry over let’s just say that you’ve paid off that debt. Well now you’ve just increased your cash flow. you’re paying $300 towards that debt, it’s paid off now, all right. Oh boy, I’ve got $300 extra now, what do I do with that money? So then that becomes the next goal. Or the next bucket. Well, we need to build this up, or I’ll tell you right now, Dave Ramsay. If you ever listen to his program. If people come in, he’s so, I admire his focus, and if you call in and ask him a question. He almost invariably will say, Carrie, have you got your emergency fund? And you say well, no not yet Dave, but I’ve got to pay this pay whatever, he’ll go Carrie. Have you got your emergency fund?

Because he’s always coming back to that. And you know what, I get it, I understand what he’s saying, because until you have that first bucket where it needs to be or where it’s comfortable. You really can’t do some of those other things. Does that make sense at all? I mean.

CD:

Yeah, it totally does, and that’s wisdom. Yeah you got to take care of what you’ve got to take care of, and then as you can, don’t forget about the planning for your future piece.

BF:

Yeah, yeah.

What types of IRAs are available and what’s the best type for a self-employed person?

CD:

So let’s talk about IRAs, we hit on them earlier, there are some different flavors of IRAs, can you talk a little bit about that, and then what your recommendations are for self-employed people?

BF:

You bet. There are in general, probably most people are obviously familiar with what we call the traditional IRA. That’s just what it is, it’s a traditional IRA. It is tax deferred, so if you put money into that then if you’re doing it on the outside of, away from a 401k, then you’ll get to deduct some of that from your taxes of the year. Now there are limits on how much you can put into a traditional IRA. And that’s right now, it’s if you’re under 50 it’s, I believe it’s $5500 a year. If you’re over 50 you can do 6500, they call that the catch up.

So there’s traditional IRA, and then there’s a Roth IRA. Now the difference is, the Roth IRA is funded with post-tax money. So you get no immediate write off on that. But it can grow, it will grow, and then you can eventually take it out, tax-free. So the traditional and the Roth are the probably the two IRAs that most people know about. And there are, now with the Roth there are what they call phase out ranges, and that gets all, I won’t get into that because it gets a little more complicated. So you know in other words, depending on how much you actually make, what your adjusted gross income is, this is where you have to talk to your tax person of course. But those are the two most common.

Now for self-employed folks, and for what I think you’re kind of talking about, and this will depend a lot on is it truly a sole proprietorship, is it I’m just starting, like my wife for instance, she’s a one person shop for what she does

I’m basically a one-person shop for that matter too. So what we have, and what I recommend to people in that situation is what’s called a SEP IRA. SEP, and that stands for Self Employed Pension IRA. Now here’s what I live about the SEP IRA for a self-employed person. Is the limits on that are much, much greater than the traditional and the Roth that I just told you about.

Those limits go up to, they can go up to like 53,000 or 54,000 maybe this year dollars, or 25% of your total income, whichever is greater. So it gives you the option, now, most people when I tell them that they laugh and go yeah, I’m going to put $53,000 in it this year, but the point is if you were lucky enough to have enough money to do that then great. You can shelter that much money into a SEP IRA. The great thing about that too is that with a SEP IRA there’s not a lot of paperwork, it’s not like a 401k where there’s all kind of legal and ramifications and things that you have to do. So it’s just an individual IRA, but it’s based on the fact that you are a sole proprietorship or you have your own business or whatever the case may be.

Now if you have employees. And you have a SEP IRA, then you have to offer that to them as well. So that’s something again that gets a little more complicated. But I love the SEP IRAs for that reason. There’s also what’s called a simple IRA. And that’s, it’s similar to the SEP in a lot of ways, and allows you to shelter a little more money, but there’s just a few more differences in that, between that and a SEP and it’s, simple IRAs are, if you have employees, it might make more sense to do a simple rather than the SEP and all that, that’s just something that you’ll have to determine. But those are probably, for a self-employed person, I mean again, if they’re a sole proprietor, I think a SEP is a great way to go.

Because here’s the other thing Carrie, you’re not required with a SEP to, you don’t have to put money in it every month. You don’t have to put any money in it, you don’t even have to put any money in it for the entire year. That’s all up to you, so I love that flexibility. So let’s take a freelancer that whatever their work is, it’s very irregular pay. So you may have one month that you virtually make nothing let’s say. But then for whatever reason the next month is a huge month, you get a big giant paycheck or whatever. Well then you might want to say wow, I’m going to put some of this in my SEP, for this month, and then you might not make another contribution for the entire year. So it’s very flexible. And like a traditional and a Roth IRA, you always have until April 15th, or in this case like this year, April 17th, to do that for the following tax year. You know what I mean.

CD:

Previous?

BF:

Yeah, yeah. So now, we’re still in a position where, and I’ve got clients that are doing this actually right now, almost as we speak, they’re making contributions now for 2017. Because they can. Until the tax deadline passes. So yeah, I think again, there’s a lot of permutations to all of those, so again, the caveat there is don’t just, you need a lot more detail than those, but those, in general, the SEPs are certainly I think a great way for a self-employed person.

CD:

So you mentioned SEP and sole proprietorship. If you’re established as an LLC, or S corp or C corp, or partnership, however you’re established. You can still do that- But just if you have employees you have to?

BF:

Yeah, if you have employees, you’d have to, now there are some caveats to that too. I mean you know they have to be full-time, and you can kind of set those parameters. They have to be full-time, you can even say they’ve had to work for me a year and that type of thing. So there are some things like that you can put on there. But in general, again, you’d have to talk to a tax professional, but in general let’s say that whatever percentage you’re doing in your SEP, you have to also contribute that percentage to an employee’s SEP if you have employees. So that’s just something to keep in mind.

Now if they’re, like I have one client that it’s basically his company, people that he did work for him so to speak, are all contract employees, so they’re not true employees. So he’s able to have a SEP and he doesn’t have to have that, because they’re not full-time employees. Does that make sense?

CD:

Mm-hmm (affirmative). Same thing with insurance, just general benefits package, you don’t have to offer it to-

BF:

Yeah.

CD:

That’s why I islands in the stream, it’s good to be solo.

BF:

Yeah. Yes indeed.

CD:

Let me take a quick break and just say hello to those of you who are tuning in live, hello and welcome. Got some folks watching via Facebook Live, hello. Also some folks watching via Zoom, hello. If you’ve got questions, go ahead and start getting those in, I’ve got a few more questions for Bill and then we’ll open up for to take any questions that you have. And if you’re just tuning in mid roll, this is Bill Farley, financial planner slash advisor. Are those two words interchangeable?

BF:

We usually just say financial advisor I mean I do financial planning as well for folks but yeah. They’re somewhat interchangeable I guess you might say.

CD:

Well all right. So we’ve talked a little bit about kind of investment 101, a little getting familiar with some nomenclature. What to do if you’re transitioning from full-time employment with a company over to self-employment, like with your 401k. Now let’s just talk about just people, here we are, we’re self-employed. Where do you start? If you’ve got nothing. Let’s say you’ve filled your other buckets up, you’re ready to start investing in something, like is the SEP IRA the best kind of jumping off point?

Bill recommends SEP IRAs for self-employed investments

BF:

Well again, I think for some people it’s all going to depend obviously on their situation and how they’re set up and everything. But in general, if you’re self-employed and certainly it’s a sole proprietorship, and it can be an LLC, an S corp, however you have that set up. Then I think the SEP is great, yeah, I would almost always recommend that to a person in that situation.

And because of the flexibility, you know what I’m saying, you can open it up right now and then not make a contribution until a year from now, you know what I mean, so there’s no restrictions on that. But it gives you that flexibility like I was saying earlier, that if you did get some big check, or you made more money than you thought you were going to make and all of that, that you have the ability to tax defer, to shelter more of that income in a SEP IRA. Because as I mentioned earlier, traditional and a Roth have those limits of 5500 or 6500 if you’re over 50. So once you’ve hit that you’ve hit it, you know. So yeah, I think a SEP would be you know. A good place to start.

CD:

Well disclosure, I have a SEP IRA, because you told me to, Bill. So whatever you tell me, someone is listening in the universe-

BF:

You’re the one, you’re the one.

CD:

I got it. And actually just to your point, you still have up till April 17th, which is the tax due date this year, to make a contribution for 2017. And that comes off of your income. So say you’ve got $100,000 and in income, and you’ve got $20,000, I mean I don’t have 20,000 laying around. But anyway, let’s say you had that. You could dump some portion of that, I think for whatever percentage, you mentioned a specific percentage. But then it now looks like, let’s say you’ve got only 80k of income to pay taxes on for 2017.

BF:

Yeah, yeah. And that’s where you know what honestly again, and like I said, I’ll say this several times during this presentation. But that’s where it’s imperative that you have a tax professional. Certainly if you have your own business and such, because here’s what will happen, and this happens a lot this time of year. Is that I have clients, and I know people that this happens with. They go to their CPA. They do their taxes. And the CPA comes back and says okay, here’s the deal. If you put X amount of dollars in your SEP or whatever they your tax goes down, or you know whatever the case may be. So a lot of folks won’t even make a contribution to their SEP IRA, until around this time of year when they’ve already had their tax, you know because. You know I can’t tell you how many times I get calls from clients saying okay, my CPA says I need to put X number of dollars in my SEP and so that’s why it’s imperative to have someone to help you with that if you’re not proficient, in which, how can anybody be, they’re so crazy.

But anyway, so yes. What you said is true. I mean in general, all things being equal, yeah. If you made $100,000 and you could afford to put 20,000 in a SEP, then yes, your income now is roughly $80,000. So that’s a good thing, from a tax standpoint.

CD:

Until you get, I guess you get screwed when you retire and pull it all out, because then you pay tax on all of that. None of it was tax deferred.

BF:

Well, yes. But the reason IRAs were invented, and 401ks and all of that. Is the theory and the thought process behind it was that you wouldn’t pull it all out in one fell swoop. I mean the whole idea is to save this for years and years, let it build up, and then when the time comes, you would just take some out for income. Or income supplements just a little bit at a time, or a little bit a year, or a month, or whatever the case may be. So that you wouldn’t owe. I mean obviously if you’re pulling out $100,000 at one fell swoop then yeah, you’re going to get taxed pretty bad on something like that, but the thought is, rather than do that maybe you’re only taking out 10,000 a year, or 15,000 a year, whatever the case may be.

So that’s the thought process behind that. So yes, you would like not to have to pull it all out in one lump sum.

What about diversification?

CD:

Okay. Makes sense. So, [inaudible 00:44:36] investment philosophy when it comes to your mix, your asset mix and some of that you know. Maybe it’s you’ve got money in different sorts of IRAs, or you’ve got some and those are invested in mutual funds, or you’ve got some individual stocks. Like is there any sort of, and I know it’s different for everybody, but do you have kind of a general philosophy on … should you have your eggs in different baskets I guess so to speak?

BF:

Well what I would say is that, however and wherever you’re investing, if you’re investing, and everybody’s heard this word too, we wear it out in this industry, is diversification is the key. So and that actually talks about what you said about having all of your eggs in one basket. Now, as far as having different accounts, I don’t know, that’s kind of a personal preference I guess you might say. But in general diversification is going to keep you from, so in other words it would be financial malpractice so to speak if someone like myself told a client, let’s put all your money in this one stock, or this one thing. You see what I mean, because what if that one thing goes belly up? I mean we all know the horror story of Enron, and what happened to their stuff. Of course those poor folks couldn’t help that they worked for the company.

But yes, you don’t want to have all your eggs in one basket when it comes to how you’re investing. Now, as far as how you’re invested, and what you’re invested in, again that is going to be very individualized, but in general what I would say is the rule of thumb is, the younger you are, the more aggressive you can be, or you have the potential to be. So the thought process is that as you get, and there are funds that even do this, and you may have seen them, certainly in a 401k, they call it target date funds and all of that. And the way those are designed is, depending on the age you are when you started, is if you’re young, they’re going to start off a lot more aggressive. a lot of stocks and international and emerging markets and all those kinds of things. But then as you get closer to retirement that’s going to become more conservative.

Because the thought process is obviously, you want to be a little more conservative as you get closer to the actual retirement date when you might have to start taking some of this money out you know? So that’s in general everyone’s different, I mean I know some folks that they, even though they’re older they want to keep the pedal to the metal so to speak, and they have a very high risk tolerance. And they’re like no, I want to go for it you know. So again, it is very individualized for folks. But that’s where I would say in general just think of it from that standpoint. The younger you are, the more aggressive you can be, and then become a little more conservative as we get closer to the end date so to speak.

How often should you check in on the health of your investments?

CD:

Okay. That makes total sense. So let’s say that … we’re talking about long-term investments. And it will make you cry if you look every day, because maybe one day you’re down 5% or you know whatever, and another day you’re up, you’re like wahoo. So if you kind of want to set it and forget it, so once you’ve established your, say SEP IRA or something. And you pick out what funds you want to be want to invest that money in. How often should you check in on the health of those investments?

BF:

Well that’s a great question. And here’s what I’ll say. I tell people, I had a full head of hair until I had to start looking at this stuff every day, so you see what happens. And if you hire someone like me, if you work with someone, I always tell folks I say, this is what you’re paying me for so to speak, is I have to look at it every day. Don’t you look at it every day. Because it will drive you nuts. But in general, kind of going back to what I said a second ago.

Depending on your age and your time horizon, you know meaning that are you planning on retiring at the traditional retirement age, or are you going to want to retire early or whatever the case may be. Is the younger you are, or the longer the time horizon you have. You can afford to … set it and forget it to some extent, again, if you have a longer time horizon. Because, I mean this just follows logically. the market goes up and down. It just does and it always is going to, and we’ve had an unprecedented bull run, but even within that we’ve seen some fluctuation.

But the younger you are, the more you can withstand that. Because you have a longer time horizon. So I always, and people say buy and hold, or like you said, set it and forget it, that type of thing. I always amend that to say buy and monitor. Because I think the way the market is now, unfortunately, is that we we’ve seen it here in the last couple of months. What’s been going on in the market, certainly this last quarter and it’s extending into this quarter so far is, this volatility. And it’s exactly what you’ve just said, you’ve seen it. Just talking about the DOW. It’s been up 400 points, and then it’s been down 500, and then the next day it’s up 600, you know and all that.

That is not currently based on fundamentals at all. It’s unfortunately based on headlines and air tactics and love him or not, Donald Trump’s tweets, quite frankly, is it’s based on that kind of stuff. So it’s not based on the fundamentals. But that’s very frustrating because you might have some really good investments in your portfolio, but they’re still getting affected by that. So that’s what I mean by buy and monitor. I don’t think you want to ever like I have to watch it every day, obviously. I would never recommend that you do that. But I think in this current climate that we’re in, and the way the market is and it can be affected by so many outside forces, that you have to just buy and monitor.

CD:

Okay. And therein lies the beauty of paying someone like you to do it for you. If you don’t want to, I mean that’s a whole other realm of education to study. So if you don’t want to do that, hire-

BF:

Well, and this goes back to something you said earlier Carrie, and what I think alluded to is that again, the younger you are. You might not need someone like me, because again, you have a little more flexibility from the standpoint of being able to take volatility and ups and downs and such. But as you get older and as that account grows and it becomes bigger, and so now, the fluctuations are more impactful. That’s the time you might say that’s when you say I don’t want to roof this house. I want to hire somebody to roof it, you know what I mean. So it all depends. But you know some people love doing that, I mean some people get a kick out of doing it themselves and that’s fine too it really is.

How much does it cost to hire a financial advisor?

CD:

Well can you give me an idea, and I don’t mean this to be a personal question, but how does someone engage you, what should they expect fee wise, is it like a retainer agreement, or a per transaction, or kind of like a lawyer? Like every time you get on the phone, the clock is running?

BF:

Well I wish, yeah that’d be great. I like to just say, hand me a blank check and I’ll fill it in, I’ll be very, very fair. No. That’d be great. I’m teasing, if any of the regulators are listening!

Advisors have various ways that they are compensated and they have various business models. What I will tell you is that the industry is moving, frankly it’s moving for the most part to what’s called a fee based industry. Meaning that most advisors, a lot of them and I think it’s just going to become the norm as time goes by, rather than charging you know. In the old days and it’s still done this way, if you bought something there was a commission on it, or there was a sales charge. Or if I sold you a stock or a bond or whatever, then there was a hunk of that came off and went to me and that type of thing.

That was the traditional way, that’s called a brokerage type account, you know a broker. And that’s where the whole term broker came up and that type of thing. But now that the industry’s moving more towards this fee based model, and the reasons for that, there’s several. Number one is you may be familiar with the Department of Labor, this DOL rule that came out, I guess last yeah now officially. The fiduciary standard. Meaning that they, and I say they, the government would like for all financial advisors to have to legally act as a fiduciary, and that means doing what’s in the best interests of the client, without any regard to how we get paid or are compensated and that type of thing.

Now. I would like to believe, that most of us, act as a fiduciary in any event. But you know let’s face it, there are bad eggs in every industry and that type of thing, and so you know there are people out there that will just buy and sell things, because it does generate commissions or sales charges or something like that. So in a fee based environment, you don’t get that. It’s a flat fee. And it’s usually based on how much money you have in the account. So it’s based on assets under management.

But that’s very transparent. I mean Carrie, here’s what that fee is. And it’s usually a percentage whatever that may be, and all advisors can be different I guess on that. But it’s very transparent. And then in that way, that brings with it a legal requirement of you acting as a fiduciary for your clients. And so that’s another reason that this industry’s moving in that direction, but again, it’s every advisor can do it differently. But here’s what I would say, you always, you need to know what an advisor’s getting paid, and how they’re getting compensated. You just need to know that. And because, two reasons, number one you just want to make sure it’s makes sense. But number two, in the lack of that information, what I have found is people make up stuff that’s much worse than it is. You know what I mean like, you know what I mean. But yeah, I mean if an advisor is not willing to tell you what that is then that’s a warning sign.

If they won’t tell you how they’re getting compensated or whatever the case may be, so.

CD:

Okay. So it’s a fair question to ask, what are you going to charge me?

BF:

Absolutely.

CD:

As it would be I guess in any industry.

BF:

Well yeah. Exactly. And if you’re interviewing so to speak, advisors or you’re thinking about one, you absolutely need to ask that question, yep. If they don’t bring it up themselves, so yeah.

CD:

Sorry, I was. I had video burp I guess, I don’t know what happened. And I thought you were still talking and it turns out you weren’t talking, so my apologies for that random bit of dead air.

BF:

No, that’s quite alright.

If you hire a Certified Public Accountant (CPA), should they be located in your state of residence?

CD:

So let’s open up the floor for some questions. If you’re watching in Zoom, there’s a little Q&A app, I don’t know what that looks like for you but supposedly there is a Q&A app you can use to bring questions up. And also on Facebook you can just leave a comment on this live video feed. Now, we’ll warn you Facebook people that my Facebook is moving at about a snail’s pace right now, so I don’t know what visibility, hopefully I will see your comment if you post it.

I did see one from Rian Kinney. And her question was, is it important to, and I can’t see the question right now, I’m going off of memory. Is it important to have a certified tax professional in your state of residence?

BF:

Yes. I would say in general yes. Because while there certainly are national tax rules and laws that we all have to abide by, it can fluctuate a little bit among states. For instance, as we all know, in Texas we don’t have a state income tax. But the majority of states do have a state income tax. And so and there are some other quirks and permutations of states that is probably in there for different states. So I would say in general yes, I would probably recommend that you, if you’re going to use a tax professional I would probably recommend that you use one that’s in your state, yep.

Do CPAs and Financial Planners work together?

CD:

Okay. And would, if someone’s working, like do you refer people typically to accountants? Like there’s the financial advisor and the accountant, do they work in harmony?

BF:

Well great question. And the perfect answer is yes they should. But what I would say is that me personally, if I’m talking to a new potential client, or a prospect, or someone’s just come in to talk or whatever. One of the questions I will almost always ask them is do you have a CPA, or do you have a tax professional that you use. And if they say no, I will usually say well you should. And if you’d like some referrals then absolutely, I know some great ones and I’d be more than happy to refer you to some. some people feel like they can do it themselves, and you know again, depending on the complexity of their own personal situation perhaps they can. I’m always going to defer to a professional, to a CPA or someone like that, only because they’re going to be up on all the latest rules and regulations and laws and things like that.

So yes, and so in a perfect world I tell people, and again, this depends on the individual and the size of what we’re talking about here, and what their business is or whatever. But in general, you should probably have an attorney. And a CPA, and then if need be, a financial advisor, and those three need to work in harmony as you say, as much as possible.

CD:

Okay. That makes sense. And I’m sorry if you’re posting questions on Facebook, I just can’t see questions over there. It’s moving too slow. Too slowly. But I do appreciate you watching. Well Bill, since I can’t see other peoples questions I’m just going to ask a few more of my own.

So you’ve given a lot of great information, and when this seminar ends, people I’m sure are still going to have questions. Do you have any favorite resources, or recommended resources for learning more about sort of investment principles, or?

BF:

Yeah, you know. I mean obviously, there’s so many resources on the internet and some of the companies that we’ve talked about, Fidelity, Vanguard, T. Rowe Price, I mean we’ve all heard those companies. They all have a really strong web presence, and internet presence. And so I think if you’re wanting to find out some more detailed information, certainly I think you could probably find some on those websites. I’d highly recommend you check those out. I mean let’s face it we live in the world of Google so you can just Google something and see what pops up. So certainly I think that’s an option. And then beyond that, I mean if you want to talk to people like me there’s ways to find people that do that.

And I think most, I mean I know I do, and I can’t speak for all advisors, but you know I meet with everyone initially, you know with no pressure, no obligation or anything, just to if they need to find out if they want to work with someone like me, or if they need to work with someone like me, you know what I mean? So I think most advisors are probably do the same thing I would think, so I think there’s a lot of resources out there.

CD:

Well I, at this very moment I am flashing your personal cellphone number across the screen.

BF:

Oh. Oh wow.

CD:

No I’m just kidding. Okay so we got a question here.

If you’re a single owner LLC, do you open an IRA as a business owner or as the employee of the business?

So regarding SEP IRAs… If you’re a single owner LLC, is it opened as a business owner or is it opened as the employee of the business.

BF:

Right. And that’s a great question. SEP IRAs are always in the, they’re opened in the name of the person that is going to be contributing to that SEP. Now, the business, is contributing to it, but in other words, Carrie Dils, is the owner of the SEP. But whatever your, Carrie Dils Inc. or whatever, is the one that’s contributing to it, does that make sense? So the interesting thing about retirement accounts in general is they are always considered a single account. So in other words, you know you’ve heard of joint accounts and things like that. You can’t have a joint account with a retirement account. It is a single account. You have beneficiaries, but it’s always in your name.

CD:

Okay, that makes sense. Thank you Matt for a great question there. Well what would be, I want people when they close down this browser, or in the future if you’re watching this, to walk away with they’re going to do something after they watch this, otherwise what’s the point of obtaining new information.

What are some next steps or even a next step that you would recommend somebody take, regarding investing for their future?

BF:

Sure. Okay, first thing I’ll say is, here’s, and I say this all the time and I don’t mean it to be as trite as it might sound.

Save money.

I mean just, if it’s $50 a month, I mea just save money. Because we all need to, and that’s a good habit to establish. Now again, if you’re in a 401k it comes right out of your check and you never see it and all that. So I recommend you just save money in some form or fashion. However you can, however much you can. It doesn’t matter if it’s not a lot, initially.

So that’d be number one. Just save money. Even if it’s just in a savings account for now, just save money. So that’d be number one.

Number two is, I would just say that you need to determine, or next steps would be kind of eluding to what I was talking about those buckets a minute ago. So I tell people that the best thing you can do is get a handle on your income and your outgo. Now most people don’t want to have to do a budget where they sit down and literally write down, I bought some gum today, and all that. That’s the great way to do it, and do it for a month, I think that’s great. But in general we all have a pretty good idea of what our outgo is. So I’m just going to use some round numbers here to give you an example.

So one way, I call this easy budgeting. And this certainly works for couples, it can work for singles, it doesn’t matter. But what I say is, open up an account at the bank, where all of the income goes into. So if it’s couples, if it’s a dual income family, whatever the case is. All the income goes into that bucket. And again, for round numbers, let’s say that’s $10,000 a month to their [inaudible 01:06:06], so 10,000 goes into that account. Then you open up a separate account, where you’re going to pay your bills out of. And let’s say, most of us have a fairly good idea of what our bills run every month. So let’s say we think it’s $5000 a month or whatever. So you transfer five into that account. And that’s where you pay your bills.

Well one of two things is going to happen in that case. You’re either going to pay all your bills and still have a few shekels as they say left over in that account, or you’re going to run out of money before you run out of month as they say. In which case okay hm, maybe our expenses are more than 5000, or maybe there was an extraordinary expense this month. But the point is, it goes back to what I said earlier about cash flow. If you can do something like that, and get into a habit of, this account’s where we pay the bills, so that if after a few months of doing that there’s a few dollars left over, that’s great. Now you realize we’ve got a few dollars left over, what do we do with that extra money, you know what I’m saying? So now you’ve increased your cash-flow so to speak.

That’s just one way to do it, but I think you’ve got to have a handle on income and outgo, because you know what the truth is we all spend a lot more money than we think we’re spending. We’re all guilty of that. So those are the two things I say. Get a handle on that, and then save money.

Wrap-up

CD:

That’s great, great advice. Well thank you Bill so much for coming on and taking your time to share your wisdom and experience with us today.

All right, well thank you to you guys who were able to tune in live, and if you’re watching this as the replay I’m thrilled to have you as well. So you can check out more over on Facebook, just search for the group The Fearless Freelancer, where we’ve got great resources going, all sorts of resources going, for people who are freelancing or self-employed. Until then I’ll see you guys later.

Additional resources for freelancers:

I’m passionate about helping freelancers find success, regardless of industry. I run a free Facebook group for freelancers and would love for you to join us. It’s a place where you can meet like-minded people to discuss common problems and goals.

If you’d like to short-cut your learning curve, I also offer freelance business courses based on my 20 years of experience.

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