The Way to Wealth

Ben Franklin quote

Today we are graced with a blog post by a dear and close friend of mine, Benjamin Franklin. Ben is legend in his financial advice, especially as it applies to frugality and debt. You might even say Ben is the father of the current FIRE (financial independence/early retirement) movement.

What may strike readers strange is that Ben Franklin also retired early. He avoided debt as much as possible and paid off what he borrowed as soon as possible. He invested his excess funds in what he understood: print shops. Ben made a fortune at a relatively young age which allowed him to retire to a life of service to his country.

In 1758 Franklin published in his Poor Richard’s Almanac a preface in what was called Father Abraham’s Speech. In this preface he brought many of the wealth maxims of the almanac over the years together. The writing was so powerful it was later published as a pamphlet with the title, Way to Wealth.

Never before or since has such financial wisdom been shared. 

Unfortunately, Ben Franklin lived at a time when the English language was in flux. People just don’t understand anymore what, Many a Little makes a Mickle, means anymore. Caught between Early Modern English and Modern English, reading Ben Franklin is only slightly easier than reading Shakespeare at times.

The message is too important to leave to history unread and unstudied. Therefore, I have decided to translate Father Abraham’s Speech, aka, The Way to Wealth, from Early Modern English into Modern English. I hope you find Benjamin Franklin’s words as important to you as they have been to me. Enjoy.

Ben Franklin quote

It has been understood for a long time that the second million is always easier than the first. And that money has a habit of growing faster than you think.

The Way to Wealth

By: Benjamin Franklin (as translated by Keith Schroeder)

A government would be considered intolerable if it taxed people 10% of their time in service of the government. Yet idleness taxes many of us much more if we consider all the time spent checking email, our phone, social media and news feeds. All these activities add nothing of value to our lives or to those around us and is no worse than the government taxing you a percent of your time.

Idleness is harmful to good health. Medical research provides proof it absolutely shortens lives. Laziness, like Rust, destroys faster than Work wears things out. A used key is always shiny. If you want a long and fulfilling life, then do not waste time! From the richest to the poorest, all have the same amount of time in each day. Do not spend more time than necessary sleeping. The best did not become the best by sleeping in late. You will have plenty of time to sleep when you are dead.

If time is our greatest possession, then wasting time is our greatest crime. Wasted time is never returned. What we call “time enough” ends up as “there is never time enough.” And still we waste this precious gift. 

Knowing the value of time, we should treat it as the precious gift it is. We need to do the things we were created to do, and with purpose. Our goals are attainable if we remain committed. Laziness makes our goals more difficult to achieve, while hard work makes them easier. 

Greet each day early and with excitement. Starting your day late forces you to run hard all day, only to barely meet your day’s goals by late evening, if at all. 

Laziness travels slow. Poverty soon overtakes the lazy. Work your business; do not allow your business to work you. Yes, early to bed, early to rise, makes a man healthy, wealthy and wise. (That needs no translation.)

Hard work does not wish for success. Living on hope will ends in poverty. Stay motivated on the tasks set before you and you will achieve your goals.

There is no free lunch. Sometimes things will get very hard. There are no gains without the pains. 

If you have a business, trade or side hustle you must diligently work at it. Planning is vital. Work the plan. Modify the plan when needed. The same applies to early retirement goals. Build a plan and work it every day.

Luck favors the prepared and those who work hard toward their goals. Do not dream of winning the lottery or an inheritance from a rich uncle. God favors those who work hard. Perseverance is the mother of good luck.

Today is more valuable than tomorrow. One today is worth two tomorrows. If you have something that needs attention tomorrow, do it today.

You would be embarrassed if the boss caught you sleeping on the job. Much more important, never catch yourself wasting time or sleeping on the job.

Persistence works like magic. No raindrop will weather a mountain. Yet, storms over the ages wither a mountain to a plain. One swing of the ax will not fell a tree, but a steady rhythm eventually will drop the mightiest of trees.

Do I hear you say that I have provided no time for leisure? If you employ your time well you will have time for leisure. If you do not know what to do this minute, do not throw away the whole hour as well. Plan and prepare! Leisure is time for doing something useful! Persistent people gain this leisure; lazy people never. A life of leisure and a life of laziness are at opposite ends of the spectrum.

Work your business and financial wealth and your business and financial wealth will take care of you. If you have business to get done, do it now. If unable to do it now, hire qualified people to do it for you.

If you desire a faithful employee, one that you like; employ yourself.

Putting off your responsibilities leads to big trouble. Neglect routine maintenance on your vehicle and the vehicle is lost; without your vehicle the dream job offer is lost (or investment opportunity); without your dream job or the profitable investment opportunity, early retirement is lost, all because you neglected to maintain your vehicle.

Hard work is vital, but we must add frugality.

The cost of bad habits will cost you decades of retirement. You might think a $5 cup of coffee, or a soda, or a quick smoke is of no consequence. The latest gadgets, fancy clothes, cars and the latest iPhone may seem no big deal. But remember, many small expenses add up to one large one.

Be leery of small expenses. A small stone in a jet engine can crash a plane and the mightiest ship is sunk, even if slowly, from a small hole. Demand not luxury of everything or you will end up a beggar. Do not start building a home without a plan or you will make the investment and the wealthy banker will end up owning your home.

Buy things you don’t need and before long you will not have the money to buy necessities.

If you know the value of money, why do you beg for others to borrow you more?

Lying is only the second worst vice; debt is the first. 

Lying and debt are partners. Honest people put their integrity on the line when they are dealing with debt. The bigger the debt load the greater the risk to your integrity. 

Poverty drives meaning from a man’s life and destroys virtue. Even modern ears understand Ben Franklin when he said, “It is hard for an empty bag to stand upright.” Where there is poverty, there is crime. Poverty does not bring the best out of people. Wealth is man’s true flowering. Mankind is designed for wealth. We shine brightest when in possession of wealth.

In conclusion, experience is the best schooling you will ever get, but the price is high. Only a fool refuses to learn from other’s experiences.  If you can not take advice, you can’t be helped. Listening to the voice of experience is the surest way to avoid the painful lessons learned from experience.

 

More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here.

Blockfi pays high interest. (Currently 8%)

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

18 Tax-Free Sources of Income

Not all income is treated equal. Ordinary income is treated the worst by the tax code. Long-term capital gains are granted preferential tax treatment. And some income is excluded from income entirely. 

When planning for retirement or any financial goal, taxes play a vital role in how quickly the goal is reached. The more tax-free income you acquire the better.

The tax code in the U.S. taxes all income unless specifically excluded by the code. Many sources of tax-free income is limited in scope, applying to very unique and special situations.

The list below contains 18 sources of federal tax-free income. States usually follow federal, but may have more or fewer items of tax-free income. Every reader should find several types of non-taxable income available to them from the list. 

What is not on the list is phantom tax-free income. Loans are a prime example. Loans are not income! They are a liability. Cash-value life insurance is another tool sometimes touted as providing tax-free benefits when the touted tax-free benefits are a half truth (usually a form of borrowing your own money).

You can also save and/or print out a shortened version of the list by clicking the image below. Keep this handy guide close so you don’t miss any of the juicy opportunities for tax-free income.

18 tax-free sources of income. Click on the image to open in a separate page for easy download and printing. Note: This placard only provides the highlights. It is important you review the source material in the blog post for the details on the non-taxable source of income.

Credit Card Rewards

Credit card cash back and bonus awards are tax free. So are the airline miles. The IRS considers them a rebate, treating the bonus as a reduction in the price paid for the products and services purchased with the credit card.

If you enjoy playing the credit card game you might even get more cash back than you spent using the credit card. And it is still non-taxable.

WARNING: While credit card rewards are tax-free and not included in income or reported on your tax return, bank product bonuses are considered interest income. You will get a 1099-INT from the bank if you received a sign-up bonus for a savings or checking account.

 

Life Insurance Proceeds

If you are the beneficiary of a life insurance policy, the income is not reported on your tax return or subject to income tax. The proceeds must be from the death of the insured (§101). Interest paid on the proceeds after the insured’s death is taxable.

Life insurance might be included in the insured’s estate.

Accelerated death benefits are excluded from income if the ensured is terminally ill, where death is expected within 24 months. A physician’s certification is required.

Accelerated death benefits for the terminally ill, used for long-term care services, are also excluded from income. Per diem benefits over $400 per day in 2021 are included in income.

 

Insurance Claims

This one is tricky. What appears to be tax-free income might really be an adjustment to the basis of the property. 

What is clearly tax-free income from an insurance claim? Damages paid to you due to physical injury or sickness, including emotional distress related to the injury (§104(a)). 

Medical reimbursements not previously deducted are excluded from income. 

Insurance claims paid in excess of basis of the property damaged is included in income. A totaled auto is usually excluded from income unless the value of the vehicle increased since you purchased it and the claim exceeded basis. Vehicles used in business have a reduced basis; some of the insurance claim for property damage might be included in income.

Property damages to your home (fire, burglary) paid by insurance are excluded from income unless the payment exceeds basis or is used to replace the damaged, destroyed or stolen items. 

Note that insurance proceeds from lawsuits, like punitive damages, are included in income.

 

Health Savings Account

The HSA might be the best thing going in the tax code. 

If you have an HSA qualified health insurance plan you can make a deductible contribute to an HSA savings account. The contribution limit for 2021 is $3,600 for self-only coverage and $7,200 for family coverage. All gains are tax-free if used for qualified medical expenses. (Generally, if the medical expense can be claimed on Schedule A the expense is qualified for payment from your HSA.)

The HSA savings account can not be used to pay medical insurance premiums. But can be used to pay Medicare premiums when you reach age 65. 

 

Roth IRA and Roth 401(k) Gains

Roth retirement plans are funded with after-tax income, but grow tax-free.

Note: Contributions to your 401(k) can either be traditional or Roth. However, the employer’s match is always a traditional contribution.

 

Long-Term Capital Gains, Part 1

There is currently a high cap for long-term capital gains (LTCG) taxed at 0% ($80,800 for joint returns; $40,400 for single and married filing separately returns; $54,100 for head of household returns for 2021).

This means if your only income is from LTCGs in 2021, those LTCGs can be $105,900 ($25,100 standard deduction + $80,800) before you begin paying tax.

When other income is involved the amount of LTCGs in the 0% tax bracket is reduced. A back-of-the-envelope way to think of this is to add all your income, putting the LTCGs at the top. Any amount under the threshold is taxed at 0%. Some readers would be wise to tax-gain harvest if they have an unused amount of 0% tax bracket for LTCGs.

 

Long-Term Capital Gains, Part 2

If you want to get serious about avoiding taxes on your long-term capital gains, consider moving to Puerto Rico.

Long-term capital gains earned while a bona fide resident of Puerto Rico are exempt from federal income taxes. (Puerto Rico taxes may apply.) 

A bona fide resident of Puerto Rico can still work remotely and keep their investments and real estate in the U.S. as long as you don’t keep a tax home outside Puerto Rico. The catch is that you must be a bona fide resident of Puerto Rico. If you are interested in this tax strategy I recommend reading the link in this paragraph.

 

Foreign Income Exclusion

Up to $108,700 (for 2021) of foreign income can be excluded from income. You must be physically present in the foreign country or countries for at least 330 full days of 12 consecutive months.

Opportunity funds can still save your serious tax dollars by breaking the income into more than one year, converting short-term into long-term capital gains and, until the end of 2021, a 10% reduction in the capital gain.

Opportunity Funds

This tax strategy made a splash when the Tax Cuts and Jobs Act of 2017 first became law and is not heard of much anymore. That is too bad because there are still two serious tax plays to reduce taxes using opportunity funds (OF).

OFs are a way of deferring capital gains. No like-kind exchange is required. Simply invest the gains, or a portion thereof, into an OF within 180 days of realizing the gain and exclude that portion of the gain from your taxes. There is no income limit or limit on how much capital gains can be deferred.

A portion could become tax-free in five years with a bit more in seven years. The seven year window is closed and the five year window closes at the end of 2021, unless Congress acts to extend the deadline (not expected).

Also, OFs can turn a short-term capital gain windfall into a long-term gain. If the gains are invested in an OF within the 180 day window, the gain is deferred. If held in the OF for at least a year and a day you now have a long-term capital gain, along with the lower tax rate for such gains.

The second tax strategy is a timing issue. You are not required to invest all your gains into the OF. Therefore, you can have some of the gain taxed in the current year and the remainder in a future year of your choice up to December 31, 2026. At the end of 2026 the gains are added back into income regardless if you take your money out of the OF. 

You can read more about OFs here.

 

Employer Benefits

Smart employers compensate their employees with a litany of tax-free fringe benefits. The employee gets tax-free income while the employer gets a full deduction. Here are just a few of the possibilities:

  • Retirement plan matching or profit sharing
  • Health insurance
  • Noncash gifts such as a holiday ham
  • Up to $50,000 of group term-life insurance
  • HSA and MSA contributions
  • Adoption assistance
  • Qualified transportation 
  • Retirement planning services
  • Qualified dependent care benefits
  • Employee discounts of goods and services normally offered to clients
  • Education assistance

There is one more monster tax-free fringe benefit employers can offer for a limited time. The CARES Act expanded, and the Consolidated Appropriations Act extended, the education assistance benefit to include student loans through 2025. Up to $5,250 of student loans payments are excluded from the employee’s income while the employer enjoys the deduction. Note: Educational assistance is capped at $5,250 for all educational assistance, including student loan repayments.

 

Workers’ Compensation Benefits

If you are injured at work, the workers’ compensation paid for lost wages, medical expenses and settlement are excluded from income. This includes workers’ compensation paid to survivors. (§104(a)) 

Survivors of public safety officers killed in the line of duty receiving a government plan annuity exclude that income. (§101(h))

Sick pay and on-the-job injury for railroad workers is excluded from income. (§105(i))

No-fault car insurance benefits for loss of earnings or earning capacity are excluded from income.

 

Foster Care Stipends

Foster care stipends are excluded from income if there is no profit motive. Expenses are not deductible unless expenses exceed the stipend. The excess expenses are a charitable deduction.

 

Caring for a Disabled Family Member

The Caregivers Act provides resources to pay people caring for a disabled family member. The wages paid in such situations can be excluded from income. The disabled family member must live with you. 

This Medicare funded program attempts to keep disabled persons out of nursing home facilities and with their families. You will get a W-2, but no income will be listed, only the total payment in Box 12. 

The author has personal experience with this. Frequently you will receive a W-2 claiming the income as reportable. Have the organization paying the wage amend the W-2. Normally future W-2s will accurately show no income to include on your tax return. If the W-2 shows a wage and you can not get it amended, include it in your tax software and mark the W-2 as not included in federal income.

 

Disability Benefits

Generally, if you pay the premiums with after-tax dollars for a disability policy, the benefits are tax-free. If your employer pays the premiums the benefits are taxable. 

Tax-free income in retirement is the best kind. With a modest amount of planning, your tax liability can tax a serious hair cut.

VA Benefits/Military Pension/Social Security

VA payments to veterans and their families are excluded from income in the following situation:

  • Pensions for disability
  • Disability payments
  • Subsistence, grants, education, training, insurance proceeds payments
  • Dividends and death gratuity

Social Security benefits are either fully or partially excluded from income. Regardless of income, 15% of Social Security benefits are excluded from income. You can determine the amount of your taxable Social Security benefits here.

Generally, none of your Social Security benefits are taxable if your combined income is $25,000 and under for singles and heads of household; $32,000 for joint returns.

Up to 50% of benefits are included in income if your combined income is between $25,000 and $34,001 for singles and heads of household; $32,000 and $44,001 for joint returns.

Up to 85% of benefits are taxable if income is above $34,000 for singles and heads of household; $44,000 for joint returns. 

 

Scholarships, Fellowships and Tuition Discounts

§117 states amounts received by a degree candidate used for tuition and fees required for enrollment, books, supplies and required course equipment is not taxable.

Reduced tuition when the student or parent of student in an employee is not reportable income.

Reduced tuition paid to a graduate student performing teaching or research activities is not considered payment for services.

Degree candidates receiving amounts from the National Health Services Corps or Armed Forces scholarship program for tuition, fees, books, supplies, and equipment is not taxable, even if for services.

 

Municipal Bonds 

Municipal bond interest is not taxable on your federal tax return. However, the income can affect the taxability of other income in some instances (Ex. Alternative Minimum Tax)

Municipal bond interest is also excluded for residents of issuing states, with some exceptions.

Capital gains on municipal bonds are taxable.

 

Gifts and Inheritances

Gifts and inheritances received are not included in income. 

However, the giftor might be required to file a gift tax return.

If you inherit a traditional retirement account or non-qualified annuity you will include the income on your tax return when distribution are received.

Doing good can be good for your wallet. Some caregiver and volunteer work is excluded from income.

Volunteer Income

Most income from a volunteer organization is taxable income. There are a few exceptions:

  • Payments from the Peace Corps for living expenses
  • Supportive service payments and expense reimbursements received from the National Senior Services Corps programs or from the Service Corps of Retired Executives (SCORE)

 

As I researched this blog post I came across additional tax-free income opportunities. The 18 sources of tax-free income listed above were common enough to make the list. Non-taxable income is frequently very specific in nature. That is a blog post for another day.

Be sure to subscribe (link at the top of this post) and comment on which sources of tax-free income you use or ones that I missed.

As always, thank you for visiting.

 

More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here.

Blockfi pays high interest. (Currently 8%)

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

10-Step Map for an Early Retirement Plan

Retirement is the one universal goal. Some plan for a traditional retirement while others dream of cutting their own trail sooner. Early retirement is a worthy goal and achievable with a modest amount of planning.

There are 10 things to consider before you submit your resignation. If you cover each issue properly early retirement will fulfill your dreams. Poor planning could put you back into the workforce.

The map below is a handy guide for your journey. Click on the map to enlarge and print. This map, along with the information below, can have you enjoying early retirement in record time.

Map and considerations for Early Retirement

 

Retire to Something, Not from Something

The first step in your early retirement plan is to make clear your future plans. In my accounting practice I see people as they enter retirement and the aftermath. Those that do it right are happy, well-adjusted and have fun. Those without a proper plan age rapidly.

Your current pastime isn’t a plan. If you enjoy fishing or golfing or travel or reading… Fishing or golfing all day every day soon turns a pastime into a replacement for the drudgery of work. Tiger Woods has a job golfing. Unless your plan is to merely change jobs, you will need more.

Doing the same thing day in and day out becomes monotonous. Even the thrill of travel grows old for many. 

List all the thing you enjoy doing. Your list needs to be long so you have plenty of opportunity for variety. 

“Retire to Something” is in the center of your early retirement map because everything else revolves around it. Where you live, your social life, spending and daily life activities need a mixture. Of course, some activities will dominate. If travel is your passion you will naturally do more of that. Fishermen will wet a line frequently. Golfers will hit the links as often as the schedule permits.

The worst thing you can do is retire from a job. You may hate your job, but if the only goal is to leave said job, your plan is completed almost instantly. Now what do you do?

Standing around wondering what you do after you retire is a bad plan. Instead, retire to the life that excites you. I can’t tell you what that is. Only you can list the things important to you. Take time. Weeks if necessary to clearly outline what you most want in life. This is the foundation of your plan.

 

Income Sources in Early Retirement

Retirement from traditional work does not mean an end to income. 

Your liquid net worth is how you will fund your early retirement. Dividends, interest, capital gains, the sale of investments and other sources of income determine the liquid net worth level needed to pull the trigger on retirement.

Funding your entire retirement in advance is unnecessary. The 4% rule says you can draw 4% every year from your nest egg without running out. If your spending (see budgeting, variable spending and contingencies below) is $40,000 you need at least $1 million liquid net worth to retire. You actually need a lot less according to this article. 

Because you are planning an early retirement you likely will have more than just passive income. Perhaps you have rental income from investment property. You may find part-time work to fill part of your day. And side hustles are always an option. In fact, you may plan your early retirement around fulfilling a business goal, such as opening a restaurant or consulting business.

The higher your income in retirement, the less liquid net worth you will need to retire.

 

Budgeting Your Life

Some expenses go down, other up, when you retire early. Job related costs will decline. Hobbies, travel and activities you now have time to enjoy are new expenses that need to be accounted for.

Most people don’t want to spend a lot of time on a budget. Neither do I. To build a reasonable budget in under an hour add up normal monthly expenses: utilities, rent, taxes, mortgage, food… Once the key areas are covered, add another 15% or so for unbudgeted expenses. 

Add to your bare-bones budget line items for new activities that cost money: travel, books, entertainment, golf fees, fishing equipment… 

Entering early retirement without debt is preferable. If you have a mortgage or other debt, account for the expenditure in your budget. Debt is the one thing you can’t reduce unless you pay off the loan. The sooner you are debt-free the better.

If your budget shows a shortfall, consider these frugal tips to cut costs. Modest frugality can bring retirement home sooner and make managing your financial life in retirement easier.

 

Healthcare

My American readers know this is the most difficult issue when considering early retirement. Once you reach 65 Medicare kicks in. Until then you need to plan your medical insurance costs and medical expenses.

The news isn’t all bad. The Premium Tax Credit can pay for most or all of your health insurance costs. You will likely have a lower taxable income once you retire. That means you may qualify for the Premium Tax Credit.

Healthcare costs are lower in other countries. If you live abroad healthcare costs may become a minor issue. With more time available in retirement, you can plan medical checkups and procedures around travel plans. Medical tourism can cut your medical cost up to 90%.

There is also an alternative to traditional medical insurance. Health sharing is a growing field as more people look for reasonable options. You can read more here if this is something of interest to you.

 

Variable Spending

There are three phases to your early retirement spending. 

  1. Before Social Security and pension income
  2. With Social Security and pension income
  3. Required distributions from traditional retirement plans

Your savings will carry a heavier load until Social Security benefits begin. Keep in mind some expenses, like medical insurance, get more expensive as you age. Plan for higher insurance and medical costs by age.

Social Security covers many of your expenses, reducing the demands on your savings, once it benefits begin. 

Once you reach 72 the IRS requires you start taking money from your traditional retirement accounts.

Taxes also play a role. Property taxes generally go up over time. Renters also face rent increases. The good news is that taxes go down with a modest amount of planning. This blog is filled with ways to reduce your tax bill; don’t be afraid to use this blog as a resource. Take advantage of the 0% tax rate on long-term capital gains under the threshold. Only profit from asset sales is added to income so it easier to qualify for the Premium Tax Credit. 

Your plan needs to include a heavier draw from personal resources prior to Social Security. It is okay to draw down funds faster than the 4% rule early on as Social Security will cover a portion of expenses later. 

 

Bucket List

Now that we have the money issues out of the way we can focus on the fun stuff we want to do once we ring the bell on traditional labor.

A bucket list is vital. A good bucket list takes time to develop and evolves over time. List all the thing you want to do, the places you want to see. 

Now prioritize your list. What is a must-do, must-see item? Mark all those with a “1” or “*”. 

Remove items that sounded good when creating the list, but really don’t excite you. (Yeah, it would be great to skydive, but on further thought, I’m not dying to do it. (Pun intended.)) The opportunity may arise where you get to zipline or skydive or whatever is on your list but not marked as urgent. The goal is to have a ready list of priority items you want to do.

Edit your list as necessary. You are allowed to change your mind as often as you want.

Arenal Volcano, Costa Rica. Surprisingly, I slept well the night we spent at the foot of the active volcano.

 

Rent or Own

Renting or owning your living arrangements will reflect heavily on your budget. Owning requires more time and possibly more expense. Renting is usually cheaper because you rent a smaller space than you buy.

Do you like tending your yard? Household maintenance? If not, a condo or renting may be the better choice. 

Owning a home also brings mortgage considerations into play. 

Budgeting for rent is a simple one line entry. Home ownership requires a sinking fund or adequate resources for roof repair, property taxes, furnace, AC, etc.

There is no right choice. You can even change your mind later. Just consider the responsibilities with owning or renting.

 

Domestic or Abroad

Where you live makes a difference in your cost of living. The cost of living within the United States varies widely. The coasts and parts of Colorado will put a heavy demand on your financial resources. Interior parts of the nation have a lower cost of living. 

Living abroad can offer an even lower cost of living. It has to be something you want to do and the location makes a difference. Paris might not be the best low-cost choice.  Costa Rica might make the list.

Research each location you are considering. Due diligence is required. Review the cost of living, laws, culture. With rare exception, renting is better than owning when living abroad. If you do plan on owning property in another country, be sure to consult with a legal professional competent in the laws in the location you are considering. An extended vacation in the location in question is also a good way to get a feel for what life will be like living there. Internet, food and security will be different than you are accustomed to.

Making new friends is the best part of early retirement.

Making new friends is the best part of early retirement.

Social Life

Early retirement has some disadvantages. Most of your friends and acquaintances will still be working. They will have less time than you to explore exciting activities.

Traveling allows you to meet new people. You may also miss people back home. 

Considerations: Will you make new friends for new activities? Is volunteering something you enjoy?  Who do you want to spend time with?

Your social life will be radically different from when you worked a traditional job. What was an activity you looked forward to to unwind is now just another part of the day. Keep you mind focused. Build a schedule. The comradery found in a work environment can be replaced with new relationships.  

People tend to build friendships with people near their age and with a similar background. Early retirement allows you to break through this border and create friendships with people of different backgrounds and age. Done with an open mind, this one benefit or early retirement can provide massive amounts of learning and pleasure. Old people can be a lot of fun when you get to know them.

 

Contingency Planning

Our final point in planning for early retirement is a warning. Life will happen. How will you handle unlimited time with family and friends? 

The kids still need an education and a chance to grow up and live their lives. If children are involved there are additional considerations. How will they complete their schooling? Are medical services for children available? What about your children’s friends? Are your children on board with the lifestyle change? 

Illness or the death of a significant other is a possibility. Serious illness will lay a heavy burden on the non-ill partner. Prepare a plan for potential issues. Current medical condition plays a role. In the case of death, the deceased needs to come home. That is an unplanned expense. Illness and death need addressing prior to travel or living abroad. Involve family and friends back home. 

Give consideration for financial loss. Theft or a market decline can shift the dynamics of your early retirement plan. Build a cushion into your plan. Don’t put all your eggs in one basket. A theft of a financial account should not be your entire financial resources. 

Your contingency planning will grow and evolve with time. Your personal situation is unique to you. You may need certain medication. That requires additional planning. Bills can be set on auto-pay. Insurance can play a vital role in protecting you at home and on the road. 

Plan for the best, prepare for the worst.

 

Every road map needs flexibility. Road construction requires a change of course. An early retirement map needs just as much flexibility. I can give you the skeleton to build on, but you need to fill out the flesh and blood.

I can’t, and shouldn’t, tell you what to do. Your plan needs to be you. All I can do is provide a framework and ideas. 

And always change your plans as your situation and interests dictate. You are not wedded to your first plan. There is a reason why quality work has a pile of editing under the hood. With a flexible plan early retirement is more than a dream; it is your reality.

 

More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here.

Blockfi pays high interest. (Currently 8%)

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Form 3115: Applying a Cost Segregation Study on a Tax Return

  • In this article we will discuss how to apply a cost segregation study on a tax return.
  • We will show the step-by-step process of applying a cost segregation study in the year a property is purchased. 
  • We will show the detail on applying a cost segregation study on property owned and placed in service prior to the current tax year.
  • Example filled-in Form 3115 and other tax return forms provided for reference. 
  • Depreciation adjustments and catch-up calculations discussed with examples provided.

This blog post is designed as an example on how to apply a cost segregation study on a tax return. It is recommended you bookmark this page for future reference if you prepare tax returns with a cost segregation study. Filled-in forms with examples are used as a reference to help you prepare an accurate return when a cost segregation study is involved.

All images enlarge in a second window by clicking on them. You may print out the images as a helpful tool in preparing your tax return. You can make calculations right on the printouts. This post will be updated when the rules change for cost segregation studies; refer back to this page anytime you deal with cost segregation. 2020 tax forms and the latest release of Form 3115 were used in the examples in this post. The tax forms will not be updated unless the reporting rules change.

If you want to learn more about how a cost segregation study works and how much it can save you in taxes you can review this post  and here if you want a very short review on how to apply a cost segregation study on a a tax return.

 

The Cost Segregation Study

A cost segregation study can run 30 pages or more. For tax preparation purposes, the pages you are interested in are the Cost Detail and Cost Summary pages. Depending on the property, there can be multiple pages in the cost segregation study that apply to these different area of the property. Example: there might be a Cost Summary and Cost Detail page for the apartments on the property and a summary and detail for a detached garage area. 

The example used here has just one Cost Detail and Cost Summary page. If multiple pages exist you just need to go through the process in this post for each detail/summary.

This is what a cost summary will look like in a cost segregation study. The summary will only show the depreciable assets; land is not depreciable and is therefore usually excluded.

 

The Cost Summary page in the cost segregation study is straight forward. It lists the total building cost with an allocation between class lives. 

This is enough information to complete an accurate tax return. However, the Cost Detail also plays an important role.

 

The Cost Detail breaks each class life down to each component. This is important information you will need if any component is taken out of service or replaced.

 

Some tax professionals like to use the depreciation adjustments used in this post on every item of each class life. This is helpful when a component is taken out of service or replaced.

Example: If a roof or flooring are replaced before the asset is fully depreciated the remaining basis is deducted at that time. If you entered each component separately the process will be easy. If not entered separately you will need to keep a note in your files, along with the Cost Detail, to handle the calculations of replacement when they occur. 

Many times replacing a roof or flooring is a repair expense instead of an improvement. This allows for a deduction for the current expense, plus the additional deduction for the remaining basis of the property replaced. This is another benefit of a cost segregation study.

 

Filled-in Form 3115

The biggest question I get from readers involves Form 3115. Few tax professionals have seen a cost segregation study or only a few over their career. Filling out Form 3115 to deal with the change in accounting method can be daunting. 

Form 3115 is 8 pages. The good news is that you only need to fill out four of them. 

Form 3115 is sent along with your tax return and the depreciation adjustments from the cost segregation study; the change of accounting method is automatic. The IRS will not respond when Form 3115 is filed unless there is an issue. You must attach a copy of the cost segregation study with the tax return. 

 

Form 3115, Page 1 filled in.

 

Page one of Form 3115 asks for basic taxpayer information at the top. My example involves an individual, but the same application applies to entities. Be sure to indicate if you are an individual, partnership, corporation or one of the other designations. On the right check the “Depreciation and Amortization” box.

Part I and II have questions you need to answer. You only need one DCN if the only issue is a cost segregation study — code 8 — because you are going from a permissible method to another permissible method.

 

Form 3115, Page 2 filled in.

 

Page 2 of Form 3115 contains more questions. My answers are the most common. Some questions do not apply. Adjust your answers to your personal situation as needed.

 

Form 3115, Page 3 filled in.

Page 3 of Form 3115 is also questions. As my example shows, only two questions need answering. Part III does not apply to cost segregation studies. 

 

Form 3115, Page 8 filled in.

 

Pages 4-7 are left blank on Form 3115 when a cost segregation is the only issue. 

The top of page 8 also does not need to be filled in for cost segregations. Schedule E on Form 3115 does need questions answered. I listed the most common answers. Pay attention to Question 4b. If you lived in the property before renting it you need to indicate so.

Question 4a requires a statement. My software generates this statement automatically. Attaching the cost segregation study probably is enough, but I always include the statement shown below.

 

Form 3115 filled in, statement.

 

Depreciation Adjustments When Applying Cost Segregation

I encourage you to print out the images in this section. They provide everything you need to complete an accurate tax return with adjustments reflecting a cost segregation study. It might also be helpful to print out the Cost Summary and Cost Detail presented at the beginning of this post. 

These are the facts used in our example.

 

We start with basic information. The property was purchased and placed in service at the beginning of 2014 and the cost segregation study will apply to tax year 2020. 

The tax return will look like this without the cost segregation study:

 

Schedule E without the cost segregation study applied.

 

And the depreciation schedule:

 

Depreciation schedule without the cost segregation applied.

 

Now we need to make adjustments to reflect the cost segregation study. Prior to the study the entire building was depreciated over 27.5 years, straight line. The cost segregation study allows us to depreciate $85,600 over 5-years and $6,893 over 15-years. These amounts reduce the amount of 27.5-year class life property to $266,816.

 

Adjusting the amounts depreciated in each class life.

 

This information is provided by the cost segregation study. See the Cost Summary and Cost Detail above.

 

Adjusting the original depreciation between class lives.

 

We need to know how much depreciation should have been used in each class life if cost segregation was applied from day one. Setting our example with a property purchased January 1st simplifies our example. You will need to adjust for depreciation based on months rather than our simplistic 6-years of ownership before the cost segregation study if any other date of purchase is involved.

Our accumulated depreciation would be as follows if cost segregation were applied from the beginning:

27.5-year Class Life:

$262,816 / 27.5 = $9,557

$9,557 x 6 years = $57,342

15-year Class Life:

$6,893 / 27.5 = $250.65

$250.65  x  6 = $2,502

Because I rounded numbers there is a small error that I account for in this class life. The difference is $2 and reconciles with the actual previous depreciation claimed.

5-year Class Life

$85,600 / 27.5 = $3,113 x 6 = $18,638

 

The new depreciation schedule will look like this:

 

The final depreciation schedule after cost segregation is applied.

 

We need these numbers to determine how much prior depreciation to apply to each class life and calculate our catch-up depreciation for the current year. 

 

The final adjustments to depreciation from a cost segregation study.

 

Our last step is determining how much additional depreciation to claim the year the cost segregation study is applied when cost segregation wasn’t applied in prior years.

The easiest part is the 5-year property since all the 5-year property should have been depreciated by this time. The remaining basis is a deduction:

$85,600 – $18,678 = $66,922

The $18,678 comes from our calculation above where we allocate depreciation from the 27.5 class life to the 5-year class life.

The $66,922 is added to the current year’s depreciation.

The 15-year property is only partially through its depreciation schedule.

 

Depreciation table for 3-, 5-, 7-, 10-, 15- and 20-year class lives.

 

As you can see, only 48.81% of the 15-year property should be depreciated out at this point, including the current year depreciation.  Note that we claim the current year of depreciation as well since we will use this number to override the depreciation calculated by the tax software The math is as follows:

$6,893 x 48.81% = $3,3433

$3,3433 – $1,502 = $1,931

The $1,931 includes the current year’s depreciation.

Your tax software will handle the depreciation for the 27.5-year class life. The depreciation schedule above listing cost segregation shows the current year’s depreciation deduction. 

 

Schedule E after the cost segregation catch-up depreciation is applied.

 

The tax savings can be substantial as the before and after Schedule E show. 

That is all there is to it. Follow this guide to simplify the application of cost segregation to a tax return.

 

If there is anything I can do to clarify the process, let me know. A comprehensive guide has been needed for a long time online. My goal is to have this page as the go-to resource when dealing with cost segregation on a tax return.

 

 

 

 

More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here.

Blockfi pays high interest. (Currently 8%)

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Good Insurance vs Bad Insurance

All insurance is a waste of money until it comes time to file a claim. The trick is in determining which insurance is good, protecting you from serious financial harm, and the bad.

When I talk about good and bad insurance I’m not talking about fraud or an insurance company acting in bad faith. What I mean when defining the quality of insurance is the value it brings in protecting against loss.

In most cases, people want the least amount of insurance possible without putting themselves at risk of a financial loss that would destroy them. Auto insurance has a minimum requirement in every state. However, some states allow you to opt out. For example, Arizona allows you to provide a bond, certificate of deposit or deposit cash with the DMV for the minimum coverage levels in lieu of actual insurance. Another example is Virginia where you can opt to register as an uninsured motorist for an annual fee as long as you have a clean driving record.

Lenders require insurance on assets they have as security. There is no insurance requirement for any real estate you own unless the property is mortgaged. 

Then we get to life insurance. There are strong feeling when life insurance is discussed, except it isn’t that simple. There are times life insurance products are powerful tools in wealth preservation. All too often life insurance is used incorrectly. We will explore where value exists with life insurance.

Most insurance is neither all-good nor all-bad, though there is more all-bad insurance than you might expect. Most falls somewhere in the middle. To gain the greatest value with the least expense requires a modest understanding of what each type of insurance covers and a modest amount of simple math. That is how you keep your insurance costs low and protection high.

You want good auto insurance should the need arise to file a claim. But too much or the wrong insurance is wasted money, or worse, lack of coverage when needed.

 

Good and Bad Auto Insurance

We will start with auto insurance since it is practically a requirement if you drive. 

State laws require a minimum level of insurance. Auto insurance is highly regulated in each state to protect lenders making auto loans and to protect those injured in an accident. 

The issue of good and bad insurance with auto coverage involves the various facets of the policy.

Collision: No state requires collision or comprehensive coverage, but lenders do. If you don’t have a loan on a vehicle you can eliminate this insurance expense.

Should you? There is a very small amount of math required in determining if insurance coverage is worth it. 

Example:

Value of vehicle: $20,000

Premium per deductible:

$5000: $500 per year

$1,000: $1,250 per year

$500: 2,500 per year

(Keep in mind insurance premiums vary widely between geographic locations, the age of the insured driver and driving record. The above example numbers are not meant to be indicative, but rather instructive.)

First, the most you can lose if you total your vehicle is $20,000. Second, the larger the deductible the lower the premium paid. 

Your financial standing plays a role in how much collision coverage you should buy. If you have a seven figure net worth you may choose to forgo collision coverage all together regardless the value of the vehicle. You may have no real choice but to buy lower deductible coverage if you don’t have the resources to pay for a $5,000 deductible or if the lender requires a minimum amount of collision insurance.

I want to look at this from a purely financial viewpoint. A $500 premium for a $5,000 deductible means you will need to have a greater than $5,000 claim every 10 year to come out ahead. Insurance companies are not stupid. They sniff out risk better than a bloodhound. If you have frequent claims it is unlikely the premium would be so low.

A good rule of thumb (though not for everyone) is not to have collision on a vehicle worth less than $5,000. The accountant in the room hasn’t had collision coverage for decades. Since I haven’t had a claim in forever it has been a good deal.

Where the tire meets the pavement is between deductible levels. The premium is $750 per year more for a $1,000 deductible than a $5,000 deductible. When looked at correctly, this means you are paying $750 per year for an additional $4,000 of protection. 

See the issue? In just over 5 years the premium pays the entire $4,000 of additional coverage. You either have a lot of accidents or you are better off with the higher deductible.

It gets worse with the $500 deductible. Now you need to file a claim more than once a year for the insurance coverage to pay off.

My example is extreme, but it illustrates nicely how you should calculate the level of insurance you really need.

Comprehensive coverage, if listed separately, should be calculate the same way. 

I’m not here to tell you how much insurance you should or should not have. I want you to understand the math so you can make the best consumer choice for you. The simple example above helps you optimize your coverage while keeping premiums as low as possible.

Liability: There are two forms of liability insurance required by most states: bodily injury and property damage. Bodily injury cover someone else’s injuries if you cause the accident; property damage is damage to the other person’s property, such as their vehicle.

Here is where the math goes out the window and risk is the primary concern. Wrongful death gets expensive fast. Same with medical bills if someone is injured. If you cause an accident, even if unavoidable, your liability risk can destroy almost any lifetime of savings. Something as simple as a slick road due to black ice or fog can put you in jeopardy. 

The more you have to lose the more liability coverage you will need. Laws differ by state so it is important to have a serious discussion with your insurance agent. They get paid when you buy a policy. Be sure to discuss your situation fully with this person to verify you have adequate coverage and that you are covered for what you think you are. You may even wish to have an umbrella policy in addition to your regular auto insurance. 

Liability and collision are the expensive parts of an auto policy. The best way to save money is to have a clean record: no traffic violations or accidents.

Underinsured (UIM) and Uninsured (UM) Motorist: This is the area where price shopping can get people in trouble. Agents can shave a few dollars off the premium to beat the competition by quoting the minimum requirements for UIM and UM. This can be a huge mistake!

UIM and UM are generally pretty cheap. Jacking the coverage to the same level as your liability coverage can be as little as a few dollars per month. You don’t save a lot by skimping on UIM and UM, but you will be surprised what you risk

Why is UIM and UM important? First we need to review who is covered by each area of the policy. Liability coverage protects them. In other words, your liability coverage deals with injuries and damages to someone else. UIM and UM protects you when the other guy has inadequate insurance and is at fault!

What does this mean? The best way is to look at an example.

A highly intoxicated driver runs a stop light and hits your vehicle, killing the intoxicated driver and your significant other in your car. The intoxicated driver is uninsured. Your insurance liability coverage deals with the intoxicated driver’s death and vehicle damage. Like most drivers, you have ample liability coverage so you come out of any litigation with no financial damages since the insurance company paid the claim. The family of the intoxicated driver stands to gain well into the six figures in damages for wrongful death, depending on the state where the accident occurs.

You, however, are covered by your UM because the intoxicated driver in uninsured. Since you have minimal coverage ($25,000 in many states) you may get a claim payment barely enough to pay for the funeral. This is why I strongly feel UIM and UM coverage should be as much as the liability coverage. Anything less and you are putting a higher value on the life of a stranger over family and friends.

 

There are more types of auto coverage, like medical, to consider. You can dig deeper into the details here if interested. 

Homeowners insurance is for more than fires, natural disasters or burglars. Good homeowners insurance provides large amounts of liability protection for a variety of risks.

 

Good and Bad Homeowners Insurance

Here are a few tips when reviewing your insurance covering real estate owned. 

First, the liability issues above still apply here. No state requires you to have homeowners insurance; your mortgage lender will. 

Once again I remind you that liability coverage is only one part of the insurance protection. Underinsured and uninsured is still in play.

Most people think homeowners insurance covers you if your house burns down or hail destroys your roof. And that is part of what your policy should cover, depending on the coverage purchased. 

Deductibles come into play. Generally, a higher deductible is favorable since it has lower premiums. Homeowners insurance premiums usually have smaller discounts for higher deductibles. Going from a $1,000 deductible to a $10,000 deductible may save so little you may wish to purchase the lower deductible policy anyway. A single claim could cover the entire additional premium cost for many years.

There are several types of homeowners policies available. You can review what each offers here.

Here is why homeowners insurance is necessary in my opinion. A slip and fall on your property can expose you to serious liability risk. There are a thousand ways something can happen on your property that makes you liable. You might have plenty of money to rebuild your home, but an extended lawsuit can leave you exhausted and broke. Just having the insurance company take care of the legal costs and hiring attorneys to defend you can be worth the price of the policy.

Once again, your homeowners insurance agent is someone you need to talk with. The default for most people is an HO-3 policy. You might need to consider riders. Review the difference between deductibles. Some coverage may not be worth it. Example: additional roof coverage in southern states that experience frequent wind/storm/hurricane damage can be so expensive that you would need a total loss more often than ever 10 years. 

Your financial situation will help you determine what risks should be mitigated and which to assume yourself.

 

Good and Bad Life Insurance

Nothing gets the dander up faster than a discussion of life insurance on a personal finance discussion board. Some hate all life insurance and some think it has value. The truth is somewhere in the middle.

Term Life: Let’s start with term life. It is cheap when you are young and provides a fairly large benefit. The problem is that is gets very expensive when you get older. It is considered temporary insurance for a reason.

Who should have term life insurance? Young families come to mind. If a breadwinner in the family dies there can be serious financial issues for survivors. 

Single premium term insurance also plays a role in tax strategies such as in charitable remainder trusts

Business owners can use a buy-sell agreement to protect all the owners of an entity. Term life insurance is cheap enough to cover all parties involved and if one happens to die the funds are available for the remaining owners to buy out the deceased’s ownership. This avoids having to deal with beneficiaries of a business partner or a complete stranger if the ownership is sold to a third-party.

Who should not have life insurance? It is my opinion that single people without dependent children probably do not need term life insurance. If no one depends on your income stream who is the life insurance protecting? When this is the case it is better to save the premiums paid.

Cash Value: Cash-value life insurance gets most of the complaints in the personal finance discussion groups and for good reason. Fees are high and if you really do the math, cash value is usually a really bad idea for a savings or investment account. 

Business owners sometimes use cash value life insurance to protect their business. Key Person and Key Employee policies are powerful tools to protect a firm with indispensable persons, such as an owner or employee with specialized skills.

The baby should not go out with the bath water. Cash value life insurance is an appropriate tool in the right situation.

Annuities: Annuities also get a bad rap in the personal finance discussion groups. Fees are once again high. Annuities protect on downside risk, but cap the upside by a significant amount, depending on the policy purchased.

However, there are instances where annuities are the preferred tool.

A Medicare complaint annuity can shelter monies from the look back rules. Generally, monies can be sheltered if the Medicare compliant annuity is funded prior to entering a nursing home. The rules are complex and we don’t have the space to discuss all the details here so I will allow you to further your research here

Annuities can also be used in several tax strategies such as NIMCRUTs

Business owners can also utilize annuities in a tax advantaged manner, as discussed above under term life insurance. 

Annuities can be used for asset protection.

(As full disclosure, the author had a life insurance license in Wisconsin for over 20 years. I did not renew my license about 5 years ago since I did not sell much life insurance and did not want to be restricted in what I could say in this blog.)

Now that you are aware of my life insurance credentials, I want to share an instance where I think an annuity is appropriate. 

I had a client entering retirement many years ago. His health was good, but his family history wasn’t favorable. He wanted a certain level of income now with a higher income income later when his wife retired. He also wanted to guarantee a certain level of income for his wife should he die young.

The solution for guaranteed income was a series of annuities. We started with an immediate annuity (a low commission product so it at least had reasonable value) that paid out for five years before being exhausted. This provided the monthly income stream for the early years.

The remainder was placed into two additional deferred annuities. The first of these was triggered in five years when the first annuity was exhausted. It was a second to die policy so the income stream covered the client and his wife. An inflation rider was added so income is keeping up with inflation. The final deferred annuity was an emergency fund. If they ever needed a larger amount of cash or wanted a larger income stream they had options.

As you can see, some people have a situation where an annuity is a reasonable choice. My client was set on having an annuity. I spent considerable time with my client explaining how this strategy worked because once done there was no going back. So far it is working according to plan.

Life insurance is not designed to protect you. It is designed to protect them. Know when life insurance is a good choice.

 

Bad Insurance or Just Plain Junk

My head hurts when I think about some of the stupid insurance people buy.

Top of the list is the insurance to cover small purchases. If you buy a $100 item you do not need to pay $20 insurance to protect it. Many credit cards protect the item for free if the item is purchased using that credit card. And if you can’t fix or replace the $100 item without the insurance you can’t afford the product in the first place.

Since there is so much junk insurance out there (think of the extended car warranty scam phone calls everyone gets). Most of this stuff is completely junk with profits sometimes as high as 98%. Yes, some of these junk policies (assuming they are not a scam or fraud) pay out as little as 2% of premiums in claims.

A good rule of thumb is that small levels of insurance are not worth it. 

Another bad insurance is dental. Some dental insurance is good, but much of it is a disguised discount only. In other words, you pay less for a dental cleaning and so forth if you buy the insurance. If you have a large dental expense it may work periodically. However, these policies are designed to only work if you come back to the dentist often! And you still pay most of the bill; the insurance is really only a discount! Dental insurance can work in some instances, but usually is self-serving for the dental practice.

Any insurance that covers something you’re already covered for is bad insurance. Credit and debit cards come to mind. Most credit cards have a long list of benefits. Some replace an item if broken or stolen within a year or two. My credit card covers cell phones that are broke and good thing. A few years back I bought a new phone and an ice patch at the office had me fall square on my phone with all my weight, crushing it. The credit card company covered the whole thing at no cost to me.

 

Good Insurance

Disability insurance is expensive, but can save a family struggling financially.  If you don’t have the resources to live through an extended disability this type of coverage can protect your hard-earned nest egg.

Long-term care insurance is good for certain situations. If you are really poor it probably isn’t necessary (what can they take if you don’t have financial resources) unless you want the ability to choose a better long-term care facility. If you have a high net worth you can self insure.

It is those folks in the middle most at risk. A $300,000 net worth, for example, can be severely damaged if you end up in a nursing home. A few years of this and there is no nest egg. If you have a spouse or others counting on your legacy it is best to protect it.

Life insurance is a powerful tool in estate planning. The number of policies available is large. You need to work with a qualified tax and accounting professional along with a qualified estate planning attorney when estate planning. The issues are many and complex.

The cheapest and best insurance usually protects against rare occurrences, but when they happen are high ticket items, taking you out financially. The goal is to avoid the train wreck. A broken laptop should not be a major catastrophe requiring insurance coverage. A $100 toy certainly does not require insurance! But a $1 million lawsuit is a life changing event. You might want to protect against that.

 

Common Sense

When it comes to insurance common sense goes a long way. Junk insurance like the stuff you get offered at Amazon or Best Buy when purchasing a cat pillow is insane. And the premiums are frequently 20% or more of the product price. Are these things built to fail before the manufacturer’s warranty expires? 

Intelligent insurance purchases take a small amount of math as you saw at the open of this blog post. I help clients in my practice on a regular basis decide what insurance and deductible level that is most appropriate for them. One size does not fit all. It always comes down to some simple math.

Shock insurance, the stuff that gets offered to you at the spur of the moment where intelligent people would not even expect to be pitched, is the worst. I avoid insurance offers that come to me.

Always shop around. Get a few quotes from highly rated insurance companies. Get the best policy for your needs and no more. If you don’t want to overspend on insurance, avoid insurance you don’t need. 

As always, use common sense. Talk to the insurance agent when shopping for auto, life, long-term care, disability and homeowners insurance. They get paid to help you make a proper choice. If you don’t ask they will sell whatever you ask for and cash their commission check. Good agents want to talk with their clients. Don’t push them away. It is their job to help you.

And always do some independent research. This blog post is a good start. Check prices and what policies cover. Doing research when you need to make a claim is not research; it is reacting. That is the wrong way to do it.

 

 

More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here.

Blockfi is currently paying 7.5%.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Winning With Benjamin Franklin’s Virtues

$100 bill. Benjamin Franklin.

Benjamin Franklin might be the most important of the Founding Fathers. His steady hand and silence shouted more than hours of oratory. When younger minds became heated at the Constitutional Convention, Franklin sat quietly until it was obvious the attendees were at an impasse. Franklin, silent during most of the proceedings, suggested a break. Gently, he spoke with several delegates during the pause in the debate. Cooler minds returned and a nation was formed. It is fair to say the United States of America owes its existence to the virtues of a single man. 

Ben Franklin knew he was not perfect by any stretch of the imagination. As a young man he set out to make himself a better person. He learned and shared sage advice still relevant today. At the core he listed 13 virtues he felt were important to master. They provided the formula for happiness, wealth and success.

Long before the modern FIRE (financial independence/retire early) movement, there was Benjamin Franklin. I learned from Franklin that retirement is overrated if you find those things you love to do and keep a healthy level of curiosity in your life. Unhappiness breeds the desire for retirement.

Winning at life, in marriage, financially, in your health, spiritually and physically were covered by Franklin. It was simple to set up, yet difficult to follow. Franklin, fully aware of his shortcomings, listed the virtues he wanted to uphold. Then he held himself accountable each day; never beating himself up for failing, but gently encouraging improvement each and every day.

 

Ben Franklin’s 13 Virtues

The best place to start is by listing the 13 virtues Franklin considered so vital. After this I will share a worksheet you can print and use for your Virtues Journal. Then I will share some of Franklin’s wisdom before finishing by sharing a program that provides the framework needed to maximize your study of these virtues.

Temperance: Eat not to dullness; drink not to elevation.

Silence: Speak not but what may benefit others or yourself; avoid trifling conversation.

Order: Let all your things have their places; let each part of your business have its time. (Author’s note: I take this to mean to stay focused on the task at hand. I doubt Ben would have been a fan of constantly checking email or smartphone.)

Resolution: Resolve to perform what you ought; perform without fail what you resolve. 

Frugality: Make no expense but to do good to others or yourself; waste nothing. 

Industry: Lose no time; be always employed in something useful; cut off all unnecessary actions.

Sincerity: Use no hurtful deceit; think innocently and justly, and, if speaking, speak accordingly.

Justice: Wrong none by doing injuries, or omitting the benefits that are your duty.

Moderation: Avoid extremes; forbear resenting injuries so much as you think they deserve.

Cleanliness: Tolerate no uncleanliness in body, clothes, or habitation.

Tranquility: Be not disturbed by trifles, or at accidents common or unavoidable.

Chastity: Rarely use venery but for health or offspring, never to dullness, weakness, or the injury of your own or another’s peace or reputation.

Humility: Imitate Jesus and Socrates.

Feel free to download or copy this Ben Franklin virtues poster.

It should be noted than Franklin fell short by his own admission most days. Temperance (drinking intoxicants) seemed to be a struggle. 

The goal is not perfection; the goal is to be aware of weaknesses and improve consistently over time.

Now to track our progress. 

Print out a page for each week. Place a dot in each location each time you go against the virtue. You can have multiple dots on a single day and virtue.

Print out a page each week for your virtues journal. Place a dot under the day of the week and the virtue when you fail to live up to the virtue.

Example: If you spent money foolishly on Monday, place a dot in the Monday column on the frugality row. You can accumulate more than one dot is a day under one virtue.

In a short time you can visualize where you are coming up short and where work needs to be done. Remember, this isn’t to belittle yourself! This exercise clarifies where you need improvement. Make a conscious efforts to improve in weak areas. Always be vigilant. Knowing where you tend to stray is a powerful tool in slowing down the negative behavior.

 

Wisdom From Ben Franklin

Franklin is an endless source of common sense and wisdom. His autobiography is must-read material for anyone serious about building wealth. Much of this wisdom was shared in his annual publication of Poor Richard’s Almanack. For 27 years Franklin built upon a solid foundation of wisdom, giving us arguably the greatest source of information on living a good and happy life, and on building financial wealth.

A good example of this powerful writing is the essay in the 1758 edition (the last year Franklin published the almanack), and included in his autobiography: The Way to Wealth. It is hard to fathom this was published 350 years before contemporary bloggers, podcasters and financial gurus. Ben Franklin put all us moderns, with our word processors and auto-correct, to shame centuries ago with a simple pad of paper and pencil. We can only aspire to such greatness.

I’ll share a few financial (frugal) quotes here. If you want more I highly recommend Franklin’s autobiography and biography by Walter Isaacson

Select quotes from The Way to Wealth:

Industry need not wish, and he who lives upon Hope will die fasting.

Keep thy Shop and thy Shop will keep thee; and again, If you would have your business done, go; if not, send.

If you would have a faithful Servant, and one that you like, serve yourself.

A little Neglect will breed great Mischief.

Buy what thou hast no Need of, and ere long thou shalt sell thy Necessities. 

Beware of little expenses; A small Leak will sink a great ship.

The second Vice is Lying; the first is running in Debt.

Lying rides upon Debt’s Back.

Of course there is much more. 

And when have you heard similar words in  modern English? From Warren Buffett? Charlie Munger? Dave Ramsey? the Wealthy Accountant!

Every nugget of financial wisdom is as old as the ages. This stuff has been known for millennia. We keep repeating it generation after generation because nothing is less common than common sense

That is why my work is never done. Every day another crowd of people struggle with financial issues and people like me try to spread the good word.

 

Benjamin Franklin Circles

It is easy to think Ben Franklin lived in a different time, a time alien to our modern world. In some ways this is true, but the differences are not as vast as you might think. 

Franklin understood the value of quality conversation, where ideas were exchanged and knowledge grown. Franklin frequented salons, where people gathered, socialized and built grand ideas, like creating a nation like none other in history. 

We can still meet in the same fashion. But, we also have the added advantage of virtual meetings. With Zoom we are no longer limited to those locally that can attend meetings.

There is a movement afoot that acts much like the salons of Europe and America in the early and mid eighteenth century. They are called Benjamin Franklin Circles. There are several ways to start your own circle. I’ll let you use the link to dig deeper into the topic. 

The Franklin Circle can be a local gathering or virtual event. The group is a year commitment. Once per month the group gathers to discuss another of Franklin’s virtues and how to best build that virtue in ourselves. 

The group can also enjoy the socializing and good conversation Franklin did in his day by extending the group into additional virtues and topics. 

You don’t have to reinvent the wheel. The link above is a beginning point if you are interested in starting a Circle.

There are also numerous guides to help with the process. (The guides are also useful as personal study materials.) Here are a few guides with links. All can be downloaded and printed out.

Ben Franklin Circle Toolkit

Meeting Guide for Franklin’s 13 virtues

Meeting Guide for an additional 12 virtues

Virtual Meeting Guide

Dinner Party guide

Use these guides to step back in time and into the future.

 

Final Words

It is impossible to give a proper review of Benjamin Franklin in a thousand words or so. Hyperlinks above expand the subject material greatly, and the two books mentioned and linked in the text do provide reasonable coverage of a remarkable man and his sage wisdom on health, living the good life and financial wealth.

I hope I whet your appetite enough to encourage a deeper drink from the well of knowledge Franklin brought us. You will find all successful people are, knowingly or not, using Franklin’s advice on some level as part of their success.

But more than that, these virtues can make us a better person. You don’t have to start a nation or build your financial empire as large as Charlie Munger’s to benefit from the time tested wisdom of Franklin. You do have to start taking accountability of yourself as Franklin did. 

A small amount of progress each day compounds to a massive amount of knowledge and wealth of all kinds. It is simple, yet requires the simple action of taking the next step. 

Begin today.

 

More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here.

Blockfi is currently paying 7.5%.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

The Goal is to Pay No Income Taxes, Legally

Taxes. They come in many forms. Some are hidden: corporate taxes are built into the cost of goods and services you buy; excise taxes are included into products like gasoline. 

Others are more visible like sales and property taxes. And then we come to the most visible and dreaded tax of all: income tax. When people complain about taxes they are usually talking about income taxes.

Avoiding income taxes should be easy considering the size of the tax code and the millions of loopholes available. And that is the problem. The tax code is so big that it is daunting so most people have their eyes roll back in their head when they should be facing the tax code head on.

We will discuss several avenues to a zero out your income tax, but first some ground rules.

  1. Keeping your income low is not eliminating taxes; it is eliminating income at a 100% tax rate. Our discussion will focus on ways to eliminate income taxes at any income level, with only a slight nod to lower incomes where incomes taxes rarely apply.
  2. Tax credits can cut your taxes significantly. I’ll point out a few of these obvious gems, but will not hang my hat on mainstream tax credits to eliminate your income tax.
  3. No using cheap gimmicks like “have three kids” to eliminate your income taxes. I will assume no children in most of my strategies here.
  4. Debt is not tax-free income. Borrowing more money is NOT a tax strategy! No universal life craziness on this blog, either.
  5. Our inquiry will focus on tax strategies available to a large number of people and legal ways of converting taxable income into tax-free income.

Before we begin our analysis I want to point you to an excellent article on this topic published by the Root of Good blog in 2013. The Tax Cuts and Jobs Act of 2017 (TCJA) changed many of the rules the Root of Good blog post used. Still, it is a good place to get ideas for the flavor of strategies available.

I also discussed 10 Ways to Legally Stop Paying Taxes in a prior post on this blog. You may wish to review that post as well if you are serious about reducing or eliminating your income tax.

 

Income Tax on Income Under $100,000

A short nod to readers with a five-figure income. 

There are so many tools for eliminating incomes taxes on incomes under $100,000 that I will only scratch a few. 

  1. Social Security benefits can be partially or totally tax-free. This link provides more details.
  2. The TCJA eliminated exemptions, but jacked the standard deduction. In 2017 the standard deduction on a joint return was $12,700. In 2021 the standard deduction is $25,100 on a MFJ return; $12,550 for MFS and single taxpayers; and $18,800 for heads of household. This means a married couple filing a joint return gets a $25,100 deduction right out of the gate. 
  3. Long-term capital gains enjoy a large 0% tax bracket. In 2021, the 0% tax rate for LTCGs income threshold is $80, 800 for married couples filing a joint return; $54,100 for heads of household; and $40,400 for single and MFS taxpayers. The easiest way to look at this is to add all your taxable income together and stack the LTCGs and qualified dividends on top. The portion below $80,800 for a MFJ return is taxed at 0%. Add this to the standard deduction and a married couple filing a joint return can enjoy $105,900 of income without an income tax with this one strategy alone in 2021. This is an incredible tax opportunity for those retiring early. 

A plethora of tax credits are available for low incomers. Your facts and circumstances will prevail. 

The Child Tax Credit (CTC) is a bit more complex in 2021 than in prior years. Portions of the CTC phase out well into the six-figures

Other common credits that can reduce your income taxes are:

  1. Earned Income Credit
  2. Saver’s Credit
  3. Education Credits
  4. Child and Dependent Care Credit

There is also a small credit for nonbusiness energy improvements for homeowners. Then there is the Premium Tax Credit. This is a big credit for those with lower incomes. You can do more research on the PTC here.

There is another new massive temporary tax-free employee benefit made available under the CARES Act. Employers can pay to the employee or the student loan provider up to $5,250 for student loan repayments. This break is available for tax years ending December 31, 2025 or before. That means you have several years to accumulate this tax-free income.

Note: You can’t take the student loan interest deduction if your employer provided the tax-free funds. However, if you made additional student loan payment you may get an additional deduction there as well. Example:

  • Student loan interest: $2,000
  • Employer paid $5,250 of your student loans
  • You paid an additional $2,000 of your student loans.

In this scenario you could also qualify for a $2,000 student loan interest deduction as long as you are below the income threshold. What is less clear to this accountant is if you need to pay the interest out of your funds and the principle from employer funds or not, and how that would be segregated.

One last gift from Congress for those with a modest income. If you have a health savings account qualified health insurance plan you need to fill that HSA savings account. Contributions are deductible, earnings grow tax-free and the whole thing comes back to you outside income taxes if used for qualified medical expenses or Medicare premiums once you turn 65.

Eliminating your income tax requires planning. The government erects obstacles you need to navigate. It is worth the effort. No need to succumb to anti-social behavior.

The Easy Income Tax Deductions

Now we turn to taxpayers with higher income. Some of these strategies apply to people with lower income as well, but the focus in the remainder of this article is on eliminating income taxes for taxpayers with a six-figure or higher income. 

Let’s start with some low hanging fruit. Here are several sources of tax-free income:

  1. Some alimony. Use the link for more details.
  2. Child support payments are always tax-free.
  3. Inheritances, gifts and bequests.
  4. Cash rebates
  5. Most employer provided healthcare benefits.
  6. Foster care stipends
  7. Worker’s Compensation benefits
  8. Disability benefits if you paid for the premiums.
  9. §121 exclusion of up to $250,000 of gains from the sale of your primary residence per person.
  10. Foreign Income Exclusion
  11. Death benefit from a life insurance policy

A source of income I do not consider tax-free income is employer matching in retirement funds because the employer contribution always goes to the traditional part of the retirement plan, even if you elect to have your 401(k) contributions treated as Roth contributions. The income is not tax-free; it is tax-deferred. This is where I disagree with the Root of Good blog post. That post suggested deductions for the current year eliminated income taxes when all it did was push them into the future where tax rates on retirement plan distributions are uncertain.

The same can be said about souped-up retirement plans like cash balance accounts. A lot of money can be deducted currently with these plans and investments grow tax-deferred. But somebody at some point is going to pay the national uncle on the east coast. 

 

Two Unique Sources of Tax-free Income

Now I want to share what I consider two very powerful tools for generating massive amounts of tax-free income.

The first involves the cash rebates listed above. Most credit and debit cards provide some kind of cash-back these days. Some offer airline or travel rewards. In either case, these rewards are tax-free. 

We need to delineate what is a rebate and what isn’t before continuing. When you get a bonus on a bank account that is interest income. Selling tradelines are also income. What I’m talking about is sign-on bonuses and the continuing cash-back rewards offered by the myriad credit card companies.

This leads to an interesting situation. The sign-on bonuses can be large, say, $500 for $3,000 of spending in the first 90 days, plus the regular cash-back the card offers. Churning cards and manufacturing spending can turn no real spending into large amounts of cash-back fast, which is still tax-free. 

There are so many ways to game the system with cash-back rewards. I suggest a deep dive into Doctor of Credit (DoC) if this interests you. Be warned, this is a rabbit hole. The number of ways to get a steady stream of small incomes is nearly endless. DoC provides a nice ongoing list of opportunities to profit. Subscribing to their mailing list is a must in such situations. (Note: I am in no way related or connected to DoC. This is NOT an affiliate link of any sort.)

Eliminating your income tax requires planning. The government erects obstacles you need to navigate. It is worth the effort.

A Billion Dollars Tax-free

A common complain in my email is that I focus too much on people with higher income. That isn’t true! I spend plenty of time outlining tax strategies for people with lower levels of income. The ones I tend to avoid helping (until now) are the uber-rich! (Except when consulting. Most consulting clients tend to be very high earners.)

One of the most powerful tools for generating tax-free income is the Roth IRA. The mechanics are as such: Money going in is after -tax (meaning it has been taxed already) and money coming out, including profits, are not included in income once you reach age 59½. (In most cases your basis is available for distribution at any age.) 

Most people don’t see the massive loophole. Any asset placed into the Roth grows tax-free. What asset could you possible own that grows really fast, turning a small amount into a really big amount in a short order of time?

Let me give you a hint. There is at least one guy (it is a guy) who placed less than $2,000 into his Roth IRA and turned it into $5  billion! Think about that for a minute: $4,999,998,000 tax-free. Sure beats winning the lottery and anybody can use the same strategy. One particular accountant in the room did, only to a much, much smaller degree.

Peter Thiel, a co-founder of PayPal, started with less than $2,000 in his Roth IRA and parlayed it into $5 billion. So how did he do it? And more important, can you?

Well, let me give you a hint. I have done it, only with a lot smaller balance.

It started many years ago when I ran a small hedge fund. Using my Roth I was able to turn a small amount into a much larger amount, all tax-free. In less than two years I can touch those gains and never pay a penny in income tax ever! Until then I can keep investing and growing the pile more. (The basis is currently available.)

What about you? How can you super charge your tax-free income? Simple. You can either invest in market securities or index funds and enjoy those returns, or, invest in your own company, placed inside a Roth. Cryptocurrencies can also be placed inside a Roth. 

It is the early years of business growth that pound returns north fast. Peter Thiel invests and continues investing in start-ups. You can do that to a lesser extent, but you can easily start a business with the shares held by the Roth. The biggest obstacle is finding an IRA administrator that allows such investments inside Roth IRAs. You may have a local firm that handles such Roth IRAs if you look. You can also check Equity Trust. (Not an affiliate.) Be sure to do your due diligence before moving money.

 

There are so many opportunities available to eliminate your federal income tax. You can mix and match the strategies listed above and more in an endless number of ways. I spend most days at the office consulting with clients on just such issues. Sometimes my hands are tied and the benefits are limited (still profitable for the client, but limited). Most of the time we crush the tax beast. 

One word of caution before I leave you to your cup of coffee. Never fall for the old trick of lower taxes for the current year only. That is a very easy game to play that ultimately screws the client (that is you, my taxpaying reader). When I work with clients I consider “all years involved”. That means investments into a traditional retirement account requires consideration for the tax consequences when the money comes out.

Now, get creative, but stay legal. You want to keep your money and enjoy it too.

 

 

More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here.

Blockfi is currently paying 7.5%.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Identify Your Ideal Client

The most common mistake I see in my practice when a client starts a new business or side hustle is that they try to be everything to everyone. This leads to overwhelm, burnout and alienates the ideal client. By identifying your ideal client you increase your chances you will have clients you love working with. And that takes the work out of work.

A prime example of this is when a client tells me they are starting a restaurant. Their logic is that everyone needs to eat, to which I reply, “Yes, but they don’t have to eat at your place.”

If a restaurant is the business you want to be in (in other words, you LOVE the idea of working with food, employees and customers at a hectic pace all day) then you better be focused. Will you serve ethnic food? Take out? Delivery? Hours?

Advertising you have good food will not cut it. People want to know what you serve. The best restaurants are always known for their specialty. In Menasha, where my office is located,  Mihm’s Charcoal Grill is known for their butter burger. People joke it is a heart attack waiting to happen. Their burgers are so moist and delicious! They are tucked away on a side street and the place is small. But those butter burgers are to die for, literally. People wait in line for that stuff! Business is good at Mihm’s. If you are ever in the area give them a try. You’ll visit more often afterwards.

Learn from successful business how to find your ideal client.

You don’t have to reinvent the wheel when searching for the ideal client or customer. Take a page from those who have done it successfully in the past.

In Wisconsin we have a gas station called Kwik Trip. They have the best coffee and pretty darn good food, too. 

You would think a gas station is impossible to differentiate from other gas stations. If you thought this you would be wrong. Kwik Trip has become a destination. People travel across the Wisconsin border just to visit a Kwik Trip. (Are your ideal clients this fanatic about what you do?) The stations are well-kept, clean, employees trained and properly paid. It shows.

Several years ago Kwik Trip showed how to find the ideal client and nobody noticed. Except me! I recommend a version of what they did to certain clients when the strategy is appropriate.

Here is what Kwik Trip did. They printed up a bunch of coupon sized glossy flyers one-third the size of a regular sheet of paper, printing on both sides. On the flyer was a $1 off coupon for any pizza. They also announced they delivered. Next to the coupon was a list of all the pizzas available and a notation that Kwik Trip made their pizzas fresh in-house. There was also information for ordering your pizza online and picking up later.

So far nothing special Anybody, or business, could do this and it would make no difference or would cost a fortune distributing the coupons.

Kwik Trip took one hour, just one hour max, to implement a stroke of marketing genius. Yes, they had the coupons available at their gas stations and yes, employees handed them out.

But they also had an employee deliver to each business near each gas station a wad of these coupon flyers. 

Wow! People didn’t read they delivered, they saw it in action. And they focused on their ideal client: people at work looking for a delicious, low-cost lunch. 

People have a hard time passing up a discount, especially when the price of the product is already reasonable. Dropping off a thick wad of coupons at each local business allowed people working near the gas station several opportunities for the discount. Kwik Trip sold a lot of pizzas. I mean a LOT of pizzas and still do to this day.

How is this the ideal client? First, Kwik Trip promised delivery and they focused on delivering pizzas to the closest customers. Second, by focusing on local small businesses many delivered orders contained several pizzas. (It is cheaper to deliver five pizzas to one location than five separate locations.) Many people also picked up their pizza, fresh and ready, when they arrived.

I suggest to my restaurant clients they modify this strategy for their personal situation. I have never seen this strategy fail! For a few hundred dollars and an hour or so of time you explode your restaurant business. 

The perfect client values my services and advice. They engage and implement. They consider my firm part of their team and work together with that mindset.

The Ideal Client for You

What about other side hustles and businesses? How do they find the ideal client? The ones they love working with? The clients/customers that turn a job into a vacation because you love doing it so much?

The strategies listed above were to get you in the right mindset. Your business is probably different from Kwik Trip or Mihm’s. 

Before you can have ideal clients you need to identify what your ideal client looks like and where they live and work. This is important: You must be very specific and detailed! It’s not enough for a dog walking side hustle to list “all dogs”.  

Below I am going to outline the ideal client for my tax and accounting practice because, as you might guess, I’m looking a few few excellent new clients. Maybe most people need their taxes filed, but I don’t want everyone as a tax prep client. 

Specifically, I’m looking for a client that needs bookkeeping. That will include tax prep work, payroll and consulting, too. 

Below, I will outline my specifics of my ideal client. This means that most people that walk in the door or email will not get an offer to be my client! Read the last sentence 30 or so times if you are a business owner. Don’t act desperate. Many potential clients are a poor fit. 

Remember, most clients on the prowl for a new accountant left their previous accountant for a reason!

I expect a new client will be a long-term relationship. This is not a one-and-done. I am not interested in cleaning up years of bad books only to have the client go AWOL for five years, returning with same same exact mess, IRS notices and all. Note: I don’t mind fixing messes as long as the mess stays fixed.

 

Ideal Client Sample

First, we need to be honest with ourselves. Why did we lose clients in the first place? Are we starting out in business? Are there things we need to fix internally before bringing in new clients? Are employees properly trained?

For readers on the Facebook page of this blog, you will already know why I am in the market for two, maybe three, new clients. To bring the rest of you up to speed: My office has had a high fatality rate. Over the past year over 4% of my clients died; over 1 in 25!

These clients died because they got old. It wasn’t a disease issue. Most were clients since the 1990s. Those that didn’t die decided to retire. Who can blame them. And then there were a few business clients close enough to retirement that took the opportunity when the economy was shut down for a while. The timing was right for them.

I think the reason for client loss isn’t an issue I need to deal with internally. Now I can focus on what I want new clients to look like:

  • Must be U.S based. Some international sales are okay, but too much international and I need to bring in outside help.
  • They can be located anywhere in the U.S. If outside my local area, must be willing to use our secure portal for document transfer.
  • Will need more than tax preparation. Must also desire bookkeeping and consulting, plus maybe some payroll.
  • Landlords are a specialty of mine and would love a few new clients that are landlords with multiple properties.
    • Landlord clients should also be interested in consulting over all the tax reduction strategies possible. 
  • New business clients must be in a growth phase or stability phase. I don’t mind helping a firm wind down, but prefer new clients as long-term relationships.
  • Must consider my services a value. If taxes, bookkeeping and consulting are done begrudgingly, I’m not a good fit for you.
  • Pay my fee in a timely manner. 
  • Find my fee a value.
  • When reviewing a potential new client I need to see at least a 5x return for the client, preferably 10X (see next bullet point).
  • An ideal client is one that probably has fees to my firm of $5,000 or more per year. $400 of bookkeeping a month get them there. Even a small amount of monthly bookkeeping coupled with tax preparation and consulting should be sufficient.
  • The minimum return to the client can come from tax reduction or additional business profits annually. An increase in the value of the business is also considered. However, the new client should be able to clearly see at least a 5X return on any fees they pay me. That means they should see $25,000 minimum in increased profits and tax reductions annually.
  • A new client should be eager to communicate with my firm regularly. Disclosure of all pertinent information is a must. They must consider us part of their team.
  • Must provide data in a timely manner.
  • Must file all tax returns by the due date, plus extensions.
  • Must remain current on tax payments. No self-inflicted tax wounds that require unlimited time trying to contact the IRS.
  • Must be pleasant to work with.
  • If they are leaving an accounting firm it should have been an amicable separation (firm closing/owner died/firm can’t handle all its work). Not a deal breaker, but a warning sign if they had problems with their previous accountant.
  • If they have employees they use a proper payroll service so payroll taxes are paid and federal, state and local regulations followed. 
  • No paying employees or contractors under the table!
  • Reports all income and expenses. No tax cheats!

 

I know the list is long, but it isn’t that hard for a new client to make the cut. They need to follow the rules, work with their friendly new accounting team and pay their bill. 

Yes, I do make exceptions.

Yes, I say “no” to a lot of potential clients. I would rather take an afternoon nap than deal with the angst of having bad clients on my books. You, as the client, want the same thing. These rules also apply to me!

Feel free to use my list and modify to your needs. I know I will so don’t be surprised if I come back over the next weeks and months and clarify the list more.

Finally, if you are in need of an accountant that cares enough to be this specific, contact me. I really am in the market for two or three new clients of the right type. If it isn’t a good fit, I sometimes give referrals if I know a professional that might be a good fit. Sometimes it isn’t you; it is me. 

And this is how you love your work, have less stress, start the day excited and make the world a better place. 

It is also profitable for all parties involved, as it should be.

 

More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.