Navigating the Tax Implications of Vehicles
Knowing how to handle vehicle expenses for tax purposes can lead to significant savings.
Knowing how to handle vehicle expenses for tax purposes can lead to significant savings. Whether you're using a personal vehicle for business or purchasing a new vehicle specifically for your company, understanding the rules can help maximize deductions. In this blog, we'll explore different vehicle-related tax implications, including depreciation, write-offs, and mileage tracking.
Business Use of a Personal Vehicle
If you're using your personal vehicle for business, you can deduct the portion of expenses related to business use. It's crucial to distinguish between personal miles, business miles, and commuting miles:
Business Miles: Miles driven strictly for business purposes, like client meetings or deliveries.
Personal Miles: Any non-business-related driving, such as personal errands. These are not deductible.
Commuting Miles: The miles driven from home to your primary workplace. These are typically not deductible.
By keeping a detailed log of your business miles, you can claim deductions either through the standard mileage rate or actual expenses, which we'll cover in more detail below.
Personal Use of a Business Vehicle
If a business vehicle is used for personal purposes, the IRS considers it a taxable fringe benefit. This means the personal use of a business vehicle must be reported as income.
There are various methods for calculating personal use, including the commuting valuation method, which assigns a fixed value per commute, or the lease value rule, where the value of the vehicle’s personal use is calculated based on its fair market value.
Example: If a small business owner uses a company car for weekend trips, the value of that personal use would need to be included in the owner's taxable income.
Bonus Depreciation vs. Section 179 Expensing
When you purchase a vehicle for business use, you can deduct part of its cost using either bonus depreciation or Section 179 expensing. Here's how they compare:
Bonus Depreciation: Allows you to deduct a percentage of the vehicle's cost upfront in the first year. Under the Tax Cuts and Jobs Act (TCJA), bonus depreciation is 60% for 2024, down from 100% in previous years. Both new and used vehicles qualify, making it a flexible option.
Section 179 Expensing: Offers a similar benefit but is subject to stricter limits. For 2024, small business owners can deduct up to $1,160,000 for equipment, including vehicles. However, this limit phases out if the total equipment purchased exceeds $2,890,000. Section 179 is often more restrictive for luxury vehicles, which are capped at $19,200 for 2024.
Writing Off the Purchase of a Vehicle
To write off a vehicle's cost, it must be used primarily for business (more than 50% of the time). Depending on the vehicle type and use, small business owners have the following options:
Bonus Depreciation or Section 179 for eligible vehicles.
Depreciation over several years for vehicles that don’t qualify for full expensing upfront (e.g., luxury vehicles).
Heavy vehicles like SUVs and trucks weighing over 6,000 pounds may be eligible for a larger deduction under Section 179, sometimes even up to the full purchase price.
Actual Cost vs. Mileage Deduction
Small business owners have two options for deducting vehicle expenses:
Actual Cost Method: Deducts all costs related to the vehicle, including fuel, maintenance, insurance, and depreciation. This method requires detailed tracking of expenses and is often beneficial for newer, more expensive vehicles.
Standard Mileage Rate: In 2024, the IRS allows a deduction of 67 cents per business mile. This method simplifies record-keeping, but owners can’t also deduct specific expenses like gas or insurance.
Important Rules:
Once you choose the actual cost method, you cannot switch to the mileage deduction in future years for the same vehicle.
If you have already depreciated the vehicle, you are not eligible to use the mileage deduction.
You cannot double dip by using both methods in the same year for the same vehicle. Choose either the actual cost method or the mileage method for the entire year.
Tracking Requirements
Accurate tracking is essential for claiming any vehicle deduction. Business owners should maintain detailed records, including:
Date and purpose of the trip.
Beginning and ending mileage.
Total miles driven for business.
Failing to keep proper documentation can result in the loss of deductions or penalties, if audited by the IRS.
Other Vehicle-Related Deductions
In addition to depreciation and mileage, small business owners can deduct:
Interest on vehicle loans used to finance business vehicles.
Leasing costs if leasing instead of purchasing.
Sales tax paid on the vehicle, which can be claimed as part of the cost.
Conclusion
Vehicle-related expenses can provide significant tax benefits for small business owners but navigating the rules requires careful attention. From tracking business miles to understanding the difference between bonus depreciation and Section 179 expensing, proper planning can lead to substantial savings.
Avoid Costly Mistakes: The Proper Use of SBA Loans
SBA loans come with specific requirements that must be met to remain compliant, and misuse of these funds can lead to severe legal and tax consequences.
Small Business Administration (SBA) loans provide essential financial support to small businesses, offering lower interest rates and more flexible terms compared to traditional loans. SBA loans come with specific requirements that must be met to remain compliant, and misuse of these funds can lead to severe legal and tax consequences.
Understanding SBA Loans vs. Traditional Loans
SBA loans differ from traditional bank loans in that they are partially guaranteed by the U.S. government. This guarantee makes it easier for small businesses to qualify for financing, often allowing for more favorable interest rates and longer repayment terms than what might be available from a conventional lender. However, with these benefits come specific rules on how loan funds can be used.
Traditional loans often have fewer restrictions and can be used more flexibly by the business owner. In contrast, SBA loans are designated for specific purposes, such as working capital, buying equipment, or expanding a business. Misusing these funds—by diverting them to personal expenses or unapproved business costs—can result in substantial penalties.
Types of SBA Loans and Their Common Uses
SBA loans are not one-size-fits-all; there are different types of SBA loans, each designed for particular business needs:
7(a) Loan Program: This is the most common SBA loan, typically used for working capital, purchasing equipment, or real estate. It provides flexibility, but funds must be used for business purposes as outlined in the loan agreement.
CDC/504 Loan Program: A long-term financing option primarily for purchasing fixed assets, like real estate or machinery. These loans have specific use cases and restrictions.
SBA Microloan Program: SBA Microloans are small, short-term loans for startups and growing businesses to fund working capital, inventory, or equipment. These loans are ideal for businesses that need smaller amounts of financing but still require strict adherence to use.
SBA Disaster Loans: These are used to help businesses recover from declared disasters; these loans are specifically earmarked for restoring business operations and cannot be used for other purposes.
Understanding the specific type of SBA loan you're receiving is crucial to ensure compliance with the terms of the loan.
Misuse of Funds: Legal and Financial Consequences
SBA loans come with clear guidelines about their use. If you use SBA loan funds for non-business-related expenses—such as vacations, personal debt, or home renovations—it may be considered misuse of funds. This could result in penalties such as immediate repayment demands, fines, or even legal action from the SBA.
Business owners must remember that SBA loan funds are meant to strengthen and grow their businesses, not for personal enrichment.
Taxable Income: The Technical Tax Implications of Misusing SBA Funds
If SBA loan funds are used for personal purposes, this could trigger significant tax implications. Depending on your business structure, the funds withdrawn may be treated differently under tax law:
S Corporations: Any funds taken out for personal use can be considered a distribution. If the amount distributed exceeds your stock basis (the sum of your original investment and any retained earnings), the excess is treated as capital gains, subject to taxes at the capital gains rate. Distributions within your basis are generally not taxed, but it’s important to track your basis accurately.
C Corporations: Misusing SBA loan funds may be classified as dividends. Dividends are taxed at the corporate level and then again when distributed to shareholders as personal income—creating a scenario of double taxation.
Partnerships: In partnerships, unauthorized withdrawals may be considered distributions of capital. If the partnership doesn’t have sufficient basis, the distributed amount could be taxed as income.
Sole Proprietorships: Sole proprietors using SBA loan funds for personal expenses may categorize these as draws, but the IRS may reclassify this as taxable income. Since sole proprietors don’t have a formal distinction between personal and business funds, careful record-keeping is essential.
Potential Fraud: Serious Legal Repercussions
Using SBA loan funds improperly or misrepresenting their use in loan applications could be seen as fraud. This not only triggers repayment and penalties but may also result in federal criminal charges. SBA loan fraud is a serious offense that can lead to imprisonment, financial penalties, or permanent exclusion from future SBA programs.
To avoid these risks, it’s critical to follow the terms laid out in the loan agreement and use funds solely for business-related purposes.
Best Practices for Proper Use of SBA Loan Funds
Adhering to best practices can help ensure that SBA loans are used correctly and keep your business in compliance:
Strictly Use for Business Needs: Ensure that all loan funds are allocated toward approved business uses such as payroll, equipment, or debt refinancing.
Separate Accounts: Keep SBA loan funds in a dedicated business account to avoid commingling with personal funds. This creates a clear paper trail.
Maintain Thorough Documentation: Keep detailed records of all transactions involving SBA loan funds. Documentation may include receipts, invoices, and bank statements.
Regularly Review Your Basis (For S Corp Owners): Ensure that you are aware of your basis in the company to avoid capital gains tax on distributions.
Conclusion
SBA loans can be a great way to fund and grow your business, but they must be used responsibly and within the parameters set forth in the loan agreement. Misusing SBA loan funds can have far-reaching consequences, from legal issues to hefty tax bills, including capital gains taxes for S Corporation owners. By following best practices, keeping thorough documentation, and consulting with a tax professional, you can ensure that you stay on the right side of the law and maximize the benefits of your SBA loan.
What is the 1031 Exchange?
What’s a 1031 exchange? And what’s the best way to sell an investment property? Continue reading to find out!
WHAT IS A 1031 EXCHANGE?
The name 1031 Exchange comes from the tax code section 1031 and in layman’s terms means that you can defer paying taxes when you sell real estate property used for business or investment and use the proceeds of the sale to buy like-kind real estate property.
Whenever you sell a business or investment property, normally you would have a gain, and you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange.
WHY WOULD YOU WANT A 1031 EXCHANGE?
You may wish to diversify your assets.
You may be seeking a property that has better returns.
You may want to consolidate several properties into one or divide a single property into several.
You may want to reset the deprecation clock.
HOW DO YOU QUALIFY?
There are a few rules that must be followed to ensure you qualify for the 1031 Exchange.
Property Use – Both the old and new property must qualify as business or investment use. The general holding period is for at least 1 year.
45 Day Rule – You must identify a replacement property in writing within 45 days.
200% Rule – The total value of the replacement properties must not exceed 200% of the value of the original property.
180 Day Rule – You must complete the transaction within 180 days or the filing date of your tax return, whichever is earlier.
Qualified Intermediary – You must use a qualified intermediary to facilitate the transaction. They hold the funds and oversee the 1031 Exchange. They can have no formal relationship with the parties of the exchanging properties.
Title Holding – The title of the replacement property must be exactly the same as the original property.
Reinvestment Requirement – The replacement property must be equal or higher value to the original property to defer all of the capital gains tax.
BASIC EXAMPLE
Let’s just say that you bought an investment property for $200,000, depreciated $50,000, and sold it for $250,000. You would have a total capital gain of $100,000. You decide to participate in the 1031 Exchange and buy a replacement property worth $300,000. Since you have the $100,000 deferred capital gain, your basis in the new property is now $200,000.
If the replacement property is of lesser value than the property sold, then the difference is taxable.
REPORTING
You must report an exchange to the IRS on Form 8824, Like-Kind Exchanges, and file it with your tax return for the year in which the exchange occurred.
Form 8824 asks for:
Descriptions of the properties exchanged
Dates that properties were identified and transferred
Any relationship between the parties to the exchange
Value of the like-kind and other property received
Gain or loss on sale of other (non-like-kind) property given up
Cash received or paid; liabilities relieved or assumed
Adjusted basis of like-kind property given up; realized gain
If you do not specifically follow the rules for like-kind exchanges, you may be held liable for taxes, penalties, and interest on your transactions.
DISCLAIMER
This blog does not constitute as tax advice. Please contact your CPA or tax professional if you are considering entering into a 1031 Exchange.
So that’s it! That is pretty much everything you need to know about a 1031 exchange!
7 Millionaire Habits
So you want to be a millionaire? Here are the habits you should be implementing in your life to get you there!
Being a millionaire takes discipline and a winning mentality. Today we’re going to talk about my top 7 habits that you should be implementing in your life to be a millionaire.
1 - BE PROACTIVE
Being proactive means more than just taking initiative. It means being responsible for your own life and realizing you have the absolute power to change it. Being proactive is a habit, an attitude, and a way of life. If you want to be successful, you have to take every day and utilize its full potential to achieve your goals.
Don’t wait for opportunity, seek it out. Those who wait to act will be acted upon.
2 - SET GOALS
It’s possible to be busy every moment of the day, but not be very effective. The best way to combat this is to set goals for yourself. If you’re having trouble setting goals for yourself, I have 2 recommendations.
1 – If you can’t figure out what you want in life or where to begin, you should explore as many options as you can. Try hobbies, sports, reading about different subjects, trying different activities until you find something that sparks joy in you. From there, find a way to monetize it and pursue it full force.
2 – Once you have a general idea of what your goals are, you should make them SMART goals. Specific, Measurable, Achievable, Relevant, and Time-bound. This will help to focus your goals so they are clear.
3 - PRIORITIZE
Things that matter the most shouldn’t be put at the bottom of your to-do list. This means you have to prioritize your most important goals and ignore the rest of the noise.
Take the time every week and prioritize your goals and focus on the most important ones first.
This also means you have to learn to say “no.” There are plenty of times where things can come up unexpectedly, and we need to learn to say no more often in order to focus on our own goals.
4 - THINK POSITIVELY
The power of positive thinking has been shown to have many amazing benefits. The reason why this is so important is because the way we feel on the inside often shows on the outside. Whether you’re dealing with potential clients, friends, family, yourself, whoever, thinking positively will only get you further in life.
Being positive and thinking win/win will by far lead to greater outcomes than thinking negatively. Additionally, on top of the power of positive thinking, it is also important to have mastery of one’s own mind. The ability to control and influence your emotions to be positive can immensely impact your life and lead to better connections, clients, and friends.
5 - LISTEN
Listening to others is important so that we are able to build and maintain lasting relationships. It’s important to not always be the person talking but rather hear other people’s perspectives first. The best way to do this is through empathic listening, which means genuinely caring about what others have to say and also using body language to convey that.
Not only is it important to listen to others to develop good relationships, but it’s also important so that you can make correct judgments and decisions with the most information possible. Asking questions is especially important here.
6 - SURROUND YOURSELF WITH WINNERS
Those who you spend your time with often resemble your level of success. This is why it is important to surround yourself with people who have winning attitudes. Now it’s important to remember that a winning attitude means something different to everyone – so you want to reflect on your goals and surround yourself with others who are going to align with your values.
This is also important for building a successful business team. You want people who are experts in their fields with a similar vision as yourself. Having different experiences, skills, and backgrounds is obviously recommended, but the winning attitude must be the common thread.
7 - CONTINUE TO LEARN
Take the time to grow your skills and expand your knowledge. Improve your emotions, grow in spirituality, and improve your body – whatever you can do to improve yourself, try to do so every day. Small improvements lead to big changes over time, so try to improve yourself daily.
Reading is also another habit that you should implement in your life. A really good quote that I like is: “The person who doesn’t read is no better off than the person who can’t read.”
Top 5 Biggest Money Wasters
Are you wasting your money? Here are some of the biggest wastes of money that you should be avoiding!
Are you wasting your money? Here are some of the biggest wastes of money that you should be avoiding!
Don’t want to read? Click here to check out my YouTube video on this topic!
Everybody spends discretionary money, but there are a lot of people who may not realize just how much their discretionary spending adds up and how little benefit they actually get from some of these money wasters.
GOING OUT TO EAT
Going out to restaurants can be a great experience to treat yourself or others to a nice meal and atmosphere, however, eating out can be extremely pricey.
Restaurant food prices are typically marked up around 300% from their wholesale costs, and this gets passed on right to you.
Not to mention that this doesn’t even cover the expense of being waited on, so the additional 20% suggested tip is added on top of the already pricey food. And the genius of this is that it tricks us into thinking the price on the menu is the price we will be paying.
The average American spends $3,000 to $4,000 on restaurants every year and the prices only seem to be going up.
It just makes more economical sense to save the money by cooking the meals yourself as the end price will be significantly cheaper, the time to cook your meal would likely be the same amount of time as going to a restaurant, and you can meal prep or have leftovers that would make other meals in the week much easier.
BUYING NEW CARS
Buying a car is typically the second most expensive item someone buys, right behind a house and the price of new cars keeps increasing. The average price of a new car in the US is about $37,000.
What is alarming about this is that the average US individual income is about $40,000 so people are buying cars way out of their budget. Not only are these cars particularly expensive, but new cars see the most depreciation with a loss of about 60% of its value in the first 5 years.
It just doesn’t make sense to buy new especially since you’ll also likely finance the car and pay interest on your underwater asset.
My recommendation is to buy a reliable used car as you will save tens of thousands of dollars in the long run.
ORDERING DRINKS
Drinks by far are the most marked-up item in any establishment, whether you are buying coffee, alcohol, or soda. Drinks are commonly marked up around 300% to 500%.
Drinks prices can often sneak up on you since many drinks are not very filling and over time can add up to quite a lot of money.
If you’re going to drink anything other than water, it really makes the most sense to drink your other beverages at home – it is far cheaper.
TRYING TO IMPRESS OTHERS
Whether it’s a big house, fancy car, jewelry, designer clothes - whatever it is, if you’re spending money to impress others, you are wasting it.
There is definitely a benefit to having nice things, particularly in a social setting, but if you’re living your life in debt or are struggling to pay bills in order to appear wealthy, this is not a healthy lifestyle choice.
My recommendation is to stick to a budget and try to find deals when you can. Otherwise, if you don’t need an expensive item, don’t buy it as most people don’t really care anyway.
CREDIT CARD DEBT
With the average credit card debt at around $6,000, this can be a major expense and a big waste of money.
Credit card interest rates on average are around 18% but it is very common that these interest rates creep up to 25% and even higher. Using 25% as our base, that is about $125 per month in interest.
Paying off your credit cards and only spending within your budget will save you a lot of money in the long run, plus it will boost your credit score as an added bonus.
Those are my top 5 biggest money wasters – if you avoid these as much possible, you will be sure to save a lot of money!
5 Ways to Look Rich Even If You're Not
Are you trying to fake it till you make it? Here are 5 tips to look rich and boost your confidence!
Are you trying to fake it till you make it? Here are 5 tips to look rich and boost your confidence!
Don’t want to read? Click here to check out my YouTube video on this topic!
TIP 1: GROOM YOURSELF
If you look on the red carpet you will likely not see a hair out of place. This is because celebrities and the wealthy present themselves as put together. This means, getting haircuts, styling your hair, and shaving or plucking when necessary.
None of this costs a lot of money, particularly if you learn to cut your own hair, but the idea is to present yourself as put together as possible and like you intended to do so.
TIP 2: WEAR FASHIONABLE CLOTHING
Nowadays people think buying expensive clothing is what is fashionable, but my recommendation is to buy clothes that you can afford. There are many great deals from department stores, retailers like Target or TJ Maxx, or even Amazon that have great collections to choose from. There is no need to break the bank here.
The biggest recommendation is to buy clothes that fit you properly. You can’t go wrong with jeans and a fitted t-shirt and jacket. Take a look at the styles of people you’d like to emulate and see if that’s something you can put together or pull off.
Also, do not forget about the shoes. Be careful with your shoe selection, especially if you’re buying sneakers because you can look like a kid instead of someone rich. I recommend some nice loafers.
TIP 3: CLEAN YOUR CAR
You don’t have to have an expensive car, but if you have a not-so-nice car AND it’s dirty, it does not look good. Cleaning your possessions means your care about them. Not only does this present yourself as someone who cares about your things, but it also can project that you will care about people too.
Not to mention it will be way less embarrassing if you need to drive others around in your car.
TIP 4: SMILE MORE
People love to see others smile. It can be contagious, boost your confidence, and get people to like you more. Smiling also helps to make you happier and if you’re smiling often people will think your life is pretty good – meaning you will appear wealthier.
Also, use a whitening toothpaste. Rich people almost always have sparkling teeth.
TIP 5: TAKE CARE OF YOUR BODY
This means exercising, eating right, taking care of your mental health, and sleeping enough hours in the day,
Putting in the time to exercise can make you appear rich because rich people typically have the time to work out. It can also help to build confidence.
Eating right is important for not only your health but also your skin and brain function. Eating right means you know how to take care of your body and that you prioritize your health over cheap, unhealthy meals.
And sleeping and taking care of your mental health can put you in a great mood that will help you shine your light onto others.
If you do all of these tips, you are sure to look put together and confident – and that’s really what looking rich is about.
How to Start Investing
Are you interested in starting investing? Here are the essentials you need to start!
Are you interested in starting investing? Here are the essentials you need from the different types of investment vehicles, trading platforms, and investing strategies!
Don’t want to read? Click here to check out my YouTube video on this topic!
TYPES OF INVESTMENT VEHICLES
So what is an investment vehicle? Well, it’s really just a tool used to invest your money. Some of the most common are 401k, traditional IRA, Roth IRA, and individual investment accounts. Within each of these, you can invest in a wide range of investments from stocks, bonds, foreign exchange, options, crypto, funds, and more.
A 401k is a retirement account that is offered through a company you work for. Traditional and Roth IRAs are other retirement accounts that you would typically set up on your own. Each of these has its own benefits, particularly dealing with taxation, but they also have their downsides in that you can be penalized for taking money out early. Either way, I highly recommend contributing to a 401k if your company offers it, but only if there is a company match. Otherwise, retirement accounts can be pretty effective in building long-term wealth. If you can be disciplined enough, nowadays, you really don’t even need to invest in a retirement account.
Now that online trading is free using most brokerages, you can effectively do all the same things as a retirement account, with nominal or no fees, plus your money will be liquid and will not be subject to penalties for withdrawing early, although you will be taxed.
TRADING PLATFORMS
There are so many platforms out there that it can be a little confusing to figure out which one to choose. There’s Etrade, Fidelity, Robinhood, WeBull, Charles Schwabb, and a ton more. It seems like everybody is trying to get into the investment brokerage business.
But essentially they are all more or less the same, I use all of the ones I mentioned above for different reasons because I like to track my money based on investment type. I use Etrade for medium to long term investments, Fidelity for my 401k, Robinhood for dividend investing, Charles Schwabb for my IRA, and WeBull for my riskier investments like options trading and a bit of day trading here and there. The point is you can use any of these platforms. WeBull and Robinhood are my choices for mobile investing and as their platforms are the easiest to use, in my opinion. I have a link for each of these platforms so that if you sign up you’ll get 2 free stocks with WeBull and 1 free stock with Robinhood.
INVESTMENT STRATEGIES
So what are the best investment strategies? Well, I recommend sticking to stocks and index funds, especially when starting out. Long term investing is always the best option and consistently is proven to make you money in the long term.
The key is to continually invest in companies you believe in that make money or good index funds like the S&P 500. You can invest monthly or weekly and over time you can expect your money to grow handsomely. The average return on the S&P 500 is about 7% per year.
Day trading can get pretty risky, especially now and the issue with it is that it is a full-time job. I day traded for a little while and it, unfortunately, took over my life because I was constantly looking for the next opportunity. So it got to the point where I wasn’t letting my money work for me, I was working for my money. So for now, I’ve significantly reduced my day trading as it can be almost like gambling.
In conclusion, investing is pretty simple once you get started, it is essentially buying stocks, holding for a little while, and selling for a profit.
7 Steps For Financial Freedom
Are you searching for ways to achieve complete financial freedom? Here are the steps you should take in your personal finance journey to set up your life to live financially free.
Are you searching for ways to achieve complete financial freedom? Here are the steps you should take in your personal finance journey to set up your life to live financially free.
Don’t want to read? Click here to check out my YouTube video on this topic!
WHAT IS FINANCIAL FREEDOM?
Financial freedom is having 0 debt and enough money to live comfortably in retirement. This blog is going to cover the basic steps to do this in a traditional career path.
STEP 1: INVEST IN 401K UP TO COMPANY MATCH
First thing is first, you have to pay yourself first - this means investing for your retirement.
If your company offers a 401k match, you need to contribute up to that match because not only are you not investing in your retirement and losing out on years of compound interest, you are also not capitalizing on free money that your company would otherwise also contribute to you.
STEP 2: SAVE 1 MONTH EMERGENCY FUND
40% of Americans are not able to cover an unexpected $400 expense. You don’t want to be part of this statistic.
Now more than ever it is apparent how critical having a savings account is and having 1 month of expenses saved up will help you if you have any sort of emergency, including broken appliances, medical expenses, layoffs, etc.
I recommend putting this money in a “high-yield” savings account to keep this money liquid.
STEP 3: PAY OFF BAD DEBT
Bad debt really is anything with high-interest rates that does not contribute to your assets. Some of these include credit card debt, car loans, and yes, student loans.
You will want to pay these off as soon as possible, my recommendation is to pay the debt with the highest interest rate first, but some may prefer the “snowball method” of paying off the smallest amounts first. Either way, you want to get these financial burdens off of your plate.
STEP 4: SAVE 3-6 MONTH EMERGENCY FUND
Now that the bad debt is cleared up, we need to save for a bigger emergency as 1 month of expenses really limited if things go bad fast.
Depending on your career and risk tolerance, you will want to save 3-6 months of expense. You can mix these savings between high yield savings and bonds (maybe even index funds if you have a higher risk tolerance), but I recommend saving in low-risk investments or just putting it all in a high-yield savings account and calling it a day. This is your safety net and it should not be used as a high-risk fund.
STEP 5: INVEST 20% OF GROSS INCOME IN INDEX FUNDS
When you have your emergency fund set, we can now work on accumulating wealth. This means investing 20% of your gross income into index funds. You can do this in your 401k, IRA, brokerage accounts, etc.
Putting away 20% per year is all part of paying yourself first and with index funds averaging about 7% returns per year, the compounding effect will be substantial when you are of retirement age.
No matter what the stock market does, keep investing. I recommend that you automate this so that you don’t get tempted to make unwise decisions based on fear or greed.
STEP 6: BUY PROPERTY
The investment that makes the most people become millionaires is real estate.
Your ideal property should have monthly expenses that are 30% of your gross monthly income. The expenses should include, the mortgage, interest, taxes, insurance, and HOA.
STEP 7: PAY OFF DEBTS OR MAKE INVESTMENTS
The last step is to clean up your debts and make other investments with your excess cash.
The largest expense in retirement is typically living expenses. By this time, you should pay off the rest of your mortgage to lessen your expenses.
After you have paid off your mortgage, I recommend using your excess funds to either save, invest in riskier assets, donate, really whatever you want!
Once you’ve completed all of these steps, you should be financially free and independent!
How to Graduate College Debt-Free
Student debt is a $1.6 Trillion problem in the United States with about 70% of college students owing money by the time they graduate. How can you beat the statistics and graduate debt-free? Let’s get down to business.
Student debt is a $1.6 Trillion problem in the United States with about 70% of college students owing money by the time they graduate. How can you beat the statistics and graduate debt-free? Let’s get down to business.
Don’t want to read? Click here to check out my YouTube video on this topic!
QUICK FACTS
The average student loan debt is about $37,000 per student borrower. It’s also common to see student debt climb to $100,000 or even $200,000 for some graduate degrees, especially when considering law or medical school.
Unfortunately, the delinquency rate continues to grow for student loans which is cause for concern, especially since student debt follows you for life and cannot be forgiven during bankruptcy.
If you start missing payments the interest rate also spikes, so it becomes even more unaffordable, so this is why it is so important to minimize your student loan debts or not get any at all.
START EARLY
Start preparing in high school by getting good grades or working to save up some money.
Taking college prep classes like AP can also be a great way to get college credit and boost your GPA to be more attractive to colleges and get scholarship money.
Another great option is to consider Dual Enrollment which means going to community college during high school to get your AA degree. The majority of times, these programs are free to students and can shave 2 years off your college years, which means less debt!
SCHOLARSHIPS
There are merit-based scholarships, financial aid, private scholarships, state grants, federal grants, and ROTC/military scholarships.
Make sure you consider all of these options and you apply to scholarships and grants as early as possible as many of these are first come first serve.
You can also find small private scholarships through your employer or parents’ employers as well.
SCHOOL CHOICE
Many people choose to go to a college based on more social considerations. My recommendation is to heavily consider the finances before deciding to go to a school because friends come and go, but college debt follows you forever.
Many smaller schools typically offer the same education as larger schools so be sure to look at their accreditations and weigh this into your decision.
If you still can’t afford these options, you can always go to a community college to get your degree or AA there and then transfer to another college for the last 2 years. This will cut down on costs greatly because the average tuition is much lesser than a state school.
Make sure you factor in additional costs like living expenses, meals, insurance, etc. when deciding on a school.
SPECIAL PROGRAMS
Do research to see if the colleges you’re interested in offer special programs or incentives that make the costs cheaper for certain majors or even offer accelerated programs.
See if the college you’re interested in also offers to CLEP classes so you can test out of them or even see if you can do summer classes at your local community college when back at home. This will greatly cut down on time at college and save you money!
WORK
See if you can work during college. You can find jobs online or on campus to start saving money and paying off your college expenses.
You can also work during the summers as many businesses offer summer internship programs. This will also help your form relationships for potential full time offers after you graduate.
And those are my tips to graduate college debt-free!