An Anthology to Inspire Financial Empowerment

AN ANTHOLOGY TO INSPIRE

Financial Empowerment

BY ST E P H WAG N E R An Anthology to Inspire Financial Empowerment

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DISCLOSURE I recently joined Northern Trust on August 9, 2019. These materials were created by me prior to joining Northern Trust. This material is for information purposes only. The views expressed are those of the author(s) as of the date noted and not necessarily of Northern Trust or its affiliates and are subject to change based on market or other conditions without notice.

This information is not intended to be and should not be treated as legal advice, investment advice or tax advice.

Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal or tax advice from their own counsel. ŠCopyright 2019 Steph L Wagner. All rights reserved.

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My personal story is one of reinvention: from stay-at-home mom, to single mother fearful about my financial security, to highly successful entrepreneur. This journey inspired me to devote my life to educating and empowering women.

S T E P H WAG N E R

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Contents WOMEN & MONEY 3 5

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What Is Financial Independence?

Here is why it should matter to you!

My Wake-Up Call to Financial Independence

Mistake 1: Thinking your lawyer is a financial expert

23 Put Your Money to Work Your paycheck is only the beginning

I wasn’t going to wait around for someone else to rescue me

PERSONAL FINANCE

The Power of “No” One two-letter word can yield big returns

27 Why You Need to Diversify Your Income—Today

The Worst Advice I Ever Gave My Best Friend

29 How to Separate Needs and Wants

I never should’ve told her to “play it small”

11 Four Money Traps to Avoid

Steer clear of these not-so-innocent set-ups

15 First Financial Steps for the Newly Single Set yourself up to thrive in your next chapter

17 Financial Advice You Might Want to Ignore What sounds like great advice can be completely wrong

19 How to Calculate Your Net Worth

Before you can grow your wealth, you need to know your starting point

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21 Money Mistakes Women Make During Divorce

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Long story short? Passive income works for you

Until you really understand your spending, you’ll never be financially secure

31 How to Spot a Scam Three simple ways to protect yourself

33 Treat Yourself Like a Business

For personal finances, think like a CFO

35 Four Smart Steps to Protect Against Financial Disaster Take precautions so you don’t lose it all

37 Angel Investing 101 Before you invest in an entrepreneur, know this!

39 The Most Wonderful Time of the Year The money-wise approach to doing good

41 Make “Cheap Money” Work for You Before interest rates rise, should you take on debt because you can?

BUSINESS FINANCE 45 How Much Should You Pay Yourself?

It’s not a simple decision, but there is a right answer

47 Whose Cash Are You Made of?

Don’t confuse your company’s wealth with your own

49 Border Disputes Multistate business taxation rules have changed

51 Risky Business It’s tempting to go all-in with your business, but you better play it safe

57 Work Stoppage If you can’t work, neither can your business

59 The High Costs of Your Exit Strategy Whether it’s a divorce or an M&A transaction, divesting can have lasting effects

61 House of Blues

Mortgage struggles of the self-employed

63 It’s Time for Your Checkup Despite rising premiums, you still have options

65 Advantage: Your Business Two ways to make the U.S. tax code work for you

67 Split Decisions How to protect your company from your partner’s divorce

69 Not So Fast A tax extension does more than buy you time—it could be smart business

53 Stop Buying Your Tax Breaks

There’s an antidote to stocking up on business expenses

55 Quit While You’re Ahead

Business is Booming? It might be time to cash out

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WO M E N & MONEY

An Anthology to Inspire Financial Empowerment

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PHOTO: ADOBE STOCK

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DA I LY W O R T H

What is Financial Independence?

HERE IS WHY IT SHOULD MATTER TO YOU!

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WOMEN HAVE BEEN TOLD since time immemorial that they need a man to help them with their financial affairs — that they can’t do it on their own. In fact, it wasn’t until the 1960s that a married woman could open up a bank account without her husband’s “permission,” and not until 1974 that a single, widowed or divorced woman could apply for credit without a man cosigning.

So I suppose it is understandable why some women fall into a patriarchal trap when it comes to money. And given the economic realities of divorce, the newly single are particularly vulnerable.

Statistics for divorcing women are sobering. Maintaining your pre-divorce lifestyle could cost you 25 to 50 percent more given that one household is now split into two, and typically, a woman’s standard of living following a divorce plummets 27 percent, while a man’s increases by 10 percent.

So out of the ashes of divorce, you have a choice: Rely on a new man and possibly repeat the same behavior that got you into this mess in the first place, or commit to being financially independent.

Being financially independent does not mean that you have achieved a specific account balance, met a targeted net worth figure or that you simply never have to worry about money again. Financial independence is attained through the commitment you make to be solely responsible for creating, building and defending your worth. It is about owning your life (quantitatively and qualitatively) and realizing that no one — not a friend, a family member, a boss and certainly not a man — can protect and grow your worth better then you.

Like most newly single women, I quickly learned that navigating my way through the financial maze of divorce wasn’t easy. Establishing financial security again seemed like a herculean task. A simple signature on my divorce decree cut my net worth in half, and caused my retirement outlook to darken.

I knew that becoming one of the three out of five women over 65 who can’t afford to cover their basic needs was simply not an option. However, one daunting question loomed over me: Despite my professional and academic pedigree, how in the hell was I going to be able to support myself, let alone my family, after opting out of the workforce for 16 years while I raised my children?

Initially, the employment outlook was grim. But simple logic told me that if I couldn’t control the inflow, I better take a hard look at the outflow. So with pen and paper in one hand, and a calculator in the other, I rolled up my sleeves and went to work, digging through mounds of paperwork like an archaeologist hunting for a lost treasure. I began to examine everything: I documented monthly expenses, itemized bills, and (among other things) I read the fine print on my credit card statements. I realized that too much money was flying out the door. I knew that money would be better spent investing in myself, creating opportunities for the future and building my worth.

The answer was clear: I had to focus on what I could control and not be paralyzed by what I couldn’t. I had to regain ownership of my life. So, I made a commitment to being financially independent. I became solely responsible for my financial present and future. I’ve since built a business and while, truth be told, I may not spend as freely as I did during my marriage, I am financially secure. The best part is, my financial plan is not dependent on anyone but me.

While financial freedom doesn’t happen overnight, the commitment to become financially independent can — and it is a critical step! If you believe, without a doubt, that you can handle whatever comes your way, you will become focused, resourceful and persistent, and you will attain financial freedom even in the face of obstacles. SW

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My Wake Up Call to Financial Independence DON’T WAIT FOR SOMEONE TO RESCUE YOU IT WAS SLIGHTLY BEFORE 6 A.M. when I heard the all too familiar sound of my iPhone vibrating against the bedside table. With my head still nestled comfortably on my pillow, I reached for the phone, expecting to see an assortment of bargain alerts from Amazon Local. Instead, the text was from my ex-husband, the father of my three boys and the man who was once my everything — that is, until the day he decided that a woman with pink hair and glitter eye shadow was more desirable than his college sweetheart and wife of nearly 20 years. There it was in small but bold letters, “I am not paying you what I owe for Dec.” No explanation, no apologies, nothing.

I felt a familiar sense of anxiety creeping over me.

As the tears threatened to spill, it hit me. Regardless of what the court documents said, I was still dependent on this man.

Like many divorces, mine was not a pleasant one. It was difficult enough to get past the infidelity, abandonment and that place of staring at the floor trying to figure out how in the hell you are going to put one foot in front of the other. All I wanted to do was crawl back in bed and hide under the security of my fluffy down comforter. Compounded with my remorse was my loss of purpose and the need to somehow regain the independence I once had.

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Back in time and pre-kids, I was working on a pedigree that would have paved the road to Wall Street and, subsequently, to an Ivy League graduate school. I was Vice President of a Boston-based private equity fund, but underestimated the power that my eight-pound bundle of joy would bring. Without hesitation I opted out. That’s right...I quit. I gave up my six-figure salary, millions of dollars in future earnings and everything that I had worked toward for the past decade. Was I crazy?

Maybe — but for me, given all the factors that were placed before me at that moment, it was the right choice.

However, what I did not realize then, as a young mom and a madly in love wife, was that said choice eventually caused me to relinquish my independence, handing it over to a man whom I trusted. I assumed my husband would value and respect that choice.

Instead, 16 years later he fired me.

I quickly found myself stewing in, “What in the hell am I going to do with the rest of my life?” My 16-year role as CMO — Chief Mommy Officer — wasn’t going to attract many job offers. I suppose there was some correlation between negotiating multi-million dollar deals and refereeing fights over LEGOs, but it might be a stretch for a prospective boss to see the connection.

Regardless of any spin factor, the facts didn’t lie: I was 41 and a stay-at-home mom raising three boys alone.

All variables led to the same conclusion and it wasn’t pretty. I began to break my situation down into mathematical equations of “if, then” statements — you know, like those formulas from an Excel spreadsheet: IF I find a job, THEN I can pay the legal fees of this freakin’ divorce.

IF I find a job, THEN I can pay off my debt.

IF I find a job, THEN I can enjoy a good bottle of wine again.

IF I find a job, THEN Jimmy Choo and I can date.

IF I find a man with money, THEN I will live happily ever after.

Wait...did I actually think that, let alone believe it?

That was the one and only moment that the pinkhaired lady and I had something in common. And that was my wakeup call. It was the call to become fully independent again. I will sign the checks, I will pay the bills and I will buy my own shoes and wine.

It’s comforting at times to believe that someone else will take care of you. But it’s pure fantasy. It’s self-deception.

According to the National Center for Women and Retirement Research, 90 percent of all women will be solely responsible for their finances at some point in their lives. This shouldn’t come as a surprise as twothirds of all of us between the ages of 40 and 70 have already dealt with a major financial life crisis: divorce, the death of a spouse, a job loss or a serious illness. Given this reality, what’s most troubling is that more than 80 percent of all women say they do not feel prepared to make wise financial decisions.

It simply doesn’t have to be this way! You must commit to be financially independent.

Being financially independent does not mean that you have achieved a specific account balance, a tar-

geted net-worth figure or that you simply never have to worry about money again. Financial independence is attained through the commitment you make to be solely responsible for creating, building and defending your worth. It is about owning your life (quantitatively and qualitatively) and realizing that no one — not a friend, family member, boss and certainly not a man — can protect and grow your worth better then you!

Messages ring throughout society, which tell us we can’t survive on our own — that we need a man to be complete (and take care of us). This thinking is self-sabotaging. We must grab hold of the reins and take charge of our financial life!

Financial freedom doesn’t happen overnight but the commitment to become financially independent can!

And if you believe, without a doubt, that you can handle whatever comes your way, you will become focused, resourceful and persistent and you will attain financial freedom even in the face of obstacles.

Most of us live in our story one too many days — that is until we get those 5:48 a.m. wake-up calls. Then it is time to get up, pull on the big girl panties and stand in front of the mirror to see that they only thing standing in the way of where you are and where you want to be is you. SW

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PHOTO: PEXEL

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The Power of “No” ONE TWO-LETTER WORD CAN YIELD BIG RETURNS FOR THE FIRST YEAR AFTER THE DIVORCE was final, my auto-response to just about every question that flew out of the mouths of my three sons was “YES!” It was an automatic, rapid-fire and knee-jerk reaction to each and every query.

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Yes, I will be your room mom!

Yes, I will be the team mom!

Yes, we can still go on vacations, live in our super-sized house, drive our SUV, and eat out at restaurants!

And the one that had me questioning my sanity:

Sure, no problem, I am happy to drive six hours – round trip – to Six Flags Magic Mountain not once – but twice – over back-to-back weekends, all to spend $500 to stand in long lines – in 95 degree heat – to ride a roller coaster that will likely make me vomit!

Like many women, I was haunted by divorce guilt and did everything I could during those 12 long months to compensate for any collateral damage to my boys.

Despite my best intentions, all those “yeses” did come at a price. Not only did my face have a half a dozen more stress-induced wrinkles, but I also became the not-soproud owner of a big fat credit card balance. Neither circumstance was how I wanted to kick off my new life as a single mom. This wasn’t the example I wanted to set for my sons.

After yet another sleepless night, I found myself asking this hard question: What in the hell could I have done with all that money if I had simply said NO? The longer I stared at my year-end credit card statement, the more I realized the power that lives in that simple, two-letter word. No. I began to see that if I embraced the notion that “no” actually means “yes” to something else (e.g., zero debt, a growing emergency fund and/or a retirement account), the results could be life changing.

As women, we’re told that we can “have it all” and “do it all,” and that wearing a “yes” on our chests makes us a superhero. Although these messages are meant to empower, they actually compound one of the most prevalent issues women face today: an inability to say “no.”

Why is it so hard for women to overcome the guilt and the shame around the word “no”? And when are we going to stop and realize the cost of always saying “yes” – both to our bank accounts and to our sanity?

The answer just may lie in an economic concept called “opportunity cost.” (Oh, how proud my microeconomics professor at USC would be if he knew that after

nearly two decades I was still throwing around that term.) By definition, opportunity cost is the benefit or value of something that is given up when one chooses one thing over another. Or – put more simply – it’s what you could do with your 10 minutes and $5 if you don’t walk into Starbucks each morning. Bottom line, you can do A LOT since that daily yes to a skinny vanilla latte over 15 years can cost you nearly 1,000 hours and close to $50,000. That is a lot of time and money that could be put to better use.

This same principle can be applied to the seemingly endless requests of our time and the obliging attitude some of us have as we “yes” ourselves into insanity and exhaustion. I am not suggesting that we all stop baking cookies or sewing several monkey costumes for our children’s school play after a long day at work -- or stop volunteering our time to worthy causes. But I am suggesting that before we shout out that “yes,” we stop to recognize that we are a worthy cause too.

Just because you can’t always quantify the cost of a “yes” doesn’t mean there isn’t an impact on your bottom line. The extra time you take walking along the beach, feeling the sand between your toes, enjoying a little downtime with a glass of wine, or reading a book to gain a new perspective can yield an even higher return.

So to all you Superwomen out there flying around with your “yeses” on your chest, it’s time to rip off the cape and stop for a moment to think about the true cost of “yes.” You just might fly higher if you embrace the power of no. SW

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PHOTO: PEXEL

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The Worst Advice I Ever Gave My Best Friend I NEVER SHOULD’VE TOLD HER TO “PLAY IT SMALL” I WAS THE FIRST TO WAKE that morning. As I rose to my feet not only were my legs unstable but every fiber of my being felt as if it was crumbling to the ground. My body was a fraction of the size it had been just six weeks earlier and my soul was every bit as weak.

I was reeling in the painful aftermath of learning that

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my husband of nearly two decades had been living a double life. The father of my three sons, and the man I had built a life around, had been having an affair for almost three years.

I stood lifeless in front of the bathroom mirror, looking for any resemblance to the woman I once was. The

woman who – until six weeks earlier – embraced life’s challenges with huge exclamation points. A woman who had thrived on saying, “Watch me!” to doubters and had built herself up by overcoming obstacles. This time was different. Overcoming this obstacle wasn’t about conquering a challenge or achieving a goal. It was about leaning into fear.

My life was slipping through my fingers. I was now dissolving into the type of woman I had spent years pitying and unconsciously judging. They were the mothers of my children’s friends and the wives of my husband’s business associates – hell, one of them was my mother! Women who appeared lost in the identity of a man. They were simply going through the motions each day. They were sacrificing their dreams, talents and – in my case – self-worth for someone else’s in order to maintain status quo.

The night before, over a bottle of wine, my best friend, Kim, had asked for my advice. She had been dissatisfied in her marriage for years. Now, she and her husband were building a business together and were at odds over the company’s direction. She wanted to develop a new product line. He wanted her to sit back and let him run the company. Her boundless enthusiasm around this new venture was palpable. It was clear she was ready to fly. Yet, it seemed she faced choosing between stepping into her greatness and pleasing her husband to save their marriage.

My advice to my dear friend was simple, “Play it small and let him shine.”

She sat silent. I did, too.

I was living in hell with a marriage on the rocks, scared of the unknown and paralyzed by fear. My new normal wasn’t something I wished upon my worst enemy, let alone my best friend. Perhaps being the “good wife” would save her marriage. Perhaps being more of a submissive one would save mine.

I didn’t recognize it at the time but I was becoming my mother. Despite having a brilliant career, she lived under the patriarchal order of my father. Outside the walls of our home, she was a force, the very model of a polished, powerful and respected businesswoman.

Inside, she was incredibly unhappy. While I respected her ambition and tenacity, I secretly viewed her as a coward, never understanding why she allowed him to silence her. The answer was far more complex than a 13-year-old girl could understand. I just know I vowed to never be like her – and yet, here I was walking the very same path and encouraging my friend to follow along.

Truth be told, patriarchal myths still permeate our unconscious. Messages resonate throughout society telling us we can’t survive on our own – that we need a man to be complete. And that if we fail as the matriarch of our family, we have failed as a woman regardless of the success of our career. The shame around this potential failure is immense and what ultimately drives many of us to just bandage the wounds and keep the peace.

But, submissiveness is not sustainable. It is self-sabotaging. We must step into our greatness.

Just last week – four years later – Kim and I spoke once again about her issue. She never started that new product line. She took a backseat to her husband and yes, she is still unhappy. Just as best friends do, I filled her with advice (some solicited and some not). And then I caught myself saying, “You get just one life. Don’t be afraid. Fly!” It was advice I could finally give because I was living it every day – learning to fly as a single mother and entrepreneur. I had found my strength again and was no longer playing it small. My happiness is no longer defined by my relationship. It was a rare full-circle moment where I saw that by leaning into the fear, I had found myself again and was stronger and wiser from the journey. SW

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PHOTO: PEXEL

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DA I LY W O R T H

Four Money Traps to Avoid STEER CLEAR OF THESE NOT-SO-INNOCENT SETUPS THE LAST THING I expected as I headed up the freeway from San Diego to Los Angeles was a money trap.

Traffic? Yes. Frustration and delays? Naturally. But a money trap? Never.

Halfway there I had a choice: jump on a wide-open toll road or sit in a sea of traffic only to arrive at my appointment sweaty and swearing. It was an easy but costly decision: my $6.50 toll quickly turned into a $70 fine. Apparently, the State of California decided to remove all the toll collection booths and forgot to tell its residents. They claim it was a decision designed to save taxpayers’ money. I think it was a trap to lure suckers like me into paying over 10 times the standard rate.

Whether helping a client plan for retirement or teaching my son to budget his birthday money for the summer, I find myself preaching over and over about the practice of mindful spending. It simply means practicing the art of awareness by being conscious of how every single dollar is spent and alert to your larger financial goals – whether that’s a hefty retirement account or a new dirt bike.

Even the savviest person can get caught in a web of wasteful spending. And the opportunity cost of turning your cheek over to this waste can amount to thousands of dollars. And that’s money you should be putting to work building your net worth.

Following are four money traps that are sure to sabotage not only your wallet but your road to financial freedom.

The “Free” Trial Offer They say the best things in life are free. Not always.

Ever wonder why businesses are willing to offer that fee trial? Sure, it builds customer loyalty and, hopefully, you happily become a repeat buyer. However, companies also know that many of us never read the fine print and they make no attempt to remind us when the free period is over. Instead your “free” subscription or service converts to a paid one. You are left with an unwanted monthly expense and now they have a steady revenue stream.

Your loss is their gain. And since credit cards are often used over debit cards to secure these “free” offers, the 15.61% APR of interest you’re paying each year amounts to an even greater loss to your bottom line. And here’s where the trickiest trap lurks: many companies make it virtually impossible for you to cancel these offers so that simple one-second click takes hours of phone calls and emails to undo. They are making a calculated bet that you’ll get frustrated and give up, but you simply can’t afford to do this.

How do you avoid this trap?

My advice is simple: say, “NO!” But if you can’t

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resist a freebie, don’t skip the fine print. Know exactly what you are agreeing to, mark your calendar when the trial ends and, most importantly, have an exit strategy so you can get out.

Also, watch out for pre-checked boxes. Often a single checkmark gives a company the right to extend their offer beyond the trial period thus authorizing them to charge you. Ultimately, this gives you little recourse if you choose to later contest the charges.

Finally, my number-one rule for clients: review your credit and debit card statements monthly. This regular ritual will catch reoccurring surprises early thus saving you money.

B E AWARE TH AT BUSIN ES SES ARE CO N STA N TLY R EFIN IN G AN D C REAT I N G N E W TR IC KS OF TH E TR A DE D E S I G NE D TO SEPAR ATE YOU F RO M YO UR H AR D -EAR N ED C ASH. The Saver: Spending to Save Spending to save rather than to satisfy a need can instantly sabotage your monthly budget. Just because you have a coupon or the opportunity to take advantage of a great deal doesn’t mean you need to act on it – especially if the good deal is for something you would not otherwise purchase like a gallon of coconut oil or two dozen cinnamon buns.

Warehouse membership stores such as Costco and Sam’s Club are designed to make a saver out of you.

Everything from their product placement, revolving door of new merchandise, and wide selection of tempt-

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ing tasters is done to encourage spending.

And, it’s working! The only way to spend less than $100 at Costco is to simply leave your wallet at home.

While purchasing items in bulk has its advantages – be strategic. It’s hard to imagine what a family of four is going to do with 2,250 Q-tips or 128 servings of salad dressing.

How do you avoid this trap?

Stay clear of the center aisles and beware of the special promotions – especially the ones found at the end of aisles known in the industry as “end caps.”

Often, these end-cap items aren’t even on sale but just higher-margin products merchandised to catch the shopper’s eye.

Be a buyer, not a shopper. Stick to a list and allot yourself a set amount of time (preferably, at the end of the day when you are tired and less likely to meander through the aisles). Use the tasters to fill your stomach, not your cart. Finally, only carry cash – having limited resources means making limited purchases.

The Upsell You’re standing at the rental car counter after a hellish day of airline travel only to be bombarded by a slew of questions.

“How about we upgrade you to a convertible?”

“Would you like to pre-purchase a tank of gas?”

“Need additional insurance coverage?”

“What about a GPS?” (As I am holding my smart phone.)

And, the one that always puzzles me given my kids are 17, 15 and 10.

“Do you need a car seat?”

“No, no, no, no and no!”

Nice try but these are money traps by way of the upsell and are designed to make the company richer and you poorer.

Upselling is a technique whereby a seller entices a buyer to purchase additional items in order to make a more profitable sale. Rental car companies aren’t the only culprits. Retailers, technology companies, consumer electronic stores and car dealerships offering extended warranties and after-market products regularly employ this tactic. Hell, even McDonald’s has mastered the upsell with its supersized offers – and that doesn’t just affect your wallet but your waistline too!

How do you avoid this trap?

Do your homework and ask questions. Know what you already own so you don’t make a redundant purchase. For example, only 10 percent of consumers need to purchase additional rental car insurance yet more than 60 percent elect to pay a daily rate that is almost as much as the rental car itself.

Before deciding on a warranty, you need to consider the reliability of the product you are purchasing and understand what the manufacturer is already offering. Many of us forgo analyzing the economics such as the warranty fee as a percentage of sale price, the average non-warranty repair cost, possible deductible and the product’s life cycle. Also, consider the actual probability of something breaking -- often we act solely on the fear of what “could” happen.

When you do say NO, stick to it. Don’t let the power of persuasion take you down. Some sellers use fear tactics to make you think you can’t afford not to have these add-on items. Truth is, most of the time you can’t afford to buy them.

Four percent of the half a billion people whom downloaded the free app in 2013 were lured by one of the biggest money traps out in the market today – the freemium game.

And Moms sitting in carpool lines aren’t the only victims. Many freemium games, including Clash of Clans, Despicable Me 2, and Smurf’s Village, are taking advantage of the purchasing power of children. With a simple password and a few clicks, young players can ring up charges from 99 cents to $99 without even knowing it. Imagine the shock one mother had when she discovered her seven-year old twins racked up $3,000 worth of in-app purchases while playing Clash of Clans.

Pull out your old flip phones and lock up you iPad because freemium games are here to stay. There is only one way to avoid this money trap – grab a book, take a walk, hit yourself over the head with a hammer, do anything but play!

These are just four of the most common areas where money traps lurk. Be aware that businesses are constantly refining and creating new tricks of the trade designed to separate you from your hardearned cash. Staying conscious of your surroundings – whether in front of your computer, at the checkout counter or speeding up the 5 Freeway – can have a dramatic impact on your bottom line. SW

The “Freemium” Game “Play on.” Seems like an innocent request, right? Ask the 12 million players of Candy Crush Saga who were enticed by those two simple words to put close to $2 billion into the pockets of the game’s creators. The worst part? This game is actually free!

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First Financial Steps for the Newly Single SET YOURSELF UP TO THRIVE IN YOUR NEXT CHAPTER MY GENERAL RULE TO THE NEWLY SINGLE is to never make irreversible financial decisions during the first year after a divorce.

But shortly after my own divorce was final, I put my house on the market and traded in my SUV for a more economical sedan.

It’s funny how we often don’t listen to our own advice!

But I knew as Chief Financial Officer of my newly formed “empire,” it was a wise move, both financially and emotionally. Not only did downsizing shave close to $2,000 off my monthly expenses (not to mention cutting my property taxes by one-third), but it also meant I had a clean slate to design the next chapter of my life.

My well-strategized plan quickly hit a glitch though.

About a week after I opened escrow on a new condo, a disturbing email popped in my inbox. It was from my lender and close friend. The subject line read, “What’s up with your credit score?”

There is little that will create more anxiety to a finance guru than a blemished credit rating. In a panic, I grabbed the phone and began dialing for answers.

“What in the hell do you mean I applied for and received a $50,000 line of credit?”

Had my fear of falling victim to identity theft sud-

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denly become a reality? The answer was yes. But the villain wasn’t a well-organized gang or a brilliant computer hacker. The opportunist was actually my ex.

The man who once was my “everything” apparently decided that the best way to access an old, inactive line of credit – which had been previously titled in both of our names and I thought was closed – was to forge my John Hancock on the renewal form. As a result, I was now the proud owner of an additional $50,000 debt and a credit score that was more than 100 points lower than just six months before.

Ouch!

One of the most difficult things to adjust to in divorce is the notion that your once beloved partner is now, in most cases, your adversary. And just because the ink is dry on the divorce decree doesn’t mean the battle is over. There is still work to be done.

Following are the six financial steps for the newly single: 1. Finalize All Financial Arrangements Establishing the financial logistics of your divorce is only the first step. It is then your responsibility to see that the terms of your settlement are actually executed, including, but not limited to: changing the way financial accounts are titled, transferring divided assets into new

accounts, executing any necessary quitclaim deed on properties and transferring title on personal property like cars, boats, RVS, etc. Also, remember to update your tax withholdings and notify your CPA about any material changes to your deductions.

Remember that if you have children, only one parent can claim them as dependents!

2. Disinherit Your Ex. Prepare a new will, trusts, living wills and/or medical directives and power of attorney. (It’s creepy to think that my ex had the ability to pull the plug!) Remember to also select new beneficiaries on all retirement accounts (IRAS, 401ks,etc.) as well as insurance policies.

Beneficiary designation trumps what you direct in your will!

3. Check Your Credit Report Not only do you want to make certain there are no surprises, it is also important that you establish a list of liabilities that need to have your name or your ex’s name removed from them per your divorce decree. Be vigilant!

Don’t assume that your ex has your back.

It is worth noting that if you own property together and both names are on the mortgage, a quitclaim deed will NOT remove you from this obligation. Therefore, if the party who was awarded the house fails to make a payment, you are on the hook and your credit can be severely affected. To ensure that you are entirely off the loan, it’s best to have the property sold or have it stipulated in the decree that the existing mortgage be refinanced by your ex within a specific period of time.

4. Don’t Make Irreversible Financial Decisions Although buying that convertible luxury vehicle, investing in a new venture or moving to Tuscany sound like great ways to begin a fresh start, you may be thinking

emotionally and not strategically. Undoing a rash decision can cost you a lot of money down the road.

5. Think Strategically It is reasonable to assume you may need to purchase a big-ticket item like a new car (please, not that convertible) or downsize into a less expensive home. If so, be strategic about it.

You may actually have a better chance of securing these types of loans immediately after divorce while your tax returns from the prior years still reflect numbers from your prior, and, often times, more stable life.

If you simply need cash, don’t rush to liquidate your retirement accounts! The cost is simply too high. Not only is there a penalty and tax consequences, you are sabotaging all the work your money has done to build your net worth. A better option may be to open a line of credit (home equity, personal, or business) where the terms are much more advantages than that of a credit card (4.86 percent vs. 15.57 percent APR.) 6. Equip Yourself With The Right Team Your new life deserves a strong footing and often surrounding yourself with a new CPA, trust attorney and financial advisor is essential. It is critical that all three share your values, ideals and possess a strong desire to work with you and the other members of your team to preserve your income, protect your assets and build your net worth.

Becoming a newly single is never easy, even under the best of circumstances. And while your ex may not intentionally try to sabotage you, there are essential steps you need to take to not only protect yourself, but also create a strong financial foundation for the next chapter of your life. SW

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Financial Advice You Might Want to Ignore WHAT SOUNDS LIKE GREAT ADVICE CAN BE COMPLETELY WRONG “SPEND LESS, SAVE MORE.” You may find yourself chanting this mantra as you total up receipts and strive to get back on track after a season of generous gift giving. To turn this intention into reality, you may decide to turn to the latest best-seller and/or the Internet in search of solid financial advice.

But beware! Before you dive in — bank account first

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— you should know that even the “best” financial advice might not be what’s best for you. Taking advice at face value, or blindly following one rule or formula, doesn’t do anything to increase your financial know-how.

Long-term success will only come when you learn the rationale behind the advice and then decide for yourself if you should take it (or leave it)!

Here are just a few reasons why you might want to ignore some of the most prevalent financial advice.

Tracking Your Spending Can Set You Up to Fail Deciding to put spending parameters down on paper is the easy part. Incorporating that plan into your daily life is where it gets tricky. While tracking your dollars and cents can help you identify wasteful spending, it is not always the best tool to change your spending habits.

Little things — a daily cup of coffee, an extra tank of gas, or an impulse purchase of a great pair of shoes — quickly add up to be big budget sabotagers. So, if you don’t remember to write down every penny you spend (and it’s highly probable you won’t), your attempt to budget will fail.

Instead, set a limit on out-of-pocket expenses and establish an all-cash policy for daily purchases. You won’t need to track your spending to realize that you just blew your budget: Your wallet will do all of the talking for you. Unlike a credit card, when cash is gone, it’s gone.

Spending “Fun Money” Isn’t Always Fun It’s not uncommon for financial experts to suggest that a portion of your income should be designated as “fun money.” In fact, one well-known author advises that as much as 30 percent of your paycheck can be used to “play with” — to spend on frivolous things, or even “to flush down the toilet.”

If you were naturally good with money, you likely wouldn’t be in search of financial advice. So, to suggest it’s wise to do whatever you want with 15, 20, or 30 percent of your income is simply irresponsible.

Instead, educate yourself and learn the consequences of your spending. Equip yourself with the tools you need to make better monetary decisions. If you knew the REAL effect that buying a designer handbag had on

your future (e.g., less money for retirement, a smaller emergency fund, less capital to invest in yourself to improve your earning power), my guess is you wouldn’t do it!

It is all about the opportunity cost of your “wants,” and what you could have done with those dollars if you hadn’t wasted them on items that will likely be featured at your next garage sale.

Not All Debt Is Bad A recurring message from one highly regarded money coach is that debt is bad. It doesn’t matter if it is a highcost credit card charging 15.14 percent interest, an auto loan at 1.9 percent interest, or a mortgage creating a much-needed interest deduction on your tax return. His instruction is the same: Pay cash for everything!

My response: He is wrong. Not all debt is the same, and not all debt should be treated that way. It all comes down to its cost of capital (the interest rate being charged). If the terms are right, leverage can be a great way to put otherwise illiquid cash to work to build your net worth.

For example, given today’s low auto loan rates (often 1 to 2 percent), paying cash for a car may not make the most economic sense. Yes, it is generally better to avoid having a monthly payment; however, it’s not always best to tie up cash in a depreciating and illiquid asset, especially when it could be put to much better use in an investment earning 7 percent (which is the S&P 500’s average compound annual growth rate over the last 40 years).

Bottom line: Don’t simply rely on someone else’s “rules” to make sound financial decisions. Educate yourself instead. A comprehensive understanding of the “why” and the “how” behind any advice will help you gain control over your financial decisions. This is always preferable to following a herd, which can be led by some not-so-great advice. SW

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DA I LY W O R T H

How to Calculate Your Net Worth BEFORE YOU CAN GROW YOUR WEALTH, YOU NEED TO KNOW YOUR STARTING POINT ASSESSING YOUR PERSONAL FINANCIAL REALITY can be a bit daunting. But it’s time to lean into that fear and face your current financial landscape. It’s like dieting: When you’re trying to lose weight, you can’t be afraid to step on the scale — you need that data to get started!

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Begin with your net worth. Net worth applies to individuals as much as businesses — it’s a measure of the total monetary value of something. Here, that something is you. And when your net worth is increasing, you are in good financial health. Your net worth is calculated by taking what you own (your assets) and

subtracting what you owe (your liabilities). Remember, although the dollar amount of your income is important, it (if managed properly) is only one small component of your net worth.

Your first step is to create a list of everything you own and its current value. Unfortunately, not all your stuff is a monetary asset. For example, stained furniture and worn-out clothing don’t count. Do include personal assets, such as your home, car, art, and jewelry, as well as financial assets, such as cash, bank accounts, brokerage/investment accounts, retirement accounts and other holdings that have a cash value (such as college savings or whole life insurance policies).

When assessing value, it is important to understand the distinction between book value and market value.

Book value is the price you paid for something, and as long as you own that asset, that value never changes.

In contrast, an asset’s market value is the price at which you could sell the asset today.

Ideally, the market value of your assets is substantially higher than their book value. However, the reality is that some of your personal assets — aside from real estate or collectables like art or jewelry, where an appraisal is suggested — will have depreciated in value (their book value will exceed what they are worth in the open market today).

The same valuation principle holds true for many of your investment and retirement-related financial assets. Each has a book value, aka “cost basis,” which is the price you paid for that security or debt instrument.

Market value is what another investor is willing to buy that same instrument for today. For most liquid assets, the transfer of ownership occurs daily via security exchanges like the NYSE or NASDAQ, so it is easy to determine the market value. But the market value of liquid financial assets — such as partnerships, own-

ership interest in private companies, etc. — is much harder to determine and may require the assistance of a valuation expert.

Now that you’ve identified what you own, create a list of what you owe. This list should include all outstanding commitments you have. In addition to outstanding balances, be sure to include the terms of each liability (for example, the interest rate and duration of each loan) as this will come in handy when you create a strategy to pay down — and eventually pay off — your debt.

Your list of liabilities might include (but not be limited to) current balances on mortgages, auto loans, lines of credit, credit cards, student loans, personal loans and other types of promissory notes.

Now that you have your two totals, subtract the dollar amount of what you owe from the grand total of what you own, and voilà, you have your net worth.

By looking at your financial landscape this way, you will quickly see that there are only two ways to increase this number: increase your assets or decrease your liabilities.

To accomplish the former, you need to increase the money in your bank accounts; experience an appreciation in the value of your home or other physical assets; or increase your retirement, investment or other financial accounts through contributions or an increase in market value. To decrease your liabilities, you need to pay down or pay off your debt.

Building your net worth doesn’t happen overnight.

It is a slow and steady process that requires patience to allow your assets to grow over time, as well as a commitment to manage your income effectively and consistently contribute to your assets. But you can do this — and assessing your net worth is the perfect way to start! SW

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DA I LY W O R T H

Money Mistakes Women Make During Divorce MISTAKE 1: THINKING YOUR LAWYER IS A FINANCIAL EXPERT MORE THAN HALF of all divorced women fear they will end up a “bag lady.” Even high net-worth women are concerned they’ll run out of money and won’t be able to support themselves or their families.

I get it: I’ve been there. Living through my own divorce — and advising the numerous women with whom I’ve worked — I’ve seen how all too often, given the financial and emotional toll divorce takes, women focus on “just getting through it” and turn their attention away from money matters.

Yes, divorce can be emotionally and financially devastating. But, it can also be a time of opportunity — a chance for a fresh start and to establish a solid financial foundation from which to build your next chapter — and your success depends on the steps you take. Here are five money mistakes to avoid during the divorce process.

1. Thinking Your Lawyer Is a Financial Expert While a family law attorney generally assumes many roles throughout a case — a legal expert, a therapist, and even a shoulder to cry on — most divorce lawyers will agree that they are not financial experts. Having

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a solid understanding of the law does not equate to a solid understanding of things like how to value stock options; calculate the tax consideration of taking one asset over another; value a defined benefit retirement plan; or identify hidden income.

In order to ensure you receive the most equitable settlement possible, you need to equip yourself with a comprehensive team. This includes not only a family law attorney, but also a financial expert(s).

2. Letting Your Emotions Do the Talking Whether it’s insisting on keeping the house before determining if you can really afford it; throwing in the towel before assessing your true financial snapshot; or sabotaging your settlement by posting libelous remarks about your estranged husband on Facebook at 1 am; too often women make critical decisions about their divorce without thoroughly analyzing the impact their actions could have on their financial future. For example, retaining your home may be the greatest decision you make during your divorce, but it must be for economic reasons. Ignoring the fact that you may not be able to afford the property taxes, maintenance

expenses, and homeowners insurance could be financially devastating.

3. Having No Access to Cash Cash is king! Although it is wise to have a diversified list of assets on your balance sheet post-divorce, there is arguably no greater resource than a liquid asset during the year following a split. After all, you will likely have furniture to buy, dishes to replace, or a security deposit to provide.

Unfortunately, during divorce, many women do not have a comprehensive understanding of the assets that make up their balance sheet. Often times assets like automobiles, boats, and furniture (which are depreciating); retirement accounts (which have significant penalties and tax consequences if liquidated); and real estate (which can generate high carrying and closing costs) are selected over good old cash.

4. Not Adequately “Insuring” Child or Spousal Support Payments Successfully negotiating the dollar amount of your support — child and/or spousal — is only the first step in securing that income. Next, you need to insure it, and life insurance policies are a great place to start.

Begin by checking whether your existing policies have death benefits large enough to cover the present value of future support payments. Some variables to consider include the age of your children, amount of time you were married, inflation rate, and tax adjustments. (Note: spousal support is taxable while death benefits typically are not.)

Then, negotiate so that the ownership of that policy is transferred to you. Simply becoming a beneficiary is not enough. If your soon-to-be ex does not agree to this condition, consult with the insurance company directly before finalizing your agreement. You must

ensure that you will remain the beneficiary as long as a support order is in place, and that you will be notified immediately if premiums are missed.

Finally, if you need to purchase a new policy, negotiate the premiums into your settlement so that the supporting spouse covers the cost. After all, it is insuring his liability.

A word of caution: In certain circumstances the ownership of a life insurance policy may trigger unnecessary and extreme estate tax liability. Therefore, it is extremely important that you consult with an estate planning attorney to ensure property procedures and structures are considered.

5. Not Accepting That Your Standard of Living Will Change Maintaining your pre-divorce lifestyle could cost you 25 percent to 50 percent more once one household is split into two. As a result, your standard of living is likely to plummet almost 30 percent.

Be proactive! The quicker you embrace your “new normal,” the faster you can create a life you can afford to love. Rather than living within your means, live below your means. Nothing is more liberating than generating a surplus each month to replenish the savings and investment accounts that were just slashed in half.

Navigating divorce is challenging, both emotionally and financially, but how you handle your money matters will have a significant impact on your future.

And trust me, it is worth switching to boxed wine for a while! Because if you do this right, the challenges are only temporary. SW

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Put Your Money to Work YOUR PAYCHECK IS ONLY THE BEGINNING IT’S TEMPTING TO FIXATE on the dollar amount of your paycheck. But the fact is: What matters far more is what you do with those dollars — and what you allow those dollars to do for you over time. True financial freedom doesn’t happen until you’ve put your money to work for you.

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It’s not just about increasing your salary but about applying some of that salary to building your net worth. By definition, net worth equals your assets minus your liabilities. Simply put: It is what you own minus what you owe. (I believe Benjamin Franklin described it best when he said, “Your net worth to the

world is usually determined by what remains after your bad habits are subtracted from your good ones.”)

According to Bankrate.com, approximately 75 percent of Americans are living paycheck to paycheck with little to no emergency fund. Not only are they walking a fine line between financial ruin and survival, they are also creating a self-fulfilling prophecy that will have them working until their very last breath.

It doesn’t have to be this way.

Rather than bore you with mathematical formulas or fancy financial lingo, let me just say this: if you do your part your money will work harder — for you — than you ever imagined. It’s as simple as putting down your credit card and saying “no” to the temptation of an extra shopping trip to Target, one too many nights out with friends, or a shoe binge at Nordstrom’s. Even with as little as $3.50 per day (a.k.a your daily latte), $25 per week or $100 per month in your budget, you can create wealth.

Let’s assume that, starting at the age of 25, you took that $100 per month and opened an IRA account that allowed for retirement savings with tax-deferred growth. Let’s also say you invested that IRA in an S&P Index Fund and consistently did this — month after month, year after year — until retiring at the age of 65. That mere $100 a month over 40 years would total $48,000. Not too shabby. However, thanks to the concept of compounding, the actual balance in your IRA account would amount to nearly $260,000!

(That’s based on a compound annual growth rate of 7 percent, and adjusted for inflation.) Beautiful, eh?

Sure, you worked hard for that $48,000 but not nearly as hard as that same $48,000 worked for you — it generated almost four and half times more money. Now imagine the impact of cutting out two, three or four bad habits per month — perhaps even saving enough to invest the maximum allowed in an

IRA each year ($15 per day, $458 per month or $5,500 annually, if you’re 49 years old or younger). Using the same annual return rate and inflation rate, your new balance in that same IRA account could amount to as much as $1,175,000. Yet, the total dollar amount that you actually worked for was only $220,000. Pretty cool stuff!

Obviously, not everyone is 25 and has the luxury of time on their side. But, keep in mind, you actually have more time than you think. With the average life expectancy of a woman being about 80 to 86 years old, there is still a lot of muscle left in your dollar. And there is no time like the present to put your money to work.

Here is a simple, three-step program for building your net worth: Step One: Open Up An Account IRAs have tremendous tax advantages and are terrific retirement vehicles; however, the same math can apply to investment accounts with a bit more liquidity.

Step Two: Set Up Monthly, Automatic Withdrawals The actual amount you invest isn’t the most important factor — it’s the commitment to be consistent. Not only do monthly contributions eventually add up, they enable you to effectively ride out fluctuations in the market. This is the “dollar cost averaging” principle and a proven technique designed to reduce market risks.

Step Three: Be Disciplined, Focused And Patient A significant increase to your net worth doesn’t happen overnight. Just as in Aesop’s Fables parable of “The Tortoise and the Hare,” slow and steady wins the race. Remember your long-term goal of financial stability and freedom. SW

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PERSONAL FINANCE

An Anthology to Inspire Financial Empowerment

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PHOTO: iSTOCK

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THIS ARTICLE FIRST APPEARED IN M A G A Z I N E

Why You Need to Diversify Your Income—Today LONG STORY SHORT? PASSIVE INCOME WORKS FOR YOU EVERYONE CAN AGREE: A business should never rely on just one customer to generate the majority of its revenue. When that client moves on -- poof! -- there goes the business. But you need to apply that thinking to the bigger picture, too. Are you relying upon your business to generate all your personal income? That’s a problem.

Don’t think of it as a knock against your ability as a business owner or your company. All you’re doing is hedging, and that’s smart. For example, one of my clients is a lawyer. She does well, but her business, like any business, has ups and downs. So she also bought the building that houses a Wendy’s franchise in Michigan, which provides her a 7 percent annual return on a lease that runs in five-to-seven-year increments. (I own rental properties, too. And as I wind down my business -- which, hey, isn’t happening yet! -- that cash will fund a sizable chunk of my retirement income.)

So how much of your income should be diversified?

The answer depends on your circumstances, tax situation and goals. Make a plan with your financial adviser.

Here’s mine right now: I’m 45, with a decent amount of investable assets, so only 20 percent of my income is passive. Barring some unforeseen financial emergency,

all that money is strategically reinvested.

Now here’s where it gets interesting: Once you begin generating passive income, you can invest it in ways that build more wealth and eventually create, yup, more passive income. Let’s say you net $2,000 of income each month from a piece of rental property. Reinvest that income, like my lawyer client did, and it could earn 7 percent annually. After 10 years, you’ve got $334,000.

Even $500 of additional income each month could turn into almost $100,000 in 10 years, depending on how you invest it.

There are many ways to save and reinvest, but the process all begins the same way: As soon as your business kicks off enough income for you to start using that money judiciously, open your eyes to new income opportunities. You worked hard for that money—and that money should be given the opportunity to work just as hard for you. SW

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How to Separate Needs and Wants UNTIL YOU REALLY UNDERSTAND YOUR SPENDING, YOU’LL NEVER BE FINANCIALLY SECURE

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I’M A FINANCIAL STRATEGIST. I tell people how to manage their wealth. But I have a confession to make: I didn’t have my own personal-finance aha moment until several years ago. For decades, I had blissfully blurred the line between “wants” and “needs” -- until I got a divorce, which is when those two things were put in stark relief. To maintain my predivorce lifestyle, I realized, I needed to immediately bring home five figures each month. I didn’t need or want that kind of pressure.

Each of us may have a moment like this. You may think you’re protected from it; I did, too. But here’s the thing: Even if you do avoid a life-changing financial shake-up, you should always understand how you use your money. And you can’t accomplish that until you divide your spending into many little pieces.

Here’s how I learned to do it.

Right after my divorce, I had to downsize fast. To do that, I needed to figure out what my true needs were.

What were my critical expenses? That seemed to be straightforward enough: My mortgage was clearly a necessity, as were my property taxes, insurance premiums, car payment, cellphone and grocery bills. But the task quickly became more complicated -- because each of those “need” expenditures was also based on my “want” to live a certain lifestyle.

So for three months, I tracked my spending down to the penny. Using credit card and bank statements, and cash receipts, I grouped my expenses into three categories: fixed, variable and discretionary. Clearly, my discretionary spending could be nixed (adios, shopping splurges). Then I zeroed in on fixed and variable costs.

And once I had a list of those, I developed a two-part question and applied it to every expense: 1. Does this purchase fundamentally make my life better?

2. Is there a cost-effective alternative that provides the same benefit?

The answers led to two key conclusions: Damn, I

wasted a heck of a lot of money! and I have more control over this than I thought! Needing to put a roof over my head didn’t mean it had to cover 3,000 square feet. Same went for my grocery bill, which was out of hand thanks to my organic-food and expensive-wine habits. Within two months, I traded in the big house (along with its big utility bills, and big rooms to furnish and clean) for a tidy condo a few blocks away. I also replaced my precious SUV (and its high monthly payments, costly maintenance and gasoline bills) for a more affordable and reliable sedan.

Do you need to start making significant changes like these today? Of course not -- and even if I said yes, I don’t expect that you’d put your house on the market tomorrow. But I strongly advise that, right now, you find some small way to cut your expenses. See how it makes you feel. Chances are, you’ll discover what I did—that you barely miss the old, more expensive thing, and feel great about your savings. You’ll teach yourself a valuable lesson, and one that you might return to in tougher times.

I kept going: I ditched the gym membership for a bike; I learned to say no more often to my kids (and wouldn’t you know it, they still love me). Poof! In total, I cut nearly $3,500 off my monthly nut. And several years later, my quality of life hasn’t suffered. I still get to travel when I truly want to, and I never feel I’m living a life of self-deprivation. As it turns out, I simply didn’t need to make as much money as I thought to live a sweet life.

And now that I know that, I know I’ll be just fine if times get tight again. That knowledge, my friend, is worth more than anything else. SW

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THIS ARTICLE FIRST APPEARED IN M A G A Z I N E

How to Spot a Scam THREE SIMPLE WAYS TO PROTECT YOURSELF WHEN SOMEONE CLAIMING to be with the IRS left a voicemail saying I was being sued, I freaked. I called back the number to see what was going on, and the second the self-­appointed IRS agent answered, he demanded my Social Security number. That’s when I knew it was a scam, and I hung up. The IRS never asks for your Social Security number over the phone. (I also know the IRS never answers the phone that promptly!) If the agency has an issue with your tax returns, it will send a formal letter first.

I next called my CPA to make sure he hadn’t received any dubious calls regarding my tax status. He told me that I was his fifth client harassed by a phony IRS agent that week. In fact, more than one million people in the U.S. are approached with similar scams every year, according to the Treasury Inspector General for Tax Administration (TIGTA). Scammers sound official by using bogus case numbers, and they demand that your unpaid taxes be paid via prepaid debit cards, money orders, wire transfers, and, believe it or not, iTunes gift cards. When you refuse to pay, they threaten to have you arrested, take away your passport and even deport you. The fear tactics work: TIGTA claims that more than $29 million has been fraudulently collected from more than 5,500 victims in the past three years.

Don’t be a victim. If you receive a call that sounds in the least bit suspicious, do this first:

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Hang Up We all receive unsolicited phone calls, and the best course of action isn’t to press a button or answer any questions. If you give fraudsters any attention, they’ll double their efforts to hook you.

Google It A scammer posing as a utility worker once called a friend of mine. He claimed that my friend hadn’t paid her bill and threatened to shut off her electricity immediately.

While on the phone, she googled the words utility and scam and realized within seconds that she was being conned. You can easily do the same.

Check Your Credit Review your bank and credit card statements and balances online at least once a week; it’s a sure way to catch a thief.

But it’s also worth signing up for a credit report monitor.

For $19.99 a month, I use Experian, which alerts me by phone and text if a new charge or bank account is opened in my name, and when my credit score changes -- even by as little as five points. SW

PHOTO: iSTOCK

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THIS ARTICLE FIRST APPEARED IN M A G A Z I N E

Treat Yourself Like a Business WHEN IT COMES TO YOUR PERSONAL FINANCES, THINK LIKE A CFO

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THANKS TO MANY YEARS of modeling financial statements and analyzing performance ratios, I tend to think like a CFO when it comes to my personal finances.

This means I have a comprehensive understanding of the ripple effect that good or bad financial decisions will have on my net worth.

One role of a CFO is to ensure profitability, despite fluctuations in revenue. This starts with the essential task of identifying the proper balance between fixed and variable costs. When managing your personal income, you must do the same.

I ALWAYS P UT AT L EAST 20 P E RC E N T O F MY TAK E-H OME PAY I N TO SAV IN GS; IT’ S A NO N N EG OTIABLE EXP EN SE.

I always put at least 20 percent of my take-home pay into savings; it’s a nonnegotiable expense. To do this, I limit my fixed overhead to no more than 45 percent of my income. Allocating at least 35 percent to variable costs (food, entertainment, clothing, vacations) enables me to control my expenses and consistently meet my savings goal. It also prevents me from having to dip into my savings account if my income changes.

However, it is possible to save too much. A business that allocates too much of its retained earnings toward growth is often starved for cash and forced to rely on alternative—and expensive—ways to fund its daily operations. The same can happen to you: Poor cash management will inevitably force you to rely on credit

cards. Given that the average card charges 15 percent interest, this will undermine any return you’ve generated by your rigid need to save.

While properly managing your income is essential to building wealth, you must also maximize the way your money works for you. I recently decided to leave California and move back to Texas. Beyond personal considerations, the move made sense from a business perspective, offering more affordable travel costs, lower taxes and a new client base.

I had planned to put my California house on the market and liquidate its equity, which has nearly doubled over the past three years, and I was set on purchasing a far less expensive home in Texas with the cash. The idea of being mortgage-free was enticing. But upon further reflection, I realized that sacrificing the opportunity to leverage up a highly appreciating asset with a 3.25 percent mortgage—not to mention the potential for rental income—was not financially prudent. I decided I would be crazy to liquidate.

So take a hard look at your assets (and debts) and ask yourself if you’re putting each of them to their best use.

Consider how restructuring your liabilities could expand your assets.

I am certain that thinking like a CFO has saved me from making costly mistakes at home. You can—and should—do the same. SW

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THIS ARTICLE FIRST APPEARED IN M A G A Z I N E

Four Smart Steps to Protect Against Financial Disaster TAKE PRECAUTIONS SO YOU DON’T LOSE IT ALL EIGHTEEN MONTHS AGO, Jessica was living a lifestyle most people only dream about -- debt-free, hundreds of thousands in the bank, owner of a kick-ass retail business and a net worth approaching eight digits. Then she got sued. Now she hardly sleeps. Her bank account is nearly empty. Her credit card balances have passed

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$100,000. She has tapped out her company’s line of credit, and the IRS is threatening to go after her unpaid taxes. Even though she is sitting on more than $5 million of real estate that she owns free and clear, no bank will lend her a dime against it.

It’s a horror story many people know well. (I’m

acquainted with Jessica but can’t reveal more details because of her ongoing case. “Jessica” isn’t her real name.)

Life is full of awful surprises like hers -- just ask anyone who has survived a contentious divorce, the loss of a job or a major illness or accident. Unless your finances are as sturdy as a bomb shelter and you have an emergency plan in place, one big disaster can topple everything you’ve built.

That’s why I want to use Jessica’s trouble -- to the extent that I can -- as an object lesson, so you can understand how to avoid her fate. First, here are some things you should be doing right now: 1. Separate Your Personal Finances From Your Business Paycheck aside, you should never rely exclusively on (or expect) your business assets -- or credit -- to fund your personal emergency expenses. Keep separate bank accounts and credit cards, and secure business and personal lines of credit now, not during a financial disaster when banks will turn you down.

2. Prepare Yourself To Be Frugal I operate under two monthly budgets: One is my normal budget, where I get to enjoy life within reason. The other is what I call “the financial cliff.” It’s the budget that tells me how little money I need to live on, and I can switch to it tomorrow if necessary. If I do make the switch, any excess cash on hand goes toward the unexpected expense.

3. Have A Team In Place The moment catastrophe strikes, talk to your accountant, attorney, financial adviser and business partner(s).

Jessica didn’t do that; she thought she could handle it herself. Now she regrets not establishing a long-term financial game plan from the onset, which could have prepared her for the worst.

4. Know Your Blindside Your instincts during peacetime may not serve you well during battle. When disaster strikes, do not operate on instinct. Have a carefully considered plan, and stick to it.

This may sound crazy, but you need to take your ego out of the equation.

So here’s what a lack of preparation looks like: First, Jessica blurred the line between business and personal finances. When her legal bills started to roll in, she paid them directly from her business. As the expenses grew (now closing in on $500,000 and increasing every month), there simply wasn’t enough cash on hand to keep her business afloat. So she turned to her line of credit. After maxing that out, she then fell behind on her accounts payables (including taxes) and was forced to delay essential capital improvements that would have kept the business growing.

Consequently, her business’s operating earnings took a hit. Suddenly Jessica could no longer pay her personal bills. That’s when her credit card balances began to skyrocket and her credit score plummeted, and she ended up where she is now, with no idea when or how it’ll all end. Lawsuits can go on for a maddeningly long time.

Jessica is a tenacious and independent spirit; she built her business by sheer force of will. But a business’s success is within our control; disasters often aren’t.

Jessica now realizes she was blinded by confidence and didn’t recognize the brutal reality of her situation. I am confident she’ll bounce back. On her best days, she is, too. She’ll get past this and rebuild her life, and she’ll be smarter and tougher for the experience. But it would have been nicer, of course, to avoid the trouble at all.

You still can. SW

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Angel Investing 101 BEFORE YOU INVEST IN AN ENTREPRENEUR, KNOW THIS! A FEW MONTHS AGO, in May, the government finally allowed the average person to become an angel investor.

This change was known as Title IV of the JOBS Act. Technically speaking, it allowed “unaccredited investors”—that is, individuals who have less than $1 million in assets, earn no more than $200,000 a year and are not professional investors—to participate in crowdfunding campaigns in exchange for equity in a company. Maybe you’ve already done this, or at least have thought about doing it.

Is it a good move? That depends. You might be able to put money into the next Facebook…but the chances are low. My fear is that inexperienced investors will more likely bet the farm and lose everything. Now, hey, I know how entrepreneurs think: The greater the risk, the more potential for enormous returns. A lot of VCs think that way, too. But there’s a smart way to go about it. Before you jump into an investment, consider a few methods used by the private equity world to increase your odds.

Limit The Size Of Your Investment Many big institutional investors allocate no more than 10 percent of their assets to VC funds. Do the same with your personal “angel fund.” The other 90 percent? Keep that in a well-diversified and appropriately allocated portfolio of stocks, bonds and cash.

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Vet Everything Many private equity funds will look at more than 1,000 investment opportunties in a year but give money to only five of them. Proper vetting is critical and takes time. So whether you’re investing $5,000 or $5 million, don’t jump at the first deal you see. Do your homework, and be ready to say no.

Hedge Your Bet Private equity funds will invest in, say, 30 companies, knowing most won’t pay out -- but betting one or two will hit big. You should play the odds as well, even if all you have is $25,000 to invest. Build a portfolio of at least five investments, and count on losing your money on one or more of them.

If You Lose, Claim It If you’re looking to win big by gambling on a few early-stage deals, your odds are worse than the ones you’ll find in Vegas. (I’m not kidding.) But high risks aside, there is one silver lining to losing money on these investments: Those losses may become an ordinary income deduction on next year’s taxes. That’s not the ideal outcome, but this is one place where our tax code can help mitigate the pain. SW

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PHOTO: PEXEL

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The Most Wonderful Time of the Year THE MONEY-WISE APPROACH TO DOING GOOD

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THINK BACK TO YOUR LAST CHARITABLE ACT. Was it impulsive -- such as a cash donation to a Salvation Army Santa or a purchase at a charity auction? While these good deeds make a difference, being strategic about your charitable giving will enable you to make more of an impact, maximizing what you can give as well as what you will receive come tax time.

Your first step is to consider what philanthropy means to you. What do you hope to accomplish? What causes are you passionate about? Answering these questions will help you to stay focused and establish guidelines that lay out the amount and schedule on which you want to give, your income and tax needs, funding abilities and most effective giving methods.

Let’s say you are about to sell a highly appreciated asset (such as your business) and are looking for ways to be charitable -- and tax wise -- with the proceeds. Using a charitable lead trust (CLT) or a charitable remainder trust (CRT) could save you thousands (or millions) of dollars in taxes and provide much-needed funding to your desired charity.

With a CLT, the proceeds from the sale are placed into an irrevocable trust that creates a steady income stream to a designated nonprofit, as well as a significant tax deduction for you. At the end of the trust’s term, the asset reverts back to you or your beneficiary, depending on the type of CLT you design.

A CRT has the opposite effect, allowing your highly appreciated asset to be converted into a lifetime income stream for you. Upon your death, remaining trust assets go to your designated charity. You not only avoid capital gains tax from the sale of the asset; you also receive a reduction in income taxes now, as well as in estate taxes when you die.

Even if you don’t have a highly appreciated asset to sell, experts will tell you that you need to be strategic with charitable gifts. “Take, for example, IRAs and other

retirement accounts, which are often someone’s greatest form of savings,” says Teresa Davis Pusztai, director of philanthropy for Make-A-Wish Colorado. “While bequeathing these accounts to a loved one other than your spouse may seem like a generous act, few realize the tax implications.”

Pusztai points out that while a qualified charity can utilize 100 percent of the asset, an individual may be subject to estate and inheritance taxes, as well as federal, state and local income taxes -- in some cases the tax bill can exceed 60 percent. Not to mention, it is very likely that liquidating an inherited IRA will push your beneficiaries into a higher tax bracket, causing their annual income to be taxed at a significantly higher rate.

All charitable giving, whether it’s to a nonprofit or an individual, is a generous act. But with proper guidance from tax and estate-planning experts, you can preserve more of your wealth and have a much greater impact on the causes close to your heart. As a board member of the Center for Community Solutions, a San Diego-based nonprofit serving survivors of domestic violence and relationship abuse, I have seen firsthand the positive influence sustainable philanthropy can have on an organization. The fact that I see a tax benefit from my philanthropy is icing on the cake. SW

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Make “Cheap Money” Work for You BEFORE INTEREST RATES RISE, SHOULD YOU TAKE ON DEBT BECAUSE YOU CAN?

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MANY PERSONAL-FINANCE EXPERTS consider debt to be evil, whether they’re talking about a credit card charging 15.8 percent, an auto loan at 1.9 percent or a mortgage creating a much needed tax deduction. Their advice is always the same: Pay cash.

But that’s an oversimplification. Not all debt is the same; taking it on comes down to its cost of capital and how you plan to use your borrowed funds. If the conditions are right, this leverage can help you preserve cash and put an otherwise illiquid asset to work to build your net worth.

Corporations regularly use debt to optimize their capital structure—and so can you. “Apple recently capitalized on low rates by issuing $5 billion in debt, despite having $178 billion of cash on its balance sheet,” says Joe Elegante, CFA, portfolio manager at RMB Capital of Chicago. “It used the proceeds to repurchase shares of its own stock.”

Why? Apple’s return on invested capital—which has averaged approximately 35 percent for the last five years—is much higher than its after-tax cost of borrowing. “Given the fact that Apple pays a $2.08 dividend (1.6 percent yield) on each share outstanding, reducing the share count actually enhances the company’s financing cash flow,” Elegante explains.

Individuals can be just as strategic with their balance sheets, in far less complicated ways. For instance, rather than using cash to purchase a car, consider taking out a 1.9 percent, 72-month loan, and invest the cash you preserved in an S&P index fund, which has a 10-year average return of 7 percent. If you assume a purchase price of $30,000 with zero money down, using credit could add almost $4,400 (pre-tax) to your balance sheet at the end of five years.

Or imagine the earning power you would have if you used a 4.75 percent home equity line of credit (HELOC) and invested the newly liquid capital in that same index

fund for the next 25 years. It’s a strategy that could generate a return of almost $75,000 (pre-tax) for every $100,000 invested. Plus, you’ve diversified, and the interest payments are tax-deductible.

The Fine Print Before you scramble to take advantage of cheap debt, consider the risks. Like corporations, individuals who accrue low-cost debt levels today may be forced to refinance them at higher rates in the future, which could have a negative impact on future cash flow. Rising interest rates can also affect income, as well as the value of the assets used as collateral, especially if they trigger an economic downturn (see: the Great Recession).

Consider yourself warned. SW

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BUSINESS FINANCE

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PHOTO: RAINDROP MARKETING

THIS ARTICLE FIRST APPEARED IN M A G A Z I N E

How Much Should You Pay Yourself?

IT’S NOT A SIMPLE DECISION, BUT THERE IS A RIGHT ANSWER

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JACQUES SPITZER WAS HAVING A GREAT RUN. He’s the founder of Raindrop Marketing, based in San Diego, which scored triple-digit growth in each of the past four years. And yet, the success worried him. The problem: He had no idea what to pay himself. “Believe it or not, growth became frightening, not fun,” Spitzer says. “I was afraid to touch our increasing profits until after each quarter’s taxes were filed.” And even after the paperwork was done, Spitzer and his partner, Adam Wagner, still worried that their own salaries would screw up their company.

So they played it safe, paying themselves the bare minimum to cover their lean lifestyles.

When you start your business, calculating what to pay yourself is simple: Start with your sales and subtract operating expenses and taxes -- and that’s what goes into your wallet. Most entrepreneurs cross their fingers and hope it’s enough to cover the bills. When your business expands, things get trickier. Sure, you could increase your take-home pay right off the top -- and pay the additional taxes that go with it. But what if business drops in the next quarter? Will your company have enough in the bank to cover its obligations?

That’s why I suggest that owners create something called “a variable component to a compensation structure.” Here’s what that means in English: You set up a modest, recurring salary, along with an additional monthly payment based on a percentage of your company’s earnings. But beware: If you don’t have the right business structure, a system like this can still turn your taxes into hell. Be sure to consult with an accountant.

When Spitzer and Wagner sat down with their CPA, the team drew up a plan to cover all their costs. It’s a good one, and can work for almost any entrepreneur.

Here it is: MONTHLY PRETAX EARNINGS

20%

Invested in employees through raises, bonuses and team-building events.

20%

Build the company’s cash reserves until there’s enough to cover at least six months of operating expenses.

30%

Set aside to cover estimated taxes.

30%

Split between the two partners, distributed monthly on top of their base salary, which they’ve set to equal the median salary of their employees.

This plan accounts for everything: The cost of doing business, taxes and an uncertain future. The guys also have a plan for any excess funds: After they pay estimated taxes, they pay themselves a midyear bonus. It’s based on the company’s performance to date, as well as a conservative projection for the final two quarters. By doing it midyear, they have time to make any necessary adjustments by year’s end. Now, finally, they’re getting paid for all their hard work -- and have a reason to work even harder. SW

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THIS ARTICLE FIRST APPEARED IN M A G A Z I N E

Whose Cash Are You Made of?

DON’T CONFUSE YOUR COMPANY’S WEALTH WITH YOUR OWN.

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Whether your business is worth $200,000 or $20 million, guess what? You’re not. Your company is just a highly illiquid asset that provides you with a paycheck. And yet, if you’re like a lot of entrepreneurs, 100 percent of your wealth is attached to your business—leaving you doubly exposed to financial disaster. If it fails, you’ll lose your

FO R M O ST EN TR EP R EN EUR S, 100 P E RC E N T O F TH EIR WEALTH IS AT TAC H E D TO TH EIR BUSIN ES S — L E AV I NG TH EM DO UBLY EXP OSED TO F I N AN C IAL DISASTER.

current and future income. “Entrepreneurs need to realize that their worth—and financial future—is predicated on their personal assets’ ability to generate income,” says Elisabeth Cullington, managing director of HoyleCohen, a San Diego-based wealth advisory firm.

How to do that? It seems obvious: Pull out as much money from your business as you can. But that’s not so simple. Giving yourself a raise or a large bonus just increases what you’ll owe the IRS. You’re better off with one of the following options.

business, Cullington says.

Think of it as a partial sale—but instead of an outside investor, your employees essentially become your partners. It’s good for all: You’ll free up cash that can be reinvested (oftentimes tax-deferred indefinitely) to further expand your personal assets, your employees will have an incentive to work harder and you’ll still have a job. The cons: They’re complicated and expensive to set up, there’s an annual fee to maintain them and they can only be used in C or S corporations, not partnerships.

Create a Pension Solo-preneurs and owners with a handful of employees should look into a defined-benefit plan. This is a modified pension plan that enables you to take out chunks of cash (for some, up to $210,000) from your business’s net profits each year. And it’s tax-free, because the IRS views your contributions as business expenses. “Essentially, it’s a retirement savings do-over for an older business owner who neglected to diversify,” Cullington says.

How it works: A formula determines the income needed to replace your current salary when you call it quits. Required annual contributions are then set for you.

The shorter the period to retirement, the more you are allowed to save. One of Cullington’s clients moved more than $2.5 million from his business into his retirement savings without touching his company’s equity. Bonus: The payments cut his corporate tax liability in half! SW

Sell Stock If you have more than 20 employees, you have enough to safely set up an employee stock ownership plan (ESOP).

While this is technically an employee benefit, it’s also one of the most tax-effective ways for a business owner to tap into equity without losing majority control of the

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Border Disputes MULTISTATE BUSINESS TAXATION RULES HAVE CHANGED FOR YEARS, TEXAS POLITICIANS have tried to lure business owners away from states such as New York and California, touting the Lone Star State’s lack of corporate or individual income tax. The idea of adding 9 to 13 percent to your personal income is hard to resist. But you may not want to pack up your office quite yet. Multistate business taxation rules have changed in recent years, and if you operate a service business across state lines -- if you’re a consultancy or marketing agency, for example -- your presumed tax savings might be smaller than you think.

Historically, states primarily taxed you based on the location of employees, offices and the business’ sales force. It was a question of where the work that created the income was performed, according to Shannon Ward, CPA and senior manager of Los Angeles-based Gursey Schneider, LLP. But now many states are enacting what are called “market-based sourcing tax laws.” For example: If you live in Texas and perform a service for an individual or company in California, then California requires your company to pay income taxes on the value of work received there. See how this can get tricky? And it gets worse: If you’re conducting businesses in any of the 19 states currently using market-based sourcing, you’re required to file and pay taxes in each of them. I spoke to one business owner who paid taxes in 17 states this year.

It wouldn’t be so complicated if every state adopted

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these laws; coordinating payments would be easier that way. But since 31 states haven’t yet, you’re at a high likelihood of double taxation, Ward says. For example, let’s say your business is based in New Jersey, which taxes your total income no matter where it comes from. But your clients are based in New York, a market-based state that wants to tax you for the work received in New York.

Both can now collect tax on your revenue. Yet if the conditions were reversed -- you live in New York but all your revenue comes from New Jersey -- it’s conceivable that you would owe no tax at all.

For entrepreneurs operating a pass-through entity, such as an LLC or S corporation, the situation can be even more challenging. If you do business in the 19 market-based states, it’s possible that you (and each of your partners) will need to file a personal tax return for each state -- and that’s on top of your corporate tax returns. It’s an accounting and logistical nightmare that will likely require you to pay income tax, and often a franchise tax, to do business outside your home state.

Details around this new taxation method vary from state to state -- and even by industry -- so before you make a move, do your homework and consult your tax expert. And keep in mind that promises made by politicians, especially regarding taxes, are never as simple as they sound. SW

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Risky Business IT’S TEMPTING TO GO ALL-IN ON YOUR COMPANY, BUT THE SMART MOVE IS TO PLAY IT SAFE

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SOME ENTREPRENEURS pour everything they have into their business: their home equity, life savings and untold amounts of blood, sweat and tears. From my perspective—as a middle-aged, recently divorced business owner raising three teenage boys by myself and facing 12 years of college tuition and my own eventual retirement—I can’t take the same approach. I literally can’t afford to assume that type of risk.

In many ways, it’s a factor of age. “Our risk tolerance as it relates to business and personal assets changes as we get older, and we tend to become more conservative with both,” says Michael Manning, president of San Diego-based Manning Wealth Management. While he encourages business owners to take professional risks, Manning suggests they hedge against the depletion of personal assets, “which by default creates a safety net that will reduce the impact and provide some stability in the event their business fails.”

I’ve followed his advice by never relying on personal assets (or personal credit) to finance my business. To secure—and separate—my personal and professional finances, I opted to have two savings accounts that I built up before starting my company. I adhered to a frugal budget. I downsized my house, traded my car in for a less expensive but reliable one and declined any luxuries—all so I could build an emergency fund with six months’ worth of household expenses and a separate growth fund for my business. I dedicated 30 percent of my income to these accounts, and it took 18 months before I felt ready to launch.

Living below your means is essential when starting a business, but some entrepreneurs take this advice too far. They use their lean personal spending as rationale for burgeoning company expenses. They bet big—investing all but living expenses in their venture (i.e., they stop saving for retirement).

But saving for retirement is critical; it forces you to

diversify. When 100 percent of your wealth is tied up in your business, you’re double-exposed. If it fails, you lose your current income and the future income your equity could have generated in retirement. Consider this sobering stat: You’ll need approximately $1 million in investment assets for every $40,000 of pretax retirement income desired. To protect yourself, Manning advises investing no less than 6 percent of your gross income in a dedicated retirement account. I invest 10 percent every month as a nonnegotiable expense.

Smart financial decisions are not enough, though. You must also take steps to ensure that your personal assets are protected. This includes insurance, as well as legal considerations regarding your business structure and estate-plan items you don’t want to figure out on your own. Work with an expert. Above all, understand that protecting your personal finances requires you to temper your entrepreneurial optimism and play it safe. SW

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Stop Buying Your Tax Breaks THERE’S AN ANTIDOTE TO STOCKING UP ON BUSINESS EXPENSES

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ONCE I BECAME A BUSINESS OWNER, I developed a curious obsession for paying as little in taxes as possible.

Despite knowing better, I’d find myself scrambling toward the end of each year to buy a bunch of extra crap (even a new car!) that I didn’t really need, all to maximize my business expenses and reduce my taxable income.

But buying a new MacBook, redecorating my office or taking advantage of a loophole in the tax code by wasting $70,000 on an SUV is not a smart financial move -even if that SUV would save me $25,000 in taxes. It was all wasteful spending and, frankly, an embarrassment to my image as a self-proclaimed financial guru. So I came to my senses, stopped spending my way to lower taxes, and researched wiser ways to reduce what I owed Uncle Sam. I’m sharing this all now, just after you’ve filed your third-quarter taxes, so you have time to be proactive instead of reactive when reducing your tax hit in a few months.

Here’s what I found.

Easy: Do A January-December Swap As you approach the end of the year, be strategic about your income and expenses. You may want to wait until January 2 to deposit earnings, or bump up paying January’s bills during the last week in December. Why? If you’re on the brink of moving into a higher tax bracket (or worse, the alternative minimum tax), some simple, smart decisions could keep you on the lower rung -- or, in the case of being several thousand dollars over the threshold, push you back down.

as an LLC, 100 percent of your earnings is subject to a 15.3 percent employment tax (a.k.a. FICA). But if you file IRS Forms 8832 and 2553, you can remain an LLC but be taxed as an S Corp. This means that only your salary (let’s say it’s $75,000) is subject to this employment tax.

The remaining $125,000 will then be considered an owner’s distribution or dividend, which isn’t taxed for FICA. That just saved you $19,125.

Expert: Be Creative With Retirement Plans Sure, SEP IRAs and solo 401(k)s are good retirement vehicles for the average entrepreneur, but if you really want to save big on taxes, consider setting up your own defined benefit and pension plan alongside a Safe Harbor 401(k). This helped a business owner I know reduce his tax bill on a million in earnings down to $400,000 in earnings. That other $600,000? More than $450,000 went into his personal retirement account. (His employees’ retirement accounts got the rest.) Work with your tax accountant and wealth adviser to set up one for yourself. SW

Intermediate: Turn Your LLC Into A Virtual S Corp.

If you operate your biz as an LLC, filing two simple forms could save you thousands. Let’s say your business is on track to earn $200,000 this year. Given your current structure, be prepared to cough up an extra $30,600 on top of your state and federal income tax -- because

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Quit While You’re Ahead BUSINESS IS BOOMING? IT MIGHT BE TIME TO CASH OUT

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WELCOME TO THE HARDEST DECISION you’ll ever make as an entrepreneur. While it’s tempting to stick with a run of financial success for as long as possible, it’s important to understand what you might leave on the table if you wait too long to cash out.

In fact, putting your business up for sale while it’s on top might be the wisest entrepreneurial move you ever make.

That’s right -- smarter than the idea that launched the business in the first place. It’s not an easy choice for founders like you who are emotionally invested in their companies.

But let’s get real. Leading a company through the various stages of its life cycle requires skills you may not have. In general, when small businesses cross a certain revenue threshold -- typically $5 million to $10 million -- the biggest obstacle to future success is usually the founder. You might believe you are the next Jeff Bezos, but it may be time to swallow your pride, hand over the reins to a professional management team and take the money.

That’s how it should work, but too often entrepreneurs sell their business only after something forces their hand, such as a divorce or an acrimonious split with a partner -- or when they face a declining market or bankruptcy.

“Businesses that have gone flat or, worse, are trending downward will have a tiny universe of buyers. As a result, their ability to negotiate the value and terms will be compromised,” warns Abe Garver, managing director of Palm Beach, Fla.-based M&A advisory firm BG Strategic Advisors.

Buyers want to know they’re making a profitable investment and want to see evidence of solid past performance. The good news is that they don’t need to see much: Even one quarter of consistent growth can yield big returns. The point is you’ve proved that your company is still capable of upward moves.

Still, I realize it’s shortsighted to bank a successful sale

solely on your last quarter’s P&L statement. Even when earnings look strong on paper, the bulk of the profits could be tied up in accounts receivable. Without adequate cash flow, you will eventually be forced to turn to expensive debt to fund your day-to-day operations, a move that could very well jeopardize the marketability of your business. Buyers want to see strong working capital, which indicates a company’s underlying operational efficiency. If you do have debt, pay close attention to your cash flow-to-debt ratio, Garver suggests. The higher the percentage, the better the company’s ability to carry its debt and the more attractive your business will be to buyers.

You may think that nothing I’ve said here concerns you because you’re making more money than you thought possible from your business, or you’ve got no problem waiting patiently for the right offer to come along. In fact, you’re exactly the type of business owner I’m trying to reach. Both of those scenarios are indicative of company strength, so it may be the ideal time to get a lucrative deal done. The question is, Are you smart enough to do something about it? SW

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Work Stoppage IF YOU CAN’T WORK, NEITHER CAN YOUR BUSINESS IF YOU’RE LIKE PRETTY MUCH EVERY business owner I’ve ever met, you can’t stomach the idea of abandoning your business. But if an accident or illness knocks you off your feet, and you’re not prepared for it, you can go from six-figure monthly revenues to squat overnight. And yet, you’ll still need to pay your mortgage, business vendors and payroll. Can you do it? If you don’t have a backup plan, turn the page — you’ll find the three financial steps you should take today to protect you tomorrow.

Step #1 Secure Access To Cash For years, financial advisers have recommended that everyone stash enough cash to cover at least six months of personal and business operating expenses for emergencies. Yeah, right. To most people, that’s an obscene amount of money to have parked in a near-zero-interest bank account. A better solution: Open a line of credit (both personal and business) that can supplement a more modest emergency fund amount of about two to three months’ expenses.

Step #2 Insure Your Paycheck If you don’t have disability insurance, get it. Some policies guarantee a percentage of your income — typically up to 60 percent — while others cover your business’s

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overhead so you can pay bills (which, conveniently, includes your full salary). But make sure you shop around and read the fine print to uncover any loopholes.

A client of mine learned this the hard way, when she found herself in the hospital after a car knocked her off her bike. The insurance company paid nothing because it determined that her business did not suffer a “significant enough” drop in revenue while she was debilitated.

She nearly went bankrupt.

Step #3 Get Down To Basics Whether you end up relying on a lump sum of cash or a reduced income stream, one thing is for sure: You’ll need to live lean when you’re out of commission. The more time you prepare for the worst by limiting your personal overhead, the easier it’ll be to weather adversity. Personally, I never let my fixed expenses account for more than 45 percent of my income after taxes. SW

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The High Costs of Your Exit Strategy WHETHER IT’S A DIVORCE OR AN M&A TRANSACTION, DIVESTING CAN HAVE LASTING EFFECTS

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IN MY PRIOR LIFE AS AN INVESTMENT BANKER working in M&A, my objectives for any client were strictly transaction-based: Prepare the company for the sale, go to market and close a deal that puts the greatest amount of after-tax dollars in the owner’s pocket. I paid little (if any) attention to what happened to the client afterward.

A N E F F E CT I V E S U C C E S S I O N P L A N F O R A B U S I N E S S OW N E R REQUIRES ANYWHERE FROM T H R E E T O F I V E Y E A R S TO P L AY O U T.

It wasn’t until I began working as a financial strategist for a number of people going through divorce that I gained a new perspective. After all, a divorce is essentially an M&A transaction, a divestiture of two entities that once merged. In both cases, a successful transaction is one that maximizes the net proceeds to the individual and preserves his/her net worth long after the court documents are filed.

Too often entrepreneurs are hyperfocused on the value of the sale and fail to adequately consider all financial implications, including whether the payout will truly cover their lifestyle and income needs. The two most common financial oversights entrepreneurs make are underestimating how many of their everyday expenses are being subsidized by their business—medical and life insurance premiums, club memberships, vehicles, travel and entertainment costs, etc.—and over-

estimating the amount of after-tax investment income that can be generated from the proceeds of the sale.

Entrepreneurs also face the difficult challenge of giving up some control of their wealth—the wealth that, until the sale, was tied up in their business, an illiquid asset that they nonetheless managed. Moving that asset into a well-diversified investment portfolio, one that maximizes after-tax income while continuing to build wealth, requires ceding some control to experts, including, but not limited to, a financial advisor, a CPA and an estate-planning attorney.

Transitioning through life’s milestones isn’t always easy. Whether you exit a business or end a marriage, the steps taken after securing the payout are as consequential as the ones taken to obtain it. This leads me to my last piece of advice: Don’t rush it.

According to Douglas Freeman, executive vice president and director of trust services and consulting at First Foundation Bank in Irvine, Calif., an effective succession plan for a business owner requires anywhere from three to five years to play out. “The reason is twofold,” he says. “First, to maximize the total enterprise value of the business, and second, to prepare yourself for life after the transaction.”

Five years may feel like an unreasonable amount of time to work through this process. But the way I see it, devoting these years to making sure the previous 20 support the next 20 is a small price to pay. SW

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PHOTO: PEXEL

THIS ARTICLE FIRST APPEARED IN M A G A Z I N E

The House of Blues MORTGAGE STRUGGLES OF THE SELF-EMPLOYED

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A STEADY INCOME STREAM, a FICO score higher than 780 and an asset base that exceeded the desired mortgage amount: My loan approval should have been straight-forward, right? Unfortunately, it wasn’t.

While applying for a home equity line of credit, I experienced a snag. My tax strategy of maximizing my business deductions has cost me access to my home’s equity—capital I was hoping to diversify. I was penalized despite the fact that a notable amount of my business’s expenses were paid from an asset—a corporate savings account—not from revenue.

My scenario is no surprise to Kory Kavanewsky, branch manager and senior loan officer at CMG Financial in Coronado, Calif. “The home-buying process has become increasingly challenging for the self-employed,” he explains. “That’s because while business deductions sound like a great idea during tax season, they are almost always counted against you when qualifying for a loan.”

So, I have two options: I can leave a significant amount of my net worth tied up in an illiquid asset (my house) or sell it outright, only to risk being denied a mortgage when I go to reinvest in a new home. That’s not a risk I can afford to take, especially considering the beneficial impact my existing mortgage interest and property taxes have on my current tax liability.

On top of that, Kavanewsky points out another strike that could be used against me. “The process used to determine an entrepreneur’s income is typically at the discretion of the lender,” he says. “Fluctuations in earnings often result in the calculation of a two-year average. When your most recent tax return reflects a decline in taxable income by more than 10 percent, that lower amount will be used.”

Kavanewsky also warns against commingling personal and business funds. “Your lender will want to see that your business’s performance does not rely on your

personal assets,” he says. If you’re using personal funds to pay down business debt or costs, the lender will spot it and increase your personal debt-to-income ratio,

WHILE B USINES S DEDUCTIONS SOUND LIKE A GREAT IDEA DURING TA X SEA SON, THEY A RE A LMOST A LWAYS COUNTED AG A INST YOU WHEN QUA LIFYING FOR A LOA N. which will decrease your ability to borrow.

Fortunately, help is coming—but it won’t be cheap.

Lenders have begun originating loans that typically require less documentation and allow debt-to-income ratios to exceed the standard 43 percent benchmark, according to Appaswamy “Vino” Pajanor, executive director of San Diego-based Housing Opportunities Collaborative, a nonprofit organization that provides housing assistance. However, he says, these loans come with higher interest rates and lower loan limits, and require higher FICO credit scores.

No thanks. I pride myself on making smart financial decisions, yet my recent challenges in securing a loan reminded me that even a savvy, strategic plan could have blind spots. Looks like I’ll be staying put for a while. SW

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THIS ARTICLE FIRST APPEARED IN M A G A Z I N E

It’s Time for Your Checkup DESPITE RISING PREMIUMS, YOU STILL HAVE OPTIONS MANY EMPLOYERS may not start thinking about health insurance until this fall, when open enrollment begins creeping up. But if your premiums got bumped up a bunch this year—and mine sure did!—you know that next year will almost certainly be just as bad. It’s time to start thinking about this now, because there are two big options you should at least explore.

OPTION ONE Stipends. If you have fewer than 50 full-time equivalent employees, you aren’t mandated to provide insurance to them. However, if you do provide insurance, you’ll have to pay a significant portion of their premiums -- in some cases more than 50 percent, says Cindy Brenke, a risk adviser at IBTX Risk Services, a business insurance provider in San Antonio, Tex. So, what’s a small-business owner to do, if you’d like to provide for your employees but want to protect yourself from rising costs?

Brenke’ s answer: Replace your insurance plan next year with a tax-deductible stipend that you determine, paid to each employee -- including yourself. Everyone can then find insurance on the open market (see more on that below) and use the stipend to help pay for it.

The stipend gives you the flexibility to pay as much or little as you can afford.

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OPTION TWO Brokers. The Affordable Care Act created federal and, depending upon where you live, state exchanges, where people can shop for individual or family health insurance.

But remember, they aren’t the only place to do that. An independent insurance broker has access to all the insurance carriers and policies available in your state, including the ones on the individual exchanges, says Brenke. A broker can help you zero in on a policy that best fits your healthcare needs and your budget. And because the insurance companies pay brokers’ commissions, all policies include their fee, whether you use their services or not. I did something similar last year. With the help of a broker, I bought insurance through a national organization of financial services professionals. This route saved me almost $4,000, compared with what was available to me on the market for a one-person policy.

NOT OPTIONAL Discuss! You must! Start the conversations with your personal accountant, your company’s directors and employees and your family to see what course of action makes the most sense for you. Your employees may not be thrilled with a major change, of course, but they’ll be happy you made a decision that keeps your business solvent and keeps them employed. SW

PHOTO: iSTOCK

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PHOTO: iSTOCK

THIS ARTICLE FIRST APPEARED IN M A G A Z I N E

Advantage: Your Business TWO WAYS TO MAKE THE U.S. TAX CODE WORK FOR YOU

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Not long ago I received a text from my 16-year-old son—who works part-time at my company—that read, “Mom, can I open a Roth IRA?” I was thrilled that he was beginning to appreciate the significance that compounding interest and time would have on his retirement.

What I didn’t realize was that I, too, stood to gain from my son’s investments. This I learned from Kimberly C. Ford, managing partner with the accounting firm Hill & Ford in San Antonio, Texas, who specializes in tax strategies for small businesses. She says few entrepreneurs realize that the IRS allows an employed child to make annual Roth contributions of up to $5,500. Moreover, this account can be used to pay for the child’s higher

F E W E N T REP R EN EUR S R EAL IZE T H AT T HE IR S AL LOWS AN E M P LOY E D C H IL D TO MAK E A N N UAL ROTH CON TR IBUTIONS O F U P TO $5 ,5 00

education (with some restrictions).

By hiring my son, I increase my payroll expense, lower my company’s taxable earnings and free up disposable income (that I would have otherwise spent on his 529 college savings plan). Even better, this savings gives me the potential to put more toward my retirement and create an additional tax deduction of $5,500, since I use a traditional IRA. Ford says there are other ways I can take advantage of the current tax code in addition to putting my child

on the payroll. For example, by incorporating as an S Corporation I can pay myself through distributions and salaries. Unlike salaries, distributions are not subject to the 15.3 percent self-employment tax. And, as long as the owner is active in the business, these earnings are also exempt from the 3.8 percent Net Investment Income Tax. However, Ford warns, “Don’t get too greedy when allocating between salary and distributions. The IRS wants to see ‘reasonable’ taxable compensation paid to an S Corp owner.”

Like many entrepreneurs, when I formed my business I had zero income and a lot of expenses—meaning that strategically allocating taxable income wasn’t a concern.

Forming a limited liability company (LLC) was the logical choice, considering its low setup cost and minimal annual reporting requirements. I also knew that as my business grew and its profitability increased, I would need the flexibility an LLC provides.

While an LLC is taxed as a sole proprietorship or partnership (depending on the number of members), it gives its owner(s) the option to convert the business to a corporation as earnings increase or other factors change—an option that a limited partnership doesn’t provide. Therefore, I can easily convert my LLC to an S Corp and avoid self-employment taxation on passthrough income. I like that kind of flexibility.

But back to that IRA. After running Ford’s advice by my CPA, I was elated to learn the positive effect my son’s retirement account would have on my own net income.

We opened an IRA, and I even gave him a raise—under the condition that he contributes at least 50 percent of his take-home pay to the account. He took the deal. SW

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PHOTO: ADOBE STOCK

THIS ARTICLE FIRST APPEARED IN M A G A Z I N E

Split Decisions HOW TO PROTECT YOUR COMPANY FROM YOUR PARTNER’S DIVORCE 67

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BEFORE YOU FORMED YOUR BUSINESS PARTNERSHIP, did you vet your partners’ marriages along with their bank statements? You may not consider it until divorce proceedings are underway, but your partners’ spouses likely own a part of your company, whether you want them to or not.

In my day job as a financial strategist specializing in complicated (and often highly contentious) divorces, I rarely see a case where the day-to-day operations, valuation and ownership structure of a business is not affected in some way by a breakup. If your partner’s soon-to-be ex receives a part of the business in the divorce settlement, you’ll gain a new, unwelcome partner who now has a voice in how your business operates and, by extension, can impact your own net worth.

Michael Lees, a business attorney and partner at Solomon Ward Seidenwurm & Smith in San Diego, recommends including a contingency for divorce in your company’s setup. “Start with a well-drafted partnership, ownership or shareholder agreement that requires a partner’s spouse to sell his or her awarded interest back to the company (or to its co-owners) in the event of divorce,” he says. “This buy-sell provision should contain a comprehensive list of terms and conditions, including the method by which shares will be valued, the transaction timeline and the source of funds to be used for the purchase, such as cash on hand, an existing line of credit and/or a loan.”

To ensure that the “right to purchase” can be upheld in family court, it is worthwhile—and often essential— to have all non-partner spouses consent in writing to all aspects of the agreement long before any marital dispute arises, according to Lees. In the event a buy-back is not possible, this agreement can limit an ex’s voting rights and/or management participation.

Even with such arrangements in place, John Ovrom, CEO of Coronado, Calif.-based Exit Consulting Group,

regularly sees divorces play havoc on operations. “If one partner has to step away from the day-to-day operations to tend to his or her divorce, the balance is thrown off,” he says. “Resources are spread thin, resentment increases very quickly, and the partnership begins to look more like a sole proprietorship. The impact on cash flow can be dramatic and devastating.”

Ovrom’s advice is to plan for the worst. Divorce, illness, disability or the death of a loved one will affect your partner’s ability to contribute to the business. “You need to set up a legally binding plan that addresses how to handle these challenges,” he says. “One that answers some basic questions, such as how long one partner can step away from the company before his or her compensation drops. Who will assume his or her daily duties? If a loan or pay advance is needed to cover skyrocketing legal bills, what are reasonable terms?”

These are tough queries, but it’s better to ask them now than in the middle of a messy divorce. Handled correctly, every partner, including you, should come away with a greater sense of trust in one another to do the right thing to preserve the company—even when someone’s personal life is going down the drain. SW

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PHOTO: ADOBE STOCK

THIS ARTICLE FIRST APPEARED IN M A G A Z I N E

Not So Fast A TAX EXTENSION DOES MORE THAN BUY YOU TIME—IT COULD BE SMART BUSINESS

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IT’S TAX SEASON AGAIN. No matter how organized I am, each year I find myself scrambling to meet the deadline. I always thought this last-minute crunch was normal—sure, I’d procrastinate, but high achiever that I am, I’d forfeit sleep before asking the Internal Revenue Service for more time.

However, given the complexity of the 73,000-plus page U.S. Income Tax Code, I’ve come to realize that not all of the 11 million Americans who file extensions are procrastinating. In fact, many are making a wise financial decision.

Tamara Sipos, a CPA and partner at Gallina LLC, a San Francisco-based accounting firm, says there are two key reasons it can pay to ask Uncle Sam for an extra six months to file your tax returns.

Max Out Your IRA While filing an extension will not affect the April 15 deadline to claim IRA contributions, it does give you an extra six months to fund your Simplified Employee Pension (SEP-IRA). That cushion may be just what you need to save up enough cash (as much as $52,000 for 2014 and $53,000 for 2015) to fully fund your SEP-IRA for the year.

Moreover, an extension will give you significantly more time to reverse a change to your IRA. Since income limits on IRA conversions were lifted back in 2010, it’s common practice for individuals to convert their traditional IRAs into Roth IRAs to take advantage of tax-free retirement distributions.

However, converting your IRA creates a tax liability, and by the time you file your return, it may be a decision you regret (especially if the market underperformed and/ or your income exceeded your expectations and elevated you into a higher tax bracket). But all is not lost.

“Thanks to an idiosyncrasy in the tax code, if an adverse tax situation was created by your conversion, you get a do-over and can ‘re-characterize’ (aka reverse) the entire transaction,” Sipos says.

Implement New Rules In late 2013 the IRS added Tangible Property Regulations (TPRs) that must be followed on your 2014 return. “Given their complexity, and the potential tax benefits to your business, an extension is likely a wise move,” Sipos says.

TPRs apply to all tangible property and provide much-needed clarity for deciding whether an expense should be deducted or capitalized and depreciated.

Every business entity, as well as individuals who operate sole proprietorships or have rental property, will need to adhere to the new rules.

“Here’s the good news,” Sipos says. “Taxpayers who have significant fixed assets with remaining depreciation, or real property, may uncover large current and future tax deductions.”

Understanding how these regulations affect your business is critical to maximizing deductions while maintaining compliance. It’s a laborious task that is going to take extra time to figure out in this first year of enforcement, so that extension may be necessary.

Sipos points out that to take advantage of these rules, you must file Form 3115, Application for a Change in Accounting Method, both with your 2014 tax return and separately to the IRS. Furthermore, there are annual elections that must be completed with your return in order to be in compliance.

Still confused? It isn’t easy, which is why I’m filing an extension this year and happily paying my accountant to figure it all out. That way, I should end up with more money in my business and less going to Uncle Sam. SW

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My mission is to help women and their families gain the tools they need to become better stewards of their wealth.

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