Financial Fluency Episode #46: When it Pays to Pay
I did an episode of this podcast that was called Gurus vs Goonies.
It was all about how you don’t always have to go for the high dollar guru in any subject. There are different ways to get the information, different ways to interact with that information, and sometimes what you really need is a group of likeminded individuals to kind of get your back and be your gang, be your wolf pack, be your talking circle, be your support, without having to pay the super high prices that it sometimes can take to hire a guru in any subject.
Today I want to talk about the other times, the times when you do need to hire a real professional to help you with something.
You can listen in and read below and Tweet it out here
To illustrate this point, I want to talk about my daughter’s swim instructor. I hired a lovely 19 year old girl to be my daughter’s swim instructor, and there was a day where we hadn’t seen her for a while, we’d missed a few weeks, we’d gone on a trip, we’d done some things, she was having finals. We went to the pool, we were planning on meeting her, and we always get there a bit early so Miffy can get used to the pool, play around and get the wiggles out before her teacher gets there.
I asked her to swim to me, just like I’d seen the swim instructor do. She was on the steps, I went kind of halfway out into the pool and asked her to swim to me. She started swimming to me and it was a great flailing splashing mess of arms and legs, all coming out of the water, splayed limbs, fingers outstretched. She got to me, I reached out for her and pulled her to me, and I thought, okay, let’s see, what can I tell her to do that’ll help her swim more like Desi wants her to swim.
I gave her some instructions, told her what I thought she should do, took her back to the step and told her to swim to me again. She did it again without much improvement at all. As that was happening, Desi walks in, gets into the pool and is ready to start teaching. Normally when Miffy’s doing her lesson, that’s when I go and do some laps, and I did do some laps, but I kept my head up above the water and kind of watched and listened.
Desi went out in the middle of the pool, she told Miffy to swim to her, the exact same thing happened as when she swam to me, but then I watched what Desi did next, and I was really impressed.
She explained a few things to her, she took her hands, moved them, she showed with her own body what Miffy needed to be doing, and the next time she swam to Desi, there was a vast improvement. She didn’t kick her legs quite as high above the water, there was less splashing, more propulsion forward. She kept her fingers closer together, it was more of what you want to see when you see kids swimming.
It wasn’t perfect by any means, but by the end of the lesson I noticed a huge difference between those first few attempts when she swam to me, and what she was doing for Desi. They got up and dove and did a lot of different things, and it really got me thinking about the times when an expert versus an amateur makes a huge difference.
Desi, yes, she is 19 years old, and yes, I am many years older than her, but Desi’s from Hawaii. She actually told me that she learned to swim before she could walk. She’s a big wave surfer and she’s probably spent close to half of her life in the water.
Me, I’m from Arizona, I lived in Philadelphia for a while, I have done very little ocean swimming and a bit more pool swimming, but honestly, not much. I am by no stretch of the imagination a great swimmer. I can keep myself afloat, I don’t drown, but if there were a shipwreck or something at sea, if I wasn’t on the lifeboat, I might not make it, let’s put it that way!
So seeing a real expert at swimming teach my daughter to swim, she truly was the expert. It was awesome to watch her teach my daughter to swim, it was fantastic to see how expertly she not only knew how to swim herself, but how to communicate what my daughter needed to be doing. I feel like that’s what I was lacking.
Sure, I knew what it should look like, I knew it shouldn’t be all splashy up above the water, I knew her fingers shouldn’t be splayed out. I knew that her feet needed to be kicking more under the water, not as much above the water, but I wasn’t communicating that to her in a way that she really understood and could take action on it.
So watching that, it got me thinking about the times that we do need an expert, that we do need someone who can see the things that we can’t see ourselves.
The Obvious Choices
Of course the first place I think of with experts is things where it really has a legal or tax consequence in your business and your financial life. So for me, I think taxes are nothing to mess around with. I absolutely think that most of us need a CPA.
If you have a super simple financial situation, if you are a W2 employee and you really don’t have much else going on in your financial world except maybe some kind of retirement savings, maybe you can do it on your own, sure, but if you are solopreneur or a freelancer, if you have your own business, I think it’s a really great idea to have a CPA to help you with the tax consequences of your business actions.
There are times when we take actions without fully understanding the tax consequences, even from the very start when we register our business, either as an LLC, stay as a sole proprietor, or go for a higher level S Corp or C Corp. Those have very real tax implications, and it’s really good to fully understand what that is.
There are certain states in the US and certain counties where different types of corporations are taxed in different ways in terms of your local taxes, so it’s really good to talk to a CPA as you’re figuring out what the best business structure for you is in terms of taxes.
Liabilities Legalities, Insurance
I think this is another area where it is really good to get some professional advice. If you are a sole proprietor who is selling things on Etsy and you have no employees, no customers come to your home, you’re not dispensing anything that’s ingested in any way, if you have pretty much zero openings to liability, if there’s no way anyone can really legitimately sue you, then maybe you don’t need the protection of a limited liability corporation or an S Corp or a C Corp.
Personally the only people I know who really go for the C Corp level are people who are intending to bring on investors, who want to sell their company eventually, or who are planning on going public at some point.
The C Corp is really for big time serious money.
- If you plan on moving large amounts of money
- If you are a start up in tech that is really going big
- If you’re in the financial services industry
- If you are starting an investment platform
- If you’re handling people’s money, there are reasons that it is really important to do that kind of high level corporate structure, but not everyone needs it.
It is expensive, there’s a large burden of record keeping, tax preparation, having lawyers on board, things like that.
I think that when you are planning out your business structure, if you’re not bootstrapping it, if you are doing it in a bigger way, if you’re trying to do a non-profit, that’s another place where it is really good to get some great legal and tax advice on how to go about things from the start, set it up right, make sure you can get the tax deductible status that you want for your donor, stuff like that.
There are some really important times when it’s great to go for the professional that is going to provide you the service, and the protection. I think a lot of it is about the protection that you need from making mistakes that can be costly in the future.
That is why I wanted to do this quick episode. I’ve been thinking about the Gurus vs Goonies episode and saying that a lot of times we just need some comrades in arms, we need people who can take the journey with us, and not necessarily someone speaking to us from on high, dispensing wisdom. Sometimes we just need someone to go along with us, but there are times when it really is worthwhile getting the professional advice and services that you need.
The Short Version
Again I’m just going to recap really quickly. For me, the most important areas when I’m talking to a new business owner about what they’re doing are business structure in terms of the tax consequences, the legal consequences and insurance, looking at what your liability is and what kind of insurance you need to cover that.
So if you are just starting out in your business, if you have very few paying clients or no paying clients, I do actually think it’s a great idea to validate the idea before you step into hiring all of these professionals, because a lot of times what you think people are going to want and need may not be exactly what they want and need.
It’s great to go through a process of engaging customers or your ideal clients, even if you don’t have customers yet. Make sure what you have is what they want before you take on the expenses of registering the business, getting licenses, getting insurance, all that sort of thing.
Once you have a validated business idea and you are bringing in enough regular income that you’re going to have to pay taxes, you really should find, at the very least, a CPA. If you have questions about business structures, there is a lot of advice online, you can go to LegalZoom or places like that to start the process. However depending on what kind of business it is and if you have much liability, if you are open to people suing you, either by coming onto a property, by working with you and getting bad advice that affects them financially, there are a number of ways that you can be open to liability that may require the advice of a lawyer.
If that is the case, it’s great to get some feedback from other people who have been in your position and moved beyond it. If you know other business owners – especially if they’re in your local area – it’s great to ask them.
- So who is your CPA or lawyer?
- How do you feel about them?
- Are you happy working with them?
- How often are you able to communicate with them?
- How much do they help you?
- Do they just do your tax filings or do they help you really strategize for taxes throughout the year?
- How often do you meet with them?
- How often do you have phone calls?
In my Mastering Money Matters group, we had a month where we looked at building your financial team, and for that I created a PDF that includes a lot of questions to ask when you’re interviewing prospective CPAs.
You can use a lot of the same questions for prospective lawyers, it really takes you through how they want to communicate with you, how often you need to communicate with them, when you need to get them certain forms by, especially for things like taxes. When do they want you to make the appointments to go over your quarterly income to get the figures for your quarterly estimated taxes? When do they strategize with you at the end of the year about things like expensing out supplies and getting ready for the new year, or do you need to put off purchases because you’re planning on making more in the coming year.
There are all kinds of tax strategies that you can do to reduce your taxes in different ways with businesses by timing different actions. It’s great to have a CPA who will look at those things with you and help you figure it out. What is the best tax advantaged retirement account for you right now? Is it a Roth IRA? Once you start out earning your eligibility for a Roth, what’s the best investment then? You could do a traditional IRA, there are SEPs, there are individual 401ks that you can set up, depending on how you’re structuring your business. There are also some back door ways into a Roth IRA by putting money into a traditional IRA and then pretty immediately converting it into a Roth, if that’s the best strategy for you.
It’s good to have some people that you can talk to about all of these things, because every individual situation is different, both based on your business and your spouse’s income, how they earn income. If you have inheritance, if you have trusts with family members, it’s good to have someone who can really look at your full tax picture and your full financial picture, because it’s possible at some point you’ll want a financial adviser too.
A lot of people are starting to question the need for financial advisers because it seems so few of them actually outperform the market in the long run, so a lot of people do have basically their major investments in index funds, and I do too, but because I am super enthusiastic about different platforms, I’ve also been experimenting with things like motif.com and Betterment and WorthFM. I recently became a beta tester for the WorthFM – which is Worth Financial Management – platform and I am investing there as well. My main retirement investments are in Vanguard.
Now, the reason for that is that Vanguard was the original creator of the index fund. They have stuck by that model, they have stayed on top of it, and they run their business as a non-profit, which I love. Vanguard and TIAA-CREF which is the Teachers’ Union financial institution are basically the two places that have this model of no third parties’ involvement, so the only funds that you can buy from Vanguard are Vanguard funds. TIA-CREF has its own set of financial products it can sell you.
There are some really interesting annuities, really interesting products, but what you don’t have through Vanguard and TIA-CREF is the sort of back door incentives to sell more expensive products to create kickbacks. So a lot of companies – and this is changing now with the new fiduciary laws – but a lot of companies in the past, at least, if they sold a product for another company which may not be the best product for the client, they could get a kickback commission on it. So there is an incentive for them to bring in that commission that could outweigh their desire to get you the best product for your current situation.
Hopefully these new Department of Labor laws are changing that with these fiduciary laws which means that the highest priority is the good of the client, so those things should be changing, there should be fewer kickbacks, fewer back door commissions and things like that, but I still feel like Vanguard was built on a really good principle, so I’ve stayed with them, I like them.
The more complicated your situation is in terms of different income streams, different financial models, different trusts or family interests within businesses and things like that, the more important it is to really have a firm grasp on the legal and tax implications of your actions, both in your business and personal. Those are the times when I think it is really important to hire a professional, and of course there are other times, depending on what kind of business you have.
There may be times when you really do need some good marketing advice, when you really do need some good technical advice, so thinking back to that other episode that I did, Gurus vs Goonies, I wanted to do this episode as a companion piece to say that yes, I fully stand by what I said in that episode, but there are honestly times when you do need to make the investment and hire the professional who really know what they’re doing, who can get your back, who can save your butt and keep you from doing anything that’s illegal or puts you in danger, or just anything that make you tons and tons of time.
Like building a website, I do not know how to build a website, I had to hire people to build a website, for me, that was a really good investment, because if I tried to build it on my own, I would probably have spent a year watching YouTube videos and trying to do WordPress. So yes, I still stand by that you don’t always need a guru, sometimes you do need some Goonies, but you also probably need a CPA, maybe a lawyer, and possibly a financial planner.
It’s good to figure out when is the right time for these different things. Again, if your business is making enough to pay taxes, it’s good to at least consult a CPA, and when you start interviewing people to find the right person for you, you don’t have to take the first person.
Most CPAs and lawyers should do a free consultation with you, you should be able to ask questions like, how do I communicate with you? What happens if you’re unavailable? What happens if you are ill, incapacitated or even die before my taxes are due? Who is next in command? Who can access my accounts? How do I handle these sorts of things? By what date do you need me to get all of my receipts and reports into you? How often do you give me profit and loss reports? Do you go over these reports with me? When do we talk about tax implications? When do we strategize for my end of year taxes? How do these things work?
If any of you are interested in joining the Mastering Money Matters group, this is absolutely the type of stuff that we totally dive into. We talk about it, we talk about our own CPAs, we talk about any problems that we have, issues that have come up, times when things haven’t turned out like we thought, times when we’ve had higher tax bills than we expected and why that was, and what we do about it, so I’ll put a link to the Mastering Money Matters Group.
If you want to join, it is a great place where we really just hash things out, have great conversations, and every Friday we get on a private Zoom where you don’t have to reveal anything you don’t want to about your finances, but any questions you have, any feedback you want, it’s really turned into a bit of a mastermind, lately. Last week we actually had one woman come on who is really shifting her business from one focus to another, and she just sat there and told us all the ideas of what she’s working on, and we all brainstormed on her business idea, how to shift it and what we thought of what we would want from the type of business that’s shifting to. It’s something that all of us need, to be honest.
It was great! We talked about her new opt in, we talked about her copy, her presentation, her positioning, and by the end of it we all felt really jazzed for seeing her launch her new thing, and just today I saw a new page that she put up, and I was like, fantastic, she’s totally making this shift, she’s going to make this work, and it’s going to be awesome. Not that we’re in any way responsible for her deciding to do this, but I feel like getting feedback from people can be invaluable, especially when the people in the group are potentially part of the target audience that you’re looking at.
It’s really my favorite place to be online right now, I completely love it. If you want to join it, I would love to have you in there.
Thank you so much for joining me, and I will talk to you again soon.