Seven Things Every Self-Employed IT Professional Should Know About Money

1. Cash flow is king. You've probably heard the expression "cash is king." But cash flow is even more important because it reflects having cash available to pay expenses, including your compensation and benefits. Service businesses run by IT consultants need to make payroll and meet expenses just like any other business. So pay attention not only to the amount of cash on hand, but the expected timing of income and expenses. Establish a business line of credit plan through your bank, if necessary, and manage it prudently.
2. Keep business and personal finances separate. You need to create a "firewall" between your business and personal finances―don't intermingle money! Set up a separate business checking account and a separate business credit card. Don't worry about sacrificing frequent flyer miles or bonus points on your personal credit cards; you can get comparable benefits from a separate business credit card either or a personal card that you use exclusively for business. Having separate accounts will simply your affairs whether you hire a professional accountant or do your own accounting using QuickBooks, Freshbooks or a comparable software program.
3. Insurance is the foundation of sound business practices and a personal financial plan for any IT consultant.No one likes insurance companies, but insurance is a necessary evil. Start with property and casualty insurance to cover your business property, including hardware and software, as well as liability insurance. This is particularly important if you have a home office, so make sure your homeowners coverage includes your business.
   
   You should also insure your greatest asset, your ability to earn an income, with disability income insurance. The risk of an illness or disability keeping you from your job is real. Disability insurance isn't just for the physical laborer; a disability can keep you from your keyboard too. Explore a health savings account (HSA) as a way to accumulate cash on a tax-favored basis for current or future health insurance expenses, especially future health expenses since you are the source of "employer retiree health insurance."
4. Don't cash out retirement plans when you leave your old employer to start your new consulting practice. If you were an IBMer, you have great investment choices so consider leaving your money in the IBM plan. The tax penalties from cashing in a retirement plan are punitive and, more importantly, you will lose the tax-deferred compounding benefits of your current balance. Explore every possible source of cash to start your business. Remember to ask yourself, "Do I want to be an IT consultant forever, or do I want to retire someday?"
5. Manage your income taxes properly. Make timely payments either through withholding as you pay yourself or by making quarterly estimated tax payments to the IRS. Set aside reserves during the year, if necessary. Don't think you can "catch up" later. Understand the difference between "pre-tax" and "after-tax" income and remember that you can only spend "after-tax" income. IT consultants can be an IRS agent's dream.
6. Start a retirement plan. An individual 401(k) is ideal for IT consultants and is available at most mutual fund firms. A traditional or Roth IRA may be viable depending on how much you can and want to save. An individual 401(k), either traditional or Roth, allows for more savings than an IRA. Start early, even if you have to start small. If you wait until age 35 you would have to contribute 9% of your income to have the same amount at retirement as a 25-year-old who started out contributing 6%. Starting at 3% of income is better than zero. The amount you contribute has a much bigger impact on your long-term success than your investment returns. Also, minimize fees and expenses to maximize your long-term returns.
7. Have a strategic plan for your IT consultant business.Create a strategic plan that allows you to identify your ideal client; the way you charge for your services; the profitability that provides your compensation and benefits plan; the way your will market yourself so you continue to have clients in the future; and a succession plan or transition plan to your retirement. One of the great benefits of IT self-employment is the ability to have a flexible work schedule and a smooth transition into retirement. You may even choose consulting as a way to supplement your retirement income without having to quit a traditional corporate job cold turkey. Enjoy! 

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.

Estate Planning Tips for Second Marriages

Many of you probably took some time last week to celebrate love and your closest relationships. Celebrating the past and present should also lead to planning for the future. Who do you want to care for you if you aren't able to care for yourself? How do you want those most dear to you to be provided for in the future? These decisions are made through a process called estate planning, and it involves more than simply having a will. 

Estate planning is not just about what happens when you die. What if you are paralyzed in an accident, have a stroke or develop dementia? Who will make healthcare decisions for you and who will pay your bills and manage your finances? To complicate matters, many people are in second marriages that include children from previous marriages, so let's make that more complicated scenario the focus of this article. 

First, you need to plan for what will happen both during your lifetime and after you are gone. During your lifetime, you need a financial power of attorney, healthcare power of attorney and a living will. A financial power of attorney, as the name implies, authorizes someone else to make financial decisions for you and execute financial transactions if you are not able to do so yourself. There can be broad or limited powers. You should designate one person and at least one alternate. A healthcare power of attorney and living will designate someone to make healthcare decisions for you and allow you to state your intentions if you are terminally ill. Again, designate one person and at least one alternate. For second marriage situations, picking the right people can add a layer of complexity. These documents are governed by state law and prototypes are typically available via an Internet search. 

Three elements warrant your attention in planning for distribution of your assets after your death: Asset ownership titles, beneficiary designations, and last will and testament or revocable living trusts. In poker language, the first two trump the third: account ownership titles and beneficiary designation precede or supersede a will or trust. If your bank accounts and mutual fund or brokerage accounts are joint with right of survivorship, the assets will automatically pass outright to the surviving joint owner. Your life insurance policies and IRAs will be distributed according to your beneficiary designation regardless of what your last will and testament says.  

A revocable living trust agreement is practically an essential document to control the "who and when" of asset distribution for a couple in a second marriage with children from previous marriages. A trust can hold assets for a surviving spouse's remaining lifetime and then distribute them to children from previous marriages in the proportions you determine. A trust for "him" and a trust for "her" can ensure that "his" assets go to "his" kids and "her" assets go to "her" kids. Asset accounts and real estate can be owned by "his" trust or "her" trust during one's lifetime and life insurance and retirement plans can be payable to the trust at death to provide for survivors. Selection of the trustee is critical; it can be an individual or a corporate trustee (like a bank or private trust company). An experienced attorney specializing in estate planning matters is highly recommended for the estate plans of a second marriage couple. 

Life is never as simple as we wish it could be, but planning ahead will provide peace of mind for you and reduce the risk of family squabbles in the years ahead.

About Bruce J. Berno, CFP^®
Bruce J. Berno, CFP^® is the founder of Berno Financial Management, Inc. a fee-only comprehensive personal financial planning and investment advisory firm headquartered in Cincinnati, Ohio. Since 1993, Berno Financial Management has been helping individuals and families achieve financial peace of mind. For more information about Berno Financial Management, visit http://www.bernofinmgt.com/.