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/.

Six Early New Year's Resolutions

In the spirit of the holiday season, here is a list of early New Year's resolutions and fun things to do in 2012!

1. Remember, cash flow (income versus expenses) is the key to long-term financial success. If you are gainfully employed, you should be saving 15% to 25% of your income. If you are retired or not fully employed and are drawing on your investment portfolio, your total annual withdrawals should be 3% to 5% of your portfolio value or less. If your savings rate is low or withdrawal rate high, take steps to increase your employment income or reduce your expenses.
2. Insurance is the foundation of sound financial planning. Home and auto insurance, umbrella liability coverage, health insurance, life insurance, disability and long-term-care insurance all require regular review and updating. Consider funding a Health Savings Account (HSA). If you own or are considering long-term-care insurance, pay particular attention to and understand the inflation protection options.
3. In 2011, we've seen renewed volatility in stock market prices. Investors are still bruised from the 2008 global financial crises and pessimism is pervasive. Remember that the stock market is a leading indicator and will turn up before business, consumer and investor attitudes improve. Bond interest rates remain low and pose a challenge for achieving reasonable long-term returns. Broad diversification will be well rewarded and realistic expectations for long-term returns (mid to high single digits) are a must.
4. Are there any family or personal changes that might prompt a review of your beneficiary designations on life insurance policies (both employer provided and individually owned), IRA accounts and employer retirement plans? Were there any changes in employer plans wherein correct beneficiary designations should be confirmed? How about a power of attorney, will or trust documents? Are there changes of address or telephone numbers for people listed in your healthcare power of attorney document?
5. Do your children or grandchildren have employment income that could be used for a Roth or traditional IRA contribution? If applicable, have you funded 529 college savings plans for the calendar year for your children or grandchildren?
6. Do your family members know where to locate important personal financial papers and how to contact your professional advisors in case of an emergency?

Have a safe and happy holiday season. Take good care of yourself. Best wishes for a healthy and prosperous New Year in 2012!

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/.

What Is Your Life Expectancy?

Mortality tables will tell you the average life expectancy is in the low 80s. But for many of us, there is a reasonable probability of living to age 90 or 95. An informal scientific analysis may be informative.

One website that may be helpful is www.livingto100.com. It asks 40 quick multiple choice questions and should take about 10 minutes to complete. (Hint: it will be helpful to have your latest blood pressure and cholesterol test results.)

The website provides personalized feedback on all of your answers and a "to-do" list for you and your physician. For example, it may suggest that if you lose "x" pounds or exercise "x" times more a week, you could add "x" number of years to your life expectancy. We do not endorse this website for medical or financial planning advice, but consider it an interesting tool and kind of fun.

"What Is Your Life Expectancy?" could be the question that will make you the life of the party at your family Christmas gathering!

Let us know if you try it and what you learn! 

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/.

Numbers to Know for 2012

Here are some short and sweet numbers to impress your friends with for 2012:

Now you know!

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/.

Reality Show for Investors: "Survivor" by Weston Wellington

Note from Bruce:
The best stock performer in 5 or 10 years will probably be a company we haven't heard of today. History is filled with icons that have crumbled. A broadly diversified, passively managed fund is the best way to capture new stocks and tomorrow's best performers.
-Bruce J. Berno, CFP®

Anyone studying the long-run history of American business cannot help but observe how many of the prominent firms of one era fail to make it to the next. Free-market economies are characterized not only by intense competition but also by disruptive change. Sometimes a company's toughest competitor turns out to be a firm it has never heard of selling a product or service that didn't exist until recently. The list of companies that once dominated their industry but have fallen on hard times is lengthy enough to give every thoughtful investor reason for sober reflection.

Among many possible examples, a number of firms come to mind that were once highly regarded but later encountered serious or even fatal problems.

• Bethlehem Steel pioneered the steel I-beam, which launched a skyscraper boom in cities across the country. Its engineering expertise supplied the steel sections for the Golden Gate Bridge. But growing competition and a changing marketplace eventually took their toll, and the firm filed for bankruptcy in 2001.
• In 1973, Eastman Kodak held a seemingly impregnable position in the lucrative market for photo film and chemicals, enjoyed a reputation for innovation and astute marketing, and boasted a market value even greater than oil giant Exxon. Kodak shareholders had been favored with an uninterrupted stream of dividends dating back to 1902. Today the company is struggling to reinvent itself as the film business shrivels, the dividend has been suspended, and the share price is limping along under $3.
• A Fortune article profiling Pfizer in mid-1998 praised it for having "one of the richest product pipelines in the Fortune 500." A Wall Street analyst enthused that "some of my clients refer to Pfizer as the best company in the S&P 500." In early 1999, a Forbes cover story sounded a similar note, crowning Pfizer "Company of the Year" and observing that "the people who brought us Viagra have more blockbusters on the way." Thirteen years later, the Viagra boom has subsided, patents are expiring on highly profitable products, and the gusher investors expected from the research pipeline has slowed to a trickle. The share price has slumped over 50% since year-end 1998 compared to a 3% loss for the S&P 500 Index.

Some companies almost single-handedly create new industries but still find it difficult to turn innovation into a permanent advantage. Pan Am (air travel), Kmart (discount retailing), Polaroid (instant photography), and Wang Laboratories (word processing) all had impressive initial success and provided handsome rewards for their investors. Alas, neither Pan Am nor Polaroid survives today, and Kmart shareholders were wiped out when the firm emerged from bankruptcy in 2003. (Kmart, Polaroid, and Wang Laboratories were all cited as examples of "excellent" companies in the 1982 bestseller In Search of Excellence.)

Evidence of this "creative destruction" appears all around us. For example, the Wall Street Journal reported that shares of Minnesota-based Best Buy Co. slumped Wednesday (9/14) to their lowest level since 2008 after reporting a 30% drop in quarterly profits. For most of its life, Best Buy has been the toughest kid on the block, vanquishing rivals such as Highland Superstores and Circuit City on its way to becoming the nation's leading electronics retailer.

Will Best Buy fall victim to even tougher competitors such as Amazon.com or Walmart? Or is this current downturn just a speed bump on the road to even greater success? No one can say. For every riches-to-rags story, we can find another tale of decline followed by dramatic recovery. According to some accounts, for example, Apple was only a few months from bankruptcy when Steve Jobs returned to the company in 1997. Now it vies with ExxonMobil for the number one spot in a ranking by market cap. And who would have imagined that a floundering New England textile firm with a low-margin business that sells suit-lining fabric would one day become a financial colossus known as Berkshire Hathaway?

The thrill of owning a great growth company during its most lucrative phase is a powerful incentive to search for the Next Big Thing. But almost every company with a highly profitable position is under constant attack from competitors seeking to garner a portion of those hefty profits for themselves.

As a result, the search for firms destined to generate greater-than-expected profits for many years into the future is fraught with peril and likely to end in frustration. Most investors will be far better off harnessing the forces of competitive markets and putting them to work on their behalf by holding a diversified portfolio. As Nobel laureate Merton Miller once observed, "Above-normal profits always carry with them the seeds of their own decay."

Miguel Bustillo and Matt Jarzemsky, "Best Buy Gets Squeezed" Wall Street Journal, September 14, 2011.

David Stipp, "Why Pfizer Is So Hot," Fortune, May 11, 1998.

"Pfizer: Company of the Year," Forbes, January 11, 1999.

Standard & Poor's Stock Guide, 1974.

Thomas Peters and Robert Waterman, In Search of Excellence (HarperCollins, 1982).

Merton Miller, "Is American Corporate Governance Fatally Flawed?" Journal of Applied Corporate Finance, Vol. 6, No. 4, Winter 1994.


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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/.

What's the Probablity

The future is always uncertain. I am not a gambling man, but many times decisions are made by asking the question, “What are the chances that this is going to be successful?”

When it comes to investing, the probability is in our favor in the strategic decisions that we have made. It is also important to understand that no strategy works successfully 100% of the time, so what is the probability of:

A. U.S. large-company stocks beating one-month Treasury bills?

We may be in one of the minority periods now, but given that one-month Treasury bills are at 0% now, the chances of stocks doing better in the future are pretty good.

B. U.S. large-value-style stocks beating the S&P 500?

C. U.S. small stocks beating U.S. large stocks?

More importantly, add to these questions how stocks perform coming out of a recession, which is certainly a fair way to describe our current environment:

A. How have U.S. large- and small-company stocks performed after recessions since 1953?

B. How have value-style stocks performed after recessions since 1970?

Value-style stocks significantly outperformed growth-style stocks after recessions for both large- and small-company stocks for all time periods referenced above.

I am also reminded of a friend who rented a motorboat while on vacation, but the motor wouldn’t start properly and he had to leave the motor idling when not in motion. When he made this fact known to the marina owner, he got a nice southern drawl answer of, “Well, nothing’s perfect…” Truly memorable words to live by.

Clearly, we want you to understand that no investment strategy works 100% of the time. U.S. value-style stocks, both large and small, and U.S. small-company stocks have underperformed in July and August 2011, after having generally outperformed in the first half of the year. Using our “let’s look forward, not back” theme, the probability of stocks beating bonds and value-style and small company stocks providing superior performance coming out of recession is pretty good. In today’s age, having reasons to be hopeful should provide much appreciated financial peace of mind.


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/.