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Apache is functioning normally

September 22, 2024 by Brett Tams

Whether you’re a dedicated DIYer or prefer to lean on professional guidance, the truth is clear: smart financial planning can save you a lot of money over time.

Below, I’ll share some recent examples of tactical planning moves I participated in, including how much money was saved.

COVID Panic

In March 2020, you could be forgiven for thinking: “the world is ending, and I want to sell everything.”

But with proper perspective and an investment policy statement – both hallmarks of sound financial planning – many investors stayed the course.

They rode the stock market down more than 30% from peak to trough. Ouch. Nevertheless, they rebalanced along the way, selling stable assets (like bonds and money market) to buy stocks. This is not natural behavior – in fact, it’s the opposite of natural (“run from the threat” not “run toward the threat”). It’s learned behavior through experience and education.

In the end, while others made portfolio mistakes that cost them 10%, 20%, or more – permanent impairment of capital that can never be recovered – the intelligent investor has a better portfolio than if the COVID crash hadn’t occurred.

What’s the value of a 10% mistake on $1M?

Bring Me a Higher Yield

A friend-of-the-blog recently sold his successful small business for ~$10M or so. Not your everyday event, to be certain. But it’s more common than I realized.

We sat down to spitball some ideas, and my honest advice to him was:

Put together a financial plan, which details future planned inflows and outflows of money. This would include some well-deserved near-term spending!
Pick an asset allocation that corresponds with that plan.
Then, dollar cost averages the money into that asset allocation (e.g. 4 large tranches of investment over 12 months, or something similar)

The problem: the idea of investing millions into the stock market concerned him. I believe good investing education can help this problem, but that education doesn’t occur overnight.

As we discussed next steps, I asked him, “Where is the money right now?”

The answer? In a large US bank savings account, earning 0.05% interest per year. That’s $5000 in annual interest on a $10M deposit.

So while we continued are long-term conversation about investing in the stock market, I gave him some vital near-term advice: seek out a higher yield via a brokerage money market fund.

In the ~18 months since I gave him that advice, his average yield has been ~4.5 – 5.0%. That’s ~$475,000 in interest on a $10M deposit.

Yes – a simple tip to be sure. But sometimes financial planning is all about identifying the simple fixed in your financial ecosystem that will provide $475,000 per year instead of $5,000.

He bought my coffee that day. Don’t tell Suze Orman.

The Car Loan

One of my clients bought a new car a few months ago and came to me with a simple question:

“Should I take advantage of the 0% financing they’re offering me?”

$40,000 cash out of pocket, or a $40,000 loan with zero interest?

The math is simple:

If she takes the loan, she can keep her $40,000 in a high-yield account (such as our previously mentioned money market account) and earn ~$1500 – $2000 per year in interest. There’s no downside. There’s no loan interest accruing against her.

$2000 a year isn’t life-changing money. But it’s easy money. Small, easy percentage points can move the needle over long periods of time.

Sneak Through the Backdoor

Another client of mine came to me as follows:

Early 30’s couple
High earners (total income ~$350,000 per year)
Using 401(k) accounts wisely, putting lots of extra money into a Joint Taxable brokerage account

I asked them if they’d looked into saving money in an IRA…

“Yep, we looked into it, but we earn too much money.”

They were partially correct. They do earn too much for “normal” IRA contributions, but they’re the perfect candidates for backdoor Roth IRA contributions.

I think we can conservatively calculate that backdoor Roth contributions will earn this couple an extra $100,000+ over the next 30 years.

Which House?

Another client lives in the greater Washington D.C. area and, with her growing family, faces an interesting question?

Where should we buy our forever home?

Their three options – Washington D.C. itself, Maryland, or Virginia – each come with their own financial pros and cons. We helped her weigh the following:

The cost of the homes themselves (e.g. how far a dollar goes)
The long-term cost of property and school taxes
The state tax benefits of home ownership
The impact of state income taxes on their earnings over the coming decades
The impact of state capital gains taxes on their long-term investing

Of course, this family must pick a home that’s right for their lifestyle. Finances come second.

But the maximum vs. minimum we calculated puts their range of possible at a net present value over $500,000. In other words, “House A” in the most expensive locality would cost them $500,000 more than that same house in the least costly locality, as measured in today’s dollars, over the next 30 years.

Then, as always, we should ask how our lifestyle and life plan might change with an extra $500,000?

The Value of a Basis Point

Portfolio reviews are vital.

If an expert looks at your investments and says, “You can accomplish the same asset allocation as you already are but could save 20, 30, or 50 basis points if you do it this way.” …what’s the value of that recommendation?

FYI: A basis point equals 0.01%. So, 50 basis points equals 0.50%

Smart, simple investing strategies don’t need to be overly expensive. While professional financial planners do need to charge for their time and expertise, they can and should also save their clients money by keeping investing costs low.

What’s a basis point worth?

Imagine a simple scenario. An average investor might invest for 35 years, socking away $10,000 per year and achieving a long-term average return of 8.00% per year. This investor’s final portfolio would be worth $1.86M. And in this case, each extra basis point of expenses along the way decreases the final portfolio value by $4500.

11 basis points adds up to $50,000.

The lesson is simple: keep fees low where you can, and make sure you’re getting value above and beyond the basis points you are paying.

What’s a “Cash Balance Plan?”

Finanical planning is a deep subject area, with many nooks and crannies I haven’t even heard of yet. One such example occurred this year, when my colleagues recommended a “cash balance plan” to one of my clients.

He’s a successful solopreneur who last year grossed about $700,000 in income. A lot of those dollars were taxed at the highest possible levels. His effective tax rate was north of 40%.

A cash balance plan is a defined benefit retirement account (whereas a 401(k) is a defined contribution account). In other words, it is like a self-funded pension.

Cash balance plans are especially beneficial when all of the following are true:

Solo business owners, or with a very small staff.
Business owners with high incomes who would benefit from putting away more tax-deferred dollars.
Business owners who are higher in age (as you’ll see below, the annual contribution limits are very high for older business owners).

This client can contribute about $200,000 into his cash balance plan this year, saving ~$80,000 on his 2024 tax bill. Those savings are likely to increase every year between now and his retirement.

Of course, he will eventually have to pay taxes on those dollars when he withdraws them in retirement. But in the meantime, he benefits from tax-free growth and, more importantly, from the flexible and planned nature of retirement withdrawals; we will help him plan those withdrawals at a much lower than ~40% tax rate.

Ugly Annuities

I dove deeply on annuities in episode 86 of The Best Interest podcast.

In short, the vast majority of annuities are:

Vastly over-costed.
Disappointing in terms of return on investment.

For that reason, 99% of us are best off never touching annuities in the first place. But what if you’ve already bought an annuity – what should you do then? As always, an essential part of financial planning is to “let the numbers be your guide.”

Annuities typically have “surrender fees,” which charge the owner an extra fee to exit the contract. These fees range up to 10% of the total annuity amount (e.g. $100,000 on a $1M annuity), and typically decay in size as the annuity matures. It’s common to see, for example, an 8% surrender charge in Year 1 of the annuity decay to zero surrender charge after Year 10.

Again, I have a client example. I’m working with an gentlemen who owned multiple annuities at various maturity level. We analyzed each one and showed him the potential upsides and downsides of dissolving those annuities, paying surrender fees, and then investing the proceeds into a moderate investment portfolio.

Together, we created a multi-year schedule to flip his portfolio to the light side of the force.

In the long run – say, over the next 20 years – I can confidently say he’ll save 1.5% per year on fees. And I can conservatively predict his new allocation will outperform the annuities by 3% per year (up to 5-6% per year if I’m being less conservative).

On his $750,000 portfolio over those 20 years, my conservative assumptions above lead to an extra $1.3M in compounding in his pocket.

The Power of Financial Planning

Smart financial planning is not about outperforming the stock market. Instead, it’s about identifying places in your personal financial ecosystem where you can and should be saving money, pay less taxes, earning better returns, reallocating assets, pay fewer fees, taking advantage of special accounts, etc. etc.

It’s about knowing all the rules of the game, and then playing it effectively. This article showed you just a few examples, including:

Avoiding 6- or 7-figure mistakes when the stock market panics
Earning simple higher yields on large sums of money. 3% on a million bucks is $30,000 per year!
Backdoor Roth contributions to earn someone an extra $100,000+ over 30 years
Optimizing a home purchase to the tune of $500,000 over 30 years
Keep investing fees low, or saving $4500 for every 0.01%
Utilizing complex tools, like a cash balance plan, to save 6- or 7-figures in lifetime taxes
Detangling ugly annuities, resulting in an extra $1M+ over 20 years

These are just a few of many examples, and none of them involved picking the winning stocks.

The real value of financial planning lies elsewhere.

Thank you for reading! If you enjoyed this article, join 8500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week. You can read past newsletters before signing up.

-Jesse

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Source: bestinterest.blog

Apache is functioning normally

September 22, 2024 by Brett Tams

A due-on-sale clause — also known as an alienation clause — is wording commonly found in the fine print of a mortgage agreement. It allows lenders to enforce being repaid for the balance of a home loan when the property is either sold or, in some instances, transferred to another owner. That’s a simple explanation, but there is more to it so let’s dig a bit deeper.

What Is a Due-on-Sale Clause?

Understanding how home loans work is an important part of the home-buying process. Here’s what to know about a due-on-sale clause before you sell or purchase a home:

Definition and Purpose

A mortgage due-on-sale clause or alienation clause requires that the loan be paid in full when the home is sold. You may have heard about assumable mortgages becoming more popular as a way for buyers to sidestep higher interest rates by taking over a seller’s mortgage at a lower-than-typical rate. The due-on-sale clause prevents one buyer’s mortgage from being assumed by whoever purchases the house next.

Lenders began using due-on-sale clauses in the 1970s as interest rates spiked and buyers assumed the seller’s loan instead of applying for a new one with a higher rate. While homeowners won several court battles against this rule during the time, the U.S. Supreme Court ultimately ruled in favor of the banks. Congress formally legalized the due-on-sale clause for mortgages with the Garn-St. Germain Federal Depository Institutions Act in 1982.

Where It’s Found in Mortgage Documents

A due-on-sale clause should be located in your loan agreement. If you can’t find it in your paperwork, it’s worth calling your lender, especially if you plan to sell your house soon. Most, if not all, conventional loans are not assumable, meaning there should be a due-on-sale clause in place.

Some mortgages are assumable, and don’t have this type of clause in the loan agreement. Assumable loans include:

• FHA loans backed by the Federal Housing Administration

• VA loans backed by the U.S. Department of Veterans Affairs

• U.S. Department of Agriculture loans

Remember, though, that even if a loan is assumable, the new borrower still needs to qualify for the loan. In many situations, however, they don’t have to go through the whole mortgage process. They simply get to assume the existing mortgage from the original owner. Also note that there are unique FHA flipping rules that you may need to be aware of if purchasing a home that has been owned by the seller for a brief time is a part of your plan.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Questions? Call (844)-763-4466.

Recommended: Choosing a Mortgage Term

How the Due-on-Sale Clause Works

Now that you understand what an alienation clause or due-on-sale clause is, find out how it works so you can avoid lenders invoking this portion of your loan agreement.

Triggering Events

Lenders are notified when ownership of a property securing a loan is transferred. If the seller doesn’t automatically pay off the loan balance at closing, the lender may choose to invoke the due-on-sale clause.

There are a few other situations that would cause a lender to invoke the due-on-sale clause. These include:

• Transferring the property to a family member without a death or divorce

• Transferring the property into an irrevocable trust

• Transferring the property into a lease of more than three years

• Changing ownership from a personal property to an LLC or vice-versa

• Creating a junior lien that would lower the lender’s stake in a property

Lender Rights and Actions

In these cases, the lender could require the recipient of the property to transfer the title back to the original owner. The recipient usually has a set amount of time to do this, such as 30 days.

Another option for lenders, however, is to foreclose on the home if the original borrower is unable to provide the remaining mortgage balance. In these situations, refinancing the property or possibly modifying the original loan are also possibilities. (To see how much your monthly payment would likely be after a refinance, use a mortgage calculator.)

Impact on Property Transfers

The due-on-sale clause makes it more difficult to transfer properties to new owners. After the Supreme Court ruling, those recipients must meet certain criteria. Plus, even if they do meet the criteria, they must still qualify for the loan.

Exceptions to the Due-on-Sale Clause

There are exceptions that cause the due-on-sale clause to not take effect. Those exceptions are:

• Divorce: If the original borrower loses the house in a divorce settlement, the due-on-sale clause should not go into effect.

• Inheritance: Should the primary borrower die, then their children or surviving spouse can inherit the house without triggering the due-on-sale clause. With the average mortgage length being 30 years, it’s understandable that unique rules had to be put in place to account for buyers dying before their mortgage was fully paid.

• Joint tenancy: If two or more people jointly own a property, then the death of one owner doesn’t trigger the due-on-sale clause. Instead, whatever portion of the property was owned by the deceased borrower is transferred to the other remaining borrowers.

• Living trust: When a property is transferred to a living trust, there are no legal ramifications. A living trust is when a trustee is designated by a property owner to manage an estate.

Implications for Buyers and Sellers

If you’re the seller, the due-on-sale clause simply means that whatever money you make in the sale of your house must be adequate to satisfy your remaining loan balance. If it doesn’t, you have to be able to pay off your remaining mortgage obligations with other funds.

For the buyer, the implication of the due-on-sale clause is that the seller will have a minimum price that needs to be met in order for them to sell the home. The original lender must receive the amount it is due, or the house will not be free and clear for sale.

Fortunately, the desire to transfer an existing mortgage to a new borrower who is unrelated to the seller doesn’t happen very often.

Legal Aspects and Enforcement

It’s important to remember that there are situations where the due-on-sale clause cannot be invoked. As noted above, a title transfer that occurs because of a divorce or death usually forbids lenders from seeking immediate repayment. And even if lenders are within their rights, they still must provide ample notification before invoking the due-on-sale clause.

Recommended: Active Contingent in Real Estate: What You Need to Know

The Takeaway

The due-on-sale clause (or alienation clause) limits who can take over an existing mortgage from a homeowner, and it essentially establishes a minimum sales price that a buyer would have to meet in order for a seller to be able to agree to a contract. This is because lenders must always receive any remaining money owed on a mortgage when a home is sold.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% – 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It’s online, with access to one-on-one help.

SoFi Mortgages: simple, smart, and so affordable.

FAQ

Can I transfer my property without triggering the due-on-sale clause?

It depends on the situation, but there are some situations where it can be done, depending on the original loan agreement. For example, it’s often possible to transfer a property during a divorce, and it’s also possible to transfer the property to an immediate family member after the death of the primary borrower.

What happens if I violate the due-on-sale clause?

If you violate the due-on-sale clause, the biggest thing that can happen is that your lender can demand immediate full repayment of your outstanding loan balance. If you are unable to pay, then you are at risk of foreclosure, which can damage your credit score for seven years.

Are there any mortgages without a due-on-sale clause?

It’s rare to find a conventional mortgage without a due-on-sale clause because it’s in the lender’s best interest. However FHA, VA, and USDA loans typically don’t have this clause.

Photo credit: iStock/Perawit Boonchu

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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^¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency.

^†Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

This article is not intended to be legal advice. Please consult an attorney for advice.

SOHL-Q324-026

Source: sofi.com

Apache is functioning normally

September 21, 2024 by Brett Tams

“It’s not as if profits have shot through the roof and investors are riding a new wave of good times,” ATTOM chief executive Rob Barber said in the report. “Far from it, as they continue to struggle to benefit from the broader market boom. But the second-quarter numbers did show another step in the right … [Read more…]

Apache is functioning normally

September 21, 2024 by Brett Tams

Snapshot: As of September 18, the Federal Reserve cut interest rates by .5%. Although consumers shopping for a mortgage may not see rates come down within the year, people shopping for auto loans or paying off credit card debt may see interest rates come down faster.

On September 18, 2024, the Federal Reserve announced that it was cutting interest rates by .5%. This is the first time the Fed has lowered interest rates since 2020. During that time, the Fed has been raising interest rates to keep inflation in check and prevent a recession.

Although half a percentage point may not seem like a huge cut, it is expected to have an impact and the Fed has indicated that more cuts may be coming later on.

What happens when the Federal Reserve cuts interest rates

In a nutshell, when the Federal Reserve cuts interest rates, it makes it cheaper to borrow money. Here’s how that can directly affect you:

Lower Borrowing Costs: Banks can borrow money from the Fed at a lower cost, and they often pass those savings on to consumers. This means loans for things like cars, homes, or credit cards can have lower interest rates.
Encourages Spending: When borrowing is cheaper, people are more likely to take out loans and spend money. This can help boost the economy because businesses benefit from increased sales.
Investment Boost: Lower rates can also encourage businesses to invest in new projects since financing is cheaper. This can lead to more jobs and economic growth.
Impact on Savings: On the flip side, lower rates can mean less interest earned on savings accounts, which might discourage people from saving money.

So, in short, when the Fed cuts interest rates, it’s aimed at stimulating the economy by making borrowing cheaper and encouraging spending and investment.

Will interest rates keep dropping?

It looks like rates will continue to drop: members of the Federal Reserve’s rate setting committee have said that they expect to see interest rates come down another half a percentage point in 2024 and then another full point in 2025.

How will this affect my debt?

The decrease in interest rates is most likely to have an immediate effect on APR – annual percentage rate. If you’re looking to take out an auto loan or a credit card, APR is what determines the interest on those lines of credit.

If you already have a car loan, this probably won’t affect you. Generally, the APR on a fixed-rate car loan does not change after you take out the loan. It remains constant for the duration of the loan term. However, if you have a variable-rate loan, the APR could change based on market conditions or specific terms outlined in your loan agreement.

If you already have a credit card, it is possible for the interest rates (APR) on your credit card to change even after you get the card. Many credit cards have variable interest rates that can fluctuate based on changes in the prime rate or other benchmarks. Check your card’s terms and conditions to understand how and when rates might change

Will the rate cut help mortgage rates?

Although the rate cut may not affect mortgage rates immediately, it might have more of an impact later on. As it is, mortgage rates have already shown signs of decreasing even before the Fed announced it was making cuts, dropping to an average of less than 6.05%.

If you’re thinking about buying a home, applying for an auto loan or getting a new credit card, lower interest rates could mean this is a better time than before. Before you apply for anything, make sure you check your credit to make sure that you’re ready to qualify for the best interest rates possible.

You can see your FICO score and a free summary of your credit profile with our Credit Snapshot tool.

Source: lexingtonlaw.com

Apache is functioning normally

September 21, 2024 by Brett Tams

Once your small business starts earning a profit, you have to decide if you should distribute those profits to yourself (and any other owners) or reinvest them back into the business.

While it can be tempting to pocket your company’s profits, funneling at least some of that money back into the business is worth considering.

For one, reinvesting can help improve the company or expand operations, leading to even higher profits down the line. For another, reinvested money is generally considered a business expense, which means you likely won’t have to pay income taxes on it.

Read on for a closer look at why you may want to reinvest a percentage of your profits back into your business, how this can impact your business taxes, and ways you might use profits to help expedite business growth.

What Constitutes a Business Profit?

Profit is the money a business pulls in after accounting for all expenses. Any profits earned funnel back to business owners, who can choose to either keep it as earnings, distribute it to shareholders as dividends, or reinvest it back into the business.

Whether you own a small dog grooming business or a multinational corporation, the main goal of any business is to earn money. Thus, a business’s performance is based on profitability. For accounting purposes, companies will often report gross profit, operating profit, and net profit (the “bottom line”).

Recommended: How to Read Financial Statements: The Basics

What Are Businesses Taxed On?

Any profits that aren’t reinvested in a business are typically taxed as income. How that tax is paid depends on the structure of the business.

Most small businesses are pass-through entities, which means that the gains or losses are passed through to the owners on their personal income tax returns. Corporations, on the other hand, pay a flat tax on business profits.

Recommended: 10 Steps to Starting a Small Business

Types of Business Taxes

When we refer to “taxes” for a business, we’re actually using an umbrella term for many different types of taxes a business may have to pay. Let’s take a closer look.

Income Taxes

Income taxes are based on the net income of your business for the tax year. Net income is the same thing as profit (income minus expenses). If you share a business with others, the net income is divided among the owners based on your business agreement. Most small businesses pay both federal and state income taxes.

Estimated Taxes

Employees have taxes withheld from their paychecks, but as the owner of your business, no one is withholding taxes from the money you take out of the business.

Instead, you need to file estimated taxes throughout the year based on the income you have earned up to that point in the year. Typically, federal and state estimated tax payments are due on April 15, June 15, September 15, and January 15 for the previous tax year.

Self-Employment Tax

Employees generally have Social Security and Medicare taxes withheld from their paychecks. If you are a self-employed business owner, however, you must calculate and pay your own Medicare and Social Security tax through self-employment taxes.

Excise and Sales Taxes

Depending on which state you operate in and what type of goods or service you sell, you may need to set up a system to collect sales tax from your customers and report and pay that tax to your state.

You may also need to pay federal and local excise taxes. An excise tax is a legislated tax on specific goods or services, such as fuel, tobacco, and alcohol.

Payroll Taxes

If you have employees, you must withhold payroll taxes from their paychecks and pay applicable federal, state, and local taxes. The taxes usually withheld from employee paychecks include FICA (Medicare and Social Security taxes) and federal, state, and local income taxes. Employers and employees each pay half of the FICA tax.

Recommended: 3-Year Business Plan Structure

How to Reduce Taxable Income

As a business owner, there are many strategies you can use to reduce the portion of your business income (or profits) that can be taxed. Here are some you may want to consider.

Reinvesting Business Profits Into the Business

Reinvesting means retaining net profits (the income left over after all operating costs and overhead are paid) and investing them in activities or expenses that can help increase the value of the business. As a business expense, reinvested income generally isn’t taxable.

You may, however, want to reinvest only a portion of your profits and look for other ways to infuse capital into the business, such as applying for a small business loan. Interest paid on business loans is typically tax deductible as a business expense.

Finding Deductions

There are numerous business tax deductions you may qualify for and, when you add them all up, they can amount to a significant reduction in your taxable business income. Here are some of the most common small business deductions:

• Inventory

• Business property rent

• Startup costs

• Utilities

• Company vehicle expenses

• Insurance

• Rent and depreciation on equipment and machinery

• Office supplies

• Furniture

• Advertising and marketing

• Business entertainment

• Travel expenses

• Interest paid on all types of small business loans

Tax Audits

As a small business owner, it makes financial sense to explore all your options for reducing your tax bill. However, when it comes to deductions, you need to be careful. It’s particularly important, for example, to keep your business and personal expenses separate. If your deductions look suspicious to the IRS, the agency could potentially audit your business.

Investing in Employees

One great way to reduce your company’s taxable income is to invest in your employees. Generally speaking, any wages, bonuses, or other compensation you pay your workers in a given year are tax deductible as a business expense. That includes any fringe benefits you offer — such as gifts, health plans, and employee discounts — as well.

Rewarding your workforce can do more than lower your tax liability, however. It can also help boost their morale, increase productivity, attract the top talent, and grow your business.

Choosing Purchases and Investments Wisely

While it’s clearly important to invest in your business, the question remains: Where should you focus your funds? Here are a few purchases and investments you may want to consider.

• Equipment: It can be smart to reinvest profits into new machinery and equipment as your current assets age and become expensive to maintain. Upgrading equipment can increase efficiency and help you stay on the cutting edge of your industry.

• Software: Investing in software, such as payroll and accounting software, can help streamline tedious tasks and free you up to focus on more important matters, such as growing your business.

• Inventory: In some cases, using business profits to buy more inventory can be a smart business move. If you often sell out of popular products, for example, beefing up inventory can help you capture sales you’ve been missing out on.

• More marketing: You might consider hiring a marketing professional or agency to help create buzz about your business, improve search rankings, and expand your customer base.

Recommended: Business Cash Management, Explained

Tax Planning Strategies

One of the best ways to make your business tax efficient is to pay attention to tax credits and not just deductions.

Tax credits are particularly valuable because, unlike deductions, which reduce your taxable income, credits reduce your tax bill on a dollar-for-dollar basis. For example, if your small business owes $25,000 in taxes, a $5,000 tax credit means you can subtract $5,000 from your tax bill and only owe $20,000.

There are a number of tax credits your business might qualify for, including:

• Credit for Small-Business Health Insurance Premiums

• Employer Credit for Paid Family and Medical Leave

• Work Opportunity Credit

• Credit for Increasing Research Activities

• Disabled Access Credit

• Credit for Employer-Provided Childcare Facilities and Services

• New markets credit

The Takeaway

It takes hard work to establish and grow your business. Once you’re able to cover all your expenses, pay yourself a salary, and still have money left on the table, it may be time to consider putting that extra money into your business.

Reinvestment means pouring a percentage of your company’s profits back into your business. It can be a great way to increase the value of your company and to help your company grow. What’s more, reinvesting can reduce your business tax liability at the end of the year, for the ultimate win-win.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

How much is a small business able to make before paying taxes?

A small business generally must pay taxes on any profit it earns, but the specific amount before paying taxes depends on deductions, credits, and the business structure. For self-employed individuals, income over $400 is subject to self-employment tax, while other tax obligations vary by income and state laws.

What does the 20% business tax deduction do?

The 20% business tax deduction, part of the Qualified Business Income (QBI) deduction, allows eligible small businesses to deduct up to 20% of their qualified business income from their taxable income. This reduces their overall tax liability, promoting business growth and investment.

What is a business write-off?

A business write-off is a tax deduction that allows businesses to subtract certain eligible expenses from their taxable income. Common write-offs include operating costs, rent, supplies, meals, startup expenses, employee salaries, and more. These deductions reduce the overall tax liability by lowering the business’s reported income.

Can you invest business profits to avoid taxes?

Yes, you can reinvest business profits into the company to reduce taxable income, but you cannot avoid taxes as a small business owner. While reinvesting can lower taxes, it doesn’t fully eliminate tax obligations, as profits are still subject to applicable tax laws and limits.

Photo credit: iStock/Andrii Yalanskyi

SoFi’s marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOSMB-Q324-032

Source: sofi.com

Apache is functioning normally

September 21, 2024 by Brett Tams

Mortgage-rate locks, which allow homebuyers to secure an interest rate for a set period, are generally a reliable indicator of purchase demand, with around 80% of rate locks leading to home purchases. “Most of the homes that are sitting on the market right now are second homes – especially those in the $400,000 to $800,000 … [Read more…]

Apache is functioning normally

September 20, 2024 by Brett Tams

Real Estate

September 20, 2024
by Mark Ferguson

Let’s dive into how interest rates are affecting the real estate market, particularly from an investor’s point of view. I’ll use an upcoming property purchase as an example to show how high versus low interest rates can make or break an investment.

I’m about to close on an 8-plex (eight-unit building) that’s seen better days. It’s a rough property, but it has a lot of potential. In real estate, you make money by adding value, and that’s exactly what I plan to do. In today’s high-interest-rate environment, it’s nearly impossible to make rental properties cash flow without taking steps to improve them, either by increasing rents or enhancing the property.

This particular property was listed on the MLS, and it’s a rare find in Northern Colorado. Even at $600,000, which is very cheap for an 8-plex in our area, the numbers aren’t great under current conditions. However, that’s why it’s available at a lower price—because it needs work. Let’s look at how interest rates play into the decision to buy a rental property like this one.

InvestFourMore Cash-on-Cash Calculator

How Interest Rates Impact Cash Flow

The cost of borrowing is a huge factor for investors. With interest rates as high as they are today, the numbers on many rental properties simply don’t add up. For this example, I’ll assume a $600,000 purchase price with a 20% down payment, though in reality, I often use private money and refinance later.

Purchase price: $600,000
Down payment (20%): $120,000
Loan amount: $480,000
Monthly rent: $4,000

With a traditional 20% down payment, this deal would be tough to justify right now. The property brings in $4,000 per month in rent, but the mortgage and expenses eat up nearly all of that income, especially with current interest rates. If you were to pay all cash for the property, your return on investment (ROI) would be an abysmal 2.2%, which is well below inflation and far from ideal for any investor.

InvestFourMore Cash Flow Calculator

Additional Costs to Consider

Investors should also be aware of additional expenses beyond the down payment. You’ll need to factor in closing and loan costs, which can add up quickly. These might include:

Appraisal fees
Prepaid interest
Insurance
Taxes
Loan origination fees
Title costs
Improvement Location Certificate (ILC)

In total, you’re looking at an additional 3% of the loan amount, or about $15,000, bringing your initial cash outlay to around $134,000. If you’re financing through a bank, you’ll also need reserves on hand to cover unexpected costs like vacancies or maintenance.

InvestFourMore Cap Rate Calculator

Ongoing Monthly Expenses

Here’s a breakdown of some estimated monthly expenses for this property:

Insurance: $500
Property taxes: $500 (this is in a small town, so taxes are relatively low)
Property management: Even if you manage the property yourself, you need to account for your time.
Maintenance: Given the rough condition of this property, maintenance costs could be high, particularly if the property isn’t fully renovated.
Vacancies: Vacancies are always a factor. Lower-quality properties tend to have more tenant turnover, while renovated properties attract longer-term tenants.

Before financing, this property is already costing about $2,900 a month to operate. If it brings in $4,000 a month in rent, that leaves just $1,100 a month in profit, or $13,200 a year. For a $600,000 investment, this results in a 2.2% ROI—not nearly enough to make it worthwhile.

The Impact of Financing

Let’s assume you take out a $480,000 loan with an 8% interest rate on a 30-year term, which is typical for investors right now. Your monthly mortgage payment would be approximately $3,522. Combined with the operating expenses of $3,000 a month, your total expenses are $7,000. Since the property only brings in $4,000 in rent, you’d be losing $3,000 a month!

If you plan to hold the property and fix it up, you might be able to increase the rents to $7,000–$8,000 a month. In that case, your cash flow would improve, but you’d still only be earning around $1,000 a month, or a 5% ROI—still not great for the effort and risk involved.

How to Qualify for a Loan on an Investment Property

When Interest Rates Drop

The real opportunity comes when interest rates fall. If rates were to drop to 5%, your monthly mortgage payment would decrease to around $3,000. Now, with $8,000 a month in rental income, your expenses would total $6,000, leaving $2,000 a month in profit, or a 10% ROI. This scenario shows how significantly lower rates can change the profitability of a property.

Building Equity and Future Appreciation

Beyond cash flow, there’s another reason to invest in rental properties: appreciation and equity growth. If I fix up the property and raise rents, other investors may be willing to buy it at a higher price, accepting lower returns in exchange for the improved condition and potential for future appreciation.

For example, if the rents reach $96,000 annually, and the property sells at a gross rent multiplier of 9, the value could increase to around $860,000. After accounting for $100,000 in repairs and additional closing costs, that’s a potential $316,000 gain in equity—a strong outcome for a value-add property like this.

Conclusion

Buying rental properties in today’s high-interest-rate environment is challenging, but there are still opportunities for investors who know how to add value and improve properties. High rates may deter some, but if you can weather the storm and improve the property, you stand to benefit from future rate cuts and potential equity gains. The key is finding the right property, knowing your numbers, and being prepared for the risks and rewards that come with real estate investing.

Source: investfourmore.com

Apache is functioning normally

September 20, 2024 by Brett Tams

Maintaining cash flow and covering essential expenses can be a challenge for small business owners. When faced with limited options and a pressing need for quick funding, a merchant cash advance (MCA) can be helpful.

Read on to learn what a merchant cash advance is, its advantages and disadvantages, when businesses use them, and how to apply for one. We’ll also explore some alternative loan options if you decide an MCA isn’t right for your business.

Key Points

• A merchant cash advance is a funding option that provides cash upfront in exchange for a percentage of the business’s future sales or receivables.

• Repayment can be through a fixed percentage of daily credit and debit card sales or fixed daily or weekly withdrawals, offering flexibility but potentially impacting cash flow.

• MCAs are particularly beneficial for businesses with fluctuating cash flows, those that lack collateral, or businesses unable to qualify for traditional loans due to poor credit or limited business history.

What Is a Merchant Cash Advance?

A merchant cash advance is a small business funding option that allows you to receive money in exchange for future sales. MCAs are technically not loans since they offer cash upfront in return for a portion of a business’s future sales. For this reason, they do not have to follow small business lending laws.

Since they aren’t loans, MCAs don’t require collateral, and merchant cash advance companies typically won’t look at your credit scores to determine approval. However, there is little government regulation on MCAs, which can lead to some merchant lenders engaging in practices that are costly to your business.

Merchant Cash Advance Example

Merchant cash advances charge a factor rate instead of a traditional interest rate. A factor rate is a decimal multiplier used to calculate the total amount you’ll repay on a loan or, in this case, an advance. Most factor rates range from 1.1 to 1.5 depending on the lender and your specific business.

Let’s say you want a merchant cash advance for $75,000. Assuming a factor rate of 1.3, you’d pay a total of $97,500 over time to get that $75,000 now ($75,000 x 1.3 = $97,500). This does not include any additional fees the lender may charge.

To pay the MCA back, a portion of your daily or weekly credit card sales will be automatically withdrawn from your account. The lower your credit and debit sales are, the longer it will take you to pay back the MCA. However, the longer it takes, the lower your overall annual percentage rate (APR) will be. Keep in mind that MCAs are one of the most expensive forms of borrowing for small businesses.

How Does a Merchant Cash Advance Work?

A merchant cash advance is not a loan but a financing option that allows small businesses (“merchants”) to get a cash advance for business expenses in return for a portion of their future sales or receivables. Unlike traditional loans, an MCA involves purchasing future sales at a discount. Typically, the process looks like this:

1. Apply for the MCA: The merchant applies for a cash advance, providing necessary business and financial information. The merchant and MCA provider agree on the terms, including the percentage of future sales or fixed payments.

2. Application approved: The MCA provider reviews the application and approves the advance based on business performance and future sales projections.

3. Funds received: Once approved, the merchant receives the cash advance, usually within a few days.

4. Repayment: There are two repayment options. A percentage of daily debit and credit card sales is automatically deducted until the advance is repaid or fixed amounts are withdrawn directly from the merchant’s bank account on a predetermined schedule. The advance is fully repaid once the agreed-upon amount, plus any fees, has been collected.

This structured process ensures that small businesses can quickly obtain the funds they need while clearly understanding their repayment obligations.

Factor Rate Used for Merchant Cash Advances

So, what goes into the factor rate merchant cash advances use?

As noted earlier, a factor rate is a decimal figure that reflects the total amount to be repaid on the merchant cash advance. They often range from a rate of 1.1 to 1.5, depending on the terms of the advance.

Similar to how traditional lenders calculate interest, merchant cash advance companies calculate factor rates by assessing the potential risk of providing funds to your business. Items that may affect the factor rate you receive include:

• The type of industry your business operates in

• Your business’s financial history

• Credit and debit card sales

• Your number of years in business

To calculate how much you could owe on an MCA, you’d typically multiply the entire amount of the merchant cash advance by the factor rate. For example, if you’re getting a cash advance of $5,000 and your factor rate is 1.3, then the total amount you’ll owe is $6,500. Here’s the calculation:

$5,000 × 1.3 = $6,500

The factor rate does not include any additional fees that may be associated with the cash advance, so check with your merchant cash advance company to make sure you’re aware of any additional costs. This step is important, as some merchant cash advances have been known to have APRs in the triple digits.

Other Fees in Merchant Cash Advances

It’s important to be aware of the various fees that MCA lenders may charge in addition to the cost of the merchant cash advance itself. These fees can significantly impact the overall cost of the financing. They include:

• Origination fees: MCA providers charge origination fees for processing the application and setting up the advance. This fee is typically a percentage of the total advance amount and can range from 1% to 5%. It’s a one-time fee deducted from the advance before the funds are sent to you.

• Underwriting fees: Underwriting fees cover the cost of evaluating the risk associated with providing the advance. This process involves assessing your creditworthiness, sales volume, and business health. The fee compensates the MCA provider for the time and resources spent on this evaluation. Like origination fees, underwriting fees are often a percentage of the advance amount but may also be a flat fee, depending on the provider.

• Administrative fees: Administrative fees cover the ongoing management of the advance. These fees can cover a range of administrative tasks, such as account maintenance, payment processing, and customer support. While some providers include these costs in the factor rate (the fee structure used to determine the total repayment amount), others may charge them separately. Administrative fees can vary widely and may be a monthly fee or a percentage of the advance.

• Other potential fees: Merchants might also encounter electronic fund transfer fees, early repayment fees, and fees for insufficient funds if scheduled payments cannot be processed. These additional costs can add up, so review the terms and conditions of the MCA agreement carefully.

Merchant Cash Advance Repayment

Merchant cash advance repayment terms are distinct from traditional loans. Instead of fixed monthly payments, repayment is typically tied directly to sales, providing flexibility and scalability with your business’s cash flow.

Credit Card Sales

This repayment method involves the provider taking a fixed percentage of your daily credit and debit card sales. This percentage, known as the holdback rate, usually ranges between 5% and 20%. Because repayments are based on sales, the amount paid each day fluctuates with your business’s revenue.

For example, suppose your business receives an MCA of $50,000 with a holdback rate of 10%. On a day the business makes $1,000 in credit card sales, $100 (10% of $1,000) would go toward repaying the advance. If sales drop to $500 the next day, only $50 would be deducted. This structure provides a cushion during slower periods, as payments reduce in line with decreased sales.

Fixed Withdrawals

Some MCAs use fixed daily or weekly withdrawals from your bank account. This method provides predictability in repayment amounts but lacks the flexibility tied to sales volume. The fixed amount is determined based on the advance size, the factor rate (the fee structure used to calculate the total repayment amount), and the anticipated repayment term.

For example, say you take out a $30,000 MCA with a total repayment amount of $39,000 over 12 months. If the provider opts for daily fixed withdrawals, the repayment might be calculated as follows: $39,000 divided by 260 business days (assuming a five-day workweek), resulting in a daily repayment of approximately $150.

Alternatively, for weekly repayments, $39,000 divided by 52 weeks equals about $750 per week. While this method provides consistency, it can strain cash flow during slower periods.

What If You Default on an MCA?

Defaulting on a merchant cash advance happens when you can no longer make your daily or weekly payments. If this happens, the MCA lender can file a lawsuit against you, possibly freeze your personal and/or business bank accounts, or even contact your vendors to try and collect payments directly.

If you think you may struggle with making your MCA payments, it’s best to stay one step ahead and apply for a small business loan to pay off the MCA. You can also contact the MCA lender directly to see if you can negotiate new terms.

Small Business Loan vs. Merchant Cash Advance

Merchant cash advance is the most common term used for such financing, but you may also see MCAs referred to as credit card processing loans, business cash advance loans, merchant loans, or merchant advance loans. Just remember, these aren’t loans. That means they come with little federal oversight and require you, the borrower, to do your due diligence when researching your options.

Traditional small business loans are different from MCAs because they provide merchants with a sum of money, typically for a specific purpose, which is then repaid in regular installments. Small business loans tend to have longer repayment terms and stricter approval requirements than MCAs. Whereas a traditional lender like a bank or online loan provider may look at your credit scores and require collateral, merchant cash advance companies usually do not.

Small business loans come with fixed or variable interest rates, which are applied to the principal balance. Interest rates on small business loans can vary depending on the loan type and borrower but may be lower than the factor rates you’d encounter on a merchant cash advance.

While there may be fees associated with a small business loan, APRs are typically lower than those of MCAs. This means that small business loans tend to be more affordable than merchant cash advances. Examples of lending options that could be workable alternatives to MCAs include:

• Equipment financing

• Invoice factoring

• SBA loans

• Small business loans

• Working capital loans

• Online business loans

4 Common Uses for a Merchant Cash Advance

One of the most common reasons a small business owner would choose a merchant cash advance is to access quick funding for short-term business expenses.

Businesses of any size can use merchant cash advances, but they are particularly helpful for startups with little to no business history, businesses with low or no credit that don’t want to apply for a bad credit business loan, small business owners without collateral, and businesses unable to qualify for loans from traditional lenders.

Here are some of the most common reasons businesses use MCAs.

1. Fill Cash Flow Gaps

If a small business has fluctuating cash flow that prevents it from making bill payments or payroll, a merchant cash advance can act as supplementary funding until cash flow returns.

2. Emergency/Unexpected Expenses

If short-term business loans are not accessible to cover unexpected expenses, small business owners can opt for merchant cash advances that could get them cash within a couple of days.

3. Inventory

Small businesses with consistent credit and debit card sales can use MCAs to purchase inventory and then repay the advance with a percentage of the revenue from inventory sales.

4. Seasonal Fluctuations

Some businesses experience significant revenue variation depending on the season. To ensure there’s always cash on hand, small business owners can get a merchant cash advance to cover expected losses during slow times.

Benefits and Risks of Merchant Cash Advances

Like any source of business financing, a merchant cash advance has advantages and disadvantages. Generally, MCAs are a last resort due to their high cost, but there could be times when it’s the right choice for your business. Let’s look at some of the pros and cons so you can make the best decision for your business.

Pros of Using MCAs

• Quick funding: Unlike a traditional loan, MCAs often provide you with funds in a matter of days.

• Minimal paperwork: Merchant lenders offering cash advances typically require a simple application and only need to see basic financial information about your business, like a record of recent credit card transactions.

• Unsecured: Business owners do not need to offer collateral to obtain a merchant cash advance.

• Payments may change with sales: If the merchant cash advance is based on a percentage of sales, the repayment amount might adjust depending on the success of your business.

• Don’t need perfect credit: If you have low credit scores, haven’t established business credit, or are struggling to get a short- or long-term business loan, a merchant cash advance can help supplement, as it is one of the few no-credit check business funding options.

Cons of Using MCAs

• Expensive: Factor rates are typically 1.1 to 1.5, depending on the terms and conditions of the MCA. When you consider additional fees and APRs possibly in the triple digits, a merchant cash advance can be significantly more costly than a traditional loan.

• No advantage to early repayment: With a merchant cash advance, you typically pay a set amount regardless of how much of the balance you’ve paid off. Merchant cash advances do not amortize like a loan, in which case you could pay less interest when you pay off the balance early.

• Lack of government oversight: Because MCAs are considered commercial transactions, merchant cash advance companies can offer cash advances to those who otherwise may not qualify for a small business loan. However, the lack of specific government regulation can also lead to questionable financing practices and less protection for your business.

• Don’t promote good credit: Merchant cash advance companies are not required to report to credit agencies. If you’re trying to build good business credit, using an MCA is unlikely to help the same way a loan would.

• Hard to get out of debt: If you struggle to get loans, relying on high-APR merchant cash advances has the potential to keep you in a debt cycle that can be hard to get out of.

• Cash flow restriction: While using an MCA can help secure funding in the short term, it could hurt cash flow in the long term. If you agree to give your merchant lender a high percentage of your daily credit/debit card transactions, for example, cash flow may run leaner during the MCA repayment period, especially if your sales are high.

Applying for a Merchant Cash Advance

Merchant cash advance companies make it fairly simple to apply for financing. The process typically involves the following steps:

• Fill out an application: A merchant lender may ask for basic identification like your Social Security number, business tax ID (EIN), and contact information.

• Collect and provide necessary documentation: This can vary depending on the MCA company, but you may need records of credit card transactions, business banking statements, lease agreements, gross revenue, and tax returns.

• Approval: A decision can take as little as 24 hours or a few days, depending on the company.

• Set up credit card processing: Your business may be required to set up credit card processing with a specific partner of the MCA provider.

After you’ve been through the application and approval process, you’ll have funds deposited into your small business account. Payments are typically deducted automatically from this account until the entire merchant cash advance is paid off.

Alternatives to Merchant Cash Advances

Because of their lack of regulation and incredibly high APRs, merchant cash advances are usually considered a last resort. Before taking on an MCA, consider these small business lending options:

Invoice Factoring

Invoice factoring uses unpaid invoices as collateral in exchange for a cash advance from a lender. This is different from an MCA, which is based on projected sales. Invoice factoring also typically has a lower APR than MCAs, generally falling between 15% to 35%.

Inventory Financing

Inventory financing is an asset-based loan provided to pay for products that will be sold at some time in the future. The inventory acts as collateral for the loan.

Equipment Financing

Equipment financing is a secured loan to purchase machinery, vehicles, or other business-related equipment.

Recommended: Leasing vs. Purchasing Equipment for Businesses

SBA Loans

SBA loans are backed by the U.S. Small Business Administration (SBA) and offered by banks and other approved lenders. They typically come with competitive rates and terms, but the approval process is lengthier than it is for other small business financing options.

Personal Loans

Personal loans are typically unsecured and based on your personal credit history (not business credit) and income. Personal loans can be used for almost any purpose, including business expenses.

Commercial Real Estate Loans

Commercial real estate loans provide funds to purchase business-related real estate, such as an office space or retail shop.

Business Credit Cards

Like a business line of credit, business credit cards can be used for short-term business needs. Business credit cards use a revolving line of credit, with interest charged only on unpaid balances from previous billing cycles.

Online Small Business Loans

Some online business lenders offer similar loan options as a traditional bank. They typically have a faster approval process and may offer more options (albeit usually at higher interest rates) for people with lower credit scores.

Business Lines of Credit

Business lines of credit are a flexible, revolving form of financing that allows you to use the funds as you need them, pay them back, and use them again. Interest is only charged on the amount you borrow.

Compare Small Business Loan Rates

If you’re considering a small business loan, consider SoFi. With SoFi’s Small Business Loans Marketplace, you can receive a small business loan offer from a top lender with just a single application and no obligation to you. Take the first step toward securing your business’s financial future today with SoFi.

If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.

With SoFi’s marketplace, it’s fast and easy to search for your small business financing options.

FAQ

What is a merchant cash advance?

A merchant cash advance (MCA) provides a lump sum to a business in exchange for a percentage of future sales or fixed daily or weekly withdrawals.

How much is a merchant cash advance fee?

MCA fees, typically represented by a factor rate, can range from 1.1 to 1.5 times the advance amount, depending on the provider and risk assessment.

What is the difference between an MCA and a loan?

An MCA is repaid through a percentage of daily sales or fixed payments, offering flexibility, whereas a loan requires fixed monthly payments with interest, regardless of business revenue fluctuations.

Photo credit: iStock/mapodile

SoFi’s marketplace is owned and operated by SoFi Lending Corp. See SoFi Lending Corp. licensing information below. Advertising Disclosures: SoFi receives compensation in the event you obtain a loan through SoFi’s marketplace. This affects whether a product or service is featured on this site and could affect the order of presentation. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOSMB-Q324-022

Source: sofi.com

Apache is functioning normally

September 20, 2024 by Brett Tams

Anyone who works in the industry probably saw this coming. But those who don’t might be left scratching their head.

Yesterday, the Fed finally pivoted and cut its own fed funds rate, yet mortgage rates went up. Why does this always seem to happen?

Shouldn’t good news on the interest rate front push rates lower across the board? Seems perfectly logical until you dig into the details.

There are two main reasons why mortgage rates often defy the Fed’s own move.

One is that the Fed’s policy is often fairly telegraphed and not a surprise, and the other is that the data is typically baked in already.

The Fed Simply Follows the Economic Data

First things first, the Federal Reserve is simply making monetary policy decisions (hike, cut, nothing) based on the economic data in front of them.

So their FOMC statement and accompanying interest rate decision generally don’t come as much of a surprise.

Yesterday, there was a little more uncertainty than normal, with both a 25-basis point and 50-basis point cut a possibility.

The Fed opted to go with a 50-bps cut, which had been the favorite with a ~60%+ likelihood per CME FedWatch.

In other words, the Fed did what the market expected, as they often do. The reason the Fed does what the market expects is because they base their decisions on publicly available data.

And the data is somewhat old by the time the Fed makes its announcement. That removes much of the element of surprise.

However, what can move the bond market after the FOMC interest rate decision is the press conference with the Federal Reserve chairman Jerome Powell.

He explained that they took the step of making a 50-bps cut because they had patiently waited for inflation to come down, and were now comfortable to make a “strong move.”

The bigger cut allows them to (hopefully) avoid a big increase in unemployment while also preventing a return to high inflation.

But he added that there shouldn’t be an expectation that 50-bps cuts are the new normal. The decisions will still be made meeting-by-meeting.

So no real surprises here and not enough new information for mortgage rates to continue falling.

Mortgage Lenders Have Already Dropped Rates a Ton Leading Up to the Fed Rate Decision

The other relevant piece here is that mortgage lenders were already aggressively lowering mortgage rates heading into the Fed meeting.

If you look at the 30-year fixed, it had already fallen nearly 150 basis points (1.50%) since the end of April.

In other words, bonds and mortgage-backed securities (MBS) were making big moves based on the data and the expected Fed pivot for months now.

A lot of the price improvement, if not nearly all, was priced in before Fed day. It’s kind of a “sell the news” situation.

You know something is coming so you buy bonds or MBS and once the news actually hits, it could be time to sell off a bit.

In this case, it’s just an expected bounce in the opposite direction as everyone digests the widely-anticipated Fed decision.

To put it another way, mortgage lenders tend to price their rates defensively ahead of an FOMC interest rate decision, so often times there’s a bit of a relief rally after a hike.

Just keep in mind this is but one day, and mortgage rates may develop a longer-term trajectory based on what’s going on with the Fed and underlying economic data.

But the best way to track mortgage rates is by watching the 10-year bond yield and/or MBS prices.

Since yesterday, the 10-year yield has already ticked up about 10 basis points and MBS prices have fallen a bit.

No major movement, but perhaps a disappointment for those who thought mortgage rates would fall further after the Fed cut rates.

Mortgage Rates Tend to Defy the Fed

September 18th, 2024: Rate cut, mortgage rates up
July 26th, 2023: Rate hike, mortgage rates down
May 3rd, 2023: Rate hike, mortgage rates down
March 22nd, 2023: Rate hike, mortgage rates down
February 1st, 2023: Rate hike, mortgage rates down
December 14th, 2022: Rate hike, mortgage rates down
November 2nd, 2022: Rate hike, mortgage rates UP
September 21st, 2022: Rate hike, mortgage rates down
July 27th, 2022: Rate hike, mortgage rates down
June 15th, 2022: Rate hike, mortgage rates down
May 4th, 2022: Rate hike, mortgage rates down
March 16th, 2022: Rate hike, mortgage rates UP

I was curious what tends to happen with mortgage rates on Fed decision day so I looked at the past 12 decisions and used MND data for mortgage rate movement on the days in question.

I included the 11 rate hikes since March 2022 and the pivot to a cut yesterday. Unsurprisingly, as far as I’m concerned, mortgage rates tend to defy the Fed more often than not.

In other words, when the Fed raises rates, mortgage rates often fall. And when the Fed cuts, mortgage rates tend go up.

I’ll need more data on the latter piece as they continue to make expected cuts. But it wouldn’t surprise me to see this trend continue.

Just note that the mortgage rate movement post-Fed rate decision often isn’t significant. And over time, things can change a lot more.

For example, even though lenders often cut rates on Fed hike day, the longer-term direction of mortgage rates was decidedly higher.

Now we might see the opposite. As the Fed is expected to make additional cuts, lenders may gradually lower rates over time.

But again, it’s not because of the Fed! It’s the underlying data and direction of the economy.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.

Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

Apache is functioning normally

September 20, 2024 by Brett Tams

Loud budgeting is a money-saving trend that is encouraging people to be honest with others about their finances and feel okay about saying “No” to expensive invitations.

The concept was first introduced by TikTok content creator and comedian Lukas Battle in late 2023 as an alternative to “quiet luxury” and involves talking openly — or loudly — about your financial goals and spending limits to those around you. Since Battle first coined the term, TikTok has been deluged with videos extolling the benefits of loud budgeting and how to do it.

Is it time to get on the loud budgeting bandwagon? Maybe. While you can’t trust all the financial advice you get on social media, many finance experts say that loud budgeting is rooted in a time-honored financial principle — that people should make spending decisions based on their budgets and savings goals, rather than peer pressure or FOMO.

Here’s a closer look at what loud budgeting is and how to incorporate this approach into your own life.

Key Points

• Loud budgeting, a concept introduced by TikTok creator and comedian Lukas Battle in late 2023, encourages transparency about financial goals and spending limits.

• Benefits of loud budgeting may include: reduced financial stress, avoiding overspending due to peer pressure, building an enhanced support system, and reaching financial goals.

• It can be implemented by determining priorities, building a basic budget, and being honest with those around you about your budget.

• Budgeting tools, such as those provided by your bank or apps that track or permit you to share your spending and savings goals, can assist with loud budgeting.

• Loud budgeting doesn’t have to entail disclosing financial or personal details — it can be as simple as sharing your financial goal and/or limits.

The Psychology of Loud Budgeting

When it comes to maintaining close ties to friends and family, it can be hard to decline an invitation to a catch-up dinner, reunion weekend, or destination wedding — even if you’re not comfortable with the cost. So, you might grudgingly say “Yes,” and figure you’ll deal with the financial fallout later. Or, you might say “No,” but make up a fake reason why you can’t be there. Neither option is ideal.

Loud budgeting offers an alternative solution — bowing out while being honest about your money concerns. It’s based on the premise that staying close and connected with people you care about doesn’t have to cost a lot. Often, it just takes one member of the group to say “No,” and suggest a way to bring down the cost of a social outing or gathering.

Recommended: 7 Tips for Living on a Budget

Benefits of Practicing Loud Budgeting

While loud budgeting isn’t for everyone, it has a number of benefits. Here are some to consider.

Reduced Financial Stress

Money worries can be a significant source of stress. Loud budgeting can immediately take some of the pressure off by making it acceptable to opt out of social plans that will cause you to spend more than you can afford. Over time, loud budgeting can help you grow the balance in your bank account, pay down debt, and achieve your goals — all of which can improve your financial well-being.

Improved Financial Transparency

While talking about money has long been considered taboo and can even trigger shame, loud budgeting aims to reduce the stigma around having financial limitations. Instead, it advocates being transparent about your budget and why you’re choosing not to spend your hard-earned cash on something. By starting the conversation, loud budgeters may also encourage others in their circle to be more authentic and honest about their finances.

Enhanced Support System

Not everyone will necessarily be receptive and understanding when you get loud with your budget. But there is also a good chance that you will get support from others who (unbeknownst to you) are in the same financial boat. This can help you build a community of people working towards similar financial goals. Your community can help hold you accountable to your plan. You can also share tips and experiences and cheer each other on when you achieve success, such as reaching a savings goal.

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How To Implement Loud Budgeting in Your Life

If you’re interested in trying out this Gen Z budgeting trend, here are some tips for how to incorporate loud budgeting into your life.

Determine Your Priorities

Budgeting (loudly or quietly) is about making sure your spending aligns with your priorities. So a great first step is to sit down and lay out some specific and achievable financial goals, along with a timeframe for when you want to reach them. For example, maybe you want to pay off your credit cards in the next six months or put a down payment on a home in one year. Knowing what you want to accomplish gives you the “why” behind your loud budget and helps you stick to your plan.

Build a Basic Budget

Before you can get loud about your budget, you actually need to make a budget. To do so, you might start by looking at what’s coming in each month (on average) and what’s going out each month (on average). If your total monthly spending is higher than your total monthly income — or it’s about the same (meaning you’re not saving anything) — you’ll need to adjust accordingly.

There are all kinds of budgets, but one simple framework to consider is the 50/30/20 rule. This entails allocating 50% of your monthly take-home income to needs, 30% to wants, and 20% to saving and paying more than the minimum on your debts.

Once you come up with a basic budget, it’s a good idea to track your spending (there are budgeting apps that make this easy) to see how well you’re sticking with the plan and, if necessary, make some tweaks to your budget.

Be Honest With Others

Once you have a clear sense of your budget, priorities, and savings goals, don’t be afraid to share this information with friends and family. While you don’t have to delve into the intricate details of your finances every time you decline a social invitation, you can say that you’re trying to spend less and be better about managing your money. You might also talk about some specific goals you’re trying to achieve. Being honest in this way can help make it easier to decline costly invites and keep you accountable to your plans.

Suggest Alternatives

When someone in your circle suggests an outing that doesn’t work with your budget, consider suggesting alternative options. For example, if you can’t swing an expensive brunch, you might suggest a picnic in the park. Or if your friend group wants to spend the afternoon shopping, see if you can entice them to go hiking instead. The idea is to find some simple, wallet-friendly ways to have fun and stay connected without sacrificing your financial health.

Find Allies

Sticking to a budget can be a lot easier when you have a supportive community — or even just one or two allies — who are on the same financial page. If you can’t find any good budgeting buddies in your circle, you might search the #loudbudgeting hashtag on your social media channels to find others who are blazing the same path. This can help you build a community of people who can hold you accountable and cheer you on as you hit your goals.

Recommended: 7 Different Types of Budgeting Methods

The Takeaway

Loud budgeting promotes being more honest about your financial circumstances and goals, rather than accepting expensive invites out of fear of being a wet blanket and then dealing with the aftermath. While it can be challenging to speak your truth, being vocal about your budget can strengthen your connections and help you stay committed to your financial health — not just while it’s the latest trend on social media, but throughout your adult life.

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FAQ

How can I start loud budgeting without oversharing?

While loud budgeting involves being open about your financial situation, you don’t have to share sensitive details about your finances with everyone you know. Rather than lay out the specifics of your income and monthly bills, you can simply say that you are working toward a particular goal (like paying off your student loans or saving for a home) and trying to be more responsible about spending, saving, and managing your money. That can help explain why you are declining invitations to, say, pricey meals out or weekends away.

Does loud budgeting work for all income levels?

Yes, loud budgeting can be effective for all income levels, as it primarily involves being open about your financial goals and priorities with those close to you. While higher earners may be focused on wealth building and investment strategies, lower-income loud budgeters might share how they are working towards being free of credit card debt, building an emergency fund, or saving for a down payment on a home.

What apps or tools can help with loud budgeting?

Any budgeting app that helps you make better spending decisions can assist you with loud budgeting. Even better if the app allows you to track and share your progress with others. You might consider the tools your bank offers for budgeting. Other options include YNAB (You Need a Budget), which can help you create a plan for every dollar you earn; Goodbudget, which digitizes the “envelope system” of budgeting and allows you to share your budget categories with family or friends, or Honeydue,which helps couples sync bank accounts, credit cards, and more for easier viewing of your financial picture.

Photo credit: iStock/Jacob Wackerhausen

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SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

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Source: sofi.com

COVID Panic

Bring Me a Higher Yield

The Car Loan

Sneak Through the Backdoor

Which House?

The Value of a Basis Point

What’s a “Cash Balance Plan?”

Ugly Annuities

The Power of Financial Planning

What Is a Due-on-Sale Clause?

Definition and Purpose

Where It’s Found in Mortgage Documents

First-time homebuyers canprequalify for a SoFi mortgage loan,with as little as 3% down.

How the Due-on-Sale Clause Works

Triggering Events

Lender Rights and Actions

Impact on Property Transfers

Exceptions to the Due-on-Sale Clause

Implications for Buyers and Sellers

Legal Aspects and Enforcement

The Takeaway

FAQ

Can I transfer my property without triggering the due-on-sale clause?

What happens if I violate the due-on-sale clause?

Are there any mortgages without a due-on-sale clause?

Will interest rates keep dropping?

How will this affect my debt?

Will the rate cut help mortgage rates?

What Constitutes a Business Profit?

What Are Businesses Taxed On?

Types of Business Taxes

Income Taxes

Estimated Taxes

Self-Employment Tax

Excise and Sales Taxes

Payroll Taxes

How to Reduce Taxable Income

Reinvesting Business Profits Into the Business

Finding Deductions

Tax Audits

Investing in Employees

Choosing Purchases and Investments Wisely

Tax Planning Strategies

The Takeaway

FAQ

How much is a small business able to make before paying taxes?

What does the 20% business tax deduction do?

What is a business write-off?

Can you invest business profits to avoid taxes?

Table of Contents

Video: Does it Still Make Sense to Invest in Rental Properties?

The Property: A Rough Aplex with Opportunity

How Interest Rates Impact Cash Flow

Additional Costs to Consider

Ongoing Monthly Expenses

The Impact of Financing

When Interest Rates Drop

Building Equity and Future Appreciation

Conclusion

What Is a Merchant Cash Advance?

Merchant Cash Advance Example

How Does a Merchant Cash Advance Work?

Factor Rate Used for Merchant Cash Advances

Other Fees in Merchant Cash Advances

Merchant Cash Advance Repayment

Credit Card Sales

Fixed Withdrawals

What If You Default on an MCA?

Small Business Loan vs. Merchant Cash Advance

4 Common Uses for a Merchant Cash Advance

1. Fill Cash Flow Gaps

2. Emergency/Unexpected Expenses

3. Inventory

4. Seasonal Fluctuations

Benefits and Risks of Merchant Cash Advances

Pros of Using MCAs

Cons of Using MCAs

Applying for a Merchant Cash Advance

Alternatives to Merchant Cash Advances

Invoice Factoring

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.