The Annoying Psychology of Why You Can’t Stick to a Budget

Break up big goals into smaller ones.

Finally, even when you do have a clear idea of what kind of future you want, it can still be hard to stick to your goal in the long term. Eventually, your motivation dwindles and you’re tempted to spend the money on something more immediate, like a fancy meal or a new pair of shoes. You figure you’ll make up for your lack of saving down the road.

To combat this line of thinking, first break your savings goal into smaller increments. Saving a million dollars for retirement seems like a pipe dream for most of us. Saving $400 a month, while still daunting, is a lot more digestible.

Again, it’s about bridging the gap between the present and the future, so breaking up a big goal in this way makes it a lot more present and actionable. It’s sort of like bringing your “future self” into the present. Research suggests you’ll save more if you think this way, too. A 2014 study used two different approaches to get people to save. Some subjects were told to save linearly, and think of the future as completely separate from the past or present. Those subjects were instructed:

This approach acknowledges that one’s life is made of separate and progressive time compartments such as the past, present, and future. We want you to think of the personal savings task as part of such a linear progress. Make your saving task a planned one: just focus on the total amount of your savings goal for the future …

Other subjects were asked to think cyclically, and imagine the future would resemble the present. Subjects in this group were given the following instructions:

The future will be exactly like the present: if you save money now, you will save in the next pay period. If you don’t save money during the present pay cycle, it is likely you won’t save money in the next cycle. We want you to focus on your personal savings in the present, and that is all. What’s more, at the end of the day, you will be able to look back and see how much personal savings you have achieved.

Across all of their studies, researchers found that people in the cyclical group saved 78 percent more than subjects who were instructed to think about the future linearly. The study suggests that it’s more effective to focus on the process, rather than the end goal when it comes to saving. Incredibly, even a small mind-set shift like this can make a world of difference when it comes to managing your money.

Tax Reform: Don’t Forget Personal Savings

President Trump’s tax plan released last week reaffirmed his goal of slashing tax rates on businesses. The plan also proposed overhauling individual income taxes by simplifying the rate structure, increasing the standard deduction, and eliminating breaks such as the state and local tax deduction.

What was missing from the Trump plan were reforms to the tax treatment of personal savings. The plan would repeal the 3.8 percent investment tax imposed by Obamacare, but it was silent on the underlying dividend and capital-gains tax rates.

5 Reasons It Might Be Time to Restructure Your Sole Proprietorship

The sole proprietorship is the simplest business structure to create and maintain. It’s the default business structure for solo business owners. If you’ve started a business and haven’t filed for a formal legal structure yet, then your business is a sole proprietorship.

There are minimal legal costs associated with forming a sole proprietorship: you just need to make sure you’re complying with any local zoning and business permit laws. Additionally, a sole proprietorship has few formal business requirements. Sounds good, right? This simplicity and affordability are why many small businesses in the US operate as sole proprietorships.

However, there are several drawbacks to the sole proprietorship, and many entrepreneurs eventually restructure their sole proprietorship to a corporation or LLC (Limited Liability Company).

If you’re currently running a business or plan on launching one soon, take note of these five reasons why it might be smart to restructure your sole proprietorship:

Reasons To Restructure Your Sole Proprietorship
1. You’re Concerned about Personal Liability

The sole proprietor of a business can be held personally liable for the debts and obligations of the business. Your own personal savings, property, and other assets are at risk to settle any debts of the business. If something should happen and your business is sued or can’t pay a debt, you will probably be required to pay up from your personal savings or property. This is because with a sole proprietorship, there’s no separation between the business and business owner; they’re one in the same.

When you form a corporation or LLC, you are separating the business from the business owner. In many cases, this offers a shield between your personal assets and the business. In industry terms, we refer to this as the “corporate veil.” A corporation (or LLC) exists as its own entity: it’s responsible for paying its bills, meeting its obligations, etc. Whether you’re in a high-risk business (like catering or selling a product to consumers) or a low-risk business (like writing), unexpected things can happen and having a corporate shield can bring peace of mind that your personal assets are protected.

2. You Want an Investor or Loan

If you plan on expanding in the future, either by finding an investor or getting a business loan, then you’ll need to have a formal business structure that’s different than a sole proprietorship. As a sole proprietor, you can only get a personal loan; that’s because there’s no separation between you and the business. Likewise, investors typically won’t invest in a sole proprietorship, as there’s no way to divide ownership or issue shares for the company. In order to receive a business loan or investment, you need to separate the business from your personal finances by setting up a legal business entity such as a corporation (C Corporation or S Corporation) or LLC.

3. You Start Working with Larger Businesses

In the course of growing your business, you may seek out work with a larger company and be surprised that their contract stipulates that you’re operating as a corporation or LLC. This is for a few reasons. First, there’s an assumption (whether it’s correct or not) that an Inc. or LLC is a more stable and trustworthy business partner than a sole proprietor.

In addition, there has been a lot of discussion over the past few years about the IRS cracking down on companies that improperly classify workers as contractors instead of shelling out payroll taxes and other benefits for an employee. If a company hires a sole proprietor for contract work, they may need to show proof to the IRS or state that the worker is indeed independent and should be considered a contractor. Yet, if a business hires an LLC or corporation for the same work, there’s no question about the classification.

4. You’re Looking for More Flexibility with Your Taxes

Since there’s no separation between the individual business owner and business, sole proprietors report all their business income on their personal tax return. Some first-time entrepreneurs and solo workers are surprised to discover how much they need to pay in self-employment taxes. By forming an LLC or corporation and electing S Corporation status, it’s possible to lower what you pay in self-employment taxes. In addition, corporations can get other tax advantages, such as claiming medical insurance for families as a deductible, and being able to leave profits in the corporation. It’s always wise to speak with a CPA or tax advisor to find out which business structure can provide you with the optimal financial situation.

5. You’re Ready to Think of Yourself as a Business Owner

For some, the simple act of filing business formation paperwork creates a powerful shift in perception: you start thinking of yourself as a business owner, rather than just as self-employed. When you consider yourself self-employed, you’re basically an employee (with really bad benefits!) But, once you start thinking of yourself as a business owner, you’ll stand a little taller and start thinking strategically about the best ways to grow the business outside of putting in more hours. Of course, you don’t need to be a corporation or LLC to start thinking like a business owner, but for some, this level of formality helps.

While an LLC or corporation is more involved to set up than the sole proprietorship, the paperwork can be done in just a few hours, giving your business a solid legal foundation for years to come. And, if you’re particularly concerned about keeping your formalities to a minimum, consider the LLC: it offers the same personal liability protection as the corporation, but with fewer administrative requirements!

Woodworker Photo via Shutterstock

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Savers have more long-term misery as they face worse interest rates

The average rate in this sector is now 1.98 per cent, down from 2.20 per cent a year ago and 2.59 per cent two years ago.

Moneyfacts said the current average rates on these deals are the worst it has seen, based on its records going back to 2008.

It said even longer-term deals in the best buy tables now offer returns of less than three per cent – showing the need for savers to act quickly if they see a good deal.

A new personal savings allowance was introduced on April 6, taking most people out of paying any tax on their savings interest altogether.

Under the new allowance, basic rate taxpayers can earn up to £1,000 in interest without paying tax on it, and higher rate taxpayers can earn up to £500 in interest tax-free. Isas, which are already ring-fenced from the taxman, do not count towards the new personal savings allowance.

30-year FRM rated hit 3-year low

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How to Fix Social Security? Expand It

Below is an adapted excerpt from Expand Social Security Now! How To Ensure Americans Get the Retirement They Deserve by Steven Hill, published by Beacon Press on May 10, 2016.

Increasing numbers of workers now find themselves on shaky ground, turned into freelancers, temps, contractors, and part timers. Even many professional jobs are experiencing this precarious shift. Within a decade, it’s been estimated that nearly half of the 145 million working Americans could be impacted, turned into so-called “independent workers” with little job security, insufficient safety-net supports, and poor wages. 

Add to that new anti-worker methods such as “just-in-time” scheduling and the steamroller of automation, robots, and artificial intelligence already replacing millions of workers and projected to “obsolesce” millions more, and suddenly things don’t look so economically set for a lot of Americans.

Now an insidious mash-up of Silicon Valley technology and Wall Street greed has thrust upon us the latest economic trend: the so-called “sharing economy,” with companies that offer short-term freelancer employment with low pay, no safety net, and a need to be in constant job search mode, looking for the next gig. One Uber driver with whom I spoke laughed bitterly when I mentioned the term “sharing economy.” “More like the ‘share the crumbs’ economy,” he said.

It’s an alarming transformation. The US middle class, one of America’s greatest inventions and a gift to the world, is in danger. The future is anything but secure. Set to replace the crumbling New Deal society is a darker world in which workers can be hired and fired by the touch of an app–turned on and off like a water spigot.

These changes mark one of the great social and economic transformations of the postwar era. A seismic shake to the supportive edifice for American workers has cracked and is beginning to crumble for all but the better-off. Not since the Great Depression have we been so in need of a system of retirement security that acts as both a buffer for individuals and families from the sudden shocks of economic downturns and bursting asset bubbles, but that also acts as an automatic stabilizer and stimulus capable of steadying the broader macroeconomy. At the very time when Americans most need a stable retirement system, it is more threatened than ever.

So yes, our economy is changing, and yes, Social Security must change with the times. But the change that must occur is not cutting it back, quite the contrary. We have to expand Social Security and create a robust, single-pillar retirement system for every worker, one that is portable from job to job. And one that functions even for those workers who have multiple employers.

So the safety net has to work for these new types of workers, and for many different classifications of workers. That’s what the need is, and an expanded Social Security could best provide the retirement portion of this new kind of safety net for this new kind of economy. No other system or method–not 401(k)s, IRAs, the remnants of company pensions, the loopholes of tax deductions and deferrals, or any other current method, even if scaled up–are capable of playing this role. Only Social Security can do it. And yet Social Security’s payout to each individual is so meager that, unless it is expanded, it will not be robust enough to play this central role as the nation’s de facto national retirement system.

 

Social Security Plus–the Only Solution Left Untried

Winston Churchill allegedly once said, “You can always count on Americans to do the right thing–after they have tried everything else.” We’ve tried just about everything else to create a secure retirement system for seniors, and to stabilize this part of the consumer demand that drives our economy. What we haven’t yet tried is Social Security Plus.

Late 19th-century German leader Otto von Bismarck first pioneered the idea of old-age government pensions, and it has since become a staple around the world. A universal social support system, whether in Europe, Canada, Japan, or Australia, is guided by a philosophy that values the creation of “social insurance” that helps individuals and families prepare for their future, including retirement. In fact, the various social insurance systems force individuals to prepare, paycheck by paycheck, by deducting from workers and businesses the funds necessary to better secure their futures. Universal social insurance means everyone pools their money, which is a crucial step that allows better planning and the creation of more efficient and less expensive support systems. Consequently, European systems of health care, child care, senior care, housing, and education cost much less per capita compared to US systems, because the efficiencies that can be designed into universal systems make them much more economical and cost-effective.

For example, the United States spends over 17 percent of gross domestic product (GDP)–about $2.9 trillion, or $9,255 per person–on a decentralized hodgepodge health-care system that is very expensive to administer and operate. Even after the improvements of Obamacare, health care still doesn’t cover about 11 percent of the US population. But European nations spend about 6 percent to 12 percent of GDP (depending on the country) and cover 100 percent of their populations. Americans also spend at least six times more per capita for child care (depending on the country), and while university tuition is skyrocketing in the United States, in most European nations it is still quite inexpensive, only a few hundred dollars per year.

The Swedish Social Insurance Agency publishes a brochure that captures the prevailing philosophy: “Social insurance is founded on the idea of people helping each other through a kind of social safety net, which is in place from birth to retirement.” Netherlands Labor Party leader Wouter Bos has argued that Europe’s social state is based on “enlightened self-interest” since “we all run the same risks, so we might as well collectively insure ourselves against those risks.” This is a philosophy with broad agreement across the political spectrum; even conservatives and the so-called far right agree, forming the basis for a “European consensus.”

So enacting a version of Social Security Plus is not as untested as it may at first appear. In many nations around the world, more comprehensive social support systems aid families and individuals and cushion vulnerable populations against economic dislocation. Nevertheless, in the United States we continue stumbling forward with our more ad hoc, decentralized, and inefficient systems, in which some people get the support they need and others don’t. And the support systems are so poorly designed that the national price tag is often exorbitantly expensive. The more deregulated US system is known for allowing individuals to keep more of their paycheck–presidents from Ronald Reagan to George W. Bush were famous for declaring, “We let you keep your own money”–and leaves it up to Americans’ discretion whether to prepare for the long run by saving money and handling the costs of retirement, or to spend it all in the short run.

But in an age of globalized capitalism and increasing economic insecurity, benefits like an adequate retirement, as well as health care, child care, sick leave, education, housing, and more, are no longer discretionary–they are necessary in order to enjoy a basic level of security and comfort. What this points to is that in today’s insecure age, a middle-class standard of living is not only about income levels or economic growth rates, but also about adequate support institutions and social insurance for individuals and families.

Japan, Canada, and countries in Europe and elsewhere have already established various vehicles to ensure their health, productivity, and quality of life that will serve them well in the new, high-tech economy. While all of these nations, like the United States, rely on powerful capitalist engines as the core wealth generator of their economies, the presence of a more robust social insurance infrastructure is the reason that these other nations have a higher level of economic security for their people than does the United States. The US is the outlier among developed nations; our “ownership society” should be called an “on-your-own” society because many people are truly left on their own.

The security of social insurance in turn stimulates consumer spending, which in turn creates jobs, which in turn acts as an automatic stabilizer during downturns. It unleashes a virtuous feedback loop, based on these necessary components of a modern capitalist economy today. A more comprehensive social insurance system allows these other countries to achieve one of America’s chief principles, namely, “life, liberty, and the pursuit of happiness,” with results that are vastly different from the American “pull yourself up by your bootstraps” society. Expanding Social Security would be an important step toward providing for all Americans the type of efficiencies that modern capitalist economies need in order to provide retirement security.

One can anticipate various objections, criticisms, and even fear of creating a Social Security Plus system. “It has never been tried before” (at least not in the United States), “it’s socialism” (even though 70 percent of Republicans support Social Security), “it’s already going bankrupt” (nonsense), and “where would we find the money?” (how about from all the hundreds of billions of dollars in tax loopholes that predominantly favor wealthier Americans?). Already there exists a concerted and well-funded effort to convince Americans that Social Security is broken and that we need to cut it back and even privatize it “in order to save it.” So I’m very aware that some Americans, both leaders and everyday citizens who have grown so suspicious of government, will reject out of hand the notion of doubling the monthly benefit.

But what can’t be denied is that the “three-legged stool” of retirement security in the United States has become wobbly and unstable. Two of the legs–private, employer-based retirement plans, and private savings based on homeownership–have nearly collapsed. Combine that with vast increases in inequality, flat wages, and a decline in personal savings in the years even before the Great Recession, and Social Security is now the only leg standing for tens of millions of Americans. An expansion of Social Security–one of the most successful and popular government programs in US history–into a more robust retirement system that doubles the current payout to individuals would build upon the most stable components of the current system.

The president and Congress, in their budgetary duties, and the US Federal Reserve bank in its financial oversight capacity, have all the levers they need to ensure financial viability. This is a matter of politics, not economics. It is clear that the best way to stabilize and strengthen the retirement system, as well as the broader national economy itself, is to expand Social Security, bringing the American retirement system more in line with those in other developed societies. This can be accomplished by making the Social Security payroll tax fairer and more universally applied, by eliminating deductions for businesses that provide retirement plans (since that would be unnecessary with Social Security Plus), and by rolling back or limiting various tax-favored loopholes and deductions that massively favor wealthier Americans. Multiple mechanisms and plans are possible toward those goals.

More broadly, the United States must begin to view universal social insurance as a critical pillar of support for Americans and their families, as well as for US businesses that currently miss out on the competitive advantages that would come if retirement and health-care systems were not substantially employer-based. The United States was once noted for its capacity for economic, political, and social innovation; in the aftermath of World War II, we created a land of broadly shared prosperity and opportunity, and starting in the 1960s began extending access to racial minorities, women, the LGBT community, and more. We have to rediscover our genius for that kind of innovation. We have to recognize that it is possible to create an affordable retirement system that is both decent and stable. This is not rocket science; it’s a matter of political will, not a failure of design.

Retirement experts like Laurence Kotlikoff, Philip Moeller, and Paul Solman, in their best-selling “advice” book Get What’s Yours: The Secret to Maxing Out Your Social Security, have provided a nice handbook on how to boost your Social Security benefit, using clever schemes like “file and suspend,” “spousal benefits,” and other brainy ploys. But wouldn’t it be better to have a retirement system that provides adequate income for seniors without having an accountant’s insider knowledge of the byzantine rules and tricks? The enormous gap between what is needed and what is being proposed by the politicians and professionals is glaring evidence that we need a completely new and pragmatic approach.

We don’t need to cut Social Security, or trim it, or pare it back, or privatize it, or raise the retirement age, or use chained CPI (consumer price index) to reduce the annual cost-of-living allowance. Even maintaining the status quo is woefully inadequate at this point. We need to expand Social Security, and we need to do it now. That is the only sensible solution to the retirement crisis. And we have a roadmap for how to get there: Tax fairness equals retirement security, which equals economic stability.

Any movement that seeks to enact expansion of Social Security must link that to a call for tax fairness, since that is the most salient source of the revenue needed to pay for the Plus system. By re-allocating federal tax and expenditure priorities that currently provide huge financial advantages to a small number of better-off people and concentrating them instead on the vast majority of Americans, we can create a retirement system that will work for all of us, instead of some of us.

The creation of expanded Social Security Plus would provide a secure and comfortable retirement for every American, and contribute greatly toward a solid foundation from which to build a strong and vibrant 21st-century economy. Our retirees, our families, our businesses, and our communities deserve no less.

Reprinted with permission from Beacon Press.

Terry McLaughlin: There are unintended consequences of well-intentioned legislators

On April 4, Gov. Brown signed legislation increasing California’s hourly minimum wage to $15 by 2022. Labor experts are already warning that such a wage hike could lead to higher prices, more automation, and a drop in employment.

James Sherk, a research fellow in labor economics at The Heritage Foundation, said such a wage hike is likely to lead to a reduction in employment, especially for manufacturing companies that sell products across state lines. Those businesses do not have the opportunity to raise prices, and they employ approximately 1.6 million Californians — 37 percent of whom make less than $15 per hour.

“A lot of those jobs will move to other states and countries,” Sherk said. He also warned that in the fast food and hospitality industries, consumers can expect to see price increases to compensate for increased labor costs.

A Grass Valley restauranteur opined that the government is creating a domino effect that can only ignite inflation. The cost of food production will rise, beginning at the source with farmers, all the way up through the staff that prepares and serves the meals to consumers, and the only viable option in order to remain open for business is to increase menu prices.

This restaurant has already removed two of its most expensive items from the menu, as the prices would have had to be increased to an unacceptable level. If customers eat out less frequently due to higher costs, then staff would have to be reduced to reflect this decline in business. This restauranteur was particularly concerned about senior citizens in our community who are living on a fixed income and who will very likely see the cost of all consumer goods, not just food, increase. Social Security benefits are certainly not increasing at the same rate, nor is the interest rate earned on personal savings accounts.

Many businesses are already turning to automation as a way to cut down on labor costs. Self-checkouts are replacing cashiers in supermarkets and customers can place orders through kiosks in some restaurants. As reported by Forbes in February, a minimum wage increase in Seattle went into effect in April 2015. As a consequence, Seattle job losses from April to December 2015 were the worst over any nine-month period since the recession of 2009.

The Feb. 18, 2014 nonpartisan Congressional Budget Office report stated, “Increasing the minimum wage would have two principal effects on low-wage workers. Most of them would receive higher pay … But some jobs for low-wage workers would probably be eliminated, the income of most workers who become jobless would fall substantially, and the share of low-wage workers who were employed would probably fall.”

In January, Gov. Brown himself said “raise the minimum wage too much and you put a lot of poor people out of work. There won’t be a lot of jobs.” According to Brown’s own budget summary for 2016, raising the minimum wage to $15 an hour would cost the state of California $4 billion annually by 2021. Additionally, the state warned that not only would such a wage hike return the state budget to annual deficits, but it would also exacerbate a recession and add to job losses. Despite his own statement, and the caution recommended by his own budget summary, Brown passed this legislation.

Adding to the costs associated with a minimum wage increase, California has also legislated that employers provide all employees with at least three days of paid sick leave, and the state is moving forward with a bill which will give employees three days off per year with full pay to attend the school activities of their children.

State Senator Connie Leyva has introduced SB 878, the “Restrictive Scheduling Bill,” which would require employers, specifically restaurants, grocery stores, and retailers, to post a three-week work schedule. Any changes made to that schedule with less than seven days notice would require mandatory “modification pay” (in addition to regular pay) as well as potential fines. This bill does not take into consideration any of the issues that could cause the need for a change in staffing – such as the weather, cancellation of large group events, or even employee emergencies.

Regardless, the Senate Labor Industrial Relations Committee passed this bill 4 to 1 and moved it to the next step in the legislative process. The previously mentioned restauranteur said the government “is trying to ‘law’ us out of business!”

Is it any wonder that the business environment in California, which is becoming more inhospitable each day, is causing major employers to leave our state? Toyota is moving 4,000 jobs from California, Kentucky and New York to Plano, Texas. Carl’s Jr is moving their headquarters from California to Nashville, Tennessee, after the CEO of their parent company said, “while the US Government makes life needlessly miserable for businesses, California is exponentially worse.”

Trying to legislate “fairness” in the marketplace rarely brings positive results. Raising the minimum wage for low-wage workers feels like a good and compassionate concept. But we should not be creating laws and regulations purely because they feel good — we need to be asking if they do good. Once again, the citizens and workers of California will find themselves suffering from the unintended consequences of well-intentioned legislators.

Terry McLaughlin, who lives in Nevada City, writes a twice monthly column for The Union. Write to her at terrymclaughlin2016@gmail.com.

Trying to legislate “fairness” in the marketplace rarely brings positive results … we should not be creating laws and regulations purely because they feel good – we need to be asking if they do good.