18 Types of Residual Income

When deciding how you would like to structure your personal finances with multiple streams of income and you are a full-time worker, you may wish to supplement your income with a second job.  However, just like your first job, your salary will still be subjected to income tax.  Moreover, the salaries from both of these jobs are considered linear income.  What you would like to do for yourself instead is earn residual income.

What is linear income? It is the income you are earning from your full-time or part-time job.  With this type of income, the amount you earn is tied to how much you work.  The more you work, the more you earn; the less you work, the less you earn.  Let’s face it.  Sick time, vacation time and PTO can only cover so much of your off time before you start not getting paid for not working.

On the other hand, residual income (also known as “passive income” or “royalty income“) involves doing the work once and being paid for this work many times over, over a period of months or even years.

From the viewpoints of residual income, many types of professionals are not as wealthy as they appear.  Doctors, dentists and chiropractors only see a fixed number of patients per day.  Salesmen can only speak to so many potential customers per day.  Attorneys can only meet with so many clients per day.  Overall, these professionals are earning a linear income.

Because a linear income shows almost immediate results, people tend to get caught in the trap of viewing a linear income as being of little value to them.  For those who would genuinely like to live off a linear income in the future, the hard work must be put in now.  Once you’re working a steady job with a linear income, you can begin working on your plan to create a stream of residual income, setting aside two to four hours after work each day or part of your weekend to make this dream a reality.

If you do not know the types of residual income you can earn, here is a list to get you started:

• Savers earn interest
• Songwriters earn royalties on their songs
• Authors earn royalties on their books, whether it is a traditional book, audio book, or e-book
• Insurance agents get residual business
• Securities agents get residual sales
• Network marketers get residual commissions
• Actors and actresses get a portion of box office receipts, DVD or Blu-ray sales, and fees from online downloads
• Entrepreneurs get business profits
• Franchisors get franchising fees
• Investors get dividends, interest, and appreciation
• Visual artists get royalties for their creations
• Software creators, game designers, and inventors get royalties
• Partners can get profits
• Mailing list owners get rental fees
• Real estate owners can gain from strong positive cash flow
• Retired persons can get pensions
• Celebrity endorsers, such as George Foreman, get a percentage of gross profits
• Marketing consultants get a percentage of profit or gross revenue

Believe me, this is not an exhaustive list of the types of residual income you can earn.  Nonetheless, if you ask yourself this question right now, “What percentage of my day did I spend creating residual income?” and your answer is zero, you may wish to spend this evening or the weekend examining how you can turn residual income into a second source of income for you.  But as the saying goes, “Rome was not built in a day.”  With careful, consistent, and persistent planning, the royalties, profits, fees, or revenue earned from your endeavor will earn you residual income for years to come.

Francis Unson

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5 Steps to Take if you Default on Your Student Loan

Students have been defaulting on their loans more frequently than in previous years beginning at the start of the school year in 2010.  If you default on your student loan, here is what you can expect: the IRS can intercept any income tax refund you may be entitled to until your student loans are paid in full; the government can take up to 15% of a student loan debtor’s wages who is in default; up to 15% of your federal benefits such as Social Security retirement benefits and Social Security disability benefits can be taken away; and you can get sued, a move the federal government has done with increasing frequency.

When you receive a notice that you have defaulted on your student loan, begin with these steps:

1. Contact the agency that is billing you.
2. Explain your situation fully and honestly.
3. Ask them what options are available to resolve your problem.
4. Let them know that you are willing to repay your loan and ask them to work with you.
5. Always stay in touch with your lender or collection agency.

There are a few repayment plans you can choose from with your lender: Standard Repayment, Graduated Repayment, Extended Repayment, and Income Contingent and Income-Sensitive Repayment.  Keep in mind that you do not need to seek professional help, unless you believe the loan default is a mistake.  You should never ignore default notices from your loan servicer.

Taylor P.

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What to Do if the IRS Audits You

The best thing to do if you receive a notice saying you will be audited is to not panic.   You should speak to the auditor and refer him or her to your tax professional so that you have a better understanding of the situation.  Getting the situation organized is a great thing to do.  Make sure you ask the Internal Revenue Service, or IRS, why you have been selected to be audited.  Some reasons could be that you were randomly selected by computer; your business was part of a program to test compliance in the industry; or an employee, co-worker, or competing business told on you.

When handling an audit, be sure to do the following:

• Be organized
• Give them only the documents needed to support the deduction being questioned
• Never give the IRS agent more or less information than is requested
• Answer questions honestly, but briefly
• Never give the IRS the original, and often, only copy of a document.  Make copies of the requested document(s).
• Don’t chatter or exchange casual conversation.  Each comment only gives them more information.
• Stay calm.  Don’t be argumentative or belligerent.
• Wait until your representative has time to review any documents before you sign one

If you are aware of what you should be doing and have all the correct information, the audit should go smoothly.  Having a representative with you could help you stay out of trouble, legally.  Always be prepared when you are speaking with anyone from the IRS.  You do not want any mistakes to happen when dealing with them.

 

Taylor P.

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Tax Season

The Internal Revenue Service, better known as the IRS, opened the 2011 tax filing season by announcing that taxpayers have until April 18, 2011 to file their tax returns.  This year, Emancipation Day, a District of Columbia holiday, falls on Friday, April 15^th.  By law, District of Columbia holidays impact tax deadlines the same way federal holidays do, giving taxpayers an extra three days to file.  The IRS suggests that taxpayers use e-file, which is the best way to ensure accurate tax returns and get faster refunds due to recent tax law changes.  For those not using an e-file, here are a few things to bring to your tax preparer, whether you are a business owner of any size, a homeowner, or a student.

For every tax payer:

• Last year’s Federal and State tax returns (for new clients)
• Income/Wage statements:
  • W-2’s
  • 1099’s
  • Alimony received or paid
  • Commissions received statement
  • Brokerage account year-end statements
  • ESPP statements
  • Stock options sale papers
  • Rental property income and expenses
  • Partnership, S Corp, trusts, or estate yearly statements
  • Pension or retirement income statements
  • Social security income yearly statement
  • Unemployment income yearly statement
  • State income tax refund statement
  • Gambling and lottery winnings (and losses, if you have winnings)
• Car, motor home, and boat registration paperwork
• Donation receipts
• IRA contributions
• Child care expenses and provider information
• Medical expenses
• State taxes paid
• Unreimbursed employment-related expenses
• Job-related educational expenses
• Casualty or theft losses
• Foreign taxes paid

For Homeowners:

• Mortgage interest year-end statement
• Home equity year-end statement
• Property tax information
• If you sold your home, purchase and home improvement information

Businesses:

• Income and expense reports
• Mileage logs for autos
• Receipts for business assets purchased

Students:

• Tuition and education fees
• Student loan information
• Grants and scholarship information

By bringing all the necessary paperwork listed above, you will help make your tax preparation as quickly and easily as possible.  You receive most of these documents in the mail from January to February.  Organizing paperwork is a great, time-saving idea.  You can create binders for each year and in them, you should save receipts, pay check receipts, old Federal and State tax returns, and other important documents.  This is a great idea for two reasons.  The first reason is that you will be organized and, should you need a certain document, you will know where to find it.  The second reason is, if disaster or an emergency strikes, you can have all your important files in a secure location, since some of the documents cannot be replaced.  Organizing your important documents now will save you and your tax preparer from headache in the future!

Taylor P.

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Living within your means: Avoiding life’s spending traps

Just before the economic decline that began in the last quarter of 2007, the average personal savings as a percentage of disposable personal income for households in the United States hovered just below 1%.  Over two years later, despite high unemployment, the percentage remains seemingly unchanged.  Credit card debt.  Recession.  Real estate meltdown.  What relief do we have in the face of a steady stream of economic gloom?  We can start by setting aside money for future expenses as well as keeping in mind a number of spending traps.

Paying off debt is much harder than taking it on

We dislike being confronted with this reality until the monthly statement arrives in the mail or their inbox.  While credit cards serve a useful purpose when used carefully and with responsible planning, we cannot forget how much they can afford to pay back.  Easy access to our money with debit cards and ATM machines do not help matters, but we can take a proactive step and setup a text message alert with our bank that notifies us of our account balance before making a purchase.

The allure of home equity loans

We like the fact that home equity loans are tax-deductible and that we can use the money to pay off a large debt like a credit card.  If we do not intend on using that credit card ever again, using a home equity loan would make sense.  However, if we fall into the trap of using our newly paid-off credit card and resume our spending habits, we would have the loan AND the credit card to pay off.

Spending unexpected income in your mind

Did you or your spouse already spend the extra money in your minds?  For example, you want to remodel the kitchen, whereas your spouse wants to take the family to Hawaii.  Before the money arrives, deduct any taxes from it, then work with the remainder.

Creating a “complete” budget

Does your budget include spending on food, housing, and transportation?  Yes, as it should.  However, is it complete?  No, especially if you excluded occasional expenses such as taxes, gifts, insurance, car repairs and family vacations.  How can you include occasional expenses practically in your budget?  Estimate how much these expenses will come to on an annual basis, then divide that figure by 12, allowing you to set aside enough money each month.

Budgets are a mutual agreement

You and your spouse are agreeing not only on the “complete” budget, but also on allowances for each of you to spend money on what is important to you or them.  Drawing up a budget that excludes these allowances would cause resentment and cause one to spend the money in other ways.

So what does it take to live within your means?  Awareness of your financial situation, making sound financial decisions, and discipline to follow through with a carefully made budget come to mind.  Understanding that using credit cards produces debt straightaway whereas spending cash is merely a reduction in assets would be a significant step away from falling into a spending trap.  You can borrow money against your home to pay off a debt, but make sure you never create that debt again, lest you have two payments, the original debt and the second mortgage, to make every month.  Finally, creating a complete budget that includes spending on regular and intermittent expenses, as well as allowances for you and your spouse, will help you both live within your means and be better prepared for life’s spending traps.

Francis M. Unson

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Union Bank

I had written a number of articles concerning financial planning, reducing medical costs, and ways to stretch your dollar.  Despite news of economic recovery and an increasing employment index, particularly in the United States, the economy still has a long way to go.  We cannot become complacent about the small gains, by no means an indicator that the economy has fully recovered, and we must continue exercising due diligence with our finances during these difficult times.

Oscar Dominguez, VP and Manager of Union Bank

Union Bank of Newhall, CA, has taken great strides towards helping its customers throughout the Santa Clarita Valley.  Oscar Dominguez, vice president and manager of Union Bank, has been in the banking industry for 25 years and understands that personal finance is a mystery for many people.  He goes out of his way to understand the financial needs of an individual, couple, or family.  He also focuses on the growth-oriented needs of business owners and small businesses.  Working closely with the community, Oscar and Union Bank not only creates opportunities for customers to make a great return on investment (ROI) by offering FDIC-insured certificates of deposit (CD), but also community outreach programs directed towards children and seniors.  If you, your family, or your business have financial goals you wish to achieve, give Oscar Dominguez a call.  All financial goals begin with a plan, and he would be more than happy to work with you towards mapping one out.

Oscar Dominguez, VP and Manager of Union Bank
Valencia Bank and Trust
Stevenson Ranch Office
23620 Lyons Ave.
Newhall, CA 91321

Ph. 661.287.6380
Ph. 661.253.5753
oscar.dominguez [AT] unionbank [DOT] com

Francis M. Unson

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Rainy-Day Money: More Than Cash On-Hand

Why is having “Rainy-Day Money” important?  We may have to deal with the uncertainties of life: a job loss, sudden injury or illness, family issues abroad and the cost of travel, etc.  Three months is no longer adequate and a longer range of 9-12 months’ worth of living expenses in cash is recommended.  However, borrowing against other sources would allow more of your cash to earn more in interest.  There are four sources of emergency cash to consider:

Emergency cash fund

Obviously, this is cash on-hand, the most liquid, and the most easily accessible – without cost, delay, risk, or penalty.  Savings or money market accounts are the best places to hold this type of cash.

Home-equity line of credit

A home-equity line of credit is a form of revolving credit where a person’s home serves as collateral.  As such, equity credit lines should be reserved for major expenses such as education, home improvements, or medical bills and not for daily expenses.

Brokerage margin account

This option is not for the faint of heart unless you have an understanding, or are at peace with, the advantages of leverage and increased risk.

A margin account allows you to buy securities, at credit, with money borrowed from the broker, allowing you to buy stocks without having to pay the total price in cash.  The poor performance of some stocks in the market can help you.  How?  A technique called short selling can help.  It is the opposite of investing as people generally understand it: investors that engage in short selling makes money only when a shorted security falls in value.  If you have a number of securities that are not performing well when you need sudden access to your rainy-day money, you are in luck.

Cash-value life insurance

Cash-value life insurance combines term insurance with savings and are more expensive than term-life insurance.  Policyholders receive the cash surrender value when cashing in the policy and will not have to pay income taxes on it.  If you borrow against the policy, however, interest would be charged.

You can plan a number of things down the road such as tuition for college and retirement.  However, life’s uncertainties come out of nowhere, and the best that we can do, just in case, is set up rainy-day money and become better aware of the collateral, investments, and insurance policies that can serve as part of that temporary, emergency source of cash.

Francis M. Unson

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Money Challenge: Can you take control of your assets in seven days?

How do you achieve financial security?

If you said, “Winning the lottery”, there is a gain of financial security that will cost you your privacy, but the latter is beyond the scope of this blog.  Furthermore, waiting for that “inheritance from my [still alive] grandfather” does not solve your financial troubles now.  In order to gain financial security, you must live beneath your means so that you can pay off debts and start saving.  Easier said than done?  If you follow the steps in the seven-day plan I describe towards taking control of your money, you will be surprised, and all it takes is 20 minutes a day for one week.  If you have arrived at your child’s school half an hour early so you can get a parking spot, you’ve waited at least 20 minutes, so instead of Tweeting, updating your Facebook status, or checking into foursquare and ousting the mom parked behind you as mayor of your child’s school for the umpteenth time, let’s get started already!

Day 1 – Organize Your Financial Records
Just how did you get yourself in a financial hole?  The personal reasons do not matter, but a number of other factors do, particularly how much you earn and where it goes.  Gather the following records so you can make the first calculations:

• Recent pay stub – Shows how much you bring in from work
• Latest tax return – How much you receive from investments and other sources of income
• Checkbook and most recent printed or online bank statements – Tells you where you are spending most of your money
• Current credit card bills – Explains how much additional money you spend that your paycheck does not cover

Day 2 – Figure Out Where Your Money Goes
With your financial statements in hand, you can now prepare a summary of your monthly expenses.  List all of your expenses, even down to your daily lattes from Starbucks, and map out where your cash goes.  Use a journal or download a budget tracking app for your iPhone and keep track of your purchases.  You may find that you waste money, and lots of it, but we are here to fix that.

Day 3 – Categorize Your Expenses
Split your expenses into one of three categories:

• Regular payments such as mortgage, utilities, car payments, car/homeowners/life insurance, etc.
• Occasional expenses with some room for reduction such as food, clothing, or transportation.
• Expenses you can do away with entirely such as eating out at restaurants, going to concerts, buying lottery tickets, etc.

The last two categories provide you with the most opportunities for cutting back.

Day 4 – Devise a Plan for Living Beneath Your Means
Reduce your monthly expenses so that you spend less than you take in.  For example, if you decide to add $500 a month towards paying off your credit card balance, you must cut $500 a month in expenses at the bare minimum.  Make a list of the expenses you are eliminating and how much you hope to save.

Day 5 – Develop a Debt-Reduction Strategy
With the extra money you are saving, begin paying off your debts, starting with your high-interest credit card bills.  Work out a realistic target date for when you want each debt to be paid off completely.  Setting lofty or ambitious dates will set yourself up for failure.

Day 6 – Establish a Savings Plan
Start saving while reducing your debts.  While this move is financially counter-intuitive, especially when paying off credit card debt at 20% interest while saving money at 4% or 5%, it is a psychological boost for yourself to be saving any money.  Furthermore, any savings put away now will come in handy if an illness or job loss occurs unexpectedly.

Day 7 – Start an Automatic Investment Plan
Saving now and investing in the future are two activities that people wish they had done only when it is too late.  Working from that perspective, doing the following is a crucial step towards learning from experience.
Call your bank, credit union, or mutual fund company and arrange an automatic investment plan, committing $50 to $100 (or more) from your paycheck each month towards an investment account.  The money invested can become the basis of your retirement portfolio or your child’s college fund.

Whether the economy is in decline or rising, being in control of your assets will help you achieve financial security, and it all begins with a plan.

Francis M. Unson

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— @ WiseStamp Signature. Get it now

Simplifying Your Financial Life

We have 168 hours in one week where we spend 56 hours sleeping and 40 hours working from Monday-Friday, leaving us with 72 hours of personal time.  However, if “personal” time includes commuting to and from work; shuttling the kids between daycare and karate, or baseball, soccer, and football practice; or running a home business, the amount of personal time you have is much less.  I won’t even go into the amount of time spent on Facebook or Twitter, or both.

With what little personal time you have left, how do you balance your family’s finances? Here are five ways you can simplify your financial life.

Reduce the number of brokerage accounts
If possible, reduce it to just one broker.  The fees from maintaining multiple accounts with multiple brokers, whether they are full-service or discount brokers, will cost you more in the long-run.  Consolidating your brokerage accounts will reduce maintenance fees and, because of the larger balance, garner more attention from your broker.

Set up a simple record-keeping system

• A folder or box for all incoming bills that need to be paid.
• A folder for items connected to and corroborating this year’s tax returns such as bank, brokerage, and mutual fund statements; life insurance, homeowner’s and car insurance records; and stubs and canceled checks proving you’ve paid your bills.
• A folder for all home-improvement records over the years, which will be useful when selling your home and offsetting the gains realized on the sale.
• Accordion folder for tax returns from the last four years, with supporting paperwork.
• A three-ring binder with an inventory of your household possessions in the event of a major loss such as theft or disaster, including photos, video, or CDs of the possessions.
  Store the binder in a safe-deposit box along with irreplaceable items such as birth, marriage, and stock certificates, and list your spouse and children as co-owners of the box.  Add safe-deposit box insurance to your homeowner’s policy if you store valuables such as jewelry or coins.

Invest your money automatically
Setup direct deposit with your employer so that part of your paycheck goes to your mutual fund or 401(k) plan.  Alternatively, setup automatic deposit with your bank so that a preset amount is transferred to your IRA.

Reduce the number of mutual funds
You need just four mutual funds:

• Growth fund
• Equity-income/growth-and-income fund that owns dividend-paying stocks
• Small-company fund
• International fund

Cut up all but two of your credit cards
Even though we may have multiple credit cards, spanning multiple credit card companies and retail stores, we can get by with two credit cards: a charge card such as American Express, and a low-interest MasterCard or Visa for everyday expenditures.  Less credit cards means dealing with just one or two bills per month.

With our busy lives, simplifying our financial lives tends to become a less pressing matter than going to the doctor or creating an efficient schedule for the extracurricular activities with which your children participate.  Organizing your financial documents should take place on a regular basis throughout the year and not just in the months leading up to April 15.  You will save yourself a lot of time and energy if you organize your supporting financial documents when you do not need them for now.

Francis M. Unson

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— @ WiseStamp Signature. Get it now

Did your personal income or spending go up in December?

December produced modest gains in personal income and consumer spending, helping the economy recover from the worst recession in decades.  While the Commerce Department indicates that personal income rose 0.4 percent against analysts’ expectations of 0.3 percent growth, consumer spending rose 0.2 percent against analysts’ expectations of 0.3 percent growth.  Consumer spending accounts for 70 percent of total economic activity.  The down economy has induced Americans to watch their spending more carefully as they saved 4.8 percent of their incomes in December, a sharp rise from spring of 2008, when the savings rate fell below 1 percent.  Read more…

Francis M. Unson

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— @ WiseStamp Signature. Get it now