With the overwhelming amount of pressure and decisions to make when starting a small business, stress can cause even savvy industry gurus to fall for common startup mistakes. In the best scenarios, mistakes will set you back a bit, but in worst-case scenarios, they can hurt your potential and outlook for long-term success. Below are common startup mistakes that can have a negative impact on your small business.
Miscalculating Startup Costs
The perils of starting a business with an insufficient budget, or an underestimated one, can be a shot in the foot before you even get running. Plan to have at least six months’ worth of income in the bank before officially cutting the ribbon to open your business. This will give you some time to get up and going, garner some clients, and generate invoices and payment.
Neglecting to create a marketing strategy
Most new businesses are going to have to put some brain power and cash behind a good marketing plan, and this should be done well in advance of turning on the lights for customers and clients. These plans should include online, offline, social media, and any other means of marketing to get the word out. Will marketing and social media be outsourced, will you handle it personally, or will you bring someone on board to solely handle this task?
Failing to be frugal
Whether through a bank loan, a generous loan from a relative, sales of your own assets, or years of saving your own money, you’re going to have some capital to spend on rent, equipment, products, employees, etc. Keep in mind that profits won’t roll in overnight. Spend your savings wisely, do your research, and make your money stretch.
Thinking you can be a one-man operation
Even if you’re a one-man or one-woman business in the beginning, you’ll need people in your corner. You’ll inevitably want to shoot around ideas with someone; you may need someone, even on a very part-time basis, just to handle invoices and office files; you’ll want feedback, advice, and even potential contacts. Consider if it makes sense for your business to create a board of advisors.
Many workers dream of retiring early. Not everyone has a choice in the matter, but if you do, there are some disadvantages and challenges to be aware of. Even if you can afford to retire early, you might not want to.
Here are some disadvantages to be aware of when it comes to early retirement.
Savings in a traditional IRA or 401(K) can’t be withdrawn without penalty before age 59 ½, so in order to retire earlier, you’ll need to have enough savings in a traditional bank or brokerage account to cover your costs until then. As for social security benefits, you’re allowed to start claiming benefits at 62, but that’s before full retirement age, so claiming early could result in a permanent reduction in benefits (i.e. if your full retirement age is 66 and you claim benefits at 62, you’ll reduce your payments by 25%).
Medicare eligibility doesn’t kick in until age 65, so retiring earlier than that means having to absorb the cost of health insurance independently. If you retire with just a few months to go before Medicare kicks in, you have the option of obtaining short-term coverage, which helps pay for catastrophic medical events but doesn’t typically cover preventive care or pre-existing conditions. If you’re looking at a longer stretch between retirement and Medicare eligibility, you’ll need to shop around for major medical insurance. These plans are the most comprehensive for early retirees and cover a broad range of medical care, from doctor visits to major surgery.
Early retirees can have a difficult time adjusting to an unstructured schedule. With high levels of energy and drive, and a strong desire to still be productive, they risk sinking into boredom and depression as they progress deeper into retirement. Increased anxiety, dementia, and cardiovascular disease have all been linked to health risks of early retirement as well. For this reason, it’s a good idea to keep an open mind about returning to work should you start to feel that early retirement wasn’t as fulfilling as you’d hoped.
Though there are some things to think about before retiring early, with careful planning and goal setting, you can make it work. It’s best to begin saving consistently (and early) – in a Roth IRA or traditional 401(K), but also in a nontraditional retirement plan so that you can have access to those funds before age 58 ½. Financial planners advise to save 30% of your income, as opposed to the conventional target of 10% or 15%. And transfer all tax refunds and bonuses into your nest egg as well. In short, cutting out your daily coffee house latte isn’t going to get you to early retirement.
Financial advisors commonly advise their clients to seek investments with high returns in order to maximize their retirement funds, but most investors don’t realize that high fees are eating into those earnings.
While fund fees have steadily declined in recent years, many investors don’t realize how much they’re paying in fees to begin with or how much these expenses and other investment costs are eating into their retirement savings. Remember that as your investment returns compound over time, so do the fees, which means your payments could accumulate to 2% or more.
Below are some of those hidden fees and what you can do to avoid them.
This refers to the annual fees charged by all mutual funds, index funds, and exchange-traded funds as a percentage of your investment in the fund. Expense ratios apply to all types of retirement funds, such as your 401(k), individual retirement account, or brokerage account, and they cut a percentage of your investment in the fund depending on its annual yield.
Mutual Fund Transaction Fees
This is a fee you pay a broker to buy and sell some mutual funds on your behalf, similar to a “trade commission” that a broker would charge to buy or sell stock.
These fees surface when a broker successfully sells a fund to you that has a sales charge or commission.
These fees are associated with maintaining your portfolio or brokerage account.
Brokerage Account Inactivity Fees
If your account allows you to buy and trade at any time, you could face an unexpected inactivity charge if you don’t trade for a few months.
To determine whether your retirement fees are too high, check the fee disclosure and look at the expense ratios on the mutual funds you are invested in. Likewise, check these fees before you invest in a mutual fund you are interested in.
To help balance your investment accounts and minimize your retirement fees, take advantage of lower-fee mutual funds if your 401(k) plan already has an expense ratio of over 1%.
Finally, be aware that fees may also be related to how much advice you’re getting and where that advice is coming from. Human advisors are more expensive than robo-advisors, and an actively managed fund will cost more than an index fund or an exchange-traded fund (ETF).
Congress originally designed the Alternative Minimum Tax (AMT) to make sure wealthy taxpayers who take advantage of multiple tax breaks and itemized deductions would still pay their fair share in federal income taxes each year. The AMT produces around $60 billion a year in federal taxes from the top one percent of taxpayers. However, because the AMT wasn’t tied to inflation, the tax has extended down to a growing number of middle-income taxpayers. Here’s what to do about it.
It’s called the Alternative Minimum Tax because it is a mandatory alternative to the standard income tax. If you are a high-income earner, you are required to calculate your taxes twice – once under standard tax rules and again under the stricter AMT rules (the AMT disallows many deductions, such as state and local tax, childcare credits, and property taxes). Ultimately, you are required to pay the higher amount.
Are You at Risk?
First, be aware of the triggers for AMT, as earning a higher income isn’t the only factor. For example, it can also affect those who are married and file jointly, have a large family (more than four dependents), enjoy profits from stock options, or live in a high-tax state. Therefore, any move that reduces your adjusted gross income (AGI) – like upping your contributions to qualified retirement accounts such as IRAs, 401(k)s, and health savings accounts – might help avoid the AMT. Additionally, aim to reduce your itemized deductions and increase your charitable contributions. Finally, pay attention to long-term capital gains – when you sell a home or other investments for a profit. These are taxed at the same rate under both the standard income tax and the AMT, but capital gains could put you over the threshold for AMT, thereby triggering it and disqualifying you from deducting state income taxes paid on the capital gains.
If you practice careful year-round preparation while being mindful of the above triggers, you’ll have a better chance of avoiding the AMT.
Amidst a strengthening labor market, rising economic activity, and a declining unemployment rate, the Federal Open Market Committee (FOMC) decided last month to raise the federal funds rate – the interest rate at which banks and credit unions lend Federal Reserve funds to other banks and credit unions overnight – by a quarter-point, from 1.75 to 2 percent. This is the second increase in 2018, and two more increases were suggested by year’s end.
To the average small business owner, the knee-jerk reaction might be a negative one. After all, interest rates do trickle down, affecting credit card balances, adjustable-rate mortgages, and variable loan rates. But the increase could potentially be good news for small businesses. Higher interest rates amid a strong economy mean more profitable deals for banks, which creates a greater motive to offer more financing options and approve loan requests.
Another potential long-term benefit to higher interest rates is a better cash flow. Because inflation is typically a motivator for rate increases, the cost of goods and services tend to escalate, effectively allowing small businesses to raise prices, improve margins, and enjoy more breathing room.
As with any change in the economy, however, the impact on small businesses could have negative consequences as well. One potential consequence of higher interest rates is the effect on consumerism. Because consumers with credit card debt will be paying higher interest rate charges, they’ll have less disposable income to spend, which could hinder sales and growth of small businesses. Additionally, companies that need to borrow money for growth can potentially incur a higher cost of capital when interest rates go up. This can affect new loans as well as existing loans with floating rates.
Because interest rates have been hovering near zero for the past several years in order to spur the economy, a move in the needle was inevitable, and we are unlikely to see rates that low again anytime soon. With the Federal Reserve’s suggestion of additional increases to come, small businesses that are contemplating applying for loans might want to do so sooner rather than later.