Everything You Need to Know About Budgeting As a Freelancer

Could logging in to your computer from a deluxe treehouse off the coast of Belize be the future of work? Maybe. For many, the word freelance means flexibility, meaningful tasks and better work-life balance. Who doesn’t want to create their own hours, love what they do and work from wherever they want? Freelancing can provide all of that—but that freedom can vanish quickly if you don’t handle your expenses correctly.

“A lot of the time, you don’t know about these expenses until you are in the trenches,” says freelance copywriter Alyssa Goulet, “and that can wreak havoc on your financial situation.”

Nearly 57 million people in the U.S. freelanced, or were self-employed, in 2019, according to Upwork, a global freelancing platform. Freelancing is also increasingly becoming a long-term career choice, with the percentage of freelancers who freelance full-time increasing from 17 percent in 2014 to 28 percent in 2019, according to Upwork. But for all its virtues, the cost of being freelance can carry some serious sticker shock.

“There are many hats you have to wear and expenses you have to take on, but for that you’re gaining a lot of opportunity and flexibility in your life.”

– Alyssa Goulet, freelance copywriter

Most people who freelance for the first time don’t realize that everything—from taxes to office supplies to setting up retirement plans—is on them. So, before you can sustain yourself through self-employment, you need to answer a very important question: “Are you financially ready to freelance?”

What you’ll find is that budgeting as a freelancer can be entirely manageable if you plan for the following key costs. Let’s start with one of the most perplexing—taxes:

1. Taxes: New rules when working on your own

First things first: Don’t try to be a hero. When determining how to budget as a freelancer and how to manage your taxes as a freelancer, you’ll want to consult with a financial adviser or tax professional for guidance. A tax expert can help you figure out what makes sense for your personal and business situation.

For instance, just like a regular employee, you will owe federal income taxes, as well as Social Security and Medicare taxes. When you’re employed at a regular job, you and your employer each pay half of these taxes from your income, according to the IRS. But when you’re self-employed (earning more than $400 a year in net income), you’re expected to file and pay these expenses yourself, the IRS says. And if you think you will owe more than $1,000 in taxes for a given year, you may need to file estimated quarterly taxes, the IRS also says.

That can feel like a heavy hit when you’re not used to planning for these costs. “If you’ve been on a salary, you don’t think about taxes really. You think about the take-home pay. With freelance, everything is take-home pay,” says Susan Lee, CFP®, tax preparer and founder of FreelanceTaxation.com.

When learning how to budget as a freelancer it’s necessary to estimate your income and expenses before setting aside savings for tax payments.

When you’re starting to budget as a freelancer and determining how often you will need to file, Lee recommends doing a “dummy return,” which is an estimation of your self-employment income and expenses for the year. You can come up with this number by looking at past assignments, industry standards and future projections for your work, which freelancer Goulet finds valuable.

“Since I don’t have a salary or a fixed number of hours worked per month, I determine the tax bracket I’m most likely to fall into by taking my projected monthly income and multiplying it by 12,” Goulet says. “If I experience a big income jump because of a new contract, I redo that calculation.”

After you estimate your income, learning how to budget as a freelancer means working to determine how much to set aside for your tax payments. Lee, for example, recommends saving about 25 percent of your income for paying your income tax and self-employment tax (which funds your Medicare and Social Security). But once you subtract your business expenses from your freelance income, you may not have to pay that entire amount, according to Lee. Deductible expenses can include the mileage you use to get from one appointment to another, office supplies and maintenance and fees for a coworking space, according to Lee. The income left over will be your taxable income.

Pro Tip:

To set aside the taxes you will need to pay, adjust your estimates often and always round up. “Let’s say in one month a freelancer determines she would owe $1,400 in tax. I’d put away $1,500,” Goulet says.

2. Business expenses: Get a handle on two big areas

The truth is, the cost of being freelance varies from person to person. Some freelancers are happy to work from their kitchen tables, while others need a dedicated workspace. Your freelance costs also change as you add new tools to your business arsenal. Here are two categories you’ll always need to account for when budgeting as a freelancer:

Your workspace

Joining a coworking space gets you out of the house and allows you to establish the camaraderie you may miss when you work alone. When you’re calculating the cost of being freelance, note that coworking spaces may charge membership dues ranging from $20 for a day pass to hundreds of dollars a month for a dedicated desk or private office. While coworking spaces are all the rage, you can still rent a traditional office for several hundred dollars a month or more, but this fee usually doesn’t include community aspects or other membership perks.

If you want to avoid office rent or dues as costs of being freelance but don’t want the kitchen table to pull double-duty as your workspace, you might convert another room in your home into an office. But you’ll still need to outfit the space with all of your work essentials. Freelance copywriter and content strategist Amy Hardison retrofitted part of her house into a simple office. “I got a standing desk, a keyboard, one of those adjustable stands for my computer and a squishy mat to stand on so my feet don’t hurt,” Hardison says.

Pro Tip:

Start with the absolute necessities. When Hardison first launched her freelance career, she purchased a laptop for $299. She worked out of a coworking space and used its office supplies before creating her own workspace at home.

Digital tools

There are a range of digital tools, including business and accounting software, that can help with the majority of your business functions. A big benefit is the time they can save you that is better spent marketing to clients or producing great work.

The software can also help you avoid financial lapses as you’re managing the costs of being freelance. Hardison’s freelance business had ramped up to a point where a manual process was costing her money, so using an invoicing software became a no-brainer. “I was sending people attached document invoices for a while and keeping track of them in a spreadsheet,” Hardison says. “And then I lost a few of them and I just thought, ‘Oh, my God, I can’t be losing things. This is my income!’”

As you manage the cost of being freelance, consider digital tools and accounting services to keep track of invoices, payments and income.

Digital business and software tools can help manage scheduling, web hosting, accounting, audio/video conference and other functions. When you’re determining how to budget as a freelancer, note that the costs for these services depend largely on your needs. For instance, several invoicing platforms offer options for as low as $9 per month, though the cost increases the more clients you add to your account. Accounting services also scale up based on the features you want and how many clients you’re tracking, but you can find reputable platforms for as little as $5 a month.

Pro Tip:

When you sign up for a service, start with the “freemium” version, in which the first tier of service is always free, Hardison says. Once you have enough clients to warrant the expense, upgrade to the paid level with the lowest cost. Gradually adding services will keep your expenses proportionate to your income.

3. Health insurance: Harnessing an inevitable cost

Budgeting for healthcare costs can be one of the biggest hurdles to self-employment and successfully learning how to budget as a freelancer. In the first half of the 2020 open enrollment period, the average monthly premium under the Affordable Care Act (ACA) for those who do not receive federal subsidies—or a reduced premium based on income—was $456 for individuals and $1,134 for families, according to eHealth, a private online marketplace for health insurance.

“Buying insurance is really protecting against that catastrophic event that is not likely to happen. But if it does, it could throw everything else in your plan into a complete tailspin,” says Stephen Gunter, CFP®, at Bridgeworth Financial.

Budgeting as a freelancer allows you to select a healthcare plan that best suits your employment status, income and relationship status.

A good place to start when budgeting as a freelancer is knowing what healthcare costs you should budget for. Your premium—which is how much you pay each month to have your insurance—is a key cost. Note that the plans with the lowest premiums aren’t always the most affordable. For instance, if you choose a high-deductible policy you may pay less in premiums, but if you have a claim, you may pay more at the time you or your covered family member’s health situation arises.

When you are budgeting as a freelancer, the ACA healthcare marketplace is one place to look for a plan. Here are a few other options:

  • Spouse or domestic partner’s plan: If your spouse or domestic partner has health insurance through his/her employer, you may be able to get coverage under their plan.
  • COBRA: If you recently left your full-time job for self-employment, you may be able to convert your employer’s group plan into an individual COBRA plan. Note that this type of plan comes with a high expense and coverage limit of 18 months.
  • Organizations for freelancers: Search online for organizations that promote the interests of independent workers. Depending on your specific situation, you may find options for health insurance plans that fit your needs.

Pro Tip:

Speak with an insurance adviser who can help you figure out which plans are best for your health needs and your budget. An adviser may be willing to do a free consultation, allowing you to gather important information before making a financial commitment.

4. Retirement savings: Learn to “set it and forget it”

Part of learning how to budget as a freelancer is thinking long term, which includes saving for retirement. That may seem daunting when you’re wrangling new business expenses, but Gunter says saving for the future is a big part of budgeting as a freelancer.

“It’s kind of the miracle of compound interest. The sooner we can get it invested, the sooner we can get it saving,” Gunter says.

He suggests going into autopilot and setting aside whatever you would have contributed to an employer’s 401(k) plan. One way to do this might be setting up an automatic transfer to your savings or retirement account. “So, if you would have put in 3 percent [of your income] each month, commit to saving that 3 percent on your own,” Gunter says. The Discover IRA Certificate of Deposit (IRA CD) could be a good fit for helping you enjoy guaranteed returns in retirement by contributing after-tax (Roth IRA CD) or pre-tax (traditional IRA CD) dollars from your income now.

Pro Tip:

Prioritize retirement savings every month, not just when you feel flush. “Saying, ‘I’ll save whatever is left over’ isn’t a savings plan, because whatever is left over at the end of the month is usually zero,” Gunter says.

5. Continually update your rates

One of the best things you can do for yourself in learning how to budget as a freelancer is build your costs into what you charge. “As I’ve discovered more business expenses, I definitely take those into account as I’m determining what my rates are,” Goulet says. She notes that freelancers sometimes feel guilty for building business costs into their rates, especially when they’re worried about the fees they charge to begin with. But working the costs of being freelance into your rates is essential to building a thriving freelance career. You should annually evaluate the rates you charge.

Because your expenses will change over time, it’s wise to do quarterly and yearly check-ins to assess your income and costs and see if there are processes you can automate to save time and money.

“A lot of the time, you don’t know about these expenses until you are in the trenches, and that can wreak havoc on your financial situation.”

– Alyssa Goulet, freelance copywriter

Have confidence in your freelance career

Accounting for the various costs of being freelance makes for a more successful and sustainable freelance career. It also helps ensure that those who are self-employed achieve financial stability in their personal lives and their businesses.

“There are many hats you have to wear and expenses you have to take on,” Goulet says. “But for that, you’re gaining a lot of opportunity and flexibility in your life.”

The post Everything You Need to Know About Budgeting As a Freelancer appeared first on Discover Bank – Banking Topics Blog.

Source: discover.com

Mint Money Audit: Affording Life After Grad School

With a brand new PhD under her belt, our latest Mint audit recruit, Renee, is ready to take on the real world with gusto. The 34-year-old is eager to buy a home and ramp up her retirement savings. She currently lives in San Francisco and has just started a full-time earning $87,000 a year (before taxes).

Renee also received a sizeable inheritance, totaling about $200,000 of which she used $30,000 to pay off her student loans.

So, why does Renee want an audit, exactly? Her finances seem perfectly in order, it seems.

As Renee explains, she wants advice around the best ways to plan for big goals like home ownership and retirement. “I’m especially eager to buy my own apartment, but it is extremely daunting (and expensive) in the Bay area,” she says. As a result, she’s leaning to move to New York City (Brooklyn, specifically, where she thinks may offer more bang for her buck in some neighborhoods.)

She wants to know how much of a down payment she can reasonably afford and how to budget for monthly housing costs.

First, though, I wanted to learn more about Renee’s finances. Here’s what the quick audit revealed:

  • Retirement savings: $40,000 in a 403(b) and Roth IRA. She allocates $200 month from her paycheck to the 403(b).
  • Rent: $1,850 per month
  • Groceries: $400 per month
  • Where is all that savings parked? $100,000 in index and mutual funds, another $50,000 in an 11-month CD earning 1.5%, and remaining $20,000 in checking.

My Advice…

Play Retirement Catch-Up

For a 35-year-old worker, one rule of thumb is that you should have an amount equal to your salary in retirement savings. For Renee, who is nearing age 35, that means $80,000 to $90,000. She’s only about halfway there, so my recommendation is to play some retirement catch up. While it’s not realistic to think that she can invest another $40,000 this year, she can do better.

For starters, what about taking advantage of her company’s 403(b) match? She believes her company offers one, but wasn’t sure about the details. I suggested she learn the specifics and try to capitalize on that offer by contributing at least enough to earn the full match. Allocating closer to 10% of her salary would be ideal. (And PS. that contribution is tax deductible!)

Worried that this would stretch her paycheck too thin, I reminded Renee that she can always adjust her retirement contributions each month, but urged her to give it a try. (My bet is that it won’t be as painful as she suspects.)

Pad the Rainy Day Account?

I wasn’t sure how far her $20,000 in checking would last her. She said it would be about a 6-month reserve, which I feel is adequate. No need to make adjustments there. One thought: She may want to move that $20,000 to a savings account that’s a little less accessible (like an online account without a debit card), so that she isn’t tempted to cash it out on a whim.

Protect Your Down Payment

Renee has $100,000 in a brokerage account, which she plans to use towards a down payment in the near future. But here’s something to consider: What if the market plunges six months before you want to make a bid for a home? And you suddenly lose 15 or 20% of your investments? It would take time to recover, more time than you want.

I would personally never risk money in the stock market if I anticipated needing that money in the next five years. And according to Renee, she hopes to buy a home in the next two years. My advice: Protect the down payment from market fluctuations by moving 50% of that money over to a short-term CD and with the other $50,000 she’s got saved in an 11-month CD, use all that savings towards a future down payment.

Know How Much House You Can Really Afford

To buy in NYC or San Francisco, a 20% down payment is standard. With $100,000 to put down, that means that she’s looking at homes valued at around $500,000. With today’s current mortgage rates nearing 4% for a 30-year fixed-rate mortgage, she’s looking at close to $2,000 a month in payments. But we’ve yet to get to taxes, maintenance and home insurance.

Instead, consider a starter apartment, a studio or junior one-bedroom closer to $400,000. A 20% down payment would be $80,000, leaving her with another $20,000 for closing costs. Her monthly payments would come to around $1,500 per month, close to 30% of her take-home pay, which is a smart cap for housing payments.

 

Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at farnoosh@farnoosh.tv (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

The post Mint Money Audit: Affording Life After Grad School appeared first on MintLife Blog.

Source: mint.intuit.com

What Are Mutual Funds? Understanding The Basics

If you’re one of those investors with very little time to research and invest in individual stocks, it might be a good idea to look into investing in mutual funds.

Whether your goal is to save money for retirement, or for a down payment to buy a house, mutual funds are low-cost and effective way to invest your money.

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What is a mutual fund?

A mutual fund is an investment vehicle in which investors, like you ad me, pool their money together. They use the money to invest in securities such as stocks and bonds. A professional manages the funds.

In addition, mutual funds are cost efficient. They offer diversification to your portfolio. They have low minimum investment requirements.

These factors make mutual funds among the best investment vehicles to use. If you’re a beginner investor, you should consider investing in mutual funds or index funds.

Investing in the stock market in general, can be intimidating. If you are just starting out and don’t feel confident in your investing knowledge, you may value the advice of a financial advisor.

Types of mutual funds

There are different types of mutual funds. They are stock funds, bond funds, and money market funds.

Which funds you choose depends on your risk tolerance. While mutual funds in general are less risky than investing in individual stocks, some funds are riskier than others.

However, you can choose a combination of these three types of funds to diversify your portfolio.

  • Stock funds: a stock fund is a fund that invests heavily in stocks. However, that does not mean stock funds do not have other securities, i.e., bonds. It’s just that the majority of the money invested is in stocks.
  • Bond funds: if you don’t want your portfolio to fluctuate in value as stocks do, then you should consider bond funds.
  • Money market funds: money market funds are funds that you invest in if you tend to tap into your investment in the short term.
  • Sector funds. As the name suggests, sector funds are funds that invests in one particular sector or industry. For example, a fund that invests only in the health care industry is a sector fund. These mutual funds lack diversification. Therefore, you should avoid them or use them in conjunction to another mutual fund.

Additional funds

  • Index funds. Index funds seek to track the performance of a particular index, such as the Standard & Poor’s 500 index of 500 large U.S. company stocks or the CRSP US Small Cap Index. When you invest in the Vanguard S&P 500 Index fund, you’re essentially buying a piece of the 500 largest publicly traded US companies. Index funds don’t jump around. They stay invested in the market. 
  • Income funds: These funds focus invest primarily in corporate bonds. They also invest in some high-dividend stocks.
  • Balance funds: The portfolio of these funds have a mixed of stocks and bonds. Those funds enjoy capital growth and income dividend.

Related Article: 3 Ways to Protect Your Portfolio from the Volatile Stock Market

The advantages of mutual funds

Diversification. You’ve probably heard the popular saying “don’t put all of your eggs in one basket.” Well, it applies to mutual funds. Mutual funds invest in stocks or bonds from dozens of companies in several industries.

Thus, your risk is spread. If a stock of a company is not doing well, a stock from another company can balance it out. While most funds are diversified, some are not.

For example, sector funds which invest in a specific industry such as real estate can be risky if that industry is not doing well.

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Professional Management.

Mutual funds are professionally managed. These fund managers are well educated and experienced. Their job is to analyze data, research companies and find the best investments for the fund.

Thus, investing in mutual funds can be a huge time saver for those who have very little time and those who lack expertise in the matter.

Cost Efficiency. The operating expenses and the cost that you pay to sell or buy a fund are cheaper than trading in individual securities on your own. For example, the best Vanguard mutual funds have operating expenses as low as 0.04%. So by keeping expenses low, these funds can help boost your returns.

Low or Reasonable Minimum Investment. The majority of mutual funds, Vanguard mutual funds, for example, have a reasonable minimum requirement. Some funds even have a minimum of $1,000 and provide a monthly investment plan where you can start with as little as $50 a month.

Related Article: 7 Secrets Smart Professionals Use to Choose Financial Advisors

The disadvantage of mutual funds.

While there are several benefits to investing in mutual funds, there are some disadvantages as well. 

Active Fund Management. Mutual funds are actively managed. That means fund mangers are always on the look out for the best securities to purchase. That also means they can easily make mistakes.

Cost/expenses. While cost and expenses of investing in individual stocks are significantly higher than mutual funds, cost of a mutual fund can nonetheless be significant.

High cost can have a negative effect on your investment return. These fees are deducted from your mutual fund’s balance every year. Other fees can apply as well. So always find a company with a low cost. 

How you make money with mutual funds.

You make money with mutual funds the same way you would with individual stocks: dividend, capital gain and appreciation.

Dividend: Dividends are cash distributions from a company to its shareholders. Some companies offer dividends; others do not. And those who do pay out dividends are not obligated to do so. And the amount of dividends can vary from year to year.

As a mutual fund investor, you may receive dividend income on a regular basis.

Mutual funds offer dividend reinvestment plans. This means that instead of receiving a cash payment, you can reinvest your dividend income into buying more shares in the fund.

Capital gain distribution: in addition to receiving dividend income from the fund, you make money with mutual funds when you make a profit by selling a stock. This is called “capital gain.”

Capital gain occurs when the fund manager sells stocks for more he bought them for. The resulting profits can be paid out to the fund’s shareholders. Just as dividend income, you have the choice to reinvest your gains in the fund.

Appreciation: If stocks in your fund have appreciated in value, the price per share of the fund will increase as well. So whether you hold your shares for a short term or long term, you stand to make a profit when the shares rise. 

Best mutual funds.

Now that you know mutual funds make excellent investments, finding the best mutual funds can be overwhelming. 

Vanguard mutual funds.

Vanguard mutual funds are the best out there, because they are relatively cheaper; they are of high quality; a professional manage them; and their operating expenses are relative low. 

Here is a list of the best Vanguard mutual funds that you should invest in:

  • Vanguard Total Stock Market Index Funds
  • Vanguard 500 Index (VFIAX)
  • Total International Stock index Fund
  • Vanguard Health Care Investor

Vanguard Total Stock Market Fund 

If you’re looking for a diversified mutual fund, this Vanguard mutual fund is for you. The Vanguard’s VTSAX provides exposure to the entire U.S. stock market which includes stocks from large, medium and small U.S companies.

The top companies include Microsoft, Apple, Amazon. In addition, the expenses are relatively (0.04%). It has a minimum initial investment of $3,000, making it one of the best vanguard stock funds out there.

Vanguard S&P 500 (VFIAX)

The Vanguard 500 Index fund may be appropriate for you if you prefer a mutual fund that focuses on U.S. equities. This fund tracks the performance of the S&P 500, which means it holds about 500 of the largest U.S. stocks.

The largest U.S. companies included in this fund are Facebook, Alphabet/Google, Apple, and Amazon. This index fund has an expense ration of 0.04% and a reasonable minimum initial investment of $3,000.

Vanguard Total International Stock Market

You should consider the Vanguard International Stock Market fund of you prefer a mutual fund that invests in foreign stocks.

This international stock fund exposes its shareholders to over 6,000 non-U.S. stocks from several countries in both developed markets and emerging markets. The minimum investment is also $3,000 with an expense ratio of 0.11%.

Vanguard Health Care Investor

Sector funds are not usually a good idea, because the lack diversification. Sector funds are funds that invest in a specific industry like real estate or health care. However, if you want a fund to complement your portfolio, the Vanguard Health Care Investor is a good choice.

This Vanguard mutual fund offers investors exposure to U.S. and foreign equities focusing in the health care industry. The expense ration is a little bit higher, 0.34%. However, the minimum initial investment is $3,000, making it one of the cheapest Vanguard mutual funds.

Bottom Line

Mutual funds are great options for beginner investors or investors who have little time to research and invest in individual stocks. When you buy into these low cost investments, you’re essentially buying shares from companies.

Your money are pooled together with those of other investors. If you intend to invest in low cost investment funds, you must know which ones are the best. When it comes to saving money on fees and getting a good return on your investment, Vanguard mutual funds are among the best funds out there.

They provide professional management, diversity, low cost, income and price appreciation.

What’s Next: 5 Mistakes People Make When Hiring A Financial Advisor

Speak with the Right Financial Advisor

  • If you have questions beyond knowing which of the best Vanguard mutual funds to invest, you can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc).
  • Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.
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7 Best Short-Term Bonds Funds to Buy in 2020

For investors with short-term saving goals, short-term bonds can be appropriate investments for your money.

They are stable and they certainly provide a higher return than a money market fund.

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However, even with the best short term bond funds, there’s also a risk of losing a percent or two in principal value if interest rates rise.

There are many options available to you, but your best option is to invest in taxable short-term bond funds, U.S. Treasury short-term bond funds and federally tax-free bond funds.

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What are short-term bonds?

Short-term bonds, or any bonds for that matter, are debts instruments that companies and the government issue. They typically mature in 1 to 3 years.

When you buy a bond, you are essentially lending money to the issuing company or government agency.

They are obligated  to pay back the full purchase price at a particular time, which is called the “maturity date.” 

Short-term bonds are low risk investments and you can have access to your money fairly quickly.

As with all bond funds, one of the risk of short term bond funds is that when interest rates rise, the prices of the bonds in the fund decrease.

But short term bond funds have a reduced risk of default, because the bond funds are backed by the full faith and credit of the U.S. government.

Moreover, because the term is short, you will earn less money on it than on an immediate-term or long term bond fund.

Nonetheless, they are still competitive and produce higher returns than money market funds, Certificate of Deposits (CDs), and banks savings accounts. And short-term bonds are more stable in value than stocks.

At a minimum, don’t buy a short-term bond fund if you’re saving for retirement or if you want to hold your money longer.

If you’re looking to invest your money for the long term and are still looking for safety, consider investing in Vanguard index funds. 

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Short-term bonds: why do you need to invest in them?

You should invest in short-bonds if you intend to use the money in a few years or so. However, don’t push your emergency cash into bonds. That is what a bank savings account is for.

Also, you should not put too much of your long term investment money into bonds, either. If you have a long term goal for your money, it’s best to invest in mutual funds such as Vanguard mutual funds, real estate, or your own business.

Here are some situations where you should invest in short term bonds.

  • You want to stabilize your investment portfolio. If you have other aggressive investments, you may need to balance it out with short term bond funds. The reason is because short term bonds are safer comparing to stocks.
  • Buying a house.
  • Retirement. If you’re thinking of retiring in a few years, short-term bonds are appropriate.
  • Purchasing a car.
  • You’re a conservative investor. Not all investors can stomach the risk of losing all of their money due to the market volatility. So instead of investing in stocks, which falls on the riskier end of the securities spectrum, you should invest in short term bond funds.

Best short-term bond funds to consider:

Most people prefer to buy bonds through a broker such as Vanguard or Fidelity.

If you’re looking for the best short-term bond funds to buy now, consider these options:

  • Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX)
  • Vanguard Limited-Term Tax Exempt Fund Investor Shares (VMLTX)
  • The Fidelity Short Term Bond Fund (FSHBX)
  • Vanguard Short-Term Tax-Exempt Fund Investor Share (VWSTX)
  • Vanguard Short-Term Investment Grade fund (VFSTX)
  • T. Rowe Price Short-Term Bond Fund (PRWBX)
  • Vanguard Short-Term Bond Index Fund (VBIRX)

Tax free short-term bonds

There are some short-term bond funds that are both state and federally tax free. But there are not too many out there.

However, the ones that are available are good investments. So, if you are in a low state bracket and in a high federal bracket, consider investing in these Vanguard bond funds.These are federally tax free bond funds:

Vanguard Limited-Term Tax Exempt Fund Investor Shares (VMLTX)

This Vanguard bond fund seeks to provide investors current income exempt from federal taxes. The fund invests in high-quality short-term municipal bonds.

This bond fund has a maturity of 2 years. So, if you are looking for a fund that provides modest income and is federal tax-exempt, the Vanguard Limited-Term Tax Exempt Fund is for you.

The fund has an expense ratio of 0.17% and a minimum investment of $3,000. This makes it one of the best short term bonds to buy.

Vanguard Short-Term Tax-Exempt Fund Investor Share (VWSTX)

Like the Vanguard Limited Short Term fund, this fund also provides investors with current income that is exempt from federal income taxes.

The majority of the fund invests in municipal bonds in the top three credit ratings categories. It also invests in medium grade quality bonds.

This fund too has an expense ratio of 0.17% and a minimum investment of $3,000, making it one of the best short term bond funds.

U.S Treasury Short-term Bond Funds: Vanguard Short-Term Treasury

If you’re interested in a bond fund that invests in U.S. Treasuries, then U.S.Treasury bond funds are a great choice for you. One of the best U.S.Treasury bond funds is the Vanguard Short-Term Treasury.

This bond fund seeks to track the performance of the Bloomberg Barclays US Treasury 1-3 Year Bond Index. The Vanguard Short-Term Treasury invests in fixed income securities with a maturity between 1 to 3 years.

This bond fund has an expense ratio of 0.07% and an initial minimum investment of $3,000. Currently, this short term bond fund has a 1-year yield of 4.51%, making it one of the best short term bond funds.

Of note, this fund is also available as an ETF, starting at the price of one share.

The Fidelity Short-Term Bond Fund (FSHBX)

The Fidelity Short Term Bond Fund is one of the best out there for those investors who want to preserve their capital. This fund was established in March of 1986 and seeks to provides investors with current income.

The fund managers invests in corporate bonds, U.S. Treasury bonds, and assets backed securities. Over the last 10 years, this bond fund has a yield of 1.98% and a 30-day yield of 1.98%. This Fidelity bond fund as an expense ratio of 0.45%. There is no minimum investment requirement.

Taxable short-term bond funds: Vanguard Short-Term Investment Grade fund (VFSTX)

If you are not in a high tax bracket, then you should consider investing in a taxable short term bond fund. One of the best out there is the Vanguard Short-Term Investment Grade fund.

This bond fund provides investors exposure to high and medium quality investment grade bonds, such as corporate bonds and US government bonds. This fund has an expense ratio of 0.20% and an initial minimum investment of $3,000, making it one of the best short term bond funds out there. 

T. Rowe Price Short-Term Bond Fund (PRWBX)

The T. Rowe Price Short-Term Bond Fund invests in diversified portfolio of short term investment-grade corporate, government, asset and mortgage-backed securities. This bond fund also invests in some bank mortgages and foreign securities. This fund produce a higher return than a money market fund, but less return than a long-term bond fund. The T. Rowe Price Short-Term Bond Fund has a minimum investment requirement of $2500, making it one the most favorite short term bond funds out there.

Vanguard Short-Term Bond Index Fund (VBIRX)

The Vanguard Short-Term bond is a good choice for the conservative investor. It offers a low cost, diversified exposure to U.S. investment-grade bonds. This has fund has a maturity date between 1 to 5 years. Moreover, the fund invests about 70% in US government bonds and 30% in corporate bonds. The bond fund as an expense ratio of 0.07% and a minimum investment requirement of $3,000.

How to Invest in Short-Term Bonds

If you’re considering in investing in these or any of Vanguard bond funds, you need to do your due diligence.

First, think about what you need the bond fund in the first place. Is it to diversify your investment portfolio?

Are you a conservative investor who need a minimize risk at all cost? Or, do you want to invest in a short term bond fund because you need the money to use in a few years for a vacation, buying a house, or planning for a wedding?

Once, you have come up with answers to this question, the next step is to do your research about the best bond fund available to you.

Use this list to start. If it’s not enough, do your own research.

Look into how much the initial minimum investment is to buy a bond fund. Most Vanguard short term bond funds require a $3,000 minimum deposit.

Some Fidelity bond funds, however, have a 0$ minimum deposit requirement.

Next compare expense rations, performance for different funds to see if they match your investment goals. But you have to remember that past performance is not an indication of future performance.

Your final step is to open an account to buy your bond funds. If you choose Vanguard, you can do so at their website.

How do you make money with short-term bonds?

You can make money with short-term bonds the same ways you make money with a mutual fund (i.e., dividends, capital gains, and appreciation). But most of your returns in a bond fund comes from dividends.

The bottom line

In brief, short-term bonds are great investment choices if you have short term saving goals. You may be interested in buying these bonds because you expect to tap into your investment within a few years or so. Or, you want a more conservative investment portfolio.

Short term bonds produce higher yields than money market funds.

The only problem is that the share prices can fluctuate. So, if you don’t mind market volatility, you may wish to consider short-term bonds.

Speak with the Right Financial Advisor

  • If you have questions beyond short-term bonds, you can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc).
  • Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.
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The post 7 Best Short-Term Bonds Funds to Buy in 2020 appeared first on GrowthRapidly.

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June Financial To-Do List + Calendar

Life happens, but you can be prepared for the unexpected with an emergency savings fund. These funds are designed to be set aside for unanticipated expenses, such as:

  • Unexpected job loss
  • Unforeseen medical expenses
  • Car repair
  • Family emergencies

Emergency funds serve as an important financial buffer in the event of an emergency, and it’s easy to get started with this savings task. In this month’s financial checklist, we’re going to focus on tasks that will help you build an emergency savings fund.

 June Financial Checklist: Emergency Savings

  1. Determine how much you want to put away
  2. Pick where to save your emergency fund
  3. Set up automatic contributions
  4. Pad your emergency fund
  5. Review and adjust your contributions monthly

Let’s look at ways you can boost your savings, build your emergency fund, and keep your finances on track as we enter the second half of the year.

  1. Determine how much you want to put away

Set a goal savings amount that is moderately challenging but attainable.

  • Less aggressive: 3 months of living expenses
  • More aggressive: 6 months of living expenses

Example: If you make $3,200 per month after taxes, you’ll want to have $9,600 to $19,200 in your emergency fund.

2. Pick where to save your emergency fund

Consider emergency savings as untouchable for expenses that are just wants – keep this money here for when you really need it.

To help resist the temptation of spending these savings, put your emergency fund in the right place:

  • High-yield savings account
  • Money market account
  • Certificate of Deposit (CD)
  • Roth IRA

Sometimes there’s not a one-size fits all solution. Consider putting emergency funds away in more than one of the above options. 

3. Set Up Automatic Contributions

  • Funnel some of your paycheck directly into your emergency fund
  • Start with a small percentage, and be sure you can still live comfortably
  • Make contributions more aggressive over time if possible

4. Pad your emergency savings

  • Sell old things you no longer use
  • Funnel “surprise” cash into your savings
  • Save your tax refund
  • Try a no-spending challenge
  • Take on a side hustle

5. Review and adjust your contributions monthly

  • Check in each month to see how much you’re putting away
  • Adjust your contributions if your account isn’t building quickly enough

 

Key Takeaways

Prefer to organize online? Create an editable copy of our June monthly template in three simple steps:

  1. Open our Calendar Template in Google Sheets
  2. Select “File”, then “Make a Copy”
  3. Save in your own Google Drive to make edits

Our finance tips can help you throughout the year so be sure to take a look! Improve your finances in 2020 with our series of financial to-do lists tailored to each calendar month.

The post June Financial To-Do List + Calendar appeared first on MintLife Blog.

Source: mint.intuit.com

Money Audit: Should We Hold on to Our Rental Properties?

This week’s Mint audit helps out a couple, Pasquale, 46, and Jillian, 39, who are starting a new life together after each experiencing divorce. Both work in software sales earning roughly the same income. When combined, their earnings average $450,000 a year.

The New Jersey couple shares a new mortgage and a savings account. They recently purchased a home together and pool a fraction of their incomes together into a joint account to pay for shared expenses such as the home loan, property taxes and utilities.

Pasquale and Jillian also arrived at the relationship owning their own properties. Pasquale has held onto his townhome in a nearby town that he bought after his divorce. He rents it out, earning a nice $500 monthly profit. Jillian also has a home in Florida, which she rents out. She more or less breaks even every month.

They would like advice related to managing their rental properties (should they sell them?), possibly buying a vacation home in the $250,000 to $350,000 range and, for Pasquale, saving up to help send his two daughters (ages 13 and 17) to college. They’re also wondering if they’re saving “enough” for retirement.

They had lots of good questions, and after an hour on the phone and a review of their finances, I was able to fit together some of their puzzle pieces.

First, here’s a break down of some their finances:

Retirement Savings

  • Pasquale: Contributes 5% to 401(k) and has about $500,000 in it. He also invests 15% in company’s ESPP (Employee Stock Purchase Plan)
  • Jillian: Contributes 5% to a 401(k) plus employer’s match, totaling 10%. She has about $200,000 saved. She also invests 11% in her company’s ESPP.
  • If they were to both cash out their ESPPs today, they’d have about $250,000 in gains, which are subject to income tax.

Child Support Payments

  • Pasquale: $4,000 per month

Debt (Credit Cards and Student Loans)

  • Pasquale: $18,000 in student loans
  • Jillian: $40,000 in student loans

Real Estate Holdings

  • Each of their individual properties has about $80,000 in equity.

 

Here are my top 3 recommendations:

Max Out the 401(k)s

The couple is doing fairly well with their retirement savings, but I think they are too exposed to their ESPPs. They contribute more to their ESPPs than their 401(k)s, which is very risky, considering an ESPP puts all your money in a single stock. A 401(k) is far more diversified.

They may benefit from reallocating some of those dollars back into their company 401(k). In doing so, I recommend they both aim to max out their 401(k)s, which also means a bigger tax deduction. This year’s maximum contribution is $18,500.

Transfer Some ESPP Earnings to College Savings

Every six months, each receives the chance to cash out some or all of the money in their ESPP. I recommend striking at the next opportunity to reduce their exposure to a market downfall and help pay for future college expenses. Taking 20 or 30 percent off the table and placing the dollars into a safer haven like a CD creates less risk.

For Pasquale, specifically, I’d look into selling some of his shares at the next opportunity and placing it into a plain vanilla savings account to cover at least the first two years of his daughter’s education. His daughter will choose a school soon and expects to receive some grants and scholarships to reduce the cost. At that point Pasquale can better estimate how much to withdraw from the stock plan.

For his youngest daughter, it’s not too late for Pasquale to open a 529-college savings account. That money can later be used for higher education costs without being subject to taxes. Investing $500 a month in a 529 starting today could help to afford at least the first year or two of school, depending on where she lands. Pasquale may even consider using some of the ESPP gains to fund the new 529 for daughter #2, if his eldest doesn’t need it.

Sell Rentals to Purchase a New Second Home

How emotionally tied are they to their individual properties? Pasquale said he could take it or leave it. The $500 cash flow is nice, but he’s open to selling it. Jillian, however, would be sad to part ways with the Florida home. While its rental income is just enough to cover the carrying costs, she likes the idea of keeping it. She’s always wanted to have a house by the water.

But I propose a scenario: What if they sold both rental properties and pooled the equity ($160,000) to afford a new second home that they’d both own? They’re eyeing a cabin near the Poconos in Pennsylvania. The estimated cost for a home that suits them is between $250,000 and $300,000. A 50% down payment on a $300,000 home would mean that their monthly mortgage would be roughly $700 per month, given today’s average interest rate of about 4.50% (or possibly higher for second homes.)

From selling the two properties they achieve their goal of affording a second home. Located in a popular resort area, they can also rent it out from time to time for more than $700 a week. Renting the place for just 8 or 10 weeks out of the year would probably cover the annual mortgage.

From there, any extra cash flow could be used to save more for retirement, travel, college, or whatever they wish.

 

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.

The post Money Audit: Should We Hold on to Our Rental Properties? appeared first on MintLife Blog.

Source: mint.intuit.com