Jacob Sensiba, Author at The Free Financial Advisor

When are Per Diem Payments Taxable?

September 2, 2020 by Jacob Sensiba Leave a Comment

Per diem payments are used when businesses have employees that travel. These payments are designed to relieve the employee from certain costs associated with traveling. Particularly meals and incidentals (ground travel, laundry, room service, etc.), and lodging.

This is great for both the business and the employee, but there are certain situations when per diem payments are taxable. In this article, we’ll explore exactly when an employee will pay per diem tax.

Two types

There are two types of per diem payments, meal-only, and meal and lodging. The names imply their use. One pays for meals, the other pays for meals and lodging.

It’s important that we specify the meals must be “non-entertainment related” meals.

Stipulations

As with many parts within the tax code, per diem rules are very specific. Meals and lodging have different rates.

Also, different cities have different rates. These differences are typically relegated to “big cities” and “small cities”, with bigger cities getting the larger rates. This is referred to as the high-low method. Businesses may also make payments based on the state in which you travel.

The per diem payments must be equal to or less than the federal allowable limit (depending on what method is selected). The employee is responsible for filing an expense report within 60 days. The expense report needs to include, date and location of the trip, purpose of the trip, and lodging receipts (if the meal-only option is selected).

You’re not allowed to “transfer credits”. What’s meant by this is if you use less on your lodging than is allotted, you can’t use the excess on food, or vice versa.

Tax Consequences

As I mentioned in the introduction, per diem payments can have tax consequences.

If per diem payments over the limit are taxable on the employee’s wages
If an expense report isn’t filed, or the filed expense report doesn’t include the required information, those per diem payments become taxable to the employee.
If the employer allows you, the employee, to keep whatever you don’t spend.

If you travel for business and receive per diem payments, just make sure you keep good records, and you hang onto your receipts. It’s better to have too much information than not enough.

Stock Splits, Asset Allocation, Cognitive Bias

August 26, 2020 by Jacob Sensiba Leave a Comment

During the last month, the market and the economy have seen and done some weird things. Apple and Tesla announced stock splits, and the NASDAQ and the S&P 500 achieved record highs. All while COVID cases increase and the economy continues to suffer as a result.

What’s going on?

Stock splits

Apple (AAPL) and Tesla (TSLA) have seen some crazy increases in their stock prices over the last few months.

Since the beginning of the year, Apple is up about 67% and Tesla is up a whopping 390%. Tesla’s insane run-up is partially due to the influx of retail investors using online platforms, such as Robinhood.

I bring this up for two reasons:

Incredible increases in stock prices, as we’ve seen with Tesla, can be dangerous. Warren Buffett illustrated it best when he said, “Only when the tide goes out do you discover who’s been swimming naked.” Insane run-ups in value attract more investors until the trade becomes crowded and unsustainable. Then people sell to capture their gains, and the stock price could fall as a result.
Stock splits are not a “get rich quick” trade. I heard someone recently say, “buy Tesla now, before it splits, because once it splits, you’ll make 4x your money in an instant.” Tesla will undergo a 4 to 1 stock split. When Tesla’s stock splits, if you own one share at $2,000, you won’t have 4 shares at $2,000, you’ll have 4 shares at $500. Your total value does not change.

Asset allocation

I knew asset allocation was one of the biggest factors determining investor success, but this year confirmed that.

So far, in 2020, we’ve seen the fastest bear market in history, when the S&P 500 fell 37% in 6 weeks. Followed by an unprecedented run that brought that same index to new record highs.

With appropriate asset allocation, depending on your age, time horizon, and risk, you were able to miss some of the downside and participate in some of the upside.

It’s important to ask the right questions to figure out what the best asset allocation is for you.

Cognitive biases

I’m not going to lie, during the month of March and April, I was feeling pretty proud of myself. Yes, I was worried about the lives affected by COVID and the economic implication it could have, but I did a pretty good job of allocating client assets accordingly.

Even after the market bottomed and started to recover, I held the belief that ugly was just getting started. With everything that I listened to and read, it appeared that once the government stimulus ran out and bankruptcies started rolling in, things would get worse.

I still believe that, but I am making sure that I do research on the opposite view. I’m trying to do what Ray Dalio does so successfully. I’m trying to prove myself wrong.

Only finding sources that back up your thesis is called confirmation bias, and I’m trying to avoid that at all costs.

Make sure you are gathering information from a variety of sources. View both sides of the aisle. Keep your biases in check.

How to Make a Legally Binding Promissory Note

August 19, 2020 by Jacob Sensiba Leave a Comment

A legally binding promissory note is used when lending money. It’s a document that states the parties involved, how much is being lent, any pertinent financial information, and signatures by the involved parties.

The agreement must be clearly defined so that no argument can be made.

Four parts

There are four integral parts to a legally binding promissory note.

Parties – individuals or entities involved in the transaction. A party must be of legal age and of sound mind capable of entering into a transaction.
Promise – Defines what is agreed upon. It defines the amount to be paid and should also include a paid off date.
Sum certain – Specific financial information including, exact amount, pay off date, interest, amortization, penalties, and when those penalties must be assessed.
Signatures – to be signed by all parties involved.

These four parts must be included and clearly defined, otherwise the agreement might not be enforceable.

Once the promissory note is signed and has all the necessary parts in it, it becomes legally binding. Once legally binding, all parties involved must meet their part of the agreement.

Promissory Note Uses

Essentially, a promissory note is used when lending/borrowing money. Mortgages, car loans, student loans, personal loans, and business loans all use promissory notes to legally enforce that the borrower must pay back the loan, plus interest, in a specified period of time.

Different kinds

There are two different types of promissory notes, simple and demand.

A simple promissory note is one scheduled, lump-sum payment on a specified date.

A demand promissory note is when the lender asks for payment to be made. Normally, there is a reasonable amount of time needed between ask and delivery.

Collection

More often than not, the borrower will abide by the terms of the promissory note and pay on time. If they don’t, however, there are a few things you can do.

Talk to them. Make sure they are doing okay. Send them a written reminder. If need be, you can send one at 30, 60, and 90 days. If they’re in a tight spot, see if they can make partial payments.

A legally binding promissory note is a very important document. Make sure you include all four parts to make it enforceable and legally binding. Might not be a bad idea to have an attorney take a look at it before you enter into the agreement.

Down Payment, Rainy Day, Be Prepared

August 12, 2020 by Jacob Sensiba Leave a Comment

During the month of June, I wrote an article Down Payment or Investment Opportunities. It was my perspective on what to do with my savings, as I want to buy a home as soon as possible, but I also saw incredible opportunities to make money in the stock market.

Review a previous post

I thought I would revisit this topic, but my mindset shifted a little bit. That’s not to say that I’m proceeding in a different way than I thought I would, but now I’m thinking about it differently.

In that post, I said that I wanted to save $25,000 (I think) for a down payment, and wanted to do it in 4 years.

That meant that I would have to set aside a decent chunk each month to make that a possibility. The caveat to that is I would forego many chances to put money to work in the stock market.

Saving money for a down payment versus actively participating in the market is not the smartest financial decision (in my opinion), but in terms of what’s best for my family and for my psyche, this is the right move.

Because I have conviction in my decision now, my “regret” for not participating in the market has gone away.

When I first made the decision to save for a home instead, I often felt regret because the opportunities to make money were so great. Just from when I wrote that post (June 17) to now, the S&P 500 index ETF (SPY) is up 7.5%.

But I know this is the right choice, so I’m better able to focus my efforts on this goal. I’m eating out much less, I reviewed my budget to see where I could save more, and I’m finding bargains or buying second-hand items where I can.

Rainy day

While we are on the topic of saving money, I want to stress the importance of having some set aside for a rainy day.

As we’ve seen over the past few months, life can get pretty ugly. Now economic and humanitarian events of this scale don’t happen very often, but that’s not the point.

What I’m trying to convey here is that life is unpredictable. You don’t know what’s going to happen, or when. You don’t know how bad it’s going to be, so it’s important you have something set aside if things do get bad.

What’s more, it’s clear that the majority of businesses and corporations don’t have hardly any money set aside when disaster strikes. We like to think that if we put our time and energy working for a company, that they’ll take care of us when the time comes, but it’s clear now that most businesses won’t do that. They’ll protect the bottom line, and that’s that.

Obviously, not every company is like that, but I think it’s safe to say that the majority of organizations operate in this fashion.

Now, I do believe that this event will change how businesses operate. They’ll back away from the lean and mean operations, and start focusing on supply chain redundancy, as well as paying a little more for the security of their products and their people.

Be prepared

What I’m trying to say here is you need to look out for yourself and your family first. Sometimes, it’s necessary to forego big vacations, big expenses, or take out.

I think there’s room to be optimistic but also plan for the worst. I think it’s necessary to do both.

Living a life full of optimism is great, but you become a deer in the headlights when something bad happens. Taking the other side of things, being pessimistic, turns you into a cynic, and that has to be a depressing way to live.

Find room for both. Expect the worst, hope for the best, and save for a rainy day.

Why the Supreme Court Banned Robocalls to Collect Federal Debt?

August 5, 2020 by Jacob Sensiba Leave a Comment

Last month, the Supreme Court held up a ruling made by a lower court that banned robocalls. The ban was set forth in 1991 under the Telephone Consumer Protection Act (TCPA) to protect individuals’ privacy.

In 2015, the Obama administration created an exemption. This exemption allowed debt collectors, specifically for debt guaranteed by or owed to the federal government, to make robocalls.

Backstory

This all came about when political groups and non-profit organizations sued because they felt the debt collectors were getting unfair treatment. They wanted the TCPA removed altogether.

The lower courts upheld the decision to keep the TCPA in place as well as the exemption for debt collectors due to their “responsibility for collecting on government debt”.

An appeals court saw the case and overturned the ruling. Claiming that the TCPA should be kept in place, but the exemption for debt collectors should be removed.

Which brings us to the Supreme Court taking the case. Of the 9 justices, 6 agreed with the Appeals Court – keep the TCPA in place, and remove the exemption for debt collectors. The other 3 justices wanted to remove the TCPA altogether.

What this ruling did

It leveled the playing field. The Supreme Court banned robocalls, no matter what organization you work for, no matter what purpose.

It was a great win for consumer privacy, as well. Justice Brett Kavanaugh was quoted saying, “Americans dramatically disagree across many different policies, but they’re all sick and tired of robocalls.”

That’s not to say that robocalls won’t happen. I can attest, as I’m sure you can as well, to getting robocalls since I got my first cell phone.

Organizations across the board shouldn’t be actively robocalling, but they do. Regulation and policing of these activities are very difficult, which is why it still takes place.

Be that as it may, the Supreme Court’s decision to keep the TCPA in place, but remove the exemptions for federal debt collectors was a big win.

How to Utilize Rewards

July 29, 2020 by Jacob Sensiba Leave a Comment

On this site, we talk about credit, investing, and how to pay off debt. One thing that’s often missed around the debt subject is rewards.

Rewards are incentives to keep going. It’s something we can use to motivate us on our journey, no matter what that journey is.

Whether we are trying to pay off debt, lose weight, or just, straight up, improve our life. You need to reward yourself, otherwise, it’s go go go, all the time.

In this article, we’ll talk about when it’s a good time to reward yourself, how, and things to look out for.

Habits

A reward should be centered around two things. Habit formation or commitment, and goals.

If you are trying to make an improvement on something, whether it’s your health or your finances, you have to develop good habits.

If you want to exercise more, do it six days in a row, then take a break. That break can be your reward. If you want to eat better, do it for six days and then take a little break with a cheat meal.

The first step is creating the habits to get yourself to that better place.

Goals

The next reward will come when you hit goals. You want to get to a certain place, say saving $20,00 for a down payment, eliminating your debt, or losing 20 pounds.

Those are great goals, but you should put in place incremental ones to help you get there. That could be a reward for every $5,000 saved, every $5,000 paid down, or every 5 pounds lost.

It’s a lot like Dave Ramsey’s “Snowball Method” with applications in different areas of life. The goal with that method is to give you small wins to keep you motivated.

How to reward

If you put those habits in place and hit those goals, it’s time for the reward. The great, but the challenging part about that is everyone defines reward differently.

So when you create a reward for yourself, you should keep two things in mind. Make sure it’s good enough to release some dopamine, but small enough that it doesn’t set you back on what you are trying to accomplish.

If you’re trying to lose weight, your reward should be a little cheat meal or a day off from working out. Not a day of binge eating or a week without breaking a sweat.

If you’re trying to save money or pay down debt, don’t let whatever the reward is negate you from saving that month or add to your debt.

Large enough to make you feel good, but small enough so you stay on course.

What to watch for

The biggest thing to watch for is the size/duration of the reward. It mustn’t be too big or too small.

It’s a fine line and may require a little trial and error before you get it right. Start small and work your way up.

As I mentioned, it shouldn’t detract you from the pursuit of your goals, but it should also make you feel good about the progress that you’ve made or the habits you’ve created.

How I handle rewards

I won’t lie to you, rewards are a challenge for me. I’m very much a black and white type of person.

I keep junk food out of the house because I can’t be tempted with it. I make regular transfers from checking to savings in order to keep “discretionary money” out of my bank account for fear of spending it away (mostly on take-out, honestly).

It’s hard for me to put the pedal to the floor and take it off for a day. I’m either all on or all off, but I’m starting to figure it out. It really just takes some practice, a little will power, and some self-awareness.

Most Important Financial Statements

July 22, 2020 by Jacob Sensiba Leave a Comment

When you’re looking for a company to invest in, you’ll want to do some research. Typically, you’ll have two options, technical analysis or fundamental analysis. Personally, I use fundamental analysis, so today we’re going to go over the most important financial statements you need to look at when conducting your research.

There are three financial statements you need to pay attention to, income statement, balance sheet, and the statement of cash flow.

Income statement

The income statement is also known as the profit and loss statement. It shows the revenues and expenses for a given time period, typically on a per quarter basis.

You’ll gain some unique insights from an income statement, including an overview of operations, management efficiency, comparison to peers, and net income. Net income = (revenue + gains) – (expenses + losses).

There are two types of income statements. Single-Step and Multiple-Step. Single-step is one simple calculation ((revenue + gains) – (expenses + losses)). Multiple-step separates operating “net income” from non-operating “net income”.

Balance sheet

The balance sheet is just as straight-forward as the income statement, except it shows assets and liabilities instead of revenues and expenses.

That means a balance sheet displays what a company owns and owes. It also shows how much is invested by the shareholders.

Statement of cash flow

The cash flow statement provides data that shows a company’s operations, where the money is being spent, and how that money is being spent.

This data is broken down into three categories: operating activities, investing activities, and financing activities.

Operating activities will show the following information:

Accounts receivable
Accounts payable
Depreciation
Inventory
Wages
Income tax
Rent
Cash receipts

Investing activities are any money spent on the future of the company, which could include equipment, R+D, property, and other assets.

Financing activities include debt issuance, stock issuance, dividends, interest payments, and stock buybacks.

Analysis

As I mentioned in the beginning, when doing research, you’ll fall into two camps. Technical analysis or fundamental analysis.

Technical analysis views everything as a security. A technical analyst will use charts and trading information to identify investment opportunities.

Fundamental analysis views everything as a business. A fundamental analyst will use the above financial statements to pass judgment on companies.

What to look for

If you are doing fundamental analysis and you are looking at these financial statements, there are certain things you want to see.

Balance sheet, income statement, and cash flows should be positive – Negative numbers either means they’re making less than they spend or they owe more than they own (in the case of the balance sheet).
Efficient operations – theoretically, you could see this on all three statements, but it will be most prevalent on the statement of cash flows. The operating revenues should be significantly higher than operating expenses (at least that’s preferable). However, this should be cross-referenced with the company’s peers (certain industries have higher margins than others).
Low outstanding liabilities – Less future earnings going towards interest and paying off debt, and more going to investing activities. This is especially favorable near the end of the business cycle, as revenues typically drop. Fewer liabilities could mean healthy margins even when revenues dip.

You’re investing in a business. You want to see that management is using capital effectively, and they’re not biting off more than they can chew. Positive financial statements and healthy margins.

Money Anxiety

July 15, 2020 by Jacob Sensiba Leave a Comment

Money anxiety is not an official mental disorder but is often treated. It manifests itself in a variety of ways, but I want to explain how anxiety and money affect my own life.

As I’ve mentioned here before, I have diagnosed anxiety so my feelings and experiences may be amplified to what you feel.

When it comes to money anxiety, I experience it in a few different scenarios.

Pleasing people

Your willingness or ability to spend money in a relationship should not determine the strength of that relationship. If that’s the case, is that a relationship really worth having?

In my case, it’s directly correlated with my former spouse. She got dealt a few bad hands in life, so I was willing to spend beyond my means to make her happy. Not that the spending inherently would make her happy, it was more of a reluctance to say no due to financial constraints.

That inability to say no stuck me with debt that set me back on my personal finance journey. Obviously, there are other personal factors that resulted in these circumstances, but that’s the gist.

Fitting in

I’ll echo what I said in the first section, your willingness or ability to spend money in a relationship should not determine the strength or quality of that relationship.

Thankfully, I’ve learned from/outgrown this, but it used to be a real challenge for me. Growing up, I never really felt like I fit into a particular friend group. So I developed relationships that I’m thankful for now but otherwise appeared destructive.

Destructive from a personal and financial perspective. As I said, I’ve since outgrown that tendency, but it’s something to be aware of for yourself.

Long-term thinking

This section will specifically talk about my house. The one I’m currently renting. Before we bought that one, we were two years into a mortgage in a different city. The plan was to live there until my son was school-age, and then we’d move to a city with better schools.

The house we ended up buying, I found on a whim. We looked at it, loved it, and put in an offer. It stretched us SUPER thin from a financial perspective. I mean, exhausted all of our savings (including retirement), and we were incredibly close to being negative on our budget.

I knew in my heart that it was the right long-term decision, and I was willing to go through the pain/struggle in the short-term for it.

Little did I know that circumstances would change dramatically in the next year or two. Plan for the long term, but also plan for short-term variances (even the dramatic ones).

What I know

Because of my profession, my training, and what I’ve read, I’ve seen what happens when you make poor decisions.

That said, many (if not all) of my financial choices are heavily scrutinized. When I say “financial choices” I mean the larger ones. Day to day spending and bills are factored into my budget, though I do review (as you should) regularly to see where I can trim excess spending.

When I make a financial decision, my money anxiety kicks into gear, as I always second guess myself. I run through the possible scenarios that could play out.

Tim Ferriss calls it fear-setting. The Stoics call it premeditatio morum. It’s a practice of expecting the worst and planning for them as they will happen. Expect the worst, hope for the best. Not a bad thing to do, in money and in life.

My Last Reflection

The Importance of Being Handy

How Long Does Bankruptcy Stay on Credit Report?

July 8, 2020 by Jacob Sensiba Leave a Comment

Filing for bankruptcy is a tough decision to make. It can provide relief when you’re drowning in debt, but it does have consequences when it comes to your credit. How long does bankruptcy stay on your credit report?

We’re going to explore the answer to that question, as well as a few other items, in this article.

What is bankruptcy?

It’s a legal proceeding when an individual or an entity is relieved from some or all of their debts. Whether it’s all or some, and how that process takes place depends on the type of bankruptcy that’s filed.

Chapter 7 – Liquidable assets are sold in order to pay off debts. When those assets are exhausted, the remaining debt is discharged.
Chapter 11 – The most expensive option, which is usually used by companies (General Motors and J.C. Penny, for example). This is a reorganization plan that enables companies to remain open while getting their financial obligations situated.
Chapter 13 – Only available to individuals. The person filing implements a payment plan and is typically able to keep their assets (house, car, etc.). The debt must be paid off in 3 to 5 years.

Federal student loans are often excluded from being discharged, so you’ll be on the hook for that.

Let’s take a look at how bankruptcy affects your credit report.

How it affects credit

I’ll state the obvious by telling you that bankruptcy negatively affects your credit. Typically, you can expect your score to drop by 20-25%. This also depends on your current credit score and credit strength.

Discharges on more accounts and/or accounts with higher balances will affect your score more than discharges on a small number of accounts and/or low balances.

Delinquency usually proceeds bankruptcy and those stay on your report for 7 years. Chapter 7 bankruptcy stays on your credit report for 10 years, while chapter 13 stays on for 7 years.

What to do after

Inspect your credit report with a fine-toothed comb. Make sure that the debts discharged were actually discharged. If you find errors, go through the proper channels to get those corrected.

Once you’ve filed, you can immediately start building your credit back up. The first step is to ALWAYS pay your bills on time. I’ve stated before that on-time payment history is the number one factor when calculating your credit score.

The next step is to open a credit account. This should be something small and manageable. I often suggest a secured credit card. With this type of account, you make a deposit and that deposit acts as your credit limit.

Establish a positive payment history and keep your utilization well below 30%.

Bankruptcy on your report

You don’t have to do anything to remove the bankruptcy from your credit report. It will fall off on its own.

Review your credit report once the 7 or 10 year period ends. At that point, depending which type you filed, the bankruptcy should come off.

Give it a few months as your credit report often lags a little after the activity actually took place.

Stay diligent. Bankruptcy is not a death sentence, it’s a fresh start. Pay on time, keep your utilization low, and keep your spending in check.

The Importance of Being Handy

July 1, 2020 by Jacob Sensiba Leave a Comment

Perhaps it is just within my circle, but it seems that the character trait or the skill of being handy has lost its value.

People seem unable to fix simple things. Around their house, their car, what have you.

I’m curious if the majority of people know the difference between a Phillips head screwdriver and a flathead screwdriver.

At no time was the importance of being handy more clear than during the last few months, when the entire country went into lockdown. You never know when that service you rely on will be unable to help you.

My Experience

My dad taught me from an early age the importance of being able to fix things yourself and the value of a strong work ethic. Those may seem unrelated, but I believe they are directly correlated.

I watched him and helped him with all of his projects. Plumbing, changing the oil on his car, renovations, replacing his brakes, you name it.

Not only did it save him and us, as a family, money, but it was quality time I got to spend with him. There were valuable lessons taught in those experiences.

Now, I can fix almost anything. It gives me a sense of pride, it saves me money, and now, it’s making me money.

At my last apartment, I was the go-to handyman for our complex. They took a small chunk off my rent and paid me by the hour when I was on a job. Saving and earning at the same time.

Now that I’ve moved, I no longer am the go-to for that complex. Instead, I’m the go-to for all rental units owned by that investor in my city. That’s an incredible opportunity for me to make money outside of my normal 9-5.

Growing up, did I think this kind of circumstance would come upon me? Of course not. But that’s the thing. No matter how you think your life will turn out, it hardly goes that way.

You have to vary your knowledge and competencies across a range of industries. You truly never know what will fall into your lap.

From there, we’re going to take a hard right turn into a different topic

Consumer Math

This is something that should have been on my radar, but it wasn’t. Until this morning. My cousin is taking a consumer math course, and after learning about what it was, I have to promote it.

You can find a consumer math course anywhere, and they all teach the same thing.

Math for real-world situations.

It’s basically a personal finance course. It teaches things like budgeting, taxes, loans, buying a car, wages, deductions, spending, and transportation.

These are topics that everyone should be knowledgeable about, as they lay the foundation for your financial life. Ace these, and you’re steadfastly in the driver’s seat of your finances.

Quick Wrap-Up

Above, we covered two things. Being handy and having a wide range of knowledge can help you later in life, and how having a foundational understanding of consumer math puts you in control of your finances.

Both of these are vitally important but dramatically undervalued by the masses.

Two types

Stipulations

Tax Consequences

Related reading:

Stock splits

Asset allocation

Cognitive biases

Related reading:

Four parts

Promissory Note Uses

Different kinds

Collection

Related Reading:

Review a previous post

Rainy day

Be prepared

Related reading:

Backstory

What this ruling did

Related reading:

Habits

Goals

How to reward

What to watch for

How I handle rewards

Related Reading:

Income statement

Balance sheet

Statement of cash flow

Analysis

What to look for

Related reading:

Pleasing people

Fitting in

Long-term thinking

What I know

My Last Reflection

Related reading:

What is bankruptcy?

How it affects credit

What to do after

Bankruptcy on your report

Related reading:

My Experience

Consumer Math

Quick Wrap-Up

Related Reading: