Employee?

My friend recently announced to me, “I got a job! At a salary of $600 per week!” My response: “Shady”

As you start searching for your first real job, you’ll encounter a lot of shady practices from companies that want to take advantage of you. Most of these are small businesses that want to save money, and are not fully educated in the law.

Let’s start with some basic concepts:

• salary: What you get paid on a monthly or annual basis, regardless of how many hours you work. Examples: $100k annual salary, $7k monthly salary. Most managers and executives fall into this compensation basis, as it gives the company flexibility to pay the employee the same amount each payroll without relation to the actual amount of hours worked. For the employee, that means if you have a Friday 9 am deadline for a presentation and it’s already 7pm on the Thursday, well, you better get crackin!
• wage: This is hourly, and what most employees are paid (for example. $8.50 an hour.) If you work 30 hours this week, you’ll get $255. If you work more than 40 hours in a week, you’ll be subject to overtime laws (1.5 times your standard hourly rate.) Some states also require overtime pay for more than 8 hours worked in a day.
• Federal law is very simple in its wording, but has a lot of gray area in application, as to whom is required to get paid a wage versus a salary. The short of it is that employees who are in managerial or highly-skilled positions can be paid a flat monthly or annual salary regardless of the amount of hours worked. Essentially, these employees are getting paid to do a job, rather than for their time.

What was wrong with my friend’s comment? $600 a week is $15 an hour; that’s an entry-level job. Legally, he would have to be paid for the hours he works, and the overtime rate too! But unfortunately, the small business that gave him the offer was trying to skirt the law.

To complicate matters, my friend declared, “I will get a 1099.” Raise your hand if you know what that is?

• If you are an employee of a company, on your first day, you complete a tax document called a W-4. Then, every time you receive a paycheck, you’ll have taxes taken out for you by the company: Federal, State, FICA, Medicare, possibly some city and county taxes too. That $20/hour job has now given you a paycheck worth only $15/hour. However, being an employee normally gives you many benefits: medical insurance, 401k, paid vacation and sick time, discrimination protections, and, in the event that you lose your job, unemployment benefits from the government. In January, you will receive a W-2 from your company which summarizes the total they paid you in the preceding calendar year, and the totals deducted for each tax agency. A copy of this goes to all of the tax agencies, and this is the document you use to file your annual tax return.
• Where does a 1099 fit in? It doesn’t. A form 1099 has nothing to do with being an employee. A 1099 is a tax form that a company gives to a vendor (that is not a corporation) to summarize the amount paid in the year. For example, Company hires Joe, a sole proprietor, to clean the office once a month, for $200 each month. At the end of the year, Company mails Joe a 1099 which states that Company A paid Joe $2400 in 2013. The company sends a copy of this to the IRS, but does not withhold any taxes. Joe uses this document to file his tax return as a company (in this case, sole prop.)

Essentially, a company can hire contractors to do work for the company, pay a flat hourly rate or rate per job, and give a 1099 as documentation.  That’s where the law gets fuzzy: can a company save money by paying someone this flat hourly rate, no overtime, no benefits, and not withholding any taxes? Many small businesses try, but it’s not quite legal.

The distinction is: is the person performing the work treated like an employee, i.e. is he told what to do, how and when to do it, using company equipment? A 1099 consultant, however, uses his own laptop, determines how the work will be done most effectively, and delivers a final product. Because the consultant is essentially a sole proprietor, he most likely has his own business expenses: laptop, cell phone, car mileage, business insurance, etc. Therefore, he charges a higher rate than someone who is essentially doing the same work, but is an employee with benefits and protections working for a company.

Many small business think, “I’m paying you by check with a 1099 at the end of the year! We’re reporting this to the IRS, so it’s legal.” This is actually just one small step above paying someone cash under the table.

That is why my friend’s $15/hour pay, with absolutely no benefits or protections, and all the risks of being his own boss, is shady, and you should be aware of that, too.

Healthy Body/Healthy Wallet

My co-worker once told me: The best thing you can do for your body and your wallet is to pack your lunch.

That’s an important lesson! You may think, “I have a job now! I can go out to lunch just like I see high-powered office workers doing on TV!” While you certainly can do that, it’s probably better not to.

First, some quick points that most of you should be familiar with:

• Meals you make yourself are usually, if not always, healthier than what a restaurant makes. You control how much salt, butter, and processed junk goes into the meal you make yourself.
• If you have an office job, you’re sitting all day, for at least 8 hours. That sedentary lifestyle burns very few calories. Most office workers gain weight during the first year on the job (and continue doing so.) It’s like the freshmen 15 all over again! (Did you ever lose that freshman 15?)
• As cheap as that lunch may seem, you can always make it cheaper yourself.

Now, some basic math:

1. Let’s say you buy a cup of coffee every morning plus a bagel/croissant for breakfast. Assuming a basic cup of coffee (none of that latte frappuccino crap) you’re spending $3 for breakfast. The average worker has 5 workdays per week, and 50 workweeks per year. $3*5*50=$750 on breakfast in the year.

2. I work in a big city, in the financial district. While I can get a Subway sandwich for around $3, most lunches here are $7-8, some even as high as $12, for just a salad or sandwich! Let’s assume between big and little cities, you can find lunch for $6. $6*5*50=$1500 for lunch.

3. Most of my co-workers leave the office at 3pm for their afternoon pick me up: another cup of coffee. I am assuming a slightly fancier cup this time: $2*5*50=$500.

Summary: If you buy your breakfast/lunch out while at work, you’re spending $2750 a year or $229 per month. That doesn’t include your dinner, snacks, your weekend meals, and going to restaurants with friends for special occasions. (For comparison, the average person can live on $200 of groceries per month.)

How many calories are you consuming? A ton. A morning bagel/croissant has 200-300 calories, all processed carbs. This is not good for you or your waistline. A restaurant sandwich is probably bigger than what you’d make yourself, has more mayo, and most likely is more processed. Estimate 500-1000 calories. And it may surprise you to learn that Subway is, in fact, junk food junk food. Even a restaurant salad is not necessarily healthy because the dressing, croutons, and cheese are piled on. The average person should consume 2000 calories per day. This assumes a normal level of exercise. If the only physical activity you get on a regular basis is clicking the mouse for 10 hours, your caloric needs are less than that.

What should you do? Follow my lead. I am lucky enough to work in an office with a refrigerator. I bring my lunch-making supplies for a few days at a time, and quickly make my lunch in the office kitchen each day. We also have hot water, coffee, and tea (which I assume most offices provide.) If your office does not have a refrigerator or kitchen, you can bring food for one day at a time. It will not spoil in the few hours till lunch time. Trust me! (And if you’re that worried, invest $20 in a small soft cooler and a couple of ice packs.)

1. For breakfast, I have a cup of healthy Greek yogurt. Sometimes I mix in honey or granola. I follow up with a piece of fruit. I drink the office coffee, which I admit is higher quality than most offices provide. You can always buy some quality coffee at home and let it brew while you’re getting dressed for work and invest in a reusable travel cup/thermos. Daily cost is $2, or $500. (Greek yogurt is the Cadillac of yogurts; you can save even more by getting the plain traditional yogurt variety, but PLAIN, none of that pre-mixed crap with artificial flavors and way too much sugar!)

2. For lunch, I make a salad: mixed greens ($0.75/serving), carrots ($0.25), avocado ($1), edamame ($0.50), and hard-boiled egg ($0.25.) Lunch cost is $2.75, or $687.50 per year. A sandwich would be similar. Bread and tuna are cheap!

3. For the afternoon snack, I usually skip coffee. I bring fruit. $0.25-$1, $156 annual average.

Summary: I spent $1,343 per year, or $112 per month, on my office meals. That’s HALF of what it costs to get your meals out.

And the calories? I used to buy lunch at work 3 days a week. In the first year when I transitioned to brown-bagging most of my meals, I lost 10 pounds. I was 125 to start out with (in the normal range for my height/body type) so the weight loss was a lot! I did not significantly alter my workout habits.

What should you do with that extra $100+ in your wallet every month? Put it towards your financial future goals. Your employer-sponsored 401k is a good place to start. (Look out for a future post on that!)

And just to be clear: I always advocate treating yourself. The occasional afternoon caramel frappuccino, lunch with a dear friend, or satisfying a craving for a cupcake are all ok. The key here is moderation. These should be special, one-off ways that you reward yourself. Remember: if you have it every day, it no longer feels special and you do not appreciate it as much. So, when you do have that fancy salad from next door to the office, you’ll really enjoy it instead of wolfing it down like you do now. Bon apetit!

Preparing for a Rental Open House

You graduated from college, found a job, and are now ready to move into your first big boy/girl apartment. Congrats!

You looked through Craigslist and found several possible contenders. Some have open houses, for others you called/emailed and made an appointment. But you should do more than just show up at the designated time. (Though do show up a few minutes early to maximize your alone time with the prospective landlord.)

If you’re serious about moving, you need to arrive at the property ready to commit (at least 90% there.) If you like the property at the showing, you should apply on the spot. You’re not signing the lease agreement yet, so you can still back out later. But if you wait to apply after the open house, you may have missed your chance. This may not be the case in small towns, but in big cities where many residents are renters and turnover is high, landlords choose their tenants based on the first satisfactory application submitted. You can improve your chances by having most of the application process completed before you even arrive at the showing, and by completing the rest at the showing.

Most landlords will require an application, which will be available at the showing. Have a pen with you so you can complete the application on the spot. The application will ask for certain information, which you should have ready:

1. Current and past addresses and landlords
1. Print out a list of your addresses and landlord names/phone numbers. If your landlord is a management company, you can state the management company name. If you are a good tenant, talk to your current or previous landlords to give them a heads up to give you a stellar recommendation.
2. Recent credit report
1. Please see my previous post on how to print a free credit report.
2. Check your credit report for accuracy ahead of time, so that you can correct any mistakes prior to the application.
3. Current employer information and proof of income
1. In most places, landlords will check that the monthly rent does not exceed 30% of your income. For example, if your gross (pre-tax) monthly pay is $4000, you can afford to pay $1200 on rent. In bigger cities where rent is more expensive, landlords will relax this rule to 50% or more.
2. Print your last two pay stubs -- this will be proof of your income, and will also list your employer information for the application.
4. Bank statements
1. While optional, this is especially important if your income is too low for the 30%/50% rule above, or if you work for yourself and therefore do not receive a pay stub. Print your last two bank statements to show the prospective landlord that you have enough savings to pay the rent even if you lose your job for a few months.
2. Your most recent tax return (just the first page) can also document your income.
3. If you haven’t started your job yet, bring your signed offer letter stating your salary.
5. Copy of ID/driver’s license -- to confirm your identity.
6. Co-signer, if needed
1. If you do not have substantial income, someone (like a parent) can co-sign the application. S/he will not live in the apartment, but will be responsible for payment if you fail to pay your rent.
2. If you are applying with roommates or a significant other, have the above for each applicant.

You should attach all of this to your application. Of course, make copies of all the documents, and only give a copy (not the original) with the application. Have this “pack” prepared for all the showings you attend. In a small city, you may get the first apartment to which you apply. In a big city, however, expect to apply to several apartments and hope to hear back from at least one.

One more thing that can help when the competition is tough: a bio. Write a little bio about yourself. Include the reasons that you are moving, your excellent reputation as a tenant, why you love the neighborhood or this building, explanation for any reasons you may not seem qualified, etc. If the landlord makes a connection with you, s/he may offer you the apartment over someone with an equally qualified application. You can even include a small picture of yourself. This will help jot the landlord’s memory when reviewing the application to match the friendly face s/he met at the showing with the application.

Some things not to do: don’t obviously bribe the landlord with muffins, gifts, or offers of paying 6 months in advance. A professional management company is not allowed to accept gifts or any payments outside of the standard rent schedule, and a small landlord might get offended.

Leave your apartment winning tips in the comments!

Accessing Your Credit

You should monitor your credit regularly: monthly, every four months, or annually.

Why?

There could be a mistake, and you have a limited amount of time to report/question/correct it.

Say your credit report shows that you paid your Visa bill 15 days late in October. But you paid it on time, and you have the endorsed check to prove it.

Or the credit report shows that you have a Macy’s credit card, but you don’t.

These are mistakes that negatively affect your credit score, and the sooner you correct them, the sooner your score will go up. (Why is it important to have a high score? Check the last post.)

First of all, if you take just one thing away from today’s post, it’s this:

DO NOT GO TO WWW.FREECREDITREPORT.COM

to check your credit score. While this website provides credit monitoring services, etc. it is a PAID subscription that will charge your credit card every month, and unless you need the services it offers, please don’t waste your money. There are FREE places to get this information.

By law, the three credit bureaus are required to give you one free credit report per year. That means that between the three, you can have a free report every 4 months. Here is the website:

www.annualcreditreport.com

From there, you will select which agency you’d like to view: Equifax, Experian, and TransUnion. The website will ask you confidential questions to confirm your identity, such as your social security number, current and past addresses, and date of birth. The important thing is that they will NOT ask for a payment method. (Because they ask for such confidential information, please access this site from a secure location such as your home, not in a public place such as a coffee shop.) You will receive your report right online. Print or pdf it immediately before the website expires, then review and make sure all the information is accurate.

If something is wrong, follow the instructions for contacting that credit bureau (found on the credit report and on the website.) In this case, you should also run the reports for the other two agencies to make sure they do not have the same mistake.

Follow this process again in 4 months, or in a year.

Note: you will not get a free credit SCORE with this -- that will cost extra. However, there’s an easy way to get your credit score for free.

www.creditkarma.com

(Note: each credit bureau has a different method of calculating the score, and a different scale. They are not comparable to one another, but you can track the ups and downs of your score by mapping the score from one agency over time.

In this website, you will create an account, enter personal information to confirm your identity, and get your credit score. You can go in and run your score once a month. This website is supported by ads, and has financial offers that may help you save money. For example, Credit Karma will see that you have a mortgage at a 6.5% rate, and you have an excellent credit score which qualifies you for a much lower rate. It will give you mortgage offers from several lenders to reduce your rate. Of course you do not have to accept these offers, but 1. know that this is advertising, and 2. realize that you may be able to reduce your financial expenses, so look into it (not just from these offers, but on your own, too.)

Credit Karma has a nifty graph which shows the progress of your credit score. If you closed a credit card in January and that lowered your score, you can see exactly by how much. Investigate any significant jumps in your score.

Another reason to keep these websites in mind: when you’re looking for a rental. More often than not, landlords will run a credit check on a prospective tenant. You should make sure your credit history is accurate before your prospective landlord discovers something (that you know is wrong) that will deny you the apartment. The best applicants bring a recent copy of their credit report to the open house. Now you know where to get one for free.

PS. I run my free credit report once a year, and check my Credit Karma score once a month.

Building Credit

This story is inspired by one of my dearest friends, N (though some details have been changed.) During college, N lived in a college town, sharing an apartment or house with several roommates. Since this was a college town and turnover was high, it didn't take much for a group of college kids to sign a lease on a slightly-dumpy apartment. Presumably, parents co-signed as well.

When N graduated from college and moved to a big city, she had to find a place to live. She and her boyfriend were looking for a small apartment. However, this being a big city, competition for starter apartments was high. N and her boyfriend didn't have super high-paying jobs, and worse, they had no credit.

At 22, N should've had some credit built up. A credit card or two, college loans. However, all of these things were done entirely in her parents' names. She was using their credit, and had no credit of her own. She was denied a place to live mainly because she had no history to prove she was a reliable payer.

Why do we need credit? Fair or unfair, companies use your credit score to determine your worthiness of paying obligations. In other words, if you have an excellent credit score, companies will lend you a lot of money, at a low interest rate, because they trust you to pay it back on time and in full. If you have a low score, companies will give you a much smaller loan, if at all, at a high interest rate, because they do not trust you to pay it back. This comes into play when you take out a loan for a car or a house. However, landlords almost always will run your credit history to determine if you will be a tenant that will pay the rent on time. Even employers these days days are running credit histories on prospective employees. If this person cannot manage his money (as evidenced by his low credit score), then how can I trust him to do his job? That's why it is very important to get your credit score as high as can be.

Your credit score is based on many factors, and the three main credit bureaus use slightly different algorithms to calculate your score. Some of the factors are: length of credit history; timeliness of payments; late payments and bankruptcies; use of credit.

What this means is:

-open a credit card as soon as you can; this is usually on your 18th birthday, but recent laws have increased this to age 21 unless you can show proof of your ability to pay. If you don't have a credit card yet, go open one. Look for a card with NO annual fees and rewards that you will use. If you actually pay the card in full each month, the APR (interest rate) doesn't matter. (I'll have a more detailed post in the future on choosing the right card.)

-you can get a credit card on someone else’s account (for example, a parent’s) with no age requirement*

-use the card, but don't use all of your credit each month (keep it low, but above zero): for example, if the total credit limit on all your cards is $2000, charge $500 of your expenses (groceries, gas, etc.) to cards each month. Pay the rest in cash. That's a ratio of 25%. There's no magic target ratio, but keep it between 5% and 30%.

-only buy what you can afford i.e. can pay back in FULL (not just the minimum payment) by the due date each month, and actually do so.  

*When you receive a credit card as an authorized user on someone else’s account, you do not actually build any credit at that point. However, once you open credit in your own name, the history of the authorized user account is added to yours. My dad gave me a card from his account when I was 16. After I turned 18 and established my own credit, the use from my dad’s card appeared in my report. My credit report shows that I have a credit card account for 15 years, even though I’m in my 20s.

Other agencies can also report to the credit bureaus. Pay your internet, electric, or telephone bill late? They will report this, and your score will go down. Landlords can report evictions too.

This is how I built credit: When I was 16, I asked my parents for a credit card. I was a responsible kid, would always tell my parents where I went and what I bought, so my parents trusted me. My dad added my name to his account, and gave me a card with a whopping $100 limit. I used this credit card as my allowance: the occasional movies with friends, shopping at the mall, even picking up last minute groceries for my parents for dinner. I didn't see the card as "free money;" I thought of it as strictly a convenient alternative to asking my parents for cash every time I wanted to hang out with my friends.

When I got my first "on the books" job at 16, my dad and I went to the (his) bank and opened up a shared checking account. My paycheck was direct deposited into this bank account. No longer did I receive an allowance. I used the credit card my dad gave me, and would pay him back from my checking account, funded by my after school job.

On my 18th birthday, after school, I went to the bank. I knew the bank my parents used had a no-fee, no minimum checking account. So I walked in, opened up my first bank account with the few hundred dollars cash I had saved up, and transferred my direct deposit from my job into this account. Within a few weeks, I received several credit card offers in the mail. I read them carefully, and applied for the card that had absolutely no fees attached. I didn't look at the APR -- it didn't matter, because I was never planning to actually pay interest on the card. I received my first official credit card in the mail a few days later, with a $75 limit.

I made all of my purchases on this card (up to the limit, of course) and paid the bill in full, by the due date with a check from my checking account. After six months, my limit was doubled. Another six months later, it was doubled again. This continued, until I had a credit limit of $7,500. By this time, I was able to open another two credit cards, get a car loan, and obtain a mortgage at an excellent rate, all because of my long-term credit. I was never turned down for a loan, offered a high interest rate, or been turned down for an apartment.

In a future post, I will explain how to monitor and track your credit.

Welcome!

Congrats! You're done (or almost done) with school! College/university, in this case. Now what?

Chances are, your formal education did not prepare you for the real world. Paying rent, school loans, and bills, and still having money leftover for going out. Preparing your tax return. Building credit. These are things that all well-functioning adults must be in control of in order to save for financial goals, build wealth, and ultimately live the life that they want to live. 

I have been lucky (and smart and hard-working, my friends would say) in order to get where I am today. I am a CPA, own property, travel, and enjoy my life. I am not an investment banker, nor did I suddenly cash out with an inheritance or lottery winnings. I have a stable job, and I am practical with my money.

My friends and I are all in our 20s. While I have been in the working world for seven years now, many of my friends are just finishing their formal educations and starting their careers. Some of them live with their parents. Many are still taking out school loans for their living expenses. 

My friends often come to me with advise for the very basic of things. How do I prepare a tax return? (My dad's been doing it for me...) How do I get credit? (I have none...) What's a 1099? (Shit, do I owe money???)

This is your after school special. Controlling your money means you have to understand how money can work for you, as well as what the IRS requires. Building wealth means building positive money habits. It also means breaking those seemingly harmless habits that add up to big expenses. Ultimately, you have to educate yourself to reach those financial goals. I hope with my practical advise in layman's terms, I can help you reach financial security.

If you have any questions or topic suggestions, please leave a note in the comments.

Thanks!

K

Please note disclosure: this blog and the posts within are my own practical opinions and experiences. They are in no way legal or financial advise and may not apply to your individual situation. If you need legal or tax advise on your specific situation, please consult a local professional who is familiar with the laws in your state.

IRS CIRCULAR 230 DISCLOSURE:

Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.