Impact Investing: The Myths

Impact Investing: The Myths

Impact investing opportunities continue to grow with one of every five dollars being invested sustainably as of 2016. Regardless, there are myths about impact investing that continue to persist, despite evidence to the contrary. For our second post in a series on impact investing, we debunk these common myths.

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Are you Self-Employed?

Consider a SEP-IRA. A Simplified Employee Pension (SEP) plan is a retirement savings vehicle available to those who are self-employed. This past year, I came across a handful of new clients who were self-employed and not aware of a SEP-IRA and its benefits. The following is a summary focused towards business owners who do not have employees. You can use the SEP-IRA with employees, but I do not go into the details of that below. A SEP-IRA follows the same investment, distribution and rollover rules as traditional IRA’s. The amount you can contribute is based on a formula. The IRS demonstrates this with an example here.

The due date for contributions is the due date of your business income tax return including extensions. There is flexibility with the contributions in that you can contribute in some years and not others. The SEP can also be paired with other retirement savings vehicles. For example, you can contribute to a Roth IRA in addition to a SEP-IRA.

As you prepare to gather information for your taxes in the next few months, remember the SEP-IRA. It may be a good retirement plan for you. To learn more, review IRS Publication 560 and check with your tax preparer.

 

Image courtesy of hin255/Freedigitalphotos.net

 

The Possibilities are Endless with Systematic Savings

 

Systematic savings is an easy yet powerful concept.  It involves setting up an automatic deduction from one account to another at some frequency (weekly, monthly, yearly, etc).   

Many of us already experience systematic savings with our paycheck.  We have automatic deductions for retirement such as 401(k) or TSP plans. Federal taxes are also automatically deducted from our paycheck.  The IRS knows that they are much more likely to get their money if they force you to pay as you go.

The benefits of systematic savings have been so well documented that the government passed a law in 2006 allowing businesses to auto-enroll employees into retirement savings plans.  Once people are enrolled, they are much less likely to make a change.  Instead, they learn how to adjust to a smaller amount in their paychecks, if they even notice.

We can apply the concept of automatic savings to other things.  It doesn’t cost anything to open up a new savings account at my bank.  Therefore, I set up separate accounts for various goals and save automatically for these goals each month. 

The idea started when we got our dog, Fulton, a few years ago.  We looked into pet insurance and, at the time, it didn’t seem to make sense for us.  Insurance didn’t cover as much as we thought it would, so it seemed hard to justify the cost.  That being said, we didn’t want to dip into our savings account in the event of a health emergency for him.

As an alternative, we decided to self-insure.  Instead of paying pet insurance premiums every month, we automatically contribute the cost of a monthly insurance premium to a separate savings account.  If we need money for a surgery or medication for our dog, we just take it out of that separate account without touching our other investments.  And when our dog passes away, we will still have the savings account to do with it what we want.  If we were paying premiums, we wouldn’t get that money back.

The negative side is that if your pet needs a $10,000 surgery, and you do not have even close to $10,000 in his savings account, you are going to have to come up with the money. If you had opted to pay insurance premiums, it may have been covered. 

Systematic savings accounts will work for some people and maybe not for others.  You have to consider your risk tolerance, self-discipline, and current emergency fund.

I have found the concept to be liberating. We have an account for future cars and car repairs.  We also have a travel fund.  You don’t stress over purchasing a gift or going out to dinner with friends when you know you are saving each month for things that are important to you, and you can enjoy the rest.  Give it a try next time you find an expense that is throwing your monthly budget into a tailspin!