5 Ways Women Entrepreneurs Can Get a Financial Life

I am honored to speak at today’s White House Urban Economic Forum for women entrepreneurs, on a panel about “second acts”—women who have embraced later-in-life entrepreneurial success.

In preparation, I called a few entrepreneur friends. One started a wildly successful clothing shop and had no retirement savings. Another served as CEO of a major fashion house, then opened her own thriving business, yet when asked about her retirement plan, she had to ask her husband. A third woman raided her 401(k) to fund a financial planning firm and her kids’ college tuition; now she’s 54, divorced, and has no retirement funds.

Their stories reminded me that although many women have second acts in work or love, most of us don’t get second acts in our financial lives until it’s too late. That’s especially important for entrepreneurs, who are ambitious risk-takers—which I love!—but have fewer safety nets than traditional employees.

Now is the time to get on track. Here’s my list of five things women entrepreneurs must do to take care of themselves financially.

1. You must have health insurance.

This is a non-negotiable: If you can’t afford health insurance, you can’t afford to go into business. Health insurance protects you in case you have a serious accident or illness. Without it, you could bankrupt yourself or your family. Self-employed folks (sans employees) can join a professional group, which lets folks purchase insurance at a group rate. Check with your local Chamber of Commerce, the Small Business Service Bureau, or the National Association for the Self-Employed. Or shop around for a low-premium, high-deductible policy that covers catastrophes at ehealthinsurance.com. Business owners who have employees can set up a small business group plan. For help, try the National Association of Insurance Commissioners. If you have a pre-existing condition that makes it hard to get traditional insurance, take advantage of affordable PCIPs (pre-existing condition insurance plans). Visit statehealthfacts.org to see the rules in your state. Lastly, look forward to 2014, when President Obama’s Affordable Care Act will let individuals and small businesses access affordable healthcare through a competitive marketplace called an Exchange.

2.  Save for retirement.

When starting your business, it may be tempting to dip into your biggest pool of cash, which is often your 401(k) from your last job. My advice: Don’t do it. You can borrow for your business, but you can’t borrow for retirement. On top of that, you must keep saving. To estimate how much you need to save, use Choose to Save’s Ballpark E$timate calculator. Don’t let the number freak you out—use it as motivation. Luckily, there are many retirement plans available to small business owners. Whether you’re fully self-employed or working a day job on the side with a 401(k), consider opening an IRA. Roth or traditional IRAs let you stash up to $5,000/year. But small business owners should consider a SEP-IRA, which lets you contribute up to $49,000/year and grows tax-deferred. The catch: a SEP-IRA can get costly if you have employees, since you have to contribute to their accounts, too. You can make an IRA contribution for the tax year 2011 by April 15, 2012, so look into all the options, consult a CPA, and figure out which plan is best for you. But whatever you do, save.        

3.  Borrow wisely.

There’s no shame in borrowing money to get your business off the ground, but do so in a way that protects your credit. Start by checking your credit score for free at annualcreditreport.com—this number will predict your eligibility and how much you’ll pay for a loan. When borrowing, shop around for the lowest interest rate. Avoid using your home as collateral or relying on high-interest credit cards. Instead, look to bank loans, which currently boast low interest rates (but can be hard to get). At the bank, ask about Small Business Administration (SBA) loans—a record $30 billion in SBA loans were issued last year. To get started, fill out a short survey to see which SBA loans are right for you. And keep an eye out for Startup America, a White House initiative with several programs to help entrepreneurs secure loans and find mentors. It certainly indicates energy and attention to the needs of small business owners.

4. Pay quarterly taxes.

The companies that pay you probably won’t withhold taxes, so checks will seem bigger than they are. To avoid writing an overwhelming check to the IRS once a year, pay estimated taxes quarterly. And make sure you pay enough self-employment tax, too. The good news is that self-employed folks have tax deductions galore. You can deduct half the Social Security and Medicare taxes you pay, all of your health insurance premiums, business travel expenses, office supplies and equipment, and (sometimes) home office expenses. If you're baffled, consider hiring a CPA. Which brings me to #5...

5.  Get a good CPA.

The most important choice in life: your spouse. Number two: your accountant. The right person can make the difference between success and drowning in paperwork, debt, and audit notices. A CPA (certified public accountant), EA (enrolled agent), or attorney will have the most experience. Call around to see which ones match your needs, and check out their qualifications, including credentials in accountancy and taxation. Recommendations from friends may not be a safe bet (hello, Bernie Madoff!). The National Society of Accountants and American Institute of CPAs are online directories to help you search, and the Accreditation Council for Accountancy and Taxation has a list of questions to ask when starting the selection process.

Best of luck on your business ventures! Feel free to ask me a question in the comments below. 



Compound interest: no math required!

If there's one concept you need to understand when it comes to saving and investing, it's compound interest.

Word people like me think of it this way: When you invest, your money earns a certain interest rate. And then your interest, as it's added to the pot, earns interest on itself.

Math folks think of it as a formula: 

Annual Deposit ([(1+Rate) ^Years+1 - 1]/Rate) - Annual Deposit = Total

Some financial types call it "The Eighth Wonder of the World." (Okay, maybe they need to get out a bit more.)

It doesn't matter what you call it, or whether you can do the math. In fact, a surprising new study from the University of California, San Diego and New York University, to be published in November, shows we don't need to know how compound interest works. But what we do need to know is that it does work—in a big way. The impact of compound interest is irrefutable and beautiful—it helps your money grow exponentially (aka HUGE, so long as you just let it sit and grow over time). Think of it like a sunset: You can appreciate its beauty without understanding the speed of light, right? Similarly with compound interest: you can appreciate the beauty of interest building on interest without being a mathematician.

If you're still having trouble grasping the power of compound interest, here's a quick example: If you were to save $1,000 a year from age 25 to 34 in a retirement account earning 8% a year, and never invest a penny more, your $10,000 investment would grow to $157,435 by age 65. But if you don't start saving until you're 35 years old and then invest $1,000 a year for the next 30 years (that's a total investment of $30,000), you'll have only $122,346 by age 65. The bottom line: Start early, so your money has enough time to pile up.

For now, I encourage you to try out the Compound Interest Calculator on MoneyChimp.com. (MUCH easier than the equation above!) Enter your current retirement contributions, estimate how much you'll put in each year and for how long, and—voilà—see an estimate of how much you'll have waiting for you. Not sure how much you'll need? Try the Ballpark E$timate calculator from ChooseToSave.org.

Once you have those numbers, think about your current retirement savings accounts. Ask yourself: Am I investing enough? Do I need to contribute more money? For newcomers who haven't even *thought* about retirement yet, use this as a push to get started. Enroll in a 401(k) or contribute more to it—even if it's just putting in 1% more of your salary. Think about opening an IRA (Individual Retirement Account) or adding $500 more to it this year than you did last year. Get in early and reap the benefits later—the not-good-at-math thing will just be between you and me.      



5 things women need to do for retirement

Happy 15^th anniversary to WISER—the Women's Institute for a Secure Retirement, for which I'm a board member. I'm so impressed with the work they do, and wanted to take a moment to spread the word, in hopes that ALL women will be financially safe and sound and able to enjoy their post-work lives! Need some motivation? Here are the top 5 things you should do, reposted from WISER's website. I urge you to start today!

 

1) Take charge of your retirement: Find out as much as you can. Talk to your spouse, find out about current and past employers, and check on your Social Security benefit. Even if you are worried about the answers, it's better to find out now than when you are ready to retire.

 

2) Take advantage of retirement benefits available at your workplace: Financial experts agree that there is no better place to grow money then at work because of the tax advantages. In addition, if your employer adds matching contributions, that's free money. The sooner you start, the longer the money will have to grow. Those over age 50 can take advantage of "catch-up" provisions that help you save more in your 401(k) and IRA plans. If you are lucky enough to have a traditional, defined benefit plan, make sure you understand why it is a valuable benefit.

 

3) Take time to educate yourself about Roth IRAs and mutual funds, long-term care insurance, and annuities: There is a wealth of information out there on the Internet, and WISER's website is a great place to start. Watch for free classes at local schools and seminars on public television, read magazines and articles on investing for retirement. Investing a little time along with your dollars can make a big difference in your retirement security. 

 

4) Take the first step to learn how much you will need to have a comfortable retirement:  The big question is whether your guaranteed sources of income, like Social Security combined with retirement accounts and savings will be enough for a comfortable retirement. Look at what sources of retirement income you can count on and what you can expect to receive from them.  Some of your expenses may go down, but others, especially health care costs, may go up significantly. Other factors include how long you will be retired, investment rates of return, and inflation. If what you have so far does not seem like enough, make a plan to save more.

5) Take the time to sound your own alarm. This is your wake-up call. Don't put it off:  Many women face challenges meeting retirement income needs, but educating yourself will help you choose savings and investment tools wisely.  Starting to plan now will give you more options later. The promise of retirement is having time for yourself after a lifetime of hard work.

Which step are you thinking about taking? Do you have any questions or concerns?

Workers: Good news ahead!

If you kept your job during the recession, you were considered lucky. But the daily grind didn't always feel so fortunate, since layoffs, salary freezes, and benefit cuts left the office pretty somber.

Luckily, spring is around the corner, and employees can look forward to two perks: raises (yes, you read that right) and new 401(k) features. Here's what you should know:

• Show me the money! Working hard may finally pay off again. Companies are budgeting merit increases of 3.0% for 2011, up from 2.7% in 2010 and the largest jump since before the recession when increases averaged 3.5 – 4.0%, according to a survey by professional services company Towers Watson. Note: These are merit-based, so the best way to qualify is to far exceed your duties, and then negotiate for the raise you deserve.

• Give me my 401(k)—with some goodies on the side.      I recently blogged about how experts are worried folks' 401(k)s won't even come close to covering their retirement expenses. To counteract this, many 401(k) plans are now offering new features like one-on-one counseling, Internet-based help, and toll-free telephone advisors to make sure people are saving enough. Whether these services will really get people to bulk up retirement funds remains to be seen. But at this point, anything's worth trying. Ask your HR contact if your company or 401(k) provider offers any of these extras—just asking may encourage them to look into it.

What good news are you seeing at the workplace?

Will your 401(k) be enough?

If you read my blog, you know I'm the biggest cheerleader for 401(k)s, since those lucky enough to get an employer match earn free money towards their futures. But right now, experts are worried that for many people, their 401(k) won't even come close to covering their expenses in retirement.

A new study shows that folks in their 60s with a 401(k) have less than a quarter of what they need to maintain their standard of living in retirement. And 25% of Baby Boomers have no retirement savings at all.Combined with fewer pensions and the shaky future of Social Security, this missing money leaves would-be retirees working more years, scaling back their standard of living, and postponing retirement 'til who knows when.

It's not a pretty situation. But remember: This is more telling of our economic times than it is of 401(k)s, and Boomers are suffering the most. For many of them, their 401(k)s plummeted in the recession and they haven't had enough time to rebound. Plus, as part of the 'sandwich generation', they're stuck between footing bills for kids' college and elderly parents' healthcare.

Point is, a 401(k) is a wonderful savings tool, if you know the right way to use it:

• Start ASAP. The younger you start, the more years your money will have to grow thanks to compound interest. Say you make $50,000 and contribute the expert-recommended 12% each year. After 40 years you'll have nearly $1.4 million, but if you start later and invest for 20 years, you'll have only $286,000. BIG difference.

• Go up a notch. Many folks contribute the minimum to their 401(k), often 6% of their annual salary to get their company's 3% match. Now, experts recommend you contribute 10-15%. It may mean cutting back in other ways, but it's easier to be thrifty now than poor in old age. And, if you're 50+, you can contribute an additional $5,500 beyond the $16,500 annual limit—do it.

• Save beyond a 401(k). Consider opening or contributing more to an IRA. Or try saving just $3 a day ; if you invest it in an IRA, it could be worth hundreds of thousands of dollars when you retire.

• Calculate correctly. It's easy to underestimate (or have no idea) how much money you'll need to in retirement. A common measure is that you'll need 85% of the salary you earn before retirement.  Or, to get an actual figure, try this formula from human resources consultant Aon Hewitt, who says Boomers 46-54 will need 14.6 times their final salary, folks 31-45 will need 16 times, and those 18-30 will need 18.7 times.

• Have faith. At the same time this study came out, Fidelity reported that the average 401(k) account balance hit a 10-year-high. Kudos!

How are you preparing for your retirement?