Die Broke Complete Book of Money

Stephen Pollan, Mark Levine

• Publisher: HarperCollins e-books
• Year: 2012
• ISBN:
  9780062039101
• Topic: Personal Development
• Subtopic: Personal Finance

The incredible economic growth of the past few years may have made scores of new millionaires and plenty of people rich, but it hasn't made managing your personal and business finances any easier.

In fact, most of the old rules and principles have proved ill suited to this new world. What's needed is a user's guide to the new economy -- a handbook for everyone looking to succeed in this new, fast-paced environment.

In this single, highly unconventional financial reference volume, America's most trusted financial consultant and author of the bestselling Die Broke and Live Rich takes an aggressive approach to the new economy and tells you everything you need to know about money.

The Die Broke Complete Book of Money is the definitive guide to modern money management. The man famous for turning conventional wisdom on its head expounds on the new rules for the new millennium with opinionated, hard-hitting, and informative entries on everything from accessory apartments to zero-coupon bonds.

Pollan's clients are grappling with today's financial challenges -- and his advice is battle tested in the real world. Putting the old rules aside, he sees the worlds of consumerism, career, business, and personal finance as being inseparable -- money has to be considered as a whole unit rather than as different elements. And because he's a practicing financial adviser who deals with real people, he knows financial decisions shouldn't be made in a vacuum: emotions, feelings, and attitudes must come into play. By explaining what you should do and how you should do it, Pollan offers advice grounded in a hands-on, real-world approach that is easy to understand and simple to follow.

Savvy, sophisticated, and succinct, this incisive and engaging book is filled with offbeat, practical advice that stems from Pollan's unconventional strategies. It is an indispensable guide to money for anyone who plans on succeeding in the new economy.

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ACCESSORY APARTMENTS

LET’S BE HONEST. Your family probably isn’t the Waltons. Neither the homes nor the lifestyles of today’s average American family easily lend themselves to multigenerational households. That doesn’t keep many seniors from expressing the desire to move in with their children in their later years.

One possible solution to this dilemma is the accessory apartment: a small living unit that’s usually attached to the home of a son or daughter. It has a private entrance and its own kitchen and bathroom. It may or may not have an interior entrance into the rest of the house.

Accessory apartments can provide seniors and their families with the best of two worlds. They help seniors retain their independence; technically, they’re still living alone. Accessory apartments also allow seniors to remain with their families, which provides important emotional benefits and adds to their sense of security. For the family, it’s a much better arrangement than having the parent share living space with the rest of the clan. Everyone has more privacy, and family members can choose to spend time together or not as fits their needs and their moods. Just having a wall between everyone significantly reduces the friction that can occur when everyone is in the same home.

You may find your home is already set up to house an accessory apartment. Or you may need to hire a contractor to do some home renovation. If financing is an issue, I have two suggestions. The first is to use some of the money from the sale of your parent’s home to finance any necessary renovation or construction. The second is to obtain a home equity loan and cover your payments with part of your parent’s income. If you wish, once your parent is no longer living in the apartment, you can continue to rent it to provide an income stream, or you can reincorporate it into your own living space.

A variation of the accessory apartment concept is what’s known as the “granny flat.” The idea began in Australia: Under a government program, a prefabricated housing unit is installed on the property of an adult child. When the unit is no longer needed, it is removed.

In the United States, granny flats are known as ECHO homes (Elder Cottage Housing Opportunity). Here, the financing and installation costs are the responsibility of the family. Some home manufacturers are tapping into this market by offering ECHO units in the $15,000 to $20,000 range. When they’re no longer needed, the units can be converted to another use or removed and resold.

The downside of both accessory apartments and ECHO units is that they may raise your property taxes. They can also generate problems with neighbors. ECHO units, in particular, tend to become a point of dispute. You may also run into zoning problems. I think the increased need for senior housing will eventually force the removal of these regulatory problems, as more and more communities amend zoning laws to accommodate ECHO units. In the meantime, you may need to petition your local government to change its zoning ordinances. Recruiting local seniors organizations or religious groups to help will further your cause.

There are legal, tax, and insurance ramifications attached to these housing arrangements. Check with your lawyer and accountant before you decide to build an accessory apartment or install an ECHO unit. Speak to your insurance agent as well to make sure you have coverage for the new addition to your property.

Sure, it may be a bit of a pain to set up an accessory apartment or ECHO unit for a parent. But in my experience, it is less problematic than taking a parent into your own home.

———————

(See also home equity loans, home improvements, property taxes.)

ACCOUNTANTS

NEVER TRUST a rakish accountant. Okay, I’m overstating things, but just a bit. There’s a very fine line between charisma and sleaze. You want an accountant who projects stability, dependability, and integrity—someone who makes Steve Forbes look like a libertine.

But just because you want a conservative-looking and acting accountant doesn’t mean his role in your financial life is colorless and unimportant. Sure, his job description—an individual trained to prepare, maintain, and analyze personal and business financial records and statements—leads most people to think of him, if ever they do think of him, as a bit player in your life. That’s a big mistake.

A good accountant can help you as much as, maybe even more than, the flashiest stockbroker or financial planner. Your accountant can save you or your business a fortune by minimizing your tax bills and preparing financial statements. Accountants aren’t all the same. For instance, income taxes are far more subjective than you might imagine. Every year Money has a panel of tax preparers, enrolled agents, and accountants prepare a tax return for the same hypothetical couple. Rarely do any two of the returns end in the same result or agree with what the 1RS believes is the right answer.

An accountant can also take advantage of this subjectivity of numbers by helping package your financial information in a way that enhances your personal credit and your business s bank-ability and attractiveness to investors.

In order to get those kind of benefits from an accountant, you need to treat his hiring as a serious matter. Forget about dropping into the temporary storefront set up in the mall by a tax preparation service. Steer clear of your nephew, who just got out of college but is a real financial whiz—according to his parents. No one, repeat, no one, should use anyone other than a certified public accountant (CPA) or enrolled agent as a tax preparer.^*

Hire a CPA

CPAs have earned those initials by passing rigorous exams. The general public might think of them as boring and unimportant, but they’re highly respected by the business world. That’s because, first, they’re required to constantly upgrade their knowledge, and second, their training has as much to do with ethics as it does with accounting.

CPAs can lose their credentials if they don’t maintain their professional standards and practices. In a world of sharp talkers, CPAs are almost always straight shooters. (Note the word “almost” and read the sidebar at the end of this item.) I’ve been with bankers who have questioned entries on a client’s loan application. When I’ve offered them letters from a CPA validating the information, they’ve treated the notes as an imprimatur. Of all professionals, the CPA has traditionally ranked at the top of the list for the most trusted adviser.

Another obvious advantage to CPAs is that they are year-round financial professionals. That’s obviously a necessity for business owners who pay taxes and borrow money throughout the year and need constantly updated financial information to make savvy decisions. But it’s also important for those who use an accountant solely for their personal tax returns.

Tax preparers hang out a shingle from January I through April 15 and then take off their accounting hats until the following year, returning to their full-time jobs as teachers, travel agents, and plumbers. A CPA, on the other hand, is available during the entire year to advise you on tax issues or other financial questions. And he will be right by your side if you’re audited. Try finding that fly-by-night tax preparer when you need help responding to a spaghetti letter from the 1RS.^† Although I have great respect for accountants and their skills, I don’t feel most are qualified to act as business consultants or financial planners. Hire them to prepare your taxes, your business’s financial statements, and maybe your money tactics. Use them to help trim your tax bill and improve your chances of obtaining loans or enticing investors. But don’t rely on a run-of-the-mill CPA for strategic advice on what mutual fund to invest in or on how to develop your business. That’s a job for a specialized financial planner or an MBA-trained business consultant.

Look for the Young and Hungry

I think the best way to find a good CPA is through word of mouth. Ask your other professionals, particularly those whose businesses rely heavily on accounting services—physicians, bankers, lawyers, financial planners—for recommendations. If you’re looking for an accountant to represent you or your sole proprietorship, keep an eye out for a young individual or a small firm eager to build a client base. Although he may not offer the services or clout of an older, established CPA, he’ll likely charge far less, be more willing to work hard and go out of his way to meet your needs, and he’s more apt to be on top of the latest developments in his field.

I always look for young accountants who have worked for medium-sized firms but have just recently gone out on their own or started their own firm. Young accountants like that generally have a broad background and are often willing to grow with a client, learning about your specific industry or unique personal financial situation, yet they are still able to help you save money, keep records, and generate statements.

There are just two caveats about hiring a young and hungry individual or firm. If your business is in a highly regulated industry, it probably makes sense to hire a seasoned CPA with specific experience in your business or a midsized firm. And in your search for youth, make sure to check for baby fat. Youthful energy and enthusiasm are invaluable, but they must be balanced by common sense and candor. I don’t mind if an accountant doesn’t know the answer to a question and says he’ll find out. That’s better than winging it and covering up a deficiency in order to impress.

Look for Midsized Firms

If you’re looking for an accountant for your business and you’re either a partnership, a limited liability company, or incorporated, I’d suggest a medium-sized accounting firm. It’s great if you’re a business owner and your accountant has contacts with financial institutions, has a tax department on hand, and has estate expertise as well. You’re more apt to find that in midsize firms. Having an accountant with a good personal Rolodex, or whose firm has many contacts, is also a plus since he may be able to turn other clients into investors. After all, who has a better handle on how a company is doing than its accountant. And if that accountant or his firm also represents the investors’ interests, it can be an excellent match.

It’s also good if a business owner’s accountant has some teaching skills. He can help you become conversant with financial ratios, projections, and statements, making you that much more of an attractive investment or borrower.

Interview Each Candidate Thoroughly

Once you have a list of candidates, make appointments with each to discuss your needs. Bring tax returns and financial statements from previous years and be prepared to have a frank discussion of your financial situation. If any candidate refuses to meet with you or wants to charge for this initial conversation, scratch his name off your list.

Look around the accountant’s office when you arrive. Does the office look well-organized? Does the staff seem well-trained? Sure, these are superficial judgments. But if a candidate’s own office is a mess, he probably isn’t going to be very good at organizing your financial records. And if a candidate’s own staff appears incompetent, he’s probably not going to be very good at teaching you or your staff.

Look for someone who, while technically proficient, is also capable of speaking and writing in language you understand. If you don’t understand the advice you’re being given, it won’t do you any good.

Ask each candidate if he has other clients whose financial situation or business is similar to yours. Knowing your industry and the players in it can be a real plus. Find out if he will be handling your business personally or whether it will be assigned to a staff accountant. And ask the candidate about his education, both past and current. Any CPA worth his fee will regularly attend seminars and classes to keep up with the changes.

Speaking of fees, don’t forget to discuss them. Charges for accounting services vary according to location, experience, and the size of the firm, so it’s tough to generalize. But be prepared to pay between $200 and $1,500 for the preparation of a personal tax return, depending on its complexity. Your business should expect an annual bill of between $2,000 and $6,000 for tax preparation, and the occasional special statements for loans and other purposes. Make sure the fee and the ownership of documents is agreed on and spelled out in writing in an engagement letter. This will prevent any misunderstandings or problems down the road.

Granted, these fees may seem expensive, particularly if you’re accustomed to using a tax preparation service or preparing your returns yourself. But keep in mind that unless your financial situation is especially convoluted, you’ll only need a few hours of a CPA’s time every year, so you’re really only talking about a few hundred dollars. Believe me, it’s worth it just to know there’s a professional standing behind you. Consider it an investment in peace of mind.

You Know an Accountant Is a Crook if He …

• Has you sign a blank tax return or a return filled out in pencil

• Asks you to have your refund sent directly to him^*

• Tells you he knows how to “get away with” not paying any taxes

• Promises you a refund without having looked at your numbers

• Takes a percentage of what he “saved you” as his fee

If you’re a business owner, you should feel no compunction about trying to negotiate the accountant’s fees downwards.

Negotiate Your Accountant’s Fees

The secret to successfully negotiating your accountant’s fees downward is to never imply he isn’t worth the stated amount. Instead, cite your own budget as the reason for negotiating, and discuss everything other than the value of the services.

Subtly suggest that you can compensate for paying a lower fee by bringing other clients to the accountant. For instance, your membership in a local business association or service organization can be an enticement for a young accountant looking to expand his client base.

An older, established accountant, or a midsized firm may not find that as valuable, however. In this case, the best way to save money is to ask for a reduction or the elimination of any advances or retainers. The very fact that the accountant is established or is part of a firm means there’s less of an need for such up-front money.

How to Ask the Uncomfortable Question

All CPAs believe that while tax evasion is illegal, tax avoidance is every citizen’s patriotic duty. Loopholes are written into the tax code intentionally. And most parts of the code are open to interpretation, at least un...