Triathlete Training to Be Fiscally Fit
At 34, triathlete Bill Howard is living proof that a man can multi-task.
Over the last 14 years, he’s juggled a series of jobs, school and a seasonal Christmas lighting business while training for a grueling endurance contest that involves a 2 1/2-mile ocean swim, a 112-mile bicycle race and a marathon.
During the Ironman Triathlon in Oceanside on May 19, Howard finished 138th out of 1,666 competitors with a time of 10 hours, 16 minutes and 45 seconds. He would have done better, he said apologetically, but his handlebars broke halfway through the bicycle race.
Now Howard has his sights on some new goals. He and his fiancee plan to marry at the end of the year. He’d like to buy a house within the next five years and start saving for retirement. He also plans to start a three-year program this fall to get an architecture degree.
Oh, and he wants to expand the seasonal Christmas lighting business he began 14 years ago to a year-round landscape lighting venture. His goal is to make a profit by the time he starts his architecture classes this fall.
To tide him over, Howard has $18,000 in a business checking account. He also is debt-free and the rent on his studio apartment in Laguna Beach is a modest $800 a month.
He expects his new business easily will cover his expenses about $2,400 a month, including his tuition and other school costs. His only concern is how much extra he needs to put away for retirement and buying a house.
San Diego planner Ted Roman recommends that Howard hold on to that confidence, and start writing a business plan right away.
“Nobody should go into business without having a business plan,” he said. “The plan doesn’t have to be long and complicated but it should define what you want your business to look like in two years and what you have to do to get there.”
Howard’s business plan should describe his business, its products and services, who will do the work, the target market (size, location, customer characteristics), the competition, promotion ideas, pricing and profit potential, Roman said.
Howard also should seek out a mentor he can talk to about his business, “someone who doesn’t have a vested interest in the outcome of your decisions,” Roman said. “Having someone to discuss things with is really huge.”
Roman said he has a “mastermind group” of eight business owners who meet for two hours once a month to discuss their business decisions and dilemmas, an idea he borrowed from Napoleon Hill’s “Think and Grow Rich.”
“You should try to get people from different disciplines and backgrounds in your group, and eight is a good size,” Roman said. “My group has an attorney, a dentist, a real estate agent, a manufacturer--even an artist who’s almost 80 years old.”
Another major consideration when starting a business: taxes.
“Many new business owners don’t pay attention to their taxes and then at the end of the year they say, ‘Oh my God, I owe how much tax?’ ” Roman said. “You’ve got to plan ahead and pay along the way.”
For instance, Howard’s business will have to clear $40,000 a year just to cover his living expenses of about $28,000 a year and pay his taxes. After that, Roman said, Howard can expect his taxes to increase by nearly $5,000 for every $10,000 in additional profit. That’s because of the 15.3% self-employment tax on net income: 2.9% for Medicare and 12.4% for Social Security--a big whammy most new business owners don’t expect.
“Many of my clients are paying more in self-employment tax than they are in income tax,” Roman said. “It’s hard being self-employed and nobody said it was fair.
“The point is, if you have a goal to save a certain amount every month for a house and retirement, you have to earn $20,000 to have $10,000 for your goals.”
One option: forming what is known as an “S” corporation, which would allow Howard to pay himself a salary and then take the rest of the business profit as dividends that aren’t subject to the self-employment tax.
Incorporating also would protect his individual assets if the business is sued.
But forming a corporation can cost as much as $2,000, tax preparation is more expensive and there’s a lot more paperwork than with a regular business.
“Right now, I don’t think it’s worth it,” Roman said. “Bill needs to beat the bushes getting jobs and limit his overhead until he’s profitable. He can incorporate at any time.”
Some planners would recommend that Howard immediately start a savings incentive match plan for employees--a plan that allows small business owners to contribute up to $6,000 of their net income to a tax-deferred retirement plan to reduce taxes and get as much growth in investments as possible.
But Howard’s immediate goal is to buy a house within five years, and he can’t take money out of a tax-deferred retirement plan without paying big penalties.
Roman recommends that Howard wait on the SIMPLE IRA until he has enough income to save for his house and instead contribute just $2,000 a year--or $166 a month--to a Roth IRA. A Roth lacks a SIMPLE’s upfront tax advantages, but enables investments to grow tax-free and allows account holders easier access to their principal.
In any case, it’s going to take some effort to save enough money to buy a house in the Laguna Beach area, where entry-level homes can cost $250,000 to $300,000. In five years, prices could be $320,000 to $380,000, Roman said.
Howard would need $70,000 to make a 20% down payment on a $350,000 house. To set aside that amount in five years, he’ll need to start saving about $950 a month and get an average return of 8% a year.
For the house fund and a Roth IRA, Howard will need to save $1,116 a month--or about $13,400 a year. Because taxes will eat up about half of his business profit, Howard will need to net an additional $27,000 a year--or $67,000 altogether--to meet his house and retirement savings goals, Roman said.
Roman said Howard could take $2,000 from his $18,000 business checking account and open his Roth IRA. The remaining $16,000 should go into a money market fund where Howard can get as much interest as possible while keeping his money accessible until his business is making enough to cover his expenses, the planner said.
Roman recommends that Howard invest his Roth IRA--and his house savings--in an index fund such as Vanguard’s S&P; 500 index fund. The fund was down 9% last year, but its five-year return still averaged about 14% a year.
Roman said the market probably won’t see that high a return for a while, but even an 8% average return would allow Howard to meet his savings goal.
The wild card with all this advice, Roman said, is that it depends on Howard’s new business making a profit. But Howard already has shown he has the tenacity, organization and optimism to be a successful entrepreneur. And he’s already got a client list with 300 names on it.
“You’re going to succeed because you obviously love what you do, and you have fun with it,” Roman said. “It’s more than just a job for you.”
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Jeanette Marantos is a regular contributor to The Times.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
This Week’s Make-Over
Subject: Bill Howard, 34
Annual income: Uncertain. He has quit his job to start a landscape lighting business. His seasonal Christmas lighting business netted him $20,000 last year. He must net $40,000 a year to pay his taxes and current expenses.
Financial goals: Saving enough to buy a house in five years and build a retirement fund, while starting a new business.
Current Portfolio
Assets: $18,000 in a Wells Fargo business checking account; a pickup and a motorcycle.
Debt: None.
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Recommendations
* Write out a business plan immediately, taking into consideration the extra taxes he’ll pay as a business owner.
* Seek out a mentor or start a mastermind group to discuss business issues and problems.
* Put $2,000 into a Roth IRA, invested in an S&P; 500 index fund such as Vanguard’s.
* Move his remaining money into a money market account to get better interest. Leave it there until his business can support itself.
* Start saving for a house first. Invest in the S&P; 500 index fund by using dollar-cost averaging, putting the same amount of money into the fund every month. In Howard’s case, he’ll need to save $950 a month, and earn 8% a year on the money, to have a big enough down payment (about $70,000) to buy a house in Laguna Beach.
* Start a Simple IRA for his retirement plan once he is saving enough to buy his house.
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Meet the Planner
Ted Roman is a fee-only certified financial planner based in San Diego.
