Money Management

Ask A CPA: The 5 Money Questions We’re Asked The Most, Answered By An Expert

By | Monday, November 02, 2020

This article is sponsored by the AICPA

Here at TFD, we get a lot of questions about money. While we’re certainly well-versed in talking about money, every individual’s experience is different — and we’re no experts. In partnership with our sponsors at the AICPA, we spoke with Brooke Salvini, a CPA, Personal Financial Specialist (PFS) and Certified Financial Planner (CFP), about our most-asked money questions. Below, she provides the answers you need to take control of your finances, whether you’re just making your first budget, transitioning to a freelance career, or trying to grow your small business. 

If you run your own small business or freelancing operation, definitely consider using the services of a Certified Public Accountant to help you reach your business goals. CPAs are qualified financial experts who give advice all year round — not just when you need to file or pay your taxes. They can offer broad business knowledge and financial expertise that most of us simply don’t have, such as financial and tax planning, business valuation, accounting services, and setting and meeting your business-growth goals. To find a CPA near you, click here to check out the AICPA’s Find-a-CPA tool.

TFD: How do I save when I still have a lot of debt to pay off? 

Brook Salvini, CPA/PFS, CFP: Paying off debt is a challenging situation but with determination, patience, and a plan you will get it done.

A secret hack to staying motivated is continuing to save while tackling your debt. The amount you can save may be small — size doesn’t matter — but you need the reward of seeing your safety net grow. 

Don’t rely on remembering to save; [automate it] with a monthly or weekly transfer to savings. Set up autopay on your debt, too. Work out a strategy to pay off the highest debt first, and rolling like a snowball with a growing amount to pay off your ever-shrinking debt.

[When you reach] important milestones, e.g. the first credit card paid off, the first $1,000 paid off, include celebrations or small indulgences that don’t cost money but are meaningful. And at these milestones, also increase the amount allocated to savings.

Tackling debt is very emotional, so you may want to journal through the experience. This way, you’ll have the great satisfaction at the end to look back at your journey, relish the accomplishment of being debt-free, and savor the peace of mind of money in the bank.

How do I figure out which of my debts to pay off first? 

It makes sense to pay off the most expensive debt first. Prepare a list of all your debts — your outstanding balance, interest rate, and minimum monthly amount due. In addition to the minimum, decide how much more you’re going to pay every month to tackle your debt. Now you have a total amount that will be spent every month paying off debt. (However, are there any small balances that can be eliminated either immediately or in a month or two? [Try to] get those paid off even if the interest rate is a little lower than others.)

Each month, pay the minimum on the lower interest rate debts, and apply everything else to the highest cost debt until it’s paid off. As each debt is eliminated, the total amount you’ve earmarked is rolled down like a snowball, growing bigger and applied to the next debt, except for the minimum paid on the lowest cost debt.

A CPA can help you prepare a schedule to map out paying off your debt so you can gauge how long the process will take and monitor your progress each month. If you find additional money that can be used to pay down your debt more quickly you’ll be able to use the schedule as a benchmark and celebrate being ahead of schedule. 

Find a CPA near you using the AICPA’s Find-A-CPA tool.

When should I put my money into a savings account vs. an investment account?

 A savings account is for money that needs to be kept safe and sound, such as an emergency fund or for specific expenses due in the near future, like the down payment on a house or balloon payment on a loan. Savings accounts earn very little, but there is complete confidence that the full amount will be available immediately when needed. This is what is called risk-free money. An FDIC-insured bank or credit union with equivalent insurance is the right place for a savings account.

An investment account is quite a bit different. Investing is about taking risk for the opportunity to grow money for future needs. This is retirement savings, college savings, and saving toward other goals 5+ years in the future. Money that is invested can change in value, sometimes dramatically, from day to day. Over the long run, investments grow, but on any one day, it’s impossible to know exactly how much will be in the account. Investing is also about protecting your purchasing power so that your money grows faster than inflation, which slowly makes today’s dollars worthless tomorrow.

That’s why an investment account is not the right place to keep an emergency fund. Savings is about certainty and immediate access, while investing is about the future and possibility. 

How do you know you are getting the best value/work from your CPA?

CPAs are all licensed by their state Board of Accountancy. Before you hire a CPA, it’s a good idea to look up their record to ensure they’re in good standing. A CPA who also offers investment advice, such as myself, will be licensed in that capacity also and you should look up their record with the SEC or State agency.

Next, you can check to see if the CPA is a member of their professional organization such as the AICPA or state-level professional society. While this doesn’t ensure great work, it does indicate a CPA is involved and connected with the professional community. The professional organizations offer continuing education and resources to assist CPAs with maintaining technical competency. This is extremely important, as the laws and rules are always changing. 

Google your CPA or check LinkedIn to see if they are a subject expert on issues related to your situation. Also ask for their CV and review their website. Similar to your doctor, you want to feel comfortable with your CPA, not intimidated by them. Your CPA should ask questions, guide you with planning (not just tax return preparation), and be available on a timely basis to resolve your issues.

How do I plan for taxes when I have a very irregular income? 

Gig work and other self-employed situations can get complicated. In this instance, I would recommend hiring a CPA to help with the best planning strategies. You’ll likely need to schedule estimated tax payments to avoid timing penalties and the nasty April surprise of a large, unexpected tax bill. Calculating your marginal tax rate and the correct amount to pay in estimated taxes can be done efficiently by your CPA. 

Your CPA can also help you take advantage of all the tax savings opportunities available to the self-employed, such as correctly choosing an entity for your business, setting up a retirement plan, and ensuring that you’re deducting all expenses you’re entitled to use to reduce income. And, very important, making sure you keep good records to support all business activity. These will be needed if you are ever audited by the IRS.

In summary, with irregular income, remember to “pay as you go” to avoid the surprise tax bill.

Image via Unsplash

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