Southern Consumers Alliance

Finance Talk FAQ Section

Should I lease or buy my new vehicle?
How can I obtain new financing for my new business?
Should I get a home equity loan?
How can I improve my credit score?
How long should I keep my records?
What accounting software package should I buy?
Should I apply for Social Security benefits before I turn 65?

Should I lease or buy my new vehicle?

This question is a very good question and is often asked from a tax standpoint based on which option would indeed provide the largest tax deduction, but this question should not be a tax question. The best advice would be to buy the vehicle that has the overall lowest cost and then manage the taxes from there. As a general rule, the difference between buying and leasing a new vehicle, no matter how you finance or structure the deal, will not produce a material difference in your tax liability. Buying and leasing are alternatives of financing and the business use of the vehicle will not be affected by the financing option that you chose. So the first thing to consider is the underlying cost of both alternatives, namely the interest rate on any loan needed for buying the vehicle compared to the underlying finance rate embedded in the lease contract. Comparing these two rates will give you a good idea of the relative cost of each. Again, keeping in mind that each are simply alternatives for the price of financing the new vehicle.

Perhaps the most important aspect in determining which option is best for you, is neither the cost of the vehicle nor the cost of the underlying financing, but is your personal habits for driving that new vehicle. As a general rule, if you tend to keep vehicles for a longer period of time then buying the vehicle will most likely be better for your overall situation. So if you tend to keep your vehicles for 7 years or 8 years or maybe even longer, then buying the car will end up costing much less of the life of that vehicle than leasing a similar vehicle. If, on the other hand, you tend to trade vehicles more often, getting a new one every two or three years, then most likely leasing will work out to be much less expensive over time. But in either case, the net tax deduction will work out to be about the same, so evaluate your specific needs and driving habits in determining which is best for you and your specific facts and circumstances.

How can I obtain new financing for my new business?

This is a very difficult question and based on the current economy getting new money or new financing can be very difficult for small business owners. The best place to start is with local bank or financial institution. Building a personal relationship with a banker and bank in your area based on your specific facts and circumstances will put you in a position to be much more flexible when you do need additional working capital. Try not to wait until you actually need the money before approaching that bank. You will need a checking account for the business anyway, so visit with a lending officer and let them know your long term plans. Provide them with timing updates as to your financial condition, results of operations and cash flow. Meet with them each quarter or at least a couple of times a year to visit about your business. Then when it is time to ask for that loan, they will know you and your business and you will be way ahead of the game.

Consider options for a guaranteed small business loan under the Small Business Administration loan program. The SBA guarantees millions of dollars in small business loans each year helping small businesses just like yours. Go to SBA.gov to see more detail regarding the guarantee program. When visiting with your local banker ask if they are a “preferred lender” with the SBA, which means they can actually approve the loan with the SBA guarantee, which can dramatically improve your chances of getting g the loan approval.

Should I get a home equity loan?

The equity in your principle residence can be a good source of financing regardless of your cash flow needs. The finance rate for most home equity loans will be a bit more expensive than your existing mortgage but still most likely less expensive than other borrowing options such as your personal credit cards. Before committing to the home equity loan consider refinancing your existing mortgage and increasing the total amount of the loan. This option can still provide the needed cash flow, but will typically provide a lower mortgage rate on the entire debt than having to pay the increased interest rate for the second loan or home equity loan.

In pursuing the home equity loan make sure to do your homework. Visit with a number of different lenders since the rates can vary widely from lender to lender. Ask about rates and timing for the equity loan application. Do your homework and you will be glad you did.

How can I improve my credit score?

The first thing to do in trying to improve your credit score is to make sure you know exactly what is included in your specific credit report. You can access a free copy of your credit report at annualreport.com every year. So the first thing to do is to make sure you have a copy of your credit report. Review that report for potential errors and mistakes. It is very common to have information that does not apply to you, including credit inquiries, late payments, charge-offs, etc., so make sure that your report does not have any adverse items that do not apply to you. Also do not hesitate to challenge information that you believe to be incorrect. There can be late payments or credit inquiries that are indeed mistakes and if you can demonstrate that the payments were indeed made on time, don’t hesitate to challenge the information.

Perhaps the most important thing you can do from today to affect that score is to make sure that you make your monthly payment on time. Over one third of the calculation is based on payment history. Making sure you make those payments on time can have a dramatic impact on your credit score in as little as 90 days. The next biggest factor in the calculation is the amount of your available credit. If you have credit cards that are near their maximums, and if you have the cash flow, paying those credit cards down and increasing your available credit will also have a positive impact on the overall credit score. The next biggest factor is the variety of credit vehicles that you have including credit cards, home mortgage, installment loans, etc. It is never a good idea to borrow money simply to improve your credit score, but the wider the range of your credit the better your score will be.

How long should I keep my records?

From a finance standpoint, the general rule of thumb is to keep all financial records for at least seven years. Rules vary from state to state, but most bankruptcy rules provide for seven year of review for transactions, credit payments, preferential debt payments, etc. Likewise, some lenders and financial service providers may ask for information as far back as those same seven years. The retention policy does not require that the records must be in paper format, and with today’s advancing technology options saying the data electronically will most likely make this process much easier.

From a tax standpoint, the IRS can review tax returns for up to three years from the date the return is filed. Since tax returns are typically filed on April 15th following the end of the applicable tax year, keeping tax records for at least four years should be part of the records retention policy. By keeping those records for four years, you will always have the data necessary if the IRS requires any additional information.

What accounting software package should I buy?

There are certainly many options available to meet the needs of your company. The most important factor in selecting the best option for you is to find one that you will actually use. Perhaps the most commonly known solutions include QuickBooks, Quicken and Peachtree Accounting. Each of these options provide detailed general ledger and general journal functions as well as check writing, payroll and financial reporting processes.

The best advice is to go on-line and evaluate each of these options, as well as others, to find the one that best fits your specific needs. The benefits of Quicken and QuickBooks include ease of operation and a ‘non-accountant’ expectation, so that they are typically very easy to learn. Peachtree Accounting is a bit more extensive but may be a bit more difficult to learn, and therefore is a better option if you may indeed have some accounting background or experience. Again, the best advice is to do a little research. Experiment with the on-line demos for each of the alternatives to find the one that you will be mostly likely to use. Whichever system you choose, commit yourself to the process and stay with it.

Should I apply for Social Security benefits before I turn 65?

As you probably already know, you don’t have to wait until your actual retirement age in order to apply for your Social Security retirement benefits. The full retirement age will range from age 65 to age 67 depending on when you were born, but you may choose to begin your retirement benefits as early as age 62. If you choose to begin your benefits before your full retirement age, then the amount of your monthly benefit will be reduced. For example if your full retirement age is 66 and you choose to begin your benefits at age 62, your monthly benefit will be about 25% less than if you waited until age 66. If you continue working until age 70 and delay your benefits until then, the monthly benefits will increase an estimated 8% for each additional year that you wait.

As you can see, the decision of when to begin your specific retirement benefits is somewhat of a complicated math problem, with the key unknown factor being your actual life span. The amount of benefits that you will receive will be based on a complicated formula based on your total lifetime earnings and the credits applied to your social security account. Those benefits are then paid to you over your remaining lifetime based on standard actuarial tables. If you start your benefits early then the monthly payment will be less since you will receive a higher number of monthly checks. If you wait until later, the amount will be greater each month since the calculation will be paid out over a fewer number of months. Therefore, if your actual life span exactly equals the standard actuarial tables, meaning you live exactly the average of everyone else your age, then the total amount paid to you over time, adjusted for the time value of money, will be basically the same no matter when you started receiving the benefits. If you live longer than the average then waiting longer to begin the benefit will most likely be better since the extra checks that you get after the average life span will be larger. If you expect to pass before the average life span of those your age, then you most likely would receive more in total benefits by starting those benefits earlier since your will then receive more checks than if you waited.

This is certainly an oversimplification and the actual benefits will certainly depend on your specific facts and circumstances. The good news is that the Social Security Administration can help you with the evaluation. They have a very good website at www.SSA.gov with a number of detailed calculators that can help you decide which scenario will be the best for your situation.