Small Business Facts

Nine Tips for Taxpayers Who Owe Money to the IRS

Did you end up owing taxes this year? The vast majority of Americans get a tax refund from the IRS each spring, but those who receive a bill may not know that the IRS has a number of ways for people to pay. Here are nine tips for taxpayers who owe money to the IRS.

1.        If you get a bill this summer for late taxes, you are expected to promptly pay the tax owed including any penalties and interest. If you are unable to pay the amount due, it is often in your best interest to get a loan to pay the bill in full rather than to make installment payments to the IRS.

2.        You can also pay the bill with your credit card. The interest rate on a credit card or bank loan may be lower than the combination of interest and penalties imposed by the Internal Revenue Code. To pay by credit card contact one of the following processing companies: Official Payments Corporation at 888-UPAY-TAX (also www.officialpayments.com/fed) or Link2Gov at 888-PAY-1040 (also www.pay1040.com) or RBS WorldPay, Inc at 888-9PAY-TAX (also www.payUSAtax.com).

3.        You can pay the balance owed by electronic funds transfer, check, money order, cashier’s check or cash. To pay using electronic funds transfer you can take advantage of the Electronic Federal Tax Payment System by calling 800-555-4477 or online at www.eftps.gov.

4.        An installment agreement may be requested if you cannot pay the liability in full. This is an agreement between you and the IRS to pay the amount due in monthly installment payments. You must first file all returns that are required and be current with estimated tax payments.

5.        If you owe $25,000 or less in combined tax, penalties and interest, you can request an installment agreement using the Online Payment Agreement application at IRS.gov.

6.        You can also complete and mail an IRS Form 9465, Installment Agreement Request, along with your bill in the envelope that you have received from the IRS.  The IRS will inform you usually within 30 days whether your request is approved, denied, or if additional information is needed. If the amount you owe is $25,000 or less, provide the highest monthly amount you can pay with your request.

7.        You may still qualify for an installment agreement if you owe more than $25,000, but a Form 433F, Collection Information Statement, is required to be completed before an installment agreement can be considered. If your balance is over $25,000, consider your financial situation and propose the highest amount possible, as that is how the IRS will arrive at your payment amount based upon your financial information.

8.        If an agreement is approved, a one-time user fee will be charged.  The user fee for a new agreement is $105 or $52 for agreements where payments are deducted directly from your bank account.  For eligible individuals with incomes at or below certain levels, a reduced fee of $43 will be charged.

9.        Taxpayers who have a balance due, may want to consider changing their W-4, Employee’s Withholding Allowance Certificate, with their employer. There is a withholding calculator available on IRS.gov to help taxpayers determine the amount that should be withheld.

For more information about installment agreements and other payment options visit IRS.gov.  IRS Publications 594, The IRS Collection Process and 966, Electronic Choices to Pay All Your Federal Taxes also provide additional information regarding your payment options.  These publications and Form 9465 can be obtained from IRS.gov or by calling 800-TAX-FORM (800-829-3676).

IRS presents a good overview of tax filing requirements for Small Business at  IRS Small Business Tax Requirements Brochure

Five Tax Scams to Avoid this Summer

The Internal Revenue Service issues a list of the top 12 tax scams each year – known as the Dirty Dozen. The scams are illegal and can lead to problems for taxpayers including significant penalties, interest and possible criminal prosecution. These scams don’t just happen during the tax filing season, they can happen anytime during the year. Here are five scams from the 2010 Dirty Dozen list every taxpayer should be aware of this summer.

1.        Phishing Phishing is a tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information in an electronic communication. Scams can take the form of e-mails, tweets or phony websites and they try to mislead consumers by telling them they are entitled to a tax refund from the IRS and they must reveal personal information to claim it. Regardless of how official this e-mail may look and sound, the IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Phishers use the personal information obtained to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name. If you receive an e-mail that you suspect is a phishing attempt or directs you to an imitation IRS website, please forward it to the IRS at phishing@irs.gov. You can also visit IRS.gov and enter the keyword phishing for additional information.

2.        Return Preparer Fraud Dishonest tax return preparers can cause trouble for taxpayers who fall victim to their ploys. Such preparers are skimming a portion of their clients’ refunds, charging inflated fees for tax preparation or are attracting new clients by promising refunds that are too good to be true. To increase confidence in the tax system, the IRS is requiring all paid return preparers to register with the IRS, pass competency tests and attend continuing education.

3.        Hiding Income Offshore Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks and brokerage accounts. IRS agents continue to develop their investigations of these offshore tax avoidance transactions using information gained from more than 14,700 voluntary disclosures received last year. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans.

4.        Abuse of Charitable Organizations and Deductions The IRS continues to observe the misuse of tax-exempt organizations. This includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets. The IRS also continues to investigate various schemes where donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets.

5.        Frivolous Arguments Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. If a scheme seems too good to be true, it probably is. The IRS has a list of frivolous legal positions that taxpayers should avoid on IRS.gov. These arguments are false and have been thrown out of court.

For the full list of 2010 Dirty Dozen tax scams or to find out how to report suspected tax fraud, visit IRS.gov.

   http://www.irs.gov/newsroom/article/0,,id=97273,00.html

Six Tax Tips for New Business Owners

Are you opening a new business this summer? The IRS has many resources available for individuals that are opening a new business. Here are six tax tips the IRS wants new business owners to know.

1.     First, you must decide what type of business entity you are going to establish. The type of business entity will determine which tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation.

2.     The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.

3.     An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Visit IRS.gov for more information about whether you will need an EIN. You can also apply for an EIN online at IRS.gov.

4.     Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.

5.     Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.

6.     Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.

IRS Publication 583, Starting a Business and Keeping Records, provides basic federal tax information for people who are starting a business. This publication is available on IRS.gov or by calling 800-TAX-FORM (800-829-3676).  Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.

Most taxpayers have already filed their federal tax returns, but many may still have questions. Here’s what the IRS wants you to know about refund status, recordkeeping, mistakes and what to do if you move.

Refund Information

You can go online to check the status of your 2009 refund 72 hours after IRS acknowledges receipt of your e-filed return, or 3 to 4 weeks after you mail a paper return. Be sure to have a copy of your 2009 tax return available because you will need to know your filing status, the first Social Security number shown on the return, and the exact whole-dollar amount of the refund. You have three options for checking on your refund:

Go to IRS.gov, and click on "Where’s My Refund" Call 1-800-829-4477 24 hours a day, seven days a week for automated refund information Call 1-800-829-1954 during the hours shown in your tax form instructions

What Records Should I Keep?

Normally, tax records should be kept for three years, but some documents — such as records relating to a home purchase or sale, stock transactions, IRAs and business or rental property — should be kept longer.

You should keep copies of tax returns you have filed and the tax forms package as part of your records. They may be helpful in amending already filed returns or preparing future returns.

Change of Address

If you move after you filed your return, you should send Form 8822, Change of Address to the Internal Revenue Service. If you are expecting a refund through the mail, you should also file a change of address with the U.S. Postal Service.

What If I Made a Mistake?

Errors may delay your refund or result in notices being sent to you. If you discover an error on your return, you can correct your return by filing an amended return using Form 1040X, Amended U.S. Individual Income Tax Return.

Visit IRS.gov for more information on refunds, recordkeeping, address changes and amended returns.

Small Business Health Care Tax Credits

With the tax filing deadline close at hand, the IRS offers 10 tips for those still working on their tax returns:

1.        File Electronically Consider filing electronically instead of using paper tax forms. If you file electronically and choose to have your tax refund deposited directly into your bank account, you will have your money in as few as 10 days. Virtually everyone can prepare a return and electronically file it for free.   For the second year, the IRS and its partners are offering the option of Free File Fillable Forms.   Another option is Traditional Free File.  About 98 million taxpayers – 70 percent of all taxpayers – are eligible for the IRS Traditional Free File.

2.        Check the Identification Numbers When filing a paper return carefully check the identification numbers — usually Social Security numbers — for each person listed. This includes you, your spouse, dependents and persons listed in relation to claims for the Child and Dependent Care Credit or Earned Income Tax Credit. Missing, incorrect or illegible Social Security numbers can delay or reduce a tax refund.

3.        Double-Check Your Figures If you are filing a paper return, you should double-check that you have correctly figured the refund or balance due.

4.        Check the Tax Tables If you are filing using the Free File Fillable Forms or a paper return you should double-check that you have used the right figure from the tax table.

5.        Sign your form You must sign and date your return. Both spouses must sign a joint return, even if only one had income. Anyone paid to prepare a return must also sign it.

6.        Mailing Your Return Use the coded envelope included with your tax package to mail your return. If you did not receive an envelope, check the section called "Where Do You File?" in the tax instruction booklet.

7.        Mailing a Payment People sending a payment should make the check out to “United States Treasury” and should enclose it with, but not attach it to the tax return or the Form 1040-V, Payment Voucher, if used. The check should include the Social Security number of the person listed first on the return, daytime phone number, the tax year and the type of form filed.

8.        Electronic Payments Electronic payment options are convenient, safe and secure methods for paying taxes. You can authorize an electronic funds withdrawal, or use a credit or a debit card. For more information on electronic payment options, visit IRS.gov.

9.        Extension to File By the April due date, you should either file a return or request an extension of time to file. Remember, the extension of time to file is not an extension of time to pay.

10.     IRS.gov Forms and publications and helpful information on a variety of tax subjects are available around the clock at IRS.gov. You can also check the status of your refund after you file your return by clicking on Where’s My Refund?

Top Ten Things You Need to Know About Making Federal Tax Payments  

Will you be making a payment with your federal tax return this year? If so, here are 10 important things the IRS wants you to know about making tax payments correctly.

1.        Never send cash!

2.        If you file electronically, you can file and pay in a single step by authorizing an electronic funds withdrawal via tax preparation software or a tax professional.

3.        Whether you file a paper return or electronically, you can pay by phone or online using a credit or debit card.

4.        Electronic payment options provide an alternative to paying taxes or user fees by check or money order. You can make payments 24 hours a day, seven days a week. Visit IRS.gov and search e-pay, or refer to Publication 3611, e-File Electronic Payments for more details.

5.        If you itemize, you may be able to deduct the convenience fee charged for paying individual income taxes with a credit or debit card as a miscellaneous itemized deduction on Form 1040, Schedule A, Itemized Deductions. The deduction is subject to the 2 percent limit.

6.        Enclose your payment with your return but do not staple it to the form.

7.        If you pay by check or money order, make sure it is payable to the “United States Treasury.”

8.        Always provide your correct name, address, Social Security number listed first on the tax form, daytime telephone number, tax year and form number on the front of your check or money order.

9.        Complete and include Form 1040-V, Payment Voucher, when sending your payment to the IRS. This will help the IRS process your payment accurately and efficiently.

10.     For more information, call 800-829-4477 for TeleTax Topic 158, Ensuring Proper Credit of Payments. You can also find out more in Publication 17, Your Federal Income Tax and Form 1040-V, both available at IRS.gov.

IRS Tax Tip 2010-60

When preparing to file your federal tax return, don’t forget your contributions to charitable organizations. If you made qualified donations last year, you may be able to take a tax deduction if you itemize on IRS Form 1040, Schedule A.

The IRS has put together the following 10 tips to help ensure your contributions pay off on your tax return.

For more information on charitable contributions, refer to Form 8283 and its instructions, as well as Publication 526, Charitable Contributions. For information on determining value, refer to Publication 561, Determining the Value of Donated Property. These forms and publications are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Links:

• Search for Charities or download Publication 78, Cumulative List of Organizations
• Publication 526, Charitable Contributions (PDF 178K)
• Publication 561, Determining the Value of Donated Property (PDF 101K)
• Form 1040, U.S. Individual Income Tax Return (PDF 176K)
• Schedule A, Itemized Deductions (PDF)
• Form 8283, Noncash Charitable Contributions (PDF)
• Instructions for Form 8283, Noncash Charitable Contributions (PDF)

Yes, insurers are price-gouging small companies. Bills in the House and Senate would help them fight back

By Joshua Kendall

Acme Illustration

Entrepreneurs have long groused that their health plans are charging them premiums far in excess of the amount required to provide care for their employees. Now a Senate Commerce Committee analysis of just how much insurers spend on health care offers some support for that complaint. In 2008, five large insurers—WellPoint (WLP), UnitedHealth (UNH), Aetna (AET), Humana (HUM), and Coventry Health Care (CVH)—spent just 80% of the premiums they collected from small companies on actual health care. (The rest goes to items such as marketing, administration, and profits.) For big-company clients, the five paid out slightly more—84%. Len Nichols, director of the health policy program at the New America Foundation, says that for companies with fewer than 10 employees, that number—known in the industry as the medical-loss ratio, or MLR—is often as little as 75%. Says Wendell Potter, the former director of media relations for Cigna (CI) who alerted the Senate to this issue in June testimony: "These data prove that America's small businesses have repeatedly been and continue to be the biggest victims of price-gouging by insurance companies."

The health-care legislation passed by the House of Representatives requires minimum MLRs of 85%, and represents the first effort on the part of the federal government to address this problem. The Senate version of the bill requires MLRs of 80% in the large- and small-company markets, and an MLR of 75% for individual policies. Insurers that don't meet this target will be required to pay rebates to their customers. "Establishing a medical-loss ratio will ensure that the dollars small businesses spend on covering their employees will actually go to provide medical care and not CEO pay or insurance company profits," says Representative George Miller (D-Calif.), chairman of the House Education & Labor Committee. Senator Jay Rockefeller (D-W. Va.), chairman of the Senate Commerce Committee, says he was prepared to bring up an MLR amendment on the Senate floor should the Senate bill have omit tedit. Says Rockefeller: "It's time for health insurance companies to spend more of the money they collect from premiums on actual medical care for people, not just marketing campaigns or purging tactics to appease Wall Street."

UNINTENDED EFFECTS?

Although regulators can ask tough questions, they ultimately depend on the insurers to determine their own MLRs. That's why the House bill also calls for the establishment of a uniform definition of medical-loss ratios and a standard methodology with which to calculate it. For its part, the industry challenges the very notion that MLRs contain any information that is useful. "The real problem is the underlying cost of medical care, not the rise in premiums," says Robert Zirkelbach, the spokesman for America's Health Insurance Plans, an industry trade group.

Some policy analysts worry that regulating MLRs might lead to some unintended consequences. To keep their MLRss at 85%, insurers might, for example, be inclined to reduce investments in areas such as information technology. They can also raise their MLRs just by paying doctors more. "MLRs are an imperfect instrument," says Nichols, who calls the House plank "better than nothing." Just because a health insurer meets its MLR minimum, he notes, does not necessarily mean that it is providing good outcomes at an affordable price.

The proposed federal legislation builds on the states' experience trying to regulate health care on their own. "I am not aware of any other way to regulate health insurance," says Eric Dinallo, former Superintendent of Insurance for New York State and now a candidate for State Attorney General, of MLRs. He considers an MLR floor an essential tool because it can ensure that insurers do what they're supposed to: pass back a large percentage of premiums to policyholders. About a dozen states have already enacted MLR floors for small businesses, choosing minimums that range from 60% in Oklahoma to 82% in Minnesota, with 75% prevailing in Maine, Maryland, South Dakota, and New York. In 2008, New Jersey boosted its MLR requirement to 80% from 75%. Over the past couple of years a half-dozen more states have drafted bills that would either set or raise MLR minimums but have failed to pass them. Sometimes it gets ugly: This spring, Maine tried to increase its MLR to 80%, but failed. "The MLR plank was a flash point because legislators were concerned that insurers would all decide to leave the state," says Sharon Treat, a Democratic state representative and the House chair of the Joint Standing Committee on Insurance & Financial Services. Unlike larger states with bigger markets, Maine has little leverage with insurers, says Treat.

The industry's vigorous opposition is not surprising. In 2008, Aetna had to return $6.6 million to 1,000 small companies in Maine that were found to have been overcharged from 2004 to 2007. Joel Allumbaugh, who heads National Worksite Benefit Group, a benefits consulting firm in Hallowell, Me., received a check for $1,800, roughly the same as the monthly premium for his three-person company. Says Allumbaugh: "I was pleasantly surprised. I wasn't expecting it." In 2008 a total of $50 million in rebates went out to 37,000 small employers in New York because the Oxford Health Plans' (UNH) MLR dipped to 70.58%, well below the state's minimum of 75%, in 2006. If the federal government does manage to bring similar legislation to the rest of the country, more small companies may well get a dose of relief.

NFIB South Carolina News and Information

According to the 2008 Small Business Problems & Priorities survey, four of the top 10 challenges facing small businesses are tax related. 

We fight for small business tax relief at the state and federal levels, because we know that a complex tax code and burdensome taxes are among the biggest challenges facing small business owners.

One way to stay on top of the game is to preorder your 2010 Tax Calendar for Small Businesses and Self-Employed, which will be available in either English and Spanish. 

This 12-month wall calendar is filled with useful information on general business taxes, IRS and SSA customer assistance, electronic filing and paying options, retirement plans, business publications and forms, and common tax filing dates.

Each page highlights different tax issues and tips that may be relevant to small business owners with room on each month to add notes, state tax dates, or business appointments.

The English-language version will be shipped on Nov. 1; the Spanish-language version, on Dec. 1. Up to five copies can be ordered free of charge. 

Getting by with a skeleton staff

Small business staffs are still shrinking, a trend likely to continue even as the economy starts to thaw.

NEW YORK (CNNMoney.com) -- Small business owners are still whittling away at their payroll, but the deluge of pink slips on Main Street is slowing down.

Businesses with fewer than 50 employees cut another 75,000 workers in October, according to estimates released Wednesday from payroll processor ADP. October's job losses marked the smallest number of job cuts in a single month since July 2008.

But don't expect hiring any time soon. "Losses are likely to continue for at least a few more months, but at a diminishing rate," Joel Prakken, chairman of ADP (ADP, Fortune 500) research partner Macroeconomic Advisers, said in a written report.

A telephone survey of 830 small business owners conducted by management consulting firm George S. May International from Oct. 28-30 found that 74% of the owners polled do not plan to increase their staff headcount in the next 90 days.

"The term 'help wanted' has become obsolete," Paul Rauseo, managing director of the George S. May International Company, said in a statement accompanying the survey's release. "Small business owners feel they do not have the need for more employees and, in fact, see sizable portions of their staff as an unnecessary expense."

Small companies have been hit especially hard by a recession double whammy: Consumers and businesses have pared back their spending, while banks have tightened their lending standards. After three years of growth, sales at small companies -- those with annual revenue of less than $10 million -- have declined by nearly 4% this year, according to a recent analysis by Sageworks, which tracks financial data at privately held companies.

That's leaving business owners with little choice but to cut back. President Obama acknowledged the problem in a speech last week about his administration's economic recovery initiatives. "We know how tough times have been for small businesses," he said. "Maybe you've had to forgo raises. Maybe you've had to do the unthinkable and lay off friends or family."

Nearly two years of recession have left businesses stripped to the bone. ADP estimates that 2.6 million jobs at small companies have disappeared since early 2008.

"They are trying to function with the minimal number of employees," said Elizabeth Klimback, executive director of the North Texas Small Business Development Center, which counsels local entrepreneurs in Dallas. "You have fewer people doing more work, and it puts a strain on the small business."

That challenge is forcing owners to come up with new approaches to filling the gaps. For Jennifer Hason, owner of Beach Lake Bread in Honesdale, Pa., free labor from participants in a job training program has helped her bakery keep payroll costs down.

Beach Lake traditionally sold to convenience stores, coffee shops and high-end restaurants. But last fall, sales started plunging. "We saw drastic pullbacks," Hason said. "The coffee shops, instead of taking our muffins, started baking their own muffins."

Hason revamped her business model to include prepared foods like soups and bread spreads. That helped her company increase sales to its remaining clients, but it also increased the bakery's workload. Hason knew she couldn't keep up without extra hands in the kitchen: "That was when we started taking on Job Corps kids."

Job Corps is a federally funded program for students age 16 to 24 years old that teaches life and vocational skills. Participants work in area businesses, picking up trade skills and training on how to hold down a job. The target population for Hason's local Job Corps center is inner city youth from New York City, especially Brooklyn and the Bronx.

One of Hason's first Job Corps students stepped in to help with the new prepared food production. "She trained up in that under her schooling, so that when we finally hired her, she was fully functional and was able to run that division," Hason said.

Job Corps students work on location for six weeks unpaid, but if there is the possibility of a full-time job coming out of the training, they can stay on longer. Hason took on her first two students in May, who worked in the bakery from 9 am to 3:30 pm each day. Both developed into excellent workers, and Hason has hired them on as full-time employees, taking her staff up to 14 employees.

"They are getting ready to send me a new crop of hands for training," Hason said. "It is my absolute dream. I get to teach and I get to have assistance -- essentially financial assistance -- from this program. It is unbelievable."

Klimback, of the Dallas small business development center, said she's hearing more stories of business owners finding innovative ways to adapt to their staff shrinkage. After a fairly grim year, she's sensing a changing attitude among the business owners her center serves.

"The optimism is there," she said. 

Starved for Financing: Is There Relief in Sight for U.S. Small Businesses?

In mid-October, President Obama moved to raise the amount of credit extended to small businesses. If Congress approves his plan, the measures would enable community banks to borrow at low rates from the Treasury Department's Troubled Asset Relief Program (TARP). It would also raise loan caps on some Small Business Administration (SBA) programs. To qualify, the banks would have to show how they would increase lending to small enterprises.

The relief could not come a moment too soon. The job-creation engine known as small business has been slammed, not only because of falling demand but also because the normal flow of financing has slowed to a trickle. Small enterprises have created two-thirds of all new jobs since 1994 and they employ more than half of all private-sector employees. (The SBA's definition of a small enterprise is "an independent business having fewer than 500 employees.") In September, for the second straight month, they laid off more workers than mid-sized or large employers. Prior to August, small businesses had never been the biggest source of layoffs, according to employee payment and data firm ADP, which began tracking the figures in 2001. Meanwhile, the U.S. unemployment rate hit 9.8% in September, and many analysts expect unemployment to hit 10% or more before topping out.

Last month, a survey by the National Federation of Independent Business (NFIB) found that expansion plans for small enterprises were at a 35-year low. That's no surprise, given that their usual sources of borrowing -- banks, government-secured financing, venture capitalists and credit cards -- are far more limited than a couple of years ago. The good news is that some tentative signs of improvement are turning up. Interviews with Wharton experts, banking officials and spokespeople from small business development organizations suggest that this patchwork of finance sources, all battered by the current financial crisis, is inching back towards pre-recession lending levels.

Wharton lecturer and small business expert Robert Chalfin, for example, notes that "community banks are still lending. They have been active. They're in business to support their communities."  According to the Bureau of Labor Statistics and the American Bankers Association, community bank loans to small businesses are only down slightly in 2009 to about $680 billion outstanding, from about $700 billion in 2007. Now, Chalfin says, even larger banks are becoming more active, if only marginally. "I'm getting many calls from the large national banks, saying, 'If you've got clients, we would like to talk with them about lending them money' -- but they are not as quick to say 'yes.'"

According to the SBA, volume for its loans is 60% or more above the exceptionally low levels reached during the January-February period this year, in part a result of easier SBA loan terms. Earlier this year, the SBA had come under fire for its low loan volume at a time when small businesses were facing enormous financial pressure, and some critics say that loans still tend to be available only for the most stable small businesses. But now, the Obama administration's proposal could open the tap to 70,000 additional SBA loans over the next year. The fragile economic recovery, meanwhile, is helping banks to improve their balance sheets and open their purse strings a bit more.

Among other positive signals: An October survey by the NFIB found the lending environment had improved slightly since May, and a Greenwich Associates survey found that earlier in the year, eight of the top 10 U.S. banks were more willing to lend in the second quarter of 2009 than in the first.

Struggling, but Viable

One company's experience shows how a small business escaped the threat of insolvency with a timely liquidity injection. Ashland, Va.-based Daystar Desserts nearly went under because it could not get a loan. Toward the end of 2008, the company was obligated to buy a building it had been renting for five years from a company it acquired in 2003, according to CEO John Fernandez.

The building was valued at $2.4 million. Says Fernandez: "We had a good scenario. We'd been paying rent. We could show we had the ability to pay." However, the real estate market was plummeting and banks weren't lending -- not even to fundamentally healthy companies such as Fernandez's. With 54 employees and about $15 million in annual revenues, Daystar was growing. And while its "financials weren't perfect, they were in good shape," Fernandez says. Still, three banks turned the company down. That transformed a seemingly viable situation into a life-or-death struggle for the business. The problem, he says, was the banks and the real estate market, not the company's balance sheet.

Help came in the form of an SBA 504 loan under America's Recovery Capital (ARC), the SBA's new program for small companies that was already in place before President Obama's announcement. According to Jonathan Swain, the SBA's assistant administrator for communications, "ARC is one small program, strictly for debt repayment, not for working capital -- a one-time temporary program that Congress asked the SBA to create under the Recovery Act." Businesses can apply for these loans to pay off debt or to reorganize. "It's really a bridge loan," says Swain. "This is a unique program targeted to a specific kind of business owner --struggling, but viable."

Daystar Desserts secured its SBA-backed loan with 6% interest, saving an estimated $150,000 compared with what commercial banks would have charged. Additionally, Fernandez says, "We saved $9,000 in upfront fees." SBA 504 and 7(a) small business loans have been around for years (504 for commercial real estate and equipment; 7(a) for general purposes). But this year, under ARC, Congress asked the SBA to change the requirements by eliminating the upfront fee altogether and increasing the amount of the loan guaranteed from an average of 75% to around 90%. "Lifting the fee makes it easier for banks to lend," says Hayley Matz, an SBA spokesperson. Under the program, the average 504 loan is around $200,000. Now, President Obama wants to expand the 7(a) loan pool by tapping TARP money.

Swain says that ARC loans represent about a quarter of all SBA programs. There have been 2,700 loans so far under ARC, with plans for 10,000 loans altogether after a ramp-up period. SBA-backed loans are made available through banks. As of September, the total volume of 504 and 7(a) loans approved was $1.92 billion, up from $1.09 billion in April. Pre-ARC, in August 2007, both loan groups totaled $1.94 billion -- close to where it is today.

According to Therese Flaherty, director of the Wharton Small Business Development Center, banks won't generally give a company an SBA loan if they are comfortable doing it from their own funds. "SBA loans mean more paperwork for the banks." The SBA comes in, she says, "when a bank isn't quite ready to do the loan."

For Daystar Desserts, the process was "paperwork intensive," recalls Fernandez. "But a 504 loan is administered through development companies that partner with the SBA.... The process was not simple. But by all means it was doable."

Alternate Financing Sources

What are some other sources of financing for small businesses that might not qualify for an ARC loan through the SBA? According to Wharton's Flaherty, "One of the obvious opportunities is to look at micro-loan funds that typically lend up to $30,000. Micro-loan groups look beyond your personal credit, with more depth into your business." And many offer technical assistance to business owners to help them manage their debt and pay off their loans.

The SBA launched a microloan program in 1991 to provide loans of up to $35,000 to small businesses. The SBA makes funds available to nonprofit community-based lenders such as community development financial institutions, which make loans to local eligible borrowers with a term of no more than six years. Additionally, a handful of regional microloan programs exist across the U.S. For example, beer maker Samuel Adams recently partnered with micro-lender ACCÍON USA to help food, beverage and hospitality entrepreneurs in New England with loans ranging from $500 to $25,000 to expand or start a business, purchase inventory or equipment, or pay licensing fees.

Another source available to some businesses: angel investors. "Angels work with small startups with a great potential to return the angel's investment," Flaherty notes. "An angel often takes equity. It's very private. You have to think about whom you are taking on as a business partner. At times, you can find a private investor who really cares about your business."

Though not easy to come by, angels might be a better source today than venture capital, where activity is down significantly, according to VentureSource, the Dow Jones database that tracks venture-backed companies in every industry. Offering some proof that recovery is tentative, an October 17 VentureSource report said that, following an uptick in the second quarter, investments in U.S. venture-backed companies stalled in Q3, "putting 2009 on track to be the worst investment year since 2003." Venture capitalists invested $5.1 billion in 616 deals in the third quarter of 2009, down 6% from the $5.4 billion placed into 595 deals during the second quarter and down 38% from the $8.2 billion invested in 663 deals during the third quarter of 2008.

Chalfin says there are other viable sources for small business financing, including credit cards, one of the largest lenders to small business. "The disadvantage is that the interest rates are very high. But the advantage is you can borrow. I've had people who needed to finance their business, generally for a short period, and via credit cards they obtained liquidity for 30, 60 or 90 days." Yet in recent months credit card companies have been lowering credit limits and increasing interest rates. According to the Pew Safe Credit Cards Project, the median lowest advertised credit card rate rose to 11.99% in July from 9.99% in December.

Community banks provided more than half of all loans to small business this year, and presumably they will be more active if the President's latest proposal involving low-interest TARP funds gets approved. (For that program, "community banks" are defined as having less than $1 billion in assets). Community banks usually require a personal guarantee and ongoing monitoring, Chalfin notes. "They'll insist on looking at metrics of your fiscal soundness. They may have pre-payment penalties or charge points up front. They will usually insist on receiving copies of your financial statement and tax returns every year. And they'll want collateral." On the other hand, there are some clear advantages to working with community lenders. "They can provide more than money," Chalfin adds. "They can provide contacts. They can introduce you to people who may have industry expertise."

In general, he says, lenders are much more conservative and more cautious. "They want the business owners to contribute equity into the deal. They're doing more reference checking, asking for more collateral, such as mortgages."

Certain sectors may have an easier time securing loans, too. According to Wharton management professor Raffi Amit, online businesses featuring social networking and other Web 2.0 platforms are likely to be able to raise money faster and on better terms than other sectors. Online organizations will have an easier time "because in principle, they require much less cash so you will be cash flow neutral or positive after investing less capital," says Amit. "Just $200,000 or so can get you cash positive." Another sector with a better track record for securing loans is clean energy, primarily because the government is making it attractive by providing incentives in order to reduce emissions and energy dependency on other countries. "That's a priority for this administration and investors will understand that."

VentureSource data underscores Amit's assessment: "For the first time, Web 2.0 investments surpassed the software sector," the company said in a recent statement. "Although the IT recovery has been sluggish, this quarter's investments in the web-heavy information services sector are nearly double the investments made in the first quarter of this year."

As always, however, "The best source of money is not to need it," says Flaherty. She knows of companies that are looking at their business and finding ways to avoid having to take out loans. "It's a good time to review a business's marketing and advertising costs," she says. "Are they advertising in English in places where no one speaks English? Have they adjusted for Internet and print ads and PR? We see people doing this who weren't doing this before." And a good number of them, she adds, are rethinking whether or not they even need a loan right now.

Flaherty's thinking is confirmed by the American Express survey of small business owners. In August, 71% of respondents claimed that over the next six months, they would manage their businesses by cutting expenses -- up from 30% in March 2003 and 48% September of 2007.

"I'm optimistic," says Flaherty. "I'm seeing a great many small businesses that are doing well, that adjusted months ago and are starting to see real increases in sales and a recovery that's making a difference to them."

Are Banks Lending to Qualified Borrowers, or Not?

Thank you for your thoughtful and thought-provoking responses to my last post. I believe that we managed to shed some light on the various confusions about the small-business credit squeeze. But not enough. Your comments have raised some interesting questions that I believe need to be answered. I would like — in an admittedly nonscientific manner — to try to figure out what is really going on out there. If not us, who? If not now, when?

Here’s what I want to know: Are qualified small businesses getting bank loans? If not, why not? Is it because they are too small (less than $5 million sales) to get a bank’s attention? We should all want to know the answers, because the banks have our money. Our government officials need to know what is going on.

So here’s my request: Please share your experiences getting a small-business loan in the last year — but only if you are a qualified borrower. Who’s qualified? Here are the criteria we seemed to agree on in the last post (for now, let��s try to set aside discussion of whether these are the right criteria):

1. Good credit rating for both the company and its owner. That means a FICO score of 720 or more.
2. A debt-to-equity ratio of 2 to 1.
3. A debt-coverage ratio of 1.25.
4. At least two years in business.
5. A history of profitability.

What has your experience been? Please start your response with “I meet the criteria …” so that we can keep this focused on the question at hand — whether “qualified” small-business borrowers are getting loans. (Actually, if you don’t meet the criteria but got the loan anyway, that would be worth knowing, too.) Remember, I know this is unscientific. I am not trying to win a Nobel Peace Prize. But this has the potential to be enlightening. Let’s stand up and be heard!

I’ll start:

Links:

Search for Charities or download Publication 78, Cumulative List of Organizations

Publication 526, Charitable Contributions (PDF 178K)

Publication 561, Determining the Value of Donated Property (PDF 101K)

Form 1040, U.S. Individual Income Tax Return (PDF 176K)

Schedule A, Itemized Deductions (PDF 116K)

Form 8283, Noncash Charitable Contributions (PDF)

Instructions for Form 8283, Noncash Charitable Contributions (PDF)

Having trouble paying your monthly credit card bills? Currently in default? Don't fret — solutions are available to help consumers in this situation.

Most credit card companies have special short-term payment plans, typically lasting three to six months, allowing customers to catch up. During this period, penalties are waived and monthly payments are decreased as incentive to repay defaulted loans. Credit card companies employ this practice to avoid using a collection agency or paying legal fees.

Utilizing this service is as easy as calling your credit card company and asking for available options.

To avoid this situation again, remember to only use your credit card when you can afford to pay off the balance in full each month.

Read more on paying off credit card debt.

Enough about spending, Terri, we want to know how much you save.

That's the question asked by a number of readers, such as Bud Wonsiewicz: "What happened to your net worth in 2006 -- what you own minus what you owe. Helping readers focus on this would cut through the clutter of your spending on TVs, decks, etc."

OK, fair enough. Here goes.

Over the last 15 years I've grown comfortable with my family's saving habits. Since we were married in 1994, my husband Gerry and I have built up emergency savings equal to slightly more than the requisite three months' salary, which we invest in taxable CDs and mutual funds; we both save each pay period for retirement, which is supplemented by contributions from our respective employers; and each month we put money into a 529 college-savings account for our seven-year-old son Gerald.

Pay down debt, or build up retirement savings? Having trouble setting your financial priorities? This article can help.

That said, we've gotten out of my husband's habit of saving in advance for big-ticket items and paying for them in cash. For big purchases and projects -- such as our backyard home-renovation project and Gerry's big-screen TV -- we tap a $100,000 home-equity line of credit. (We also use credit cards, but the balances are normally paid at the end of every month.)

To keep debts from getting out of control, we make one major purchase at a time and don't make another using the account until the bulk of the last purchase has been paid off. We also make monthly payments that exceed the minimum payments due, to pay the debt off quickly and keep our finance charges to a minimum. Occasionally, we're able to slash outstanding debts quickly using one-time cash infusions, such as year-end bonuses, tax refunds and a nice severance package Gerry received after being laid off last summer.

Gerry's dad believes we've become spendthrifts. He's a Depression-era baby who encourages us to save every dime and live as frugally as we can. Although he appreciates the comfort our home-remodeling projects have given us, he thinks we could have and should have spent far less. He also urged Gerry to downgrade the other large expense in our lives -- our boat -- back when Gerry was having second thoughts about keeping it. My own parents love what we've done with the place, and they appreciate the joy we get out of the boat, but I'm sure they feel the same way my father-in-law does. As our parents face retirement, and the escalating costs for health care, they worry we're overdoing it.

Gerry and I have a different view. Gerry started saving for retirement earlier than most, and has retirement-savings and pension plans in his current job. I started saving much later than Gerry, but have made retirement savings a priority and over the last decade I've closed the gap in our savings. We're comfortable now that our retirement savings-goals are on target, and so we feel less anxiety about spending a little more of our disposable income to enjoy our lives now. Were Gerry and I only a few years into saving, we'd no doubt be funneling most of our disposable income into retirement savings.

Still, as our incomes have risen over the years, our spending has increased in step. I wondered: Has our line of credit clouded our judgment about what we want versus what we can afford? Are we spending more than we earn? If so, we're not alone: Personal savings as a percentage of personal income was near a record low -1% in November, compared with -0.7% a month earlier, according to the Bureau of Economic Analysis. (Compare that to an average personal savings rate of 9% in the 1980s!)

I decided to crunch the numbers to see whether Gerry and I need to curtail our spending. Using my Quicken personal-finance software, I walked through what we spend and save during a typical month and compared it to the national average. Since the most-recent government stats on the national personal savings rate are for November, I'll use that month for comparison. (November usually isn't a typical month for our finances because we tend to start Christmas shopping in the week or two leading up to Thanksgiving Day. But freakishly warm weather in the Northeast left us so out of the holiday spirit that we didn't get around to shopping until mid-December.)

I used the BEA's table of "personal income and its disposition" to start my calculations. Top of the list: our gross personal income. Our income in November totaled $11,222.11. Of that amount, $737.28 came from Gerry's overtime pay and a stipend I get for monthly television appearances. It also includes $71.23 in interest and dividend income from our taxable investments (after capital-gains taxes).

Next I subtract the $2,787.24 Gerry and I contributed to federal, state, Social Security, Medicare and disability-insurance taxes from our personal income in November. (In most months that total is actually $3,279.72, boosted by the additional $492.48 in taxes I'd normally pay each month before hitting the Social Security wage cap of $94,200. In 2007, that threshold is $97,500.

Our total disposable income for the month so far: $8,434.87.

Now come personal outlays -- that's government-speak for living expenses. We'll start with most people's biggest expense: their homes. We pay $1,000 a month ($805, plus a prepayment of $195) for our primary mortgage. We owed $650 on our home-equity line-of-credit payment in November, but we paid $1,500 to get the debt down more quickly. Our property taxes came to $525 for the month, and homeowners insurance was $52.50. So home-related costs came to $3,077.50.

That brings our disposable income down to $5,357.37, or a little less than half our total gross income, and we haven't even started "spending."

We don't have auto loans and this month we didn't make any large purchases of durable goods -- defined as items with a life expectancy of three years or more. Instead, our largest expenditures went to food, commuting and charitable giving. According to Quicken, we spent $841.53 on groceries, with Thanksgiving entertaining boosting our typical cost at the checkout, probably by $100 to $150. We spent an additional $590.18 dining out (including actual dinners out, buying lunch at work and Gerald's lunch money). So food ate up $1,431.71 of our disposable income in November, leaving our disposable income at $3,925.66.

Commuting costs were a big expense, too: $848.71 for gas and ferry fare. Charity was a part of our budget as well: We gave $750 to our church and to an autism-research charity walk to benefit our niece Rylina. (That was higher than usual -- normally we give $400 to $450 a month.) Protecting our assets also came at a price: $412.85 for life, auto and boat insurance. We also paid $275 for Gerald's after-school program. Total: $2,286.56.

That brings our disposable income down to $1,639.10.

Utilities -- landline and cell phones, cable TV with premium package, Internet service, gas and electricity -- totaled $454.10. (Note: That's unusually low, because we're paying an introductory price for our "three-play" phone-TV-Internet service and because the weather was unseasonably warm. $750 would be a more-typical outlay here.) Miscellaneous expenses, including medical expenses, dry-cleaning costs, postage, union dues and gifts added $212.75 more. Total: $666.85.

All told, we paid $7,662.62 in November to keep Cullen Inc. running. Subtract that from our total disposable income of $8,434.87, and we're left with our personal savings for the month: $972.25, or a personal savings rate (savings as a percentage of disposable income) of nearly 12%.

An important note: For whatever reason, the government doesn't consider funds deposited in tax-advantaged flexible-spending accounts in its formula for calculating the personal savings rate. We contribute $5,000 a year ($192.30 a month) pre-tax to a dependent-care flexible spending account, an additional $500 a year ($41.60 a month) pre-tax to a medical spending account, and $1,100 ($91.60 a month) pre-tax to a commuter-spending account. Paying for these expenses with pre-tax dollars shaves about $1,750 off our annual tax bill.

The government formula also doesn't consider funds deposited in tax-advantaged retirement savings accounts, such as my 401(k) plan. I contribute 10% of my salary to a 401(k) plan, 2% of which is matched by my employer, in an aggressive portfolio made up mainly of U.S. and international stock mutual funds. (Bonds make up about 5% of my portfolio.)

Our personal savings rate would have been higher if I followed the government's formula for calculating personal income and included contributions made by Gerry's employer to his pension and retirement plans. I chose to break that income out separately because Gerry's monthly work hours fluctuate -- some months he works overtime most weekends, others he has no overtime at all. (Including income from Gerry's hectic November work schedule would have made it look like we save a lot more than we typically save.)

As part of Gerry's retirement-savings plan, his employer now pays $4.65 an hour to his trade union's annuity. (That will rise to $5.25 an hour next month, under his contract.) Depending on how much overtime he works, that rate of pay can be higher. His employer also contributes $2.80 an hour to his pension plan.

My 401(k) portfolio is light on bonds because Gerry's annuity is invested primarily in very conservative stock funds and high-grade corporate and government bonds. Combined, we've accumulated about $490,000 in retirement savings, not including Gerry's pension plan. (We don't include Gerry's pension in our retirement planning because if recent trends are any sign, there's a chance those funds won't be there for us when we retire.)

In addition to retirement saving, Gerry and I sock away $300 a month in New York state's 529 college-savings account for our son Gerald, invested in an aggressive life-cycle portfolio, with an aim toward paying about 75% of his total college costs. And, as I said, over the last decade we've built up about $20,000 in savings to provide a financial cushion in the event of a medical, layoff or other type of emergency.

So are we saving enough? We think so -- we've done our retirement planning and are satisfied that we're on target to be out of the working force full-time by age 55.

But after doing the math, I'm thinking we could at least try and save a little more. I'm not maxing out my 401(k) account, so there's a good place to start: This year I'll boost my savings by an additional 1%, with an eye toward doing so each year until I've reached the maximum contribution allowed (that's $15,500 for 2007, or $20,500 if you're age 50 or older). Gerry's less worried about saving right now and more focused on paying down our home-equity line of credit -- he's earmarked his holiday bonus toward that end.

Although financial forecasts do not guarantee success, a forecast does signal for immediate attention to problem areas. Responding to problems quickly increases the business’ chances for long-term success.

A projection is different from a forecast. A financial projection, unlike a forecast, assumes the business will undertake some major change. Generally, financial projections should be prepared for start-up businesses as well as existing businesses that are contemplating a major investment, such as the acquisition of another company, the development of a new product line, a major equipment purchase, or some other significant capital expenditure.

Financial projections enable management to make smart business decisions before expending company resources or incurring debt. Given certain assumptions, management can assess the risk of debt payback for a significant capital expenditure. For example, assume a business is considering an acquisition and the financial projection indicates the debt payment will be tight. With this information, the owners can renegotiate the purchase price, renegotiate the payment terms, or reconsider the purchase altogether.

A comprehensive financial forecast or projection includes the following documents, broken out on a monthly basis:

• Forecasted or projected statement of operations;
• Forecasted or projected statement of cash flows;
• Forecasted or projected balance sheet; and
• Statement of significant assumptions.

Some companies prepare only a forecasted statement of income, erroneously believing that this will be adequate to provide them with the information they need to be successful. Cash flow forecasts are also essential. Although actual monthly operations might proceed in line with an annual income forecast, a negative cash flow might hamper an company’s ability to continue with its plans. Possible reasons for a cash flow crunch include the following:

• Poor billing of work in progress;
• Inadequate collection efforts; or
• Insufficient lines of credit.

If a company prepares a comprehensive financial forecast, such problems will be immediately apparent and can be addressed. Unaddressed problems can result in a company leaving money on the table and risking its financial solvency. In addition, upon reviewing the forecast, management would have learned important information about the company’s operations and gained confidence that its operations were under control.

Nonprofit organizations also need financial forecasts and projections to ensure their success and continued existence. Because nonprofits typically operate under a tight budget, they sometimes hesitate to spend the necessary dollars for the preparation of a financial forecast. Because of their very thin equity base, however, a grasp and understanding of an organization’s complete financial position is paramount. The board of directors of a nonprofit organization has a fiduciary obligation to exercise due diligence. Lack of a financial forecast can call into question the board’s judgment and ultimately lead to an organization’s downfall.

Financial forecasts and projections are also critical for banks’ loan officers. Bankers generally insist on detailed projections before approving any start-up business or business acquisition loan. Bankers should also require financial forecasts from existing clients. If a business’ profits begin to erode, bankers will typically review the historical financial statements and discuss possible reasons with the business owner. Historical information, however, does not provide the banker with information on the future solvency of the business. The financial forecast is what alerts the banker to critical issues that need addressing. The banker can then make an informed decision about the banking relationship.

Edward F. Saroney III, CPA/ABV, CVA, is a principal with Fagliarone Group CPAs, Syracuse, N.Y., specializing in the area of business valuations and business forecasts/projections.

If you want to drive your business to the next level, there are in fact a few tried-and-true lessons you can't afford to ignore.

Some people will tell you failure starts with a lack of good marketing. And that may be partly true. But it really starts with a vision of the role your business plays in your life. For many, their accounting practice or career is simply a way of making a living. For others, their business represents an asset to be developed, a legacy to be passed on to another generation, or, in other words, something of lasting value — value that can survive beyond the day we decide to retire or move on.

So take this to heart:

Mistake No. 1: Working IN your business instead of ON your business. If you're managing people instead of building systems, go re-read the classic The E-Myth by Michael Gerber, get Client at the Core by August Aquila and Bruce Marcus, or grab a copy of CPA Bill Reeb's new book, Securing the Future: Building a Succession Plan for Your Firm.

Only 50 percent to 60 percent of your time should be spent on income-producing activities, say the experts. About 20 percent to 30 percent of your time should be spent on marketing activities. And the other 20 percent should be spent on everything else.

Mistake No. 2: Failing to implement systems. In any business, you must automate and optimize every possible area. Use technology to its fullest. Delegate repetitive tasks immediately. Focus on those things that only you can do.

Mistake No. 3: Giving marketing too much credit and not enough attention. Marketing may not be the answer to everything, but nothing is going to happen in your business until you create and follow a marketing plan. Experts say businesses that consistently use a marketing plan are 70 percent more likely to be in business in seven years. I'll take those odds any day.

Mistake No. 4: Forgetting to market to your current clients. I'd say 60 percent to 70 percent of your marketing budget should be directed to the people who already know you. Every month that you fail to communicate with your customers — "touch" them in some way — their propensity to do business with you drops by 10 percent.

Mistake No. 5: Failing to test or track your sales and marketing efforts. In this, what you don't know could definitely hurt you. As a financial maven you already know: What you can measure, you can improve. And in this day of digital marketing, there's just no excuse for not using the right tools for the job.

Mistake No. 6: Failing to follow up with prospects and clients. Everyone gets busy. But in many businesses, the average sale happens after the fifth attempt. Successful businesses have a process in place that automates the process to make sure they're following up with prospects regularly. If you're not using a customer-relationship management system, like Act!, Goldmine, Salesforce.com or even Outlook, just to name a few market leaders, you can't say you're serious about service.

And for that, there's no excuse. This is, after all, a professional service business. After all the effort you've put into honing your professional skills, just take care of the business side and you'll reap the rewards.

But which order?

People often make mistakes in their financial priorities. Most of us need to save more and get rid of debt, but some tasks are more pressing than others. For instance, parents frequently, and understandably, save for their children's college education when they should be saving more for their own retirement first.

"Priorities are the key," says Sophie Beckmann, a financial-planning specialist at A.G. Edwards Inc. "You'll have long-term goals and short goals. You're saving for retirement, a house, a car, college for a kid."

Here's what many financial advisers say is the right order in which to prioritize your financial goals:

Debt. The first priority is to pay off high-cost, nondeductible consumer debt.

"Don't even bother saving for retirement or saving for college if you haven't paid credit-card debt," says Rande Spiegelman, vice president of financial planning at the Schwab Center for Investment Research, a division of Charles Schwab Corp.

That's because paying off a credit card that's charging 18% interest "is like earning a risk-free, tax-free 18% rate of return," he says.

There are a couple of different strategies for getting rid of debt. Some people like to first pay off the credit card with the lowest balance, to see faster results. The most cost-effective method, says Stuart Ritter, a financial adviser at the T. Rowe Price Group Inc. in Baltimore, is to pay off the card with the highest interest rate first.

He also recommends saving at least something for retirement and emergency spending -- while paying off debt -- so you'll get in the habit of saving.

Cash savings. Once the credit-card debt is gone, experts advise saving enough cash to live on for three to six months, and to keep it easily available in a money-market account for emergencies. Someone with more financial flexibility, who could use a credit card if the car breaks down, could set aside less cash. But you should save as much as possible if a job loss or other major event could be on the horizon.

Retirement savings. Once you have a cash cushion, you should contribute to your 401(k) retirement account as soon as you hit the work force. "Invest at least to the amount of the company match, because that's free money," says Ms. Beckmann.

Most people get their raise in January, making this a good time to increase your 401(k) contribution before the money even hits your checking account.

Ideally, people should be saving at least 15% of their salary for retirement, according to financial firms. While most investors don't reach the maximum, an investor could contribute $15,500 into a 401(k) plan, which is for people in the private sector, or a 403(b) plan, for those in academia or nonprofits. People 50 and older can contribute an extra $5,000 annually to these accounts. Depending on your tax situation, and especially if your employer doesn't offer a pension, you should also contribute to an individual retirement account.

"Whatever you're going to do, automate it," says Mr. Ritter, who teaches a financial planning course at Johns Hopkins University. "If you automate, you don't have to think about it every month."

College savings. It's not what parents want to hear, but saving for retirement must come before saving for college for the kids.

That's because there are many ways to pay for college. A student could borrow, get scholarships or attend a less-expensive community college or state university. But no one is going to lend you money or give you a scholarship for retirement.

"Retirement is a priority," says Ms. Beckmann. "If you need to, you can borrow to go to college, but you can't borrow for retirement."

If you are saving 15% of your salary in a 401(k), by all means put some money away for your children's education. The most effective way to save is to contribute after-tax income into a state-sponsored 529 college-savings plan. Money in these accounts grows tax-free and can be withdrawn free of federal tax on investment earnings as long as it is used to pay for higher education. More than 30 states also provide tax and other benefits, such as a tax deduction for contributions, and the fees on many accounts have recently fallen significantly.

Prepaying your mortgage. Many people find it tempting to prepay their mortgage. According to new research, though, you're probably better off putting that extra money into your 401(k), at least up to the maximum matched by your company.

Prepaying is a good idea, says Greg McBride, senior financial analyst at Bankrate.com, if you're close to retirement or already saving enough for retirement. Consider prepaying, he says, "if you are in the latter portion of a mortgage where your interest is no longer enough to justify itemizing your tax deduction."

Buying insurance. If you haven't evaluated your insurance coverage in a while, do it now. Home values have soared in recent years. Make sure that your homeowner and auto policies are up-to-date and that the deductibles make sense.

Do you have enough life insurance? As a general rule of thumb, a full-time worker with a family should have life insurance equal to six to 10 times salary. In recent years, the cost of life insurance has dropped significantly, especially term life.

Additionally, people need to consider whether to buy long-term-care insurance, which can help pay for time spent in nursing or assisted-living care.

Estate planning. No matter the size of your estate, it's important to update your will to ensure that your wishes are carried out. That means you also should have a durable power of attorney and a health-care power of attorney, which authorizes someone to make medical decisions if you can't make them yourself.

Planning ahead also saves time and money for your heirs. Make sure the beneficiary designations and titling on your bank, brokerage and retirement accounts are up to date, because it's not unusual for someone to accidentally leave something to an ex-spouse.