QBI Deduction for Freelancers: The Basics

Section 199A of the tax code created a 20% write-off on the net income from your pass-through business back in 2017, and 2025's One Big Beautiful Bill Act made it permanent. Qualified business income means your net profit after regular business deductions, not your gross revenue. That figure doesn't include W-2 wages, capital gains, dividends, or interest that isn't tied to the business.

Reasonable salary you pay yourself as an S corp owner is also excluded, along with any guaranteed payments you take as a partner. Sole proprietors, single-member LLCs, partnerships, and S corporations can all claim the deduction. C corporations can't, since those already get a flat corporate tax rate (IRS Instructions for Form 8995). Owners of REITs and publicly traded partnerships (PTPs) get a version of the same 20% treatment on qualified REIT dividends and PTP income, though that's a narrower case most freelancers won't run into.

Freelancer Eligibility for the QBI Deduction

Most freelancers qualify for the QBI deduction automatically, because self-employment income reported on Schedule C counts as qualified business income by default. Positive net income from an active trade or business is what counts, not a hobby, and not a single 1099 for a one-off gig. A freelance writer with three regular clients qualifies. Someone who sold a used couch on Facebook Marketplace and got a 1099-K for it doesn't, because that's not a trade or business.

Business structure matters here too. Anyone unsure how to set theirs up can check our LLC vs sole proprietor breakdown, since sole proprietors, single-member LLCs, partnerships, and S corps all pass income through to your personal return in a way that qualifies. One thing the deduction won't touch is your self-employment tax bill. QBI lowers your income tax, not the 15.3% you owe for Social Security and Medicare on your net earnings, and it doesn't change what you calculate on Schedule SE before the QBI deduction ever comes into play.

How Much You Can Actually Deduct

Your QBI deduction equals the lesser of two amounts: 20% of your qualified business income, or 20% of your taxable income minus any net capital gain. Picture a freelance graphic designer with $80,000 in net Schedule C profit and no other complications. Twenty percent of that is $16,000, and as long as taxable income stays under the threshold below, that full $16,000 comes off taxable income. That's not a credit, so it won't cut the tax bill dollar for dollar. It does shrink the income the IRS taxes, though, which can be worth several thousand dollars depending on the bracket.

Now picture that same designer landing a big year and netting $220,000, over the single-filer threshold. They still get a deduction, but the calculation shifts to a wage-and-basis test. That component gets limited by the W-2 wages paid to any employees and the unadjusted basis of business property, so the final number can land below a flat 20%. No itemizing required either way. Standard deduction or itemized, eligibility doesn't change, as long as there's qualifying business income (IRS Instructions for Form 8995).

2025 Income Thresholds for the QBI Deduction

Calculating the QBI deduction for freelancers gets simpler the further income sits below a set line, and more complicated above it. Under a certain taxable income, the full 20% applies with no exceptions. Above that line, the rules depend on the type of business. Here are the 2025 thresholds, for the return most freelancers are filing this season:

Stay under the threshold and the simplified Form 8995 covers the full 20%. Cross it and Form 8995-A takes over instead, adding the SSTB and wage tests covered next (source: IRS Instructions for Form 8995-A).

SSTB Rules: Why Your Line of Work Matters

Income under the threshold above means this section doesn't apply yet, so skip ahead. Past the threshold, the IRS splits businesses into two camps. A “specified service trade or business,” or SSTB, is one where the value comes mainly from the skill or reputation of the people running it. Health care, law, accounting, consulting, financial services, brokerage, investing, athletics, and the performing arts are the classic examples (IRS Instructions for Form 8995-A). Marketing consultants, financial coaches, and attorneys doing contract work usually land in this bucket.

Web developers, graphic designers, photographers, and e-commerce sellers usually don't, since the IRS treats those as ordinary trades rather than reputation-driven services. Between the threshold and the top of the phase-in range, an SSTB owner's deduction shrinks fast and hits zero once income clears the top figure. Non-SSTB businesses don't lose the deduction entirely at that level, but the wages the business pays and the basis of the property it owns cap the final number. Genuinely confusing tax-code territory, this part is worth a real conversation with a tax professional if income lands anywhere near these figures.

Claiming the QBI Deduction Step by Step

1. Confirm your business type. Sole proprietors, single-member LLCs, partnerships, and S corps generally qualify. C corps don't.
2. Calculate your qualified business income. That's net profit after ordinary business deductions, not gross revenue, and not S corp salary or partnership guaranteed payments.
3. Compare taxable income to the 2025 thresholds. $197,300 for single filers, $394,600 for married filing jointly, figured before the QBI deduction itself.
4. File Form 8995 below the threshold. Most tax software fills in this short, simplified form automatically once Schedule C or K-1 income is entered.
5. File Form 8995-A above it. Form 8995-A walks through the SSTB and wage/basis limits for higher earners.
6. Let tax software run the numbers. Nearly every consumer tax program calculates the QBI deduction once business income is in the system, so hand-calculating the phase-in is rarely necessary.

Changes to the QBI Deduction Coming in 2026

Nothing about this deduction is going away. Congress had set it to expire after 2025 under the original 2017 law, but the One Big Beautiful Bill Act, signed in July 2025, removed that expiration date, making it a permanent part of the tax code. Two other changes are already law but don't apply to the return due this season.

Starting with tax year 2026, filed in 2027, the SSTB phase-in range widens. Single filers get $75,000 of room instead of $50,000, and joint filers get $150,000 instead of $100,000, giving high-earning SSTB freelancers more space before the deduction disappears. Taxpayers with at least $1,000 of qualified business income who materially participate in the business also get a new $400 minimum deduction, even when the regular 20% math comes out lower. Both changes are real and enacted. Confirm the current figures each filing season rather than assuming they carry over, since neither applies to the return due this year.

Conclusion

The QBI deduction for freelancers rewards you for doing exactly what you're already doing: running your own business. Confirm your business type, check income against the 2025 thresholds, and let tax software or a tax pro handle the form. It won't touch your self-employment tax bill, so pair it with a real look at your quarterly estimated tax payments and the other deductions available to 1099 contractors. Once the QBI deduction is sorted, consider whether SEP IRA or Solo 401(k) contributions make sense for your business too, since both can lower taxable income even further heading into retirement. Browse the full taxes archive for more on filing as your own boss.

Signs it's time to fire your financial advisor

Three red flags cover most cases: you can't explain how your financial advisor gets paid, you haven't heard from them in over a year, or your portfolio is full of products with high fees and no clear reason you own them. A good advisor should communicate your financial plan clearly and check in as your goals and life change, not disappear until renewal season. None of these red flags require a dramatic falling out to act on. A short email is enough to start the process.

Part of the confusion is legal, not just personal. A broker-dealer working under the SEC's Regulation Best Interest has to recommend products in your best interest and disclose conflicts, but that duty applies mainly at the point of a recommendation. Registered investment advisers carry a full fiduciary duty under the Investment Advisers Act instead, a standard the SEC describes as a duty of care plus a duty of loyalty. That duty “applies to the entire relationship between the investment adviser and the client” and “cannot be satisfied through disclosure alone” (SEC.gov). Both standards usually produce similar outcomes for everyday investors, the SEC itself says so, but the legal floor is different depending on which professional is handling your money. It's worth understanding which one covers you before you decide whether to stay with your current advisor.

Know what kind of advisor you actually have

Your financial advisor's pay structure tells you almost everything about their incentives. NAPFA, the National Association of Personal Financial Advisors, defines a fee-only advisor as one “compensated solely by the client with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product” (NAPFA.org). Fee-only advisors skip commissions, 12b-1 fees, and revenue-sharing payments entirely. Every NAPFA member also commits to a fiduciary standard, with fees disclosed in writing before any financial planning begins.

Ask directly for your financial advisor's Form ADV Part 2 if this isn't already in writing. It's the disclosure document that spells out exactly how they're paid and what conflicts of interest exist. Expect a real fee-only fiduciary to hand it over without hesitation, since transparency about fees is the whole point of the model.

How to fire your financial advisor, step by step

Firing a financial advisor is mostly paperwork, not confrontation. You don't need to justify the decision or give notice the way you might at a job, and you don't owe your advisor an explanation. Here's the process that keeps the transition clean.

1. Pick where your money is going next. Open the new account first, whether that's a self-directed brokerage, a robo-advisor, or a new fee-only financial advisor, so your money has somewhere to land as soon as you fire the old one.
2. Pull your records. Download or request every statement, cost basis report, and account number you have with your current advisor. You'll need this for taxes, for your financial plan, and for the transfer paperwork.
3. Send a short written notice. An email or letter saying you're ending the relationship and moving your accounts is enough to fire a financial advisor cleanly.
4. Ask about outstanding fees. Some firms charge a fee to close or transfer out an account. It's set by each firm, not a federal rule. Check your account agreement or the firm's Form CRS relationship summary before you request the move.
5. Start the account transfer at the new firm, not the old one. This step begins at the new financial advisor's firm, and they handle contacting your previous advisor for you.
6. Confirm the transfer completed and the old account is closed. Log into the new account and check that every position landed before you consider the switch done.

What actually happens during the account transfer

Most brokerage-to-brokerage transfers run through the Automated Customer Account Transfer Service, or ACATS. It's an electronic system built by the National Securities Clearing Corporation specifically to standardize this process for anyone moving away from a financial advisor. You start it by submitting a Transfer Initiation Form to the new, receiving firm, not the old one. FINRA Rule 11870 requires your old firm to validate or take exception to that transfer instruction within one business day. Once it's validated, the old firm must complete the transfer within three business days (FINRA.org).

A handful of holdings move slower, like certain annuities or when-issued securities. Don't be surprised if one odd position in your account takes longer than the rest to transfer.

Will firing your advisor trigger a tax bill?

A properly done transfer, in-kind and trustee-to-trustee, doesn't trigger taxes. For an IRA specifically, the IRS is explicit. A transfer of funds directly from one trustee to another “isn't a rollover,” and “because there is no distribution to you, the transfer is tax free” (IRS Publication 590-A). It also doesn't count against the once-per-year IRA rollover limit, since it was never a rollover to begin with.

That same logic covers a taxable brokerage account moved in-kind. You're transferring the same shares to a new custodian, not selling your investments, so there's no capital gain to report just for switching financial advisors. One trap: a firm that liquidates your holdings and sends you cash instead of transferring the actual shares, which can trigger a real tax bill on a taxable account. Confirm with both firms that the transfer is in-kind before you sign off on anything.

Surrender charges are the one place a real cost can still show up after you fire an advisor. Some annuities and insurance-wrapped investment products charge this fee if you cash out or transfer within a set number of years of buying them (the SEC's investor.gov glossary covers this). Check the contract for a surrender period before you move an annuity your old advisor sold you as part of your financial plan.

Where to move your money next

For most people, the destination is simpler than the financial advisor relationship they're leaving. A low-cost brokerage account holding broad S&P 500 index funds or a target-date fund covers most of what an expensive advisor was charging you to manage. There's no ongoing advisory fee eating into your investments every year, and market swings don't change that math. Confirm you're getting the full employer 401(k) match at work first, that's an immediate return no investment can match. Then check whether a Roth IRA fits your financial plan before you pick a taxable account.

An old 401(k) from a previous job is also worth rolling over into your new IRA now, instead of leaving it scattered across accounts you no longer track or understand. Self-employed? Compare a SEP IRA against a Solo 401(k) before you open a new retirement account. The right one depends on your income, your long-term wealth goals, and whether you have employees.

Not everyone wants to manage their own investments, and that's a reasonable call too. Look for a fee-only fiduciary instead of a commission-based salesperson if you want ongoing financial advice and hands-on planning. Treat a robo-advisor as a middle option if you want low-cost, hands-off investment management without giving up the fiduciary standard.

Vet a new advisor before you sign anything

Look up any new financial advisor before you sign with them. FINRA BrokerCheck, at brokercheck.finra.org, is a free public database. Search it for a broker's or brokerage firm's registration status, employment history, and any disclosures or complaints on file. The SEC's Investment Adviser Public Disclosure database, at adviserinfo.sec.gov, covers the same ground for registered investment advisers instead of brokers. Run both searches before you hand over your financial plan to someone new. Some professionals are registered as both a broker and an adviser, and you want the full picture before you trust them with your accounts again.

The bottom line

Once you've decided your current advisor isn't serving your interests, the transition is mostly logistics. Know your financial advisor's pay structure, put your notice in writing, and use an in-kind ACAT transfer so you don't trigger taxes on the way out. Pick where your money is going, whether that's a self-directed portfolio or a new fee-only fiduciary, before you leave the old relationship, so your financial plan never sits idle. The goal isn't to punish an advisor for a bad year in the market. It's to stop paying for financial advice or products that no longer earn their keep.

Conclusion

Firing a financial advisor is a paperwork problem, not a confrontation, and most people who go through it wish they'd done it sooner. Maybe your next move is a DIY index fund portfolio, a robo-advisor like the one in this robo-advisor breakdown, or a new fee-only professional who actually communicates. Either way, you'll come out with a clearer financial plan and lower fees. For more on building the DIY side of your investing plan, browse the Investing category here on Personal Profitability.

The 2026 1099-K Threshold: $20,000 and 200 Transactions

The 1099-K threshold for 2025 and 2026 is $20,000 in gross payments and more than 200 transactions in a year, per app. That's not a new rule. It's the original threshold that applied before 2022. Congress reinstated it through the One, Big, Beautiful Bill Act (OBBBA), signed into law on July 4, 2025. The IRS confirms the reset applies retroactively, reaching back to cover 2022 and 2023 reporting too.

That reset undid a genuinely confusing few years. The American Rescue Plan Act of 2021 set a new $600 threshold with no transaction minimum. It was meant to start with 2022 payments. The IRS delayed it every year it was supposed to kick in, then set a $5,000 transition threshold for 2024 forms as a stepping stone toward $600. OBBBA scrapped the whole phase-in before the lower numbers ever fully applied. The threshold is now locked back at $20,000 and 200 transactions. If an article online says the threshold is $600 or $2,500, it's describing a rule that no longer exists.

These are federal tax rules, not state ones. They apply the same way to a full-time freelancer and to someone who occasionally sells things through Venmo, PayPal, or another payment platform. Taxpayers sometimes assume a small amount received through a payment app is automatically free of tax consequences. It isn't. The IRS rules on what counts as taxable income haven't changed. Only the tax rules for when a form shows up have.

So, Do You Have to Pay Taxes on Venmo and Cash App Money?

The honest answer depends on what the payment was for. It has nothing to do with which app you used or whether a 1099-K ever showed up. A 1099-K reports payments. It doesn't decide what's taxable. The IRS says so plainly: “Just because a payment is reported on Form 1099-K doesn't mean it's taxable.”

So the form is just a paper trail. Whether you owe tax on that money got decided the moment you earned it, based on what it was for.

What Actually Counts as Taxable Income on These Apps

Money you receive for goods or services is taxable, full stop. It doesn't matter if it's $40 for mowing a neighbor's lawn or $3,000 for a freelance design project booked through Cash App or PayPal. That includes selling items for a profit, getting paid for gig work, collecting tips through an app, or running any side business where customers pay you through payment platforms.

If that income adds up over the year, it belongs on your tax return as self-employment income. Report it on Schedule C, the same as cash or check payments. It's worth understanding how self-employment tax works once you're earning this way regularly. Payment-app income doesn't get special treatment just because it moved through an app instead of a bank transfer.

What If You Don't Get a 1099-K but Made Money Anyway?

You still need to report it and pay the tax. The IRS is direct about this one: “Even if you don't get a Form 1099-K, if you received payments for goods, services or property, you must report your income.” Staying under $20,000 or 200 transactions only means the app isn't required to tell the IRS about your payments. It doesn't mean the income is tax-free, and it doesn't mean the IRS can't find out some other way.

Gifts, Rent Splits, and Reimbursements Aren't Taxable

Money a friend Venmos you for dinner isn't taxable income. Neither is a roommate paying their half of the electric bill, or a birthday gift from a parent. That's true even if it lands on a 1099-K by mistake. The IRS is explicit here too: “Payments of gifts and reimbursements for shared costs are not payments for goods or services and therefore are not reportable on Form 1099-K.”

The catch is that Venmo and Cash App don't always know the difference between a gift and a payment for work. Mark personal payments as “friends and family” or “gift” whenever the app gives you that option. That's what keeps them off your 1099-K in the first place, instead of leaving you to sort it out at tax time.

A few practical habits keep a personal account from accidentally triggering a 1099-K. Use the “friends and family” or personal setting for anything that isn't a business transaction. Keep a separate account or a business profile for client payments. Avoid mixing rent splits or reimbursements into the account you use for freelance income. That separation makes it obvious, to you and to the IRS if it ever asks, which transfers were real earnings and which weren't.

Hobby or Business? How the IRS Splits Side Hustle Payment App Income

Getting paid regularly through an app for something you sell or do raises a real question for the IRS: is that a business or a hobby? The answer changes how you report it. A real business, one you run with a profit motive, keep records for, and treat like work, gets reported on Schedule C. That's where you can also deduct your actual expenses.

Occasional activity with no real profit motive counts as a hobby instead. Hobby income still has to be reported, as Other Income on Schedule 1, but hobby expenses aren't deductible at all. That's a real trap for casual sellers who assume a side project that barely breaks even owes nothing. See our guide to tax deductions for 1099 contractors for what you can actually write off once the IRS considers it a business.

Does This Apply to PayPal and Zelle Too?

PayPal follows the same $20,000 and 200-transaction reporting threshold as Venmo and Cash App. It's also a third-party settlement platform under the tax law that created the 1099-K. If business payments into your PayPal account cross that threshold in a tax year, expect the same form. It doesn't matter if the money came from one client or two hundred separate transactions.

Zelle works differently, and the threshold doesn't apply to it at all. Zelle moves money directly between bank accounts instead of holding it in an intermediary account. That means it isn't classified as a payment settlement platform under the same rules. Zelle's own FAQ confirms it: “Zelle does not report transactions made on the Zelle network to the IRS,” and it won't issue a 1099-K “even if the total is more than $600.”

That doesn't make Zelle income tax-free. If clients pay you for goods and services through Zelle, that's still taxable business income. Talk to a tax professional if you're not sure how to report business transactions that will never generate a form of their own.

What to Do If You Get a 1099-K by Mistake

If a 1099-K shows money that wasn't actually taxable, like a rent split or a gift, don't just ignore it. The IRS already has a copy, and it will expect that amount to show up somewhere on your return. Ask the payment app for a corrected 1099-K first, showing the accurate amount. If a correction doesn't come through in time to file, report the full 1099-K amount as Other Income on Schedule 1. Then subtract the non-taxable portion as an Other Adjustment. The two entries net to the correct number, instead of a form the IRS flags as unreported income.

Frequently Asked Questions

The Bottom Line on Venmo and Cash App Taxes

The 1099-K threshold for 2026 is $20,000 and 200 transactions. That number only controls when an app has to report your payments to the IRS. It has never controlled whether you owe tax on money you earned. Treat every dollar you're paid for goods or services as taxable the moment you receive it. Keep a running record, the way you would for any self-employment income. Do that and you won't get caught off guard by what shows up in your mailbox in January.

For more on the tax side of freelance and side-hustle income, see how quarterly estimated taxes work once you're earning this way regularly. Browse the rest of our taxes coverage for what else the IRS expects from a side hustle.

What a Credit Utilization Ratio Actually Is

Your credit utilization ratio is the percentage of your available revolving credit you're currently using. Divide your total card balances by your total credit limits and multiply by 100. Two cards with a combined $10,000 limit and a combined $3,000 balance puts you at 30% utilization.

myFICO, the consumer arm of the company that builds the FICO Score, says amounts owed on accounts determines 30% of a FICO Score, and utilization is the biggest piece of that category. Only payment history carries more weight. That's why a maxed-out credit card can hurt your score even if you've never missed a payment in your life, and why keeping your utilization rate low matters even when your other bills are current.

What Counts as a Good Credit Utilization Ratio

A good credit utilization ratio is in the single digits, not just under 30%. That 30% number gets repeated everywhere, but myFICO is blunt about it: the data doesn't support a hard cliff at 30%, it's just a threshold some advisors picked. Lower is better, all the way down, until you get close to zero, and that's the real pattern.

Experian's own account data backs that up. Take a look at the numbers below: they show how average utilization actually breaks down by FICO Score band, based on Experian's Q3 2024 consumer credit data:

One catch worth naming. myFICO also warns against sitting at exactly 0% utilization on every credit card. Reporting a small balance and paying it off does more for your credit score than showing no balance at all, because the score wants to see you actively and responsibly using credit, not avoiding it. Aim as low as possible while still showing some activity, since the goal isn't zero.

How to Lower Your Credit Utilization Ratio in 7 Steps

Here's the actual work. None of these require a new loan or a credit repair company, just a different pattern with the cards you already have.

1. Pay down the highest-interest card first, unless one balance is tiny. The highest-rate card usually deserves the extra payment whether your main goal is interest or your utilization ratio, since it saves you money on interest while also improving your ratio. Knock out one small balance first if you need a quick win, then go back to attacking the highest rate.
2. Time your payment to land before the statement closes, not just before the due date. Card issuers usually report your balance to the bureaus on your statement closing date, which is weeks before your payment is actually due. Paying in full by the due date still leaves a high balance reported for that cycle.
3. Ask your issuer for a credit limit increase. A higher limit on the same balance instantly lowers your ratio, and most issuers let you request one online without a hard inquiry. Ask before you assume you need one.
4. Spread purchases across more than one card. Charging everything to your favorite rewards card can quietly push that one card's individual ratio past 30% even while your overall picture looks fine.
5. Keep paid-off cards open. Closing a card removes its limit from your total available credit, which raises your ratio on paper even though you didn't spend a dime more.
6. Make a mid-cycle payment. When you know your balance will be high on statement day, knock it down a week or two early instead of waiting for your normal due date.
7. Track it monthly, not just when you need a loan. Free tools like Credit Karma or your card's own app show your utilization in real time, so you catch a creeping balance before it hits a statement.

How Your Utilization Ratio Actually Gets Reported

This is the part that trips people up. Your FICO Score doesn't reflect what you owe today. It reflects whatever balance your issuer last reported, and that's almost always your statement closing balance, not your current balance and not your paid-off balance after the due date.

Experian explains it plainly: issuers typically report your balance and limit to the bureaus right around the end of your statement period, and your payment due date usually lands three to four weeks after that. Paying your card off in full every month doesn't prevent this. Even a full payment can leave high utilization on your report if you happened to carry a big balance on the one day your issuer reported it.

Timing, not spending less, is the actual fix here. Check your statement closing date (it's on every statement and usually in your online account settings), and make a payment before that date if you're carrying a balance you want off your report.

Per-Card Utilization vs. Overall Utilization

Both numbers matter, and scoring models look at both. Your overall utilization is every card's balance divided by every card's limit, combined. Per-card utilization is that same math for one card by itself.

You can have a low overall ratio and still get dinged for one maxed card. Say you have three cards with a combined $15,000 limit, and $4,500 of that sits on a single $5,000-limit card. That card is running 90% utilization even though your overall ratio is a tidy 30%. Scoring models catch that, so don't assume one healthy-looking total protects you.

Why Utilization Weighs More Than Your Other Debt

A high credit utilization rate can hurt you more than an equal amount of installment debt, because lenders and credit scoring models read the two very differently. An auto loan or a mortgage is expected to shrink on a fixed schedule, so carrying a balance there is normal. A maxed-out credit card looks like you're leaning on your full credit limit just to get by, and that's the pattern scoring models penalize.

This matters most right before you apply for new credit. Lenders pull your credit report and weigh your utilization rate heavily when they decide how much of a mortgage or auto loan to approve, even if your overall debt-to-income picture looks fine on paper. Opening multiple new credit cards right before a big application can make things worse, not better, since new accounts temporarily lower your average account age and add a hard inquiry. It's more effective to spend a few months lowering your utilization than to chase a quick fix with new credit.

Mistakes That Keep Your Ratio High

A few habits quietly work against everything above. Watch for these:

• Closing old cards right after paying them off. You lose the available credit and your ratio jumps the same day.
• Opening a new card right before a big purchase like a mortgage. The hard inquiry and the lower average account age can cost you more than the extra limit helps.
• Putting everything on one card for the points. Great for rewards, rough on that card's individual ratio if you're not paying it down before the statement closes.
• Forgetting about authorized-user cards. If you're an authorized user on someone else's card, their balance and limit usually show up on your report too.

Managing Your Ratio Month to Month

Improving your credit score long-term means treating utilization as something you manage every month, not a one-time fix. Free credit monitoring from Credit Karma, Experian, or your card issuer's own app shows your reported balance and limit, so you can catch a creeping ratio before it shows up on your credit report. Most apps also flag it when a card issuer reports new account information, which helps you avoid surprises.

Requesting a credit limit increase is worth doing every year or so, whether your spending has grown or not, since increasing your available credit lowers your ratio automatically as long as your balance stays the same. On-time payments build the track record that makes issuers more willing to approve it. Most people underestimate how much this five-minute request can move a credit score.

Frequently Asked Questions

The Bottom Line on Lowering Your Credit Utilization Ratio

Credit utilization is the rare scoring factor you control almost entirely with timing, not income. Pay down balances before your statement closes, spread purchases across multiple credit cards, keep old accounts open, and ask for a limit increase instead of a new card. That's how to lower your credit utilization ratio without a new loan, a credit repair company, or a long wait. It's important to stay consistent, because one high-balance statement can undo a few months of good payments. Do it regularly and your ratio, and your credit score, moves faster than almost anything else that's possible to control.

If you're still working on the fundamentals, start with how to build credit from scratch and what credit score you start with. And once your utilization is under control, how to choose a credit card walks through picking the right one for what comes next. For more on building a credit history that helps your financial picture and opens better rates and offers, see the Credit archive on Personal Profitability.

What Does a Virtual Assistant Actually Do?

A virtual assistant provides professional support to a business owner or executive online and remotely instead of working from their office, handling the tasks they don't have time for themselves. That covers a wide range of services, and you don't need to offer all of it. Common virtual assistant services include:

• Inbox and calendar management
• Scheduling meetings and travel
• Customer service and live chat support
• Data entry and research
• Social media management and light content work
• Basic bookkeeping (categorizing expenses, not filing taxes)
• Onboarding new clients or customers

The best-paid VAs pick a lane instead of offering all of it. A VA who says “I manage email and calendars for busy founders” is easier to hire than one who lists fifteen skills and hopes something sticks.

Your clients are usually small business owners, solo founders, coaches, real estate agents, and e-commerce sellers, not big companies with an HR department. They're hiring you because they're drowning in tasks that don't require their specific expertise, not because they need a full-time employee. That's why VA work is one of the easiest side hustles to start part time. A client who needs five hours of inbox help a week isn't looking for a 40-hour commitment.

The Skills That Actually Get You Hired

You don't need formal training to start, but a few skills separate a beginner who lands clients from one who doesn't. The core skills clients look for in virtual assistant services are:

• Clear written communication. Most client contact happens over email or chat, so clear, professional messages matter more than a polished resume.
• Time management. You're often working with more than one client at once, so staying organized and managing your own schedule is part of the job, not just your client's.
• Basic comfort with tech and online tools. You don't need to be technical. You just need to learn new software quickly, from Google Workspace and project management apps to simple design tools like Canva for basic social media graphics.
• Administrative reliability. Showing up, meeting deadlines, and following instructions closely helps you earn trust faster than years of experience would on its own.

These are skills you likely already have from working a regular job, even if you've never worked remotely before. Gaining a bit more comfort with the specific tools your target clients use is often the only real gap between where you are and your first paid gig.

No Certification Required, Here Is What Actually Matters

No. There's no license or certification requirement to work as a virtual assistant, and most clients don't ask for one. They're actually screening for whether you can follow instructions, communicate clearly, and hit deadlines without much oversight, and you can prove all three without a single hour of paid VA work.

Have you ever managed a calendar, answered customer emails, run a company's Instagram account, or kept a spreadsheet of anything at a regular job? You already have a skill a small business owner will pay for. The experience is real. It just wasn't labeled “virtual assistant” yet.

The trick is translating what you did into a service a stranger can hire. Keeping a shared team calendar straight becomes calendar management. Drafting routine emails for a manager becomes inbox management. Tracking expenses in a spreadsheet for a small team becomes basic bookkeeping support. Write your past work in that language on your profile or pitch, not as a job title.

Common Mistakes New Virtual Assistants Make

A few mistakes show up over and over with new VAs, and avoiding them saves you months of frustration:

• Underpricing to “get your foot in the door.” A rate that's too low attracts clients who expect unlimited scope for it, and it's harder to raise later than to start fair.
• Skipping a written agreement. Even a simple one-page scope of work (hours, tasks, payment schedule) prevents the most common client disputes.
• Saying yes to everything. Taking on tasks outside your service list dilutes your pitch and eats time you could spend finding better-fit clients.
• Not setting aside money for taxes. See the tax section below. A client payment is not all take-home pay.

How to Become a Virtual Assistant With No Experience: 7 Steps

Beginners often ask where to actually get started. Follow these steps in order for a step-by-step path from picking a skill to landing your first paying client.

1. Inventory the skills you already use. List every task from your current or past jobs that involved organizing, communicating, or managing details for someone else. That's your starting service list.
2. Pick one or two service areas, not fifteen. Inbox management and scheduling is a service. So is social media posting. Don't advertise as a generalist on day one, it makes you harder to hire.
3. Create a small portfolio, even without paid clients. Build a sample inbox workflow, a mock social media calendar in Canva, or a cleaned-up sample spreadsheet. People hire based on what they can see, not what you promise.
4. Set up free tools before you pay for anything. Tools like Google Workspace, Calendly, and Trello cover most VA work at no cost and help you stay organized from day one. Add a paid tool only once a client's work justifies it.
5. Decide on a starting rate you can defend. Price by the value of the task, not by guessing low to “get your foot in the door.” Knowing exactly what to charge before you pitch builds the confidence to hold your rate. See the rate section below for real ranges.
6. Land your first client. Start with your own network before a marketplace. A former coworker, a small business owner you already know, or a local group is often faster than cold applications.
7. Treat it like a business from day one. Track every dollar you're paid starting with your first invoice. The IRS treats virtual assistant income as self-employment income, and the paper trail is much easier to build as you go than to reconstruct later.

Virtual Assistant Pay: What the Rates Actually Look Like

Virtual assistant earning potential ranges widely based on experience and specialization, and no one can promise you a specific rate. According to Upwork's own published hourly rate data, the median rate for virtual assistants on its platform is $13 an hour, with most general VA work falling between $10 and $20 an hour. VAs who specialize in a skill like bookkeeping, e-commerce support, or technical tasks typically earn more.

Source: Upwork hourly rate data. Treat these as a starting range, not a guarantee. Your actual rate depends on your niche, your client's budget, and how well you can show the value of the specific task you're doing.

Rates tend to climb the most when you move from general admin tasks to a specific, higher-stakes skill a client can't easily replace. A VA who only answers email competes on price with every other generalist on a platform. A VA who manages e-commerce inventory, runs ad account reporting, or handles bookkeeping is solving a problem the client can't hand to just anyone. Solving that harder problem is exactly why the higher end of the range exists.

Where to Find Your First Virtual Assistant Clients

Your first client is almost always closer than a job board. Before you apply anywhere, ask your own network directly: a former boss, a small business owner in your family, or someone in a local entrepreneur group who's mentioned being overwhelmed. A warm introduction beats a cold application nearly every time when you have zero reviews.

Once you're ready to look wider:

• Freelance platforms like Upwork and Fiverr, where clients are already looking to hire
• Facebook groups built around freelancing or your specific niche (e-commerce, real estate, coaching)
• LinkedIn, searching for small business owners posting about being overwhelmed or hiring
• Direct outreach to small businesses whose social media or customer service you notice could use help

Your first client is the hardest one to land. After that, referrals and reviews do a lot of the work for you. Ask every client you finish work for if they know anyone else who could use the same help. Small business owners usually know at least one other overwhelmed founder, and a referral from an existing client closes faster than any cold pitch will.

Taxes on Virtual Assistant Income, Explained

Yes. Virtual assistant income is self-employment income, and net earnings of $400 or more in a year trigger self-employment tax, per IRS Tax Topic 554. Clients may send you a 1099-NEC or report payments through a 1099-K if they pay you through a platform, but you owe tax on the income either way, even if no form arrives.

Set aside a portion of every payment for taxes as you go. For the full mechanics, including the current rate and due dates, see self-employment tax explained and how to pay quarterly estimated taxes. Scaling into a full VA business with multiple clients? LLC vs sole proprietor walks through when it makes sense to formalize.

Frequently Asked Questions

Start With One Client, Not a Business Plan

How to become a virtual assistant with no experience really comes down to three things: one skill, one sample of your work, and one client willing to pay you for it. You don't need a website, a logo, or a business plan first. Land that first client, do the work well, and let referrals and reviews build the rest of the business from there.

For more on getting your first paying gig off the ground, see how to start a side hustle with no money and how to price your freelance work. Once the income is steady, self-employment tax explained will walk you through what you owe and when. Browse more ideas in our Side Hustle category.

What Counts as Business Mileage

Business mileage is any driving you do in your vehicle for work that isn't your regular commute. Meeting a client, picking up supplies, making a bank deposit for your business, or shuttling between two job sites in the same day all count as business vehicle use. Your drive from home to the office you go to every day doesn't count, even if you take a work call the whole way there. The IRS treats that drive as a personal expense no matter how far it is or what you do during it.

One exception matters if you work from home. A qualifying home office makes your house your tax home for that business, and that flips every drive from home to a client's office, a supplier, or any other work stop from a commute into deductible business travel. Freelancers and small business owners who work out of a home office overlook this move more than any other one on this list.

Two Ways to Deduct Your Miles: Standard Rate or Actual Expenses

You have two methods for turning your business driving into a deductible mileage deduction, and you can't mix the two methods for the same vehicle in the same year.

The standard mileage rate multiplies your business miles by the IRS rate for the year. Track your miles, multiply by the rate, and you're done. Gas, repairs, insurance, and depreciation don't get deducted separately, because the rate already bakes those in.

The actual expense method has you add up what the vehicle really cost to operate: gas and oil, tires, repairs, maintenance, insurance, registration fees, and depreciation or lease payments. Then you deduct the business-use percentage of those vehicle expenses. Recordkeeping runs heavier than the standard mileage rate takes, but an expensive-to-run automobile or a high-mileage year can push the actual expense method to a bigger tax savings and a larger deductible total.

Timing is the catch. Choosing the standard mileage rate has to happen in the first year the vehicle is available for your business, or you lose the option to use that method for that vehicle ever again. Picking it in year one still leaves room to switch to the actual expense method in a later year if the math works out better. Starting with the actual expense method (and the vehicle depreciation that comes with it) generally locks you into that method for that car going forward.

Leased vehicles carry a stricter version of the same rule: choosing the standard mileage rate means using it for the entire lease term, including any renewal, with no switching away. Sole proprietors, freelancers, and LLC owners all follow the same rules here. IRS Publication 463 (Travel, Gift, and Car Expenses) is the source document covering the benefits and limits of both methods in full detail.

The 2026 Mileage Rates, Including the Mid-Year Increase

For 2026, the IRS business standard mileage rate is 72.5 cents per mile for driving from January 1 through June 30, then 76 cents per mile from July 1 through December 31. That change came in Announcement 2026-11, a rare mid-year adjustment the IRS hadn't made since 2022, to catch up with rising fuel costs. The standard mileage rates for the first half of the year were set back in December 2025 under Notice 2026-10. Most confusion about using the right rate comes down to one thing: which half of the year the trip happened in.

Congress sets the charitable rate by statute instead of letting the IRS adjust it for inflation, which is why it stays flat. Match whichever business rate fits when you actually drove the miles, and keep the two halves of the year separate in your log when you total up your business mileage deduction. One flat rate can't cover miles you drove before July 1 and miles you drove after.

Medical and moving rates in that table aren't related to your business deduction, but they're worth knowing if you're calculating deductions for your whole household. Using your vehicle for medical care purposes, like trips to a doctor, dentist, or pharmacy, is what the medical mileage rate covers, and any taxpayer with deductible medical expenses above the itemized-deduction threshold can claim it. Moving mileage works differently and cannot be claimed by most taxpayers anymore. Tax law changes suspended the moving expense deduction for almost everyone, so today only active-duty military members moving under permanent-change-of-station orders, plus certain intelligence community members, can use it.

How to Calculate Your Business Mileage Deduction

Calculating your deduction is straightforward once you have your mileage log. Multiply your business miles from each rate period by that period's rate, then add the two totals together. Picture 4,000 business miles driven from January through June and 3,500 more from July through December:

• 4,000 miles × $0.725 = $2,900
• 3,500 miles × $0.76 = $2,660
• Total deduction: $5,560

Business parking fees and tolls go on top of that total, since the standard mileage rate doesn't cover them and they get deducted separately. Local transportation expenses like tolls and parking under $75 don't require a receipt, as long as you keep a written record of the amount, date, and business purpose. Anything at $75 or above needs the actual receipt.

The Mileage Log the IRS Actually Wants to See

Adequate records have to back up your business mileage deduction, and the IRS standard is a log kept as you go, not one rebuilt from memory in April. Every business trip needs four things on record:

1. The date of the trip.
2. Where you drove, meaning your starting point and destination.
3. The business purpose of the trip.
4. The miles driven or your odometer reading.

A mileage app that logs GPS trips automatically is the easiest way to keep this current. A notebook or spreadsheet works too, as long as it gets updated close to when you actually drove. Extra scrutiny follows mileage deductions because they're easy to inflate, and a log built from memory months later won't hold up if you're ever asked to show it.

Where to Claim the Deduction on Your Taxes

Self-employed filers report their business mileage deduction on Schedule C, line 9, car and truck expenses, alongside their other deductible business expenses. Part IV of that same form asks for the date you put the vehicle in service, plus your business, commuting, and other mileage totals for the year, so keep those numbers ready before you file. One business vehicle or a small fleet for a growing side hustle both get reported the same way.

W-2 employees who drive for work and don't get reimbursed by their employer face worse news. Tax law changes over the past several years permanently ended the itemized deduction for unreimbursed employee expenses, mileage included, so claiming it on a federal return generally isn't possible anymore. Asking your employer for a mileage reimbursement or an accountable plan is the better move. That money comes to you tax-free and costs the company less than a raise would.

None of this is personalized tax advice, just general guidance. Your mix of income, vehicle, and state rules can change the math, so run your specific numbers by a tax professional before you file.

Frequently Asked Questions

The Bottom Line

Lowering your tax bill when you drive for work rarely gets simpler than the business mileage deduction, but only if you track your miles as you go and use the right rate for when you drove them. Log every trip, split your miles across the two 2026 rate periods, and claim it on Schedule C if you're self-employed.

For more on the tax side of self-employment, see how self-employment tax works, what other 1099 tax deductions you can claim, how to pay quarterly estimated taxes, and how to price your freelance work so it actually covers what your business costs to run. More self-employed tax basics live in the Taxes category.

Key Takeaways

• Self-hosted WordPress beats a free blog platform once you plan to run ads or affiliate links.
• Pick a niche where people already spend money, not just one you enjoy writing about.
• Expect to write for months before your first dollar, and years before it replaces a paycheck.
• Ads, affiliate links, sponsorships, and your own products are the four real ways bloggers get paid.
• Blog income is taxable whether the IRS calls it a hobby or a business. Only the deductions change.

Before You Touch a Keyboard: What You Need First

You need four things before you write a single post: a topic you can stick with for years, a domain name, real self-hosted hosting, and enough patience to run this like a business with no revenue for a while. None of it takes long to get started once you know the order to do it in.

Expect to pay about $10 to $20 a year for the domain name. Basic hosting for a new blog runs roughly $3 to $10 a month if you shop the beginner tiers, more once you have real traffic. Compare that to almost any other business and it's a small bill, part of why blogging stays a popular side hustle even after fifteen years of “blogging is dead” takes.

Plenty of free options exist, a no-cost WordPress.com site, Blogger, or a free newsletter tier included, and they work fine for practice. But a lot of ad networks and affiliate programs either won't approve a free-hosted site or take a bigger cut of what you earn. WordPress.org, self-hosted and free to install, is the same software running this site, and it gives you full control over ads, affiliate links, and your own email list from day one. Most modern themes also let you create a clean, professional-looking blog without hiring a designer.

Choose a Niche That Can Actually Pay

The niche that pays is the one where people already spend money, not just the one you like most. A blog about your cat is fun. Swap it for pet insurance, pet food subscriptions, or vet bills for new pet owners, and suddenly real advertisers and affiliate programs are lined up, because actual money already changes hands in that space.

Personal finance, food, travel, home improvement, software reviews, and parenting rank among the deepest niches for a reason. Readers there are actively comparing products, prices, and services, exactly what an ad network and an affiliate program want to see. Productive Blogging's 2026 survey of more than 1,000 bloggers found food blogs reported the highest median monthly income of any niche, at $9,169 a month, well above the broader survey average. One well-established niche with strong ad rates and affiliate potential doesn't guarantee the same result for every food blog, but it shows how much niche choice matters.

You don't need the single most profitable niche in existence, just one with real buyer intent that you can write about honestly for years, because a blog that stops publishing stops earning.

How to Start a Blog to Make Money, Step by Step

1. Pick a niche you'd still want to write about in three years. Look for buyer intent (something people research before they spend money), not just a hobby you like.
2. Buy a domain and self-hosted hosting. Skip the free platforms so you own the site outright and can add ads, affiliate links, or a store whenever you're ready.
3. Install WordPress and a simple, fast theme. Cluttered, slow themes cost you readers before you've written a word.
4. Publish the posts your audience is actually searching for. Answer a real question in the first sentence, then go deeper than the page-one competition already has.
5. Build an email list starting with your very first post. Your list is the one audience you own outright, no algorithm can take it away.
6. Turn on income once you have real traffic. Ads need pageviews to add up to anything, and affiliate links convert better once readers trust you.
7. Track every dollar like a business from day one. Good records save you a headache later, since the IRS treats blog income as taxable either way.

Get Found: Basic SEO for a New Blog

Creating content nobody can find is the single biggest reason new blogs stall out. Google has to understand a new blog post before it can rank it anywhere on the web, so set up an SEO plugin (AIOSEO runs this site) and give every post a title, a meta description, and one clear focus keyword before you hit publish. Handling this using a plugin instead of hand-coding meta tags is standard practice, and a caching plugin plus an email opt-in tool round out the handful of plugins most sites need. Getting this set up once pays off on every post after that.

Start each post with a real search term, not just a topic idea. Running a quick search on Google, plus a look at what already ranks on page one, can help you see if your angle is different enough to compete. Free keyword research tools can help you find topics and content ideas people are actually typing into a search box, and most have a free tier that's plenty for a new blog. Keep a running list of topics so you never sit down to a blank page. Keeping a simple content calendar helps you create posts on a schedule instead of waiting for inspiration. After a post is live, promote it once or twice on social media or in an email newsletter, then let search traffic take over as the post ages.

Growing traffic online takes consistency more than talent. Most successful blogs come from publishing specific, useful posts on a real schedule for a year or more, not from one blog post that goes viral. Readers who find real value tend to share your best posts without being asked, which helps more than any promotion you do yourself. Once you have a library of posts covering your niche, internal links between them help both readers and search engines find your best content, and that structure is what eventually supports real monetization through ads and affiliate marketing as your blog continues to grow. It's just as important to check for duplicate ideas already covered on other websites in your niche, since a distinct angle is likely to outrank a rehashed one.

Where the Money Actually Comes From

Bloggers who earn real money almost always stack more than one of the four revenue streams below.

Selling a digital product, a guide, a template, or a short course usually takes the longest to set up but keeps the most profit per sale once it's built, though templates make it simple to create a professional-looking one without design experience. Give readers free access to a short resource in exchange for their email, and that list becomes the audience you eventually sell to.

What Blogging Income Really Looks Like

Most bloggers make very little money for a long time, and that's the honest starting point. Productive Blogging's 2026 survey of more than 1,000 bloggers found the median time to earn a first dollar runs about a year, and the median time to reach a full-time income runs about three years. Only around a quarter of the bloggers surveyed ever reach full-time income at all. About 28% of that group reached full-time income within two years, faster than the three-year median for everyone else.

The typical earner in that survey made somewhere between $100 and $300 a month, not the four and five figure income reports you see shared on social media. Those bigger numbers are real for some bloggers, particularly in high-intent niches like food and personal finance, but they represent years of consistent publishing, not one lucky post that went viral.

None of this makes blogging a bad side hustle. It makes the payoff closer to planting a tree than flipping a coin. Accept a slow first year, keep showing up, and the income tends to compound the way an index fund does. A little more every year you stay in the game.

Do You Owe Taxes on Blog Income

Yes. The IRS taxes blog income whether it treats your blog as a hobby or a real business. Deductions are the only thing that changes.

Several factors go into whether the IRS calls your blog a business or a hobby: running it in a businesslike way, keeping good records, depending on the income, and genuinely intending to make a profit (26 CFR Section 1.183-2). No single factor decides it alone. If the IRS treats your blog as a hobby, you still owe tax on what it earns. Deducting hosting, a domain, or any other expense against that income is off the table, though.

Once your blog runs like a real business, you report the income and expenses on Schedule C, and you owe self-employment tax on the profit, the same as any other self-employed income. Self-Employment Tax Explained walks through exactly how that tax works and what it costs you.

Sometimes a 1099 shows up too. Payment processors have to send a Form 1099-K once you cross $20,000 and 200 transactions in a year, and an ad network or affiliate program has to send a Form 1099-NEC once it pays you $2,000 or more in 2026 (up from $600 in 2025). Either way, the 1099 is a paperwork trigger, not the tax law. You owe tax on blog income the moment you earn it, whether or not a form ever lands in your inbox.

Frequently Asked Questions

Start Small, Run It Like a Business

Circling how to start a blog to make money without pulling the trigger? This is the sign to just start. Few side hustles are cheaper to launch than a blog, and few are slower to pay off. That combination scares most people away in year one, which is exactly why the people who stick around for year three usually aren't competing with many other blogs in their niche anymore.

Choose a topic with real buyers in it, host it yourself from day one, publish like you mean it, and let the income streams stack once you have traffic worth monetizing. For a faster-to-monetize side hustle to run alongside your blog while it grows, How to Start a Side Hustle With No Money and AI Side Hustles That Actually Make Money in 2026 are good next reads. When any of it starts generating real income, Self-Employment Tax Explained and an email marketing tool built for bloggers will save you from learning either lesson the hard way.

For more ways to build income on the side, browse the Side Hustle category here on Personal Profitability.

Key Takeaways

• The home office deduction is $5 per square foot (up to 300 square feet), or the actual-expense method based on your business use percentage of rent, mortgage interest, and utilities.
• Standard mileage is 70 cents a business mile for 2025, split into two different rates for 2026. Business travel and equipment purchases have their own rules.
• Self-employed health insurance is 100% deductible, capped at your net profit for the year.
• A SEP IRA or Solo 401(k) retirement plan lowers your taxable income while it builds your savings.
• The 1099-NEC threshold is $600 for 2025 payments and jumps to $2,000 for payments made in 2026.
• Keep documentation, receipts, mileage logs, and bank records, for every expense you claim.
• Talk to a tax professional for help if your deductions get complicated or your income crosses a QBI phase-out threshold.

What Makes You a 1099 Contractor at Tax Time

You're an independent contractor for tax purposes the moment a client pays you and doesn't withhold taxes or treat you as a W-2 employee. That's true whether or not a 1099 form ever shows up in your mailbox. The IRS taxes that income as self-employment income, reported on Schedule C, and you owe tax on it even if a client never sends the form. That single fact is why deductions matter so much. Your net profit on Schedule C, income minus these write-offs, is the amount that flows into your self-employment tax and your taxable income. Every related expense you miss costs you twice.

Keep the ordinary-and-necessary test in mind for every expense. The IRS defines a deductible expense as one that's common in your line of work (ordinary) and helpful for it (necessary). It doesn't have to be required or perfect. Design software passes for a freelance designer. A gym membership doesn't. When you're not sure, ask whether you'd have spent the money if you weren't running this business. If the answer is no, it's probably deductible. A self-employed contractor with a side gig and one with a full-time freelance practice follow the same rules here. Only the dollar amounts change. Keep records for every expense you claim. A folder of digital receipts sorted by month beats a shoebox you dig through in April, and it's what backs you up if the IRS ever asks you to prove a deduction.

The Home Office Deduction

You can deduct $5 per square foot of home office space, up to 300 square feet, for a maximum $1,500 write-off. No receipts required. That's the IRS's simplified option, and it's the fastest way for most freelancers to claim this deduction. The space has to pass two tests. You use it regularly and exclusively for business, and it's either your principal place of business or where you regularly meet clients. A kitchen table you also eat dinner at doesn't qualify. A spare bedroom that's now your desk and nothing else does.

Say your home office is large, or your actual expenses (rent or mortgage interest, utilities, insurance, repairs) run higher than the simplified cap. The regular method lets you deduct the business use percentage of those actual costs instead. It takes more documentation. If you own your home, it also factors in depreciation, so run the numbers between both methods before you pick one.

Vehicle and Mileage Deductions

The IRS let you deduct 70 cents for every business mile you drove in 2025. That rate already moved twice for 2026: 72.5 cents from January through June, then a rare mid-year bump to 76 cents from July through December. You have two ways to claim vehicle costs. The standard mileage rate multiplies your business miles by the rate. The actual expense method deducts the business use percentage of gas, insurance, repairs, and depreciation instead. Most freelancers do better with standard mileage, since it's simpler and skips the gas-receipt shoebox. If you drive a newer or more expensive vehicle, run the actual-expense numbers before you decide.

Either method requires a mileage log. Track the date, the business purpose, and the miles for every trip as you make it, not from memory at tax time. Commuting from home to a fixed, regular workplace still doesn't count. But if your home office is your principal place of business, trips to client meetings, the post office, or a coworking space usually do.

Health Insurance, Retirement, and the Other Big-Ticket Write-Offs

You can deduct 100% of your health insurance premiums, including coverage for your spouse and dependents. That's true as long as your business shows a profit and you're not eligible for subsidized coverage through a spouse's employer. The IRS caps the deduction at your net self-employment income for the year, so a loss year means no deduction. You claim it on Form 7206 rather than as a Schedule C business expense.

Self-employment tax itself splits into two pieces worth knowing. Social Security gets 12.4%, and Medicare gets 2.9%, for the familiar 15.3% total. Retirement contributions are another big lever on that same taxable income. Money you put into a SEP IRA or a Solo 401(k) lowers your taxable income for the year on top of building your retirement savings. The contribution limits run well above a regular IRA, so compare the two before you decide which fits your income.

Beyond those two, look at business insurance (liability, errors and omissions, a business owner's policy) and the Qualified Business Income deduction, up to 20% of qualified business income for eligible pass-through businesses, subject to income limits, per the IRS. Interest on a business loan or a business credit card balance counts too, and Schedule C has its own line for it. Add tax prep and bookkeeping fees, plus any legal or other professional services tied to the business. A professional can also help you decide whether a piece of equipment should be written off now or depreciated. That matters more once your purchases get bigger than a laptop.

Everyday Deductions Freelancers Miss

The write-offs that add up fastest for most independent contractors are the small, recurring ones you already pay for every month. Software and subscriptions (your invoicing tool, project management app, design software, cloud storage) are fully deductible when they're for the business. Phone and internet apply at your business use percentage. Use your cell phone 60% for client calls, and 60% of the bill counts. Advertising and marketing costs (your website, hosting, domain registration, business cards, paid ads) are fully deductible. Bank fees and payment processing fees count too, the portion Stripe, PayPal, or Square takes. They're easy to overlook because they never hit your bank account as a separate charge.

Business travel is deductible when the trip is primarily for work: airfare, hotels, and 50% of your meals while you're away from home. That's the same 50% limit that applies to client meals. Equipment and supply purchases you make for the business, a laptop, a camera, a standing desk, office supplies, are deductible in the year you buy them if they qualify for the de minimis safe harbor or Section 179, rather than depreciated over several years. Continuing education (a course, a certification, a conference) counts too, as long as it maintains or improves skills you already use. Education that trains you for a brand-new line of work generally doesn't. A bookkeeping service, or a bookkeeper who can help you log this as you go, is itself a deductible professional service. It often pays for itself in expenses you'd otherwise write off late or not at all.

What You Can't Deduct

Ordinary commuting, your everyday clothes, and anything mostly personal stay off Schedule C, even if you can make a business case for them. A few specifics: business meals with a client are 50% deductible, not 100%. Entertainment (concert tickets, a round of golf) isn't deductible at all under current law. Clothing only counts if it's a uniform or protective gear you wouldn't wear outside of work, so a nice outfit for a client meeting doesn't qualify even though you bought it for the business. A gym membership doesn't count just because you work from home. And if you use something for both business and personal life, like your phone or your car, you can only deduct the business-use share, never the whole cost.

The general rule holds up better than any specific list. If a reasonable person would call it a personal expense first and a business expense second, the IRS will see it the same way. It also helps to know the difference between a deduction and a tax credit while you're filing. A deduction lowers the income you're taxed on. A credit lowers your tax bill directly, dollar for dollar. Confusing the two is a common mistake for a self-employed worker doing their own return for the first time.

New 1099 Reporting Rules for 2025 and 2026

The IRS reporting thresholds for 1099s just changed under the One Big Beautiful Bill Act. The change affects which forms gig workers and independent contractors will get, not what they owe. For 2025 payments, the 1099-NEC threshold is still $600. A client who paid you $600 or more still has to send you the form. Starting with payments made in 2026, that threshold jumps to $2,000, so you'll get fewer 1099-NEC forms from smaller clients going forward. Separately, the 1099-K threshold for payment apps and platforms (PayPal, Venmo, Stripe) reverted back to $20,000 and more than 200 transactions. That undoes the lower thresholds that had been phasing in.

None of this changes your tax bill. You owe tax on every dollar of self-employment income whether or not a 1099 shows up. Don't treat a missing form as a sign the income is off the books. Keep your own records of every payment you receive, and report all of it on Schedule C regardless of what forms land in your inbox.

Tax Deductions for 1099 Contractors: Put the List to Work

Tax deductions for 1099 contractors add up fastest when you track them as you go, not when you scramble every April. Open a separate business bank account. Save digital receipts as you spend. Log mileage the day you drive it, not the week before you file. From there, pair this list with how to pay quarterly estimated taxes, so your payments reflect your real, deduction-reduced profit instead of your gross income. Check whether an LLC changes anything for you in LLC vs sole proprietor. For more on lowering next year's bill, browse the full Taxes archive.

1099 vs W2, What Each Term Actually Means

A 1099 worker is an independent contractor who gets paid gross, with no taxes withheld, and files a return on their own. W2 status means an employer withholds income tax and payroll tax from every paycheck instead. IRS rules decide which one applies based on control, not on what a contract calls you. Under the common law rules, you're an employee if your company can direct not just what work gets done but how and when you do it. Genuine independent contractors usually set their own hours, tools, and process, and the client only cares about the finished product. Get this wrong and the IRS can reclassify the relationship using Form SS-8, which can trigger back payroll taxes for the business. That's mostly the company's risk, not yours, but it explains why some employers push everyone toward 1099 status even when the job looks like an employee role.

Worker classification isn't optional paperwork, it's the legal basis for the whole relationship. Get classification wrong and a business can be held responsible for back employment taxes, including FICA and FUTA, the taxes that fund Social Security, Medicare, and unemployment insurance. Think you've been misclassified as a 1099 contractor when you're really functioning as an employee? File Form SS-8 with the IRS and let it rule based on the specific facts of your situation, not just what your contract says.

The Math Splits Differently on Taxes

Taxes are where the 1099 vs w2 gap actually shows up in your bank account. Every worker owes the same 15.3% for Social Security and Medicare on their earnings, according to the IRS. The difference is who writes the check. W2 employees pay half, 7.65%, with the employer covering the other half automatically. Self-employed workers pay the full 15.3% as self-employment tax instead, filed on Schedule SE, though half of that amount is deductible as an adjustment to income.

On the Social Security side, the 12.4% portion only applies up to the annual wage base, which the Social Security Administration set at $184,500 for 2026, up from $176,100 in 2025. Earn more than that and the Social Security portion stops. The 2.9% Medicare portion never caps though. High earners also owe an extra 0.9% Additional Medicare Tax once combined wages or self-employment income cross $200,000 for a single filer or $250,000 for a married couple filing jointly, per the IRS.

Why the Same Rate Doesn't Mean the Same Paycheck

A 1099 rate and a W2 salary that look identical on paper rarely land the same in your bank account. Say a company offers $70,000 salaried or $40 an hour as a 1099 contractor for the same role. On the surface, the hourly math looks close. But the 1099 worker also covers the employer half of payroll tax and buys their own health insurance. There's no paid time off either, and you usually need to set aside 25% to 30% of every payment for taxes since nothing gets withheld automatically. Quarterly estimated payments come out of that reserve, not a surprise bill in April.

A rule of thumb a lot of freelancers use: ask for 20% to 30% more as a 1099 rate than the equivalent W2 salary would pay per hour, to cover the added tax liability and lost benefits an employer would have handled. Treat that as a starting guideline, not a formula, and run your own numbers based on your actual expenses and tax bracket.

A W2 Job Gives You Protections 1099 Work Doesn't

A W2 job hands you a safety net a 1099 contract almost never includes. Your employer handles federal and state income tax withholding automatically, so there's no quarterly guesswork and no April surprise. Many W2 jobs come with health insurance too, often with the employer covering part of the premium. A 401(k) with a partial match is common as well, which is close to free money once you contribute enough to get it.

Unemployment insurance covers you if you're laid off, and workers' compensation covers you if you're hurt on the job, protections 1099 workers don't get. Paid time off, sick leave, and short-term disability show up often too, even though none of them are legally required nationwide. None of this is guaranteed at every company, so check your actual offer letter instead of assuming.

1099 Work Gives You Control a W2 Job Doesn't

Being 1099 trades that safety net for control and, often, higher gross pay. Setting your own hours and choosing your own clients come standard with contract work, instead of being tied to one employer. Many independent contractors take project-based work instead, paid on a per-project or hourly basis, stacking several clients at once. Working 1099 also unlocks business deductions a W2 employee can't touch.

Home office costs, business mileage, software subscriptions, and professional development all come off your income on Schedule C before you calculate what you owe. Business driving gets a 2026 standard mileage rate of 72.5 cents a mile from the IRS, so tracking your miles is worth real money if you drive for work. Every deduction requires real recordkeeping though, and every dollar of profit is subject to self-employment tax unless you elect a different business structure.

New Reporting Rules to Know for 2026

The paperwork behind 1099 income changed for 2026, and it affects how much of your side income actually gets reported to the IRS. Clients now only have to send a Form 1099-NEC once they pay you at least $2,000 in the year. That's up from the old $600 threshold, effective for tax years beginning after 2025, per the IRS instructions for Forms 1099-MISC and NEC.

Getting paid through an app like PayPal or a marketplace like Etsy works differently. Those platforms only issue a Form 1099-K once you cross $20,000 in payments and 200 transactions in a year, a threshold Congress restored after a much lower rule never fully took effect.

Here's the part that trips people up: not getting a 1099 doesn't mean the income isn't taxable. Every dollar of self-employment income is taxable, form or no form. Keep whichever forms you receive for your own filing, since your tax software still wants the total income reported for each client and platform.

Deciding Between 1099 and W2 Work

The 1099 vs w2 call gets easier once you run it through a few real questions about your own financial situation instead of just comparing two paycheck numbers side by side.

1. Calculate your real hourly rate. Subtract self-employment tax, health insurance, and lost benefits from a 1099 offer, then compare it to the W2 number.
2. Rate your appetite for paperwork. Quarterly estimated taxes, expense tracking, and a Schedule C aren't hard, but they take real time every month.
3. Weigh how much stability you need right now. A mortgage application, a new baby, or a thin emergency fund all argue for the steadier W2 paycheck.
4. Check whether you can get benefits elsewhere. A spouse's health plan or a marketplace policy can make 1099 work far more workable.
5. Decide if this is temporary or permanent. Plenty of people take a 1099 contract for a year to build a portfolio, then convert to W2 once they land the job they want.

1099 vs W2 Side-by-Side Comparison

Here's the whole 1099 vs w2 relationship broken down factor by factor, side by side, so you can scan the total picture in one place before you decide.

Frequently Asked Questions

The Real Answer: It Depends on Your Situation

1099 vs w2 isn't a contest with one universal winner. It's a tradeoff between control and security that only you can weigh. Take the 1099 route if you can command a rate that covers your own taxes and benefits and you don't mind running the paperwork. Take the W2 route if predictable pay, automatic withholding, and employer benefits matter more right now. Either way, run the actual numbers before you sign anything, not just the headline rate.

Two guides worth reading next: how self-employment tax actually works, and how to pay quarterly estimated taxes so April doesn't blindside you. Once you've made the leap, learn how to pay yourself as a business owner and whether an LLC or sole proprietorship fits your setup better. Browse the Taxes category for more.

Mega backdoor Roth, defined

A mega backdoor Roth is a two-step move inside a 401(k) plan. First you contribute after-tax dollars to your 401(k), on top of your regular pretax or Roth deferrals. Then you convert that after-tax money into a Roth account, either a Roth 401(k) inside the same plan or a Roth IRA, so it grows and comes out tax-free in retirement. You already pay tax on the dollars going in, so you won't pay taxes again when you pull them out later. The “mega” is the size of it. A regular backdoor Roth IRA moves a few thousand dollars a year. This version can move tens of thousands, because it rides on the much bigger overall 401(k) contribution limit instead of the small IRA limit. For a high-income saver, it's one of the bigger tax breaks still available under current law.

Three separate buckets live inside one 401(k): your regular pre-tax or Roth deferral, your employer's match or profit-sharing contribution, and this third bucket of after-tax (non-Roth) contributions. That third bucket is what makes this whole strategy possible, and it's the bucket most plans skip entirely.

How the mega backdoor Roth works, step by step

Here's how the mechanics actually work, step by step, assuming your plan supports it (more on that below).

1. Max your regular elective deferral first. Put in the full $24,500 for 2026 (or more if you qualify for a catch-up contribution) before you touch after-tax dollars. Never skip a full employer match to fund this instead. The match is free money and it comes first.
2. Confirm your plan allows after-tax, non-Roth contributions. This is a distinct feature from a Roth 401(k) option. Check your plan's summary plan description or ask HR directly, because the account statement often lumps everything together and won't show it clearly.
3. Confirm your plan allows in-plan Roth conversions or in-service withdrawals. Contributing after-tax money does nothing for you on its own. Your plan also has to let you move that money to Roth, either through an in-plan conversion or a withdrawal you roll into a Roth IRA.
4. Contribute after-tax dollars up to the overall plan limit. Keep contributing after-tax dollars until you hit the total 415(c) limit for the year (see the table below), minus what you and your employer already put in.
5. Convert quickly, ideally right away. Any investment growth on the after-tax money between the contribution and the conversion is taxable. Some plans convert automatically and immediately, which keeps the taxable gain close to zero. If yours doesn't, ask how often conversions run and convert as soon as you can.
6. Invest the converted money the same way you'd invest anywhere else. A low-cost S&P 500 index fund or a target-date fund inside the plan, not a stock pick. The tax treatment changes, the investing strategy shouldn't.

The 2026 contribution limits

The IRS adjusts these contribution limits every year for inflation. Here are the 2026 limits, from IRS Notice 2025-67.

The $72,000 figure above is the one that matters here. It covers your own employee contributions, your employer's match and profit sharing, and your after-tax contributions, all added together. Subtract what you and your employer already put in from $72,000 (or $80,000 or $83,250 with a catch-up), and whatever's left is your after-tax contribution room. One more thing worth knowing: starting in 2026, if you earned more than $150,000 in FICA wages the prior year, any age-based catch-up contribution has to go in as Roth, not pre-tax. That doesn't block this strategy, it just changes which bucket your catch-up lands in.

Here's what that looks like with real numbers. Say you defer the full $24,500 in 2026 and your employer kicks in a $6,000 match. Add those together and you're at $30,500 of the $72,000 overall limit, leaving $41,500 of room for after-tax contributions. Convert that $41,500 to Roth quickly and you've moved almost double your regular deferral limit into tax-free growth, on top of whatever you already put into a Roth IRA. That's the entire point of this move: it turns unused space in the $72,000 bucket into new tax-free savings instead of leaving it empty.

Does your plan actually allow it?

Most workplace 401(k) plans don't offer this, which is the real reason it stays obscure. Two separate features have to both be true: the plan has to accept after-tax (non-Roth) contributions, and it has to allow in-plan conversions or in-service withdrawals of that money. Large plans at big employers, especially in tech and finance, are the most likely to have both. A lot of smaller-company 401(k) plans have neither, because adding them costs the employer money in plan administration and testing.

If you're self-employed, you have more control than a W-2 employee stuck with whatever their employer picked. When you set up your own Solo 401(k), you choose the plan document, and some Solo 401(k) providers will let you write in after-tax contributions and in-plan Roth conversions from day one. Not all of them do this by default, so ask specifically about “after-tax, non-Roth contributions” and “in-plan Roth conversion” before you open the account, not after. A generic, free Solo 401(k) template often skips both features. A provider built for self-employed people who want this option will advertise it directly.

Why this matters more for high earners

A Roth IRA has income limits. Once your earnings pass a certain threshold, the IRS blocks you from contributing directly, which is exactly why the regular backdoor Roth IRA exists in the first place. A 401(k) has no such income limit, so high earners locked out of a direct Roth IRA contribution can still build tax-free income through this route. That's the real case for high-income earners: it's one of the few paths left to meaningful tax-free retirement savings once your income rules out the easier options.

Some plan statements call this bucket an “after-tax, non-Roth” contribution rather than a mega backdoor Roth, so knowing the real name helps when you call your plan administrator. It sits apart from your regular pretax or Roth deferral and any Roth contributions you're already making elsewhere.

A few considerations before you start. You have to still be working for the employer that sponsors the plan, or be self-employed with your own plan, for any of this to apply. Your plan has to support both after-tax contributions and conversions. And if your situation involves multiple old 401(k)s, several traditional IRAs, or other complicated retirement planning, loop in a financial planner or tax professional before you move a large amount. Done right, this is one of the more powerful ways to add flexibility and tax-free income to a retirement plan that already includes a traditional 401(k), one or more IRAs, and your regular catch-up contributions.

The tax mechanics and the mistakes that cost people money

This version is cleaner than the regular backdoor Roth IRA in one specific way: there's no pro-rata rule to worry about. With a backdoor Roth IRA, the IRS treats all your traditional IRAs as one pool, so old rollover IRAs can make part of your conversion taxable. The 401(k) version doesn't have that problem, because it lives inside a single plan with its own separate after-tax bucket.

Rollovers add one more wrinkle worth knowing. If you've ever rolled an old 401(k) into a traditional IRA, that pretax money sits apart from your new after-tax contributions and doesn't get pulled into this pro-rata calculation the way it would for a regular backdoor Roth IRA. The IRS caps the overall 415(c) limit each year, and that annual number tends to increase most years with cost-of-living adjustments, so check the current figure before you plan around last year's cap. You're not required to convert the very same day, but the sooner you do, the less taxable growth you end up reporting.

The actual risk is timing. Any earnings on your after-tax contributions before you convert them are taxable as ordinary income in the year you convert, even though you already paid tax on the original amount. The maximum tax-free benefit comes from converting fast, before earnings pile up. Leave the money sitting for a year before converting and you'll owe tax on whatever it grew. Convert within days, and there's barely anything to tax. That's why the plans that automate the conversion (sometimes weekly or even same-day) are worth more than the ones that make you request it manually.

Watch for one more detail: some plans only allow in-service withdrawals, not in-plan conversions, and some restrict how often you can take one. Read your plan document or ask your plan administrator directly what your specific plan allows before you contribute a dollar of after-tax money, because contributing it and then discovering you can't move it to Roth just leaves it stuck as ordinary after-tax savings with no real tax advantage.

Who should actually do this

This is a high-income, high-savings-rate move, not a starter step. It makes sense once you've already taken the full employer match, maxed your regular 401(k) deferral, maxed a Roth IRA (directly or through the regular backdoor route if your income is too high to contribute directly), and you still have cash left over that you want to invest for the long term. Not every saver is able to reach the full $72,000 cap, and that's fine. If any of those earlier steps aren't done yet, do those first. There's no point stacking an advanced move on top of an unfunded match, and the mega backdoor Roth strategy works best for high earners who've already covered the basics.

It's also a long-term bet on tax-free growth. Once the money is in Roth, it never gets taxed again, no matter how much it grows over the next 20 or 30 years. For a high earner who expects to be in a similar or higher tax bracket in retirement, that trade is usually worth making. If your income and savings rate don't leave extra room after the earlier steps, skip this one for now. It's a “yes, and” for people already doing everything else right, not a shortcut around the basics.

Conclusion: a real move, not a gimmick, once the basics are covered

The mega backdoor Roth is one of the few legal ways to get a genuinely large amount of money into a Roth account in a single year. It's not for everyone, and it's not a step one move. Get the match, max the regular deferral, fill up a Roth IRA, and only then go looking for the after-tax bucket. If you're weighing where the extra dollars go next, compare this against topping off an HSA as a retirement account, another tax-advantaged spot worth filling before a plain taxable brokerage account. And if you're running your own business and building the retirement side of your setup from scratch, start with the fundamentals in our guide to SEP IRA vs Solo 401(k) before you go looking for this feature on top of it. For more on the full range of retirement accounts and how they fit together, visit our Retirement category or head back to the Personal Profitability homepage.

Choose a Regulated Exchange First

Begin with a large, U.S.-registered exchange rather than a random app from an ad. Federal law requires any business that exchanges virtual currency for real money to register with the Treasury's Financial Crimes Enforcement Network (FinCEN) as a money services business. Registering means filing a Form 107 and running an ongoing anti-money-laundering program (fincen.gov). None of this makes an exchange risk-free, but it's the baseline check before you hand over a dollar. Coinbase, Kraken, and Gemini are all registered this way. Skip anything with no visible compliance page, no matter how good the sign-up bonus looks. Reputation matters here.

Compare three things before you commit to one: the fee for a small purchase, which payment methods it supports, and whether it's actually licensed to operate in your state. Bank transfers usually run cheaper than card purchases. Also check the platform's mobile app if you plan to buy and check prices from your phone, since not every exchange offers the same features on the app that it does on the website, and confirm the app itself is secure before you link a bank account to it. Walk away from any platform that won't show you its fee schedule before you fund an account.

Two separate costs show up on every purchase, and it helps to tell them apart. The platform fee is what the exchange charges to process your order. The network fee is what the Bitcoin network itself charges to record and confirm your transaction on the blockchain, and it has nothing to do with the exchange. Both costs are normal. What's worth avoiding is a wide bid-ask spread, the gap between the buy price and the sell price, since a wider spread quietly costs you more than a visible fee line does.

Verify Your Identity Before You Fund Anything

Every registered exchange asks for your name, address, date of birth, and a photo ID before you can buy anything. This isn't the exchange being nosy. It's the same “know your customer” check, often shortened to KYC, that applies to opening a bank account. Exchanges are legally required to run anti-money-laundering checks and file suspicious activity reports when something looks off (fincen.gov). Verification can take anywhere from a few minutes to a couple of days if the exchange reviews your documents by hand. Use your legal name and current address, since a mismatch is the most common reason this step stalls. Exchanges require this step before you can fund an account, so complete it honestly and fully the first time, since a rejected application usually means starting over.

Fund Your Account With a Bank Transfer

Link your checking account and fund your purchase with an ACH transfer if the exchange offers it. That's almost always the cheapest way in. Debit and credit card purchases clear faster, but exchanges typically charge a noticeably higher fee for the convenience. Some card issuers even code crypto purchases as a cash advance, which can trigger extra fees and interest on top. Never buy crypto with a credit card balance you can't pay off that month. You'd be paying interest on an asset that can lose a third of its value in a week.

Wire transfers settle fast too, but most exchanges charge a flat wire fee that only makes sense for a larger purchase. Your linked bank account is usually the simplest and cheapest payment method for a first, small buy.

How to Buy Bitcoin for Beginners: Place Your First Order

After your account is funded, you'll choose between a market order and a limit order. Market orders buy immediately at whatever the current price is, which works fine for a small first purchase. Limit orders let you set the exact price you're willing to pay, and the trade only fills once the market reaches it. That control matters more once you're buying larger amounts. Either way, you don't need a whole coin to get started. Start small.

1. Decide a dollar amount, not a coin amount. Bitcoin is divisible down to one hundred-millionth of a coin, so you can buy $25 worth just as easily as $2,500 worth.
2. Enter the dollar amount you want to spend. The exchange converts it to a fraction of a coin at the current price automatically.
3. Review the fee before you confirm. The quote should show the price, the fee, and the total charge to your account separately.
4. Confirm the order. A market order usually fills within seconds.
5. Check your holdings page. You should see the exact fraction of a coin you bought, valued at the current market price.

Avoid These Common Mistakes While You're Buying

Almost every new buyer trips up on the same few habits, and avoiding them matters more than picking the perfect entry price. Don't check the price every hour and trade in and out based on the swings. Frequent trading racks up fees and taxable transactions, and there's no evidence it beats simply holding long-term. Never send your first purchase to an address you copied by hand. Always copy and paste a wallet address, or scan a QR code, because Bitcoin transactions can't be reversed once sent. A single mistyped character sends your coins to someone else's wallet, permanently. There's no undo button.

Avoid splitting a small amount across five different apps and exchanges. Spreading funds that way multiplies the passwords, recovery phrases, and account logins you have to secure, and each extra platform is one more place a breach could happen. Pick one exchange you trust, complete verification once, and use it consistently while you're still learning the basics.

Pick a Storage Method You Actually Trust

You have two real choices once you own Bitcoin: leave it on the exchange, or move it to a wallet only you control. Leaving it on the exchange is the easiest option, and it's fine for a small amount you're still learning with. You're trusting the exchange's own security and solvency though, and your coins aren't protected like a bank deposit if that exchange fails or gets hacked.

Moving your Bitcoin to a wallet you control removes that risk. Software wallets, often called hot wallets because they stay connected to the internet, are free and work fine for smaller amounts on your phone. Once your balance is large enough that losing it would actually hurt, cold storage is the safer call. This hardware wallet, a small physical device like a Ledger or Trezor, keeps the private keys that prove you own your coins offline and away from any network connection entirely. Whichever method you pick, write your recovery phrase on paper, store it somewhere private, and never type it into a website. That phrase is the only thing standing between your coins and anyone who finds it. Guard it well.

Turn on two-factor authentication through an authenticator app, not text messages, since a text code can be stolen through a SIM swap. Use a unique password for the exchange. Legitimate platforms never ask for your password or recovery phrase through an email link, so don't click one that claims otherwise.

Know the Tax and Risk Rules Before You Click Buy

Buying Bitcoin with cash and holding it isn't a taxable event. Answer “no” to the digital asset question on Form 1040 if all you did was purchase digital assets with real currency and didn't sell, trade, or spend any of it that year (irs.gov). Things change the moment you sell, trade one crypto for another, or spend it on something. Virtual currency counts as property, not currency, under IRS Notice 2014-21, and every one of those moves is a taxable event you have to report. Understand that distinction before you sell or trade, since it changes what you owe. Check crypto taxes explained for the full rundown on cost basis, gains, and losses.

Know the protections you don't have too. Most crypto platforms aren't registered as a broker-dealer, exchange, or investment adviser, and the SEC warns that accounts held with them carry none of the protections that come with a brokerage account (investor.gov). Crypto assets also aren't FDIC-insured, and FDIC coverage doesn't protect you if a crypto exchange or custodian fails (fdic.gov). Nobody is backstopping this the way they'd back up your checking account. Weigh those risks against the potential upside, and consider your own risk tolerance, before you decide how much to buy.

Given all that, treat Bitcoin as a small, speculative slice of your money, not a retirement plan. Fund your emergency savings and retirement accounts first. Decide only afterward whether you still want to put a small amount into something this volatile. Your Roth IRA, funded with index funds, does the actual work of building your retirement. Own Bitcoin, if at all, as a side bet on top of that plan, never as a replacement for it.

Frequently Asked Questions

Buy Small and Keep Perspective

Now you know how to buy Bitcoin for beginners: pick a registered exchange, verify your identity, fund with a bank transfer, and buy a dollar amount you're comfortable losing. Move it to a wallet once the balance is worth protecting. Keep the tax and custody rules in mind from your first purchase, not after the IRS sends a letter. I earned a big return on a small, lucky Bitcoin bet years ago, and you can read that story here, but luck isn't a strategy. Build your emergency fund and retirement accounts first, then treat Bitcoin as a small, separate bet you could afford to lose. See crypto vs index funds for where it fits next to a normal investing plan, and crypto taxes explained for the reporting details once you sell or trade. Consider browsing more investing guides on the site for related reading.

What Is House Hacking?

House hacking is buying a property with rentable space, living in one part, and using the rent from the rest to offset your housing cost. The classic version is a duplex, triplex, or fourplex where you occupy one unit and rent out the others. It also covers a single-family home with a basement apartment, a garage conversion, an accessory dwelling unit, or extra bedrooms you rent to roommates. Zoning and permit regulations for these different unit types vary a lot by city, so check local rules before you convert a garage or add a basement unit, since an unpermitted unit can create real problems at resale or refinance. The goal is the same in every version: cut your own housing payment, sometimes to zero, while you build equity in a property you own.

House hacking for beginners isn't a new idea. Real estate investors have rented out part of an owner-occupied property for decades. What changed recently is the financing. Lenders now let owner-occupants put far less down on a 2 to 4 unit property than they'd need for a pure rental purchase. That's the whole reason house hacking works as a beginner strategy, instead of something you need $50,000 in savings to try. For a lot of first-time buyers, house hacking is one of the most common paths into real estate investing without a big pile of cash saved up. It's a short-term trade: you give up some privacy and take on landlord duties for a year or two, and in exchange you build wealth through home equity and monthly cash flow instead of paying that money to someone else's landlord business.

Steps to Start House Hacking for Beginners

Start by qualifying for an owner-occupant loan on a 2 to 4 unit property. Then let the rent from the other units cover as much of your payment as your market allows. Here's the sequence in order.

1. Check your credit and savings first. These loans still run a normal credit and income check, so know your score before you shop. Our guide to building credit from scratch covers the basics if your score needs work.
2. Pick your property type. A duplex, triplex, or fourplex is the cleanest house hack because each unit has its own lease and its own door. A single-family home with a basement apartment or extra bedrooms works too, and it's easier to find in neighborhoods that don't have much multifamily housing.
3. Get pre-approved as an owner-occupant, not an investor. Tell your lender upfront that you'll live in one unit. These loans have lower down payments and better rates than an investment-property loan, but you have to disclose that you're the one moving in.
4. Run the numbers before you make an offer. Add up the mortgage principal, interest, taxes, insurance, and a repair reserve, then subtract the rent you can realistically collect from the other units. Use current listings for comparable rentals nearby, not a guess.
5. Close and move in. Most owner-occupant loans require you to move into the property within 60 days of closing. You then stay for a set period, commonly around a year.
6. Screen tenants like a real landlord. Run credit and background checks, verify income, and use a written lease even for a roommate situation. You're living next door to whoever you rent to, so screening matters more here than in a distant rental.
7. Track income and expenses from day one. Rental income is taxable, and you'll want clean records for depreciation and repair deductions when you file.

Best Loan Options for House Hacking

FHA and VA loans offer the lowest down payments for house hacking for beginners. A conventional loan now comes close, too, after Fannie Mae cut its multi-unit down payment requirement. The three main paths compare like this.

FHA loans, VA loans, and conventional mortgages all help you get started with far less cash than a standalone investment property would require. The FHA program insures loans with as little as 3.5% down on a one to four unit property when a 580 or higher credit score is involved. You just need to occupy at least one unit as your primary residence, according to HUD‘s FHA guidelines.

A VA loan lets an eligible veteran or service member buy a 2 to 4 unit property with no down payment at all. They just need to move into one unit, per the Department of Veterans Affairs' occupancy rules. On the conventional side, Fannie Mae now allows just 5% down on an owner-occupied 2 to 4 unit home, down from the 15% to 25% it used to require. That change took effect in November 2023. It made house hacking realistic for a lot more buyers who don't have VA eligibility or don't want FHA's mortgage insurance.

Whichever loan you use, expect the lender to count only part of the projected rent from the other units toward your qualifying income, not all of it. Also expect a 3 to 4 unit property to face a stricter income test than a duplex. The exact rules vary by lender and loan program, so confirm the current numbers with your loan officer before you assume a property will cash flow. Anything under 20% down also means private mortgage insurance until you build enough equity to drop it.

How Much Can You Save With House Hacking?

The math behind house hacking for beginners can cut your monthly housing costs to a fraction of a normal mortgage payment, and sometimes to zero, letting you live for free depending on what you can charge for the other units. Consider a simple example, using round numbers, not a promise of what any specific property will do.

Say you buy a duplex with a total monthly payment (principal, interest, property taxes, and insurance) of $2,200. You live in one unit and rent the other for $1,100 a month. Your out-of-pocket housing cost drops to $1,100, half of what you'd pay to live there alone, and less than you might pay to rent a comparable one-bedroom nearby. Add a basement apartment or a rented bedroom into that same scenario and the math improves further. This is the entire appeal of house hacking: someone else's rent check does most of the work your paycheck would otherwise have to do.

The number that actually matters is your local rental market. A hot area with strong rental demand narrows or erases your housing costs. A soft rental market with long vacancies can leave you covering more of the mortgage than you planned. Pull the real rental potential for your neighborhood before you buy, using comparable listings, not a national average, since a “typical” house hacking result doesn't really exist across every metro.

Taxes and House Hacking: What You Need to Know

You owe tax on the rental income from a house hack, but you also get to deduct a share of your expenses and depreciate a share of the property, which often shrinks the taxable amount by a lot. The IRS's Publication 527, Residential Rental Property, covers exactly this situation under its section on renting part of your property.

In practice, it works like this. You report rental income and rental expenses on Schedule E. Then split your property costs, mortgage interest, property tax, insurance, repairs, and utilities, between the personal portion you live in and the rental portion you don't, usually based on square footage or number of rooms. Only the rental-portion share of those costs is deductible against rental income. You can also depreciate the rental-portion share of the building's value, not the land, over 27.5 years using the straight-line method, per IRS Publication 946. That turns a real, non-cash cost into an annual deduction.

Two practical notes worth flagging early. First, keep a separate log of what you spend on the rental unit versus your own space, because the IRS expects a reasonable allocation method, not a guess after the fact. Second, when you eventually sell, the rental portion doesn't automatically qualify for the personal-home capital gains exclusion the way your living space does. A house hack sale can be more complicated than selling a single-family home you've always lived in alone. Talk to a tax preparer about your specific numbers before you file, especially in the year you sell.

Risks and Downsides of House Hacking

The biggest financial risk in house hacking is living next door to your tenants, not the financing itself. A bad tenant, a slow-paying roommate, or a stretch of vacancy hits you immediately, because you're the one hearing about it at 11 p.m., not a property manager three states away.

• Vacancy risk falls straight on you. An empty unit doesn't just cost you rental income, it means you're covering the full mortgage payment yourself until you re-rent it. Keep a repair and vacancy reserve, not just enough for the down payment.
• You lose some privacy. Sharing a duplex wall or a house with tenants isn't for everyone, and it's worth being honest with yourself about that before you commit to a year-long occupancy requirement.
• Being a landlord takes real time. Screening, maintenance calls, and lease paperwork are part of the deal even when the property is small. If a repair or a tenant issue would wreck your week, budget for a handyman or a part-time property manager instead of assuming you'll handle everything yourself.
• Selling gets more complicated. As covered above, the rental portion changes how the sale is taxed, and buyers for small multi-unit properties are a narrower pool than buyers for a standard single-family home.
• Not every market supports it. House hacking depends on local rent covering a meaningful share of the mortgage. In high-cost areas where multi-unit homes are priced far above rents, the math might not work no matter how motivated you are.

None of this makes house hacking for beginners a bad idea. It makes it a real landlord responsibility wrapped in a beginner-friendly loan. Going in with realistic expectations is what separates a house hack that works from one that turns into a headache.

Frequently Asked Questions

Conclusion: Is House Hacking Right for You?

Overall, house hacking for beginners works best as a first real estate move, not a side experiment, because the low down payment only applies while you're living there as an owner-occupant. Whether it becomes a one-time move or the first property in a bigger real estate investment portfolio is up to you, but it's one of the most beginner-friendly strategies for building long-term wealth. Say your local rents can realistically cover a meaningful chunk of the mortgage and you're comfortable with the tenant side of the deal. Then it's one of the clearest paths from renter to property owner, without needing a large pile of cash first.

Before you commit, get your finances in order the way you would for any home purchase. Read our guide to saving for your first home purchase and our guide to getting approved for a mortgage. If you're weighing whether you want to be a landlord long-term, our guide to becoming a landlord covers what comes after the house hack.

Key Takeaways

Before the full breakdown, here's the short version of crypto vs index funds in five points.

• Index funds hold a diversified basket of real, revenue-generating companies. Crypto holds no underlying business at all.
• Crypto has historically shown far higher volatility than stocks, and returns swing harder in both directions.
• The IRS taxes crypto as property, so trades and swaps between tokens are taxable events. Index funds inside a Roth IRA or 401(k) can grow tax-free or tax-deferred.
• Most crypto exchanges aren't registered with the SEC the way a brokerage holding your index funds is, so investor protections differ.
• A reasonable approach: fund your retirement accounts with index funds first, then cap any crypto exposure at an amount you could fully lose.

What Index Funds Actually Are (and Why They're the Default)

An index fund is a low-cost fund built to track a market index, like the S&P 500, often structured as a mutual fund or an ETF (exchange-traded fund), so your money spreads across a basket of hundreds of companies instead of riding on one stock or one coin. The SEC's investor education office describes an index fund the same way: a type of mutual fund or ETF that seeks to track the returns of a market index, whether that's the S&P 500, the Russell 2000, or the total U.S. stock market.

That diversification is the whole point. A total stock market index fund owns stock in thousands of companies, which the SEC calls “a lot of diversification for one investment.” If one company has a bad year, or even goes under, it barely dents the fund, because your money was never riding on that one individual company to begin with. Because index funds use passive management rather than paying a team to actively pick stocks, they usually charge lower fees than actively managed funds, and the SEC is blunt about why fees matter: even small differences in fees compound into large differences in returns over time. That passive approach is also why index funds fit so well with a long-term, hands-off strategy instead of trying to out-trade the broad market.

The other piece worth naming plainly: when you own an index fund, you own a claim on real, revenue-generating businesses. Their long-run value is tied to what those companies actually earn and how much investors are willing to pay for that stream of earnings. That's a fundamentally different level of risk than the one you're taking on with crypto, which is the next question.

What You're Actually Buying When You Buy Crypto

When you buy Bitcoin, Ethereum, or another cryptocurrency, you're not buying a piece of a company. You're buying a digital token whose price is set entirely by what someone else is willing to pay for it next, with no earnings report, no dividend, and no legal claim on a business behind it.

The SEC's own investor guidance doesn't soften this: investments in crypto assets “can be exceptionally volatile and speculative,” and the exchanges and platforms where people buy, sell, borrow, or lend crypto may lack protections that investors take for granted elsewhere. Most crypto exchanges aren't registered with the SEC as a broker-dealer, exchange, or investment adviser, so the rules that protect you when you use a regular brokerage often don't apply. FINRA backs this up with the numbers that matter to your wallet: crypto assets have experienced higher volatility than traditional investments like stocks and bonds, and they're also less liquid, which can make it harder to sell when you actually want to, especially during a sharp downturn.

There's also a custody risk that doesn't exist with a mainstream brokerage account holding an index fund. If the exchange holding your crypto runs into financial trouble, the SEC notes that customers have, in real cases, had their ability to withdraw assets suspended, with no guarantee of getting it all back. None of this means crypto is a scam or that nobody should own any. It means you should walk in with your eyes open about what you actually control.

A quick note on “crypto index funds.” Some providers now sell products literally called crypto index funds, which bundle a basket of different tokens together the same way a stock index fund bundles companies, spreading your money across several cryptocurrencies instead of one. That reduces the risk of picking the wrong individual coin, but it doesn't change the underlying picture compared to a stock index fund. A crypto index fund is still a basket of assets with no earnings, no dividends, and pricing driven by sentiment, not one with real businesses generating cash underneath it.

The SEC also approved the first spot Bitcoin ETFs in January 2024, a fund structure that holds actual bitcoin directly and trades on a stock exchange through a normal brokerage account, the same way you'd buy an index fund. That gives you crypto exposure without setting up a separate exchange account, and it comes with the disclosure and custody rules that apply to other regulated fund products. It's a more convenient execution path for some investors, but it doesn't change the asset underneath. You still own something with no earnings and no dividend, so the volatility and the “what actually backs this” risks are exactly the same as buying the token directly.

The Tax Difference Nobody Explains Well

The IRS taxes cryptocurrency as property, not currency, so nearly every time you sell, swap, or spend it, you trigger a capital gain or loss you have to report. An index fund sitting inside a Roth IRA or 401(k), on the other hand, can grow for decades without you owing the IRS a dime along the way.

Per the IRS, digital assets (its term for crypto, stablecoins, and NFTs) are treated as property for federal tax purposes, and the general tax rules for property transactions apply. Sell it within a year of buying it and you owe short-term capital gains. Hold it more than a year and you owe long-term capital gains instead, usually at a lower rate. Here's the part that catches people off guard: trading one token for another, say Bitcoin for Ethereum, is a taxable event too, even though no cash ever touched your bank account. We cover the full mechanics of reporting crypto gains and losses in our crypto taxes guide if you want the deeper walkthrough.

Compare that to an index fund held in the right account. Inside a Roth IRA, your contributions grow tax-free, and you don't owe anything on qualified withdrawals in retirement. Inside a traditional 401(k) or an HSA used as a retirement account, the growth is tax-deferred or, in the HSA's case, can come out tax-free for medical costs. That structural advantage alone is a reason to fully fund your tax-advantaged accounts with index funds before you set aside a dollar for crypto speculation.

Crypto vs Index Funds, Side by Side

Put the two next to each other and the differences stop being abstract. Here's how they actually compare, side by side, on the factors that matter to your money.

Looked at through that lens, the two aren't really competing investments. They carry a different level of risk, a different tax treatment, and a different amount of protection if something goes wrong, so they belong in different parts of your financial plan.

Questions to Ask Before You Put Money Into Crypto

If you want crypto exposure, work through these questions first. They're the same filter Eric uses before any speculative move, and they keep a side bet from turning into a plan you didn't mean to make.

1. Is my employer 401(k) match fully claimed? That match is free money, and skipping it to buy crypto instead means giving up a guaranteed return to chase an unguaranteed one.
2. Do I have an emergency fund in place? Crypto's volatility means you could need cash exactly when prices are down. An emergency fund keeps you from being forced to sell at the worst time.
3. Am I only using money I could fully lose without changing my plans? FINRA's guidance is blunt on this point: never invest more than you can afford to lose. Treat that as a hard rule, not a suggestion.
4. Do I understand how the IRS taxes every trade? If you're not ready to track cost basis on every swap, you're not ready to trade actively.
5. Have I set a target allocation? Decide the split between your index funds and any crypto exposure before you buy, not after a big price swing makes the decision for you.
6. Will I actually rebalance? If crypto grows to a much bigger slice of your portfolio than you planned, decide ahead of time whether you'll rebalance back toward your index funds and around your original target, or let it ride.
7. Am I buying because I understand it, or because everyone's talking about it? Buying because a token is trending is speculation dressed up as a strategy. Buying because you've done the homework is a choice you can defend later.

The Biggest Mistake People Make Comparing the Two

The biggest mistake is treating crypto and index funds like they're competing for the same job in your portfolio. They're not. One is supposed to be the boring, reliable engine that funds your retirement. The other, if you use it at all, is a speculative side bet you could walk away from without derailing your future.

The pattern we see most often: someone pulls savings out of their index funds to chase a crypto run after it's already spiked, then panics and sells low when it corrects. That's market timing with extra steps, and it fails for the same reason timing the stock market fails. Nobody can consistently call the top or the bottom, in crypto or anywhere else.

Dollar-cost averaging a set amount into your index funds on average every month, rather than trying to time entries, is the boring approach that actually works over time. If crypto interests you, size it small enough that its swings don't run your financial life, and keep the two goals, retirement and speculation, clearly separate in your head. None of this is a recommendation for any specific coin, exchange, or fund product. When you weigh crypto vs index funds honestly, it's a framework for comparing the real risks of two very different investment strategies against each other, not a verdict that one is always right.

Frequently Asked Questions

Conclusion: Build the Core First, Speculate Second

Crypto vs index funds isn't really a fair fight, because they're not built to do the same job. Index funds are the tool for the money you're counting on, the retirement fund, the house down payment, the future you're actually planning for. Crypto, if you choose to use it, is a speculative side bet sized so small that its swings never touch the parts of your financial life you can't afford to gamble with.

Start with the boring stuff. Get your employer match, fund your Roth IRA, and let compound interest do the heavy lifting over time. From there, if crypto still interests you, go in with real numbers and a real cap, not FOMO. For more on building the rest of your investing foundation, browse our investing archive.

How Does an Employee Stock Purchase Plan Work, Step by Step?

An employee stock purchase plan, or ESPP, lets you buy your employer's stock through automatic payroll deductions, usually at a price below what everyone else pays on the open market. Contribution room is capped by the plan itself, often somewhere between 1% and 15% of pay. Money builds up in a holding account during an offering period, which commonly runs six months. On the purchase date, the plan uses your accumulated contributions to buy shares in a single lump purchase, and any leftover cash gets refunded. Nothing complicated about it.

Most large public companies run what's called a qualified ESPP under Internal Revenue Code Section 423. Qualified plans follow specific rules on price, timing, and how much stock any one employee can accrue. In exchange, they unlock better tax treatment than a nonqualified plan gets. Without a Section 423 plan, the discount you receive is simply taxed as ordinary income the moment you buy the stock, with none of the qualifying-disposition upside covered below.

Your Maximum ESPP Discount Is Capped at 15%

Section 423(b)(6) caps a qualified ESPP's price at no less than 85% of the stock's fair market value, so 15% is the maximum discount any qualified plan can offer. Many plans also add a lookback provision, which prices your shares at 85% of whichever number is lower. Pick the lower of two prices: the stock's value on the first day of the offering period, or its value on the purchase date. A lookback is what turns a solid discount into a genuinely good one.

Picture your company's stock opening an offering period at $50 a share and closing it six months later at $60. Under a lookback, your purchase price is 85% of the lower number, $50. You pay $42.50 a share for stock now worth $60. That's close to a 29% built-in gain before you've made a single investment decision, on top of the paycheck you already earned. Free money, basically. Without the lookback, you'd pay 85% of $60, or $51, still a discount, just a smaller one.

$25,000 Is the Most You Can Accrue Each Year

IRS rules cap ESPP purchases at $25,000 in fair market value per calendar year. This is the most stock you can accrue the right to buy under a qualified plan, measured on the grant date, not on what you actually pay. IRS Section 423(b)(8) sets this cap, and it applies across every Section 423 plan your employer offers, so stacking multiple offerings won't get you around it.

That $25,000 figure is based on the stock's price at the start of the offering, not the discounted price. Because of that, your plan's own contribution-percentage limit usually kicks in well before the $25,000 ceiling does. Offering periods that stretch across two calendar years get a bonus. The IRS lets you accrue up to $25,000 for each calendar year the offering stays open. Rarely an issue in practice. Still, worth checking if your plan runs longer than six months.

The Two Ways an ESPP Sale Gets Taxed

What you owe when you sell comes down to one question: did you meet the IRS holding period? Hold the shares more than one year after the purchase date. Also hold them more than two years after the grant date, the first day of the offering period. Meet both conditions, and you've got a qualifying disposition. Sell before that and it's a disqualifying disposition, which triggers a different tax bill.

Qualifying dispositions report ordinary income equal to the lesser of your actual gain or the discount available on the grant date. Everything above that gets taxed as long-term capital gain, at the lower rate. Disqualifying dispositions work differently. Every dollar of spread between what you paid and the stock's fair market value on the purchase date counts as ordinary income right away. Only the gain above that gets capital-gains treatment. Simple rule, real dollars.

Reporting ESPP Income on Your Tax Return

Employers send Form 3922 the year you buy ESPP shares, and it's worth keeping, because it has the numbers you need to track your holding period and figure your cost basis later. Keep every form you get. Form 3922 itself doesn't get attached to your return. It just documents the transfer.

Once you sell, the ordinary income portion goes on Schedule 1 (Form 1040), line 8k. That changes if your employer already added it to your W-2. Then it's already part of your wages on line 1a, and you don't report it twice. Capital gain or loss goes on Schedule D and Form 8949. This is where a lot of people overpay. Brokerages often report your cost basis on Form 1099-B as just what you paid for the shares, not adjusted for the ordinary income you already reported. Miss that adjustment on Form 8949 and you can end up taxed on the same income twice. Check the 1099-B cost basis line against your own records before you file, or hand your Form 3922 to whoever does your taxes.

Is an ESPP Worth It?

For most people with access to a qualified plan, yes, an ESPP is worth using, at least up to a level you're comfortable with. Usually, an easy yes. A 15% discount is a guaranteed return before the stock does anything at all. Selling right after purchase locks in that discount as a gain, in most cases.

Concentration is the catch. Your paycheck already depends on this company. Tie a meaningful chunk of your savings to it too, and a bad quarter for your employer can hit your income and your net worth on the same day. That's the single-stock concentration risk the SEC's investor.gov warns about with any employer stock benefit. One common fix: sell ESPP shares soon after purchase, even if that triggers a disqualifying disposition. Then move the proceeds into a diversified index fund instead of holding out for the qualifying-disposition tax break.

There's no universal right answer. Much depends on your other savings and how much company stock you already hold through options or restricted stock. Risk tolerance matters too, especially if the price drops the week after you buy. Bring the numbers to a fee-only financial advisor who can factor in your specific plan and tax situation.

Where an ESPP Fits Into Your Bigger Money Plan

ESPPs rank among the more generous benefits sitting in your open-enrollment paperwork. Yours is worth using once you understand the mechanics. In practice that means a real, capped discount, a firm annual limit, and a tax bill that depends entirely on when you sell. Run the numbers for your specific plan. Decide upfront if you're holding for the qualifying-disposition tax break or selling right away to cut concentration risk. Either way, keep your Form 3922 handy. Simple as that.

Building out the rest of your retirement and investing picture is the natural next step. Start with What Do You Need to Know About Your Company's 401(k) Plan? to see how an ESPP fits alongside your employer match. From there, compare account types in Roth IRA for Beginners. For newer investors, How Should a Young Person Get Started with Investing and The Stock Market: The Complete Beginner Guide are good next stops. Once you've decided what to do with your ESPP shares, the Investing category has more on building a diversified portfolio.

What Is an Overdraft Fee, Exactly

An overdraft fee is what your bank charges when you spend more than your available balance and the transaction still goes through instead of getting declined. The bank effectively covers the gap for you, then charges a flat fee, often $30 to $35, for the favor. That's different from an insufficient funds (NSF) situation, where the bank just declines the payment outright, though some banks charge a fee for that too. The trigger is almost always the same: your available balance drops below what you're trying to spend, whether that's a debit card swipe, an online purchase, a paper check, or an automatic bill pay.

Why Banks Refund Overdraft Fees in the First Place

Banks refund overdraft fees because losing you as a customer costs them more than the fee is worth. A typical overdraft charge runs in the $30 to $35 range, and the bank would rather waive one than watch you close the account and move your direct deposit somewhere else. This is a business decision, not a legal right, so nobody has to say yes and reps are more willing to help on a genuine first-time slip than on a fourth ask this year. The Consumer Financial Protection Bureau notes that many banks will waive a fee if you ask, even though they're under no obligation to do it. Overdraft and related fees are a real profit center for the banking industry, so the FDIC tracks them as a consumer-protection issue for banking customers, not a footnote.

That's the mindset to bring to the call. You're not begging. You're a customer worth keeping, and knowing how to get overdraft fees refunded starts with treating it that way.

Overdraft protection is the umbrella term for how your bank handles a purchase when your checking account doesn't have enough money to cover it. Some banks link a savings account, a credit card, or a line of credit that transfers funds in automatically. Others just let the transaction go through and charge a flat fee for the privilege, which is standard overdraft coverage rather than true protection. Ask your bank which version you're enrolled in. If you're paying for the second kind and don't need it, you can typically switch or opt out through customer service in a few minutes.

How to Get Overdraft Fees Refunded, Step by Step

Call the number on the back of your debit card, not a branch line, and follow this order. Every step is here because skipping it is the reason people get told no.

1. Call within a day or two of the fee posting. A fresh ask reads as a mistake worth fixing. A fee from six weeks ago reads as you shopping around for free money.
2. Name the exact transaction. Have the date, the amount, and the merchant ready. “I noticed the $34 overdraft fee from Tuesday's $6 coffee purchase” beats “I got charged a fee” every time.
3. Say you're asking for a one-time courtesy waiver. Use that exact phrase. It's the internal term most banks use, and it tells the rep you know how this works.
4. Explain your situation briefly. “I've banked here three years and this is the first time this has happened” gives the rep a reason to help. Don't overdo it.
5. If the first rep says no, ask another rep or escalate. A supervisor has more authority to override the system than a frontline rep does. Stay polite and ask directly: “Is there someone who can approve a one-time exception?”
6. Get it in writing. Ask for a confirmation number or a note on the account. If the refund doesn't show up in two business days, you have something to point to when you call back.

Watch for Extended and NSF Fees Stacking on Top

One overdraft fee is rarely the whole story. Some banks add an extended or sustained overdraft fee, a second charge for every few days your balance stays negative, on top of the original fee. Others charge a separate non-sufficient funds (NSF) fee when a payment gets declined outright instead of covered. The FDIC's own consumer guidance flags this stacking as one of the biggest ways a single $6 coffee purchase turns into $70 or more in fees within a week. When you call to ask for a refund, ask about every fee tied to the incident, not just the first one. A rep who agrees to waive the original overdraft charge won't automatically reverse the extended fee that followed it unless you ask for that too.

How Often Will a Bank Actually Waive the Fee

Most banks will waive an overdraft fee once, sometimes twice, in a rolling 12-month period, and then the answer gets harder every time after that. There's no published industry standard, because it's an internal courtesy policy, not a regulation, so the exact limit varies by bank and even by rep. What's consistent is the pattern: first-time asks get approved more than repeat ones, and reps can usually see your waiver history on their screen before they even answer. If you're calling for the fourth time this year, expect a no, or at best a smaller partial refund.

If overdrafts keep happening, the fix isn't a better script. It's closing the gap that's causing them, which the last section of this guide covers.

Know Your Overdraft Rights Before You Call

You have one real legal right here, and it's worth checking before you ask for a favor. Under Regulation E, your bank can't charge you an overdraft fee on a one-time debit card purchase or an ATM withdrawal unless you specifically opted in to that coverage. If you never opted in and you got hit with a fee on a debit card swipe or an ATM transaction, that's not a courtesy request, that's a required refund, and you should say so directly: “I never opted in to overdraft coverage for debit transactions, so this fee shouldn't have been charged.”

Know the current regulatory backdrop too, because it changed recently. The CFPB finalized a rule in December 2024 that would have capped overdraft fees at large banks at $5, or required banks to treat overdraft lines as regular credit with full disclosures. The agency estimated it would have saved consumers roughly $5 billion a year, or about $225 per household that pays these fees. It never took effect. Congress repealed the rule in May 2025 using the Congressional Review Act, and the president signed the repeal. There's no federal cap on overdraft fees in 2026. Your bank sets its own rate, and it's on you to know it and to ask when you get charged.

Check-based and recurring-payment overdrafts work differently and aren't covered by the opt-in rule, so a bounced check or a missed auto-pay can still generate a fee either way.

One more thing worth knowing: a single overdraft usually won't affect your credit score, since your bank doesn't report routine checking account activity to the credit bureaus. But if you leave a negative balance unpaid long enough, your bank can close the account and send the debt to collections, and a collection account absolutely can affect your credit score and show up on your credit report. Don't let a $34 fee turn into a credit problem months later.

What to Do When the Bank Says No

A no isn't always final. Try these before you give up on the fee.

• Contact customer service again, in writing. Send a secure message through the bank's app or website restating the request. A written record sometimes gets routed to a different customer service team than the phone queue, and it gives you a timestamp if you need to escalate further.
• File a complaint with the CFPB at consumerfinance.gov/complaint if you believe the fee violated your opt-in rights under Regulation E. Banks respond to CFPB complaints on a deadline, which tends to get faster answers than a customer-service line.
• Consider checking account products with no overdraft fees. Several major banks, including Capital One, Citibank, and Ally, have eliminated overdraft fees entirely for their customers in recent years, and others now allow a small negative balance with no charge or have cut their fee sharply. Policies change, so check your own bank's current fee schedule and your target bank's before you switch checking accounts.
• Move your account if this keeps happening. If you've asked twice and been told no both times, the fee schedule is telling you something about the account, not about your luck on the phone.

How to Avoid Overdraft Fees Going Forward

The best refund is the fee you never get charged. A few moves make avoiding overdraft fees the normal outcome instead of a phone call away, and your financial institution's app can help with most of them.

• Turn on balance alerts. Every major bank offers a free text or push alert when your account balance drops below a number you set. Set it at $100 above your usual low point and you'll almost always catch the gap before it becomes a fee.
• Set up overdraft protection through a linked savings account. Most banks will pull from a linked savings account before they charge an overdraft fee, and the transfer fee, if there is one, is usually a fraction of the overdraft fee. Some banks skip both fees entirely on their checking accounts, so it's worth checking what yours charges.
• Keep a small buffer in checking. A $200 to $500 cushion absorbs the timing mismatches, like a direct deposit landing a day late or a subscription charging before you expected it, that cause most accidental overdrafts.
• Check for a monthly minimum-balance rule too. Some checking accounts waive their monthly maintenance fee only if your balance stays above a set line, which is a separate charge from an overdraft fee but easy to trigger at the same time. Know both numbers, not just one.
• Automate the boring parts. If you're not already tracking your spending and your balance by hand, automating your finances removes the guesswork that leads to overdrafts in the first place. Most banking apps will track this for you automatically once you turn the right settings on.

Frequently Asked Questions

The Bottom Line

The short version of how to get overdraft fees refunded: one phone call made quickly, specifically, and without apology. Ask for the one-time courtesy waiver, know your Regulation E rights on debit and ATM transactions, and escalate if the first answer is no. Getting one fee refunded is easy once you know the script. Building the banking habits that make the call unnecessary is the real win. Close the gap for good with a balance alert, a small buffer, or a bank that's dropped the fee altogether. For the bigger picture on keeping cash on hand so this never comes up, see our guides on building an emergency fund and how a high-yield savings account works, or browse the rest of our banking coverage for more ways to keep your bank from quietly taking your money.

What Makes an HSA a Retirement Account, Not Just a Medical Fund

An HSA becomes a retirement account the moment you stop spending it on today's copays and start letting it compound. A health savings account is a tax-advantaged account you can open if you're enrolled in a qualifying high-deductible health plan (HDHP), not enrolled in Medicare, and not claimed as a dependent on someone else's return (IRS Publication 969). Most people open one, put in just enough to cover the deductible, and spend it down every year. That's fine for cash flow, but it skips the part that makes an HSA worth more than almost any other account you own: nothing forces you to spend it.

Unlike a Flexible Spending Account, an HSA has no “use it or lose it” rule. The balance rolls over every year, it stays yours if you change jobs or health plans, and once your provider lets you invest it, it can sit in index funds and grow for 20 or 30 years, same as a 401(k). Treat it that way and you've turned a medical perk into one more retirement account, one that happens to have better tax treatment than the rest of them. HSAs offer something no other account on your list of benefits does: total flexibility on when you actually take the money out.

Qualified medical expenses cover more ground than most people expect, and knowing the current list helps you decide how much cash to keep on hand versus how much to leave invested. Doctor visits, prescriptions, dental work, vision care, mental health counseling, physical therapy, and even certain over-the-counter items all count as qualified medical expenses (IRS Publication 502, referenced directly by Publication 969 for HSA purposes). The wider that list runs, the more expenses you can choose to pay from savings today or, better, pay out of pocket and reimburse yourself from your HSA later.

A quick sample of what's covered, so you know how much room you actually have to work with:

• Deductibles, copays, and coinsurance on your health plan
• Dental cleanings, fillings, and orthodontia
• Eye exams, glasses, and contacts
• Prescription medications and many over-the-counter drugs
• Therapy, counseling, and other mental health services
• Physical therapy and chiropractic care
• Medicare premiums and a limited amount of long-term care insurance premiums (once you're eligible, covered later in this guide)

Every one of those is a real expense you're probably already paying for out of some other account. Pay for qualified expenses from your HSA when cash is tight, or pay cash and use your HSA as the receipt-backed reimbursement account described below. Either way, the expenses don't disappear, you're just choosing which account absorbs them.

The Triple Tax Break That Beats Your 401(k) and Roth IRA

An HSA is the only account the IRS lets you fund tax-free, grow tax-free, and withdraw tax-free, and no 401(k) or Roth IRA does all three. Contribute through payroll and you skip income tax and payroll tax on that money. Contribute directly and you deduct it on your return, no itemizing required. From there, the balance grows tax-free the whole time it's invested, and if you spend it on a qualified medical expense, the withdrawal is tax-free too, at any age (IRS Publication 969).

Compare that to your other accounts. A traditional 401(k) gets you the upfront deduction and tax-free growth, but every dollar you pull out is taxed as ordinary income. A Roth IRA skips tax on the way out, but you funded it with dollars you'd already paid tax on. An HSA is the only one that dodges tax at all three stages, which is exactly why financial planners who focus on retirement accounts often rank it above both once you've grabbed any employer 401(k) match. It's a genuinely powerful piece of a long-term financial plan, not just a place to park a few hundred dollars for a doctor visit.

2026 HSA Contribution Limits (Self-Only, Family, and the Catch-Up)

For 2026, you can put up to $4,400 into an HSA with self-only HDHP coverage, or $8,750 with family coverage, and if you're 55 or older you can add another $1,000 on top of either limit (IRS Revenue Procedure 2025-19). That catch-up amount is fixed by law, not indexed for inflation, so it hasn't moved in years and won't move next year either. If you and your spouse are both 55 or older and both HSA-eligible, you each get your own $1,000 catch-up, but only in separate accounts.

To qualify for any of this, your HDHP has to meet the IRS deductible and out-of-pocket rules for the year. For 2026, that means a minimum deductible of $1,700 for self-only coverage or $3,400 for family coverage, and a maximum out-of-pocket cap of $8,500 for self-only or $17,000 for family coverage (Revenue Procedure 2025-19). Check your plan's numbers against these before you assume you're eligible. Not every plan with a high deductible technically qualifies as an HSA-eligible HDHP.

Confirm your own plan's deductible and out-of-pocket max with your insurer before you contribute, since a plan that doesn't meet these thresholds can't fund an HSA even if your employer calls it a “high-deductible” plan.

Invest It, Don't Spend It: How to Actually Use an HSA as a Retirement Account

Using an HSA as a retirement account means paying medical bills out of pocket when you can afford to, and letting the account invest instead. Most HSA providers hold your balance in cash by default, and cash earns close to nothing over 30 years. The move is to check whether your provider offers an investment option, and if it does, move any balance above your comfort cushion into a low-cost index fund, the same kind you'd hold in a 401(k) or Roth IRA.

1. Max the match first, then the HSA. If your employer matches 401(k) contributions, grab the full match before you redirect money to your HSA. That match is still free money nothing else beats.
2. Confirm your HSA provider offers investing. Some workplace HSAs default to cash-only. If yours does, you can often roll it into a self-directed HSA provider that offers a brokerage window, similar to rolling an old 401(k) into an IRA.
3. Set an investing threshold and stick to it. Many providers require you to keep a minimum cash balance (commonly $1,000 to $2,000, though this varies by provider, so confirm your own) before the rest can go into investments. Anything above that threshold is a candidate for index funds.
4. Pay medical bills out of pocket when you can. Every dollar you pay in cash instead of pulling from the HSA is a dollar that keeps compounding, tax-free, inside the account.
5. Keep every receipt. You'll need them later. More on that below.

This only works if you can actually afford to pay medical costs out of pocket without going into debt for it. If a $2,000 deductible would wreck your budget, spend the HSA the normal way and don't force the investing strategy. An emergency fund and a paid deductible beat an aggressive HSA-investing play every time.

The Receipt Trick: Pay Now, Reimburse Yourself Decades Later

You can reimburse yourself from your HSA for a medical expense years, even decades, after you paid it, as long as the expense happened after you opened the account and you have the records to prove it (IRS Publication 969). That timing rule is the whole trick. Pay this year's $400 urgent care bill out of your checking account, save the receipt, and let the $400 that would have come out of your HSA stay invested instead. Do that every year for 20 years and you've quietly built a second retirement account funded entirely by expenses you already paid for out of pocket.

When you eventually want the cash, whether that's at 45 or 75, you reimburse yourself for the stack of old receipts and pull the money out completely tax-free, because it's still a qualified medical expense even if you paid it 15 years ago. Keep the receipts somewhere you won't lose them, a folder, a scanned drive, a dedicated app. The IRS doesn't require you to submit them when you take the distribution, but you need them on hand if you're ever asked to prove the withdrawal was qualified.

What Happens to Your HSA After Age 65

Once you turn 65, your HSA stops being a medical-only account and starts acting like a traditional IRA for anything else. Before 65, a withdrawal that isn't for a qualified medical expense costs you ordinary income tax plus a 20% penalty. After 65, the 20% penalty disappears completely. You can spend the money on anything, a vacation, a car, rent, and you'll owe ordinary income tax on it, the exact same treatment as a traditional 401(k) or IRA withdrawal (IRS Publication 969). Spend it on a qualified medical expense at any age, including after 65, and it's still entirely tax-free.

There's another quiet advantage here: the IRS doesn't require minimum distributions from an HSA the way it does from a traditional IRA or 401(k) starting at age 73. Nothing forces you to touch the account, so it can keep growing for as long as you leave it alone, longer than almost any other retirement account you can open.

Using HSA Money for Medicare Premiums and Long-Term Care Insurance

Once you're on Medicare, you can pay Medicare premiums tax-free straight out of your HSA, including Part B, Part D, and Medicare Advantage premiums, though not a Medicare supplemental (Medigap) policy (IRS Publication 969). That's real help against a cost that hits almost every retiree's budget for the rest of their life, and it's a benefit most people never plan for when they're still working and funding the account.

Your HSA can also cover a limited amount of long-term care insurance premiums, subject to age-based limits the IRS adjusts each year, so check the current limit for your age before you count on the account to cover a full policy. Between Medicare premiums and long-term care insurance, an invested HSA can quietly absorb two of the biggest health care costs of retirement, on top of everyday medical expenses.

Who Should (and Shouldn't) Lean On an HSA for Retirement

This strategy fits people who already have a fully funded emergency fund, are grabbing any employer 401(k) match, and can genuinely afford to pay medical bills out of pocket without going into debt. If you're self-employed and picking your own health insurance plan, an HSA-eligible HDHP paired with an invested HSA can stack well next to a SEP IRA or Solo 401(k), since you're already managing your own retirement contributions and can decide how aggressively to fund each one based on your personal cash flow.

It takes real work to keep this up for decades, tracking receipts, checking your provider's investment menu, resisting the urge to spend the balance on a routine expense you could easily cover in cash. That work is exactly what earns the tax break. If your current financial situation doesn't leave room for it, that's fine. Fund the HSA enough to cover your deductible, skip the investing strategy for now, and revisit it once your income or savings picture changes.

It doesn't fit everyone. If a high-deductible plan would leave you skipping care because you can't afford the deductible, a lower-deductible plan is the better move even without the HSA tax break. And if you're not disciplined about saving receipts or you'll be tempted to raid the account for non-medical spending before 65, you'll pay the 20% penalty and lose the whole advantage. The tax break is real, but it only pays off if your cash flow can actually support paying costs out of pocket today.

A Few Things to Consider Before You Start

Consider your own individual situation before you lock in an aggressive HSA-investing plan, because the right answer is different for a salaried employee with a stable paycheck than it is for a freelancer whose income swings month to month. Continue contributing enough to cover your plan's deductible first, and only push extra dollars into investments once that cushion exists.

A few more things worth planning around as your situation changes over the years:

• Pre-tax contributions through payroll save you both income tax and payroll tax, so route contributions through your employer's plan when that option exists instead of contributing directly.
• Your future self benefits most from starting the invest-it strategy early, since the tax-free growth compounds longer the sooner you stop spending the account down every year.
• A fee-only financial advisor can help you weigh HSA investing against your other retirement savings goals if your situation is complicated, self-employment income, a growing family, or a major health event. Skip anyone who earns a commission on the products they recommend.
• Retirement savings plans work together. An HSA doesn't replace your 401(k) or IRA, it adds another tax-advantaged bucket alongside them.

FAQ: HSA as a Retirement Account

Conclusion: Let It Grow Before You Spend It

An HSA as a retirement account isn't a loophole or a trick, it's just what happens when you use the account the way the tax code actually rewards: fund it, invest it, and leave it alone. Grab your 401(k) match first, confirm your HSA provider lets you invest, and pay what medical bills you can out of pocket so the balance keeps compounding. If you haven't set one up yet, our guide to how to set up an HSA covers the mechanics of opening the account itself. And if you're self-employed and weighing an HSA-eligible plan against your other coverage options, our post on the self-employed health insurance deduction is the next thing to read. For the broader retirement picture, see our full library in the Retirement section.

Property, Not Currency: Crypto Taxes Explained

Back in 2014, the IRS decided that virtual currency counts as property for federal tax purposes. That single call is still the foundation of every crypto tax rule today (IRS Notice 2014-21). Doesn't matter that a coin lives on a blockchain instead of a bank vault. Property rules that tax a house or a stock certificate tax your Bitcoin, your Ethereum, and your NFTs too, and every cryptocurrency counts as a capital asset by default. Owning crypto by itself doesn't create a bill. Disposing of it does: selling, trading, spending, or otherwise giving up ownership once the value has moved since you got it.

One myth this rules out fast: watching the price swing on your exchange app isn't a taxable event. Buying and holding never is. Only a disposal counts. Hang on to that distinction (capital gains, ordinary income, reporting all build on it) and the rest of this guide will click into place on its own.

Capital Gains vs. Ordinary Income: How the Rate Depends on the Clock

This is the piece of crypto taxes explained that trips up the most people. How much tax you pay depends on one number: how long you held the asset before you sold it. Hold for one year or less, and any profits count as a short-term capital gain, taxed at your regular income tax rate, the same bracket that taxes your paycheck. Hold longer than a year, and those profits qualify for long-term capital gains rates instead, a lower 0%, 15%, or 20% depending on your income. That's the most important number in this whole guide: how crypto gets taxed comes down to the calendar.

For 2026, those long-term brackets break down like this, based on the IRS's inflation-adjusted figures in Revenue Procedure 2025-32:

Those thresholds run on taxable income, not gross income. Your actual deductions bring you in under them more often than you'd guess. Here's the lesson that actually changes behavior: sitting on a gain near the one-year mark? Wait a few extra weeks. That move alone can drop you from your ordinary rate down to 0%, 15%, or 20%. Not a loophole. Just the calendar working in your favor.

Which Crypto Moves Actually Trigger a Tax Bill

Every one of these counts as one of the taxable events the IRS's own guidance on digital assets lays out, whether it's a disposal or a receipt of new coins:

• Selling crypto for U.S. dollars
• Trading one crypto for another, even coin to coin with no cash involved
• Spending crypto to buy something, from a coffee to a car
• Earning crypto as payment for freelance work or a side hustle
• Mining or staking rewards, valued the moment you gain control of them
• Receiving an airdrop or a hard fork payout

And here's what doesn't trigger anything: buying crypto and holding it, moving coins between two wallets you own, and donating appreciated crypto you've held over a year to a qualified charity. Doing so lets you skip the capital gain entirely and still deduct the fair market value, though gifts over $5,000 need a qualified appraisal. Family gifts work similarly for the giver. Gifting crypto isn't taxable to you up to the annual gift tax exclusion, $19,000 per recipient for 2026 (IRS: What's new, estate and gift tax). Recipients inherit your cost basis and holding period once they eventually sell. Moving crypto between your own accounts feels like doing something, but the IRS doesn't see a disposal there, unless you paid a transaction fee in crypto to make the transfer. Paying that fee counts as a tiny taxable spend on its own.

Reporting Crypto on Your Tax Return: the Forms You Need

The reporting side of crypto taxes explained comes down to three forms. First, every 1040 now asks a direct yes-or-no question near the top: did you receive digital assets as a reward, award, or payment at any point in the year, or sell, exchange, or otherwise dispose of one? Sold, traded, spent, or earned crypto during the year, and the answer is yes. Only bought and held, or moved coins between your own wallets without paying a fee, and the answer is no (IRS: Digital Assets).

Second, every disposal gets listed on Form 8949: date acquired, date sold, proceeds, and cost basis for each transaction. Calculate your gains and losses line by line, then roll the totals up to Schedule D on your 1040. Mining or staking income goes on Schedule 1 instead (or Schedule C if you're running it as a business, more on that below).

Third, the paper trail is getting easier to follow, whether you want it to or not. Brokers and exchanges now have to report gross proceeds on Form 1099-DA for transactions from January 1, 2025 forward. Starting with assets acquired on or after January 1, 2026, they'll report your cost basis too, with the first basis-inclusive statements going out by February 17 for that filing season (IRS: broker reporting on digital asset sales). Assets you already held before 2026, or moved in from an outside wallet, count as “noncovered.” The broker still reports the sale, just not your basis. You're on the hook for that piece either way.

Using Crypto Losses to Cut Your Tax Bill, Here's the Limit

A down year in crypto isn't only bad news at tax time. Capital losses offset capital gains first, dollar for dollar, crypto gains included. Losses running higher than your gains? Up to $3,000 of the excess ($1,500 if married filing separately) reduces your ordinary income for the year. Whatever's left over carries forward to next year's return, and the year after that, for as long as it takes to use up (IRS Topic 409).

Tax-Loss Harvesting: Turning a Down Year Into a Deduction

Tax-loss harvesting means selling an investment on purpose while it's down. You lock in the loss, offset a gain elsewhere, then decide whether to buy back in. Stock investors have used the strategy for decades. It works even better with cryptocurrency, for one specific reason: the wash sale rule doesn't currently apply to crypto. Sell a coin at a loss and buy it right back five minutes later, and the loss still counts toward reducing your capital gains tax. No 30-day waiting period required. The wash sale rule in the tax code only covers stocks and securities, and crypto is treated as property instead.

Year-end becomes a good time for cryptocurrency investors to look at the whole portfolio, thanks to that gap. Unload the losers, bank the losses against this year's gains, and bring in a tax professional if the trades get complicated across multiple exchanges. Don't treat the wash sale gap as permanent, though. Congress has floated closing this exact loophole more than once. Use it while it's current law, not as a strategy your entire plan hangs on.

Getting Paid in Crypto as a Freelancer or Side Hustler

A client pays your invoice in Bitcoin. Or a customer tips you in Ethereum. Either way, that counts as payment for goods and services: ordinary self-employment income the moment you receive it, valued at that day's fair market value, not whatever it's worth when you eventually cash out. Report it on Schedule C with your other freelance earnings, subject to self-employment tax the same as a dollar payment would be. My self-employment tax explained guide covers that 15.3% rate and how it stacks with your regular income tax.

Mining works the same way, if you're running it as an actual operation rather than a hobby. Gaining control of mined coins triggers ordinary income at that day's fair market value, per the IRS. Rise to the level of a trade or business, and the net earnings count as self-employment income too, reportable on Schedule C with equipment and electricity deducted as ordinary business expenses. Here's the double tax event nobody warns you about: income tax on the crypto's value when you receive it, then a separate capital gain or loss later when you sell it, based on how the price moved between those two dates.

Crypto-heavy side income can also push you into owing quarterly estimated taxes. Nobody's withholding on it the way an employer would. Check my guide to paying quarterly estimated taxes for the four due dates and how to dodge the IRS underpayment penalty.

Recordkeeping That Makes Crypto Tax Season Painless

Once you've got crypto taxes explained down cold, the last piece is discipline. Track it as you go, and none of this is hard. Wait until March to reconstruct it, especially once you own several different cryptocurrencies across different exchanges, and it's miserable. A few habits fix that:

1. Log the date, price, and amount for every buy. This is your cost basis, and you'll need it for every future sale.
2. Log every disposal the same way. Sale, trade, or purchase with crypto, all count, and each one needs its own line on Form 8949.
3. Download exchange statements before you close an account. Shuttered exchanges and apps rarely email you your old history later.
4. Separate wallet transfers from real trades in your records. Moving coins to cold storage isn't a sale, and mixing the two up overstates your taxable activity.
5. Bring in a tax professional once it gets complicated. DeFi swaps, staking, mining, and NFT sales each add a wrinkle, and a CPA who's actually handled digital assets is worth the fee.

Bottom Line: Crypto Taxes in One Paragraph

Crypto taxes explained plainly: the IRS treats your coins as property. Selling or trading gets taxed as a capital gain or loss based on the calendar, and anything you earn in crypto counts as ordinary income the moment you receive it. Track your cost basis as you go. Stay past a year when you can to catch the lower rate. Harvest your losses in a down year. That's the whole system, and it isn't more complicated than tracking a brokerage account, once you know what information to log. Serious cryptocurrency investors treat tax planning as part of the investment, not an afterthought every April.

Weighing crypto against a more tax-sheltered way to invest? My Roth IRA for beginners guide is a good next stop, and our Taxes category has more IRS-sourced guides on self-employment income, quarterly payments, and deductions.

Is This Actually Identity Theft, Even in a Family?

Yes. The law doesn't care that the person who opened the account shares your last name. If a relative used your Social Security number, birthdate, or other personal details to open the account without your permission, that's identity theft under federal law, full stop. The Federal Trade Commission's identitytheft.gov doesn't ask who did it before it lets you file a report. It's built for exactly this kind of case, including family and roommate fraud, which shows up constantly and is often the hardest kind to report.

The emotional part is real. Reporting a sibling, a parent, a child, or a spouse feels different than reporting a stranger. But the account itself doesn't know that. It's showing up on your credit report, hurting your score, and possibly heading to collections, and none of that waits for you to sort out the family dynamics first.

Warning Signs of Credit Card Fraud by a Family Member

Card fraud inside a family often shows up in small, easy-to-miss signs before it turns into real damage to your credit score. Watch for a statement from a credit card issuer you never signed up for, a hard inquiry on your credit report you don't recognize, collection calls about credit cards you never opened, or mail from creditors that suddenly stops arriving because someone changed your address. Any one of these signs is a reason to pull your credit reports and check for accounts you don't recognize.

Victims of family fraud often notice the signs late, since a relative who has access to your mail or your financial information can keep new cards and statements from ever reaching you. If something feels off with your credit, don't wait for proof. Check your reports and protect your accounts first.

Are You Legally on the Hook for the Debt?

Usually not, but the answer depends on which kind of fraud happened. There are two different situations, and they work differently.

If a relative opened a brand new card, one you never applied for, that debt legally belongs to whoever opened it, not you. A fraudulently opened account is treated as identity theft, not your debt, once you report and dispute it. You're not required to pay a cent on an account you never opened, as long as you act.

If someone used a card you already had, charging things on your existing account without your permission, a different rule applies. The Fair Credit Billing Act caps your liability at $50, and only if you don't report the charges within 60 days of your statement. In practice it rarely gets that far, since most major card issuers offer $0 fraud liability when you report unauthorized charges promptly.

One catch. If you knew about the account for months and let it ride before saying anything, some issuers may treat that delay as a sign you approved it. Report the fraud as soon as you find it. Waiting is the one thing that can actually cost you here.

What if You Added Them as an Authorized User Yourself?

That's a different situation, and it's not what the rest of this guide covers. If you willingly added a relative as an authorized user on your card, you gave them permission to charge on the account, and you're on the hook for what they spend even if you regret it later. The fix there isn't a fraud dispute, it's a phone call to your issuer to remove them as an authorized user, which stops new charges immediately but doesn't erase what's already on the statement.

The test is simple. Did you apply for the account, sign for it, or add someone to an account you control? That's authorized use, and you own the debt. Did someone use your name and personal information to open something you never agreed to? That's identity theft, and the steps above apply.

What to Do After a Family Member Opened a Credit Card in Your Name

Work through these in order once you confirm the fraud. The first two steps matter most, so don't wait until tomorrow to start.

1. Call the credit card issuer's fraud department. Tell them the account wasn't opened by you, ask them to close it, and request confirmation in writing.
2. Place a free fraud alert. Contact one of the three credit bureaus (Equifax, Experian, or TransUnion) online or by phone and ask for a fraud alert. That bureau is required to notify the other two. An initial fraud alert lasts one year.
3. File a report at IdentityTheft.gov. It's free, and it builds you a personalized recovery plan plus pre-filled letters you can send to creditors and your financial institutions, along with an official FTC Identity Theft Report.
4. Pull your credit reports. Get all three, free, at AnnualCreditReport.com (permanent, once a week, from Equifax, Experian, and TransUnion), and look for any other accounts you don't recognize.
5. Dispute the fraudulent account in writing with each bureau reporting it, and attach your FTC Identity Theft Report.
6. Decide whether to file a report with your local police department, keep a copy for your records, and freeze your credit if you want the strongest protection while this gets sorted out.

How to Dispute the Account With the Credit Bureaus

Send a written dispute to each bureau reporting the account, and include your FTC Identity Theft Report. That report gives you real legal leverage. Under the Fair Credit Reporting Act, once a bureau receives your Identity Theft Report, it has to block the fraudulent information from your credit file within four business days. The bureau also has to notify whoever reported the account, meaning the card issuer, that it may be the result of identity theft.

Keep copies of everything, and send disputes by certified mail if you can, so you have proof of when each bureau received it. IdentityTheft.gov generates the dispute letters for you, pre-filled with the right legal language, which saves you from drafting them from scratch.

Should You File a Police Report on a Relative?

It's your call, and there's no single right answer, but a few things affect the decision. Some card issuers ask for a police report before they'll fully clear a fraudulent account, and the stronger, seven-year extended fraud alert requires either a police report or your FTC Identity Theft Report. You don't have to name a suspect to file either one. You can report that fraud occurred on your identity without accusing a specific relative if you're not ready to go there.

If the debt is small and the issuer clears it with just your FTC report, you may never need to involve the police at all. If it's large, or the relative refuses to help fix it, a report, and possibly a consumer-protection attorney, may be the only way to get the account fully removed and stop it from happening again.

How to Lock Down Your Credit So It Doesn't Happen Again

A fraud alert is the lighter touch. A credit freeze is the strongest lock available, and it's been free at all three bureaus since 2018. Here's how the two compare:

If a relative had access to your personal information once, a freeze stops anyone, including them, from opening new credit in your name until you unlock it. That protection matters even after you fix the first account, since the same person could try again. Pull your free weekly reports at AnnualCreditReport.com and scan them every few weeks while this stays unresolved.

How Long Recovery Takes and What Happens to Your Score

A fraudulent account can drag your credit score down while it's open, mostly from the hit to your credit utilization and any missed payments reported on it. The good news: once you get it disputed, the damage isn't permanent. A bureau has to block the fraudulent information under your FTC Identity Theft Report within four business days, not months. Your score typically starts recovering as soon as the account is removed, though a full bounce-back can take a few statement cycles as the bureaus recalculate your utilization and payment history.

Check your credit reports again about 30 days after you dispute the account, and again at 60 and 90 days, to confirm it's actually gone and hasn't reappeared. Reinsertion happens occasionally, and if it does, you have the right to demand the bureau explain why in writing.

Frequently Asked Questions

Conclusion: Move Fast, Keep Records, Don't Pay a Debt That Isn't Yours

If a family member opened a credit card in your name, it's still identity theft, and you still have every legal protection a stranger's victim would have. File your report at IdentityTheft.gov, dispute the account in writing, and freeze your credit while it gets sorted out. Don't let the family relationship talk you into paying a debt you never agreed to.

For more on protecting your money and your credit, see our guides on identity theft prevention, disputing credit report errors, building credit from scratch, and the complete beginner's guide to credit scores.

What Makes an AI Side Hustle Different From the Hype

An AI side hustle looks different from a normal side gig for one reason: the barrier to entry dropped, so the competition showed up overnight. Everyone has access to the same tools you do. ChatGPT, Midjourney, and a dozen other apps are one signup away for anyone with a phone. That means raw AI output, by itself, has close to zero market value. Anyone can generate a paragraph or an image in ten seconds, so nobody will pay you just to click a button.

What actually sells is the layer on top: editing raw AI output into something accurate and on-brand, knowing which prompts get useful results instead of generic ones, catching a wrong answer before a client does, and packaging the result so it's ready to use. No one is quietly making six figures by prompting a chatbot in their sleep. That pitch is marketing copy for a $497 course, not a real business. Picture a real AI side hustle as a normal freelance service with an AI-shaped shortcut built into the workflow. It's still work, and it still takes a skill you bring to the table.

AI Side Hustles That Actually Make Money

Upwork's 2026 In-Demand Skills report found that freelance work tied to applying AI on the job grew 109 percent year over year in 2025, with AI video editing up 329 percent, AI integration work up 178 percent, and AI data labeling and annotation up 154 percent. That's real hiring activity, not hype. Here are six categories worth trying, in roughly the order most beginners can start them.

• AI-assisted writing and editing. Clients want blog posts, email newsletters, and product descriptions fast, but raw AI drafts read generic and get flagged by readers and by Google. You get hired to create content with AI and then edit hard: match the client's voice, fact-check every claim, and cut the filler a model always adds.
• Prompt-based design and video. Etsy templates, print-on-demand designs, YouTube thumbnails, and social media marketing content all lean on tools like Midjourney and Canva's AI features now. Composition and brand fit are what actually sell, not the prompt itself. Someone who knows what looks good beats a hobbyist who just types more words into the box.
• Chatbot and automation builds for small businesses. Plenty of local business owners want a simple customer-service bot or an email automation and have no idea how to build one. No-code tools like Zapier and Make let you wire one together without writing code. Basic logic and patient testing are what you need, because a bot that breaks on the first weird question costs you the client.
• AI data labeling and annotation. AI companies pay real people to label images, text, and audio so their models learn correctly. It's not glamorous, but it's real, paid work with a low skill floor. Follow the labeling spec exactly, every time, without getting sloppy on hour six, and that's really the whole job.
• AI-powered virtual assistant work. Solo founders, small startups, and content creators need inbox triage, scheduling, and meeting notes handled, and AI tools make you faster at all three. You're still selling your judgment and your reliability. AI just means you can take on more clients without working more hours.
• Reselling AI-built digital products. Templates, spreadsheets, Notion systems, and printables get built faster with AI tools, then sold on Etsy or Gumroad. Picking a niche people actually search for is the skill that matters here, not the AI part of the build.
• AI consulting and training for small businesses. Plenty of small business owners are non-technical and don't know where to start with AI tools. You get hired to understand their existing process, then walk them through workflow setup, tool selection, and basic staff training, turning your own experience into a paid service that protects their time and revenue instead of free advice on social media. A short case study from your first client makes the next one easy to close.

Start One of These This Week

Pick a hustle from the list above and start now, not after you've watched ten more YouTube videos about it. Here's the move, step by step.

1. Pick the hustle that matches a skill you already have, not the newest tool you just discovered. Writers should start with AI-assisted writing, not chatbot builds.
2. Set a real, tiny income goal for your first month. Something specific, like $200, beats “make some extra money” because it tells you when you're actually on track.
3. Do the work once for a real client, even at a steep discount or for free in exchange for a testimonial. One finished project beats a portfolio full of practice pieces.
4. List the service on one marketplace (Fiverr or Upwork) or pitch five small businesses directly by email. Don't spread yourself across five platforms at once.
5. Track every dollar and every hour from day one. This counts as self-employment income to the IRS the moment a client pays you, so the paper trail starts now, not at tax time.
6. Raise your price after your first three paying clients. Your intro rate was a foot in the door, not your actual worth.

Realistic Pay for AI Side Gigs

Pay varies enormously by skill and niche, so anyone quoting you a flat hourly rate for “AI side hustles” is guessing. Your rate is set by the underlying skill, not by the AI itself. A freelance writer who uses AI to draft faster still charges writer rates. A designer who prompts for concepts still charges designer rates. There's no separate “AI rate” you can look up, and you should be skeptical of anyone who claims there is.

What you can trust is the demand signal. That double-digit growth means real clients are actively posting this work right now, which is what actually matters when you're picking where to start. Most of the tools cost little or nothing to use. ChatGPT, Canva, and Zapier all have free tiers, so your early cost is time, not money. What a client actually pays for is quality control: a human who reviews the AI-generated draft, catches the awkward line or the wrong fact, and delivers a finished result they don't have to touch again. That's the real opportunity here, and it's also why the hustles on this list hold up better than a course promising passive income for zero work. Use the table below to match a hustle to how fast you can realistically land a first client and start to earn.

Recurring monthly clients pay more reliably than one-off projects, and you don't need to build an agency to land them. One small business willing to pay for a custom chatbot or a monthly batch of content can turn into steady, predictable income once you deliver good work the first time. Charge based on your existing knowledge and the traditional rate for that type of work, then raise it once you have a few recurring clients on the books.

Taxes on AI Side Hustle Income

The IRS treats AI side hustle income exactly like any other self-employment income the moment a client pays you. There's no separate “AI income” category and no exemption for small or informal work. Report your profit on Schedule C, then use Schedule SE to calculate self-employment tax once your net earnings from self-employment hit $400 for the year. That tax is 15.3 percent on top of the regular income tax you owe on the profit, and it covers your own Social Security and Medicare contributions.

If you get paid through a marketplace or a payment app, it only has to send you a Form 1099-K once you cross $20,000 in payments and 200 transactions in a year, a threshold the IRS reinstated for tax year 2025 and beyond. Falling under that number doesn't mean the income is tax-free. You still have to report it, the 1099-K is just a paperwork trigger, not the line where taxable income begins. Read our full breakdown of self-employment tax before you file, and once you land steady clients, our guide to pricing your freelance work can help you build tax into your rate instead of getting surprised by it in April.

The Mistakes That Sink an AI Side Hustle

Most AI side hustles fail for one of five avoidable reasons. Watch for these before you build a habit around them.

• Selling unedited AI output. Clients can tell, and it burns the trust that gets you repeat business.
• Ignoring a platform's AI-disclosure rules. Some marketplaces and clients require you to say AI was involved. Read the terms before you list anything.
• Chasing an oversaturated niche because a course promised “no skill required,” without doing basic market research first. Most courses selling that dream skip the taxes and the actual client work, and they skip explaining that traditional freelance skills still set the price. If a hustle sounds effortless in an ad, assume a thousand other people saw the same ad.
• Underpricing because “the AI does the work.” Your judgment is the product. Pricing yourself like a tool operator instead of a professional leaves real money on the table.
• Skipping the bookkeeping because the hustle feels casual. It's taxable from the first dollar, whether you treat it that way or not.

Frequently Asked Questions

Conclusion: Pick One and Start Today

AI side hustles that actually make money are still side hustles. They take real skill, real client work, and real bookkeeping. AI just speeds up your first draft. Pick the one closest to a skill you already have, land one paying client this week, and reinvest that first check into better tools instead of chasing every new AI trend that shows up in your feed. For more ways to build income on the side, read our guide to retail arbitrage, dig into how to price your freelance work once you land a client, and browse the full side hustle archive for more ideas.

How This Deduction Compares to What Employees Get

Employees rarely think about this deduction because they don't need to. When you work for an employer, the company typically covers a portion of the health insurance premiums and takes your share out of your paycheck before taxes, so it never shows up as a line on your tax return. Self-employed individuals don't get that built-in benefit. You're on the hook for the full premium yourself, whether you buy an individual plan or a family plan directly from an insurer or the Marketplace, with no employer around to lower the sticker price. The self-employed health insurance deduction is the tax code's way of narrowing that gap. It doesn't reduce what you pay in insurance premiums, but it does reduce what you owe in tax on the income you used to pay for them, which is the closest thing to an employer subsidy that a solo business owner gets. Think of it as the self-employed equivalent of the tax-free treatment a W-2 employee gets on their share of premiums, just claimed a different way, on your own return instead of your paycheck.

Who Qualifies for the Self-Employed Health Insurance Deduction

You qualify if you had a net profit from self-employment for the year and you paid for health insurance premiums under coverage established under your own business. The deduction itself comes from Internal Revenue Code Section 162(l), and the mechanics for figuring it are spelled out in the IRS instructions for Form 7206. Per those instructions, eligibility covers four situations: you're a sole proprietor or single-member LLC owner with net profit on Schedule C, you're a farmer with net profit on Schedule F, you're a partner with net earnings from self-employment reported in box 14, code A of your Schedule K-1, or you're a more-than-2% shareholder in your own S corporation who received wages from it. That's who can claim the deduction. Notice what's missing from that list: a loss year. If your business didn't turn a profit, you can't claim the deduction for that business's premiums, though the expenses might still count as an itemized medical expense on Schedule A if you clear the 7.5% of AGI floor.

Partners get their own wrinkle. The insurance plan can be in the name of the partnership or in your name personally, but if you pay the premiums yourself, the partnership has to reimburse you and report the amount on your Schedule K-1 as a guaranteed payment included in your gross income. Otherwise, the IRS won't treat the plan as established under the business, and you lose the right to claim the deduction even though you genuinely paid for real coverage.

What Health Coverage Counts

Medical, dental, and vision insurance all count, along with qualified long-term care insurance. The coverage can protect you, your spouse, your dependents, and any child who was under 27 at the end of the tax year, even if that child wasn't your dependent. Medicare counts too. If you voluntarily pay Medicare Part B, Part D, or Medigap premiums for coverage similar to a private health plan, those premiums are eligible, which matters a lot for self-employed people who've aged into Medicare but kept freelancing.

Long-term care insurance gets its own limit, and it's based on the age of the person covered, not a flat dollar figure. Here are the amounts from the IRS instructions for the 2025 Form 7206, the most recent the IRS has published as of this writing. The IRS adjusts these every year, so check the current year's Form 7206 instructions before you file.

Source: Instructions for Form 7206 (2025), IRS.gov. If you paid more than the limit for someone's age, the extra doesn't disappear, it just isn't eligible for this deduction and may qualify as a Schedule A medical expense instead. Health insurance premiums for you, your spouse, and your dependents can all be deducted together on the same Form 7206, so you don't need a separate form for each family member's coverage, only for each separate business.

Above-the-Line vs. Itemizing: Why This Deduction Beats Schedule A

This deduction is worth more to most self-employed people than deducting the same premiums as an itemized medical expense, and the reason comes down to one number: 7.5%. If you itemize on Schedule A, medical expenses only count once they clear 7.5% of your adjusted gross income, and you have to give up the standard deduction to itemize at all. The self-employed health insurance deduction skips both hurdles. It comes off your income on Schedule 1 before you even decide whether to itemize, so every eligible dollar of premium reduces your taxable income directly, not just the sliver above a 7.5% floor. That's the whole reason the IRS carved out a separate above-the-line break for self-employed people instead of leaving health premiums stuck in the itemized deduction pile with everyone else's.

There's a real-world consequence to this. Say a freelancer with $70,000 in adjusted gross income pays $8,000 in health premiums. Itemized on Schedule A, only the amount above $5,250 (7.5% of $70,000) would count, and only if total itemized deductions beat the standard deduction in the first place. Taken above the line instead, the full $8,000 reduces income directly, assuming the earned income limit covers it. That gap is why almost every self-employed person with eligible coverage should claim this deduction first and only fall back to Schedule A for whatever premium amount doesn't qualify.

How Much You Can Actually Deduct

Your deduction can't be more than your net profit from that specific business, minus the deductible half of your self-employment tax attributable to it, minus any SEP, SIMPLE, or other self-employed retirement plan contribution tied to the same business. The IRS calls this your earned income limit, and it's the whole point of Form 7206. Most profitable freelancers have plenty of room under that limit, and there's no dollar cap on how much you can deduct in insurance premiums beyond it, unlike the flat limits on long-term care coverage. It's a real constraint mainly when your business barely broke even or when a big retirement contribution ate up most of your profit. Either way, the amount you can claim the deduction for on your return never exceeds your adjusted gross income (AGI) reduction potential from that business alone.

Here's a simplified example. Say you netted $60,000 freelancing, paid $9,000 for a family health plan, and put $6,000 into a SEP IRA. Your earned income limit after backing out half your self-employment tax and that SEP contribution still comfortably clears $9,000, so you deduct the full premium. Now say a slow year leaves you with only $8,000 in net profit after a heavy SEP contribution. Your earned income limit could land below what you paid in premiums, and the leftover amount doesn't just vanish, it rolls over as a potential Schedule A medical expense instead. These are illustrative numbers to show the mechanics, not a substitute for running your own figures through Form 7206 or your tax software.

The Rule That Trips People Up: Employer-Subsidized Coverage

You can't deduct premiums for any month you were eligible to participate in a health plan subsidized by an employer, your own or your spouse's, even if you turned it down and bought your own policy instead. The same block applies if you were eligible through a subsidized plan maintained by the employer of your dependent or your child under 27. Eligibility is what matters, not enrollment. The IRS applies this test month by month, so if your spouse starts a job with subsidized health benefits in October, your deduction generally stops for the months you're eligible for that coverage, even if you never signed up for it.

Common Mistakes That Cost People This Deduction

A few avoidable errors show up over and over on self-prepared returns. Watch for these before you file.

• Buying the policy in the wrong name for an S corporation. If you're a more-than-2% shareholder and you pay insurance premiums personally without running them through payroll as W-2 wages, the IRS treats the plan as never having been established under the business, and you can't claim the deduction.
• Forgetting the month-by-month employer test. People assume one snapshot at tax time settles the question, but eligibility for subsidized coverage is checked for each month separately, including a spouse's plan you never signed up for.
• Claiming a loss-year business. No net profit from that specific business means no deduction for that business's premiums, even if a different business you run is profitable.
• Missing Medicare premiums. Self-employed retirees often forget that Part B, Part D, and Medigap premiums are eligible, not just a traditional private policy.
• Skipping Form 7206 when it's required. Using the simple worksheet when you have more than one self-employment income source or you're claiming long-term care premiums produces the wrong number.

How to Claim It: Form 7206 or the Simpler Worksheet

Most people can use the worksheet in the Form 1040 instructions and skip Form 7206 entirely. You need the longer form only if any of three things apply to you: you had more than one source of self-employment income, you filed Form 2555 for the foreign earned income exclusion, or you're counting qualified long-term care premiums toward the deduction. Here's the general flow either way.

1. Total your premiums. Add up what you paid for health coverage established under your business for you, your spouse, and your dependents.
2. Add eligible long-term care premiums. Use the smaller of what you actually paid or the age-based limit for each person covered.
3. Find your net profit. Pull it from Schedule C line 31, Schedule F line 34, or your K-1 box 14, code A, for the specific business the plan is established under.
4. Subtract the deductible half of your self-employment tax attributable to that business's profit.
5. Subtract any retirement plan contribution, like a SEP or SIMPLE, tied to that same business.
6. Compare the two numbers. Your deduction is the smaller of your total premiums or what's left of your earned income after those subtractions.
7. Report it on Schedule 1, line 17. That's the line the worksheet and Form 7206 both feed into.

S Corporation Owners Have a Different Route

More-than-2% shareholders can't just pay insurance premiums out of pocket and deduct them directly. The coverage has to run through the corporation first, applicable whether you buy an individual policy or a family plan. Either the corporation pays the premiums itself or sets up a reimbursement arrangement and reimburses you for them, and either way, the amount has to show up in Box 1 of your W-2 as wages. Skip that step and the IRS won't treat the plan as established under the business, which means you can't claim the deduction, even if you genuinely paid for real coverage. If you run an S corporation, loop in your payroll provider or accountant before year end to make sure the premiums paid land on your W-2 correctly. It's worth reading alongside our comparison of LLC vs. sole proprietor if you're still deciding how your business should be structured.

One more wrinkle worth knowing about: if you bought coverage through the ACA Marketplace and got advance premium tax credit payments, this deduction and that credit affect each other. The IRS spells out an iterative calculation in Publication 974 for exactly this situation. Tax software handles it without you noticing. Doing it by hand is realistic only if you enjoy solving equations for fun.

Conclusion

The self-employed health insurance deduction is one of the most reliable write-offs available to freelancers and business owners, but only if you get the mechanics right: check your eligibility, confirm the coverage qualifies, watch the employer-plan trap, and run the earned income limit before you assume the full premium is deductible. Get those steps right and you can claim the deduction on your return with confidence instead of guessing. Pair it with what you already know about self-employment tax and quarterly estimated taxes, and you've got a much clearer picture of what you actually owe each year. If you haven't looked at the home office deduction or SEP IRA vs. Solo 401k yet, those are two more places self-employed people leave money on the table. For more, browse our Taxes archive.

Side Hustle With No Money: How to Start With a Skill You Already Have

Start with something you can already do, not something you'd need to learn first. Write clean emails at your day job? Sell that same skill through someone else's newsletter. Keep a tidy spreadsheet? Local businesses will pay you to keep theirs tidy too. Waiting to “find your passion” is how a side hustle stalls out before it starts. Skip that step. Make a short list of everything you get complimented on or paid to do in your regular job, from organizing files to fixing a bike chain to explaining fractions to a kid. Pick the one you could sell to a stranger this week.

You don't need a certification to get paid, and you don't need years of professional experience either. What you need is someone with a problem and a way for them to find you. Two things, not twenty, and beginners land real opportunities this way all the time.

Test the skill against a real question: would you pay someone else to do this for you if you didn't have the time? Say yes to that test and someone else will pay you for it too. Write down three skills that pass that test before you move to the next step, because having options here beats betting everything on the first idea that comes to mind.

Use the Free Tools You Already Have Access To

Your phone, a free Google account, and the social media apps already on your home screen cover almost everything a brand-new side hustle needs. Skip the paid website builder and the $30-a-month scheduling app until you have paying clients who need them. Here's what actually gets you started at zero cost:

• A portfolio: a free Google Doc or Google Site works fine for your first ten clients.
• Invoicing: Wave and Square both offer free invoice templates, so you don't need accounting software on day one.
• Marketing: a Facebook group, Nextdoor, or a post to your own network costs nothing and reaches people who already trust you.
• Design: Canva's free tier makes a clean flyer or social graphic without a designer.
• Scheduling: a shared Google Calendar link does the job before you need a booking system.

Buy the paid version of anything only after a client's money is paying for it, not before.

Land One Paying Customer Before You Build Anything Else

One paying customer proves the idea works. A logo doesn't. Ask your existing network first, your coworkers, your neighbors, your kid's soccer team parents, before you spend a single hour on a website. People who already know and trust you are far more likely to take a chance on a brand-new side hustle than a stranger scrolling past an ad. Tell five people directly what you're offering and what it costs. Directly beats a vague social post every time.

Charge for the first job, even a small amount. Free “trials” teach you nothing about whether strangers will actually pay, and they train your first customers to expect free work forever. Set a real rate before the conversation starts, even if it's modest. $20 for a first proofreading job or $15 an hour for a first round of pet sitting is enough to prove someone will hand you cash for what you can do. Raise your rate once demand shows up, since a full calendar at a low rate is a sign you're underpriced, not a sign you're popular.

Expect some no's. That's normal, not a sign the idea is dead. What matters is the first yes, because it tells you the market for this skill is real and not just a hunch.

Free Online Platforms to Find Your First Clients

Once your own network is tapped out, a handful of free online platforms already have the buyers and the payment systems built in, so you're not building demand from a blank page. Several cost nothing to join.

• Upwork and Fiverr for freelance writing, editing, virtual assistant work, and other online services, where clients are already searching for exactly what you offer.
• TaskRabbit for local, hands-on help like moving, assembly, or errands, useful while you build a client base for a more specialized service.
• Facebook groups and Nextdoor for hyper-local services like tutoring, pet sitting, and small-business bookkeeping, where trust is already built into the community.
• LinkedIn for B2B services like social media management or consulting, where a single post to your existing connections often outperforms a cold pitch.

Create one simple profile with real, specific language about what you do and who you help. Vague profiles get scrolled past. Specific language gets a reply, like “I help small businesses catch up on a year of bookkeeping in two weeks.”

Ten Side Hustles You Can Start Today for $0

These all start with a skill, some spare time, or an asset you already own, not a purchase or a storefront. Several use free online platforms that already have the audience and the payment system built in, so you're not building demand from zero.

1. Freelance writing or editing. Pitch a local business newsletter or a blog in your field using writing samples you already have, like old work emails or a personal blog post.
2. Virtual assistant work. Small-business owners and busy founders will pay for inbox management, scheduling, and basic research long before they can afford a full-time hire.
3. Tutoring or homework help. Offer it to a neighbor or through a free community board before paying for a tutoring-platform account.
4. Pet sitting or dog walking. Word of mouth and a free neighborhood app listing bring your first clients without a franchise fee.
5. Selling what you already own. Facebook Marketplace, Poshmark, and Amazon's trade-in and resale tools turn closet clutter and old electronics into your first side hustle cash today, no listing fee required to get started.
6. Proofreading or transcription. Freelance job boards post this work constantly for anyone who catches typos other people miss, and most jobs don't require special software or prior experience.
7. Bookkeeping for a small business. Basic math skills and a free spreadsheet template are enough to start with one client who's behind on their books.
8. Social media management for a local business. Plenty of small companies want a consistent posting schedule and don't have the time to run it themselves. Manage their accounts using the free version of a scheduling tool and content you create on your own phone.
9. Affiliate marketing. Most companies run a free affiliate program that pays a commission when someone buys through your link, so start with a product or service you already use and like. Share it honestly with people who'd actually want it, on a platform you already use, and never recommend something you wouldn't buy yourself.
10. Digital products and content creation. Build a simple template, printable, or how-to guide once and sell it through a free storefront platform, or start a free YouTube channel or short-form video account in a topic you know well. Both cost nothing to start, and platforms like YouTube pay through their own ad programs once you qualify.

Notice what all ten have in common: each one turns a skill, an asset, or content you already have into cash without inventory or upfront investment. Pick the one that matches how you actually like to spend an evening, because the side hustle you'll stick with beats the one that only looks good on paper. Starting more than one at once usually means finishing none of them well, so commit to a single hustle for your first 30 days before you add a second.

Other Low-Effort Ways to Earn a Little Extra

Not every side hustle idea needs a client or a skill to sell. Gig apps like DoorDash, Instacart, and Uber pay you for hours you already have and a car or bike you already own, with flexible scheduling and no interview. Paid survey and user-testing sites, like Swagbucks or UserTesting, pay small amounts for your opinion or your time testing a website, so treat them as a way to earn a little extra on the side, not a real income stream. Rates on gig apps and survey sites vary by city, by demand, and by the platform's own pay structure, so test one for a week before you count on the income.

These options are the easiest on-ramp for total beginners because there's no pitch and no portfolio required. Most people graduate from them to a higher-rate skill-based side hustle once they know how much time they actually have to give it.

Set Up the Money Side Before the Cash Shows Up

Side hustle income is taxable from the first dollar, even if nobody sends you paperwork for it. The IRS requires you to file Schedule SE and pay self-employment tax once your net earnings from self-employment hit $400 in a year. Self-employment tax runs 15.3%, split as 12.4% for Social Security and 2.9% for Medicare, and it's separate from your regular income tax. Clients generally only have to send you a 1099-NEC once they've paid you $600 or more in a year, but you owe tax on every dollar you earn whether a form shows up or not.

Open a second free checking account and move a third of every side hustle payment into it the day it lands. This covers the tax bill before you're tempted to spend it. If you expect to owe $1,000 or more in tax for the year after your withholding, the IRS expects quarterly estimated payments on this schedule:

A due date that lands on a weekend or holiday just rolls to the next business day. Track every payment and expense from day one in a free spreadsheet. It makes tax season faster and it's the difference between guessing and knowing whether the side hustle is actually worth your time.

Reinvest Before You Upgrade Anything

Don't buy the course, the logo, or the premium software until your side hustle has paid for them. Let your first few payments fund the next real bottleneck, not a purchase that just feels productive. Clients repeatedly asking for something you can't deliver without a paid tool is your signal to spend. Nobody asking yet? The free version is still doing its job. This is often slower than the gurus selling a $997 side hustle blueprint claim, but it's the honest version of how to start a side hustle with no money and no debt to show for it.

Protect the Time You're Not Getting Paid For

A side hustle with no money down still costs you something: hours. Block the time on your calendar the same way you'd block a shift, so it doesn't quietly eat your evenings without ever showing up as income. Track your hours for the first month alongside your earnings. Dividing the two gives you a real hourly rate, and that number is the honest test of whether this particular hustle is worth continuing or worth trading for a different one.

Say no to scope creep early. A client who keeps adding “one more small thing” for free is quietly cutting your hourly rate every time you agree. One simple line, “happy to add that for $X,” keeps the relationship friendly and keeps the math honest.

Conclusion: Start Small, Start Free, Start Today

You don't need capital to start a side hustle. You need a skill you already have, one person willing to pay for it, and the discipline to set the tax money aside before you spend the rest. If you want the fuller framework, the basic five-step version of this process still holds up, and if you're short on ideas, 137 ways to earn your first side hustle dollar is a good place to browse. Once the income is steady, here's how to know if it's time to go full time. Browse more in the Side Hustle category for the next move once your first client pays.

How Does a High-Yield Savings Account Work? What Makes It “High-Yield”

Savings accounts earn the “high-yield” label when they pay well above the national average, and right now that bar is low. According to the FDIC's national rate data for June 2026, the average traditional savings account pays 0.38% APY, based on figures as of May 31, 2026. Unlike a traditional savings account, a HYSA usually comes from an online bank or an online-only financial institution, and it pays several times that national average. Its interest rate moves with the broader rate environment the Federal Reserve sets.

APY figures change over time along with that broader rate environment. The Federal Reserve's target range for the federal funds rate was 3.50% to 3.75% as of its June 17, 2026 policy statement, and savings rates tend to track that range, up or down. Don't chase a number you remember from last year. Pull up the bank's current rate page before you open an account, since the APY typically shifts a few times a year.

Why This Account Matters More If You Freelance or Run a Side Hustle

Self-employed and side-hustle income makes a high-yield savings account earn its keep faster than it does for someone on a steady paycheck. Freelance income swings month to month, so a cash buffer isn't optional. It's what keeps a slow client month from turning into a missed rent payment. Park three to six months of expenses there, separate from your everyday checking. Then you stop dipping into it for anything but a real gap in income.

It also works well as a holding spot for money you already owe someone else, like the cash you're setting aside for quarterly estimated taxes. This money isn't yours to spend, so it might as well earn interest while it waits for the IRS deadline. Set up a separate high-yield account, funded automatically every time a client pays you, so that tax money stays visible and untouched. Your regular spending never touches it.

Is Your Money Safe? FDIC and NCUA Insurance, Explained

Yes, a high-yield savings account is safe as long as the bank is FDIC-insured or the credit union is NCUA-insured. The FDIC covers up to $250,000 per depositor, per bank, per ownership category. The NCUA insures credit union accounts the same way, up to $250,000. This coverage is automatic. You don't apply for it or pay extra, and it kicks in the moment you open an insured deposit account.

Before you open an account anywhere, verify the financial institution carries FDIC or NCUA coverage. Every legitimate bank and credit union displays it on their website and in their account disclosures. A “bank” that doesn't show it is one to walk away from, not a detail to overlook.

Why Online Banks Pay More Than the Bank Down the Street

Online banks pay more because they skip the cost of branches, tellers, and vault cash. They pass some of that savings back to you as a higher interest rate. Traditional financial institutions with hundreds of branches carry real estate and staffing costs that a savings account rate has to help cover. An online bank doesn't carry that overhead, so it can compete for your deposits with interest rates instead of a lobby.

Access is the tradeoff. You won't walk into a branch to deposit cash. Moving money in or out usually means an electronic transfer that takes one to three business days. For a fund you're not touching often, like an emergency fund, that tradeoff is an easy one to make.

High-Yield Savings vs. Other Places to Park Cash

A HYSA isn't the only place to keep cash at a financial institution, and it isn't the right place for every dollar. See how it compares with traditional savings accounts, CDs, and a few other common options below.

Deciding between building this cash cushion and investing for retirement? Our Roth IRA guide for beginners breaks down when to prioritize long-term investing instead.

A Few Things Worth Checking First

Compare more than the headline APY before you pick a high-yield savings account. Rate matters most, but a few other account features decide whether it actually works for you.

• Minimum balance and fees. Monthly maintenance fees can wipe out the extra interest you're earning, so look for no minimum balance to maintain and no monthly fee.
• Withdrawal and transfer limits. Some banks cap the number of withdrawals or transfers you can make in a statement cycle, so check the account's terms if you move money often.
• Transfer speed. Some banks move money in one business day, others take three. That matters if you ever need the cash fast.
• Rate stability. Some banks lure new customers with a low introductory rate, then drop it later. Read the account's current rate page, not just the ad.
• Mobile app and ATM access. Most online banks offer a solid banking app plus mobile check deposit, but confirm before you move your emergency fund somewhere new.
• FDIC or NCUA insurance. Make sure it's listed on the bank's site before you open the account, not after.

Steps to Open a High-Yield Savings Account

Opening a high-yield savings account takes about ten minutes online. Here's the process, start to finish.

1. Confirm FDIC or NCUA insurance. Check the bank's site before you go further, so you know your deposit is protected up to $250,000.
2. Compare current APYs, not last year's rates. Rates move with the Fed, so pull up each bank's live rate page the same day you apply.
3. Check the fee and minimum-balance policy. Rule out any account with a monthly fee you can't easily avoid.
4. Apply online with your ID and Social Security number. Most online banks approve an account in minutes.
5. Link your checking account and fund it. An electronic transfer from your current bank usually takes one to three business days to clear.
6. Set up an automatic transfer. Even a small recurring deposit is what actually builds the balance. Automating it means you don't have to remember.

FAQ: High-Yield Savings Accounts

Put Your Cash to Work

A high-yield savings account works exactly like the savings account you already have, except it actually pays you for keeping cash there. Open one with FDIC or NCUA insurance, compare current APYs instead of old numbers, and automate a transfer so the balance grows without you thinking about it. Building the fund that belongs in that account first? Start with our guide to emergency funds. Once that cushion is in place, our guide to saving money and our guide to building credit from scratch cover the next moves for putting the rest of your money to work. Browse more in the Banking section of the site.

Zero-Based Budgeting, Defined

Giving every dollar of income a specific job before you spend it, that's zero-based budgeting in one line, and the plan lands at zero unassigned dollars from the start. Nothing in your bank account needs to hit zero. Every dollar has a job: rent, groceries, gas, savings, debt payoff, or fun money. Bring home $4,000 this month, and you write down where all $4,000 goes before you spend a cent of it.

That's different from tracking spending after the fact. Most budgets are really spending reports. You spend the money, then look back and see where it went. This method flips the order. Decide where the money goes first, then spend inside those limits. The method itself is simple. Sticking with it takes real work every month, because your income and expenses shift and you rebuild the plan from scratch instead of coasting on last month's numbers. Corporate and government financial planning also uses the term ZBB for this same method, though the personal version works the same way for your paycheck.

Building Your First Zero-Based Budget, Step by Step

Build a zero-based budget in six steps, and plan on doing this at the start of every pay period, not once and done.

1. Add up your expected take-home pay for the month, including any side income you're confident will land.
2. List every expense you know is coming, from rent to your streaming subscriptions, using last month's bank statement as a starting point.
3. Write your savings goal and debt payments as their own line items, not as whatever is left over.
4. Assign every remaining dollar to a category, groceries, gas, fun money, until income minus every category equals zero.
5. Track spending against the plan as the month goes, and move money between categories when one runs short instead of pulling from your card.
6. Rebuild the whole budget again next month. Your income and bills will shift, so last month's plan is a starting point, not a template you copy.

Sample Zero-Based Budget

Here's what a zero-based budget looks like for someone bringing home $4,500 a month after taxes. Every category is a choice, and the total lands exactly at $4,500, not a dollar left unassigned.

The categories above aren't a template to copy. Your rent, your debt load, and your goals are different, so the dollar amounts should be too. What matters is that every dollar in your take-home pay has a named category, and the categories add up to the whole paycheck.

Paid every two weeks instead of monthly? Run the same exercise on each paycheck instead of waiting for a full calendar month, since some categories, like rent, might only get funded from one of the two checks. Three-paycheck months, which happen a few times a year for biweekly pay schedules, are a good moment to assign that extra check straight to savings or debt instead of letting it blend into regular spending.

Comparing This to the 50/30/20 Rule

Here, every category gets its own dollar amount, while the 50/30/20 rule splits your paycheck into three broad buckets, needs, wants, and savings. For the simpler version, read The 50/30/20 Budget Rule Explained. Naming every category takes more time each month than working within three broad buckets, but it gives you more control. Say your grocery bill jumped $80 last month. Losing that $80 shows up immediately here, naming the exact category that has to give it up, while a 50/30/20 budget just tells you your “needs” bucket got tighter. Choose this method if you want precision or you're working to fix a specific problem, like overspending on dining out or a debt payoff you're trying to speed up. Go with 50/30/20 if you want less monthly maintenance and a simpler starting point.

Budgeting With Variable or Side Hustle Income

Build your zero-based budget off your lowest reliable income month, then treat anything above that baseline as bonus dollars you assign once it actually arrives. Freelancers and side hustlers don't get the same paycheck every month, so a zero-based budget built on your best month sets you up to overspend the moment a slow month hits. Look back at your last six to twelve months of income, find the lowest month, and build your baseline budget on that number. Everything above the baseline, a big client payment, a strong sales month, still gets assigned a job the moment it lands, just not until you know it's real. Reading How to Price Your Freelance Work first is worth it if you're not sure your side income covers your time yet, before you build income assumptions into any budget.

Who This Method Fits Best

People who want control over every dollar, not just a general sense of where the money went, get the most from this budgeting approach. It's a strong fit if you're paying off debt on a deadline, saving for a specific goal, or juggling income that changes month to month, since naming every category forces you to notice a problem the same week it starts instead of a few months later. It's also a good fit if a looser budgeting method hasn't stuck. Some people try a simple percentage rule, drift for a few months, and never quite know why the plan fell apart. Assigning every dollar removes the guesswork.

The main advantage of zero-based budgeting is precision: every goal, every expense, and every dollar of savings gets a name, so nothing slips through unnoticed. Time is the tradeoff. Unlike a traditional budgeting method where last month's categories mostly roll over unchanged, this approach rebuilds the plan from scratch each time, and that upkeep is the real disadvantage for anyone who wants a lighter touch.

Not everyone needs this level of detail, and that's worth saying plainly. Already saving consistently and rarely overspending? Just a light monthly check-in is plenty, and this level of detail is more maintenance than you need. Building one from scratch takes real time, usually 20 to 30 minutes once you've done it for yourself a few times, longer the first few tries. Consider a simpler budgeting method like the 50/30/20 rule, or even automatic transfers into savings on payday, if you know you won't keep up with the extra detail.

Common Mistakes to Avoid

Irregular expenses trip up most people first, an annual insurance premium, a car registration fee, holiday gifts, whatever doesn't hit every month, and then they scramble when the bill lands. Set aside a sinking fund category each month for expenses like these, so a once-a-year bill doesn't wreck a budget built for a normal month. Treating zero-based as spend-it-all is the second mistake. Unassigned money is what “zero” refers to here, not an empty savings account. Savings and debt payoff are categories like any other, and they get funded before fun money, not after, or the whole point of the method falls apart.

Giving up after one bad month is the third mistake. Rebuilding constantly is the whole point, not a contract you either follow perfectly or fail. Blow through your grocery category one week? Adjust next week's plan and move on. Being too rigid to leave any room for fun is the fourth mistake. Budgets with zero room for anything you enjoy rarely survive past a few weeks. When part of your debt payoff plan lives in this budget, decide upfront whether the debt snowball or the debt avalanche method fits your situation, since the debt snowball vs. avalanche choice changes how much goes to each debt every month.

Tools That Make This Easier

Spreadsheets handle this fine, and cost nothing, a free option if you'd rather not pay for budgeting software. Track your categories in a simple spreadsheet, and rebuild the numbers each month before the money hits your account. For an app built specifically for this method, both You Need A Budget (YNAB) and EveryDollar sync to your bank accounts automatically and apply the same give-every-dollar-a-job approach. Either path works. Software matters less than the method, so don't let picking an app delay your first budget.

Final Word

Zero-based budgeting works because it forces a decision on every dollar instead of letting leftover cash decide itself. It takes more monthly effort than a simpler method like the 50/30/20 rule, but it gives you the clearest picture of where your money is actually going and the fastest way to redirect it toward a goal, whether that's an emergency fund, a debt payoff, or just breathing room. Start with one month. Build the categories, assign every dollar, and adjust as you go. If you want the foundation first, the Complete Beginner Guide to Budgeting and the Emergency Funds guide are good next reads, and the Debt Snowball vs. Avalanche breakdown is worth it if a debt payoff is part of your plan. Browse the Budgeting category for more on building a system that actually holds up month to month.

Key Takeaways

• Your business structure decides your pay method: an owner draw for sole proprietors, guaranteed payments for partners, or a salary plus distributions for a corporation.
• An S corp owner requires a reasonable salary before taking any distributions, or the IRS can treat the whole thing as subject to payroll tax.
• Growth changes the right approach. As profits grow, revisit your pay consistently instead of leaving it on autopilot.
• Set aside 25% to 30% of every draw or distribution for taxes, since none of this money gets withheld the way a W-2 paycheck does.

Owner's Draw, Salary, and Distribution: What's the Difference

An owner's draw is money you pull out of the business whenever you decide to take it. A salary is a set wage paid on a regular schedule through payroll. A distribution is a share of company profit paid out separately from any wages. Each one gets taxed differently. That's why the label matters more than it sounds like it should.

Taking a draw is simple. You transfer money from the business account to your personal account. No payroll, no withholding, no W-2 involved. A salary works differently. Income tax, Social Security, and Medicare come out of every check, and the company pays a matching employer share on top. A distribution is what's left after the business covers its expenses, and for an S corp owner, after it pays a salary first. Distributions usually skip self-employment and payroll tax entirely. That's exactly why the IRS watches how S corp owners split their pay between salary and distributions.

How You Pay Yourself Depends on Your Business Structure

Your business structure decides which options are even available to you. The IRS spells out the rule plainly. Sole proprietors, partners, and corporate officers each follow a different path, and you can't switch methods just because one looks more convenient at tax time.

Notice the pattern. The more your business looks like its own separate legal entity, the more your pay looks like a real paycheck instead of just moving cash between accounts you control. Each structure also has its own form for reporting profits: a sole proprietor uses Schedule C, a partner uses Schedule K-1, and an S corp owner uses Form 1120-S plus a personal W-2. This is also why an S corp election is worth exploring once your profit gets steady. Splitting pay into salary plus distributions can lower your overall self-employment tax bill, a move we cover in our self-employment tax guide.

Partnerships add one more wrinkle: the guaranteed payment. It's the term the IRS uses for money a partnership pays a partner for services or the use of capital, whether or not the business turned a profit that period. A guaranteed payment behaves like a salary in that you can count on it every period. But it still gets reported on Schedule K-1 and taxed as self-employment income, not run through payroll like a W-2 wage. Partners can also take draws against their expected share of profit on top of any guaranteed payment. Many multi-member LLCs mix both.

Why “Reasonable Compensation” Matters for S Corp Owners

S corp owners must pay themselves a reasonable salary before taking any distributions. Skip that step and you've built the fastest path to an audit. The IRS says payments to a corporate officer count as wages to the extent they're reasonable compensation for the work performed. It can reclassify your distributions as wages, plus add back payroll tax, penalties, and interest, if your salary looks artificially low.

There's no fixed formula for “reasonable.” The IRS and the courts weigh what you actually do for the company, your training and experience, the hours you put in, comparable pay in your industry, and your business's history of distributions. Most tax pros start from a simple question: what would it cost to hire someone else to do your job? Then they adjust from there. A $40,000 salary next to a $150,000 distribution rarely survives that comparison, and it's unlikely to survive an IRS review either.

How Much Should You Pay Yourself

There's no single right number here. Most business owners settle on one of three approaches: a market-rate salary benchmark, a fixed percentage of profit, or a cash flow draw that flexes with revenue. The one that fits depends on how steady your income is and how your company is structured.

• Market-rate benchmark. Look up what an employee would earn doing your job, whether that's a project manager, a designer, or a bookkeeper, and use that figure as your salary floor. This matters most for S corp owners who need a defensible reasonable-compensation number.
• Percentage of profit. Many sole proprietors and freelancers pay themselves a set share of what the business brings in each month, commonly somewhere between 50% and 70% of profit after expenses, and hold the rest in the company as a buffer.
• Cash flow draw. If your income swings month to month, pay yourself a modest base amount every pay period. Add a larger draw only after you've covered upcoming taxes, payroll, and at least one month of business expenses in reserve.

Whichever method you choose, stick to a consistent schedule instead of pulling money out whenever the mood strikes. A regular owner draw or paycheck makes it far easier to manage your own household finances, plan for growth, and estimate what you'll owe in taxes each quarter.

The Taxes You Owe on What You Pay Yourself

Most business owners owe self-employment tax. That rate is 15.3% and covers both the employee and employer halves of Social Security and Medicare. The IRS splits that rate into 12.4% for Social Security and 2.9% for Medicare. The Social Security portion only applies up to the annual wage base. The Social Security Administration set that wage base at $184,500 for 2026. The 2.9% Medicare portion applies to all of your net self-employment earnings with no cap at all. Income over $200,000 as a single filer, or $250,000 married filing jointly, or $125,000 married filing separately, triggers an extra 0.9% Additional Medicare Tax on the amount above the threshold.

S corp owners pay payroll tax on their salary the same way any employee does, split between employer and employee. Their distributions generally skip self-employment tax altogether. That's the core tax advantage of the S corp structure, and it's also exactly why the IRS scrutinizes the salary number so closely.

None of this money gets taxes withheld the way a W-2 job does, aside from an S corp salary. So you'll likely need to make quarterly estimated tax payments. The IRS safe harbor rule helps you avoid an underpayment penalty: pay the smaller of 90% of this year's tax, or 100% of last year's tax. That threshold rises to 110% if your prior-year adjusted gross income topped $150,000, or $75,000 married filing separately.

A due date that lands on a weekend or federal holiday shifts to the next business day. Track your estimated tax percentage every time you pay yourself and save it in a separate account. Do that and a quarterly deadline never catches you without the cash.

How to Pay Yourself as a Business Owner, Step by Step

1. Open a dedicated business bank account. Keeping personal and business money in separate accounts protects you legally and makes your books, and any IRS review, far easier to defend.
2. Confirm your business structure. A sole proprietor or single-member LLC can only take an owner's draw. A partnership can use guaranteed payments. An S corp owner needs payroll set up before taking a salary.
3. Set your pay method and amount. Choose a market-rate salary, a percentage of profit, or a cash flow draw, based on how steady your revenue is and what your structure allows.
4. Run payroll if you're an S corp. A payroll provider withholds income tax, Social Security, and Medicare from your salary and files the required forms. Don't try to handle this by hand.
5. Set aside taxes from every draw or distribution. Move 25% to 30% of what you pay yourself into a separate tax savings account the same day you receive it.
6. Pay quarterly estimated taxes on time. Use the safe harbor math above and pay by each due date to skip the penalty.
7. Revisit your pay every year. As profit grows, adjust your salary or draw and check whether your business structure still fits, especially your S corp reasonable-compensation number.

Common Mistakes to Avoid

A few habits sink owner pay faster than anything else, and every one of them is avoidable once you know to watch for it.

• Treating the business account like a personal wallet. Pulling money out with no schedule and no tax set-aside leaves you guessing at tax time, and often short on cash every April.
• Setting an artificially low S corp salary. A token wage that dodges payroll tax on most of your income works, until the IRS reclassifies the distributions as wages and adds back payroll tax, penalties, and interest.
• Forgetting a draw isn't deductible. An owner's draw or distribution doesn't reduce your business's taxable profit the way a salary does at an S corp. Moving money out doesn't shrink your tax bill.
• Skipping quarterly estimated payments. Waiting until April to settle up on a full year of untaxed draws or distributions typically means an underpayment penalty on top of the tax itself.

Your industry, income level, and state rules all affect this math. Confirm your specific numbers with a tax or accounting professional before you lock in a pay structure.

Frequently Asked Questions About Paying Yourself as a Business Owner

Conclusion: Pick a Method That Matches Your Structure

Paying yourself as a business owner comes down to matching your method to your structure, then treating your own paycheck with the discipline you'd expect from any employer: a set schedule, taxes saved up front, and a number you could defend if the IRS ever asked. Still choosing a structure? Start with our LLC vs sole proprietor guide, then read up on self-employment tax and SEP IRA vs Solo 401(k) to plan how much of your pay to set aside for retirement. Pricing your own work before you decide what to pay yourself? Our guide to pricing freelance work is the natural next read.

If you're building credit from the ground up, the step-by-step playbook is in how to build credit from scratch. This post answers the question that actually confuses people: when your first score shows up, what it typically looks like, and why the “everyone starts at 300” myth is wrong.

Why You Don't Start With a Credit Score at All

You don't start with a credit score because there's nothing yet for a scoring model to measure. FICO and VantageScore both calculate your score from the activity sitting in your credit file, so an empty file has no score to calculate, not a low one. The credit bureaus call this a “thin file” or “no file,” and it's why a college freshman with zero credit accounts shows up as unscored on a credit report, not as a 300. The number only exists once a lender or scoring model has something to read.

What It Takes to Get Your First FICO Score

FICO requires two specific things before it will generate a score for you, according to myFICO, the company's own consumer education site. You need at least one account that's been open for six months or more, and at least one account that's reported activity to a credit bureau within the past six months. Your file also can't show any indication that you're deceased. Meet those two conditions with even a single credit card or student loan, and FICO can score you. Miss them, and you stay unscored, not scored low.

That six-month wait is the reason so many new credit users search for their “starting” score and come up empty. There isn't one to find yet. The clock only starts ticking once your first account reports to a bureau, so opening that first card or loan is the real starting line, not some default number sitting on your file already.

VantageScore Can Score You Months Sooner

VantageScore can generate a score with as little as one month of credit history and a single reported account, according to Experian, one of the three credit bureaus that co-owns the VantageScore model. That's a real advantage if you just opened your first card or became an authorized user, because a VantageScore number can appear months before FICO has enough history to score you.

The catch is that not every lender pulls VantageScore. Many still pull a FICO Score for a mortgage, an auto loan, or a major credit card, so a fast VantageScore doesn't replace the need to build FICO-eligible history too. Think of VantageScore as your early preview and FICO as the score that matters most for a big application down the road.

What Credit Score Do You Start With, Really?

Your first credit score is rarely 300, even though 300 is the floor on the standard 300 to 850 scale. Experian puts it plainly: your first score usually won't be that low unless you're already missing payments. A brand-new file with a short history but no late payments, no collections, and low balances tends to land in the fair range rather than at the bottom. The scoring models weigh negative history far more heavily than they weigh a simply short one.

There's no fixed number everyone starts with. Your first score depends on the specific account you open, how much of its limit you carry, and whether you pay on time from day one. Two people who open the same starter credit card in the same month can land at different first scores based purely on how they use it.

Why Your Score Might Look Different on Different Apps

Credit Karma, Chase Credit Journey, and most other free credit apps show you a VantageScore, not a FICO Score, because VantageScore data is cheaper for those companies to license and display. Check your score the week after opening your first account, and you're probably looking at VantageScore's faster read on a thin file. Pull the same file through myFICO or a lender that discloses which score it uses, and you may see no score yet, or a different number. FICO simply needs a longer look before it scores you.

Neither app is wrong. They're running different models with different minimum requirements, and that mismatch is exactly why “what credit score do you start with” doesn't have one universal answer. It also helps to know that Equifax, Experian, and TransUnion each keep separate credit reports. A new account may show up on one report before the others, which is one more reason your score can look slightly different depending on where you check it.

The Key Factors That Shape Your Starting Credit Score

Once you're scoreable, the same five factors apply to a brand-new file and a decades-old one alike, according to myFICO. Knowing them helps you understand why your specific starting credit score lands where it does.

• Payment history (35 percent). The single biggest factor. On-time payments across your credit cards and loans build this fastest, and even one missed payment hurts.
• Amounts owed (30 percent). This is your credit utilization, how much of your available credit limit you're actually using. Lower is better, and it updates every time your card issuer reports new information.
• Length of credit history (15 percent). A brand-new file starts at a disadvantage here simply because there's no long history yet. This factor improves automatically the longer your account stays open.
• Credit mix (10 percent). A healthy credit mix includes both revolving accounts, like credit cards, and installment loans, like a car loan or student loan. You don't need every type to start, but adding a second kind of account later can help.
• New credit (10 percent). Applying for several credit cards or loans in a short window can ding your score, since each hard inquiry and each new account resets part of your average account age.

The reason a starting credit score is hard to predict is that these factors interact. Two people opening the same starter card can end up with different scores because one carries a higher balance or applies for a second card too soon. Good habits on the two factors you control most, payment history and amounts owed, do the most work to help your score climb once it exists.

Common Myths About Your Starting Score

A few myths follow new credit users around, and they can cost you real money if you believe them. Here's what's actually true.

You don't need to carry a balance to build your score. That's myth one, and believing it costs you interest for nothing. The Consumer Financial Protection Bureau lists this as a straight-up myth, and Experian confirms it. What matters is your credit utilization ratio, not whether you leave a balance sitting there overnight, so paying your card in full every month shows lenders you're using credit responsibly and builds your score exactly as well as carrying one. Keep your usage under 30 percent of your limit and pay it off, and you establish the same score benefit without paying a cent of interest.

Checking your own score does not hurt it. That's myth two. Looking up your own credit report or score is a soft inquiry, and myFICO is explicit that soft inquiries never affect your FICO Score. Only a hard inquiry, the kind that happens when you actually apply for new credit, can cause a small, temporary dip. Check your score as often as you want while you're building it.

Not everyone starts at the same number. That's myth three, and it's the whole point of this post. There's no default starting score. Your first number depends entirely on your own account, your balance, and your payment history, so comparing your first score to a friend's first score rarely tells you much.

How to Build Your First Credit Score, Step by Step

You can't skip the wait, but you can control what your file looks like once it's scoreable. Here's the order that works:

1. Open one account you can manage. A secured credit card or a student card is the easiest first credit card, because approval doesn't depend on having existing credit. A small credit-builder installment loan works the same way if a card isn't the right fit.
2. Ask to become an authorized user. If a parent or partner has an older account in good standing, being added as an authorized user can add years of history to your file almost overnight.
3. Consider a credit-builder loan. These small loans, often $300 to $1,000, hold your payments in a savings account until you finish paying, and they report your payment history to the bureaus the entire time.
4. Keep your balance low. Use under 30 percent of your limit and pay it off in full most months, so utilization doesn't drag on your score once it exists.
5. Pay on time, every time. Payment history is the single biggest factor in both the FICO and VantageScore models, so set up autopay for at least the minimum, so one missed date doesn't wipe out months of progress.
6. Give it time. Six months is the real minimum for a FICO Score, so let your first account season before you go looking for a number.

How Long Until You Have Good Credit?

A first score, once you have one, usually lands in the fair range. Getting to a good credit score or better takes longer, because length of credit history is its own factor and there's no way to speed past it. Here are the FICO score ranges, according to myFICO:

Most people who open one account and pay on time can expect to cross into the good range within one to two years, though the exact timeline depends on how many accounts you add, how much of your available credit you use, and whether you ever miss a payment along the way.

One more thing to watch: opening several new accounts at once can actually slow you down. Each new account lowers the average age of your credit file, and length of history is its own factor in both the FICO and VantageScore models. Add one account, let it season, and add the next one later rather than opening three cards in your first month.

Bottom Line: There's No Starting Score, Only a Starting Point

You don't start with a credit score. You start with a blank file, and your first real number shows up once you begin using a credit account responsibly for a few months. There's no way to guarantee the highest score possible right out of the gate. But you can stack the odds in your favor: pay on time, keep balances low, and give your first credit card or loan time to season before you add a second one. A missed payment can hurt more than almost anything else here, so protect your payment history above all.

Building your credit the right way, one account and one on-time payment at a time, is what turns a fair starting number into a genuinely good credit score. Once you have a score, learn why your credit score matters more than you think, and check out the complete beginner's guide to credit scores for how the number is actually calculated and how to improve it. Browse the Credit category for more on establishing credit and protecting your score, or head back to the Personal Profitability homepage for more money moves for hustlers and entrepreneurs.

If you're still building your emergency fund first, check out the guide to getting started with retirement savings on this site. It lays out the order of operations before you put a dollar into any account.

What Is a Roth IRA for Beginners?

A Roth IRA is an individual retirement account where you invest money you've already paid taxes on, and your earnings grow completely tax-free. When you retire and take withdrawals, you pay zero taxes on the growth. That's the whole deal in one sentence.

The “Roth” comes from Senator William Roth, who championed the account as part of the Taxpayer Relief Act of 1997. It's been around for almost 30 years and is one of the most-recommended accounts in personal finance because the math is compelling: pay a small tax now on the money you contribute, then pay nothing later on however much it grows.

Compare that to a traditional IRA: you get a tax deduction upfront, but you owe ordinary income taxes on every dollar you withdraw in retirement. The Roth flips the order. For most people who expect their income to grow over time, that trade is worth it. Consider a Roth IRA if you're early in your career, expect to be in a higher tax bracket later, or simply want tax-free withdrawals in retirement.

How a Roth IRA Works

Here's the mechanics. You make after-tax contributions to a Roth IRA. Your investments grow inside the account without being taxed each year. And when you take withdrawals in retirement, both the contributions and the earnings come out tax-free.

Three rules that matter most:

• Your contributions can come out anytime, for any reason, tax-free and penalty-free. Put in $5,000 last year and need $3,000 back? Take it. The IRS already collected tax on that money when you earned it.
• Earnings are tax-free after age 59½, with the 5-year rule. Once the account has been open for at least five years and you're past 59½, everything comes out tax-free. The five-year clock starts January 1 of the year you make your first contribution, so open the account early even if you only contribute $100.
• No required minimum distributions (RMDs) during your lifetime. Traditional IRAs force withdrawals starting at age 73. A Roth IRA never requires one while you're alive. That flexibility is a serious planning advantage.

One constraint: earned income is required to contribute. Wages, salary, freelance income, and net self-employment income all count. Passive investment income doesn't. A non-working spouse can still contribute to a Roth IRA based on the working spouse's earned income, as long as the couple files jointly and has enough combined income to cover both contributions. This is sometimes called a spousal IRA.

2026 Roth IRA Contribution Limits

For 2026, the IRA contribution limit is $7,500, up from $7,000 in 2025. This limit applies across all your IRAs combined. If you hold both a Roth IRA and a traditional IRA, your total contributions to both can't exceed $7,500.

Savers 50 and older can make a catch-up contribution of an additional $1,100, bringing the 2026 total to $8,600. The IRA catch-up amount is now indexed to inflation under the SECURE 2.0 Act of 2022, which is why it increased from $1,000 in 2025 to $1,100 in 2026. (Source: IRS Notice 2025-67)

Contributions for a given year can be made until the tax-filing deadline. For 2026, that's generally April 15, 2027.

Income limits and partial contributions

Roth IRAs have income limits. When your modified adjusted gross income (MAGI) is too high, the ability to contribute phases out. Within the phase-out range, you can make a partial contribution (a reduced amount instead of the full limit). Above the top of the range, you can't contribute to a Roth IRA directly at all. Here are the 2026 income limits:

When your MAGI is within the phase-out range, your partial contribution is calculated proportionally. A single filer earning $160,500 in 2026 is halfway through the phase-out range ($153,000 to $168,000), so they can contribute roughly half the normal limit. The IRS provides a worksheet to calculate the exact partial contribution amount.

Above the income limits? Look into the backdoor Roth IRA: make a non-deductible contribution to a traditional IRA, then convert it to a Roth. It's legal and effective, but subject to tax complexity. Work with a CPA or tax professional to do it correctly and avoid unintended tax consequences.

Roth IRA Withdrawal Rules

Understanding Roth IRA withdrawals before you need the money saves you from expensive surprises. The rules depend on what you're withdrawing and when.

Contributions: Withdraw your contributions at any time, at any age, with no taxes and no penalties. The government already taxed that money when you earned it. There's nothing left to collect.

Qualified withdrawals (tax-free): Withdrawals of earnings are tax-free when the distribution is “qualified,” meaning the account is at least five years old and you're 59½ or older. Qualified distributions also include withdrawals due to disability or death, and first-time home purchases up to a $10,000 lifetime limit. Both conditions (the five-year rule and the age requirement) must be met for earnings withdrawals to qualify.

Non-qualified withdrawals of earnings: Pull out earnings before age 59½ or before the five-year rule is met and you generally owe income taxes plus a 10 percent early withdrawal penalty on those earnings. Contributions always come out first, so the penalty only applies when you start drawing down the growth portion.

The practical takeaway: don't treat a Roth IRA as an account you'll dip into regularly. Let the investment growth stay untouched so your withdrawals in retirement are fully tax-free. The flexibility on contributions is a safety net, not an invitation to spend it.

How to Open a Roth IRA Step by Step

Opening a Roth IRA takes about 15 minutes online. Here's exactly what to do.

1. Confirm eligibility. Earned income is required to contribute, and MAGI must fall below the 2026 income limits for your filing status. Single and earning under $153,000? Contribute the full $7,500.
2. Pick a brokerage. Fidelity, Vanguard, and Charles Schwab are the most popular options for beginners because they have no account minimums to open an IRA and no commission on stock and ETF trades. Pick one you can picture using for decades.
3. Complete the online application. Have your Social Security number, a government-issued ID, and a linked bank account ready. Most applications take 10 to 15 minutes.
4. Fund the account. Set up a one-time transfer or schedule automatic monthly contributions. Anywhere up to $7,500 per year is allowed for those under 50 in 2026.
5. Choose investments. A Roth IRA is a container, not an investment itself. The investment types you hold inside determine how the money grows. (The next section covers what to pick.)

No paperwork goes to the IRS when opening a Roth IRA. There's no form to file just for making a contribution.

What to Invest in Your Roth IRA

The biggest mistake new Roth IRA owners make is leaving money sitting in cash. A Roth IRA is a tax-sheltered account, not a savings account. Put investment types in it that can grow over the long term.

For most beginners: a low-cost index fund. A total stock market index fund gives you a slice of every publicly traded company in the US with one purchase. Broad index ETFs at Vanguard, Fidelity, or Schwab charge about 0.03 to 0.05 percent per year in fees. On a $10,000 balance, that's $3 to $5 per year. Essentially free.

A simple two-fund or three-fund portfolio handles the basics and doesn't require much management:

• One US total market index fund
• One international index fund
• One bond index fund if you're within 10 to 15 years of retirement

Target-date funds are the simplest option. Choose the fund with the year closest to when you plan to retire, and the fund adjusts the stock-to-bond investment mix automatically as you age. Fidelity Freedom Index funds and Vanguard Target Retirement funds are two well-regarded, low-cost choices.

Individual stocks are worth avoiding until you're an experienced investor. The Roth's tax shelter makes it tempting to swing for big gains, but big losses are equally possible. Diversified index funds help most investors build wealth more reliably over a long time horizon. For more on the fundamentals, check out the easiest way to invest for retirement.

Roth IRA vs. Traditional IRA

The main difference is when you pay taxes. With a Roth, you pay now and take tax-free withdrawals later. With a traditional IRA, you get a deduction now but owe taxes on every withdrawal.

For most hustlers and entrepreneurs who expect their income to grow, the Roth IRA is the better long-term bet. Lock in today's tax rate on money that could compound into much larger future dollars, then take tax-free withdrawals in retirement. Self-employed and want to save even more? The SEP IRA vs Solo 401(k) comparison covers the high-contribution options for the self-employed.

Start Your Roth IRA Now

Time is the Roth IRA's biggest advantage. Every year you wait is a year of tax-free compounding you can't get back. Check your eligibility, pick a brokerage, open a Roth IRA, fund it, and choose an index fund. Most people finish the whole process in one afternoon.

Once the account is open, keep contributing. Even $100 a month adds up fast when qualified withdrawals stay tax-free in retirement. Automate the transfer so you don't have to think about it, then check in once a year to rebalance your investment mix.

Self-employed and want to go further? The SEP IRA vs Solo 401(k) guide covers accounts with much higher contribution limits. For the big-picture framework, the basic retirement plan guide walks through where the Roth IRA fits in your overall strategy.

The boring truth: a Roth IRA won't make you rich overnight. What it does is let you keep every dollar your investments earn. Over 20 or 30 years, tax-free qualified withdrawals are worth a lot. Start now.

Key Takeaways

• The debt snowball method targets your smallest debt first, paying it down until it hits zero, then rolling the payment to the next one.
• The debt avalanche method attacks your highest interest rate first (the largest interest drain) to minimize the total interest you pay.
• The avalanche method saves more money, but the snowball method often leads to better follow-through.
• Both strategies require making minimum payments on all debts and focusing extra payments on one target at a time.
• Pick the method that matches how you stay motivated, not just the one that looks better on a spreadsheet.

What Is the Debt Snowball Method?

The debt snowball method sorts your debts from smallest to largest balance, ignoring the interest rate. You pay that lowest balance first, focusing every extra dollar on it until the account reaches zero. When it hits zero, you roll its full monthly payment into the next smallest debt on your list, then the next smallest after that. Your payments snowball larger every time you clear one account, and your debt repayment momentum grows with it.

Dave Ramsey popularized this approach through his Baby Steps system. The snowball method's power is psychological, not mathematical. Clearing a $600 card balance in three months feels like winning. After you pay off that smallest debt, roll its freed-up payment into the next account and feel the momentum build. That win keeps you motivated after months of paying when the $14,000 car loan is still staring at you. For people who have struggled with motivation, the snowball method can help them stay on track far more effectively than an approach where progress is invisible for months.

The trade-off is real. If your smaller balances first happen to carry lower interest rates than your larger debts, you will pay more total interest with the snowball method than with the avalanche. That cost is worth knowing before you choose. But for many people the alternative is losing motivation halfway through and making only minimum payments for years, which costs far more in the long run. Paying the minimum on all your debts for years is far more expensive than the extra interest the snowball costs.

The snowball method works best when:

• You have tried paying off debt before and stopped.
• Your debts are spread across many smaller accounts you want to simplify.
• Your smallest debt (the lowest balance you have) can realistically be cleared in two to four months.
• You need a visible, early goal to stay engaged with the plan.

What Is the Debt Avalanche Method?

The debt avalanche method sorts your debts from highest interest rate to lowest, regardless of the balance. You make your minimum payment on everything else and focus all extra payments on the highest-rate debt. When that one is gone, you roll its payment into the minimum on the next highest rate. This way, you are always attacking the debt with the higher interest rate, which costs you the most per year. Continue rolling the payment down the list until the last balance is gone.

The avalanche method is mathematically optimal. Every extra dollar attacks the principal compounding fastest against you, which helps you save money on total interest. After each account is cleared, you roll the full payment to the next highest-rate debt. The result: less total interest paid and a faster path to becoming debt-free and save more money overall, especially when your debts have widely different interest rates.

The challenge with the avalanche method: your first zero balance can take a lot longer than with the snowball. If your highest-rate debt also has a large balance, you might be paying down that one debt for 12 to 24 months without closing a single account. The longer it takes to pay off the first debt, the harder it becomes to stay motivated. In many situations, the avalanche method requires more psychological discipline than the snowball. The interest savings are real, but they are paid out over years of consistent paying, not visible on any single statement.

The avalanche method works best when:

• You are motivated by numbers and can see the long-term savings clearly.
• Your highest-rate debt has a small or medium balance, so you attack and eliminate it for a relatively fast first win.
• You have paid off debt before and know you will continue to follow through.
• The rate spread between your debts is significant, say 8 to 12 percentage points or more.

Debt Snowball vs Avalanche: Pros and Cons

Both methods have real pros and cons that matter depending on your financial situation. Here is how their key pros and cons compare on the factors that matter most for choosing a debt repayment strategy.

The main con of the snowball method is cost: you pay more interest when rate differences are large. Its main pro is psychological staying power. The main con of the avalanche method is motivation: it can be hard to stay on track when the first win is still months away. Its main pro is saving the most money. Both strategies work when you stick with them consistently.

Which Debt Repayment Method Saves More Money?

The debt avalanche method saves more money. When you attack the highest-rate debt first, every extra payment eliminates the principal that was compounding fastest against you. The avalanche method is the financially optimal approach for saving money on interest charges quickly.

Here is a simple scenario to make it concrete. Say you have three debts:

• Credit card A: $2,000 balance at 24% APR (high-interest)
• Credit card B: $5,000 balance at 18% APR
• Personal loan: $3,000 balance at 10% APR (lowest rate)

Total: $10,000 in debt. You have $300 a month above your minimum payments to put toward extra payments. The largest balance is credit card B at $5,000.

Using the snowball method, you focus on credit card A ($2,000) first because it has the smallest balance. Next comes the personal loan ($3,000), then credit card B ($5,000).

Using the avalanche method, you also target credit card A (24%) first because it is the highest rate. Then you move to credit card B (18%), then the personal loan at the lowest rate (10%).

Both methods start with the same debt in this scenario. The difference appears in step two. The snowball moves to the personal loan (10%) next, while the avalanche moves to credit card B (18%) instead. The avalanche method keeps extra payments aimed at the higher rate debt, so less interest accumulates on your remaining balances while you work through the list.

The amount you save depends on your rate spread and balances. With large spreads and large balances, the difference in total interest paid between using the snowball vs avalanche can be hundreds or even thousands of dollars. With smaller debts and similar interest rates, the gap in interest paid between strategies is modest. Consider running both scenarios through a free debt repayment calculator to see exactly how much interest you would have paid either way. The Consumer Financial Protection Bureau offers guidance on evaluating your total debt at consumerfinance.gov.

The honest counterpoint: a plan you complete always beats one you abandon. A finished snowball method costs less than an unfinished avalanche method, every time.

Which Strategy Will You Actually Stick With?

This is the question the math alone cannot answer. Behavioral research consistently shows that small, frequent wins build long-term commitment to a financial goal. The snowball method is built on that insight. Clear one account, your monthly payment rolls forward, and the finish line feels closer every time a balance reaches zero.

Some people are genuinely motivated by saving money. If you map out a payoff timeline, track your progress by watching the interest charges shrink, and find that compelling enough to continue for 12 or 18 months without clearing a single account, the avalanche method will help you get debt-free faster and save more.

Two questions help narrow it down.

First: have you started paying off debt before and quit? If yes, the snowball method's quick, early wins may be the structure that helps you stay on track this time. The snowball's power is the clear, measurable goal of eliminating each smallest debt, one at a time.

Second: how wide is the interest rate spread across your debts? If all your debts sit between 14% and 19%, the avalanche savings are modest while the snowball's motivational advantage probably wins. If you have a high-interest credit card at 27% alongside a 6% car loan at lower interest, the avalanche savings are real and worth the longer wait for a first win.

A hybrid debt snowball vs avalanche approach some people use: focus on accounts that are both higher-rate and relatively small first. This is similar to a hybrid method, combining the emotional boost of quick wins with the financial benefit of attacking expensive balances. It is less clean to explain but can be a useful middle ground in many situations. Whatever debt repayment strategy you choose, commit to it and start. The biggest mistake is not picking the wrong method. It is waiting to start.

The psychological aspect of debt payoff is often underestimated. Research consistently shows that the psychological reward of clearing a debt entirely, watching a balance go from something to zero, is a powerful motivator that keeps people paying. Many people who consider themselves disciplined find that the avalanche method feels discouraging when they are paying for 18 months and the number of accounts has not changed. Others find the snowball method psychologically draining because they know they are paying more interest over time. Be honest with yourself about which psychological pattern fits your situation before you start.

What About Student Loans, Mortgages, and Other Debt?

Most financial advisors recommend focusing the debt snowball vs avalanche strategy on high-interest consumer debt first: credit cards, personal loans, medical bills, and high-rate car loans. Student loans and mortgages are a different scenario.

Student loans often carry lower interest rates than credit cards, and they may come with income-driven repayment plans, forgiveness programs, or a tax deduction on the interest you pay. Lumping them into a snowball or avalanche alongside a high-interest credit card is usually the wrong priority order. Pay off the high-interest balances first, then continue to work on student loans separately. Our guide on choosing the right student loan repayment plan covers those options in detail.

Mortgages are generally the last financial debt to address in any payoff sequence. The rate is almost always the lowest of all your debts, the interest may be tax-deductible, and you are building equity in an asset while you pay. Some people focus extra payments toward their mortgage early once consumer debt is gone, but that is a separate goal from the snowball or avalanche method.

The short rule: run credit cards and personal loans through the snowball or avalanche debt repayment method first. Then evaluate lower-rate debt like student loans and car loans based on their specific rates and terms. A 4% car loan is a very different situation from a 20% credit card. Your car loan, student loan, and mortgage are typically last on the payoff list.

How to Start Your Debt Repayment Plan

Both the snowball method and the avalanche method follow the same five steps. The only difference is how you sort your list in step two. Using either approach consistently is how you pay off debt more quickly than minimum payments alone will ever allow.

1. List every debt. Write down the balance, minimum payment due, and interest rate for every debt: credit cards, personal loans, auto loans, student loans, medical bills. You cannot build an effective debt repayment plan without complete information.
2. Sort the list. Snowball method: start with the smallest debt, then the next smallest, working up to largest. Avalanche method: highest interest rates first to lowest. Set a rough debt-free timeline for each account based on your extra payment amount. Consider setting student loans and your mortgage aside for a second phase once high-interest consumer debt is handled.
3. Find extra money for extra payments. Cut any spending that is not a necessity until the debt is gone. Even an extra $100 a month in extra payments makes a meaningful difference across months of debt repayment. Check out our list of seven easy ways to save money fast if you need ideas to find extra money quickly without upending your life.
4. Focus all extra payments on the target debt. Make your minimum payment on everything else. Do not split extra payments across multiple debts. Concentrating on one target is what makes both methods effective and helps you get debt-free faster than spreading a little extra everywhere.
5. Roll the payment forward when you clear a debt. When a balance hits zero, roll its full monthly payment into the minimum on the next debt in the list, regardless of the method you chose. Keep rolling the payment forward until the list is empty. Read about how compound interest works to understand why eliminating high-interest debt early is one of the best financial moves available to you. That same compounding starts working for you once you shift from debt to saving and investing.

One important step before you start: if you have no emergency fund at all, save $500 to $1,000 first. After that, your debt repayment plan can proceed without the risk of new charges derailing your progress. A financial cushion means an unexpected bill does not force new charges onto the cards you are working to clear. Our full guide on building an emergency fund covers how to do this quickly without derailing your debt repayment momentum.

After your consumer debts are paid off, roll those monthly payments toward retirement savings or investing. The discipline of paying an extra $300 a month toward debt does not disappear once the debts are cleared. Redirect it to a Roth IRA, a 401(k), or a taxable brokerage account. The same compounding that was working against you in interest now works for you in returns. Getting debt-free is the move that transforms your financial life. The fastest path there is clearing high-rate debts first, then pointing that freed-up cash at your next goal.

Conclusion: Debt Snowball vs Avalanche

Pick the snowball method if you have struggled to stay motivated on past debt repayment attempts, if your smallest debt can be cleared within a few months, or if seeing fast progress helps you continue. Pick the avalanche method if you are comfortable with slower visible progress toward fewer account closures, if the interest rate spread between your debts is large, or if you have paid off debt before and know you will follow through.

Both methods are effective. Both require a sorted list, minimum payments on everything, and one extra payment target at a time. Pay that target balance first, regardless of distractions. Using either strategy consistently will help you become debt-free faster than minimum payments alone. The longer you wait to start, the more interest accumulates across multiple debts, so starting today is always better than waiting for a perfect plan. The strategy you choose is less important than the financial discipline you bring to it.

Want to go deeper on your financial situation? Our guide on loan consolidation covers an alternative debt repayment strategy that can combine multiple balances into one monthly payment at a potentially lower interest rate. And the 50/30/20 budget rule is a simple framework for saving enough of your monthly income to make meaningful extra payments on your debts. Once those debts are paid off, redirect those same extra payments toward retirement savings and your longer-term financial goals. Getting debt-free is not complicated. It just takes consistency.

Self-Employment Tax Explained: The 15.3% Rule

First, a key distinction: SE tax is not income tax. Those are two separate calculations that both appear on your tax return. SE tax is specifically the combined Social Security and Medicare tax that funds retirement benefits, disability insurance, and hospital insurance for self-employed people. Calculated on Schedule SE, it flows to Schedule 2, which feeds your Form 1040.

The 15.3% rate breaks into two parts, per the IRS:

• 12.4% for Social Security (old-age, survivors, and disability insurance). This is the Social Security tax portion.
• 2.9% for Medicare taxes (hospital insurance)

If you've ever looked at a pay stub and seen FICA deductions, you'd recognize 6.2% for Social Security and 1.45% for Medicare. Those are the employee's half. Your employer matched that exact amount and sent it to the IRS alongside yours. When you work for yourself, there's no employer, so you send the full 15.3%. You pay both the employee and employer shares.

One important distinction: self-employment tax and federal income tax are separate obligations. Both apply to your net earnings throughout the year, but you calculate them independently by different rules. Your total federal tax bill is the sum of the two, plus any applicable state income tax.

Who Has to Pay Self-Employment Tax?

You owe self-employment tax if your net earnings from self-employment hit $400 or more in the calendar year, according to the IRS. That applies to:

• Freelancers and independent contractors filing Schedule C
• Sole proprietors and single-member LLC owners
• Partners (as individuals) receiving a distributive share of business income from a partnership
• Gig workers earning through rideshare, delivery, or freelance platforms. All of these individuals are required to file Schedule SE if their net earnings reach the threshold.
• Anyone receiving 1099-NEC income from clients

The $400 threshold is net income, not gross. If you earned $2,000 freelancing and had $1,700 in legitimate business expenses, your earnings from self-employment are $300, below the threshold. When earnings from self-employment stay that low, you may not owe any SE tax for the year. Most people who freelance regularly are well above it.

Having a W-2 job doesn't shield you from SE tax on side income. If your employer withholds FICA on your wages, that covers your payroll taxes on the job. Your side hustle income is separate. You owe SE tax on that net profit regardless of what happens at work.

Thinking about making the full jump to self-employment? The 5 things to consider before self-employment is worth reading first.

How to Calculate Self-Employment Tax in 2026

The IRS doesn't charge 15.3% on every gross dollar you earn. It charges 15.3% on 92.35% of your net earnings from self-employment. The 92.35% factor exists because the IRS lets you deduct the employer-equivalent portion before calculating the tax (mirroring how FICA works for employees). That calculation is handled automatically by Schedule SE, but understanding the math helps you plan.

The three-step formula for calculating your self-employment taxes:

1. Calculate net self-employment income (business revenue minus deductible expenses)
2. Multiply by 0.9235 to get net earnings subject to SE tax
3. Multiply that by 15.3% to get your SE tax

A concrete example for self-employed individuals: you net $75,000 from freelancing after expenses.

• $75,000 × 0.9235 = $69,262.50
• $69,262.50 × 15.3% = $10,597.16 in SE tax

Your income tax is calculated separately on your AGI after the SE tax deduction (covered below).

The 2026 Social Security Wage Base: $184,500

The 12.4% Social Security portion only applies up to a ceiling. For 2026, that ceiling is $184,500 in combined wages and net earnings from self-employment, according to the IRS. Once you cross that threshold, you stop owing the Social Security piece. The 2.9% Medicare tax applies to every dollar of net earnings above that line. There is no cap on Medicare.

High-earning self-employed individuals face an additional 0.9% Medicare surtax on top of the regular Medicare taxes on income above $200,000 for single filers or $250,000 for married filers filing jointly, per the IRS. This stacks on top of the regular 2.9%. Most freelancers and side-hustlers won't hit these thresholds, but they're worth knowing about as income grows.

Each year, the Social Security wage base increases by a set amount. Employers face the same $184,500 ceiling for their employees. For reference, it was $176,100 in 2025. The current-year base is published by the SSA and appears in IRS Publication 15 each January.

The Self-Employment Tax Deduction

You pay 15.3%, but the IRS gives you back half of it as a deduction. Specifically, you can deduct one-half of your SE tax from your adjusted gross income (AGI) when you file. It's called the employer-equivalent deduction. It mirrors the break an employee gets. That employee never sees the employer's 7.65% contribution, because it comes out of the employer's pocket, not the employee's paycheck.

Using the example from above: $10,597 in SE tax divided by 2 equals $5,299. That amount reduces your AGI. If you're in the 22% federal income tax bracket, that deduction saves you roughly $1,166 in income tax.

Above-the-line means it applies whether you take the standard deduction or itemize. You don't have to do anything special to claim it. Schedule SE calculates the amount, and it flows automatically to Schedule 1, then to Form 1040. Tax software handles the flow. Knowing it exists helps you understand why your real effective tax rate is lower than the 15.3% headline on SE tax alone.

How Self-Employment Tax Compares to Employee FICA

The 15.3% rate can feel like a penalty for being your own boss. The honest comparison is more interesting than that. When you were an employee, your total FICA contribution was still 15.3%. You just only saw half of it.

The money going to Social Security and Medicare is the same. What's different is who cuts the check and when. An employee's taxes are withheld automatically and sent before they ever touch the money. A freelancer receives gross income on earnings from self-employment and has to manage the tax portion manually.

That gap in timing is where first-year self-employment gets people in trouble. You invoice $10,000, it lands in your checking account, and it feels like $10,000 is yours. It isn't. A chunk of it belongs to the IRS. The practical fix: open a dedicated savings account the moment you go self-employed, and transfer 25% to 30% of every payment you receive into it. That covers SE tax plus federal income tax for most people in the 22% bracket. If your income is higher or your state has income tax, transfer closer to 35%. What's left after you file is yours.

How to Reduce Your Self-Employment Tax

The SE tax rate is fixed. Your net self-employment income is not. Every dollar of legitimate business expense that reduces your net income also reduces your SE tax. The math works in both directions: expenses cut income tax and SE tax at the same time, which makes deductions more valuable for self-employed individuals than for W-2 employees.

Common deductible business expenses for self-employed people:

• Home office (must be used regularly and exclusively for business, per IRS Publication 587)
• Business equipment, software, and tools
• Professional development and training directly related to your work
• Business portions of phone and internet costs
• Business vehicle mileage (check irs.gov for the current-year IRS standard mileage rate before filing)
• Business insurance
• Fees paid to subcontractors

Health insurance is a significant one. Self-employed individuals can deduct 100% of health insurance premiums for themselves, their spouse, and dependents as an above-the-line deduction on Schedule 1. This doesn't reduce SE tax, but it does lower your AGI and your income tax.

The single most powerful tool for high earners is a retirement account. A SEP IRA lets you contribute up to 25% of net self-employment income (up to the IRS annual limit). A Solo 401(k) has even higher potential contribution limits. Both contributions work together to reduce your taxable income for income tax purposes. The SEP IRA vs Solo 401(k) comparison breaks down which one makes sense for your situation.

One strategy some high earners consider: electing S corporation status, which lets shareholders take distributions that aren't subject to SE tax (only wages are). It can work, but the cost of maintaining an S corp (payroll, separate filings, and state requirements) needs to exceed the tax savings. That decision is a question for a CPA, not a DIY calculation.

How to Pay Self-Employment Tax

Self-employment tax doesn't get paid on a separate form or through a separate system. It's combined with your income tax payment and goes through the same channels: quarterly estimated payments and your annual return.

The IRS typically expects you to pay quarterly on your earnings from self-employment, not in a lump sum in April. Miss the required quarterly payments and you may face an underpayment penalty when you file. The 2026 quarterly estimated tax due dates, per Form 1040-ES, are:

The IRS's safe harbor rule says you avoid underpayment penalties if you pay at least 100% of last year's total tax liability or 90% of this year's actual liability, whichever is smaller. If your prior-year adjusted gross income exceeded $150,000, the threshold is 110% of last year's liability. Spreading that total across four equal payments keeps you safe.

You can pay online at IRS Direct Pay (irs.gov/directpay) at no cost using a bank account. The quarterly estimated tax guide walks through the step-by-step payment process and the safe-harbor calculation in detail.

The Bottom Line on Self-Employment Tax

Self-employment tax explained in full: it's the price of working for yourself, and it's a price worth paying when you understand it. The 15.3% rate and the 92.35% calculation sound complicated until you run the numbers once. After that, it's just arithmetic you plan around.

The moves that matter: keep your business expenses documented so your net income is accurate, set aside 25% to 30% of every payment into a dedicated tax account, and make your four quarterly payments on time. The deduction for half your SE tax is automatic (Schedule SE handles it), and knowing it exists helps you understand why your total tax burden is lower than the headline rate suggests.

If you're self-employed and want to cut your tax bill further, a retirement account is the most powerful tool available. The SEP IRA vs Solo 401(k) guide covers the contribution limits and which option fits a freelancer's situation. And if you're still getting started with self-employment, the Complete Beginner Guide to Freelancing covers the full picture. Taxes are just one piece of building a business that pays you well.

Setting freelance rates is not guesswork. The right number comes from a formula. Here's the step-by-step process to build it, research your market, and start charging what you're worth.

Why Most Freelancers Underprice Their Services

New freelancers almost always charge too little. The key mistake is pricing by feel rather than math. They're nervous about scaring clients off, they don't know what others in their field charge, and they forget to account for the true cost of self-employment. Beginners in particular underestimate their actual expenses, which leads to rates that can't sustain a real income and has a direct impact on long-term financial stability.

The biggest hidden cost is taxes. As an employee, your employer covers half of your Social Security and Medicare taxes. As a freelancer, you cover the entire thing yourself. The IRS calls this the self-employment (SE) tax, and it runs 15.3 percent of your net self-employment income: 12.4 percent for Social Security (up to the annual wage base, which the IRS adjusts each year) plus 2.9 percent for Medicare, according to IRS Tax Topic 554. You can deduct the employer-equivalent portion from your adjusted gross income, which reduces your income tax, but you still owe the full SE tax. Your freelance pricing has to absorb that cost from the start.

Beyond SE taxes, you're paying income tax, funding your own health insurance if you don't have coverage through a spouse, buying your own software and tools, and covering every expense your employer used to absorb. Consider this: a freelancer who bills $80,000 a year for services is not taking home $80,000. Once you run the real numbers, the right price for your services becomes obvious.

The Freelance Pricing Formula: Your Step-by-Step Rate Calculator

Your minimum viable rate is the floor below which you can't hit your income goal, no matter how many projects you take on. This pricing structure helps you calculate that number in five steps. Following this model ensures you cover your costs, hit your financial goals, and set your prices at a level that makes freelancing sustainable.

1. Step 1: Set your desired monthly take-home income. Start with the net amount you actually need each month after taxes and expenses. Not a dream number. Your real minimum. Consider what it costs to cover rent or mortgage, bills, food, debt payments, and retirement savings. Multiply by 12 for your annual income goal.
2. Step 2: Gross up for taxes. SE tax alone is 15.3 percent of net earnings. Add income tax on top, which depends on your filing status, deductions, and income level. A working estimate: multiply your annual take-home target by 1.35 to 1.45. Confirm with a CPA or the IRS Tax Withholding Estimator for your specific situation. Remember: if you expect to owe $1,000 or more when you file, the IRS generally requires quarterly estimated payments.
3. Step 3: Add your annual business expenses. Health insurance, software subscriptions, hardware, a home office, professional fees, tools, and training. Total up what you spend or expect to spend on your freelance service business each month and multiply by 12. These costs are real and your price has to recover them.
4. Step 4: Estimate your billable hours per year. A full-time work year is roughly 2,000 hours, but not all billable. Sales calls, invoicing, admin tasks, and skill-building eat into the total. Consider that most freelancers bill 1,000 to 1,400 hours a year across projects. Use 1,200 hours as a conservative baseline for setting your annual rate.
5. Step 5: Apply the formula. Divide your total gross revenue need (grossed-up income target plus annual business expenses) by your estimated billable hours. That number is your minimum hourly rate. Price every project at or above that floor, with premium work priced higher. Any earnings above your minimum is profit you can reinvest in your business or keep as take-home income.

Here's the formula applied with real numbers so you can see exactly how to calculate your minimum rate:

Charging $30/hour will not get you to your income goal. You'd need to bill more than 3,000 hours a year to make it work, while a full-time year only has about 2,000. Running this pricing structure before you price your services stops the undercharging before it starts. Any earnings above your minimum rate is profit that helps your freelance business grow.

How to Research Market Rates for Your Freelance Work

Your minimum viable rate is the floor. Market rates tell you what's actually possible to earn. Research both before you price your freelance services.

Check the Bureau of Labor Statistics. The BLS Occupational Outlook Handbook lists median wages for hundreds of occupations and industries by skill level. These reflect employee wages, not freelance rates, but they're a useful anchor. A freelancer typically charges a per-hour premium over employees doing the same work, because clients pay for on-demand access to specific expertise and skills and avoid paying for benefits, tools, and employer-side payroll taxes.

Look at what freelance platforms show. Upwork is one of the most useful tools for freelance rate research. Search your skill category on Upwork and filter by experience level to see the spread between starting freelance rates and senior rates for the same services. Upwork data shows what clients in your field are paying right now for specific types of projects. For design work, marketing campaigns, writing, development, and most professional freelance service categories, Upwork has enough volume to give you a real sense of market demand. Fiverr and Toptal offer different pricing structures and can fill in gaps depending on your field.

Talk to other freelancers. Join a professional Slack community, a subreddit for your industry, or a trade association. Most experienced freelancers will share their rate range if you ask directly and honestly. You're likely not competing with them for every client. The information is genuinely useful to both sides, and firsthand data from someone with similar experience and skills is more reliable than any price list online.

Look at equivalent staff job postings. When a company posts a full-time role at $90,000 a year, that's roughly $45/hour. A freelancer providing the same professional services can reasonably price that work at $65 to $100/hour, because the client saves on benefits and employer-side payroll taxes and gets access to premium specialized skills and expertise on demand. Consider adjusting upward based on your experience level, the impact of results you can document, and the market demand your skills command.

Combine your floor calculation with market research from two or three of these sources and you'll have a real pricing structure: a lower end to quote with confidence and a higher end to build toward as your professional reputation and demand for your services grow. Calculate your minimum first, then check the market to understand your potential.

Freelance Pricing Models: Hourly, Project-Based, Retainer, and Value-Based

Most new freelancers default to hourly pricing because it's the simplest model to understand. The problem is that the hourly model caps your income at your hours. There are four main pricing models to consider. Each model works differently and has different pros and cons depending on the types of projects you take on, the skills you offer, and the clients you serve.

Hourly pricing charges clients based on hours worked. Pros: simple to explain, easier to adjust when scope changes, flexible for open-ended work. Cons: rewards time over expertise, your earnings per hour drop as you get faster, and clients may push back on how long tasks take. The hourly model works well for ongoing retainer arrangements where the mix of tasks changes each month. Consider hourly pricing for maintenance work, consulting, and retainer clients who need different help each month.

Project-based pricing charges a fixed fee for a clearly defined set of deliverables. Pros: rewards efficiency, removes the hours discussion, and lets you earn more as you get faster because the client pays for the value of the output, not your time. Cons: requires accurate scope estimates to price correctly, and scope creep will lower your effective rate if the project isn't well-defined upfront. Before you start, define the deliverables, the number of revisions included (one or two rounds of revisions is standard), payment terms, and any tasks outside scope in a written contract. Fixed-fee project pricing works especially well for design projects, marketing campaigns, writing assignments, web builds, and any project with a clear, defined output.

Retainer pricing is a recurring model where a client pays a set monthly fee for an agreed-on structure of tasks or hours. Pros: stable, predictable income month after month, easier to plan your finances, and you build deeper relationships with clients you work with consistently. Cons: requires a well-defined contract to avoid scope creep on ongoing work. While project work can swing between feast and famine, a retainer from one good ongoing client provides a financial base to build on. Many experienced freelancers sign two or three retainer contracts that cover their desired base income, while taking on individual projects on top. When you set up a retainer, define the payment schedule, the monthly deliverables, what tasks are in scope, and how the retainer rate increases over time.

Value-based pricing is the highest-earning model for experienced freelancers. Instead of setting rates based on time or scope, you price based on the value and impact your work delivers. Pros: the highest potential earnings, rewards expertise and efficiency rather than hours. Cons: harder to sell to clients early in your career, requires documented results to justify the price. A freelance marketing strategist whose campaigns help a business increase sales isn't charging $50/hour. A freelance designer whose branding work drives real conversions isn't pricing per task. Both are setting their prices based on the desired outcome and the value they create for the client. Value-based pricing works best when you can connect your freelance services directly to the client's earnings or revenue growth.

Most freelancers start with the hourly model, move to project-based pricing on most projects, and eventually use value-based pricing for their highest-impact freelance services. Understanding how self-employment taxes affect your take-home becomes more important as your income grows at each step.

How to Quote a Rate Without Flinching

Know your number before the conversation starts. Say it once, clearly, and stop talking. “My rate for this project is $4,000. Does that work for your budget?”

Silence after quoting is normal. Don't fill it with discounts or apologies. Clients who agree will say so quickly. Clients who push back will tell you their budget number, which helps you understand whether the project is worth pursuing or the gap is too wide to bridge. Either way, you've started a real negotiation with a clear price on the table.

Asking “What's your budget?” is the most expensive sentence in freelancing. It hands control to the client and invites lower prices than what you'd have quoted. Give your rate first. The client responds to your price, which puts your pricing strategy in control of the conversation and keeps the focus on the value you deliver.

When a client asks before you understand the scope, give a range: “For projects like this, I typically charge $2,500 to $6,000 depending on scope and timeline. Can you walk me through what you need?” That approach gets you the information you need to price accurately without locking you into a lower number too early.

How to Adjust and Raise Your Freelance Rates Over Time

Raising your freelance rates is the fastest strategy to increase your income without taking on more projects or working more hours. The key is knowing when and how to raise your prices. The right time to adjust: when you're consistently at capacity, when you've built your skill set or portfolio, when inflation has pushed your monthly financial obligations up, or when you find you've been below market.

For new clients: just quote the higher rate. No announcement, no explanation needed. Your pricing structure has been updated. Done.

For existing clients, including ongoing retainer clients: give 30 to 60 days notice and say it plainly. “I'm updating my rates on [date]. Your new rate will be $X per [hour or month or project type].” Good long-term clients almost always accept a reasonable increase from a professional freelancer who delivers consistent value and results. A client who refuses any rate increase is effectively giving you an annual pay cut as your costs rise and your skills grow.

Review your freelance rates at minimum once a year, or every six months during active growth. A 2022 rate held flat through 2026 has lost real purchasing power. The experience, results, and professional expertise you've built justify premium prices that a beginner freelancer cannot yet command. Consider raising rates by 10 to 20 percent annually during growth years, and re-benchmark against market rates each time so your prices reflect your current worth. If you're building toward turning your side hustle into a full-time freelance business, the rates you set and raise today shape the entire trajectory of your earnings.

How to Price Your Freelance Work: The Bottom Line

Knowing how to price your freelance work comes down to three steps: calculate your minimum viable hourly rate using the formula above, research what clients in your field actually pay for your freelance services on Upwork and other platforms, and quote your price with confidence. From there, consider moving from the hourly model to project-based pricing, adding retainer clients for stable income, and eventually using value-based pricing as your professional experience and documented results grow. Raise your rates at minimum once a year so your prices reflect your current worth and the value you deliver.

The home office deduction and other self-employed write-offs also affect your real take-home math, worth reviewing before you set your final rates. For the full picture on building sustainable freelance income, visit Personal Profitability or browse the Earn More category for more on maximizing what you keep from every project.

What the 50/30/20 Budget Rule Is and Where It Came From

Senator Elizabeth Warren and her daughter Amelia Warren Tyagi popularized this budgeting method in their 2005 book All Your Worth. Warren was a Harvard Law professor and bankruptcy researcher, and the method came from years of studying why American households fail financially. Their core finding: most budget problems aren't spending problems. They're structural. Too much of the paycheck is locked into fixed expenses before anyone decides where the money goes.

The three-category split was designed to fix that. Fifty percent to needs keeps fixed monthly expenses from crowding out flexibility. Thirty percent to wants gives you a real life instead of a joyless budget that nobody follows. Twenty percent to savings is the floor needed to actually build financial security over years.

Everything is based on your after-tax take-home pay, not your gross salary. The method only works when you start with the right number. After taxes, after payroll deductions, the real take-home is the baseline. That after taxes figure is what you divide. For freelancers and side hustlers, calculating that number takes one extra step, covered below.

How to Calculate Your 50/30/20 Budget Numbers

Start with your monthly after-tax income and run three multiplications. That's the whole calculation. The method doesn't require categorizing every individual expense, just the totals across three broad buckets.

Plug in your real monthly income after taxes and run the same percentages. Compare those three targets against your actual spending by category last month. The gap between what you spent and what the targets say tells you what to work on.

If housing expenses alone eat 45% of your take-home before you buy groceries, the method still tells you something useful: the exact size of the gap and what you'd need to earn or cut to close it. That clarity is the value. Most people have never run this calculation before, and the first time is usually revealing.

What Counts as a Need vs. a Want

This is where most people get the 50/30/20 rule wrong, and where honest categorization does the most work. A need is an expense you must pay to live and maintain your ability to work. A want is something you choose. The line is easier to draw than most budgets make it.

Needs include:

• Rent or mortgage payment (housing is the largest need for most households)
• Utilities: electricity, gas, water, and basic internet
• Groceries (the grocery store, not the restaurant)
• Transportation expenses: car payment, auto insurance, gas, or a transit pass
• Minimum required debt payments on student loans, credit cards, or any other loan
• Health insurance premiums
• Childcare required for you to work

Wants include:

• Restaurants, takeout, and coffee shop orders
• Streaming subscriptions (Netflix, Spotify, Hulu, and others)
• Gym membership, unless medically necessary
• Clothing beyond necessary replacement
• Hobbies, gadgets, and entertainment spending
• Vacations and travel
• Upgraded versions of things you already have: a bigger apartment, a newer car, the faster internet plan when the slow one works fine
• Shopping trips that aren't replacing a worn-out necessity

That last category is where budgets go sideways. A two-bedroom apartment when a one-bedroom works is a want. A car payment on a newer model when your current car gets you to the job reliably is a want. The 50/30/20 method categorizes based on what you need to function, not what you've grown accustomed to. Without that honest distinction, the 50% ceiling on needs means nothing.

How to Put the 20% Savings Category to Work

The savings category is the one that changes your financial future. It covers two things: building assets and paying down debt faster than the minimum requires. The order you fund these goals matters.

1. Emergency fund first. Keep 3 to 6 months of living expenses in a liquid savings account before you invest a dollar anywhere. One unexpected expense without a buffer means the savings category immediately turns into new debt. See Emergency Funds 101 for how to build and size yours.
2. Employer 401(k) match. If your employer matches any part of your 401(k) contribution, put in enough to capture the full match first. A 50% or 100% match on your contributions is an immediate guaranteed return that no other investment can match.
3. IRA contributions. After the match, fund a Roth or traditional IRA. For 2026, the IRS sets the annual contribution limit at $7,500 per person, or $8,600 if you are 50 or older, according to the IRS retirement contribution limits page. Whether Roth or traditional depends on your tax situation now versus in retirement.
4. Extra debt payments. Credit card debt payments above 15% APR cost more than most safe investments will earn. After the tax-advantaged accounts, direct extra funds toward high-rate balances. Paying off debt is a guaranteed return equal to the interest rate.
5. Taxable investing. After the emergency fund, the match, the IRA, and high-interest debt payments are covered, invest the remainder in a taxable brokerage account.

Most people start with just the emergency fund and the employer match, then layer in the rest as income grows. The order matters more than the amounts when you're starting out. For more on building the savings habit, see Saving Money: How to Create Savings Habits and Goals.

How to Apply the 50/30/20 Budget Rule on a Variable Income

Freelancers, side hustlers, and business owners hit a real problem with this budgeting method: the rule says “50% of your income,” but what is your income when it changes every month?

Use your average monthly take-home over the last 6 months as the budgeting baseline. Add up 6 months of net income and divide by 6. If your income swings a lot, lean toward the lower half of that range rather than the average. Budget conservatively. You can always redirect a surplus to savings, but you can't un-spend what's gone.

In a good month, the extra goes to savings goals or extra debt payments. In a slow month, draw from your cash buffer rather than reaching for a credit card. That buffer, part of your emergency fund, is what makes variable income livable. Without it, one slow month blows the whole budget and the entire method breaks down.

One extra step for the self-employed: your after-tax income for the 50/30/20 rule is what's left after setting aside money for income taxes and self-employment taxes. Not gross revenue. Not the gross deposit to your business account. If you're not yet making quarterly estimated payments to the IRS, our guide to quarterly estimated taxes covers how that works and when payments are due each year. Budget the split against the real post-tax, after taxes number, not the gross.

The 50/30/20 Method vs. Other Budgeting Methods

The 50/30/20 rule is one budgeting method among several. Knowing how it compares to the alternatives helps you decide whether it fits your situation or whether you need something more granular.

Zero-based budgeting assigns every dollar a job, so income minus expenses equals zero at the end of each month. Zero-based budgeting requires more work: you categorize every transaction and plan every spending category in advance. It's the right method if you want maximum control over your expenses or if your spending patterns vary a lot month to month. The tradeoff is time. Zero-based budgeting is thorough but demanding.

The 50/30/20 method trades granularity for simplicity. You track three categories, not 30. You don't need to pre-plan every purchase or count every expense by line item. If you're new to budgeting or find detailed tracking unsustainable, the 50/30/20 rule is the better starting point. You can always move to zero-based budgeting later if you want more control.

The envelope method uses physical or digital envelopes for each spending category. Like zero-based budgeting, it's highly structured. The 50/30/20 rule is simpler than the envelope method and more forgiving, which is why it's often the method people actually stick with.

The best budgeting method is the one you'll use consistently. For most people starting out, that's the 50/30/20 rule.

When to Adjust the Percentages

The rule is a benchmark, not a contract. There are situations where the standard split won't work, and adjusting it is smarter than abandoning the method.

High cost-of-living areas. In New York, San Francisco, or Seattle, housing expenses alone can take 40% to 50% of median income. The method still tells you something: exactly how far above the benchmark you are and what income level would help you get under 50%. In the short run, acknowledge the gap and work with what you have.

Entry-level income. At a starting salary, saving 20% might not be possible while covering necessary living expenses. Even 5% is a real start. The habit of always saving something compounds faster than the dollar amount suggests. Don't drop the savings category to zero because you can't hit 20% yet.

Aggressive debt payoff. In a focused push to eliminate a high-rate balance, temporarily redirect part of the wants category to savings and debt payments. A 50/10/40 split for several months can meaningfully accelerate payoff. That's a short-term posture, not a permanent change to the method.

Very high income. At some income levels, 30% to wants exceeds what you'd naturally spend. Let the surplus roll into savings or investments instead of inventing new wants to fill the bucket. The percentages are targets, not requirements.

Real 50/30/20 Budget Examples

The math is simple once you plug in real numbers. Here are two realistic budget examples using the 50/30/20 method so you can see exactly how to apply it to your own situation.

Example 1: $3,500 monthly take-home pay

Ask yourself: what's my real take-home after taxes? If it's $3,500, here's how the 50/30/20 budget strategy looks:

• Needs (50%): $1,750. Housing costs like rent or mortgage take the biggest share, typically $900 to $1,200. Add utilities ($150), groceries ($250), and transportation costs ($200 to $300) and you're at or near the budget limit. Minimum debt payments go here too.
• Wants (30%): $1,050. Dining, streaming, hobbies, and shopping. This is the category most people overspend. Track it for one month and the number will surprise you. A budget plan is the only thing that keeps it honest.
• Savings (20%): $700. Start by putting $400 into an emergency fund until it's fully funded, then redirect that $400 to a Roth IRA or extra debt payments. The steps are the same regardless of income: emergency fund, match, IRA, extra debt, taxable investments.

Example 2: $6,000 monthly take-home pay

At $6,000 a month after taxes, the 50/30/20 budget gives you real room to save money and still have a life:

• Needs (50%): $3,000. Higher income doesn't mean higher housing costs have to follow. If your specific rent and housing expenses fit under $3,000 with utilities and transportation, you're on budget. The 50/30/20 strategy rewards you for keeping fixed costs steady as income grows.
• Wants (30%): $1,800. More room to travel, dine out, and enjoy yourself without guilt. At this income level, the wants budget is usually enough to cover real quality of life. The goal is to spend to $1,800, not beyond it.
• Savings (20%): $1,200. At $1,200 a month, you can fully fund a Roth IRA ($625/month, $7,500/year), cover your employer match, and still have money left for extra debt payments or taxable investing. This is the income level where the plan starts to really compound.

The specific numbers change with your income. The strategy doesn't. Remember: the goal is to use the 50/30/20 rule as a starting point, not a straitjacket. Most people find that the 20% savings category is the hardest to protect in the first budget they write. Automate it first, spend what's left.

Frequently Asked Questions

Your First Step With the 50/30/20 Budget Rule

Pull up last month's bank and credit card statements. Add up what you actually spent in each of the three categories: needs, wants, and savings. Compare those totals against your take-home pay. That's your real budget picture, and the first time you run those numbers is usually the most useful 20 minutes in personal finance.

Most people find the wants category bigger than expected. Spending on dining, subscriptions, and shopping adds up quickly when nobody is tracking it. The savings category is almost always smaller. The 50/30/20 method makes both visible in one pass without requiring a category-by-category spreadsheet.

Once you see the gap, the next moves are clear. If needs are above 50%, housing or other fixed expenses cost too much or income needs to grow. If wants spending is above 30%, find the largest line items and cut them first. If savings are below 20%, set up an automatic transfer on payday so the money moves before you see it. Automated savings is the move that actually sticks because it doesn't depend on willpower.

For a complete walkthrough of building a budget from the ground up, see the Complete Beginner Guide to Budgeting. Once you're tracking the three categories consistently, see Saving Money: How to Create Savings Habits and Goals for practical ways to make the 20% automatic and put it to work over time.

Never borrowed money? Then you're not bad with credit. You're invisible to it. Lenders, landlords, and some employers can't see a track record, so a blank file reads as a risk, and they charge you more or say no. The fix is a short, clear process you can start this week. This guide from Personal Profitability walks through the exact steps, the accounts that actually report to the bureaus, the numbers that move your score, and the mistakes that keep beginners stuck. That's all there is to how to build credit from scratch, and it's more doable than it sounds.

What “no credit” really means

No credit isn't the same as bad credit. A thin or empty file gives the scoring models nothing to read, so they can't rate you at all. Millions of U.S. adults are “credit invisible,” a group the Consumer Financial Protection Bureau has tracked for years, and most of them simply never opened the kind of account that reports to a bureau.

That gap costs more than it looks. A blank file can mean a higher interest rate, a bigger security deposit on an apartment, a denied card application, or a utility company that wants cash up front. Build a short, clean history and those doors open. You don't have to be rich or carry debt. What you need is a few accounts that report to the three nationwide credit bureaus, Equifax, Experian, and TransUnion. Good credit lowers your interest rates, helps you qualify for better cards, and makes renting an apartment easier, so the payoff is real.

What goes into your credit score

Your FICO score comes from five things, and two of them carry most of the weight. Payment history (35%) and how much of your limit you use (30%) make up about two-thirds of the score, per FICO. For a beginner, that's good news, because both sit fully in your control from day one. That's why how to build credit from scratch is less about money and more about habits.

Want the longer version of how this works? Read our primer on what a credit score is and why your credit score matters. The short version is simple. Pay on time and don't max out your limits, and you're already nailing the two biggest factors.

How long does it take to build credit from scratch?

Plan on about six months to get your first FICO score. To generate one, your file needs at least one account that's been open for six months or more, plus at least one account reported to a bureau within the past six months, according to FICO. A single account can satisfy both rules.

So the clock starts the day you open that first reporting account, not the day you decide to fix this. VantageScore, the other main model, can sometimes produce a score a little sooner. Either way, a score shows up fast. A strong score takes longer, usually a year or two of steady, on-time payments and low balances. Open your first account now and your future self gets the head start.

7 steps to build credit from scratch

Below are the seven steps in how to build credit from scratch, in order. Not all of them happen at once. Begin with step two or three, then layer the rest in over the first year.

1. Check your credit reports first. Pull all three for free, weekly, at AnnualCreditReport.com, the only federally authorized site. Confirm you really have no file, and catch any errors or signs that someone opened an account in your name.
2. Open a secured credit card. You put down a cash deposit, often $200 to $500, and that deposit becomes your limit, the CFPB explains. Use it for one small recurring bill, pay it off in full each month, and pick a card that reports to all three bureaus and refunds the deposit once you graduate.
3. Or get a credit-builder loan. A bank or credit union holds the loan amount in a locked savings account while you make small monthly payments for 6 to 24 months. When you finish, the cash is yours. You build a payment record and a little savings at the same time, with no debt along the way.
4. Become an authorized user. Ask a parent or partner with a long, clean card to add you as an authorized user. Their good history can flow onto your file. The CFPB's research found that authorized-user-only files are weaker on their own, so treat this as a boost, not your whole plan.
5. Pay every bill on time, every time. Payment history is 35% of your score, the single biggest factor. Set autopay for at least the minimum on every account so one busy month never costs you a late mark. Consistent, on-time paying builds a positive payment history, and a single 30-day late payment can undo months of progress.
6. Keep your balances low. Amounts owed is 30% of your score. A common guideline says to use less than 30% of your limit, and lower is better. On a $500 secured card, that means holding the balance under about $150, even though you pay it off in full.
7. Let it age, then add variety slowly. Time does the rest. Leave your first account open, since length of history is 15%. After a year of on-time payments, a second account type (a card if you started with a loan, or the reverse) helps your credit mix without spooking the new-credit factor.

Secured card vs. credit-builder loan: which should you start with?

Reach for a secured card if you want flexibility and a path to a regular card. Choose a credit-builder loan if you'd rather not touch a card at all and want to bank some savings while you're at it. Both report to the bureaus, both build payment history, and running them at the same time is fine. Here's the side-by-side.

Your own bank or credit union is the first place to ask for either one, since a relationship already exists there. Compare the deposit, the fees, and whether the account reports to all three bureaus before you sign up. Weighing a regular card for later? Our guide to how to choose a credit card walks through the trade-offs.

How to build credit faster (without gaming it)

You can speed this up with a few honest moves, none of which involve tricks or paid “credit repair.” The fastest path is still on-time payments and low balances. Knowing how to build credit from scratch is half the job, and these habits handle the other half.

• Pay before the statement closes. Card issuers report your balance once a month, usually on the statement date. Knock it down before that date and a lower balance gets reported, which keeps your credit utilization low.
• Ask for a limit increase after 6 to 12 months. A higher credit limit with the same spending drops your credit utilization automatically. Check whether it's a soft pull first.
• Look at a student credit card if you qualify. Students often qualify for starter credit cards built for thin files, an easy way to add a second account and build credit responsibly. Use it lightly and pay it off in full.
• Keep your oldest account open. Closing your first card shortens your credit history and can bump your credit utilization. Leave it open and use it lightly.
• Don't apply for everything at once. Several applications in a short window add hard inquiries and lower your average account age, which hurts most when your file is thin. Space them out.
• Avoid credit repair companies. They can't do anything you can't do yourself for free, and the CFPB warns about ones that charge up front or promise to erase accurate information.

Check your credit reports every few months and watch the score trend, not the daily number. For the habit side of this, see our take on watching your credit report from a young age.

The bottom line

How to build credit from scratch comes down to one move repeated: open an account that reports to the bureaus, then pay it on time and keep the balance low. A secured card or a credit-builder loan gets you a score in about six months, and a year of steady payments turns that into good credit lenders like, which helps you qualify for better rates. No debt, no gimmicks, and no paid service required. Patience and autopay do the heavy lifting.

Pull your free reports first, then open your first reporting account this week. From there, keep learning: dig into what a credit score is, why it matters, and how to choose a credit card once you're ready to graduate. More waits in our Credit section. This is general guidance, not advice for your exact situation, so confirm the details of any account before you sign up.

LLC vs Sole Proprietor: The Short Answer

Start as a sole proprietor when you're testing an idea or your risk is low, and form an LLC when you have real liability exposure, real income, or you want the credibility and the option to save on taxes later. A sole proprietorship is the default the law gives you for free. An LLC is a legal entity you register with your state that separates your business from you personally. Here's how the two stack up.

The Key Differences Between Sole Proprietorships and LLCs

The LLC vs sole proprietor decision turns on three differences: liability, formation cost, and paperwork. A sole proprietorship gives you no separation from the business, costs nothing, and takes zero filing. An LLC builds a legal wall around your personal assets. It costs a state fee and a bit of yearly upkeep. Taxes barely move the needle at first, because both are pass-through structures by default. That surprises a lot of business owners who assume an LLC is a tax play. It isn't, not until you're big enough to elect corporate treatment. Keep that in mind as we break down each structure below.

What Is a Sole Proprietorship?

A sole proprietorship is a one-owner business that isn't legally separate from you. You already have one if you've earned money on your own without forming a company. There's no paperwork to start and nothing to file to create it. Report the profit on Schedule C with your personal Form 1040, and the business pays no separate federal income tax. Freelancers, delivery drivers, Etsy sellers, and weekend consultants are all sole proprietors by default. It's the simplest legal structure there is.

The catch is liability. The U.S. Small Business Administration puts it plainly. With a sole proprietorship “your business assets and liabilities are not separate from your personal assets and liabilities,” and “you can be held personally liable for the debts and obligations of the business.” Picture a client suing, or the business owing money it can't pay. Your personal savings, car, and home can be on the line. For a low-risk side gig, that's usually fine. For a business with contracts, clients on your premises, or real money moving, it's the weak spot. New to working for yourself? Our complete beginner guide to freelancing covers the first steps.

What Is an LLC?

An LLC, or limited liability company, is a business you register with your state. The registration creates a legal wall between the company and your personal assets. To form one, you file articles of organization and pay a state filing fee. Once it exists, the SBA notes that an LLC protects you from personal liability in most cases. Your personal assets like your vehicle, house, and savings accounts generally aren't at risk if the business faces bankruptcy or a lawsuit. Most LLCs are owned by one person, but they can have multiple members too.

That protection is the main reason to form one. It isn't a force field, though. You can still be on the hook if you sign a personal guarantee on a loan, mix personal and business money, or are personally negligent. To keep the wall standing, run the LLC like a real business. Use a separate bank account, keep clean books, and never pay for groceries out of the company account. Many LLCs also write an operating agreement, which is an internal document that sets out who owns what and how the business runs. A single-member LLC stays simple. By default the IRS doesn't tax it as a separate company, which brings us to the part that surprises most people.

Ownership and Management: How Much Structure Do You Want?

A sole proprietorship has the simplest ownership of any business structure. One person, no partners, no formal management to maintain. You make every call and keep every dollar of profit. An LLC offers more flexibility. It can have one owner or many members, and depending on your state you can run it member-managed, where the owners run it, or manager-managed, where you appoint someone. That flexibility is why partnerships and growing teams often pick an LLC over the two simpler options.

Ownership also changes the tax form. A single-member LLC files like a sole proprietorship. A multi-member LLC is taxed as a partnership by default, which means it files Form 1065 and passes profit to the members. The operating agreement is where you write down ownership splits and management rules. A sole proprietorship needs none of that, which keeps your business finances and paperwork light. More structure buys flexibility and protection. Less structure buys simplicity.

How an LLC and a Sole Proprietor Are Taxed

By default, a single-member LLC and a sole proprietorship are taxed exactly the same way. Both are pass-through businesses, so the company itself pays no federal income tax. Profit flows to your personal return on Schedule C. The IRS treats a one-owner LLC as a “disregarded entity” unless it elects otherwise. Its own guidance says the owner “is subject to the tax on net earnings from self employment in the same manner as a sole proprietorship.” Forming an LLC, on its own, does not lower your income tax. Same profit, same entity-level tax of zero, same personal return.

On top of income tax, both owners owe self-employment tax on net profit. Per IRS Tax Topic 554, the self-employment tax rate is 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare. The 12.4% Social Security piece applies to net earnings up to an annual wage base, which the Social Security Administration set at $184,500 for 2026, up from $176,100 in 2025. The 2.9% Medicare piece applies to all of your net earnings, with an extra 0.9% Additional Medicare Tax once income passes $200,000 (single) or $250,000 (married filing jointly). The IRS lets you deduct one-half of your self-employment tax when figuring your adjusted gross income. Because both structures pay this the same way, you'll handle quarterly estimated taxes either way.

One tax difference does matter. An LLC can elect corporate taxation by filing IRS Form 8832, or S corporation taxation by filing Form 2553. A sole proprietor can't make either election. Under an S-corp, you pay yourself a reasonable salary that's subject to payroll taxes. Profit above that salary can come out as a distribution that isn't hit with self-employment tax. That can save real money once profits are high enough to justify it. The catch: the IRS requires the salary to be “reasonable,” and running payroll adds cost and paperwork. Treat this as a talk-to-a-tax-pro decision, not a default. The same goes for self-employed retirement accounts, which both structures can use. See SEP IRA vs Solo 401k for that side of the math.

Liability: The Real Difference Between the Two

In the LLC vs sole proprietor comparison, liability protection is the single most significant reason to choose an LLC. As a sole proprietor, there's no legal line between you and the business, so a business debt or a lawsuit is your debt or your lawsuit. An LLC draws that line. If the business gets sued or can't pay its bills, the claim generally stops at the business assets and doesn't reach your personal accounts.

How much that matters depends on your risk. A writer working from a laptop carries little risk. A contractor on job sites, a shop owner with customers walking in, a business with employees, inventory, or signed contracts carries a lot. The more ways your work could lead to someone claiming money from you, the more an LLC earns its cost. Business insurance still matters in both cases, because an LLC protects your personal assets but doesn't pay a claim for you.

Cost and Paperwork to Set Up Each

A sole proprietorship costs nothing to start. An LLC costs a state filing fee plus some ongoing fees. Here's what the formation and upkeep actually take for each one.

• Sole proprietor: No formation filing and no fee. You may still need one or more local business licenses to operate legally. If you use a business name, you'll usually file a “doing business as” (DBA) name registration. That's the whole list.
• LLC: File articles of organization with your state and pay the filing fee, which varies by state. Filing fees and annual fees both depend on where you register. Many states charge annual fees too, like an annual report fee or a franchise tax, to keep the LLC active. Some states also require a registered agent, and a registered agent service runs an added yearly cost. The same business licenses can still apply.
• EIN (both): Get an Employer Identification Number free from the IRS at irs.gov. A sole proprietor or single-member LLC with no employees can use a Social Security number. An EIN keeps your personal number off business paperwork. It's usually required to open a business bank account or build business credit.
• Business bank account (both, essential for an LLC): A separate account is recommended for both business structures and keeps your books and expenses clean. For an LLC, it also helps protect the liability shield by proving the business is truly separate from you.

One more practical note. An LLC tends to read as more credible to clients, lenders, and partners. That's a soft benefit. For some businesses, it's worth the filing fee on its own. It also makes building business credit under the company name cleaner down the road. Whichever route you pick, track every dollar and business expense from day one so you can claim what you're owed, including the home office deduction if you qualify.

When to Switch From Sole Proprietor to an LLC

The LLC vs sole proprietor switch makes sense when the business has real liability exposure, steady income, or growth plans that make the protection and credibility worth the cost. No income number in the law forces the change. As a general rule, it's a judgment call about your level of risk. Stay a sole proprietor while you're testing an idea, earning a little on the side, or running something low-risk with almost no chance of a lawsuit. Move up to an LLC once you have clients signing contracts, employees, physical premises, valuable assets, or profit high enough that an S-corp election could cut your tax bill.

Starting as a sole proprietor costs you nothing later. Switching is straightforward. You file the LLC with your state, get an EIN from the IRS, open a business bank account, and move your operations and contracts over. There's no penalty for starting simple and upgrading when the business earns it. Most successful small businesses do exactly that, growing from sole proprietorships into LLCs as the stakes rise.

Conclusion: How to Pick Between an LLC and Sole Proprietor

The LLC vs sole proprietor choice comes down to risk and stage. If you're just starting, testing an idea, or earning a little on the side with low risk, stay a sole proprietor and keep it simple, because it's free and the taxes are identical. Once the business has real liability exposure, steady income, or growth plans, form an LLC for the personal asset protection, the credibility, and the option to elect S-corp treatment down the road. Both report on Schedule C by default and both pay the same self-employment tax, so this isn't a tax decision until you're big enough for an S-corp election. Whatever you choose, cite-and-confirm the specifics for your state and situation with a tax pro, track every dollar, and keep your business and personal money separate.

Keep building: read how to pay quarterly estimated taxes, the home office deduction guide, and our SEP IRA vs Solo 401k breakdown, or browse more in the Earn More section.

What is the home office deduction?

It's a tax break, sometimes called the home office tax deduction, that lets you deduct expenses for the portion of your home you use regularly and only for business purposes. The IRS gives you two ways to figure it. You can use the simplified method, which is a flat rate per square foot, or the regular method, which deducts a slice of your real home costs. It works whether you own or rent, and it covers houses, apartments, condos, mobile homes, and even a boat you live on, per IRS Publication 587. The deduction lives on your Schedule C, so it lowers both your income tax and your self-employment tax. To be eligible, you have to be self-employed and pass the use tests below.

Who qualifies for the deduction?

You qualify if you're self-employed and you use part of your home regularly and exclusively for your business. That covers freelancers, independent contractors, gig workers, and small business owners who file a Schedule C. W-2 employees can't claim it. The IRS suspended that unreimbursed employee deduction for tax years after 2017, so a regular paycheck job working from home does not count, even if your employer never gives you a desk. These office deductions are for self-employed individuals running real business activities, not for a salaried worker who happens to answer email at home.

The IRS sets two tests, and you have to pass both.

• Exclusive use. The space is a dedicated area used exclusively for business. A desk in the corner of a room you use for business and nothing else passes. The kitchen table where the family eats dinner does not. Any personal use of that exact space breaks the rule.
• Regular use. You use the space on a regular basis, not once in a while. Occasional or incidental use doesn't count.

You also have to show the space is your principal place of business. Your home counts as your principal place of business if you use it exclusively and regularly for the admin or management side of your work and you have no other fixed location where you do substantial admin work. So a contractor who does the job at client sites but handles all the billing, scheduling, and books from a home office still qualifies. You can also qualify if you meet clients, patients, or customers there, or if you use a separate structure like a detached garage or studio.

Two exceptions skip the exclusive-use test. If you store inventory or product samples at home for your only business location, that storage space is fine even if it isn't used only for that. And a licensed daycare run from your home doesn't need to meet exclusive use, per Publication 587.

The two ways to calculate it

You can calculate it one of two ways each year: the simplified method or the regular method. The simplified method trades a smaller, capped deduction for almost no paperwork. The regular method takes more record keeping but can be worth far more if your home costs are high or your office is big. You can switch between them year to year. Here's how they stack up.

How the simplified method works

The simplified method, which the IRS calls the simplified option, is a flat $5 per square foot of office space, up to 300 square feet, for a maximum deduction of $1,500. The IRS set that rate in Revenue Procedure 2013-13, and it has held since. You measure the space, multiply by $5, and you're done. No receipts, no depreciation, no Form 8829. It's the easy way to determine your home office expenses when the space is small.

Say your office is 150 square feet. Multiply 150 by $5 and you get a $750 deduction. If your office is 400 square feet, you still only count 300, so you cap out at $1,500. With this method you also claim your full mortgage interest and property taxes on Schedule A as usual, with no split. The downside: you can't deduct depreciation, and you can't carry any unused deduction to next year.

How the regular method works

The regular method deducts the business-use percentage of your actual home office expenses, figured on Form 8829, Expenses for Business Use of Your Home. First you determine your percentage. Divide your office square footage by your home's total square footage. If your home is 2,000 square feet and your office is 200, that's 10 percent. Your deduction is then based on that share of your home costs.

Then you sort your costs into two buckets, per Publication 587:

• Direct expenses apply only to the office, like painting that one room. You deduct these in full.
• Indirect expenses cover the whole home, like rent, utilities, insurance, and repairs. You deduct the business-use percentage of these.

Stick with the 10 percent example. If you spent $20,000 for the year on rent, utilities, insurance, and general repairs, you could deduct 10 percent of that, or $2,000. Homeowners can also deduct depreciation on the business share of the house, which the simplified method doesn't allow. That's where the regular method pulls ahead for a real office in a high-cost home.

How to claim the home office deduction on your taxes

You claim the home office deduction on your Schedule C, the form where you report self-employment income and expenses. The path depends on your method.

1. Measure your office and your home. Get the square footage of the space you use only for work and the total square footage of your home.
2. Pick a method. Run the simplified $5-per-foot math and the regular percentage math, then take whichever is bigger if you have the records for it.
3. Fill out the right form. For the simplified method, you enter the deduction directly on Schedule C. For the regular method, you complete Form 8829 first, then carry the result to Schedule C.
4. Keep your records. Save a note of your square footage, and for the regular method save receipts for rent, utilities, insurance, and repairs in case the IRS asks.

If this is your first year paying tax on business income, the deduction also feeds into what you owe each quarter. See our guide to paying quarterly estimated taxes so you don't get a surprise bill in April.

Limits and mistakes to avoid

Your deduction can't be more than the income your business earned from that home use. The IRS calls this the gross income limitation, and it means the deduction can't create or grow a business loss. In plain terms, it can't turn a thin profit into a paper loss. Under the regular method you can carry the unused part to next year. Under the simplified method you lose it. A few more traps catch people every year:

• Claiming a space that isn't exclusive. The guest room that doubles as a gym fails the exclusive-use test. Be honest about the space.
• Forgetting depreciation recapture. If you used the regular method and took depreciation, you may owe tax on that amount when you sell the home, separate from the usual home-sale exclusion.
• Taking it as an employee. If your only income is a W-2 job, you can't claim it, no matter how much you work from home.
• Guessing your square footage. Measure it. A round number with no basis is the kind of thing that looks wrong on paper.

None of this is individualized tax advice. The rules have edge cases, so confirm your situation with a tax pro or check the IRS source directly before you file.

The bottom line on the home office deduction

If you work for yourself from home, the home office deduction is real money for a space you're already paying for. Measure the room, make sure you use it only for work, and run both methods before you file. The simplified $5-per-foot route is the easy win for a small office, and the regular method pays off when your home costs are high. For more on keeping your tax bill down, read our tax tips for self-employed people and the complete beginner guide to freelancing. You can browse the rest of our taxes coverage too. Keep the receipts, stack it with your other deductions, claim what's yours, and put that money back into the business.

A Solo 401(k) adds a flat, tax-deductible employee contribution on top of the employer piece, so you maximize your total at a lower income. A SEP IRA is pure simplicity, with one employer contribution and almost no paperwork. Want the most savings and a Roth option? The Solo 401(k) usually wins. Want the easiest possible setup? The SEP IRA is hard to beat. New to retirement accounts in general? Start with our guide to how to open an IRA or Roth IRA, then come back here. For more on building income you can invest, the whole Personal Profitability library is built for hustlers and entrepreneurs.

SEP IRA vs Solo 401k: the short answer

For most one-person businesses, a Solo 401(k) lets you contribute more at the same income, and a SEP IRA is easier to open and run. Both cap out at the same $72,000 total for 2026, and both are funded with pre-tax dollars that grow tax-deferred. The split is about how each one calculates your contribution and how much paperwork it costs you. Here is the side-by-side.

The figures above come from the IRS 2026 cost-of-living limits in Notice 2025-67. Now here is how each account actually works.

How a SEP IRA works in 2026

A SEP IRA is an employer-funded retirement plan where you, as your own boss, contribute the lesser of 25% of your compensation or the annual maximum contribution, which is $72,000 for 2026. There is no separate employee contribution. The whole thing is one employer deposit. The IRS sets the 2026 SEP contribution limit at $72,000 and the compensation cap that feeds the math at $360,000. It is built for self-employed individuals and small business owners who want a high ceiling with no plan administration.

If you are self-employed rather than paid a W-2 salary, the 25% rate works out to roughly 20% of your net self-employment earnings, because the calculation backs out half your self-employment tax and the contribution itself. That makes your net income the number that matters. The IRS publishes the exact rate worksheet in Publication 560, so run your real figure there or with your tax pro. A quick example: on about $60,000 of net income from self-employment, your SEP contribution lands near $11,000 to $12,000, and the whole amount is tax-deductible.

The catch with a SEP is the employee rule. If your business has eligible employees, you generally have to contribute the same percentage of pay for them as you do for yourself. For a true solo operator that never matters. The moment you hire, it can get expensive fast. SEP contributions are traditionally pre-tax and grow tax-deferred until withdrawals become taxable in retirement, and you can open a SEP-IRA at almost any brokerage in a few minutes with no annual filing required.

How a Solo 401(k) works in 2026

A Solo 401(k), which the IRS calls a one-participant 401(k), lets you contribute as both the employee and the employer, which is why it usually beats a SEP on total savings. As the employee you can defer up to $24,500 of pay in 2026. As the employer you can add a profit-sharing contribution of up to 25% of compensation on top. The combined total still cannot exceed the $72,000 annual contribution limit the IRS sets for 2026, but you reach that ceiling at a much lower income than a SEP allows. It is the strongest retirement plan for self-employed business owners with no staff.

Two extras make the Solo 401(k) stronger for a lot of people. First, catch-up contributions. If you are 50 or older you can add another $8,000 in 2026, and if you are age 60 to 63 the catch-up rises to $11,250, both on top of the $72,000 limit. A SEP has no catch-up at all. Second, the Roth option and the flexibility it brings. A Solo 401(k) lets you split between traditional pre-tax and Roth elective deferrals, so you choose whether the money is taxable now or tax-free later. That is a real lever a SEP usually does not give you.

The trade-off is effort. A Solo 401(k) is only for a business with no employees other than a spouse, and you usually have to establish the plan by December 31 to contribute for that tax year. Once the account tops $250,000 in assets, the IRS requires a short Form 5500-EZ each year. Most major brokerages offer free Solo 401(k) plans, but you do the setup once and file that form later. For a one-person business chasing the biggest tax-deductible deduction, that extra paperwork is usually worth it.

SEP IRA vs Solo 401k: contribution limits compared

At the same income, a Solo 401(k) almost always lets you contribute more, because it stacks a flat employee deferral on top of the employer percentage. Picture a freelancer with about $60,000 of net self-employment income. With a SEP, the contribution is roughly 20% of that, near $12,000. With a Solo 401(k), that same person can defer $24,500 as the employee and add the same roughly $12,000 as the employer, for a total around $36,500. Same income, three times the tax-advantaged savings.

The gap only closes at higher income. To hit the full $72,000 with a SEP, you need compensation around $288,000, since 25% of that is $72,000. A Solo 401(k) gets you there far sooner because the $24,500 employee deferral does not depend on a percentage, and the additional catch-up can push your total even higher. So the lower your income, the bigger the Solo 401(k) advantage. At very high income, both land at the same $72,000 ceiling and the choice comes down to simplicity versus the Roth and catch-up features.

When a SEP IRA is the better choice

A SEP IRA wins when you want the simplest possible account and you are not trying to squeeze out the absolute maximum. Pick a SEP when:

• You want zero paperwork. A SEP has no annual IRS filing, ever, no matter how big it gets.
• You opened it at the last minute. You can set up and fund a SEP up to your tax filing deadline, including extensions, for the prior year.
• Your income is high and steady. If you earn enough that 25% already maxes you out, the Solo 401(k) edge mostly disappears.
• You might add staff later. A SEP scales to employees, though you then owe them the same percentage.

When a Solo 401(k) wins

A Solo 401(k) wins when you want to save the most on a modest or mid-range income, or you want a Roth bucket. Pick a Solo 401(k) when:

• You want to contribute more at the same income. The flat $24,500 employee deferral does the heavy lifting.
• You are 50 or older. The $8,000 catch-up ($11,250 at age 60 to 63) only exists on the 401(k) side.
• You want Roth money. Roth employee deferrals let you lock in tax-free growth.
• You have no employees. A spouse is fine, but anyone else generally rules it out.

How to open a SEP IRA or Solo 401(k)

Opening either account is straightforward, and most large brokerages offer both with no setup or annual fee. Here is the path.

1. Confirm you have self-employment income. Freelance, 1099, or small-business profit all count. A side hustle counts too.
2. Pick the account that fits. Use the comparison above. No employees and want the max? Solo 401(k). Want dead-simple? SEP.
3. Open it at a brokerage. Major firms like Fidelity, Schwab, and Vanguard offer free SEP and Solo 401(k) accounts. Choose low-cost index funds for your investment inside it.
4. Calculate your contribution. Use the Publication 560 worksheet or your tax software so you do not over-contribute.
5. Fund it before the deadline. Employer contributions can go in up to your filing deadline plus extensions. A Solo 401(k) usually needs to be established by year end.

This is general information, not individual tax advice. Your exact contribution depends on your net earnings and your full tax picture, so confirm the numbers with a tax pro before you file.

Conclusion: which one should you open?

If you run a one-person business and want to save the most, open a Solo 401(k). If you want the simplest account with no annual filing, open a SEP IRA. Both shelter up to $72,000 in 2026, both cut your tax bill, and both beat doing nothing while your profit sits idle. The best account is the one you actually fund, every year, with low-cost index funds inside it. Keep building from here with our guides on saving for retirement when you are self-employed, how to buy index funds, and the quiet power of compound interest. If quarterly taxes are part of your life now, our walkthrough on how to pay quarterly estimated taxes pairs well with this. For more, browse the full retirement section.

What are quarterly estimated taxes, and who has to pay them?

Quarterly estimated taxes are prepayments of the income tax and self-employment tax you owe on money that has no withholding. A regular paycheck has taxes pulled out before it hits your bank account. Freelance income, 1099 contract work, side-hustle cash, business profit, investment gains, and rental income usually don't. Both individuals and small businesses that earn this kind of untaxed income make estimated tax payments, because the IRS wants its share as you earn it, spread across four payments through the year.

Most self-employed people owe estimated taxes. The federal rule: you generally have to pay if you expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits, according to the IRS. That threshold catches most full-time freelancers and a lot of side hustlers too. Got a W-2 job and a side gig? You can owe estimated tax on the side income even though your day job withholds plenty on its own.

Skip the payments only if your paycheck withholding will already cover at least 90% of this year's tax or 100% of last year's, which rarely happens once you earn real money outside a W-2. When in doubt, run the numbers on the federal Form 1040-ES or talk to a tax pro about your own situation.

The 2026 quarterly estimated tax due dates

The 2026 tax year splits quarterly taxes into four payment periods, and each one has a hard deadline. Here are the dates straight from IRS Form 1040-ES for the 2026 tax year. Mark all four so you pay estimated taxes on time throughout the year.

Two things trip people up. The “quarters” aren't even three-month blocks, so Q2 covers only two months and Q3 covers three. And the last payment lands in the next calendar year. You can skip the January 15, 2027 payment if you file your full 2026 return and pay everything you owe by February 1, 2027. If a due date falls on a weekend or legal holiday, it moves to the next business day. All four 2026 dates land on weekdays, so they hold as listed.

How much should you pay each quarter?

Pay enough to hit a safe harbor, and the IRS won't charge you a penalty even if you end up owing more in April. The safe harbor is the smaller of two numbers, per the IRS:

• 90% of this year's total tax, or
• 100% of your prior year total tax (it jumps to 110% if your prior year adjusted gross income was over $150,000, or $75,000 if married filing separately).

The prior year rule is the easy button for quarterly taxes. Take the total tax from your prior year return, divide by four, and pay that amount each quarter. Base your payments on the prior year and you're covered against the penalty no matter how much your income grows this year. The catch: you'll still owe the difference in April if you earn more than the prior year, so set the extra aside throughout the year.

Got steady income? The simpler move is to estimate this year's total tax, split it in four, and make an equal estimated tax payment each time. A lot of freelancers set aside 25% to 30% of every payment they collect into a separate savings account, then pay their estimated tax payments from that account each quarter. That single habit keeps a tax bill from wrecking your cash flow. For the deductions that lower the amount you're estimating, see our guide to deducting small business expenses.

How to pay quarterly estimated taxes, step by step

The fastest way to pay quarterly estimated taxes is online and free, directly to the IRS. These steps work for individuals and businesses alike. Here's the process from start to finish.

1. Estimate your tax for the year. Use Form 1040-ES or last year's return to get a number, then divide by four. Include both income tax and self-employment tax.
2. Pick how you'll pay. IRS Direct Pay sends money straight from your bank account with no fee and no account to set up. EFTPS (the Electronic Federal Tax Payment System) is free too and keeps a record of every payment, which is handy for an individual running a business. You can also pay by debit or credit card for a processing fee, or mail a paper 1040-ES voucher with a check or money order.
3. Choose the right tax year and reason. When you pay, select “estimated tax” and the 2026 tax year. Picking the wrong year is the most common mistake, and it sends your money to the wrong place.
4. Pay by the deadline. Send each payment on or before its due date from the table above. Online payments post fast. A mailed check counts as on time by its postmark date.
5. Save the confirmation. Keep the confirmation number or canceled check. You'll report your total estimated payments when you file, and the record settles any dispute.

You don't have to split your payments across the four methods. Pick one, set a reminder for each due date, and run the same play every quarter. Most people who pay estimated taxes settle on IRS Direct Pay or EFTPS and never look back, since both make a quarterly tax payment in about two minutes.

How self-employment tax changes your estimate

Self-employment tax is the part most new freelancers forget, and it's why your estimated payments are bigger than you'd guess. When you work for yourself, you pay both the employee and employer halves of Social Security and Medicare. The combined self-employment tax rate is 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare, per IRS Tax Topic 554.

• You apply the rate to 92.35% of your net self-employment earnings, not the full amount.
• The 12.4% Social Security portion applies only up to the wage base, which is $184,500 for 2026, according to the Social Security Administration. Earnings above that aren't hit with the Social Security piece.
• The 2.9% Medicare portion has no cap. It applies to all your net earnings.
• An extra 0.9% Additional Medicare Tax applies to earnings over $200,000 if you're single or $250,000 if you're married filing jointly.
• You can deduct half of your self-employment tax as an adjustment to income, which lowers your income tax.

Add self-employment tax to your regular income tax, and that total is what you're splitting into four estimated payments. This is why setting aside 25% to 30% is a sane starting point for a lot of freelancers. Once you're self-employed, also look at how that income affects your retirement savings options, since a SEP IRA or Solo 401(k) contribution can cut your taxable income.

How to avoid the underpayment penalty

Avoid the underpayment penalty by hitting a safe harbor and paying on time, every quarter. The IRS charges penalties when you pay too little or pay late, calculated like interest on the shortfall for the time it stayed unpaid. Paying everything in April doesn't erase a penalty for missing the earlier estimated tax payments.

A few moves keep you clean. Pay 100% (or 110% for higher earners) of last year's tax to lock in the safe harbor. Earning unevenly? Pay more in the quarters you earn more, since the IRS expects payments to track when you actually made the money. And if you also have a W-2 job, bump up its withholding to cover the side income, because withholding counts as paid evenly through the year even if you boost it late. A few of these basics show up in our tax tips for self-employed people.

Already behind? The IRS lets individuals and businesses set up a payment plan to pay a balance over time, with interest and fees on the amount owed, so falling behind isn't the end of the world. The cleaner path is to make estimated tax payments on schedule so you never carry a balance into the next current tax year. Pay your tax as you earn and you skip the plan, the interest, and the stress.

Frequently asked questions about quarterly estimated taxes

The bottom line

Paying quarterly estimated taxes comes down to a simple loop: estimate what you'll owe, set aside a slice of every payment you collect, and send the IRS its share by April 15, June 15, September 15, and the following January 15. Hit a safe harbor, pay on time, and you'll never sweat a penalty or a surprise April bill. Build the habit once and it runs on autopilot. The numbers here come from the IRS and the Social Security Administration, but your own situation can have wrinkles, so confirm the specifics with a tax pro when it counts.

For more on running your money as your own boss, read our complete beginner guide to freelancing, our take on what to consider before going self-employed, and the rest of the Personal Profitability taxes archive. Want one money win in your inbox each week? Visit the Personal Profitability homepage to subscribe.

How can you make sure you get the best car insurance for your needs without breaking the bank? Here’s what you should know to save money while staying safe on the road.

What To Look for When Shopping for Car Insurance

Whether you are shopping for your first car insurance policy or are looking to switch providers, there are some key things to look for when you compare providers.

Price

The price is the first thing most people consider when shopping for insurance. Obviously, this is a significant factor, and you should compare several companies to find the best price.

We know about companies like GEICO, Aflac, Allstate, State Farm, Esurance, and a handful of others from commercials. Some claim to save you “15% or more” with one call. Others will compare your rate with other companies.

There is no right or wrong way to review rates. You can call in and get a quote or do it yourself online. Either method has advantages and disadvantages regarding time, speed, and discounts.

It's important to note that, depending on where you live, a factor that could impact your rate is your credit score. Some companies use a soft inquiry to get your score, which does not impact your credit report. Others do a hard inquiry, which impacts your report and can lower your score.

If you get multiple quotes, ask how they pull your credit first. This way, you can safeguard your credit.

Coverage Quality

All insurance companies are not equal. If you read customer satisfaction surveys and check company reviews, you will find that some of the older, high-service companies like Liberty Mutual and Allstate score higher than the low-price sites.

Make sure that your plan gives you extensive coverage. I have only researched quotes for plans with low deductibles (about $250) and high coverage that offer uninsured motorist, medical, and comprehensive vehicle coverage.

Some companies can offer a lower rate because they offer less extensive coverage. You have to decide for yourself which is more important, but I prefer to err on the side of having better coverage.

Customer Service

If you ever had to file a claim, it can be a miserable process based on the insurer you choose. Dealing with approved shops, quotes, rental cars, repair schedules, surveys, deductibles, and customer service representatives can be a nightmare.

When you read online customer satisfaction reports, certain trends emerge. You will easily find which companies have good service and coverage and which will leave you angry, upset, or frustrated.

How Does Being a High-Mileage Driver Impact Rates?

Driving can cost a lot of money. Between car payments, maintenance, fuel costs, and insurance, using your vehicle can be pricey. It pays to look for ways to save on transportation costs whenever possible.

This is especially true if you drive a lot since your insurance rates can see an impact if you qualify as a high-mileage driver.

What Qualifies as High Mileage Driving?

Simply put, mileage influences car insurance premiums because more time on the road means a higher risk of accidents or damages. On the flip side, if your car spends most of the time in the garage, it’s not very likely to be the source of an insurance claim. 

If you’re making a long commute daily, your accident risks are objectively higher, resulting in higher premiums.

According to statistics, the average American motorist drives around 13,000 miles annually. If you fall in the range of 10,000 to 15,000 miles yearly, your premiums are unlikely to see a hike. If you drive over 15,000 miles in a year, you may qualify as a high-mileage driver. 

How Much More Do High-Mileage Drivers Pay?

How much more will you pay if it turns out you are a high-mileage driver? Let’s look at some average statistics from The Zebra:

Average six-month premiums by mileage include:

• 0 – 7,500: $1,710
• 7,501 – 10,000: $1,760
• 10,001 – 15,000 miles: $1,795
• 15,000+ miles: $1,826

While this is a fairly marginal change in premiums, you should also be aware that premiums can vary by state. For example, in California, rate hikes for high-mileage drivers could go up to 30% (as compared to 1% to 3% for high-mileage drivers in other states).

How Can High-Mileage Drivers Lower Their Insurance Rates?

There are a few things high-mileage drivers can do to lower their insurance rates. These include:

• Finding a cheaper insurer: It pays to shop around for a better deal. Online tools have made it easy to compare insurance rates between companies and find a better rate than you have now.
• Maintaining a clean driving record: A driving record free of accidents and traffic violations is one of the most dependable ways to keep your rates low (or at least prevent them from getting higher). Do your best to drive defensively.
• Take advantage of discounts: Insurers commonly offer discounts and other perks for things like being a good student, driving safely, bundling your insurance policies, or prepaying. Get in touch with your insurance company and find out what they offer.
• Change your coverage: If your car is fully paid off and worth less than $4,000, consider dumping your collision and comprehensive coverage. Your liability insurance should be sufficient for your needs.
• Buy a cheaper used vehicle: Older cars tend to attract lower rates as their value depreciates. Now might be a good time to trade down by purchasing a used vehicle.
• Take a defensive driving course: Some insurance companies will lower your insurance if you can prove you completed a defensive driving course, reducing your risk of an accident on the road regardless of how much you drive.
• Drive less and lower your mileage: While this might seem like a no-brainer, it could be worth looking into how you could drive less often. If public transportation or biking is an option, consider giving that a try.

Should I Install a Telematics System?

One major way car insurance companies offer their customers lower rates is telematics. A driving tracker installed in your car will collect usage data telling the insurer how much you drive, what time of day you drive most, and what your driving behavior is like.

If the data collected shows you drive safely, you can use that data to negotiate a lower rate. Plus, many insurers will give you a discount simply for letting them collect that data in the first place. 

For some, this might be a privacy concern. However, it might be the solution if you are looking for another way to save money.

Are There Insurance Options for Low-Mileage Drivers?

Yes! In fact, your car insurance could go down by half if you are a low mileage driver and switch to Metromile.

Pay-per-mile insurers like MetroMile realize that you probably will not get into a car accident when your car is sitting still, so you shouldn’t have to pay as much if your vehicle is parked.

With pay-per-mile, you pay a lower fixed monthly rate plus a few cents for every mile you drive. If you drive more, you pay more. If you drive less, you pay less.

Anyone who drives less than 10,000 per year could save money with pay-per-mile. 

What About AAA Membership?

While an AAA membership won’t cover you in terms of insurance, many people have heard about it and wonder if it’s worth the cost. I’ve found that it can be a helpful investment that provides extra peace of mind on the road and additional financial perks.

Here are the benefits of using the service.

Hotel Discounts

While I originally got AAA so I could tow my car, I use the hotel discounts much more often than anything else I get from AAA. I find that I save around $10 per night when using a AAA discount. If I spend at least six nights in a hotel annually, I cover the cost of the lowest membership level.

When looking for hotels, remember that AAA is not always the cheapest, but it usually is. I was at a wedding once and found that the AAA rate was lower than the wedding rate by about $20 per night. I have also seen deals where AAA is more than other offers. 

Just do your homework to ensure you make the right choice.

Emergency Services

Getting your car towed is expensive. My AAA plan gets me towing services, tire changes, jump starts, lockout service, and gas if I accidentally run out.

I have actually only used AAA roadside assistance once, for the tow the day I signed up. In this regard, I am really just paying for peace of mind. You never expect your car to break down, but it can happen.

Travel Services

AAA's free maps, travel guides, and travel info are beneficial. I have planned weekend getaways, road trips, and other short vacations using information products provided to AAA members for no extra fee.

I once planned a weekend getaway to Disney World and used AAA for a discounted travel package. It doesn't come up all that often, but it is useful enough when I need it that I get some value from the travel services.

The Bottom Line

If you do your homework and consider your driving habits, you can save money on your car insurance. Evaluate what kind of coverage you need based on your vehicle and how far you drive each day, and then choose the best insurance policy for your needs.

How can you make saving money a habit? What goals should you set? And can saving help you get rich (albeit slowly)? Spoiler alert: the answer is YES.

How to Make Saving Money a Habit

Personal finance experts often throw around the term “pay yourself first.” You may have heard that phrase before, but you might not know how to actually do it. Here are some steps you can take to put this popular finance advice to work and get on the road to saving money.

Create a Budget

The word “budget” has negative connotations for many people. For some, it means being unable to spend money freely or being tied to something impractical. I know that’s how I used to view budgeting, but it could not be farther from the truth.

Having a budget lets you see what money you have coming in and where it’s going. If you do it correctly, a budget will show you areas where you spend too much money and how to convert that overspending into savings.

Track Your Expenses

Tracking your expenses is really part of the budgeting process, but you can further define where your money is going when you track your expenses. What I am referring to here is keeping track of every cent you spend. 

I know it sounds tedious, but it can be done. If you have a smartphone, you can easily record spending when you’re on the go with handy apps. If you don’t have that option, keep receipts and record them on a piece of paper or a spreadsheet each day.

This practice will help you see where each cent is going and where you can cut back as you decide how much to put into each spending category. Make sure you budget for bills you can’t live without, like rent/mortgage, utilities, food, phone, internet, your car, and insurance.

Automate Your Saving

I was introduced to this practice years ago. Many banks today allow you to electronically move money into a savings account at no cost. You can do this weekly, monthly, etc.

My bank transfers money to my savings twice a month, and I don’t have to do anything. This allows me to save automatically without feeling the money coming out of my account.

Put Some Cash Aside For Fun

If you don’t have fun, what’s the point? You should always spend consciously and only put your money into things that you get value from, but if you don’t budget for it, you won’t have the money when you need it.

Fun money is important and should generally come out of your checking account. You could also spend fun money on your credit cards to get sweet travel rewards, but make sure you only spend as much as you can pay off each month in full.

Saving Money Is a Discipline

Saving money can be difficult for many people. I know it was for me in the past. Don’t allow that to be an excuse or hold you back. 

Maybe you can only afford to save $50 per month. That’s great, start with that! As time passes, you’ll hopefully be able to save more. In the present, take hold of the discipline of saving until it becomes a habit and is second nature for you.

Set a Savings Goal

Since you now know how to start saving money, take a few minutes to decide on a saving goal and implement a savings plan. Having a savings goal can even help you stick to your habit of making saving money a priority.

Here are some worthy goals to consider pursuing.

Emergency Fund

At a bare minimum, you should have an emergency fund. Most finance folks suggest you save at least three to six months of expenses to ensure you can survive a job loss or unexpected expense. I agree 100%. 

If you don’t have three months of expenses easily accessible in the bank, you might end up in a tough spot if your income disappears.

Having cash on hand is also essential in case an unexpected emergency arises. Sometimes, that emergency is a broken furnace or water heater. Other times, it is a new set of tires or a bad transmission.

The easiest way to build an emergency fund is by setting an automatic transfer in your bank account. A great option for this is Capital One 360. Capital One 360 has competitive savings account rates and allows for easy transfers. 

Build an Extra Cushion

Once you reach your emergency fund goal, you shouldn’t stop saving. I passed my emergency fund goal and started saving in my liberty fund, a bank account that will cover almost anything that comes up.

I may use it for a down payment on a new home, rental property, or car. If anything happens with my company, I can easily live on that money for a long time.

Saving for Retirement

Retirement is the biggest savings goal you will ever have in your life. When you retire, you need enough assets to cover the last ten, twenty, or fifty years of your life. Many factors come into play when determining how long you will be retired. Whatever your plan, you need to be ready.

A common guideline is that we will need to replace 70% of our income in retirement. Calculate that goal and how long you expect to live on retirement income to determine what you need. Or, you can use this retirement calculator from AARP.

When it comes to saving for retirement, take 100% advantage of all employer 401(k) matching. If you get a 100% match on 3% of your pay, put at least 3% of your pay into the 401(k) plan.

Next, put money into your Roth IRA. The maximum you can contribute to a Roth IRA each year is $6,500 if you are less than 50 years old.

Beyond that, you can always put more into a 401(k), up to $17,000 annually. The same rules apply to 403(b) plans from non-profit employers.

You Can Never Have Too Much Money

Something to remember when you are saving and budgeting is that you can never have too much money. Warren Buffet didn’t get rich by spending all of his income. He lives in the same house he bought for $31,500 in 1958.

If you save a lot, you are in great shape. Not saving enough is a common regret for people in their 30s, 40s, and beyond when working toward financial freedom.

Save Money and Get Rich By Doing It Slowly

My “get rich slowly” experience began when I was $20,000 in student loan debt. I was hardly earning enough to live in my lavish apartment, and then the student loan bills started to come in. I was scared. How was I supposed to survive, let alone save money?

Then, I was handed a Dave Ramsey lesson pack. There were seven steps to wealth, and they were laid out like this:

1. Save up a $1,000 emergency fund
2. Use the snowball method to pay off all consumer debt
3. Save up three to six months' worth of expenses in your savings account
4. Invest 15% of your income into Roth IRAs and pre-tax retirement
5. Save for children’s college education
6. Pay off your home early
7. Build wealth and give

This process was not a speedy one. After three years, I paid off all of my consumer debt, saved up my six months of expenses, consistently invested 15% of my income for my retirement, and worked toward paying off my home early. 

Because of my decisions regarding frugality, I amassed between $3,000-$4,000 each month after my living expenses were taken care of. It took a while, but think about what my future will look like!

My future holds things like no mortgage payments, disposable income of up to $5,000 monthly, real estate investments, income increases, and much more.

I do not say all of this to toot my own horn. I am writing it out because it is possible for anyone!

The problem with this plan is that it is NOT fast. You will need discipline. My advice is to find someone with a similar goal. If you can find this person and hold each other accountable, you will likely find your pockets overflowing with money in the future.

The Bottom Line

Saving money is an integral part of ensuring your long-term financial wellness. From cutting costs on expenses to putting money away for your financial goals, you can make a big difference in your financial health when you make it a priority to save money.

The process might seem overwhelming at first. However, by making savings a habit, setting savings goals, and understanding that getting rich won't happen overnight, you can set yourself up for financial freedom.

Beyond that, you must know how to use your card safely and effectively. Here’s what you need to know to choose and manage a new credit card.

Why You Need a Credit Card

I once wrote a post explaining why you need to stop using credit cards. That is not entirely true. Understanding the risks and dangers of using credit cards irresponsibly is essential, but it is also important to understand and take advantage of the benefits.

Reason #1: Your Credit Score

The first reason you need a credit card is your credit score. If you are in your 20s or 30s, you are likely renting your home. When you want to purchase a car (with a loan) or buy a house (with a mortgage), you need a good credit score. 

You probably can’t pay in full for a new car or have the entire cash amount needed for your first home purchase. The first thing a bank will look at when deciding on a loan is your credit score.

A credit score is not generated overnight. It is not created in a month or a year. Building a good score takes years, though it can take only weeks to destroy it. 

I have had perfect credit since I was 18, when I got my first card. During that time, I used and paid off my cards in full every month. I have taken out a car and student loans, ensuring I am always early on my payments.

I paid off my car loan and student loans early and have never missed a payment date for any credit card or loan. In fact, I have paid my cards off in full each month and never paid a cent of interest.

Reason #2: The Perks

When I started this blog in 2008, I hesitated to use my credit cards too much because I have seen what happens when people spend more than they can afford. However, I’ve learned that using cards responsibly can lead to good credit and amazing perks.

I’ve written about my experiences with my favorite credit cards, which I have used to get free flights to Europe and around the United States, free hotel nights, and other perks.

How To Choose a Credit Card

There are a few things you should consider when choosing a credit card to make sure you opt for the one that is best for your needs.

What You Qualify For

Before applying for a credit card, you need to know your credit score. Many credit cards will have minimum credit score requirements to be approved.

Since your credit score can be impacted by inquiries into your score (which happens when you apply for a credit card), it’s important to only apply for cards you know you qualify for. This way, you don’t needlessly hurt your credit score when applying for a new card.

Interest Rates

While the interest rate may not be a significant issue when choosing a card if you plan to always pay your card in full each month, it does come into play. You should always see a table like the one below when looking at credit card terms.

This is a standard disclosure for all cards and is an example of a Bank of America credit card. Notice the major important numbers, including interest rates for standard purchases, balance transfers, and default.

The default APR will go into effect if you make late payments or do not follow standard credit card procedures. Variable rate information discusses potential rate changes in the future. The grace period is how long you have from the billing date to pay.

One good resource for understanding the dozens of pages of disclosures is the Credit and Charge Card pamphlet from the Federal Reserve of San Francisco.

Fees

There are some key fees you should evaluate before choosing a card. These can include:

• Annual fees
• Foreign transaction fees
• Late fees
• Balance transfer fees

Why is it important to understand these fees? Because they will directly impact how valuable the card is to you. For example, if you choose a card with an annual fee but the rewards you receive don’t exceed the fee, the card isn’t worth it.

Or, let’s say you travel internationally frequently and plan to use your card overseas. If this is the case, avoiding cards with foreign transaction fees is wise.

Rewards

One of the big considerations when choosing a card is the rewards it offers. I’ve had a few conversations with friends about cash back credit cards vs. miles credit cards and recorded a video blog post to explain which one I think is better.

Full transcript:

“Hi everyone, this is Eric from Narrow Bridge Finance here with my first video podcast, video blog post rather, so welcome. We’re excited to have you.

So, I’m here today to talk to you about the difference between cash back credit cards and rewards credit cards with miles and points. I talked to a few people about this lately, and some people think the cash back’s better, some people think miles is better, so I wanted to clear up the difference and explain a few things about it.

So, first, I want to talk about the benefits of cash back credit cards. They’re pretty simple, you get the idea. You spend money, a certain percent you get cash back in your account, you get that as a check, you can spend that however you like. It’s money in the bank. Pretty straightforward.

Miles and points are a little more complicated. There is often big signing bonuses, you get more miles one place than another. There’s a lot of different options; you can use the points for expensive flights, cheap flights, first class, coach. The miles have a lot different value structure than the cash, which is pretty straightforward.

And myself, I prefer to use miles and points. Why? As one example, I went to Israel last year, 100% covered by miles other than $200. Less than $200 a person. I know that’s pretty crazy, right? I flew a kind of complicated route from Denver to New York to Germany to Israel, but I got to the other side of the world for less than $200 a person, so I was able to take my girlfriend with me on a great trip to my cousin’s wedding.

So I think the value of those miles, where I could get a flight that might have been $1200 a person, so $2400 total, I could get for $400 total. Now, you might think, “Well, if I spend enough money on my cash-back card, I’ll have enough cash to buy those flights.” You know, that might be true, but it takes a lot longer depending on how you do it. Because most cash-back cards give a flat 1% back, maybe two, three, four, even 5% on some bonus category, whereas on my special mileage card, you can get five times on whatever you spend on office supplies or your cell phone bill in points.

So, for every $200 phone bill you pay, you get a thousand miles, and I know a thousand miles doesn’t sound like a lot, but that adds up pretty quick. For example, I’m going to Las Vegas tomorrow for the weekend. YEAH! Party in Las Vegas! It cost me $5 out of pocket and about 11,000 miles on Southwest. I was able to do that by spending on my Sapphire Preferred card, transferring just the number of miles I needed, and getting that flight and everything squared away. So I think the miles card and miles credit card options are much better than cashback, and that’s why.

If you have any questions, feel free to comment, and I’ll be happy to answer. Have a great day.”

Why You Should Skip Store Credit Cards

My first job in high school was at Target, and I was one of the top employees in the store for selling Target credit cards. Since I can do simple math, I just told people what the 10% they could save would be for large purchases. 

People would almost always take the savings on large purchases. If you could save $100, I bet you would say yes.

However, we must remember why not to apply for these types of cards, including:

• Complexity: Simplicity is important in finance. I am a big advocate of automated and simple personal finance. One less card makes life easier.
• Most offers are limited: At Target, you save 10% one time. A one-time deal is an excellent tool to pull you in but is a short-lived reward.
• You may spend more: This is pretty self-explanatory. If you can spend, you might do it.
• Impacts on your credit score: New credit lowers your credit score. It takes a while for that new credit to be “incorporated” into your credit report and for your score to go back up.
• High Interest Rates: Most store cards have rates well over 20%. 
• Bad Terms: Most store cards have questionable terms. The marketing is dirty, and the interest rates are high. They are just not good for consumers.

How Should Millennials Start With Credit?

I attended a FinCon many years ago and was interviewed by the credit reporting agency Experian. They asked me about starting with credit for college students and young professionals. Here’s my advice!

Full transcript:

“This is my 3^rd FinCon, and I’m super excited to be back. Not only is it an opportunity to reconnect with friends and other bloggers around the blogosphere, but I also run the Ignite event here, which brings speakers together for short, quick, fun talks. That’ll be a great night event.

It’s important for millennials to understand and know that when they get out of college, they’re already running full speed towards a good credit score. That actually starts even before they graduate when they take on their first student loan or get their first credit card. So, it’s important to know when you get your first card, that credit card will impact your ability to maybe buy a house later in life, so you have to manage it responsibly right from the beginning. 

A lot of young people get out of college, and they want to go buy everything they can. They think they have a new shiny job, it’s time to go spend, spend, spend. And the easiest way to do that is to put the money on a credit card. They don’t understand that you really have to pay that back, and the interest rates can be quite high. So, it’s important to manage your credit and use it wisely so you’re not paying a lot of interest, and you’re building a high score for your future.”

Should You Get a Smart Credit Card?

EMV, an acronym for Europay, MasterCard, and Visa, the companies responsible for the chip’s design and standardization, is the most common style of smart chip credit card. The small electronic chip is generally 3mm tall by 5mm wide and is embedded into the card.

Each time an EMV card is used, the terminal uses the chip to fully authenticate the card. Card skimmers have become a popular method of credit card fraud since replicating a magnetic bar is easy and inexpensive. The chip prevents that type of fraud and protects against others using high-tech analysis, authentication, and verification.

While EMV wasn’t always a common feature on credit cards, it’s more widely used today. In fact, it’s reported that over 13 million credit cards worldwide have EMV. As a result, it’s more likely than not that your credit card will be a smart card, whether you like it or not!

Ways To Be Smart With Your New Card

Getting a new credit card in the mail can be exciting. That said, it's important to be responsible when your card arrives.

Set Bill Reminders

The first thing you should do when you get a new card is to sign up for online access and turn on email reminders when your bill is due. Setting up a system of reminders will help you keep from missing a payment.

Missed payments result in fees and potentially higher interest rates. They also lower your credit score, which can keep you from getting new credit in the future or raise the cost of a loan.

Pay In Full Every Month

Don’t just pay your bill each month. Pay it in full. Paying your bill 100% in full each billing cycle means you don’t pay any interest at all. You only pay interest on outstanding balances at the end of the billing cycle, so save money by paying it in advance.

Never buy anything you can’t pay for in full with cash, and find a system that works well for you to keep your credit cards under control. I pay my bills in full each payday to make sure I’m always on top of the bills before they arrive and to match my income with my expenses.

Read the Fine Print

The fine print is boring, but ignoring it can cost you big time. You can miss out on great benefits like bonus miles, rental car insurance, free concierge service, purchase protection, extended warranties, and more.

Beyond that, you could miss important terms related to what the card costs you and end up paying unexpected costs and fees. The fine print for credit cards may even protect you from the credit card company if something goes wrong.

Put Annual Fee Reminders on Your Calendar

If your card carries an annual fee, it is important to decide each year if you are getting enough value for the fee to keep the card open.

I have more than one card with a fee, and I put a reminder on my calendar a few weeks before the fee date to decide if I want to keep the card open. If I don't, I call the bank, convert the account to a no-fee version, and throw the card in the back of a drawer.

Keep It Open

Unless it has a high annual fee, always keep your accounts open as long as possible. The average age of accounts and your open credit limit are two factors that impact your credit score, so you should always keep your cards open (unless they cost you money).

The Bottom Line

When you are getting started with a new credit card, be smart. From choosing the card that best fits your needs to always paying your bills on time, using your credit card effectively can benefit your overall financial health.

But what should you know before looking for (or accepting the terms of) a new loan? We answer some common loan questions to help you begin your financing journey.

What Are Balloon Payments?

A balloon payment is a deferred amount paid in a lump sum at the end of a loan or lease. For most people, the balloon payment is usually somewhere in the range of thousands of dollars.

The time value of money shows that deferring payments is beneficial because you can earn interest on your money rather than giving it to someone else to earn interest with. For example, if the loan interest rate is 4.95% and you can earn 5% or more with another investment, you are better off deferring the payment. 

Some people may struggle with balloon payments because they forget to save enough money to make the payment at the end of the loan. Consequently, it’s essential to make sure you save money each month to ensure you can pay off your balloon payment.

If you can’t earn more in interest than your loan interest rate, it is in your best interest to prepay your loan as fast as you can. Otherwise, if you can do better elsewhere, such as the stock market or bond investments, delaying payments as long as possible is best.

What Is Loan Amortization?

Anyone who has ever had a loan has seen the statements updating you on your progress. Early on, it is often disheartening to see that the bulk of your payment went to just the interest, and a small amount went to the outstanding loan balance.

Several important factors determine the amortization schedule, or schedule of payments, including the interest and principal reduction, loan length in years, number of payments per year, beginning balance, and ending balance. 

The ending balance is usually zero, and 12 payments are made yearly. Based on these factors, a loan amortization schedule can be created.

Based on the inputs above, a loan amortization calculator will determine the monthly payment needed for the loan to have the desired ending balance depending on the interest rate, starting balance, and loan terms.

The loan is broken up so that you can see what interest is required and what the principal balance remaining would be after each period. An easy calculator that gives an annual amortization can be found here.

If you understand how loan amortization works, you know about 90% of critical financial concepts. Bonds, loans, and anything with an interest rate use the same formulas to calculate present and future values.

How Can You Improve Your Odds of Getting a Loan?

There are ways to improve your chances of getting a loan, and understanding how bankers underwrite loans to decide whether to approve or deny prospective customers can help. Here’s how you can increase your odds of getting a loan.

Get Your Free Credit Report

Get a copy of your annual credit report for free from annualcreditreport.com. 

Remember that your credit score is more of a screener than an approval tool. If your score is bad, you will be screened out right away. If it is fair or good, you will go through the process below.

Once you have your credit report in front of you, start at the top and cross out any credit account that says “authorized user” next to it. Those are generally accounts for which someone else is a primary user, and the bank assumes that you do not pay for those.

Look for Late Payments

Next, go back to the top of the report and highlight any late payments. The report usually makes it easy to find those in your payment history. Look for a grid with stars representing on-time payments and 30, 60, 90, etc, representing the number of days late.

My report looks like this since I have no late payments.

If you have late payments, highlight them with a bright pink highlighter or circle them with a red pen to denote them as bad. If all payments on the account were on time, put a checkmark next to them.

Ensure every account is crossed out (authorized user), checked off (on time only), or marked for late payments.

Look at Account Balances

Next, you need to look at your balances. Evaluate your accounts and circle any account balances with a black or blue pen or highlight it with a color that is not what you used for the “bad” items. Make sure every balance is highlighted. 

For revolving credit accounts, such as a credit card, highlight the credit line amount as well. Add up all your balances and credit limits separately and write them at the bottom of the report.

The account below has a balance of $299 and a limit of $2500. Look for something like that as an example.

Then, highlight all the minimum payments on your installment loans, such as a car loan, mortgage, or any loan with a fixed payment and end date. Add those up and write that number at the bottom.

Calculate Your Credit Utilization

Divide your outstanding credit card balances into your credit limits. This gives you a utilization percentage. In the $299/$2500 example above, you would have an 11.9% utilization rate, which most banks accept.

Any number over 25% might hurt your chances of getting a loan. Anything over 75% will almost certainly disqualify you. If your total outstanding revolving balance is over $10,000, you will probably have a tough time getting a loan as well.

Now, multiply your outstanding revolving balances by .1 to give you 10% of your balance. For example, 10% of $299 is $29.90, or about $30. That is what most banks will assign you as a minimum monthly payment. 

Add that to your installment minimum payment, and you will have a total debt servicing payment amount. For example, if you have $300 in revolving balances and a car loan that requires a $220 monthly payment, your debt servicing payment is $250 monthly.

Calculate Your Debt-to-Income Ratio

Write down your monthly regular income. You can include child support, alimony, or social security if you receive payments. Then, subtract your monthly rent or mortgage payment and fixed expenses from that number. 

Next, divide your debt servicing number by your income after fixed expenses. That gives you a debt servicing ratio. If you have a $250 payment and your monthly income after fixed expenses is $2000, your ratio is .125. Any number below .1 is excellent.

Many banks would consider any number below .3 acceptable. If you are over .5, you probably will not get the loan.

Evaluate Your Findings

Look at the whole picture. Past performance is the best prediction of future performance. If you have many late payments, high balances on your credit cards, or are using 90% of your available credit, most banks will not give you a loan. 

A single issue might be overlooked, but the big picture is what will make or break you.

How Can You Find an Unsecured Loan?

When I worked in banking, customers regularly asked about unsecured loans. While many banks do not offer personal loans, there are ways to find unsecured loans if you know where to look.

Credit Unions

Many credit unions offer their members personal loans. These will have a higher interest rate than a mortgage or auto loan because the credit union is risking that you will not pay them back. They have no collateral or recourse if you stop paying. 

A recent, unscientific survey of credit unions put the average interest rate around 12% for this type of loan.

Big Banks

Credit unions are not-for-profit institutions that have their member's best interests in mind as they operate. Big banks are in it for the profit. They may offer personal loans if you are a low-risk borrower and think they can make money.

A quick search online will give you options for banks near you.

Social Lending

A newer option, but certainly one worth considering, is looking to a social lending site. These sites offer competitive rates for unsecured loans. They are crowd-funded by investors who choose your profile on the site.

If you are compelling and have a good risk profile, you can usually get a loan quickly and pay a lower rate than banks or credit cards.

Credit Cards

Credit cards are the default personal loan, though most people don't think of them that way. However, most credit cards charge extremely high interest rates compared to other loans. You can easily pay over 20% annual interest on a credit card.

I suggest avoiding this option unless you already have a great interest rate on your account.

Is 0% Financing Helpful?

When done correctly, you can rule 0% financing to come out on top. It doesn't matter if you have the money saved or if you don't have the money saved. Here's how you can benefit from 0% financing.

If You Already Have the Money Saved

Let's take a look at the numbers. Assume you have $15,000 saved up in a car fund and are buying a car that costs $15,000. When you pay for it in cash, the $15,000 is out the door, and you own the vehicle.

If you get the car for 0% interest with a 25% down payment, you spend $3,750 on day one. From there, you can keep the remaining $11,250 for five years.

What is $11,250 worth over five years? If you are responsible and keep it in a savings account, you can earn at least 1% per year with a savings account. With compounding interest, after five years, $11,250 becomes $11,826.55.

By saving the money, you get $576.55 in interest over five years. That is not chump change. Even after taxes, you get to keep about $430.

This works with any zero-percent interest offers. Whether you are shopping for a car or furniture, make sure to stash the money in savings to earn the interest you would have been giving away.

If You Don’t Have the Money Saved

If you don't have the money already saved up, you should take advantage of a 0% offer. Why pay interest when you can borrow money for free?

However, use the 0% to your advantage to create a “loan sinking fund” just as businesses have “bond sinking funds.”

To create your fund, start a new savings account with the goal of having the right amount of money to pay off the entire loan when the 0% period ends. We will stick with the car example from above for the numbers.

Use a time value of money calculator to plug in your situation to find your specific savings amount.

If you know you will need to pay back $11,250 at the end of five years, work backward to find what you need to save every month to have that at the end. Without interest, you need to save $187.50 per month. 

With interest, you only have to save $182.78. I know it's only $5 per month, but every dollar counts.

If you put away the entire $187.50 in the 1% savings account for five years, you pay off the loan, plus you have a bonus amount saved up thanks to compounding interest. Your saved amount after the 60 months is $290.

The Power of Savings

Albert Einstein is famously (and likely incorrectly) quoted as saying, “The most powerful force in the universe is compound interest.”

Whoever coined that quote was on to something. As you can see, saving money with interest while borrowing without interest allows you to save real money.

What Happens When Loans Move to New Lenders?

Sometimes, people with student loans, mortgages, and auto loans get a letter that their loan has been transferred to a new lender. This can be a surprising letter to receive in the mail, but it happens for important reasons and should not cause you extra stress.

Why Loans Move

When a bank accepts a deposit from you, it records the deposit as a liability on its balance sheet. Federal banking regulations allow the bank to lend out most of those balances in the form of loans.

However, a portion of those balances must be held to return to their customers when they want to make a withdrawal. This cash balance that the bank must maintain is called the reserve requirement.

When banks want to make more loans than their reserve requirement allows, they can sell those loans to other banks, financial institutions, or investors to free up capital. This also offloads the risk of defaults from the bank, so some banks sell loans to reduce risks.

When a bank sells a loan, it gets a payment for the outstanding loan balance. In some cases, they also get a premium for future interest payments. If the loan is particularly risky, the bank might sell it at a discount to avoid future loan losses.

What To Know if Your Loan Transfers

When your loan transfers, the loan terms are the same. You owe the same amount each month, and you are legally bound by the same promissory note that you signed to start your loan.

If you are set up for autopay, you may need to set up your payments again for the new servicer. Otherwise, if the same bank still services the loan, you do not need to make any changes.

When you make payments through your bank's bill pay, you must add the new servicer so the right institution receives your payments if your servicer changes.

It is critically important for your credit to update your information and set up payments for the new lender. You don't want a late payment to hurt your credit score.

Should You Take a Loan From Your 401k?

Most anyone with a 401(k) account can “borrow” funds from their retirement account. The IRS allows you to withdraw money from a tax-deferred 401(k), stipulating that you pay it all back within a certain period to avoid tax penalties.

In general, it is a horrible idea to take money out of a 401(k) until you are retired. This is mostly a psychological issue, not a financial one. I am in the mindset that my 401(k) funds do not exist. Those funds are not accessible until I retire. Period.

From a financial perspective, it is easier for many 401(k) borrowers to skip paying it back and take the tax hit. This is often a lower dollar amount than paying the fund back.

The Finances of the Situation

Mechanically, it is probably better to take out the money to pay off the 27% credit card. If you would pay yourself back at the rate you were paying the credit card companies, taking the money out is a slam dunk.

However, there are alternatives to a 401(k) loan that you might consider. The first thing I would do is call the bank and ask for a lower rate. It is often that simple.

If I could not get a lower rate, I would look around for balance transfer opportunities. Do you have other credit cards that would let you do a balance transfer? If you will save more than the transfer fee by moving to the lower rate, go for it.

In the event you are a homeowner, you can take out a “second mortgage,” which would be secured to your home and offer a much lower interest rate. However, your home is at risk if you don't pay that loan.

If you have never looked into social lending (also called peer-to-peer lending), you might be surprised by a good deal from sites like Lending Club or Prosper. Depending on your credit score, you might get a great rate compared to a credit card.

How Can You Make the Most of a Loan?

Here are some recommendations for people who use loans to ensure they make the most of their financing without hurting their financial future.

Read the Terms 

It's important to know what to expect with a loan. Companies that lend money provide literature that is essential to read to avoid surprises.

Be sure to review all of the terms of your potential loan before committing to borrow any sum of money, and review the terms regularly to ensure you don't violate them.

Shop Around for Interest Rates

Make sure you understand the interest rate associated with your loan. The interest rate is the additional cost on top of the money you borrow. 

When paying back your loan, the lender will profit off your interest charges, so it's best to shop around for the lowest rate possible. Short-term loans usually have higher interest rates, but getting a rate that works for you is possible.

Borrow Only What You Need

Most credit and lending industry experts, like Don Gayhardt Of Curo, recommend only borrowing the amount of money you truly need. A short-term loan is best used sparingly when you only need a little cash to fulfill your financial responsibilities.

Like any loan, your cost increases if you borrow more. Borrowing a small amount that is just enough to help you stay financially fit can be more beneficial than taking out a larger loan.

Make Timely Payments

Borrowers need to pay back their loans in the allotted time. Missing a payment or having a late payment can negatively impact your credit.

For a short-term loan, a missed payment may also mean a higher interest rate or more penalties and fees that don’t help your financial situation.

Pay Off Each Loan Completely

For short-term loans, in particular, it's essential to pay them off as quickly as possible. You can try various payoff strategies if you have other monthly obligations. This way, you don't have to worry about taking out a second loan if another financial emergency happens.

It’s better to get a clean slate and clear your debt burden as fast as possible to prepare to build up your savings over time.

Make Arrangements During Tough Times

Sometimes, consumers experience a financial disaster before paying off their loans. If this happens to you, and you can't make your loan payment, talk to your lender about an extension or other arrangement.

Not all companies will agree to change the terms of your loan for a short period of time, but it is worth a shot to at least ask.

Budget Your Expenses Effectively

As you navigate the ins and outs of paying off a loan, developing a plan to budget your monthly expenses is vital. See where you can cut costs on your daily spending, and look for ways to add more into your pocket each month to help.

The Bottom Line

Taking out a loan may sound complex or like a bad strategy to afford a big purchase. Fortunately, that’s not the case, and knowing the answers to these loan questions can help you use loans to your advantage.

But what does this mean, and how do you do it? Here’s what you should know!

What is Financial Automation?

Automating your finances means using technology to manage your money more efficiently. This can include setting up recurring fund transfers so you don’t have to think about your money. From your paycheck to your mortgage payment, you shouldn’t have to do a thing.

Many people don’t realize you can automate more than your direct deposit. You can set up transfers between your accounts or automatic bill payments to other banks and companies. You can automate everything!

In my financial life, I have automated investments, savings, credit card payments, auto loan payments, student loan payments, and mortgage payments.

Automating means you don’t have to worry about moving your money around or going to the bank. Everything simply happens for you the way you set it up.

How To Create an Automated Plan

In order to automate your finances, you have to create a plan. Luckily, this process doesn’t have to be too complex!

Draw an Automated Money Map

To visually see where your money is flowing, I suggest drawing an automated money map. You can make it fancy and draw it out with a computer or do it by hand to make it quick and easy.

Your map should be a step-by-step diagram tracing how your money comes in and goes out each month. It should start with your direct deposit paycheck and end with bills and savings.

To understand how it should look, look at my example map below. These are all made-up numbers for what a typical automated plan should look like.

Automate Your Account Tracking

Once you have done a full account inventory, it is time to make tracking your accounts and organizing your statements easier. I use a few free tools to keep my accounts and transactions organized, and it only takes a few minutes to set them up.

Empower

Empower is my personal finance hub. It is a free tool that gives you your account balances, recent transactions, spending patterns, and an investment analysis all in one place.

Signing up is an easy, fast process. Once you are signed up, link Empower with your online banking, credit card, and investment accounts. Empower takes care of the rest.

Empower will refresh your data with each account's newest balances and transactions every time you log in. Rather than logging into each bank website whenever you want to check in on your money, you can log in to one site.

Empower also offers a mobile app for iOS and Android so that you can check your balances on the go.

When I signed up for Empower, I did a deep dive into the fees on my investments and found ways to save over $300 per year on mutual fund fees in my retirement accounts. This free tool is well worth using!

Award Wallet

While you are automating your finances, keep it going with your travel rewards tracking. If you enjoy travel, it is part of your personal financial circumstances. As a result, you should treat your travel rewards like money.

For my miles and points, I use AwardWallet. AwardWallet is a free site that works like Empower for tracking frequent flyer miles and hotel points.

It is easy to set up and helps me track my balances and expiration dates.

TripIt

Since we are already talking about travel, I use one other site all the time that is free and saves me time when tracking my actual travel. TripIt automatically imports my flight and hotel information from my Gmail account and creates an itinerary complete with directions, weather forecasts, and anything else I need to know.

Having everything all in one place makes it much easier to keep track of my travel and anything that will impact it.

Automate Your Paycheck and Savings

If you get paid every week, every other week, or twice a month, you can save yourself a lot of trips to the bank or time depositing checks on your phone by automating your paycheck with direct deposit. 

Most employers offer direct deposit and may even allow you to split your check between multiple accounts. If you don't split your paycheck between multiple accounts, consider setting up automated recurring transfers from your primary checking account to savings accounts to ensure you are working toward financial goals.

If your bank doesn’t offer free online transfers, it is time to look for a new bank. One of the most popular online checking accounts is 360 Checking from Capital One 360.

Set Up Autopay

Chances are, you have a bunch of bills to pay each month. For example, I pay my mortgage, credit card, power, phone/internet, student loan, and utility bills each month. All but one offers autopay (also known as direct debit), which is an automatic direct monthly withdrawal from my bank account.

Direct debits can be used for any monthly payment. People who are short on time and busy with work or their day-to-day lives often find direct debit to be a significant time saver. Instead of spending an hour or more to pay a bill, you can make a phone call or use online banking to authorize the payment.

The most obvious perk to automated payments is the “automated” part. Beyond that, you may have the option to get a discount by using autopay. Both of my student loan providers gave a .25% interest rate deduction for the duration I used autopay. 

However, if you do not look at your bank accounts and you are hit with a bill payment you forgot about, you might overdraft. As a result, you'll want to be careful with autopay and check your account balances each month to ensure you can cover your bills.

To set up direct debits, you can:

• Authorize the collector to get the money from your account by phone or email
• Instruct your bank to allow the debit to happen from the collector
• Enter your payment information into the collector’s payment portal

Here are some bills you can put on autopay.

Credit Card Bills

Auto-pay is the easiest way to ensure your credit card is paid on time. With auto-pay, the credit card company automatically pays the bill with an automated monthly withdrawal from your account.

If you get nervous about that, you can also use your bank's bill pay. Each payday, I go into my bank's bill pay and pay my bill in full. However, if I didn't, I would get an email reminder from my bank to go in and pay my outstanding bills before the due date.

As another line of defense, you can use Empower to get reminders before your bills are due.

Utilities

Most utilities allow you to use autopay or your bank's bill pay, just like your credit card company. However, I don't like that route because I don't get any reward points from paying out of my bank account.

Instead, I registered for auto-pay using my credit card. I get an email reminder each month before the bill hits my account. I have a high credit card limit, so I never worry about missing a payment or exceeding my limit.

Other Bills

Whether you have to pay for a doctor's visit or a car repair, each biller has different rules about how you have to pay. Some make you pay online, others require a check. To deal with these, I set up a calendar reminder in Google Calendar to email me before it is due.

If I can pay by check, I add it to my bank's bill pay so that it automatically sends it on the right day. Otherwise, if I have to pay online, I make sure to take care of it with plenty of time before the due date just to be safe.

The Bottom Line

Why is it important to automate as much as you can when it comes to your finances? To save time and effort in the long run! You shouldn't have to spend much time working on your money. It should be simple and automated. Your money should work for you.

Fortunately, there are ways to make sure buying a wedding gift doesn’t drain your budget. Here’s how to give a gift to the happy couple without breaking the bank.

How Much Should You Spend on a Wedding Gift?

I don’t mind buying a wedding present or gift card for a friend. But knowing how much to spend and what to get can be challenging. I recently read that the average wedding gift costs $70.

Many experts have rules about how you should decide what to spend on a wedding gift, but I think you have to figure out your own way to determine what you can afford and what is appropriate.

Here are the guidelines I use:

• I usually spend about $50 to $60 for a good friend from high school or college.
• For a lifelong friend or someone I consider to be a very close friend, I usually spend about $75.
• I spend about $100 for a close friend who knows all my deepest, darkest secrets.
• If I bring my wife to the wedding, I add about $25.
• This has increased over time as my income has increased. When I was right out of school, I usually spent about $50 no matter what, as that is what I could afford.

The Knot suggests these pricing tiers:

• Coworker or distant family friend or relative: $50-$75
• Relative or friend: $75-$100
• Close relative or close friend: $100-$150

Ultimately, the general rule is nothing less than $50, with a reasonable maximum being $150 to $200.

What Gifts Should You Buy?

Once you set your budget, how can you decide what to buy? There are a few simple ways to give a gift that will be both appreciated and cherished.

Stick With the Registry

If you are on the fence about what to get the bride and groom, stick with the tried and true wedding registry. Many couples have a registry, which makes it easier to choose what gift to buy. If you get something from the list, it’s hard to go wrong!

When I got married, this was 100% true. We were totally happy with every gift of money or item from our registry. Other gifts were very hit-and-miss.

Don’t DIY

Most wedding experts don’t recommend going DIY or crafty on this occasion unless you can make something you know they will use. 

For example, let’s say you are an experienced woodworker. If the couple has a cutting board on their registry, you could make them a custom cutting board with their initials on it.

Otherwise, save the DIY gifts for Christmas or a birthday. 

Combine Practical and Fun

Wedding gifts should be practical but also fun. You want to create an experience for them! Think of things the couple likely won't buy for themselves but something that would be useful and provide value and luxury in their lives.

If they like to cook, kitchenware or fancy kitchen tools are always a great option. You could also give a nice warm blanket or silky sheets. 

When you know their beverage preferences, consider indulging them in a Keurig or a cocktail tray, recipe book, and martini glasses. Or, if you know they are music or theater lovers, buy them a membership to the orchestra or the local theater.

Make it Memorable

You want your gift to be memorable and an extension of your friendship, so incorporate some of their interests and passions as well as some of your personality into the gift.

For example, if you are friends with the bride and you both enjoy making candles together, get a candle-making kit featuring a scent from one of the bride and groom's favorite places to travel.

Other Costs Associated with Attending a Wedding

While a wedding gift is one unavoidable aspect of attending a wedding, there are a few other costs to be aware of to minimize their impacts on your wallet.

PTO

If you are attending a wedding that isn’t nearby, you will likely need to take paid time off from work (or miss out on pay for a day or two if you are self-employed). While this isn’t a typical cost, it is still something to factor into your budget.

There are a couple of ways you can accommodate for this. The first is to try to minimize the number of days you need to take off by opting for departing flights that leave later in the day, not costing you a full day of work.

Another solution is to turn the destination wedding into a vacation to maximize your PTO. Instead of taking one day off, take a few so you can enjoy the city you are traveling to without having to rush to see all the sites. That way, you’ll return to work feeling rested and refreshed.

Clothes

You can’t attend a wedding wearing your regular, day-to-day clothes. Depending on how casual or formal the event is, you’ll likely need appropriate attire to wear. This can get expensive!

Before you start shopping, check your closet to see if you already own anything that would suffice. Maybe you have an old suit tucked away that just needs dry cleaning. Or, you may have a dress you wore to a different event that will also work for an upcoming wedding.

Travel Expenses

If you are attending a destination wedding, flight, hotel, and rental car can easily approach $1,000, depending on the destination. Once you factor in meals, bar visits with friends, airport parking, and other incidental costs, $1,000 becomes conservative. 

Try to save money on these expenses by splitting the room costs with another guest, seeing if flying in and out of a different airport nearby might be cheaper, or opting for flights at less ideal times to get better deals on airfare.

The Bottom Line

With the right strategies, you can ensure attending a wedding is fun while minimizing the impacts on your bank account. Being smart about a gift budget and your wedding gift to the newlyweds is a critical part of the process.

But what is retail arbitrage, and how can you make money doing it? Here’s everything you need to know to get started!

What Exactly is Retail Arbitrage?

The dictionary defines arbitrage as:

“The simultaneous purchase and sale of the same securities, commodities, or foreign exchange in different markets to profit from unequal prices.”

That might be a little dense for most of us, so let me simplify it. The basic idea of arbitrage is finding something you can buy at a lower price and sell elsewhere for more.

This is most commonly seen when people take advantage of a difference in a buy price and sale price of foreign currency or stock prices in a short time period. Currency arbitrage is probably the most popular way to make money fast on a small margin with arbitrage. 

Super wealthy investors and professional traders may find an arbitrage opportunity on a currency where they can make a fraction of a cent several billion times in a deal. But 1/10th of a cent a billion times is a 1 million dollar profit.

Unfortunately, most of us don’t have millions of dollars, let alone the ability to quickly make a billion 1/10th pennies. We need to look at smaller markets with less competition where we can buy something at a low price on one website and sell somewhere else for a profit. 

This is where retail arbitrage comes in. I like to call it eBaytrage, but you can also call it flipping items. It’s where you find retail items for sale at a low price that you can afford. Then, you resell them for a higher amount.

How To Find Things To Sell Online

When you are searching for things to sell via retail arbitrage, look for a product that is selling super cheap but has a high demand. For example, I have successfully resold digital cameras but have yet to buy a computer with a higher capital investment and less liquidity.

I know people resell more expensive goods and products, but you have to be an expert to know you are not getting ripped off on the buy and won’t get stuck with something you can’t sell.

But where can you find items to sell? These are some of the top places to find low-cost items you can flip to make money.

Craigslist

Craigslist is a popular place for people to unload their junk with little effort, which often translates to free. I once found a desk on Craigslist that I picked up for free. It sat in my garage for a few months before I found a buyer who wanted it for $50. 

From start to finish, the whole process took an hour or so of my time. $50 for an hour’s work that I would have probably wasted watching TV is not bad if you ask me.

The tricks to finding items on Craigslist are perseverance, a big truck or van, storage, and patience. I have two full encyclopedias that I have been patiently waiting to resell. Every couple of months, I give it a shot. Maybe I should lower my price, or perhaps I just need to be patient.

eBay 

People are always trying to sell collectibles and miscellaneous goods on eBay. If you can find an item that is below the market price, you can likely buy and resell it. Just be careful that the item is in new or excellent condition and well below the market price. 

You often have to beat the market to resell, and you need to beware of thin margins. Plus, you don’t want to get stuck with a product you can’t sell or have to sell for less than you paid. 

To take advantage of eBay for sourcing when finding products to sell online, you have to be a true expert in the products you are buying.

Woot

If you have never heard of Woot, you are missing out. It is a discounted product website that gives one deal each day, and you can buy up to three of whatever is being sold. 

These products often come at a steep discount, but sometimes they do not. You have to do your research.

Every once in a while, you might be lucky enough to see a “Woot Off.” A Woot Off is the equivalent of a Las Vegas casino for online shopping. The site hosts a series of short Woots that last until the item sells out. Once it is sold out, the next item begins. 

This can be an opportunity to stock up on products to resell. However, Woot reselling is popular, which means you will have competition and potentially lower profits.

SlickDeals

SlickDeals is one of my favorite deal websites. It is the deal crowd-sourcing home of the Internet and is updated constantly throughout the day with new tips. 

Most deals are for some sort of electronic item, but I have seen many exceptions. I once bought a digital camera through a Slick Deals tip and sold it on Craigslist for a profit of about $25.

Garage Sales

One man’s trash can indeed be another man’s treasure, so going to garage sales can be an excellent strategy if you are looking for things to sell online. People who are clearing out their homes are likely willing to part with items for a low cost.

If you find something valuable at a garage sale, you can resell it for much more than you paid for it.

Big Box Retail

Every big store has sales that provide great opportunities to snatch an item quickly. For example, you could consider buying and selling for a profit from Office Depot since they have heavily discounted supplies. 

Stores need to sell off inventory to make room for new stuff. If you can time it right, that can turn into money in your pocket.

Reselling Products Online for a Profit

Once you’ve found cheap items to sell, you have to find buyers. The easiest way to do this is to take advantage of selling platforms to promote your items for sale.

These are some of the best sites to use if you want to try your hand at retail arbitrage.

Craigslist

Not only is Craigslist a great place to find items to flip, but it’s also the first place you should list your inventory. Since you can list and sell for free on the site and you can avoid shipping costs because everyone is local, this is the best place to sell items.

Be sure to include a high-quality picture and a great description to increase the odds of a sale. When someone contacts you to buy, you might have to do a little price negotiation, so you may want to increase the price slightly to make up for this.

If you do sell on Craigslist, remember to be safe. Meet at a public place like a coffee shop, only take cash only on delivery, and always avoid giving out your phone number or home address if you can.

Amazon Fulfillment

When you just want to get rid of your retail arbitrage items today and worry about the money later, Fulfillment by Amazon allows you to ship your junk over in a big box all at once. When it sells, Amazon ships it out to the final customer for you.

If you already have an Amazon account, getting started is easy. Sign up as an Amazon seller and add the Fulfillment by Amazon service to the account.

Next, get your boxes and the stuff that you want to sell. Pick your first box (you list items by the box, so it is important to stay organized) and determine what will fit inside. Go to Amazon Seller Central and choose “add a listing” from the inventory menu.

Follow the prompts to add your item, list its condition and selling price, choose to sell it using the Amazon fulfillment service, and where you are sending the box from. You can keep adding as many items as you can fit in the box. 

After you are done adding items to your box, choose the option to “work on shipment.” Follow the prompts and make sure your inventory list matches what is in the box. Choose SPD for your shipping option and send it from the Amazon partner carrier.

Print your packing slip, stick it in the box, and seal it. Enter the box size, dimensions, and weight on the next page. You will be charged for shipping, so try to be accurate to ensure you are charged correctly and the carrier accepts your shipment.

Finally, print your label and attach it to the box. From there, schedule a pickup from the carrier or just take the box to a shipping store. Amazon will take care of the rest for you.

eBay

There’s a reason I like to call retail arbitrage “eBaytrage,” and it’s because eBay is an excellent option for both buying and selling items online. The platform makes it easy to list items for sale and is one of the most well-known platforms on the web for shopping.

Keep in mind that with eBay, you will pay a fee when your items sell, which can eat into your profits. Be sure to factor that in when you are determining your pricing.

Strategies to Succeed with Retail Arbitrage

If you want to maximize your success and profits with retail arbitrage, there are some key tricks to follow. Here are some things to remember to make the most money from the items you resell.

Relist Items

Keep relisting items and make them look valuable. By listing your items again, you can get them to the top of the search results and make them look like they haven't been sitting around for a while.

Older listings will get less interest than newer ones, so relisting is critical.

Take Good Photos

Photos can truly make or break your listings. Having no photos at all will likely prevent you from selling your items, while poorly lit or blurry pictures can also be problematic.

Make sure the photos of your items are clear, well-lit, and show whatever you are selling from multiple angles to ensure buyers know exactly what they are purchasing. 

Write Great Descriptions

Writing excellent descriptions of your items can also be critical to selling items. Include everything a potential buyer might want to know in your item’s description, including the brand, size or dimensions, condition, any flaws or defects, color information, and more.

Again, buyers want to know exactly what they are purchasing before they shell out their money. A thorough description lets you find the right buyers and get the best price for your items.

Price Items Competitively

Retail arbitrage can be competitive, and you likely aren’t the only person selling the items you are flipping. As a result, it’s important to do your research so that you can price your products competitively within the market.

Pricing your items too high will send buyers to other sellers. Listing them for a price that’s too low may help you sell them faster, but you will be missing out on potential profits. Do your research to find a happy medium.

Bigger Stuff Can Earn More Money

I have met people who own a large SUV or truck and pick up free or low-cost furniture on Craigslist for resale. You can often find items people are trying to unload on Craigslist due to moves or furniture upgrades. 

Check out the “free” section on Craigslist on weekends, and you might be able to find free desks, dressers, tables, and couches. Do a little cleaning and list it again for a fair price.

If you don't have a truck, maybe you can find a friend to partner with. When you pool your resources, you can make much more together than you could ever make alone.

Clean Up Your Items

No one wants to buy dirty items, so take a few minutes to wash whatever it is you want to sell. Sometimes, they may even need a little polish or even a quick refinish so they can turn a huge profit. 

This might not be the most glamorous thing you have to do, but it can increase your profit margins.

The Bottom Line

Have fun buying and selling stuff to make money. I can attest that this is a thrilling and fun hobby, but retail arbitrage takes work and has some risks. 

Start small and work up to having a fun business for side income. Don't expect to make a full-time salary flipping items, but know that this side hustle can help boost your budget so you can achieve your financial goals faster.

The answer is a resounding YES! Here are some easy strategies to reduce your costs without leaving the house (and potentially even your couch).

1. Use an Adjustable Thermostat

The highest utility cost in our house is gas. Our central heating system uses natural gas, as most do. Using a programmable thermostat has been one of the biggest ways we've been able to save money at home.

Programing your thermostat can also save you money on heat. You only need to keep the house warm if you are home, so shut your heater off if you leave. Or, if you are asleep, put on extra blankets and turn down the temperature a few degrees.

This trick is twofold. First, it saves you a bunch of money. Second, it saves the environment. It’s a win-win situation!

2. Get Your Inbox to Zero

Some long-time readers may remember a series of posts I wrote called “inbox clutter week.” The goal was to wrangle and manage my emails to have an empty inbox. It inspired me to launch a free week-long course! You can sign up using this simple form:

Missing important emails can cost you serious money. If you miss a notification from your bank or credit card company, you could lose hundreds of dollars due to missed payments and late fees, not to mention the implications this can have on your credit score.

Plus, having tons of marketing emails landing in your inbox can cause you to spend money on things you don’t need. Hit the unsubscribe button, and then delete those unnecessary emails.

Inbox clutter can also suck up a lot of time and cause completely unnecessary stress. Avoid the stress and save money with better inbox management.

3. Watch Your Bills

I was once charged for Comcast cable TV equipment that I had returned, but it wasn't credited to my account. Fortunately, the Comcast customer service rep on the phone found a record of my return and credited my account.

Another time, I checked my bank statements and saw that I had been charged twice for my monthly bill with Qwest. On a separate occasion, one of my doctors told me once that he had spent months paying for insurance on a car he didn’t own.

The moral of these stories? Sit on your couch and review your statements for a few minutes every month. If something looks wrong, call the company.

It is not rocket science and can save you a ton of money.

4. Hire (or Don’t Hire) a Maid

A clean house is essential to peace of mind, but sometimes it’s hard to find the time to clean. As a result, some people wonder whether or not hiring a maid is worthwhile.

In my area, maids charge about $30 per hour. Do you value your time at more than $30 per hour? If you are paid more than that at your job, then the answer is yes. Or, if you can take on side gigs that pay more than that per hour, the answer is also yes.

However, consider if you use every hour productively and ask yourself if you can find two hours to clean your home. You must decide what your time is worth and whether it is better to use your time to clean or your money to have your house cleaned.

If money is super tight, it's likely best to DIY. But, if you know you can use the time you spend cleaning more productively to increase your wealth, a maid could be worth it by saving you time that you can use to earn more money.

5. Secure Your Online Life

This tip is an unorthodox way to save money at home, but when you are hanging out on the couch after a long day at work, take the time to secure your online life and protect your finances in the process.

Using unique passwords is a critical way to do this. I have custom passwords for almost every website I use. Each one is a randomized alpha-numeric 15-character password. I don't know them, and they are nearly impossible to guess, so a brute-force attack would be futile.

Remembering these passwords is impossible. There is no way to remember one of them, let alone all of them. So, I use LastPass to manage my passwords. That one password to my Lastpass account is the last one I ever had to remember.

By securing your online life, you can save time and potentially money by making it incredibly difficult for hackers to access your accounts. The last thing you want is someone breaking into your online banking and draining your accounts.

6. Save Money Shaving

I hate shaving. The only thing I hate more is the scratchy, pokey, itchy feeling you get when you don’t shave for a few days. So, I shave, and it can get expensive.

While doing the whole social media thing, I saw multiple friends trying out a company called the “Dollar Shave Club.” Once a month, you get a cartridge with four fresh blades in the mail. You can buy basic blades (plus shipping) or premium blades.

Each month, your new cartridges show up like clockwork. Not only can this save you money, but you also don’t need to think about ordering more razors or leaving the house to pick up another pack at your nearest drugstore.

7. Fix Your Leaky Showerhead

I once had a small plumbing issue that needed attention. People often pay $100 just for a plumber to walk in the door. 

Fortunately, I was able to fix my leaky shower head on my own and save money in the process. Here's a quick “how to” video I recorded of the repair. Hopefully, it can help you save money at home if you encounter the same problem!

8. Clear Your Pipes

It's essential to check your radiators regularly and bleed them when necessary. Also, clear your drains and the gutters to prevent blockages that could require an expensive visit from a professional to fix.

One simple and chemical-free method to ensure your drains are clear is to use a homemade baking soda and boiling water solution. Pour one cup of baking soda into the pipe, followed by three cups of boiling water.

Then, you can follow that with a cup of vinegar to create a fizzing action that can dislodge any existing blockages.

9. Refresh Exterior Paintwork

The harsh wind and rain of winter or the blazing summer sun can damage exterior paintwork, so ensure your house's paint is in optimum condition. Sand down paintwork and give it another coat of hard-wearing exterior paint to increase protection if needed.

Don’t wait for paintwork to start flaking before you act. Prevention is always best, and the last thing that you want is for rot to set in on your window frames, doors, and any other exterior woodwork.

10. Check Your Roof Tiles

High winds, rain, and snow mean that your roof can take a beating. Not only can losing tiles off of your roof cause damage to your home and let water in, but falling roof tiles are also hazardous.

Check your roof tiles and ensure they are all secure before they become a more costly problem.

11. Set Up Online Bill Pay

When I changed banks to online-only banking, I knew I wanted to keep my money organized. You all know how I like to use aggregators to keep everything in one place. Unsurprisingly, online bill pay is exciting for someone like me.

Bill pay is not only a cool tool for paying your bills, but you can even get your bills there. Most credit card, phone, internet, TV, and utility providers work with banks to deliver your bill automatically via bill pay.

Once you are set up, you don't have to log into one website to pay for your cell phone, a different site for your internet, another for each credit card, and your other bank's site for your mortgage. You can do those all from one place.

Plus, you can automatically pay your bills, so you never miss a payment. This can help you avoid late fees. So, the next time you are home watching your favorite TV show, set up online bill pay. It's an easy way to save money at home while sitting on your couch.

12. DIY vs. Hiring a Professional

If something breaks at your house, you might be able to fix it yourself. I am not an overly handy guy, but I have installed and removed toilets, changed locks, repaired cabinets, and done a handful of other tasks around the house with no problems.

That said, before you do any work on your house, make sure you have the proper skills. For example, if you are working on anything electrical, it is important you don't injure yourself or burn your house down. If you don't know how to do electrical, don't do it. Call a professional instead.

For more cosmetic-based projects, it might be worth trying to DIY since you won't risk substantial damage to your home. However, the final result might not look as good as hiring a professional.

13. Know When to Buy vs. Rent Tools

If you own your own home, you might like to do upgrades yourself. Chances are you have a standard toolset, but the day will come when you need a more substantial tool for your projects.

For example, let's say you decide to install your own hardwood floor. Buying a flooring nailer would cost you over $400. If you use it for three projects over ten years, you are looking at over $130 per use. A rental will only run about $50-$60 daily, so renting is the better choice.

Alternately, if you do regular woodworking projects, investing in a portable saw for $200 might make more sense. If you use it once a year for five years, you have easily broken even on buying this over renting it.

When you are on the fence about buying or renting an expensive tool, analyze the cost to rent vs. buy. First, come up with a realistic estimate of how often you would really use it. Don't overestimate. You know yourself and how often you actually do DIY projects.

Divide the purchase cost by the number of times you will use the tool over a reasonable lifespan. Then, figure out the price to rent it that many times. If the cost to buy is lower, buy away. If not, you are better off renting to save money.

14. Make Money Cleaning Out Your Home

Regardless of when you do it, cleaning out your home from time to time is important. Some people love it, while others hate it. Regardless, it can be a good practice. Not only can you reduce junk in your house, but you may also find ways to make money while doing it. 

When you find items you no longer want that are in good condition, you can try selling them on sites like Craigslist, eBay, OfferUp, Nextdoor, or Facebook Marketplace. This might not necessarily be a way to save money at home, but it's putting money in your pocket.

You could also donate items you no longer want. While this doesn't have immediate savings benefits, itemizing your deductions could lead to savings when tax season rolls around.

15. Change Your Light Bulbs

Are you ready for an easy project to save money at home and help the environment? Change your light bulbs!

The cost of an incandescent bulb is cheap compared to the energy it uses. While the bulbs cost about $1.25 each, electricity costs about $300 over the bulb's lifespan. They might be cheap to put all over the house, but they are not cheap forever.

Compact fluorescent bulbs (CFLs) cost more upfront than their incandescent predecessors. They cost about $4.00 each, which is four times more than an equivalent power incandescent bulb. However, they only use $70 in power over the bulb's lifespan.

It's also important to note that the lifetime of the two bulbs is different. The life of 42 incandescent bulbs is the same as five CFLs. Each CFL lasts more than eight times longer than the average incandescent bulb and uses far less power.

While 25 incandescent bulbs cost $8,812 over their lives, the same number of CFLs cost $2,244. The CFLs will save you about $6,570 over their lifetimes.

16. Relax at Home

I'm a sucker for a night on the town. I love the lights and sounds of nightclubs. The thumping bass and the pulse of the crowd are a rush! But I don't like the cost of a round of high-priced drinks that can easily break $50 for me and a few friends.

You can save money at home by simply staying home. Rather than chase the parties, I hang out at home with my beautiful wife and have a great weekend without spending a dime. We enjoy movie nights, puzzles, games, and cooking meals together.

17. Save on Utilities

If you want to save money at home by cutting costs on utilities, it is easier than you might think. You can start by improving your windows and insulation. 

Did you know that 42% of energy costs within a home go to heating and cooling? You can seal your windows and doors with caulk and weather stripping to save money.

To step up your utility-saving game, OhmConnect is a free service that helps you save energy and pays you to do it! It will notify you when the power grid is stressed so you can temporarily reduce your energy usage. If you are successful, the company will pay you! 

If you want to cut your water use, you can get a low-flow toilet and put on a low-flow shower head. Water-efficient toilets can save 25% or more of your annual water consumption. Plus, a low-flow shower head can cut your water use in the shower by 50% to 70%.

18. Reduce Cable and Internet Costs

You don't need cable to live. It is hard for some people to believe, but unlike food, water, and shelter, you can do just fine without cable or satellite TV. I cut the cord and saved over $100 per month!

If you don't want to cut the cord, call your cable provider and ask for a discount. Ask to speak to someone else if the customer service representative you are talking to doesn't want to provide one.

In general, most cable companies have deals they can offer current subscribers as “retention discounts.” Customer acquisition costs are high, so if they can keep a customer with a discount, it is cheaper than losing someone and trying to get them back later.

When it comes to internet service, shop around for the best deals. For example, in my area, you could get service from Spectrum for about $50 per month or opt for Verizon at $35 per month. It pays to do your research.

19. Cut Costs on Appliances

When it is time to buy your next appliances to use around the house, get high-quality, energy-efficient appliances. Cheap appliances don’t last as long (or do as good of a job). Investing in quality means you will have a better result that lasts a long time. 

Appliances are also huge energy users. Refrigerators run 24 hours a day. Washers and dryers have enormous energy needs. While it might be a higher cost upfront, finding low-energy-rated appliances can save you a lot of money in the long haul.

The Bottom Line

There are many ways you can save money at home. Sometimes, they take a little effort. Other times, they can be done from the comfort of your sofa.

If you are having trouble staying on budget, consider using one or more of these strategies to keep more money in your wallet!

Here’s what you need to know if you want to use your credit cards to their maximum potential.

What Do the Experts Say About Credit Cards?

A credit card comparison page confirms that consumers should shop around for the best deals. Financial advisors across the board agree that meticulous selection of credit cards is imperative for keeping costs as low as possible to guard against unreasonable debt-to-income (DTI) ratios. 

Be Savvy About Choosing a Card

These days, customers are much savvier about the types of credit cards they are applying for. Cash back, rewards, low-interest APRs, and other options are now being used to reduce the burden of credit card debt as a percentage of overall debt.

People are selecting credit cards with cashback offers (between 1% and 3%), low APRs (0% for 12 months or 18 months), and bigger rewards. 

Pay Your Card In Full Each Month

Pros say that it's imperative to repay credit card balances in full before the end of the month. This is the most challenging aspect of sensible credit card practices. 

The only way to dramatically reduce the burden of credit card debt is to use the savings and rewards offered by these lines of credit to your advantage.

For example, big-ticket purchases on credit cards are typically associated with cash back. By paying it off in full, the discount is the cash back.

Understand that Credit Cards Produce Profits for Banks

Although 166 million people are using credit cards, that number doesn’t do justice to the checks and balances that banks are putting into play to protect themselves against default. Banks rely heavily on their high-yield cash cows like credit cards. 

The U.S. Government Accountability Office reported that credit card debt in the country has reached over $1 trillion. It is in an issuer’s best interest for credit card users not to pay their balance in full each month because this allows them to profit from interest rates.

By understanding how banks profit from credit cards, you can use your card more wisely and ensure more money ends up in your pocket vs. your bank’s coffers.

Why the Experts Use Credit Cards

When used responsibly, credit cards are the best option when it comes to making purchases. But why do credit cards reign supreme above other payment options?

Cash Is Silly

Who uses cash anymore? Not me, and not many people I know. Unless you are overcoming a serious debt issue and like the envelope budgeting method, never use cash unless you have to.

Think about the downsides of cash. If you lose cash, it's gone. There's no recourse. If you use cash, you don't have good records. When you use cash, you don't get rewards. Plus, using cash means that you are not building credit.

Using cash generally doesn’t benefit your financial health.

Debit Cards Are a Bad Idea

Debit cards are a bit better than cash, but not much better. There are a handful of reasons why. The biggest is that your card is linked right to your bank account.

When there are big card data thefts, people who use a debit card are at the worst risk. If someone steals and uses your account number, the money vanishes from your bank account. This can lead to bounced checks, fees, costs, and hassles.

Since it's a card, you can get the money back, but it is a lot of work. Plus, you don’t just get off scot-free. You may still get stuck with fees.

Credit Cards Are Safest

Even if your credit card is involved in a data breach, it’s not a big concern.

Why is this? If it is used, the banks just take the charge off my card, and I fill out a form legally acknowledging that the transaction was fraud. A few minutes of my time is the entire cost to me.

A more practical benefit to using credit cards is that they offer us, as consumers, protection against various things.

Have you ever bought something over $50 only to find it to be defective when you got home or had a dispute with a retailer over erroneous charges? If you have, then using a credit card instead of cash or a debit card avails you to the Fair Credit Billing Act, which can potentially limit your maximum liability to $50.

Beyond that benefit, some credit card issuers will even extend warranties on certain items. We’ve never had to use that ourselves, but I can see how that would be helpful if the computer we bought last year decides to break down on me in the next few months.

Stretch Your Budget

It may seem counterintuitive, but if you use them wisely, credit cards can help you stretch your budget at times. It's less applicable in today's interest rate climate, but it can allow you to play the float between purchasing an item and paying for it.

You can also see this when you travel and need to rent a car or stay at a hotel. If you use a debit card, they’ll place a hold on your card for a certain dollar amount, meaning that you can’t access that money. However, with a credit card, your funds are accessible right away. 

True, the hold falls off when you leave the establishment, but many find it inconvenient to have their cash “frozen,” something you will not encounter when using one of your credit cards.

Big Rewards

Rewards are another important reason to use a credit card instead of a debit card or cash. I took a trip to Israel for about $70 each way. I flew to Portland for $5. Las Vegas, $5. The last time I paid full price for a flight was about two years ago.

It wasn’t a cash back credit card that made this happen. It was a combination of several miles and points cards that made it happen. Ever since I took a trip to London, Paris, and Amsterdam for half price, I have been an enthusiastic travel hacker trying to see the world for free.

One of the best perks of using credit cards is the ability to earn free rewards points that can be used on a wide range of things, from cash to free airline miles. My wife and I churn credit cards, and I can attest that our ability to earn enough for a free trip does make it enticing to continue.

What if earning free trips isn't your thing? That is no problem since many credit card companies will give out rewards such as free cash or gift cards that can be used at various retailers.

I may sound like a cheerleader for churning credit cards. While I do like the benefit, if spending is an issue, then no free trip is worth racking up all sorts of debt in the long run.

Other Benefits

Beyond the rewards and fraud protection, a credit card has other benefits. Depending on your card, those include a complimentary concierge service, price protection, extended warranties, lost luggage protection, additional travel protection, rental car insurance, and more.

Be sure to read through your card benefits to make sure you are not leaving anything on the table.

Is It Ever Okay To Charge More Than You Can Afford?

Standard personal finance advice is to use credit cards responsibly and pay off your balances in full every month. Some experts go so far as to say that you should avoid credit cards altogether if you cannot do that.

But, like most things in life, nothing is black and white. There are a lot of gray areas that blur the lines between responsible and reckless, cautious and crazy. These are areas where we may not be doing the “right thing,” but we’re doing the best we can.

One such scenario is living on credit cards. In an ideal world, living on credit cards wouldn’t be an option. But in this imperfect world, when is living on credit cards the right thing to do?

To Avoid Homelessness

Let’s say you come across hard times. You lose your job or get in an accident, and your whole financial world is turned upside down. In this case, an emergency fund would come in handy, but what if it wasn’t enough? What if you needed extra help yet couldn’t work?

In some cases, you may have the option of moving back home with your parents or staying with friends for a bit. But, depending on your situation, doing those things is either really inconvenient for you or them or simply impossible.

If you don't have the funds to pay rent and risk being homeless, use your card to get by until you can find a cheaper place or until you get back on your feet.

Feed the Family

Another case where living on credit cards might be the right thing to do is if it means feeding your family or going hungry. My first suggestion, aside from using credit cards, would be to apply for government assistance or food stamps to help survive a financial rough patch.

However, depending on your income and situation, you may not be eligible for assistance. If you are not eligible, have a family to feed, and do not have the funds, use your credit cards to ensure there is food on the table while taking steps to save at the grocery store.

Dealing With a Cash Flow Issue

Sometimes, your cash flow doesn't work well with other deadlines in life, such as rent or bills. For example, if you are self-employed, you can go weeks without a check. In that case, you know the money is coming, but you may not have it when your bills are due.

Many of us have also dealt with the long wait to get paid when starting a new job. It always feels like it takes a full month to get paid. In situations like this, using your cards to cover your bills and pay them on time may be a good option.

Tricks To Avoid Credit Card Fee Traps

Credit cards come with a certain amount of fees. As a cautious customer, you might want to consider paying close attention to “fee traps” to ensure they don't hurt your finances.

Here are some common fee traps that you should watch out for.

Rising Interest Rates

Credit card companies are legally required to inform you about rate changes, but it's easy to miss notifications like this amidst all the junk mail and emails you get daily. They may even implement a rate change for you and have a valid legal reason.

For example, your interest rate can increase if you miss a payment. In February 2010, the passage of the Credit Card Act limited the situations when card companies can raise your rate, but there are still plenty of scenarios where it can happen.

New, Unexpected, or Increasing Fees

There are many things credit card companies can charge you for doing. Having a surcharge on a cash withdrawal or other card usage activities makes sense. But did you know that some cards charge an inactivity fee?

This means that you get charged for not using your card. That's just one example. Watch out for changes to the norm, and read your contract carefully to ensure you know how to avoid card fees.

“Checks and Balances”

Comparing credit cards is more complex than people may think. Too many people glance over the basic details of the card and then apply for whichever one sounds best.

The problem is that there is a lot more to cards than what you see at first glance. Upon further comparison, the card that looks great upfront might be horrible for your finances.

For example, the low APR may sound great, but what if it is hidden in the fine print that the low APR expires after six months and then becomes exceptionally high?

This is what is meant by “checks and balances.” The card will offer something great and advertise that, but there are plenty of negatives to balance out the positives.

The bottom line is that you shouldn’t make a hasty decision about a card because your choice could have a bigger impact than you think. Always read the fine print.

Expert Strategies for Fulfilling Credit Card Bonus Requirements

Many financial experts will use credit cards and sign up for new ones to take advantage of bonuses. These can be a great way to maximize your spending and fast-track your rewards.

However, it's essential to make sure you fulfill the spending requirements to receive the bonus. Here's how to ensure you unlock the full potential of credit card sign-up bonuses.

Buy Gift Cards

The easiest possible solution is to buy gift cards at the grocery store to meet your minimum spend. For gift cards you can use anywhere, like a Visa gift card, you may have to pay a fee of $3 to $5 per $500 card. This is worth it for cards that give you up to 50,000.

If you buy Visa or American Express gift cards, you can use them anywhere at your leisure and rest easy knowing you have already hit the spending requirement for the big bonus.

Otherwise, if you buy one for a store, make sure it is one you shop at regularly and will not spend extra just because of the gift card. Think of Amazon or the grocery store for this.

Open a New Card in Advance of a Big Purchase

When you have a large purchase coming up, such as needing to replace a piece of furniture or buying a new laptop, open a new card with a bonus that aligns with your purchase.

If a credit card company offers a 50,000-mile bonus for spending $3,000 in the first three months of card ownership and you are getting ready to spend $3,500 on new furniture for your living room, put that big purchase on the new card to rack up extra miles.

Use Your Card for Every Purchase

It's much easier to fulfill the sign-up bonus requirements if you put your other cards away and just use your new card for all your purchases. Take your other credit cards and debit cards out of your wallet and only use your new card for a few months so you receive your bonus.

Get Help From Family and Friends

This can be risky, so only do it with loved ones you trust. Ask your family and friends if you can pay their upcoming bills and have them reimburse you via cash, check, or Venmo.

You only want to do this with people you trust because you want to avoid running the risk of not getting paid back once you pay their bill. However, if you have trustworthy family and friends willing to help you, this can help you meet minimum spending requirements faster.

The Bottom Line

Credit cards can be a helpful financial tool if you know how to use them right. There’s a reason why many experts use them in their day-to-day lives, and the benefits of having a card can be substantial when you know how to minimize costs and maximize rewards.

Just make sure to pay your card in full each month and watch out for fees. If you do that, you’ll successfully use credit cards like a pro!

But how can you keep your money safe in a world where data breaches, identity theft, and scams run rampant? Here are some key strategies you can implement today to protect your finances.

1. Keep Your Account Info Private

Unless you have a joint account, there is almost no reason for anyone other than you to have your account information. Account numbers, routing numbers, credit card numbers, and other financial account information should be kept private.

In the event that you do have a shared account, keep tabs on it and monitor for suspicious and unexpected activity.

Do not give your account information to someone so they can run an errand for you. Never give your information out because you think someone may need it. Just keep it secure, and you have nothing to worry about.

2. Beef Up Online Security

We’ve all read stories about someone’s ex breaking into their email or Facebook account. Far worse than your buddy finding your computer unlocked and writing profanities on your Facebook wall is giving someone access to your online life.

Want evidence? Just search for breakup horror stories involving Facebook and Gmail online. You will find plenty of stories.

To ensure my accounts are secure, I don’t even know my passwords except for my Google and LastPass accounts. LastPass generates randomized passwords for every site you use. It has a Chrome, Firefox, IE, and Safari plugin that auto-populates your passwords for you.

Just remembering two passwords is easier and will keep you safe. No one will guess or brute force their way into my randomized, 16-character alphanumeric passwords.

3. Act Quickly If You Lose a Card

Once, I went to the ATM at an airport, and when I went to grab my card later that night, I realized it was gone. I don't know where I lost it, but I did know how to ensure everything was okay.

The first thing to do when you realize your card is gone is cancel it. Canceling your card is free and easy, so don't delay. If someone stole or found it, they can use it until it is canceled. You could be liable for the charges if you didn't make an effort to report your lost card immediately.

Over the next few days, make sure to check your charges daily. Some charges do not show up right away, and if the card was used, you can tell the bank to start the fraud process. If you don’t watch for problems, you might end up on the hook for your thief’s purchases.

If the card is canceled and you don’t see any unauthorized charges for three or four days, you are most likely safe and will not see any problems.

Also, if you use your card for any monthly bills, update the merchant with your new card number so you don't get hit with accidental late fees.

4. Don’t Fall for Scammers

Identity theft is on the rise in the United States, and there are a few things to watch out for so you can avoid scammers.

Keep in mind that no one from your bank will call you to ask for your Social Security number or anything else. They already have all of your information. If your bank or any other financial institution needs to know your private information, they will not call you to ask for it. 

No one from any bank will ask for your online login information. They already have it because they are the bank. If anyone asks you for login information besides a bank or trusted financial planning site like Empower, you know they have bad intentions.

Beyond that, you did not win a lottery in the United Kingdom, nor did a dead person in Nigeria leave you a fortune. If someone says that you will get lots of money and only need to wire or send them a smaller amount to get access, they are lying. 

5. Browse Safely

When you sign into online banking or any website that deals with your money, make sure your browser says https rather than just http. The s stands for secure and indicates that the site uses Secure Socket Language (SSL) to ensure encrypted transmission across the web.

Anyone can access and steal your information if you don't have an SSL connection and use public Wi-Fi. A clever hacker can also pick up your info, but SSL keeps you safe.

In addition, do not log in to a secure site with your important information on a public, non-secure wireless network. Keep your banking and shopping to your secure, home wireless network or a wired network you trust.

6. Shred Your Documents

Always shred any mail that has your name and address. Furthermore, shred credit card applications you receive in the mail.

Your name and address are all someone needs to cause you a headache and possibly cost you a lot of money. They can make up the rest of the information.

I have the Royal HG120 12-Sheet Cross-Cut Shredder in my home office and highly recommend it.

7. Take Inventory of Your Cards and Accounts

Make a list of all the cards you carry in your wallet or purse. Keep it somewhere safe so you can cancel your cards immediately if they are ever lost or stolen.

It's also wise to have a complete, up-to-date inventory of your current financial accounts and review statements for them each month. This way, you can ensure there have been no unauthorized charges or fees.

8. Protect Yourself From Yourself

Sometimes, you can be a threat to your own finances. This can be especially true if you are a big spender, go on frequent shopping sprees, pull out your credit card when you get emotional, or your home is filled with items you rarely use.

If any of those categories apply to you, you can safeguard your finances using a few key strategies. The first is keeping a spending log. This lets you track the money you spend and the places you spend it so that you can tell precisely where you need to cut back.

Next, create a budget to help you to balance your spending with your income. This ensures that you leave room to save money and pay bills. If you'd like some help with your budgeting, there are plenty of sites out there that can help you.

Finally, get some accountability. Tell a friend or a family member you'd like to work on your spending habits. If someone else knows about your goals, they can follow up with you to make sure you are achieving them.

9. Deal With Data Breaches Quickly

In 2022, there were over 1,800 data breaches in the United States. This is when hackers break into a company's computers and steal customer information.

If you have received word from a place you’ve shopped, your bank, or the media that your data was leaked in a data breach, don’t panic. Everything will be fine.

When fraudulent charges are made on your credit card or debit card, you are not liable for the charges. Your cardholder agreement protects you from fraud. The merchant and your bank share some liability for the fraud. In most cases, the bank will cover the fraudulent charges.

However, you should still act immediately to protect your money. Contact your bank to request new cards, and check your statements to ensure there are no unauthorized charges. If there are, report them immediately.

10. Know the Differences Between Credit and Debit Card Safety

When it comes to credit cards, I'm never worried about fraud because my personal assets are protected with a credit card. If you ever see fraud on your credit card account, notify the bank immediately. They will remove the charges from your account.

In the event your debit card information is stolen, that is a whole different story. It is essential that you demand a new account number right away, even if the bank does not offer one.

If someone gets ahold of your debit card number, they can drain all the funds from your bank account. While you will get the money back after filing a fraud claim, it can take weeks or months before you get your money back.

This is one of the reasons I encourage people to use credit cards for all purchases.

The Bottom Line

It doesn’t take much time or effort to protect your finances. By following these easy steps, you can ensure your money is safe as you work to improve your financial health.

Don't let all your hard work to grow your wealth go to waste. Take the steps needed to safeguard your finances today!

However, it can be overwhelming to launch a website if you don’t know the first thing about making one or ensuring its success. Fortunately, it’s not as complicated as you might think.

I’m breaking down everything you need to know about how to start a successful website.

Build Your Website in Five Minutes

While building a website might seem overwhelming, putting together a basic site is quite simple. In fact, it only takes about five minutes to do!

Choose Your Domain Name

Your domain name is what visitors will type into their browser when they want to visit your website. Think of it like your address for the internet. Generally, it will end in a .com, .net, .org, or one of dozens of new options like .club, .plumber, .business, .money, and .academy.

The most reputable and recognized top-level domain is .com. If you can get the exact name of your business (or your own name) as a .com, that is the best option for you. If you can’t, you’ll have to get a little more creative. 

As an alternative, .net and .co are the best backup options for a business. I also like .me for personal sites and businesses built around you if you can’t get your name .com.

Some hosting companies include your domain registration in your hosting purchase. Others require it to be purchased separately. If you want a domain but are not ready for hosting yet, expect to pay about $7 to $12 per year for a domain name.

I registered my first domain with GoDaddy in 2006 and still have an account with them today.

Select Your Hosting

If your domain is your website’s address, hosting is your website’s house. It is actually a physical computer server sitting in a data center. 

For most new websites, the best option is shared hosting, where multiple websites share the same server. As your site grows (or if you want multiple sites in the same account), expect to upgrade to a larger shared hosting account to meet your needs.

Eventually, if all goes well, you will have enough traffic (and revenue) to justify moving to a virtual private server. This is a fancier hosting setup where you have more dedicated resources. However, this milestone is well down the road when you’re brand new.

Shared hosting ranges from a few bucks a month to about $20 per month on the high end. Here are a couple of popular options to choose from:

• SiteGround – This is where I send all of my web design and development clients, and for good reason. The servers are well-maintained and very fast. Customer support is top-notch. They don’t overcrowd their servers to the point that you get bad service, and they do it for a very competitive price.
• Bluehost – Bluehost is popular because of its low cost. However, poor customer support and poor performance can be problematic with this provider. They’re cheap, but you get what you pay for.

Hosting Registration

Because I like SiteGround best, I will walk you through the setup process there. The video below shows me setting up my account and launching a brand-new website in under five minutes.

Check out this video, where I go through the entire process in under 5 minutes! Really! In this 4-minute and 59-second video, I take you through all the steps to getting a site up and running.

SiteGround offers three shared hosting plans.

• StartUp – This plan is best for brand-new sites and includes hosting up to around 10,000 visitors per month for a single site.
• GrowBig – This plan is suitable for up to around 100,000 visits per month and includes enhanced support, caching (site speed), a free year for a wildcard SSL certificate (https), and free backups.
• GoGeek – This is the most powerful of SiteGround’s three hosting packages. It includes 40GB of storage and can power about 400,000 visits monthly. It includes advanced developer tools and staging sites, fewer accounts per server, and PCI compliance for credit card payment processing.

In the video, I signed up for the StartUp plan. I opted to skip two options along the way, but they are good to understand before you choose.

• Domain Privacy – If you choose this option, your information will be kept private from whois searches. Unchecking this option will make your registration information public on the web.
• HackAlert Monitoring – This service scans your site for malicious code and hacks daily. There are some free, third-party services that we can use for WordPress sites, but if you are brand new and uncomfortable with this, it doesn’t hurt.

Install WordPress

Once your hosting account is activated, the next step is installing WordPress. WordPress is an easy-to-use content management system (CMS) that lets you log into your website to create and publish content.

In SiteGround, setting up WordPress is easy. Just open the “My Accounts” tab and click the orange button to access your CPanel. CPanel is the interface for your web hosting server space.

In CPanel, look for the “AUTOINSTALLERS” section and choose WordPress. On the next page, click “Install Now” to choose your options.

In the first box, you can choose whether you want to have www at the start of your website name.

Keep in mind that you should only choose https if you have an SSL certificate. If you choose https and don’t have that certificate, visitors to your website will see a warning message. When in doubt, do not use https. You can always add that later on.

In the next box, choose your domain from the dropdown box.

In most cases, leave the third box blank. If you enter anything else there, it will be added to your website URL. For example, if you enter “store” in that box, your site will live at yoursite.com/store.

In the next section, choose your website's public name and description. If you don't know what WordPress Multisite is, leave that box unchecked. Then, choose a username and password for your site and an email you can use for password recovery.

You can skip the plugins and installing a theme. Under advanced options, leave those alone. SiteGround takes care of that for you.

Finally, click “Install.” On the next page, you'll find your login information to get logged in and start customizing your site.

Protecting Your Business by Investing in Domain Names

I've shared how and why I spent $1,000 to buy EricRosenberg.com. This came about a year after I paid $500 to buy this domain, PersonalProfitability.com.

Some people may think it is crazy that I've spent $1,500 on domain names, not counting the many other annual domain fees I pay each year. The oldest transaction in my Quickbooks for domain expenses is from December 2013, and I've spent thousands on domains since.

I consider this a significant investment in my online brands and real estate. There is nothing more valuable online than a well-formulated .com domain. I own eric.money and eric.business, which I don't do anything with. But my primary focus is on my .coms.

The Value of a .com for a Business Owner

As a business owner, your domain is one of your most important assets. Whether your business is focused on the web or is a part of the brick-and-mortar world, if you don't have a website, you might as well not exist.

Businesses must consider social media, online listing and review sites like Yelp and TripAdvisor, and, most importantly, their own .com website. Remember, getting your website up and running takes only five minutes.

A business website doesn’t have to be complex. Some of the most effective business sites are simple. In fact, some businesses only need a site that gives a summary of what they do and contact information. 

Ultimately, investing in domains that include your name or your company’s name can ensure that your customers end up on the right website vs. a competitor site. This can be critical to growing your client base and ensuring your customers keep returning to your business.

The Value of a .com for Personal Use

Before I spent $1,000 to get EricRosenberg.com, my online business lived at NarrowBridgeMedia.com, while my personal site was EricRosenberg.me. I decided that, at this point, I am my business, so I merged them into one.

However, having a personal website is still very important for most people.

If you were hiring someone for a job, what is the first thing you would do before deciding if an applicant is worth an interview? After scanning their resume, you would Google them. 

What comes up when someone Googles you? If it is anything other than yourname.com or something similar, it’s time to make some changes!

When you are an entrepreneur or side hustler, your personal website is the hub of your online earning and a place for people to find out what you’re up to. If you are a regular employee, your website acts as an online resume that you can use to present yourself and your skills.

If you don’t own your own name online, you’re doing it wrong! I registered my daughter’s name’s .com website when she was a few weeks old to ensure she would always have it. There is no real estate more permanent today than a personal website, so use that to your advantage! 

Check out other popular options like .net, .me, and .co if the .com is not available.

Getting a .com Domain for $10 is a Bargain

I used to own a blog in a community of many .blogspot.com and .wordpress.com sites. I was blown away by how many people were willing to spend hours and hours writing a blog every week but wouldn't pay $10 to get their own domain name!

You can get domain names through your hosting company, but I prefer to keep them separate and use nameservers to point the domains where I want. 

I opened an account with GoDaddy when I bought my first domain on March 29, 2007, for $7.17. My account there is still active, and they offer competitive prices for nearly any possible domain extension. Search for your domain at GoDaddy to get started.

Get a Domain ASAP to Establish Yourself Online

If you don't own your name, your business name, or run your website through anything other than your own .com, .net, or other awesome domain name, it's time to invest. You can get a permanent piece of the internet for such a small amount of money.

At $10 per year, you pay less than three cents per day for a domain. That’s like leave a penny, take a penny cheap.

Don't wait! Head over to your favorite registrar to pick up your domain names today. If you are starting out, you can get a great deal with GoDaddy.

Make Your Online Business Profitable Fast

If you will use your website to generate revenue online, making your site profitable is easier than you may think. You can do many things to increase your profits and make money fast.

By following these tips, you can start seeing a return on your investment quickly.

Figure Out What Makes Your Business Unique

Determining what makes your online business unique is the first step to making it profitable. What do you offer that no one else does? What can you do better than anyone else?

Start by brainstorming a list of your unique selling points. List every aspect of your business that makes it special. Then, start promoting these features to your target audience. Let them know what sets you apart from the competition. 

You can capitalize on your uniqueness and sell more products or services with this information.

Set Up a System for Tracking Expenses and Revenue

If you want to make your online business profitable, you need a system to track expenses and revenue, such as those found on AWS Marketplace services. This will help you see where money is spent and how much profit you make.

Without this information, it will be tough to make changes to increase your earnings. Your business has to make more money than it spends to be profitable.

Use Social Media To Reach New Customers

Social media is a great way to reach new customers and connect with existing ones. If you are not using social media to promote your business, you miss a huge opportunity. 

By creating a solid social media presence, you can attract more customers and make more sales. Every successful business has an active social media presence these days.

Invest In Quality Tools And Resources

If you want to succeed, you need to invest in quality tools and resources, such as AWS Marketplace services. Many great products are available that can help you save time and money. 

By investing in the right apps and tools, you will be able to increase your profits and run your business more efficiently. There are many valuable tools, so do some research and find the right ones for your business. An efficient business is a profitable business.

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