Debt & Delay

cbbfb2a7It is not hard to find advice on managing money.  There are print publications, websites, gurus, apps, non-profits, licensed professionals and people we know who give us their ideas on money: saving it, investing it, making more of it and how to spend it.

One of the biggest concerns Americans have about money is debt.  In our consumer-centric culture we rely on interest-bearing credit cards and loans to finance non-essential wants, in the process racking up mountains of debt that we end up struggling to pay.  We are bombarded with ads while checking e-mail, on social media and elsewhere designed to trigger our impulse to purchase on a whim.  Temptation to consume is everywhere.  But for the small business owner, being mindful of discretionary spending is especially important; the consequences of personal finance habits can have a big impact on their business aspirations.

Debt & Delay

According to the 50/30/20 rule, 30% of your income should be allotted for discretionary spending.

098689848723_2A disheartening consequence of having unmanageable “bad” debt is delay in attaining goals and dreams.  Bad debt is debt acquired for things that have no real value.  (Good debt is that which is acquired for things that we can use to increase our net worth today that could also continue to provide resources in the future; for example, a home mortgage.)  Money diverted toward paying the monthly interest on balances carried forward on credit cards represents an opportunity cost both in the moment and the near future.  This is especially true for entrepreneurs.  Access to capital is essential to start and grow a business.  Many entrepreneurs will apply for a bank loan and solicit investors for this purpose.  After loan officers and investors read the business plan, they will want to assess the owner’s financial credibility.  They may look at the credit report and bank accounts among other things, and usually require that the owner have some “skin in the game” to share in the risk (a certain percentage of the loan amount.)  The amount of his/her own cash and/or assets that the owner is expected to have invested in the business could be sizable.  Besides that, business owners always need a cushion for unforeseen hits to their budgets.   Even the most motivated entrepreneur with the best ideas can have trouble getting their business off the ground due to perpetual financial constraints.  An entrepreneur can spin his wheels for years and years, missing out on opportunities and delaying plans, due to large amounts of avoidable debt.

Unmanageable, avoidable, high-interest debt can cause delay in living as well.  We probably all have a wish list of things we’d like to do and things we’d like to see.  Travel pages on Instagram are some of the most popular on the platform.  They portray idyllic destinations both abroad and at home and we can just picture ourselves on that beach or walking those shop-lined streets.  A nice trip to Morocco, Tanzania, Singapore or Brazil can cost thousands.  But most Americans have less than $500 in their savings account.  People put off weddings until enough money is saved to have the kind of wedding they would like.  In so many areas we delay living our lives to work for money to pay debt.

Or as soon as we pay debt off or down we begin the cycle again.  When we don’t have the cash to do and have the things we want we often turn back to our credit cards.  When we in the habit of using credit there is always something else for which to use it.  If we cannot save or save less than we should, we remain cash-poor and resort to credit once again.

2017 is the year to end this vicious cycle of debt and delay!  It will require discipline, planning and keeping our long-term vision in focus.

There are behaviors to void and behaviors to embrace:

  AVOID                                                                  EMBRACE

Impulse buying/Giving in to temptation                     Delayed gratification

Using credit cards                                                                 Paying with cash

Lending money you can’t afford to not get back      Paying Yourself First

Scrambling for money in an emergency                       Building an Emergency Fund

Spending Every Penny                                                      Saving 10-20% of Income

Redundancy                                                                          Reusing/Recycling/Repurposing

Spending for unnecessary things                                  Spending for experiences

Expensive outings with friends & family                    Free to low-cost events

Delayed Gratification:  Do you have a closet full of clothes that you hardly ever wear?  A house full of belongings you hardly ever use?  You were probably excited to buy them.  But you got over it quickly.  If we choose to take the time to save the cash for a purchase instead of whipping out the credit card, after a while that item may not seem as desirable.

credit_card_logos_10

Credit Cards:  Take a look at the interest payment you make on each card every month.  Have you ever added them up? Get a monthly total of interest you pay to make it viscerally clear how much your debt is actually costing you; money that you are not able to invest into your future. Remember this feeling every time you consider using a credit card to buy something you don’t need or could put off until you have the cash.

And have $1,000 saved before attacking your debt.

Lending Money You Can’t Afford to Get Back:  Judge Judy would be out of business if people would say “no” to friends and family who ask them to borrow money that they cannot afford to lend.  Such a loan is really a gift by another name.  A generous spirit is beautiful, but it should not cause you stress and damage your relationships.  Part of becoming successful is knowing when to say “no.”

Scrambling For Money In An Emergency:  On the other hand, it doesn’t feel good when you have to resort to asking family and friends for money to bail you out in a pinch.  Things happen.  There’s no shame in needing and asking for help.  Sometimes it’s unavoidable.  The best thing to do is save as much as possible when times are good, not spend it all.  An emergency fund should be at least three, but ideally six, months of living expenses.  Start where you are towards a specific target based on a realistic idea of how much you live on every month.  But strive to consistently save 20% of your net income (after taxes), before spending or paying bills. Visit www.bankrate.com to compare savings account interest rates.  I like Barclay’s.

Don’t neglect to invest – and I don’t mean CD’s!

200520930-001Redundancy:  As stated above, many of us have lots of stuff we don’t use and eventually forget about.  It is good to take an inventory of those junk drawers and crowded basements to avoid re-purchasing items we need down the road for a project or errand that pops us.  Otherwise try to sell excess belongings, especially duplicates, on auction sites like ebay, apps like 5miles, or sites like craigslist.

Spending On Unnecessary Things:  A lot of times when we shop, especially women, it can feed a need for satisfaction, accomplishment or escapism.  How about putting that money and effort toward investing in experiences?  Concerts, art shows, international travel, charity, lessons to learn a skill or develop a talent.  Good experiences that allow us to de-stress, meet new people, learn new things and really LIVE can satisfy the same needs while also allowing us to grow as individuals.

Expensive Outings:  I have a small group of girlfriends that I love spending time with.  We schedule regular outings to eat, go to cultural events and hang out.  I found myself spending much more than I would intend to and promising myself that the next time I will stick to a budget.  In 2017 I am going to be more disciplined about this.  Being honest with my friends about my need to reign in spending will help me to keep focused.  I have a specific saving and investing goal for the year and I am going to be ruthless in achieving it.

It can be challenging for entrepreneurs to remain motivated and inspired.  The things of life can distract us and make our dreams seem farther and farther out of reach.  Controlling spending and debt can help to secure some peace of mind and allow us to leap forward when the right opportunity comes about.

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The Power of the ‘P’: Perseverance

If you’ve decided to be an entrepreneur you’ve taken a leap of faith in your vision and ability to create something out of nothing.  You begin with enthusiasm, anxiety, excitement and hope for all the dreams and goals you want to achieve.  You might even have a business plan; a home office; an LLC; client leads.  You have all the pieces in place to get started.  But then you come to a line of delineation, separating the known – what you can control: your knowledge, environment, all the elements required to start your business – and the unknown – market response, sales, the economy, the weather!

Being an entrepreneur is a test of personal character.  One aspect of your character is the ability to persevere through the challenges you will face.

Perseverance [Converted]

Perseverance: Steadfast in doing something despite difficulty or delay in achieving success

Obstacles don’t have to stop you. If you run into a wall, don’t turn around and give up. Figure out how to climb it, go through it, or work around it.” – Michael Jordan

Once the line is crossed from the known things that are in your control, into the unknown and out of your control, such as the first day in actual business, there are constant internal and external hurdles that test the agility of your will power, confidence and creativity.  The word for this is ‘motivation’ and it is the fuel that drives perseverance.  The entrepreneur must work on all of these elements simultaneously, limited by the confines of energy and time; and only one of those is renewable.

The main culprit in losing time (i.e., productivity) is fractured energy from a lack of focus.  This is why a business plan is so important.  It lays out priorities, milestones and expectations that are time-bound.  So that when the personal obstacles of self-doubt, fear or lack of knowledge show up there is already a practical, impartial road map laid out before you, and all you need is to put one foot in front of the other: to persevere.

Perseverance embodies the concept of “Failing Forward.”  It means using failure as a tool to propel you toward better decisions in the future.  Fear of failure keeps us stagnant.  But when we acknowledge the potential for failure, we put ourselves in a position of power to deal with it rationally.  That is what a business plan is for and why it can be the most important part of the foundation of a business.  There will be times when nothing seems to be going right or things don’t seem to be moving as fast as we would like.  The plan provides a baseline and benchmarks to be able to track the progress that has been made at any given point: number of potential customers reached; strategy implementation; income goals.  When we fail at achieving short-term objectives a plan helps to identify mistakes and strategize how to get back on track.

“Every strike brings me closer to the next home run.” – Babe Ruth

No one who has achieved great success hasn’t failed.  Sometimes a lot.  The difference between people who achieve their dreams and those who don’t is that they didn’t quit.  Successful people keep practicing, improving and adjusting, which takes focus and discipline.

“I’ve failed over and over and over again in my life and that is why I succeed.” – Michael Jordan

 

 

Debt Bad, Leverage Good

Big money stack. Finance concept

Sometimes in life a concept can either mean something good or mean something bad, depending on the person’s perspective.  A word like “debt” can illicit pangs of dread or a spark of promise, depending on the listener’s mindset.  The difference between the two is in some combination of observation, education and experience.

In our consumer-driven society, there is a lot of anxiety around debt.  The media regularly reports on the financial habits of American households and how much we are beholden to creditors.  The types of household debt of greatest concern seems to be credit cards (consumer) and mortgages.  The data tell us that Americans do not save – for the most part – which is the inevitable result of the simultaneous accumulation of large amounts of credit card debt.  At the same time, many homeowners are upside down on their mortgages or own homes they cannot truly afford.  We are losing value hand over fist: first, to high credit card interest rates, then to loss of property value.  We are trained to believe that debt in and of itself is bad, and there is no shortage of evidence that seems convincing.

But, this presidential election brings to light an important truth about debt that often goes un-reported: debt can also be good for you.  One of the two candidates in this race is an unapologetic debt enthusiast.  He has grown an empire built on debt (other business practices aside.)  Almost anyone who has amassed a fortune in business has done so by utilizing the power of debt, but they call it leverage.

According to a recent Inc. article, “the only way to get rich rapidly is to understand the principle of leverage.”  The author describes leverage as the financial secret of the super wealthy.  In simplest terms, leverage allows a person the potential to exponentially increase the benefit, or return, received from putting an asset to work; it can be your time, energy, money or other resources.  A person utilizing the principle of leverage has acquired more of what they need to accomplish a goal, but that additional resource is not derived from their own effort.  In the case off money, the resource is, of course, debt.

Leverage is the bread and butter of the capital markets.  There are many financial instruments (options, futures, etc) that increase the buying power of an investor’s dollar, thereby allowing the investor to own more shares of a company than would otherwise be possible.  Businesses use leverage to operate, expand and improve when they borrow.  In real estate, investors use leverage to acquire, rehab and flip properties.  An investor or developer who pools funds from other investors will be able to do much bigger.  Real estate investors even fund acquisitions and rehabs with credit cards (which for most people is on par with a 4-letter word.)  The key to leverage in your finances is to “buy things that will appreciate in value. When you can leverage your time and your money and then put your money to work, you are on the road to riches.”

Leverage is a valuable mechanism for maximizing output and efficiency in the functions that impact profits.  The author gives an example of how this works.  It’s also the concept behind network marketing: on your own you will make a certain income.  But if you duplicate your efforts via a team that you develop to work with you, each of whom will develop teams of their own,  your income will expand exponentially.  An entrepreneur may start off doing all the labor him/her self, but when he/she is able to hire staff to do the work instead, he/she will have created an opportunity to significantly increase both the client base and the amount of work that gets done within the same time frame.  This way time, energy and money are leveraged, which can quickly escalate one’s income and grow wealth.

What Kobe Bryant Learned About Money

Last month, NBA superstar Kobe Bryant contributed to a series by The Player’s Tribune titled “Letters To My Younger Self.”  What he wrote echoes many of the same messages depicted in shows like Survivor’s Remorse, which he produces, and Ballers.  His letter addresses the management of personal relationships after coming into a windfall – especially at a young age.

The issue he points out is the need to ensure that his generosity toward his loved ones is enabling in a positive way.  He tells his 17-year-old self that his new wealth can either be a help to their ability to step into their purpose, or a hinderance.  There is a tone of regret as he warns that “handouts” will stunt their growth and self-reliance.  Clearly as he matured he realized that he had to transform this dynamic in his relationships with his family, and he admitted that there is some lingering tension as a result.

2011 NBA All Star Game Portraits

Kobe Bryant #24 of the LA Lakers NBA All-Star Weekend February 18, 2011  Getty Images 

The basketball star’s most revealing admission is that his willingness to give things so freely was, in actuality, all about his own ego.  If it were up to me to coin a phrase, I would call this New Money Syndrome, or at least one of the symptoms of it.  And you don’t have to be wealthy or even grown up to exhibit this very human tendency: I’ve seen it in my nephew.

Even at 5 years old my nephew got a little allowance.  He was very proud to have his own money.  In his young life he had seen struggle among some of the adults/care-takers in his life, as well as a lifestyle not so encumbered with financial woes.  I remember once when he was going to visit his other grandmother and aunt and uncles, he wanted to take all of his allowance with him.  He was entirely unconvinced by warnings about losing it, spending it all, or having it stolen from him.  I remember him holding on to his $10 defiantly and proudly.  It seemed to me that it was important to him to show that he had his own money – whether to brag, for his own self-assurance or to be able to help if need be.  As he got older and gained more siblings he felt a strong sense of responsibility to be a good role model to his younger brothers, including them in his journey to fulfill his goals and dreams and sharing with them whatever he had.

I can only imagine the weight of responsibility involved in becoming enormously wealthy as a teenager with those same impulses and intensions, while having your entire family look to you as a “money tree.”  When he signed his first million-dollar contract he became an instant leader for his family, for potentially generations to come.  At some point he began to understand that.  It is important to note that Kobe is not suggesting his younger self cut people off, but to be mindful of the way in which he shares his prosperity.  Moreover, he puts the blame on himself.  I believe it takes good character to do that.  He learned to use his wealth to help those around him shine, not be diminished by his shadow.

The Mortgage Is Just The Beginning…

I am in the process of becoming a 1st-time homeowner.  I’ve been approved for a mortgage with a great fixed interest rate; because I’m getting a chunk of equity I won’t have to come up with a down payment; and I don’t even have to pay closing costs.  Plus my mortgage payment will be very affordable.  I got a great deal.

The decision to buy a home for the first time is a big one and once it is made the focus is usually on getting the paperwork and financials together to be able to apply for a loan.  Applying for a mortgage itself is a bit of an intimidating prospect.  And when we get approved for a loan our main focus is on what the monthly payment will be.  But in reality, the mortgage is just the tip of the iceberg.

5 Things To Avoid In Your First Year of Home Ownership

Owning a home for the first time will require an entirely new set of priorities that I have literally never faced before.  Perhaps the most important thing will be to expect and be prepared for the unexpected costs associated with owning a home.  There will be no super to call when the roof leaks, or the basement floods or the plumbing has a problem.  I will have to have the funds on hand, know who to call when I have a problem and how much I should reasonably expect a service to cost.  I will also have to be financially prepared for the things I should expect, such as property taxes, garbage and sewer fees, water and insurance.

Still, it’s a challenge I am excited about and I can’t wait to get the keys and step into the pride of home ownership!

Real Estate Investing, With Other Peoples’ Money (It’s a thing)

 

I am a hard-core multi-tasker, in life and in business.  For better or worse, I am happiest when I have several objectives to handle at once.  So I like the idea of having multiple streams of (potential) income.   I have a variety of really strong skills and I enjoy finding ways to grow and use them.

Last year I attended a very impressive seminar on real estate investing.  It was held over 3 days in 8-hour-long sessions.  The purpose was to show attendees how to become financially independent by investing in real estate, but at a higher level.  The scope of the information and the extent of the detail provided was stunning, and frankly a bit overwhelming.  So exceptional was the training and the skill of the trainer that a ballroom full of hundreds of people remained transfixed from the first minute of the first day to the last minute of the last day.  Some attendees were seasoned renters, rehabbers and flippers who found themselves blown away by the eye-opening education.

One of the biggest take-aways from the seminar was that it is possible to get started in real estate investing with little to no money out of pocket.  Even some of the most successful real estate investors began with hardly any money to their name. Below are a handful of ways that cash-poor self-starters can begin their journey to financial freedom through investing in real estate.

6 Real Estate Investment Money Myths, Busted!

1.  Wholesaling

Wholesaling is a  popular way to get started in real estate.  A real estate wholesaler is someone who helps investors locate the types of properties they are interested in buying.  The warehouser builds a database of homeowners who are looking to sell their properties as soon as possible, as well as active investors who have the funds to grab the right opportunity when it presents itself.  When you see a sign on the road with an offer like, “WE BUY HOUSES, ANY CONDITION” that person is a wholesaler.  A wholesaler is a type of real estate investing intermediary.

2.  Creative Financing

This is for someone willing to take on a bit of calculated risk. There are quite a few ways that a budding investors short on funds can find money to get started.  These methods may sound irresponsible because they contradict conventional wisdom.  For example, if investing for retirement standard guidance is to invest for the long-term and NEVER make withdrawals so you don’t miss out on gains.  But I have a saying, “It’s not the ‘what’, it’s the ‘how’.”  In other words, it’s the ‘how’ in what you want to accomplish, not the ‘what’ itself that counts.  With the right information and training, what may look like a questionable decision to someone else could be the best decision you will ever make.

HELOC

One way to begin investing in real estate is to tap the equity in your own home through a home equity line of credit (HELOC).  I won’t go into too much detail here but with the right amount of planning and skill to do it properly this can be a relatively safe way to begin investing without having to come up with cash out of pocket.

Retirement Account

A similar method that successful real estate investors have used to get started without having to come up with extra money is by taking a short-term loan from their retirement accounts such as the 401K.

Private Money Lenders

Real estate investors must always have a Rolodex (so to speak!) of sources of money to acquire more properties.  I call them the ‘investors’ investors’, but the official title for individuals who will lend their own money is ‘private money lenders’.  A private money lender is anyone you may know – a family member; wealthy associate; property owner; etc, who has money that they are looking to lend to others with the expectation, of course, of a certain return on that investment.  This is one way that individuals seeking to grow their portfolio can do so without having to go into the stock market, where value is largely arbitrary.  Private lenders include people who lend from their HELOC.

Long gone are the days when people could park their money in a savings account and watch the interest pile up, and not even conventional investing wisdom from the stock market gurus are panning out as they did in decades of the recent past. Today there is a new paradigm.  In this new world of constant uncertainty and upheaval it is imperative, in my opinion, to have a backup plan for our financial survival that is well-rounded and smart; calculated investing in real estate should one of the tools in that tool box.

The ‘Trial’ Temptation

 

There are many obvious ways that our efforts to save money and practice good financial habits can be sabotaged.  High interest rates, late fees and even the opportunity costs of not investing and/or saving adequately are among them. But there are other subtle little bank balance busters that go unspoken in media on household money management.   One of them is unwanted memberships and subscriptions from un-cancelled  free trial or introductory periods.

In a consumerist culture like ours it can be hard to make a budget and stick with it.  It takes an enormous amount of disciple to resist the incessant barrage of temptations that surround us almost every moment of every day, to keep spending money.  One of the ways that savvy companies tempt us to put our guard down and hopefully spend money (we don’t have to spare) is the “free trial offer”.  Trial offers can last days or even several weeks but the key is to obtain our credit card and contact information to allow us this temporary access to services and information for free.

The words “free” and “no risk” are a great way to peak interest in a product or service.  Who doesn’t want something for free if they can get it and it can be of benefit to them?  But we also know that there is usually a catch: that free trial will come with some expectation upon us to do something or give something up at some point.  It can be referrals, which businesses often find even more valuable than a one-time sale, or the sale itself – subscription or membership.  Not to mention that once we willingly provide our personal details the company has gained the ability to continue to market itself to us.

The problem with trial periods – for the consumer, at least – is that it can be difficult to remember to cancel on time.  Many people take advantage of these offers with the intention of cancelling before it’s over.  If you forget to cancel a trial membership or subscription you end up paying for something you don’t want, and if you don’t catch on for weeks or even months there is the potential for a substantial financial loss to you.  Companies have different rules regarding canceling a subscription after the trial period has expired.  Some companies will reimburse all of the subscription rate if you cancel within a day or two of the first charge; others will prorate the reimbursement based on how many days are left in the subscription.  Others disallow reimbursement of funds but will cancel charges as of the next billing cycle.

Obviously there are ways to try to prevent this mistake from happening, like adding the last day of the trial period to your calendar, but of course the easiest way to avoid the problem is to not sign up for trial periods at all.  There are times when you need to utilize a service but only for a short period of time to accomplish a specific goal. This is when trial periods are most useful and sensible.  What you want to avoid is failing to discontinue a trial period for something you never even used or didn’t find beneficial anyway.