Budgeting

Instead of Taking out More Debt, Do This Instead

One of the first ways most people try to cover a financial shortfall is to incur more debt. Whether this is to support a struggling business or even on a personal level. This may be a solution in some cases or may be used in conjunction with other financial methods. However, there is another solution that may work to solve your shortfall.

Reason for shortfall: Simply put, there will be a shortfall when your income is less than your expenses. Sometimes this is temporary or seasonal and you may be able to predict a shortfall based on business patterns.

The debt solution: Usually, most businesses turn to debt to smooth out the shortfalls. While this may be a viable solution, it should be well though-out and other options should be explored.

Alternative solutions: Aside from needing funds to support a large purchase, if your income is not enough to cover your expenses then instead of first choosing debt, here are a few other options:

Sales: Focus on increasing your sales. An increase in sales will help to increase your bottom line results. Will your expenses increase as a result? Most likely yes, but so should your profit. Aside from industries that have a poor cash conversion cycle, which is a topic all by itself, the additional business activity should help to offset your financial shortfalls.

Expenses: Small businesses should always be conscious of what they are spending their money on. Based on observation, small businesses do not usually spend their money excessively, but they may spend allocate it to areas of their business that do not generate a benefit, such as poorly spent advertising dollars.

Profitability by service/product/client: It may come as a surprise, but most likely there are several aspects of your business that are really not that profitable or may not be profitable at all. If that is the case, then by eliminating these activities your profits will increase as you can focus on increasing sales of higher profit services.

Don’t always go for the “easy” solution, but perhaps a simple, more sweat-producing, long-term solution to help the finances of your business.

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Use the Snowball Effect to Get Better Financial Results

According to the Cambridge Dictionary, a snowball effect is a situation in which something increases in size or importance at a faster and faster rate. It sounds too simple and general, but it is a useful principle that can be used to achieve significant results over time. Practical examples of this are as follows, along with how the opposite can also be true:

Savings/Investments: Do you find it hard to save or invest? Start with saving just the smallest amount possible and then build upon there. For example, if you start with a small percentage, such as 2% and increase it by 2% each year, then within 5 years you will be investing 10% of your income. If you are unable to save at all, then you need to either increase your income, decrease your expenses, or possibly do both.

Paying off debt: Want to pay off your personal and business debts quickly? Allocate a small percentage of your income towards paying off your balances, starting with the smallest balance first. Once you have paid off the smallest balance, then use those payments towards the next largest balance. If you start with the largest balance then you will lose the moment due to a lack of sense of achievement.

Increasing your income:  If you increase your income by 10% per year, then it will double in about 7 years and in approximately 5 years if you increase it by 15% per year. Even more modest increases can make an impact over time. Small actions, such as allocating a consistent amount of your time and resources to increase your business volume will add up significantly over time. For example, that one extra phone call (made or received), blog post, additional employee hired, etc. matters. For a multitude of tips, search prior blog posts.

Avoid this approach: Most people want instant results and because of this they either stop too soon or start too strong in an unsustainable manner. There is nothing wrong with strong approaches, but it must be sustainable over the long-term. All you have to do is apply this approach to weight loss and fitness and see how many of your friends and family start an exercise program and eat extremely healthy and then stop after a few months. It is hard to go from no exercise to spending an hour and a half 5 days a week exercising.

Over time your results will get better and better, but give it time to be productive. Think of your actions as planting a fruit tree, as it will take time to bear fruit.

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5 Ways Your Calendar Will Help You to Work Less Hours

Are you using your calendar as a tool to be as productive as possible? Most people do not use their calendar in a way to maximize its effectiveness, but if used properly, it can help you to reduce the amount of hours you work. Here are 5 ways your calendar can help you to work less:

Scheduled tasks get done: When a task is scheduled there is a high probability that it will get worked on. Have you ever had the feeling that you did not get anything accomplished on a particular day? The main cause is most likely due to not having tasks scheduled.

Allocation of time: How much time should you allocate for a specific task or meeting? By allocating specific time slots and durations, this will help to alleviate the open-endedness of meetings and tasks. Parkinson’s Law states “Work expands to fill the time available for its completion.”

Batching of activities: Similar activities may benefit by scheduling them close together or within the same day(s). For example, new clients or patients may need a much longer time slot for an appointment, which can all be scheduled on a specific day.

Schedule key tasks early on: Important, but usually not urgent tasks, should be scheduled first thing in the morning or early in the week. There is a constant pull for your time and if you do not focus on important items first, then you may never get to them.

Long-term planning: A calendar can include tasks that are several weeks or months in the future. This can include both tasks and meetings. If you can plan your vacation months in advance, which is very important, then you can and should plan business tasks well in advance also.

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Beware of These 3 Conflicts Between Husbands and Wives When Both Work, Which Lead to Marital Tensions

According to the Bureau of Labor Statistics, approximately 61.1% of both parents work in families that have children under 18 years of age.  It seems to make economic sense to have both parents working nowadays, but it can create underlying tensions, which you should be aware of:

Independence vs. interdependence: Spouses are interdependent upon one another, but with both spouses working, this can create a lack of unity. Problems may arise by simply and innocently having separate checking accounts for each spouse. The problem is that this can create disunity and a lack of joint decisions regarding financial matters versus working together to make decisions jointly.

Income comparisons: When there is a large disparity of income, which there commonly is, one spouse may look down upon the other spouse as not contributing enough financially to the household. There may also ensue an unspoken, unhealthy competition between each spouse whereas they focus too much effort on who makes more money.

Importance comparisons: Everyone wants to believe that their job is more demanding, more stressful, and harder than others, whether this is real or perceived. Even so, comparisons to your spouse’s job are not going to make for a pleasant conversation at dinnertime.

There are many more, but they are just variations of the overall theme of comparisons and a lack of working together. Can you imagine what a comparison-free, working-together household would look like?

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Do This to Avoid a Big Tax Surprise

If there is one recurring theme from this tax season that caused the biggest tax surprise it is this:

Double-check your withholdings: The withholding tables were revised and many taxpayers were under withheld, which caused them to owe taxes versus receiving a refund. The easiest way to correct this is to see how much you owed and then divide it by the number of paychecks left in the year. Then, either ask your employer to withhold this extra amount or complete a new Form W-4 to request this additional amount to be withheld from your paycheck.

Remember, a lower refund does not mean a lower tax liability. A refund is a function of your withholdings and estimated tax payments versus your tax liability.

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The Instructions Said 20 – 25 Minutes

Recently, I purchased a bed from Wayfair that had to be assembled from four large boxes that it was delivered in. I waited until the weekend to assemble it and learned a few things:

After spending hours and hours assembling and completing the bed, I took a look at the assembly time to see if I was in line with how long it should take to assemble. Over the years I have, or at least I thought I have, become proficient with assembling toys, bikes, trampolines, furniture, and just about everything else. However, the instructions said that it should take 20 – 25 minutes for two people to assemble the bed. It took about that long just to take the pieces out of the box. This made me realize either: I assemble way too slowly (hope this isn’t true, but it is humbling), the time on the instructions apply to professionals who assemble beds on a daily basis, and most importantly, you can’t believe everything that you read.

To apply this in business (hopefully you are not putting together a bed when you should be working), are you spending the proper amount of time on the right activities and minimizing or eliminating tasks that you should not be doing? Are you seeking the help of professionals when necessary? Are you seeking the correct information to determine what you need to do to succeed?

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Business Lessons from a Paperboy

I was a paperboy when I was a kid and I also mowed some of my neighbors’ lawns. These are two activities that have become extinct in modern times. I was fortunate to learn some good business lessons from these entrepreneurial endeavors.

The value of money : If I worked not only hard, but did a good job then I made more money. I learned the value of money, how to save up for larger purchases, spending money wisely, and also saving for the future. Unfortunately, kids and adults nowadays tend to ignore these basic financial principals and choose impulsive, debt-incurring decisions.

Customers are interesting: Each customer is unique and interesting. Some more than others, but if you take the time to learn about your customers then you will find out about their lives, families, interests, personalities, and unique characteristics. Positive interactions create a wonderful experience and help to make your job or business responsibilities easier to handle, especially on a rainy day.

Responsibility: Take responsibility for your actions. There are many things that are out of your control, but many things that are. Be accountable to yourself and others even when it is the hard thing to do.

Sometimes bad stuff just happens: The owners of the newspaper I delivered newspaper for decided to replace us all with adults. I believe we had some notice of the transition, but we had no control. It was just like a corporate layoff or having your largest customer go bankrupt.

I could probably list another dozen or two lessons from my experience as a paperboy, which have stayed with me through all these years.

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Is Your House Really Considered an Asset or Just a Place to Live?

Is your house an asset? Some would say yes, and I am sure that some would say it’s actually a liability. Here are different ways of thinking about your house.

Asset: Hopefully your house will appreciate in value over time, but this is not always the case. Because of the often high amount of leverage that most people take on when buying a house, the increase in value can often be multiplied. If it goes down in value and you are underwater, then your asset turns into a nightmare.

Even if your house does appreciate in value it usually does not make much of a difference. This is because most people end up selling their first house and using the proceeds, if any after considering all of the costs of selling a house, to purchase a larger house. Any equity is then “locked up” in their new house again.

No income generation: Unfortunately, your house does not generate income, unless you own a multi-family property, which is not a bad idea, but shunned by most. As a side note, a good strategy is to purchase and live in a multi-family house as your first home, stay for a number of years, move to a new home, and then rent out your unit.

Place to live: Economically, over the long-term owning a home is much better than renting, although life does seem much simpler when renting.  If you think of your home as a place to live vs. an asset than your perspective will change, including funds spent on  improvements. A cost benefit should be considered when making improvements, but know that improvements to your home are not usually the best investment.

Using it as an asset: If your home appreciates in value and your mortgage balance has steadily increased then you have the opportunity to tap into the equity of your home. Just make sure to use this equity wisely as you don’t want to find yourself unable to pay your equity loans and then end up in financial turmoil. Investments considered should be high return, low risk, which they should always be.

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Some Horrible Ways to Lower Your Tax Bill That are Not Recommended

I don’t think that I ever met anyone that likes to pay taxes. Everyone feels better when their taxes are paid in full with no outstanding balances, but not actually paying them. Sometimes this hatred of paying taxes can go too far and here are a few examples of what not to do:

Understate your income: As a business owner there is a huge temptation to “pocket” any cash that is received or cash checks instead of depositing them to your account. However, if you understate your income too much then you may be facing jail time and massive penalties.

Overstate expenses: Maybe you really like cars and use multiple cars for your business. However, if your spouse does not work in your business then her car payment is not a tax deduction. The same goes for personal meals, personal expenses, and outright lying about your expenses and deductions. Most likely you do not give 15% of your income to charitable. It’s possible, but not very probable.

Losing money in a side business: The main purpose of starting a business is to make money. Maybe some contemporary experts think that you should try to change the world, but most likely you are selling a product or service that is not going to cure illnesses. Sometimes a newer business owner is so intent on losing money to not pay taxes that they never let their business actually become a business. A business can only lose money for so long. The same goes for real estate investments and traditional investing.

Spend a dollar to save a quarter: Do not ever spend money on an unnecessary tax deductible expense just to save taxes. The math is very simple – spend $1 to produce $.25 of tax savings, which equals $.75 lost.

Multi-state taxation: The tax laws are extremely complex and each state has its own set of rules. However, don’t let this stop you from doing business or working in other states to take advantage of opportunities.

Tax-exempt investments: Even though municipal bonds are exempt from Federal taxes and possibly state taxes, this does not mean that they are appropriate for you. You must do the math to make sure you compare after tax returns of taxable investments to tax exempt investments, otherwise you may be worse off economically.

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What is all the Hype About Generating Passive Income? Here are Four Examples

I’m sure that you have seen YouTube commercials about generating passive income while lounging in a pool with your collection of high-end sports cars collecting dust in your oversized garage. Is this really practical and can you really generate massive amounts of passive income? The answer is yes and no . . .

Passive income defined: Passive income is any income that is derived from sources that you do not actively participate in to generate that income. Examples can include rental real estate, businesses that you do not materially participate, and royalties.

Can you really do it?: Yes, you can do it, which is the simple answer. However, it is much more difficult than the commercials let in on. Here are several ways to generate passive income starting from the least amount of capital needed to the most:

Side business: Start a business on the side while you are either working as an employee or if you already have a business. In order to make your endeavor take as little time as possible, then your need to focus on a either a product or information based business, while skipping a service-based business. The reason for not choosing a service business is because it will most likely require much more of your time.

Existing business: No matter which business you are in, you can make your business less and less dependent upon you so that you are not required to materially participate in the day to day activities. However, this can take at least several years or more to make this happen, and you have to make sure that your sales can support the additional expenses. The approach must be methodical whereas each aspect of your responsibilities is either transferred to employees or outsourced. It is easier to do this if you have a business that is not very complex.

Real estate: Depending upon where you purchase real estate, this can take a lot of capital. However, if you choose a rental property wisely and continue to build your portfolio, then eventually your rental income can substitute your regular income over many years. A good place to start is to either purchase a building for your existing business or to rent your home if you plan on moving.

Investor/lender: Once you have a sizable amount of cash, then you can and should look for privately held businesses to provide capital for. This can be in the form of equity or debt. If you are very selective then you can build a great portfolio over time with returns that are much higher than traditional investments, although the risk will usually be much higher.

There you have it now go for it!

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