College

Are You Too Financially Cautious?

Is it possible to be too financially cautious?  Cautious does not mean that you are just conservative or frugal with your money, but that you are too afraid to spend your money wisely. You may not even be aware that you are too cautious and here are some examples:

Hesitate to make the right investments: Aside from traditional investments, you may be too cautious to invest in your own education and knowledge, spend the money for new equipment and technology, marketing, or spending money on employees.

Too cautious about wasting money: If you are so concerned that you will waste your resources then you will end up spending too much time trying to save a nickel, but it ends up costing you a dollar. For example, you don’t want to spend the money to keep track of your finances in QuickBooks or even Quicken for personal use, but yet you incur hundreds of dollars of insufficient funds charges each month. I have seen clients spend approximately $10,000 for insufficient funds fees.

Not taking a loan when you should: I am not an advocate of borrowing money excessively or foolishly, nor do I think that borrowing should be avoided at all times, which some pundits advocate each position strongly for. However, sometimes you need to have a line of credit to smooth out some bumps or to take advantage of low-risk opportunities that arise. Alternatively, if you pay off all of your debts too quickly then you may not have any cash available.

Time versus money: Using your time productively strongly dictates your financial success. However, if you spend your time on $10 per hour activities that drive you crazy instead of paying someone to perform them, while you can be making $200 per hour, then that is a poor use of your time and financial resources.

Money before relationships: If you are too financially cautious then you will probably never want to get married, and if you do, then you will worry about not having enough money for your children and will probably not have any.

Another way of saying financially cautious is to be penny wise and pound foolish. Don’t try to save your pennies, but make dollars!

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Is There a Link Between Strong, Healthy Relationships and Financial Success?

We don’t live in a vacuum. We are surrounded by family, friends, acquaintances, employees, bosses, clients/customers, colleagues, advisors, vendors, and everyone else. Financial success is not just all about you, but your support system. Let’s take a look:

Family and friends: A common theme is to go to college, move out (possibly out of state), and do it all yourself. Nowadays you can keep in touch with family more easily with the use of technology, but nothing beats geographical closeness. If you have a medical emergency or even something minor requiring the help of family or friends, then finding support is more problematic. Another example is the support system inside your marriage, which is why a healthy relationship with your spouse is so important. Divorce does not help your finances, but your attorney’s. No one is going to support you more than your family and friends.

Bosses: There is a saying that it does not matter where you work, but who you work for. Look at your past and see if this is true. Having a healthy relationship with your boss can catapult your career much easier than constantly questioning if your boss is going to fire you today. I’m sure that your stress levels will be lower too.

Clients/customers: If your customers see you as just another provider of products or services then that is what you are to them, which is not very beneficial to either of you. This is why it is so important to have good rapport with your clients. There are always times when someone isn’t satisfied, and if the relationship is strong then it can overcome hiccups along the way. Remember, no one is perfect and everyone annoys someone or makes mistakes along the way.

Advisors:  Anecdotally, individuals that have tax and/or financial issues tend to have had poor relationships and communication with their advisors.

Everyone else: The examples are unlimited and healthy relationships should even extend to your neighbors, landlord, and every single business that you patronize. People who tend to have poor relationships seem to struggle more than those who do.

Strong, healthy relationships are important and our goal should be to build them vs. thinking that we can always rely on our own strength.

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When Should Your Parents Stop Being Involved in Your Financial Affairs?

Our parents raised us and shaped who we are today, and there is probably nothing that we can do in comparison to what our parents did for us, except for perhaps raise our own children well. But, when should our parents stop taking charge of our finances, career and/or business?

It is a good for us to always seek counsel from our parents, especially on matters that they may have more experience with or needed expertise. Even when we are in our fifties it is wise to communicate financial issues with a knowledgeable parent. However, make sure to separate having trust in someone versus their ability to competently advise you.

Once you are in the workforce and are an adult, then you need to deal with your employer directly. Several examples have been shared with me regarding parents contacting their adult child’s previous employer over payroll issues. Even worse is that in those situations the adult child was a professional that advises others! Again, feel free to seek the advice of your parents, but do not have them act as your “proxy.” I can just picture this now, “This is Mr. Smith, and I am calling to let you know that Timmy will not be at work today because he is under the weather. Please cancel his meetings with the executive vice-presidents of Fortune 500 Co.”

Sometimes you may own and operate a business and employ one of your parents, which does happen occasionally. Your parent may be able to give you insight that you are not seeing regarding employees, customers, or finances. However, unless you hired your parent as a strategic advisor because they have developed successful companies in the past, or the CEO, which small business owners actually are, then your parent should not be actively deciding the direction of the company or connections with key people.

Anecdotally, it seems that adults who enforce boundaries with their parents make better financial decisions, are more successful, and have more confidence.  I’ll let the psychologists further elaborate on this topic.

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A Silly Trap When Trying to Pay Off Debt

I have had numerous clients tell me that they are paying off their debts early, whether it is a student loan, car loan or mortgage, which is very admirable. However, they really aren’t paying off their loans early. How can this be and why?

The reason is simple. They are not actually paying off their debts, but prepaying their regular monthly payments. The assumption is that if you make extra payments then those extra payments will go directly towards principal, which in essence will reduce your loan balance. It sounds logical, but usually the loan company will apply these payments towards future bills, so in reality no extra principal is being paid. They are just considered prepayments.

One way of determining if your extra payments are being applied properly is to look at your current monthly statement to see if your payment amount is either -0- or shows a lower amount than normal. If this is the case, then your extra payments are not being applied towards principal.

The proper way and easiest way to ensure that your extra principal payments are being applied correctly is to specify that your extra payment should be applied towards principal. It is best to do this online and then check your activity once the payment settles to confirm this.

It’s not right, but when it comes to finances you must be extra careful and do not make any assumptions!

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Is Debt Good or Bad?

What are we to believe? Is debt good or bad? On one extreme are some financial pundits that say to go into debt and use other people’s money to make money, and on the other extreme are experts that believe that any form of debt is bad. Who should we listen to?

Ignoring the rare exceptions, most successful people have incurred some form of debt either personally or through their business, and if they did not incur this debt then they would most likely not be in the position that they are in currently, even if they have now paid off all of their debts. Let’s look at some pros and cons.

Pros of debts: Without incurring debts, virtually no one in this expensive area would be able to purchase a house. If you were debt averse and had to save up for your house to pay cash, then you may never get there. If a $500,000 house appreciates by 3% per year on average (let’s ignore significant ups and downs to keep the point simple), then just one year later you would need to save an additional $15,000 to purchase your home. You may never get there.

If you want to expand your business or start a new one and need capital to build out your office or purchase equipment, then a loan is most likely needed. Even the best savers have a hard time saving up the significant sum that is needed to do so. The same applies to investment properties.

Unfortunately, you most likely need to incur some debt to finance college or purchase a vehicle.

Cons of debt: Debt is not without risk and I am a big proponent of proceeding cautiously and wisely when incurring debt. Here are several pitfalls of debt:

Over leveraged: If you incur too much debt than you may not able to meet your payment obligations. This is especially true if and when there is a slow down in the economy and/or your business. Think of debt payments as taking from your future income, but you really never know what your future income will be. If you find yourself with tons of debt then you need to closely examine your spending and look for ways to increase your income.

Increases risk: Debt amplifies the risk of any financial endeavor due to a decrease in cash flow from making debt payments and the financial obligation of the debt. Most debt is personally guaranteed, even if it is for business. Trust me when I say that a bank owns you when you take out an SBA loan. They may even put a lien on your children, but that may just be a rumor.

Makes you spend more (much more): Surprisingly, this isn’t mentioned too often as most people only consider the monthly payments, interest rate, and length of a loan. However, debt makes you less cautious when spending and investing money, even if it is for something productive, such as  purchasing equipment for your business or buying rental properties. The end result is that you wind up spending more than you anticipated. Why do you think so many companies offer enticing payment plans for just about everything? If you have the resources to pay cash, then it probably makes sense to do so.

Increases costs: Even loans with low interest rates increase your costs due to both interest and fees, which can be very significant.

As you progress on your financial journey, then a noble goal is to become debt free. Ideally, you should try to avoid debt when possible, but it may provide you with a much needed boost to get you started. Just do not over do it.

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5 Financial Truths

There is a lot of information out there about finances, and it’s hard to figure out what is exactly true or not true. Always seek the truth, especially from someone that is not trying to sell you something. Here are some examples:

College: We are led to believe that all of our children must go to college to be successful and make a lot of money. While I am a big believer in education and college, it is not the only route and it is not for everybody. With the high cost of college, the decision to attend college should not be automatic. There are alternatives, such as becoming a tradesman, learning a special skill that does not require college, starting a business, sales positions, military or government positions that do not require college, stay at home parent (yes, this is a vocation), etc.

Retirement savings: Saving for retirement is a good thing, however, it should be balanced with both short and mid-range needs. For example, if you allocate virtually all of your savings towards retirement accounts and ignore having a cash cushion, then your risk of financial catastrophe increases. If a financial crisis arises or a large purchase needs to be made, then you will have to withdraw from your retirement accounts, which is one of the worst financial decisions to make due to both income taxes and penalties on the withdrawals. Furthermore, if you do not have withholdings taken from your distributions, then you will probably end up with a tax problem once you file your return. The prudent action is to have a cash cushion of 3 to 6 months of expenses for emergencies and to save for mid-range goals, such as a house purchase.

Debts: Debt truly is a double-edged sword. There are some who advocate staying away from debts at all costs and others who encourage you to leverage yourself to make more money. The truth is that debt should be used wisely and sparingly, if necessary and as a last resort, and it should not cripple you. If you are able to avoid debt, then that is excellent, as debts increase your risk and they also encourage risky behavior and increased spending in many cases.  To prove this point, why do you think McDonald’s started to accept credit cards, why do auto loans have 7 year terms, and why can young adults take out massive loans for college?  It is to get you to spend more than you would have otherwise.  As you mature financially you should seek to decrease your debts.

Most people would not be able to afford a house without obtaining a mortgage, and if they waited to purchase a house and rented instead, then they would most likely be worse off financially over the long term. Also, some businesses may need to incur debts to purchase expensive equipment, inventory, or improvements that would not be possible if they did not incur debts. To emphasize, it should be used wisely and sparingly.

Expenses, income and savings: Most likely your expenses are way too high. If you are able to save 15- 20% of your income and have no debts then spend whatever you want. Otherwise, set aside money towards savings to steadily increase the percentage that you save each time you get paid. This way you will spend whatever is left over. If you are not able to do this then you need to take a serious look at decreasing your expenses and increasing your income. The truth is that it is really not that hard, but most people have a hard time doing this. As Yogi Berra said, “Baseball is ninety percent mental. The other half is physical.”

Home and health = wealth: In the quest for success, don’t ignore your most valued relationships or your health. Nothing can cripple your finances as quickly as health or family issues, such as divorce. With either of these issues your expenses increase exponentially while your income suffers at the same time. Make sure to prioritize.

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Where Are all of the Young CPA’s and Why Should You Care?

I was at another continuing professional education seminar recently, which is very often as CPA’s are required to have 120 hours of continuing education every three years. One of the observations that I make each and every time is that I am one of the youngest CPA’s in the entire room. This is true now and was true 10 plus years ago when I became a CPA. Unfortunately, I have been jumped past the young man status, so it has nothing to do with being a “young” CPA. Why does this matter and why should you care?

Some details: When looking around the room this time and every time, It appears that approximately 5% of the CPA’s are younger than 50 years old, with the majority being older than 60. Could it be that older CPA’s attend the seminars that I happen to attend or is this true throughout the profession. When digging deeper, I found out that according to the AICPA, approximately 75% of CPA’s are expected to retire in the next 15 years, so my observation applies throughout the entire profession, and not just Bergen County.

More accountants, less CPA’s and CPA firms: Studies are showing that although there are more accounting graduates, less are becoming CPA’s. There are numerous reasons why including greater education requirements, time requirements, and the expense of taking and studying for the exam. Also, although I do not have a statistic on the age of CPA’s that own small firms, I do not know, even casually, one CPA firm owner that is younger than me. Just to reiterate, I am not a spring chicken anymore.

Negative impact on clients: CPA’s are the main business and tax advisors to small business owners and many individuals, so who will fill this void? I can only make several guesses to the alternatives, which are not very good for clients. Alternatives include: using non-CPA business advisors and preparers (whom generally lack the education, expertise, and training of CPA’s), using larger firms (along with much higher prices and less attention to the “little” guys), and doing everything yourself (ie. QuickBooks, however you need to be an accountant to actually get the numbers correct, along with not receiving guidance that saves business owners more than they actually pay their CPA). Another negative aspect is that there will be less CPA’s to collaborate with as peers. As a side note, the CPA’s that I know have been the most generous, helpful, and supportive people to me professionally.

General trends: There has been a generally trend for less people to start their own businesses, which has been the case for decades, according to a 2017 report by the Kauffman Foundation, titled, “The Entrepreneurship Deficit.” Several reasons are cited, including demographic changes, technology, and geographic changes. It appears that the CPA profession is not immune to these general trends, and as a result there are less small CPA firm owners.

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Cost of College = $1,000,000?

If it costs approximately $30,000 per year to attend college, although that figure can be much higher, then the cost of college for my children will be over $1,000,000 when the time comes, especially as rates keep on rising. In case you are wondering about the math, here it is:

7 children times $120,000 (for 4 years) = $840,000. Multiply that by an average annual tuition increase of 3% over the next 7+ years and the cost is over a million dollars.

When I get asked the question, “How are you going to send your children to college?” I usually reply with a snide remark that I am going to discourage them from attending college. However, there is some truth in that, and here are some alternatives from paying high tuition that we have discussed with our children:

Military: One of my sons wants to be in the Army. This is extremely noble and brave and not for everyone. If he stills wants to be in the Army when he comes of age, then he can also apply to and hopefully get accepted to West Point to accelerate his military career. There is no tuition at West Point.

Entrepreneur: I’m very biased with this one because I work with entrepreneurs all day long. Aside from certain professionals, such as doctors, attorneys, CPA’s, etc., you usually do not need to go to college to start your own business. Some do very well and some don’t, but I would hope that they would receive my guidance to help them to succeed.

Nursing: There are many good local colleges to choose from, which will eliminate the cost of room and board. This will dramatically reduce the cost.

Famous: Who says you can’t get paid to be famous?

Mom: My older daughters say that they want to be moms. Although it is not in vogue to be a stay at home mom nowadays, I believe that it is one of the greatest gifts that can be given to your children.

YouTuber/Gamer: I’m not sure what this one means exactly, but I think that it means recording yourself playing video games while narrating what is going on. Although, I am not sure if you can make a living wage from this or for how long, but if so, then great.

My children are not even teenagers yet, so let’s see what happens. I am definitely keeping an open mind and not taking this too seriously at this point!

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Say “Hi” to Your Customers

When I was in college I worked at the now defunct supermarket chain, Grand Union, as a cashier. I really didn’t want to work there at first, but working there helped to pay for all of my expenses while attending college. Thinking way back, I remember that when customers came in line I usually didn’t even look at them or say “Hi” until one day after talking with my dad.

I must have been complaining about dealing with customers when he asked me one simple question.

“Do you say “Hi”i to your customers,” he asked.

“No,” I answered, thinking why should I?

“Why don’t you start saying “Hi” to your customers from now on,” he commanded.

Surprisingly, I actually listened to my dad even though I knew best as a teenager, and it transformed my work experience immediately. Instead of having disgruntled customers, they now seemed to be transformed into casual friends. It was amazing that one word changed both my experience and that of my customers.

Why was this so effective and powerful? I can only make a couple of assumptions as I’m not a psychologist, but this is what I think:

  1. It created a dialogue between the customer and myself
  2. I was viewed as a person, rather than some mindless cashier, or worse
  3. Usually people are nice to people who are nice to them
  4. Lastly, people want to be recognized, even in the smallest of ways

Were people nice each and every time? No, but it was rare that I had a bad experience with a customer from then on. Don’t forget to say “Hi” to your customers, or your local cashier. Who knows, one day they become your CPA!

Don’t Worry if the Timing is Not Right to Conquer the World

Ever feel frustrated that your business or your career isn’t going as well as it should? I’m sure that most people feel like this from time to time, but sometimes there are valid reasons for this. Not excuses, as the “success” coaches may call them, but as human beings we have many moving parts to our lives. Some reasons for not being able to conquer the world right now and what to do include the following:

Health Issues (Physical & Mental): They may come at any time and can be minor, permanent, or severe. Health issues can put you out of work for months or even years. The main objective should be to focus on getting your health back so that you can take care of yourself and your family. Next, you should look into how future health problems may be prevented, if possible. You may also find that you have to attend to family members that get sick, such as spouses, children, and aging parents. First things first.

Raising Children: Raising children is not an easy task and many parents feel the tug between working and taking care of their children, especially mothers. This is especially true when both parents work, which is the majority of parents nowadays. I’ve written about the trap when both parents work full-time as the financial benefit is not usually as great as it seems when factoring in taxes, additional expenses, etc. Some options to help juggle responsibilities are to change your work schedule, have a flexible schedule, or work part-time, especially during school hours.

Addictions: Addictions can be in the form of alcohol, drugs, pornography, and gambling to name the major ones. No one likes to talk about this because of the stigma of addictions, but these will have a devastating impact of your business or career, even if you are indirectly impacted by addictions, such as with a child or spouse. Healing and overcoming addictions needs to take place.

Family Issues: Divorce or separation is a common family issue and may go hand in hand with the other examples above. Marriage struggles, especially divorce, will not only impact you and your children emotionally and spiritually, they tend to destroy family finances. Who care if they are successful if their family is torn apart? Marriage therapy, family therapy, or spiritual guidance from a priest or minister can help to save your marriage. Also, all kidding aside, they are much less expensive then a divorce attorney.

We are not machines, but people that have problems, emotions, and are all fighting our own battles. Some battles are greater than others, but we must build a solid foundation before conquering the world.