Expenses

The Secret Formula for Financial Happiness

Is there really a secret formula for financial happiness? If so, it would look like this:

Income = $100

Spending = $90

Result = Financial happiness

Alternatively:

Income = $100

Spending = $110

Result = Not too happy financially (at least not for long)

Simple, but true.

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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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Is It Better to Pay Off Debts or Invest?

Almost everyone has some sort of debt and economic data shows that this is the case. Between mortgages, student loans, credit cards, business debts, and auto loans and leases (yes, a car lease is debt), many people find themselves allocating large portions of their income towards debt payments. When you are in a position to start paying off debts, should you do so or invest your extra funds? Let’s take a look at the pros and cons of each.

Pay off debts: Pros: Paying off debts with your extra cash will help you to decrease your liabilities, save interest, which can be significant with credit card debts and some business loans, and eventually enable you to free up cash flow. A non-conventional way to pay off debts is to start with the smallest balance debt to get the momentum going.  Cons: If you focus solely on paying off debts while ignoring investing then you will have no assets for long-term or short-term needs. If a short-term emergency arises, then you will be forced to incur debt to pay for it.

Invest your extra funds: Pros: Investing and savings will hopefully produce a much larger amount of assets over time and enable you to take care of emergencies that arise. Keep in mind that funds for emergencies should be kept very liquid, and a reasonable amount to set aside should be 3 to 6 months of expenses. Cons: Your liabilities will decrease slowly, interest expense will remain high, and you most likely will earn less on your investments especially when factoring in risk, then if you were to pay off debts.

Alternative: The decision to pay off debts or invest does not have to be an either or. Some well-known experts advocate at both ends of the spectrum. Why not do both? Assess your debts and savings to see where you will get the most bang for your buck. For example, let’s say you are able to allocate 6% of your income to savings or investments, then you can use 2% to pay off high interest debts, 2% to save for short term needs, and the remaining 2% can be used to save for retirement.

What if you don’t have extra funds?: The solution is simple, but not easy. Assess your lifestyle to see where you can cut expenses while working to increase your income. If you spend everything that you make currently and work to increase your income by 3% and decrease your expenses by 3% then you will now have extra funds. If your situation is more extreme, such as expenses that are higher than your income, then you will have to take stronger action. For smart ways to cut expenses, then type “expenses” in the search function of this blog.

The mature approach: If you have large excess funds then don’t incur more debts and pay off existing debts quicker once your savings rates are much greater than needed. You can be the only one on your block that doesn’t have debt and no one has to know. I am sure that the quality of your sleep will improve!

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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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How and Why to Strengthen Your Personal Finances to Increase Profits

Most people view their business to be a completely separate entity from their personal finances, and rightly so. This is generally true from a legal, tax, and accounting standpoint, whereas your business operations and finances should be separated from you personally. However, most small business owners are completely dependent upon their business to support them, as they feed off each other. So how and why should you strengthen your personal finances to increase your profits?

Why:

The business won’t starve: By withdrawing every single penny of profit from your business, it will make it much harder to invest in technology, equipment and capital improvements, and people. One of the main reasons that businesses fail is due to a lack of capital.

Increased profitability: If you have a large personal expense that is coming due, such as your mortgage, then you are more likely to take on less profitable customers, jobs, or may even sell your products at a discount due to desperation.

Better business decisions: It’s no secret that people make better business decisions when they are not feeling stressed or anxious. A common example of a bad decision is to cut expenses that support the main operations of a business to save a few pennies, but it ends up costing you dollars of revenues.

How:

Decrease your personal spending: There are numerous ways to decrease your spending, including groceries, dining, entertainment, taxes, auto, clothing, and virtually every category of spending. Some of my other posts will give you ideas regarding cutting expenses, but a few tips including: using cash more, cash budgeting (aka the envelope system because almost no one actually prepares a real budget), reviewing all of your “necessary” expenses, and delaying expenditures/gratification.

Increase cash reserves: Most people are poor at this (no pun intended), including those who save well for retirement. Savings should be allocated for short-term needs, such as emergencies, mid-term needs, such as for a house, and long-term, such as retirement. The easiest way to start saving is to allocate a very small percentage of every deposit that you make in your personal account towards a separate savings account. You can even start with 1%, just to get used to doing this and you’ll quickly realize that it is not that difficult. Over time you can increase your savings rate as you increase your business profits.

Reduce debts: Similar to increasing your cash reserves, you can start with applying a small percentage of every personal deposit towards your debt balances. The big question is which debts should be paid down first. Since finances are very behaviorally driven, then one technique is to start with the smallest debts first while ignoring the interest rate. The reason for this method is because it creates a sense of accomplishment once a debt is paid off, and will motivate you to continue moving forward.

 

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What is the Best Type of Business to Own?

What’s the best type of business to own? One that makes money of course, but let’s dig a little deeper . . .

Simple: The more complex a business is then the harder it is to operate. For example, if your business requires the talents of very technical people, then this complicates the delivery of your products and services. Unfortunately, it also requires more time and expertise of the owner. Such businesses include engineering, law, healthcare, IT consulting, accounting, and other technical fields.

Low capital requirements: If you need to invest heavily in equipment, real estate, or large amounts of inventory, then this can create a drain on your cash. Supposedly, lack of capital is one of the main reasons for business failures.

Repeat business: A perfect example of a business that receives repeat, recurring sales is a subscription based software company. An example of the opposite type of business is a general contractor. There is a wonderful book called, “The Automatic Customer” by John Warrillow that outlines the value of a having a business with predictable, steady, recurring sales. He gives numerous examples on how this can be applied to many businesses, and not just software companies. I’m a big advocate of businesses trying to maximize their recurring sales.

Easily duplicated: Any business that can easily replicate the tasks that the owner performs is a plus. Did you ever notice that many of the chain restaurants do not serve overly complex dishes? If they did, then it would complicate the way the run their business.

If you are thinking of starting a new business, an additional business, or even a side business, then you should strongly consider a business with these traits.

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Are You Cheap or Frugal? Take the Quiz!

There is a fine line between being cheap and frugal. Being cheap has a negative connotation and is almost like a having a disease that makes it painful to part with your money, even when it is beneficial to you or others. Frugal can be defined as using your resources and money both prudently and economically. Which one are you? Take this simple quiz to find out:

  1. Do you leave an extremely small tip or “forget” to tip your waiter when going out to eat, even though the service was great?
  2. Did you ever order a box of munchkins from Dunkin Donuts, return the box half-eaten for a refund after declaring there are bugs in the box, when you actually dug up earthworms and put them in the box?
  3. Do you use coupons?
  4. Do you avoid spending time with family and friends because you don’t want to spend money on gas or gifts?
  5. Are you always looking for a good deal, such as buying used vs. new?
  6. To save money on paper, do you flip over used paper to the blank side, print on that side, and give it to someone else, even though the original side contained very, very personal details?
  7. Instead of buying plants at your local garden center, you secretly bring a small scissors to cut pieces of their plants to take home and grow on your own?
  8. Do you avoid paying back your family or friends when they purchase a group gift?
  9. Do you either cut your own hair or color it even though it looks absolutely horrible afterwards?
  10. Do you consider lower cost alternatives?
  11. Do you try to avoid paying for anything even when you agreed to the price or signed a contract to do so?
  12. Instead of fixing a problem, do you apply a band-aid approach or ignore it, especially a health issue, which ends up making the problem worse?

By the way, non of these are made up, even the silly ones. Don’t worry, everyone has a cheap habit that others find strange.

Answers:

If you answered yes to all or most of these, except for #’s 3, 5, and 10, then you are cheap. Although, sometimes you can cross the line to the cheap zone with these too if you take it too far!

Low-Cost Memorial Day Weekend Ideas

If you haven’t already booked a trip for this weekend and are looking for some fun, low-cost ideas then here are a few tips:

Parades: Many towns have parades this weekend, and if you haven’t been to one in a while then it may bring back some memories from when you were a kid. I have to admit that when I go to a parade with the kids, I do get tempted to chase after the candy that’s thrown to us parade watchers.

Town Pools: If you don’t have a pool, then you may want to join your town pool. Divide the cost by the number of times you use the pool and it really is a bargain.

Spending Time with Family & Friends: Relax and spend some time with your loved ones. Either host a barbeque or attend one, but don’t forget to bring something.

Yard Work: It will make your spouse happy and you’ll feel good that you’re making your house look nicer.

Go to a Park: There are so many parks throughout North Jersey to choose from. One of my favorites is Van Saun County Park in Paramus, which has picnic areas, train rides, a zoo, carousel, playgrounds, fishing, etc.

Go to a Farm: It may be a little early to pick berries or veggies, but many farms offer freshly baked items, dairy products, greenhouse veggies, and very nice scenery.

Whatever you do, make sure to remember that Memorial Day is a day to celebrate and honor those who died while serving in the armed forces.

Increase Sales or Cut Expenses?

What should be the focus? Should we increase our sales or cut our expenses? All of the marketing and self-development gurus tend to focus on increasing our sales, but other financial experts want us to focus on cutting costs and debts. Who is right and what should we do? Let’s look at the pros and cons of each:

Cut your expenses and debt: Being aware of our expenses and cutting unnecessary expenses is a smart move, along with reducing debts. However, cutting expenses will only go so far because you need to incur expenses to support your business operations. Reducing debts is also a smart move, but this should not be done to the detriment of using up all of your cash, otherwise you will go right back to increasing your debts.

Increase your sales: Every business should look for ways to grow their sales, as a business tends to naturally deteriorate over time. An increase of sales can and should lead to an increase of profits, but not always. Many times, a business will increase sales activity, but their profits may actually decrease, stay flat, or only increase incrementally. The main reason for this is due to the fact that a business needs to spend money on marketing, people, technology, and infrastructure to be able to support higher sales.

The optimum solution: Instead of focusing on either or, you should focus on both to some degree, which is what the most successful companies do. Instead of just growing your sales haphazardly, you should focus on growing your sales profitably. To accomplish this you will need to perform some simple math to make sure that you are focusing on profitable services and products and delivering them in a profitable way as not every dollar of sales is equal. Better profitability will also allow a business to have excess cash to help pay down debts and not get into more debt. Without a focus on profitability, a fast growing company will tend to have cash flow issues, and companies that focus on cutting expenses tend to cut themselves into irrelevancy.

9 Ways to Reduce Your Money Worries

When we lack money it creates a lot of stress and anxiety, and can be a source of tension in relationships. But how can we make our money work for us? Here are several ways we can take more control of our money to reduce our stresses:

  1. Change your thoughts: Reframe the way you think about money from being worried about it to being non-emotional about it. Nothing changes if you are worried about it, but worries may cause you to make worse financial decisions. This doesn’t mean that you should not care about money or be reckless.
  2. Be a good steward: If you think of your money not as your own, then you will manage it differently. It is a resource, no matter how great or how small, that we are given to be responsible with. Don’t be foolish with how you spend your money or the way you invest it.
  3. Save it first: Save your money first before you pay anyone else. Even if you start with saving 1 % of your income, it will create a habit that will last you a lifetime, and over time you can increase the percentage to more meaningful amounts. Although 1% may only amount to $20, $50 or so a week so there is almost no excuse to save this small amount, even if you are struggling. I like percentages because you save more when your income is higher and less when it is lower.
  4. Delay large purchases: Houses and cars are our largest expenses, but usually there is not a lot of thought put into these purchases. More time should be spent discerning larger purchases then small ones.
  5. Minimize useless debts: It seems as though anything can be financed today, from cell phones to plastic surgery. If your cell phone bill is $500 a month because you financed 5 iphones then you probably couldn’t afford the phones in the first place.
  6. Make more money: If your income is not high enough and your spending is not an issue, then figure out ways to make more money. If you need to switch jobs or hire a consultant for your business then do it.
  7. Give it away: I’m not sure if there are studies on this, but anecdotally, people who are more charitable seem to be happier than those who are not.
  8. Be timely: Pay your bills in a timely manner by being more systematic. Late fees and threatening notices are never enjoyable.
  9. Do something different: As with any problem, you need to change what you are doing because obviously it is not working. Yes, we are all stubborn.

By the way, it doesn’t matter if you make $50,000, $500,000 or $5,000,000, as you will have the same issues, with different variations. And, more money doesn’t mean fewer problems.