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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Just When I Thought I Was So Smart . . .

As a professional, it’s always wise to project a good image of yourself, especially that you are intelligent. However, sometimes or many times we do things that really humble us and hopefully help us to not be so prideful. Here are a few things that I have done recently and not so recently:

GPS: My GPS on my phone showed that it would take about 2 hours to get back home, which I thought was due to traffic and was normal, even though I was about 35 minutes away. For some reason the GPS kept on taking me through side streets with lights, which seemed to appear every 200 feet. Finally, after about 20 minutes I pulled over and took a good look at the directions and realized that I was taking the bike route. Yes, it took me 20 minutes to pull over.  I think that my pride ran away at that moment.

App and phone purchases: If you know anything about children and video games then you know that you can make in-app purchases within the games to obtain more virtual money, coins, or gems. There weren’t the proper safeguards in place on their tablets and in a blink a lot purchases were made. A lot of purchases were made. Did I mention that a lot of purchases were made? We were able to get some refunds, but let’s just say that where this is a will there is a way, especially when your children then ask if they can borrow your phone and decide to go on a shopping spree at Amazon. I really don’t need a PS4.

Per diem: When I started my practice years ago during the recession it took time to acquire clients, which is normal and expected. In the meantime I could have worked per diem at another firm at least for that first year or so. However, I had such a bad experience with the previous firm that I worked for as an employee that I told myself I would never again work for anyone else. The extra cash made working per diem would have been nice and would have made the transition from employee to practitioner easier and less stressful financially.  Eventually, I did work per diem after about a year or so at a few different firms, and I met some really good people.

There are many more that I’ll keep to myself, but we all need to be humbled from time to time.

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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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Focus on These 3 Areas to Multiply Your Business Success

Having a business is not easy, and even successful business owners know this. But what is the secret to running a successful business and multiplying your results? You must focus on these 3 areas:

Operations: Operations is a very broad category, but it can be viewed as any activity that supports or creates and delivers the services or products that you are selling from start to finish.  Many small business owners are very good with providing their service or selling their product. However, there are usually great improvements that can be made with efficiencies, employees, and using time and resources wisely.

Marketing & Sales: Surprisingly, some small business owners perform almost no marketing activities, but are actually marketing their business by their reputation, the way they deliver their services, the characteristics of their products, and the overall customer experience. Virtually all must sell to some degree as many interactions are sales opportunities. Think of restaurants that try to “upsell” a larger size or additional items, such as much needed desserts! Smart marketing and effective sales can help you to multiply your revenues, and it does not have to be expensive.

Financial: This is all of the boring stuff, such as accounting systems, cash flow, internal controls (to ensure more reliable financials and to reduce fraud), and managing receivables and payables. I have yet to see a business that does not either have cash flow issues or tax issues if they ignore this part of their business. Finances are a crucial part of every business and are mistakenly ignored or paid very little attention to. With proper attention to finances, a business can easily become more profitable, have greater cash flow, pay less taxes and interest, reduce stress levels, and have a greater sense of control.

An interesting observation is that all three areas are very interdependent upon each other. An improvement in one are will help the others, but on the flip side, if one are is lacking, then the others will suffer as well. If you need help with any of these, then please let me know.

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.

Bad Credit Card Policy?

Some business owners are penny wise and pound foolish with their credit and debit card policies. Even worse some do not even accept credit cards. Here is why you should review your credit card policies:

Higher Purchase Amounts: Statistics show that when consumers use a credit or debit card it increases the amount of their purchases. Several studies show an increase of approximately 10% to 15%, but when the purchases tend to be small the increase in purchases can easily climb to 50% or more. Why do you think McDonald’s and other fast food restaurants started to accept credit cards? I believe McDonald’s shows an increase of over 50% for customers that use a credit card. That is why a business should never place a minimum for credit cards either due to this phenomenon. On the flip side, this is why I advocate that consumers use cash!

Convenience Factor: Recently, I went to a really good burger place that I knew doesn’t take cash, and if I didn’t have any cash on me I would have went somewhere else. To make matters worse, the man in front of me placed a fairly large order and was told that he had to walk across the street to get cash from the closest ATM. I wonder how often he will go back there but, the business saved approximately 3% plus $.25 of transaction fees. Next time they will save the transaction fees, but lose the sale.

You Actually Get Paid: Businesses need to get paid to survive, which is why they should accept credit cards. If a customer has an outstanding balance, then it may be easier for them to pay with a credit card.

Businesses may be able to mitigate credit card fees by implementing a few strategies. First, they may be able to charge a surcharge when a client uses a credit card, secondly, they can accept ACH’s, which have lower transaction fees, and lastly, they can shop around for lower-cost processors, such as Square.

Don’t Take “No” for an Answer!

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What does not taking “no” for an answer have to do with financial matters? Plenty! Very often when we ask for something the response is “no” or is not what we wanted. This can happen when dealing with business or personal matters and it can cost you significantly.

When applying for a loan, it is not uncommon to get denied or receive unfavorable terms. But should you accept this or keep moving along? Unfortunately, we tend to take rejection very personally, but we have to be objective, see what we can do differently, and ask another lender. If getting a loan for your business or a mortgage is crucial to your livelihood then it is important to seek another lender.

What about asking a customer service rep for a lower rate on your credit card? Nowadays, the credit card companies are very hard to negotiate with, but that doesn’t mean that you should stop trying.  When you don’t get the rate you are looking for, then ask to speak to a manager, or maybe even try to call back at another time.

Has anyone ever told you that you should not start a new business venture or switch jobs? Don’t take “no” for an answer. If your plan is well thought-out and it really makes sense then do not let anybody tell you not to do it.

We only have one lifetime so make sure that when you look back at your life you were not afraid to move forward. Don’t let anybody tell you “no” when you believe the answer should be “yes.”

Budgets are Boring

Ever wonder where all of the money went and you just don’t know what you spent it on? You’re not alone, but it’s still not a good thing. Here are a few simple ways to help you to keep track of your money on an individual level. We’ll address businesses in another article.

Quicken: You need to develop a budget and keep track of your money. A good software program Is Quicken, where you can create a budget and compare it to your actual income and expenses.

Envelope Method: Another old-fashioned, but yet effective budgeting method is to use the envelope system for your expenses. You would use an envelope for each of your expenses, such as gas, groceries, and dining, and then contribute a set amount of cash to each envelope each time you get paid. Once the envelope is empty then you wouldn’t be able to spend more for that category. This takes some practice though, because you need to make sure that you contribute enough and don’t “steal” from other envelopes.

Automatic: This method calls for automatic withdrawals and payments from your checking account and/or paycheck. For example, you can have a portion of your paycheck directly sent to a savings account or have investments withdrawn each month from your checking account. Expenses and even donations to your Church can also be made automatically.

Each method has its pros and cons, which is why you need to choose the one that fits you. I believe that one reason why people do not like to budget is because they view budgeting as a way of restricting themselves, similar to a diet.  The opposite is actually true because a budget will ensure that you are spending your money on the things that matter the most to you.