Doing Tax Day Wrong

 
April 15 is here and you’re either getting a refund or sending a check to the government but either way you’re doing it wrong. 

tax_april_15I’m not saying that you can work things perfectly during the year and owe zero on April 15 but I will say that if you are getting more than a few hundred dollars back or sending more than that to Uncle Sam, you’re doing it wrong.

Making a Payment

Let’s start with why making a payment is a bad idea. Beside the obvious, that no one wants to be surprised with a big tax bill, there are other reasons. First, you’re not being aware of your money. You’re not planning well and that lack of planning is costing you now. The other thing is that Uncle Sam doesn’t like it either – he wants his money on time and will hit you with estimated payments in 2015 to make up for your shortfall.

Refund

This one is a little harder because who would complain about getting a nice fat check in April? Nobody! But it’s still poor planning. You just gave the government an interest free loan. They had your money and now they’re just giving it back. Taxes are not a savings account – or they’re a really bad one. It would be much better off to have the IRS deduct less money from your check so you could invest it – not spend it. Contribute more to your 401k, Roth IRA, or invest in index funds in a taxable account.

Balance

The important thing when playing the tax game is to achieve balance. If you are getting a big refund or owe a lot then make adjustments now to your withholding so that you can be in balance.


Posted in General, Money, Taking Action and tagged , , , by with no comments yet.

Your Life is a Business

 
CEOWe are all self employed and our business is ourselves. If you run your life like a business, understanding things like cash flow and investments, you will be very successful and not worry about your future.

I watch shows like The Profit on CNBC and Restaurant Impossible on Food Network and the common thing between these shows is how most of the business owners don’t know basic information about their finances.

As a business owner I’ll admit that I may not be able to answer all their questions off the top of my head, but I have meticulous records and I could have an answer within minutes. Can you do the same for your personal finances?

Salary versus income

This is the first thing that people often get wrong. In business it’s the difference between revenue and cash flow. Say your salary is $100,000 a year, that’s $1,923 a week. But that is not what you take home. After taxes, health insurance and other deductions, like your retirement savings, you are saving for retirement right, you could easily be taking home only about $1,000 a week or less which is just $52,000 a year. Live like you have 100k and you’ll be broke all the time.

Here are my questions for you: what is your net worth? What percent of your gross income did you save in 2014? If you can’t answer them immediately can you get the answer in less than a few minutes?

Mislabeling investments

Forget the debate on whether a house is an investment or not, what some people do with their homes in the name of investment can be downright silly. For example, renovating the kitchen, bathroom, or basement might add some value to your home when it’s time to sell but it’s not an investment, it won’t appreciate beyond the value of the house as a whole. You can’t sell your kitchen renovation when you’re short on cash.

In business every investment has an ROI, return on investment, meaning that if you spend $100 on a new piece of equipment it better increase your income by $200 or more (because you don’t invest to break even). Then there are capital expenses and that’s more like the kitchen upgrade, it may not make you money but it’s necessary to function.

A hobby is not an investment even if you consider it a business. Unless there is potential for this hobby to be your sole source of income it’s just not an investment. I’m not against hobbies or even having a little side income but inflating what it is doesn’t help.

Stretching is for exercise

Too often I see people reach beyond what they can afford for what they want (even so called experts). They want a new car but the payments are too high so they lease it instead, a couple with one child in a two bedroom home say they’re outgrowing it and buy a bigger house they can’t afford, they want a vacation home and overestimate the rental income they will get.

All these examples are people who stretched to afford something but they all run the risk of pulling a muscle to keep the analogy going. Instead, buy the car one model lower, stay in the house longer, only buy the vacation home if you can afford it without renting it out, and still rent it.

Successful business people look at every expense carefully, they don’t spend unless it’s necessary or will lead to more income.

What are some things you feel people could do better if they ran their lives more like a business?

 


Posted in Business, General, Money, Success and tagged , , , , , by with no comments yet.

The Reality of Entrepreneurship

 
Hello, my name is AJ and I’m an entrepreneur. Sounds like the beginning of a twelve step program meeting. I introduce myself this way because a lot of people make entrepreneurship sound wonderful, even magical. You can be your own boss, set your own hours, you create jobs and contribute to society. All good things for sure.

aloneBut there is a dark side. First among the dirty little secrets of entrepreneurship is that it’s hard.

More difficult than you can imagine

Starting something from nothing is hard. Even when you can get help, as so many do through franchises, it’s still hard. Even though people talk about the depressing statistics of business failure, which vary widely, the picture they paint is still rosey. Entrepreneurs are considered brave and they are revered for their actions. That’s fine but let’s not encourage people to be foolish. There’s no reason to throw caution to the wind and go for it without a plan.

Starting a business takes up more time than most people can physically give, it’s tiring. I’ve heard it said that the only person who cares about your business is you and it’s true. No matter how good the team you build is, the business is not their priority. They will call out when you need them most, they will say the wrong thing at the worst possible time to the most important customer, and you will have to fix it all. They will leave for a few cents or a few bucks more per hour. Owning a business can be frustrating and yet you have to be there with enough enthusiasm to spread around.

All that difficulty can lead some to become disallusioned but the successful ones will have just a bit more positive energy than negative.

More expensive than you planned

It also takes more money than most people realize. I was told once that no matter what I planned, double the amount of time and money I thought I needed, even if my estimates were high. I can tell you from experience that advice was 100% correct.

Under capitalization is the single worst mistake someone going into a business can make. We’ve all heard about the outliers who started with a hundred dollars and made millions, but if that were the norm we’d all be millionaires. You have to know that, if you need to, you could carry the business expenses for months or maybe even years.

Other people’s expectations

When you see friends or family and they ask how’s business, they don’t understand that you might have had a bad day. They don’t understand that bills are coming due and revenue might not be keeping up. If you’re honest and tell them it’s hard, they’ll usually respond with “but it’s all yours right?” as if that makes it better.

You can’t go to friends and family for solace because they don’t understand, and you don’t want to go to other business owners for fear of looking weak.

It takes longer too

I’m over a year into my business and things have stabilized. Everyone wants to make a profit right away but it takes longer than you think. What matters more is cash flow, positive cash flow. Positive cash flow and profitability are two different things. Startup costs aren’t paid for quickly, they’re large and revenue grows slowly.

I saw a friend shortly after her second child was born and asked how it was going. Her response? “Oh my God no one told me it was going to be this hard.” That’s how I feel about entrepreneurship so I’m here to tell you it’s that hard.

My advice? Think long and hard about going into business. Imagine every bad scenerio you can and then imagine what you’ll do to get out of it. Plan for the worst and work hard, harder than you ever have for the best.

Just as I was finishing this post someone on LinkedIn posted this article. It’s worth reading and backs up everything I say here – and then some.


Posted in General, Money, Success and tagged , , , , , by with no comments yet.

Timing is Everything

 
Originally written Jan. 31, 2014 I’ve updated this post to reflect the reality of how time affects perspective. I’ve added new comments in blue italics surrounded by parentheses.

Well it’s back to a topic that is very important to me, finances.

Going DownAs I write these words the stock market is a bit more than an hour from opening though you’ll read these words (because I’ll finish this post) after it opens. Based on the pre-market indicators today is going to be a down day (possibly very down). So far 2014 has been a down year with the Dow dropping 4.39% or 748 points and that doesn’t include whatever is in store for today. I for one hope it continues down. (Well it didn’t continue and as you read these words the Dow is up 3.82% for the year)

Wouldn’t it have been nice to sell everything on Dec. 31, 2013, the peak, and then buy it all back whenever we hit the bottom? (That would have been Feb. 03) It would have but it’s also impossible to know when those two events will occur, eveyone knows that. They say timing is everything in life but perfect timing is impossible when it comes to stocks. Since perfect timing is impossible then what about not so perfect, or just average timing? We’ll get to that in a second.

I gave up trying to time the market very early in my investing career but there is some wiggle room. Almost as soon as this new year began, I started selling stock. Not because I’m a clairvoyent investor but because I had to rebalance my portfolio anyway and rebalancing to me doesn’t mean selling and buying at the same time. Since the year began I have sold 3.2% of all my stock holdings and moved it to cash or bonds. (I’ve continued selling as the year went on and the markets have risen) That’s not a lot in the grand scheme of things and fits with my philosophy of buy and hold. I held onto 100% of my stocks during the 2008 collapse and subsequent recession and even added to my positions which paid off very well with 2008 seeing a 16% decline but 2009 seeing a 25% increase and 2010 seeing a 17% increase all while buying on the way up.

If you have a plan you can and should stick with it and that’s exactly what I’ve done and am doing. (My plan is to buy low and sell high – duh – but I rarely sell – the little selling I’ve done is very small compared to my holdings. More importantly I’ve been saving and it’s those savings that will allow me to buy when I beleive the time is right) Also very importantly, do not make big moves. 3.2% is not a big move but, if I’m successful, it will have a big impact many years from now, and that is what planning is all about.

Will I begin buying stocks at the exact right moment, when the market hits the bottom and things begin going up again? Absolutely not! But will I buy at a lower price then I sold? Yes. Will that growth compound over many years if I continue to hold? Yes. The timing is not when to sell but when to scale back buying and when to amp up buying.

My next post will be on my technique for rebalancing my portfolio.


Posted in General, Money and tagged , , , , by with no comments yet.

Passive Takes Work

 
hammockIf you know anything about me you know that the title of this post has nothing to do with being lazy or taking it easy.

Instead this post is about passive income but, unlike most articles, books, and blog posts about passive income I’m going to tell and show you that passive income is difficult, it takes work. There are a lot of financial bloggers who promote real estate as a panacea for wealth creation but I’ll tell you they’re wrong. At the same time I’ll say that real estate has been a great success for me. That sounds schizophrenic but the reality is that for real estate to generate income it takes work and smart decisions, there is no easy way and while some people will have great success with real estate others will struggle or lose everything.

As promised this post is a followup to some of the numbers in my post titled Manage Your Money Don’t Let it Manage You. Specifically I said that, in 2013, dividends and interest accounted for 14.75% of my gross income. That’s a high number, imagine making an extra 14.75% of what you make right now – it would be nice, right? Well this does vary year by year and here how’s its gone for me: 2007 – 12.59%, 2008 – 7.08%, 2009 – 3.45%, 2010 – 5.57%, 2011 – 10.15%, 2012 – 9.68%.

Passive income indeed but it is highly variable and you can see that the recession years had very low numbers that reached a low in 2009 and have been (mostly) growing since. I expect 2014 to be lower than 2013 because I don’t expect the stock market to do as well (Update: I was wrong. 2014 saw dividends and interest at 18.67%). Let’s also not forget that you may owe taxes on those dividends and if you reinvest those dividends (which you should) you’ll have to come up with that money yourself. I say may owe taxes on the dividends because it’s only true if the stocks, bonds, mutual funds, or ETFs that generate the dividends are in taxable accounts. Most of our dividends come from our retirement accounts, 401k and IRA.

Over the years I’ve read a lot of self help books especially with a financial bent but most weren’t very helpful which is why I wrote my own. One book, however, stuck with me. It’s called Your Money or Your Life and puts forth the concept of passive income through dividends and interest eventually replacing your salary allowing you to retire. But it takes a while and requires aggressive savings. I liked the idea so much that it is a major part of my retirement plan but as you can see, even with my aggressive savings, I’ve got a long way to go.

Now to real estate. In the same post I referenced above I pointed out that my rental properties represent 6.11% of my income but they also account for 9.09% of my expenses. In other words I’m losing money on the real estate. Not to mention the time I devote to overseeing and renovating those properties. Anyone who has rental real estate knows the income is anything but passive, it takes a lot of work. But there are several things going for me: first, I get to use those properties while I’m there to oversee and renovate them (they’re vacation rental properties and so are a literal pleasure to visit), second  I will be able to deduct the money spent on renovations, repairs, and improvements when I sell the property (income limits called passive income rules prevent me from doing so now), and third, and maybe most important is that the properties have increased in value over the years and I’ll be able to sell them for more than I paid. Like any investment these are long term commitments.

When people start talking about passive income like it’s easy, come back here and read this for a little balance.

Do you have experience (good or bad) with passive income? Add your comments below!

 


Posted in General, Money, Success and tagged , , , by with no comments yet.

Manage Your Money Don’t Let it Manage You

 
So I haven’t written anything in a very long time and I’ll get around to some reasons in future posts but yesterday I saw a sudden rush (which for me means three or four people) reading some posts I wrote a while back, they even tweeted links to their followers (thanks!). That inspired me to make an effort to write some more so I’ll start again with a favorite topic of mine, finances.

Percentage_IncreaseI keep very detailed stats on my money, what’s coming in and what’s going out, my investments, how they’re performing, and my plans for the future. One thing I do every year is a cash flow analysis (because I’m that exciting). Because I track everything I spend I can make informed decisions rather than just guessing. Of course I’m not going to share actual numbers – you know my name after all, but I will share percentages.

All of my income is 100% but what is the total from? Well my salary represents 35.92% and my wife’s salary represents 41.91%. Yes she makes more than me and I’m not only ok with it, I love it because it shows that smarter people are rewarded more. So our salaries represent 77.20% of our income where does the rest come from? The next largest chunk comes from investments in the form of dividends and interest at 14.75%. This might sound high and it is (and will be the subject of a future post) but is key to building wealth. I wrote about our two rental properties in What Next and they represent 6.11% of our income. After that comes our 401k match which represents 1.87% of our income and that is free money, money that we’re not taxed on but that grows and grows until we retire (and beyond). The importance of the match can’t be overstated.

Now comes the importance of tracking your spending because I can list, in broad categories, where every penny of my money went.

Mortgage: 12.67%  Loans: 2.22%  Insurance: 1.78%  Taxes: 19.59%  Commuting: 1.59%  Household: 1.57%  Vehicles: 4.19%  Eating Out: 2.67%  Groceries: 0.80%  Entertainment: 2.01%  Utilities: 1.79%  Travel: 0.72%  Medical: 0.38%  Pets: 0.49%  Rental Properties: 9.09%  New Business: 17.57%  Misc: 2.64%.

Since the numbers above don’t equal 100% where did the rest go? Savings! Last year we saved 18.23% and that’s from gross income while in the midst of opening a new business.

Some observations:

While my rental properties contribute 6.11% of my income it takes 9.09% in expenses. In other words “passive” income like this isn’t easy money and often the return isn’t evident until the property is sold.

Even though a large amount of money is generated by dividends and interest (this year, 2013, was unique because of how much stocks were up) most of that money is inaccessable because it’s in retirement accounts such as a 401k.

We spend very little on groceries for two reasons: we eat out a lot and we buy in bulk at Costco which if done carefully can save us a lot.

 


Posted in General, Money, Success and tagged , , , , by with no comments yet.

You Can’t Get Rich Working for Someone Else or Can You?

 
I’m sure you’ve heard or even repeated the expression “You can’t get rich working for someone else.” I’ve said it but I’ve grown to realize it’s not true. I’m not talking about high level executives with huge salaries, stock options and bonuses that make them a millionaire each year. I’m talking about a normal person with a good, but not extraordinary, job.

stacks-of-cash-2The secret (I hate that word because it’s not a secret, it’s common sense) is to save, often aggressively, work, really hard, and invest, wisely. A couple of weeks after writing this I saw a bit of news about a school teacher who left behind an estate worth $10 million when she died. Along with her twin brother they lived by these three “secrets” and it paid off.

SAVE

Wealth is about opportunity but being in the right place at the right time isn’t opportunity, what you’re able to do when you’re in the right place at the right time is. If you meet an inventor with a great new produt who needs investors, you’re at the right place at the right time but if you don’t have the money to invest it doesn’t matter. That’s why aggressive savings is so important. I’m not talking about normal savings like the advice you’ll read in magazines, I’m talking about serious savings. My wife and I have saved, on average, nearly 25% of our gross income each year. It would have been higher if not for item number three on my list, investments (which some will view as savings but read on to discover why I don’t).

Read here about a woman, Leah Manderson, who maxed out her Roth IRA (that’s $5,000) while earning only $28,000. That’s a 17.87% savings rate. Can you say you’ve saved that much? If not then you aren’t saving aggressively.

WORK

A job is a means to an end. We have to work to survive (unless you want to grow a long beard, live in a shack, and kill your own dinner). A job is also a means to security when we’re too old or tired to work.

While I would highly recommend doing something you love, you should also maximize your earning potential by advancing through the ranks and negotiating well. Hard work means being the go-to person, the lynchpin as Seth Godin puts it.

It has been my ability to increase my income and my aggressive savings that allows me to move on to each What Next.

INVEST

You can invest in yourself by working hard and you can invest your money by contributing to your retirement (401k, IRA, etc.) but that’s not the kind of investments I’m talking about.

I’m talking about investments that require active participation like rental real estate, it’s an investment I’ve used throughout my life (I’ve seen a lot of people use it as an investment very badly). It’s also an investment that requires sacrifice. I can’t have a fancy and expensive house for myself if I’m also buying homes for rentals.

I have also had side projects (some would call them businesses but I don’t think many of them rose to that level). What they did do is provide some extra income to invest in other ways. It also allowed me to learn a lot about myself and business in general.

Now than that I’m older, more established, and secure I’ve invested in actual businesses, recently opening a franchise. The key with all of it is that my job, the thing people say won’t make you rich, made all my investments possible. I call it corporate sponsorship. None of these investments can be considered savings since there’s no garuntee that I’ll get a return or how big that return will be. Once I sell an investment, then fine, the proceeds will move over to the savings category.

You can get rich working for someone else if you’re smart about it and are willing to do more than those who say you can’t get rich working for someone else.


Posted in General, Money, Success, Taking Action and tagged , , , , , by with no comments yet.

Insights on Success with Gary Vaynerchuk

 

NOTE: Starting Monday April 1, I’ll break down the interview into smaller chunks but first check out questions I wish I asked.

Monday April 1: The Escalator Question

Tuesday April 2: Gary Vaynerchuk Knows Himself Well

Friday April 5: Is Gary Vaynerchuk a Risk Taker?

Wednesday April 10: Balancing Ideas and Execution

 

You never know the outcome of a decision when you make it. You may have hopes or plans but the outcome can’t be known with certainty. That’s why successful people are flexible and do more things, try more things, and take more risks than average.

I have made many attempts (some successful and some not) at meeting certain people, at getting noticed. If an opportunity arises I’ll see what happens and that’s exactly what I did when I saw this tweet from Gary Vaynerchuk:

GaryV_IntvADay

There was nothing explicit about that tweet, but I clicked the link because I’m curious, and learned that I could sign up to interview Gary, someone I believe is a What Next kind of guy. Gary took his father’s liquor store and turned it into a 60 million dollar wine retailer called Wine Library. Gary wasn’t satisfied to build only that business, however, and has taken many more paths as an author(Crush It, The Thank You Economy, and his latest to be released in October, Jab, Jab, Jab, Right Hook), new media entrepreneur, and motivational speaker. He is someone I’ve wanted to meet and talk with for some time. A lot of people want the same thing so when I tried to register for my 15 minutes to interview him, I was told he was already booked.

Gary_1

I didn’t give up and learned that he still had a couple of spots available but that I’d have to wait until October. I was fine with that. That’s why I was so shocked to get a phone call from his PR rep asking me if I was available to talk to Gary the very next day, Thursday.

My answer, of course, was yes and the interview can be heard below. In the following days I’ll break the interview down to smaller chunks and have more specific posts about the topics we covered. Until then enjoy the whole interview.

Vaynerchuk Intv3


Posted in Curiosity, General, Money, Success, Taking Action and tagged , , , by with no comments yet.

Savings Matter

 
In my last post, I talked about so called financial experts and how often they seem wrong. I’ve also written about these “experts” here and here. At the end of the post I said that I’d show you how my savings and investing strategy has allowed me to be aggressive when I wanted to and cautious when I needed.

piggybankThe key to finances is having options. If you buy a new car every couple of years, go on really expensive vacations, and otherwise live at or above your means, you’re not leaving yourself many options. If, on the other hand, you save aggressively you will have many options when opportunity arises.

Deciding to change

In 2006 I decided to change my career from television to financial planning. I had the option, the ability, to spend the $5,000 for tuition and an additional $2,000 for networking by traveling to financial planning conferences. I saved aggressively in anticipation of the transition knowing that I’d be leaving behind a good salary to start over.

But what does it mean to save aggressively. Well in 2006, the year I decided to go back to school, Julie and I saved 31.71% of our gross, not net, income. In 2007 the middle year of this transition we saved 42.18% of our gross income. And in 2008, the year I passed the CFP® exam, we saved 34.2% of our gross income. Another important aspect of finances is tracking your money. Without tracking my finances I couldn’t tell you with such specifics how much I saved each year.

A New New Course

In 2009, having no luck finding the right fit in financial planning (another option I had was to be picky with my choice of employer), I decided not to pursue this plan any further. What then was I going to do with the money I had saved?

Two things happened that year. First I wanted to renovate a rental property I own on the Jersey Shore. That plan was also abandoned when the local zoning laws were too much to deal with. Once again I had a large amount of savings with no plan for it.

Option 2

That’s when a friend mentioned that her sister owned a rental property in our favorite part of California, The Coachella Valley. That’s when we decided, just after the real estate market had crashed and was continuing its slide, to buy an investment property. The years of saving meant we could explore other options and this one has turned out pretty good. Our savings in 2009 were just 0.47%! That’s less than 1% but it was because we had saved that we had the option for an investment with the possibility of a big return. This investment is part of a long term plan that we are able to add to every few years because we save when we need to and spend when it’s wise.

Maybe we could have had a little more fun and a little more things but It comes down to sacrificing in the short term for long term gains.


Posted in General, Money and tagged , , , , , by with no comments yet.

Foolish Cycle Continues

 
WhitneyThe experts are at it again. Not that they ever stop spouting off but when they change direction I think that’s a sure sign to ignore them. One such expert perpetuating this foolish cycle is Meredith Whitney.

The Difference

I’ve said it before, that if you use the gauge of who is richer, who garners more respect, and who can get on TV any time she wants then Ms. Whitney is far more qualified than I am to offer her financial advice. The difference is that I’ve been correct in my predictions and she’s been wrong though she’ll never admit it (especially to me).

What Now?

Stocks have gone up very quickly and there are various reasons for that but Ms. Whitney has been cautious about stocks – until now. CNBC states “Known more for her pessimistic take on the markets, and banks in particular, Whitney has turned in the opposite direction.” Run the other way!

Whitney says she’s “not been this…bullish…on equities in my career.” Yeah I know, but I have, and I’ve been right and she’s been wrong. I’m a lot more cautious, now, just as she seems to be jumping in with both feet.

This reminds me of another person I’ve called out for being a fool who jumps on whatever bandwagon is rolling through town, James Glassman, who wrote the book DOW 36,000 just as stocks were about to crash from their internet binge. Glassman later wrote, Safety Net, a book about how stocks were not a good investment and which favored bonds just before this amazing stock market run we’ve experienced these past few years.

Pickers

My feeling on investing has evolved over the years and at one time I thought I could time the market, predict with reasonable certainty what individual stocks would do. I was wrong. Since then I have become a passive investor (passive is such a misnomer).

It’s been said that you can pick your friends, you can pick your nose, but you can’t pick your family; I’d change that to you can’t pick the direction of the market. And yet people try. They tried with internet stocks, they tried with housing, and they’re trying again with bonds.

My Advice

You choose whether you want to listen to these so called experts but my advice is to ignore these fools and invest with a long term view. Tomorrow I’ll have a post about how my saving and investing has enabled me to be aggressive when I wanted and cautious when I needed.


Posted in General, Money, Success and tagged , , , , , , by with no comments yet.