Progress Vs. Perfection

 
twit1There are a couple of trends I’ve noticed among those I follow on twitter recently. The first is a belief that passive income is the path to success. That one isn’t wrong but it isn’t as easy as it sounds either. The other trend is the choice (maybe a false choice) between progress and perfection.
The Truth
It is true that if you wait until everything is known, until there is no risk and everything is perfect, you’ll never get started. Paralysis by analysis as it’s called. But that doesn’t mean you should settle. Strive for perfection while moving forward.
The Reality
In What Next I talk about the ability (metaphorically speaking) to hike or travel two or more paths at the same time. This is working a day job while pursuing a business idea you have, for example. Well the same is true with progress and perfection. Keep moving forward and when you fall short of perfection ask why and modify your course.
Simple Sells
The reason progress or perfection is presented as a choice or passive income is presented as the solution to success is that they’re simple. These choices let you off the hook. You don’t have to work hard because you have passive income – well that’s bull. It’s ok not to strive for perfection because at least you’re moving forward – also bull.
It may not be the simple solution you want, but the truth is, success is hard. If it wasn’t, you wouldn’t be reading this and other similar posts. Don’t let yourself off so easily, dedicate yourself to doing the hard work and find true success.


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Side Hustle

 
http://www.dreamstime.com/stock-image-hand-displaying-spread-cash-us-one-hundred-dollar-bills-image42507251Make Money Blogging!

Work from Home just Hours a Day!

Turn Your Hobby into Profits!

This all sounds easy and could fit into the definition of what so many entrepreneur cheerleaders call a side hustle. A lot of people post on social media about their side hustles, and Gary Vaynerchuk is a big proponent of hustle in general. The reality, however, is that what many think is a side hustle is really just a time, energy, and money suck.

A side hustle is a way to earn extra money on the side. If you aren’t smart about it and think it will be easy then you will probably fail.

Side hustle isn’t a get rich quick scheme – just ask people who thought flipping houses in the mid 2000s would be easy money.

Most of my side hustles didn’t work out but the difference is that it didn’t cost me much either.

In the appendix of What Next I have a trail map of my career and entrepreneurial side hustles – some are dead ends, some go on for a while, and some have made me lots of money. The point is that I didn’t put all my effort into one thing and I didn’t stop looking for a next hustle. Maybe most important, I was willing to walk away from ones I grew tired of or were becoming a drain rather than an addition to my income, time, or energy.

It’s great to have the motivation to pursue a side hustle but you also have the common sense to know when something is just a pyramid scheme or when an investment could end up costing you more than it makes you. The emphasis should be on the word hustle because these things take work, hard work, and too many people think it will be easy.


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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?

 


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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!

 


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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.


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The Three Month Test

 
While my current job is considered white collar, I’ve worked my way up to this position including seven years as a union member. Until actually joining a union I was a big supporter of the concept. I was, however, completely unsatisfied with the union experience. In 1998 the company I worked for locked my union out for 11 weeks.

Locked OutJulie and I lived together, she had a good job so we weren’t too concerned with the lack of income. But without knowing how long this would last or even if I’d have a job after it was all over, we decided to plan for the worst.

You can’t always live in fear that the worst will happen but you can’t live as if nothing bad will ever happen either. You have to find balance between being prepared and enjoying life. At the time of the lockout I decided to test my will. I decided that other than fixed costs such as my mortgage and utilities, I wouldn’t spend any money on discretionary items. That meant no eating out, no take-out, no movies or even video rentals (it was a long time ago). The lockout occurred just as winter was beginning and I had recently begun skiing, but until we were allowed back to work, there would be no skiing for me. I didn’t buy any music or take any trips. I didn’t spend money on anything unless I absolutely had to. This was not the easiest thing to do, to deny myself the little pleasures in life, especially with all the free time I had. 

Over those 11 weeks, almost three months, I lost over $13,000 in income but when it was over and we returned to work, my bank accounts were lower by only $4,000. By the end of the lockout one co-worker declared bankruptcy and others were precariously close to calamity. I also know people who counted on the union winning an arbitration award that would give us back pay, but that never happened, and those who expected back pay were in much worse shape than those who assumed the money would never come.

The greatest lesson from this event was that I realized that I could live much farther below my means, that a sudden shock to my income such as a job loss, wouldn’t be the end of the world. Can you say the same thing?

If you’re serious about being prepared for the future, serious about doing what it takes to get much farther ahead in life, then you have to make a commitment to do whatever is necessary. You can get rich no matter what your income but the less income you have the more you’ll have to do. Keeping track of your income and expenses is crucial, spending less than you earn is an absolute requirement. Discipline can be learned.

I found that the three months I was locked out, and my subsequent choice to eliminate discretionary spending, gave me the discipline I needed to really concentrate on building wealth. I call this time my three month test and I suggest that you might want to try the same thing.Days pass

That’s right I’m asking you to stop spending money on anything other than essential items for three months. You obviously have to pay for your mortgage or rent, your utilities, groceries, and other necessities, but if you’re serious then you have to give up everything else for three months.

Ok. I’ll stop here and give you permission to do a trial run. Three months might be too much to ask and could just set you up for failure, but how about three weeks? Are you willing to try this out for three weeks to see if you have what it takes to really build wealth?

The rules are fairly simple. You can keep the services you currently have like cable, cell phone or magazine subscriptions. You can keep any recurring bills but you can’t upgrade those services like the cable, for example. You can’t add any channels, subscribe to any new websites, magazines or newspapers.

This test is not meant to see if you can live like Scrooge but it’s also not meant to be easy. You’ve seen in the news the low paid worker who dies leaving behind millions of dollars? Well how do you think they got all that? Ok, you’re right, they probably lived like misers but there can be a balance if you just try. After all, what good did that money do them now that they’re dead?

This test might crimp your social life but that’s the challenge. How can you still enjoy yourself for less money? That’s the key to the test. Once you see that you can do it, you’ll think twice before getting together with friends at a bar and instead invite them over to your place where the alcohol and food costs significantly less.

If you choose to take this test, and treat it seriously, you can find out a lot about your spending habits. You’ll see how much that coffee at Starbucks is really costing you. You’ll notice that stopping to get a donut on your way to work is a significant amount of money (and fat) over even three weeks. Oh yeah did I mention the other benefit? You might lose weight (if that’s something you want) since you’ll be either eating at home or not eating because even a quick stop at McDonalds is out the question for those three weeks.

Do you have what it takes to commit to a better future? Are you up to the challenge? I did it because I felt the pressure of not having an income for an unknown period of time but it turned out to be a great test. Now it’s your turn – you can do it.


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Random Thoughts – Taxes

 
IRSOk maybe I need to get out more on the weekends but it’s cold outside and my wife and I have been painting for several weekends now so I’m stuck inside. On the rare and brief moments I get to check email and other computer related stuff what have I been reading? One item that caught my eye was a headline that said “No, Entrepreneurs Like Steve Jobs Do Not ‘Create Jobs’ By Inventing Products Like The iPhone.” I clicked and it was a well reasoned look at why raising taxes on the super-wealthy (or even just the mere wealthy) won’t “kill” jobs as many politicians say. The article makes a strong case that raising taxes on the wealthy will create more jobs. Oh and it’s not exactly on a liberal website, it was on Business Insider.

Reading the article referenced above I was reminded of Henry Ford who once encouraged other manufacturers to hire workers that previously had been laid off. If they didn’t, Ford wondered “Who would buy my cars?” The idea is that if workers are paid a decent wage and can afford to buy goods, the economy will do well. A strong middle class is needed for consumption to fuel the economy. If, on the other hand, as we’re seeing today, there is a wide gap between rich and poor with a shrinking middle class, the economy will suffer.

The article was based on an editorial for Bloomberg by Nick Hanauer, a billionaire. Mr. Hanauer is very clear that he is not a job creator, nor are any rich people. Then who is? The consumer. Mr. Hanauer writes:

I’ve never been a “job creator.” I can start a business based on a great idea, and initially hire dozens or hundreds of people. But if no one can afford to buy what I have to sell, my business will soon fail and all those jobs will evaporate.

That’s why I can say with confidence that rich people don’t create jobs, nor do businesses, large or small. What does lead to more employment is the feedback loop between customers and businesses. 

Another problem with this taxes-will-cause-people-not-to-start-businesses line of reasoning is that it doesn’t matter how much I pay in taxes if I earn more than I had before. Imagine there was a flat tax of 30 per cent and I wanted to start a business. If I make $100,000 then I keep $70,000. I’m better off. Now imagine that taxes are raised to a flat 40 per cent. If I start a business and make $100,000 I keep $60,000. I’m still better off. Not as much but still better. It reminds me of the people I’ve worked with who would complain about how much they paid in taxes on their overtime pay. Who cares how much taxes you paid, you have more money in your pocket and that was the purpose of the overtime.

I may not be a billionaire but I’m not complaining if my taxes rise a bit from the historically low rates of today.


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