We’ve heard a lot of discussion about the toxic assets held by our financial institutions. Here’s what hasn’t been explicitly stated too often – in order for these financial institutions to have toxic assets, many of us must be carrying toxic debt.
We’ve seen government at all levels, corporations, and yes, individuals borrow more and more money over the past few years. Many people now have this sinking feeling that they will never get out from under it all.
So today we want to talk about what to do if you have that feeling.
The King and Queen of Personal Finance
Cash is king again and credit score is queen. In the coming years, people with cash and a good credit score will have more options, be able to take advantage of more opportunities, and will experience less stress. Isn’t that a nice place to be?
A Timeless Principle Makes a Comeback
It requires discipline. It’s amazing how we can rationalize our purchasing decisions. If I can’t afford to buy it now without credit, why would I think that I can afford to pay for it later along with an exorbitant interest rate?
So we need to pay cash or don’t buy at all. Eliminate purchases on credit, even ones that promise “no interest, no payments” for some period of time. Of course, if you already have the money, and you’re just using their money, and you need the item … really need it … then go ahead and enjoy!
Two Important Financial Moves
Perhaps more so than at any time in our lives, we need to build up our emergency reserves. Financial planners have been saying it all along, for the most part. Many of us weren’t listening. Keep six to twelve months of living expenses in a readily-accessible reserve account just in case you need it.
Pay off almost all of your debt. You may not pay off your mortgage. You may even keep a car loan for a time. Get rid of all other debt; it’s robbing you of your future.
Then you’ll be ready to start looking for the tremendous opportunities that will be available to anyone with cash to invest.
Drastic Steps to Dispose of Toxic Debt
Drastic times call for drastic measures. These steps will not be easy. In fact, they will be uncomfortable at best. However, if you’re feeling overwhelmed by all of your debt, they are necessary.
Sit down and logically determine how quickly you could get out of debt, given the two exceptions we noted above. If it’s more than five years, even after considering the steps we’re about to outline, it’s probably best to seek professional help. Here are the steps:
Look around for anything that you don’t need, never needed, don’t use, or never used. Get rid of it and use the money to build up your cash reserves and/or pay off debt.
Get a second income
Get a part-time job or find a way to make some spare money. Even if it’s only $300, $400, or $500 a month, plowing this money into paying off high-interest debt will pay you bigg dividends in the future. This doesn’t have to be something to do forever, just do it until you get your financial situation shored up.
Cut back on contributions to your retirement plan
We always hesitate to suggest this because you’re robbing your future. Talk to your financial planner before you take this drastic step. But even with an employee match, it may be better to pay off high-cost debt. You may earn 30% by paying off a credit card, for example, and give yourself more room to maneuver through tough times and unexpected events.
Reduce housing costs
With the price of houses down in many markets and the continued lack of buyer demand, now probably isn’t the time to consider downsizing. However, analyze your specific situation because you might be surprised.
Another option might be to rent part of your home. Or find other ways to cut costs on your existing house. For example, property tax assessments will be going out in January. Check your assessment and the price of houses that have sold nearby to see if you can protest the value you’re being charged for.
Cut transportation costs
Could you get by with one less car? Could you take advantage of public transportation? Could you car pool? All of these ways put money in your pocket that can be used to build up cash and pay off debt.
Stretch your dollars
We’ve covered the bigg ones, but it’s also important to look at all your other discretionary expenses. Many people have already cut back on dining out. Go even further – buy fewer prepared foods and cook meals yourself. Sure it will take more time, but it will save you money that can be used for stockpiling cash and knocking down debt.
Look for your recurring expenses – cable bills, cell phone bills, and everything else. Is there a way to make cuts?
Strive to stretch every penny you can out of every dollar you bring in so you get back on your feet and on track to being a bigg success!
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Next time, we’ll discuss the “must-haves” for your productivity tool kit. Until then, here’s to your bigg success!
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We all know that the three essentials for living are food, clothing, and shelter. We definitely rent our food. Do we rent or own our clothing? Hmmm.
Part of the American dream is to own your own home. And there are good reasons to do so. For instance, a Federal Reserve study[pdf] shows that the average family that owns a home has a net worth of nearly $625,000 while families who rent have a net worth of just a little over $54,000.
Homeowners on the move
We’ve seen an interesting statistic bantered about, but we haven’t been able to pin down a reliable source. If this statistic is true, American homeowners move once every five years or so, on average.
So we thought we’d consider what that does to the buy vs. rent equation. We’ll use some averages and national statistics to create an example. However, what really matters is your own situation and your local real estate market. Only you, working with your financial advisors, can determine what’s in your best interest.
When I was younger, one of my bosses in radio told me that I was just throwing away money by renting. I remember thinking that it made sense. I’d reached an age where maybe I should consider buying. So I did. As often happens in the radio business, less than a year later, I lost my gig. So I had to sell my house to move to a different market. I lost a lot of money by buying. If only I had had a crystal ball!
Putting buy vs. rent to the test
We created a fictional purchase to see if we would be better off renting or owning a house for five years. We assumed that:
- We bought an average-priced house for $314,000.
- We put 20% down (approximately $63,000).
- We financed the rest with a 30-year mortgage
- The interest rate would be 6.50%, slightly above the current rate.
- Our house would appreciate 4% per year, slightly below the recent average.
- Property taxes would cost us 1% of the value of the home.
- Insurance would run 0.50% of the value of the home. (Renters and homeowners have to insure the contents. We have the added burden of insuring the building.)
- Repairs & maintenance would consume 1.50% of the value of the home.
Over the first five years, 83% of our total mortgage payments would go for interest. In other words, for the most part, we’ve traded renting property for renting money. If the interest rate is higher, the portion that would go to interest would also be higher. Of course, the reverse is also true.
During this period, we would pay $2,171 per month as “rental costs” for our home. We call them rental costs because they have no value once they’re paid. They only allow us to keep owning. So if we could rent a similar property for less than this, we would be better off renting instead of buying.
Of course, if we had made a down payment of less than $63,000, our cost would go up because we would be paying even more interest.
Where’s the break-even?
We also looked at how it would take before we would break-even. After all, it costs money to sell a house. We would have to pay commissions to our realtor, closing costs, and the like. We assumed these costs would total 8% of the selling price.
Given our assumptions, we looked at what would happen if we sold after one year. Our house would now be worth $326,560. From that, we would pay $26,125 in selling costs. After a year, our mortgage balance would be $248,392.
So we would be able to take out $52,043 in cash. But remember, we invested $63,000. So we lose about $11,000 if we sell after one year.
But that’s not the whole story …
We haven’t yet considered the opportunity cost of tying up that $63,000 in a house. Because if we didn’t invest it in this house, we could have invested in something else. We assumed we could have earned 6% by investing in some portfolio of financial assets.
That would have returned nearly $3,800. So by buying this house and selling it in a year, we would put ourselves in the hole nearly $15,000.
Even after 2 years, we’d still be about $3,500 behind, given our assumptions. Of course, one of those assumptions is that real estate prices are rising. It’s almost certain they will in the long run, but will they rise in the next year or two? They may not in some markets.
What’s the bottom-line?
We concluded that if we didn’t plan to own a house for at least two years, we’d rather rent. We also saw that the longer our holding period, the better we would do. For instance, in the last five years of the mortgage, only 15% of the mortgage payment would go to interest. It seems like buy-and-hold is rewarded in real estate investing.
How to get around it …
We have two friends who have been able to get around the short-term ownership problem. One of them is in the military, so he moves frequently. He only buys a house that he knows would make a good rental property. If he gets transferred, he hires a local property manager and rents it out. Until he decides where he wants to retire, he plans to hold a number of his houses.
Another friend doubled-down on this strategy. He moved quite frequently as he climbed the corporate ladder. Not only does he own houses in a number of cities, he bought additional rental properties, so he has a diversified portfolio across a number of cities. Now he’s retired living off the rents!
So you can get around the disadvantages of short-term ownership by having an alternative exit strategy!
Next time, we’ll discuss how a toy that you probably played with as a kid can help you manage your time. Until then, here’s to your bigg success!
One thing people often don't think about when going into business with a friend is the relationship itself. You’re going into business as friends. You want to remain friends.
Business is full of surprises. Discuss the possible surprises upfront, before you mix friendship and business, so you can keep your relationship strong while you’re in business.
You may think your friendship is really strong … and you’re probably right. But when you go into business together, your friendship will be tested more than it ever has been before. It’s wise to prepare for it beforehand, so you already have a lot of the answers when you’re in the middle of a tough situation.
Look at it this way – a business partnership is like a marriage. You need a pre-nuptial agreement! So find a good attorney to draw up an agreement for you.
8 “What if …” scenarios to discuss with your attorney
#1 – What if the business fails?
According to statistics, if the business fails, it’s most likely that no one will be owed any money. But what if that’s not the case – what if the business does owe money? How will you resolve that?
#2 – What if it succeeds wildly?
That may not sound like a problem, but you’d be surprised. Sometimes when a business succeeds at this level, greed enters in. Then comes the power struggles. Discuss the dream scenario upfront to avoid a nightmare.
#3 – What if one of you is incapacitated?
What if one partner is no longer able to do his or her part? How will the others handle this? Will this person get bought out? Is there formula for the price? There’s a lot to think about if this unfortunate situation happens.
#4 – What if one of you dies?
Obviously this is even more extreme than the last scenario. There’s the human side – your friend has passed and you’re grieving. But you also have business to attend to; work still needs to get done.
Many of the same questions from Scenario #3 apply here. But there’s more. For example, does the deceased partner’s family now have an ownership stake? Or do you buy them out?
#5 – What happens when one of you gets married?
Or you may already be married. What say does the spouse have in the business? Can the partner’s interest be jointly owned with a spouse or do you want to restrict ownership to your original group?
#6 – What if one of you gets divorced?
The business interest may be a significant asset. You probably don’t want a former spouse having a say in your business – even as a minority stakeholder. It can really muddy the waters, as the saying goes. What restrictions will you place on ownership?
#7 – What if one of you wants out?
How will you determine a price? What kind of notice will you require? What is the process?
#8 – What if one of isn’t pulling his or her weight?
How will you determine that this is case? What can, and will, you do about it?
These aren’t pleasant things to think about, let alone talk about. However, you’re more likely to find good solutions now when you’re thinking logically than to try to work them out in the heat of the moment.
We can’t stress this enough – get a good business attorney.
Then sit down with your partners and your attorney and work through these issues. Your attorney will probably have even more situations to discuss. Work through these issues before you start – for the sake of your friendship … and your business.
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Max is a business owner. He hired a salesman about a year ago. Max put him on the same compensation plan that his other sales people were on (a small base salary with an incentive).
The guy has done a phenomenal job. Max’s company is showing record sales and profits, largely due to this sales person. But here’s the problem: this salesman is now making more money than Max.
Max wants to know if he should adjust his salesperson’s compensation.
What should you do about this, Max? Here’s what we think …
Here’s why …
Is it costing too much?
It is possible to over-compensate your people. You can’t design a system where a small number of top performers win bigg while the company loses money.
But that’s not the case here. You’re also making more money, Max. So if it ain’t broke, don’t fix it!
Handle with care
We’ve heard of great sales people who were let go when a situation like this occurred. It does happen. But remember the nursery rhyme about the goose that laid the golden egg?
This sales person is the goose. Handle him with care. Like the old Proverb says,
Your bigg payoff
Don’t miss the bigg picture. The bigg payoff for owning a business often isn’t what you make each year. It’s what you make when you sell it.
You’re building an asset whose value is based on the income of the business, sometimes called owner’s cash flow. As your bottom line increases, so does the value of your asset. That’s your bigg payoff.
How you can get paid more
You’re making record sales and profits so you can probably afford to add another salesperson. Before you do, look at your infrastructure and capacity to make sure you can support an additional salesperson.
If you can, then go for it!
There’s a good chance, if you do that, you’ll be the highest paid employee of the company again!
Model this employee
We would suggest cloning, but okay … we won’t go there!
So try to find someone with traits and characteristics similar to this salesperson. To do that, think about what you know about him.
What industry did he come from, if he came from outside your industry?
What experience did he have?
Are there any other clues you can get from his background?
If you did a personality assessment as part of your hiring process, what did his look like?
And ask your sales person if he knows anybody who might work out well. Bigg goal-getters know bigg goal-getters.
Thanks Max for sending us your bigg challenge. We wish you bigg success!
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