What’s Your Motive?

Each day, we are assaulted with news stories about the level of debt Americans hold both in government and personally.  Still others trumpet the fact that Americans are actually reducing their debt levels.  Others are more cynical stating that debt levels are declining because of higher defaults.  No one really knows of course what is going on.  However, these are all macroeconomic statistics.  Today, let’s take a look at you specifically.  Are YOU trying to reduce your debt load and what is your motive?

In pure economic terms, debt is more acceptable in certain cases when inflation is present or the economy is growing.  During times of inflation, the real value of the debt you hold is being paid back in dollars that continue to decrease in value making the overall economic cost lower to the purchaser.  That is good for the debtor but really bad for the debt holder.  During times of economic growth, businesses can use debt as leverage to prop up their earnings.  As everyone knows, we are now in a much different time.  The economy is not growing as quickly as before.  Businesses and individuals who took on all that debt now have the distinct pleasure of paying it all back or defaulting.

Which brings me to my question.  Why are you paying off debt?  Is it simply to put yourself in a better position to borrow again when times improve?  This reasoning got us into the current housing mess.  We’ll buy a house now and it will increase in value and we’ll sell it and make more money and buy a bigger house…. and repeat multiple times.  A better way of thinking is that your debt reduction plan can give you flexibility in the future regardless of what happens. This could lead to a more stress-free life. If you look at the fixed payments required to service your credit card debt, auto loans and lines of credit, you’ll see that you are essentially locked into long-term slavery.  Think of the stress if anything abnormal happens to upset your servicing of all this debt.

It takes so long to clear the debt mess, that it would be a shame to simply dive back into it in the next economic boom cycle.  What about this scenario?

• Your only payment is towards your mortgage.
• You have normal utility bills each month.
• You pay cash for everything.
• You have a savings account that contains 6 months of living expenses.
• You have life, short-term disability and long-term care insurance.
• You live within your means.

Can you see the difference in the amount of stress? Incidentally, the latter scenario is recommended by most financial consultants.  There are no short cuts to this plan.  You simply make sacrifices and pay back all the debt accumulated from years of overspending.  There is a very pleasant side effect of cutting back on the “fluff” that we all think we need to make it in every day life.  Suddenly, meals at home with the family, game nights with friends, and quiet time with your spouse become a bigger part of your life.  If materialistic (selfish) thinking invaded your life to get you into debt, changing that thinking to spending time with others (giving) is a benefit of getting back out of it.

Keeping Up With Celebrities…

During my lunch break, I usually read news articles and opinions from various news sites.  One thing that is always fascinating is the paradox of how many people want to be like the various celebrities in the news, yet how out of touch those same celebrities are with real people’s lives.  So many magazines at the checkout stand in the grocery store offer “new” ways to attract men or make yourself more attractive, or drop pounds and even change your body in a few easy steps.  Unfortunately, nothing in life is that easy whether it be finances, dieting or your career.

As part of a successful personal financial plan, it is important to keep your focus on your ultimate goal, getting out of debt and planning for both unforeseen problems and retirement.  It is also important to ignore the temptations around you that try to get you back into your old ways of overspending.  I think the current economic climate has taught many Americans that buying on credit is simply not the smart way to go regardless what everyone else is doing.  What happens if you lose your job or your income is reduced?  A good budget will help you work your way out of debt while still affording a few small “rewards” along the way to keep you motivated.  It also provides a bit of accountability

To get started in a budget, the first thing that needs to happen is to stop reading about celebrities and fashion.  They make “crazy money” as Angelina Jolie once said for doing very little.  They have essentially unlimited resources that the rest of us don’t!  Book after book has been written on how stuff and money simply does not bring happiness.  I invite you to spend more time with friends and family.  Getting to know people and making an impact in someone else’s life is a pursuit that brings lasting rewards.  Soon the stuff you bought will be broken or obsolete anyway. Why bother with more of it?

Fashion houses and designers will tell us that our wardrobes all need to be refreshed each season with the latest styles.  Why?  Is that pair of pants any less useful now that someone else has declared it “out of style?”  I know, coming from a CPA (traditionally fashion-challenged people), it’s hard to take fashion advice.  Think how much extra money you could put toward paying off debt if your closet didn’t look like a department store!  Wearing clothes for more than one year and dressing in classic styles can save hundreds of dollars.  Think how much less stress you can have sitting on your couch watching a movie from RedBox ($1) in last year’s jeans and t-shirt with a cup of hot cocoa (6 pack from grocery store for $4). You have created a relaxing quiet evening in without worrying about how you will pay for all the new stuff you just bought.

I Don’t Need No Stinkin’ Budget

Q. I’m a small business owner on the East Coast.  I’m trying to make sure I’m spending my company’s money right.  We are expanding and I want to avoid laying off the new employees that are coming on board now.  Any tips?

A. To answer your question in detail, it would take up more space than a normal college textbook.  However, because you focused on spending, this edition is going to cover budgeting. These concepts can be applied to personal financial situations as well.

First, you need to be able to get a rough forecast of your income.  That is the driving force behind any budget.  Look at your bank statements for a good starting point.  Bank statements are like a cash-basis financial statement.  You can see income and outgo all in one place.  This gives you a good starting point as you try to identify months where you have more can than average that you can use on months that do not have as much inflow.

Next you need to have a good expense identification plan in place.  Do you use financial software like QuickBooks, Peachtree Accounting or Microsoft Small Business Accounting?  By entering and categorizing every expense, you can begin to see where you spend your money.  Are you seeing increases in inventory costs or benefit costs or supplies?  What about employee salaries?  Are you budgeting enough to handle raises for those who have provided you with the labor needed to run the business effectively.  Without records, you must make an educated guess as to the amount of these expenses.  Over time, you will again see trends and be able to determine where the “fat” is in your organization.

To make an initial educated guess, you should be searching in industry trade publications for expense estimates.   For instance,  service organizations will spend more of there income on salaries and benefits.  Manufacturing and retail would be spending more on inventory and cost of goods to produce a sellable product.

As a small business owner, you may also wish to join up with your local chapter of the NFIB, National Federation of Independent Business.  They have great resources to get owners educated on the issues in business.  They also lobby Washington on behalf of small businesses.  The US Small Business Administration is another good resource for those running smaller businesses.  They provide links to discussion on the many areas that small business owners need to keep in mind.