Saturday, January 22, 2011

Top 10 Ways To Go Broke Trying To Build Wealth

10  Buy on impulse what feels good at the time and don't keep records of what you spent your money for.  After all, life is short, you might as well enjoy it!

My response:  You definitely should enjoy life, but are you settling for something good or simply momentarily pleasurable and giving up the better and best of life.  If you don't keep records, you likely will have a nagging feeling that "life is flying by and what do I have to show for it?"  But consider this.  If you do a quick $40 ATM withdrawal twice a week, that's over $4,000 in a year, and over $200,000 in a lifetime that you have no idea where it went.  If that's you, and you can't seem to get your $20,000 in total credit card balances to go down, paying on time 11 months a year but late "only once", then you're paying 29.99% interest -- $6,000 every year just for interest.  No wonder the balance doesn't go down, when it takes $500 every month just to tread water.  Over a lifetime, if you keep that $20,000 balance, you'll pay over $300,000 in interest on those cards.  Hard to build wealth when you do that.  Keep records.  Look at them.  Be surprised with how much you spend on things that are already consumed.  Decide which of those things you'd rather do without ... would you rather make yourself wealthy, or the bank?

Commingle business and personal money.  Keep things "simple" - just have one bank account that you use for personal, business, and whatever.  If you have an emergency reserve, keep it in that bank account also. 

My response:  You need to know if you are earning money from your business or you continually have to feed it.  You have enough to feed, without having a business drain you too.  If it's all in one bank account, you won't know.  Filing taxes will also be harder, and I promise you'll miss legitimate deductions because you forget them or can't prove them.  Worst of all if your emergency money is in the same account, it won't be there when a real emergency hits.  You'll have already used it for every day life -- so then where will you turn? (see number 8 for the likely answer to that one ...)  By the way, there are plenty of financial institutions that don't have a monthly service charge on checking accounts, so that isn't a reason not to have separate accounts for personal, business, emergency fund, and investments.  If you need a referral to one of them, I'd be happy to give it to you.

8 Borrow money at 29.99% while earning 0.05% on your savings. 

My response:  Sounds ridiculous, I know.  If you have $1,000 in a savings account earning 0.05% per year in interest, you are being paid (drum roll) 50 cents per year!  That's if they don't hit you with a service charge.  Meanwhile if you have a $1,000 credit card balance that you pay 29.99% on, that's $299.90 per year you're paying, just for interest expense.  Before the $35+ annual fee.  Before the $39 late payment, over the limit, or returned check fee.  My all time biggest shock on this one was a tax client I had who signed up for an internet service that advertised 1,000 hours for free and wanted a credit card to sign up.  The fine print said it was for the first 30 days, but that wasn't noticed.  Do the math, there aren't 1,000 hours in a month, so it was impossible to use all the hours.  This person had opened a credit card account with a $300 limit to start rebuilding their credit.  They used that card to sign up, but never bothered to even open the mail from the company, because "I haven't used my 1,000 hours yet".  I got called to help when the client couldn't understand why the credit card company was calling them all the time.  Turns out that after the first month the internet service cost $29.95 per month.  So the card was being charged $29.95 per month for the service, plus a $39 late fee because the monthly payment wasn't made.  When the $300 credit limit was reached, that didn't stop the internet service from being paid -- the card company just added another $39 monthly fee for being over the credit limit.  When I was called to help, the card balance was over $600.  Including $15 for  finance charges, the total monthly charges were $123!  OK, that's sounds overwhelmingly stupid ... but it makes a point.  You are never going to build wealth paying credit card interest.  Period.

Don't have a budget - spend freely on those 29.99% credit cards for everything that looks cute and might help your business.  Budgets are too confining. 

My response:  You do need to spend money to build your business.  You can accomplish anything you really want to do.  But you have to be selective.  You can't do everything, at least not at the same time.  A budget is your friend -- it helps you remember the choices you made in advance and stick to them -- IFF you compare that budget to what you actually spend each and every month.  (PS from my friends at Paul Revere Junior High who had Philo C. Farnsworth for algebra class -- IFF wasn't a typo.  It means "if and only if".  I love that phrase!  And Mr. Farnsworth was tough, but he was passionate about math and made it come to life.  Thank you!)

6 Buy a $60,000 gas guzzler with all the goodies to impress your customers and to save on taxes.  If your business makes it long enough for you to pay off half the guzzler, then be sure to trade it in for another one and repeat the cycle throughout life.  (Of course, if your business doesn't make it and the guzzler is repossessed, then your path to going broke is made that much quicker and easier) 

My response:  We're at least getting a little better here.  You're probably not paying credit card interest rates on the guzzler.  (But it's still surprisingly easy to pay $10,000, $20,000, or more in interest on a $60,000 car loan over 72 months).  And if you keep good records of your business use, you will save some taxes.  But even if you get a zero interest loan and even if you save $20,000 in taxes, you're still out $40,000.  If another vehicle for $20,000 will do the job, that's the one you need.  You can still put your logo on the outside of that vehicle too.  Your customers want you in a reliable vehicle, so you can be there to give them good service.  That's all they want, trust me.

5 Have the IRS rule that your Mary Kay business is really a hobby (for example consider, U. S. Tax Court Summary Opinion 2004-59, RALPH D. AND BRENDA KONCHAR, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent - click on those words for a copy of the actual court ruling if you want to check it out) 

My response:  I don't mean to specifically pick on Mary Kay, you can substitute whatever business venture you like here and the principle is the same if you make the same mistakes.  And those mistakes can be costly.  You can have a situation where your business that is ruled a hobby generates a little revenue and a 1099 form, on which you will be expected to pay income and self-employment taxes on (that's double social security and medicare -- both employee and employer portions).  Yes, you're allowed to deduct your hobby expenses up to the amount of hobby earnings -- but only as a miscellaneous itemized deduction.  If you take the standard deduction, or you are subject to alternate minimum tax -- surprise!  NO deduction is allowed.  Really.

Here's a couple other links to give you ideas of do's and don't for your business: and,,id=169490,00.html  There is nothing wrong with taking a personal passion that starts as a hobby and making a real business out of it.  Just be sure you do make a real business out of it.  Have a written business plan (see number 1).  Follow it.  Keep good records.  Keep your business finances and banking accounts separate from personal ones.  Get the knowledge needed to make your business successful and profitable.  Work with professional advisors that will help you get this knowledge (and who will passionately help you succeed).  Get the proper licenses and permits.  Make sure you have the needed insurance.  There's more, of course, but that will come later.  I'm trying to give you the why first and then we can discuss the how.

Don't worry about finding out what your customers want and need.  Assertively talk them into what you want to give them. 

My response:  You need a marketing plan as much as you need a financial plan.  And if that marketing plan is only about advertising, and web sites, and locations, and logos, and ... it won't work!  All of those things are vital.  After you find out what your customers want and need, and after you figure out how to best give it to them, while still earning a profit.  (Otherwise, we're back on our way to going broke.  As Pete Clarke, a wonderful marketing professor of mine at BYU loved to emphatically point out, if you are losing 60 cents on every item sold, you aren't going to make it up on volume!)  You also need to refer to number 3, because what your customers want and need changes often, and your marketing plan needs to continually adapt to that.

Adapting to change is overrated!  Keep doing things the way you have always done them "just because". 

My response:  The only thing you can count on to be constant ... is change!  If you've had a car built by General Motors, have you ever noticed the little plate in the doorwell with the Fisher Body horsecarriage logo?  The other horse carriage companies went out of business when the car came along.  Fisher Body adapted and started making car bodies instead, then General Motors bought the company. 

I really recommend the little book, Who Moved My Cheese, by Spencer Johnson.  It's an easy, fun read.  And if you don't want to starve to death looking for cheese in the same places when it has permanently moved elsewhere (or go broke trying), you need to read it!

Stay so busy all year that you don't even think about your taxes until well into the extension period for the previous year.  Definitely don't worry about finding out if there is a tax impact on something you want to do, just do it.  Being a sole proprietor is easiest, so why worry with an entity? 

My response:  If you only see your tax pro once a year, you're going to pay tens of thousands of dollars too much in taxes over your lifetime.  Uncle Sam will appreciate the gift, but don't you pay him enough without giving him a gratuity?  You ought to plan with your tax pro at least quarterly, plus follow-ups whenever a major decision is made.  And what type of entity you should use for each activity you are involved in is definitely a major decision, again with thousands of tax dollars at stake.  That includes whether to have a will, a living trust, both, or neither.  I'm not exaggerating, and I'm not solely talking about corporations and limited liability companies (LLCs) here.  Even if your decision is to simply use yourself as the entity, which sometimes is the best answer, check with your tax pro before proceeding.  If that thought bothers you, I suggest working towards changing to a different tax system, because as long as we have this one, just doing what you have to in order to complete the forms once a year is definitely number 2 on the list of ways to go broke trying to build wealth!  Which leads us to (double drum roll) ... number

Just wing it!  Think of yourself as an artist.  Let your thoughts and emotions flow.  Be creative and unstructured.  Don't tie life or your business down to a plan. 

My response:  I am not knocking artists here.  In fact I would argue that good scientists and good accountants, need to be artists!  Art is not limited to what is pleasing to the eyes, the ears, or our other senses.  Art covers a broad range of passionate, creative, innovative thinking!  But make no mistake, the artists who want to make a living and thrive either directly plan themselves, or they hire people to work closely with them to make and implement their plans.  Think back to our last discussion, about the book Blue Highways.  Sometimes the winding road is the best path, but even then you need a plan that includes what to do about contingencies such as breakdowns and road construction.  If you decide you want to drive to Times Square from wherever you live in the world, and your plan to get there is to simply flip a coin to decide which direction to turn at every intersection, with no reference ever to a map -- how likely would it be that you ever arrive there? 

The clear cut number 1 way to go broke while trying to build wealth is to have no plan as to how to do it and instead go wherever life takes you.  And the irony is that once you have wealth, then you have the freedom to buy your time back and live in the way you choose. 

Please join the conversation and share your comments here ... See you next time, and thanks!

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