Small Business Taxes & ManagementTM--Copyright 2017, A/N Group, Inc.
CPAs and financial advisors are often asked "how come I'm not richer?" There are basically three ways to gain wealth--inherit it, earn more, and spend less. There's not too much you can do with the first or second ways. You may be able to earn more by switching jobs or careers, going back to school, etc. but even here your choices are limited.
That leaves spending less as the option you have the most control over. While much depends on your life situation, almost anyone can save a significant amount more by simple, painless changes in lifestyle.
Keeping up With the Joneses
Your friend, relative, neighbor just bought a high-end German auto. Resist the urge to match him. It'll cost you and may not be nearly as satisfying as you may think. And his or her situation my be much different than yours. He may have inherited a substantial sum, have decided to forgo the European vacation, or decided not to have kids. The same advice goes for home improvements. Are you putting in a pool because you want a pool or because your neighbor is getting one? The high-end kitchen appliances may make sense if you do a lot of cooking and entertaining, but not if you and your spouse work late most nights and eat out most nights.
You don't have to imitate Scrooge to save money. You don't have to go to the thrift shop to buy your shirts, but we know of one individual who decided to paint most of the rooms in his home himself. He didn't have "paint clothes" so he went to a deep discount store and bought cheap pants and shirts.
Buy in bulk. Two sides to this one. If you've got a spouse and three kids to feed, it makes sense. You'll easily go through a large package of meat before it goes bad. But don't overestimate. This won't work for everyone. And buying items that go bad is throwing money away. On the other hand, buying canned goods that you use regularly (e.g. tomato sauce) should work for everyone.
Coupons and sales. They're designed to get you in the store with the hope you'll also buy items at regular prices. Nothing wrong with that if the regular priced items aren't higher than the store down the street or an item that will go on sale next week. And there are times when the sale price at one store is still more than the regular price at another. We heard someone say they got a fantastic deal on an espresso maker--50% off at Madison & Co. Sounds good until you realize 50% off at Madison & Co. is still overpriced.
Driving to save. Some people obsessed with getting the best price go from store to store to save. How much it costs to run a car varies, but the IRS allows about 50 cents a mile for business use--and they're not known to be overly generous. Driving 10 miles each way to save $3 doesn't make sense. The same thing goes for your time. Extra time spent shopping means you've got less time to work or with your family.
Buy to fit the need. You're all thumbs and never learned to fix anything around the house. You just found out screwdrivers come in different sizes. Buying top quality tools to have around for emergencies makes little sense. Buy the bargain-basement models to have around just in case. They don't have to last. If you're just the exact opposite--you've got two rental properties and haven't called an electrician or plumber in 15 years, buying quality makes sense. There are some items where quality counts, even if the item will be little used.
Research or not? If it's a one-shot low cost item, doing extensive research and shopping price probably doesn't make sense. On the other hand, if you intend to keep that lawn mower for 15 years, checking it out on the web or in magazines is a smart move. The same advice goes for recurring items such as monthly cable or cell phone service. A saving of just $10 per month is $120 per year. Here again, check the numbers.
Almost everyone knows a hoarder. They scrounge or buy stuff they never use or need and never throw anything out. This can be a real problem. The stories can sound funny, but really aren't. One individual did all the work on his rentals and his home himself. But both he and his spouse were hoarders. He often could not find the tool he needed in the clutter, so he'd buy a new one. His wife had clothing in sizes from 2 to 18, but the smaller sizes hadn't been worn in 20 years.
Saving gone wrong. One individual saves to replace appliances, home furnishings, etc. Items to be replaced have their own jar, with savings going in on a regular basis. We thought this was an excellent idea until we heard the rest of the story. Once there was enough money in the jar, she'd use the contents to purchase the appliance. In one case that resulted in purchasing a replacement for a 3-year old refrigerator.
Total cost of ownership. It's a concept used in business. It's not the initial cost of the machine that counts, but how much it'll cost to run it over its useful life. Buying that luxury vehicle will not only cost you initially, if you keep the car past a couple of years, or you buy used, maintenance is likely to be much more expensive. The same applies to options added to the vehicle. Sophisticated electronics or other features may be cool, but they can be expensive to fix. That touchscreen display may be $1,500 or more to replace. Do you really need it? The same is true for household appliances. The top of the line ones are not only expensive to purchase, but also to repair. And, in more than a few brands, they have a higher repair history.
Expense list and budget. There aren't too many situations where you can save more without making a list of expenses first. (The $300 cable bill might be one of the exceptions.) It's just as critical for a family as for a business. The expense list will show where you're spending the money. You say you don't spend much on coffee but one expensive coffee in the morning on the way to work could cost you just under $1,000 a year. If you make $100,000 that's 1% of your income. There are plenty of different ways to create a list or spreadsheet; the objective is to have a format you can analyze. Concentrate and get details on items you can control.
After you've done your analysis you should make a budget. A budget is guess on how much you'll need to spend. It's a tool for controlling expenses. You can't predict what you'll spend on the food each week, but you should have a ballpark number. As you go along that amount can be refined and later you might be able to cut costs more intelligently.
Cutting costs. The two fastest ways to show savings is by looking at big ticket items and recurring ones. Leasing (or buying) a quality Japanese car can easily save $150 per month over opting for a German one. That'll add up to $1,800 a year. That's 1.8% of your salary if you make $100,000 a year. The next way is by looking at recurring items. Go to the movies every week? If it's just you and your spouse, skipping one week a month will save $360 a year at $30 trip.
Unless you're covered at work, health (and other) insurance is most likely a big portion of your budget. Consider a higher deductible, particularly if you're healthy. Same goes for homeowners and auto. Don't go without some sort of health coverage. A visit to the emergency room can cost you several thousand dollars. And, because of negotiated pricing by the insurance company, you'll probably pay top dollar if you have no coverage. Finally, without insurance if you do have a hospital stay you'll get a bill that could jepardize your financial plans for years.
Emergency fund. Most people don't have one. Everyone needs one. If you're rich you need one because most of your funds are probably invested and you don't want to tap that source. If you're less well off, you don't want to put a big car repair, doctor bill, etc. on your card and pay 25% interest. How much you need will depend on your personal situation, but $1,000 is the bare minimum, $2,000 plus is more realistic.
Saving and retirement. You should be putting some money away each month for savings and retirement. That's especially difficult for most young people; it's also especially important for most young people. And you should also cultivate an attitude that hitting the savings and, more importantly the retirement fund, should only be done as an absolute last resort. If you look at them, particularly the retirement fund, as a source for buying luxury items, going on vacation, etc. you'll never get ahead. (It's also costly from a tax stanpoint.)
Investing. Start young and look at the long term. Want to play the market? Take 10% or 15% of your funds and have fun. Go for the high flyers. But investing in solid companies for the long term is really what works. You may not believe it now, but you'll realize it when your 65--but then it's too late. There's an old saying in life insurance--by term and invest the difference. The logic is whole life is expensive; term insurance gives the same coverage at less cost but there's no cash buildup. You'll do better by investing the savings on your own. The problem is 95% of people never invest the savings. They would have been better off with whole life. Most people need professional advice. Get a good financial advisor and double check his work with an annual talk with your CPA. Starting young is the tough part, but getting into a routine makes it less painful. Don't know what to invest in? An index fund based on the the S&P 500 is a good starting point. Professionals can argue with the choice, but it's far better than no equity investments.
Everyone's different. Some squirrel away every extra dime; others spend it. Some spend it by buying real estate. Done right it's a good investment. In some families the husband is a spendthrift; the wife a saver. Some the reverse; in some both are savers; in some neither. Some people need a forced saving such as putting the max in a 401(k) plan. The method isn't as important as the end result--a regular saving/investment program and a retirement plan. Use whatever method works for you--even if it means putting money in a jar.
Signs of Trouble
Recurring crisis. If you seem you have a new financial crisis every month, live paycheck-to-paycheck, use payday loans, etc. you have a serious problem that you should address. Everybody has a crisis now and then. The transmission in your car costs $3,500 to replace; you fall down the stairs and the hospital bill is more than the insurance; etc. But if they happen too frequently, they should be part of your regular planning. That rebuilt transmission might be an indication your car needs replacement.
Credit cards. Rewards cards aren't worth it unless you use them very carefully. There's nothing wrong with credit cards if you pay them off monthly or, if you have a balance because of large purchases, you reduce the balance every month. If you carry large balances, you can't reduce the balances, or you borrow or use savings to make minimum payments, you have a serious problem. There are other tell-tale signs.
If you've tried some of the tricks above and simply can't save, it may be time to seek professional help. The first thing to do is talk to a financial advisor or your CPA. They may be able to offer suggestions. But, it's not unusual for the problem to go deeper or be more difficult. Your problem could require a psychiatrist or psychologist. We've known several people that spend or can't save because of deeper problems. The problem here is that finding the right professional isn't easy, but it will be worthwhile.
Copyright 2017 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 05/31/17