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Morning Column
The New American Dream
By Thomas Houck, CPA, CFP®
We've all been programmed to pursue the American Dream - a nice house, fast
cars, and lavish vacations. Unfortunately, there's a short circuit in the
current generation's thinking. Many are living the new American Dream:
Live the dream now, and figure out how to pay for it later. Unfortunately,
this only creates a future American Nightmare. The truth is simple - in
order to attain the American Dream, you need good money habits; work, save,
and then spend. The current generation, however, has developed some bad
habits: spend, work, and then maybe - someday - save.
Brian, a small business owner, was in a financial crisis that was causing
him stressful days and sleepless nights.
"It seems like the business is doing okay," he thought. "My numbers are up
from last year, and my expenses are about the same; but I can hardly pay my
bills. The bank won't lend me money because my credit cards are almost
maxed out. My accountant is always on my case about funding my retirement
plan, but how the heck am I supposed to do that if I can't even make the
mortgage payment? What's going on?"
Brian decided to hire a consultant to look at his business to see what was
broken and how he could fix it. To the entrepreneur's surprise, the
consultant discovered that the business was outperforming many similar
competitors in his industry. But his bottom line discovery was news to
Brian: The problem was not the business; it was Brian's bad money habits.
The consultant suggested that Brian and his wife, Jen, sit down with him,
take a good, hard look at their financial situation, and commit to
developing good financial habits.
This meeting was tough for the couple. They quickly realized how out of
control they'd become over the years, and how challenging it was going to be
to right their ship. To help them make this change, the consultant suggested
that they mutually agree on some hard and fast rules regarding their
finances…and abide by them.
Rule One: Don't spend more than you make
Although this sounds simplistic, there are millions of Americans who can't
pull this off. Some guidelines are:
· Determine how much you make after taxes; i.e., your "take-home pay." This
would be the amount that you can comfortably "draw" from your business each
month, while setting aside cash to take care of taxes. This number
shouldn't drain the business to the point of causing a cash flow crunch.
· Choose a monthly figure for your "necessary spending," which includes rent
or mortgage payment, food, utilities, insurance, and clothing. It does not
include a BMW, a three-week vacation in Maui, dining out five nights a week,
or a new Jacuzzi.
· Divide your necessary spending by your take-home pay. If the number is
higher than 75 percent, you have work to do. The immediate, short-term
action is to cut down on your spending. The long-term goal is to increase
business cash flows so that you can increase your draw.
Rule Two: If you can't afford it, don't buy it
This rule may sound obvious, but an entire generation of Americans doesn't
"get" it. There's a huge difference between a "want" and a "need." If you
make your living by fishing, you need a boat. If you see a cool catamaran
at a boat show and decide to buy it, even though you've never sailed before
and are up to your eyeballs in debt, that's a "want." If you really must
have a boat, save up for a few years, and buy it without any financing.
Rule Three: Don't use ANY debt, especially high-interest options
This one isn't complex, either. When you borrow something from someone, they
expect you to pay it back. As a matter of fact, they take it pretty darn
seriously. And credit card companies are the most serious of them all, which
is why using plastic is an expensive way to buy anything. These companies
charge you an outrageous interest rate, tempt you to buy more by offering
points and perks, and then ruin your credit rating if you fall behind. If
you really want something, determine the cost, and buy it only when you have
the money in hand.
Rule Four: If you don't save for retirement, you won't be able to retire
Many people are missing this one. If you spend more than you make, and rack
up high interest debt during your working years, what's going to happen when
you want to stop working? You won't be able to, because you won't have any
money; or worse yet, you'll have more debt than assets. The smartest thing
that an entrepreneur can do is to talk to a CPA and financial advisor, and
pick a suitable retirement plan. Then, fund the plan until it hurts. If
you do this for 20 years and then sell your business, you should be able to
retire comfortably.
Rule Five: Make the best investments
The education of your children is by far the best investment you can make.
Today, almost every state has some type of prepaid college plan. The
younger the children are when you start funding the plan, the easier the
payments will be. Visit www.collegesavings.org to find options in your
state.
So what about Brian and Jen?
They had several disagreements, but made some tough decisions during the
first six months after their meeting by playing by the rules. Brian sold
his treasured boat, and they cancelled a Hawaiian vacation. Going out to
eat became a delicious and rare treat. On the flip side, they've paid off
most of their credit cards, and are funding 529 plans for the kids'
educations, and retirement accounts for themselves. Brian's business has
started to take off, because he can now sleep at night and isn't stressed
over money all the time.
They both agree that abiding by these five simple financial rules is going
to let them make their own American Dream a reality.
About the Author:
Thomas E. Houck, CPA, CFP®, is a speaker, author and consultant whose
program, "Your CFO Advantage™" helps business owners grow their businesses,
reduce their taxes and lower their stress level. His book, "The Top 10
Mistakes Business Owners Make (and how to fix them) ™" helps business owners
develop strategies to lead a better life by running a better business. For
more information you can visit Tom's website at
www.heritagebusinesssolutions.com
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