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Photo by WesGold Fellows" For most families, just $100 in extra income each month would make a major impact on their ability to pay bills on time."
Most people understand the importance of cash flow and are quick to admit the fact that they need more cash coming into their household each month. For most families, just $100 in extra income each month would have a major impact on their ability to pay their bills on time. In my opinion, managing money is a very, very easy topic to master. Financial professionals tend to make financial matters—just as lawyers tend to do with the law— sound mysterious and difficult. But, the truth is, all you need to know to be successful with your personal finances can be found in this very simple formula: "You need more money coming into your household each month than you have going out for expenses." I’ll bet you agree with that formula and might even be saying to yourself, "No kidding, wise-guy, I knew that already. I didn’t need to buy your book to learn what I already knew." Hopefully, you will bear with me and allow me to remind you of some fundamental truths about cash flow and reenergize your understanding of this crucial concept.
It isn’t that people don’t know they need to increase cash flow beyond their expenses. The need for cash flow is, without question, a well-known concept. But when it comes to actually making it happen, most people fall short of their desires. If the need for cash flow is so well understood, why then, do most families lack the cash flow they need? Why do so many families struggle to pay their bills each month?
MAKING DREAMS COME TRUE
The reason is as simple and fundamental as the formula for success. Most people don’t have a solid plan of action. Let me restate that; I think I was a little too easy on you. Most people have no plan of action at all. They have dreams. They have what I call the "Someday
Syndrome." People say things like, "Someday I won’t have to work anymore." Or, "Someday, I’m going to start my own business." They usually say this, by the way, on the way to work. People afflicted with Someday Syndrome are prime candidates for get-rich-quick schemes, because these opportunities usually promise quick, no-effort shortcuts to riches. The Someday Syndrome is very common. Do you have it? Give yourself this test to find out. Be honest. Have you, in the last thirty to sixty days, said to yourself, or someone close to you, the following: "Someday, I/we are going to ______." Be sure to fill in the blank with whatever it is that you want: Buy a bigger home, pay off credit card bills, get a better job, start a small business, travel around the world, play golf everyday. I think you know the drill. There is nothing at all wrong with being a dreamer. I am a big dreamer myself. That is what fueled my drive to write this book and do a nationally syndicated radio talk show. But dreams without action to make them happen never have a chance to materialize. Dreaming all the time without seeing your dreams materialize leads to frustration. Frustration often leads to depression and a feeling of powerlessness. Despair is a common feeling that can set in and often can lead to the ruin of families and individual lives. Unfulfilled dreams, in my opinion, are the leading killer of happiness. Just think of all the things you thought you would accomplish when you were in high school. The world was literally at your disposal when you were seventeen or eighteen years old. You could have had anything or been anyone you wanted. I believe this is true. With few exceptions, especially if you live in the United States of America, you have every opportunity to succeed at what you dream of doing with your life. Somehow, though, most people’s lives end up vastly different than what they had imagined. Dreams without action are not the only roadblock to success. Knowledge without action is also useless. If you doubt this premise, ask yourself why there are professors in colleges and universities across the world who teach successful business practices, yet, how many of them are— or ever become—independently wealthy? In spite of their vast knowledge of the subject of making money, they still go to work each day to earn a living. Teachers have immediate access to all of the known information in the world on creating wealth. For that matter, so do you and I. There are no secrets to becoming wealthy. It has all been written about. There are millions of books about how to generate cash flow. So why do so few of us reach the promised land of independent wealth? Why are the majority of people living paycheck to paycheck?
SEEKING SOURCES OF INCOME
As I have said, one major reason is that people do not run their personal financial lives as they would a business. For some reason, generating income from sources other than their job is foreign to them. Let me ask you this: Are you generating income from a source other than your job? If you are, you are way ahead of more than 90 percent of your fellow consumers. If you are not, you are no different than the majority of people in the world. Cash flow is the life-blood of business but it is no less important to you and I in our personal lives. Each day, in e-mails and on the radio show, the most common question I receive sounds something like this: "I am able to make my monthly bill payments, barely, but I don’t seem to be getting ahead. What should I do?" My answer often sounds facetious because it is so obvious of an answer. But, it is true, and a very easy thing to do. Increase your cash flow! What comes to your mind when you think of increasing your income? The answer will give you a good clue as to what your preconceived notions are about generating income. Some of you immediately thought about getting a better job or having to get a part-time job, or, of working overtime at your current place of employment. Others of you thought of investing or starting a small business. Some of you thought about having a garage sale. All of these are possible answers to the question of how you might increase your cash flow. Yes, there were also those of you who immediately thought of buying a lottery ticket. While there certainly are lottery winners, I want to encourage you to think in more realistic terms, and to think of possibilities that have a better chance of occurring than you being struck by lightening. And don’t forget to work that lottery ticket purchase into your spending plan! Now, here is the big, important question: How many of these realistic solutions have you tried this year, or last? Or ever? If you have not attempted to increase your income using any of these techniques, or others not mentioned, you can’t really say you have done everything you can do to improve your lifestyle. That would tend to put you into the "dreamer" category. As I said, dreams are good only if they are followed by informed action. If you are working forty to sixty hours a week and have a family, the idea of working another twenty or thirty hours may be too much for you to consider. And it probably should be. Remember, we are talking about improving your lifestyle. A big part of improving your lifestyle means spending more time at home with your family, not less time. This doesn’t mean you have no chance of increasing your income if you don’t spend more time at work and less time with your loved ones. It just means you will have to be a bit more creative than the vast majority of your fellow citizens. Let me take this opportunity to make the point very clearly that you will have to invest time in order to generate additional cash flow. It may not be twenty or thirty hours of overtime a week, or at a part-time job, but you will need to invest some time. It may be time spent preparing for and hosting a yard sale every weekend or time spent researching and starting a small business or investment program. There will be an investment of your time required.
SMART TIME INVESTMENT
Some have called this investment a "smart time investment." You invest time working extra hours at your job. But that investment returns dollars for your hours. No hours of work, no dollars. The smart time investment I am talking about here should yield more of a long-term return on your time investment. You want to find ways to invest your time once and then receive ongoing return-on-investment in the form of cash flow over and over again, even when you stop investing your time. The idea of investing your time versus spending your time is an important concept that you must understand and adopt if you truly wish to improve your cash flow in a meaningful way. You are investing time. Time is the most precious commodity known to man. None of us know how much time we really have to invest. We all get the same amount of hours in a day, but how many days will we get? Nobody knows. You’ve no doubt heard the phrase, "Time is money." If you don’t have a lot of money, you must invest your time. There is a big difference between spending time and investing time. You spend time watching television if you watch a sitcom. You are investing your time if you watch a television show on investing or starting a small business. In addition, if you want to start generating income from something other than a job, you will also be required to invest some money as well. It may not be much money, but it will be nearly impossible for you to start any type of legitimate business without some investment of funds. You can’t have a yard sale without putting up a sign. Even if the sign is homemade, it will cost something. The fact that you have to spend some time and money to make some money may be enough to stop you in your tracks. You may be thinking, "I’m in debt and can’t even afford to pay my bills. I don’t have any money to invest in starting a business." I understand why you would feel that way. However, your only other choice is to stay right where you are now, in the Someday Syndrome. "Someday, I will be out of debt and will be able to start a business, or do something else to generate income, so I won’t have to work so hard trading hours for dollars and leave my financial future totally in the hands of my employer." In the long run, your optimum goal must be to get involved in something that can generate cash flow on an ongoing basis with very little or zero personal labor or hourly time investment on your part. You start by putting in an investment of your time and money in an initial effort. If you have chosen properly, you will not need to work hard for a long time. Your plan should include a time frame for when your endeavor will show positive cash flow. If cash flow is too far down the road, you may want to consider something else before you start. The idea is not to get yourself another job—you already have one of those. When you work at a job, you trade your hours for money. If you don’t go to work, you will not generate money. If you start a business or invest properly, your initial efforts can lead to ongoing income even when you are doing things other than your business. At one time, I was involved in the long-distance business. It was just after the long-distance telephone companies were deregulated and many small companies, which were just getting into the long-distance telephone business, needed help marketing their services. I was marketing discounted long-distance service. I loved it.
Once I did the initial work to sign someone up for the new service, every time he made a long-distance call, I would make a small percentage of the monthly bill. Imagine, even when I was sleeping, people I had signed up were making long-distance calls and generating income for my family. This happened twenty-four hours a day, seven days a week. This same scenario exists in thousands of existing businesses, with new ones popping up every day. Your goal is to get involved in a business or investment that can deliver income around the clock whether you are working the business or not. You may need to hold some yard sales to pay off debt and generate some income to start your real income-generating idea, but that won’t go on forever. And don’t think you have to reinvent the wheel to be in business. Most successful business people get involved in already existing ventures and improve on them just a bit. I didn’t invent long-distance telephone service, but I did come up with some creative ways to get large groups of people interested in cutting their long-distance costs.
YOU DON’T NEED ANOTHER JOB
Many people think that the only way to start a business is to go the traditional route of starting a restaurant or a retail store of some sort. The investment of time and capital to properly do something of that scale is virtually impossible for most working people, so they give up on their dream. In my opinion, your dream really should not be to start a business. Starting a business is a means to an end. The real objective should be to create cash flow from a source independent of your personal labor. One reason I think a large percentage of business start-ups fail is due to the fact that the owners started a new job, not a new business. They did not set up the business to run independently of their personal efforts and so they burn out and things start to slip. You see it all of the time and it is sad to see. It is actually very easy to rent some space, buy some inventory, print some business cards, and say you are in business. In fact, within twenty-four hours or less, you could set yourself up in business for very little cost right from your kitchen table. According to the Small Business Administration, most small businesses are started with $20,000 or less. But, will you be generating revenue? Probably not. Getting into business is not the goal. If it is, do it today and consider yourself successful. However, the subject of this chapter is cash flow, and without it, your business is doomed. I don’t have to tell you that without proper cash flow, your personal financial life is doomed as well.
POSITIVE CASH FLOW
By proper cash flow I mean positive cash flow. No doubt you have heard the term positive cash flow used before. It simply means you actually have money left over at the end of the month. If you end each month with no extra money or are actually in a negative position where you owe more in expenses than you have coming in to cover the bills, you are in a dangerous place and must take action immediately to change things around. You must do whatever it takes legally to get yourself into a positive cash flow position, in business and in your personal life. I can’t tell you how many people I come in contact with who are just a few dollars from positive cash flow. I mean, less than $100 a month short of paying all of their bills in full and on time. That is just $25 a week. Quick, think of five ways to earn $25 a week. I will give you ten seconds. Did you do it? Great, then you just thought of five ways to increase your cash flow by $100 a month. You may have thought of things like having garage sales, cutting lawns, shoveling snow, setting up a table at the local flea market once a month, typing resumes or college papers, cleaning homes or offices, cooking for others, bringing items to a consignment shop. Some of you thought of your professional or job skills you could offer for sale. If you thought of five ways to create an extra $25 a week and you do all five, you can have $500 a month in extra income. Would $100 or $500 extra each month make a difference in your family’s lifestyle? You bet it would. Have you ever seen a neighbor drive by in a brand new car, like a BMW or a Cadillac, and said to yourself, "How can they afford that?" You just answered that question for yourself with the "five ways to $100" exercise. Sit down and list every skill, interest, and ability you have—or could learn fairly quickly—and you will begin to see how valuable you really are. Then choose the skills that you can translate into cash flow generation without a great deal of time or financial investment. What can you do this week to create some cash flow? What starts out as a way to create o a multi-million-dollar business.
$25 a week could eventually grow to millions if done properly.
PAY ATTENTION TO THE MARKETPLACE
There is lots of advice around about starting businesses. A common piece of advice is to take a hobby or other favorite pursuit and make it into a business. I will admit, there have been cases where people have taken a hobby and grown it into a business. But it really depends on what your hobby is. Is it a hobby that is also enjoyed by millions of other people? If so, then maybe you have a chance of being successful. I once received some very useful advice from a very successful businessman. We were discussing marketing strategies and how he came up with new products to sell. He told me: "When trying to come up with new things that others would like to buy, never be an audience of one." He went on to explain what he meant by the term, "audience of one." He told me that just because he liked to read the Wall Street Journal everyday, he realized more people read tabloids each day. Just because he could afford to shop in the most expensive stores and price had become less important to him, he had to keep in mind that most people live on a fixed income and price really matters to them.
Your personal preferences, while they should play a role in any business decisions you make, must take second place to the desires of the majority of the marketplace you wish to serve; that is, if you want to generate cash flow and profits. There are plenty of companies that are, simply, labors of love for the owner, whether they make money or not. However, these businesses don’t necessarily bring their owners closer to positive cash flow. If the business you create can’t run while you are home or on vacation, or doing something else, then it is a job, not a business. If your business is effectively "closed" when you take a day off, you have not separated yourself from having to trade your hours for money. Since my business is my creativity through my writing, the daily radio show, and other creative endeavors, I could be in the same situation. However, thanks to technology, I can write and broadcast the radio show from just about anywhere on earth. So, to
that degree, I have freedom. In my situation, we use leverage to create revenue. My radio show is rebroadcast during the week with some stations airing the show even when I am asleep. Our Web site, www.mikeshow.com is open for business twenty four hours a day, and our books and newsletters are available for sale long after I have put in the initial effort to create them.
SMART TAX STRATEGIES
Another great reason to create a small, home-based business is because of the potential tax savings you can create. I am asked constantly for strategies for reducing taxes by people who are working hard at their jobs and hate to see how much money is taken out of their paychecks each payday. One of the first questions I always ask them is if they have a small business. The tax code is friendly to legitimate businesses. Most people dream of being their own boss. By starting a small business, many expenses that were personal now may become partly or fully tax deductible. Business startup and operational expenses, tools, home office furniture, office supplies, cost of goods to be sold, travel, mileage, subscriptions, meals, entertainment and gifts, some insurance premiums, and retirement contributions are some of the many legal business expenses that can help you actually reduce your taxable personal income while you build a small business. IRS Publication 535, "Business Expenses," explains the rules for deducting business expenses very clearly. I suggest you print yourself a copy of this form when you visit www.irs.gov. But remember, the idea is to create cash flow from your business. Your goal is not just to create tax deductions. Most businesses take a few years to see positive cash flow, but when you begin to create positive cash flow, you will create tax liability on your profits. Many state and local governments levy additional taxes upon commercial ventures, and even small, home-based entities are not immune. When you get to the point where your business is creating revenue exceeding your expenses—a surplus—it would make sense to hire a good certified public accountant, tax attorney, or both, to help you structure your business to again minimize your tax liability to the least required by law. It is important that you understand how to properly utilize the tax deductions that are available to you under the law. As reported in the February 2003 issue of Kiplinger’s Personal Finance Magazine, 100 million American taxpayers overpaid 2002 taxes by $200 billion. If you are currently overpaying your income taxes, you can actually increase your weekly take-home pay from your job by making a simple adjustment to your W-4 form. Remember, you are the one who tells your employer how much to take out of your paycheck each payday in order to pay your income taxes for you. If you adjust the number of allowances on your W-4 form at work, the amount of money taken out of your paycheck and sent to the government on your behalf would change. The higher the number of allowances you list, the less money taken out of your paycheck. Now, you cannot just take a large number of allowances in order to reduce your tax burden. You are required by law to pay the proper amount of taxes due based on your taxable income. So this strategy is only viable for people who are creating legitimate tax deductions based on IRS guidelines and who itemize their tax returns. If you underpay taxes during the year, you risk audit and fines from the Internal Revenue Service. However, if you overpay, the IRS will give you your money back without interest once you file your annual tax return. Most people overpay their taxes and get a big refund each year about forty-five days after they file their tax return. The average tax refund this year is running $2,400. A simple adjustment in your company’s payroll office will give you an instant raise in your take-home pay. I have heard all of the reasons why people overpay taxes. These excuses include being afraid of being audited by the IRS and liking the idea of getting a big, lump sum of money once a year. My response to these two very popular reasons for overpaying taxes is the following: One, if you are doing things legally, an audit should not scare you; and, two, that lump sum once a year is coming to you without interest. You would be better off adjusting the number of your personal allowances on your W-4 form, if your situation allows, getting an increase in your take home pay, and putting the increase into a savings account paying 1 to 2 percent interest. You won’t have the government doing the savings work for you anymore but you will be earning interest on your hard-earned money. The extra income might allow you to pay down high interest debt. For example, if you pay off an 18-percent credit card debt with your pay increase, you are effectively earning 18 percent return on that investment. Isn’t that better than getting zero percent from Uncle Sam? What if you could just increase your take-home pay by $25 a week or $100 a month by doing a little tax planning? Yes, it will require you to look at your finances and your taxes this year instead of next April when most people start to deal with their taxes. If you wait until the end of the year to start thinking about your taxes, your opportunity to do anything about how much you owe will be lost. You need cash flow now, so now is the time to plan and make adjustments, which will give you more cash flow.
YOUR CASH FLOW ACTION PLAN
A small home-based business can give you opportunities to lower your tax burden and it can also allow you to create additional income. A small home-based business can lead to something big in your financial future. You could eventually replace your job income totally. It won’t happen overnight but you could actually become wealthy with your business or businesses. You are in the right country to make it happen. Wouldn’t it be a great story? You start a small business because you needed some extra money to pay off some credit card debts and you end up becoming a millionaire. It happens every day in this great country so don’t ever count yourself out of the game. Whatever you ultimately choose to do, be sure to keep foremost in your mind the fact that you need to create cash flow. You don’t want to end up creating even more debt for yourself in an attempt to pay off personal debt by borrowing lots of money to start a business. But, there is nothing wrong with making some short-term investments if there is a high probability of them paying you back within a time frame that is acceptable. If you need quick cash to catch up on some late bills, starting a business that will take twelve months just to break even does not make sense in your situation. It all should start with you taking the time to access your short-term and long-term needs and then creating an action plan that matches your desired outcome. Short-term goals are things you can accomplish within the next twelve months such as paying off some credit card debt and reducing expenses. Long-term goals help you plan for the next two to five years and might include paying off a car loan, saving a certain amount of money in your child’s college fund, and generating enough income from your home-based business to replace the income you now get from your job. It is very difficult to generate quick cash by starting a business, or through any other investments, because you need some time for any investment to create a return. This fact limits your choices to what is immediately available to you. For most people that means looking for more hours at your job—if you are paid hourly, and more work is available—or, possibly, it means taking on another job. If your short-term goals require quick cash flow, this may be your only option. But, in your long-term plan, the second job should be replaced by something that is a little more family and personal-health friendly. A very commonly overlooked way to generate additional cash flow each month to help pay your bills is by cutting monthly expenses. I know, this seems such an obvious solution yet, so many of you procrastinate on this very important part of your financial plan. The name of this book is Spend Your Way to Wealth. Obviously, we realize spending money is a requirement in life. Where you spend money and how much you spend on everything you buy is the part you can manage successfully. Cutting expenses is not synonymous with cutting your lifestyle. As you must know by now, the popular belief is that cutting expenses requires a great deal of sacrifice and deprivation, but I do not necessarily accept that. I’ve shown you that if you know how to buy a car correctly, you can still afford to drive your dream car. The same goes for your home, clothing, and every other thing you can think of. If you want to generate more cash flow, you must start by completing a monthly spending and net-income analysis in order to see where you are spending every penny that is coming into your home. A spending and expense analysis is the only way for you to actually see, in black and white, where you can make some changes in order to free up cash to pay your bills and start to save money. Even if you start to generate more income from a second job or small business, you should complete a spending and income analysis every month, since, as I’ve stated elsewhere, there is no amount of income that you cannot outspend, if you’re not attending to your expenses.
INCREASING CASH FLOW BY LOWERING MONTHLY BILLS AND FEES
When attempting to work on a spending analysis, there seem to be many areas of expenses that are missed. A commonly overlooked area of expense is credit-card interest rates. It is shocking how many people do not know what interest rate they are being charged when they borrow money by using a credit card. Even fewer people know the dollar amount of fees that can be charged on their accounts if they are ever late with a payment or charge more than their limit. I suggest you call all of your credit-card issuing companies and ask them what your interest rate is on each of your accounts as well as how much they could charge you in fees; also check your annual fee. Next, while you are on the telephone, ask for a lower interest rate. If you have been a good customer and have made on-time payments for the past twelve months, even if you’ve only made the minimum required payments, chances are good that the creditor will grant your request for a lower interest rate. Competition for customers is fierce right now in the credit card industry. If your company will not lower your interest rate upon your request, and your credit score and credit report are in good shape, I suggest you shop for lower interest rate cards and, if approved, transfer your debt to the new card at the lower interest rate. While you are on the phone requesting a lower interest rate, be sure to ask the company to eliminate your annual fee if you are paying one. That annual fee represents $25 to $100 that should be in your pocket, not in the credit-card company’s coffers. Those companies make enough profit on the interest, late fees, and over-the-limit fees they charge. Again, if the company will not eliminate your annual fee, you may want to shop for a company that does not charge an annual fee. Don’t be afraid to ask for these things. You have nothing to lose and cash flow to gain.
Your utility bills offer another overlooked opportunity to cut expenses without cutting into your lifestyle. Turn off lights in unused rooms, shut off the hot water while shaving, and consider canceling your cable television connection for a short while until you can affordably work it into your plan. Check your long-distance telephone usage and find a cheaper rate. You should not be paying more than 4 or 5¢ a minute for long-distance service. Use e-mails more to communicate with others, or wait for people to call you rather than calling them. Speaking of telephones, watch out for the costs associated with your cellular telephone. Since so many people have cellular telephones today, they are used without giving thought to the expense. It is very convenient to use a cell phone at the drop of a hat. These costs can really add up if you are not on a monthly plan that matches your level of use. If you are surpassing the amount of included minutes of your plan every month and paying for expensive minutes, talk to your representative about moving to a different plan. If you really take a good look at what you use your cellular telephone for, and were willing to adjust your habits just a little, you could trade a little bit of convenience for a less-expensive monthly cell phone bill. Again, a few more dollars in your pocket at the end of each month is your goal. Investigate the viability of refinancing your mortgage for a lower interest rate. As I write, mortgage rates are at a forty-year low level and if you are planning to stay in your home for at least the next two or three years, refinancing for a lower interest rate may make sense for you. Make sure you are not paying outrageous monthly bank fees. This is an area that can quietly eat a big hole in your finances, especially if you use your ATM card a lot at machines that are not owned by your bank. As you read this, someone, somewhere, is taking $10 out of an ATM machine. She will pay a $1.50 fee to the bank that owns the ATM machine for processing the transaction and pay another $1.50 fee to her bank, also for processing the transaction. This represents a grand total of $3, or, a 30 percent fee, to get $10 of her own money out of her bank account. Paying fees like this saps you of cash flow. Instead of buying your lunch everyday, pack your lunch even if it is for just a month or two. Remember, these are just suggestions. If you enjoy eating out each day, just work it into your monthly spending plan. There are many ways to create more cash flow in your life and you can start to do many of them today. Life and business both come down to cash flow. That is the system we have. It would be great if we did not need cash to live. We could all go off and pursue the hobbies and other things in life that bring us joy. Until you have enough cash flow separate from your personal labor, you will never be truly free to do what you want when you want. Approach the task of generating cash flow for your family just as you would if it were for a business you owned or managed. This is the business of you—You, Inc.—and there is no more important business in the world.
Like this article?
Most people understand the importance of cash flow and are quick to admit the fact that they need more cash coming into their household each month. For most families, just $100 in extra income each month would have a major impact on their ability to pay their bills on time. In my opinion, managing money is a very, very easy topic to master. Financial professionals tend to make financial matters—just as lawyers tend to do with the law— sound mysterious and difficult. But, the truth is, all you need to know to be successful with your personal finances can be found in this very simple formula: "You need more money coming into your household each month than you have going out for expenses." I’ll bet you agree with that formula and might even be saying to yourself, "No kidding, wise-guy, I knew that already. I didn’t need to buy your book to learn what I already knew." Hopefully, you will bear with me and allow me to remind you of some fundamental truths about cash flow and reenergize your understanding of this crucial concept.
It isn’t that people don’t know they need to increase cash flow beyond their expenses. The need for cash flow is, without question, a well-known concept. But when it comes to actually making it happen, most people fall short of their desires. If the need for cash flow is so well understood, why then, do most families lack the cash flow they need? Why do so many families struggle to pay their bills each month?
MAKING DREAMS COME TRUE
The reason is as simple and fundamental as the formula for success. Most people don’t have a solid plan of action. Let me restate that; I think I was a little too easy on you. Most people have no plan of action at all. They have dreams. They have what I call the "Someday
Syndrome." People say things like, "Someday I won’t have to work anymore." Or, "Someday, I’m going to start my own business." They usually say this, by the way, on the way to work. People afflicted with Someday Syndrome are prime candidates for get-rich-quick schemes, because these opportunities usually promise quick, no-effort shortcuts to riches. The Someday Syndrome is very common. Do you have it? Give yourself this test to find out. Be honest. Have you, in the last thirty to sixty days, said to yourself, or someone close to you, the following: "Someday, I/we are going to ______." Be sure to fill in the blank with whatever it is that you want: Buy a bigger home, pay off credit card bills, get a better job, start a small business, travel around the world, play golf everyday. I think you know the drill. There is nothing at all wrong with being a dreamer. I am a big dreamer myself. That is what fueled my drive to write this book and do a nationally syndicated radio talk show. But dreams without action to make them happen never have a chance to materialize. Dreaming all the time without seeing your dreams materialize leads to frustration. Frustration often leads to depression and a feeling of powerlessness. Despair is a common feeling that can set in and often can lead to the ruin of families and individual lives. Unfulfilled dreams, in my opinion, are the leading killer of happiness. Just think of all the things you thought you would accomplish when you were in high school. The world was literally at your disposal when you were seventeen or eighteen years old. You could have had anything or been anyone you wanted. I believe this is true. With few exceptions, especially if you live in the United States of America, you have every opportunity to succeed at what you dream of doing with your life. Somehow, though, most people’s lives end up vastly different than what they had imagined. Dreams without action are not the only roadblock to success. Knowledge without action is also useless. If you doubt this premise, ask yourself why there are professors in colleges and universities across the world who teach successful business practices, yet, how many of them are— or ever become—independently wealthy? In spite of their vast knowledge of the subject of making money, they still go to work each day to earn a living. Teachers have immediate access to all of the known information in the world on creating wealth. For that matter, so do you and I. There are no secrets to becoming wealthy. It has all been written about. There are millions of books about how to generate cash flow. So why do so few of us reach the promised land of independent wealth? Why are the majority of people living paycheck to paycheck?
SEEKING SOURCES OF INCOME
As I have said, one major reason is that people do not run their personal financial lives as they would a business. For some reason, generating income from sources other than their job is foreign to them. Let me ask you this: Are you generating income from a source other than your job? If you are, you are way ahead of more than 90 percent of your fellow consumers. If you are not, you are no different than the majority of people in the world. Cash flow is the life-blood of business but it is no less important to you and I in our personal lives. Each day, in e-mails and on the radio show, the most common question I receive sounds something like this: "I am able to make my monthly bill payments, barely, but I don’t seem to be getting ahead. What should I do?" My answer often sounds facetious because it is so obvious of an answer. But, it is true, and a very easy thing to do. Increase your cash flow! What comes to your mind when you think of increasing your income? The answer will give you a good clue as to what your preconceived notions are about generating income. Some of you immediately thought about getting a better job or having to get a part-time job, or, of working overtime at your current place of employment. Others of you thought of investing or starting a small business. Some of you thought about having a garage sale. All of these are possible answers to the question of how you might increase your cash flow. Yes, there were also those of you who immediately thought of buying a lottery ticket. While there certainly are lottery winners, I want to encourage you to think in more realistic terms, and to think of possibilities that have a better chance of occurring than you being struck by lightening. And don’t forget to work that lottery ticket purchase into your spending plan! Now, here is the big, important question: How many of these realistic solutions have you tried this year, or last? Or ever? If you have not attempted to increase your income using any of these techniques, or others not mentioned, you can’t really say you have done everything you can do to improve your lifestyle. That would tend to put you into the "dreamer" category. As I said, dreams are good only if they are followed by informed action. If you are working forty to sixty hours a week and have a family, the idea of working another twenty or thirty hours may be too much for you to consider. And it probably should be. Remember, we are talking about improving your lifestyle. A big part of improving your lifestyle means spending more time at home with your family, not less time. This doesn’t mean you have no chance of increasing your income if you don’t spend more time at work and less time with your loved ones. It just means you will have to be a bit more creative than the vast majority of your fellow citizens. Let me take this opportunity to make the point very clearly that you will have to invest time in order to generate additional cash flow. It may not be twenty or thirty hours of overtime a week, or at a part-time job, but you will need to invest some time. It may be time spent preparing for and hosting a yard sale every weekend or time spent researching and starting a small business or investment program. There will be an investment of your time required.
SMART TIME INVESTMENT
Some have called this investment a "smart time investment." You invest time working extra hours at your job. But that investment returns dollars for your hours. No hours of work, no dollars. The smart time investment I am talking about here should yield more of a long-term return on your time investment. You want to find ways to invest your time once and then receive ongoing return-on-investment in the form of cash flow over and over again, even when you stop investing your time. The idea of investing your time versus spending your time is an important concept that you must understand and adopt if you truly wish to improve your cash flow in a meaningful way. You are investing time. Time is the most precious commodity known to man. None of us know how much time we really have to invest. We all get the same amount of hours in a day, but how many days will we get? Nobody knows. You’ve no doubt heard the phrase, "Time is money." If you don’t have a lot of money, you must invest your time. There is a big difference between spending time and investing time. You spend time watching television if you watch a sitcom. You are investing your time if you watch a television show on investing or starting a small business. In addition, if you want to start generating income from something other than a job, you will also be required to invest some money as well. It may not be much money, but it will be nearly impossible for you to start any type of legitimate business without some investment of funds. You can’t have a yard sale without putting up a sign. Even if the sign is homemade, it will cost something. The fact that you have to spend some time and money to make some money may be enough to stop you in your tracks. You may be thinking, "I’m in debt and can’t even afford to pay my bills. I don’t have any money to invest in starting a business." I understand why you would feel that way. However, your only other choice is to stay right where you are now, in the Someday Syndrome. "Someday, I will be out of debt and will be able to start a business, or do something else to generate income, so I won’t have to work so hard trading hours for dollars and leave my financial future totally in the hands of my employer." In the long run, your optimum goal must be to get involved in something that can generate cash flow on an ongoing basis with very little or zero personal labor or hourly time investment on your part. You start by putting in an investment of your time and money in an initial effort. If you have chosen properly, you will not need to work hard for a long time. Your plan should include a time frame for when your endeavor will show positive cash flow. If cash flow is too far down the road, you may want to consider something else before you start. The idea is not to get yourself another job—you already have one of those. When you work at a job, you trade your hours for money. If you don’t go to work, you will not generate money. If you start a business or invest properly, your initial efforts can lead to ongoing income even when you are doing things other than your business. At one time, I was involved in the long-distance business. It was just after the long-distance telephone companies were deregulated and many small companies, which were just getting into the long-distance telephone business, needed help marketing their services. I was marketing discounted long-distance service. I loved it.
Once I did the initial work to sign someone up for the new service, every time he made a long-distance call, I would make a small percentage of the monthly bill. Imagine, even when I was sleeping, people I had signed up were making long-distance calls and generating income for my family. This happened twenty-four hours a day, seven days a week. This same scenario exists in thousands of existing businesses, with new ones popping up every day. Your goal is to get involved in a business or investment that can deliver income around the clock whether you are working the business or not. You may need to hold some yard sales to pay off debt and generate some income to start your real income-generating idea, but that won’t go on forever. And don’t think you have to reinvent the wheel to be in business. Most successful business people get involved in already existing ventures and improve on them just a bit. I didn’t invent long-distance telephone service, but I did come up with some creative ways to get large groups of people interested in cutting their long-distance costs.
YOU DON’T NEED ANOTHER JOB
Many people think that the only way to start a business is to go the traditional route of starting a restaurant or a retail store of some sort. The investment of time and capital to properly do something of that scale is virtually impossible for most working people, so they give up on their dream. In my opinion, your dream really should not be to start a business. Starting a business is a means to an end. The real objective should be to create cash flow from a source independent of your personal labor. One reason I think a large percentage of business start-ups fail is due to the fact that the owners started a new job, not a new business. They did not set up the business to run independently of their personal efforts and so they burn out and things start to slip. You see it all of the time and it is sad to see. It is actually very easy to rent some space, buy some inventory, print some business cards, and say you are in business. In fact, within twenty-four hours or less, you could set yourself up in business for very little cost right from your kitchen table. According to the Small Business Administration, most small businesses are started with $20,000 or less. But, will you be generating revenue? Probably not. Getting into business is not the goal. If it is, do it today and consider yourself successful. However, the subject of this chapter is cash flow, and without it, your business is doomed. I don’t have to tell you that without proper cash flow, your personal financial life is doomed as well.
POSITIVE CASH FLOW
By proper cash flow I mean positive cash flow. No doubt you have heard the term positive cash flow used before. It simply means you actually have money left over at the end of the month. If you end each month with no extra money or are actually in a negative position where you owe more in expenses than you have coming in to cover the bills, you are in a dangerous place and must take action immediately to change things around. You must do whatever it takes legally to get yourself into a positive cash flow position, in business and in your personal life. I can’t tell you how many people I come in contact with who are just a few dollars from positive cash flow. I mean, less than $100 a month short of paying all of their bills in full and on time. That is just $25 a week. Quick, think of five ways to earn $25 a week. I will give you ten seconds. Did you do it? Great, then you just thought of five ways to increase your cash flow by $100 a month. You may have thought of things like having garage sales, cutting lawns, shoveling snow, setting up a table at the local flea market once a month, typing resumes or college papers, cleaning homes or offices, cooking for others, bringing items to a consignment shop. Some of you thought of your professional or job skills you could offer for sale. If you thought of five ways to create an extra $25 a week and you do all five, you can have $500 a month in extra income. Would $100 or $500 extra each month make a difference in your family’s lifestyle? You bet it would. Have you ever seen a neighbor drive by in a brand new car, like a BMW or a Cadillac, and said to yourself, "How can they afford that?" You just answered that question for yourself with the "five ways to $100" exercise. Sit down and list every skill, interest, and ability you have—or could learn fairly quickly—and you will begin to see how valuable you really are. Then choose the skills that you can translate into cash flow generation without a great deal of time or financial investment. What can you do this week to create some cash flow? What starts out as a way to create o a multi-million-dollar business.
$25 a week could eventually grow to millions if done properly.
PAY ATTENTION TO THE MARKETPLACE
There is lots of advice around about starting businesses. A common piece of advice is to take a hobby or other favorite pursuit and make it into a business. I will admit, there have been cases where people have taken a hobby and grown it into a business. But it really depends on what your hobby is. Is it a hobby that is also enjoyed by millions of other people? If so, then maybe you have a chance of being successful. I once received some very useful advice from a very successful businessman. We were discussing marketing strategies and how he came up with new products to sell. He told me: "When trying to come up with new things that others would like to buy, never be an audience of one." He went on to explain what he meant by the term, "audience of one." He told me that just because he liked to read the Wall Street Journal everyday, he realized more people read tabloids each day. Just because he could afford to shop in the most expensive stores and price had become less important to him, he had to keep in mind that most people live on a fixed income and price really matters to them.
Your personal preferences, while they should play a role in any business decisions you make, must take second place to the desires of the majority of the marketplace you wish to serve; that is, if you want to generate cash flow and profits. There are plenty of companies that are, simply, labors of love for the owner, whether they make money or not. However, these businesses don’t necessarily bring their owners closer to positive cash flow. If the business you create can’t run while you are home or on vacation, or doing something else, then it is a job, not a business. If your business is effectively "closed" when you take a day off, you have not separated yourself from having to trade your hours for money. Since my business is my creativity through my writing, the daily radio show, and other creative endeavors, I could be in the same situation. However, thanks to technology, I can write and broadcast the radio show from just about anywhere on earth. So, to
that degree, I have freedom. In my situation, we use leverage to create revenue. My radio show is rebroadcast during the week with some stations airing the show even when I am asleep. Our Web site, www.mikeshow.com is open for business twenty four hours a day, and our books and newsletters are available for sale long after I have put in the initial effort to create them.
SMART TAX STRATEGIES
Another great reason to create a small, home-based business is because of the potential tax savings you can create. I am asked constantly for strategies for reducing taxes by people who are working hard at their jobs and hate to see how much money is taken out of their paychecks each payday. One of the first questions I always ask them is if they have a small business. The tax code is friendly to legitimate businesses. Most people dream of being their own boss. By starting a small business, many expenses that were personal now may become partly or fully tax deductible. Business startup and operational expenses, tools, home office furniture, office supplies, cost of goods to be sold, travel, mileage, subscriptions, meals, entertainment and gifts, some insurance premiums, and retirement contributions are some of the many legal business expenses that can help you actually reduce your taxable personal income while you build a small business. IRS Publication 535, "Business Expenses," explains the rules for deducting business expenses very clearly. I suggest you print yourself a copy of this form when you visit www.irs.gov. But remember, the idea is to create cash flow from your business. Your goal is not just to create tax deductions. Most businesses take a few years to see positive cash flow, but when you begin to create positive cash flow, you will create tax liability on your profits. Many state and local governments levy additional taxes upon commercial ventures, and even small, home-based entities are not immune. When you get to the point where your business is creating revenue exceeding your expenses—a surplus—it would make sense to hire a good certified public accountant, tax attorney, or both, to help you structure your business to again minimize your tax liability to the least required by law. It is important that you understand how to properly utilize the tax deductions that are available to you under the law. As reported in the February 2003 issue of Kiplinger’s Personal Finance Magazine, 100 million American taxpayers overpaid 2002 taxes by $200 billion. If you are currently overpaying your income taxes, you can actually increase your weekly take-home pay from your job by making a simple adjustment to your W-4 form. Remember, you are the one who tells your employer how much to take out of your paycheck each payday in order to pay your income taxes for you. If you adjust the number of allowances on your W-4 form at work, the amount of money taken out of your paycheck and sent to the government on your behalf would change. The higher the number of allowances you list, the less money taken out of your paycheck. Now, you cannot just take a large number of allowances in order to reduce your tax burden. You are required by law to pay the proper amount of taxes due based on your taxable income. So this strategy is only viable for people who are creating legitimate tax deductions based on IRS guidelines and who itemize their tax returns. If you underpay taxes during the year, you risk audit and fines from the Internal Revenue Service. However, if you overpay, the IRS will give you your money back without interest once you file your annual tax return. Most people overpay their taxes and get a big refund each year about forty-five days after they file their tax return. The average tax refund this year is running $2,400. A simple adjustment in your company’s payroll office will give you an instant raise in your take-home pay. I have heard all of the reasons why people overpay taxes. These excuses include being afraid of being audited by the IRS and liking the idea of getting a big, lump sum of money once a year. My response to these two very popular reasons for overpaying taxes is the following: One, if you are doing things legally, an audit should not scare you; and, two, that lump sum once a year is coming to you without interest. You would be better off adjusting the number of your personal allowances on your W-4 form, if your situation allows, getting an increase in your take home pay, and putting the increase into a savings account paying 1 to 2 percent interest. You won’t have the government doing the savings work for you anymore but you will be earning interest on your hard-earned money. The extra income might allow you to pay down high interest debt. For example, if you pay off an 18-percent credit card debt with your pay increase, you are effectively earning 18 percent return on that investment. Isn’t that better than getting zero percent from Uncle Sam? What if you could just increase your take-home pay by $25 a week or $100 a month by doing a little tax planning? Yes, it will require you to look at your finances and your taxes this year instead of next April when most people start to deal with their taxes. If you wait until the end of the year to start thinking about your taxes, your opportunity to do anything about how much you owe will be lost. You need cash flow now, so now is the time to plan and make adjustments, which will give you more cash flow.
YOUR CASH FLOW ACTION PLAN
A small home-based business can give you opportunities to lower your tax burden and it can also allow you to create additional income. A small home-based business can lead to something big in your financial future. You could eventually replace your job income totally. It won’t happen overnight but you could actually become wealthy with your business or businesses. You are in the right country to make it happen. Wouldn’t it be a great story? You start a small business because you needed some extra money to pay off some credit card debts and you end up becoming a millionaire. It happens every day in this great country so don’t ever count yourself out of the game. Whatever you ultimately choose to do, be sure to keep foremost in your mind the fact that you need to create cash flow. You don’t want to end up creating even more debt for yourself in an attempt to pay off personal debt by borrowing lots of money to start a business. But, there is nothing wrong with making some short-term investments if there is a high probability of them paying you back within a time frame that is acceptable. If you need quick cash to catch up on some late bills, starting a business that will take twelve months just to break even does not make sense in your situation. It all should start with you taking the time to access your short-term and long-term needs and then creating an action plan that matches your desired outcome. Short-term goals are things you can accomplish within the next twelve months such as paying off some credit card debt and reducing expenses. Long-term goals help you plan for the next two to five years and might include paying off a car loan, saving a certain amount of money in your child’s college fund, and generating enough income from your home-based business to replace the income you now get from your job. It is very difficult to generate quick cash by starting a business, or through any other investments, because you need some time for any investment to create a return. This fact limits your choices to what is immediately available to you. For most people that means looking for more hours at your job—if you are paid hourly, and more work is available—or, possibly, it means taking on another job. If your short-term goals require quick cash flow, this may be your only option. But, in your long-term plan, the second job should be replaced by something that is a little more family and personal-health friendly. A very commonly overlooked way to generate additional cash flow each month to help pay your bills is by cutting monthly expenses. I know, this seems such an obvious solution yet, so many of you procrastinate on this very important part of your financial plan. The name of this book is Spend Your Way to Wealth. Obviously, we realize spending money is a requirement in life. Where you spend money and how much you spend on everything you buy is the part you can manage successfully. Cutting expenses is not synonymous with cutting your lifestyle. As you must know by now, the popular belief is that cutting expenses requires a great deal of sacrifice and deprivation, but I do not necessarily accept that. I’ve shown you that if you know how to buy a car correctly, you can still afford to drive your dream car. The same goes for your home, clothing, and every other thing you can think of. If you want to generate more cash flow, you must start by completing a monthly spending and net-income analysis in order to see where you are spending every penny that is coming into your home. A spending and expense analysis is the only way for you to actually see, in black and white, where you can make some changes in order to free up cash to pay your bills and start to save money. Even if you start to generate more income from a second job or small business, you should complete a spending and income analysis every month, since, as I’ve stated elsewhere, there is no amount of income that you cannot outspend, if you’re not attending to your expenses.
INCREASING CASH FLOW BY LOWERING MONTHLY BILLS AND FEES
When attempting to work on a spending analysis, there seem to be many areas of expenses that are missed. A commonly overlooked area of expense is credit-card interest rates. It is shocking how many people do not know what interest rate they are being charged when they borrow money by using a credit card. Even fewer people know the dollar amount of fees that can be charged on their accounts if they are ever late with a payment or charge more than their limit. I suggest you call all of your credit-card issuing companies and ask them what your interest rate is on each of your accounts as well as how much they could charge you in fees; also check your annual fee. Next, while you are on the telephone, ask for a lower interest rate. If you have been a good customer and have made on-time payments for the past twelve months, even if you’ve only made the minimum required payments, chances are good that the creditor will grant your request for a lower interest rate. Competition for customers is fierce right now in the credit card industry. If your company will not lower your interest rate upon your request, and your credit score and credit report are in good shape, I suggest you shop for lower interest rate cards and, if approved, transfer your debt to the new card at the lower interest rate. While you are on the phone requesting a lower interest rate, be sure to ask the company to eliminate your annual fee if you are paying one. That annual fee represents $25 to $100 that should be in your pocket, not in the credit-card company’s coffers. Those companies make enough profit on the interest, late fees, and over-the-limit fees they charge. Again, if the company will not eliminate your annual fee, you may want to shop for a company that does not charge an annual fee. Don’t be afraid to ask for these things. You have nothing to lose and cash flow to gain.
Your utility bills offer another overlooked opportunity to cut expenses without cutting into your lifestyle. Turn off lights in unused rooms, shut off the hot water while shaving, and consider canceling your cable television connection for a short while until you can affordably work it into your plan. Check your long-distance telephone usage and find a cheaper rate. You should not be paying more than 4 or 5¢ a minute for long-distance service. Use e-mails more to communicate with others, or wait for people to call you rather than calling them. Speaking of telephones, watch out for the costs associated with your cellular telephone. Since so many people have cellular telephones today, they are used without giving thought to the expense. It is very convenient to use a cell phone at the drop of a hat. These costs can really add up if you are not on a monthly plan that matches your level of use. If you are surpassing the amount of included minutes of your plan every month and paying for expensive minutes, talk to your representative about moving to a different plan. If you really take a good look at what you use your cellular telephone for, and were willing to adjust your habits just a little, you could trade a little bit of convenience for a less-expensive monthly cell phone bill. Again, a few more dollars in your pocket at the end of each month is your goal. Investigate the viability of refinancing your mortgage for a lower interest rate. As I write, mortgage rates are at a forty-year low level and if you are planning to stay in your home for at least the next two or three years, refinancing for a lower interest rate may make sense for you. Make sure you are not paying outrageous monthly bank fees. This is an area that can quietly eat a big hole in your finances, especially if you use your ATM card a lot at machines that are not owned by your bank. As you read this, someone, somewhere, is taking $10 out of an ATM machine. She will pay a $1.50 fee to the bank that owns the ATM machine for processing the transaction and pay another $1.50 fee to her bank, also for processing the transaction. This represents a grand total of $3, or, a 30 percent fee, to get $10 of her own money out of her bank account. Paying fees like this saps you of cash flow. Instead of buying your lunch everyday, pack your lunch even if it is for just a month or two. Remember, these are just suggestions. If you enjoy eating out each day, just work it into your monthly spending plan. There are many ways to create more cash flow in your life and you can start to do many of them today. Life and business both come down to cash flow. That is the system we have. It would be great if we did not need cash to live. We could all go off and pursue the hobbies and other things in life that bring us joy. Until you have enough cash flow separate from your personal labor, you will never be truly free to do what you want when you want. Approach the task of generating cash flow for your family just as you would if it were for a business you owned or managed. This is the business of you—You, Inc.—and there is no more important business in the world.
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