Money Smart Skill: How to pay yourself first
The money smart skill of paying yourself first is a tough one for many. My first years in business I felt like the pay machine for everyone but myself. Across the board every financial advisor I consulted preached the importance of paying myself first, yet I could not feel good about taking money out of my business when I still had bills unpaid at the end of the month. Finally I had to face the fact that if I could not pay myself then I had no business working for myself.
In order to pay myself I had to bring in more income and/or lower my expenses. The money smart skill of paying myself first had to become a priority and I knew I had to change my entire mindset about money. Instead of looking at money itself I started looking at how to use it differently. For instance, I knew I could not work more hours than I was working so I had to look at other sources of income that did not require more hours of work from me. At least not long term.
Network marketing was a Godsend for me. At first I worked a few more hours a week but as I gained more skills I had income coming in each month based on my previous efforts. My network marketing efforts did not bring in huge sums of income but the consistent checks gave me room to breathe and allowed be to work a few less hours a week. By working fewer hours was able to study more and increase my skills which allowed me to raise my prices.
Two ways I increased my income:
Started a network marketing business
Advanced my skills and raised my prices
Next I looked at how I was spending money. At that time I was renting my clinic and it made sense for me to buy my own property. Purchasing my own clinic was a way of paying myself because I was building equity in real estate. Another way of paying myself was to start contributing to a SEP retirement fund which also saved money on taxes. The money smart skill of paying myself first began to shift my bottom line and over the years allowed me to gain financially.
Two ways I paid myself:
Purchased my own clinic and stopped paying rent
Invested in a SEP retirement account
Because the money was automatically invested through mortgage payments and direct withdrawal from my bank account I never had to make a choice of paying myself or paying bills. Interestingly, the bills still got paid. Madalyn
Enjoy our free E book: Journey to Enlightened Wealth
Money Smart Skill: Appreciation of residual or perpetual cash flow monthly
Recently I asked myself why I get so excited about small increases in my residual cash flow monthly and take my more significant earned income for granted. It is not that I don’t appreciate the money I earn in my veterinary practice but I see that money evaporate when the bills come due and then I have to earn it all over again.
My residual cash flow monthly, on the other hand, is based on past effort and financial investment. Although generally a smaller amount than my earned income I don’t have to earn it every month, it just shows up. I love that. I have spent to last 15 years developing the money smart skill of shifting my overall income from primarily earned income to residual cash flow monthly.
Residual is what is left over at the end of a process, in the case of residual income it is money that comes to you regularly in return for your past work and investment efforts. You might argue that you should have money left over after paying bills with earned income. This is true but you have to work for that money each time.
Passive is another term for residual income but I don’t like it because it implies that the income happened with no effort on the part of the receiver. Nothing could be further from the truth. Creating residual cash flow monthly requires significant effort, sometimes working months or even years with little reward.
I prefer the term perpetual income which means something that continues indefinitely without interruption. Some people call this mailbox money from back in the days before direct deposit.
Lets look at a hypothetical example of how earned and perpetual income compare over the course of a few months:
Month 1
Earned income $1000 with $200 left over after paying bills
Month 1
Perpetual income of $200 from investments such as rentals or a network marketing business
Month 2
Economy slows. Earned income $800 with none left over after paying bills
Month 2
Economy slows. Perpetual income of $200 remains consistent
Month 3
Great economy. Earned income $1200 with $400 left after paying bills
Month 3
Great economy. Perpetual income of $200 remains constant
Month 4
Brief illness limits work. Earned income of $800 with none left over after paying bills
Month 4
Brief illness does not affect perpetual income of $200
Month 5
Vacation needed to recover from illness and overwork. Earned income $800 with none left over after paying bills
Month 5
Perpetual income of $200 comes right on time while you enjoy vacation
Month 6
Back to normal. Earned income of $1000 with $200 left after paying bills
Month 6
Perpetual income of $200 remains constant
Lets look at the final tally over a typical 6 month period:
Earned income $5600 with $800 net
Perpetual income of $1200 with $1200 net
Earned income and perpetual income combined $6800 with $2000 net
This may seem like a simplified example but it is a reflection of reality. If you ever wonder why you don’t get ahead with earned income alone I hope this helps you understand. I am not saying quit your job but I am suggesting you consider adding a source of perpetual income. Keep your job to pay the bills and create perpetual cash flow monthly to enjoy your life. Madalyn
Free E book: Journey to Enlightened Wealth
Photo credit: http://www.flickr.com/photos/joeshlabotnik/ / CC BY 2.0
Money Smart Skill: Patience
I got a very late start with my financial education but I have been working hard to catch up. My favorite mentor is Robert Kiyosaki of RichDadPoorDad fame. Kiyosaki created a board game called cashflow to help teach people his financial strategies. In the game you draw a card that has a profession on it and you get a list of expenses and your cash flow monthly. The goal is to escape the rat race board and graduate to the fast track.
After playing the rich dad financial education game, cashflow, many times I have found the way to consistently get out of the rat race in less than 2 hours. I always draw the doctor card even if I am not trying to. I think God is wanting to make a point. The doctor card is one of the most challenging cards because it carries the highest cash flow monthly.
Right, I said the highest income. It also carries the highest monthly expenses and the object of the game is to get your passive cash flow monthly higher than your expenses. You might think a big monthly paycheck would be the ticket to building passive income but that is not necessarily the case. Passive income is money that comes through businesses, rental income or other investments. In the rich dad financial education game, cashflow, you must build up a portfolio of investments until your passive cash flow monthly exceeds expenses.
In the cashflow game you have expenses that are fixed and you have debt that you can pay off to lower your monthly expenses. Like the game I have fixed expenses such as malpractice and liability insurance, home insurance, license and association membership fees as well as mandatory continuing education. In the game you have fixed child expenses and they are higher for the doctor card. I have 4 legged children and they have significant expenses associated with them that are not negotiable.
When I first started playing cashflow I was so frustrated to see other players, who drew the truck driver or mechanic card, breeze out of the rat race once they got the hang of the game. Despite all my money making efforts I was always the last to make it. This cost me a few sleepless nights.
So what is the secret I finally discovered about getting out of the rat race? Patience! This has not been an easy lesson for me. When I first played the game I tried to save my money so I could invest in some big deals. This never worked. Then I tried to borrow money to make big deals. This did not work either. I resisted the reality of my situation and was sure I could make one big deal and change my financial situation quickly.
Finally I resigned myself to being the last one in the game to get out of the rat race and low and behold I started having success. I learned to follow a boring plan of paying off as many of my high expenses as possible. While other players were able to invest and buy real estate I did best when I stayed with my plan. Get a paycheck, pay down debt was my life for 75% of the game. My action oriented temperament fought against this strategy but I persisted.
As my expenses went down I began to have a little extra to invest if I was careful. When I stopped trying so hard to get ahead and focused instead on the basic principles of paying down debt and investing in good deals when they presented themselves I made headway.
The cashflow game has been such a powerful learning experience for me. Based on my experience playing the game, when I decided to make my move to Fischer I took on my high expenses with open eyes. I knew I would be challenged but I also understood that I could work smarter to lower my debt and build my passive income at the same time, SLOWLY.
The path I have taken in not what is recommended in most financial education books. I did not start saving when I was 20 and I don’t have a big retirement account. I chose to live above my means and continue to work smart to get my means up to speed. I avoid consumer debt but sometimes I have to use short term credit which I pay off as quickly as possible. I understand that high, non fixed interest payments on credit cards make it very hard to get ahead financially.
Even though I got a late start with my financial education, I do have some savings and I am continuing to add to my passive income from several businesses. I love being a veterinarian and an entrepreneur. I am looking forward to having even more time to spend with my animals but I am not wanting to retire early.
Some months or even years are tight and I don’t get to do all the improvements I want to on my property but I know I am on the right path. I am learning to be patient and let time work for me as my debt gets steadily lower and my cash flow monthly gets higher. I am so glad to have the financial education to understand about money and have a plan and watch it unfold over time. Every day I am more appreciative of the gifts God has given me. Like patience. Madalyn
Did you get started late? Not sure how to get your cash flow monthly up? I would love to have a conversation. Contact me.
Photo credit: flickr via creative commons
Money Smart Skill: Do you know your money model?
Do you know your money model? By this I mean how do you earn and spend your money. Is your model to earn a salary and spend less than you learn? Is your money model to build a business and live off the proceeds of this business? It is a very important money smart skill to know your money model then to ask the very important question – is this model working in your life?
How do you know if your money model is working? Well, are you able to pay all your bills each month and have money to set aside for investment and retirement? Is your quality of life what you want? Are you able to tithe and help others? If you answered no to any of these questions then your money model is not working for you.
Back in 2000 I had to look at my money model. My model of working harder so I would have enough money to pay my bills, invest and still have time to enjoy my horses was not working. Luckily Robert Kiyosaki gave me a new model via his RichDad education books.
Changing models or paradigms is not something one does easily, especially if the model is one that has been in place for a long time. A great book to read about understanding models is Personal Career and Financial Security by Richard J. Maybury. Maybury emphasizes that for you to be successful you have to base your decisions on a sound model.
Personal Career and Financial Security is only the first in a series of books to help you understand models, history, economics and politics. I am finding these books fascinating. They are helping me understand that just because I changed my model does not mean I will be instantly successful in life and finance.
My money model now is based on the money smart skills of:
1. Decrease bad debt
2. Increase my cash flow monthly
3. Invest in assets
This is not an easy model but it is a sound one. One month may get me 2 steps forward and the next 1 step back but I am gaining. How about you? Is your money model working? Madalyn
Want to find out what I am doing to increase my cash flow monthly? This cash flow model is not for everyone but if you are interested in finding out what I am up to get in touch.
Money Smart Skill: Where does your money go?
I am retiring another checkbook cover. I opened this business account in 1986 and I have written over 13,000 checks on it. Even at averaging a modest $200 per check, a lot of money has passed through this account. Where did all that money go? Knowing where your money goes is an important money smart skill.
I went into business with a very poor financial education. Most of my cash flow monthly went to paying bills. I was not introduced to the Kiyosaki, RichDad financial education program until I read his first book in 2000. After a brief period of total shock at how little I understood about finances, I set about figuring out what was happening to my money.
In the year 2000, despite having a thriving veterinary practice, I had no assets. Kiyosaki stressed the importance of looking at profit and loss statements to determine where your money is going. When I started tracking my money it was clear that paying interest on consumer loans was where much of my money went. What a shock to find that a simple thing like not planning for consumer purchases was keeping me broke. Tracking my money was a money smart skill I had to develop if I wanted to change my future.
According to Kiyosaki, it is not only important to determine where your money actually goes but also to plan for where you want it to go. The Kiyosaki, RichDad education program teaches you how to invest in assets that will pay you and then you can use that money to buy things you want. This way you keep your original money or principle intact. What an amazing concept.
Tracking your money, budgeting your money and investing your money are all critical in controlling where your money goes. If you don’t take control of your money it will take control of you. Madalyn
Three money smart actions:
1. Reduce bad debt – consumer loans, loans with variable rate interest
2. Increase cash flow monthly – increase income or reduce expenses
3. Invest in assets – investments which bring in positive cash flow monthly
Photo credit: Flickr via creative commons
Money Smart Skill: Is refinancing a mortgage right in this recession economy?
Robert Kiyosaki often says that being able to gain experience from solving problems is an important money smart skill. In this recession economy, I am having lots of learning opportunities. I made a bad real estate investment by purchasing a rental property close to the height of the real estate boom and keeping the property rented and the negative cash flow monthly covered has been a challenge.
One benefit of the recession economy is that lenders are lowering their standards on refinancing but not all deals pay in the long run. It is a money smart skill to be able to sort through all the hidden costs of a refinance deal to determine if it is worth the lowered payment. I recently got all excited about a deal I thought I was getting but reading the fine print quickly burst my bubble.
I had heard that refinancing usually costs between 3 to 6% of your outstanding mortgage principle so I was thrilled when my agent told me my closing costs would only be $1300 hundred dollars to lower my monthly payment by $200. Luckily I did not break out the champagne. When I read over the papers the trade off for decreasing my negative cash flow monthly was not only the $1300 at closing but an additional $6200 in fees added on to my loan and a new 30 year mortgage rather than the 24 years I currently had remaining. Not a good deal!
Refinancing can be a good idea if these criteria apply:
You will be living in your home long enough to recover the refinancing costs, usually 5 to 7 years
Your new loan is for less than 80% of the current value of your home
Your new loan balance does not exceed the total amount of your existing mortgage
Your credit rating is equal to or higher than when you took out your original loan
You have an adjustable rate mortgage(ARM) and you expect a significant increase in rates before you plan to sell your home
I am not blaming my loan agent for not being totally clear about all the costs. It is my responsibility to get my money smart skill level up to speed. I learned a lot by going through the process even though I did not decide to do the refinance. I also looked into making my payments twice a month instead of once and found that this would not give me additional benefit over making 1 extra principle payment each year. I am not losing faith. This recession economy may be around for a while and I may have another opportunity to refinance at lower rates. In the meantime, I am smarter now. Madalyn
Like this post? Check out: Congratulations, You just failed
Photo credit: flickr via creative commons
Spend Now to Pay Debt, Borrow Later … and Other Recession Economy Lessons
Guest Post by Stephanie Yeh
Doing the right thing is always a good thing, but not necessarily an easy task, especially in this recession economy. Turn on the news and you are likely to end up depressed. Ignore the news and you might miss an important newsflash that could affect your financial future.
So what’s a person to do?
Two Basic Money Smart Principles
I’ve learned quite a bit reading the Go Cash Flow Now blog by veterinarian Dr. Madalyn Ward, and that’s why I’m writing this guest post. I want to share some of the money smart lessons I have learned from this blog. Hopefully these lessons will help other people as well, since making the right financial decisions can be terminally confusing. I have learned a lot from this blog, and here are just two basic principles that have really played a big role in my financial security in this recession economy.
Money Smart Lesson #1: Pay Off Debt ASAP
One of most important and counter-intuitive lessons I have learned from this blog is this: pay off debt now, even if that means borrowing again later. This important lesson comes from playing Robert Kiyosaki’s Cash Flow game. The goal of the game is to get out of the rat race, where you trade your time for money rather than having passive income sources like rental income. In the game, you play a character, like a plumber or a doctor. Being a veterinarian, Madalyn frequently picks the doctor card because it matches her lifestyle of high income AND high expenses.
What is really interesting is that when Madalyn pays off debt every chance she gets, starting with the high-interest credit cards, she gets out of the rat race faster than if she waits to accumulate enough cash to pay off the whole debt. Even if she has to borrow money from the bank later, she still gets out the rat race sooner. I have done this and I feel so much better. I really sleep better at night … even knowing that I might have to borrow again in the future.
Money Smart Lesson #2: Save Money but Stay Sane
While belt-tightening is definitely a big money smart strategy, I have learned from this blog that you still have to spend money occasionally so that you can stay sane. If you over-tighten your spending so that your quality of life is low, you won’t feel positive about your life or your money situation.
Madalyn and I are both horse-crazy, and we both have spending weaknesses in this area: Madalyn likes to buy high quality tack and I collect horses, especially mustangs. Whenever we feel like splurging we call each other and prevent each other from over-spending.
For instance, if I spot a gigantic jumper-perfect mustang that I want to go adopt, NOW, Madalyn talks me out of it and helps me spend a lot less to maximize my experience with my two current horses. I spend a little bit to stay sane, but don’t saddle myself with the expense of taking on a new horse.
We are always looking for others who want to inspire each other to spend wisely on horses and other hobbies. Want to play?
Money Smart Skill: How to resist impulse spending
Perhaps the most overlooked and under appreciated money smart skill is patience. Patience is required to resist impulse spending. My Kiyosaki, Rich Dad education has taught me about how to be patient in waiting for my businesses to grow into income producing assets but gaining long term financial freedom also requires the ability to resist impulse spending.
Impulse spending has been a huge challenge for me in past years so I have to put safeguards in place to help me resist. For instance, I really, really want a yard fence. My goats and horses are constantly knocking over my stuff, eating out of the bird feeder and pooping in my yard area. I would love to have an animal free zone around my house. Before I would not have hesitated to spend this money even if it meant putting the expense on my credit card. I did not worry about having credit card debt because I knew I could just work a little harder to pay it off.
Thanks to my Kiyosaki, Rich Dad education, I have come to realize what a disaster credit card debt is and how it holds me hostage from realizing my long term financial freedom. This past year my focus has been on developing the money smart skill of patience to resist impulse spending. I can’t do this with willpower alone so I have some built in systems to help me.
Steps to help you prevent impulse spending:
Have a short term budget and long term financial plan in place and stick to it
Have your monthly expenses automatically withdrawn from your bank account
If you have any non fixed credit debt, have a set payment withdrawn from your account every month until this debt is retired
When you shop, make a list and bring only enough cash with you to cover your list
Keep a set amount of cash on hand to reward yourself for resisting impulse spending
So, my yard fence will have to wait. I am paying down some credit card debt and the payment is being withdrawn from my account each month. Skipping one payment would cover my yard fence but it is easier for me to resist since I would have to stop the auto payment. By waiting the extra 9 months to pay off this card debt I will be able to build my yard fence and have a clear conscious that I am sticking to my long term plan.
I know myself well enough to realize that if I have money in my accounts I tend to spend it. I have learned to have money automatically transferred out of my main account and into an investment account that is not to be touched except in an emergency. Unfortunately, my yard fence does not constitute an emergency. I do keep a little cash slush fund for occasional shopping sprees as a reward for resisting big impulse spending.
I also listen to and trust my spirit to guide me where and how to spend money. Sometimes deals appear that justify deviating from my plan. For instance, a great deal on hay comes along that will save me money in the long run. Even with these kind of deals I ask for guidance before I make a decision. Over the years I have learned that some impulse spending can look good at the time but not end up working out. If I listen and trust guidance from my spirit things work out well. Madalyn
Check out our Free E book
Money Smart Skill: How to raise your monthly gross income without working more hours
Raising your monthly gross income without killing yourself overworking is a valuable money smart skill. I was raised with the belief that if I wanted more money the only way to have it was to work more hours. This is the classic time for money trap that can lead to overwork.
The person who is an employee or is self employed understands well the concept of working more hours to make more money. The challenge is when you run out of hours you can work and you still need to increase your monthly gross income to make ends meet or enjoy the lifestyle you desire?
To increase your monthly gross income without working more hours you have to master the money smart skill of generating passive income. When I was growing up I never heard the term passive income so I did not even know such a thing existed. The first time I read the Robert Kiyosaki book, Rich Dad Poor Dad, light bulbs started going off like fireworks in my head. The whole concept of having money come to me that I did not directly trade my time for was mind boggling.
First, I want to say that the term passive income can be a bit deceptive. It kinda sounds like you don’t actually have to do anything to earn the income and nothing could be further from the truth. Building a passive income producing asset is hard work. The secret to passive income is doing the hard work up front and then reaping the rewards for your efforts on an ongoing basis.
For example, I have been working of building an internet product sales site into my veterinary website for over 5 years. My goal has been to provide holistic products to my customers and generate passive income from repeat sales. Sounds easy but in reality it has been a huge challenge and learning experience. After 5 years of effort, my partners and I are beginning to see an increase in our monthly gross income and for the most part we are not having to put significant time in. If someone were to look at our current business they might conclude that we were making profits without working for them but in reality we have worked very hard for those profits through past effort.
So, what I am saying is to raise your monthly gross income without working more hours initially you have to work more hours. You also have to learn new money smart skills and stay focused on your goals even when you do not have a boss or customer breathing down your neck.
A few possibilities for raising your monthly gross income without working more hours indefinitely include:
Build an internet marketing business
Write and market a book
Invest in rental property
Grow a stock portfolio that focuses on raising your monthly cash flow
Join a network marketing company and build a network of customers who order monthly
Of all these options, network marketing is by far the most accessible to someone who does not have significant money to invest. A company that offers a solid product, business plan and long term vision will save you years of time and learning curves. Raising your monthly gross income without working more hours is a money smart skill that will serve you for the future and allow you to live your dreams. Madalyn
Check out our free E book
Interested in starting a home business: Contact me
Recession Economy: Inflation is a hidden tax
This recession economy has been with us for much longer than most similar periods in the past. Words like deflation and inflation are thrown around but few actually understand the implications each of these has on our lives. Our understanding is complicated by the fact that we can have one or the other in different sectors of the economy.
At this time we have deflation in the housing market, but inflation in the cost of energy, consumer goods and health care. Our interest rates are still at record lows but starting to rise. The challenge with deflation is that businesses have such low profit margins that they can’t afford to expand and hire new employees. At some point, continued deflation in prices will put many companies completely out of business. Increased energy costs also drive up the cost of raw goods further eroding profits.
The federal reserve is attempting to combat deflation by keeping interest rates low to encourage people to borrow more money and spend it. They are also printing massive quantities of dollars in an attempt and create controlled inflation to shift us out of the recession economy. The problem with both of these strategies is that interest rates will eventually have to come up and, controlled or not, inflation eventually lowers the value of the dollar.
To summarize:
Deflation of the dollar increases its purchasing power but too much can slow down expansion of the economy and jobs
Inflation decreases the purchasing power of the dollar but supposedly helps with growth and expansion in our economy( I don’t believe this)
This is where the hidden tax concern shows up. The government can take a portion of your income in the form of a obvious tax or they can use printed money from the federal reserve to sell as bonds which lowers the value of the dollars you have. In other words, the government gets the printed money before it goes into circulation and loses value. For more on this concept check out The dollar is not money.
The fact that we are printing money to lower the value of the dollar is not lost on the foreign nations we have loans with. They have no desire to be paid back with dollars that are worth less than what they were when the loan was made. Based on our actions, future loans will come with much higher interest rates, if they come at all.
What we can do to protect ourselves from manipulation of our currency during the recession economy:
Elect officials to all levels of government who will be fiscally responsible and curb spending
If you foresee a need in the next year for a product, make that purchase now to support our businesses
Do not spend money on non necessities
Do sell stuff now that you do not need
Do not hold savings in the bank in the form of dollars
Do hold your savings in products that have real value such as real estate or precious metals, such as silver
If you invest in the stock market, focus on commodities that people must have for survival, such as energy and food
Pay off all debt that does not have a fixed, low interest rate
Educate yourself on economic and financial issues
Do not depend on elected officials or proclaimed financial advisors unless you see positive results from their actions
Do look into starting a home based business that will give you additional cash flow
I make these recommendations based on my research but you should do your own study to determine what is best for you. I have a good books section of my blog that can help you get started. I believe our recession economy will right itself based not on government action but the actions of each of us as individuals. I believe the American people will get it right and lead the rest of the world back to prosperity. Madalyn
Check out this video on the Fed Printing Money
Check out our free e book
Photo credit: Flickr via creative commons
