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
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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
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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.
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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
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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
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Money Smart Skills: Being willing to work today for someday money
Money smart business owners understand the concept of working hard now for money that will come someday in the future. Patience is one of the most important money smart skills and also one of the hardest to develop. We live in a world of instant gratification and waiting for many people is not an option.
Building a business is all about working hard now for what you will reap someday. In most cases that someday is not well defined or completely in the control of the business owner. It takes someone with an entrepreneur spirit of adventure to work hard to lay the foundation of a business and wait for the payback but this is exactly what makes money smart people wealthy!
Business building activities that don’t generate immediate income:
Building a brand or reputation
Finding the best location or building the best website
Developing a product
Marketing a product
Hiring employees
Building infrastructure such as purchasing equipment and setting up utilities
Finding financing for start up expenses
It is pretty obvious why many people don’t jump right out and start their own business but what if most of these business building activities were already in place? A franchise is an example of a business that has much of the initial work done. Network marketing is another example with a much lower start up cost. Both of these business models are very profitable for the money smart person willing to put in the effort now for someday money.
You can always forget about ever being wealthy and just do what you are already doing that pays you right now but offers little hope for the future. Or with the money smart skill of patience you can start now, even as you continue with your current job or profession, and build a business that will someday allow you to live your dreams. With the right company and support team that someday could be much sooner than you think. Take you first action today and contact me. Madalyn
Along similar lines check out the post: Want it, See it, Do it.
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Money Smart Skills: What to do with extra cash flow monthly from your home based business
As you build your home based business, you will have extra cash flow monthly after you cover your expenses. How you handle the extra income will determine if you are able to advance to true financial freedom.
Money smart people reinvest extra cash flow monthly back into their business until the business is solid and growing at a steady pace. Money smart people resist the temptation to spend extra cash flow monthly on non business related expenses such as a new car or other luxury.
Money smart people realize that as they build their home based business they are building an asset that with time will buy them financial freedom. A home based business not only brings in extra cash flow monthly, it also provide tax savings each month in the form of business related deductions.
Money smart people understand that in the early stages a home based business does not bring in large amounts of cash flow monthly but if these modest sums are saved and invested with a long range plan, financial freedom is the result.
For example, say your income from your home based business combined with tax savings increases your cash flow monthly buy $500. You could spend this extra money on a new car payment or other luxury or you could use it to advance your financial freedom plan using the steps below.
Money smart ways to handle extra cash flow monthly:
Reinvest in your business for marketing, business training or infrastructure
Pay down debt
Invest in additional assets such as real estate, commodities or the stock market
Once your cash flow monthly from you investments surpasses all you monthly expenses you are financially free and you can spend any additional cash flow as you please. Not only that, you can choose whether you want to continue working in your business. This is the way money smart people think and plan their lives. Madalyn
Check out this blog: Invest in assets
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Money Smart skill above all others: Trust in God
As important as our money smart skills are, especially in this recession economy, God never ceases to amaze me with his abounding Grace. Everywhere I look I see examples of all the blessings God has given me and how he always works behind the scenes for our good. For example, here is what my day has looked like:
I got up early to make some soup for my cousin, Libby. Libby is taking care or her 79 year old, husband, Sonny, who is bedridden with a brain cancer. Sonny helped me build 5000 feet of fence when I moved to my new property.
While visiting with Libby, our neighbor, David, called. David is a mason and a friend of his called to offer him some free flagstones. David knew I wanted to build a patio so he called me and we went to load up this beautiful free rock that was about to go into a landfill.
While loading the rock with David I noticed the tires on his truck were worn badly. David said he really needed new tires but they were not in his budget. As it turns out my friend, Debbie, had brought me 4 free tires the day before. I had loaned my flatbed to Debbie to pick up some round bales and she said if I knew anyone who needed the tires I could have them. They were a perfect fit for David’s truck.
This, my friends, is God’s Grace in action. His magnificent Grace does not usually come like a lightening strike but through our friends, family and neighbors acting under his guidance. In addition to bestowing His Grace upon us I believe God also guides us to take right action such as becoming money smart so we can be part of the solution to the recession economy not part of the problem. Madalyn
Looking to become money smart and increase your cash flow monthly by $500? I invite you to work with me.
Money Smart Skill #3: Invest in assets
First of all, what is an asset? Sounds like a fancy accountant term. In reality, an asset is something of value which you own but smart money investors expect to not only own assets but have those assets bring in cash flow monthly. Boy, was this a lesson for me.
For example, by definition my horses are assets, but they cost me money rather than making me any. Money smart investors would not invest in horses but they are my family. Money is not everything and I never think that way. I love my life now even though I am hardly rich but investing in the asset of a network marketing business has given me back my dream of spending time with my horses.
According to one of my money smart mentors, Robert Kiyosaki, there are 4 classes of assets which bring you cash flow monthly. They are:
Businesses – the advantages of owning a business are tax benefits, the ability to leverage other people’s time to increase your cash flow monthly and control of the way things are run. The disadvantages include high start up costs, managing people and developing the money smart skills to turn a regular profit.
For me starting a network marketing business was perfect to help me get started in building an asset. Once I understood the power of leveraging other people’s time without having to actually employ them I was on willing to get started. I did not have the money or desire to get into a franchise business so the low start up cost of network marketing was perfect. I found a product I loved and was passionate about and a company I believed in.
The first network marketing company I joined did not have a strong training and marketing system in place so I struggled with maintaining a positive cash flow monthly but despite this my business grew. After working hard to build a strong customer base I wanted to look more for business partners and I needed a company that focused on the money smart principles I had learned from Robert Kiyosaki about the power of building networks.
With my current company, Xango, I am getting support for developing my leadership skills so that I can work with a smaller group of dedicated partners and guide them to the training systems the company provides. Not only does this make the best use of my time but I end up reaching and helping more people with my product as the process duplicates through my network.
Five hundred extra cash flow monthly is so doable with Xango. This is the average income for the 5K level, only the second step in the company compensation plan.
Actually the average 5K distributor makes over $800 but I am talking about a net cash flow monthly after you pay for the products you personally consume. I pick the $500 amount because studies show with this amount of extra cash flow monthly 95% of the home foreclosures could have been avoided. This level of extra cash coming in each and every month is life changing for many households.
Real Estate – the advantages of owning investment real estate include the ability to leverage the banks money, take advantage of tax benefits like depreciation and collect a steady cash flow monthly if the property is managed well. The disadvantages include significant skills to select good properties, the money smart skills to manage them and ability to have money tied up in property.
After realizing that my raw land was not an asset, by money smart thinking, I set about to turn it into one. I refinanced the land and built an office building/barn on it. My plan was to rent this out to cover the new mortgage payment and then eventually move my practice to the new building. My lack of money smart skills showed up with one mistake after another. I certainly did not do my research about rental rates and location.
Despite making many mistakes I was able to rent my property and eventually sell it which gave me the money to buy my current farm and a rental house in Arizona. Of course, I sold my land and bought at the height of the real estate bubble so my rental house is not currently an asset. I am learning and the willingness to learn from mistakes is an important money smart skill.
Paper assets – the advantages of paper assets include the ease to buy and sell them and the ability to start with a small investment. The disadvantage is the need to become educated and spend the time to monitor your paper assets closely.
I got started very late with my stock market investing so I did not have the luxury of waiting for gains based on compounding interest over many years. I wanted to learn about investing in stocks so I read several good books and worked some with a dependable stock broker. I picked a few good stocks and had some nice gains but invariably I would get distracted and miss important news that affected my holdings. I ended up losing money on most of my stocks.
I decided I was better off going with managed mutual funds and I saw my holdings go up and down at the whim of the market. I decided to pull out of mutual funds before the market tanked completely. With what I am learning about how inflation eats away at gains in the stock market I am very pleased with this decision even as the market is currently in a rebound.
Commodities – Oil, Gold and Silver are examples of commodities. These are real, physical assets that go up in value as inflation increases. Commodities are less likely than paper assets to increase or decrease rapidly in value and they are less affected by people’s daily fluctuating emotions. The disadvantage is that since they are physical they have to be stored and this can increase the cost.
I moved into commodities such as precious metals, real estate and natural gas that I could follow more closely. Since I bought these exchange traded funds to hold long term, I then sold options on them to bring in income even if the funds did not go up in value. With this kind of option I sold the right to buy my stock at a set price over what I paid for it. If the stock went up more than this price the purchaser of the option made more money for his extra risk money and I made a small profit. If the price did not go up to the set price I made the option money and the risk taking option buyer lost his money. This is a more conservative style of investing but it allows me to make money even in a flat market. Even though I pay more in commissions I work with a trained stock broker to handle my account.
Part of being money smart is to pay attention to trends and cycles. What is working right now may not work next week, month or year. It is important to pay attention to your money but not dwell on it. Dwell on your dreams. Those you gain the money smart skills of getting rid of bad debt, building cash flow monthly and investing in assets will be able to live their dreams. Madalyn
