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Personal Finance: Thinking Like a Business Person vs. a Consumer

Business Mind

I’m a big fan of Panasonic; all my stuff is Panasonic. Over the years I’ve found that they make great quality electronics and, you either get more features for the same price as other premium brands, or you get the same feature set for a better price.

In December, my TV (which I’ve had for 10 years) finally gave up the ghost. It was time to buy a new one and after some deliberation I finally narrowed it down to 2 choices:

  1. 42″ Plasma full HD
  2. 32″ LCD 480i

Right now you’re thinking ‘Woohoo – get the plasma!!’ Which makes a lot of sense because even though I don’t have an HD player right now, everything’s moving towards HD and I might as well plan for the future, right?

Well, that’s just your consumer brain thinking and it can be very convincing.

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American Express Plum Card: The Credit Card Wars Heat Up

American Express Plum Card

There was a lot of speculation on how well the Mastercard IPO would do in 2006. The stock’s done well. Very well. And investors are waiting anxiously for the coming Visa IPO which has got fortune-maker written all over it.

These public offerings are raising the stakes in the credit card arena significantly and the offerings we’ll see from the various credit card issuers as they duke it out is going to get a lot more competitive.

Understanding Trade Terms in General

Most businesses have credit accounts with other businesses (their suppliers). When it come to trade terms on business-to-business transactions, the most common set of terms is net 30 days; you buy something and you have 30 days from the invoice date to pay for it.

But there’s another common term that’s used for B2B credit accounts called 2% 10 days. What this means is that if you pay within 10 days of the invoice date, you get a 2% rebate on the invoice amount. 2 percent 10 days is a set of terms that’s usually forced on small companies by large retailers and distributors because it’s a good deal for these cash-rich buyers.

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The Must-Have Stock Pick for 2008: Visa IPO

Charge!

Again and again I hear talking heads on the boob tube talking about how sitting on a diversified portfolio over the long haul is a great way to invest your money. And while that’s a safe bet, unless you get lucky, the chances are pretty good that you’ll never make a ton of money doing that.

If you want to make good money you have to catch the waves. You have to keep your money moving in and out of the opportunites as they come along.

It’s not fire-and-forget. You have to get in the game. You have to get involved in your own investing.

There are two kinds of stock plays I really like:

  1. Buying small to mid caps on bad news
  2. Can’t-lose IPOs

Both of those plays will give you better than average returns. And you can make anywhere from 200% on your money in a couple weeks to 500%+ in a year or two. A lot better than the run-of-the-mill 10% annual return you’ll make in a diversified mutual fund.

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Making Money with the Boom, Bust, Blitz

The blitz

The standard business cycle lasts about 10 years. There’s also a bigger cycle called the long economic cycle which covers a span of 50 to 60 years. Both these cycles go through a boom, a bust, and a blitz, and at each of these stages there are some great opportunities.

The key to making a good play at any point in the cycle is to manage your assets and your liabilities to the best advantage.

First, Two Kinds of Assets

Many things are considered assets but they all boil down to one of two things …

  1. Real assets. Reach into your pocket and pull out all the cash you have on you. That’s a real asset. Simple. No matter where you are in a business or economic cycle, cash is king.
  2. Speculative assets. The value of your home is a good example of a speculative asset. It’s speculative because no matter what it’s worth today, six months from now the market price could go up or down. Stocks are also speculative assets.

Speculative assets contain some real worth. Your home will always be worth something, no matter what happens or where the market goes. So there’s a certain amount of its worth that’s real and a certain amount that’s speculative or uncertain. The same goes for your stocks and most other assets.

Next, Good Liabilities and Bad Liabilities

Most people think that liability or debt is a bad thing. But sometimes it’s a very good thing …

  1. Good debt. A mortgage is good debt. Another form is good debt is taking out a loan to start a business.
  2. Bad debt. Racking up your credit card to fill your house and garage with toys is bad debt.

The difference between good debt and bad debt comes from what you purchase with it. If you buy assets, it’s good debt. If you buy more liabilities, it’s bad debt.

Finally, Working the Boom, Bust, Blitz Cycle

Most people are out buying liabilities with their speculative wealth during a boom. When the bust happens, it’s never pretty. Boom times are the best time to be selling because prices are high and because of all those people out spending their on-paper profits.

During a boom, you want to stay away from taking on bad debt and concentrate on building real assets. It’s also a great time to sell off your speculative assets while the prices are high.

When a market goes bust, prices fall and it’s time to look for deals. It’s time to buy. It’s your real assets that carry you through a bust. And a bust is the time to leverage that real wealth to take on some good debt and buy speculative assets at bargain-basement prices.

And then comes the blitz. Between the bust and the next boom is the blitz. It’s a crazy time because prices are all over the place. Some things are still doing badly and others are rocketing upwards. This is a great time to leverage all your assets and do a lot of creative deal making.

The blitz is also a great time to take some risks because the next boom is on its way which creates a bit of a safety net.

The Takeaway

Every market; stocks, bonds, property, business, all go through the boom, bust, blitz cycle. And by following some simple rules you can take advantage of every part of the cycle:

  • There’s never a good time to take on bad debt
  • The time to sell speculative assets is during a boom
  • The best time to buy is during a bust
  • The blitz is the best time to take some risks

Hike!

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Get Out of Debt, Part 3: Thinking Rich

Mountain vista

« Read Get Out of Debt, Part 1: Stop the Bleeding
« Read Get Out of Debt, Part 2: Grab the Bull by the Horns

It’s very easy to add up everything you owe, figure out how long it will take you to pay it off, and get extremely discouraged.

That’s why it’s important to focus on the things you’re doing to get out of debt and not on the debt itself.

The Snowball Effect

As you work your plan to cut expenses, manage your debt, and increase your income, something amazing will happen. You’ll gain momentum. And speed. You’ll start paying your debt off faster and faster until suddenly, you find yourself out of debt and saving massive amounts of cash.

You can thank the universe for this. The universe loves momentum; just look at these catchphrases:

  • It takes money to make money
  • The rich grow richer
  • Success breeds more success

That’s the universe at work. All these ideas say the same thing; if you start down a path, that’s the path you’re on. It’s like practice makes perfect. The more you do something, the better you get at it. And with a 3 point plan (expenses, debt, income), you’ll get very good, very quickly.

Once the snowball effect kicks in, your thinking will start to change. You’ll start to think rich. And once that happens, there’s no stopping you.

Thinking Rich

In a horror movie, the biggest tension doesn’t come after the monster jumps out and attacks the heroine. It comes before we know what to expect. Or when to expect it. The biggest tension sits in the quiet dark corridor before we ever see the monster.

Debt happens the same way. It’s the monsters we can’t see yet that cause us the most tension.

For example, if you’re worried your beat-up old car will break down and leave you stranded somewhere; that tension is worse than the tension of going into debt to buy a new one that’s reliable. It’s easier to take on the debt because that’s a monster you can see.

But if you can buy a brand new car tomorrow, debt free, that tension doesn’t exist. And the chances are excellent that if you have the money, you have better things to do with it, like investing it.

Suddenly you don’t need a new car.

That’s the essence of thinking rich. As you make progress paying off your debts, not making those payments will cause you more tension than the thought of your beat-up old car breaking down. And when you start saving and investing your money, not doing that will cause you more tension than the things that might happen.

You know you can buy a new car when you need to. Just knowing that, slays the monster. Knowing is everything.

Now you know.

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Get Out of Debt, Part 2: Grab the Bull by the Horns

The bullfighter

« Read Get Out of Debt, Part 1: Stop the Bleeding

Like most things, getting out of debt is about doing the right things in the right order. So it’s no accident that Part 1 is about how to cut your expenses.

Cutting your expenses is the easiest part. And making some progress there will give you just enough momentum and enough light at the end of the tunnel to do what you have to do next. Which is manage your debt and increase your income.

It’s time to get in the game. It’s time to grab the bull by the horns.

Managing your Debt

Consolidation is NOT the name of the game.

The problem with consolidation is it usually requires you to get more credit like a big low-interest loan to put all your debts into. But the danger is, you still have access to all the credit that’s hurting you now. It’s better to consolidate using existing credit. If you already have a low-interest line of credit, transferring your expensive credit card debt to it will cut the amount of interest you’re paying every month.

The best way to manage your debt is to use a simple set of rules.

  1. Pay off high interest debt first. This means making minimum payments on your low-interest loans and making the biggest payments you can afford on your high-interest credit cards.
  2. You only need one card. You can do anything, anywhere in the world with a single Visa or Mastercard. All you need is one of those cards. Cut up the rest and pay them off first.
  3. Pace your payments. Cutting your expenses and increasing your income is what wins in the end. If you make a debt payment that you really can’t afford, and then have to rely on your credit to pay the electric bill 2 weeks later, you’re keeping a bad habit alive. Pay what you can pay while still living your life.
  4. Practice smart habits. At some point, you’ll pay off all your credit cards including the one you’ve decided to keep. Use it, but only for things you would normally buy like groceries. While you’re working to pay off the rest of your debt, pay that credit card off in full EVERY single month.

Now, you’ve cut your expenses and have started managing your debt. It’s time to put the final piece of your plan into action.

Increasing your Income

The flip side of cutting your expenses is increasing your income. It’s not enough to do one or the other. Doing both will literally double your results and get you out of debt faster than you ever imagined.

Here’s a list of the obvious:

  • Get yourself a pay raise
  • Work all the overtime hours you can
  • Get a second job
  • Work odd jobs that you find through friends, relatives, or neighbors
  • Find a different job that pays better
  • Start selling all the stuff you really don’t need
  • Concentrate on one thing with your own small business; selling

The list is just a reminder. You already know what to do and how to do it. The trick is to make it your mission to make at least 2 of these things happen.

Increasing your income might be the hardest part of getting out of debt. But by now you’ve got the bull by the horns. The bull is tired. And the crowd comes to the arena for one reason; to stand up and cheer.

They need you to win so they can stand up and cheer.

We’re not quite done. In Get Out of Debt, Part 3, I’m going to talk about the mindsets of debt vs wealth. As you make real progress in eliminating your debt, how you think about money will change.

You’ll start to “think rich”.

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Get Out of Debt, Part 1: Stop the Bleeding

The blood money of debt

Several years ago, I had a mass of debt that I just couldn’t shake free.

This might sound familiar if you’ve ever struggled with debt yourself. I’d gain a little ground and pay some of it off, and then a couple months later I was right back where I started. Whenever I worked out a plan to get out of debt, the numbers always told me it would take a few years to pay off.

But it only took me one year.

This is a 3 part series on how you can get out of debt.

You Have to Stop the Bleeding First

Just like running a business, your personal finances have 2 components; income and expenses. When your expenses are greater than your income, you’re digging yourself deeper into debt. And this can happen gradually over time, or it can happen after a catastrophic event in your life.

You have to deal with these expenses before anything else. Just like a trauma surgeon, you have to stop the bleeding first.

Make Two Lists

The first list, we’ll call Fixed Overhead. These are the regular bills you have every month, including your minimum debt payments. Things like the mortgage, the electric bill, cellphone contract, car payments. Make a list of everything.

The second list, we’ll call Variable Costs. These are things that you buy all the time where the costs change depending on what you’re doing, and how much of it you’re doing. This is everything from buying coffee on the way to work, to food, to entertainment, to buying a big screen tv.

Between these two lists you should account for every single dollar that you spend on a monthly basis.

Now Use these 3 Simple Rules

To get out of debt and get your life back requires change. To make that change happen, you have to change the rules. There are 3 rules and you have to apply at least one of them to every single thing on both your lists.

Rule #1: Simplify

Simplifying your life is the simplest way to cut your expenses. There are things you have that you just don’t need. If you get the newspaper delivered, have an internet connection and 300 cable news channels, it’s time to simplify. Pick one.

A friend of mine got rid of her house phone and just kept her cellphone. Get creative.

Rule #2: Downsize

Downsizing means getting rid of things you have that are a big drain on your cashflow and replacing them with cheaper options. And downsizing usually works best with big things like where you live and what you drive.

It means getting rid of that massive $600 a month SUV lease payment. Sell the truck or find someone to take over the lease. Get yourself into a vehicle that’s half the price. Or take it a step further and start commuting. Take it another step and you might buy yourself an old bicycle at a garage sale.

Whatever it takes.

And when you downsize something you own (an asset), you’ll lower your monthly costs, and end up with some extra cash in your pocket too.

Rule #3: Replace Old Habits

Some things are not easy to simplify. If you’ll absolutely die without your morning coffee, then instead of cutting it out all together, start brewing yourself a cup and taking it with you. You’ll save an enormous amount of money over paying 5 bucks a day for capo grando whatever-o.

And even if you have to buy a coffee-maker to replace the habit, the money you save will pay for it in a week or two. That’s a killer return on investment.

Replacing old habits also works great for cutting back your entertainment budget. Spend more time with your friends and family instead of going out to costly events. Or find a new passion or hobby that can fill your time without emptying your wallet.

It’s Time to Get Started

Even if you’ve already cut everything you think you can, make your lists and apply the rules. It’s a very powerful exercise and you’ll find things you don’t need, things you need less of, and things you can replace.

In Get Out of Debt, Part 2, I’ll give you some action items to help wrestle your debt down to the ground and build up the income side of your finances.

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Investing In Rental Property … Bubble Or No Bubble

Investment Property

There’s still a good buck to be made.

Despite the fact that we’re in the largest housing price bubble in history. And despite the fact that subprime lenders are losing their shirts thanks to a massive spike in foreclosures … you can still get into investing in rental properties with the right opportunity.

And that’s the key. The right opportunity.

We might be standing on a cliff face where housing prices are set to plummet anywhere from 10% to 40%. You can still get in now and do well. Again, you just need the right opportunity.

8 Rules For Creating The Opportunity

I know some solid and savvy property investors. This is not real-estate seminar BS. You can create the opportunity by sticking to some very smart rules that they use:

1. Get The Rent. You need a property where you can get 1% of the cost of the property in monthly rent. In other words, you need $2000 a month in rent from a $200,000 property. This is not easy to do, but the opportunities are out there. This percentage ensures you can pay the mortgage, the taxes, repairs, go through some vacant months, and even hire a property manager.

Don’t try and buy a property that’s renting for $1200 a month for $300k and think you can get a higher rent out of it. The rent is the rent. Renters can only afford so much. You need to get that property for $120k to get your 1%. And getting your 1% is non-negotiable. Stick to your guns and find the right property.

2. Test Drive It. When you find a property you like, advertise it for rent in the local paper. If you get a few calls from people wanting to rent it, scoop in and buy it up. Now it’s already pre-rented and you know the property is in a good area and the price is right.

3. Go Duplex. Ever wonder why there are so many condos these days? They have a small footprint and it’s a lot easier to find your 1% when you don’t have to add a back yard to the overall square footage and the cost. Other great opportunities exist in duplexes, four-plexes and houses zoned as “multiple dwellings” with upstairs and downstairs suites.

4. Get Ugly. Upscale neighborhoods are not filled with renters. Scratch that … actually there are some very nice neighborhoods where the owners rent out their basement suites. But if you’re going to buy an entire property in a really nice area, get the oldest, ugliest piece of shack you can find. Some cash and elbow grease will bump up the value, and so will the surrounding neighborhood.

5. Wall It Up. If you find a 2 or 3 or 4 bedroom property and the layout gives you ample room to divide up a family room or rec area, add another bedroom. This is one of the easiest ways to really add value to a property that allows you to get more rent for it. A nice new kitchen or bathroom isn’t going to do that like adding an extra bedroom will.

6. Inspect It. The last thing you want to do is buy a new roof on your new rental property. You’re looking for a great deal and you need to make sure it’s a great deal. In most places, people don’t need any qualifications to become a home inspector so find a good firm or an inspector with a solid background and credentials. Check the roof, the foundation, the plumbing, wiring. Check for pests like termites.

7. Outsource It. Being a landlord is not easy sometimes. You’re an investor, and that’s why hiring a property manager to find tenants, collect the rent, and deal with all the little problems can be a very smart expense. They charge anywhere from 5% to 10% of the gross monthly rent and take most of the hassle out of investing in property. This is also a great option if the best opportunity you can find is in the next town or in the next several towns over.

8. Go Long. Rather than getting a 30 year mortgage, look into getting a 40 year mortgage to reduce your monthly payments. Going long is not usually recommended for home owners. It adds considerable interest cost to the overall purchase price and your equity builds more slowly. But, you’re renting this property out. You’re not paying for it. If a 40 yr mortgage can put an extra hundred bucks cash into your jeans every month, it’s worth looking at, especially in an expensive market.

Summing It Up

The most important thing to remember is that a business has to be able to pay for itself. The property you invest in has to pay all the bills and then give you a profit every month. And at the same time you’re building up equity.

If you do it right, the hardest work you have to do is to find the right property. And to not settle for less than one that gives you your 1%. As long as the property can pay for itself, if market prices crash, you’re still getting paid, and in fact you’ll do better because as the worth of the property goes down, so do the property taxes.

The three things that can really hurt your investment are:

  • Rental prices drop
  • Interest rates rise
  • A one horse town loses its one horse

What if rental prices dropped 25% or you go to renew your mortgage in 5 years and interest rates are up to 15%? Or the economy in the area takes a dive and people move away? These things have happened before. Take them into account. And if you can weather the storm you’ll be alright.

Bubble or no bubble, smart investing strategies work.

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Think Rich: Use Your Credit Card The Right Way

Charge

I hate to tell you, but that high interest rate you’re paying on your credit. It’s because of people like me.

I was reading about Andreas Bard’s credit card experience. I found a link to the post on Nate Whitehill’s Powerful Posts of the Week and I thought I’d weigh in on what’s good and what’s bad about credit cards.

The Two Camps Of Credit Card Philosophy

  1. They’re evil.
  2. Not really.

First, They’re Evil

Credit card debt has been growing massively over the last several years. The main reason for this is easy credit. Banks have lowered the bar on what kind of income level, credit history, and employment stabilty that’s required to get a credit card.

Ten years ago you needed to show a level of stability and responsibilty to get a credit card. You needed to show that you were a low risk. Today, you just need to show them that you have a pulse.

If you don’t have a lot of experience with money or personal budgeting, it’s pretty easy to get yourself in debt quickly with a pocketful of plastic. And once you get into debt with these little plastic miracles, you have to make a decision. Are they evil. Or did you just let yourself get caught in the money making machine that they are. Choose the latter.

So Two, Maybe They’re Not So Bad

I use my credit card a lot. But I pay it off every month, and I only use it on things that I’d normally buy. I don’t have any tendency to go crazy with the card because I make purchasing decisions based on my cash, not my credit. You always want to be aware of your cash position.

The advantage is, I use the banks money all month while my money is working for me. And then I pay them back at the end of the month. In full. Interest free.

Credit card issuers generally hate people like me because I cost them money. Which is why, if you’re in debt, you have to pay for that cost with a high interest rate. They’re high, mainly because it’s high risk credit. But you get the picture.

Break The Debt Cycle

To take advantage of the good things credit cards have to offer, you have to get out from under them first. Here are some best practices for turning the tables in your favour:

  • Budget. You need to track all your income and expenses. Every month. If you’ve got a paycheck coming in twice a month or every two weeks, then go through your budget that often. No matter how ugly the picture is and how much you don’t want to look at it, you have to. Don’t do it for a couple months and then stop. Do it until you die because no one cares about your financial situation more than you do.
  • Keep one card. All you need is one good credit card. Get rid of the rest, and focus on paying those ones off first. This makes it a lot easier to track and manage your expenses on an ongoing basis. There’s only one bill to take care of every month.
  • Consolidate. Go and get a line of credit from your bank. It’s a lot cheaper than credit card rates and you can consolidate all your debt into one bill. If you can’t get a line of credit, go talk to another bank and explain to them why you want it.
  • Don’t use them. No exceptions. You start to make some progress on paying them off, and then boom, the balance is right back up there. You can’t pay them off if you’re using them. Don’t use them. Like I said, keep one and do nothing with the others except pay them off. If you only have one card, then ignore the “keep one card” rule and don’t use it.
  • Shop consciously. Impulse buying is a killer. Force yourself to stop and make a conscious decision. Do you need this? Can you get it cheaper? Make the decision to leave the store, think about the purchase, and then go back later after you’ve thought it through.

So those are some good strategies. They work. And after you do the hard work, you can take advantage of credit cards and make them work for you.

Either your money is working for you or it’s working against you. There is no middle ground.

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Building A Grass Roots Movement: The Billion Dollar Take-Down

Buzz Fuel

I got an email from a friend the other day. You know the kind … the pass-it-to-10-people chain-mail powerpoint presentation kind. This one’s plight was simple: Stop buying gas at selected gas stations to spark a price war that would push the price of gas down.

The Pitch

In Canada, PetroCan and Shell are a couple of big players. They’re named in the email. I know a lot of you come to Zoomstart from the US, the UK and Australia among other countries. You know who the targets would be in your corner of the bright blue planet better than I would.

The whole idea behind this email is to pick a major gas company and stop buying gas from them. And just them. And of course, spread the word. Theoretically, they would then lower the price of gas to bring people back, and all the other gas stations would have to also lower their prices to compete.

And then everybody gets cheaper gas. Happily ever after.

Really?

No, not really. It’s a grand idea. It’s got buzz. And it’s an issue that strikes people because we’ve all gone to the pump, filled up, and swore at how it cost us 10 or 20 bucks more than the previous fill-up.

But from a business perspective, it’s an idea with a lot of holes:

  • Getting enough people on board to put the squeeze on. Very tough to do.
  • We have to wait out the target companies while all the other gas companies hose us by raising their prices.
  • They’d just sell their gas to the companies we were buying from because the demand is not going away, it’s just going elsewhere.

The list goes on.

Grass roots ideas can work. But they have to be backed up by solid fundamentals or else they just fizzle and die. Just because something has buzz, doesn’t mean it’s a solid idea. It just means that more people are going to hear about it.

If you really want to bring the price of gas down, buy less. Ride your bike. Walk. Buy a pogo stick. It’s not a billion dollar take-down, but you’ll save a couple bucks, get some exercise, and who knows …

It just might catch on.

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