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Personal finance mastery with a pinch of motivation.

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Formal Education And Money Skills

January 9th, 2009 · 1 Comment

I had a discussion with a mortgage loan officer recently and she shared with me a fascinating piece of trivia.  I asked her who had the worst money skills of the loans she gives.  Her unwaivered answer was lawyers and college professors.  First, let me say that I have friends and family with PhD’s and I know several attorneys that are friends of mine.  But why would she say this?  What makes attorneys and college professors bad money managers?

The attorneys I can understand as profiled in the Millionaire Next Door.  They can be under pressure in their field to consume, wear and exhibit high-status artifacts.  Whether they have the means to do so or not is irrelevant.  

Now, college professors on the other hand is a different story.  My inclination is to believe they are so educated in their chosen field or area of research that they may not have learned basic money skills.  If you think about it, a college tenured position is recession-proof, layoff-proof and has nearly guaranteed annual raises.  A professor may be inclined to have no fiscal restraint in tough economic times because he or she knows a pay increase will be coming each year regardless of the economy.    The longer you are in that “ivory tower” environment the less knowledgeable you become on the perils of high-interest loans and spending more than you make.  

My experience in meeting people in life is that advanced formal education although generally helps your money skills, it’s no surefire way to accumulate wealth.  As a matter of fact, for most college graduates the degree itself is initially a significant hindrance to the graduate early in life.  Also, I have met plenty of business owners who exceled financially with no college degree and barely any other formal education.  

Bottom line:  formal education is no guarantee of financial success.

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The Dangers Of Accounts Receivable Loans

January 8th, 2009 · No Comments

Driving home one night I heard a commercial on the radio for a company that offers accounts receivable funding.  It is designed for small businesses who have cash flow issues and want to collect their money instantly.  This intrigued me since I am a small business owner.  The ad went on to say you should not “waste your time collecting bills” so that you could “focus on selling.”  Sounds fair enough, right?  Aren’t sales the key to any business staying in business?  I then went home to research this further.  Could these businesses be better than banks at loaning money?  Whatever that means. Here is more elaboration on the benefits of choosing an accounts receivable funding firm than choosing a tradional bank:

Accounts receivable funding firm:

We will help you if your business is…..Fast Growth, Startup, Financial Loss, Seasonal.   (sounds like companies with a solid future to me!)

We offer unlimited A/R funding, No Financial Covents, Advances Up To 90%, Free Credit Checks

Our approval process has NO financial statements needs, NO dependency on personal credit, NO normal three years of tax records, NO lengthy approval process, NO denial for IRS problems, NO denial for tax liens.  (sounds like they don’t say NO to anybody!)

Now, of course they paint traditonal banks as the enemies of small businesses with all of their requirements, paperwork, risk assessment, yada yada yada.  

So, let me summarize:  Accounts receivable funding firms apparently will loan money to anyone who claims to own a business.  A quote from Wikipedia’s definition of this practice (called factoring) says this:

Factoring is a method used by a firm to obtain Cash when the available Cash Balance held by the firm is insufficient to meet current obligations and accommodate its other cash needs.

A method to obtain cash when the cash balance is insufficient to meet current obligations.  Well, yeah.  That’s pretty much what a loan is, no?  A loan is what you get when you have no money.  Duh.  But here’s the rub with the firms that offer this “factoring” or accounts receivable loans.  The fee structure is exorbitant.  They take 10% (or more) right off the top of your outstanding accounts receivable.  Then they pay you back the the remaining 10% based on how much they collect from your debtors.  Less any of their fees, of course.  Now, what’s the incentive for the factoring company to lower that 10% to 8% or 5%?  If I’m the owner of that factoring company, I’m thinking “um, we tried to collect from your clients but they were down on hard times.  We weren’t able to collect back that 10%.”  These folks get a 10% return on their loan to you nearly right off the bat.  

But wait, it gets better.  The Wikipedia article goes on to say that the risks of this industry include fake invoices (by the loan applicant), direct payments to the loan applicant from his customers (without telling the factor company) and clients being billed twice (once by factor company and once by original debtee).  This sounds like a recipe for disaster to your business.  

What is the solution to this need for cash by small businesses?  It’s the exact same one I’ve preached to you on this blog for years – keep large amounts of cash in the bank.  If you want to stack the odds of business success in your favor, pay cash for as much as possible and stay away from these awful loans.

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The Ridiculous Concept Of Dealer Invoice Price

January 7th, 2009 · No Comments

How many of you have a friend or relative who claims to have a bought a new car right at the dealer’s invoice or very close to it?  Well, let me tell you.  First of all, almost no one should ever buy a new car but that will be covered in another post.  Second, I want you to convince me that your source (the salesman himself, Consumer Reports, a web site…wherever) for this invoice price is accurate?  How do you know it’s accurate?  Let’s go over the concept of dealer invoice price first.

Just like a store that sells products and keeps them on the shelves with an inventory, car dealers are no different.  Basically, all of the cars you see on their lot is their inventory.  And just like other retailers they buy the cars from Honda, GM, Toyota or whomever and then sell them at a profit.   So, how can a dealer possibly make a profit on a car they just sold for “factory invoice” meaning the price the auto manufacturer charged the dealer for the car?  Well, here’s how.  Dealer incentives.  When General Motors notices one of their latest models is not selling very well, they give the dealers “incentives” (i.e., cash rebates to the dealer directly) to start unloading these vehicles.  GM may charge a dealer $19,000 for a new Chevy Malibu.  Let’s say in a slow economy that dealer is having a hard time selling those Malibus for much higher than $19,000.  What does GM do?  They may send the dealer $3,000 per Malibu sold just to jump start their numbers of that model.  Dealer paid $19,000, sold it for $0 profit but received $3k back from GM and the consumer thinks he got the car at “dealer invoice” price.  Everyone here is a winner, right?  Wrong.  GM, as usual, is the financial loser here.  By giving back that $3,000 to the dealer they may have actually lost money on that car.  So now you can see why General Motors has been in such a financial quagmire for so long.  

In addition to the car company incenting the dealer to sell those cars, the dealer and/or the car company often give cash back, 0% financing or other perks to the consumer directly.  Why is this?  It’s because they will always have a continual need to sell model-year cars.  Do you really think GM gives cash incentives to dealers to sell used cars?  Of course not!  The car companies are always under tremendous pressure to hit certain sales figures per year.  Why do you think the Ford Taurus and Honda Accord battled so long for the title of “best selling car in America”?  That whole thing was a sham as well because Ford included fleet sales to car rental companies in their sales figures and Honda doesn’t even sell many to rental companies.  

So the next time you or a friend think you just got a steal by getting a car at dealer invoice, think again.

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Why Department Store Credit Cards Are So Profitable

January 6th, 2009 · No Comments

OK, I’ll admit it.   I am amazed at all of the perks the Kohl’s charge card throws at you.  If you spend $600+ per year you are in the MVP Program.  Periodically throughout the year Kohl’s has sales that reward you with $10 coupons for every $50 you spend.  Finally, it seems like every other week they have a sale with extra savings for Kohl’s credit card customers.  The psychology behind it is unbelievable almost like you are losing money if you do not have a Kohl’s credit card.  Sometimes I wonder how much margin is built into their products that they can literally give away the farm on some items and still remain profitable.  How do they do it?  Exactly like every other major department store with a credit card.  It’s a numbers game.

The more transactions you put on your card per month (and especially the more dollars on the card per month) the more likely the store is to make extra profits when and if you don’t pay off the balance each month.  Now, hopefully most readers of this blog pay off the cards each month or, better yet, don’t use cards at all.   But if you are in the majority of consumers who do not pay their cards off each month, happy days for Kohl’s!  They also know the age-old Las Vegas secret that not seeing your actual green money leave your wallet drastically increases your odds of spending it.  Kohl’s isn’t stupid, folks.  I have not even read Kohl’s annual report to shareholders, but I guarantee the credit card division is among the most lucrative division of the whole company if not more profitable than the whole company itself.

So, the next time you consider opening a charge account just for the initial 10% off your first purchase remember….if you play with snakes, eventually you’ll get bitten.

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Taking Sallie Mae Out To The Curb

January 5th, 2009 · No Comments

If you are in your twenties or thirties and you have a college degree you likely have some college debt.  If you are like most people, you just accept this debt as part of life and the ten or twenty years that accompany paying off the debt.  Imagine the immediate raise you’d get (that’s what it is) once that loan is paid off.  For some of you that would be $200 a month and for some it could be $500 a month.  Many people have been conditioned to accept the conventional wisdom that debt is normal; everyone has it, right?  

Well I’m here to tell you that that college loan debt is crippling your ability to accumulate wealth.  One of the best financial advice quotes I have ever heard is “it’s not how much you save, it’s how long you save.”  The 22-year-old can begin saving $100 a month and stop at age 30 whereas the 30-yr-old can start at age 30 saving that same $100 a month and NEVER catch the 21-year-old’s snowball growing into a avalanche of cash by retirement.  

Other money moves that a recent college graduate should not do include:

  • buying a brand new car (this will absorb a decent portion of your precious new income from your first job)
  • financing new furniture or electronics for your apartment
  • charging up big clothing bills

Many students take the attitude that “I worked so hard in college I deserve this purchase.”  Well, guess what?  You don’t deserve that purchase.  Is there really a time when you are allowed to make bad money decisions?  Going into debt right when you are starting out in life is not a good time to go into debt.    Frankly, I cannot think of any good time to go into debt.

Develop a game plan to pay off the typical ten-year student loan in half the time or even sooner.  You’ll get a huge jump on accumulating wealth very early in life.

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