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Managing Cash Flow

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I have always been interested in entrepreneurship.  In college, I took several courses that dealt with starting and running a business.  Though none of the material was exceptionally difficult, I was intimidated by assembling financial statements.  One would normally think that being an engineer and otherwise being very proficient in mathematics, this wouldn’t be difficult.  However, there is a world of difference between using math to solve an interesting problem and using math to keep a business solvent, feeding your family and keeping people employed. 

Like many people I was intimidated by assembling income statements and balance sheets and left the creation of these documents by other folks who were in traditional finance fields.  Looking back this is amazing since both income statements and balance sheets consist of nothing more than simple addition and subtraction.  The most difficult parts of preparing financial statements usually comes in the initial setup when you do not have a history that will guide you in making predictions moving forward.  Even in these instances, there are numerous ways one can estimate costs and incomes if one thinks things through.    I would have given myself a tremendous advantage earlier on had I chosen to apply myself more in facing my lack of confidence and learn it. 

Speaking plainly, you will never move forward financially until you learn to track your financials and make reasonable financial projections.  You need to learn to track your income and outflow so you can effectively manage the challenges of spending today and projections are needed to manage the challenges of spending in the future.

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Sir Issac Newton’s Other Discovery

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Most children are taught the story of Sir Issac Newton sitting under the apple tree and being struck in the head by a falling apple and how the falling apple prompted him to discover gravity.  However, what kids are not told is that same event prompted another Newton invention.  Gravity is the force that describes how things are pulled down toward the center of the earth.  In order to explain the concept of gravity and to make the new concept more useful, Newton invented a whole new branch of mathematics called calculus.  I have an engineer’s training and have taken more mathematics classes than the vast majority of the population.  Although teaching calculus to kids at an early age may be difficult, the basic concepts behind calculus are very simple, easy to illustrate and are vitally important in the teaching of financial education concepts.

Prior to the invention of calculus, it was very hard to make sense of many things in nature, because math was limited to snapshots.  Algebra, geometry and trigonometry only make sense for the given data at a certain time.  If you wanted to see how things behaved with time you needed to figure out the equation at a bunch of different points and draw the graph to see it.  Calculus allowed us to see how things are changing at a given instant.  It allowed us to see that if we are in our car and slam on the brakes, we can predict how far and how long it will take us to stop.  It allowed us to see if we are spending money at a given rate and earning money at a smaller rate, how long will it be until we run out of money.  These types of measurements weren’t easily performed prior to the invention of calculus.

When it comes to personal finance, each of us does calculus all the time, though we may not realize it. Calculus is used to measure the rate at which something is changing at that instant.  Week-to-week, month-to-month, we adults always work the Net Income equation to make choices.  Net income is simply total income minus expenses.    The bulk of financial education is geared toward increasing the rate of change of the net income equation.  When we work to be more frugal, we are making expenses smaller.  When we invest, take on additional jobs or get wage raises, we are making the gross income side bigger.  Both of these increase the rate at which the net income equation is changing.

300px GodfreyKneller IsaacNewton 1689 Sir Issac Newtons Other Discovery
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By using the net income equation, we can make predictions about where we are going to be financially in the future.  When will I be able to afford that new item?  Will I have enough money to go buy groceries or go to the movies?  Will I be able to pay my tuition bill?  Will there be enough left over to continue to pay for other things?  These are the questions that one can reasonably answer through the help of calculus.

I find it unfortunate that teachers in schools often tell about the first discovery the Newton made that day, but so often neglect to mention the latter.  Kids need to know the concept behind calculus and rate of change at an early age.  It will help them throughout life.  If you think about it, you will find many ways to illustrate these concepts for your children in the car, on the playground and in the home.

This type of learning is important, because gravity tells us that, on earth, unless we do something about it, things fall. This applies to equally to checking account balances as it does to apples.

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Seven Financial Dwarfs – Are Your Kids Getting Off the Right Track?

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Although I wouldn’t characterize myself as necessarily religious, there are often a number of great lessons one can learn by looking to biblical wisdom.  The seven deadly sins tell us that many things that are inherently beneficial to our souls and spirits can rapidly degrade into destructive behavior if driven to excess.  Self confidence is good, but excessive pride is a detriment.  Slowing down to enjoy life is great at helping us to appreciate what we have and where we are, but sloth prevents us from moving forward.  Eastern religions also revere the concept of balance.

Much like the seven deadly sins, there are seven types of financial “people” which although based on a good foundation, will cripple your child if he or she relies too much on one type of character.  Like everything else, balance is the key.

Scroogy – Like Scrooge from A Christmas Carol, when these kids get their hands on a dollar, they tuck that dollar away.  They enjoy watching their hoard of gold grow.  Saving is a great skill to master, but Scroogy kids take saving to an unhealthy level.  Money is a tool.  If kids hoard their money, they are not developing the skills to manage it.  Money is a medium of exchange.  You can’t eat money.  Kids must learn to use money to fulfill their needs and to the extent practical their wants.

Spendy – Like all people, kids like stuff.  Our commercialized culture sends our kids messages on a continual basis that consumerism is the way to happiness.  Adults, with supposedly more refined critical thinking skills, often fall victim to the messages, so is it any wonder that our kids are often more susceptible.  Spenders believe that the stuff they have will bring them respect and acceptance from others.  These kids need to learn that stuff won’t bring them happiness and the good feeling they get from showing off something new will quickly fade.  Kids must learn what adults must learn if they ever want to get ahead. The race to keep up with the Jones’s is one that only produces losers.

Scrapy – Scrapy kids are ones that have taken the concept of frugality to an extreme and have crossed over to cheap.  They beat up vendors on price and they don’t like spending money at all.  Rather than go to the movies with friends, they’ll stay home and watch TV.  Frugality and bargain hunting are good skills to develop, but should not take a back seat to enjoying the zest of life.  These kids turn into adults that have a hard time indulging themselves in anything.  They lose out on opportunities to connect with others.  Finally, they have a hard time giving.

Wanty – All of us have wants.  One step on the road to maturity is the concept of delayed gratification.  Another is the realization that sometimes wants must go unfulfilled in life.  Asking for what you want is not necessarily a bad thing.  Desire is healthy, but that desire must be matched by a work ethic that will push our child to achieve those desires.  The sooner kids learn this, the better off they are going to be.

Givey – Some kids are just naturally generous.  They give away everything.  I, myself, gave away a bag full of matchbox cars to a friend down the street when I was about 5.  They know it intrinsically feels good to give and they know they get great messages of approval when they do so.  Generosity is noble, but generosity without a willingness to look after oneself through life actually promotes lower self esteem and an unhealthy level of altruism.  These people are ready made victims for con artists, moochers and abusive spouses.  When your children choose to give, make sure also to give them messages that promote self worth and how worthy they are to keep things too.

Whiny – Whiny kids have achieved success in nagging parents about things they want until the parents finally relent.  They are learning that “work” consists of scheming or begging others until someone else fulfill their needs and wants for them.  The epitome of the entitlement culture, these kids are on course to becoming passive souls clutching at victimization to explain their lack of success.

Trader – Kids are excellent negotiators.  Few parents have not had an experience where the reflect upon a conversation with their child and ask themselves “Why did I agree to that?”  It’s hard to say no to our kids and most kids know this.  Traders, however, take advantage of this excessively.  These kids learn that everything is negotiable, without regard to the merit of the idea.  Parents who tolerate their kids to be Traders run the risk of their kids becoming amoral – people who truly believe the ends justify the means.  Negotiation skills are important to develop, but kids who are used to always getting what they want through bargaining often end up without a moral code, because they’ve never had to fight for what they really wanted.

Conclusion

Take time to observe your kids.  Chances are your kids show signs of one of more of these characters.  Remember that balance is what to strive for.  Balance is what will help kids to become well rounded, mature kids with good notions about handling money, versus kids with significant financial blind spots and life-long money problems.

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We are the Choices We Make – Where am I Living?

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Some of you know of my recent move from the big city to the middle market of Omaha, Nebraska.  Personal changes and challenges aside, I was very surprised to see how much cheaper things were.  My wife went to the grocery store and we were delighted to find that a shopping cart full of groceries which would normally cost $160 to $170 where we lived recently only cost us $116.  On top of that the sales tax was only 14 cents.  We are very excited to know we can feed our family even better than before but still increase our savings.

One of the biggest choices one makes is where one makes a life.  I recall several years ago, I was urged to move to New York where my salary would be much higher for a similar job.  However, after quickly reviewing the cost of living comparison, it was clear that although I would be making a big mistake.  When the new opportunity came to me in Omaha, analysis of the cost of living showed that I would feel better off even though I wouldn’t be making as much as I would have been in other locales.

Too often we are lured irrationally by talk of better salaries.  But wealth is not built based solely upon what we earn.  Wealth is built based upon how much of that salary is ours to keep after paying everyone else.  For if we experience a 10% salary increase, but our expenses increase 15%, we have gone net negative 5%.  This is akin to someone buying the penthouse of a 15 story building for the view only to find that his building is surrounded by 20 story buildings.  How disappointing.

It costs a great deal to living “in the city” or even in their surrounding suburbs.  Keep this in mind as you evaluate opportunities.  Know that really, prices are generally correlated with how much money is available from buyers.  When an opportunity comes your way, always evaluate the new salary relative to the median salary in that area.  If the salary is at or below the median, you may need to closely watch your expenses and sacrifice some luxuries to get ahead.  However, if you find you are making significantly above the median salary, you may be surprised how comfortable your life can become financially.

 We are the Choices We Make – Where am I Living?
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56,000 Broken Promises

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“Things fall apart.  The center cannot hold.”  ~ William Butler Yeats

The economic downturn of 2008 through 2010 hit many people hard.  I would like to share with you a story of one way I was hurt through the downturn.

I have worked closely with real estate investors since 2005.  One of the tools real estate investors use frequently is private money, where one investor or pool of investors lends to others for the purpose of acquiring or fix up a new property.  Instead of going to a bank, these private loans are very useful in jumping on opportunities quickly.  In 2006 and 2007, I made three such loans.  For two of these loans I took advances from credit lines to increase my gains to partially fund the loans.  The third loan came from my individual retirement account.  All told, I lent a total of $56,000 of my and other people’s money.  Each of these investments are no longer performing.  The interest in one loan was exchange for property interest which may never pay me back any part of my investment.  The second loan was put into a business property.  A few months after the loan was made, the business owner started having difficulty and eventually turned over operation of the business to our investment group.  Unfortunately, the owner had eroded much of the value of the business prior to turning it over.  The business no longer has the necessary earnings to make loan payments to me.  It is unknown when this investment may ever start paying dividends.  Today, I learned that my third loan will be lost when the investor declares bankruptcy.

In each of these cases, I had chosen to lend to individuals with great reputations and in deals which looked to be fantastic based on reasonable assumptions.  Unfortunately, this downturn has been exceptional.  Each of these individuals has been either ruined or are treading water.  Each individual has broken a promise to me.  I have lost over $56,000 in principal, several thousands of dollars more in lost interest, and have been left with over $30,000 in debts that became my responsibility.

I cannot blame the others for the debts I had to assume.  I knew the risks involved.  But I am a man who knows statistics.  What are the odds that all of the investments go belly up?  The problem is that when the world goes upside down, chances are, all of them will go belly up and they do.

An unpaid debt is a broken promise.  Whenever such a promise is broken it often leads to the breaking of further promises.  When the income that was promised to me did not pan out, I was no longer able to keep the promises I made.  I have to live with that.  For a person who values integrity, few things hurt more than breaking your word.  It caused me untold amounts of personal pain and problems in my personal relationships.

Learning the lessons of financial responsibility too late put me in a position that I felt I had to put myself in a vulnerable position in order for me to get out from the mountain of debt and obligation that I had built for myself.    My poor decisions early in life set me up for unjustified financial risk taking later in life.  It took losing everything to give me a chance to start over.  I will do it right this time.   I have dedicated myself to help others avoid the challenges I made for myself.  As you read and follow my comments, know that the comments have been fashioned by hard times and difficult experiences.

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Participating as a Voter is Financially Smart

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150x100 Participating as a Voter is Financially Smart
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Like it or not, our governments are in control of huge amounts of money, including a portion that, in theory, belongs to me.  Our leaders in our locality, state and Federal governments have leveraged themselves use of that money over a period of years.  Since the founding of the nation, there have always been people who have felt that tax rates are too high.  It seems that sentiment is only growing with time.

I don’t agree with many of the ways our government chooses to manage it’s financial affairs.  Among the ways I try to communicate that to my elected officials consists of voting.  The vote is one of the easiest and one of the most treasured political acts a citizen can make.  It requires a small investment in your time, yet our voter turnout is shockingly dismal.  It is even lower among young people.  If it is difficult to mobilize citizens to go to the polls, how can we expect to take on the more difficult work of solving the nation’s long ignored and festering problems?

Some people do not see voting as a financial issue.  But, most people do not realize that the total tax burden on individuals ranges from about 10 to 30% of income.  If you are spending 1 to 3 dollars of every 10 you earn on an item, wouldn’t you normally want to choose the one who is doing the spending?

Do the financially smart thing.  Get to the pools on November 2, 2010.

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Book Review: Rich Dad, Poor Dad

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51Dt6NylXOL. SL160  Book Review: Rich Dad, Poor Dad

For this review, I discuss another great book on financial education.  The first book Robert Kiyosaki wrote, Rich Dad, Poor Dad, presents simple, but powerful lessons on managing personal financial affairs using simple stories and easy to follow concepts.

Rich Dad Poor Dad: What the Rich Teach Their Kids About Money-That the Poor and the Middle Class Do Not!

This book does the wonderful task of explaining such dry accounting concepts of income statements and balance sheets in a very readable and understandable format.  It shows the cash flow patterns of poor people, middle class people and rich people.  It also shows how from a strictly financial standpoint that it is the middle class cash flow pattern that is the absolute worst one to have.

But more than the accounting concepts, it discusses that rich people just think differently about money, how to use it, the powers of it and virtues of it.  I have long observed that the United States is a country which craves success, but hates successful people.  Too often, I have seen people vilified whose only crime is that they worked hard and achieved success and wealth.  When I was younger, I, too, shared many of these opinions.

Granted, there are a few people, who act as leeches and make a living sucking the financial marrow out of the lives of others (pay day loan people and many sellers of financial product come to mind), but by and large, most people who have achieved wealth have done so through hard work and being of service to others.

One of the most powerful concepts is the fact that you will only earn so much by working for a paycheck.  It is possible to get rich working for others if you start early and manage your cash flow well.  However, if you open your own business on the side, the potential for reward is much higher as a business owner.  In addition, as an employee, you serve the employer in a designed role.  This means that, most likely, the role was not designed specifically for you and consequently, wasn’t designed to take advantage of your unique gifts and talents.  It is only when you have the opportunity to craft a role just for you, will you have the best opportunity for success.  Finally, when you work for a paycheck instead of profit and you can count on a safe and steady stream of income, you often subconsciously turn off part of your creative centers of your brain.  When your financial well-being is tied to generating new ideas, you will be surprised how much more you can dream up and give life to.  Unless you are trained to look for opportunities, you will pass them by.

The most vital learning to gain from this book is a realization that the employee mindset is a limiting one. The employee as is largely understood today is a relic from the industrial era and the factory culture.  Prior to the industrial era, money was generally earned by farmers and tradespeople buying and selling the fruits of their labor.  In effect, everyone was self-employed.  In the 1800’s and much of the 1900’s, roles were designed for people to act as cogs in the manufacturing process.  Tasks were developed by managers into established procedures and the last thing the managers wanted was for an employee to use their brains to redesign the system or dream up ways to change things.  In exchange for doing things exactly the way the managers told you to do them, the employee was paid a wage.  The belief in the infallibility of management decision making has thankfully gone away in most workplaces, modern management thinking is moving much more in the employee designed workplace that is paid based on performance and production.  But the factory/employee mindset is still alive and well.  It is very dangerous to have in economic climate of the 2000’s.  To remain competitive in a global economy, you need to be able to leverage the talents and creativity of your people and the employee mindset is a real obstacle businesses need to overcome.

By rejecting the employee mindset and adopting a self-employed mindset (even if you are an employee) you are not only going to distinguish yourself to your employer, you are also going to continue to exercise and grow your creative muscles and your ability to identify and capitalize on opportunities.

Rich Dad, Poor Dad is a great book that brings you several great lessons.

If I have inspired you to pick up Rich Dad, Poor Dad, I encourage you to click on the links in this post or on my page.  YouthFinancialEducation.com is not only a great place to learn how to succeed financially, it is also a place that I am constantly leveraging my creativity and skills to bring you value.  By clicking on links from here, you help reward me for bringing that value to you.

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The Myth of the Living Wage

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I think one of the worst lies a politician makes surrounds rhetoric regarding a “living wage”.  Invariably, some politician complains we need to do more for the poor and working class and increase the minimum wage so that they can be paid a living wage.  People who believe this aren’t paying attention or are extremely gullible.

I remember when I was working in 1994.  I remember that I used to get a McDonald’s combo for $3.25 when I was making a $4.25 minimum wage.  Now that minimum wage is about $6.25, a McDonald’s combo is about $5.50.  For those who didn’t catch that:

1994       $4.25 – $3.25 = 1 McDonald’s combo + $1.00 in my pocket

2010       $6.25 – $5.50 = 1 McDonald’s combo + $0.75 in my pocket

I recall when the minimum wage increased a couple of years ago. Prices jumped overnight.  One of the biggest secrets is that when businesses are staffed by minimum wage workers, prices are driven in large part by the minimum wage.  When the minimum wage increases, prices increase in lockstep.  Since poor and working class workers frequent more places staffed by minimum wage workers, they pay higher prices which usually at best means you keep the same amount of money.

However, the dark truth is that you don’t have the same amount of money, because the very politicians who promised a living wage are the ones who enact minimum wage increases without modifying tax structures.  Therefore, more and more poor and working class folks end up in higher tax brackets and consequently they pay more taxes.  The cynic in me believes that when politicians discuss “living wages”, they are seeking only to increase the amount of taxes they collect.

As further injury, minimum wage increases impact unemployment.  Suppose many customers think a McDonald’s combo is worth $3.25, but not worth $5.50.  When the price goes up, fewer people come to McDonalds, so fewer workers are needed and, consequently, more people are out of work.

Now, is it possible to feed a family on $6.25 an hour?  I would find it extremely difficult.  But the answer isn’t to have the government mandate a minimum wage.  It only hurts then ones who are supposed to be helped.  All of us need to find ways to serve others that qualify us to earn the standard of living we want.

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Who Are You Working For: Group Question

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After the most recent blog post, I think it is a good question to ask you folks.  What are activities we spend time working on someone else’s behalf?  I will ask you to answer that question.  There are probably activities we do every day that we should avoid doing because they enrich others while leaving us tired and less well off.

Please take some time to discuss an activity from your life or the life of others you’ve observed that qualifies as work and doesn’t enrich you either financially, physically, emotionally or spiritually.  Keep these definitions in mind as you work this activity.

·         Work is defined as anything you do that you find unpleasant

·         The activity does not enrich you financially, physically, emotionally or spiritually.  (For example, I personally find exercising unpleasant, but it does physically and emotionally enrich me when I do it, so this would not qualify.)

·         Describe who, if anyone, is being enriched.

·         Provide some potential work-arounds or solutions to avoid doing this unrewarding work.

I whole-heartedly believe in free trade.  Free trade is built upon a fair exchange of value for value.  But when you exchange your value (either the value of your time or your efforts) for lesser value or worse–negative value, you are allowing yourself to be taken advantage of.  It is made all the worse by the fact that we unwittingly spend too much of our time doing this work and not realizing we are doing it or doing it because our society considers it part of life.  I reject that notion!  I encourage you to work differently.

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Who Are You Working For?

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Sorry for taking a couple of days off, recently. Rest assured that it isn’t because of me slacking.

My family has made a move across a couple of states to allow me to take a new position. The move is advantageous for a couple of reasons. The job pays more and will be more interesting. But secondly, my commute will only be 10 to 15 minutes. This will personally save me close to 1 to 1 1/2 hours in commuting time per day. Not only will this allow me to spend more time with my family, it also allows me to spend more time working on serving you folks.

I believe in hard work. But I try to be selective about to whom I work and I expect to be justly compensated for that work. Consider commuting time. First, I consider any time I am not enjoying myself to be work. It’s a good philosophy to have. It really helps you prioritize your life. Therefore, since I dislike commuting, it is work. In addition, since I am not earning, but paying. In effect, I am working for the gas companies and car maintenance companies and paying them for the privilege. In addition, the time behind the wheel is time I can’t spend on doing things that will increase my income.

If there is one thing that YFE tries to get across, it is that life is all about decisions. The decisions you make on a day to day basis are the ones that will either allow you to grow wealthy or will drive you to poverty.

I encourage you to examine your life and find ways to allow you to avoid working for others (unless fairly compensated) and increase your quality of life.

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