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3 Ways To Save More On Every Purchase

The quickest easiest way to have more money is to spend less.  The quickest easiest way to get ahead is to get more value for every dollar you spend.  Usually, when working with people a typical person can save 10%-20% of what they make over what they are saving already just through some simple strategies.

Today we’re going to go through the master toolset for increasing value for your money.  It is the universal that if you master it you can apply to absolutely any expense in any field.  You can save yourself and businesses thousands or millions of dollars each year and you can imagine what that’s worth.

It also has the advantage of helping you to identify hidden opportunities in the assets you’ve already got to increase your income and help those around you.

It’s what we call the 3 dimensions of value.

When you make any purchase of any kind there are three components that go into that purchase determining how much value you got:

  1. What you paid for it – bigger discount or bargain = better value, in other words you’re spending more for the same thing. This is what most people are used to focusing on and by paying close attention you can usually create some savings here.

 

  1. How much output it provides – this is a measure of quality in other words higher quality for the same price = better value. People are pretty aware of this but often forget to measure it and definitely have opportunities where they can get ahead by getting better quality for their money.

 

  1. How much you use it – this is the most overlooked aspect of value…utilization. Increase the utilization of anything you purchase = increase the value for the money.  In most cases this offers the largest opportunity for improvement.

 

First Step = Measure Everything You Spend

Most people tend not to measure all their expenses accurately.  Either they think they spend less than they do or they are missing expenses especially non-recurring expenses like annual renewals or purchases you make every few years.  For example, a budget for a new car if you’re paying cash, a budget for furniture, a budget for clothing, etc.  The fact is this money has to come from somewhere and you’re spending it so…

Non-recurring expenses tend to be what kills people’s sense of what they’re really spending.

Bottom line before you get started on anything else make a very thorough list of everything you’re spending and review your spending on a monthly basis if not more frequently.  Know what expenses are coming up and budget for them on a monthly basis even though the money isn’t actually going out.

 

Getting Bargains

The first dimension of value is bargain, the larger the bargain the greater the value.  Your goal should be to always buy everything for substantially below retail.  Think about it this way.  If you and a friend make an identical amount and live identical lifestyles the one who spends less will end up ahead.  The same is true for a business.  The business that spends less to achieve the same result is going to have more profit.  This in turn means they can cut their prices and get more business and the competitors can’t compete so will eventually die out creating a compounding effect on growth.

How do you get bargains?

  • Shop on sale – being able to plan your purchases for when things are on sale will help you
  • Buy used – buying used allows you to avoid tax and to find things cheaper than they should be
  • Buy wholesale – when possible this will allow you to get lower prices
  • Negotiate on EVERYTHING – even when you think you can’t you can often save
  • Collect points – just by using credit cards I average a 2% saving across the board

One of the best things you can do is understand where the costs are that drive the price and buy in ways that eliminate the costs so the seller can offer you a better price.  A good example of this is marketing costs businesses have but are lower when selling wholesale or buying from private individuals.

For every expense you’ve listed go through and see how you can apply each of those 5 strategies.

 

Buy Quality

You can radically increase your value by paying attention to a quality metric rather than just the price.  For example, say you’re buying food.  The metric might be nutritional value.  In other words, one item of food might cost more or the same in pure dollar terms but be much better value on a per nutritional content basis.

Virtually anything you buy you’re buying for a specific reason and if you understand that reason you can often get that same value for less money.  For example, say you’re buying a luxury car and your objective is to get prestige.  You could buy a new Mercedes for $40k, on for $120k or a used Bentley for $60k.  Which has the best and worst value?  Arguably dollars per prestige the Bentley will give you better value because even though it’s a used vehicle people just see “Bentley” and don’t worry much about the rest.

Likewise, the prestige value of an expensive Lamborghini vs an inexpensive one is minimal in most cases unless you’re appealing to car enthusiasts who have a lot of similar cars in which case a classic might offer better value for the money.

You also might find something that’s better quality retains its value better (sometimes and you should verify each time).  For example, an expensive Chanel purse might cost $8000 but you might be able to sell it for close to that 5 years later vs an inexpensive purse you might not be able to sell at all after 5 years.  When examining your expenses consider how well the things you’re buying will retain their value.

When you’re hiring staff for your business if you pay attention to output you’ll find an employee who costs less per hour might not be nearly as cost effective due to the quality of work.  This is especially true for revenue producing roles such as sales or marketing but could also apply for project managers, programmers, engineers, web designers, etc.

Generally speaking in any case where you can get a lot of upside the quality you’re getting is far more important than the price you’re paying.

Go through the list of all your expenses and determine a quality metric and find ways to improve the quality you’re getting per dollar.

 

Increase Utilization

Say you buy food in bulk then half of it goes bad and you have to throw it out.  This was poor utilization.  Or you’ve got a big car or truck with a lot of seats but it’s mostly being driven around empty, this is poor utilization.  Short term rentals vs purchase or a longer term lease is often a poor use of money.  Consider that if you were going to rent a car for a month you might be better able to buy something for a good deal, drive it for the month then sell it…maybe.

The point is anytime you under utilize something you’ve got an opportunity either to potentially split the utilization with someone else to drive down your cost per utilization.

Utilization ties in closely with quality because something quality tends to allow for higher utilization.  For example, I might buy a shirt for $20 that lasts me 2 washes vs a shirt for $50 that lasts 20 washes, which was cheaper?  The $50 shirt was cheaper on a per utilization basis ($2.50/wash vs $10/wash for the supposedly cheaper shirt).

You might also wear something more or use something more because the experience is better.  For example, I might buy a nice shirt and get compliments on it so wear it regularly whereas another shirt that might not fit as well, etc. goes unused and therefore drives up the cost per utilization.

In business I might be better off to utilize an external contractor rather than hiring someone internal if I won’t use them much.  Or maybe I can split an employee with another business in order to avoid the higher contractor rates.

You could also find ways of splitting marketing costs or joint venture with another company to gain extra leverage out of each client.

The ways to increase utilization or decrease wasted utilization are nearly endless.

Go through your list and for each expense determine whether you’ve got excess capacity or perhaps the ability to drive down your costs based on higher utilization.

 

How Much Can You Save?

Based on applying these three dimensions to each of your listed expenses in the year how much are you able to save?  How much additional value are you able to extract?  It’s very normal for an individual to save $5000/yr. or more.  Businesses are obviously much larger numbers because the spending is higher.

 

Want Assistance?

Our team is happy to coach you through the process of reducing your expenses and increasing the value per dollar spent.  Usually the simple process will save you thousands without even counting what you might save on taxes.

Or alternatively can recommend someone for you to hire to do it for you.

Contact us today.

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The Worst Question Financial Advisors Ask You

I recently read an article about “what should I do with my extra cash?”

The basic premise here is cash loses value over time so you want to minimize how much cash you’re holding keeping only enough liquidity around to deal with your needs and provide a buffer so you’re not forced to sell investments when they are down.  With this in mind the question makes perfect sense.  Unfortunately, the answer reflected the common nonsense you often hear from financial planners.

Let’s start with the basics.  FINANCIAL PLANNERS ARE NOT INVESTMENT EXPERTS!

What?  You ask isn’t that the point?  Maybe it’s supposed to be but in practice virtually none of them do better than the market investing their own money in fact most do worse.  In other words they aren’t necessarily great sources of information.  Worse, they are USUALLY incentivized by getting commissions based on the products they sell you, hardly an impartial source of information.  This isn’t always true of course there are financial fiduciaries who can be very good but they are the rarity and still aren’t necessarily skilled investors.

That’s a buyer beware.

Now back to the main subject here, which is a question I hear from financial advisors and planners all the time “how much risk are you willing to take on?”  AWFUL!

Why is this question so bad?

Well, we’ve talked before on numerous occasions both in our training and blog posts as well as books, etc. about how risk is defined and how it isn’t defined in a meaningful way.  Technically, the answer to the question should always be “I want the best risk weighted return”.  Here’s an example, it is NEVER sound financial advice to tell someone to buy lottery tickets.  I don’t care what their tolerance for risk is it’s bad advice but that’s what the question implies.  In other words the question comes from a place that is uneducated, which is a good reflection of the investment knowledge of most financial advisors.

Good financial advice should maximize the risk weighted returns for clients, always period there is really no other value or purpose of a financial advisor if they aren’t helping you to get a better return on a risk weighted basis then they aren’t doing their job well after all why would you pay them if not for this?

So let’s talk about what the real question should be when you get into the conversation.  “What is the time horizon in which you’ll need this money and consequently how much volatility is safe?”  In other words if you buy something with a fair bit of volatility there’s a risk you’ll be forced to sell when it is down.  That is the ONLY risk that should be considered in this part of the equation the so called “risk appetite” because all the other risk should be balanced against returns so on a risk weighted basis you’re getting ahead.

Why are other questions about risk nonsensical to ask a client?  Because it implies that there is somehow a correlation between risk and return.  In other words to get higher return you have to take on more risk.  The problem is that’s false.  You might…maybe, have to take on more volatility.  You’ll definitely have to take on greater exposure to the underlying asset but that’s not the same as risk.  Remember the way we define risk that is actually meaningful to people?

“What is the chance of loss and severity of loss?”  That’s risk the way it matters.  In this sense as we’ve noted in other articles increased volatility can actually decrease returns so decreasing risk by that definition actually increases returns.  Likewise for choice of asset class and price of asset class.

Financial advisors should be helping you to simultaenously decrease risk while increasing returns.  To do this they need to consider your financial needs over the next little while and they should educate you about potential investment performance and how to cope with potential events psychologically.  But on no planet should they be guiding you into higher risk weighted investments that’s just bad financial advice.

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How Do You Get Banks to Lend You Money?

Banks have fairly straight forward lending criteria; it can be as simple as a formula you learn (and you should learn it if you are looking for bank financing whether a mortgage, line of credit, or other financing).  On the other hand it’s amazing that someone who doesn’t know what they are doing can walk into a bank and ask for a loan and get turned down, then someone else can walk in representing the exact same business with identical needs and get the loan.  What’s the difference?

Your first assumption might be the individual in question has a relationship with the banker, might have better credit, more personal assets, etc.  Those things might all be present and yes in certain circumstances those can make a difference, but those are not the differences we’re talking about.  In this case (and this is an actual example I have personal experience with and have seen happen many times) none of those details were different from the original bank visitor, in fact the second individual was merely acting as a representative of the first.

When I or many others like me did this what did we know and how did we act differently than the first person who couldn’t get the loan?

The answer lies in understanding the language of the banks, what they are looking for, and being committed to getting the result.  When you walk into the bank you need to be focused on what they want in order to be able to give them what they want in order to get what you want.  Banks aren’t out to deny you loans; they’d rather give you the loan provided it meets their criteria.

What banks care about is security, they are generally asset lenders and their most important concern is the assurance not from you but from what’s backing you that they’ll get repaid.  In other words if things go badly how are they protected?  If you can make it next to 100% that they’ll be protected if things go wrong you’ll be very likely to get the loan.

Think about it what are the three easiest loans to get?  First, mortgages, why?  Because the value of the house is typically greater than the amount of the loan so worst case scenario they can sell the house and recover most of their money.  Second, collateralizing life insurance policies.  Again this comes down to the same thing they know there is a fixed value to the life insurance policy so when in doubt they can recover their money from the asset.  Third, loans backed by cash or GIC deposits.  In other words if you walk into a bank and put down cash or a GIC as security the bank will essentially always give you a loan based on that security because they are protected, it’s like they are lending you your money back to you and who wouldn’t make that loan?

First lesson put yourself in the shoes of the lender.  The lender makes money by making the loan so they want to do so.  The lender is generally in a better position when you repay since it’s a hassle to go through the collection process if you default.  The first most important thing to the lender is that you repay.

Second lesson banks determine whether you’ll be likely to repay primarily through three factors.

  • Assets as security such as: real property vehicles, equipment, land, cash, bonds, securities, etc.
  • Cashflow on the personal side this is measured by before tax income, in the case of a business it’s profitability. Keep in mind when it comes to cashflow you need to show track record again think as the lender they want to know it’s steady income and not one time income, in other words do you have the income to make the debt payments?  With this in mind there’s one more factor to consider when it comes to cashflow and this is the relative amount of debt.  In other words it’s all well and good that you’ve got a certain income but if you’ve already borrowed so much money it consumes your whole cashflow then it’s not safe for the bank to lend you more.  This is called the debt service ratio.
  • Credit is essentially a measurement of how likely you are to repay.

Some banks will work and get resourceful to help you and find ways but generally that’s not the case.  Generally, they won’t know what resources you have available at your disposal in terms of different profit centers, different assets, etc. to call on to provide them with what they need so it’s up to you.  You’ll need to understand what types of loans are available to you and how to qualify for them.  For example, typically, lines of credit are more difficult to qualify for than loans for vehicle or property purchases simply because of the security.  Sometimes you can restructure debt to improve your debt service ratio, other times you can provide cross company guarantees to provide more cashflow to support a loan, the list goes.  The bottom line is when you walk into a bank if you do so with the understanding of what they are looking for and what you have available as resources you can present them with plans A, B, and C about how they are going to get paid back, in essence remove the risk from the deal for them and then they’ll be able to do all kinds of great things for you.

There are lots of little things to know that vary from bank to bank, but the above points form the essence of it.  The moment I learned what banks were after and was then able to engage in conversations with them about what resources I had available that I could manipulate to give them what they needed it become comparatively easy to get approved for loans.  You won’t always be able to borrow money from any institution this way, there are times when you won’t qualify, but it gives you a massive advantage.

For further detailed training and resources on this matter please check out our Richucation training programs.