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Transform Your Life Forever With the Dreamlife Ratio

Dreamlife Ratio

What’s your dream life?

Take a moment to think about it…

Where are you?

What are you doing?

Who are you with?

How do you feel?

What is your typical day like?

Now consider this basic fact.

The life you live today is the life you’re living. The life you’ll live tomorrow is going to be determined by two things:

  1. Circumstances external to you
  2. Your behaviours

Some people will argue the factors external to them are overpowering and they are strong.The life you live today is the life you’re living. The life you’ll live tomorrow is going to be determined by two things:

But there’s something unique about humans compared with all other living things…

We have the ability to alter our environment.

I’m writing this from Belgrade Serbia where I’ve been working the last couple weeks and preparing to travel to Bali in a week or so.

Here the average person is very poor. Life is very hard for them with wages around $400 per month it’s amazing they can get by at all.

Maybe your situation is the same or worse or slightly better the point is it would be inaccurate and unfair to suggest that someone in these circumstances has the same access and ability as someone born into a wealthy family in a developed country.

Yet, many people do rise above their circumstances even if this means leaving an environment that makes life harder.

The reason I mention this is it comes back to behaviors.

In other words, our environment will have a powerful impact on us but we have the ability to change our environment over time to better support us.

All of this points to a basic truth.

The quality of your life over time will be determined by the quality of your behaviors. The choices you make and the actions you take.

It’s not exclusively the case but it’s all we can do and the rest is up to a higher power.

Since we’ve been given this one chance, this moment here and now doesn’t it make sense to do the most we can with what we’ve got?

We’re going to talk then specifically about what YOU can do today and every day forward to bring yourself a little closer to your dream life.


The Question of Values

Our time is limited.

As a result, life, whether we admit it or not, is always a matter of picking something over something else.

I choose to go out with my friends so I’m not able to study at home.

I choose to spend money on clothes, so I don’t have the same money to travel.

Constructing your dream life then is all about deciding what’s most valuable to you then optimizing your life for those values.

Your values are unique to you, someone else cannot choose them for you and your happiness will largely be determined by the extent you manage to make your reality align with what you believe is most valuable in life.

Everything we’re going to discuss then pertains to choosing what you value over what you don’t value.

This is what choices are all about you’ve got something even if it’s a potential something and you give it up in exchange for something else.

A good choice or a good life involves choosing to trade away as much of what you don’t value as possible to get as much as possible of what you do value.

Make sense?

For example, you might value the bustle of a city with great conveniences over lower costs so for you moving to New York or London or Tokyo might make sense.

Someone else might value tranquility and calm or a laid back easy life with warm weather so for them it makes sense to move to Greece or Bali or Costa Rica.

You can only be in one place at a time, so you need to choose what you value most.

The worst situation is where you feel trapped, you push the choice off, or you choose something you don’t value over something you do. That’s a recipe for misery.


Growing the Size of the Pot

Some of you might be thinking, “but I want both!”

Others might recite the old line, “you can’t have your cake and eat it too”.

The truth is you might not be able to now but you can often increase your overall, this is key to achieving your dream life.

Think about it like this.

Say you want to be able to travel the world and to afford a nice car.

If you’ve only got a small amount of money you might have to choose between them.

Some people live lives of resignation where they accept this as a fact.

Those who live the greatest lives say, “this is my reality today and I can improve it for tomorrow”.

How do you do this?

It turns out there’s only one way…

You grow the size of the put by getting more for less

In a sense the secret to having more is getting more for less.

So, the secret to the dream life then is two-fold:

  1. Getting more
  2. Trading what you don’t value for what you do value

This goes from “having more”, which isn’t necessarily better, to “having more of what you want and less of what you don’t want” = dreamlife!


What is the Dreamlife Ratio?

At Richucation we talk about what we call the “Dreamlife Ratio”.

This is a simple measurement of what you’re giving up (your inputs) for what you’re getting in exchange (your outputs).

It recognizes that we’ve always got many types of inputs:

  1. Time
  2. Money
  3. Timeframe
  4. Relationships
  5. Reputation
  6. Assets
  7. Risk
  8. Opportunity
  9. Peace of mind
  10. Health
  11. Etc.

And on the other side we’ve got similar outputs.

Most people go through life and don’t measure.

Most people do trades that keep them at roughly the same place.

Most people don’t find ways to make their trades worth progressively more, effectively banking their time (we discuss this in The Free Golden Path training for multiplying your income and it applies everywhere).

This is at the core of our Deal ROI training.

In fact it’s at the core of the idea of ROI or Return on Investment in general.

People think of Return on Investment in monetary terms but it applies for time, for energy for relationships, for reputation, etc. as well.

Most people don’t have a full view of their life and all they are giving up or getting in return.

And as a result, most people never live their dream lives.


What’s Next?

If you want to get a little closer to your dream life start by identifying what you really truly value in your heart of hearts.

Not what you give in to pressure from other people on, not what others say you should value but what matters to you.

Figure out what it will take to have it (in our Free Revenue Growth Action Plan we help break through process down).

Then begin measuring what you’ve got and start paying attention to the trades and learn to improve them.

If you need skills to improve this consider our Mastery ROI training.

If you need extra income, consider our Marketing ROI training.

If you need a team, consider our Team ROI training.

If you liked this article check out others we’ve written, reach out to us, we’re available to work with you 1 on 1, in groups or simply to provide you free resources and education to help you get there.


The 3 Ways to Save on Taxes

The 3 Strategies

All tax planning comes down to three strategies. There are a myriad of ways to implement these strategies and the methods vary based on how income is earned, where in the world you are based, where the income is earned etc. but ultimately you’re looking for ways of doing these three.

#1 Reduce taxable income

This is where you decrease the amount of money the government or governments will consider taxable. The two most common ways of decreasing taxable income are making charitable donations and incurring expenses against the income, which generally involves starting a business because a business can typically write off far more than an individual.

#2 Lower tax rates

This is generally achieved either by relocating income to somewhere where the tax rates are lower or by changing the income type. For example, dividends might be subject to a lower tax rate than wages or interest, capital gains also might be taxable at a lower rate and so on. Through proper planning it is often possible to decrease the net rate payable on income.

#3 Deferral

This is when you avoid having to pay tax until later. It is common in registered retirement funds in various parts of the world. Normally, you’d be taxed on gains each year but in a deferral vehicle you don’t have to pay taxes until the end when you take it out. Capital gains through ownership of real estate and stocks tend to function this way as well they can grow without tax until the end when they are sold and then you pay a final tax but because they grew tax free they were able to compound more than if they were taxed along the way. In sophisticated cases this is often achieved by using international companies to defer income that would otherwise be taxable indefinitely.

These Strategies Compound

There’s another potential category, though it’s arguably just a reduced tax rate, which is in the case of vehicles such as insurance where growth isn’t just deferred it’s not taxable at all. Again, rules vary from one part of the world to another.

Tax shouldn’t be your leading decision point in investing, spending, or making money but it does represent one of the largest expenses for most people in their lifetime and learning to minimize those taxes can give you a significant advantage compared with others.

Take a look at just how big a difference this can make over a 20 year period using each of the three methods.


Reduce Taxable Income

Say you can reduce your taxable income by 30% by applying various deductions that come from making purchases through a business rather than personally, which allows you to spend pre-tax dollars rather than after tax dollars, watch how the numbers grow based on a 30% tax rate assuming a $100k/yr. annual income in both cases:

​30% tax on full amount

Tax on reduced amount

Year 1

$100k @ 30% = $70k

$70k @30% + $30k = $79k

Year 2​

$100k @ 30% = $70k + $70k = $140k

$70k @30% + $30k = $79k + $79k = $158k

Year 3

$100k @ 30% = $70k + $140k = $210k

$70k @30% + $30k = $79k + $158k = $237k

Year 4​

$100k @ 30% = $70k + $210k = $280k

$70k @30% + $30k = $79k + $79k = $316k

Year 5​

$100k @ 30% = $70k + $280k = $350k

$70k @30% + $30k = $79k + $79k = $395k

Year 6

$100k @ 30% = $70k + $350k = $420k

$70k @30% + $30k = $79k + $79k = $474k

Year 7

$100k @ 30% = $70k + $420k = $490k

$70k @30% + $30k = $79k + $79k = $553k

Year 8

$100k @ 30% = $70k + $490k = $560k

$70k @30% + $30k = $79k + $79k = $632k

Year 9

$100k @ 30% = $70k + $560k = $630k

$70k @30% + $30k = $79k + $79k = $711k

Year 10

$100k @ 30% = $70k + $630k = $700k

$70k @30% + $30k = $79k + $79k = $790k

Difference

-$90,000                                               

+$90,000                                                        

A $90k difference in 10 years might not seem like much on the surface but this doesn’t count the compounding value of those figures. What if the difference was invested at a rate of 10%/yr. Now, the difference would be over $166,000! This is without assuming you could then apply deductions to the superior investment returns and earn an even greater difference!

This is a 24% difference in the total available capital after only 10 years. What if you could have earned higher deductions? What if you were compounding over 20 or 30 or 40 years instead of only 10? What if you could invest the capital at higher rates? What if the tax rates were higher than 30%, which they are in much of the world. This 24% advantage could easily be a 50% advantage or better.

Look at it another way. If you had an extra $166,000 after 10 years how many family vacations would that pay for? $16,600 per year for 10 years will pay for one hell of a vacation or maybe even three or four great vacations per year.

Let’s keep going.

Lowering the Tax Rate

Say you could reduce your tax rate from 30% to 15%, what kind of effect would this have over 10 years based on a $100k annual income?

30% tax

15% Tax

Year 1

$100k @ 30% = $70k

$100k @ 15% = $85k

Year 2

$100k @ 30% = $70k + $70k = $140k

$100k @ 15% = $85k + $85k = $170k

Year 3

$100k @ 30% = $70k + $140k = $210k

$100k @ 15% = $85k + $170k = $255k

Year 4

$100k @ 30% = $70k + $210k = $280k

$100k @ 15% = $85k + $255k = $340k

Year 5

$100k @ 30% = $70k + $280k = $350k

$100k @ 15% = $85k + $340k = $425k

Year 6

$100k @ 30% = $70k + $350k = $420k

$100k @ 15% = $85k + $425k = $510k

Year 7

$100k @ 30% = $70k + $420k = $490k

$100k @ 15% = $85k + $510k = $595k

Year 8

$100k @ 30% = $70k + $490k = $560k

$100k @ 15% = $85k + $595k = $680k

Year 9

$100k @ 30% = $70k + $560k = $630k

$100k @ 15% = $85k + $765k = $765k

Year 10

$100k @ 30% = $70k + $630k = $700k

$100k @ 15% = $85k + $+765k = $850k

Differ​​​​ence

-$150,000

+$150,000

This alone creates a difference of $150,000. What if the difference each year could be invested and compounded at 10%/yr.? This would yield a difference of nearly $278,000!

Again, what if those investment returns were subject to a lower tax rate so there was a double compounding effect? What if the tax rates were $40 and 20% respectively as is loosely representative of capital gains or dividends rates in the US as of the time of this writing? What if we extrapolated this same process out over 20, 30, or 40 years? Already this is nearly a 40% advantage over the higher tax rates.

Again, what could you do with an average $27,800 per year extra? This is practically a full time salary for some people. You could buy a decent car each year for that price without having to ever worry about reselling the old one. You haven’t made any more money in this example, you’ve just kept more of what you’ve made.

But we’re not done.

Deferral

Deferral only really matters when you can compound the difference, but the difference this compounding can make is huge. To really represent the difference we’re going to look at the impact of $250k invested at a rate of 10%/yr. based on a tax rate of 40%. In the first scenario we assume the gains are taxable each year while in the second there is no tax payable until the very end.

40% Tax Annually

40% Tax at the End

Start

$250k * 10% = $25k * 60%

$250 * 10% = $25k + $250k

Year 1

$265,000.00

$275,000.00

Year 2

$280,900.00

$302,500.00

Year 3

$297,754.00

$332,750.00

Year 4

$315,619.24

$366,025.00

Year 5

$315,619.24

$402,627.50

Year 6

$354,629.78

$442,890.25

Year 7

$375,907.56

$487,179.28

Year 8

$398,462.02

$535,897.20

Year 9

$422,369.74

$589,486.92

Year 10

$447,711.92

$648,435.62

After Tax

$447,711.92

$489,061.37

Difference

-$41,349.4​​​​5

+$4​​​​1,349.45

Year 20

$801,783.87

$1,681,874.99

After Tax

$801,783.87

$1,109,124.99

Diff​erence

-$307,341.12

+$307,341.12

Year 30

$1,435,872.79

$4,362,350.57

After Tax

$1,435,872.79

$2,717,410.34

Difference

-$1,281,537.55

+$1,281,537.55

Year 40

$2,571,429.48

$11,314,813.89

After Tax

$2,571,429.48

$6,888,888.34

Difference​

-$4,317,458.85

+$4,317,458.85

In this case after 10 years we see an advantage of around 10% or a little over $40,000 but look how it inflates after 20 years, 30 years and 40 years! After 20 years the difference is over $307,000! More than $15,000/yr. on average or more than 38% more in total. By 30 years the difference is over $1.2 MILLION DOLLARS! Or approximately $40,000/yr. representing nearly 100% more almost twice as much money in your pocket! This is nothing though, by 40 years the difference is over $4 MILLION DOLLARS! More than $100,000/yr. nearly triple the amount of money in your pocket even after all these taxes.


What Do They Look Like Together?

Now imagine you could combine these strategies together?

Rather than simply deferring at the end of the deferral period instead of paying 40% tax you’d only pay 20% tax. This would add more than $2 MILLION EXTRA to your already substantial advantage.

This is essentially what Warren Buffett has done. He buys stocks that he never sells thereby deferring his taxes for literally decades (you think this is big imagine at 50 or 60 years what the impact would be). Then when he does sell he pays favorable tax rates of approximately half what the normal person would on their regular income. In his case on top of all the rest instead of growing his capital at a rate of 10%/yr. as most people do he grows his capital at a rate of 20+%/yr. Based on those numbers the advantage is almost $300 MILLION DOLLARS! All off a $250k investment made 40 years ago.

These are not fancy tax strategies available only to the rich. Anyone can do these and they are part of the way to become rich!

Start a business so you can write off expenses and in many cases either avoid or get sales tax back.

Utilize tax deferral or tax reducing vehicles to invest. Or invest in long term assets that compound tax deferred.

In the short run the advantages are minor, that’s what’s so deceptive. Wealth is built over time and the effect of compounding is very hard to understate.

If you need assistance or have questions contact us.

​The 5 Stages of Business that Will Make Your Business Grow Bigger, Faster, Easier

5 Stages of Business

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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What Should You Do When You’ve Got a Cash Crunch? A Proven Method to Deconstruct and Solve Your Cashflow Issues

One of the most common challenges I hear from business owners is having cashflow issues.  The good news is often this comes from growing rapidly where you’ve got to put out money for inventory or services and are waiting to be paid but because of how fast you’re growing there’s a shortfall.  So long as you’re really profitable that’s a short term problem though it can still sink you.

Worse is when you’re struggling from a temporary downturn in your finances.

In either case it can be incredibly stressful, sometimes scary and overwhelming and in either case you need to take action.

The question becomes what do you do when you’ve tapped all the accounts and the well has run dry?

As with most problems in business and in life it becomes a lot easier not to mention less overwhelming if you can deconstruct it into small actionable pieces so here’s the formula I’ve used successfully again and again in my own life, with my own businesses and with clients and friends.

 

Step #1 – Separate Incoming and Outgoing

You have two parts of this equation what’s going out or supposed to go out and what’s coming in or what you can bring in.  In other words

  1. What can be done to lower your obligations?
  2. What can be done to bring in funds?

These are really two separate issues either one of which could solve your problem but most likely you’ll solve it through a combination of the two.

Your goal here is going to be to brainstorm and then apply solutions in each area and breaking it down helps you to brainstorm more options.

With that in mind you’ve separated out the outgoing from incoming but it helps to break it down further to determine possible solutions for each area.

Richucation Tip – Start by making a detailed list of all your obligations how much they are and when they are payable

 

Step #2 – Deconstruct Possible Solutions to Your Obligations

Though it might not seem immediately obvious…or maybe it is there’s a few different options in terms of how you can deal with your obligations in these circumstances.  You can deconstruct these into essentially two things that can be done:

  1. Reduce Expenses – in other words find ways so you don’t have as much you’ll have to pay out
  2. Push Back Expenses – in other words find ways so you can pay expenses that you can’t eliminate later than they are normally due in order to buy yourself breathing room and time to bring in more cash to cover those obligations

This is fairly obvious right?  You can address some of your cash shortfall by not having to put so much out at all.  Or you can push back those obligations until you’ve had time to bring in more money.  This later only works assuming you’re profitable in the long run, that you’ll be bringing in more money than you’re spending on a regular basis though sometimes it buys you the time to make more money.

 

We’re off to a good start but we can deconstruct the problem and brainstorm solutions even further.

There are basically three ways you can reduce your expenses:

  1. Finding unnecessary expenses and removing them – this should be a monthly practice in your business for you and all your managers to help keep expense from becoming bloated
  2. Negotiating to make expenses go away – this might look like calling up a creditor and saying “look I’m not going to be able to pay and going to have to default at which point you’ll get nothing, I can offer you 50% if you’ll take that instead”. Alternatively, you can call active suppliers and say “hey we’re shopping for better pricing if you want to keep our business I need you to come down on these numbers.  Often this can get you a 5%-10% discount if you’re a good long term customer who’s valuable to them and assuming you haven’t done this in the past.  Again, this is a practice you should be doing regularly in your business.
  3. Finding another place to meet the need without the cost – this is essentially a case of moving an expense from you to someone else. For example, maybe rather than providing employees with cell phones and computers they use their own along with their home internet connection and perhaps you reimburse them for any extra costs or help subsidize their cost so it’s a win – win.  Often, there’s someone else who already has the resource you need and you can use it without any real excess expense to them or split it with them for a win-win.  This can be particularly useful for women who are suffering from personal cash crunches as often guys will take them for dinner, give them rides, etc.

For a very personal example of this when I was at my brokest all my credit cards were maxed and had been frozen except one and I remember buying just over $19 of groceries and shaking as I scanned my last credit card not sure if it would go through.  During that time, I had to resort to eating my roommate’s Kraft dinner because I couldn’t afford my own thinking “I’ll buy him some when I’ve got money”.  I got packets to ketchup from McDonald’s and toilet paper from public washrooms, rides from friends to save on gas, etc.  Chances are you aren’t in that desperate a situation and hopefully never will be but it’s an example of how sometimes people have resources that you can get from them to temporarily decrease what you need to put out.

Richucation Tip – Refer to Richucation resources on the “3 Dimensions of Value”, “The Cost Halo”, “The 6 Resources”, and “The 5 Ways to Get Great Deals”.

We can also put you in touch with financial experts to analyze your expenses and help you cut costs.

 

In terms of pushing back expenses a lot of bills are due but you can get away without paying them on time if you’re desperate.  In my case because I couldn’t pay most of them when I was at my worst I’d figure out which ones I couldn’t avoid paying because they were going to cut off the services and I’d pay those while leaving the others.

One thing to note is often if you’re a good customer and call whoever you owe the money to they are happy to extend you terms so you can avoid paying for 90 or 120 days.  Not always possible but it’s often an option again to help buy some breathing room.  Costco literally builds part of their business model off of these terms because they’ll buy inventory on payment terms, sell it then invest the money to get a return before they have to repay.

This is very common when you take over a struggling or failing business.  For example, when I purchased a spa I met with the landlord and said “hey, the spa isn’t doing well, they’ll default on the rent unless I do something about it and you’ll lose out.  I need you to work with me here.”  It’s much better than the alternative for them so they’ll usually work with you.

Obviously, not all expenses can be eliminated or even pushed back but usually across all your expenses it can provide extra breathing room.

 

Step 3 – Breakdown Possible Options For Bringing In Funds

When you’ve exhausted all your options to cut expenses and push back expenses you’re left with bringing money in.  Once again there are lots of ways to bring money in and most people having dug deep enough into all the available options so breaking those down will help you become more resourceful.

 

Option #1 – Make Money

The first place to start when you need to bring in extra money is to ask yourself is there any quick cash I can generate?  In other words, can I make some quick sales and get paid right away?

When I was at my lowest for example I made a deal with a friend to sell some of his services and sold to someone I knew (close network so easy sale) then got the client to write a check to me.  I’d negotiated a 50% commission but needed to keep every penny because I needed it all and it was only after a few months that I’d regained enough to my friend his 50% share.  It wasn’t ideal but it helped me.

The important thing being “is there someone who needs something where I can provide a referral and get compensated for it for some quick money” (some kind of affiliate arrangement).  Can you do some sort of discount or promotion to generate rapid sales?  Or do you have a list of existing customers who you could offer something additional to?  I’ve done this with raising money for investments on a few occasions, as well as numerous other things.  I don’t believe it makes a good long term business model but for short term cash it’s useful.

This can actually help generate another revenue stream for your business if done well.

 

Option #2 – Sell Assets

I hate to do this one because whereas #1 is adding to your wealth to cover expenses after selling assets you’re impoverished.  That being said it’s a method of getting some quick cash in some circumstances.  For example, maybe you’ve got excess inventory or equipment you can sell off, maybe you’ve got investments that can be liquidated.  Maybe it’s possible to sell some things you own and rent instead (for example selling vehicles to generate cash and then leasing to replace them).

This is the least favourable and in fact the main danger of short term cashflow issues is that you need to sell assets at a loss in order to cover obligations, which is the reason for bank reserve requirements.  On the other hand, it beats being forced into bankruptcy, taken to court for obligations, etc.

In business perhaps the most common asset to sell is part of the business in trade for an equity investment.  This is sometimes a great way to go but also be careful it’s a long term obligation to a short term problem.  You want to ensure you’re getting long term value out of the investment.

 

Option #3 – Borrow Money

I’d rather not do this but sometimes it’s the only option and it’s worth exploring the options here.

The question of course is “from who and on what basis will they make the loan?”  Goodwill or unsecured credit only go so far where loans are concerned.

I’ve lent enough people money over the years to know that if it’s being lent based on goodwill unsecured I’m often at risk of not recouping my investment so if they are personal loans I’ll generally consider it a gift to help a friend and simply be grateful if I do get paid back or else make sure I’ve got some sort of security.

Richucation Tip – Contact us on advice for loan structuring to make sure you get paid back

This being said most people aren’t sufficiently creative here.  We’ve worked with clients who have cashflow issues and have credit that’s been destroyed or other outstanding issues that mean they can’t get money from a bank but we’ve been able to facilitate loans internally through the Richucation network.

The key here becomes “what can you offer as collateral?”

Very often people have latent assets they can borrow against in one form or another that protect the lender while allowing you to get the money you need.

Remember we were talking earlier about assets and not wanting to sell them?  Often, if you’ve got short term cashflow needs you can borrow against them instead.  Or you can sell them to someone at a discount with a lease to buy option in place so you’re both protected.  You get your cash short term; they get a rate of return but also an asset they can sell if you default and recoup their money.

Another example is the pre-sale of services.  A Richucation client early in his career approached a client and convinced them to lend him money for a venture based on providing services for the coming year.  I’ll do this in some cases where I’m extending private loans and concerned about repayment specifying that I can take repayment either as cash or services at my option.  I’m somewhat protected and the person gets the money they need, win-win.

You can also factor accounts receivables if you’ve got some steady or committed income.

Most of the time people who are looking for money don’t think enough from the perspective of the lender and the lender’s desire to protect their investment and earn a return.  They’ll make promises that aren’t necessarily realistic while at the same time failing to offer protection.  If you can offer protection to the lender that more than covers them, you can usually get someone to extend the loan.

Richucation Tip – Contact us if you need assistance determining how to borrow money

You’ll want to identify who might lend to you and what you can offer to help make the loan a no brainer for them.

 

Option 4 – Receive Gifts

This really applies primarily to personal cashflow issues as opposed to corporate ones but is still worth mentioning.  Although it’s usually not an option sometimes you’ve got people who are willing to help you out and ask nothing in return.

If you’re in a personal cashflow crunch brainstorm who all might fit in this category for you to help you get over the hump.  Sometimes it’s a bunch of people each making a small contribution, the movie “Cinderella Man” is a great example of this.

 

Step 4 – Use All These Strategies Together

Generally, if cashflow issues are serious no one strategy will work on its own so brainstorm solutions in all of them and then start implementing if nothing else you’ve got backup plans if one or two options fail.

As a basic rule prioritize making money and reducing expenses first, then pushing back obligations, then borrowing and only as a last resort selling assets.

Contact us for personalized assistance.

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What is Credit?

Credit is used every day often without us even knowing it.  If you’ve got a tab at the bar they have essentially provided you with credit even though it’s very short term credit.  There’s an illusion that only banks can create credit and some conspiracy theorists who decry the unfairness of this system.  Nothing could be further from the truth.

Credit is incredibly important and in other articles we’ll examine how it works to create cycles within the economy.  The question is what is it?

To be clear, we’re not referring to credit scores here.  What we’re referring to is a means of payment.  You pay with either cash or credit, again not referring to credit cards in this case.  So what is it?

In any transaction there is an exchange a good or service for cash or credit.  Let’s consider what happens in a cash transaction (not referring to physical bills here but where there is no debt created).  In a case such as this I pay you money and you give me a good or service.  Look at our balance sheets.  At the start I’ve got an asset and you’ve got cash.  Then when the transaction goes through we swap.

Before the Transaction

 

Me You
Cash Goods

After the Transaction

Me You
Goods Cash

Now let’s see what happens if we change this process and instead of paying with cash.

Before the Transaction

Me You
Assets Liabilities Assets Liabilities
None None Goods None

After the Transaction

Me You
Assets Liabilities Assets Liabilities
Goods Debt (payable) Debt (receivable) None

 

Notice what happened here.  Instead of paying cash debt was created.  What is debt?  Debt is an asset for the person who is going to collect the debt and a liability for the person who has to pay the debt.

In other words, credit is when we create out of thin air an asset on one person’s balance sheet with a corresponding exactly equal liability on the other person’s balance sheet.  When the debt is paid off you’ll go back to the way it was in the cash transaction with just cash on the balance sheet of the person who was paid and no liability on the balance sheet of the person who paid.  What’s important about this?  A lot of people confuse credit for money because it can be used as such but credit, which can be issued to an unlimited extent within the confines of physical resources is not really the same as creating money.  It is treated as money in many cases to exchange goods and services but the difference is there is no net growth in wealth because credit cancels itself out.  What it does is it allows transactions to take place sooner, which can help to increase productivity and activate resources in the economy that would normally just be sitting.

Hopefully that gives you a basic understanding of what credit is and how it works.  There’s a lot more to it of course but we’ll cover those nuances in future posts.

If you’re interested in a deeper understanding of credit or any other business or wealth building issue please contact us and we’d be happy to assist you.

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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.

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Risk the Mother of All Bad Deals

Our second principle at Richucation is rich people love great deals, they love to be able to buy things for less than those things are worth.  There are many factors in this process such as knowing your true costs (a good friend once remarked it’s worth it to pay $200 for a shirt you like because the real cost isn’t the shirt, it’s your time to find one that’s perfect for you and you’ll spend more money in time trying to find a better deal or find another you love for a great price than you will save), knowing the accurate value of what you’re buying, etc. but ultimately we return to this as a foundational principle and our first lesson to new students.  Rarely accounted for though is the cost of risk and how risk undermines good deals.

Mark Cuban, the billionaire owner of the Dallas Mavericks, once remarked on his blog that the score comes not from what you extract from any single deal but what you end up with overall.  Put another way it doesn’t matter how an athlete performs in a single game, it is their average over time, the aggregate results.  Most successful companies lose money on various transactions throughout the year but in the aggregate those transactions are covered off by the profitable ones.  The key is knowing those numbers to ensure the winners more than cover the losers and then improving the statistics.

Nowhere is this more true or the dangers more insidious than when considering risk.

Risk is not a particularly popular word with entrepreneurs, by nature entrepreneurs tend to be optimistic, they also tend to as a group overlook failures and focus on successes and psychologically this approach has merit.  In terms of creating success you’ve got to look at the failures and the failure rates.

Let’s start by defining risk.  In this case risk is the probability of failure and its related cost.  It is most insidious because you don’t see it in the short term, it only shows up in the long term so you can have what appear to be great successes that ultimately turn out to be great failures.

Consider the example of the exempt market investment products industry.  Walk into in local investment office and ask them about their available products and they’ll tell you all about the MICs, the real estate development LPs, and many more.  They’ll frequently pitch returns ranging from 8% to 25% per year.  Consider yourself warned, Warren Buffett averages 20%/yr. over a long period, if you think these guys can get you a 25%/yr. return in the aggregate (meaning not by getting lucky during a small cross section of the cycle but when averaged across the whole cycle and repeated cycles) you’re probably deceiving yourself.  Are 25+% returns possible?  Yes, definitely, especially in small deals in limited timeframes by very skillful experts.  Buffett has actually remarked that he could get 50% on $1 million because the dynamics are different.  However, keep in mind that in order to return you 25% the company really needs to be earning probably 35% – 40% because they have to pay all their expenses plus etch out a profit.  Let me be clear, no one truly offers consistent long term returns of 25+%.  The only people who get that are people who are managing their own money often in their own business and other factors weigh in, you should probably be running from promises such as those.  But what about the lower end, a 10% return.  This is very respectable and certainly attainable so you can accept those numbers right?  Not really.  Those in the exempt market industry are fond of harping against the mainstream investment industry pushing mutual funds and GICs.  They talk of beating the market through the exempt market but the truth isn’t nearly so glamorous because the general market accounts for risk in its figures the exempt market does not.

When your mutual fund advisor tells you about the 5%/yr. returns a particular fund has averaged over the last 20 years that’s after accounting for all the ups and downs of those decades.  It might have been 15% one year and -15% another year but after all was said and done they managed to scrape together a 5%/yr. return.  When your exempt market dealer tells you about the 8%/yr. you’ll be getting that’s not an aggregate of results, that’s a promise made without security.  In other words there probably are some that will pay 8%/yr. just like a couple stocks in that bundle within the mutual fund will actually earn a 15%/yr. return.  The problem is people, including investment advisors and portfolio managers, are notoriously bad at picking those companies so to protect you from the risk they buy dozens and work the averages.  You can do the same thing within the exempt market but you’ve got to realize that’s how you’ll see your real returns and it won’t be pretty.  Of those 8%/yr. companies you might actually have a couple that lose all your money, a couple where you lose 20% of your money, a couple might actually pay 5%/yr. and a couple might even pay the full 8%/yr.  The problem is for you to pick, for your investment advisor to pick, for you to be able to bank on it is extremely unlikely.  Thus, you have to when you’re making your investments look at the probability of failure and account for those probabilities.

A simple example, if you’ve got a 20% projected rate of return with a 20% chance of complete loss (btw the chances of complete loss in the exempt market are very high, there’s rarely any cases where investors recoup only a portion of their money, they tend to get returns or lose it all) then what’s your real rate of return?  The real rate of return in the aggregate is actually 0%, meaning if you invest several times these will average out to a 0% rate of return.  You might get lucky and hit a winner without a loser; then again you might get unlucky and hit some losers without any winners (they tend to clump together because they tend to be based on the current stage of the market cycle).  Bottom line you need to be able to do the numbers and make decisions based on the probabilities not based on the projections or promises of advisors and sales people.

The same principle applies in business since all business is an investment.  A real example, I had a company where we’d run promotions with heavy advertising and at the end of the promotion period we’d calculate how we did when accounting for all the advertising expenses, cost of goods sold, wages, commissions, merchant processing, etc.  We’d look at the numbers, see we were pulling in a healthy profit and act accordingly run regular promotions to get the volume high enough to surpass breakeven.    At first, all looked good but there was a critical error in the calculations…the defect rate.  Not that often, but often enough we’d have a defective product that would need to be replaced.  When I’d become involved in the company I’d added warranty upsells so that helped to cover some of the cost and at first blush we’d figured it was no big deal because our margins were so strong, about 75% gross margins we had plenty of room to replace a few defective products and the high level of customer service we offered was good for business.

What was the problem?  First, we didn’t know the defect rates or account for them conservatively in our numbers so we’d walk away from a weekend seeing a $12 000 profit and in the short term that was true, in the long term it was not.  It got worse though, when we looked at the costs we were thinking in terms of a 25% cost, if we say had a 25% defect rate at a 25% cost we just needed to add an additional 6.25% to each product sold to account for these losses.  But what of the real costs?  We needed to pay staff to take the phone calls, to handle customer RMA requests.  We needed to pay for return shipping of the defective unit as well as shipping to the client of the replacement unit often times those shipping costs could exceed our cost on the product to begin with.  Even all those might have been tolerable but in many cases we were selling through a third party and we were hit with refunds.  Now in the case of refunds we needed to refund their full money, but we’d still incurred the shipping costs, we still incurred the staff costs to handle it all, and we now had an opened or defective unit we couldn’t easily resell.  In such cases it was a pure loss that needed to be accounted for.

The bottom line is these sorts of considerations exist in any business and you need to count the aggregate, the long term and the large numbers, not any one instance or sale and you need to turn that into a profit or the business model isn’t sustainable and scalable.

For assistance with figuring this out and developing strategies to mitigate this risk or any other business, investing, and wealth building questions please contact us by clicking “Ask a Business Question” in the lower right corner of the screen and we’ll be happy to assist you.