Wise Money Matters - Get Out Of Debt and Finally Enjoy Life

I was recently surfing YouTube for some good videos about personal finance and came across this video:

Overall the video has some good financial advice for women, however the first portion of the video talks about “Good Debt vs Bad Debt”.

There is no such things as “Good” debt

Now I can understand her reasoning in the video that school loans and homes are debts are generally acceptable, but I still wouldn’t label them as “good” debts.

Proverbs 22:7 says the “Borrower becomes servant to the lender.” Any debt at all puts you in bondage to that debt. The lender controls your financial future. If you fail to pay a mortgage, you will be out on the street and have a horrible credit score.

You should look at all debt as bad debt. Every single time you need to take out a loan for something, think of ways to pay for it with cash.

School loans with a bad debt mentality

An education is good as it will help you increase your potential to earn money, however school loans are bad. A possible solution is go to school in the state you live in rather than an out of state college. Out of state tuition costs much more than in-state tuition.

If your particular field requires a college that is in another state, figure out what the policies are for in-state tuition. Most require that you live in the state for 6 months. If this is the case, simply move to the state and get a job. This will give you a little extra savings for your first year of college anyways.

Then, guage whether you can work some part time jobs in the evenings when you aren’t taking classes. If you have a lot of online classes, sometimes you can work quite a few hours and still get your homework done if you are disciplined enough.

Lastly, consider living with family during college if it’s feasible. Not having to pay for food or rent can go a very long way to reducing expenses to allow you to pay for college.

Car loans with a bad debt mentality

Instead of getting a brand new mid size vehicle, save for a $2000 reliable vehicle such as Honda or Toyota. Both of those vehicles will often drive with no problems to 200K or even 300K miles if taken care of properly. Put a “car payment” into savings instead

After the end of 1 year, sell the $2000 car. You will likely be able to sell it close to $2000 after one year. Take this money and your “car payment” savings and buy a $4000 car (or equal to whatever amount you saved). Repeat these steps until you have your desired car.

1 year will rarely cause a car to lose too much equity until you start getting closer to brand new.

The next key is to keep your desired car for 7-10 years if possible. Continue to make your car payments to yourself and you will be able to buy brand new cars every 7-10 years as needed. Plus you will have an extra heft emergency fund if a crisis called for it.

House loans with a bad debt mentality

This is one of the areas where you will have to compromise. Purchasing a new home with cash is extremely difficult unless you are an amazing business person or you got a great inheritance. There are ways, however, to reduce the damage of the debt significantly.

First, don’t buy too much house. I recently had the opportunity to purchase a $350,000 house. My income plus my available capital for a down payment could easily pay for such a house. Instead I purchased a home for $218,000. We don’t have any kids yet and I don’t need a big fancy house until I do. In 5 years we will probably be at the point where kid #2 or #3 will be popping out and a larger home may be necessary. At that point, we will consider upgrading. Until then, we are content.

Secondly, attack that mortgage like it’s your worst enemy. The other plan I have is to make more than double payments on the house. This should pay off the mortgage in approximately 5ish years. I look at the mortgage I have as an evil entity that needs to be removed from existance.

Lastly, consider the area you live in. I live in an area which has always had much higher cost of living than the surrounding areas. I have considered moving to Phoenix where $218,000 could buy me a really nice big house. Of course, this means I would only need to buy a $100,000 house instead to live at about the same lifestyle I’m at now. It’s still an option I will continue to keep in the back of my mind if the opportunity arises.

Life with a bad debt mentality

The point is that all debt is bad. While you can compromise for some necessary debt, you shouldn’t become numb to debt. It should always be an annoyance in the back of your mind that won’t go away until it’s paid off. If you live with this bad debt mentality, you will be more likely to succeed in life.

Owning a business has many tax benefits compared to simply being an employee but the biggest tax benefit is simply in how the taxes are calculated.

When you are an employee, you fill out a W-4 to see how much taxes are going to be taken out in each pay check. Hopefully at the end of the year you paid the right amount of taxes. Sometimes you pay too much and get a return. Sometimes you pay too little and have to pay. Either way, you pay something out of each paycheck.

When you are a business, you run your business and at the end of the year you pay taxes on any profits made at the end of the year. Now the question is why is this inherently better?

More tax deductions

First off, there are a lot more tax deductions in a business than there are as an individual. Basically anything that is a business expense is considered a tax deduction and in some cases that can roll over into personal items.

For instance, your company vehicle happens to be the vehicle that you take home everyday from work. As an employee, your car is not a tax deduction but since it’s a business vehicle used primarily for work purposes, it can be a business tax deduction.

If you use a home office to run your business, you can deduct a percentage of the utilities as a business expense equal to the percentage of total home square footage that the office takes up.

Now I will warn that a lot of people walk the line of what is legal and illegal in many situations. Technically with a company vehicle, you are only supposed to write off the non-personal use of the vehicle, but those lines can be blurred. Picking up a Christmas present on the way to a business meeting? Technically the goal of the drive was business use but personal use overlapped it. Most people simply ignore the minute details and leave it as a business trip.

Going to a business conference in Vegas? Make a mini vacation out of it on the company. Technically you were there for a business conference and you had to stay in a hotel in Vegas. It may have only needed to be a single bed but we got the suite for the whole family. And don’t mind the Blue Man Group show we went to that evening with the family.

I’ve even heard of guys deducting their groceries because some of the groceries went to the office kitchen. This is almost definitely crossing the line over into illegal but it has happened.

I would advise you to talk to your accountant on exactly where the line is so you are in compliance with the law. I am not an accountant and therefore do not know precisely what is legal and what isn’t. In practice, as is shown in some of the examples above, when you blur the lines between business use and personal use (which inevitably does happen when you are running the business), you will usually get a tax deduction for it where you otherwise would not and therefore you pay less in taxes than you otherwise would.

More capital during the year

The other great benefit of how business taxes work is that since you don’t have to pay taxes until the end of the year, you have more money to work with during the year. Let’s say you pay $20,000 in taxes at the end of the year. You could use that $20,000 and simply put it in a high interest online savings account and earn 3% on it. This would give you and extra $600 at the end of the year. Then you give the government their $20,000 and you can keep your $600.

It makes it much easier to make the bills during tough economic times.

So basically, you have the potential to make more money with a business and pay less of a percentage in taxes with a business. It seems like a win-win situation to me.

Continuing with our topic of starting a business, one of the primary fears is the fear of failure. We have the fear that if we put all of our time, money and energy into something, it may turn out that we somply just go broke.

Is starting a business high risk?

This really depends on who you ask. There are definite risks involved in starting your own business but there are also risks involved in being an employee.

With owning a business, you are in control of the risks. You have control over whether a business succeeds or fails. Sure, there are outside influences which can affect your business dramatically, but it’s ultimately on you. There is a reason why some companies make it through tough economic times and others don’t.

When you are an employee, you have no control of the risks. If a company decides to layoff 10% of it’s workforce, you don’t know if you will be one of the one’s laid off. You have some control over how valuable of an employee you are, but if someone in management simply doesn’t like you, there’s usually not a whole lot you can do. Also, if a company folds, you have little or no control over that. You are now simply unemployed and have to start all over again.

When you own your own business, you usually have multiple sources of income. If you lose a client, you are not likely to run out of money (assuming you are a good business person). Some companies even have multiple facets to the company. For instance, if Apple’s entire computer division failed, they would still survive on their iPod and iPhone divisions.

When you are an employee, if you lose your job, you have just lost all of your income. One change in the company and you are now unemployed.

Being a business owner, you choose to manage income and expenses. Being an employee, you ARE the expense.

There are definitely risks involved in being a business owner, but being one gives you much more control over those risks and over your future.

What is so bad about failing?

So lets say you do start a business and you fail. What then? What is the worst that could happen? Luckily we live in a country where, the absolute worse that could happen is that you have to declare bankruptcy and start over. You aren’t likely going to be living on the street trying to find your next meal in a trash can. You will survive.

You also can minimize your risks of failure by using wise business strategies. You can setup your business as an L.L.C. or Corporation in order to minimize liabilities. You can put your personal house and vehicles in trusts and L.L.C.’s in order to minimize the risks of losing them in case of failure.

There are a lot of ways to protect yourself from the worst case scenario. Doing so further minimizes your risks. Paying for a good lawyer can save you a lot of money in the end.

My last business failure

The last business I ran was a tour company to the Grand Canyon. It was a family business in which I didn’t really care for the business but decided to take it over from my dad anyways as he was retiring. I learned a lot of lessons from that business and ultimately it did end up failing. I went into debt for it as I had used equity in my home to fund it. But regardless, it was a good learning experience and I am working towards paying off the debts I have accumulated.

My goal for the future is to start another business. I’m not sure exactly what business but I have a few ideas. I have learned what failure is like and found that it’s not as scary as I had thought. Eventually I’ll start something that works and makes it big. Until then, I’ll keep trying and learning.

The best way to make lots and lots of money is to start your own business. You can make money simply by doing the regular recommended routine of going to college, getting a degree in something lucrative like the legal or medical field, but in order to be above all the rest is to simply start your own business. Technically even in the legal and medical fields, you often start your own practice anyways.

So why do so few people start their own business?

Fear

That’s the number 1 reason people don’t start their own business. Fear can stifle your life to a great deal. Here are some common fears that prevent people from starting their own business.

• Fear of rejection
• Fear of failure
• Fear of disappointment
• Fear of the unknown
• Fear of insecurity

All of these are completely natural and legitimate fears. Most people have such feelings of fear when the idea of starting their own business comes up.

Courage

Courage is simply the idea of overcoming your fears.

Dictionary.com has this for the definition of courage:

n. The state or quality of mind or spirit that enables one to face danger, fear, or vicissitudes with self-possession, confidence, and resolution; bravery.

Courage isn’t some magical power that is gifted to some people and not others. It is a state of mind. It is the determination to do something in spite of your fears.

Over the next week, I plan on showing you the benefits of owning your own business.

One of the books I recommend as a starter on this subject is Robert Kiyosaki’s book Rich Dad, Poor Dad. While it’s not a step by step book, it will help give you the courage to face your fears and bring light as to why you should start your own business.

It amazes me how many people lack basic common sense sometimes. You are trying to sell your house and of course you want good money for it and yet you leave it looking like trash. Here’s some basic common sense adivce about selling a house.

Clean off your counters

There shouldn’t be anything unecessary on the counters. In fact, clear as much as possible. I don’t care if you like having your entire kitchen on your counters for easy access, it simply makes them look smaller. You want potential buyers to think you have tons of counter space even if you don’t. A house with little counter space will look better than a house with tons of counter space with crap all over it.

Same goes for the bathroom. Put your hair dryer, your lotions, your vitamins and any other crap in a drawer. Just keep your tooth brushes and possibly a glass of water out. Nothing else.

Clean out the closets

If you are selling your house, you are planning on moving anyways. Take all of your clothes that you don’t need immediately and put them in boxes. As of writing this, we are into winter. You probably don’t need your shorts and tank tops for several months. Put them away. When your closet looks sparse even though you have clothes in it, it will seem bigger to a buyer.

Clean out all of the storage in the guest bedrooms. You will need to clean them out when the house sells anyways, so why not get a head start. Put everything in boxes and put it in your garage or better yet, a storage unit. You can keep a few things in there so it doesn’t look like you are clearing everything out, but make it look sparse.

Cut the grass

Seriously. I’ve seen so many houses that look like they haven’t had any upkeep. When I was looking at houses, I noted every little thing wrong with the intention of using it as a bargaining chip to get more money off the price of the house. If too many things were off, I disregarded the house entirely.

It doesn’t cost a lot to fix up your home. Simple things like picking weeds, taking out the trash that’s been next to your house for 2 years, and steam cleaning the floors can go a long way towards making your house look top quality.

Reduce clutter

As with all of the stuff listed above, please make sure to clean up the house and keep it clean. The best way to do this is to go ahead and pack up everything you don’t need for day to day life. Anything that hasn’t been used in a month should go into storage or sold at a garage sale. This will significantly reduce the junk you have in the house and make the house look more presentable to potential buyers.