Stop Milking Me! - Cow’s Journey To Financial Freedom

A lot of us think that saving 50 cents on the cereal bar and 20 cents on a bottle of milk is a great thing to do for our finance. But aren’t we forgetting something? When did anyone in the history get rich by cutting coupons? Not to mention all the precious time we could use to do other more productive things to boost our financial health such as learning a new skill or just read money.cnn.com.

I have always been told by my parents, who both run businesses right now that the difference between poor people and rich people is the different mentality:

• Rich people (or soon to be rich) try to do everything they can to make more money rather than just saving every penny. They do whatever they can to boost their earning powers by either moving up the chain or start their own businesses.
• And the poor people (those hard working but still poor) focus on working every hour and saving every penny.

So the fundamental difference is the concept of “Making Money” vs “Saving Money”. As far as I can tell, the riches do both with the focus of “Making Money”, either by making the “saved money” to work harder for them, that is INVESTIING, or bringing in new fresh money from the higher paying jobs or business earnings.

We only have 24 hours a day. If we can spend the precious time to pick up a new skill, learn how to invest, get a degree, learn from others, or set up a business rather than cutting coupons or counting the pennies in the piggy bank, I am sure we will have a whole lot more money coming in than just $2 we saved from the coupons we cut.

OK, I know I haven’t started my “Flipping Project” yet. But here is a great tip I saw that I don’t want to forget:

You want to write down your very first impression about the house you see and focus on the bad stuff, because these items WILL be on your “Home Improvement” list. If you are annoyed by some features of the home, say a cracked drive way, or the disgusting landscape, your potential buyers would not appreciate these features either.

Then, write down the good stuff about the house. Although you don’t have to worry about these good stuff this time. It might be something you want to add to your next flipping project.

In time, you will have a comprehensive “First Impressive” list that documents all the appealing little features with those not so appealing ones that you want to work on.

After all, buying a home is an emotional process for most of the buyers. They want to “feel” the home is right for them and the first impression and guts instinct play a major part in their decisions. The statistic reports show that the buyers usually decided whether they like the homes or not in the first few minutes. So capture these little things that matter a lot in the first few minutes.

I just had an interesting conversation with a friend of mine about purchasing a vacation home as an investment property. She is a young single 100% traveling consultant just like what I used to be. She makes great income and pretty much lives in hotels and on company’s dime with no other significant expenses. With all the extra cash she has saved up, she’s been toying with the idea to buy a 500K – 600K beach house in the East Coast where she vacations a couple of times a year.

On the paper, it all looked great: It’s a wonderful vacation spot! She can use it for her own benefits or invite family and friends over. She can then rent it out the rest of the year. But for some reasons, my guts feeling tells me NO.

I have always had a principle to “Start Small and Start Simple”. Real Estate investment is a tricky long haul business that involves in a lot of money, energy and time. If you are using it as your primary residence, then it is a different story. Because in worst case scenario, you have bought a piece of roof on the top of your head. But if the property is purely for investment purpose, you will have to crunch the number to see whether it suits your current situation or not.

Using my friend as an example, the reasons I think it is not a good idea to sink in $100,000 cash right now are:

1. After crunching the number, she has to spend about $15000 a year to keep up with the cost. That is, after factoring in the rental income (which is a hugely optimistic assumption), the tax benefits and other regular maintenance expenses. It’s more than $1200 a month expense! Unless she lives in it, it doesn’t make sense to throw so much money in it.
2. She is still young and hasn’t started a family yet. There will be a lot of good usages for that 100K cash. By putting so much money on one property, that’s one giant egg in one giant basket. I just don’t think it is a good idea.
3. Vacation rental home is a tricky business simply because A) You are not local B) You have to rely on management company. C) You change tenants every week or so. Without any previous landlord experiences, it could be a bit overwhelming at first

So my suggestion to her is to start small and start local. Find a cheaper rental property near where her parents live and ask them to help out to manage it. Then, after a few years, refinance it or take out the equity and buy another (or more) rental(s). Repeat the process until she is comfortable with the whole thing. Then she can buy something big and fabulous.

A few years? Doesn’t that take way tooooo long? You may ask. After all of these years investing in rental properties, I have to say that real estate business is a long haul type of thing. There is really no fast money especially in rental business. Well.. flipping business might be a different story. I will soon find out.

A lot of us (small business owners and investors) are puzzled by the form of business structure we want to establish to protect our personal assets. A while ago, I formed a S Corporation and here is why:

Tax
Both LLC and S Corp are pass-through entities in terms of tax. The income of your business becomes your personal income, thus eliminating double taxing. C corporation is the one that gets taxed twice, which is subjected to corporation income tax and personal income tax. So there is no difference here between a S and a LLC.

But the difference is the employment tax (Soscial security and Medicare). LLC’s owners are taxed on the entire net earnings, while S Corporation’s owners are only taxed on the salary they get paid. The rest are treated as Corporoation distributions and will only be taxed as income but not employment. (meaning, a 15.3% savings).

So for example, if your S Corporation pulls in 100K a year but you only pay yourself $50K a year. You only need to pay $7650 in Social Security and Medicare tax if you own a S. But if you own a LLC and makes the same amount of money, you pay double of that.

Although we are very careful with the salary payouts. There is absolutely no cheating here allowed. IRS will nail you if you make 100K but only take 5k a year salary.

Business Ownership and Procedures
S Corporation is owned by shareholders (no more than 75) and LLC has greater flexibility in terms of business ownership. LLC can be member managed based on your agreement. S Corporation however has to abide a set of procedures and processes such as record keeping and board meetings. The profit for S Corporation has to be divided up according to the shares owned by each shareholder. LLC however, can distribute its profits in whatever ways the owners/managers seem to fit.

We like the formality of the S Corporation and thinking long term, it is better for a S Corporation to expand and manage than a LLC. LLC is heavily depending on the agreements you have with other owners. S Corporation, however divides the profits based on the investment. There are records being kept from each board meeting to document major decisions. Since it is law so nobody has excuse NOT to do it.

Another difference is that S corporation has to be owned by US citizens and Legal Resident Alien. LLC has no such restriction. All of our shareholders are US citizens so we don’t need the advantage offered by LLC

If it’s a Mama-Papa shop, maybe LLC will work better since you can fight over the agreement in the bedroom at anytime you want. But if there are several investors working together, I would personally choose S over LLC.

I don’t really know how much I save since I deduct or withdraw everything out of my paycheck automatically each month. I only use the left over money. Out of curiosity, I looked at my last paycheck and did a quick calculation to see how much I save each month. Wow! I put away almost half of my paycheck each month! I used to distribute the money in 401K, Roth IRA (mainly Growth funds), cash savings and non-retirement stock and bond funds. Since I am saving money to buy a house, other than the 401K contribution, everything else goes to my online saving’s account these days.

So to give you an idea of what saving half of the paycheck feels like, here is a summary of my life style and spending habits comparing with those of my co-workers who make the same amount of money:

Cars:
Co-workers: Bimmer 3-series is normal. Many own Mercedes or large SUVs

Me: Toyota RAV4

Homes
Co-workers; 400K – 500K is normal for my co-workers. Many have vacation homes too.

Me: Bought a home for my parents for 245K. I still rent and live in a one bedroom apartment. I am about to buy a home in 4 months.

Family
Co-workers: married with kids
Me: single and no baggage

Vacations:
Co-workers: Cruises, Hawaii, Europe, Carribean vacation experiences are constantly brought up in our weekly status calls.

Me: I can only spell “C-r-u-i-s-e”. Ok, I do hop on the planes a lot to see friends and families. Matter of fact, majority of my monthly spending is related to travel.

Nail caring
One of my female coworkers have in-house manicure and pedicure service every week.

Me:
Buy some nice bottles and do-it-yourself.

Here is a post about my spending habits and my budget.

Ok, I admit that my income is probably in the top 10%. I just try not to spend what I make. The fact that I am single with no kids also helps a lot. I guess right now is the golden years to save before the little ones come out to empty my piggy bank.

I attended an official eBay Univeristy’s “Advanced Selling For Serious Seller” course this past Saturday. Although the presenter was very good at telling real life eBay stories, I felt that majority of the stuff can be found on the web and other free sources. If you have already opened up a store or having been selling for a while, this course isn’t going to be advanced at all for you. So spend your 60 bucks elsewhere.

The only good thing about that course is the small booklet we received as part of the cource offering. Although they didn’t put a lot of juicy selling secrets in the booklet, it is a pretty comprehensive guide to teach you a structured way to sell, package, avoid negative feedbacks, dealing with unpaid buyers, etc…

A few tips I learned from the course that I didn’t know before:

1. Hot list. You can download ebay’s hottest sales each month via pages.ebay.com/sellercentral/hotitems.pdf
2. You can sell marked tome stones, but you can’t dig a stone out of a grave yard and sell it.
3. How to use second chance offer to the lower bidders since they are your potential serious buyers.
4. Combine shipping is the best discount/promotion you can give to the buyers if selling multiple items.
5. Some sellers actually put the following sentence in every listing :” Do not bid on my items unless you understand my strick policies.” Nothing turns away bidders faster than using phrases such as “Do not bid”
6. Don’t list the same item at the same time unless you expect to sell multiple at the sametime. Why competing with yourself?
7. Buy It Now is a good feature to have. It encourages buyers to bid. But use it only when you are absolutely sure about the price and add a couple of dollars to the usual price
8. Items with Reserve price tend to turn away buyers
9. Have a return policy and charge 15% or higher restocking fee.
10. You can sell Harrison Ford’s autograph, but you can’t sell his canceled check with his signature on it. You need Harrison’s permission to do that.

Have you ever had a financial madness month that you have to deal with a number of unexpected expenses and totally screw up your budget? Well, this month is my financial madness month.

After switching my job role recently from an on-the-road consultant to an office lady, my boss told me that I have to learn how to play golf. Apparently, the people I work with constantly work at the golf courses; discuss business strategies while taking a few swings. I was very reluctant to take on a golf club and secretly planned to ignore my boss. But after visiting a driving range, I actually like the sport quite a lot. So I decided to put my boss’s assignment back on agenda. The problem? Cheapest golf clubs cost a few hundred dollars!! Ouch!!

Not to mention that I still have to squeeze money to solve my bra problems and pay for the $230 bridesmaid dress for my best friend’s wedding. And that Garmin Streetpilot i5 GPS has been on my “most wanted” list for a while since I constantly got lost while navigating in the town due to my lack of sense of directions.

If I buy everything right now, I am looking at $500 for golfing equipment, $600 for my bras ( I did buy 3 VS bras since I wrote my last Bra Emergency post), $230 dress money I own to the credit card, and at least $350 for the GPS I want. Total price tag: $1650. My current month budget allowance: $650.

Well, I can certainly charge everything on my credit card and worry about the balance later. But I don’t want to do that. That’s how I got into credit card debt situation when I was younger.

So here is my plan to deal with the problem:

1. Golf Clubs: Found some used clubs for 24 bucks a set earlier, thanks to my expert golfer friend. When I got home today, I received a package. It was a whole set of top brand golf clubs from my buddy Paco! Holy Cow!! I was very surprised. Yes, I was helping him with his career earlier but not in my wildest dream that he would actually give me his favorite set of golf clubs!!! He could sell them on eBay for a handsome profit! So thanks to both guys for helping me out!
2. Bridesmaid dress is a done deal. That’s for my best friend’s wedding. So I am paying whatever it takes to look good.
3. GPS: Although I am still suffering from the frustrations of getting lost constantly, I think I can wait till the next month and budget that expense into my “toy” and “recreation” categories. For now, I just need to be very friendly with mapquest.com
4. Bras.. hmm.. bras… Like I said earlier, it is hard to give up your favorite brand. But I am going to give Target Generic brand a shot. Buy a couple of $13 ones and see how they fit. If they feel nice, I will mix a few more of them into my VS collection.

With this plan and my friends’ help and generosity, I am only spending around $450! I still got money left to drink a few more White Chocolate Mocha and treat my friends with some magaritas!

This morning I wrote a short post titled “Budgeting For Golf Clubs, Bridesmaid Dress, GPS and Bras”, I got the following interesting comment:

“How is it possible to spend $600 on bras? Not to be overly judgmental, but I find this expenditure ridiculous. Since I am not familiar with your blog, I went back and checked some of your earlier entries, including the one from March in which you wrote that “[a]fter working 10 years, I finally hit the moment that I can’t even pay my bills. … I had about four hundred bucks in my saving’s account.” If these are your financials, may I suggest that your spending habits are a tad bit out of control? “

Besides the fact that the person missed a lot of my posts and the facts that I save 45% of my paycheck, I own rental and commercial properties and I do have more than 400 bucks (they are just not cash I can use right away), he does have a good point: The 600 dollar bras does sound like ridiculous.

Yes, as frugal as I am, I would throw down 45 bucks on a piece of bra. But when it comes to a pair of nice shoes, I can easily pass and move on (Yep, not all women are crazy about shoes). My friend Paco who gave me his set of golf clubs is a very frugal person. He saves even more than I do. But these clubs are Taylor Made that probably cost him about a thousand bucks! And I am sure there are a lot of people out there who would spend hours cutting the coupons to save a few dollars but spend 50 bucks on a piece of whatever because it is important to them. You start to question what is frugality?

I don’t think there is a right or wrong answer out there. But I do believe that being selective frugal is probably the way to go. Like what I answered in my comment to that guy,

“As why I would spend 600 bucks on bras,.. I think as much frugal as we want to be, certain life quality we enjoy should not be compromised. My bra is one example…”

So if this is something you can live without, then go cheap and save the money. But if this is something that will make a significant impact to the quality of our lives such as the quality sexy bras or the recreation gear (such as Paco’s golf clubs and my rock climbing and snowboarding gear), then budget it and get it. After all, it’s all about how important that “stuff” means to us.

Two Personal Finance Bloggers are talking about making more money vs controlling more spending, which one is better in terms of achieving financial freedom?

It’s very interesting to read the differences from their opinions while comparing their backgrounds.

Blogger A is a 37 year old lawyer. Based on the comments he left on other blogs, this guys’s networth is too large to be disclosed. And I assume he owns or jointly owns a law firm (just my guess).

Blogger B is a young software engineer who works for a company, just like majority of us out there.

Blogger A says:

What is your most valuable asset? You may be surprised. It isn’t your house, or your 401k, or even your 6-figure balance at Ameritrade (if you’re lucky enough to have one). It is your ability to earn an income. Over the course of your working life, your ability to generate income that can be saved and invested, will determine when you are able to retire, and what the financial quality of your life will be in retirement. No other factor even comes close.

If you want to get rich, focus on increasing your top-line.

Living Within Your Means is Important, but Won’t Make You Rich. Don’t get me wrong: keeping your spending under control is important. I have a number of friends who make several hundred thousand dollars per year, but who somehow manage to go through all of their income, and consequently have no net worth. However by and large, picking up nickels here and there by squeezing your cost structure it isn’t going to make you rich. Instead, controlling your spending is just what keeps you out of the poorhouse.

Even though compound interest is a powerful thing, if you only have a small asset base to begin with, it will only grow into a small number by retirement. The juice that really drives asset appreciation is the ability to invest a large sum of money. And the way you get a large sum of money, is by having a strong income (while controlling your expenses).

Here is the link to the entire article.

Blogger B says:

These posts state that many of us are concentrating too much on finding ways to save more money instead of finding ways to make more money. While I agree that increasing your in flow will impact your bottom line more than decreasing your out flow, I think they’ve tried to oversimplify things.

Sure, getting a 5% raise is much better than most every way to save more money in our daily lives. But the reality of it is, how often do you get a chance to get a raise or a boost in your income. My company gives raises once a year, so I have one opportunity to increase my income. Yes, I know, each work day is a chance to increase my income, but I strive to produce my best work every day anyway. That’s a given.

Just the other day, several people told me how excited one of our customers was after the demo of the new feature I put in our software. One person told me I needed to ask my boss for a raise. Is it that simple? I just consider it doing my job. It really ticked me off at my last company when employees would get recognized for doing something that they should be doing anyway.

[back on topic, please]
My wife is a teacher. Her salary is set by the county. She could be the best teacher in the county or the worst teacher in the county; her salary would still be the same. She doesn’t get merit raises either. They just don’t do that for teachers. So how can she increase her income?

It seems to me there are many more ways to decrease spending than there are to increase income. That’s why we all focus on decreasing spending. So, keep on saving money. And when your chance to increase your income comes around, be sure to get it for all it’s worth.

Here is the link to the original post.

Cow says (well, that will be me if you are not familiar with this blog):
I am not going to comment on both bloggers’ opinions. I just want to get back to the original topic about top line vs bottom line in a mathematical way:

Let’s say you make $50,000 a year. What is the max of the bottom line? Yep, $50,000 assuming you will eat snow, sleep on the streets and hide income from Uncle Sam. Bottom line must be less than your income. It’s common sense. What is the max of topline? Hmm, I don’t think there is a limit. It can be $80 above your income right now, like what I made so far from eBay and online Ads. Or it can be $5 million if I create a successful business.

I agree with both Bloggers, increasing topline is way harder than controlling the bottom line. And that’s probably why majority of the people are struggling with the bottom line while only those who dare to challenge the top line let the bottom line to take care of itself.