Split your mixed retirement plan to traditional and Roth = OK.
Do a backdoor Roth conversion with no other IRAs = OK.
Do a backdoor Roth conversion when you have other IRAs = Warning!
Do a backdoor Roth conversion when you have a SIMPLE or SEP = Warning!
Move money to your 401(k) and the rest to a Roth = potential opportunity!
WHAT DO SMALL BUSINESSES AND FAMILIES HAVE IN COMMON?
Apparently, that’s cash flow! I know that standing at our kitchen counter holding the utilities bills, we have that thought; “ugh, I just paid this!” But did you know that it keeps our small business and entrepreneur friends up at night, too? In fact, according to a study conducted by QuickBooks, 69% of small-business owners are up at night fretting over cash flow constraints. Furthermore, they found that 2 in 5 businesses reported having issues and that a third will be unable to pay themselves, their vendors, their loans, and those very near and dear to us, the employees!
WHAT’S HAPPENING AND WHAT CAN WE DO?
For us young, eager, super excited startups and first year businesses, we’re making some beginner mistakes. For one, we’re spending too much too early. It’s so easy to do, right? We’ve all heard that you have spend money to make money, and we all want all those operational tools and shortcuts to bring us success sooner. Second, we have a tendency to overestimate our budgets and forecasts. We tend to be maybe a little overconfident in our process, our sales abilities, and the speed at which we can make receivables and payables match.
Our more experienced business owners struggle for some of the same reasons, like overspending, but their biggest pitfalls come to the concept of timing. Not coordinating actual cash receipts and outflows (or being aware of really when things are moving), not having a cash cushion to allow for slow times (and even more importantly, during times of growth!), and being passive in regards to their accounts receivable while at the same time paying your accounts payable early, all play into very real cash-flow traps.
Here are some suggestions to get all of that under control so your business can live and thrive:
In this world, Cash is King. I want you to be the King and I want you to feel great about your financial life and business. There are tons of other things we can do, short of raising our prices, that can make our businesses more efficient and less like work to run. Cash-flow is one of those things. Here were 5 suggestions; take the helm or ask for help.
In this dialogue, I’m going to describe some of the things I’m doing in my financial world. Like many of you my family falls into the demographic of married couple, age range thirties through forties, and we have two beautiful little girls. We absolutely don’t have buckets of cash to invest, but we do have a lot of moving parts and life transitions that make planning paramount. It’s important for me share with you some of my values and opinions so you can better understand some of the decisions I’ve made along the way. It’s also important to be aware that I’m not the only decision maker; my wife has her inputs, and our environment has a say, too. Some key things that are important to me are; continuing my education and building platforms to share that knowledge and those experiences, providing experiences for my girls as they grow up and an education for them in the future, spending time together and traveling with my family, I started a new business and I’d like to see it thrive as a lifestyle practice, and lastly, I do not like debt and want to be free of it (but I understand it’s a tool to be leveraged).
DEBT AND CASHFLOW
When I came out of college, I had significant (like six figures worth) student loans to repay. My private loans had interest rates that were as competitive as you could possibly get them, like barely over prime. My federal loans, I managed to get knocked down to 6% by working with a Fleet and Family Support Counselor through the Navy. This was possible through the Servicemembers Relief Act. Furthermore, I took advantage of a military deferment option on all of my loans, and this was I think, my first mistake. So, I’ll get to what my strategy is today later on, but here is what I think I should have done back then: Since I was newly married and a geo-bachelor (meaning I was stationed somewhere my wife wasn’t), I had very little strain on my budget. But I got sticker shock and didn’t know anything, so I kicked the can down the road. I should have figured out what I needed, how much I wanted to do for entertainment, and dropped every other cent into those loans… They’d be gone years ago.
For us, the math worked out that it made sense for us to refinance my federal loans around the same time we refinanced the house we were living in. The interest rates were super low, we could reduce the term on our mortgage (and still pay less per month!), and it would be easier for me to pay a single monthly amount by combining the several payments; so that’s what we did, I paid off two of my four federal loans from cash flow and lumped the two higher balanced ones into my mortgage. So, I went from 5 monthly payments with interest rates all over the place to one, not including other obligations like my car or private loans. Our mortgage went from 30-year to 15-year. A nice little icing is that interest paid is still deductible in April.
Three years ago, this summer, we moved to our current house. We love the town, the neighborhood, the schools, the property (obviously), and this is to be our forever home, so we bought it. If you think you’re going to move in less than ten years, don’t buy. Do the math before you even start shopping for houses to determine what you can afford without being house-poor, to see the difference of cost-of-ownership versus renting, will it fit your family over the years, etc. In my opinion, it’s a waste of money that you could be allocating to something you value more than the appearance of success through homeownership, if you just rent. Even when you first start having kids, if you don’t think you’re going to be there long enough to recover your investment and build equity, why not just wait? So now we have two mortgages…
and a car loan… and the remainder of my private loans, plus sprinkle a little credit card debt in there. The way I’m attacking these and all my other family expenses, is through a bucket system. I have my static monthly bucket which consists of all my debt and fixed monthly obligations. I have my weekly bucket, this is my “control” cash, used for all those variable monthly expenses like groceries, beers, zoo trips, and movies. The last bucket is my Goals cash. In here, I’ve got retirement savings, the girls’ college, vacation money, etc. The way I filled these buckets is I assigned accounts to them (multiple when it comes to the goals bucket) and I estimated my annual income from all sources, subtracted my fixed obligations from that number, and put it and a little extra into the monthly bucket. The remainder, I used my budget to determine roughly my weekly needs and what I could spend less on (by cutting it, or coupons, discounts, self-control, whatever); that amount goes in bucket number two, and the last bit goes in my goals bucket. This part right here, is where my values come into play because I’m taking a little extra and putting it into my first bucket and I’m not a big fan of trimming the fat on my second bucket, I’d rather just try to earn more. If this were a Ven Diagram, though, my first bucket and third would over lap and you’ll see why in a minute. Inside my monthly cash, I’m using an Avalanche to pay down my debt. This means that I pay the minimum on everything, except the highest interest-bearing obligation I’m paying that little extra I dropped in. This overlaps the third because debt freedom is one of my goals, too. Skipping to that third bucket, I have monthly payments going to 529 accounts for my girls’ educations, a little bit going to cash value life insurance policies (for a hundred reasons!), and believe it or not, I recently stopped contributing to my retirement. Oh man, that’s taboo, I know! But I did that thoughtfully. I need that little bit of cash flow to help launch my new business and stabilize my cash flow until I’m paying myself a regular salary. So, it’s ok to pause retirement savings when you’re young to pursue opportunities or protect yourself for accumulating more debt. I give you that permission, so long as you don’t let it fall off your radar for the future. I review my personal and business budgets and cashflow about monthly to see how well I did and to adjust for any changes in goals or circumstances. What’s also important to note that what Erin (my wife) and I are doing, is that we aren’t living like paupers. Anyone that knows how often we go to Disney, knows that, and we make room for other trips together, too. We do take advantage of discounts where we can. We don’t buy things that we don’t find value in. In fact, I unsubscribe from newsletters and emails regularly because I want everything I see, I just don’t need them or value them. Ironically, I sign up anytime I am shopping for membership (not credit cards or store cards) in order to get whatever deals the retailer may have. We both have a history of driving our cars into the ground; I had my last one for ten years and so did she! So, we only spend on things that are valuable and important to our family like food and Disney trips. In planning, you have two choices when a goal has a shortcoming or not enough funding; save more by spending less, or just earn more. A lot of advisor, don’t discuss this viable option. When we moved, we didn’t sell the other house. I really, really wanted to because I do not want to be a landlord, I do not want the carrying costs of another house, and in the current market my return on investment is more than I can get mathematically selling than renting and depreciation. But I’m coming around to renting it because it will free up cashflow for our other family goals and ease some of the pressures today.
MY PLANS FOR THE FUTURE
I said before that I stopped my retirement contributions. Well, that is only temporary. Every dollar I contribute today towards debt will be reallocated to long-term savings in the future. The majority will be to retirement, the next bunch to the girls’ futures, and the last to some nice vacations with family. My retirement considerations are not as simple as deferring income to get the company match or just putting money back into my Roth while I qualify. The decision I’m going to make will consider funding a SEP or a Solo 401(k) plan, and under the circumstances what will be the most bang for my buck there. Small business owners and contractors stay tuned for that blog because I’ll go through the pros and cons of all of our choices.
I am also working on cultivating additional sources of income and “side-hustles”. One example, is by leveraging my Post-911 GI Bill to obtain my master’s degree. I’m getting additional education which I value personally and professional, plus, my tuition gets paid and I get a small monthly stipend. That monthly stipend helps me offset our family costs while I transition and launch the new practice (thus allowing my savings to stretch further, less risk). As that comes to fruition this Fall, I will work on teaching a couple classes at a local university. Again, not only will this bring in additional income, but helps me fulfill my goal of sharing knowledge with others. It might even help with my girls’ cost of education in the future, too. What I would suggest to you, is that you can’t do what I am doing anymore than I can copy your life, but the approach I think is the same. Identifying the things we value, knowing our numbers, and being systematic towards pursuing the lives we want are things everyone can do at home.
There is constant flak associated with the Millennial generation because, as should’ve been expected, they do things and think just a little different from their predecessors. I don’t actually care about all that. What I do care about is that we’re not yet the target market for most financial service professionals, and what’s worse, is that we impose our own limitations on ourselves. Often times we’ll turn to Google before we turn to a professional for help. This isn’t everyone, but it is common enough.
WHY GET A PROFESSIONAL
The things I hear the most from my peers are: “I have to concentrate on paying off my debt before I can focus on growing my wealth”; or “I don’t have any wealth to invest, yet;” and “oh, I’ll work with someone once I get everything figured out first.” To me, those statements seem counterintuitive (and not because I’ve started a new practice and want people to work with me!). The way my head works is that math is math and if I can optimize anything, I will probably reach my goal sooner. I believe that being emotional and empathetic are some of our most powerful qualities, but they also significantly work against us. They get in our way of seeking help, they inhibit our success in the market, and just imagine the momentum we could have if someone could help us direct our emotions to be in alignment with our goals. For example, I can easily do a quick web search on best ways to pay off my student loans: I can use the “avalanche” to pay off highest interest first; the “snow ball” to get a series of victories by attacking balances first; I can just as easily adopt PAYE and REPAYE plans and/or work for debt forgiveness on certain federal loans. It’s not as simple for everyone as just deferring to the math to define which is best for them, and that’s where a professional comes in. And I’ll let you in on a little secret, the most math efficient technique in any area of planning is NOT always the best. A fun example is in the design of submarines. An engineer can figure out mathematically the best way to decrease friction, reduce heat loss, maximize output, and how to cram as much stuff into a small space as possible, but if they aren’t careful, they’re going to put some critical valve or component upside down in some horrid location that a technician can’t get to let alone perform maintenance! It’s the same with dieting; I know I can lose ten pounds by axing carbs. At the same time, I’ll quit that diet if I can’t drink my beer when I want. The same goes for budgeting and every other concept, you have to take the person into consideration. It’s not an easy task, even for the most self-aware individuals.
Working with someone can help you fit the best strategy to you thus increasing the probability of success. Professionals should be able to address the behaviors and feelings that only an objective perspective can. I like to think that as I move through life transitions, even without “wealth” to invest, that my life would be more fulfilling if I had a sounding board, a coach, an advisor and advocate that could keep me on track, make me aware, or teach me the things that I know I don’t yet know. If can start the process earlier and make small tweaks here and there as I go, two things will happen; (1) I won’t have to make a huge correction later on because I started later, and (2) I’ll be on my desired path sooner, which will feel much better. Plus, the more time we have left to our own devices (regardless of how great a DIYer you are), the more time we have to make mistakes.
WHAT CAN YOU DO BEFORE PAYING SOMEONE
Especially for the younger generations, on a personal level cash flow always seems tight. So, before we rush to hand our money over to, what seems like, every professional we meet, let’s figure out what we can do first to make the most out of that time. I approach this the same way I approach planning, I ask a few questions. “What would I want if there weren’t any obstacles?” “What have I learned from the past decisions I’ve made?” And lastly, “what’s going right that I’d like to see more of?” These questions set the groundwork to answer personal value questions, they help you set goals and objectives if you don’t have any yet, not given it thought, or need to clarify existing ones. A little self-reflecting can help us identify our own habits, biases, passions, and strengths which facilitate making behavioral changes, adapting, and evolving our dreams to even bigger possibilities.
From here, take a snap shot of where you’re at and the ideas you’ve tried and are trying. Typically, in the finance world that may look like a balance sheet and a cash flow statement. Naturally, you can see the logic in that if cash flow is a concern. You simply can’t stop the bleeding if you don’t know where the money is going. And that’s a big part of getting to work, is getting organized and being aware of where you are. Once you know this you can take steps to optimize the course you’re heading or completely change directions. That power is up to you now. For money especially, the anxiety of not knowing and feeling overwhelmed by these burdens is very real. The more financial stress we have the more we tend to make missteps, too. So, take a little bit of time and figure out where you are and one small thing you can do again or do differently, and I’ll bet you see a dramatic change in the long run and in how you feel.
Now that you know roughly where you’re at and one thing you’d like to adjust or replicate, the next step is what kind of person can help me make this make sense and work better. Find professionals that specialize in your objectives and interview them. How they get paid, not necessarily just how much. What is their personality like and what’s their approach? This person is going to learn a lot about you, hopefully you like them, and at the same time we don’t want them to just be a “yes” man or woman. Share with them what you are good at and areas that lack your interest so they can best help you. If you’re super analytical ask them for the math or the statutes so you can understand and internalize the advice. If you’re more visual, explain that certain graphs make you more comfortable or to slow down with the math. The point is to find and articulate the style that works best for you so that the advice you receive is more actionable for you and takes less time to arrive at. Therefore, you have better value and bang-for-your-buck.