Financial Planning

This is the process of estimating future financing needs. We look both forwards and backwards. How were previous funds financed and for what purposes were they spent?

The management of a company can determine if the financing and spending patterns are in line with the company’s goals.

Looking ahead, management can budget timing and amounts of when funds will be needed and how they will be obtained.

Bombeck on Success

If you live with someone with the "Sorry-I'm-Late Syndrome, you must resign yourself to never seeing the bride walk down the aisle, never seeing the opening moments of a movie, and never hearing the national anthem to a ball game.

- Erma Bombeck

More on Erma Bombeck

Financial Planning for the Poor/Middle/Rich

The poor are advised to count on Social Security and Medicare. My own advise is to increase income. Personally, I suggest the poor start in network marketing because that way they get financial and business education. This is addition to the obvious: get the best job you can.

The middle are advised to work hard, live below their means, save, invest for the long term in mutual funds. They are passive investors who invest not to loose.

The rich are active investors who invest to win.

All of this tells me that the problem of poor/rich narrows down to achieving the active investor status. Of course, one has to know how to do this – and be smart.

Begin With the End In Mind

This gets back to having a goal. Covey says that all things are created twice, first in the mind and then in the physical.

He talks about the difference between leadership and management. His metaphor to explain this is to imagine cutting a path through the jungle. The leader chooses the path, the manager are the ones cutting through the undergrowth.

This is the chapter where he goes into why and how to make a Personal Mission Statement.

This habit is about leadership, starting with leadership of yourself.

Ben Franklin's Rules of Life

In July 1726 he was 20 years old. Sailing from London to a new job in Philadelphia, he wrote out for himself his “Plan for Future Conduct”. In this plan, he listed four basic rules he would live by. These are those rules.

1. It is necessary for me to be extremely frugal for some time, till I have paid what I owe.
2. To endeavor to speak truth in every instance; to give nobody expectations that are not likely to be answered, but aim at sincerity in every word and action – the most amiable excellence in a rational being.
3. To apply myself industriously to whatever business I take in hand, and not divert my mind from my business by any foolish project of suddenly growing rich; for industry and patience are the surest means of plenty.
4. I resolve to speak ill of no man whatever.

Franklin was one of the earliest self-help improvement authors in America.

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Pictured: Benjamin Franklin at his regular day job, working in the printing office.

More information: Wikipedia, Franklin's Autobiography

The Gold Myth

He believes gold to be a bad investment. I agree that the historical rates of return on gold have been around 2% to 4%. Not good on a long term basis.

I disagree with him about what to do in times of economic collapse, though. In those kind of times, gold can be a safe place to stash your cash until times get better. At least you know it won’t loose value.

Restaurant Marketing

Why do you suppose an Italian restaurant in New York’s “Little Italy” quickly goes out of business?

In terms of the 5 criteria for defining a market segment:

1. Substantial: there were not enough people in the neighborhood to patronize another Italian restaurant. They either ate Italian food in their own homes or they ate Italian so much, their idea of going out was to eat something else. – Chinese, anyone?
2. Homogeneous: inability to identify what group of people would patronize this restaurant.
3. Heterogeneous: the place failed to form a separate identity with respect to other restaurants in the area. Suggestion: “we’re the place for Tuscan food.”
4. Accessible: Location, location, location. Could people find it?
5. Operational: Difficult to find out the attitudes of the target market, since people in the neighborhood might be reluctant to admit they were tired of Italian food.

This kind of thing illustrates the importance of planning a marketing strategy. Who are you going to sell to and then, how are you going to approach them?

Winget on Leadership

Service must be the ultimate motive of your life. Your work is the way you perform the service. Success, happiness, and prosperity come from having served well.

- Larry Winget

The Problem of Financial Education

Both men believe that much of the economic problems the middle class and the poor face is caused by lack of financial education. In another book, Robert said that one has to know how to earn money before one can know how to spend money. He cited that as the reason that many lottery winners are unable to keep the fortunes that they won.

I think that this is a reason that the economy is the way it is. People listen to politicians who make no sense because they do not know better.

Be Proactive

Steve means more than just taking the initiative by this. He also means to stop seeing ourselves as others see us and letting that affect our behavior in negative way.

I do not think that this means that we should be indifferent to how people see us. My dad admonishes me to this day to dress right. People will more naturally be willing to do business with someone who looks professional rather than a slob. Girls and boys will be more willing to go out with someone who looks good than someone who does not.

What I got out of this section of Covey’s book is the importance of attitude. Like Napoleon Hill’s, “Think and Be Rich”. Covey’s approach to changing attitudes is to act. Positive attitudes come from positive behavior.

The Permanent Portfolio

I am not sure what makes this portfolio (PRPFX) permanent other than the marketing gimmick, “the only investment allocation mix you will ever need,” but the mix is easy to grasp and anyone can set up their own fund for themselves. Here’s the formula:

• 15% Aggressive growth stocks
• 35% U.S. government bonds, bills, and notes
• 20% Gold
• 5% Silver
• 10% Swiss Franc assets
• 15% Real estate and natural asset stocks

Source: Permanent Portfolio Funds.

This is a conservative mix which outperforms other mutuals in bad times but lags behind in good times.

The problems are: 1) the 35% in government bonds and 2) the 25% in gold and silver.

Bonds usually get a lower rate of return than stocks. You pay for the security. If you believe the future to be mostly bad, then by all means invest in bonds. Despite the recent downturn, the past history of the 20th. century and the first decade of the 21st. have been mostly good.

Gold simply does not keep pace with either stocks or bonds. Despite all the booming in conservative circles, the numbers don’t lie. Between 1802 and 2006, the value of gold has barely doubled. That’s pathetic.

To sum up, last October, when the financial markets imploded, and you saw on your TV John McCain wanting to cancel a Presidential Debate in order to deal with “the crisis”, it would have been a good time to have dumped your regular funds and bought into this one. Once it looks like the economy is coming out of the recession, then it may be a good idea to move your money back.

Source: The Motely Fool.

Don't Worry About What Other People Think

Whether it be network marketing or frugal living, friends and neighbors may look down on financial makeovers. DR advises to not even consider keeping up with the Jones. Chances are that they're broke.

I would also advise that earning extra income through some honest labor is as good as cutting expenses. As a CPA, image is very important to me. Financial security ought to be even more important to all of us.

Accounting for Leases

Is your lease an operating lease or a capital lease? The magic number is 90%.

If the lease payments (less interest) add up to 90% or more of the asset’s value, then you’ve got to put it on the balance sheet as an asset. You still get to depreciate it and expense the interest, too but the lease payments go to pay down the liability. Oh, yes – you’ve got to calculate your lease liability and put that on the balance sheet, too.

If lease term is 90% or more of the asset’s estimated useful life, then same thing: capitalize.

It’s so much simpler to just expense the lease payments as an operating lease.

The rules for leases are much more complex than the above. This gives you an idea of what to look out for.

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For my accounting reference book, I use
Wiley GAAP 2010: Interpretation and Application of Generally Accepted Accounting Principles (Wiley Gaap (Book & CD-Rom))

Tracy on Leadershop

When you create a clear mental picture of where you are going in life, you become more positive, more motivated and more determined to make it a reality. You trigger your natural creativity and come up with idea after idea to help make your vision come true.

- Brian Tracy

Cash Flow Quadrant

There are 4 ways to make money:

I. THE RAT RACE
1) Get a job and work
2) Self-employed (you own your job)

II. THE FAST TRACK
3) Business Ownership (your business has employees)
4) Investors (not day-traders but folks who put their together their own investments.

This actually is not a bad way to look at things.

When you own a business, you have people doing the work and you make money off of them. Like Network Marketing structures, business owners sit on top of something like a pyramid scheme. The employee takes only a part of the value he adds to the business; the owner takes the rest.

Investors have to know what they're doing. That's why they have to have owned companies themselves. That's how they can really evaluate the good ones from the bad ones.

Change Bad Thoughts to Good Thoughts

Stop thinking, "I have to do ____." Replace it with, "I choose to do _____."

Here are four other negative thoughts to convert:

1) "I must finish." Instead, "When can I start?"

2) "This is so very, very big!" (My largest hangup.) Instead, "I'll take just one small step."

3) "I must be perfect." Try, "I can be human." (Sadly, too many times I turned in work that was both imperfect and late. - By commencing on a project timely, at least I eliminate one of the flaws.)

4) "I don't have time to play." Replace this with, "I must make time to play." For me, this means scheduling a me-break.

Now the problem becomes of when shall we begin the process of replacement of those bad thoughts with the good ones. I guess, we have to stop procrastinating, sometime. Just make the decision and do it!

Alimony Versus Child Support

Regarding Tax Treatment of Divorces:

Did you know that alimony payments are deductible to the person having to pay, and taxable income to the person receiving it?

Child support, on the other hand, is not deductible or taxable. That's supposedly something parents would have to pay for their children whether they stayed married or not.

Review: Rich Dad, Poor Dad

One can go far just from reading from Robert Kiyosaki’s Rich Dad, Poor Dad series. The series takes its name from this first book. RK writes down to the reader so that anybody can understand what he’s saying. Since he illustrates his teaching with abundant stories, there’s a lot of fluff to someone like me. I just want the meat and go on. Here’s my summary of the book.

Introductory material says he has two fathers. His real father was poor but a boyhood friend’s father mentored him in the mysteries of finance. His stories contrast what ordinary people think (Poor Dad) versus what rich people think (Rich Dad).

Rich people don’t work for their money; they have their money work for them. In other words, passive income.

Assets are things that earn you money. If a thing costs you money each month instead of earning you money, it is a liability, not an asset. For example, you personal home is a liability, a necessary liability true but still a liability. If you rent a part of it out then that part becomes an asset.

Rich people own their own businesses. They may have a job but they have some income-producing activity on the side. Exception: top executives at major corporations.

Corporations reduce taxes. I got a lesson in that recently. I’ve got to start my own, even though I’m not rich and happy working for other CPA’s.

Use jobs as learning experience. Sales is a particular experience that you need. That is why he recommends Direct Marketing, if only to learn how to sell. The biggest problem there is fear of rejection and that can only be learned by doing.

There’s more but that’s what I got out of the book. The next book in the series is The Cash Flow Quadrant.

Budget in Writing

Ramsay says that he's interviewed thousands of self-made rich people and every one of them had a budget in writing for each month.

To me, the budget's purpose is to control spending. A real make-over requires both spending and receiving. A budget can also help by setting goals for cash receipts, too.

Fiscal Policy Limits

You're driving a car. Trouble is, there's a time lag whenever you hit the accelerator or the brakes. And, sometimes they don't work at all.

For example, you do not know how much time will elapse between the moment you hit the brakes and the car starts to slow down.

Question: How will that affect your driving? Answer: You will want to drive the car as steadily as possible.

Government fiscal policy is like that.

Non-Finance Jack 3/10/10

Here's some recent things I wrote in other places:

Herodotus in Egypt
Twitter eye-opener
Can Sam Sloan ever be respectable?
What are Obama's goals in Space now?

are linked here. What I'm up to when I don't blog history.

and don't forget my first Youtube video ever!

Ford on Leadership

Business that grow by development and improvement do not die. But when a business ceases to be creative, when it believes that it has reached perfection and needs to do nothing but produce - no improvement, no development - it is done.

- Henry Ford

More on Ford

Investment Foundation

None of Rich Dad's suggested investment strategies will work unless one is willing to make the committment to earn $100 - $200 extra per month. Investment ought to not be a gamble; it is what you do with disposable income. Before passive income must come active income. Control expenses by all means but look to additional revenues, too. Both are needed.

A Definite Chief Aim

The first law of success is to have one chief goal and to work towards that goal. Among the virtues of this kind of thinking, is to eliminate distractions and doubts.

I recall the advice from the chess book Think Like a Grandmaster, by Alexander Kotov that one should analyze a candidate move completely and then go on to the next. Once one has analyzed all your candidate moves and the opponent's responses to that, then settle on the move you choose. If you have time, check and double-check your analysis but do not keep going back and forth while you do.

Then make your move and stick to it!

How to Read a Quarterly Report

The Securities and Exchange Commission requires reports to be filed (form 10-K). At a minimum, these reports must provide information on sales, net income, taxes, nonrecurring revenues and expenses, accounting changes, contingencies (like lawsuits) , additions or deletions of business segments, and material changes in financial position.

Read these together with the last audited annual report. Prior year data provides a basis for comparison.

Donald Trump's 10 Rules of Success

I got these from this book. It was much better than I expected it to be. I shall blog more from this book. I highly recommend it.

1. Never give up.
2. Be passionate.
3. Be focused.
4. Keep your momentum.
5. See yourself victorious.
6. Be tenacious.
7. Be lucky.*
8. Believe in yourself.
9. Ask yourself, “what am I pretending not to see?”.
10. Look at the solutions, not at the problem.

* Re: rule 7. “The good player is always lucky.” – Jose Capablanca, World Chess Champion.

Passive Income

Rich people generate passive income. This means that money comes in from some business or property without them actively working on it.

There is only so much that one person can do; hence only so much money he can earn from his own activity. Real money comes from multiple activities, hence Kiyosaki's emphasis on passive income.

Now how can I get me some of that?