Author Topic: Reader Case Study: Shoot holes in my finances  (Read 5043 times)

orangewarner

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Reader Case Study: Shoot holes in my finances
« on: November 16, 2015, 11:08:03 PM »
Reader Case Study:  Shoot holes in my finances

Life Situation: married couple, 35/32, both with bachelors degrees, 3 children 8/6/1

Gross Salary/Wages: Self employed, I own a pool service, repair, and construction company.  I pay myself 60k/yr

Pre-tax deductions: none

Other Ordinary Income: no other income

Qualified Dividends & Long Term Capital Gains: none, donít even know what these are

Rental Income, Actual Expenses, and Depreciation: bought a 1940 bungalow an hour from my home in a college town for $145k in 2008.  struggled through tenants, evictions, and upkeep on a 75 year old house, watched the value drop to 99k, and just last week sold it for $132k.  I walked away from closing with $22k, happy to not have to deal with the looming roof and sewer line replacement costs.  Old houses make terrible rentals!

Adjusted Gross Income: $60k annual, but I could pay myself whatever I wantÖ

Taxes: 9% federal income tax, 6.2% SS, 1.4% medicare, 5% state of Utah income tax (this all equals about 21.5% per $2500 biweekly paycheck, or $536.92)

Current expenses: per month, and these are averages over the last 11 months

mortgage is $1600 but I pay $2000. 

$584 on all food out, which includes gas station drinks and treats as well as restaurants.  Typically 2-3 meals out per week

$739 on groceries and everything to run a household (toiletries, food, etc)

$147 on auto expenses, gas, oil changes, washes, etc

$720 on miscellaneous, which is clothing, school items, haircuts, birthday presents, home depot stuff, crafting and project materials, etc

$112 on entertainment, movies out, Netflix/hulu, personal pampering like manis/pedis, etc

our utility costs are fairly low, natural gas bill is $20-80 usually, electricity is $100-150, and water/sewer/garbage is $50-70

I pay for our internet(30), cell phones(140), and health insurance premium(240) with reimbursements from my business

We only have one personal vehicle, a 2010 mazda cx9 that seats 7 and we drive it only about 12k miles per year

All the rest of the vehicles (5-8 usually) are held in the business.  Auto insurance paid through the business.



***expenses summary: 
$500 savings (was tithing when I was a believer haha)
$2000 mortgage
$2300 other expenses
$200 utilities
$5000 total expenses  =  $5000 total gross income

from the looks of this, we go negative each month with taxes figured in.  But we really donít for some reason. 
I can lower the mortgage all the way to $1600/mo and can also adjust the savings rate all the way down to $0 if needed. 
I have them at the levels they are at because thatís where they are a little bit of stretch without putting a cramp on our living

The wildcard in our finances is I keep doing small things with loans I give myself from the business cash.  For example, in the last couple of months Iíve bought and sold 3 or 4 vehicles, making a few thousand on each one I flip.  That cash goes into the safe or I let my wife buy retarded things like furniture or home improvements. 

Each year we vacation in mexico or Hawaii for a week or two, completely paid for by credit card points cash.  This year so far I have 10k accumulated, and Hawaii will only cost $6k.

Also, we never buy anything unless we have 3x the amount saved up.  Want a new tv for 800?... save 2400 first, then buy tv. 


Expected ER expenses: n/a

Assets: building lot paid off, value varies from 40k-75k depending on economy, I just pay the taxes per year which are less than $500. Bought in 2005 for $75k and paid it off in 3 years

My business shop, which is a small storefront with a small warehouse, bought in 2014, paid it off in 1 year and 1 day, it cost $170k with improvements included. 

Iím not sure what else qualifies as assets?...  here are some things that maybe would go here?:

$4000 in a roth IRA
$500 in shitty stocks
5-8 work vehicles, +/- $20k if I blew them out in a quick sale
$30k cash in a floor safe
$1-2k in sock drawer that my wife uses for immediate cash for babysitters, pizza delivery, etc.
$10k in a savings account tied to my personal checking account.  2 years ago I stopped paying tithes to my church and started diverting $300/mo into this savings account.  I upped the amount to $500/mo a few months ago.  Occasionally I will dip into this account for weird reasons like craigslist purchases and other non-budgeted-for items.
Term life insurance policy on me only for $500k, which is about $350/year

And since I own the business, I could pull all cash out of the checking account at any time.  At the moment Iím writing this, thereís about $140k in the business checking. My business grosses a little under a million per year in cash brought in, with a profit of 8-15%, which includes lots of personal perks (called ownerís distribution) throughout the year.

***assets summary:  if I had to pull everything together within a month to flee the country or whatever, I estimate I would have about $200k not including the properties, or another $360k if I sold the properties super quick.

Or the way I normally look at it, if I died, my wife could liquidate everything including the business, stay in our home, and keep up a similar lifestyle for about 10 years.  Thatís plenty of time to flirt with and then marry a doctor.


Liabilities: in 2013 I built my own house.  I had previously bought the lot for $85k from a customer of mine, and once I had it paid down almost completely, I started building my house.  I finished it in a year and its in a very desirable neighborhood in a growing part of southern Utah.  I owe $282k on it and it appraised within the last 3 months for $530k.  EDIT: 3.25% 30 year

To capture the equity in the home (that would otherwise just be imaginary), I either needed to sell it for the appraised amount which I didnít want to do, or get a HELOC.  I got a $125k heloc that I donít plan to use, but I wanted to get it now while I donít need it and loans are easy to snag. 

Specific Question(s): initially I just want to see how my situation appears to you mustachians.  This info is not exactly the stuff you share with friends and neighbors!  I want my personal finances scrutinized primarily, and then if anyone has any experience with it, I would LOVE if someone could help me modify my business to be more economical and frugal.  It has proven very difficult to find ways to run a service business without having gas guzzling trucks and tons of overhead!!!
« Last Edit: November 17, 2015, 07:50:01 AM by orangewarner »

lauren214

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Re: Reader Case Study: Shoot holes in my finances
« Reply #1 on: November 17, 2015, 12:01:38 AM »
One thing that jumps out right away is that you have quite a lot of cash that isn't doing a whole lot for you. 30k in a floor safe? I'm not sure how you feel about investing, but even something very low risk would be giving you far better returns. And that 140k in the business account - I'm not sure how much liquid cash the business requires, but I would certainly recommend at least finding a very high interest bank account (I know that many of the online ones pay about 1%).
Also, the fact that you are self employed means that you have a great way to tax shelter/ defer a ton of income through a sep/ simple/ solo 401k. I recently went through the process of setting one up - I called vanguard and they talked me through the whole thing and figured out which was the best plan for me and how to do everything. You should be able to shelter/defer around 56k if you wanted since your business makes so much, which is awesome.
Other than that, just keep reading here on the forums and asking for help. Good luck!

orangewarner

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Re: Reader Case Study: Shoot holes in my finances
« Reply #2 on: November 17, 2015, 05:59:44 AM »
The floor safe cash has fluctuated between 20k and all the way up to 100k. I got super spooked in 2008 when I heard people had a hard time withdrawing money from banks when things were crashing and banks were failing. I've had such low and unimpressive performance with stocks and watching the IRA that I started just keeping it at home under the mattress. (Im not saying this is wise, I'm just explaining my justification for doing it.

One thing I have found is that (other than paying individuals) getting rid of cash is pretty difficult! Banks are weird about accepting it, and you can't buy real estate with it.

The 100k+ in the business account is probably more than I need, but it moves up and down sometimes 50k waiting for payments etc.


orangewarner

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Re: Reader Case Study: Shoot holes in my finances
« Reply #3 on: November 17, 2015, 06:31:31 AM »
"I'd suggest splitting some savings off into long term and investing it, and keeping short term and emergency money easy to access.

How much? And where? The money in the safe just sits there (I actually have to get it out and play with it once a month to keep it dry and not sticking together haha).

I get phenomenal returns flipping cars and loaning mo way to people. WAY better than savings accounts.

Where can I put this money so it'll be 1,000,000 in 20 years?...

rubybeth

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Re: Reader Case Study: Shoot holes in my finances
« Reply #4 on: November 17, 2015, 06:42:41 AM »
I would just like to comment on the food budget. I don't have 3 kids, so I don't know what's normal, but it seems high. You're spending about $1,300 on who knows what--food, soda, and household products? I can see needing diapers, toilet paper, etc. for five people is going to cost more than what my DH and I pay for two people, but yeah. I'd see if you can get your wife onboard to be somewhat more frugal in this area.

One other question is about life insurance. Do you have it for yourself or for your wife? I only ask because you have three young-ish children, and while your wife may have enough assets to live on for 10 years if something happens to you, what would you do if something happened to her? Term life insurance should be fairly inexpensive to get in your early 30s, and could cover you until your children are in college (I'm thinking like 15 to 20 year term life insurance).

I like that you over-save when you want to make a large purchase... shows an interesting mindset toward money. I can't really comment on the business stuff, but I also think it's interesting that you pay yourself $60,000. How much more could you pay yourself?

Axecleaver

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Re: Reader Case Study: Shoot holes in my finances
« Reply #5 on: November 17, 2015, 08:01:56 AM »
Hi Orange, great case study. Just for perspective, you're grossing $1m a year, with business profits of 80k-150k per year, plus owner distributions (which are normally figured as part of the corporate profit). You didn't say how much in distributions you're taking. So you're making 60k salary + 80-150k + some amount of distributions. Nice, dude! You're killing it!

I'd take a close look at your tax situation and figure out the best way to balance your corporate tax liabilities with your personal liabilities. I'm sure there are some efficiencies to be gained here. How is your company organized, as an S corp?

I'd start drawing down the cash in your business account and using it to either grow the business, or pay yourself larger distributions. More advertising, hire a commission only sales guy, invest in more or newer vehicles or equipment... lots of possibilities. Banks are required to report any deposit of $5000 or more, and cash deposits raise eyebrows. You may want to trickle the floor safe fund into your business checking over time to avoid problems.

Regarding your huge cash stash, I would be MUCH more worried about asset forfeiture than failing banks. Let's say one of your employees is arrested for a drug possession, and the cops raid your office. They could legally seize your floor safe funds and the burden of proof is on you to prove that it was acquired through legal means. Google asset forfeiture for some really terrifying horror stories from normal people doing normal business activities involving cash.

Once you get a handle on your tax situation, you're probably going to want to ramp up retirement deposits. Those can go in a low cost index fund, where you're not exposed to bad stock picks (you're picking all the stocks, not individual stocks). We need a better picture of your distributions to advise you best on the next step of your plan. Setting up a 401k is tricky for you, because you have to offer it to your employees, too. A solo 401k isn't available for you because you have employees.

AgentCooper

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Re: Reader Case Study: Shoot holes in my finances
« Reply #6 on: November 17, 2015, 09:20:21 AM »
Just a few ways weíve reduced our expenses in similar categories:

I fuel my car at gas stations, but not my body.  I donít need a 32-ounce cup of high-fructose corn syrup for $1 or $2, or any other gas station treat.  I pay at the pump so I don't have to go inside.  I try not to eat from places that donít sell ďrealĒ food (places like gas stations, pharmacies, dollar stores).  I try to avoid things that come in shiny plastic or foil packages, especially if they make health claims, contain more than 5 ingredients, or contain ingredients that I donít know how to pronounce or know what they are.  So when Iím in a store, I sometimes still pick up a desired treat, but then I flip it over and view the ingredients, then think to myself, ďYuck!Ē and I put it back.  Michael Pollan's food books helped me get my thinking straight about what food items are actually real foods which provide nutrients to the body, as opposed to edible food-like substances.  If the at-home food budget goes up as a result, one anticipated consequence is that the long-term health care budget may go way down as a correlation. 

2 to 3 meals out per week?  Iíd go to 1 or 2 times per month until it feels like a treat again.  Iíd avoid wine/alcohol served anywhere other than your house, if that is part of this expense.

Auto:  change own oil, wash own car.  Insource, baby! MMM-style. 

Misc:  Haircuts - insourced at home.  Home Depot stuff is a killer for me too.  I try to stay out of there because I want pretty much everything they have.  Check craigslist as a default, rather than making "I'll just stop by Home Depot for one thing" be the default reaction to any perceived supply need.  I've also had some savings success in trying to be creative and make what I need rather than going out to buy it.  For example I wanted a nifty straight-edge tool that Home Depot was offering for about $50.  It was simply a piece of metal that clamped onto the board, to allow me to cut in a very straight line.  So I bought a $3.50 metal stud, and 2 small clamps for a few dollars each, and made my own. 

Entertainment budget seems high.  Iíd switch to movies out only when it is something youíre really anticipating (Episode VII, as opposed to a weekly trip that starts with, ďLetís go see whatever is playingĒ).  Reflect on whether you're really getting $10 or $20 or $50 worth of entertainment during those 90 minutes.  Check Rotten Tomatoes or your favorite review site, and if the ratings are under 90%, wait for it to come out on video.  I also try to only go to a movie at a cinema when it is something where screen size will matter, e.g., Avatar or King Kong, but not The Aviator or a rom-com.  Public library has movies for free. 

Personal pampering expenses (manis/pedis) Ė if youíre paying for that, just picture the person using their mani-pedi tools to trim your money mustache right off your face, because thatís what they are really doing. 
« Last Edit: November 17, 2015, 09:23:28 AM by AgentCooper »

orangewarner

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Re: Reader Case Study: Shoot holes in my finances
« Reply #7 on: November 17, 2015, 09:31:43 AM »
couple of comments about these:

  "I'd start drawing down the cash in your business account and using it to either grow the business, or pay yourself larger distributions. More advertising, hire a commission only sales guy, invest in more or newer vehicles or equipment... lots of possibilities. Banks are required to report any deposit of $5000 or more, and cash deposits raise eyebrows. You may want to trickle the floor safe fund into your business checking over time to avoid problems.

this is where my mustachianism kicks in.  i only buy very used vehicles for the business.  i drive a 2003 cng ford f150 with 270k miles on it that gets the equivalent of 30 mpg.  the rest of my fleet is 1999-2004 f150 cng trucks, a 4cyl ranger, a 4 cyl tacoma, a cng civic, and then one large f450 diesel for heavy hauling (pool plaster material weighs 3500lbs per pallet and i go through about 50 pallets a year, liquid chlorine weighs 180lbs per barrel and i go through 800 barrels a year, etc.) so as much as i want to downsize my fleet to a bunch of nissan leafs or XAs or even more civics, there's a line where it doesn't make sense to go smaller.  but that is a definite item i want to research more. 

if i get more business by way of a sales person or advertising, etc, i couldn't handle the more work.  as it is i work generally sun up to sun down year round including every saturday and at least a few errands or service calls every sunday also.  i thoroughly outwork my 4 employees, at least three-fold...

what else could i do or focus on to move the cash through the business in a meaningful and wise way?






"Regarding your huge cash stash, I would be MUCH more worried about asset forfeiture than failing banks. Let's say one of your employees is arrested for a drug possession, and the cops raid your office. They could legally seize your floor safe"

the floor safe is at home and only contains cash that has never hit the books (i.e. craigslist sales, when a customer pays with cash, etc.)  is this ethical?  eh, maybe not so much.  but as far as asset forfeiture goes, i think the risk is low.


orangewarner

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Re: Reader Case Study: Shoot holes in my finances
« Reply #8 on: November 17, 2015, 09:42:48 AM »
i wish there was a way to comment directly under and in relation to a comment, like reddit, but i guess this will have to do:

"I fuel my car at gas stations, but not my body." i totally agree with you.  i eat horribly.  i intake about 5k calories a day and still lose about a lb a day during the week, and then up a lb or two each weekend day.  i am literally almost running as i work the whole day to keep up with my workload.


"2 to 3 meals out per week?  Iíd go to 1 or 2 times per month until it feels like a treat again.  Iíd avoid wine/alcohol served anywhere other than your house, if that is part of this expense." i just barely for the first time in my life started buying alcohol, but we're talking 1-2 beers from a gas station maybe a total of 3 times ever (i grew up mormon).  eating out is super hard, especially when cafe rio is in your town!!!  i will commit to eating out less and see if i survive.  i will follow up with you

"Auto:  change own oil, wash own car.  Insource, baby! MMM-style" my employees are required to keep all the vehicles clean, and oil changes (only every 5k miles) are cheaper to do at walmart than doing it myself when opportunity costs are factored in. 

"Misc:  Haircuts"  my awesome wife gets hers cut about 3x per year and has never had color or perm, so the 100/yr is a blessing compared to what it could be.  and i've tried having my wife cut mine but she sucks at it bad, and i need a decent cut for customer service reasons, so i usually get a $20 (tip included) cut at sports cuts or similar quick places. 

"Home Depot stuff is a killer for me too."  luckily i can almost always justify the hd stuff being purchased on my business cc!

"Entertainment budget seems high."  i always thought this was super low.  netflix is like $8, hulu is like $8, and we go to the movies maybe once per quarter.  we have a decent live disney-style theatre here in town called tuacahn theatre, so most of the expense is probably there.  the movies and plays are worth it because of the date time with my wife. 

"Personal pampering expenses (manis/pedis)" you're totally right, its a raping, but its something my wife and girls do together.  and keeping my wife pampered and happy is worth approximately 1 billion dollars!!!


i will work on all of it though!!

FrugalSpendthrift

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Re: Reader Case Study: Shoot holes in my finances
« Reply #9 on: November 17, 2015, 10:35:51 AM »
what else could i do or focus on to move the cash through the business in a meaningful and wise way?
If there isn't a clear need to reinvest capital in your own business, then you should think about investing in other businesses.  I don't mean starting other business, because it sounds like you have already allocated all of your time.  I can tell that you aren't comfortable with stocks, but a basic index fund could be a very hands off way of growing your assets.  I would suggest reading a few books about investing and see if it is something you are more comfortable with.

Sibley

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Re: Reader Case Study: Shoot holes in my finances
« Reply #10 on: November 17, 2015, 10:52:20 AM »
I'm starting from the top of your post down, and I'm just going to throw everything out there that I see.

First, I'm going to take a wild guess and say you're ex-LDS? Not that it matters, but I'm guessing there.

You're spending $1,323 a month on food, toiletries, etc. Yes, there's 5 people, but kids don't eat that much. Seriously, cut this down.

Wash your own cars, or live with them dirty. Do your own oil changes if you aren't already. The oldest kid is plenty old enough to help here. added: yes, I saw about the business. see my note at the bottom about business vs. personal.

Your misc category. Don't buy new clothes for the kids. They're just going to grow out of them/destroy them. Used clothes, hand me downs from friends/family, or ask for clothes for birthdays, etc from family.  You and your wife probably don't need clothes either. If you do, coupons, thrift stores, etc. Get clippers and learn to cut your on hair, and figure out how to cut a straight(ish) line and do the kids yourself. Kids are cute even with bad hair cuts, and you need to make sure they can cringe about something when they're older! Home depot/crafting stuff - ok, I do some of this myself. Use coupons. Get on the annoying mailing list for Joanns/Michaels or wherever you go and use the coupons.

mani/pedi - buy your wife a lovely present of a mani/pedi set, then invite some of her friends over, cook a nice dinner for them, then get yourself and kids out of the house for a few hours. Playdate at grandmas or something. They'll have a lovely time, she'll love you for your thoughtfulness, and they can do their own mani/pedis. Probably cheaper, and more enjoyable.

Entertainment - you have movies out, netflix and hulu. Try your local library, see how much you can replace with that.

Your assets.
You have way to much cash on hand, both personally and I think in the business. You are losing money to inflation. Take a bunch of that cash and invest it. Stick to plain vanilla index funds at Vanguard, go with tax advantaged accounts as much as you can. Sell the "shitty stocks" (love the description btw), get rid of the floor safe, and reduce the amount in the sock drawer. If nothing else, if you get robbed everyone checks the sock drawer. I get that you were spooked in 2008. It's not 2008, and FDIC kicked in anyway. Whatever cash you need on hand, try to optimize interest rates. You don't know much about investing, some self-education will be your friend. If you understand how it works, it's not as scary.

You'll probably need to deposit the cash in smaller chunks over time, because banks are weird about large amounts of cash. Unless you can run that through the business easier, but see below I don't like that idea.

Sounds like your business could use another employee or 2 to keep up with the workload and possibly expand. If you overwork people, you lose them eventually.

Really, you have some of the basic instincts down. What's your long term goal? Do you want to FIRE? If so, when? Overall, I feel like you're generating a ton of cash, but don't have a goal that doesn't involve spending it.

-------
Note about the business accounting. It's not completely clear, but I get the impression that there's some casualness about keeping business vs. personal separate. That's fine, until it's not. When it's not it's usually a bad situation and you really don't want to spend the time to straighten it out, assuming you even can right then. I'd recommend that you put some sort of structure in place to keep them separate. Doesn't have to be a legal incorporation, though you may want to consider it. If you get audited by IRS, sued, etc, it can be hard to prove that it's business or personal if you're consistently intermingling. If you keep a firewall in place, and you can show it, then you're more likely to prevail in arguing that something is business or personal. If you do get to the point where you want to incorporate, then having completely separate business accounting will make it easier.

Also, if you want us to look at your business to suggest efficiencies, it's a lot easier if we don't have to worry about what's personal stuff and what's business. FYI- you generally don't get to deduct things for taxes that are personal expenses, so you're really not saving on that. There may be some exceptions, but in general it's a wash.

And your business expenses have nothing to do with your personal expenses. For your personal expenses, I don't care that your business owns 8 vehicles, or that employees have to keep them clean and you take them to walmart for oil changes. It doesn't affect your personal expenses.

/Wow, that was a long note about business expenses. Can you tell I'm an accountant?

Bracken_Joy

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Re: Reader Case Study: Shoot holes in my finances
« Reply #11 on: November 17, 2015, 11:19:57 AM »
My impression is exactly what Sibley was getting at: You seem to have very little division between business and personal. This applies to your finances and your time. This isn't a good thing, legally, financially, or psychologically.

I would suggest trying to get at what is "you" vs what is "your business". It's not one and the same, and treating it like it is is a recipe for trouble.

ShoulderThingThatGoesUp

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Re: Reader Case Study: Shoot holes in my finances
« Reply #12 on: November 17, 2015, 01:35:10 PM »
You may want to trickle the floor safe fund into your business checking over time to avoid problems.

This is called "structuring" and is a crime in its own right.

It's stupid, but it's true. Deposit it all at once or spend it.

Proud Foot

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Re: Reader Case Study: Shoot holes in my finances
« Reply #13 on: November 17, 2015, 01:58:26 PM »

the floor safe is at home and only contains cash that has never hit the books (i.e. craigslist sales, when a customer pays with cash, etc.)  is this ethical?  eh, maybe not so much.  but as far as asset forfeiture goes, i think the risk is low.

The bolded part absolutely is not ethical and could cause you some serious trouble if the IRS would ever investigate you.  Especially if you are deducting the expenses but not recording the income from those customers. Exactly like Sibley and Bracken_Joy said: You really need to at least keep a division between your business and personal accounts and expenses. 

As far as using the cash in your safe, figure out an amount to keep there and either deposit it all at once or figure out what expenses you can pay with cash and spend it that way.