You Can Choose Not To Be BrokePosted on February 28, 2014 by
Elmer was my adopted dad when I first got started investing in real estate. He had spent 31 years in the Marine Corp and retired as a Colonel. His career had been as a pilot and the first portion of that was spent as a fighter pilot. He had been in flight training in 1938, the year I was born. The latter part of his career was spent flying military cargo planes and eventually doing administrative jobs as a senior officer in the Marines. What a blessing it was for me to have Elmer as a discipline coach, He didn’t reach that point being a jerk with no discipline. He had class! He had discipline! He had leadership abilities. He had very valuable experience. All of that could be my reward for being a true friend. He would teach me provided I wanted to learn but he wouldn’t waste his time if I could not at least jot down my spending plan.
Thus my habit of spending New Year’s Day going over all of my financial affairs was developed. I had to have all of the mortgage balances for outgoing payments and incoming payments. The interest would be deductible on the outgoing payments and I needed to get that information ready for the tax preparer. The interest would be taxable on the incoming payments and I needed to send that person a Thank You card (yes, always say thank you when someone makes your wallet thicker) and a statement for his taxes before January 20. Elmer always said the best way to get your money is in the mail. Now we might say the best way is direct deposit. Make it convenient for people to pay you. We don’t need an ivory tower office. We need a bank account that acts as a collection point. We don’t want to pay office rent! We want to run a skinny operation. Remember that it is better to stop an outgo than it is to start an income. It is better by about 25% which is about the average for taxes and cost.
I am trying to get my tenants to have their bank account at the same bank that I use. That makes it easy to draft their account each month for the rent. If I have a few that can’t change for some reason, I might open a small account at their bank to use as a collection account. I want it to be easy for the people who owe me to pay me, none of this getting lost in the mail; the check is in the mail, etc. You either did transfer the money or you didn’t. I like it better if I have authority to draft their account. Very seldom do I forget they owe me and it makes such a pleasant day at work when it is spent transferring money to my account.
There is an old theory about budgets for the typical working person. Elmer would tell me that there would be collection problems if I tried to get more than about 25% of their gross pay for rent. He always said that we should plan on about 25% for housing, about 25% for living expense, about 25% to pay our debts, and about 25% for taxes. These figures should be thought of as a rough guideline or model to pattern our living because we can’t exceed tried and tested management principles. We are not trying to re-invent the wheel but it is obvious that a person who earns a million dollars a year might have a bad headache if he tries to spend 25% on living. We are talking about our customers who are normal working people and those percentages are pretty close for them. You might notice we didn’t include anything in our basic plan for investment.
My plan will have ten percent for what I like to call Capital. That will have to be carved from the other parts and it will be among the first things in my plan. Remember now this is my spending plan. It is not a budget. Every category will have to tighten up a little if it becomes necessary in order for me to put away the Capital. Somebody might pass by selling $100 bills for just $50 and I will surely need enough capital to buy at least one. You don’t need to be broke when the good deal appears. Be sure to put away some capital because you get to choose where to spend your money. That means that you are broke because you chose to be unless you have had some type of catastrophe happen recently. It is not a sin to be broke. The sin part comes in when we stay that way.
I just realized that I have been choosing to pay almost $100 per month to watch satellite television. Notice I said that expenditure was a choice and it is! Wonder what that would place in my Capital account if eliminated the monthly payment to the satellite company? My calculator says if I could just make that money earn 10% in those future ten years, I would have $20,400. But I would have only put in 120 payments of $100. That is $12,000. Somebody else must be helping me because there would be more in the account than I would have put in. My Mother would explain things like this with a simple statement. She would say that “God helps those who help themselves.”
If I could make that TV money earn 12%, there would be $23,000 in the capital account. If it could earn 15%, the amount would be $27, 500. This seems like such a small sacrifice on my part to provide this kind of money. I will just get some rabbit ears and watch whatever is on. My taste for special programs that are only available on satellite seems to have left me. But remember that the choice where this money goes every month is mine. If I ever got too much money by winning the mega jackpot lottery, I could always re-direct where the money goes. Wonder if I could find something else in the next month or so that would produce that kind of money for me simply by redirecting where it went in my spending plan?