Why the rich should NOT get a tax hike next year.

Some of you are already mad at me based solely on the title.  I’m okay with that.  Hear me out.

First, let’s get the following out of the way:

1) This is a very contentious issue

2) The definition of “rich” is arbitrary and relative.  For the purposes of this post, I’ll use those with incomes (combined or otherwise) of over $250,000.

3) I am not rich (at least by my arbitrary definition of financial wealth)

Now that we understand each other, let me lay out my reasoning.

1) The rich buy stuff.

2) The rich employee people.

3) You might be rich someday.

4) Some of the rich aren’t rich.

5) Let’s stop punishing success.

I could end the post here but let me further explain.

1) Wealthy people buy lots of things.  When their tax burden goes up and even when a tax increase is suggested, they buy less stuff.  That hurts the economy.  Many wealthy families have more disposable income than the average per capita personal income of $39,138.  That means they are able to spend more than $39,000 on things they really don’t need but that perhaps you or your company sells.  Take Chelsea Clinton’s wedding for example.  What small town wouldn’t want a wealthy family to come spend $3,000,000 in one weekend?

2) The rich employee people.  When I hear someone complaining about the wealthy I ask them, “How many poor people have you ever worked for?”  The answer is always the same: zero.  Wealthy individuals are often wealthy because of the businesses that they run or have started.  When their taxes go up, they are less likely to expand their business by creating jobs, expanding infrastructure and (ironically) becoming more profitable.

3) You might be rich someday.  Do you really want to work for six months of the year for the government and only get to keep half of the income that you worked so hard to earn?

4) Some of the rich aren’t rich.  I’ll probably do a whole post on this some day.  The small business owners who are reading this are already saying, “Thank you!”.  Let’s suppose you own a small business.  You employee 20 people.  Your sales for the year were $2,000,000, with a $200,000 profit.  Your salary is $50,000.  You are rich.  “Why?,” you ask? Because most small business are sole proprietorships, partnerships, LLCs or S-Corporations.  The profits from all of these business entities get recorded on the owners 1040 as income meaning your $50,000 just got $200,000 added to it.  Ouch.

5) Our income tax code is set up to punish success.  If my son sells lemonade one weekend, he keeps the profit, no questions asked.  If he sells lemonade every weekend of the summer and earns $5000, he pays no taxes.  If he hires his three siblings and they set up four stands and work them for the whole summer and he earns $10,000 after paying his siblings, he begins to pay taxes.  If the company grows someday and becomes a business with 30 employees and he pays himself $60,000: more taxes.  Then he takes it regional.  150 employees, a $300,000 salary, and a lot of taxes.  Why grow it to 1000 employees?  Why take it national?  Is it really worth it?

Now at this point some of you are saying, “What about the deficit? We have to raise taxes to reduce the deficit.”  Wrong.  Before my wife and I got married we committed to do something radical, something that many families, most states and Washington D.C. can’t do.  We decided to live on less than we make.  No matter what.  It hasn’t always been easy, but it works.  My solution to the deficit: spend less than what comes in.  Washington D.C. can not create jobs or stimulate the economy by taking from the economy.

Let’s not make a struggling economy much worse by raising taxes on the only people with the ability to truly stimulate the economy and create jobs.   Leave the rich alone.

Maybe the market is still working!

News today from Detroit: the market has rewarded Ford for not being part of the bailout/stimulus fiasco!

Free market economists like to believe the following:

1) The market always self-corrects.

2) Good companies will be rewarded.

3) Bad companies will be punished.

4) Hands off, Uncle Sam!

Recent history, however has shown that this is not always the case.  Ford was not part of the bailout and has now made 5 straight quarterly profits.  If GM reports a profit, it will be the second quarter in a row and that’s with billions of taxpayer dollars being tossed their way!  Why the difference?  Here are 5 reasons why Ford is being successful now:

1) Attention to customer desires.

2) Careful debt management.

3) Good leadership from CEO Alan Mulally.

4) Rejection of taxpayer dollars.

5) The market worked.

And kudos to my hairdresser friend who bought Ford shortly after the government bought GM.  She made a tidy return on her investment.

Be like Bach!!

I know what you’re thinking, “What does Bach have to do with business?”  The answer: EVERYTHING!  Bach composed around 2000 pieces of music during his lifetime.  That’s the equivalent of one piece of music every week for 40 years.  In addition to doing some composing, Bach was an acclaimed organist and also played the harpsichord, viola and violin.  How was one person able to accomplish so much in his 65 years of life?  Excellence.  Bach pursued excellence in all that he did.

Now we can’t all have the talent of J.S. Bach, but we can all pursue excellence the way he did.  Here’s how:

1) Become well rounded within your specialty.  Bach performed and composed music.  The one informed the other and increased his skill.  You don’t need to be all things to all people, but you should have the bases covered within your discipline.

2) Practice excellence regularly.  Not every one of Bach’s compositions is well known today, but they were all done to the best of his ability at the rate of one per week.

3) Manage your time well.  One composition per week in addition to practicing and performing.  That takes careful time management.

Bach is a hero to many in the musical world, I think he should become a hero to the business world as well.  Be like Bach!

SDG

Service still matters!

Two weeks ago my wife and I traveled to Eugene, OR for a family wedding. It was also our anniversary weekend so we spent a few extra days there in a beautiful bed & breakfast called C’est La Vie. I had reviewed several other B & Bs online and settled on this one for one reason: service. C’est La Vie is not the most or least expensive B & B in Eugene, but reviewers consistently rank it high in service. So we decided to try it out.

Two words: expectations exceeded. The inn is beautiful, the innkeepers hospitable, the food delicious, the gardens gorgeous and the list could go on. Then it occurred to me: Jack & Anne-Marie get it. Service still matters! Just because the economy has slowed and people don’t have as much disposable income doesn’t mean that businesses in service related industries can cut corners on the actual service! In fact, the only differentiator that mattered to me was service.

I’ve been to several businesses in recent months and left with the impression that quality service left when the market sank below 12,000. As if somehow service was a luxury that can be done without. Not the case. For your business to survive this recession, service must once again be a top priority. It’s the only way to ensure that you continue to get the referrals, contacts, sales, etc. that you need to stay in business.

Are credit cards evil?

I’ve heard both sides of this argument for years now. I’ve listened to (and have a great deal of respect for) some of the prominent national voices that are anti-credit card. I’ve heard lots of people espouse the virtues of credit cards (most of whom were carrying significant credit card debt).

I’ve always tried to stay in the middle ground. The way I see it, credit cards are like the internet. Can the internet be used for evil? Yes? Can the internet be used for good? Yes. If you are disciplined enough to 1) not make unnecessary purchases and 2) pay your balances in full every month, then go for it! If you can’t do one or both of those: STAY AWAY!!

Here are some tips:

1) Purchase only those items that you need to purchase. Every purchase should fit within your budget for that category for the month. (Read my article on Budgeting for real people.)

2) Pay the balance in full when the statement arrives. Since you aren’t spending money that you don’t have, this shouldn’t be a problem, right? Don’t wait until it’s due, eventually you’ll miss a due date and you’ll be in trouble.

3) Be careful of reward programs. I’ve used frequent flier mile cards for more than a decade. I love them. We’ve flown around the country and this fall 17 of us will be flying to southeast Asia, 14 of us are going on frequent flier mile tickets. That’s a savings of ~$28,000! But watch the fees on these cards. They’ve crept up so high now that many of them aren’t worth it unless you’re charging more than $40,000/year. Make sure the value of the rewards that you receive is less than the cost of the annual fee.

4) Never make a purchase in order to boost your rewards. Let me repeat: only purchase what you have already budgeted for the month!

5) Find a card that works for you and stick with it. Constantly changing credit cards will hurt your credit score. Every time you apply for a new card, your credit score gets pulled. Repeated credit checks hurt your score.

6) Whenever possible, use a credit card with a reward program for business purchases. Whether it’s cash back, miles, hotels or some other reward, let your business pay for them. Business finances tend to work a little different than personal finances and often need to make use of short-term financing. This can be dangerous, however, and you must have a firm grasp on your cash flow in order to make this work for you.

In short, credit cards are what you make of them. You alone are responsible for the good or the evil that can come from them. And if you get in over your head, please don’t come looking for a bailout. I tried to warn you!

Are you making or losing money right now?

Sounds like a simple enough question, but I continually meet business people who don’t know if they are making or losing money. And I view this question as merely a big picture question. I want my clients to know how much they make on each latte, widget, contract, etc. But I’ll save that for another post.

This question is one that should be asked regularly by business owners or their coaches. When an owner knows the current financial health of his business, he can proceed with confidence towards the goals that he’s set. When the answer is unknown there are some unfortunate outcomes:

1) You think you’re doing great but actually are in deep trouble. You proceed with expansion plans only to have the bank pull the plug “unexpectedly”.

2) You think you’re doing poorly because you’ve heard that the economy stinks when in reality you are doing quite well. You miss out on opportunities that would have propelled your business far beyond your goals.

So, if any of the following statements are true:

1) You have no idea how your business is doing.
2) You’re afraid of your financial statements.
3) You think your banker is the enemy.
4) You screen all of your calls.
5) You think the accounting department or bookkeeper are always full of bad news.

….maybe you need someone to walk you through your financial statements and show you how to be able to answer this question. Once you’ve learned what to do with the financial statements you’ll come to the point where you no longer fear them or are surprised by them. You will develop the ability to know instinctively whether at the present moment you are making or losing money.

When you arrive at this point, your will be able to take your business to your goals and beyond.

Hire around your strengths to diminsh your weaknesses

We all have strengths and weaknesses. The most successful among us are not threatened by their weaknesses, instead they see them as opportunities for improvement. Now, I’m not talking about working on your weaknesses and trying to bring them up to par with your strengths. I think that’s a waste of time. What I’m talking about is hiring people around you whose strengths are your weaknesses. Let them work in their strengths while you work in yours.

You may ask, “What about improving myself and my skills set?” “What about self-help?”

I say, “Go for it!” Improve yourself. This post isn’t about personality and character it’s about job skills. Focus most of your job skills improvement time, energy and resources on your strengths, those areas that are going to be useful in your chosen career. I see it this way: I can work for the rest of my life on my graphic design skills and never be as good as an average graphic designer. So why would I do that? Why not hire a graphic designer to work in their strength while I work in mine. And hiring doesn’t have to be a full time position. Don’t be afraid to outsource some portion of your business to a local firm that is better set up to handle it and can do it more efficiently than you.

My work is to handle the finances for small businesses. I take care of their bookkeeping, tax preparation, analysis, coaching and consulting needs. This frees them up to do what they do best.

After all, nobody ever started a small business so that they could forget about their dream and spend countless hours trying to figure out their finances!

Focus on what you do best and let someone else handle the rest.