Budget Blog

by Brad Hoffer, www.xlyourfinances.com

Recently, my wife and I set a goal to hike the Grand Canyon, rim to rim.  Our friends think it’s a great idea while our family is convinced we are crazy.  Before you get  too concerned about our safety, know that we are going with a group that has done the hike dozens of times and has strict guidelines we have to follow to ensure we are “ready”. 
Planning for this hike has been unlike anything we have ever done before.  This one goal has completely transformed how we approach almost everything related to our health and fitness.  To begin, our weekend hikes have gotten much more serious.  Some of these trails we have been on before, however, in the past, after about a mile of hiking we would turn-around because we knew we had a mile to get back home.  Knowing that we need to be ready to go 7.5 miles/4,714 feet down into the canyon and then turn around and do 9.9 miles/ 4,314 feet back up, we have suddenly started getting more serious about our exercise, our eating and especially how far we go on hikes.  We went for a 5 mile hike and it turned into 7 miles due to taking some wrong turns on the trail.  In the past this might have been a huge frustration that we went further than we planned.  Now we were happy about it because we know it is preparing us for the Grand Canyon.  It is amazing how quick your perspective can change based on setting a goal!
It is interesting that the only thing that has changed was now we had a challenge to overcome.  This alone has triggered all kinds of actions and changes that we never would have even attempted without it.  You can have the same amazing transformation to your finances simply by setting a goal.  The key is it needs to be something challenging.  Saving up for a vacation is a good goal and can give you something to work towards, but probably won't "transform" your financial habits.  Some big goals to consider could be paying off your mortgage in half the time, buying an investment property, choosing an amount you want to give to your kids for college, saving for adoption, starting a business etc.  The key to this working is it needs to be big and at the same time it needs to be something you really want to accomplish.
Once you come up with the what, you need to then determine the how and how much.  This is where you need to know where your money is going and start making a plan on what you could change.  You might determine that you need to find other streams of income to get where you want to go.  Again, this is something you might never consider otherwise, but now that you have a challenge in front of you, you will be surprised at what you come up with.
If you don’t challenge yourself, you will most likely stay where you are at.  There may be nothing wrong with staying, but if you are not satisfied with your current situation, a goal may be the motivation you need to change it.
To better understand why this works, let's take a look at the research that has been done on goal setting theory.  The following are extracts from an article I found on goal setting theory from www.positivepsychology.com.   

“The following findings summarize the last 90 years of goal-setting:

• 92% of New Year resolutions fail by the 15th of January;
• People who write their goals are more likely to achieve their goal than those who don’t by 50%;
  
• Motivation experts agree that goals should be written down, and carried with oneself, if possible;
  
• Carefully outlined goals, which can be measured and set within specific timeframes, are more effective;
• Explaining your goals to someone you are close to, or making the commitment public, substantially increases your chances of reaching your goal;
  
• By contrast, goals that are kept to oneself are more likely to be mixed up with the 1,500 thoughts that the average person experiences by the minute;
• Often, achieving a goal means sacrificing something or putting aside certain habits, or beliefs about yourself–it may even result in an emotional or physical toll;
• Harvard research documents that 83% of the population of the United States do not have goals.
• Goal-setting typically yields a success rate of 90%;
• Goals have an energizing function. The higher the goal, the greater the effort invested (Locke & Latham, 2002).
• You need to set positive goals, not negative:  Research shows that punitive strategies often result in anxiety, a lower persistence, and performance, especially in comparison with goals that are set with a positive outlook (Roney, Higgins, & Shah, 1995).
• Frese et al. (1991) have developed the concept of “error management,” which intends to reframe errors during the process as opportunities for the individual to learn from.
  
• Framing mistakes and negative feedback with statements such as “Errors are a natural part of the learning process!” and “The more errors you make, the more you learn!” (Heslin, Carson and VandeWalle, 2008) are beneficial.
  
• In short, discouraging fear-based environments encourages people to try again, rather than give up on their goals. This ‘forgiving’ aspect also enables individuals to expect, and not apprehend, failure as part of the growth process.
  
• Goal-setting is not a straight-forward path to success, and it is important to feel like one can “fail” and still aim for their goal, maybe with added specificity.
• People like a challenge, especially when it seems difficult but possible.
• So far, we have seen what goals do, but we have omitted to mention what happens to people when they do not set goals in their lives.
  
• Indecision, lack of focus, boredom, and not having something specific to strive for, can lead to a feeling that one is living a dulled, less meaningful version of their life. Symptoms of depression, among other mental health struggles, often appear in these perceived unchanging spaces.
  
• This is because specifically-written goals can provide individuals with a sense of existential structure, purpose, and meaning."

https://positivepsychology.com/goal-setting-theory/

In summary, when you set a goal for yourself, make sure it is positive, let others know about it, write it down, set a timeframe, be ready to make some sacrifices to achieve it, have a growth mindset, view setbacks as learning opportunities and don’t be afraid to make the goal big, but achievable.

I look forward to letting you know how our hike across the Grand Canyon goes. In the meantime, get started today with your own goal and watch it transform your life.

by Brad Hoffer, www.xlyourfinances.com

by Brad Hoffer, www.xlyourfinances.com

​As an entrepreneur you know every decision has a risk-reward analysis. Some of these decisions are simple and can be made within seconds while others are very complex and require much more analysis.  As the owner, you have the weight of each of these decisions on your shoulders.  You make a decision and there are limitless potential outcomes, some good and some bad.  When it comes to making good money decisions for your business there are some guardrails you can structure around your business that can keep you on the right path.  Guardrails are not guaranteed to keep you on track, but they definitely increase your chances.

The first guardrail is good record-keeping!  You don’t know what you don’t know.  It is going to be impossible to make good business decisions if you don’t know what is happening financially.  Think of Accounting as a reflection of reality.  You may feel like you are being successful, but the numbers should prove that out.  When you are starting out it is easy to allow your personal and business records to overlap.  Keep them separate and stay on top of reconciling your bank accounts to ensure accuracy.  Depending on the complexity of your business, you should consider hiring an Accounting firm to assist you with your bookkeeping functions.  As part of your record-keeping you should establish your goals for the year in the form of a budget.  Each month you should be comparing your results to the budget and if you have more than one year of business you should also be comparing results to the prior year.

The second guardrail is cash flow.  You can be making money and still have negative cash flow.  The timing of payroll, debt payments, receivables and payables can create a cash crunch that can threaten your business survivability.  Cash is king!  You must invest the time necessary to evaluate your future cash flows.  In addition to the timing of your monthly bills, you will need to consider your business' sales cycles including seasonality.  There may be times of the year where sales are high but cash is tight and other times where it is the opposite.  When you talk to your bank about your cash needs, the conversation will go a lot better if you have this work done.  Your bank can provide you a line of credit to help navigate these fluctuations.  Depending on your business the bank will have its own set of metrics that they will expect you to meet to ensure you aren’t getting over-extended.  Your banker can be a valuable resource as they are in a unique position to see what works and what doesn’t across many industries and many businesses.  They are vested in your success because they have skin in the game.

The third guardrail to consider is profitability.  Sometimes I encounter business owners who have an unprofitable business model.  They have a good product or service but they are not making money.  They may have positive cash flow which allows them to keep operating but it is just a matter of time until it will catch up with them.  Sometimes these owners are so busy running the business that they don't take the time to figure out how to turn a profit.  They keep hustling for more sales but adding more business to a flawed business model just produces more of the same result.  As stated by James C. Collins book "Good to Great" you must "confront the brutal facts".  It is amazing the lengths we will go to avoid an uncomfortable conversation.   The mantra I try to embrace is "fear no conversation".  The truth of a situation will come to light if you stop avoiding it.  No one wants to work for a failing business, but at the same time, there are a lot of people who are energized and motivated to turn a business around.  The reality is you won’t ever turn around if you don’t know you’re lost.  Take the time to honestly evaluate your business.  What level of profitability are you satisfied with and what will it take to get there?

The fourth guardrail is leverage.  How much debt are you carrying in comparison to your assets and income?  If you carry too much debt, you greatly restrict your options.  Do not take on too much debt until you have a proven revenue stream.  This is difficult because so many times a business concept takes a lot of money to get off the ground.  This is why you often see businesses who are successful venture into other areas because they have the security of their core business that enables them to attempt to do something new.

The fifth and final guardrail is to establish integrity as a core value.  I have been fortunate in my career to not only work for businesses that had a strong business model but more importantly had the right values.  You need to establish early on what kind of business you want to operate.  Will it be one of integrity that your employees can be proud of or will it be one of poor rapport?  Establish your core values, hang them on the wall and teach your employees to embrace them.  It has amazed me the number of times decisions that were made because we were “honest” came back to benefit us in the long run.  Your reputation and trustworthiness make other businesses and customers want to work with you.  This doesn’t always have an immediate impact on your numbers but it definitely benefits you in the long run.  Play the long game and choose long-term strength and sustainability over short-term gain.  The reality is that those short-term gains that come out of compromised moral values really are losses that just haven’t been recognized yet.  In Accounting we call that an accrued liability. 
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Whether you started, acquired or inherited your business you know the stresses of ownership.  Sometimes this stress can lead to poor decision making.  Follow these money guardrails to improve your chances of success.  The risk-reward analysis will come out in your favor more often than not.  Start with good record-keeping, manage your cash flow, analyze your profitability, minimize your leverage and run your business with integrity and you will be well on your way to running a successful business you can be proud of.

by Brad Hoffer, www.xlyourfinances.com

Some things in life are a complete mystery. For example, if you are trying to plan a vacation 3 months from now, you do not know if it will be good weather or bad...it's a complete mystery. At the same time, if someone asked you what the weather was like yesterday, you probably could answer the question fairly easily. But who cares about yesterday’s weather. Now here is the interesting thing, do you know that if you predict tomorrow’s weather (rain or no rain) by saying it is going to be the same as today’s, you will be correct more often than not, with somewhere around 75% accuracy. So knowing the past can help predict the future. Now it doesn’t necessarily help you predict 3 months from now, but it can at least help you with the near future.

Your money is much the same way. No one can know their distant financial future. They can hope and they can make educated guesses, but no one knows for sure. Your job may change for the better or for the worse. Your investments could grow exponentially or decrease suddenly. The good news is, you can have some idea about your near future by looking at how you earn and spend your money now. This knowledge can help you know what direction you are headed and what changes you need to make.

The problem is that even though this sounds like a simple concept, it isn’t. It is difficult to know exactly what is happening with your money, right now. So much of the money going out the door is based on decisions you made weeks, months or even years ago. Your past decisions on housing and the vehicle you drive are two major factors shaping the way your finances look like today. Your past decisions put the pressure, or lack of pressure, on yourself for today. This is why the journey to financial peace begins with knowing how you got here. At the same time, it is surprising how little thought is given to the future. When I first built the financial forecasting spreadsheet, I was surprised by the outcome. I was also surprised by the impact of decisions overlapping and creating 'tough' years. For example, I put an amount I planned on contributing to each of my kids, for each year that they would be in college. I also inputted 'big vacations' I was hoping we could do as a family. I then put in when I think our vehicles would need to be replaced (not to mention the extra vehicles needed when kids started driving) and suddenly I had a very interesting picture. The fact that college is spread over 4 or more years helped more than I realized and the timing of that big vacation became critical. How much we should spend on replacement vehicles became more obvious and which years I might need to tap into our Home Equity and possibly how much to cover expenses was clearer.

With this exercise of laying out a future plan, year-by-year, some of the decisions we would make, sometimes on a whim, became more significant in my mind. By at least having a picture of how the years would play out, I could better guide my family to maximize our experience. So many times we think that doing a financial analysis will mean we just have to spend less, but sometimes you will find, that you can actually spend more on the things you want to spend more on, if you are disciplined with some of the other major spending decisions. When you lay out a financial future, and see that it actually works out, you have more peace than if you just carry anxiety that you are spending too much, or there just isn't enough. This exercise can help break the bondage of illogical beliefs about money, and can actually increase your confidence about your future.

Consider the scenario where you actually do have enough money, but instead of enjoying it, you worry about money every day and refuse to spend or give any of it away? What kind of person are you becoming? At the same time, what if you are overspending and giving too much away? This isn’t responsible either. If you haven’t put together a future plan, you really don’t know what category you fall under. If someone said to you that you should take a vacation with your family because you only live once and those memories are priceless, you might brush them aside and say that is irresponsible. However, if you put a plan together and see that it is 'ok', that you will have enough money, then not taking that vacation might actually be the money mismanagement. Tracking your spending and planning your future are not just to restrict your spending, they are tools for you to maximize your money to your benefit.
The point of money is to direct it with intention and to maximize every cent that comes your way. If you over spend or over save, either option isn't desirable. The ideal is to spend and save the right amount. The amount that is appropriate to your particular situation, that accomplishes your dreams and helps you bless those in and around your life. You are less likely to give to others if you are living in a state of 'never enough' and fear for tomorrow. You don't have to live in fear, but in order to overcome that fear, you may need more knowledge. More knowledge on where your money is going and what your future will look like based on the decisions you have made and will make in the future.
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Money, in many ways, is a mystery, but so is life. With money and in life, you can improve your situation by having self-awareness and living with intention. Money often reflects our approach to life... if you want to find peace with money, you need to increase your awareness with tracking and a budget and build out your plan (your intention) with a future forecast. Once you have done these activities, you will be in a much better position to enjoy your money (and life) with a little less mystery.