Economic disparity has always been a problem in our country, but today, it has reached crisis proportions. Why has this happened? Many hot button issues are cited. One of them, I feel, has not gotten enough attention—namely, the fact that so many people are financially illiterate in our culture. We grow up watching commercials, actors, sports stars, and the like. We are hit with a steady wave of images of flashy cars, fancy clothes, jewelry, and trips to exotic locales, all the things that wealth can buy. Society normalizes things that most people cannot afford or really even dream of affording. Your parents probably went through this same cycle and did one of a few things that was within their power: They stopped caring about labels or being flashy; became so incredibly rich that such a lifestyle was achievable; or like many today, took out credit cards and loans, splurged, and are now struggling in an effort to show the rest of the world that they are successful when in fact they are barely living within their means and planning for the future.
One of my Financial Advisors (John F.) is very passionate about this topic, and I hope he will contribute to some of my future blog posts. He has a vision, and he shares his insights by giving free talks in high schools about money management, saving, and living within your means. I am very fortunate to have learned early in life how to live modestly. My parents never had flashy things or set high standard-of-living expectations when it came to finance or labels. I had hand-me-down clothes, and many of the things I enjoyed were gifts (think laptop, Legos, sports items). My parents prioritized food/clothing/shelter over vacations, cars, etc. I was also fortunate because my grandpa was able to fly me down to Florida often to visit, and while he wasn’t “rich,” he was “comfortable.” What exactly does the term comfortable mean? It’s a concept I struggle with all the time, and I’m not the only one to do so. Poll people about the word (“What does the term mean?”), and you’ll get as many different answers to the question as the number of people in the statistical sample. I think of myself as comfortable now, but I could probably be comfortable making a fraction of what I do make. My comfort level stems from my savings and investments, predominantly in my businesses, which continue to throw off cash.
So why talk about personal finances in a blog about a small business/start-up?
When I began my first big business, I didn’t understand some of the basic principles of finance, and this cluelessness kept me behind the eight ball for years. My company made plenty of profit and could pay all of its operating expenses, no problem, but I didn’t understand the effect that inventory had on cash flow. I had a mentor, who was at one-time the division CFO at Macy’s, and he tried time and again to drill the importance of cash flow into my skull—to no avail. I felt pretty good about my situation because I didn’t buy flashy things. Sure, I bought a house and paid a little extra on my mortgage, but I was still able to put some money away for retirement. In short, I was managing my personal money just fine by spending less than I earned. Things were good. On the downside, I was not managing the business’s money well. At that time, I owned an entertainment company and did not understand the pricing market. In addition, I wasn’t budgeting for things like advertising and new equipment. As a result, things were done ad-hoc, and there was no concrete planning. I did not have a long-term strategy. I often found the business falling behind on payments to vendors or not having cash on hand to do the things I needed to do. Eventually, the company found itself caught in a downward spiral, and the problems were compounded by a partner who had been siphoning off assets from the business, behavior he had concealed from me.
I learned from those mistakes, and in my next venture, I was much more cash cautious and inventory minded. But if I had listened to my mentor, maybe the first venture would have continued to grow and succeed. Who knows? Ultimately, having a strong foundation in financial literacy and understanding basic accounting and some basic rules of business are critical to the success of your business/side hustle. I used a phrase quite often in the tough years. I would say, “If it don’t make, you can’t take.” This slogan referred to profit and paychecks or distributions that went to me as the owner. You can’t draw money from the business if it isn’t making money. One book I read that I found particularly interesting and reinforced many of the things discussed here was “Boss Life: Surviving My Own Small Business” by Paul Downs. I highly recommend the read. I encourage all entrepreneurs to take some type of class in financial literacy. Two that I have seen/taken—both were great for learning the basic principles of business finance—were from ProfitSoup and Profit Mastery. Each covers some core principles that, if followed, will help prevent you from making many of the mistakes I made. Over the next few weeks, I will outline some of those key topics and give brief overviews of them.
I also want to make a request. If you are not good with money now or find yourself in debt due to student loans, credit cards, car notes, and so on, consider taking some basic personal financial literacy course before you actually venture into business. (When speaking of personal debt, I’m not speaking here, for example, of your home mortgage unless it is more than you can afford.) Making lots of money is great, but if you don’t know how to manage that money, you can find yourself spending $250k a year just as quickly as you spend $40 or $50k a year. And this kind of spending means you never build any wealth or get ahead.
Links to some of the things mentioned in this article- I do not have referral credits with any of these vendors, nor do I receive any compensation from the links.
Comments (2)
John F
Great post! Another great book is the psychology of money.
Victor
I didn’t want this post to end!