Have you ever made a mistake? Of course you have. Like me, you have a few doozies in the closet to air out, too, if you are honest. Mistakes come in all sizes. From the minor mishap to the really stupid to the criminal, we all have our moments of ignorant brilliance.
As luck would have it, mistakes do not define us. Maybe you were drinking and driving and got caught or have been convicted for possessing an illegal drug; maybe you ruined a relationship due to infidelity or sheer apathy; maybe you trusted someone and they betrayed you; maybe you made an investment and after it was too late suffered a major financial setback to your early retirement plans. None of these mistakes define you; how you deal with the mistake does.
The Wealthy Accountant’s Inferno
Before we start talking about you or solutions, I need to confess a great sin I once committed. Many years ago my commercial tax software provider branched into DIY tax preparation. Accountants using their software in their office were given a free license to market the online program. Needless to say, I was excited. I developed a business plan to take it to TurboTax and all the other online DIY tax programs. I would compete on price and quality.
As tax season approached I put my marketing machine into action spending $80,000 in TV, radio, and online advertising before I discovered this was not working as planned. When the dust settled the revenue from my little project netted a bit over $3,000. I took a $77,000 loss on an idea I thought really had potential.
I made one huge mistake and a bunch of smaller ones. The mistake did not define my business or me. It certainly hurt the pocketbook, but I was lucky to have an established business where the investment came from cash flow; no borrowed funds were used.
Before we get started I need to add a disclaimer up front. Periodically a topic comes up at the office where I shed financial advice in a less than politically correct manner. What you read here is a scene that took place as I left the office last night. When I get into one of those moods—usually induced by an overdose of caffeine—the advice I give is solid coupled with a massive dose of sarcasm. If you are easily offended you might want to take a pass on today’s post.
The topic of college costs came up and the payment of student loans. I have no sympathy. Student loans are a cancer that need to be excised immediately. The argument was other debt should be paid first before student loans. I disagreed. Let’s listen in on the conversation.
Tyler speaking to Dawn: You shouldn’t pay off student loans first.
Wealthy Accountant: Yes you should. Do you know how hard student loans are to discharge? The darn things follow you like the plague.
Tyler: But she has a car loan.
Dawn: The interest is higher on the car.
WA: Yeah, yeah, I forgot about that. Yes, you should pay the higher interest loan off first. You shouldn’t have student loans in the first place. You don’t need student loans to go to college; it’s not part of the curriculum.
I started investing in Prosper, the micro-lending platform where you can invest as little as $25 on a loan, back in June 2012. By investing a small portion in a large number of loans risk is spread out; no one loan going bad has an outsized effect on performance. I started withdrawing money after the returns plummeted after changes were made to the platform. Because it takes time to collect payments from loans held, it is an illiquid investment. My original investment of $13,400 is still worth $979 after withdrawing $15,430. Not great, but not bad either.
Before investing I did my research. I wanted to invest in Lending Club, but was unable to at the time because Wisconsin residents were not allowed. Prosper was my second choice so I took the plunge. Eventually I was able to invest in Lending Club, but because the rules were so easy to change (as I saw at Prosper) and the investment is illiquid I only added $5,000 to my Lending Club account.
When Lending Club went public I was allowed 200 shares of the IPO (I think, whatever the max was) at the IPO price. I sold within a day or so after it went public for a tidy profit. My opinion (and review of the financials) was investing in loans was better than the stock. My instinct served me well in hindsight.
Leadership is a skill far beyond bossing people around and delegating workload. Leadership skills take years to develop with careful grooming to prepare for the day you step into the leadership role. We think of leaders as politicians or business owners, but we all take leadership roles in our daily life. Parents are leaders of their children for good or bad. Cultivating the most desired traits of a great leader in ourselves allows us to make a difference in the world around us in a positive way. Without these traits you can lead you and your followers off a cliff.
Many years ago I had a CPA employee who wanted a management position so bad it hurt. I was dubious of his leadership ability but he had a decade of experience with me and he was due for a promotion. My fears came true immediately. The CPA emptied his desk on everyone else and bitched at the entire staff for not performing while he sat at his desk watching the stock market all day. His tenure as a manager was over before it began. As a leader I know the characteristics of good leaders. Bossing people around is not one of the desired characteristics.
Bad leaders are easy to spot. We point out the flaws of our elected officials and sports figures. We also notice awesome leaders like Bill Gates or Steve Jobs. Their great leadership skills are hard to pinpoint because they make it look so easy. Take Steve Jobs as an example. He started a company that in his short lifetime became one of the biggest and most profitable companies before his death. Yet, when we analyze his leadership skills we sometimes think of his short fuse and how he treated people poorly. He may have done these less than desirable things, but he also instilled admiration and respect. Jobs’s abusive behavior must have taken second seat to his ability to inspire people to their best or he would never have accomplished as much as he did.
Low interest rates have raised concerns if it is proper to pay off debt early. The good news is there are ways to determine if you should pay down debt, including the home mortgage, or invest funds to accelerate net worth building. Low interest credit card teaser rates and equity lines of credit add another dimension to the ever evolving world of personal finance. There are two factors to consider when balancing between reducing debt or increasing investments: the return on the investments over the cost of capital and the risk factor.
Personal finance can learn a thing or two from corporate finance when it comes to debt and investment. Just like a business, when a household decides to pay down debt there is a tradeoff. Accelerating debt reduction takes money from other areas, mostly spending or investment, but also reduces risks associated with debt servicing. In this post I will assume you have reduced your spending to a reasonable level and the trade-offs are between debt retirement and investment only.
Think like a Wealthy Accountant
Business owners understand investing capital. To survive, businesses must invest capital to preserve and grow future revenue and profits. Without investment it is only a matter of time before the business stalls followed by decline. At the same time a business invests in its future it also has to keep an eye on debt levels. Many small businesses choose to operate with no debt, funding investment internally; many households do the same. However, a home purchase usually is accompanied by a mortgage. The question now revolves around paying the mortgage off faster or investing the extra funds into investments generating a better return than the mortgage interest rate.
The IRS has audited tax returns the last several years at a historically low rate. Individuals faced a 0.84% audit rate in 2015; millionaires, 9.55%; Schedule C sole proprietor taxpayers, 4%; partnerships, 0.51%; and S corporations, 0.40%. (Source: The Kiplinger Tax Letter: Vol. 91, No. 4) None of this makes a difference if your number comes up. Over the years I developed methods to reduce risk of audit. My clients are audited at a fraction of the national rates due to the steps applied to all tax returns leaving my office.
IRS audits are expensive even if you did nothing wrong. Hiring an accountant to navigate the audit process is time consuming regardless of guilt. Unlike criminal law, in tax matter you are guilty until you prove yourself innocent. The burden of proof is on you to provide proof of income and deductions should the government come knocking. Below are several tips to reduce your risk of getting an unfriendly letter from Revenue.
Mechanics of a Tax Return
There are a million ways to prepare a correct tax return; some lead to audit. Big numbers in certain places on a tax return invite the IRS to take a look. It is easiest to illustrate using a sole proprietor’s Schedule C.
First, miscellaneous expenses should be a small number. If you have a large amount of miscellaneous deductions, break it up and add the expenses to another line deduction or list separately.
Second, large numbers on certain lines are acceptable, other lines, not. A salesperson on the road a lot will have a serious mileage deduction. An office will have more office expenses than a construction business. Whenever possible, break up large numbers into smaller categories of expense. It is reasonable to
My previous post on delegation had a comment from John McCarthy with the following request for advice:
I would be interested in some of the behind the scenes (nitty-gritty) detail of the things you are now delegating. Like you, I am running a tax preparation firm. For the past 15 years it has been a side business, but now I am putting my full effort into marketing and expanding it. I spent a year building a financial planning practice at XYPN but decided I could do more good in the world by helping other financial advisors as a tax consultant and a safe place for them to send their financial planning clients to for tax preparation. I am really enjoying working with financial advisors to provide proactive service to their clients.
If you were advising a new business owner of a tax practice, what would be your top three pieces of advice? Would love to hear your perspective!
I felt my answer would serve more readers than just business owners and the answer in rather long so I decided to make it a special post. (Two posts in one day! Wow Mr. Accountant, are you on something? Why, yes. Yes, I am.)
First, let me address how I structure delegation in my office. Delegation is more than just taking stuff on my desk and throwing it on somebody else’s. If you want work done right you need to delegate to the proper people. The best delegation keeps projects from your desk in the first place.
There is a sickness spreading in the FIRE (financial independence, retire early) community. This sickness threatens to topple the best laid plans of intelligent young men and women everywhere. The mentality is that you must do everything yourself to save a dollar and reach your FI goal as soon as possible. Except this DIY mantra is the surest way to delay FI and early retirement by a substantial amount of time.
The worst disasters at my office and lowest times of profitability are when I, as the boss, either refuse to delegate or do not have qualified employees to delegate to. The same applies in personal life. When you do every possible job yourself you lose the economies of scale a professional can bring to the table at a lower cost, faster completion, and a better finished product. Your FIRE goal can be delayed because you refused to delegate.
What are Friends For
The past tax season was a challenge to say the least. Two factors played a role: lack of qualified employees for me to delegate to and the refusal to delegate projects I should only be overseeing once qualified employees were in place. It took a while, but I have a good team in place handling the additional workload. The weak link was yours truly. I reluctantly delegated work as it piled up behind my desk. Finally, when I had nowhere to run, I delegated the bulk of my workload. Stuff sitting behind my desk for months was getting done and out to the clients. It also increased profit margins.