51bWz-LER7L._SX322_BO1,204,203,200_The Western word is being destroyed by a select group of people determined to live within their means. From artist Ted Dave and his Buy Nothing Day movement to Daniel Suelo who decided to live without money to Jeff Yeager and his spending fast to Mr. Money Mustache and his grand scheme to keep spending low, even when income rises, we face the greatest economic crisis of our generation. Or are we?

All too often we act as if the economy were an actual living being. It is not. The economy is only a construct of the human imagination. Can you image any animal living in crisis because their local economy collapsed? Even humans, thousands of years ago, did not worry about this crazy thing we call the economy. Somewhere between there and here we convinced the vast majority of people they are duty bound to feed this imaginary beast.

Spending lubricates the beast. It does not matter if the spending is on stupid stuff. Buy a Hummer and save the economy, they say. That was the mantra a decade ago. Remember the government’s response the 9/11 attacks? We were encouraged to keep spending to show the terrorists we would not be affected by their actions. But the terrorists did win! They got us, as a group, to engage in insane spending habits sure to destroy the one thing we worship above all others: the economy.

The real question we all need to ask is: Why is the economy so important? The “recorded” economy is what the government really cares about. It is this recorded economy they can tax and tax hard. Taxes are highest on owning stuff like real estate and the movement of money (spending). The government so far has been unable to tax things like: inviting friends over for a beer and enjoying good conversation. Rather, the government prefers you go to the bar, spend 20 times as much, and don’t care one bit if you enjoy it or not. By spending more you lubricated the economy and that is good for the country, or so they say. During World War II the government told us our patriotic duty was to “Buy Bonds!” and spend less on yourself. Today we are told to spend like drunken sailors by the very same entity. Each bit of advice was self-serving, but the saving mantra created a world super-power. The 1950s and 60s were times of awesome economic growth fueled by a high savings rate. Today we fuel the economic flames with debt and each new obligation has less effect than the last.

The Daniel Suelo’s and Mr. Money Mustache’s of the world are not the problem; they are the solution. If you are happy, satisfied with what you have, does it matter if the economy grows? Once you cover the basics and few niceties it is time to move away from the “more is better” mentality. More is not better! One aspirin cures a headache; a thousand give you a bleeding ulcer and kills you. The same applies to everything in life. Everything in moderation. But moderation does not keep the economy humming or ever increasing taxes flowing to the government.

Inside your home there is also an economy. If you don’t spend money today your household experiences a Great Depression. Sounds stupid when you think of it that way. You stay home and prepare a nutritious meal, enjoying it with the wife and kids and somehow you created a massive problem; you destroyed the local economy! But the local economy means absolutely nothing. Your life’s mission is not to see how big you can grow the insatiable economy.

If you want to create a better community, less spending goes a long way toward that goal. Savings are what fuel the “real” economy. The real economy includes only the basis: food, shelter, clothing. Once the basics are covered we are only forcing the economy larger. There is no real value to spending a thousand dollars taking the family to see the football game. I argue you gain more pleasure playing ball in the back yard or in the park with the kids.

Economic recessions (all recessions are of an economic nature) mean nothing if you have ample savings. Think of it this way. I grow a garden and can and freeze my ample excess produce. When I enjoy my garden’s bounty in mid-January am I concerned? I hope not. My savings of produce allow me to live off the summer’s gift. This is a form of saving with a zero percent rate of return. So low interest rates are not an excuse to not save and invest more.

Enough complaining. We should all agree saving more is better than spending more than you earn. The stress of overspending destroys marriages and other relationships so it is important to learn to feel satisfied with what we have.

Your personal savings rate should exceed 50% during your working years. Your mindset must be: half for now, half for later. Unless your income is below $20,000 (in the U.S.) it is more than possible to live this way. Heck, Daniel Suelo lives without any money at all. Most people need to drop their savings into an index fund and let it ride. Today’s investment soldiers will reproduce like rabbits. Within 10 – 15 years you can retire from forced servitude and pursue your heart’s desires. This does not mean you suffer for 10 – 15 years. You can live very comfortably on $20,000, $30,000 or $40,000. When you start looking at the stuff you are buying you will realize how much of your life you have wasted chasing stuff of no value.

Living without Money

The world would not end if there was no money. Money is only an exchange of value for debts owed. Therefore, money is really a part of the debt transaction. Money is debt. Investments, on the other hand, are not. A small business (and what better way to live life than running your own business) should produce profits. Invested capital earning more than the cost of capital creates value.

We are so used to having money (cash, credit cards, checks) on us at all times (same with the dreaded cell phone) that we feel naked and vulnerable when without money on us. We justify our fear by saying if we have no money on us at any particular moment we are a vagrant. You are not a vagrant if you leave your wallet at home!

Train yourself to feel normal without money on you. Go for a bike ride or long walk without any money on you. Remove temptation to stop for a cup of coffee; bring a hot cup with you from home. Graduate to leaving your wallet home when you go to work or visiting friends. I have seen people freak out when they try this. It’s nuts! Just because you cannot buy something at the drop of a hat should not cause you angst. You are nowhere near the level of Daniel Suelo, living your life completely without money. You are not a consumer unit; you are human being with needs and desires that transcend money. There is more value in family and friendships than spending money.

Spending Holiday

Now I want to share a plan to living better without spending money. The idea of a spending holiday never occurred to me until I read Jeff Yeager’s “Cheapskate” books from the library. I practiced spending holidays without even knowing it! The goal is to bring your spending under control. Spending holidays train your wealth building muscles to accept as “normal”, days without spending any money.

Starting small is important; no ladder is climbed starting on the top rung. I recommend a one-day spending holiday to start. As you flex your financial muscle you can work up to a full week spending holiday. Once you get the groove you can go crazy insane with a one-month spending holiday. (FYI: I max out at around a week. A whole month causes serious challenges.)

The spending holiday needs clarification on what “spending money” is. Eating is not spending money; neither is turning on the lights (unless you want to take it that far). Here are some of the things you will do and avoid during the fast:

  • No buying fuel for your vehicle. When the tank is empty you walk or bike. Or enjoy time at home.
  • Eat homemade meals with food in the fridge, freezer and pantry.
  • Normal bills get paid, especially if they are on automatic. The mortgage payment is not spending; it is paying for past spending. We allow electric use and water. Utilities are a form of spending, but also a need. Food, water, and shelter are things only the hardcore can include in a spending fast and not a good place to start.
  • Entertainment: Spend time talking with family and friends. A refreshing bike ride to the library for a movie is acceptable; ordering a movie is not.
  • No cheating. Maybe you have a gift card. You cannot spend from so-called free sources. No spending a credit in your Amazon account for a movie. If you already have Netflix we will allow you the luxury (and it is a luxury).

A one-day spending holiday should not even be a challenge for you. I hope you strive for a one-week spending holiday or even a two-weeker. It is liberating to have large chunks of time where spending is not a part of your lifestyle.

Buy Nothing Day

When Vancouver artist, Ted Dave, founded Buy Nothing Day people did not notice until Adbusters magazine promoted it. In the United States, Buy Nothing Day is the Friday after Thanksgiving Day, Black Friday. This is traditionally the biggest shopping day of the year. When ads were purchased to promote Buy Nothing Day, retailers complained and had the Buy Nothing Day promotions shut down. (Gotta keep the economy going, ya know.)

A fun family event is to plan twenty Buy Nothing Days a year by putting them on the calendar in advance. Every month you can have one or two days where money is not the focus. Take the opportunity to spend time with your children and/or parents. Talk about current events or school, hobbies, good books, and similar interests. By taking an interest in yours children’s lives they will end up well adjusted and happy; by spending quality time with your spouse or significant other you can build a powerful relationship that lasts; by spending time with your parents you can enjoy the massive legacy of knowledge the older generation has gained through experience.

Of course, this is all only a start. In my household we don’t buy Christmas presents or presents for any commercial holiday. We share experiences and build gifts with our own hands. It has been a long time since we had a Buy Something Christmas. Birthdays are times to spend together. Gifts should never be an obligation satiated with cheap plastic junk pre-made for the landfill.

You can keep spending if you want. You don’t get a retirement then. You either save for future spending or you must keep working until the day you die. Spending holidays and buy-nothing-days grant you the ability to control your life. It is only a few days a month where you can do whatever you want. The rest of the month you can return to your spending servitude. It is good for the economy.

Book only.

Book only.

In the course of my work I am frequently asked to place a value on a business a client wants to sell or acquire. There are several ways to determine value in such situations. Today we are going to focus on the value of listed companies (stocks). Warren Buffett has stated most people should drop their money into an index fund and let it ride. If you are like me you follow Warren’s advice, but invest a portion of your money in individual stocks anyway.

There are numerous books on Warren Buffett and his style of investing. These books glance over the process Warren uses, focusing on tidbits of advice Warren has given over the years. Reading Graham and Dodd’s Security Analysis exposes how difficult it can be to value a company. Since Graham and Dodd, our understanding of value creation has grown and Warren Buffett uses the new analysis tools in his investing style.

The best book on corporate valuation today is Valuation: Measuring and Managing the Value of Companies by McKinsey & Company. Normally I would ask you to run to your library, but this book is not available in most libraries. Another reason to invest in owning Valuation is the depth of the material. You will want to highlight as you read and make notes in the margin. You will come back again and again to this book as you consider investments.

Valuation is used as a textbook in many business schools. At over 800 pages you will want to take your time as you drink from the knowledge provided. I will share some of this information below, but want to outline a few different ways to purchase Valuation. I managed two hedge funds in the first decade of this century. Books like Valuation allowed me the opportunity to earn outsized returns.

There are three ways to buy Valuation. I provided the book cover image in this article three times explaining what each purchase involves. The first image is linked to Amazon to purchase only the book. This is what I use. The second image links to Amazon to purchase the book bundled with a workbook to help you learn and retain the information you are reading. The final image links to a bundled book with software. The software allows you to plug in information from an annual report and produces the information contained in Valuation. In short, the software eliminates the need to do the math yourself.

What is Value?

Workbook only.

Workbook only.

It is impossible to share the entire book with you here. Instead, I will show you a simple way to evaluate a company to determine if it is a good candidate for purchase. “Companies that grow and earn a return on capital that exceeds their cost of capital create value.” (Phrases in this article in quotations are direct quotes from Valuation.) Value is described in monetary terms. A company investing in research and development or capital equipment must earn a return greater than the cost of capital or they are destroying value.

“Creating shareholder value is not the same as maximizing short-term profits.” When Warren Buffett finds an undervalued company he does not expect the stock price to instantly reflect his perceived value after he buys it. As you will see shortly, value discovered takes time to reveal itself in the stock price. Warren Buffett’s greatest secret is patience. He buys great companies at a discounted price and waits as the company continues to increase value for shareholders.

Overemphasis on reported earnings is a poor way to discover value. Short-term profits can easily be inflated or manipulated. A manager may cut advertising or R&D, artificially inflating short-term results. Public corporations are notorious at stripping out certain expenses and listing them in notes in the annual report. Many wages are hidden in stock buy-backs. Public companies buy back their own stock only to issue it as options to management. The amount reported in earnings is less than the real cost to the corporation. The Earnings Report only provides a glimpse of a company’s income and expenses and is easily manipulated. The cash flow statement offers a better view of the company’s finances and exposes value creation or destruction.

“As a result of their focus on short-term EPS, major companies often pass up value-creating opportunities.” When you make your own investment decisions versus investing in an index fund you need to find companies with managers willing to forego short-term profits for long-term value creation. There are ample opportunities in the stock market to find undervalued companies working hard to create value. Short-term investors frequently avoid stocks based solely upon reported EPS. They pass companies growing real long-term value.

Return on Invested Capital

ROIC is the single most valuable tool investors like Warren Buffett use to discover hidden value. The ability of a company to invest capital and create revenue growth over a sustained period of time determines how much value management creates. As long as the ROIC is more than the cost of capital value is created. ROIC less than the cost of capital actually destroys value.

Book, including software.

Book, including software.

“Growth, ROIC, and cash flow are mathematically linked.” Reported EPS is not linked in the same manner. Cash flow will reveal ROIC and growth over time. Companies with a high ROIC do better when they focus on growth while low ROIC companies benefit from increasing their ROIC. Faster growth rarely fixes a ROIC problem.

Here is a real life example from the book. From 1985 to 2012, Walgreens and General Mills earned similar shareholder returns. Walgreens grew after-tax operating profits at 13 percent per year while General Mills grew 9 percent. Over this period Walgreens grew profits by 25 times whereas General Mills grew earnings only 9 times larger. “The reason General Mills could create the same value as Walgreens despite 30 percent slower growth, was that General Mills earned a 29 percent ROIC, while the ROIC for Walgreens was 16 percent.”

Without a positive rate of return on capital a company cannot grow or create value. The greater the sustained ROIC, the greater the value creation.

Illustrating ROIC

A simple illustration can help us visualize ROIC in action. From the book we will use the example of Value Inc. versus Volume Inc.

Value Inc.

                                Year 1        Year 2      Year 3     Year 4    Year 5

Revenues                 1,000       1,050       1,102       1,158       1,216

Earnings                     100           105          110          116         122

Investment                 (25)          (26)          (28)         (29)         (31)

Cash Flow                    75              79            82            87          91


Volume Inc.


Revenues                 1,000       1,050       1,102       1,158       1,216

Earnings                     100           105          110          116         122

Investment                 (50)          (53)          (55)          (58)         (61)

Cash Flow                   50              53            55           58            61


Value Inc. and Volume Inc. both have the same earnings and growth. Which company would you invest in? Which is creating more value? In our example, Value Inc. invests 25 percent of its profit while Volume Inc. needs to invest half of its profit to maintain the same level of profits growth. After five years, Value Inc. has nearly 50 percent more cash flow than Volume Inc. Volume Inc. is required to invest half its profit to maintain the same growth as Value Inc. This is why reported earnings do not tell the whole story and it is a wonder why so much emphasis is placed on that single number.

The ROIC is significantly different between the companies. A $25 investment produces a $5 increase in profit for Value Inc. while Volume Inc. invests $50 for the same return. Here is the math that ties Cash flow, growth, and ROIC together:

Growth = ROIC x Investment Rate

Value Inc. looks like this:

5% = 20% x 25%

And applying the formula to Volume Inc. is as follows:

5% = 10% x 50%

Volume Inc. needs a higher investment rate to accomplish the same growth.

Another consideration is the discounted value of future earnings. Time value of money and risk make future earnings worth less than current earnings. Investments made today fuel future earnings. Today’s investments lose their power as time depreciates equipment and new products (internally and from competitors) reduce the value of the investment.

There is a model in Valuation that helps further clear the fog around the math on value creation. I will not delve deeper into that math in this blog post. I do want to add one more piece to the above example of value creation, however. Let us assume Value Inc. was able to invest 40 percent of profits (instead of 25 percent) with the same ROIC. Should management engage such an endeavor? It depends if you are a short-term or long-term investor. If management does decide to make the additional investment, cash flow will be lower the first eight years, equal in year nine and higher in year ten and later. Reported profit will be higher each year, but cash flow will be lower in the early years. Dividends and share buy-backs are paid for from cash flow or borrowed money. So less cash flow will restrict dividends early in the investment, while higher cash flow in year ten and after provide more funds for dividends, share buy-backs, or more investment. There is the added risk an investment will not perform as planned.

Investment Considerations

7-module course.

7-module course.

Mature industries are easier to gauge than upstarts. Investing for the higher ROIC makes sense, but you also need to consider the industry. When searching for a company to buy you want to start with strong industries. Buying the best company in a strong industry provides a margin of error for any miscalculations. Not every bank will be a great buy. The strongest bank with the highest ROIC will probably continue to outperform its peers.

Management is also important. A management team with a reputation for performance is a powerful inducement for investment. However, when a management team’s reputation and a poor industry meet, the poor industry will win, producing poor results. Higher ROIC companies also command a higher price/earnings ratio. The PE ratio and reported earning only provide a check on your research. Using only reported earning in your investment decision making will require luck to win (and I don’t have much faith in luck).

By applying these methods of research it is possible to generate an outsized rate of return on your investments. You can beat the market and have one huge advantage over Warren Buffett: Warren Buffett needs to invest massive amounts of money to move the needle; you can invest a small amount in a small company where Warren Buffett cannot.

It is unfortunate when management games ROIC by cutting investment to artificially increase current stated EPS. By riding on past investments, poor managers can provide short-term results. Before long the price is paid as growth from past investments declines. In your research you need to beware of such foolish activities by a company. A company increasing investment with a solid ROIC will create value. Your research should always include several years of data to see the level of investment made each year and how productive that investment was.

The final rule is patience. Every business has its ups and downs, even good companies with high ROIC. The stock price will not immediately reflect its underlying value the day after you buy the company. Value is frequently revealed in layers, year after year, as quality investments compound excessive ROIC. More cash flow for the company means more value for you, as the shareholder.

Remember, “Value is driven by expected cash flows discounted at a cost of capital. Cash flow, in turn, is driven by expected returns on invested capital and revenue growth. Companies create value only when ROIC exceeds their cost of capital.”


As we finish this post, let’s engage in an experiment. Last week I bought a small number of shares in Netflix at $95.63. It is the first stock purchase I made this year. The stock was down after forward guidance by management disappointed. With information easily available online, discuss why you think I found Netflix a company worth buying? Why did I buy such a modest number of shares? My investment horizon is always years and decades, not weeks or months. If Netflix continues to fall I will buy a few more shares.

In the comments below discuss why you think I invested in Netflix the way I did. I will chime in periodically on comments with my thought process on this single investment. To prod the discussion, think about a few Netflix facts. Netflix recently entered 130 new countries (investment). Their earnings, cash flow, and growth do not reflected this investment because they just made the investment and will continue investing in this arena. Also think about margin of error and what could go wrong. Most of all, have fun.

More interesting books on investing and Warren Buffett.

fishingAnother tax season is in the books as I write this. After thirty years in the business I am always surprised by how much my business grows and the industry changes. This year I received a major push from Mr. Money Mustache. His blog introduced a larger world to the crazy and wacky accountant from Wisconsin resulting in over 12,000 requests for help. Sure, I know the industry is understaffed and the level of super tax professionals is low and declining. But this was insane!

Another crazy tax season required your favorite wealthy accountant to work more hours than he cares to admit. It also requires a serious question: Why? Isn’t “work” a four-letter word to be avoided at all cost? It all depends. Do you like to golf? Golfing is work for me; for you, golf might be loads of fun. Tiger Woods plays golf for a living. Fishing also falls in this category. Fishing can be a lot of fun or work.

Fun becomes work when we do too much of it. When people talk about early retirement they usually mean they want to do something else or they want the freedom to work on projects that interest them at the time. If I am having the time of my life in the tax profession I should continue doing it. It becomes work when I take on too much. The simple solution is to manage work-flow. For two and a half months a year I disappear into my office, leaving the world behind. I am happy in this world; I am also happy returning to my regular life after the rush is over.

The Meaning of Retirement

Think what happens to something when we retire it. When you finish paying your mortgage you say you “retired” it. A machine at the end of its useful life is retired. The word retire is not an endearing term. The word retire is used to describe something that no longer has value. For some reason people cannot wait until they retire. Crazy! Who wants to reach the end of their value or usefulness? The term has been modified to mean sitting around doing nothing of value. Look it up. I am not “done in my profession” so I am not retired in the strictest sense of the word. I do get to practice the things I love.

I am retired if you include the rest of the definition: do not need to work anymore. A long time ago I reached a point where I did not “have” to work. When I was young I lusted for that magical moment. Then it arrived and I discovered I was having the time of my life doing what I am doing. Better still, I was getting good at it which made the process even more fun.

The Value of Retirement

Fun produces more income than work. Living a daily drudgery does not bring the best out of you. Watching a person doing something they love is an awesome experience. I do not watch sports, but I still enjoyed watching Michael Jordon doing his thing. I had no interest in the outcome of the contest. My pleasure came from watching a man do what he loved and doing it well.

Warren Buffett is one of the world’s greatest investors. There are a few who have better rates of return, but nobody has as much fun doing it as Warren Buffett does. This is why people love to hear what he says. How do you invest? To make money? Is it drudge work doing all the research? Your attitude may explain some of your results. Warren Buffett (and most wealthy people I know) turns investing into a simple process fun to engage in.

What Is Work?

Too often we act like work is something undesirable. Remember back to your college or high school science class days? You learned work equals force times distance. Therefore, work is the exertion of effort where displacement happens. Better said, work is physical or mental effort applied to an object or problem and there are results toward your goal. Still better, work is positive results towards what you want. See, work is fun!

You work toward retirement. Make sure you understand the words you are using and you get what you really want. To stop working is to stop moving toward your goals or even trying to move toward goals or desires. Work is not a bad thing; it is how you get things done.

As you can see I hate the word “retire” in its common usage. Nothing good comes out of retirement. All the value you have, all the experience, all the knowledge are put to rest when you subscribe to a retirement mentality. I see a lot of people in early retirement. After a brief fling with ‘sitting back’ they end up working part-time jobs or starting a business, working at non-profits, or taking on a serious hobby. They all tell me the same thing; they were not happy without something to do. It is not natural to live a meaningless life.

What Is Fun?

Well, if work is so good for you, what about this silly thing we call “fun”? Fun in its purest form is enjoyment. Multiple layers of fun exist. Amusement is fun; so is entertainment; joking, too. Fun is different for each person. I have a lot of fun spending a day at the office with clients and employees. They are like an extended family to me. It amazes me I get paid so well for having so much fun. Not everyone is going to find a tax office fun. Good thing. The world would be a boring place if we all did the same thing because it was fun.

How much fun would fishing all day, every day be for you? Me neither. I like fishing once in a while, but every day? Nope. I have a client who hunts and fishes ten months a year and sells health insurance like a wildman the remaining two months. It is right for him because it brings him joy. When I go on vacation I take the opportunity to speak on tax and personal finance issues. Some would consider this a busman’s holiday. Well, it is! I like it, so I do it. I hate ‘sitting around’ vacations. I want to be doing something constructive, moving toward a goal, sharing ideas. In other words, work! Golfing does not count.

The Mixing of Work and Fun

When done properly work and fun are the same thing. The modern connotation of ‘work is bad’ and ‘fun is good’ is wrong. You can get a lot of work done having fun. Do not confuse tired with work. You can be tired after a long day of work and still have a lot of fun.

Work is a four-letter word we try to avoid. As we learn to understand ‘work’ is a basic need of life the desire to retire disappears. Who wants to be put out to pasture? Do you really want to go from useful to useless? Imagine Warren Buffett saying he has enough so he will stop working. What a waste! Look at all the fun Warren would have missed if he raced to retirement. Once he had enough to live he could have stepped down. I think he has more fun doing it the way he has.

Now a job is different. You can retire from a job. Make sure you have something fun to do. Also, when I die, please retire my body. My great-grandfather left me a plot at the cemetery a couple miles down the road. My guess is at that time I will truly have become useless. Unless you bury me in a shallow grave. Then I would make good fertilizer. I do eat home-grown food, you know. Come to think of it, I will always have work to do.

W-2As the tax deadline approaches we will discuss two problems preventing you from filing your taxes: missing or inaccurate tax documents. Some small employers forget to send W-2s preventing you from filing your taxes; other businesses may send incorrect forms. K-1s are even worse. With a K-1 you may not even know what the numbers should be and they always come late in the tax season.

There is a process in finalizing your tax return when information reported to you (and hence the IRS) is wrong. The IRS knows some tax reporting documents have errors. Unfortunately, the IRS computer only believes what it sees. Once information is reported to the IRS you need to make sure you tell the IRS computer what it wants to hear or you will end up in IRS hell getting letter after letter while the IRS employee working your case is never available. The best course of action is to avoid the IRS letter or audit in the first place. There is a process to fix wrong information at the IRS.

Missing or Incorrect W-2s and 1099-Rs

The process is different with W-2s and 1099-Rs versus other tax reporting documents, so we will start there. The first step when a W-2 is wrong or missing is to contact the employer to secure a copy. Many employers and payroll services provide information online now making it easier for most people to gain access to their information. If attempts to acquire your tax document are unsuccessful you can file your tax return by filing Form 4852. The form is a substitute for a W-2, 1099-R and a few other tax reporting documents related to retirements plans and insurance contracts. Form 4852 cannot be filed before February 15th. If the W-2 is missing you need to make an estimate of income and withholding. If the IRS received the W-2/1099-R you will receive a letter stating the difference. Unless you have records of the correct amounts or the number the IRS has is obviously wrong, you will be stuck with the IRS’ numbers.

Missing or Incorrect K-1s

K-1s create more frustration than missing W-2s. At least with a missing W-2 you probably have a paycheck stub to estimate your numbers from. With a K-1 you are at the mercy of the entity creating the K-1. K-1s also show up late in the tax season so you don’t know if it is late or missing. Partnership K-1s are due the same day as individual returns which means they can drop them in the mail April 15th. If a K-1 is missing you almost always file an extension and hope the K-1 arrives. By May it is time to file without the K-1.

An AWOL or incorrect K-1 (including the capital account information) is handled with Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request. The capital account information is something you should have a record of; the income information is a different story. Estimating K-1 information is challenging since you don’t have a reference point or complete understanding of the entities activities. Here are a few solutions:

  • Use numbers similar to past years. Some K-1s are similar year to year. There may also be a pattern after several years. You can continue the pattern in your estimate.
  • In a worst case scenario you will have no reference points. There is no other choice than to guess. Use reasonable numbers. As hard as it can be, you still need to make an estimate. The IRS will have to do the same thing you are if they challenge your numbers.

I have never seen the IRS challenge my numbers unless the IRS received the actual K-1. The IRS knows you are in the best position to decide the number closest to correct. The IRS can still challenge your position and you should be prepared for that event. However, if the IRS never received the K-1 their guess is as good as yours.

Putting It All Together

My office prepares a small number of these forms every year. In most cases the W-2 or K-1 was never sent to the client or IRS. In cases where the IRS received the information, but the client did not, the IRS sends a letter and we need to adjust for the information the IRS provided unless we have proof a number is wrong or it is obviously wrong.

The best defense is to keep good records. A missing W-2 is only a problem if you did not keep your paystub. A paystub can be wrong, but only in a minor way. K-1s are hard to verify, but you can track your own capital account. Have your tax professional track your basis in their tax software. Technology makes it so much easier today.

Here is to a great tax season.

20160414_091410Today’s post is for my U.S. readers only. Sorry.

Extension to File

The tax due date is fast approaching. This year your tax return or extension is due by Monday, April 18th. If all your paperwork has not arrived or you are unable to file your return by April 18th, file an automatic extension with Form 4868. Here are some tips about an extension to file:

  • Your extension should contain a reasonable estimate of your tax liability or the IRS can invalidate the extension. I have never seen the IRS invalidate an extension, but it is in the rulebook.
  • You are not required to make payment with an extension; the extension will still be valid.
  • Your tax return is due on October 17th this year with a valid extension.
  • You do not need to sign Form 4868. Your accountant can file an extension without signatures, too.
  • Here is a neat trick. Pay part or all of your estimated tax due with a credit or debit card or with EFTPS. If you do Form 4868 is not required. You are automatically deemed to have filed an extension.
  • You file for an extension with Form 2350 if you expect to qualify for the foreign earned income or housing exclusion. You will need to meet either the bona fide residence or physical presence test.
  • An extension to file only eliminates the late filing penalty (5% per month for a maximum of five months). Interest still accrues. If you paid at least 90% of your tax liability by the original due date (April 18th), the late payment penalty does not apply during the extension period.
  • In the case of a federally declared disaster, terrorist attack, or military action the IRS can extend the deadline. The IRS automatically abates interest in such cases during the extended period.
  • Military personnel have an automatic two-month extension if on duty outside the U.S. or Puerto Rico. If additional time is needed to file, Form 4868 can be filed by June 15th for an additional four-month extension.
  • A U.S. citizen or resident alien residing abroad also qualify for the automatic two-month extension

Extension to Pay

Most people are unaware of Form 1127, Application for Extension of Time for Payment of Tax Due to Undue Hardship. Many tax professionals also are unaware of the limited opportunity to extend payment. Here are some key points about the extension to pay:

  • The extension to pay in NOT automatic.
  • Interest will still accrue during the extension period.
  • A statement must be attached to Form 1127 showing assets, liabilities, income and expenses for the three preceding months.
  • Form 1127 must be filed by the due date, excluding extensions.
  • The extension is for six months only.
  • You must show you are unable to borrow or sell assets without undue hardship.

Alternatives to Pay Late

If you owe additional tax with your timely filed tax return and intend to pay within 120 days there are no additional forms to file. The IRS will send letters demanding payment during this time; payment penalties and interest will continue to accrue.

If you need more than six months to pay your tax liability you should file an installment agreement. If your tax filings are all current and you owe less than $50,000, you can use the online payment system at the IRS.

Balances of less than $50,000 with a payment plan of six years or less (three years or less for balances of $10,000 or less) should be granted. The installment agreement is not automatic and can be filed at any time.

Form 9465 is available to apply for an installment agreement by mail. Form 433-F must be attached.

Installment agreements are not free. The current IRS fees for installment agreements are as follows:

  • Payment by check, money order, credit card or payroll deduction: $120.
  • Payment by electronic funds transfer: $52
  • If your income is below 250% of the poverty guidelines, file Form 13844 for a reduced fee of $43

Hope this helps you put the finishing touch on the current tax season. You can click on the banner below to file your extension. I’ll have a short post in the next few days on how to file a tax return with a missing or inaccurate W-2 or K-1. Then we can get back to the serious matter of wealth building. I have a powerful investment post slated for later this month. You will not want to miss it.

I did not have the equipment of expertise to handle a mound system on my own so I called in the troops.

I did not have the equipment or expertise to handle a mound system on my own so I called in the troops.

The DIY movement is alive and well. Taking the bull by the horns and getting a job done can save massive amounts of money. Early retirees get to their exalted status because they kept costs low. Frugal people are drawn to DIY projects like flies to honey. With so many people undertaking projects on their own it is time to ask an obvious question: Should you be doing that project on your own.

I have seen some really bad DIY jobs over the years. Buying a large number of rental properties over the years revealed some doozies. Still, I handle a large percentage of jobs around the office, home and farm on my own. There are times I do need to take a knee and bring in somebody with experience.

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20160407_071533Early retirement comes faster when you have a plan. A frugal lifestyle is the first step; the second step is a high paying part-time seasonal job allowing you a retirement lifestyle with a modest amount of work to cover living expenses. Regardless your net worth, you can semi-retire at any time with the game plan outlined here. Below I highlight twelve high paying jobs you can use to start your retirement today. I have clients in each job earning $30,000 or more per year working part-time. Since $30,000 is more than enough to live a phenomenal lifestyle, the jobs below are a great way to live the good life starting now.

The great news is that you can earn even more than $30,000 per year with the jobs below. No matter where you are on your road to financial independence you can step off the treadmill of traditional work and start spending more time with family and friends. Modern technology has made it not only possible, but easy, to live off a small number of work hours. The basics are covered by a few hundred hours of work per year. Everything else is extra wants. The same technology handles so many of our daily tasks freeing more time for personal development.

The risk you have with these part-time seasonal jobs is how fun they are. If you do not watch yourself you will soon be working more than part-time and more than seasonally. (We will not mention any names, Keith.) In those cases you should break six figures. If you go more than part-time you can use the excess cash to wipe out debt and fully fund your retirement accounts. I do not recommend such a hectic lifestyle. If you choose that course you will be in a position to stop working forever in five to ten years.

Tax Preparer: For some reason this is my favorite idea for a seasonal job. The main problem a tax preparation business has is how many people will want your services. It can easily take over your life and create massive amounts of cash every year. A bedroom or remodeled basement in your home is all you need to open a tax practice. In most states you don’t need any special licenses or schooling, but I recommend educating yourself so you provide your clients with the highest level of service. A tax preparer with 100 clients can make a solid income. Individual tax returns are around $250 in most parts of the U.S. while business tax returns go from $500 and up. Some of the business clients will need bookkeeping and payroll services too; these clients are worth thousands per year. You can farm out the extra work or hire a CPA or enrolled agent. A good mix of tax returns should average $400 per return (more for corporations and partnerships and less for most individuals). Your tax preparation revenue of $40,000 with another $10,000 per year for sideline accounting work will require a few hours of work per week for nine months of the year and maybe 4 or 5 hours of work a day for the 10 weeks of tax season.

Retirement is earlier than ever with these 12 part-time seasonal jobs with high pay. The perfect side hustle mixes vacation travel with income producing hobbies. #wealthyaccountant #hobby #sidehustle #earlyretirement #retirement #travel #vacationHealth Insurance Sales: Clients always amaze me. A twenty year old client of mine started selling health insurance years ago, working only two months per year. He loves hunting and fishing and spends his entire day outdoors in such activities as long as hunting or fishing season is open. In Wisconsin there is about a two month gap where neither hunting, nor fishing is allowed (or so I have been told). During this two month window my young client sells health insurance like a wild man. He works long days talking with small businesses helping them set up health insurance. In two months per year he earns over $60,000. Not bad for a single young guy. (Ladies, I cannot disclose client names.)Then he focuses on the important stuff for the next 10 months.

Consultant: I see more and more consulting businesses every year. The IT industry is filled with consultants and consultant-like businesses. The number of clients in my office consulting in retirement is growing double digits every year. The income is excellent too. I see part-time consultants earning six figure incomes. Consulting covers every possible facet of business management and sales. I can’t tell you what to consult on; each person has their own sets of unique skills. What I do know is you have something of value to share with businesses or individuals. By reading this and similar blogs you are setting yourself up as a life coach, a perfect consulting job. People in sales can consult with a number of businesses helping them grow their client list. The list of consulting ideas is endless.

All the stuff you do for fun can now provide income. You already know what you love . Why not turn it into a side gig or hustle. 12 ways to earn extra money. #wealthyaccountant #hustles #sidegig #extramoney #money #fun #play #vacationDrop Shipping: This is a unique kind of part-time business I probably have the name wrong on. I can give an example of a client I have. He works out of his home and connects businesses with the supplies they need. For example: a company needs a large quantity of a certain chemical and he finds another company with that chemical for sale. He brings the buyer and seller together and makes a profit from the transaction. You can expand on this idea for almost any product. Another example: you could find a quantity of paper and offer it to accounting firms anywhere in the country. The company with the paper handles the shipping. My tax office has not paid for paper in over ten years due to a clients doing what I just said. Because of his huge volume he kills the competition on price.

Crafts: For people who love to create beautiful things with their hands a craft business is the perfect idea. One of my clients provides fabric to people for crafts and earns over $300,000 per year. The abundance of craft fairs, Etsy, eBay and Amazon are only a few of the outlets for selling your handiwork. This idea extends to caricatures and specialty gigs. Putting extra cash in your pocket on a pleasant summer day as people pay you to sketch a caricature of them is a great way to pass the time and meet wonderful people. It is only a matter of time before a wealthy family or business wants you to paint the family portrait or a mural for a massive fee.

Painter: Anyone can paint their own home, but most prefer someone else to do it. The demand for interior painters is huge. You can hook up with contractors to get a steady stream of work. Drywallers are a perfect source of referrals; when they finish their work the painters come in next. A quick introduction to the local apartment association will provide you with more work than you want. To lighten your workload and supercharge your income, you can hire a team to get the work done while you are out bidding on more jobs. Even if you want to work alone you can make up to $40 and more per hour. Not bad for a quiet day brightening room after room with beautiful colors.

Small Farm Growing Specialty Items: Your favorite accountant is victim to more than one of these part-time jobs. (What else am I going to do with all my free time?) I grew up on a dairy farm and it is hard getting it out of my blood. For the first time in over 15 years I don’t have steers due to cattle pricing issues. I still have chickens and several gardens. Specialty items make more money. Flowers seem to do well. My parents make a nice side income selling flowers they grow on their 15 acres of the world. Mushroom farming can take place in a barn or even a basement. Farming is seasonal work, especially if you get away from milking cows. Crops are a spring through autumn job.

61Twbn88OcL._SX401_BO1,204,203,200_Truffles or Ginseng: We are lucky here in Wisconsin since ginseng grows wild in these parts. There are regulations in the state as to how much wild ginseng can be harvested. The growing conditions are ideal in many part of the U.S. for cultivated ginseng. The work is light except during harvesting. With ginseng selling for $600 – $1,000 per pound it does not take long to generate a modest seasonal income. Understand, ginseng is small and it takes a lot to make a pound.

A few lucky areas have truffles. Digging truffles is great exercise and the right truffle can sell for significant sums. I am unfamiliar with the truffle trade, but I believe truffles can be a lucrative seasonal job, same as ginseng.

Forensic work: There is high demand for several kinds of forensic work. Here I am specifically speaking of forensic accounting. Attorneys and estates are always looking for unclaimed accounts. Landlords would love to collect on judgments. For seven years I ran two hedge funds designed to collect what banks could not. This is one of those seasonal jobs that can easily take over your life. Once you have a reputation for results you will have more work than you want. Revenue from forensic work can reach to 50% of collections. You can start by speaking with your local apartment association, attorneys, and small businesses. Most have accounts they would love to have help collecting on. Helping individuals find lost accounts is also satisfying.

Do you things you want and get paid for them. These 12 high paying part-time seasonal jobs give you the freedom to live the life you choose. #wealthyaccountant #freedom #lifestyle #parttimejob #seasonaljob #sidehustle #sidegig #hustles Hunting/Fishing Guide: Here is a seasonal job that turns play into income. If you love the outdoors, guide services are for you. You don’t have to stop with fishing and hunting. Guides are needed for all kinds of outdoor adventures. A junior accountant in my home is spending the summer leading a group for Girl Scouts. Room, board and meals are all provided, plus a paycheck. Looks like someone in my household will be packing it away in the First National Bank of Wallet this summer.

Speaker: Good speakers can make massive amounts of money. Speaking is easy, fun, and you meet lots of awesome people. I generally speak 5 – 10 times per year around the U.S. I speak at Goodwill Industries one or two times every year locally. Fear of speaking keeps many people on the sidelines when they could be sharing their knowledge and experience with the next generation of people in their line of expertise. I speak on early retirement, personal finance, time management, writing, and, of course, taxes. If you can turn a difficult subject (think taxes) into something entertaining and educational you will be a hit. Since I hate travelling this gives me a reason to get out there, see places, and have something to do while there. Unstructured vacations drive me insane. Now I get to travel and remain sane. Lucky me.

Blogger: I have been blogging for about 10 years now. In the beginning I used content farms like HubPages and free services like Google’s BlogSpot. You can make money on virtually any subject. A few years ago I ran across a subgenre of flash fiction while researching a medical condition my daughter has. I discovered this small group of blogs had massive traffic and nobody was monetizing their sites. I could not leave well enough alone. My flash fiction* blogs generate over 2.5 million page views per year now and enough income to get me through the worst of times if everything else went south. The Wealthy Accountant is a little different. I hired a web designer to set the whole thing up. In less than two months this blog has about 500 page views per day and brings in a few dollars daily, too. Here are my rules for creating a profitable blog:

  • Build content. Traffic does no good if there is only one post to read. Spend six months to a year building content before pushing for massive traffic.
  • Build traffic: Once you have content it is now time to get serious about traffic. The blog traffic discussion is left for another day.
  • Monetize: Once you have content and traffic it is time to monetize in a serious way. Even modest traffic can generate $50,000 in revenue or more. Like traffic, monetization is left to a future blog post.

There are endless ideas when it comes to high income part-time seasonal jobs. We don’t have to work long hours to make ends meet. It takes very little to pay for the basics. More time with family and friends is important. Yes, I know I spend a lot of time preparing taxes. It makes me happy so I continue, tax season stress and all. It could be worse; I could have nothing to do and spend my days with a beer in one hand and the remote in the other.


* Flash fiction stories are generally under 500 words and sometimes even under 100 words.


More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let them know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 


The best kept secrets of happy and successful people. #earlyretirees #happiness #happy #Success The day is April 2nd, a Thursday. A small bar attached to a bowling alley next to the college has Happy Hour until 7 p.m. A young man who would someday be known as the Wealthy Accountant attended Macro-Economics at the college across the way. Class was held on Tuesday and Thursday from 5 p.m. to 7 p.m. A group of students, led by the junior wealthy accountant, ambushed the professor, convincing him to cut breaks short and end class at 6:50 so the group could race to the bar called The Image before Happy Hour ended. It was important to the students to make Happy Hour. The Image had free tacos if you bought a drink and a full meal for the price of one soda was one heck of a deal.

Our junior wealthy accountant had his own home at this time and spent his days reading library books. Years before he was engaged to be married and found his fiancé in bed with another man. He withdrew from life knowing how important it was to find the right woman to share his life with. He wanted someone in his life, but had given up hope there was “the right” woman out there for him. So he kept reading all day, attended a few college classes and enjoying life as it was.

*  *  *

A demure young woman ran a daycare out her parent’s home. Her fiancé attended college at a campus on the other side of the state. He informed our demure young woman he found someone else; the wedding was off. She withdrew from life, spending her days taking care of children. By now she was working for a larger daycare center so her parents could have their home back.

Our demure young woman had a sister-in-law that felt it was unhealthy for our heroine to spend so much time at home alone. After adequate harassing she agreed to go out for a drink at The Image. The day was April 2nd. It was 29 years ago.

*  *  *

Our junior wealthy accountant was not demure. After washing down a plate of free tacos with a glass of Sprite he noticed a quiet young woman sitting with a friend next to the dance floor. It was a Thursday night so the crowd was thin. He approached the young woman and asked for a dance. She accepted. After the dance he asked the young woman her name; she refused to answer. The accountant was unable to secure the young woman’s name, address or phone number. There was only one chance. “Can I see you here next Friday?” All she did was nod.

The next Friday our hero waited anxiously at The Image praying the young woman would return. When she walked in his heart stopped. They danced and then left the bar for a table in the bowling alley where you could hear a person talk. It did not take long for our couple to discover they had a lot in common. One year and six days after their first meeting they were married. They are celebrating 28 years of marriage this week; they have been married to each other longer than they have not been.

*  *  *

What makes a person happy? What traits do wealthy people have in common? Is there commonality between happy people, wealthy people and early retirees? The answers are so simple most people miss them.

Bill Gates recently revealed in an interview, marrying his wife, Melinda, is the single greatest decision he made in his life. I understand what he means one-hundred percent. Marrying Sue has been the single greatest thing I ever did. No amount of money could ever replace what my relationship to that demure young woman has brought me.

The Secret

Happy people, early retirees and wealthy people do have a common thread running through them. Millionaires, according to The Millionaire Mind, by Thomas J. Stanley , tend to be married for a long period of time, tend to live in the same house forever (see Warren Buffet) and are frugal even after they achieve massive amounts of financial wealth. It seems wealthy people are happy for reasons other than money.

Early retirement is possible with a plan. Planning is the one thing you control. #success #earlyretirement #FIRE #marriage #wealth #happinessKeith’s Rule # 9: Money cannot make you happy, but it can make you miserable.

I love the story of the wealthy businessman who loved his wife so much he transferred a significant amount of his wealth into his wife’s name. He had his attorneys write up all the paperwork. He wanted the love of his life taken care of no matter what happened to him. Once the transfer was complete he told his wife what he had done. His wife smiles and says, “That is nice, dear,” as she continues clipping coupons at the kitchen table. The money meant little to her; she had her wealth sitting across the table from her.

Okay, Bill Gates tells us his best decision in life was marrying his wife; Warren Buffet has lived in the same home for decades. So is that the secret? Marry the right person and live in one home forever? These things can make you happy, but it does not satisfy the wealthy part or early retiring part. Happiness is the most important of the three so I think we have a trait or two happy people seem to possess in higher levels than the population at large. Now we need to dig further to find the best kept secret of all three types of people: the happy, the wealthy and the early retiree.

Keith’s Rule # 10: Be happy with what you have; it could be a whole lot less.

Desire, lust, coveting and ego are acid to happiness and wealth. Wanting something is one thing, but to always want more, to never be satiated, is the perfect prescription for unhappiness and poverty. Well-adjusted happy people tend to put up a hand and say, “Enough for me.” Happiness comes from inside not from out there. No amount of stuff will ever fill the void. I know a demure young woman that filled a void I had. I was never foolish enough to think money or stuff would do it for me. Good thing. If I did I would not be celebrating 28 years this week.

Wealth should be no secret. You can achieve your dreams. Learn from those who have done it. Simple personal finance strategies can make financial independence come true.#dreams #wealth #money #personalfinance #financialindependence #secrets #marriage #spouseThe secret is frugality. Think of it. People get divorced because they fall out of love or some other crazy reason. There are valid reasons to divorce, but those reasons apply to a very small percent of marriages. Frugal people are happy with what they have, including their significant other. If you are never satisfied with what you have you will eventually want a new person in your bed, too.

Several years back I had a personal trainer help me rehabilitate a bicep I blew out while butchering chickens. After a while she started saying rude things about Mrs. Accountant and suggestive things to me. It did not take long to find a different personal trainer. It ended badly for her. Her fiancé (ring and wedding dress already purchased) found out she was playing the field (she was sleeping with the assistant manager of the gym) and promptly ended the engagement. Do you think she found happiness? Now she is marrying the boss, but deep down inside all parties know she is willing to exchange men in her life at the drop of a hat. Until she is happy with what she has she will always be miserable and in fear of being found out.

Happy people do not need more stuff; wealthy people are wealthy because they realize they already have enough; and early retirees achieved their goals by saving first and spending only a fraction of their income. I encourage my clients to save 50% of their gross income. They usually give me a look. I am more the Crazy Accountant to them than the Wealthy Accountant. It is a truism that frugality will get you through almost any challenge you face in life. Desire for stuff leads to debt and debt is a terrible taskmaster to have.

Here are a few guidelines for a life of happiness, wealth and even early retirement if that is your goal:

  • Marry the right woman (or man). I understand some people do not want to be married or in a relationship. It is okay to live single. Instead, have good friends. Most of us want a significant other in our life. Choose well and make it last a lifetime.
  • Keep the spark in your marriage. After 28 years I still chase Mrs. Accountant around the house. (Was that TMI? Sorry. I still find my wife the most desirable woman on the planet. I refuse to change or even entertain the idea. I have what I want.)
  • Save first, spend later.
  • Be happy with what you have.
  • Don’t house hop. It is okay to move as long as there is a valid reason. Transaction costs on the transfer of any asset digs into your net worth so move only when it makes sense to do so.
  • Always know you have “enough”.
  • Meditate every day on how lucky you are. You are lucky!
  • Read good books!
  • Love the significant others in your life. Kiss and hug your wife (or husband) every day no matter what. Do the same with your kids; I kiss my girls on the cheek or forehead every day and tell them I love them; Mrs. Accountant gets a big sloppy smooch. Tells your parents how much you love them while you still can. Tell your friends how much you care while you have the chance.
  • Take your loved ones on a walk and hold hands.
  • Gaze into each other’s eyes.
  • Accept the gift of life you already possess. You have already won.


More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here.