# basic financial planning



## BigTiny (Jun 29, 2010)

*Financial planning basics for the woodworking pro.*

I've volunteered to do a few blogs on the financial planning of going pro, so here comes the first installment.

First and foremost, you can't plan where you're going if you don't know where you *are*.

You have to sit down and do a complete list of your financial picture, sort of a "monetary snap shot" of yourself. List every debt you have, from the mortgage to the ten bucks you borrowed from a buddy because you were short at lunch. Make sure it is as complete as you can make it. List all your utilities, insurance premiums and so on. Even the couple of bucks a week to the paperboy. Add to this list the cost of any tools you need but don't yet have.

Now list all your assets. Any savings? Life insurance cash value? (if you can borrow against it, don't cash it in). Any other sources of income? Put them all down.

Okay, now you have an idea where you starting from. Now it's time to do some serious thinking, and be honest. You'll only be fibbing to *yourself* if you aren't. You have to figure out what the minimum is that you need to survive each month. Then figure how long you can hold out at that rate before you go broke. This is your limit, more or less, for becoming self supporting in the business. Can you make it by then? Be honest with yourself. If you can't, this will be an exercise in frustration and will only be a strain on you and your family. Better to wait until you save up enough to make it safely. (or at least as safely as is possible in business)

Okay, so you've gone through the exercise and made the decision to go for broke. What now?

The most important first step is to put everything down in black and white! EVERYTHING! If you don't keep good, accurate books, the tax man and you are going to become a lot better acquainted than you want. There are many simple, easy systems out there for keeping your own books. Good advice on which to use can be obtained from your bank manager or the local chamber of commerce (or whatever the equivalent is in your country).

Now that you've made the leap into the sea of commerce and have a good bookkeeping system in place, what else do you need?

I'd advise a decent insurance policy for disabilities, so an accident or illness won't put you out of business and your family will have dinner on the table if something lays you out for any extended period. If you think you can't afford it, ask yourself if you can afford *not *to have it if you, for example, trip and break your leg?

While we're talking about insurance, you'll need it for your business too, so if someone breaks *their *leg at your shop, the resulting lawsuit won't result in you living in the poorhouse. Even if you *win *such a suit, the legal fees and time lost in attending court can be as bad financially as* losing*.

We all have things we love doing, and things we hate, plus a million and one that fall somewhere in between. At first, you can't afford to let personal preference influence your choices in what projects you undertake. For now, you have to do whatever you can find that pays. Making that 17th century reproduction of a heavily carved and inlaid armoire can wait until *after *you've made a thousand kitchen cabinets or so. You have got to be realistic and understand that by becoming "self employed" you have traded *one *boss for *many; *your *customers.*

Well, this should give you some food for thought. If anyone has some generalized questions, or has a direction they'd like to see the next installment go, let me know.

Paul


----------



## TopamaxSurvivor (May 2, 2008)

BigTiny said:


> *Financial planning basics for the woodworking pro.*
> 
> I've volunteered to do a few blogs on the financial planning of going pro, so here comes the first installment.
> 
> ...


When I first started business and had employees, I had a disability policy that I was told would pay $10,000 a month if I was injured/disabled could not work. It has long since been canceled since I don't need it any more. With what I have learned about insurance since then and especially disability insurance, I seriously doubt if they would have paid much of anything. Remember; be very skeptical of insurance sales people. Their job is to extract money from an unsuspecting public and deny claims for anything that really happens, but everything else is always fully covered. Sorry to sound so negative, but that is just my personal experience with them speaking.


----------



## wseand (Jan 27, 2010)

BigTiny said:


> *Financial planning basics for the woodworking pro.*
> 
> I've volunteered to do a few blogs on the financial planning of going pro, so here comes the first installment.
> 
> ...


It is late Paul but I put it on my watch list so I will read it in the morn. I appreciate the time you are putting in to this.


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *Financial planning basics for the woodworking pro.*
> 
> I've volunteered to do a few blogs on the financial planning of going pro, so here comes the first installment.
> 
> ...


I'm sorry if you ran into a bad insurance company or agent. I personally know a few people who did collect, one for about five years and another for the rest of his life, about twelve years. The latter died of leukemia, the former had a bad car accident. There were others of my clients who had their claims honored for varying lengths of time.

I have *never *had a client who was covered under a policy I had recommended fail to collect if they had a claim.

One idea I would offer: deal with a* broke*r wherever possible. He can sell policies from a number of companies where an agents sell for the company that sponsors his license.

*No *single company has the best policy for *everyone. *I would send a doctor to one company, a woodworker to another, and a deep sea diver to a third, each depending on his specific needs.

I'll give you an example. A doctor client of mine (my own doctor at the time) had been on a skiing trip to Switzerland with a friend who "ate a tree" and broke his leg quite badly. He missed a total of 6 months work due to the severity of his injuries.

I was reviewing my doctor's finances for the first time, and when I came across his disability policy, I informed him that it was a good thing his friend ate that tree and not him, as the policy he had applied *only *in North America. Other than that, it was every bit as good as the policy I recommended to him except for cost. The agent who sold it to him had gone strictly on which policy had the lowest premium instead of finding out his clients *real *needs. The difference in premium? Less than $2 a week on a policy that paid close to $3,000 a month on claim.

Another recommendation. If the guy says something like "ignore all the fine print. You don't need to know what all those ten dollar words mean, just trust me." *RUN!* Never buy *anything* you don't understand *every word *of. If it take three days for him to explain it to you, take the time. He's getting well paid to educate you in his business. Make him *earn *it.

Are there companies out there that treat you poorly when claom time comes along? Sure there are, the same as there are lousy tool makers whose tools fall apart in a week. Are there agents who will sell you ice cubes in a blizzard? Yes to that too. Same as there are wood workers who will try to pass off veneered MDF as solid wood.

However, there are also honest brokers and decent companies who will treat you as you deserve and provide the protection you've paid for.

On a personal note, my own claim started in the mid 90's and they've never missed a payment. I just wish I'd taken out more coverage.


----------



## gyrene1 (Feb 28, 2011)

BigTiny said:


> *Financial planning basics for the woodworking pro.*
> 
> I've volunteered to do a few blogs on the financial planning of going pro, so here comes the first installment.
> 
> ...


Thanks Big Tiny, I'm hoping your blog will give me a few pointers, 'cause I'm thinking of changing my status from amatuer to pro. I'll be watching (reading).


----------



## TopamaxSurvivor (May 2, 2008)

BigTiny said:


> *Financial planning basics for the woodworking pro.*
> 
> I've volunteered to do a few blogs on the financial planning of going pro, so here comes the first installment.
> 
> ...


I am saying be skeptical of every professional you come in contact with unless you have a good reason to trust them. I have always been the opposite, very trusting unless I have reason to not trust them. That has proven to be a very expensive attitude at times. I didn't have a claim and glad I didn't. When shopping for disability coverage at a later date, I discovered things about disability policies that made me doubt I was told the truth about the coverage.

I will tell about one of my first CPAs. He took over the business of my former CPA a year after I started. I estimated my gross for the year within to a couple thousand dollars. I asked about any potential liability I might have on April 15th. I was told nothing more than $1,000 at the most.

On April 13th of 1987, he called me up saying I needed to send the IRS a check for $13,000 to cover 1986 and to send $5,000 for my first estimate of 87!! I was not a tax expert, but I knew the tax on 2K was not 13K! I did a little bit of research, found I could file and extension rather than the tax return, but I needed to pay the amount to avoid any penalties. I was very fortunate I had the cash, but it certainly made making payroll a bit nip and tuck for a few months.

I called the previous owner and told him if he had not been cashed out when he sold he had better take care of his previous customers because that clown was going to leave it in shambles in short order.


----------



## shipwright (Sep 27, 2010)

BigTiny said:


> *Financial planning basics for the woodworking pro.*
> 
> I've volunteered to do a few blogs on the financial planning of going pro, so here comes the first installment.
> 
> ...


You make very good points, Paul. I spent most of my working life self employed and attribute much of my success to the fact that I was lucky (clever?) enough to marry an accountant. If not for her I would probably have been rich and broke again half a dozen times. With her I was able to retire at 55. I hope that members here contemplating getting into business listen to what you have to say even though they may not like what they're hearing.


----------



## scrollgirl (May 28, 2010)

BigTiny said:


> *Financial planning basics for the woodworking pro.*
> 
> I've volunteered to do a few blogs on the financial planning of going pro, so here comes the first installment.
> 
> ...


This is good, basic advice that makes lots of sense. In my early business days, it seemed that I only looked at the parts of the business that I wanted to - not the whole picture. Being realistic and facing figures gives you the knowledge to made adjustments so you can be successful. Glossing things over that you don't want to face will only set yourself up for failure.

Great blog!  Sheila


----------



## HorstPeter (Aug 27, 2010)

BigTiny said:


> *Financial planning basics for the woodworking pro.*
> 
> I've volunteered to do a few blogs on the financial planning of going pro, so here comes the first installment.
> 
> ...


Thanks for this. I'll be reading the follow-ups soon as well.


----------



## BigTiny (Jun 29, 2010)

*Do regular "check ups"*

Okay, dear readers, time for part two of my insomnia cure… er… financial planning for the woodworking pro.

You're rolling now, doing real honest to golly wood work for real, honest to golly customers and getting real, honest to golly money for it. *Now* what?

*Every day *you have to do your book entries for the day. If you let yourself fall behind, it will grow into a monster too large to face and you'll just let it *keep *growing until it topples your fragile financial house. It's easy if you keep it up to date. If you don't, remember what I said about getting to know the tax man *far *too well?

Another benefit of the daily routine of entering everything is the fact that you can do a bottom line calculation any time you want to, letting you know how healthy (or unhealthy) your business is.

Speaking of which, you should be checking that bottom line once a week. Schedule a time every week, as close to the same time/day as possible, to do a financial "check up" on where you stand. Look for trends and try to figure out what is behind them. If you notice every time you do a couple of widgets in a particular week, the bottom line that week is better that the weeks you didn't make any widgets, maybe you should be actively promoting your widgets. Conversely, if your bottom line suffers every time you work on a thingumabob, don't make any more thingumabobs. Get the idea? This is an easier, faster method than doing a time and materials break down on everything you make. (not that the time and materials study isn't a valuable tool too, it just takes longer).

My point is that it's very important to keep track of how your business is doing. This helps in planning for the future. It lets you spot things that are benefiting you and things that aren't so you can focus your time and energy in the areas that will give the best returns.

In the early days, expect a lot of red ink in the totals column. It's only natural. As long as the red figures are shrinking, you're on the right road. If they get bigger, it's time to find out why.

Once the bottom line starts to show up in black ink, you can start to relax a bit. Now it's time to pay more attention to your second set of books, your *personal *ones. The first books, the business ones, keep track of the business. Your other set of books keep track of your own finances. All those expenses the tax man doesn't care about but still have to be paid, such as residential rent or mortgage, food, heat and light for the home, etc. As one of Charles Dickens' characters once said, "Annual income ten pounds, annual expenditures ten pounds two shillings and sixpence, result? Misery! Annual income ten pounds, annual expenditures nine pounds nineteen shillings and sixpence, result? Happiness!" True then, true now. If your business is in the black but you are in the red, you're *not *going to be happy. What can you do to improve this? One of two things (or a combination of the two): reduce the expenditures or increase the income until your personal bottom line is not only in the black but growing.

I know, now you're going to ask how, right? If I had a universal answer, I'd be a millionaire! (grin) Since my bank manager can tell you I am not a millionaire, we'll all have to find our own answers to that one. I can, however, offer one little tip.

Do *not *live beyond your means. If your bottom line is red, you have no business eating anything not prepared at home. You have no business buying anything you don't absolutely need.

This next point isn't going to sound like it's financial, but trust me, it* is*.

*Work full time hours!* I don't care what you're doing, but do *something *to do with your business at least eight hours a day. *Every *day! If you aren't building something, go out and prospect for customers. Do the books. Sweep the shop floor. Do *something*. If you get in the habit of taking half the day off because things are slow, you're putting the skids under your own feet. Get in the habit of working at least full time if you're serious about the business. If you keep at it full time, and if you're good at what you do, (and if the Gods are smiling on you), you will succeed.

This next one also won't sound like financially based, but it too is.

Do the absolute *best *work you are capable of on *every* item you make. Believe me, you can't afford *not *to! What's the best advertisement in the world? A happy customer! What's the worst? An *un*happy one! No amount of money can buy the one or make up for the other. One ticked-off customer with a bee in his bonnet can *bury *a business!

Okay, that's enough rambling for tonight. Stay tuned for another installment. Same time, same station.

Tonight's program was brought to you by the letter "L" and the number 2. (grin)

Paul


----------



## MarioF (Feb 6, 2009)

BigTiny said:


> *Do regular "check ups"*
> 
> Okay, dear readers, time for part two of my insomnia cure… er… financial planning for the woodworking pro.
> 
> ...


Thank you Paul, sound advice, bottom line calculation is definitely a must to keep the shop afloat.


----------



## a1Jim (Aug 9, 2008)

BigTiny said:


> *Do regular "check ups"*
> 
> Okay, dear readers, time for part two of my insomnia cure… er… financial planning for the woodworking pro.
> 
> ...


Well done Paul 
where were you when I went into business 40 years ago ? )


----------



## Eric_S (Aug 26, 2009)

BigTiny said:


> *Do regular "check ups"*
> 
> Okay, dear readers, time for part two of my insomnia cure… er… financial planning for the woodworking pro.
> 
> ...


Great advice Paul.


----------



## lanwater (May 14, 2010)

BigTiny said:


> *Do regular "check ups"*
> 
> Okay, dear readers, time for part two of my insomnia cure… er… financial planning for the woodworking pro.
> 
> ...


Paul: I like your advise on working full time hours. I have seen many small business owner showing up latet at work and taking too many unscheduled hollidays just because the commercial say "you deserve it".

I fully agree that one need to keep their personnal finances apart from the business finances. 
The best way to do that is to pay yourself a salary just like you would pay someone else to run your business.
That would insure that you don't spend your business capital.

Thanks , This an excellent set of blogs.


----------



## woodspark (May 8, 2010)

BigTiny said:


> *Do regular "check ups"*
> 
> Okay, dear readers, time for part two of my insomnia cure… er… financial planning for the woodworking pro.
> 
> ...


Good advice Paul, thanks.

I think any self employed woodworker who ONLY works 8 hours a day, is not going to make it!

I typically do 10 hours a day in the shop. Many nighttimes I do another hour or 2 behind the computer working on bids or cutting lists or correspondence. Yes, I still enjoy it! How many hours do people waste mindlessly staring at crap on the TV!!


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *Do regular "check ups"*
> 
> Okay, dear readers, time for part two of my insomnia cure… er… financial planning for the woodworking pro.
> 
> ...


As our good friend Div points out, the 8 hour day is a minimum and you will find yourself doing many more hours than that if you are successful. Indeed, the most successful wood workers coule work 24 hours a day if they wanted and still not get every item they are asked to build completed. they are in the enviable position of being able to pick and chose what they will do and what they won't.

Oh to be that successful, eh? **


----------



## woodspark (May 8, 2010)

BigTiny said:


> *Do regular "check ups"*
> 
> Okay, dear readers, time for part two of my insomnia cure… er… financial planning for the woodworking pro.
> 
> ...


You have to do many hours in order to BECOME successful! Then you have to do many hours to STAY successful! I maintain that 8 hours is not enough ESPECIALLY when you are trying to establish yourself. Pro woodworking is not a job; it is a passion, a lifestyle, a calling, something that gives meaning to your life. The book "Zen and the art of making a living" comes to mind. It should be compulsive reading/study in schools! 8 hour days are for those who want to work for a boss. I write from the perspective of a one man shop.

Sorry Paul, I feel/know strongly about this!


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *Do regular "check ups"*
> 
> Okay, dear readers, time for part two of my insomnia cure… er… financial planning for the woodworking pro.
> 
> ...


Hi Dive.

My friend, I am *not* disagreeing with you. I totally agree that more than 8 hours a day are *mandatory *to success in self employment. My point was that there should* always* be *something* to do, and to do something rather than sit around if things are slow. Getting in the habit of doing nothing is a sure road to failure.

I too feel strongly about putting in the hours, and did an average of 10 to 11 hours per day plus a lot of weekend work on top of that. The 40 hour week may work for the 9 to 5 set, but it is death to those of us who take the harder path of self employment.

Friends again? **


----------



## woodspark (May 8, 2010)

BigTiny said:


> *Do regular "check ups"*
> 
> Okay, dear readers, time for part two of my insomnia cure… er… financial planning for the woodworking pro.
> 
> ...


He,He, I'm not angry at you  I've silently been enjoying your posts, comments here on LJ's. I like the way your mind works! Your point is off course a good one, I just wanted to add about the extra hours.  Anyway, this is supposed to be about finance of which you know much more than me. I am learning things here, keep it up! Thanks for sharing your knowledge Paul.


----------



## BigTiny (Jun 29, 2010)

*nothing new tonight*

It is with a heavy heart that I must beg off tonight. I'm waiting for the demerol to kick in on a particularly* bad* back pain that is keeping my eyes crossed.

Look for me again tomorrow night, barring more back pain. (Keeping my fingers crossed.)


----------



## scrollgirl (May 28, 2010)

BigTiny said:


> *nothing new tonight*
> 
> It is with a heavy heart that I must beg off tonight. I'm waiting for the demerol to kick in on a particularly* bad* back pain that is keeping my eyes crossed.
> 
> Look for me again tomorrow night, barring more back pain. (Keeping my fingers crossed.)


I hope you feel better soon, Paul. You don't worry about us. We will be here whenever you are ready. Take it easy and get better!

Sheila


----------



## richgreer (Dec 25, 2009)

BigTiny said:


> *nothing new tonight*
> 
> It is with a heavy heart that I must beg off tonight. I'm waiting for the demerol to kick in on a particularly* bad* back pain that is keeping my eyes crossed.
> 
> Look for me again tomorrow night, barring more back pain. (Keeping my fingers crossed.)


I sure hope you feel better. There are very few things that hurt more than a bad back.

Can you self-administer demerol in Canada? It's a potent drug.


----------



## rivergirl (Aug 18, 2010)

BigTiny said:


> *nothing new tonight*
> 
> It is with a heavy heart that I must beg off tonight. I'm waiting for the demerol to kick in on a particularly* bad* back pain that is keeping my eyes crossed.
> 
> Look for me again tomorrow night, barring more back pain. (Keeping my fingers crossed.)


Take it easy friend. DAvid (Patron) is also suffering with back pain.


----------



## ClayandNancy (Feb 22, 2010)

BigTiny said:


> *nothing new tonight*
> 
> It is with a heavy heart that I must beg off tonight. I'm waiting for the demerol to kick in on a particularly* bad* back pain that is keeping my eyes crossed.
> 
> Look for me again tomorrow night, barring more back pain. (Keeping my fingers crossed.)


I know where your at. Tough to love a hobby and not be able to do it when the backs not in it. Hang in there buddy.


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *nothing new tonight*
> 
> It is with a heavy heart that I must beg off tonight. I'm waiting for the demerol to kick in on a particularly* bad* back pain that is keeping my eyes crossed.
> 
> Look for me again tomorrow night, barring more back pain. (Keeping my fingers crossed.)


Hi Sheila, Rich.

Thanks for the well wishes, both of you.

Rich, I have a chronic back problem involving bone "spurs" growing between the lower vertebrae in my back, pinching the nerves. I've been suffering from this for over ten years and the problem is progressive. As a result, I am prescribed a number of pain medications, most of which I use three times a day, but the last chance drug to use when the pain breaks through the other medications is Demerol, and my doctor gives me a substantial amount of it each month to be used as needed. Sadly, these days I've needed it more often and in higher doses than in years past.

I wouldn't wish this condition on my worst enemy. There is no cure, the pain when I overdo things is unbelievable and the medications are having less effect from using them for so many years. I am already at the maximum dose of each of my medications and there is nothing left in the pharmacutical arsenal to add to help me. Nor is there any surgery that would help, so I'm facing the pain getting worse each year and my activity level being more and more curtailed by it.

Fun, huh?

The reason I'm back on here now is that the pain kept me from sleeping, in spite of the Demerol. This is nothing new, but it is annoying as all get out. I use the net to take my mind off my problems when the pain is keeping me from doing anything constructive, but the Demerol keeps my head so fuzzy I cant't really contribute too much to my favorite sites like LJ.

Paul


----------



## woodspark (May 8, 2010)

BigTiny said:


> *nothing new tonight*
> 
> It is with a heavy heart that I must beg off tonight. I'm waiting for the demerol to kick in on a particularly* bad* back pain that is keeping my eyes crossed.
> 
> Look for me again tomorrow night, barring more back pain. (Keeping my fingers crossed.)


Hey Paul, so sorry to hear that. I've had problems in the past with lower back pains( a form of arthritis) so I can imagine what you must be going through. Hang in there, I'll send some good prayers your way.


----------



## gfadvm (Jan 13, 2011)

BigTiny said:


> *nothing new tonight*
> 
> It is with a heavy heart that I must beg off tonight. I'm waiting for the demerol to kick in on a particularly* bad* back pain that is keeping my eyes crossed.
> 
> Look for me again tomorrow night, barring more back pain. (Keeping my fingers crossed.)


I too have been plagued with severe back pain from scoliolsis which has no cure.My nurse daughter had me see the cosmetic surgeon she works for!He injected my back in one spot,took ten seconds,and I have been pain free for over eight months!He injected me with BOTOX!I was really skeptical but desperate enough to try anything.The theory is that the pain is muscle spasm in origin.Worked super for me.You might ask some Drs. up there if it is an option for you.Hope this helps and best of luck.gfadvm


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *nothing new tonight*
> 
> It is with a heavy heart that I must beg off tonight. I'm waiting for the demerol to kick in on a particularly* bad* back pain that is keeping my eyes crossed.
> 
> Look for me again tomorrow night, barring more back pain. (Keeping my fingers crossed.)


Sadly, my pain is caused by the spurs growing there and not spasm, so Botox wouldn't help. They have even tried to "fry" the nerve with an electric pulse but no luck.


----------



## BigTiny (Jun 29, 2010)

*Another blank night*

Still haven't been able to sleep even with the Demerol. Been over 60 hours now. Head is fuzzy as a Georgia peach.

I want to thank all my friends here for the messages of sympathy and encouragement. They are greatly appreciated.

Paul


----------



## MsDebbieP (Jan 4, 2007)

BigTiny said:


> *Another blank night*
> 
> Still haven't been able to sleep even with the Demerol. Been over 60 hours now. Head is fuzzy as a Georgia peach.
> 
> ...


60 hours… oh my, oh my… 
when you finally sleep - you will wake up, they'll be calling you Rip Van Winkle.


----------



## MarioF (Feb 6, 2009)

BigTiny said:


> *Another blank night*
> 
> Still haven't been able to sleep even with the Demerol. Been over 60 hours now. Head is fuzzy as a Georgia peach.
> 
> ...


Take it easy Paul, we´ll be here. Hope you get to feel better.


----------



## woodspark (May 8, 2010)

BigTiny said:


> *Another blank night*
> 
> Still haven't been able to sleep even with the Demerol. Been over 60 hours now. Head is fuzzy as a Georgia peach.
> 
> ...


Hang in there brother, you have my sympathy!


----------



## wseand (Jan 27, 2010)

BigTiny said:


> *Another blank night*
> 
> Still haven't been able to sleep even with the Demerol. Been over 60 hours now. Head is fuzzy as a Georgia peach.
> 
> ...


I know back pain all to well Paul, I have all the sympathy in the world for you. What you need is one of the Russian Women to give you a good massage.LOL Hope you get some rest soon.


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *Another blank night*
> 
> Still haven't been able to sleep even with the Demerol. Been over 60 hours now. Head is fuzzy as a Georgia peach.
> 
> ...


Finally got a few hours sleep this morning. Hit the pillow about 9 A.M. and was back up about 2 due to my back giving me trouble again (still?).

Hey, five hours sure beats nothing, doesn't it?

I'm still quite tired (it is now 4:20 A.M. here), but a bit of rest does wonders, so I'll give a short try at a new blog entry tonight. Stay tuned.

Many thanks for all the good wishes from all my good friends here on LJ.

Paul


----------



## BigTiny (Jun 29, 2010)

*Okay, what's next?*

Welcome back all. Sorry for the hiatus

Okay, you are now a partially established wood pro, making a living, if not a fortune, out of your shop. "Quo vadis?" (where to from here?)

Well, first things first. Pay off all the bills you accumulated getting started. The credit card purchase of that tool. The hundred bucks aunt Milly loaned you to get the table saw blades. And so on…

Okay, the bills are paid (lucky you) and you're up to date on the household stuff, is there anything you should be doing now?

*YOU BET!*

Once you start making a buck, the tax man wants his taste! *More *than his fair share if he can get it. So, is there anything we can do to keep his grimy fingers out of our pockets? (*without* ending up in a government institution that has locks on the doors and bars on the windows that is)

*YEP! *There *is!*

First, make sure every possible deduction is taken care of, and is well documented. Get receipts for *everything*! I don't care if it's one lousy postage stamp, every penny counts. It all adds up. Comes tax time, you want every penny you can legitimately claim listed and accounted for. Why pay a cent more than you legally *have *to? The government has enough $1,000 screwdrivers already! Don't buy them another one by not keeping track of your business expenses.

What kind of expense gets missed? You'd be surprised. If you go for coffee with someone and you talk business, it is deductible. Take someone to dinner and talk business? Same thing. I'm sure most of you know this, but there are other, less obvious items that fit this catagory. Since these differ from place to place and this us an international site, I won't go further into this here, but direct you to your accountants to direct you on this one. *Ask* them. Make them *earn *their money! They work for* you*. Every jurisdiction has its own tax code and its own "loopholes" that only accountants know for sure. Learn which ones fit your business. They can add up to thousands of dollars a year. It's your money. Do you want it in *your *pocket, or in the *tax collector's*? I know which one *I *would choose.

Now we do a little tax planning. I am often asked what the difference is between a financial planner and an accountant. My usual reply is, an accountant tells you what your mistakes will cost you. A planner tells you how to *avoid* the mistakes. The accountant is, by training, a historian of sorts. He is most interested in what has already happened. The planner thinks about the future. His training is in making the most of what you have. How to get to where you want to be in the most efficient manner possible. Both accountants and planners have their places in the broad scheme of things. There are even some planners who started out as accountants and took the several years additional training to become planners. Not too many, but some.

Okay, what is "tax planning"?

It's using the tax code to your advantage to pay the absolute least tax legally possible. How? A great example is a retirement account. Here in Canada we have the RRSP, or Registered Retirement Savings Plan. Within certain limits, money put into these plans can be deducted from your taxable income. In other words, if you made $50,000 in taxable income last year, but put $5,000 of it into an RRSP, you only have to pay taxes on the remaining $45,000. Not bad, eh?

But what happens to that five grand? Does it disappear into the ether, never to be seen again? That would be silly, wouldn't it? Instead, it gains interest just like any other bank account (this is a simplified explanation, there are quite a few options as to where the money can be deposited and how it earns interest or other types of income for you). The big benefit to you in addition to it being untaxed is that the income generated inside the account is *also *tax free while it remains in the plan!

Let's take two hypothetical taxpayers, mr. A and mr B. Both make $100,000 a year (lucky devils), both are 29 years old and both are single. (nothing against married folks, I'm married myself. Just want to keep this simple)

Now mister A puts $10,000 of pretax income in an RRSP while his friend mr. B puts the same amount in the same bank and the same kind of account (a 5 year guaranteed interest account for this example), but, his is *non*-registered.

Now let's set some ground rules for the sake of this hypothetical. The interest rate will be 12% and both individuals are in the 50% marginal tax bracket. (I know, 12% is out of sight these days, but it was quite normal, and even low when I started in the industry, and it will be again some day, plus, it makes things easier for this illustration).

Now accountants have a rule of thumb called "the rule of 72". What this means is, if you divide the interest rate into 72, the result will be the number of years it takes for your money to double.

So, using the rule of 72, mister A takes his $10,000 and puts it in his RRSP. Since it* is* a tax deferred plan, he pays *no tax* on the money, so the whole amount goes into the0 account.

Mr. B on the other hand has to pay taxes on the money *before* he gets it into his account, so at a 50% marginal tax rate he only gets to put $5,000 in his savings account. The tax man gets the other $5,000.

So right off the bat mr A has twice as much in his account as mr B.

Now we go 12 years into the future. Both friends are now 41 years old. Both still have their accounts untouched. Neither has put any more into their accounts. (silly boys!) Both are still confirmed bachelors.

Where do they stand?

Mr A has his initial $10,000 plus the interest, which according to the rule of 72 has doubled his money twice, so he now has $40,000 ($10,000×2 x 2). He is still paying no tax on the earnings in the account, so his total is $40,000.

Mr B had his initial amount taxed, so he only had $5,000 to start with. The same rule says his money has also doubled twice, right? However, he has to pay taxes on his income on the account, so his account only doubled once. He now has $10,000 ($5,000×2 x 2 divided by 2 for taxes)

12 more years down the road. Both our friends are now 53 years old. Neither has made any changes to their accounts. They're both still single.

Mr A's account has doubled twice more to a comfortable $160,000, while mr B's has only netted a doubling once after tax to $20,000. (are we seeing a trend here?)

12 more years and both our buddies are 65 and ready to retire. How do they stand now?

Mr A's fund has once again doubled twice for a total of $640,000. Not too bad, eh? Mr B's has doubled only once after the taxman got done with him, so he is left with a total of $40,000.

Now to be fair, Mr B's money has had the taxes paid on it already, so it is all his, free and clear. Mr A's has been sheltered, but if he takes it all out in a single lump sum (the worst possible option tax wise), he has to pay that 50% tax on it. * All* of it. Even then, he is *still* left with a net of $320,000.

Who's better off?

Ah, the joys of sheltered compound interest! * *

If anyone doubts these admittedly hypothetical totals, check them with your accountant or banker. After doing some heavy calculator or computer work, they'll be remarkably close to the ratios I have shown here.

Now to show another fact these figures show, the importance of starting retirement planning* EARLY*!

For this we need only to look at mr A. If he had waited 12 years to start his account at age 41, he would only have *HALF* as much to retire on. ($320,000 total instead of $640,000 pretax)

If he had waited until age 53, it would only be a pretax total of $160,000, a *quarter* of what he would have had if he'd been smart and started back at age 29.

If your head isn't spinning by now, you either weren't paying attention or you got all A's in math. (grin)

Remember, these examples are for a single, one time deposit of $10,000 of before tax income. See how much difference good planning can make?

That's enough for tonight. (heck, I used to get $49.95 a head for that little lecture, filled out a bit more with nice color graphics on the projector screen and a nice brochure that recapped the same info so you didn't have to take notes, but the same basic content) I think I'm going to try to get some sleep.

Good night all.


----------



## NH_Hermit (Dec 3, 2009)

BigTiny said:


> *Okay, what's next?*
> 
> Welcome back all. Sorry for the hiatus
> 
> ...


Sounds to me like good advice for anyone. Folks, this free advice is exactly what I paid good money for fifteen years ago. I'm only sorry I did not read this thirty years ago, but then, life is like that.

Stay healthy, Tiny!


----------



## scrollgirl (May 28, 2010)

BigTiny said:


> *Okay, what's next?*
> 
> Welcome back all. Sorry for the hiatus
> 
> ...


Thanks BT! I am just getting ready to get my taxes done. I am still on the first step - paying back start up costs and tool costs, but I will certainly be able to use your advice soon. Oh, to be 29 again! I suppose I am what you call a 'late bloomer', but this is good advice and will be very helpful to many. Thanks so much!

Sheila


----------



## wseand (Jan 27, 2010)

BigTiny said:


> *Okay, what's next?*
> 
> Welcome back all. Sorry for the hiatus
> 
> ...


This is some great information BT. Every tidbit of info a guy/gal can get on starting a business is so helpful. You are going beyond that to give a excellent foundation to start with. I appreciate you taking your time to share your knowledge with the rest of us.


----------



## majeagle1 (Oct 29, 2008)

BigTiny said:


> *Okay, what's next?*
> 
> Welcome back all. Sorry for the hiatus
> 
> ...


BT, thanks so much for this so valuable information and taking the time to post it here for the benefit of LJ's.

This kind of information may be known to the majority of the folks here, but, if it even helps a small percentage of us dedicated woodworkers, then we are indebted to you! Also, like John said, many of us also might have heard this information years ago, didn't understand then or it didn't "click". This is just the kind of thing that brings it to the forefront again and maybe this time it will "click".

Thanks again and take care of yourself, your health and comfort is important. We will all be here when your feel like and/or are able to continue your "lessons".


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *Okay, what's next?*
> 
> Welcome back all. Sorry for the hiatus
> 
> ...


Thanks for the positive feedback all. It's nice to be appreciated. (grin)

I always thought of my job as being a teacher, as it is easier to use information when you understand "why" and not just "how". I tried to get across to my clients the information they needed to make the right decisions in building their own financial picture to achieve their monetary goals in a timely manner.

Sheila, don't forget that any interest on the purchases of your tools and such at start up is deductible. (I just can't turn it off here!) (grin)

Have a great day today and a better one tomorrow.

Paul


----------



## BigTiny (Jun 29, 2010)

*Keeping it in its place*

Good evening group.

Tonight we talk about the separation of business and personal. No, I don't mean keeping your spouse out of the shop. I'm talking about *money.*

One of the very first things you need to do is set up a separate bank account for your business. Then *keep *it separate.

This means, for instance, if you need to "top up" the business account to cover some expenses, you do *not* pay that expense out of your personal account. You "lend" the business the money, then deposit into the company account, then draw a cheque from it to pay the business expense. When there is enough in the business account to recoup that money, cut yourself a check and note it in the books as "loan repayment." If you get nothing else from tonight's ramblings, get this: keep track of your business money and keep it separate from your personal funds.

You should go so far as to pay yourself a wage (once you're doing well enough to do so". * Never* just take out "a few bucks to tide you over". This is a bad habit. Exercise some self discipline. Getting into bad habits like this will give your bookkeeper prematurely gray hair and make the tax man your permanent guest.

If you worked for someone else and helped yourself to company funds, you'd get arrested! Treat yourself like an employee.

Now this doesn't go only for the bank account. You should have a separate business credit card too. (and for the love of hardwood, do *not* carry a balance from month to month. Credit cards are great if you pay them off *on time*. It's like getting a free loan for the balance for about a month, but if you carry a balance, you are paying horrendous interest rates. )

Use the company card to pay for such things as gas for the business vehicle, business entertaining, buying tools or materials and so on. Cash is for birthday cards to grandkids. Plastic is the modern way, and you automatically get a receipt without having to ask for one.

If the receipt doesn't list what the purchase was, write it on the back right there and then. You don't need to go into too much detail. "Dinner for Harry Doe, potential client" is enough, we don't need the menu.

If you are buying things with different tax classifications, make it easier on the bookkeeper and get separate receipts. Things like power tools are written off over a number of years as depreciation, while consumables like nails and screws can usually be written off immediately. This point isn't critical, but it'll make the bookkeeper's life a bit easier. Since you may be your own bookkeeper at first, it's your own life that will be easier. (grin)

At first, when you don't have a registered business name and such, how do you go about getting such a separate account? Talk to your banker and explain what you are doing. He will probably suggest another account much like what you have now, with the only difference being where your present checks read "John Doe, 123 Any Street", the new ones could read "John Doe, Woodworker, 123 Any Street". Simple, minor difference, but it tells those who receive one of these checks that they are dealing with a *businessman.*

When you are doing well enough to have money left at the end of the month (instead of month left at the end of the money), it is time to decide where to keep it. Do not keep it in the company account. Half a month to a month's worth of transactions is a good rule of thumb as to how large a balance you need. This avoids bounced checks and rushes to the bank to make a deposit in time to beat a check there.

By now you have decided on how much you will pay yourself each week. Any excess should go into a short term interest account of some sort. Your bank manager is a good adviser on what kind is best for your circumstances. Make sure it is earning you some interest and yet can be accessed in an emergency. Something like a major power tool going boom at just the wrong time. (remember Murphy's law?) This account should still be in the company name, not yours. That way the interest earned is income to the business and will usually be taxed at a lower rate than your personal tax rate.

Well, it's nearly 3:00 A.M. here and I need my beauty rest or I tend to scare small children, so goodnight to all.

Paul


----------



## scrollgirl (May 28, 2010)

BigTiny said:


> *Keeping it in its place*
> 
> Good evening group.
> 
> ...


You hit on one of my biggest issues - separating business from personal. Since my business is a "sole proprietorship", when I started out I was kind of led to believe that they were pretty much one in the same, so I figured it wasn't "that bad". As my business is growing however, I can see how it can get confusing.

It is very difficult when you are struggling to separate the two. Bills need to be paid and if the business account is where the money is, it needs to be used. With the month to month being so erratic (one month could be great and another very slow) it adds to the difficulty of working on a typical 'budget'. Until you build enough capital to cover those day to day expenses on the slow months, it is hard not to use whatever money is there to keep things going.

Ideally, I think the business should have a reserve to cover the slow months without touching the 'personal money' but what do you do until you get to that point? Any suggestions?

Thanks again for a great blog.

Sheila


----------



## anjelahills (Mar 7, 2011)

BigTiny said:


> *Keeping it in its place*
> 
> Good evening group.
> 
> ...


I was very encouraged to find this site. I wanted to thank you for this special read. I definitely savored every little bit of  it.

Maple Syrup Diet


----------



## NH_Hermit (Dec 3, 2009)

BigTiny said:


> *Keeping it in its place*
> 
> Good evening group.
> 
> ...


Again, some good advice! This one takes discipline as one goes thru the busy business of daily living.


----------



## chrisstef (Mar 3, 2010)

BigTiny said:


> *Keeping it in its place*
> 
> Good evening group.
> 
> ...


Big Tiny .. you hit the nail on he head with this one. Fresh out of college i started worked for a company that seemed to be growing in leaps and bounds every year. After a few years in the field i ended up in the office as an estimator. Right then and there i knew somethin was up. I was green (and still am) but i had just finished business school and somethin smelled rotten. The owner was using the company account as a personal checking account, putting everything on credit cars, and paying peter with paul's money. Needless to say the company and i parted ways and 2 years after that they folded up. Keeping your personal account and your business account is supremely important. Both for business and health.

Well written and well explained Tiny


----------



## Bearpie (Feb 19, 2010)

BigTiny said:


> *Keeping it in its place*
> 
> Good evening group.
> 
> ...


I think this is the "KEY" area where most new business owners have problems with (I, for one) and it is very difficult to get out of once you start without a lot of discipline. I can attest to that! Good blog Paul! (I hope you are not the Paul I used to rob to pay Peter?) 

Erwin, Jacksonville, FL


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *Keeping it in its place*
> 
> Good evening group.
> 
> ...


Greetings all.

Thanks again for the positive feedback.

Sheila, your point about having a cushion to get through the lean months is a good one. I know that it can be tough to keep your head above water when the bills keep coming but the jobs don't. All I can say is to hang in there and try to keep busy. Maybe do some lower paid stuff you normally wouldn't bother with until thinks pick up again. Anything to keep the cash coming in.

Bearpie: yes, I *am* the Paul you used to rob to pay Peter, and I want it *back*! (grin)


----------



## woodspark (May 8, 2010)

BigTiny said:


> *Keeping it in its place*
> 
> Good evening group.
> 
> ...


Thanks for the advice and effort Paul.


----------



## boardmaker (Mar 8, 2011)

BigTiny said:


> *Keeping it in its place*
> 
> Good evening group.
> 
> ...


Great Blog,

I appreciate the advice.


----------



## BigTiny (Jun 29, 2010)

*A place for everything*

Good evening group.
Today we look into record keeping among other things.

First and foremost, you must have a secure place to keep your records. A good filing cabinet is a great start. It should be a *minimum* of three drawers and four is better. Why not build one? They're an easy build. I once did one with nothing but a Skill saw and a router. MDF covered in plastic wood grained laminate. Still have it some 29 years later and it still serves its purpose..

*Organize* your files! Keep your gas receipts separate from your wood receipts. Use file folders for each type and have one for each month. At the end of the month, put a new set in front of the old ones and total the old ones up for the past month, then enter the totals in your books. This way you don't get caught in a mad scramble at tax time. It also helps with knowing where you are financially at any time. Remember to put your papers away *every day*! Don't let the sun set with papers in your pocket!

Once you have done your books for the year, retire the file folders to a storage box labeled with the year and what you have in the box, such as "1999, receipts" or "1999, sales slips" etc. This way you can quickly lay your hands on any piece of important paper in moments. This can settle disputes with suppliers, customers, the car dealership's repair shop or even the tax man.

Retain these files at *least *five years, more if you want, but *never *any less.

If a receipt isn't clear as to what it is for, write that information on the receipt. Don't trust your memory to be enough to keep track. (I know I've mentioned this before but it fits here too)

These files are like a history of your business, and as such are valuable information and should be treated as such.

Another important point, replacing these records in the case of their loss through fire, flood or other disaster would be well nigh impossible, so* make backup copies*. Use a scanner and transfer them to a computer CD-ROM disk. Store these disks AWAY from the business. Your home if there is no other option, although the safest place is a safety deposit box. They are quite inexpensive to rent, and the rent is tax deductible. A lot cheaper solution that having your accountant rebuild the records at his hourly rate.

Well, this should give you some basics of getting into the world of business. This is nowhere near a complete course on the subject, but remember, I have had to talk in generalities in light of this being a multi-national forum and what works in Rome doesn't necessarily work in Carthage.

I may add another chapter or two to this blog if I come up with something general enough to be of interest to all.

Have a great today and a better tomorrow.

Paul


----------



## scrollgirl (May 28, 2010)

BigTiny said:


> *A place for everything*
> 
> Good evening group.
> Today we look into record keeping among other things.
> ...


Again, Paul - you are right on the money! (Pun intended!) I did do pretty well last year with keeping my receipts for just about everything and it made a world of difference in figuring things out this year. I don't have all that many receipts because my business is small, so I have one of those 12 month accordion folders and I just put everything in there. I didn't run totals after each month, but I do intend to do that this year and made up a little spread sheet each month as I go along. That will take the work out of doing it all at once the end of the year. I plan to dedicate one day per month as a day to do my books and stick to it. It really shouldn't take me more than an hour - even less if I am organized, and it will make things much easier next year when I do my taxes. I have set up an alert from my Google Calendar to remind me every month. Sometimes that is all I need. 

All your advice has been very helpful. No matter how busy we get, we need to take time to work on this part of our businesses. A little effort now will save a load of headaches later.

Thank you so much for taking the time to write this blog. I am sure that many people have benefited one way or another from it. I know I have.

Sheila


----------



## Edwin (Mar 11, 2010)

BigTiny said:


> *A place for everything*
> 
> Good evening group.
> Today we look into record keeping among other things.
> ...


Thank you Paul that's good advice. I for one am not a good record keeper, just a cardboard box I kinda throw stuff that I think is important into it. As for your receipts if you *leave them in your truck long enough *they will fade and all you have is a blank piece and wonder what the @#$% is this from… Geez… Any way I will take your advice. Ed in Port Republic 08241


----------



## woodspark (May 8, 2010)

BigTiny said:


> *A place for everything*
> 
> Good evening group.
> Today we look into record keeping among other things.
> ...


Thanks for the blogs Paul! I am guilty of many things you mentioned but this series should get me motivated to do more!


----------



## HorstPeter (Aug 27, 2010)

BigTiny said:


> *A place for everything*
> 
> Good evening group.
> Today we look into record keeping among other things.
> ...


Again, thank you. There are some really important things in your blog posts that might seem simple, but if you think about them for a second, you realize just how much of a difference they will make. Mentally as well. I'll try to take it all to heart.


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *A place for everything*
> 
> Good evening group.
> Today we look into record keeping among other things.
> ...


Hi all.

Again, thanks for the feedback.

Sheila, those accordion folders are great for an operation like yours. All I would advise is to do the scan and CD ROM thing, just in case, and store the disks somewhere *away *from home. No sense doing backups if they can be lost in the same disaster, eh?

Edwin, the truck is* not* a suitable storage area for your paperwork! If the truck were to get stolen (I live in the auto theft capital of Canada, Winnipeg) your receipts are gone with it. *Not *good. It takes seconds a day to bring them in and put them away where they belong. Start doing it daily and you'll soon get into te habit and do it without even thinking about it. It just becomes part of your routine.

Div my friend, we *all* need motivation from time to time. If I've been able to provide some to those reading my blog, I'm happy. It's what I *hoped* to do with this series.

HorstPeter, there are no "great secrets" to becoming successful in business. It's 99% hard work and 1% common sense. However, I've found that "common sense" is seldom common. (grin)

Paul


----------



## BallardPops (Mar 4, 2011)

BigTiny said:


> *A place for everything*
> 
> Good evening group.
> Today we look into record keeping among other things.
> ...


Hi Paul - Great Advice! Now if I can just get my office mucked out enough to get to the file cabinet I can muck it out and get rid of the 15 year old files in prep for the new ones. Good seeing you over here. Look for you over at the other place.

Pops


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *A place for everything*
> 
> Good evening group.
> Today we look into record keeping among other things.
> ...


Hi Pops. Welcome to my other home away from home. It's no secret on either LJ here or over on Tommy's board that I hang out in both establishments.

This place has a lot more photos while Tommy's gets into the discussions more. Both are great and seem to compliment each other. I'm sure you'll enjoy your time here too.


----------



## scrollgirl (May 28, 2010)

BigTiny said:


> *A place for everything*
> 
> Good evening group.
> Today we look into record keeping among other things.
> ...


I just wanted to follow up. Just to show how simple it can be to get organized. I found some printable ledger paper here" http://incompetech.com/graphpaper/ledger/ ". It gives you several choices with number of columns, etc. All you need is a pocket folder for paper receipts and the ledger to write down expenses and income. What can be easier?

Thanks again, Paul! 

Sheila


----------



## BallardPops (Mar 4, 2011)

BigTiny said:


> *A place for everything*
> 
> Good evening group.
> Today we look into record keeping among other things.
> ...


Hi Sheila - Great catch on that FREE printable ledger paper!

Hi Paul - I'm glad you brought up this place over on Tommy's board. Both look to be very interesting to me. I will keep following both places. Now, back to checking out more shop pics. I love to look at other shops and get some good ideas.

Pops


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *A place for everything*
> 
> Good evening group.
> Today we look into record keeping among other things.
> ...


Hi Sheila.

Thanks for adding the very useful downloadable forms to the discussion. This is what LJ is all about, friends helping friends.


----------



## BigTiny (Jun 29, 2010)

*know the tax codes*

Hi everybody.

Here's an example of how you can make the tax laws work *for *you for a change, and therefore the importance of knowing them, (or at least knowing someone else who does).

Here in Canada, we have what is called a registered retirement savings plan (RRSP). It is a tax deferred way for people to save for their retirements.

For this example we will look at someone who has both an RRSP and a mortgage. First, let's look at some background information.

As you are most likely aware, mortgage rates are normally about 2 percentage points or so above term deposit rates for the same period. This is a fact we will take advantage of in our example.

Our taxpayer wants to set up a "self managed" RRSP. As long as certain terms are met, this is perfectly legal.

Why you ask?

I'll tell you.

By opening such a plan, he can put his mortgage into the plan, and thus pay *himself!*

The advantage? A mortgage earns (as an example for this exercise only) 5% interest on a five year term, while a term deposit earns only 3%. By buying his mortgage into his retirement plan, he earns an additional 2% on his money, which can be a considerable difference on the amounts involved and over a number of years. If we assume he has a $100,000 mortgage in the plan, that's about $2,000 a year *more* he has in his retirement fund.

Not too shabby, eh?

Now this has been simplified for purposes of illustration, but the idea is valid and is in common use here.

Other countries have their own plans and rules (of course), but the idea of learning how to use the tax codes to your best advantage remains the same no matter *where* you live.

Have a great today and a better tomorrow.

No go out there and *make *a buck!

Paul


----------



## fernandoindia (May 5, 2010)

BigTiny said:


> *know the tax codes*
> 
> Hi everybody.
> 
> ...


OK Tiny, you convinced me.

I will give out wood working and dedicate to finance then, 

Take care


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *know the tax codes*
> 
> Hi everybody.
> 
> ...


Hey, if you really have the calling, it's a growing field and there's good money to be made in it.

Of course, the training takes a number of *years*.

Whatever you decide to do, do t with style! **


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *know the tax codes*
> 
> Hi everybody.
> 
> ...


Hi Barry.

As I said right in the title of this episode, "*Know *the tax codes". I also pointed out that this was a Canadian example. My point is that a good knowledge of the codes can be put to use to your advantage. It isn't necessarily a retirement plan that will fit your particular situation, but there are many other parts of the various tax codes in the varying countries our members live in that *can* be utilized in such a way as to reduce the taxes paid while remaining *legal.* In no way would I ever advise *anyone *to break the law, or even to bend it. Not even a little bit.

I appreciate the feedback. It shows that people are reading this blog and taking enough interest to think about it and to see if anything I've posted would help in their own situations. This is great, as it shows I am achieving what I wanted; getting people understanding that running a business in wood working involves *much *more than making things out of wood.

I see from your user name you are a fellow Cessna pilot. Remember the comment from ground school: "When you want to become a pilot, *one *of the things you should learn along the way is how to fly an airplane."? It meant there were many other aspects in getting your ticket. Meteorology, theory of flight, aero engines, radio, navigation, air regulations and so on. The physical act of actually flying the aircraft was only one small part of the complete course. You probably had only about 20 hours or so of dual instruction in the aircraft (I'm guessing a Cessna 150, due to my size I had to use a 172) compared to about 50 or more hours in the classroom. Here, I'm sort of like a ground school instructor, showing our members here a few ideas that, on their own, won't help them that much, but if successful will get them thinking about paying more attention to another very important part of their business, the financial part. If they learn the importance of good record keeping, of keeping their personal and business finances separate, and that a good tax adviser can save them some serious money, I've done what I set out to do.

Thanks for taking enough interest in the topic to point out one difference between American and Canadian tax law.

So, you getting much Cessna time in these days? Sadly, my ticket is history since I had a couple of heart attacks a few years back. These days I do my flying with an eight foot span scale model of a deHaviland Turbo Beaver, which I started constructing recently. It ain't the same, but it's better than nothing. (sigh)

Paul


----------



## BigTiny (Jun 29, 2010)

*A little exercise/*

As the title says, this is a little exercise. Don't worry, you don't need gym equipment for this exercise and you shouldn't even break a sweat.

This is a *financial *exercise to prove a point, mainly that you don't know where a *lot *of your money goes.

Now for the details… If you decide to actually do this, no cheating please. You'll only be cheating yourself

I want you to get a new pocket sized note book. In this book you are going to list *every penny *you spend over the next week. *Every penny! *List the date, time, amount and what it was spent on. The amounts should be in the right hand column and either in a different color ink or in bold or underlined so they stand out and won't be missed.

At the end of the week, total up all the money, and then do a total of the purchases you didn't absolutely *need. * Now figure that out as a percentage of the total. That last figure is the one that will raise a few eyebrows.

Now when I say "absolutely need", I do not mean a cup of coffee because you were having a caffeine jag. I mean things you really *need, *either as a home expense or a business expense.

Nobody needs to post their results here. This is strictly between you and your conscience. I think the results will surprise many of you. I ran this exercise in a company head office once, for the senior members of the company, and the average amount that fell into the "miscellaneous" file was about 30%. In other words, about one third of all they spent went on things they didn't need. Guess where the first place to look for extra money for something you want, like a new tool or some nice hardwood might be? You got it, first try! That unexplained drain on your wallet.

I know doing this is inconvenient. That's why I use a week as the time period instead of a month which would be even better as the amounts are larger and have a bigger impact. Still, give it a try and see where *you *can cut out some little drains that add up over time, and redirect that money to a more constructive use.

Have a great today and a better tomorrow.

Paul


----------



## scrollgirl (May 28, 2010)

BigTiny said:


> *A little exercise/*
> 
> As the title says, this is a little exercise. Don't worry, you don't need gym equipment for this exercise and you shouldn't even break a sweat.
> 
> ...


Hi, Paul:
As you know I am going away this week on a business trip for several weeks. I am going to pass on this exercise until I get back and my life gets back to "normal".

However, with that being said, I want to tell you how much I agree with you as to how important this type of thinking is. Several years ago, I found that I was a bit overextended financially. It filled my life with stress that could have been easily avoided had I been thinking along these lines.

Since getting things under control, I have adopted a "*want* vs.* need*" strategy that I do live by every day. If I see something that I am going to buy, I stop and ask myself "is it a want or a need?" and I take a closer look at the big picture of my life (can I really afford it if it is a want?) This only takes a few seconds, but has saved me a LOT of money and helped me make some better financial decisions that would have otherwise caused me stress.

Now I am not saying that I never choose the "wants", but I do so when it is appropriate for me to do so (when I can afford them!) and helps me stay out of trouble. It is good to be honest with yourself in this way and a great habit to get into.

Great advice from you! 

Sheila


----------



## davidroberts (Nov 8, 2008)

BigTiny said:


> *A little exercise/*
> 
> As the title says, this is a little exercise. Don't worry, you don't need gym equipment for this exercise and you shouldn't even break a sweat.
> 
> ...


Good topic. I propose another column labled "What were you thinking", as in "WHAT WERE YOU THINING, YOU BIG DUMMY"


----------



## SST (Nov 30, 2006)

BigTiny said:


> *A little exercise/*
> 
> As the title says, this is a little exercise. Don't worry, you don't need gym equipment for this exercise and you shouldn't even break a sweat.
> 
> ...


That IS a great exercise. I used to use that tool back when I did financial planning to help families find the money they needed to either invest for retirement or insure for needs. It's amazing how much money we all fritter away on stuff that is relatively unimportant. 
Now that I'm not doing the planning stuff any more, let me put it in a way that we LJ's can relate to: Do this exercise for a month and see how much fluff you have in your budget, then use that money you found to go out & buy a new tool for your shop. -SST


----------



## woodspark (May 8, 2010)

BigTiny said:


> *A little exercise/*
> 
> As the title says, this is a little exercise. Don't worry, you don't need gym equipment for this exercise and you shouldn't even break a sweat.
> 
> ...


Hey Paul! A Very good suggestion indeed. I'll certainly give it a go. Now, I am just wondering if I can convince SWMBO to do the same….


----------



## lanwater (May 14, 2010)

BigTiny said:


> *A little exercise/*
> 
> As the title says, this is a little exercise. Don't worry, you don't need gym equipment for this exercise and you shouldn't even break a sweat.
> 
> ...


Paul,

I am sory to say that I am going to cheat before even starting…

I mentally did the math and everything related to tools and woodworking was in the absolutely needed(I don't make a penny from woodworking).
Clothing, food etc… was somewhat needed.

Seriously that's a great excersise to do.

thanks.


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *A little exercise/*
> 
> As the title says, this is a little exercise. Don't worry, you don't need gym equipment for this exercise and you shouldn't even break a sweat.
> 
> ...


I used to tell people that if they see something they just can't *live *without, go back *tomorrow *and buy it.

You'd be surprised how often something you just can't live without today you can't be bothered going across the road to buy tomorrow.


----------



## BigTiny (Jun 29, 2010)

*Getting a jump on going pro*

Here's a little tip for those of you thinking of going pro, either as a business or in retirement for extra cash.

Start keeping track of the materials you use in a project and the time it takes to make them, *now. *Even better, break it down into sections, like planning phase, layout, cutting, jointing, assembly and finishing. This information will be priceless when it comes to estimating prices on projects for your clients.

Don't forget to include such things as waste (if you take 6 feet out of an 8 foot board, you charge the client for the entire 8 feet) and such things as glue, nails, screws and so on. They add up.

Having this information to draw on could make the difference between making a profit on a job or losing money. Nobody wants the second to come along, so you gotta know this sort of thing.

Paul


----------



## Ken90712 (Sep 2, 2009)

BigTiny said:


> *Getting a jump on going pro*
> 
> Here's a little tip for those of you thinking of going pro, either as a business or in retirement for extra cash.
> 
> ...


Big Tiny you couldn't be more correct. I have started doing this, being people are always asking me to make something or how much for this and that? I'm presently keeping real close track on an Entertainment Center I'm building just in case. Cutting boards was my big wakeup call. Keeping track of everything. Even out electric bill went up from the planer, saw, drum sander ect ect.. Not sure I want to make a career out of it but good advice as none of us want to work for free or lose money.

I have gotten over worrying about price I feel is fair for me to make something. I tell them well I could charge you what I make at work if you like…. LOL

Thx for the post good to hear from you again.


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *Getting a jump on going pro*
> 
> Here's a little tip for those of you thinking of going pro, either as a business or in retirement for extra cash.
> 
> ...


I think what a lot of new pros forget is to include in such things as maintaining tools and even, yes, sweeping the shop floor. These things *have *to be done, and if you don't bill for them, it's *you *that pays for them in lost time that could have gone into a revenue producing project. My suggestion would be to figure out what percentage of your time goes into such things and then mark up your time estimates by that amount.


----------



## BigTiny (Jun 29, 2010)

*Retirement planning and timing.*

Here in Canada, we have the *RRSP* or registered retirement savings plan. I'm sure the USA has something very similar. It is basically a savings account that allows deposits to be made each year and then allows you to deduct the deposit from your taxable income. The amount you can deposit eac year is limited by a number of factors that aren't important to today's discussion.

That topic is *timing.* If you are like most people who take advantage of this program, you make your deposit at the end of the year. This is the *worst *time to do it! For one thing, this puts a rather large payment right at the worst time of the year, when the Christmas bills are coming in and the heating bills are hitting the ceiling. For another, it means you are losing an opportunity to put away more money than the maximum and do it *legally!*

How can we put away more than we're allowed? Easy! If you put the deposit away at the beginning of the year, by the end of the year when everyone else is making their deposits, you have the same amount as they do, *plus *a year's *interest!*

In Canada there is another method that is slightly off the beaten path, but still within the letter of the law. If you make less than the amount that would allow you to make the top legal deposit, you still make your deposit at the start of the year, but you put in the top allowable deposit, then withdraw the overpayment amount at the end of the year. This way, you have your full legal deposit, the year's interest on it, *plus *the interest on the overpayment sitting in your plan. These days, this isn't a big deal as interest rates are at an all time low, but that ain't gonna last my brothers and sisters. Anyone remember the 80's and 18% mortgage rates? I did one of these for a client back then and it made a difference of a couple of grand for a single year!

As with anything I set out here, this is generalized information only. Before making decissions, please consult your own financial adviser and check up to date local laws and statutes. It's easy to make a mistake that could cost you.

Yes, timing is important, but even more important in saving for your retirement is to *do *it! You know how much you'll have come your retirement if you just sit there and think about it?

*Zip!* So no matter when, open a plan according to your country's laws and make a deposit! If you can't afford to make the maximum allowed deposit, put in *something! *Compound interest can work wonders, but it needs *something *to work on.

Have a great today and a better tomorrow.

Paul


----------



## a1Jim (Aug 9, 2008)

BigTiny said:


> *Retirement planning and timing.*
> 
> Here in Canada, we have the *RRSP* or registered retirement savings plan. I'm sure the USA has something very similar. It is basically a savings account that allows deposits to be made each year and then allows you to deduct the deposit from your taxable income. The amount you can deposit eac year is limited by a number of factors that aren't important to today's discussion.
> 
> ...


Your whole series has great advise. If only I would have been smart enough to know all that have put forward and do it before retirement age. Now I'm like many others trying to figure out how to live on Social security. If your young enough listen to Paul and take his advise so your not in the same situation when your at retirement age.


----------



## Popsnsons (Mar 28, 2010)

BigTiny said:


> *Retirement planning and timing.*
> 
> Here in Canada, we have the *RRSP* or registered retirement savings plan. I'm sure the USA has something very similar. It is basically a savings account that allows deposits to be made each year and then allows you to deduct the deposit from your taxable income. The amount you can deposit eac year is limited by a number of factors that aren't important to today's discussion.
> 
> ...


Amen brother…and get the kids to start thinking in that mode early in life. They'll thank you down the road.


----------



## pjones46 (Mar 1, 2011)

BigTiny said:


> *Retirement planning and timing.*
> 
> Here in Canada, we have the *RRSP* or registered retirement savings plan. I'm sure the USA has something very similar. It is basically a savings account that allows deposits to be made each year and then allows you to deduct the deposit from your taxable income. The amount you can deposit eac year is limited by a number of factors that aren't important to today's discussion.
> 
> ...


Unfortunately here in the US there are many who are of the opinion that the government will take care of them. Many do not listen to those that have gone before and we also must change that mind set. My parents came from Canada to the US back in the 20's and instilled in their kids a work ethic which is fast becoming a thing of the past.

You must put away today for those tomorrows to which you look forward. It is no joke, every penny will grow and in 25-40 years you will be rewarded.

Thanks for the reminder and the good advice, keep it coming.


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *Retirement planning and timing.*
> 
> Here in Canada, we have the *RRSP* or registered retirement savings plan. I'm sure the USA has something very similar. It is basically a savings account that allows deposits to be made each year and then allows you to deduct the deposit from your taxable income. The amount you can deposit eac year is limited by a number of factors that aren't important to today's discussion.
> 
> ...


If only we could get the younger set interested in this. At 12% interest, $1,000 deposited at age 18 will grow to about *a quarter of a million dollars *by age 65! Wait until age 30 to make that deposit and at age 65 you end up with only about $ 64,000. Do it at age 42 and at age 65 you get back only around $16,000, a fraction of what you'd have gotten if you had done it at age 18.

Looking at it the other way, to get a quarter million at 65, we've seen that the 18 year old only had to put away $1,000. 
Wait until age 24 and it takes $2,000. Age 30 and it's $4,000. By 42 you'd need $16,000 and by 54 you'd have to deposit a whopping $64,000 to end up with the same as the 18 year old fot for his one grand.

Time can be your friend, *or* your enemy. It's *your *choice.


----------



## scrollgirl (May 28, 2010)

BigTiny said:


> *Retirement planning and timing.*
> 
> Here in Canada, we have the *RRSP* or registered retirement savings plan. I'm sure the USA has something very similar. It is basically a savings account that allows deposits to be made each year and then allows you to deduct the deposit from your taxable income. The amount you can deposit eac year is limited by a number of factors that aren't important to today's discussion.
> 
> ...


I wish you were my friend when I was 18! I often wonder why there isn't a mandatory class in high school for financial planning. I think it would set the tone right for young people and even if they slept through most of it, some of it would certainly stick!

Thank you again Paul for a wonderful series and all the great information you are sharing. Your posts are simple enough for everyone to understand, yet by taking small steps the effects can be quite profound to our financial health. Great blog again!

Sheila


----------



## GMman (Apr 11, 2008)

BigTiny said:


> *Retirement planning and timing.*
> 
> Here in Canada, we have the *RRSP* or registered retirement savings plan. I'm sure the USA has something very similar. It is basically a savings account that allows deposits to be made each year and then allows you to deduct the deposit from your taxable income. The amount you can deposit eac year is limited by a number of factors that aren't important to today's discussion.
> 
> ...


Great advise you're giving Paul, while going to school I always had part time jobs and I finished high school in 1959 in 1960 I started working now with my part time jobs I had enough money saved to buy a good 2nd hand car and I still was saving, money grows fast and at the age of 53 I had enough to retired I don't own any money all I have house , vehicles are paid cash after I buy a new vehicle cash I always open a saving account for my next one with good interest and my next vehicle I pay cash instead of paying the finance company I pay in my own account.
But today's kids go to Universities and come out with a dept of $50000 and jobs today are hard to get so it makes it hard for them to save.
I have a grand daughter that will be out next year with $50000 in dept.


----------



## chrisstef (Mar 3, 2010)

BigTiny said:


> *Retirement planning and timing.*
> 
> Here in Canada, we have the *RRSP* or registered retirement savings plan. I'm sure the USA has something very similar. It is basically a savings account that allows deposits to be made each year and then allows you to deduct the deposit from your taxable income. The amount you can deposit eac year is limited by a number of factors that aren't important to today's discussion.
> 
> ...


I can remember working at the lumberyard at 18 years old and can remember my friends old man making him put aside $2,000 each year to put into a Roth and at the time i had no idea what a Roth was. Looking back on it i wish i took some of his advise. I have been fortunate enough to go through business school and come out debt free due to an accident settlement i was awarded at 16 and started my 401k at 25. Putting the money away is a hard pill to swallow at first but once you see it grow it can be very encouraging. Every time i get a raise (which is never enough lol ) i set aside another 1% in the retirement, this way i never realize or feel the money coming out.

Tiny, youve put out some great words of wisdom in this piece and hopefully you catch one of the younger folks and they listen to you.

Sheila, I think you make a great point about putting financial planning in the curriculum at the schools. It woiuld be a huge eye opener to a lot of kids. Hopefully they wont get caught up like everyone else did when they were borrowing the farm before the market took a dump.


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *Retirement planning and timing.*
> 
> Here in Canada, we have the *RRSP* or registered retirement savings plan. I'm sure the USA has something very similar. It is basically a savings account that allows deposits to be made each year and then allows you to deduct the deposit from your taxable income. The amount you can deposit eac year is limited by a number of factors that aren't important to today's discussion.
> 
> ...


The schools and universities are so busy teaching folks how to *make *a buck, they don't bother teaching them what to *do* with it once they *have* it!


----------



## bunkie (Oct 13, 2009)

BigTiny said:


> *Retirement planning and timing.*
> 
> Here in Canada, we have the *RRSP* or registered retirement savings plan. I'm sure the USA has something very similar. It is basically a savings account that allows deposits to be made each year and then allows you to deduct the deposit from your taxable income. The amount you can deposit eac year is limited by a number of factors that aren't important to today's discussion.
> 
> ...


While completely agree with the principle, there's no such thing as sustained, year-after-year 12% compound interest. The people who believed that are cursing themselves for trusting Bernie Madoff with their savings.


----------



## pjones46 (Mar 1, 2011)

BigTiny said:


> *Retirement planning and timing.*
> 
> Here in Canada, we have the *RRSP* or registered retirement savings plan. I'm sure the USA has something very similar. It is basically a savings account that allows deposits to be made each year and then allows you to deduct the deposit from your taxable income. The amount you can deposit eac year is limited by a number of factors that aren't important to today's discussion.
> 
> ...


In most cases, if it sounds too good to be true, then it's probably not true. The point is, that over the long run and not starting with all of your life savings, there will be a gain rather it be 2 ½ %, 3 ½ %, or 12% and the earlier you start the more you gain.

The stock market is a crap shoot and you have to be willing to lose if you invest, but, also what entices people is the high gains which they may accumulate if they are lucky.

The older you get you can't afford to take high risks so extremely conservative approaches must be taken even if the Bernie Madoff's of the world make it sound so easy. It's not easy. Sorry, get over it, you can't get rich quick unless someone leaves it to you or you start at an early age and save, save, save.


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *Retirement planning and timing.*
> 
> Here in Canada, we have the *RRSP* or registered retirement savings plan. I'm sure the USA has something very similar. It is basically a savings account that allows deposits to be made each year and then allows you to deduct the deposit from your taxable income. The amount you can deposit eac year is limited by a number of factors that aren't important to today's discussion.
> 
> ...


I know what you mean about the stock market, having taken a $30,000 hit in the recent collapse myself. Thankfully, most of my assets were out of the market by then, and the stocks I did retain are more that double the value they bottomed out at, so it wasn't a total loss.

I used to tell my clients that they should have a mix of assets, both interest bearing and equity based, and they should slowly increase the interest based portion and lessen their equity holdingsas they got older and less able to weather a downturn in the markets.

Still, even if they had all their savings in the market when it took the tumble, at least they had some savings, which is more than most people can say. North Americans are in debt to a level never before seen today, and when (not if, *when*) rates go back up, a lot of them are going to be facing a lot of trouble trying to pay the interest on those debts.

I feel sorry for them.


----------



## AmandasHusband (Jan 10, 2011)

BigTiny said:


> *Retirement planning and timing.*
> 
> Here in Canada, we have the *RRSP* or registered retirement savings plan. I'm sure the USA has something very similar. It is basically a savings account that allows deposits to be made each year and then allows you to deduct the deposit from your taxable income. The amount you can deposit eac year is limited by a number of factors that aren't important to today's discussion.
> 
> ...


About 5 years ago my dad turned me on to this book Automatic Millionaire by David Bach.

It's a very good book for going over the basics about putting away for retirement and the power of compound interest.

After I read that book I got serious about my 401k and retirement planning. He really harped on putting *atleast* 1 hour of pay every day into your retirement. A mere 5 hours of pay each week. Which comes out to 12%.

It's important. And the sooner one realizes this the better off they'll be come retirement age.


----------



## BigTiny (Jun 29, 2010)

*A couple of minutes very well spent.*

How many of you just check the total and write a check when you get your credit card bills?

*BAD PRACTICE!*

I told all my clients to go over their receipts and check them against the bill* every month.*

Why?
*
Extreme example but true:*

I had a client who took my advice and went over his bills. No receipts, but few enough entries that he could remember what each charge was for. All that us except one. It was a charge for about $50 and it was from a company he didn't know. It wasn't listed in his local phone book either. He spotted the same charge again the next month, so he called the credit card company. After some checking, it turned out this was the parent company of a health club/gym that he had joined on a month by month basis.

*MORE THAN TEN YEARS PREVIOUSLY!*

He had attended on and off for a few months, them just stopped going.

He'd been paying for a membership he wasn't using for more than ten years at a cost of over $600 per year, for a total wasted of more than six thousand dollars!

*Please* people, keep your receipts and take the time to check them against your bill. If someone is making false purchases on your card and you don;t spot it for several months, you could be held responsible for anything more than the current month.

It takes only a couple of minutes and can save you a bundle.

After all, it's* your* money!

Have a great day and a better tomorrow.

Paul


----------



## roman (Sep 28, 2007)

BigTiny said:


> *A couple of minutes very well spent.*
> 
> How many of you just check the total and write a check when you get your credit card bills?
> 
> ...


just b4 the fat bastard popped….......aka world economic meltdown hit the #@itfan

i told every one to buy bullion

and they said "bogus"

it was trading at 300/oz

.
.
its far exceeded my expectations of 900 $$$ an oz and might peak at 2K

hmmmphffff

trust me, I often tell my clients


----------



## MsDebbieP (Jan 4, 2007)

BigTiny said:


> *A couple of minutes very well spent.*
> 
> How many of you just check the total and write a check when you get your credit card bills?
> 
> ...


Good advice.


----------



## BigTiny (Jun 29, 2010)

BigTiny said:


> *A couple of minutes very well spent.*
> 
> How many of you just check the total and write a check when you get your credit card bills?
> 
> ...


I had much the same thing happen to me with the guy who got me started in financial planning 35 years ago. He told me to hock my soul and buy gold. It was under $40 an ounce then. He bought 2,000 ounces by mortgaging his home. I thought he was nuts and ignored him because gold had been stable for many years.

Six months or so later, when it topped $700 an ounce, he sold half of his and paid off his home and all his debts and pocketed a nice profit to boot. Plus, he still had the other 1,000 ounces left!

The fun part was, he did it all *tax free! Legally!* I won't go into how, but it was what got me interested in my future profession.


----------

