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-So I'm going to ask-- this is kind of a blanket, but kind of a big one here. Last question I want to ask you about this. Because this is huge. If you're sitting down with me and I'm an entrepreneur, in what ways-- as a general rule, because you work with tons of clients all over the country-- if I were to hire you and I'm sitting down meeting with you, what are the ways, it's kind of broad brush, where most entrepreneurs are just wasting cash, losing cash, spending money on liabilities where we need to just-- what are some areas that most of us are just wasting cash.
-Well, a lot of times in the business, we'll take money out of the business to be able to buy the stuff for our wife that we've always wanted to do. We've got some cash here. Let's start doing this. Or let me buy this boat. Let me-- you know what--
CLAY CLARK: You want to buy a boat.
-I want to buy a boat for my family. Or we have a, hey listen, I've only got a 50 inch TV. And I mean that thing is like three years old. The technology is old. I can get a 72 inch for the same price as I bought that other one. It's a deal. And it's about 20% off. I'm saving money.
CLAY CLARK: I can write it off, I think.
-I'm saving money. I can write it off. And then what do they do? They go out and spend that money. So that money comes out of their business into something that their kids rot their brains in front of as they watch. And TV, I'm sure it's got something-- you guys are watching a video right now, so there's some value to it.
-Better not be watching it on your TV.
TIM REDMOND: As long as it's a 72 inch flat screen TV that you bought with a big loan that you're not sure how you're going to pay off. So the whole idea when you're taking money that you can invest in growing your business so you can have more, create the momentum going, what you do is when you justify spending money on stupid stuff that really doesn't help you build the money-- early in your business you want to be able to create the momentum so that-- what happens to that guy making $1,500 a week?
What if he started $6,000 or $8,000 or $10,000 a week?
-It blows my mind. I almost wanted to cry, seriously, yesterday I'm talking to the dude. I'm like, are you kidding me?
-He is spending 50% to 60% of his income to buy this house, to build this house. What happens if he's getting $10,000 a week, $40,000 a month. And you can do that. And then now we're only talking about 10% of his income.
-Here's where this principle kind of takes it back to the beginning. He talked to his parents before making the buying decision. And he says, mom, dad, what do you think? They said, well, it's the best investment ever. Who are his parents? They're people that haven't saved for retirement. They're people that-- so it's just like this self perpetuating thing. And I'm just pleading with the guy. I'm like, whatever you need to do. Lose your deposit on the house. Just get out of there. Pull out.
-So we ask for advice from people that we don't want to be like. When we get there, we're asking advice from people we love. Now if you love somebody, you want to get advice from them, right? Wrong. You want to get advice from people that have established disciplines and have established decision making processes that can help you grow. I like what Dave Ramsey says. You got to-- what does he say? You got to live like nobody else so that eventually you can live like nobody else. You really have to live below your means, put that money back into the business, grow this thing so it's a big snowball rolling down the hill.
Then now you can say, well, listen. It's only going to be 10% of my income to buy this house, and I wanted to buy this house. It's not too early.
-Now principle three here, I want to ask you about, is we want to avoid death by debt. Tim, we're always hearing about good debt versus bad debt, or that it's good to buy something because you can write it off. You always hear, oh, it's good because you can write off. Tim, what is good debt and do you agree that such a thing even exists?
-If possible, if you're able to get what you need without going into debt, that's better. Because what is debt? Debt is borrowing from the future to have right now. So you're taking your future power, the future whoever you are, you're pulling that from the future to have right. Investing is just the opposite. It's taking what you have right now and you're throwing that into the future so it can grow. But if you have to have debt, I think there's good debt and there's bad debt. Bad debt is when you buy something on credit, get a loan, and it doesn't make you money.
CLAY CLARK: Like a TV.
-Like a TV. Like a boat. Like a brand new car that-- your two year old car that's only got 22,000 miles on it is running just fine. Still under warranty for a lot of it.
-So for those of you who are watching this show on a brand new boat, with a heavily financed TV on the screen-- you're sitting on a boat, watching on a heavily financed TV, and boats big enough to park your brand new car on that you have payments on, shame on
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-That's-- right? That's the bad. Now what's good debt? What's good debt?
-OK so when you go into debt to buy something that's going to make you money, you want to buy a widget maker because you're selling widgets.
-OK, let me give you an example. I have a guy right now I know who-- he's making good money-- making very, very good money. And he does printing. He prints custom signs, banners, t-shirts, that kind of thing.
And he asked me recently, should I borrow some money to buy this new thing. It's called the Chameleon, and I guess it prints a ton of t-shirts-- like a ton of t-shirts-- so he can speed up his efficiency, like, three times. He says, should I buy it?
Is that good debt in your mind? I mean, if the math works on it, is that good debt? To borrow money against the future to buy this machine that will help him make sure it's three times as fast?
-Yeah, I think in many instances, that's a great investment. Because you can see that you're going to be making money off of that. The money you're making is way above the money you're having to spend.
Now I've seen a lot of my clients. They get excited. They got some money. And so they want to spend it on something that makes the increase of their production maybe 10%.
But it's almost like the cost of it was 50%. It's a lot more. And so now, it's like, well they're justifying it.
It's going to make the operations run smoother. But really, if they would just-- it's not a big enough improvement in the production where it doesn't justify it. The future flows-- the money you're going to make from that device-- isn't big enough to justify that expense.
-I see a lot of entrepreneurs where we want to get something for our business, we say. And we try to justify it as good debt. So I'll just give maybe a half-dozen examples here, because I think these are happening all the time. And you probably see it.
You'll see a business owner who has a nice office. And they've decided they want to borrow money to build a brand-new office. In Tulsa, there was a rash of doctors that-- my partner and I, we used to do real estate. I did the marketing, and he did the transactions. He's a licensed broker.
And you meet these doctors who had maybe 40 patients a week, who borrowed money to build, like, the Taj Mahal-- the palace-- the palace. I mean, they were talking about granite, marble, fountains. It's awesome. Like you walk in, there's this water wall. And then they still have 40 customers-- 40 patients-- at the new place.
And it's, like, way overbuilt. They're into debt up to the hilt. You see businesses all the time that are buying stuff that probably doesn't make them money, but they think it makes them money. Describe to me-- is this is a bad thing when someone's borrowing money to buy a new office, but they don't have any customers?
-Right, we were talking earlier about some of your clients that are doctors. And I've had clients like this, too. Where they're in the service business, and what they do is, when they really don't have quite the momentum that they need, they don't have the cash reserve that they need, they don't have this snowball rolling down the hill, getting bigger, and bigger, and bigger. Like you mentioned, one client had about 40 clients, and they bought this huge Taj Mahal of this building, having all these fancy amenities and all that-- those are expenses that aren't making them money.
And it drains them from the core business of growing the core business, marketing, and advertising, and getting on the radio, and getting on the TV, and all these different types of things that help them get more clients where they can afford it. I think it's OK to buy a place if you're in a service business. It's OK to buy a place like this from an excess of cash that you've made over a few years worth of savings.
-But it's just making sure that what you're buying puts more money in your pocket. It goes back to that.
-I remember watching one of my favorite shows on CNBC. It's called "The Profit". This guy comes in and buys businesses, and helps turn them around.
And I remember he went in to buy this car dealership. And this guy spent $4 or $5 million on making this phenomenal car dealership-- this building. They got a place where the kids can play games, and these big-screen TVs. They spent tons of money on this painting.
And The Profit came in and said, how is this making you money? And literally within weeks, against this guy's better wishes, just shoved all that stuff out, got rid of it, turned into merchandise areas. And every aspect of this whole building from being this wonderful experience that wasn't selling any cars. And they turn it into this huge profit center, so wherever they went, there's things to buy and ways to make money. And they turned the whole business around.
-So we keep coming back to that core, that if I'm going to buy something, it better be to make me more money.
-It's got to make you money.
-Now moving on to principle number four. Set up a monthly budget. Webster and his incredible dictionary there, he defines the word "budget" as being the amount of money available for spending that is based on a plan for how it will be spent, or a plan used to decide the amount of money that can be spent, and how it will be spent. What does that mean in real world terms, and what is a monthly budget all about?
-OK. I think budgets freak a lot of people out. We make it this complicated thing, and there's, like, a whole lot of lines and numbers flowing around, and I don't like numbers. I'm just going to push the whole thing away. And when you think about a budget as being a fairly simple thing, it's got three main parts to it. You've got your mandatory obligations.
-So if you went ahead and bought that house, you've got to make the mortgage payments, or you're going to lose the house. So your mortgage payments, and your car payments, and all these payments that you have to make. And then we have our needs. The second thing is our needs, our ongoing needs. So if you have produced offspring, and you have children running around, then you need to feed them and clothe them. And you need to pay the utility because if you're living in a place that gets 40 below, and you don't pay your bills, here, and they turn off your gas.
-It gets 40 below inside.
-Eventually it does, and then it becomes a little bit uncomfortable to live. So we have our needs, and then we have, at the very bottom, we have our wants.
-Now we get confused between what our wants are versus what our needs are. And what we want to have in a budget, a budget without a goal of where you're going, really it's hard to maintain that. So if you have a goal that you want to save up money to get out of debt, or you want to save up money to save money just to have that emergency fund, or have some money for investing, or have money for your kids' education, or have money for that big vacation you want. You don't want to borrow money for your vacation.
-Going to Des Moines. Des Moines, we're coming for you.
-I live in Tulsa, and so we're saving up to go all the way out to Broken Arrow to live it up.
-The camera guys, they took offense to the Des Moines humor. I'll tell you what. Des Moines and Tulsa, where we're broadcasting from here, we kind of compete each year for tourism dollars. It's like, come to Tulsa or Des Moines. I mean, those are the two that really fight it out.
-Tulsa. I think I've been to Dess Moy-nees. It's an exciting place, I'm telling you. Now I forgot what we were talking about. I am thinking about Des Moines right now.
-I'm so sorry. I'm so sorry.
-That's all good. So on these ones, we have obligations, we have needs, and we have wants. We've got to have a goal in our budget to say why do we want to hold ourselves to this? If we don't have a reason to want to follow a budget, we're not going to follow a budget. So you've got to have a really clear cut goal.
-If we don't have a reason to follow a budget, we're not going to follow it.
-Right. So reason number one is I want to live below my means because when I live below my means, I live from a place of power.
-So if I want to take an action step right now, what can I do? If I want to go through and set up a monthly budget, you're saying, one, I have to make a mandatory obligation list.
-What loans or bills have you obligated yourself to make every month.
-And second, is what are my needs? And then third, what are my wants?
-What are your needs? Your needs are just, we were talking about food and shelter, all those kind of basic things that you need to have, like there's school supplies. I mean, I put that in there. And then the wants are those things to say, OK listen. Do we really need a brand new car? Well, you know, it may be that you've got your 1970 station wagon is costing you $800 a month to keep fixing, so that may be a good idea. Do you have to buy a brand new car?
Well, if you're barely struggling, getting by-- if you're making $10,000 a day, go buy a new car. What the heck? But if you're making $10,000 a year, you want to make sure that you live below your means. When you live below your means, well, that's bondage and it's such, it's horrible. The bondage of having less than $12,000 20 years before you die is more of a frightening bondage. It's a frightening thought.
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