Sharing my habits is quite a personal thing, so excuse me if I’m telling you too much.
My accountant is a top bloke. Loyal, reliable, intelligent, honest, all the things one might look for.
He’s my mate.
He’s also prone to grunting to demonstrate his disapproval of my spending habits.
Thing is, I don’t agree with him that my spending habits are all that bad.
Maybe the better word would be “reinvesting habit”.
I suffer from a compulsion to reinvest pretty much all of my Company’s profit directly back into the business. Which means I don’t hold much cash.
The main weaknesses I have are marketing (there is literally no cap on this and it’s the first area I allocate funds), software and staff.
The marketing spending really makes my accountant grunt. It’s kind of like a “grrrrummmphhh” when he tells me what I’ve spent… as if I didn’t know that.
Most businesspeople don’t know how to think – they think like a bean counter. Bean counters are there to count beans, not decide how the beans are spent.
Businesspeople must think like businesspeople.
I.e., their job is to grow the business. “Stay small and die”, is one of my favourite business sayings. If you’re always counting beans, you’re going to stay small.
The other point I’d like to make is that cash is friggin’ worthless until it’s used for something worthwhile.
Other than covering the non-discretionary spending outside your business, the only thing cash enables you to do, is to pay for things. (hint: things that grow your the value of your business or your individual wealth)
Having cash on hand for emergencies – okay. Excess cash? Dumb.
Inflation erodes the value of cash.
Super simple math for you: Let’s say you had $100k saved and are receiving a savings rate of 2%. So, all things remaining equal you should gain $2,000 in interest in that year.
Now for reality…
Inflation is currently somewhere around 5% in Aus, so, given the purchasing power of the dollar decreasing by 5% per year, we need to deduct that from the interest gain we’ve made.
So: $100,000 x 2% = $102,000, less inflation of 5% = $97,000. (okay, okay, nerds out there, this isn’t dollar accurate, it’s approximate and close enough for all the non-nerds)
So if I’m holding excess cash, what good is it doing for my wealth? It’s actually doing nothing for it. I’d even say that it’s causing me to go into reverse.
In contrast, If I reinvested that same $100k into an ad spend, and each new lead cost me, say, $15, I’d receive 6,666 leads, at a conversion over 2-years of 8% and an average deal value of about $4,200 gives me a return over 2-years of more than $2.2m divided by 2 = $1.1m, therefore the first year annual return is 11-times or 1100%.
This is a better return than negative $3,000, don’t you reckon?
I hear you… Not everyone is going to have the confidence to reinvest $100k back into their business or their own investments, but this is how money is multiplied and fortunes are made.
I’d like a fortune, please, and all the trappings, fun, experiences and things that go with it.
The majority of investors (which in essence, I am) stop at their first investment property, or index fund, or one stock holding or one project. They usually spend or save the winnings which are soon taxed or eroded by inflation.
The dumbest thing business owners do is prematurely sell their business, pay tax, lose their cash flow and then start going backwards.
Look at the smart ones, they keep all of their successful businesses and continue to invest in new businesses and on and on and on and on.
This is a critical, vitally important lesson you must get your head around to become truly financially successful, and it’s a lesson that most accountants haven’t and won’t ever learn. They’re not programmed this way, and that’s cool. It certainly doesn’t make them any less important.
If you want to create wealth and financial security, ignore your accountant, invest, invest and invest some more.
Then reinvest and repeat.
You get the picture.
Call me if you want to invest in property and need guidance. You can request a quick 10-minute call with me =>here.
Brodie Brown
Professional Mortgage Broker and Habitual Spender