Five People, One Income, and Self-Made Success

bootstrapping real estate investor
Myth: If you’re supporting 5 people on 1 income (and it’s not a high income), you’re screwed. You’ll never become a business owner or an investor. You’ll be lucky just to pay the bills.

Fact: Ladies and gentlemen, meet success story: Rental Randy.

In my last blog post, I re-emphasized that the best way for two-income couples to turbocharge their savings and investments is to live on one persons’ income, and save 100 percent of the others’. Live like you’re a one-income couple.

This led to a great follow-up question: What if you’re already a one-income family? Specifically, what if you’re a family of 4 or 5, living on one income? What then? (And what if you’re single — a “family of 1″ living on one income?)

Here to answer that question is an Afford Anything reader named Randy, who supports his family of 5 on a single income … and still bootstrapped his way to becoming a successful real estate investor.

Here’s his story, in his own words, completely unchanged / unedited:

Five People, One Income, and Two Years of Savings

I have three children and did not buy my first income property until after my youngest was born. My wife does not share my drive to prepare for our future, which means she does not contribute financially to this cause. I pay the majority of the family bills and I do not have a high paying job. Still, I managed to save enough to get my first property. It took two years of saving every dime (literally) I could.

I have an unconventional life and job and work odd hours so I could be a stay-at-home Dad and primary caregiver for our children. It means I have to live off 4-6 hours of sleep a night and be a walking zombie some days, but that’s okay. I did it primarily so our kids would have a parent looking after them and not a day care employee, but I can’t lie and say the money saved wasn’t a small part of that choice.

You have to start. Just start.

One year, I decided to open a Rental House savings account at my bank. I started with about $25. Every chance I got, I deposited money in that account. Tax return? (having a mortgage and three kids helps there) Straight into the Rental House account. Xmas Gift money? Sorry kids and wife, but no big ticket gifts this year or the next. That money’s going straight into the Rental Home account. Friends want to meet at the local bar/restaurant and have fun? Sorry guys, I can’t go out until I buy an investment property. That’s $30 into the Rental House account.

I didn’t choose to buy a home that was outside my budget — say, the type of home/neighborhood you or I might choose to raise our children. That would be setting myself up for failure. Besides, it offers a sort of built-in excuse for not accomplishing my goal. I chose a price point that worked for me, went to the real estate websites, and searched for properties I could afford.

Then, after I’d saved a few thousand dollars, I went to my bank and asked how much money they would loan me. Remember, I don’t make a ton of money. I was disappointed when the bank offered $10,000 less than I wanted. No problem. I lowered my Rental House budget and kept searching. I found a property that needed a little bit of repair. Between the money I’d saved and the bank loan, I bought the property, fixed it up, and had it rented in two months.

I don’t view the rental income as “income”. It all goes to paying down the debt. The sooner I pay it down, the sooner I can buy more properties. Both my homes are owned free and clear, though I have a few thousand to pay back on a line of credit I used to help fix the second property. Also, I have a bank lined up to provide a HELOC on one of my rental houses. I will use that money (and some of my own savings) to buy my next property.

It can be done. You just have to start. Now. You don’t need a detailed plan initially. Just start saving. Now.

Savings Happens in Small Increments

Boom! Drop the mic!

That was awesome. Thank you, Randy, for sharing your story with the Afford Anything tribe. You rock.

Here are some key takeaways from Randy’s story:

#1: Savings Happens in Small Increments.

It’s tempting to get shell-shocked by a large number. “I need to save $12,000? How on earth can I come up with that?”

But savings unfolds in tiny increments. You save $10 or $20, again and again, until you reach your Mega-Number-Goal.

(It’s like burning calories — you burn an extra 50 calories here, an extra 70 calories there. And pretty soon, these tiny increments have added up to 3,000 calories, and you’ve lost 1 pound.)

(Or, conversely, you nibble on an extra 40 calories here, an extra 80 calories there, and soon you’ve gained 1 pound.)

When people say that they can’t trim their budget any further, my response is:

  • Do you buy red meat, like beef or pork? Swap it with beans/lentils or possibly chicken, and you’ve lowered your grocery bill by $20 – $60+ per month.
  • Do you pay someone to cut your hair? Start trimming your own, and you’ll save $10 – $50 per haircut, depending on the “caliber” of salon you’ve been frequenting.
  • Do you buy orange juice, cheese, and other packaged foods? I love juice, and I used to buy a ton of it. But when I was saving for my round-the-world trip, I knew I needed to cut back. Each time I shopped, before I hit the checkout aisle, I’d put back any juices in my cart and devote that money to my Travel Fund. (I literally kept an envelope with me, marked “Travel.”) That meant I saved an extra $6 each time I hit the store — about $24 per month, or $288 per year. (And these days I make my own fresh juices / smoothies at home.)

There are always ways that you can save more. Remember: there’s a difference between “I can’t” vs. “I choose not to.”

#2: Your Goal is Investing (Earning), Not Saving

Frugality is the first step — not the last.

Nobody penny-pinches their way to wealth. If that were possible, the most miserly, cheapest SOB’s would be billionaires. But they’re not.

Instead, the (self-made) millionaires in our society are the people who build valuable businesses and invest in cash-flow machines. That’s where you focus needs to stay.

Frugality is a means to an end; it’s the method by which you raise your initial investment money — your “seed” money. But you can’t stop there; you need to move to the next step.

Notice that Randy didn’t penny-pinch … and then let his money fester in a savings account. Instead, he bought an asset which will give him monthly cash flow for the rest of his life.

#3: Reinvest Your Profits

Here’s where the magic really happens:

Randy will reinvest the equity from Rental House #1 (plus his “day job” income) to buy Rental House #2. And I’m betting that he’ll use the equity/cash flow from Rental Houses #1 and #2 to purchase #3.

Do you see where this is going?

This is classic “the rich get richer.” Instead of spinning around on the time-for-money-exchange (known as a J-O-B), you create profits — and use those to create more profits.

After a few cycles of this, Randy won’t need to use his “day job” income to buy houses anymore, and he won’t need to appeal to banks. Instead, his houses will start buying more houses.

And at that point, you’ve really won the game.

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Budgeting Tips for Small Business Owners

I mentioned recently that I’m self-employed, which has a huge number of benefits:

  • I work in my pajamas
  • My commute takes 30 seconds
  • I never utter the words “my boss won’t let me …”

It also means my income comes in random spurts.

Most readers of this blog grapple with sporadic income in one form or another. Some:

  • Fundraise for nonprofits or run small businesses. They must budget (at work) for unpredictable income.
  • Earn side-income.
  • Collect commission.
  • Rely on bonuses – which vary each year.
  • Livin’ la vida self-employed. (Okay, my writing’s not as cool as Ricky Martin singing about it.)

This means a lot of my readers — at work or at home —  know the major challenge to sporadic income is keeping track o’ your money.

Checks roll in at random times. Some months are fat, some are lean.

With such sporadic bursts of income, how can you create a budget?

Try This:

1. Find the least amount you earned in a given month, over the past 24 months.
2. Keep your “fixed costs” 20 percent lower than this.
3. Automatically transfer the remaining 20 percent to a savings account earmarked for taxes.

Why 20 percent? It’s a rough but reasonable estimate, given that:

  • The corporate tax rate is 15 percent of the first $50,000 of income and 25 percent on the next $25,000.
  • The individual self-employed tax rate is your standard income tax plus an extra 13.3 percent Social Security tax on the first $106,800.
  • Even charities have to pay taxes on their business-activity earnings.

4. Most months — remember, 23 out of 24 months — you earn more. Earmark this extra money for:

 

  • An emergency fund (for either yourself or your business)
  • Saving for a dream (trip to Bora Bora)
  • Annual Expenses (Christmas gifts, car registration, a Valentine’s Day dinner extravaganza)
  • Retirement (you might live to a ripe old age)

But I’m lazy. What’s the easy way to do this?

Slot certain paychecks towards certain bills. I mentally assign all the income from one client into “trip to Africa savings,” and all the income from a smaller client into “pesky cell phone bill.”

When you’re comfortably NOT living paycheck-to-paycheck and you have a nice cushion that allows you to be lazy, this is a perfectly fine way to budget. It’s simple and easy — just as money should be.

The Biggest Accounting Mistake Small Biz Owners Make


Do you run a small business?

Are you self-employed?

If so, there’s a strong chance you’re among the thousands of small business owners who make this critical accounting mistake …

… and thanks to this one simple error, they never realize how strong or weak their business is.

Yikes!

No, it’s not a mistake that will get you in trouble with the IRS … in fact, tax laws are written in a way that promotes this erroneous way of thinking.

As a result, some small business owners spend their lives never realizing they’re committing this glaring error.

Many small business owners — especially solo entrepreneurs — confuse profits with pay.

They fail to calculate profits AFTER paying themselves. They never account for their own time. They think their business is turning a profit – when in fact, it’s operating at a loss.

What do you mean?

Sally is a freelance writer for a handful of newspapers and magazines. She writes celebrity gossip. Last year, from her home office, she pitched — and got! — lucrative assignments from big-name publications like People magazine, TMZ.com and the Los Angeles Times. She brought in $55,000 last year from her writing assignments. When she sat down to do her taxes, she deducted her “business expenses” as follows:

Professional association dues – $72
Conferences – $500
Smartphone  – $1200
Home Internet – $720
Postage – $500
Home office deduction – $2,000
Land-line Telephone – $120
Mileage – $1200
Flights – $1500
Hotels – $1800
Meals – $700
Web domain and hosting – $80
Total Yearly Expenses: $10,392

Sally subtracts this from her income of $55,000, and reasons that her “Freelance journalism” business made a pre-tax profit of $44,608. Right?

Wrong! Sally Didn’t Make a Profit At All!

But $44,608 isn’t the profit that her business made — it’s simply the pre-tax money that was left over in the business to pay herself.

Let’s imagine Sally had an assistant who earned $25,000 a year doing research for Sally’s stories. Sally would deduct that research assistant’s pay as an “expense” before calculating the profits her business made that year, right?

So why wouldn’t she value her own time?

This is where freelancers and other small business owners so often get it wrong — they fail to value their own time in the same way they would value an employee’s time.

How Much Is My Time Worth?

Let’s imagine that Sally were to decide freelancing is no longer the life she wants. She applies for a job. During the interview, HR asks for her salary requirements. Without hesitation, Sally says: “$50,000 a year.”

She’s making a statement that $50,000 per year is what she feels her time is worth — about $25 per hour in a 2,000 working-hour year (40 hours per week x 50 weeks per year).

Why wouldn’t she make that same demand on her own company?

Sally is an employee — the ONLY employee — at her writing business.

So what if Sally were to “pay herself” as though she were her own employee? Then she would realize that she didn’t make a “profit” of $44,608 last year.

In fact, after paying herself $50,000, her freelance writing business actually LOST money, to the tune of $5,392. Her business isn’t in the black (profits); it’s in the red (debts).

How can she pay herself more than she earned?

But if Sally were to put herself on a salary of $50,000 a year, how could she pay herself $5,392 more than her business earned?

Her business would need to borrow money in order to pay it’s one employee, Sally.

If Sally doesn’t want to go to a bank (they’re not keen on lending to freelance writers), she’ll have to borrow money from herself in order to pay herself.

Borrow Money from Yourself?

Borrowing money from yourself, in order to pay yourself, is a strange mental hurdle.

“What’s the point?,” you might ask. “It ultimately comes to me.”

Yes. But you need to keep your business finances separate from your personal finances. You deserve to be earning a salary. Your business needs to pay you.

And your business also doesn’t have the money. It needs a lender or an investor. Enter: You.

When you pay yourself, you separate Owner You from Worker You.

On one hand, you feel great — look, you’re earning a monthly salary! On the other hand, your business feels broke — it’s constantly in the red and can’t even keep up with paying its employees (you).

Borrowing money from yourself, in order to pay yourself, is the best way to value your time. You’ll keep the company’s financials in clear perspective.

One final note: Charge your business a reasonable interest rate, like 5 percent, on the loan that you issue. After all, you deserve to be compensated for your risk.

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Three Mantras for Small Biz Owners

Remember this when starting your business ...

I took part in a pretty dynamic, thought-provoking Twitter chat tonight in which a lot of small business owners shared ideas about how to take the leap to starting your own business.

I want to share 3 of the best quotes from that chat, and accompany them with a sentence or two about how you can apply that advice to your own small business (whether it’s an actual “business” that sells a product, or a side gig like tutoring, for which you still have to promote your service, manage your time, demand payment from clients, etc.).

These 3 brilliant snippets of wisdom were all said by @caroljsroth, author of The Entrepreneur Equation, carolroth.com:

If a few people aren’t laughing, you’re not dreaming big enough.

SO TRUE!!!! Now can I make a confession? I am embarrassed to call myself a blogger — because I don’t make a living from it yet. I feel like an imposter. (Who calls themselves an “aspiring blogger,” anyway?) I’m afraid that if someone asks what I do and I reply, “I write Afford-Anything.com,” they’ll laugh.

But you know what? My dream is for this blog to become big. HUGE. My dream is to start an entire Afford Anything movement. I want 1,000,000 readers to this blog. I want 200,000 email subscribers. I want this to spawn books, magazine articles, a television show. I want nothing short of a cultural phenomenon.

Are you laughing? Good. That means I’m daring to dream big. And so should you.

Be willing to take a couple steps backwards to make a huge leap forward.

Again, this is entirely true. The biggest barrier to risk-taking is comfort. If you’ve got a comfortable life, with a comfy job, comfy income, comfy home, comfy shoes, you’re at risk of not taking risks.

USA Today recently reported that the Great Recession and layoffs spawned record numbers of people to start businesses. Why? Because with 10 percent unemployment, and an even greater percent of underemployment and low wages, people stopped feeling comfortable. And that’s when the real fun began.

Your time is valuable — if you don’t think so, no one will.

Small business owners who sell a service — such as freelance writing — often charge extremely low rates, which they justify by telling themselves that they’re in a business with very little overhead. After all, a freelance writer just needs a laptop and an internet connection, right? And some incidental office supplies?

What that freelance writer isn’t considering is his or her time — hours of her life which she’ll never get back. Hours which could have been devoted to doing something else, whether it was pursuing more highly-paid work or relaxing and enjoying life.

Our lives are short and our time is valuable — so value it.