At a recent golf tournament for the construction industry, I spoke with a gentleman about a once very successful contractor who is no longer in business. I instantly figured that the gentleman had sold his business and pursued other endeavors. However, I found out that although he was successful, every dollar he made was spent on homes, cars and boats. This isn’t as common in the construction industry as it is in other industries, but I see more and more business owners get leveraged right out of business.
To achieve your financial goals, you need to be a diligent saver and investor. But you need to do more than just build your assets; you also must do a good job of managing your debts. If you let your debts get out of control, they will eventually erode your savings and investments—and when that happens, the road to financial success can get pretty bumpy.
Unfortunately, your fellow Americans are doing a poor job of saving money and staying out of debt. Here are some telling statistics:
- Debt is rising.By September 2006, household debt had reached 130.9 percent of disposable income, according to the Center for American Progress. In plain English, that means we owe about a third more than we have available to spend after we’ve paid our taxes and met our expenses.
- Savings have fallen.For most of 2005 and all of 2006, the personal savings rate was negative, according to the U.S. Commerce Department. Previously, we haven’t had a negative savings rate since the Great Depression. In short, we’ve gotten into the habit of spending more than we save.
These grim figures foretell a discouraging financial future for many of us. Every dollar you pay for debt is a dollar you can’t use to invest. Furthermore, if you have too little in savings, you may well be forced to dip into your existing investments to pay for short-term needs, such as a business expense like a new truck or repair to your existing fleet. And the more you take from your investments today, the less you will have available tomorrow when you might need the money to help pay for retirement or your children’s college tuition.
So what can you do to protect your savings and investments against the demands of debt? You probably already are familiar with some steps you can take to cut costs: Extend the life of your fleet, eat out less often, look for cheaper phone and cable service, etc. Especially, watch your phone bill at your company. In short, review your entire lifestyle, and try to separate the “nice to have” items from the “must have” ones. If you can reduce your expenses, you can start whittling away at your debt.
While you’re taking steps to cut your costs, you can still add to your investments. How? For starters, increase your contributions to your 401(k) or other employer-sponsored retirement plan every time your business achieves growth. Until you retire, you generally won’t be able to access this money without taking a big tax hit, so you won’t be tempted to “raid” your 401(k) to pay off debts. [You can, however, typically take loans from a 401(k) or similar account.]
You also may want to “pay yourself first.” Each month, before you pay the mortgage, the utility companies and your other obligations, set aside an amount for your investments. It’s easier if you set up a bank authorization to move the money directly into the investment you choose. By having the money taken out this way, you are less likely to “miss” it—and, hopefully, you’ll be less likely to look at it as a source of funding for your daily life.
By cutting your debts, boosting your 401(k) contributions and paying yourself first, you can help yourself get a firmer grip on your financial situation—today and tomorrow.