How to Be a Frugal Business Owner

As if it’s not enough that we’re living it, we have to listen to people talk and strategize about it – the recession has put all of us in a spin and it’s going to be some time before we can recover enough to go back to the life we were used to before. But if you think of the situation beyond the surface hardships, in a way, a recession is a great time to learn good spending and thrift habits, whether you’re an individual, a family or a business.

It’s the small and medium businesses that are hit the hardest; with not much of a cash cushion to help them ride out the storm, they have been forced to effect layoffs and salary cuts, measures that don’t win them any points with the employees that remain. One of the best ways to see off the recession is to tighten your belt and begin to live frugally, an initiative that must percolate down from the owner and manager of the business, to the most insignificant employee. You can start your cost cutting measures by:

  • Reducing your electricity and water usage: Offices are infamous for leaving their lights on all throughout the day and night and for appliances and gadgets that are always on standby. This not only causes you to use more power and harm the environment, but also raises your recurring monthly expenditure significantly. Begin by asking your employees to make a conscious effort to not switch on lights during the day and to practice switching them off when they’re leaving a room for some time. Shut down computers, printers, fax machines and other appliances when they’re not being used for a long period of time or overnight. You could also save on paper by using both sides to print or by taking the email route for most of your communication needs. These are small measures indeed, but they sure go a long way in helping you save some money at the end of each month.
  • Minimizing risks: It’s better to take calculated risks rather than foolhardy ones that put you in a hole of debt that is hard to climb out of. Most organizations have gone back to depending on cold, hard cash rather than leverage to do business. And even if they are borrowing money, they do so at low interest rates and pay their bills every month so that the outstanding does not keep rising.
  • Keeping personal expenses separate: Just because you own the company, it does not mean that you have an unlimited expense account. You need to separate your business interests from your personal ones by spending only your salary or monthly allowance on yourself. Remember to look at the long term benefits of making your business grow rather than paying yourself more just because your expenses are too high.
  • Not going overboard: And by this I mean that it’s not necessary to be penny wise and pound foolish – there are some people who try to do everything by themselves in order to cut costs. But there is a difference between being frugal and being plain stupid. When you try to do too much, especially if you’re not sure about what you’re doing, you end up making a mess of it and having to spend more than your original budget in trying to put things right.

This article was contributed by Nicole White, who writes about online web design school. She invites your questions/comments at Nicole.White222 @gmail.com.

Weekly Roundup: Bad Car Luck Edition

If you’ve been following me for a while you know that I am nearly finished paying off our family vehicle.  As luck would have it, my old van died again today in the work parking lot, so it looks like my final push toward car loan freedom may be in jeopardy.

Of course, I’m also nearing the point where I wonder how many more usable months the old van has in it. At twenty years old, some of the parts are beginning to look pretty bad and there are parts of the exterior are nearly rusted through.

This presents a dilemma – without a fully funded “car fund” I can’t buy anything else with cash. On the other hand, as repairs become more frequent, I’m paying nearly enough for a new (used) vehicle in accumulated repairs.  My mind is made up though; I refuse to borrow money for another car.  So it looks like I’ll either be repairing the van again, hitching a ride, or commuting by bicycle.

The Fab Five

Amish Finances.  I’ve always been intrigued by the Amish culture, particularly their frugality. This is a great piece from someone with first-hand experience living and working closely by the Amish community in Lancaster County, PA. (@Houston Chronicle)

Best Places to Retire Cheap. I am not a world traveler. In fact, I’ve only been out of the country once, and that was to Canada. Though I don’t personally aspire to see the world (I’d still like to explore my own backyard), I recognize that there are some incredibly beautiful places to live on the cheap (in US dollars).  (@The Digerati Life)

Create a Financial Mission Statement to Stay Focused. It’s funny; we often suggest people create a written list of goals to accomplish a given task, but how many of us think to put our financial mission down on paper? (@Money Relationship)

Don’t Wait for Things to Get Back to Normal Because Normal May Never Return.  People will argue the future success of the markets, and the broader economy, but I like the overall tone of this post.  Don’t sit around for things to “get back to normal” to get on with your life – get on with it now! (@Generation X Finance)

Is There A Downside to Gazelle Intensity?  Short answer, yes. I think there is a downside with to being too intense chasing any goal. It often involves sacrificing a natural balance in your life required for some level of happiness. I tend to get really gazelle intense when within striking distance of paying off a debt (i.e. our car payment), and then back off a bit while continuing to move steadily towards my goal. (@Being Frugal)

Best of the Rest

Site of the Week

Ten Practical Uses for Your Credit Card. This was an amusing post over at Scavenging, a site I recently discovered. I’ve heard there is a new card out that is supposedly safe for landfills, which sounds like a pretty good place for them.

Gift Of Equity

Have you ever considered purchasing a home from a family member? If so, did you know you may be able to use the equity in their home as a down payment, and to cover closing costs?  Well, I didn’t know such an option was available. It is called giving a gift of equity, and it basically means the seller gifts the equity in their home to the buyer to serve as their down payment.

A Real World Example

A friend of mine is considering the purchase of his in-laws’ house. The house appraised for $205,000, and they owe roughly $150,000. His in-laws are looking to relocate for retirement, so if they can sell the house to their daughter and son-in-law without having to market the home, and gift the equity to their kids, everybody wins.

My buddy’s in-laws have graciously agreed to sell them the house for what they owe, and gift the equity in the home to him and his wife.  While they can easily afford the mortgage, they don’t have a pile of money sitting around to come up with down payment required by their lender.

Gift of Equity Letter Requirements

If you decide to go this route, you’ll need the seller to sign a Gift of Equity letter stating the following:

  • Name of the donor
  • Name of the recipient
  • Relationship (son, mother, sister, etc.)
  • Address of the property
  • Assessed market value of the property
  • Gift amount

The letter will also need to have some language explicitly stating the gift of equity is just that – a gift. There is no obligation or expectation of repayment.  Contact your lender, as most have a standard form or Gift of Equity Letter available in a format they prefer.

Tax Issues Associated With A Gift of Equity

Tax issues are of little concern if you receive a gift of equity. However, if you are on the giving end of a gift equity, there may be tax consequences to consider related to gift taxes in general.

As it stands, anyone can give up to $13,000 per year to another individual. If the gift of equity exceeds that amount then a gift tax may be reportable (that doesn’t necessarily mean you have to pay taxes on that money, but you will likely have to file IRS Form 709 to report the gift).

Even if you have to file Form 709 (IRS website) the amount of the gift of equity exceeding $13,000 per individual involved in the transaction will simply be deducted from the million dollar exclusion for which most of us are eligible.  It is probably not a deal breaker, but when discussing a gift of equity it makes sense to discuss the deal with a CPA or tax professional, particularly one familiar with real estate deals.

12 Things Our Grandparents Lived Without

My grandfather grew up in a rural setting during the Great Depression, and for much of his young life had no running water or electricity. Actually, he jokes that they did have running water–he ran to the well with a bucket and ran back.  During particularly lean summer months, he didn’t even have shoes.

Since my parents divorced when I was a young boy, I spent a lot of time with my grandparents while my mom was busy trying to provide for her and her young son as a single mom with no support. My grandfather shared many stories about his youth; some good ones, and some that made you feel for him and his eight brothers and sisters (and his parents). He often jokes that he doesn’t know why people refer to those times as “the good ol’ days,” because there wasn’t much good about them.


Photo courtesy of DEEJKEOKI

Of course, I cherish these stories and the time spent with my grandparents because they made me the “frugal dad” I am today. When I feel myself pining for a new gadget I think back to stories of my great-grandmother searching the cupboards for a missing dime that meant a can of soup for her kids’ dinner.

We are in tough times these days too, no doubt about it. But those who compare today’s standard of living to the times my grandfather faced, have little appreciation for how hard life was back then.

A visit to an electronics store with my grandfather is always amusing, as he marvels at the advances in technology, particularly the miniaturization of devices. I have to say he’s pretty well connected though, as he owns both a computer and a digital camera (two things he probably couldn’t have even dreamed up as a boy).

We also share a laugh at the things people spend money on to make life seemingly easier. With that in mind, here are a few things our grandparents (or great-grandparents) lived without, but we consider a necessity. As a disclaimer, I’m not advocating that many of these items have not made life easier. In fact, I own or have participated in a few on this list. I’m just making the point that there are many things out there we consider required goods that people got along without for many years, and probably could again in a real crunch.

  • GPS Devices. For me, the jury is still out on GPS devices for your car. I hear about more people arriving late because they took the “GPS directions” than I hear success stories. I don’t know what’s wrong with a road atlas – I just bought a new one from Sams Club for a few dollars. Besides, some of the best discoveries are found when you are lost.
  • Cell Phones. Yes, people can live without a cell phone. In fact, many still do, as hard as that is to imagine. If you are concerned with safety while traveling, consider a prepaid phone and keep it charged. Heck, even a cell phone without a calling plan, but a charged battery, can call 911 in an emergency.
  • Microwaves. I’ve yet to taste anything out of a microwave that tastes as good or better than stove top or grilled. Still, it’s a time saver, and since we all have so little of it these days I suppose it helps.
  • Credit Cards/Debit Cards. The concept of borrowing has been around for centuries, but it has only evolved into plastic over the last century. Speaking of plastic, my grandfather didn’t use an ATM card until he was in his 70′s, instead opting to enter the bank, walk up to the teller and do “business eye-to-eye.”
  • Electronic Book Readers (Kindle). Why would you spend over $400 to read something on a screen the size of a book when you could simply…read a book. They even let you borrow them for a couple weeks at libraries for free. Yes, I know toys like the Kindle do other stuff, but it’s primary role is an electronic book reader.
  • Digital Cable. Even I can remember growing up with seven or eight channels from rabbit ears on top of the television. My grandfather can remember times before television! Imagine getting all of your news and entertainment from a radio, instead of Fox News and MTV.
  • Plasma Televisions. Up until 2004 my grandfather owned a decades old, 27-inch floor model console television.  He eventually got rid of it when the picture began to have problems around the edges, and now has a basic 19-inch screen on a shelf. When I asked him about a plasma screen once he said, “There is nothing wrong with the picture on my screen now. Besides, I’ve heard those plasma things cost as much as a small car.” Indeed.
  • iPods. Pay for a device to store music you had to buy when same music is readily available via the radio for free (and available for purchase on CD). Most of my grandfather’s favorites are on cassettes, and his Sony cassette Walkman serves him just fine.  Over time he has upgraded to CD, since most classical compilations can be found for a couple dollars in the bargain bin.
  • XM Radio. Along the same lines at the iPods, why pay to listen to something that is available for free? I did get an XM satellite receiver for my grandfather’s car he did find one feature worth paying for – no commercials.
  • Xbox, Playstation and Wii. I remember one Christmas while staying with my grandparents I got an Atari 2600 game system. I hooked it up to the television and ran through games like Combat, Frogger and Pole Position. He thought it was interesting enough, but those little game cartridges sure were expensive!
  • Tanning Bed Salons. Why pay to cook your skin when the good Lord shines a sun over your head that does the same?  I’m paraphrasing, but I think I’ve heard close to those same words in response to spying a tanning bed salon.
  • Health Clubs. Why pay to pick up heavy weights and walk on a 10-foot belt that runs underneath your feet? You can get the same workout walking outside, lifting things in the garden, etc.

I wonder what things we’ll make fun of when we get older? What things have not even been invented yet, and are beyond even the most creative imaginations today?  For me the lesson is to think about the things we spend money on to make sure they are a real necessity, while making room for a few wants, too.

How Much Cash Do You Carry ?

My wife and I used to make a small withdrawal of cash each pay day to fill a few envelopes for our envelope budget system.  Over time, we’ve become less disciplined (or worried) about the day-to-day spending categories, deciding instead to take more of a “big picture” approach to managing our finances.  The downside to this was that we rarely had any cash to carry on us, and we relied heavily on debit cards.

Why Carry Cash?

There are times when you just need to have a little cash on your person.  Here’s a few recent examples when I was glad to have some cash in my wallet:

  • Tips
  • Kids’ lunch money
  • Office contributions for flowers, meals, etc. for coworkers
  • Vending machines (I know I shouldn’t get anything from them, but sometimes you’re working late and you must as a last resort)
  • Some gas stations give you a discount for paying in cash

How Much Cash to Carry?

Naturally, there is a fearful side to everyone that keeps them from opting to carry cash. But seriously, the chances of getting mugged are pretty slim. And if it does happen to you and you lose a hundred bucks, but get away without injury, consider yourself lucky.  Besides, I’d almost give $100 not to have to contact five credit card companies to report my card lost, dispute credit card charges, and spend countless hours dealing with their customer no-service people.

I think it is prudent to keep between $100-$200 on your person. This would be enough to handle an emergency cab fare out in the middle of nowhere, or similar small-to-medium sized emergency.  If you do have to use your cash for an emergency, replenish your wallet from your emergency fund and build it back up again.

I just looked in my wallet and I have exactly $67, so I guess it’s time to beef up the back pocket a bit.  Actually, any other time I’d be feeling pretty rich to have over $50 in there.  Most of the time the only thing occupying the lining of my wallet is a business card or two, and some receipts (explaining where my cash went).

How much cash do you carry, as a general rule?  Or do you prefer to only use debit or credit cards?