Ten things you need to know about money

MONEY AND OUR ABILITY TO MANAGE IT determine how comfortably we will live, how well we will be able to care for our families, how well we’ll sleep at night and, yes, how well we will enjoy our golden years. That is why it is so important for you to be well informed on the basics of business and personal money management.

Here are 10 tips for becoming a better manager of the money flowing into your contracting business.

Use your money to make money

Open a money market account at your bank and have it linked to your business checking account to allow for online transfers. Then, deposit all of your daily receipts into the money market account where they will immediately start drawing interest.

Never deposit receipts directly into your checking account. Keep a minimum balance in the checking account and transfer cash online only as needed to cover checks written. Modern technology has made online money transfers so quick and easy that you can’t afford to pass up this profit-enhancing technique.

Don’t be in a hurry to pay bills

Ever notice how checks are slow to come in from people who owe you money? That’s because hanging onto cash as long as possible keeps that money available to draw interest or to work in the business.

Take the time to set up a system that provides for paying bills only when they are due. Don’t go overboard and jeopardize your credit standing by paying bills late. Just pay your bills when they are due—not before, not after.

Skip the credit life insurance

Credit life insurance is expensive, far more expensive than most other types of insurance. Although such a policy offers some protection to the borrower, the prime beneficiary is the lender. If you die before you pay off the loan, the proceeds of the policy will go directly to the lender. Nothing goes to your estate even though you paid the premiums.

Most financial advisers suggest that you offer a firm “no” when offered credit life insurance.

Don’t overpay estimates to avoid owing the IRS

It may seem satisfying to discover that Uncle Sam owes you money at tax time, but don’t be fooled. The IRS gets the last laugh when you overpay your quarterly estimates. When you do that, you’ve given them an interest-free loan at your expense.

“The least expensive way for you to pay your tax liability is to try to have estimated payments come out as close as possible to the amount owed,” said Tom Normoyle, CPA, Huntingdon Valley, Pa.

Don’t pay income taxes with credit

Should you take advantage of the pay-by-credit-card program now offered by Uncle Sam and a number of states?

On the surface, this option will seem attractive to some contractors. It will enable you to postpone your payment, even pay in installments to the credit card company. Then there are those perks offered by some credit card issuers—airline miles or cash rebates. But, here is the catch: You’ll be charged a “convenience fee” of about 3 percent of the tax liability paid. This is in addition to any interest charged by the credit card company for installment payments.

The bottom line: Don’t do it. Almost any other way to come up with the money you need for your payment will be cheaper.

Beware of debit cards

Be aware of the unique risks of debit cards, and how they differ from credit cards. When you use a debit card, you must already have the money in your bank account. Debit cards give you no grace period for paying your bill. The money will be deducted from your account immediately each time you use it.

Unless you are a fastidious record keeper, keeping your account in balance can be a problem. It is easy to misplace a receipt and forget to notate the transaction in your check register. That can result in overdrawn accounts and financial penalties.

With credit cards, you may dispute errors or unauthorized charges and withhold payment until the matter is resolved. With a debit card, your money is spent the moment you complete the transaction.

If you’re a so-called convenience user of credit—-someone who pays off your credit card balances in full each month—the last thing you need is a debit card. You’re now enjoying up to 40 days of free use of someone else’s money. This is called “using the float,” the period between the purchase date and when the money is actually withdrawn from your account. In this case, you should congratulate yourself on your financial acumen and hang on to those credit cards.

Think twice about consolidating credit debt

Debt consolidation comes in several varieties including debt- consolidation loans, balance transfers to a zero-percent credit card, and home equity loans or lines of credit.

Are these services a magic cure for credit card debt? “No,” said Chris Viale, CEO of Cambridge Credit Corp., a nonprofit credit-counseling agency based in Agawam, Mass. “Once you allow yourself to fall into unmanageable debt, there’s no easy way out. Debt consolidation may sound like an easy cure, but many consumers and business owners find that this choice only leads them down the road to an even more burdensome debt load.”

“Consolidating debts may be only digging yourself into a deeper hole,” said certified financial planner, Brent A. Neisner, Greenwood Village, Colo. “Before you take that serious step, you should ask yourself how you got into debt trouble. Overspending almost always involves emotional and psychological issues that aren’t going to go away by treating the symptoms.”

You can find further information on debt counseling at the Web site of the National Federation for Consumer Counseling at www.nfcc.org.

Consider leasing

Leasing products such as cars or vans for personal use is generally not economically advantageous. Most accountants agree that leasing is the most expensive way to maintain a car exclusively for personal use. However, the rules of the game are different for business. “The nature of business accounting is such that leasing can be the most sensible approach to many types of capital investments, including vehicles,” said Normoyle. “It usually makes sense to lease if you will be able to use the cash in your business or in your investments to earn a better return than the cost of leasing.”

Talk to your tax adviser about this the next time you’re considering any purchase of capital equipment that might be available on a lease basis.

Log on to www.leaseguide.com/lease03.htm for more information on this subject.

Beware the service contract

Service contracts are the most profitable items sold by many equipment vendors and retailers. Sellers of contracts (sometimes called maintenance agreements) have a big advantage over buyers. By using repair history records, they simply add a substantial markup to the average cost for maintaining a given product, thus guaranteeing themselves a nice profit.

That is why only contractors who historically require more than the average amount of repair service can hope to come out ahead. Hint: If you’re one of those people whose products collapse 24 hours after the warranty expires, you’re a good candidate for service contracts.

Don’t be afraid of credit

Extensive use of credit for personal affairs can be problematic. When it comes to business, it’s a different matter. At today’s relatively low interest rates, careful use of credit can be one of your most effective business-building tools.

It makes more sense to spread the cost of capital purchases out over time than to put stress on your cash flow by laying out large amounts of cash that you could put to productive business use. In addition, the costs of borrowing are legitimate tax deductions for businesses.

Credit, when used in a sensible manner, can be a powerful profit enhancer. Once you make use of business credit, though, it is essential that you protect your credit reputation by keeping a spotless credit history.

For many people, how much money we earn is viewed as the yardstick by which we measure financial success. For those in the know, however, earnings are only one-half of the money equation. Equally important is the manner in which we manage those earnings. Making the right money decisions is an essential ingredient in the recipe for long-term financial security.   EC

LYNOTT is a former management consultant and corporate executive who writes on business and financial topics for a variety of consumer and trade publications. You can reach him at [email protected] or through his Web site at www.blynott.com.