Not much to comment on this month. Going forward I’ll just be posting the Liabilities side. I’ll still keep tracking everything, but not posting that top portion here. Anyway, I’ve had a good last few months business wise and February looks like we should keep about the same pace. I read the “E-myth” about 3 months ago, and it’s seriously helped me tremendously. I used to think my development business would always be stuck in the under 20K zone, but I think I may be able to break out of that this year because of what I learned from the book.
So what is up for February? Well, for one, I’m hoping to be able to eliminate a large line item on the liabilities section…the Shareholder item. Assuming everything goes according to plan, that will go away sometime towards the end of the month or early in March. This is going to be a HUGE relief for me. It’s a family friend, who never knew about all the stupid stuff I did. Buying him out is the first major step in me making things right with other peoples money. My Mom and other creditors being the next major ones. Anyway, I’m excited about this.
Observations
- Networth increases (or is it decreases when you are negative?) over 5%.
- Made extra student loan payments
- Made 2 IRS payments ($1200 total)
- Stock holdings got killed (No more money going towards that….)
- Need to make 2 car payments this week
{ 19 comments… read them below or add one }
Impressive, the way you have tackled your debt. I think that is exciting you will be able to buy out your shareholder this month. Congratulations on that! Keep up the good work. and keep focusing on creating business systems which you can then manage. That is the key!
Netwealth increased by nearly 10K. Good work!
Good idea to stay out of the market I think. Pay down all your debts before thinking about investing. Keep the small emergency savings account in cash, and if you still have any stock you may consider selling them at loss and putting it towards the debt. Don't hold on to them if you think they could fall further (i.e. the sunk cost fallacy).
I know your mother isn't sending collections agencies after you, but you might want to consider giving her a bit more money next month.
But again, congratulations!
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DebtKid,
First of all, congratulations on the progress you've made so far. I find the debt destruction fund particularly impressive.
Now on to some criticism, which I hope you take the right way. Some harsh words follow, but I write them from the bottom of my heart.
1. "Shareholder Liability". For a "personal finance" blogger, you don't seem to have a strong grasp of some basic financial concepts. The interest of a shareholder in a corporation is not a liability of the corporation, it is equity (i.e., whatever is left of the assets after the liabilities have been paid off). Whether your investor is a shareholder or a creditor depends on what happened at the time of the investment, and is not something that you can change now. Did your family friend received stock in your corporation (or a membership interest in the case of an LLC)? Was he supposed to share in the upside (i.e. profits) of your business? If so, it looks like he is a shareholder (or member, in the case of an LLC). On the other hand, if your family friend and you characterized the investment as a loan (i.e., you set an interest rate and repayment terms, and he was entitled only to get back his principal plus interest, and not to share in the profits), then he would be a creditor.
To be clear: If his investment was equity, you cannot go back now and say "let's treat it as a loan." (Of course, a corporation could borrow money from an existing shareholder, or sell shares to an existing creditor, in which case the investor would wear two hats: shareholder and creditor. I doubt that was the case with your family friend.)
[NOTE: I went back and looked at your October 2008 balance sheet post. Looks like you understand the difference between debt and equity, but choose to ignore it. Can't do that when you're insolvent, kiddo.]
Further, and more important, a corporation cannot make a distribution to shareholders (whether in the form of a dividend, or by repurchasing their stock) while it is insolvent. In other words, creditors come first. So if the money to pay your shareholder was coming from your business… forget it. It would be a "fraudulent conveyance" (as in "fraud"–look it up), and your "real" creditors could get that money back from the shareholder.
If the money is not coming from your business, if instead it is your own money, then presumably you could buy the shares from the shareholder, and the corporation would not be involved (other than registering the transfer, but that is a purely ministerial act). However, even if it is "your" money, you have to consider first, whether you got the money from your business as a distribution (as opposed to a salary or compensation for your work), in which case the fraudulent conveyance would be that initial distribution to you, and second, whether purchasing shares of stock in an insolvent business would not be a fraudulent conveyance with respect to your personal creditors.
This does not mean that you can never "pay back" (i.e., buy out) your stockholder. All it means is that he is going to have to wait a bit longer. Remember, creditors come first.
If you have any questions, post them here and I'll try to answer them, but this is something you should really discuss with your bankruptcy lawyer. You would not want to commit fraud, would you?
2. Stock "Investments". Your buying individual stocks (although I confess I don't remember the details) is not investing, it's gambling. Maybe if you bought a low cost index fund, like the Vanguard SP500 fund, with a long term view, that would qualify as an investment (setting aside the wisdom of you making "investments" outside your business when you have so much detb to repay). But buying stocks? Pure gambling. Looks like you are not over it after all.
Get back on track. Pay off your goddamn debts first! You should only allow yourself modest liGet back on track. Pay off your goddamn debts first! You should only allow yourself modest living expenses and direct investments in your own business that grow your bottom line. Other than than, every penny should go to pay back the money you borrowed. I know you are generally on track, and making good progress, but I hate to see you stray.
What are the plans for the debt destruction fund? When do you plan to do some destroying? I hope it was not going to pay off your shareholder. That would be more self-destructive than debt-destructive.
Cheers,
Alan
PS: Sorry for the long and piecemeal post. I promise to be more laconic in the future.
Alan ~ Thanks for this. My plan was to buyout the shareholder first, then go about settling some of the old debt on the business side. Looks like I will have to swap the order there. Which is fine. I don't want to do anything fraudulent.
Hi Debt Kid:
I've not been following you for a while… off doing other things. I wanted to check back and see how things are going. First, much prefer your new banner/headline. The website is looking good. Second, it appears your business is doing well given the tough economy. Congrats!
Now, for a little "smart girl" spanking. You need to increase your payments to your mom. I've said it before and I'll say it again – your mom does not have the "catch-up" time to establish her nest egg for retirement. Your spreadsheet shows it clearly – since '07 you've made more progress and paid down more on your student loans than you have your mother. Overall, you've repaid your mom $9500 (or, as your spreadsheet shows a 6.25% reduction) while you've paid Uncle Sam $10,166 (a reduction of over 22% of the originating debt).
More on my suggestions in the next posting.
Smart Girl.
Hi Debt Kid:
In my last post I made a suggestion regarding your debt reduction – this post outline in further detail the recommendation.
First, eliminate those first with highest interest rates and penalties starting with the IRS…. then pay off the WA state taxes and your car loan. Ultimately, think of the peace of mind you will have knowing the vehicle is yours, completely paid off. Then, make a large payment to your mom prior to April 1, 2009. Encourage her to take the funds and deposit immediately into a ROTH IRA so that she'll think twice (or three or four times) before accessing the funds prior to her retirement.
So, this is my recommendation:
IRS: $29,086
WA State: $ 2,147
WA State: $ 2,400
Auto: $10,518
Mom: $ 6,000
Total: $50,151
With the above payments made, you will have still have over $3,000 remaining from your "debt reduction" fund. More to come in my next post.
I've paid off the first WA state tax line. Did that about a week ago. Felt great. Also, I'm working on disputing the IRS debt now. I totally did my taxes wrong when I calculated that, my accountant thinks that debt can go away. I'm hopeful there.
Also, with my mother, I've been sending $800 a month lately. I can only send $13K a year without gift tax implications. In talking with my accountant it looks like I may be able to give a little bit of my company too her and repay her more through shareholder earnings in that way. We'll see.
From my previous post I suggested an outline of payments that have a variety of benefits: First, eliminating government agencies on your list of creditors, paying off your car, and providing your mom with a generous payment to aid in assuring her financial future.
Much of these recommendations are based upon common sense while also giving you an incredible psychological boost of having those "monkeys" off your back. In addition, taking care of the debts outlined above will help you to maintain your own sense of control – and reduce the possibility of some creditor or government agency grabbing the funds from your "debt reduction" account – something you experienced before.
Now, with the progress you've been making I want to give you a little "long-term" thinking advice:
How are you doing on rebuilding your credit score? How do you feel about your business' long-term prospects? If you feel you are getting on solid financial footing and feel comfortable with your progress (particularly with your ability to generate revenue to make payment progress as outlined). In my next few posts Ihave some suggestions.
OK, let me get into all this great questions….
I am working on rebuilding my credit score. I have two "rebuilder" type credit cards that I am keeping a small balance (like $15 on each) on and paying each month. I feel good about my business' long term prospects. I've learned a lot and am executing well there.
Given the progress you've been making, here are goals for your consideration to help lay the foundation for your financail future.
1. Rebuild your credit score. 2: Start putting money aside into three accounts:
A. Emergency fund: (My guess is your "debt reduction" account has been a psychological safety net for the past few months: You want to continue this, so set aside $$ so cash available during lean business months).
B. Retirement planning: As a business owner you have available a variety of options for putting aside money (SEP, IRA, etc.) that have a variety of tax benefits. Obviously, this is not a liquid asset, but a long-term holding and investing account that you won't touch for 40 years. (And stay away from day trading!)
C. Real Estate Investment Fund: Home/RE prices will continue to drop in 2009. In certain areas property sold through foreclosure is almost 50%. (In southern Oregon, two of every five homes sold were via foreclosure auction.) In 24 months, provided you've paid down debt and saved the $$, you could find a great buy on a small condo or cottage.
A.) good point. B.) Not a big fan of retirement planning stuff right now, maybe down the line, but honestly, right now I can earn way more by investing in myself and my business than looking at retirement plans. It's just not my cup of tea, maybe I'd do some IRA real estate investing at some point, but that is way off.
C.) I hope in 24 months to have a small place. Good goal.
There are great "buys" in both the RE markets and the falling values will continue for another year. My thought is with continued hardwork and a little luck, you might be able to purchase a small condo/house in 18 to 24 months – provided you continue to rebuild your credit, pay down debt, and set aside funds for a 20% down payment. With your ability to save over $50,000 in your "debt Reduction Fund" I have no doubt you can do it again.
I'm not suggesting anything fancy – just a small 2bd condo/cottage in a nice neighbohood with excellent schools. This is not a "flip" or "investment property" but your own home that provices you with added advantages of mortgage interest and property tax deductions. My nephew just bought a great little place for $90,000… with taxes and interest, his monthly payment is about $650!
Once again you've made great progress. Now, step back, take a breath, and think about your continued progress and initial steps for assuring your financial future is on a firm foundation.
2bd condos in Seattle are still 250-300K range. And that's outside downtown. Little cottages are in the 300K range….and we are talking 1000 sq. feet. It's still kinda nuts.