Best Way To Use My Finances

In My Humble Opinion
1

Looking for a little insight into my situation, hopefully from dopers who have lived through it and either made the right choice, or in hindsight, would have done things differently.
I am currently 26 years old
Self-employed

For this exercise i would just like to focus on my personal finances.
From 18-24 i was dead broke, as a result i am saddled with tons of debt.

List of liabilities:

Mortgage
Student Loans
Small credit card debt ($1800)
List of Assets:

2 cars
2 trucks (rented to my company)
2 forklifts (rented to my company)
Simple IRA
Tiny amount in the stock market (does about 4-6% year)

Now, for the first time in my life, i have discretionary income. What should i do with it?

Focus on paying off debt? My only thought on this is, it is obviously a good idea to pay off debt, however, besides the credit card, the rest will take me nearly a decade to pay off even if i throw all extra money i have at it.

Savings? Savings accounts aren’t paying anything. Stock market does decent but carries some risk with it.

Invest in my business? Carries a risk of not being diverse enough if the store goes under.
I know you are not my financial advisors, and my ultimate decision will be my own.

Just looking for some real-world advice from dopers that have done it before.

2

I can’t say I have any experience running a business, but I’ve done well handling my own finances and investing, so I’ll just make a few observations for what they’re worth.

  1. Your credit card debt should be the first thing to go. Unless it charges an ultra low interest rate, it makes no sense to keep it while making 4-6% returns in the stock market. Channel your savings to pay this off first. In fact, I would sell off any stocks that have already made substantial gains (and therefore more likely to retrace) and use that to pay off the credit card, as much as necessary.

  2. Chances are, your mortgage and student loans are fairly low-interest debt. If so, these should be left to be paid off on their normal payment schedule, as long as they don’t cost any you more to carry than you’re making in market returns.

  3. Being self-employed, it seems your financial situation will sink or swim with your business. You seem to know what you’re doing as far as that goes. Don’t worry then about not being diversified. It’s obviously making you money for the time being. Is your business easily scalable? If so, I would just as soon focus your energy and resources into growing your business and thereby increasing your cash flow. This increased cash flow should then be used to pay off your other debts faster, rather than increasing your non-business (i.e. personal) expenses to match. When your debts are paid off, then you’ll have the option to either enjoy some of your profits, grow your business even more, or a balance of both.

3

Just follow the steps.

4

Get rid of the credit card debt first.

Then, just be patient. It’s not going to happen overnight, but just keep making progress. You’ll be amazed at how fast that time goes by.

5

Very random thoughts -

First congratulate yourself on the progress you have made in a relatively short time. Even thinking as you are and asking the questions you have puts you in a good spot.

You were broke at 24? And now you are only 26? Only 2 years difference? Keep doing what you are doing, you will be in excellent shape.

On that note, to reiterate what others have stated in a different way, another asset you have is time. Your student loan and mortgage flatten your debt out over time, and are likely at a lower interest rate. Being as young as you are you have a longer time horizon to work with when thinking about retiring the debt.

2 cars? You don’t say so, but if you are single why not sell one and use that to pay off the credit card?

6

Minor nitpick, but slightly important since you’re running a business so you should understand the difference. The forklifts and trucks that you’re renting, aren’t assets. Since you don’t own them, they don’t increase how much you’re worth. In other words (for example), you can’t sell one of those forklifts to pay off that $1800 in credit cards. All those rentals are mostly neutral since they’re basically just recurring expenses, but technically, if you really want to get down to it, if you’re locked into a contract, they’re actually liabilities, just like your mortgage, student debt or credit cards (cell phone bill etc).

7

Minor nitpick on your minor nitpick - to me it sounds like he owns the forklifts and trucks, and rents them TO his company. That sounds like a clever money move to me.

8
  1. Eliminate extra expenses that you can.
  2. Pay down any debt with an interest rate over 10% (credit card, probably)
  3. Build up an emergency fund. Usually several months of expenses. The goal here is that when some unforeseen expense comes up, you don’t have to put it on the credit card.
  4. Pay down the other debts, highest interest rate first.

Why do you have two cars? Many people manage to get by with one or zero cars. Can you sell one to pay down some of your debt?

Yeah, but think how long it’ll take if you don’t.

I don’t think people generally expect you to pay off a mortgage in 10 years.

There’s an argument to be made for paying off your student loan debt as soon as possible, since it’s generally not dischargeable in bankruptcy. If you hit major financial hardship, you want that reset button to be an actual reset.

9

Can I ask what your business is to go from dead-broke at 24 to having discretionary income at 26?

10

I agree with 1-3, but partly disagree with 4. You should only pay down debt if the interest rate is higher (after accounting for inflation) than the interest/return you expect from any other potential investment you have. You cannot expect 19% from any investment, so paying of credit card debt is a no-brainer. But your mortgage might be 2-3% (inflation is so low, nominal and real are pretty close), and you can reasonably expect 4-5% from the stock market, so putting extra money into a mutual fund instead of paying off your mortgage might be wise (plus it diversifies you in case the house price crashes)

I want to know how you got a mortgage as a ‘dead broke’ 24 year old…

11

True, and plenty of reasonable people can make different decisions on this. So, let’s say step 4 should be: “Pay down all non-mortgage debt”, or “Pay down all debts with an interest rate above, say 4%”? After that, think about other options. Paying off the mortgage still might be the best move, though.

People often underestimate the risk of leverage. If you can borrow at 2-3% and make an expected 4-5%, yes, you’ll probably make a good return. But there is a limit to how much you should leverage. If you owned your house free and clear, would you take out a mortgage for 80% of its value and invest that money in the stock market? Most people would not, and it’s exactly the same tradeoff.

I personally am paying down my mortgage with excess investment money (after investing in tax-advantaged accounts). Guaranteed 3.75% return (that’s what my mortgage is at) is excellent for such a safe investment.

12

I actually got the mortgage when I was 19, had a bunch of money saved up, great credit, and no debt.

After that I started my first business and three years later was broke and in a mountain of debt. I then sold any assets I had to start my current business. Low margin, extremely high volume. Coupled with very low overhead, I was able to dig myself out of my financial mess.

Regarding my two cars. I live with my fiancé, both cars are mine, she uses one, I use one.

The forklifts and trucks. I personally own the vehicles and rent them to my business.

13

Like others have said, pay off the credit card debt, even if you have to take it out of the stock market.

The trucks and forklifts are depreciating assets. Are you able to write off the depreciation against your personal income? I’ll assume you had someone advise you to do it this way, and that it works to your advantage overall, but if you didn’t, you might want to talk to someone about whether owning the equipment and renting it to yourself the best thing to do. (It might be, I honestly don’t know.)

In that vein, you were concerned a bit about investing in your business and not being diversified enough as a result. If your business fails, will you be able to rent the equipment to other companies?

I wonder if it might not be better to sell the equipment, rent from someone else, and take the proceeds from selling the equipment and putting it in some mutual funds. Yeah, the stock market has some risk (and it is near record highs right now), but in X number of years your equipment will definitely be worth zero, right? I guess it all depends on the exact figures, like the amount of rent versus the value of the equipment, etc.

If you can service your student loan debt and mortgage and still have extra money to invest (and assuming the interest you are paying is reasonable), I would invest the extra money rather than pay down the debt. If you ever need liquidity in the future, it is better to have it in the form of investments that you control rather than needing to borrow it, because it is precisely when you need to borrow that it becomes very hard to borrow.

14

Ah, got it. I’ve (personally) never seen that with forklifts, but it’s common with property/buildings. Some poking around on the internet shows it’s just as common with pretty much everything else as well, more about that to follow.

A few things as I read the thread:

As for paying off the debt, the common strategy is to pay off the things with the highest interest rate first. However (but not ignoring that), I always say it’s worth it to knock out any small stuff first, if even just as a morale booster. That is, if you have a credit card with $1000 at 20%, another with $2300 at 17% and the balance on your student loan is $400 at 5%. Yes, everyone is technically correct that it makes financial sense to keep tossing fifty bucks at the student loan in order to make bigger payments on the credit cards. OTOH, it would be nice to just get rid of the student loan and be done with it. You’ll feel better with one less bill in the mail each month…but that’s just me.

Renting the equipment to yourself. Like I said earlier, it’s common. If you don’t have an accountant and/or lawyer yet, you’re really should get one. This is something that needs to be set up properly, rented for the ‘going rate’ in your area (maybe call places like United Rentals or you’re local Yale/Crown dealer and get a ballpark number (then lower it a bit)). Also, it would probably be wise to set up an LLC for yourself to do this.

Something you didn’t mention is how well the business is doing. There’s (IMO) a huge difference between “this business it doing not so well/just barely breaking even/ehhh ok, but I just want to know what to do with the money I’ve allowed myself to take home” and “business is great, what now”. Some of these are accountant questions, some of them we can toss out some ideas. For example, if you have some extra cash in the business (and you’re so inclined), the business could could by the one or more the the forklift/trucks from you. There’s pros and cons to that, but I’m not sure if that’s a viable option for you, before we explore that.

You got a mortgage (on your personal house?), what, 7 years ago? What’s the APR? If it’s over 6, you should really look into doing a refi, if it’s under 6, it’s still probably worth it, but unless you’ve paid it down enough that you can afford a 15 year, it may be worth waiting it out a few months to see if the rates fall back below 4% (they were just 3 months ago). My WAG with some assumptions is that if you refi for 30 years you can save some money each month and if you refi for 20 you’ll pay about the same but be paid off sooner.
If you’re on good/first name terms with a banker, if may be worth talking to them and see if they can ‘run some numbers’ to see if you’d even qualify (if you’re worried) before you pay an application fee. Also, I may be mistaken, but I think some application fees may be refundable if you’re denied (look up “reg z”).

Okay, last few thing of a long winded post (but this kind of stuff really is right up my alley)…

  1. If you don’t have a CPA, get one. Even if you do your own books, it’s extremely worthwhile to have someone give them a once over at least once a year. That also gives you a working relationship with them so that you have someone you can email questions to throughout the year.

2)As I said earlier, if you haven’t already, you should probably set up an LLC for you’re rental business. I’m not totally sure of the exact reason why. It seems to be a ‘just what you do’ thing. I believe it has to do with making it look like the owner isn’t just siphoning money out of the business (not that the IRS is stupid, but still). But this is a CPA thing, they set up ours for the same reason.

3)Nothing to do with this thread: All those vendors that have you sign credit apps, don’t sign, in fact cross out the part that says “PERSONAL GUARANTEE”. Now, if you’ve only been in business a short time, and I know you have, you might not be able to get away with this with everyone, but try. For some places, that’s a for sure no go if you’re existed for less than 5 years, but in general what will happen is the sales guy will either say ‘don’t worry no one signs that’ or ‘uhhh, you missed that’ and then you say ‘well, just hand it in and see what happens’ and that’s usually that.
If it hasn’t been explained to you yet, what that part says is, more or less, if you don’t pay for something, they get to take you’re house.
3b)With that, next time you get some produce delivered, check out the PACA statement at the bottom (ask me how I feel about that racket), did you know that until you pay for produce, the person that sells it to you still owns it. They can come in and confiscate it (or the goods you made out of it). Furthermore, if you go bankrupt, they’re automatically right up at (near) the top of the list to collect money.
3c(in the unrelated to this thread category). As I recall from earlier threads, you do a lot of DIY stuff. You can save a lot of money that way make sure you keep at the DIY repairs, but not only that, make sure you stay on top of maintenance too. IIRC you were posting about some freezer repairs way back when. That’s a good example, it takes 10 minutes every few months to clean out the condenser coils, but a cooler or freezer that breaks or shuts down on overload due to a blocked condenser will cost a lot more.

I know this is a long post, but, like I said, I’ve been doing this for a really long time, and I have my hands in every part of the (well, my) small business. Even with all I know, there’s always something new, every day. It’s my family business. It started (this iteration) 37 years ago and I’ve been punching the clock for 25 years now (and still, truly, love what I do, most of the time). I started out as a common minimum wage grunt and worked my way up to running the entire store, more or less by myself. And, on top of everything else, I think I mentioned in another thread, we also handle some of the same type of stuff that you do. Not in anywhere near the same volume, but it’s a odd little corner of the market that I’m familiar with.