Rick Kahler's Financial Awakenings

To listen to Rick’s column click here: Download heavyweight_boxer.mp3

I recently read an interesting article by Timothy L. O’Brien of The New York Times. It was published on September 18, 2006, in the online edition of the International Herald Tribune under the title, "Fortune’s fools: Why the rich go broke." (To read the complete article, go to http://www.iht.com/articles/2006/09/18/business/web.0918broke.php.)

  O’Brien interviewed former boxing champion George Foreman. Today, many of us associate Foreman more with oven mitts than boxing gloves. Yet his successful second career as a marketer of George Foreman grills came only after Foreman made boxing history. In 1994, after coming out of retirement and at the age of 45, he won the heavyweight championship against an opponent young enough to be his son.

Why would a middle-aged man, a former champion who had earned millions, choose to subject himself again to the punishing demands and high risks of the boxing ring? To prove he could still do it? For the challenge? Those factors may have been part of it—though, speaking as a man who just turned 50, it would have seemed a lot easier to deal with a mid-life crises in the traditional way, by buying a sports car.

Foreman told O’Brien his real reason for returning to boxing—money. In the late 1980s, he was facing bankruptcy, a more frightening opponent for him than the most aggressive competitor in the boxing ring.

Interestingly, Foreman seems not to have blown his early winnings on high living. Instead, he invested his money. Unfortunately, his investments were unsuccessful. After he made his second fortune, he was wise enough to seek out better advice, and today he is by all appearances a wealthy man.

Yet, in what to me was the most interesting part of O’Brien’s article, Foreman revealed he still didn’t feel comfortable about money, saying, "I will never feel secure again."

This is a man one has to admire for his determination and capability. Even more important, he has had the wisdom to learn from his mistakes. Yet not even his current success has been enough to erase the scars left by his earlier difficulties.

O’Brien quoted Foreman’s assessment that real wealth is more than just one’s net worth. "If you’re confident, you’re wealthy," he said. "I’ve seen a lot of guys with millions and they don’t have any confidence. So they’re not wealthy."

Even though Foreman has apparently not achieved that confidence himself, his definition is right on target. Your level of fear or discomfort about money has little to do with how much of it you have. Lying awake at night worrying about money is a stressful way to live, regardless of your income level.

The fact that someone with money may worry about it or not have the sense to hire competent investment advisors may come as a surprise to you, as it once did to me. I believed that if you had money, you felt secure, you were smart, and you knew how to manage it so you would always have "enough."

Over the years I’ve found out these beliefs were more often incorrect than correct. This is why I have broadened my financial planning practice to include helping clients develop healthier relationships with money. Much as I enjoy managing portfolios and the nuts and bolts of investing, that aspect of my work alone is no longer enough for most of my clients. It’s much more rewarding to help people move toward emotional confidence as well as financial security.

My wealthiest clients are not necessarily the ones with the highest net worth, but the ones who are comfortable with what they have and able to use their resources to build satisfying lives.

One of Rick’s area’s of expertise is using corporations and LLC’s to protect your assets from frivolous lawsuits and cutting your federal income tax liability.  Often, it is a combination of these entities can produce significant protection and savings.   In this class, you will have a chance to get answers to your specific questions regarding the proper use of corporations and LLC’s and learn if they are for you.  This class will also be a perfect follow up to last month’s class on why SD residents may want to consider putting their real estate into an LLC before the November elections.  Join Rick on October 26th, at 4PM MDT.  You can register by going to the KFG website by clicking here. Sign up today!

Listen to Rick’s column here: Download is_your_home_underinsured.mp3

The recent hot, dry summer in our area served forcefully to remind us how vulnerable any homeowner is to a sudden disaster. The Eastridge fire in wooded areas near Rapid City destroyed several homes, though incredible efforts by firefighters saved many others. Prairie fires burned homes and threatened many ranches and entire towns in northern Nebraska—a strong reminder that even homes built on the prairie, without a tree in sight, are at risk from wildfires.

Besides fire, there are a number of other disasters that can happen just as quickly to almost any homeowner in the Northern Plains. These include high winds, tornadoes, heavy snows, flooding, hail, freezing, and even earthquakes. About the only things we’re exempt from are hurricanes and tidal waves.

The good news is that most of us have home insurance to cover such losses. The bad news is that most of us don’t have enough.

According to a Wall Street Journal article that appeared August 26, 2006, 58% of all homeowners are underinsured. They do not have enough insurance coverage to replace their homes. Most only have enough to pay for 80% of the cost of rebuilding. An average home in Rapid City would cost about $200,000 to rebuild, so a homeowner with 80% coverage would need to come up with $40,000 out of pocket in order to rebuild. Most of us don’t have that much spare cash.

The biggest reasons for such widespread underinsurance are the recent appreciation in property values and the skyrocketing cost of building materials. In Rapid City, for example, house prices have increased by 50% just since 2000. And since building material prices have escalated at an even faster rate, the cost of rebuilding the average home would probably take most homeowners by surprise.

Last week, I contacted my insurance agent to review my coverage. I had $298,000 in coverage with an additional 25% cushion to take care of cost overruns. Basically, I had $372,500 of insurance. My agent did a quick calculation and determined it would cost $450,000 to $525,000 to rebuild my home. That meant I was among the 58% of underinsured homeowners, with only had enough insurance to pay 71% to 83% of the cost of rebuilding. If my home burned I would be writing a check for $75,000 to $150,000.

I strongly suggest that you do a similar review of your homeowners insurance. Don’t limit it to the cost of rebuilding the house, either. A complete loss will also mean you need to replace all of the personal items in your home. The cost of replacing everything in your home will probably be as surprising as the cost of rebuilding it. Experts suggest you should insure your personal property for 50% of the coverage on your home. If you own such things as antiques, valuable collections, or fine jewelry, ask your insurance agent whether you need to list those specifically as additions to your policy.

In addition, be sure that you have photographs or a videotape of your home’s contents as proof of what you own. The importance of having such a record was underscored by the experience of one couple who lost their home in the Eastridge fire. They had intended to videotape the contents of their home, in large part because they were going to rent it out during the Sturgis Rally. Their home burned the weekend before they planned to do the taping.

Their unfortunate loss prompted me to videotape my home the next day. I also have increased the coverage on my home to $450,000. Sometimes writing columns has personal benefits, too.

As many of you know, I exercise daily and have done so for the last 25 years. The ironic result of my daily exercise habit is that I would actually be in a lot better shape if I didn’t work out.

I first started running in my late 20s, only to stop when my knees and back started bothering me. I then picked up weight lifting, only to stop when I hurt my right shoulder. After a little investigation, I thought I had found a form of exercise where it would be impossible to hurt myself: yoga. I was wrong.

About two years ago, while practicing "power" yoga, I hurt my left shoulder. Hoping it would go away, I continued my daily workouts. Unfortunately, my sore shoulder never did heal.

I finally gave in and spent the money for an MRI. The results showed that I had a torn rotator cuff. As you might suspect, that news didn’t exactly make my afternoon.

After speaking with my doctor and a physical therapist, I concluded that my shoulder would never heal on its own and that I would eventually need surgery to repair the damage. After doing a lot of research, I decided to have the surgery sooner, rather than later. Sooner came last Thursday.

I am told it will be six months to one year before I am able to work out again at the level of intensity I had reached. Right now, it is hard enough just to eat, dress, and maneuver safely. Even typing is not possible at the moment. That will take another two weeks. That is why I am dictating this blog entry on Dragon Naturally Speaking software!

To all of you who kept me in your thoughts and prayers, thank you for your kindness. Now, the hard work of rehabilitation begins. Hopefully, a year from now, I will be back into my daily workout routine feeling stronger than ever.

Last quarter we heard about the benefits of long term care insurance. This quarter, our guest speaker is a local attorney, Mike Abourezk, of Abourezk Law Offices. Mike is a specialist in personal injury claims. He will explain the "other" side of long term care insurance, the side that insurance companies don’t really want you to know. He will explore some case studies of clients who didn’t get the coverage they expected and describe how some companies avoid paying LTC claims. Learn how to evaluate your policy and what to look for when purchasing new coverage.  This workshop will be held in our dining room on Sep 27th – 11AM MDT.

My hunch is that South Dakota’s property tax assessment cap amendment, known as Amendment D, will pass in November. This ill-conceived law will guarantee our property tax system will become increasingly unequal and unfair. The long-term result of this Amendment will be some property owners paying two, three, or four times as much in property taxes as their neighbors.

There is a way around this inevitability for those who plan ahead, but you’ve got to move now. If you own real estate, attending this call could save you tens of thousands of dollars, if not hundreds of thousands.

This important teleclass will be held on Sep 28th – 4 PM MDT.

Listen to Rick’s colum here:Download the_american_dream.mp3

Owning your own business—it’s part of the American Dream. For most people, however, the dream should stay a dream. In my experience, very few people have the combination of skills needed to successfully run their own businesses.

Knowing whether you have the skills to operate your own business is an accomplishment all on its own. Those insightful people who can discern their limitations are often the ones who achieve financial success helping make their employers or companies successful. An example might be a man who is a skilled salesman with outstanding people skills, but who is frustrated by financial details and quickly bored with office routines. He is likely to be happier, as well as financially more successful, working for a company that rewards his selling skills than he would be trying to manage a business of his own.

There is a classic book called The E Myth, by Michael E. Gerber, which I recommend to anyone thinking of getting into business. Gerber says there are three skills necessary in running your own business: technical, managerial, and entrepreneurial. If you fail at any one of these, your business is probably going to end up consuming you, your assets, and your dream.

Most of us start out in business as technicians. That is, we learn our trade, whether it is in sales, technology, medicine, law, or hundreds of other vocations, and we learn it well. So well, in fact, that we may start dreaming about becoming the boss.

When you start daydreaming about owning the place, that’s the time you we really need to wake up and take notice. If you expect to make that dream come true, you have to be willing not only to work hard, but also to expand your knowledge and skills. You may be a phenomenal technician, but to be successful in business, you’ve got to acquire management and entrepreneurial skills.

Teaching technical skills is the core competency of colleges and universities, but that academic arena isn’t the best place to learn how to be a successful manager and entrepreneur. Certainly there are useful classes available, as well as many books on management, and it’s a good idea to take advantage of them. In addition, you can learn by observing successful business owners. Finding someone willing to serve as a mentor is one of the wisest things a prospective business owner can do.

When it comes to management skills, one of the most critical areas is understanding finance. Too many aspiring business owners just don’t have a clue when it comes to understanding how money works. Yet it is darn near impossible to be successful without a basic understanding of what drives your income, where you spend your money, and what is left over (the profit) that keeps you in business by driving further innovation and capital investment. What is left after all that is your reward for taking the risks inherent to being in business.

That reward—the lure of financial and career success—is what most would-be entrepreneurs focus on when they’re at the dreaming stage. There’s nothing wrong with having it as a goal and an incentive. At the same time, it’s essential to realize that the way to gain that reward is to do the day-to-day work it takes to manage a business.

If you wouldn’t enjoy learning or practicing managerial and entrepreneurial skills as well as technical ones, it’s unlikely that you would succeed as a business owner. Fortunately, there are many other routes to success. The best way to fulfill your dreams is to choose a route that’s the best fit for your skills and talents.

To listen to this column, click here. Download holding_the_boss_hostage.mp3

Some years ago I had an acquaintance who owned a small business. After a burglary at a neighboring business, he had an electronic security system installed. He was so uncomfortable with it, however, that he refused to learn the code for shutting off the alarm. If he wanted to get into his own building after hours, he had to get one of his assistants to let him in.

This man had put himself in the position of being a hostage to his employees. The term “hostage” may be a bit of a stretch. Still, I have recently realized how vulnerable a position you are in as a business owner if you are ignorant about day-to-day operations. Staff turnover in my office has forced me to become more involved in those operations, including a crash course in learning some complex new software.

If you own or manage a small business and are too much of a “hands-off” boss, your position of authority may be more illusion than reality. If you can’t find what you need in the files (paper or electronic), don’t know how to contact the company that clears snow from your parking lot, or don’t know how much money your company spent last month, you may be allowing yourself to be dangerously dependent on those who work for you.

Being the boss, as any business owner can tell you, means that you are responsible to your employees as much as they are responsible to you. Mutual trust is essential if you want your business to flourish. That trust, however, doesn’t mean taking yourself out of the loop. Part of being a good manager is knowing when and how to delegate. At the same time, it’s unwise to delegate so freely that you isolate yourself from the daily operations of your business.

Here’s a basic list of obvious but often overlooked things an owner or manager ought to know:

· How the accounting system works.

· Exactly what money is coming in and what is going out, including signing checks or approving expenses and being kept up to date on accounts payable and accounts receivable.

· How to use essential software (accounting, invoicing, inventory, etc.), including access to all employee passwords.

· The filing system—how things are organized and what is kept where.

· Who does what—the job descriptions and specific responsibilities of all the employees.

· Contact information and contract provisions for companies or individuals who provide maintenance, technical support, or other services for your business.

If you operate a business, your education is probably in the "what" of that field rather than the "how" of running a business. Your training has taught you how to be an engineer, a plumber, a mechanic, a doctor, or whatever it is you do. It hasn’t necessarily taught you how to run an engineering firm, a plumbing business, a repair shop, or a clinic.

Part of your job as a business owner, then, is to provide that training for yourself. You don’t have to get an MBA to do so; all you have to do is ask questions. If you don’t understand the monthly financial statements or know how to use your accounting software, ask your CPA or your bookkeeper. If you have no clue about the filing system, ask the secretary or office manager to explain it.

I’m not suggesting that the owner should have a finger on every detail. Micromanaging isn’t a good way to run a business. Yet—as I can attest with my newfound software skills—knowing what’s going on is a boost to a boss’s security, confidence, and ability to delegate wisely.