Making Smart Choices

A Big Hand For The Idiots

October 19, 2011

Instead of 22.9%, he’s now paying 19.9%. Who’s winning? <This guy>

In 2009, Congress passed the Credit Card Accountability Responsibility and Disclosure Act, the latest in a series of clever acronyms to become law. (Which, at 4 letters, is brief as these acronyms go. It’s all but inconceivable that anything will ever beat the 10-letter Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001.)

Congress passed the Credit CARD Act because, in short, consumers who vote (or more to the point, voters who consume) are moronic and would rather complain than rein in their spending. The Credit CARD Act required issuers to:

mail statements out 3 weeks in advance instead of 2, because with so many good things on TV it’s impossible to devote one day out of a mere 14 to scratching a check that you know you’re going to have to scratch anyway (“Mail”, if you’re wondering, is this laughably archaic method by which people used to send documents);
reduce rates for anyone whose rates they’d raised and who’d then paid on time for 6 consecutive months. Yes, a government-sanctioned rewards program;
offer cardholders fixed limits;
cap the fees they charge to cardholders who exceed their credit limits, i.e. cardholders who couldn’t be bothered to remember their credit limits in the first place;
provide a toll-free number on their statements that people who shouldn’t hold cards in the first place can call to get free credit counseling;
perform several other requirements, which we won’t get into because we try to keep these posts around 1000 words.

The bill also ordered the Federal Trade Commission to spend your money determining whether it’d be feasible to create a technology that lets an ATM user who’s “under duress” enter a PIN that would call the cops. Seriously. Section 508(a).

No one disputes that as a result of these requirements, banks’ credit card revenues would fall. Banks, like every other business in the history of the universe, seek to maximize profits. When our elected representatives reduced the banks’ ability to profit off their core customers, those same representatives forced the banks to find other customers to gouge. Which they did. You and me, the responsible ones.

Bank of America recently announced that it’s going to start charging its debit card holders $5 a month. You may remember that 2 short years ago, consecutive Secretaries of the Treasury took $135 from each of us (or if you prefer, 27 months’ worth of future debit card fees) and awarded it to Bank of America for its inability to assess risk before lending money.

Bank of America might be effectually a Soviet state-controlled enterprise whose losses the citizens cover – a modern-day GUM department store or Aeroflot – but it’s still going to seek revenue within whatever legal bounds it’s been afforded. Among all the Credit CARD Act’s byzantine stipulations, there isn’t a word in there about how much banks can charge customers for using debit cards. Therefore, banks chose to, because they can.

The good news is that you won’t pay the $5 fee if you manage to go the entire month without using your debit card. Instead, you can either go Montana Freeman and print your own money, or you can make as many (free) ATM visits as you want and pay cash; the same outdated activity that debit cards were supposed to make obsolete.

There’s a secondary reason for banks charging debit card fees. People respond to incentives. A debit card fee gives a consumer a compelling reason to use a different method of payment. You know, like a credit card. If banks can’t profit by charging high-revenue customers as much as possible, they’ll make do (and abide by a federal mandate) by charging less, but to more customers. At least a few of the people who wouldn’t otherwise have used credit cards will start incurring balances. As for those of us who’d never consider carrying credit card balances, well, we’re welcome to pay that $5 fee.

To recap: the government gives banks incentive not to mine their profligate customers for profit, so those banks are forced to hit up the responsible customers. Which gives those same responsible customers incentive not to spend. Because economic activity is the last thing you want to encourage during a recession.

What recourse do we have as responsible consumers? Well, there remain other banks to do business with. Petitioning Congress to rescind the law would be a colossal waste of time and effort. Resorting to the ridiculous practice of writing checks is a possibility, too. As is carrying big fat wads of cash. In the meantime, find yourself a debt-laden consumer who thought the Credit CARD Act was a necessary protection against a banking industry run amok, and kick that person in the shins. The cosmos will thus regain balance.

Filed Under: Bad Examples, Consumer Debt, Credit Cards, Making Smart Choices Tagged With: balance transfers, credit card act, Credit Cards, debit card fees, debit cards

Getting Fired Never Felt So Good, Part II

October 14, 2011

No one who refers to his place of employment as “the salt mines” looks like this.

If you missed it, go here for Part I of the story of John, an entrepreneurial field experiment. He’s a former wage slave who was lucky enough to get fired by a boss who wasn’t very good at assessing the value of his employees’ human capital. John got fired not over performance, but over money (among other things.)

(A note to bosses: do that, and you’re giving your employee a more accurate idea of his market value than working for you ever could.)

Sudden unemployment forced John to think entrepreneurially. He started a business, incorporated it, and started living for himself, his wife and his kid (drat, that just gave away the ending) rather than his boss’s yacht. John’s making far more than he did before, and can take days off at a stretch if he feels like it.

But there’s more, starting with the pride that accompanies ownership. That goes for what you drive, where you live, and especially where you work. There’s a reason why privately owned houses look nicer than Section 8 housing does. Any sane person will put more effort into maintaining something that’s his own, rather than something he has only a transitory interest in. (When was the last time you washed a rental car?)

Most salaried workers salivate at the idea of getting off work early, whether they choose to admit this or not. Your average successful entrepreneur just wants that day’s work to be completed, and doesn’t care if it takes 13 hours on that particular day, or 1.

In his new life as a business owner, John’s financial fate no longer rested in the hands of a single, capricious, inherently flawed human: a boss whose job description mandates paying John as little as possible.

Instead, all John had to do now was just please customers. The more he pleased (and continues to please) them, the richer it made him. The money is fine in and of itself, but every dollar Dog & Pony earns gains him greater self-determination. So why don’t more people do this?

Going it alone had crossed John’s mind before, but getting fired gave him the necessary impetus.

I had run my own company for a short time while in Detroit, but gave up on it too early. I did sound design for car commercials and used someone else’s studios. It turned a profit, but I just wasn’t prepared. And the paperwork overwhelmed me. When I received an offer to be a salaried employee at another studio I took it, and a year later Omega Center hired me.
Once they fired me, I had no choice, so this time I knuckled down and got it done.

To start a sound design business, you need a big initial outlay on equipment. With his savings hovering around 0, John buttressed them with an, ahem, credit card advance and an $18,000 second mortgage[1].

That took care of capital expenditures. Labor expenditures, at the start, were staring at him in the mirror every morning. Clients, he got through word-of-mouth and “some judicious cold calling.” That leaves the dull but critical process of getting things nice and legal.

I got the business up and licensed with the state and then went to the county to figure that part out. Given the choice between doing business as a limited liability company or an S Corporation, I went with the latter. It gives me tax advantages and better protection from libelous types.

That part can’t be underestimated. We show you how to set up an S corporation (or an LLC, which you shouldn’t immediately rule out) quickly and without fuss in our new ebook.

It took John 6 months to turn a profit. As to the magic formula for transitioning from tentative to successful, here’s it is:

You just have to keep plugging away. There’s no magic formula, just hard work and ignore the self-doubts.

The next MBA-level textbook that has that passage in it will be the first.

John started by creating a studio in his house, using the home equity line of credit to buy a laptop, a microphone and some odds and ends. The line of credit paid for more equipment as the business took off: he soundproofed one end of a hallway and created an isolation chamber to record voice talent in. John purchased an Integrated Services Digital Network line, enabling him to send and receive sound files in real time to and from anywhere. (By the way, he paid the initial advances off in 2 years.)

Eventually, with the business growing several-fold (and John’s family growing by 50%), it came time to move into real offices. Which sounds expensive to the untrained ear, but

I turned to my network and found a great banker who listened to my pitch and believed in my company.

Today, Dog & Pony has 3 full-time employees and grosses about $600,000 a year. The studios sit in the epicenter of Las Vegas, the city with the worst unemployment in the state with the worst unemployment in the country. Yet Dog & Pony’s revenues have increased in each of the last 4 years.

John did go to college, but not for this. There are hundreds of schools that offer useless degrees in subjects like women’s studies and sociology, but only a handful that have begun teaching the practice and study of entrepreneurship. (They include the University of Nevada-Las Vegas, whose entrepreneurship program CYC’s own Betty Kincaid helped found.)

John’s personality and attention to detail made him popular among peers and clients while he worked for Omega Center, but that reputation only translated into so many dollars while he was an employee. Actually, it only translated into so many 7¢ amounts: see Wednesday’s post. When John became a business owner, his positive reputation turned from a desirable attribute into a force multiplier. The beneficiary of his hard work, commitment, and reputation was now him. Just as it should be.

John didn’t have a 5-year plan. No sales goals, no revenue goals. He had literally no expectations. Which doesn’t mean he thought he was going to fail, but rather it means he took success as it came. He doesn’t hire people on a schedule, but as they become necessary:

I couldn’t handle the phone calls, billing and studio work so I needed an assistant. When there was too much studio work for just me as a producer, I hired another. And so on…

As for the numerical drudgery of bookkeeping, taxes, and payroll, those are easy enough to handle that Dog & Pony does most of it internally.

It’s surprisingly easy to run QuickBooks if you just knuckle down and read the damn manual. Our office manager/zookeeper handles it, and a once a month we receive a visit from a professional bookkeeper. And we have a great accountant.

You can see John is full of regret, and dying for a chance to return to the unpredictability of a “steady” job.

What was the hardest part about deciding “OK, I’m going it alone?”

Just doing it. Sorry to sound like a Nike commercial, but the biggest impediment is always self-doubt. If you can get past that hurdle, and your skill or business is viable, then you’re on your way.

Controlling your destiny is what this whole personal finance game is ultimately about. We’ll say it again and again. You can do this. John proved as much. But the 2^nd, 3^rd, 4^th, 5^th and thousandth steps can’t happen until you take the 1^st.

[1] Do we recommend this? Under normal circumstances, of course not. But John wasn’t buying jetskis or installing an atrium. He was purchasing his destiny. To draw a parallel, under normal circumstances you shouldn’t stuff your face with Klondike bars and Jack Links. But if you’re emerging from a week on the Ross Ice Shelf without food, then eat whatever you can get your hands on. Worry about survival first, and only make decisions about quality once you have the luxury of doing so.

**This article is featured in the Carnival of Personal Finance #331-Global Stock Markets Edition**

Filed Under: Capitalism, Entrepreneurship, Healthy Living, Making Smart Choices, Role Model Tagged With: Dog and Pony Studios, entrepreneur, John McClain, Las Vegas, sound design

Getting Fired Never Felt So Good, Part I

October 12, 2011

It’s obscured, but his right middle finger is pointing directly at conventional employment.

You want a real-world example of someone who flipped the bird to the idea of being an employee and never looked back? Here’s Part I of a test case for (and testament to) the wisdom of sacrificing a “secure” paycheck for the riches that come with self-determination. The thrilling conclusion will come Friday.

You don’t know him. His name is John McClain, and he’s the youthful 46-year old founder/owner of Dog & Pony Studios in Las Vegas. They do sound design for movies, TV shows, commercials etc. But that’s secondary to what the business has been able to do for its owner. Not only does has it created gainful employment for multiple people, it’s allowed John a lifestyle that includes a second home and exotic vacations.

(Wait, that sounds overly grandiose. The vacation home is a modest cabin in small-town Utah, not a private Caribbean island. And Laos is cheaper to visit than you think.)

He didn’t start the business in his parents’ basement, recording his friends’ conversations on 8-track as a precocious preteen and growing the business over decades into what it is today. Far from it. Instead, he…well, let’s let him tell the story.

John worked for an East Coast production studio, which we’ll call “Omega Center”. In 1996, Omega looked to expand to the West Coast, and put John in charge of those operations. The job involved him managing the studio, producing commercials and other pieces, creating original music, hiring and training employees, et al. He’d signed a contract, and, as John put it,

I made the classic employee mistake of not having an attorney look over my “contract”. Because my employer would never do anything to screw me, right?

Of course, John didn’t know this (or even think of it) at the time. Most employees wouldn’t. I get paid every 2 weeks, the checks don’t bounce, why would I worry about my contract? Besides, those things are boilerplate, aren’t they?

When Omega offered me the job, I also had a great offer on the table in Detroit, where I was living at the time. I figured I’d throw caution to the wind and asked for $100,000 a year. They looked at me like I was from Mars but I kept a straight face and offered some story about moving my wife, leaving home, etc. They offered $45,000 + 7% of gross earnings.

Stop. John insisted on a percentage of gross rather than of net. He knew that gross revenue is easy to trace, and that’d he be the one largely responsible for maximizing it. Dollars in are straightforward. Not so for net revenue, which Omega’s accountants could easily lower to a level they found palatable. (“You bought lunch for the clients? Sorry, that counts as a cost of goods sold. We’re deducting it.”)

All I had to do was get the studio’s earnings up around $725,000 and I’d be earning about what I’d asked for. Before I started, West Coast operations grossed $150,000 and were performed via phone and FedEx. With a physical presence, in 5 years I’d raised gross revenues to $1.2 million and hired 2 producers (in addition to myself.)
Did my salary change? Yes. Did it go up? No. The owner never thought I’d do so well, and was angry that he had to pay me 7% of $1.2 million. Never mind that he was earning 93% of an amount he never thought he’d earn. He cut my salary and I began preparing an exit strategy.

Still, John was in a place that most employees would envy. He was “management”, he had 4 people under him (including an office manager), and the people he had to report to were 2500 miles away. It was his to succeed or fail with. Sounds liberating, right?

It should have been, but Omega suffered from myopia; you can’t do it that way, because we’ve never done it that way before. They micromanaged my office and told me I was doing it all wrong. By the way, the home office was retaining only 28% of its clients from one year to the next. Here on the West Coast, we were holding onto 68%.

It’s awesome that he’s petty and/or detailed enough to remember that years later. John was putting in 50 hours a week, and one day reached the point of no return that so many employees do.

I started telling myself the job wasn’t that bad.

Everyone who’s ever done that, raise your hand. Yup, you in the back, too. Higher, where we can see it.

John came to work one morning in 2003, and was greeted by the owner sitting at his (John’s) desk. Owners don’t fly across the country without a reason. And in this case, a severance check.

Omega paid John what the contract stipulated, but reminded him that the contract forbade him from plying his trade. John hired a lawyer to look it over, but

The owner had written it himself. My lawyer literally laughed out loud when she read it.

John had (or had had) a boss who knew nothing about contract law, but other firees aren’t so lucky. If you do insist on working for someone else, never accept a contract that includes terms that can affect you even after they fire you. Better to go hungry until you find an employer who won’t force you to stay unemployed months or years down the road.

So here’s John. Late 30s, wife, mortgage, cats, dogs, pink slip. Being rational, he took his new employment status in stride:

I freaked. Then I let all my friends and clients know what had happened. Then those same friends and clients started calling me directly to book me for their jobs.

He had enough work to see him through in the short term, and fortunately his wife was continuing to make good money. But as John (and not many other people) is frank enough to admit,

She and I were always spenders, not savers. One salary wouldn’t cut it at the time. We were super tight for dollars and had no savings to speak of.

Sometimes you wonder if the boss who’s holding the scimitar over your head knows that you haven’t saved anything. Every person who dispenses financial counsel loves to advocate creating an “emergency fund”, but hardly anyone actually does it.

The standard move at this point is, of course, to apply for jobs at other companies in the industry. That’s just what you do. But like a dog who’s been abused, John was wary. It’s hard to put 100% into your search while thinking, “The same thing might happen again. I need to go it alone.”

I received an offer from each of my prior competitors but I didn’t want to go back to another j-o-b. My former employer had taught me how to not run a business, and I was determined to put those lessons to the test.

You already know how the story turns out, especially if you clicked on John’s company’s link, but it didn’t go down the way you think. Come back Friday for Part II.

**This article is featured in the Baby Boomers Carnival: One Hundred Fourteenth Edition**