MJ DeMarco
I followed the science; all I found was money.
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ServiceFly's story (http://www.thefastlanetomillions.com/failure-mistakes-goofs/17084-my-original-blunder.html) here got me thinking about one of the biggest success traps new entrepreneurs make....
In fact, this trap is so pervasive, it is the reason why those high-flying mortgage brokers who were making $80,000/mo for years, are now broke. It is root of all riches-to-rags stories.
Lets say you build a business and start cash-flowing big profits.
You rocket to an impressive monthly income -- for this exercise, lets assume you are earning $100,000/mo.
Here comes the trap ... when people start earning this kind of income and aren't accustomed to it, they have a tendency to go out and spend all of it, if not MORE. Their bad habits when they worked for a paycheck, transcend to their business income.
TRAP: You earn $100,000/mo and you go out and spend $120,000/mo on expensive toys thinking "this gravy train will never end!". The cars. The powerboats. The big houses. The 90 inch plamsa TV with dual flux-capacitors. You know, the refrigerator with an internet connection and video game console built-in. This trap fuels the show "MTV Cribs" ... believe me, half of the people featured on the show are living well beyond their means.
If you cash-flow profit to the tune of $100,000/monthly; the fact is, that $100K/mo is really only $60K/mo as the federal and state governments will likely take 40%.
So you are really earning $60K/mo. Now, the entrepreneur who goes out and *thinks* he is being frugal by spending $70K/mo (hence leaving $30K on the table) is still coming out NEGATIVE once the tax man comes calling.
My safety range was 20%. If I was earning $100,000, I tried to keep my expenses within 20% of cash-flow - or, about $20k/mo. If I had income of $200,000 for the month, I was able to spend more, but had to also, save more.
Believe me, I've had those nightmarish calls from my accountant dozens of times -- "MJ you owe the State of AZ $133,000 and the Feds $380,000". These calls are scary, frustrating, and evidence to the danger of this trap. You don't want to be on the IRS's radar screen.
So here is an outline of the Income Trap:
1) As entrepreneurs, we must realize that the tax man no longer gets paid first, they get paid last. You must set aside cash for taxes.
2) For high income entrepreneurs, you must not spend 100% of your cash-flow -- to grow your biz and service the tax man, your cash-flow expenditures must be 50% or less.
3) If you earn $200K/mo and spend $250K/mo, you aren't rich ... you're just playing roulette with the government, your business, and your life.
Had this trap not caught so many, we'd have mortgage brokers who would still be in business and riding out the storm with plenty of reserves.
Good luck.
MJ
In fact, this trap is so pervasive, it is the reason why those high-flying mortgage brokers who were making $80,000/mo for years, are now broke. It is root of all riches-to-rags stories.
Lets say you build a business and start cash-flowing big profits.
You rocket to an impressive monthly income -- for this exercise, lets assume you are earning $100,000/mo.
Here comes the trap ... when people start earning this kind of income and aren't accustomed to it, they have a tendency to go out and spend all of it, if not MORE. Their bad habits when they worked for a paycheck, transcend to their business income.
TRAP: You earn $100,000/mo and you go out and spend $120,000/mo on expensive toys thinking "this gravy train will never end!". The cars. The powerboats. The big houses. The 90 inch plamsa TV with dual flux-capacitors. You know, the refrigerator with an internet connection and video game console built-in. This trap fuels the show "MTV Cribs" ... believe me, half of the people featured on the show are living well beyond their means.
If you cash-flow profit to the tune of $100,000/monthly; the fact is, that $100K/mo is really only $60K/mo as the federal and state governments will likely take 40%.
So you are really earning $60K/mo. Now, the entrepreneur who goes out and *thinks* he is being frugal by spending $70K/mo (hence leaving $30K on the table) is still coming out NEGATIVE once the tax man comes calling.
My safety range was 20%. If I was earning $100,000, I tried to keep my expenses within 20% of cash-flow - or, about $20k/mo. If I had income of $200,000 for the month, I was able to spend more, but had to also, save more.
Believe me, I've had those nightmarish calls from my accountant dozens of times -- "MJ you owe the State of AZ $133,000 and the Feds $380,000". These calls are scary, frustrating, and evidence to the danger of this trap. You don't want to be on the IRS's radar screen.
So here is an outline of the Income Trap:
1) As entrepreneurs, we must realize that the tax man no longer gets paid first, they get paid last. You must set aside cash for taxes.
2) For high income entrepreneurs, you must not spend 100% of your cash-flow -- to grow your biz and service the tax man, your cash-flow expenditures must be 50% or less.
3) If you earn $200K/mo and spend $250K/mo, you aren't rich ... you're just playing roulette with the government, your business, and your life.
Had this trap not caught so many, we'd have mortgage brokers who would still be in business and riding out the storm with plenty of reserves.
Good luck.
MJ
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