Many personal finance and “get out of debt” blogs often advise their readers to avoid the use of credit cards at all costs. For some people, it’s all too tempting to buy more than you need and waste money on frivolous items when all you have to do is hand over a piece of plastic. By paying for everything in cash, you force yourself to correlate the cost of the items that you buy with actual dollar values which in theory helps curb your spending.

Photo By Andres Rueda

While these mind games work for the average individual, when it comes to running a small business, credit cards are an absolute must. My personal opinion is that if you lack the self control to watch your spending, then you have no business becoming an entrepreneur either. When running a small business, it’s important to watch what you spend closely and carefully to control your burn rate. But even more important, it’s crucial that you be able to completely separate and track all business transactions apart from your personal purchases. Keeping your business purchases on a separate credit card serves three main purposes.

• Come tax time, it’s extremely easy to extract out your business expenses on your Schedule C or other business tax forms.
• If you ever get audited, you have a much better case if you can show that you keep your business and personal expenses completely separate.
• It makes bookkeeping easier because your credit card company automatically tallies up and in most cases categorizes your expenses for you.

Using credit cards for as many purchases as possible allows you to streamline your bookkeeping. Plus, there are many rewards and money saving benefits to using credit cards for your business as well. Having done a fair amount of research on credit cards over the past decade, here’s a list of the best credit cards for small businesses that I could find in terms of cash rewards and savings with no annual fees.

Note: If you spend an abnormally high amount on business travel, then there are probably other cards that can save you more money on plane fare. For the purposes of this analysis, I focused on cards that provide you with cash back or savings off of your purchases rather than perks. Cash is king for any small business and you want to conserve as much of it as possible.

CostCo Business American Express Card

By far the best credit card that I’ve found is the Costco American Express card. This card is the perfect card for small business owners because it provides rewards for some of the most common expenses that entrepreneurs incur. Here’s a list of benefits for this card.

• 4% cash back off your first $6500 worth of gas at any Costco or domestic gas station
• 3% cash back off of eating out and dining at restaurants
• 2% cash back off all travel purchases which include plane tickets, lodging, cruises, tour operators etc…
• 1% cash back off of everything else
• 90-day coverage from date of purchase against theft and accidental damage up to $1,000 per occurrence
• Extends the terms of the original manufacturer’s warranty up to one additional year on eligible purchases with warranties of five years or less that are eligible in the U.S.

The main disadvantage is that you have to be a Costco member in order to apply for this card. But if you have a family like I do, chances are that you have a Costco membership already so it’s a no brainer. The other thing you need in order to apply for this card is proof that you have a business. This proof can come in the form of an LLC filing, proof of incorporation or a DBA. In addition, to establish your credit limit, you will need to submit your prior years business tax return. The Costco business American Express card is the card that my wife and I use for almost everything and there is no limit to the amount of rewards you can accumulate.

Chase Ink Plus Unlimited Rewards Card

Not every establishment takes American Express, so it’s important to also carry a Visa or Mastercard as well. My wife and I have found that the Chase Ink Plus card offers excellent cash back rewards. The main benefits are as follows

• 3% cashback on gas stations, restaurants, office supply stores, hardware and home improvement stores
• 1% cashback on everything else
• Unlimited cash back rewards
• Unlimited cards for employees and the ability to set individual spending limits per card

The benefits aren’t quite as good as the Costco Amex card but since it’s a Visa/Mastercard, you’re likely to be using it quite a bit at smaller establishments. Once again, you’ll need to provide proof of your business along with your application. In addition, you’ll have to send your business income tax return to establish your credit limit.

Honorable Mentions

The following credit cards received an honorable mention:

• Citibank Dividend Rewards Card – Offers 5% off of gas, groceries, drug stores, and utilities for 6 months. Then it becomes 2%. There’s a 1% cash back for everything else
• Chase Freedom Card – 3% cash back on gas, home improvement and department stores
• American Express Blue Card – 1% cash back off supermarkets, drug stores and gas for the first $6500. After $6500, it becomes 5% cash back. You get 1.25% off other purchases

What Credit Cards Do You Use?

If any of you use credit cards that provide greater rewards than the cards mentioned above, let me know. I excluded Discover cards from consideration because so few places accept it.

In order to build wealth effectively, we all have to be frugal to a certain extent. We have to watch our spending. We have to analyze our expenditures and cut back on the fat. We have to make sacrifices to make sure that we can save enough money for college and retirement.

Photo By Edward Kimuk

Fortunately, my wife and I both share the same principles when it comes to spending money (ie. we don’t spend frivolously). Otherwise, we would be seriously screwed. But after analyzing last year’s expenses using Quicken, I feel all frugalled out. We have pretty much cut back as much as we possibly can without drastically affecting our lifestyle.

If we look closely at last years expenses, we cut spending by another 4% over the year before. We are going out to eat less thanks to my wife’s desire to cook and we don’t really spend that much on entertainment anymore because the kids have to be in bed early. We haven’t bought a new car in ages and I can’t remember the last gadget that I’ve purchased. All of this for a measly 4% savings. While one could argue that 4% is a lot of money overall, I wouldn’t have minded cutting loose a little bit more.

On the other hand, if you look at our business, our profits grew 41% last year. And this profit increase should have been around 75% had my wife and I not shut down the store to take care of a family emergency. We had a 41% increase and it didn’t really require that much more incremental work to earn a much larger payout. The numbers don’t lie. Why should we bust our butts to pinch every penny when we could just transfer that energy into additional income with our business?

Being Frugal Can Only Take You So Far

I love being frugal, I really do. And I love following all of the frugal blogs out there. In fact, one can really learn a lot about saving money by just taking a few extra measures. But after a while, there’s nothing left. You are just tapped out. Unless you started out spending money egregiously, there is a fundamental number that you simply can’t go below without greatly sacrificing your lifestyle.

For example, I love eating out. Sure, we could cut going out to eat entirely out of our budget but where would that get us? While I truly love my wife’s cooking (hope she sees this), I don’t think I could eat at home every night. I wouldn’t be happy and I’d probably get cranky as a result.

Maybe I could cut out an additional few tenths of a percent by driving less and carpooling or riding my bike, but that would be a major pain as well. And quite frankly, I love buying new gadgets. Why shouldn’t I cut loose a little bit and get that Android phone I’ve been eying for several months now?

How To Have An Unlimited Upside

The problem with using frugality to increase your bank account is that there are diminishing returns. Sure, being frugal is easy to do and that’s why most people try to build their bank accounts by cutting spending first. But will being frugal lead you down the path to riches and a better lifestyle sooner rather than later? Is it worth the sacrifice? One might argue that frugality coupled with a sound investment strategy is the way to go, but for me it’s a no brainer. The best way to accumulate wealth is to simply make more money.

Instead of focusing all of your energies on clipping coupons or searching for the absolute best deal, why not channel that energy into starting a business or freelancing on the side? Why not spend time on something that has limitless earning potential?

Even though my wife and I run a successful online business, I still fall into this trap all of the time. Hell just the other day, I spent 2.5 hours looking for the best deal on a new crib for my son. Sure, I ultimately saved about 50 bucks but with that 2.5 hours I could have been working on my brand new course on how to create an online store (my current project). I could have been writing new blog entries. I could have been optimizing our online wedding linens store. All three of these activities would have easily made me much more than the 50 dollars I saved.

Food For Thought

The truth is that many of us waste time on projects that return very little and we need to step back and to focus our energies on what will give us the most gain. By sticking with what is “easy”, we are limiting our potential. So the next time you are driving around town looking for the best deal or looking for ways to eek out another few extra bucks in savings, think about better ways you could be spending your time. Don’t get me wrong, frugality is not a bad thing but you can always make more by expanding your top line rather than focusing on your bottom line.

Many would be entrepreneurs hesitate to start their own business because they think it is too risky from a monetary perspective. In fact, most people don’t think starting a business is even worth trying unless they can come up with a grand slam profitable idea. Of course profitability is an extremely important factor with any business, but what if I were to tell you that you could save a decent amount of money every year with your business while only making a small profit or none at all?

Photo by Chasing Fun

That’s right! Most people don’t consider the tax savings involved in running a business. Most people don’t realize that having a day job is one of the worst ways to save on taxes because Uncle Sam takes a huge chunk out of your paycheck BEFORE you pay for anything. On the other hand with a business, you can effectively pay for everything using pre-tax dollars which can save you up to 35%. So while on paper your business may not be making any money, in reality you could be saving big bucks by purchasing goods with money that is not taxed at all.

But talk is cheap! I thought that it would be interesting to throw some numbers into the mix by calculating how much the average American could save by starting their own business.

The Average American

First off, the average American makes roughly $63,091 before taxes. If we assume that they fall under the 25% tax bracket, the average American is also getting reamed up the wazoo by Uncle Sam to the tune of about $11960 before they can even use this money leaving themselves with only $51131. Even worse, the average American spends roughly $49638 a year which doesn’t leave much savings. It’s no wonder that the average American household is just barely scraping by!

In order to calculate the tax savings associated with running a business, we must break down each and every expense of the average American to see what can possibly be written off with a business and assume a certain percentage of savings. Below is my analysis.

Transportation – Gasoline And Oil Costs

The average American spends roughly $2384 on gasoline and oil related products. If we assume that gas is $3 a gallon and that the average car gets 20 miles per gallon, the average American drives roughly 15893 miles per year. We’ll round this number to 16000 for simplicity.

Currently with my business, I’m able to expense roughly 22% of the miles I drive on my car for business purposes. How do I do this? Whenever I need to drive some place or run some errands, I make sure that I try to take care of something business related along the way. For example, if I need to go to the grocery store, I also make a trip to the office store or other related establishment where I need to pick up something for the business. It takes a bit of planning and excellent documentation but you’d be surprised by how easily you can find ways to use your car for business.

For the average American, 22% of 16000 miles is roughly 3520 miles. For 2009, the IRS mileage tax deduction is 55 cents. 3520 * $.55 equals a tax writeoff of $1936.

Housing And Shelter

The average American spends $10,023 on housing or shelter every year. Currently, my wife and I expense 20% of our rent for business related purposes. In actuality, we use more than 20% of dedicated business space in our home but we keep things at 20% to prevent the likelihood of an audit. In any case, 20% of $10023 equals $2004.60 of tax writeoffs for the average American.

Food – Eating Out

The average American spends roughly $2668 a year eating out. For my wife and I, we love discussing business over dinner. In fact, we make many of our key business decisions at restaurants because it’s a more relaxed environment and easier for us to concentrate.

As a result, we are able to expense some of our meals every month. For this analysis, let’s assume that the average American can expense 10% of their meals. Because meals and entertainment can only be deducted at 50%, this effectively equals a 5% writeoff. $2668 * .05 equals $133.40.

Travel

The average American spends roughly $1600 on summer vacations every year. While travel expenses purely for pleasure can not be expensed, any vacation can be made to be business related with the proper planning. So what my wife and I usually do every year is plan our vacations around our business travel.

For example, a few years ago my wife and I had to meet with linen and textile vendors in Japan so we made a vacation out of it. We purposely planned our meetings every other day and used our free days to relax and pamper ourselves. If you do things right, you can pretty much expense almost the entire vacation!

Because I’m not sure how the $1600 a year is broken down in terms of airfare vs food/entertainment costs, I’m going to assume that 75% of this cost is deductible for the average American. Total tax deduction $1200.

Utilities

Since we use 20% of our house for business, it’s only fair that we deduct the same percentage for utilities. In addition to water, gas and electricity, we also have a dedicated phone line for the business which can all be expensed.

The average American spends $3477 on utilities every year. Once again, the exact breakdown of this number is unclear so we need to make some assumptions. For example, a business probably wouldn’t be able to expense the cable tv bill. However, most other items are fair game. To be conservative, I’m going to assume that at least 10% of this amount is deductible which puts the deduction at $347.70.

Computer Equipment And Household Furnishings

Unfortunately, this category is extremely vague. Computer equipment and household furnishings covers everything from furniture all the way to decorative items and computers but excludes major appliances. Because this category is so broad, I’m going to be conservative here and assume only 15% of this amount is deductible.

Thanks to section 179, computer equipment and other furnishings can be expensed 100% up to a six figure dollar amount every year. Chances are, if you have a business and purchase a computer, it can be written off in its entirety in the same tax year. The average American spends $1797 in this category. 15% of $1797 is $269.55.

Adding It All Up

Obviously, I have not included every possible business expense in my analysis, only the common items. If you really want to get nit picky, in reality you could probably expense far more than what I’ve mentioned in this article.

In any case, if we total all of the categories mentioned above, this comes out to $1936 + $2004.60 + $133.40 + $1200 + $347.70 + $269.55 = $5891.25.

Based on an income of $63091, this represents almost a 10% writeoff on the average American’s taxes! Putting all of the numbers together at a 25% tax bracket, this is a savings of $1472.81 every year. Keep in mind that most of the deductions I calculated above were on the conservative side. In practice, my wife and I actually deduct a good amount more especially under the computer and equipment category.

If you are worried about getting audited, the best thing to do is to arm yourself with an accountant and document every expense carefully. Your accountant should be able to tell you with high confidence whether or not an expense is actually deductible. This is free money folks, but only available if you have a business. Stop giving your money away to the government now!

Further Reading

• How To Save Money On Taxes

Disclaimer: As one reader pointed out, this article is not meant to encourage people to haphazardly make tax deductions for their business. In fact, I discuss the flip side in depth in my article on Is Your Business Just A Hobby In The Eyes Of The IRS. However that being said, the deductions mentioned in this article are not exaggerated. In fact, I believe that the majority of people don’t take tax deductions that are rightfully theirs because they are afraid of the IRS. Talk to your accountant! They will know how to help you figure out how to make the most out of your deductions.

When most people think about starting a company or business, they think of the Microsofts, the Googles and the YouTubes of the world. They tend to think big because the media focuses on these multi-million dollar success stories and over glamorizes the risks and rewards.

Photo by MarkyBon

In fact, the media tends to portray entrepreneurs like lottery winners because that’s what makes the news. Because the chances of creating a company like You Tube or Facebook are so slim, most people shy away from starting their own business because they think it’s just way too risky with very little chance of success.

Just the other day, I had one of my readers email me that they were afraid to go out on their own because they didn’t want to risk everything for a measly 1% chance at success. A 1% chance at success? Where the hell did he get this number from? Turns out that he read that “99% of small businesses fail within their first year” which made him believe that he only had a 1% chance of succeeding.

Listen to me. This 99% statistic is complete and utter BS! Starting your own business doesn’t have to be the next big thing. And if you do things right, your business doesn’t have to be that risky either.

You Don’t Have To Hit A Home Run

The first thing that you have to understand is that your business idea doesn’t have to be the next Google, You Tube or Facebook to make money. If you are planning to start a company for the sole purpose of getting acquired for a billion dollars, then your chances truly are one in a gazillion. So instead of buying a lottery ticket, start something that you can make profitable within a short time frame.

Instead of setting your sights so high, focus on what can make you some money now with very little risk. Ignore the glamor and the hit or miss ideas. Divert your attention to simpler things. The simple things that people are looking to buy. Your idea may seem boring to your friends and family and it may even be mundane, but who cares? Find something that you can do and do it well.

Take a look at Tony Hsieh of Zappos. The man sells frickin shoes over the internet and makes billions of dollars a year. He’s successful because he sells shoes in such a way that people want to buy from his company. If you need a smaller example, take a look at our wedding linens business as well. We sell frickin handkerchiefs over the internet and make six figures every single year.

You don’t have to invent the next big thing. You don’t even need to do anything fancy. Look for a small niche and exploit it. If someone has already taken your idea, don’t let that stop you because the market is probably big enough for the both of you.

If you still don’t believe me, take a look around the next time you go shopping or go out to eat. My wife and I just ate at our favorite Chinese restaurant the other night. But did we go there because it’s the only Chinese restaurant in town? NO! In fact, there are probably 50 Chinese restaurants within a 15 mile radius of our house. And all of them have been in business for years. Despite the heavy competition, they still all make money.

By choosing a business idea that is simpler and easier to execute, you can improve your chances of success by several orders of magnitude. You might not strike it rich or make instant millions, but you can make a nice comfortable profit and be your own boss.

Keep The Upfront Costs Minimal

Keeping the risk factors low means keeping the expenses low as well. By creating a presence online, you can easily start your business for only a couple of bucks a month. Our wedding linens store is an online only store and costs only 80 dollars a month to maintain. If business were to suddenly stagnate, we could literally keep our store open indefinitely at our current burn rate.

When we first started out, our upfront costs were even less. Our web hosting only cost us $6.95 a month at Bluehost and we paid absolutely nothing in development costs. If you just take the time to look around, you can find a lot of free open source software already written for you and ready to use. These days, it’s extremely easy to Create Your Own Business Online. Read my tutorials and get a head start!

If you want the absolute lowest risk business possible, then start a blog or an affiliate marketing site. At $6.95 month, you can keep your website up for as long as you want until you are profitable.

Don’t Quit Your Job Until You Are Ready

If you need even more of a safety net, work on your business while you have a full time job. Take your time! Incubate your business within the comforts of your full salary and launch only when you are ready.

My wife and I worked on our online wedding linens business while we both had full time jobs. There was no pressure whatsoever for our online business to make any money early on because we had our salaries to back us up. Had we not had this cushion, we probably would have made more rash decisions just for the sake of money.

Some people can only be motivated by placing themselves in pressure situations. But if mitigating risk is your most important criteria, then don’t quit your day job until your business is already making money.

What Does It Mean To Fail Anyways?

My biggest beef about the “99% failure rate” statistic is that all businesses are lumped into one large category. I’ll bet that if this statistic was compiled again for just internet businesses alone that the failure rate would be far less.

These days, it doesn’t take much money to start a business and it doesn’t cost that much to maintain one either. If mitigating risk is your number one concern, then play it safe and start a low cost internet business. Pick something simple and build upon it. Businesses take time to grow and you can turn any boring old business into something huge if you have the time and patience.

My wife and I are currently on the verge of coming to an agreement on a house purchase and we’re excited and terrified at the same time. In just a few short months, we’ll be running an online store, maintaining a small business blog, and taking care of a second child as well. Besides the need for an extra bedroom for our new little one and a nice backyard to play in, our business has required the use of more and more room as we continue to expand. In a nutshell, we are in desperate need of some extra space and this house fits the bill.

Photo by Rev Dan Catt

The problem for me when it comes to home buying though is that I hate carrying a large mortgage. I was always brought up to pay my debts in their entirety and to not have any financial obligations hanging over my head. For example, I always pay my credit cards on time. I rarely if ever borrow money from friends. Hell, I won’t even borrow money to buy a car unless the finance rate is at or below the interest rate I can get at a bank.

All of these ideals are further reinforced by all of the frugality and personal finance blogs that I read on a regular basis. But principles aside, it looks like I’m going to have to bite the bullet with the house since I simply don’t have enough money to buy a home entirely in cash.

Our Situation

Speaking of cash, my wife and I are in fairly good shape. Because of our frugal ways and our online business, we have managed to save at least what I consider to be a decent amount of cash. And having this nest egg of money has allowed us to sleep very soundly at night. If I were to ever lose my job, we could survive pretty much indefinitely on our online business income at our current burn rate. If I were to lose my job and our business went under, we could still survive for a decent amount of time as well off of our savings.

But when you factor in the cost of the new house into the equation, our financial situation definitely worsens. That’s not to say that we are going beyond our comfort zone with this new house, but the size of the down payment will put a huge dent into our nest egg and introduce a fairly hefty mortgage payment as well.

The Question

If everything continues to go smoothly with both my job and our business, we can easily afford this house. If I lose my job for an extended period, our business can still pick up the slack for a very long period of time. But if I were to lose my job and our business went under, we might be in a bit of a bind. We could still survive for a reasonable amount of time but it would definitely be stressful.

By the way if you haven’t noticed, I’m more concerned about losing my day job rather than our business going under. That’s not to say that I’m insecure about my job, but I’m not 100% in control over my day job like I am with our online business. The likelihood of our online business suddenly making zero revenue is pretty close to nil. If anything bad were to happen to the business, it would happen gradually over time and we would be able to see it coming and adjust accordingly. With my job however, the executives and the board of directors might suddenly decide that the project I’m working on is no longer worthwhile and lay me off at a moments notice. This is a very important distinction and one of the main reasons having our own business is more stable than my day job.

In any case, I’m left with a very difficult decision. Do I borrow more money and maintain a larger nest egg or do I borrow less and have a much smaller monthly mortgage payment?

The Case For Borrowing More

We are currently in a unique situation living in this depressed economy. Interest rates for mortgage loans are at rock bottom. And while it’s still a bit difficult to get approved for a loan, once you do it’s a major bargain to borrow money right now. In fact the interest rates are so low that it is highly unlikely that rates will be this low again for a very long time. In addition at the rate the US government is printing money, it seems that higher inflation is inevitable making it extremely favorable to take out a larger loan.

The other thought I had in regards to taking out a larger loan and putting less money down is that my salary and our online business earnings will continue to rise to offset the increased mortgage payment. Borrowing more money also means having more cash readily available in case of disaster or more realistically in case we need to make any additional modifications on the house.

The Case For Borrowing Less

Borrowing less money is more inline with the principles that I was brought up with. By having a more manageable mortgage, either the business or my day job alone would suffice to cover all of our costs at our current burn rate. We would have to live frugally but I would have peace of mind that we could continue to pay the mortgage even in pretty bad times. The only problem is that our nest egg would be depleted leaving us with less money in case of emergencies.

Clearly there is a fine line here where we need to find a happy medium. Given the following hypothetical scenarios, which would you choose?

• Take out a larger mortgage while maintaining a large enough nest egg for a years worth of burn rate in case something bad happens.
• Take out a smaller mortgage with a significantly smaller nest egg but with a mortgage payment that is easily manageable by either the day job or business alone
• Take out the largest mortgage possible to offset future inflationary pressure

I’m eager to hear your thoughts.

I never understood how the phrase “Time is money” could ever apply to my life. After all, no one was paying me 24 hours a day so how could my free time possibly translate to money? How could wasting time watching television or playing video games cost me anything when no one was paying me anything anyways?

It took me quite a while to comprehend the true meaning behind this statement. And after 10+ years of frittering away countless hours and taking my free time for granted, my business and my child finally made me realize how badly I was selling myself short.

Photo by tlindenbaum

For example, I used to always try to save money whenever I could by doing things myself. I would try and save a couple of bucks by changing my own oil even if it took me twice as long as going to Jiffy Lube. One time my car needed new brake pads so I spent a full weekend learning how to replace them myself. Sure, I ended up saving a couple of bucks but at what expense? Could I have used this time more wisely by doing some other activity?

The other day one of my friends finally bought a house after over 2 years of house hunting. Turns out that he tried to save money by going with a discount real estate agent. Basically this agent was willing to refund him .75% of the sales commission as long he did all of the leg work. As a result, he wasted tons of time looking at houses that he was not interested in and had to arrange his time around open house schedules. In the end, he probably saved around 7000 dollars but at what cost?

He probably could’ve saved a ton of gas and time by having a real estate agent preview homes for him. That way he would only have had to look at houses that he realistically had an interest in buying.

Time Is Only Money When You Are Making Good Use Of It

The reality of it all is that time is not valuable until you do something valuable with it. Most people neglect to factor in the time component when it comes to making or saving money. And as a result, most people drastically undervalue their time because they aren’t making productive use of it. When my wife and I didn’t have our business and I didn’t have this blog, we didn’t have any concept of using our time wisely. So we squandered it away watching television and lounging around with very little to show for it.

As a result, I never used to place much value on my time at all. While I enjoyed relaxing, I always felt empty at the end of the day. Since time was not a scarce commodity for me, I was willing to do some stupid things to save money at the expense of my time.

Perhaps one of the most egregious examples of my poor use of time was when I decided to move out of my apartment without the help of a moving company. I figured I could grab a few friends and save a good deal of cash by moving out myself. In the end, it took my friends and I an entire weekend to complete the task. Meanwhile, a moving company could’ve completed the same task for a few hundred dollars and saved me over a day. Given that my 3 friends and I probably spent over 12 hours doing the move, we were paying ourselves roughly 9 dollars an hour per person. Definitely not worth it.

How Do I Make My Time More Valuable?

So how can you avoid the same trap that I fell into? Do you find yourself selling yourself short? Do you spend time on projects that simply aren’t worth your time?

If you answered yes to any of the above questions, you need to sit down and reevaluate how you budget your time. The key to making time equal money is to immerse yourself in projects that have long term value and to avoid projects with one off gains.

Instead of thinking about how you can save or make money on a singular project or activity at the expense of your time, think about how you can develop systems that can save or make money for you on a consistent basis in the long run.

In other words, instead of focusing of saving a few bucks here or a few bucks there, try and think of ways that you can provide value for a broader audience.

For example, I maintain this blog in order to motivate others and help them start their own businesses. I know that every article I write that provides value will pay me back a hundred fold in the long run.

The same is true with my online business. I know that every hour that I spend working on the website or adding new content or products to the store will eventually net me gains that far outweigh my time investments.

Meanwhile, if I use my time saving a few bucks here and there changing my own oil or doing other things that I’m simply not efficient at doing, I might save some money once but the time investment would offer no long term value.

How Do I Distinguish Between Good And Bad Time Investments?

These days, whenever I see an opportunity to save or make money, I ask myself the following questions before proceeding.

• How long will it take me to complete the project?
• How much money will I make or save?
• Is the hourly savings or cost worth my time? What other projects require my attention?
• If the hourly cost is not worth the money, is this activity something that can provide me with a useful skill? Will I enjoy doing this activity?

While I can not quantify the exact value of an hour of my time, I do know that my schedule everyday is completely packed. I have to constantly juggle spending time with my daughter, working on our online business or writing articles for this blog. These days, an activity has to really be worthwhile in order displace some of my other activities that are already providing long term value. As a result, I rarely try to do anything beyond my core competency by myself unless I’m really interested in learning a particular skill. Time is far too valuable to waste on petty projects. The key is prioritizing your time for activities with the most potential.

This article is the start of a 5 part series on how to create a profitable online store. If you’re tired of devoting the majority of your time to your day job and you’d rather set your own hours and be your own boss, the best way to escape from the rat race is to start your own business online.

When my wife became pregnant with our child and decided that she was quitting her job, we managed to create a profitable online store that generated 100k in profits in just over a year. Today, my wife stays at home with the kids and works just several hours a day on our online business from home!

Starting A Store Or Business Online Is Ideal Because…

1. You don’t have to be physically present to make money. Your computer can take orders for you even while you sleep.
2. There is little or no overhead to maintain your website.
3. Most if not all of the backend software is already written for you. All you have to do is to set things up and customize it.

These days, opening up your own online business is easier than ever thanks to the many services and free software available on the internet. In fact, you can start an online business completely from scratch for as low as 5 dollars a month!

In order to make money online, you have to have goods to sell to the end customer. And to sell goods, you have to have a storefront. I’m going to show you just how easy it is to open your own online store in 5 easy steps and I will cover these 5 steps in detail in the next 5 posts. In the meantime, I thought that I’d go over the different online store options.

What Are My Options?

When most people think of owning a store, selling and delivering physical goods is usually the first thing that comes to mind. However, shipping physical goods is only one of the many ways to make money with an online store.

Did you know that you can setup up your store such that all you have to do is take orders and have the manufacturer fulfill them for you? Have you ever stopped to consider selling informational products that require no shipping whatsoever?

I’ve outlined below the various ways to make money with an online store along with the pros and cons of each.

Dropshipping

Dropshipping is one of the easiest ways to start an online store without ever having to worry about carrying inventory. Once you have set up an arrangement with a dropship distributor, all you have to do is set up your online store and take orders. As orders are received, you simply pass the customer information along to the distributor who is then responsible for delivering the actual goods to the end customer. The profit you make is the difference between your selling price and the wholesale price you’ve negotiated with the vendor.

Dropshipping is one of the easiest ways to make money with very little physical effort on your part. Once you have your store setup, it can almost run on its own. The negative aspect of dropshipping is that the profit margins are fairly low compared to some of the other store options. The other disadvantage is that you are responsible for making the customer happy even though you have no control over order fulfillment. Managing customer support is one of the biggest challenges with dropshipping which is why it is essential to choose reliable manufacturers to work with.

Selling Physical Goods With Inventory

This is the most traditional way of making money via an online store. You purchase physical goods from the manufacturer at a wholesale price, stock inventory and ship the goods directly to the end customer. It sounds like a hassle and it definitely can be troublesome at times, but the profit margins are extremely high compared to dropshipping.

It is because of the high margins that opening up a traditional online store is one of the fastest ways to make a meaningful amount of money in a very short period of time. The negative aspect of opening a traditional store though is that it involves greater risk because you have to put some of your own money up front to purchase inventory.

Opening up a traditional online store has been an extremely profitable venture for my wife and I. We chose to open a traditional online store because we needed to supplant my wife’s salary in a very short time frame when she quit her job. In the span of just a year, we were able make 100K in profits from our online wedding linens store and our business continues to grow every year.

Selling Your Own Goods

Not everyone has the intelligence, creativity and aptitude to sell their own goods created from scratch, but those that do so successfully make the most profits of them all. The hot ticket items to sell online these days are informational goods. Why? It’s because you don’t have to ship anything physical. You can deliver informational products with a simple download once payment is received.

If you have a special talent or possess knowledge that is scarce, selling your own goods is definitely the way to go. Best of all, you get to keep all of the profits.

Selling as an Affiliate

Becoming an affiliate is very similar to being a drop shipper except that you carry no responsibility whatsoever. All you have to do is to refer someone to a product or service. If that person makes a purchase, then you get a cut of the sale. Once the sale is made, you are out of the picture altogether. Being an affiliate is by far the lowest energy way to make money. Unfortunately, it also carries the lowest profit percentage.

If I were to evaluate the different types of stores based on effort and profitability using a table, here’s what it would look like.

As with all things, there’s a direct correlation between effort level and the amount of profit that you can make. With greater risk carries greater rewards and your decision should be based on your own situation. You also want to consider future scalability of your business. For example, even though dropshipping offers lower profit margins, running a dropshipping store is much easier to scale in the future since you don’t have to worry about inventory. My wife and I chose a traditional store because we needed to replace her lost income in a fairly short period of time. Plus, we wanted to be in full control of our customer service. While I know many people who dropship and sell items as an affiliate, the ramp up time to meaningful profits is much longer.

Next up…Step 1: Finding a Webhost and Domain

I admit it. I used to be ashamed of telling other people about our wedding linens business. When we first opened our online store, not only did we not receive many orders in the first 4-6 months, but the idea of opening an online wedding linens store seemed almost silly compared to what my other entrepreneurial friends were up to.

You see at the time, a good number of my friends and acquaintances were starting their own businesses and they were all quite impressive. One of my friends started his own cellphone gaming company. Another friend started his own web development software company. And a third friend started a small consulting firm. Whenever we saw each other, we would ask each other how things were going with our respective companies.

Photo by Nina Frazier

Friend: So Steve, how’s the linens business? Is it fun?
Me: Linens business is ok. We are starting to get indexed in Google and business is picking up. And you?
Friend: Business is great. We are currently working with some big name companies to see how we can help their businesses grow.
Me: Wow, that sounds impressive.

I used to dread these conversations. After all, how could a silly linens business compare to a software business with limitless money making potential?

Gradually though, our linens business continued to grow while some of my friends’ businesses went underwater. In the process, I learned that entrepreneurship isn’t really about what you do, it’s about how you do it and whether you are meeting your own personal goals and expectations.

What Are Your Goals?

The first question that you need to ask yourself is what are your goals? When we started our online wedding linens store, our goals were clear and simple. We wanted to start a business that would allow my wife to stay at home and take care of our kids.

In actuality, we didn’t really care what the business was about. While we preferred to sell something that we could relate to, ultimately we probably could have pursued a wide variety of business ideas as long as it fulfilled our main goal.

As entrepreneurs, we all need to decide early on what our business goals are and stick with them. Clearly, my other friends had loftier and more aggressive ambitions. If you asked them directly, you would find that their end goals were all to eventually create hundred million or billion dollar companies.

I doubt if our online wedding linens store will ever reach that point, but I don’t really care. Family is the most important thing to me and our business allows us to spend more family time together. The last thing I want is to run a business that consumes all of my time with only a small chance of a big payout.

How Much Time Can You Devote To Your Business?

When my wife and I started our business, we were both realistic. We didn’t want to quit our jobs while our business was unestablished so we resigned ourselves to something we could create only during the weekends. We chose to open an online store because of the following benefits.

• You don’t have to meet with any clients during the day.
• You can work at your own pace, decide when to launch or add products at your leisure
• You can sell your products directly on the web with very little customer intervention. Of course this depends on what you are selling but we chose products that met this criteria.

On the contrary, all of my friends’ ventures pretty much required them to work on their businesses full time. They had to constantly meet with potential customers and perform software integration and other software maintenance tasks on a regular basis. I doubt that they could have worked on their businesses only during the weekends because of the end customers they were targeting.

Ultimately, you have to make a choice. Are you choosing to be an entrepreneur to enhance your lifestyle or to create the next big thing? Both choices are perfectly respectable.

What Is Your Time Horizon?

Many businesses take several years to generate any sort of profit. For example, most software companies don’t make any money at all until their software is complete and actually shipping to customers. Depending on the nature of the work, creating your own product and then selling it for profit can take many years.

On the other hand, opening an online store can generate revenue almost immediately. If you are importing and selling goods directly, there is almost no turnaround time except for throwing up a usable web store front.

Because we wanted our business up and running within 9 months, our time horizon for generating reasonable profits was around a year or so. This narrow time line restricted our choices on what type of businesses we could pursue.

Nothing To Be Ashamed Of

Whatever you decide to do, there’s nothing to be ashamed of as long as you are actively going after your goals. Who cares if you are pursuing a not so glamorous business idea? Who cares if your friends are all trying to create hundred million dollar companies?

Only you can decide what will fit your lifestyle goals. The important thing is to get up off of your ass and do something about it. Be proud of whatever you are doing and feel a sense of purpose. As long as your business works for you, then who gives a crap?

I received a surprisingly large number of emails after writing my last article entitled Housing Has Dropped And Rates Are Low – Should I Buy A House? so I thought I’d devote a blog post to addressing some of these mails.

I was kind of shocked because the majority of emails that I received were in favor of purchasing a house right now despite the mathematical analysis that I performed in my last article.

So I went ahead and picked some of the strongest arguments from these emails to address below. Most of these points may be valid for some people but I don’t feel that they apply to me directly. In any case, here are some of the arguments in favor of purchasing a house right now and why I personally disagree.

Argument 1:Interests Rates Are Low And They’ll Never Be This Low Again

One of my readers strongly urged me to take advantage of the ridiculously low interest rates while they still last. His argument was that interest rates may never be this low again so you should take advantage of your increased purchasing power.

Honestly, I want interest rates to rise. Hell, I want interests rates to rise so high that my borrowing power goes to crap. Why? Because if interest rates go up then housing prices will go down and I can get a better deal on a house. The prices for housing in my area are still a bit inflated and they are still high partially because low interest rates are propping prices up.

Interest rates are at historic lows and people are losing their jobs. Most of my friends aren’t getting raises this year and many of them are lucky just to be employed. Once interest rates go up, housing prices will drop because incomes are not increasing and peoples’ borrowing power will decrease. Since interest rates are practically as low as they can go right now, rates can only go up which means housing can only go down in the near future.

I would much rather have a cheaper house with high interest rates than a more expensive house with lower interest rates.

Argument 2:Real Estate Never Drops In Value In The Long Run

I strongly dislike general arguments like this one that have no specific time frame involved. Sure, if you hold real estate long enough, eventually you’ll probably come out ahead. It’s the same as the tried and true ‘buy and hold’ strategy for stocks right?

But you know what? If you think that housing is going to drop in the near future, shouldn’t you wait until it makes sense to buy and hold? If you thought that a stock was going to drop in value for all of this year, wouldn’t you want to wait and buy the stock next year?

Times are tough right now and I personally want to keep as much money in cash in case of emergencies. It is not my goal to burden myself with a large mortgage which I could potentially get stuck with if housing goes down.

Argument 3:The Equity Of Your Payments Increases Over Time

This is very valid argument. In my last article, I didn’t account for the increase in equity year over year for a mortgage payment. After the first year, the equity portion of the payment does in fact increase slowly over time. Arguably, after 5 years or so, I would be just about break even in the scenario I presented in my last article.

But let’s say I think housing prices are going to drop. What happens to my equity then? Buying a house is a lot like trading stock options without a time frame mainly because real estate is a highly leveraged investment. Let’s say I put 125k down on a 625k house. My equity is 20% right?

But if my house were to go down 10% in value or 62.5k, I would be effectively losing 50% of my investment. When it comes to buying a house, everything is amplified. Why should I risk leveraging my wealth when I think housing still has a ways to drop?

Argument 4:Buying A House Is A Good Hedge Against Inflation. Rents May Rise

This is a completely valid argument. No matter how much prices or rents may rise in the future, your monthly housing payments will remain fixed for the term of your loan (assuming you have a fixed interest mortgage). And the way the fed has been printing money lately, it is inevitable that we will hit a large amount of inflation sometime in the future.

But I don’t think that this will happen anytime soon. Arguably, we’ll see flat prices or even a little bit of deflation because everyone’s houses are dropping in value. In fact, most people are struggling just to make payments on their loans. The general public simply does not have the money right now to buy anything. Because everyone’s income is staying flat to lower, it is unlikely that rents or rates will rise in the near term.

Argument 5:The Intangibles Of Owning Are Worth It

I can’t really argue with this one. Believe me, my wife and I really want to own a home. But on the flip side, we also don’t want to put ourselves in a situation in which I’m forced to work for my mortgage.

This article is not intended to say that housing is not a good buy for everyone. Hell, I’ll bet that housing in Detroit or Florida is probably a great value right now. Perhaps it makes sense to buy something there!

But where I live right now, housing prices are still disjointed from rental costs. As long as I believe that housing is still going to fall and that renting is cheaper than buying, I’m going to stay on the sidelines no matter how badly I want to buy something.

Further Reading

• Housing Has Dropped And Rates Are Low – Should I Buy A House?

Home prices have dropped 10-20%. Interest rates are at historic lows. So does it make financial sense to buy a house right now? I’ve been asking myself this question for the past few months but can’t seem to find a compelling reason to do so. The numbers just don’t quite stack up.

Since I have a child and a business, my parents are also pushing me to buy a house. Even my accountant is advising me to purchase a home in order to provide a tax shelter. Do I listen to my parents and my accountant? Is it worth sitting down and running the numbers? In general, I don’t take anyone’s advice blindly unless I have a chance to do my own math. Here’s why I’m holding off on buying a house and a breakdown of my analysis.

Calculating The Monthly Mortgage Payment

Photo By Fotographix

The easiest way for me to perform a buy vs rent analysis is to run the calculations on the home that I’m currently renting. Right now, my rent is $2200. According to other comparables in my area, the house I’m renting is worth roughly $625K.

If I were to put 20% down, take a 500K loan at 5% (30 year fixed), my monthly payments would be roughly $2684 dollars. As you can see already from a cash flow perspective, buying a house would increase my monthly payments by roughly $484 right off the bat.

Taking Into Account Tax Benefits and Equity

But just taking the mortgage payment at face value isn’t really a complete and fair calculation since there are tax benefits involved with owning a home. In addition, since a small portion of my payment goes directly towards the equity in the house, I need to factor that amount in the final calculations as well.

My handy mortgage calculator tells me that the amount of equity I would be gaining per payment (for the first year) is roughly $600 and the remaining $2084 is what I would be paying as mortgage interest.

If I assume that I’m in the 33% tax bracket, that’s roughly a savings of about $695 dollars a month. If I factor these two numbers into my calculations, my true monthly costs of buying a house come to about $2684 – $695 – $600 = $1389. Keep in mind that $600 of this money is in equity that I can’t easily extract unless I get a home equity loan. All of a sudden though, it appears quite favorable to buy.

Property Taxes and Other Expenses

What else am I missing here? Here’s something that most people forget to include in the cost of owning a home, the dreaded property tax. In California, property tax is roughly 1.25% a year. For a $625k house, this amounts to $7812 a year or about $651 monthly.

This amount is technically tax deductible but because of AMT, I’m never able to deduct my property tax. Therefore, property tax becomes a pure cost to owning the home for my particular situation.

Another expense that most people forget to include is fire insurance. It really depends on your coverage but the quote that I received from my insurance provider was roughly $100 a month for a comparable home. If you also factor in another $100 (being really conservative) a month for upkeep (gardening,repairs, renovations), that puts us at about $2684 – $695 – $600 +$651 + $100 + $100 = $2240.

Opportunity Costs

Still seems about even in terms of buying vs renting right? The other item missing from our calculations is the time value of money. By sinking $125k of my hard earned cash into the home, I could’ve been using this money to earn even more money. Even if we assume a very conservative 3% yearly rate of return, this amounts to $3750 a year or about $312 a month.

With everything taken into account, it all of a sudden costs

$2684 – $695 – $600 +$651 + $100 + $100 + $312= $2552

to buy the same home that I’m renting. If I look at things from a pure cashflow standpoint, I’m effectively spending $3152 (removing the equity portion of the calculation) to buy vs $2200 a month to rent the exact same house.

The Intangibles

Most people will argue that the pride of owning your own home outweighs the additional costs involved. They’ll also tell you that real estate never goes down in the long run.

It’s tough to take into account the intangibles when buying your own home, but during these hard economic times, one thing is absolutely clear. You need to be conserving cash. You need to be controlling your cash flow to prepare yourself for potentially harder times ahead.

The real estate market is still in the doldrums. Instead of shelling out extra cash for the pride of ownership or as an investment, you need to run the numbers and all of the scenarios involved.

In my case, I believe that real estate prices are going to remain flat for at least the next few years. Why risk my cashflow when there’s very little financially to gain in the near term?

Further Reading

• Reader Response: Should I Buy A House Right Now?