June 25, 2021

Using debt to start your business

Using debt to start your business

💯 💯 💯 "I want you to define what makes something affordable for your business so that you can make decisions that are based on actual budgetary capacity and not emotional ones."


EP 26:  Every entrepreneurial move has startup costs, and it is very common to interact with debt to fund the launch of your new business.   While doing so is not inherently a bad decision, without awareness of your finances and the knowledge of how to attack debt, you could leave your business vulnerable.  In this episode, I will give you 5 points of consideration to help you navigate your tango with consumer debt.  

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Transcript

Michael Der  0:07  
You're listening to Artrepreneurs, a podcast that inspires photographers and visual artists to live their best creative lives. My name is Michael der and I am a full time photographer with nearly 10 years of experience in the freelancing world. And I'm sitting down with an amazing community of visual artists to talk about process, business, and the lessons that have helped them grow. So let's get to it Artrepreneurs starts right now.

All right, what is up everybody welcome to Artrepreneurs, thank you so much for tuning in and sharing just a few minutes with me today my name is Michael der, I am your host and today we are on episode 26 of our weekly program which means we are exactly at the halfway point of our yearly content calendar which is a very big milestone for me because I set out to do this show every single week, rain or shine, and if you have any similar experiences with scheduling weekly Instagram or blog posts or YouTube channel content, then you know how much work goes into consistent content creation. So I am going to just rejoice in making it to the halfway mark this year because if you don't celebrate the small wins, you are doing yourself a major disservice. I hope that resonates with some of you out there. 

So with that out of the way let's dive into today's topic which is about using debt to build your business, and I really wanted to broach this topic because it's an area that all creatives go through right out of the gate, and if you're a student or recent graduate, chances are you may be encountering large scale expenses for the very first time when I was in college, the only real expense, I had to worry about was what I was going to feed myself for that day. And when I graduated, I had to worry about rent I had to worry about phone bills, car insurance and student loans. On top of that I needed to pay for my gear like computers, software website hosting and other tools of the trade, and while my parents and teachers have done amazing jobs in so many areas of our development, by and large I do think our collective culture fails to nurture financial education at an age that is primed for that knowledge, in my opinion we shouldn't be learning about money habits after we started making it, we should be taught about money well before we take our first job, but the sad reality is that's a battle I can't win, it would honestly be easier for me to win the lottery than to change school curriculum. 

What I can say for sure is that no matter who you are, what your ethnicity is what your background is, what your career path may be you will interact with money. Everyone in some form of another is going to engage with earning. Spending, Saving growing and owing money throughout their entire lives, and that owing part is what debt is, you are in a state of owing money, so if you make a purchase and you put it on a credit card to pay off later, you are engaging with that. If you accept a loan to pay off your car or your student tuition, you are engaging with that. And to be clear, I actually don't believe that engaging with that is an inherently evil act, in fact most small businesses have startup costs that won't be paid off in time in the first couple of years of business but it was necessary for them to take on to kickstart their services. What makes debt, dangerous, is when you consistently scale your business or your personal lifestyle, or maybe even both. While you're in debt, and there's this term that everyone should be aware of, it's called Lifestyle inflation, and what that means is as you get older the typical behavior is to elevate your lifestyle, the more money you accumulate. If you get more clients you get more gear, if you get a promotion, maybe you buy a nicer car or you move into a nicer home. And so the danger in that is that while you're spending all or most of the money that you make your debts are actually working against you with such high interest rates. So what that means is that any money you have leftover, it's actually losing money every single day. And when you add on typical inflation rates and the rising cost of living in so many areas, you have many factors from multiple different directions working diligently to weaken the potency of your money while you are none the wiser. So it is very important that you understand these concepts of debt, so that you can better determine how you want to engage with it and, ultimately, how you can pay off the debt so you don't have to pay more out of pocket than you need to. You don't want to find yourself in a position where you're throwing away large amounts of money that you worked so hard to get. 

So with that being said, whether you are a college graduate or a second career creative. Here are five points of emphasis to consider as you interact with debt to start your business. 

1: know the difference between assets and liabilities. So my experience over the years tells me that nobody can justify a purchase quite like a photographer, there were just so many tools of the trade that could potentially make our work easier faster or better, that it's hard not to see everything as an investment in our career. But the key thing to remember here is that in order for it to be an investment. It has to make you money, it has to be an asset not a liability. So to define what assets and liabilities really are I'm going to borrow a phrase from author Robert Kiyosaki, who I think eloquently articulates the difference between the two. So he says assets put money into your pockets and liabilities take money out of your pockets. And so the more liabilities that you purchase meaning the things that don't earn you any income, the more susceptible you are to having debt really work against you because you won't be making any extra money to offset that cost that's going to force you to maintain a balance on your credit card each month, instead of paying it off in full, and this is really easy to do as you start which is very understandable, you can't get the jobs without the necessary tools to do the jobs, so you will naturally be taking a hit when you first start your business. My biggest emphasis is to simply make sure that you approach each purchase, asking yourself whether that new piece of software or equipment that you've added is going to make you money, or simply cost you money.

2: define what it means to be affordable. So if I were to ask you can you afford this camera, what would your answer be, and even before you answer that question, ask yourself this other question, what is your criteria to meet that standard. Do you even have one. How would you define what is and isn't affordable. Now to all the young creatives out there who have grown up in this digital era where cash is being phased out a digital currency and smart pay are being relied on almost exclusively. Here's my friendly PSA, just because you can take a product home with you. Doesn't inherently mean that you can afford it, you might have the ability to drop down $10,000 onto a credit card, but if you can't pay that balance off in full each month, I believe you've overextended yourself and you've definitely put yourself in position to spend more money on that purchase than you originally thought. So for me, my definition of affordability is whether I can go to the ATM, take out the cash to pay for that product or service in full, and then still have the ability to pay for my essential expenses. That is how I define affordability, Jay Z on the other hand says you can't afford something, if you can't buy it twice, so I want you to define what makes something affordable for your business, so that you can make decisions that are based on actual budgetary capacity and not emotional once. 

3, don't assume everything can be deducted. Now there are many advantages to running your own business one of them being the ability to deduct expenses for your business, but the mistake that you could make is to assume that every expense is tax deductible, which might give you a sense of freedom to greenlight more purchases, therefore increasing your total debt. No I am not a CPA and there will eventually be an entire episode dedicated to self employed deductions, but for now let me just say that not everything can be written off, and I hear this from Green photographers who often say, this is a tax write off without really knowing what they're talking about. Don't assume you can treat you and your colleague to a lavish lunch, thinking that you can write it off because you invariably discuss how work is going. Don't assume that because you're checking your email on your phone every day that you can write it off as a business expense, thereby permitting you to buy the latest iPhone, each and every release. And don't assume that if you bring your camera on your vacation that it's an open invitation to write off all your trips as business expenses. You should be researching what deductions you can take advantage of and talk with your tax professional, about how you can lower your taxable income, the right way, and you may be able to deduct a lot of expenses on your business. But the point is, don't use it as an excuse to go open season on gear shopping. The goal is to minimize your debt footprint 

4: understand your debt situation. So this is going to go without saying, but to solve a problem, you have to understand the problem first. If you are in debt. Start off by listing every category you owe money to. Do you have car loans, do you have student loans, do you have a mortgage or medical bills do you owe your parents. Do you have a balance on your credit cards. Do you know how interest rates work, and what your interest rates are. Now I don't want to scare anybody here. But when I say you could be throwing away hundreds to 1000s of dollars a year in interest penalties if you're not careful, that should at least pique your interest to understand what your situation is, and understandably, this might be the hardest part if you are in such a critical position facing the ugly reality of your financial situation is an emotional blow. I know I've been there before. And I know friends who were hundreds of 1000s of dollars in debt because they got two degrees, bought a brand new car instead of used one, and ordered in every meal instead of cooking. Do you think they want to talk about their debt situation, heck no, they don't even want to look at it, but the cost of inaction is quite substantially higher. 

Here's an excerpt from the book, I Will Teach You To Be Rich by Ramit Sethi. "Let's assume someone has $5,000 in debt on a card with 14% APR, if dumb Dan pays the 2% monthly minimum payment, it will take him more than 25 years to pay off his debt. No, that's not a typo. It's really 25 years, over the entire process, he'll pay over $6,000 in interest, more than the original amount he spent. And that's assuming he doesn't rack up more debt, which you know he will." 

So just imagine that.  $5,000 became $11,000, just by paying minimum payments, and I bet there's a good percentage of listeners out there who didn't realize that they should be paying more than the minimum payments. This all starts with awareness of how debt works, and what your situation is. So start off by writing down all the categories you owe money to car medical student loans, credit cards etc, get a full rundown of who you owe money to. And next to each category, what I would do is list the total debt I owe, and the interest rate associated with it. The best way to clear debt is to visualize the problem areas. Now we're ready to attack. 

5, build your debt killing system. Okay, so as I've mentioned before, it's very natural to interact with debt when starting out, but you may also flirt with it. As you continue your business years down the road, for instance, it might be a slow season, and your computer crashes and you need a new one. Maybe you find a one time offer that you need to jump on but you don't have the income to match pays. So it is very common for people to engage with debt well after their initial startup, and as such, it's very important that we know how to get out of the red quickly, so it doesn't compound. And the great news is you've already done some of the groundwork by listing your debts, and the aprs. This is the foundation of a budget, which helps you visualize your debt killing process. Now I'm not going to dive deep in on the methods of how to kill off your debts, I will reserve that specific tutorial for another day. For now it's just important that you understand a couple principles. First, you should prioritize attacking debt before saving for big purchases or investments. Now I know you want to take that vacation but by prolonging the debt, pay off that interest rate is working against you daily. So you're gonna end up spending more money in the end, and if you are investing or saving money just for growth sake, even if you've got a 10% return on investment. It doesn't match the 15 to 25% on your credit card so that math doesn't add up. Secondly, on the most important that you have, which can usually be determined by either the total amount of debt, or by the highest interest. The choice is yours. Don't pay minimum payments, throw more money at it every period, the other debts that aren't as important, those can be paid with minimum payments, but for now get hyper focused on the most important one, pay twice a month if you can, and always pay a little bit more to accelerate your debt killing success, and as you chip away at your debt, as you see it actually start to lower keep charting that progress, and I started the show by talking about the importance of small wins. And while I do think that killing off debt falls under the category of a substantial win. The point is to celebrate that achievement. It is not easy to live life to the fullest with this weight on your neck. When you do get it off. Enjoy the relief. 

Okay, so let's go through a final review folks, number one, at any level, no matter what experience you have, you should approach each purchase you make with a critical eye, is that new product or service an asset or a liability. number two, define what affordability means to you through the lens of what your bank account is telling you, and not through your ability to receive the product. Number three, don't give yourself permission to buy whatever you want, just because you think it can be tax deductible Number four, get a clear understanding of how debt works, and what the cost of inaction would be if you ignore it. And number five, build some sort of repeatable system where you can attack your debts aggressively, so that if you get back into the red. You can get out of it in short order. Alright so I hope this episode gives you some food for thought everybody, I will happily do a deeper dive on how to kill dead with a little bit more instruction down the line. For now, this episode was really more about the mentality in the approach to interacting with that as you build your career and debt is not this inherent evil, it can actually be leveraged to improve your services and the projects that you create, before you even start getting clients, so there is a benefit if used properly, but without the awareness and the knowledge of how to eliminate debt, your business will only go so far, and it will likely suffer greatly. So with that being said I want to thank you all so much for tuning in and supporting this show, Artrepreneurs is back every Friday morning with brand new content, this is Michael der signing off for now take care of yourself, everybody, and have a great week.

Hey everybody, this is Michael der thank you so much for making it all the way to the end of the episode, I hope you'll follow tag and engage with us on our Instagram account at Artrepreneurspod. We've also launched our website, Artrepreneurspod.com. it is the central hub where you can sign up for our newsletter, read our blog posts, send us voicemails and even access discounts from our amazing affiliates. It's also the perfect spot to shout out entrepreneurs with what would be an immensely appreciated five star rating and review. And if you're feeling extra generous, you can even make a small donation that's really going to help accelerate the growth of this podcast, but no matter what you do folks, I just want to say thank you so much for supporting and there are a lot of great photography podcasts out there and I am just grateful to have gained your trust, even for a moment. Take care everyone. See you next week.

Transcribed by https://otter.ai