CBA Blog

Financial literacy - Part 4 - Paying yourself first & building equity

Life challenges are like the wind.  We cannot direct the winds but we can adjust our sails.  The sailboat needs to get from point A to B.  However, the wind does not necessarily blow in the anticipated direction or speed.  Sometimes, it can be a storm or windless.  Therefore, sailors must constantly adjust their sails in order to steer the boat in the right direction.   

You might be familiar with the book "the wealthy barber".  The book talks about paying yourself first.  The simple barber pays himself first before any authorities or personal obligations.  He owns a simple house, drives a simple car, lives a simple life, and retires a millionaire.  You see, when we were employees, at each payroll, our paycheque shows a deduction for CPP, EI, taxes, and in some cases union dues before we actually see actual money in our bank account.  Depending on your tax bracket, it can go as high as 50%.   Before long, we do not feel anything and it does not take long to accept that life is paying your share to the Government before paying yourself.  When we become self-employed entrepreneurs, we first pay Government taxes in installments or at the very end when we file our taxes.  Even though we draw dividends or payroll from our company, we failed to still fail to pay ourselves first.   

What is actually paying yourself first?  Simply put, it is paying yourself before you pay taxes, expenses, and personal responsibilities.   If you are religious, you should give the first fruits to your creator first before paying yourself.   You set up a pre-authorized payment to invest under your name.  The investment can be a straight term deposit, mutual funds, or other investments.   

This concept of paying yourself is not new.  In 1955, the Government of Singapore introduces the Central Provident Fund which is a compulsory contribution for both employees and employers.  The CPF is Singapore's social security system for a down payment for their primary residenence, medical bills, and retirements.  You can call this "forced savings".   The employees and employers contribute 20% each month which means the employees get to save 40% from their gross payroll.   For example, if your income is $5000 per month, you would have saved $2000.  If you ask me, I would think that force savings are good when you do not know how to spend your earned income.  Today, many retirees in Singapore are millionaires.  They own real estate and savings.   On the other hand, many retirees in Canada are the opposite.  In Canada, working people saving at 40% of their payroll is next to impossible.  However, putting aside 10% is more realistic or $500 per month. 

Suppose you invested in dividends mutual fund and you got an average return of 8%.  When you add compound interest, within 10 years the amount, this $500 a month contribution will grow to $92,582.84.  $296,973.61 within 20 years and $750,647.59 over 30 years.   You get all this by doing nothing and going on your daily life.   By the time you know it, you have built yourself asset and equity.   

Stay tuned for part 5.  

 

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Financial literacy - Part 3 - Accounting Concepts

Regardless of your profession or if you are currently a student or if you are an employee or self-employed entrepreneur, it is good to learn the basic accounting concepts.  You do not need to be an A or B graded math student to find accounting concepts easy.  If you are in high school or post-secondary, please pick up financial accounting I & II in your electives.   After you complete your former schooling, it would be harder to learn accounting due to time.   

For the sick of easy understanding, I will do away with how I was taught accounting at school.  Concept explain will be somewhat according Generally Accepted Accounting Principals.  Those who understand accounting, please do not jump at me. 

Two rules:

Rule 1 - Revenue and Expense.  

Revenue as we know it is money coming into our pocket, either from employment or earned income from our clients.  For simplicity, gifts, grants, insurance payments are all considered revenue.   Borrowed money is not revenue.  Revenue and borrowed money increase our bank account and increase our asset.  However, borrowed money increase liability. 

Expenses are money coming out of our pocket.  They are what we spent in-order to buy the things like food, rent, motor vehicle expenses, travel.  Expenses are also interest we pay on borrowed money like loans and credit cards.  For simplicity, it is non-refundable.   Expenses decrease your bank account and decrease your asset.  The leftovers increases your asset and equity.  

If you put revenue and expenses together, we have what we called Income Statement or Statement of operation.   

Rule 2 - Asset & Liability & Equity.

Assets can be break-down into short-term and long-term.  The short-term asset is commonly known as current asset.  Current asset as the name suggest are purpose to be used over the next year.   They are bank account, GIC, mutual funds, accounts receivable (customers owe you) and inventory.  Unlike inventory, you cannot feel and touch them in a tangible way.   However, you can use them to generate revenue.  You hear the saying "it takes money to make money".   It should also be noted that current asset overtime acts as a spring board to acquire long-term asset.  There is a saying "small axe fall big tree".  This is why forced savings is so important in the life of individuals and business. 

Long-term asset is commonly known as fixed asset like real estate, motor vehicle (car lease is not asset), machinery.  The ownership uses them to generate revenue.  Fixed asset is not expected to be converted in cash within one year. 

How you finance your company is either from your own pocket or others money.  Financing by your own pocket is called equity and financing from others money is called liability.  

Liability are debts owes to others.  This includes loans, accounts payable (owe to suppliers), mortgages.  Liabilities is not necessarily a bad thing.  If liabilities are used in the right places, it will either generate capital gain through asset acquisition or generate more revenue through business operation.  However, if debts are use with none of the above, soon you will have sinking ship.   

Equity are funds invested to the company by the owner(s).  Retained earnings equity too.  Retained earnings are net income or loss accumulated over time.   

To sum-up, Rule 2 are commonly called Balance Sheet or Statement of position.    There are many different purpose of Balance Sheet, the common purpose is to know your financial strength.   Within the framework of financial strength is your overall net worth.  Net worth is calculated by Asset less liabilities.  The less liabilities, the more net worth.   This is one big reason investors and creditors want to see your Balance Sheet to have faith in your company. 

Now that I have explained Rule 1 & 2, how do we use accounting concept to our advantage?   Please stay tune for Part 4. 

 

 

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Financial literacy Part 2 - Interest & Tax

Putting politics aside; in the Western World, like it or not, our Governments are deeply influenced by the billionaires and the special interest groups.  Billionaires wants the bottom line while the special interest groups are commoners who wants the common good for our world.  This is why today; you hear social justice in our school textbooks and social media.    The billionaires are the most loop-sided minority in the world who control 85% of the world economy. 

Personally, I have done books for different successful multi-millionaires and I understand first-hand what it means to see seven digits of overflow in the company and their personal income.   I saw 7-digit income tax payment to CRA.   Their overflow is like continuous river flowing out from the icy mountains into the riverbends and out to the ocean with no ending in sight.   Because of their rapid increasing in building equity, they are able to acquire other equities within a short period of time. 

These group of entrepreneurs have structures in place to help them be successful.   Basic structures like workable business model for their different companies, human resource like good managers and employees, legal team, exceptional Tax CPA, private banker and not to forget INTEREST.   I will touch on interest only.  Yes, they are excellent playmaker of using others money to make money.   They repeat this formular over-and-over again like playing the beat and rhythm of drums.  The best part is regardless of if they are successful, the interest are tax deductible.  If the business suffer loss, those losses can be carry-forward to indefinite years against future profits.   

Second.  When the entrepreneur withdraws funds for themselves, they would either withdraw as dividends, shareholders loan, management fees or inter-company transactions.   This is where the skilled Tax CPA comes into play.   If you are a Canadian Controlled Private Company (CCPC), meaning your net income is under $500,000 per year; the general rule-of-thumb is to pay yourself in dividends as this is the least amount of tax for both the corporation and business owners. 

For sole proprietors, your net income will be your earned income.  Tax rate is based on marginal income.  You will still get the small business deductions for operation your business in-order to reduce taxes.  To further reduce your tax, the RRSP will reduce your income.  RRSP should not be overlooked.  

If you are neither a incorporated business owner or sole-proprietors, interest can still work for you.   We call this group Investors.   Investors bring much needed cash to companies to make money.   Our Government recognizes that, and interest can be deducted for eligible investments.   Investors either make dividends, capital gains/loss or interest income.  The first two type of income has a better tax treatment than interest income.  Tax treatment for interest income is the same as earned income.   Why is that?   I will leave you to answer the question on risk and reward.  

Stay tune for financial literacy - Part 3

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Financial literacy - Interest & Taxes

My goal is to educate and improve our lot because our education and religious system do not teach us that.   The rich understand the rules of the game.  The saying goes “the rich get richer and the poor get poorer”. 

As many of you already know, if you want to learn how to play a musical instrument like a guitar, you must learn how to count the beat of each song.  This is because every song has a different beat and most are four.  Then comes the different type of rhythm and notes.  As you advanced, you will become more skillful by mixing different beats and rhythms, notes, and then comes the plucking and classical.  The underlining foundation is all about the number of beats. 

In life, there are two things that we will experience other than life and death.  They are "interest" and "tax".  Interest from paying the mortgage, credit cards, personal loan, car loan, leasing, retail payday loan, and least but not last, interest by the tax authority for late tax payment.  The world cannot live without loans because people in the modern economy cannot afford the necessities of life without getting into debt.  Necessities like shelter, motor vehicle, food, and essentials.   The world economy is built on debts.  To keep the world moving, the Government of the world, businesses, institutions, and people get into debt.  What is tax?  Tax is what you owe to your Government.  Tax can be break-down into sales and income tax.  Income tax can go up to 52% depending on your tax bracket. Historically, billionaires and special interest groups influence how the Government structures taxes.   

Interest and taxes are like masses of spider webs.  Those who understand the rules of the game can see the potential opportunities and pitfalls.  The lucky ones break free, walk on them, and became stronger every year.    Thus, they can fend off the spider.  Unfortunately, the unlucky ones walk blindly or miscalculated, got entangled and some eventually got eaten.  

So, how do you escape the spider web of interest and taxes?  The answer is not by making more money, work longer hours, and increase your paycheques.  If the solution is that simple, we will not see the dwindling number of middle-class in the advanced countries from the start of the twenty-first century.  Many middle-class are well educated who are now in their middle age.   The spread between the top 1% and middle-class is drifting further and further away as time passes.  Unlike in the past, today the middle-class is struggling to meet end meet and has little or no savings.  Or does the answer come from the old wisdom of living within your means?  It is a pearl of good wisdom to follow by keeping you on the right track and the rich follow this principle.    

The golden answer lies in making "interest" and "tax" work in your favour instead of working against you.  You should see them as your friend and not your enemy.   It is by taking advantage of the structure of the tax rules in your favour based on your individual situation.  The tax rules apply differently to different people in different life situations.  For example; if you work from home during a pandemic, you want your employer to issue form T2200.   With this form, you are permitted to deduct maximum allowable employment expenses.   However, if you work from home and do not have form T2200, the maximum tax deduction allowed is a mere $400.  Yes, just that!  The T2200 allowable employment expenses deduction is 90% as good as the business owners with a home office.   In Canada and the US (I am sure the rest of the world), the business owners and investors have the best tax advantages.  For those who do not fit into one of the two groups, there are still ways to let interest and tax work in your favour.  Using the beat of tax rules, skillfully applied will improve your lot in life.  You will go further and faster.    

As I explore financial literacy, I plan to touch further on interest and tax; accounting concepts - revenue & expense and asset & liability; principle of paying yourself first; and building equity.    I hope to touch further on the different types of loans aiming at the purpose of line of credit, preferred credit card, retail credit card, and payday loans.   And if the situation permits, I will touch on how to understand the financial value of motor vehicles.    

Please come back for financial literacy part 2...    

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WHAT CAN BUSINESS OWNERS DO TO HELP THEMSELVES IN THE BOOKKEEPING PROCESS

I have a box client whom I dread doing their books. Each year, they gave me bag(s) of mess-up receipts, invoices, bills, bank, and credit card statements that looks like a house robbery in-progress. Oftentimes, papers were folded oddly or have water stained with no meaning pattern to follow. This is not the real challenge as I have other clients who did the same as I have no problem organizing them. I understand they hate paperwork.

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The "New Norms"

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2020 COVID19 has forced the world to change at gun point. It is the new beginning and an end to many on our way of life. Going through the predictable motion of life has come to a cross-road to all. We fear for the unknown virus that can ambush without notice. Certain industry will rise and others fall. Companies and employees who adjust to the “New Norms” will survive. We have seen white-collar staff and professionals, organizational meetings, schools and classrooms, entrainment TV shows, religious services starting to operate remotely. Social distancing is becoming the norm without losing human contact. In a matter of time, businesses will come to the realization that they do not need lots of office space. On the greater good; this result in less traveling, less pollution and the earth are getting cleaner. Most importantly, it saves cost to the employer and employees. Existing technology make this possible.

What will be the “New Norms” moving forward? Those who worked from home during COVID19 can expect to work from home. Be it be full or part time varies according to industries and companies. Demand for office spaces will decline while industrial spaces and medical labs demand will remain because humans are needed there. Companies will downsize on office spaces to save cost while having white-collar employees work from home. Meeting remotely via apps like Zoom will become the norms. For human gatherings, part time bigger meeting spaces will likely see increase demand.

Where do these leave businesses on financial reporting?
For companies who are currently using cloud technology for their accounting, the transition is much less challenging for employees to work from home. New structure of cloud workflow, communication and information sharing will be in the future. However, those who are still using desktop, they will undergo a period of adjustments or metamorphosis. Change is in the future.

In urban city like Vancouver, office space rent at $15-$45 per square feet depending of office class B, A, AA, AAA. That works out to an average of $250 per month for a 100 sf space for one employee to work comfortably. For $250/month, remote bookkeepers can possibly prepare financials for an average $150,000 yearly revenue company.
The advantages of outsourcing bookkeeping are many to count. One of them is one less employee to manage, one less regulatory payroll obligation and best of all it is scalable. Meaning, you can pay more or less depending on your business output.

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COVID-19 Federal Government help for small businesses.

Q. Can I qualify for Canada Emergency Response Benefit (CERB) even when I do not qualify for EI?
A. Yes. The income of at least $5,000 may be from any or a combination of the following sources: employment; self-employment; maternity and parental benefits under the Employment Insurance program

Q. What Small Business help are available from the Federal Government?
A. There are currently two access to credit available for small businesses. First. Business Credit Availability Program (BCAP). Second. Canada Emergency Business Account. Interest free loan of up to $40,000 for small business with a minimum payroll $20,000 during 2019. You are strongly encouraged to approach your bank to apply for these loan.

Please visit https://www.canada.ca/en/department-finance/economic-response-plan.html

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What info does my CPA needs

Preparing small business taxes can be daunting task. So, hiring Tax Accountant can help save time and create peace of mind.  Before you head up to your Tax CPA, here are a list of must haves for your Tax Accountant to file your small business taxes. 

Unless you are a regular client, your Tax Accountant will need

Personal Information: If you are a sole-proprietor or partnership, you will need to provide your basic information, including legal name, current address and social security number (SIN) and date of birth (DOB).  

Business information: If you are an incorporation, you will need to provide copy of business number, Certificate of incorporation. 

Previous Year's Tax Return: This helps them get a better understanding of your business and gives quick information about the deductions your company has (or hasn't) been taking. 

Financial Business Report: At minimum, this includes Income Statement and Balance Sheet.  To speed up the process, do provide accounting access to your Tax Accountant to view your books in the cloud like QBO. 

Other Report: Asset, Loan, Deductible expenses - home office, mileage log, travel, donation, Payroll report, Closing Inventory count, other report. 

 

 

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Disability Tax Credit & Diabetes

Are you or your child living with Type 1 Diabetes?  You may qualify for a disability tax credit when you file your taxes.  Check out the Diabetes Advocacy website to learn how to qualify for this tax credit.   If you qualify for prior years we can amend your tax returns to get you tax refunds.  If you think you may qualify please take action right away because Canada Revenue could change the rules to qualify at any time.  There are also other conditions that are eligible for the Disability Tax Credit.  Check out the Canada Revenue website or speak to a team member for more details.

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