Death of the Middle Class

The middle class will be executed in the near future by four horsemen:

1) Taxes

2) Inflation

3) Bad Debt

4) and the old 401k

Taxes

If you work for a paycheck you are earning earned income which is taxed at the highest level, up to 50%. There are three types of income:

• Earned
• Portfolio
• Passive

Portfolio income is taxed at 15 to 20% and passive income is potentially taxed at zero percent. Portfolio income is created through capital gains and dividend paying stocks and passive income is generated through investments such as rental property and business. Business owner's utilize tax deductions to lower their taxable income.

An example of zero percent money:

Let's say you buy a $100,000 property with a 20% down payment and a principle balance of $80,000. After five years, through improvements to the property and appreciation, the property is now worth $150,000. The bank will give you up to 80% equity in a new loan. So after five years, you have $76,537 equity in the property:

• You have paid down the original mortgage to $73,463

• The value of the property is now $150,000

• $150,000 – $73,463 = $76,537

Thus, the bank will give you $61,230 ... tax free! Of course this would have ramifications to your cash flow and you may want to consider taking out only 50% of the equity which would still be $38,268.50. Remember, this tax free money equates to $76,537 in earned income since by the time all is said and done, earned income is taxed at 50%. This is one of the reasons why debtors are winners and savers are losers in this new economy.

Additionally, earned income could possibly be taxed at higher levels to cover social security benefits. At Social Security's inception there were approximately 16 workers for every retiree. Soon that number will be down to 3 to 1 and one of the solutions is to tax more heavily those still working.

Inflation

Inflation is the silent tax and essentially it can be thought of like this: You go to your local food super-mart and buy a box of Kellogg's Corn Flakes for $3.50. Two years later you go to the same food super-emporium and buy the same box of Corn Flakes for $5.00. You have experienced inflation.

In Germany in 1923 they had 33 printing plants cranking out 45 billion marks a day in order to counter their deflationary economy. A pair of shoes that used to cost 12 marks cost 30 trillion marks. A loaf of bread went from half a mark to 200 billion marks. In the U.S. it took us 200 years to go from a currency supply of $0 to $825 billion and then last year ... we printed another $900 billion and then another $1.2 trillion. So now we are at $3 trillion dollars. Add this to our fractional lending system (for every $1 you put in the bank they can lend out $9) and the result is a heavily diluted money supply. Your dollar competing with trillions of other dollars means your dollar becomes worth-less, thus inflation.

Additionally, stock market talking heads (the ones who say invest your money in the stock market, close your eyes, go to sleep for 40 years, wake up and see how much you have) claim that on average the stock market goes up by 10 to 11% over the long haul. When you put the Dow in terms of real value, (not dollars, but real value) this is the picture you get:

The market has been crashing for some time.

Good inflation fighters: fixed rate debt, real estate, gold and silver.

Bad Debt

If you buy 5 jet skis on credit cards, you have just created bad debt at a high interest rate. Let's say you pay $25,000 for the jet skis. In two years they are worth half as much but more than likely, with interest payments you still owe what you bought them for. Essentially they are now worth $12,000 but you still owe $25,000. You are upside down on jet skis by $13,000 and this scenario is the black hole of the middle class. Plasma TVs, expensive cars, boats, home entertainment systems all fall into this category. If you want nice things first buy assets that cover the expense with cash flow.

The Old 401k

The trick with the old 401k is that it comes right off the top of your paycheck and when you withdraw the money at retirement it is, taxed at earned income levels. Additionally, you are typically investing in a vehicle that has been crashing for sometime and faces a new threat: the flaw of ERISA.

With the passage of the ERISA act in the 70s, companies switched from a defined benefit plan (pensions) to defined contribution plans (401k and IRAs). This switch was a significant savings for employers - they no longer had to fund your retirement - but there is a fundamental flaw to the program and it originates with baby boomer population numbers. A staggering 65 million baby boomers will hit retirement age in the next few years and there is not an upcoming generation to replace their ranks (we had a birth dirth in the 70s and 80s.) In the near future millions of baby boomers will be required to start withdrawing funds from their defined contribution 401ks and IRAs. This is not optional - this a mandated minimum withdrawal. When folks withdraw from their stock accounts they place sell orders. When the market is sold the market drops.

Additionally, when you invest with a mutual fund you pay a management expense fee. Although it can appear to be misleadingly low (1%) the mutual fund management team actually rakes in up to 80% of your profits. So in this investment you are putting up 100% of the investment, taking 100% of the risk and only get to keep 20% of the profits. In the end it is a Vegas casino in which the house always wins.

In the end, the four horsemen of Taxes, Inflation, Bad Debt and 401k savings will annihilate the middle class - you will either be rich or poor with nothing in between. To combat these threats you must develop a good financial IQ, learn about different types of investments such as business and real estate, and change your context.

Financial Statements 101 - the Cash Flow Statement

There are two chief things I want you to understand about the cash flow statement:

1) How the cash flow statement is really an interaction between your balance sheet and your income statement and

2) The difference between your income statement and your cash flow statement.

First things first ... the picture of the interaction between your balance sheet and your income statement:

The bottom two columns represent your balance sheet. The left is your assets, the right your liabilities. The top portion of this picture is your income statement. The very top row is your income the very bottom row is your expenses. Income minus expenses equals what is left over correct? On the balance sheet, for our purposes an asset is something you own that puts money into your pocket every month while a liability is something that takes money out. Note, these are not the accounting definitions, they are financial independence definitions.

Now, the ellipse that travels up from our asset column and into our income column is our cash flow. This cash flow is generated by our assets and once we have attained a level sufficient enough to meet our expenses, then we are financially independent. This is the first dimension of cash flow you need to understand.

Second, the cash flow statement and how it differs from the income statement.

To understand the cash flow statement, first think of the income statement - income minus expenses equals what is left over ... simple enough correct? Now I want you to understand the difference between accrual and cash accounting. The income statement is generally reported on an accrual basis. This means that if you have a sale in July, even if you don't receive the payment for 60 days in September, the sale is recorded in July on the income statement. The cash flow statement says no way Jose, the cash isn't collected until September so I will not show the cash income until September. This is known as cash accounting and it applies to payables (bills we owe) as well as receivables (the sale example we just ran through.) On the payables end the income statement would say "I had an expense of $200 in February for supplies" and if it was on 90 days credit the cash flow statement would say "yeah but I didn't pay it until May so I will show it in May."

The second thing to understand about the cash flow statement is that it shows the beginning and ending cash balance of your company. So, think of it like this: how much cash are you starting out with at the beginning of the month ... let's say $1,000. Now how much income did you take in? Let's say we made $3,000 cash in the month. Now, what were the expenses, including interest and principle payment on debt. (this is an important difference to note as well. The income statement is an operating profit statement so it will only report interest on a loan payment. In theory, a principle payment is applied towards an asset buying you equity, technically a balance sheet item but the cash flow statement wants to know about all cash transactions which includes both interest and principle payments.) Let's say we had $2,000 in expenses so ... what is your cash position:

Starting Cash - $1,000

Income - $3,000

Expenses- $2,000

Ending Cash- $2,000

See how the math works in that example? Also, the cash flow statement wants to know the sources and uses of cash from three major sources: operations, financing and investing. Cash flow from operations comes from the making and selling of product and can be thought of as the cash that comes from the income statement. Financing activities can be the retirement of debt or initiation of debt and investing activities can include the purchase of building and/or equipment and the raising of capital from investors.

Below is an example income and cash flow statement. The top portion, the "Profit Plan" is the income statement portion. The center section, the "Cash Budget" is the cash flow plan. The bottom section is titled "Loans" and keeps track of what financing has been used (it keeps running tallies of both long and short term loans) and indicates payback (the balances are reduced as payaback occurs.)

Passive Cash Flow of $3,000 a month for $184,000

In theory one could become financially independent by implementing a mere three passive income asset sources: Rental, dividend income and covered call option income

If one had expenses of $2,500 a month then a mere $1,000 in monthly rental income, $1,000 in monthly dividend income and $1,000 in covered call option premium a month could get the job done. Is this possible? Let us find out.

First let us assume the individual has already followed through on a boiler-plate financial plan program - you know, the ones that say, pay off all debt, save up an emergency fund, pay off your house. If the individual has followed through on these steps then 1) they have lowered their monthly expenses to a low hurdle amount that our passive income sources can easily smother, in this case a monthly amount of $2,500 and 2) they have a large amount of disposable income. So the first big step in this plan:

1) Pay off all bad debt (credit cards, cars, frivilous debt) and pay off the house.

Next, buy rental property and dividend stocks that will deliver $2,000 a month in passive income. Easier said then done right, but in order to determine the solid parameters surrounding this, how much capital do you need. Assuming you are a savy investor that can find a good yield (especially in these trying stock market times) of 10%, then you need $120,000 invested in stocks. ($120,000 x .10) / 12 = $1,000 a month. Not a small amount to bat an eyelash at but it's not a million dollars either.

Now on the rental ... you are definitely going to need more than a duplex and unless you find the deal of a lifetime, you are going to need a hefty down payment or some sort of rapid repayment plan. In my area one can score a four-plex with a down payment of $34,000 which will generate approximately $600 a month in cash flow. Phantom cash flow will add-back another approximate $100 for $700. With a repayment of an approximate $30,000, one can expect to reach the $1,000 cash flow level. Total capital needed so far: $120,000 + $34,000 + $30,000 or $184,000.

Now to generate income on all those stocks you bought in step 2. Learn enough about writing covered call options to generate enough income on those stocks you hold (study, study, study) to generate $1,000 a month in income. Writing a covered call on a stock you hold is the equivalent to charging rent on your stock - a true win-win and since you already have a capital outlay in the stocks this costs you nothing. $1,000 a month is well within the realm of possibility.

So there you have it: Passive Cash Flow of $3,000 a month for $184,000.

The Case for Silver - Massive Transfer of Wealth on the Horizon?

Does anyone know what happened to Germany in the 20's? Okay, I didn't either but ... in 1923 they had 33 printing plants cranking out 45 billion marks a day. By the end of the year it was 500 quadrillion a day!

A pair of shoes that used to cost 12 marks cost 30 trillion marks. A loaf of bread went from half a mark to 200 billion marks.

The only thing that outpaced inflation was gold and silver. The price of gold had gone from around 100 marks to 87 trillion marks per ounce. When the hyperinflation came to an end the currency supply had grown from 29.2 billion marks to 497 quintillion marks, an increase of currency supply of more than 17 billion times but ... the total value of the currency supply dropped 97.7% to gold.

At this time an entire city block of commercial real estate in Berlin could be bought for 25 ounces of gold. ($500)

Now, does anyone know where we are in the U.S.? It took us 200 years to go from $0 to $825 billion and then last year ... we printed another $900 billion and then another $1.2 trillion. So now we are at $3 trillion dollars.

For history to repeat ... gold would have to rise to a price of $15,000 an ounce to cover the paper dollars that exist. It is currently at $1,100 an ounce. Silver is an even better deal currently at approximately $20 an ounce.

Financial Statements 101 - The Income Statement

Simply put, the income statement is all income minus all expenses and it reflects your company's net income or loss.

The key parts to this statement include:

• Sales or revenues
• Cost of goods sold
• Expenses
• Net income or loss

Cost of goods sold or COGS is comprised of all the company costs to produce or purchase the goods it sold. Expenses include all expenses involved in operating a business to support the sales process. This can include advertising, administration costs, rent, salaries, etc.

One of the important distinctions between the income statement and the cash flow statement, which I'll cover later, is that sales are realized on an accrual basis, meaning - the sale in the income statement is realized the month the sale occurs not when the cash is received. So, for example, a sale that occurs in January but is purchased on a 60 day credit terms from a customer is recorded on the income statement in January but on the cash flow statement it shows up in March. The same goes for payables - an Accounts Payable is recorded the month it occurs versus the month it is paid.

Additionally, when it comes to mortgage or loan payments, only the interest or operating portion is shown in the income statement versus both the principal and interest in the cash flow statement.

COGS

"In financial accounting, cost of goods sold (COGS) includes the direct costs attributable to the production of the goods sold by a company. This amount includes the materials cost used in creating the goods along with the direct labor costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs." - Wikipedia

In a hamburger stand business, COGS would include the cost of the ground beef, the buns, the pickles as well as the labor cost that goes into making the hamburgers. Example: If Phil works the register for 4 hours and makes hamburgers for 4 hours and he is paid $10 an hour, then $40 of his labor goes into your COGS for the day.

Expenses

Advertising and promotion: TV, radio, Google Adwords, print ads, etc. Promotion includes product giveaways, name identification on a sports stadium, charitable events, etc.

Other selling administration expenses: This is a catchall for any selling expenses; salespeople's and sales managers' salaries, commissions, bonuses and other compensation expenses. The cost of sales offices and any expenses related to those offices would fall in this category.

Other operating expenses: This includes items such as general office needs, royalties, research and product development.

Interest Expenses: Expenses paid for interest on long or short term debt are shown here.

Depreciation and Amortization: Depreciation on buildings, machinery, or other items, as well as amortization on intangible items are shown in this line item.

Insurance Expenses: theft, fire, other losses life insurance, etc.

Taxes: Ye olde income taxes go here.

Other Expenses: Any expenses that don't fit into one of the other categories go here.

EBITDA

This is Earnings Before Interest, Taxes, Depreciation and Amortization. This figure is used for analysis sake because it eliminates the effects of the company's activities to raise cash outside their operating activities. It also eliminates accounting decisions that could impact the bottom line such as the company's policies relating to depreciation.

Net Profit or Loss

The bottom line of any income statement is the net profit or loss but this line can mean very little if you do not understand the preceding lines that go into the make-up of this number.

To see an example of an income statement, click here.

Financial Statements 101 - The Big Three

Let's get back to basics here and review the big three financial statements you are going to run into in business and personal investing; the balance sheet, the income statement and the cash flow statement.

The Balance Sheet

Simply put the balance sheet is Assets = Liabilites + Equity. Assets include everything you "have", such as cash, inventory and buildings, liabilities include everything you "owe" such as a credit line with the bank for the inventory and a long term note against the building, and equity is the "value to the owners" or let's say for example's sake, the difference between what your building is worth and how much you owe. So, if your building is worth $100,000 and you owe the bank $50,000, then your equity is $50,000. This would be represented on the balance sheet like so:

Of course, this is a rather simplistic picture for even this balance sheet item. You would have other considerations such as accumulated depreciation (how much decline in useful value of the fixed asset have you recorded) as well as the current portion of the long term note (how much is due in total over the next year) but let us stick with the basics for now.

The balance sheet is a snapshot in time of what the company has, owes and is worth. Building on this analogy, the balance sheet is what the company has today (assets), what it owes today (liabilities) and what it is worth today (shareholders' equity.) Digging into the balance sheet, let us look at the first category ...

Assets

Assets are everything you've got, including cash in the bank, inventories, buildings, machinery, etc. as well as certain rights you have with a monetary value. Specifically, this would include your accounts receivable, what your customers owe you. Assets on the balance sheet are ordered from most liquid (current assets) to least liquid (fixed assets.) Current assets generally include the categories of cash, accounts receivable, inventory and prepaid expenses and fixed assets include items such as building and equipment.

Here's what the asset side of the balance sheet looks like with these items. Note the additional categories of other assets and accumulated depreciation. Sample data has been inputted as well so you can follow the math of the line items.

Now, let's turn to the flip side of the balance sheet and take a look at liabilities.

Liabilities

Mirroring the Asset side of our balance sheet, the liability side is going to list liabities from current to long-term. The categories you see here will include current liabilites, which includes accounts payable, accrued expenses, the current portion of debt and income taxes payable as well as long term debt. Here is what the liability portion of the balance sheet is typically going to look like:

Those current liabities are bills that must be paid within one year of the date of the Balance Sheet. Accrued expenses are monetary obiligations similiar to accounts payable (bills to other companies for material and equipment bought on credit). Examples would include employee salaries earned but not paid yet, interest due but not paid yet, etc. Current portion of the debt includes any notes payable (loans due in 12 months) and the payment portion of long term debt that is due in 12 months. Income taxes payable are just what it says - income taxes that are owed but have not been paid yet. Long-term debt is any loan to the company that has to be repaid more than 12 months afte the date of the Balance Sheet.

Let's move to the equity portion of the balance sheet or as properly termed, Shareholder's Equity.

Equity

The net-net to this section of the balance sheet is that if you subtract what you owe from the assets you get the owner's value in the company or equity.

Here is what this portion of the balance sheet looks like:

Capital stock is the original amount of money the owners contributed as their investment in the stock of the company. Retained earnings is all the earnings of the company that have been retained - not paid out as dividends to owners. Retained earnings can be viewed as a "pool" of money from which future dividends could be paid.

So, here's the complete picture, remember it must balance - Assets = Liabilities + Equity:

Next, the income statement.

Seventeen Steps to Franchise Ownership

1. Follow your passions

2. List industries that interest you

3. Understand the franchise type that is best for you

4. Find franchise listings – franchise.org, aafd.org, americasbestfranchises.com, franchisehelp.com

5. Get an idea of franchise costs

6. Determine your income requirements

7. Assess your assets

8. Contact multiple franchisors

9. Fill out franchisor forms

10. Hire an experienced franchise attorney

11. Pre-qualify with a lender

12. Contact current and former franchisees

13. Talk to Potential franchisors

14. Work in a franchise

15. Visit the franchisor’s corporate headquarters

16. Examine the franchise agreement

17. Sign the franchise agreement