My first boss (from back in my lawyering days) early on told me that growth sucks cash, by which he meant, if a client decides to grow a company, you had better tell the client that s/he client had better be prepared to spend some serious money. My boss’s phrase is a bit more pithy than my translation here, don’t’ch’ya think? So his phrase stuck with me, mantra-like: growth sucks cash.
Over the years I’ve come to view the growth sucks cash mantra as being meaningful to all financial existences, whether it be the financial existence of a business, the financial existence of a family, or the financial existence of an individual.
I work with all three kinds of clients (all three can just about always use some help improving their overall financial health, yes?). When it comes to my work with most business clients, usually quite early on I find it necessary to look the client straight in the eye and say, You know, don’t you, that growth sucks cash? Yes, you say? Good. So let’s figure out what that looks like. With individuals and families it’s not as predictable, but nonetheless I just about always find that, somewhere along the way, we’re having a conversation and the absolutely right thing for them to hear is: growth sucks cash.
So in my first boss’s honor, and to take that phrase around the iteration race track a few times, here’s today’s Top 10:
Top 10 Things that Suck Cash
10. Growing a company. This is where we began, so just to flesh it out, it’s always the case that hiring employees, having more space, doing more marketing, developing new products, having more inventory, etc. — they all cost cash. The good news here is that growth is fun; bidding adios to the cash simply is part and parcel of that fun (proviso: growth can be un-fun when not done well . . . ).
9. Buying a new car. What they say about losing half the value the minute you drive a new car off the lot is approximately true. So if you’re going to buy a new car, the most cash-preserving way to do so is not very often.
8. Buying a new German car. Have you ever seen what BMW and Mercedes used car prices are like? It’s a case of Ouch! for many models, and Double-Ouch! for a few of ’em — especially compared to Honda or Lexus and even some of the lesser known Japanese and Korean brands. It’s true that nothing, but nothing, drives like a Bimmer, and it’s also true that nothing, but nothing, feels as solid as a Merc, but you had better also believe that you’re gonna be tossing plenty of cash out the car window as you cruise on down down down down the autobahn.
7. Living in the city. Not only is living in the city sometimes tough, but, compared to living in the country, it is also a whole lot more expensive. Sure, if you live in the city you’ll likely make more, but if the houses there cost three times as much and you make two times as much, then you better believe that your lifestyle decision is sucking cash away from you. (Full Disclosure: my lifestyle choice is to live in one of the most expensive cities in the country because, for us anyway, it is way worth it. Suck on, you little city by the bay, we loves you and are willing to pay for the privilege of waking up to you every day.)
6. Kids. I once ran some numbers on how much having a child costs — not for the birth itself, but for everything after, i.e., the food, the shelter, the clothes, the daycare, the babysitting, the swim classes, the gifts for other kids’s birthday parties, etc., etc., etc. I don’t recall what the number was, but $350k comes to mind (think about it: at $15k a year for 18 years, that would be $270k right there). But I stopped talking about that number with clients pretty much right away because, if ever there was a place to *not* do a cost-benefit analysis, it seemed to me that this would be precisely the one (though if a client looks hard enough and what-if’s enough in some of my tools, it is most definitely viewable in there . . . ).
5. Pets. Along the same lines, our pooches and our poods cost us. We love them — how could we not? — so we don’t think about the money. Unlike our kids, though, when pets get sick, many of us pay through the nose because, while (hopefully) most of our kids are covered by medical insurance, few of our pets are covered by veterinarian insurance. So when things go wrong with our lovely little furry friends, it’s gonna be a cash-suck no doubt.
4. Remodeling. We start with two assumptions. First, all things being equal, the bigger the thing is, the more it costs, and, second, the more one-off the thing is, the more it costs. Remodeling a house is a big, one-off undertaking, so the first time you change something in your house bigger than a light bulb please get ready to say buh-bye to some cash. Time was that a new kitchen would set you back $50k (remember, these are Ess Eff Sea Eh prices) but now you’re looking at more like $75k and often quite a bit more. $5k fridges and $5k stoves really drive the price up, but, hey, so too does that Porsche Cayenne Turbo your contractor is driving.
Now please stop a moment to notice a shift here — to notice that, even though remodeling sucks cash away from you, some of the sucked-away cash does a U-turn and ends up embedded right there within your newly remodeled abode, almost literally, where you cannot use it to buy, say, a nice latte, or, for that matter, use it in any way other than as forevermore-house-part (yes, I’m ignoring here the possibility of getting at that cash via cash-out re-fi). As a general starting point, then, you can think of half of the dollars staying with you (i.e., because they get added to the price someone would pay you for the house right now) and half going away from you forever (because, e.g., there’s that Porsche your contractor is driving, yes, but also because of the possibility that your willing buyer might think all those remodeling dollars you embedded into your abode demonstrate an utterly abhorrent lack of taste and sophistication, so that the entire remodel will have to be demolished and put in the city dump, so why would your willing buyer be willing to pay you for those soon-to-be-in-the-dump embedded remodel dollars you just spent?), with the conventional wisdom being that some sorts of remodels are much higher value-add than others.
So, without getting all CPA’y on you, I usually think of a remodel-spend as being part expense and part capital expenditure (though, for tax purposes, it’s all basis baby!). That is, the half that goes into the house is like a capital expenditure (i.e., it built a capital asset for yourself via the increased value of your house), while the other half is money that, like Elvis, has left the building. Hopefully you’ll enjoy the nicer space and benefit from the imputed rent of living in that oh-so nice space!
3. Furniture. For people starting out in their adult life, furniture is something that involves transactions measured in the hundreds of dollars (thrift shops can be so handy!). For people a bit further into their adult life, though, furniture quickly becomes something measured in thousands and oftentimes in the tens-of-thousands of dollars. In terms of the type of analysis set out in the previous semi-CPA’y paragraph, then, you can think of furniture as being like a car (in that, if you buy new furniture and then decide to sell it right away, you are going to take a very nasty cash-hit on that round-trip buy/sell), but you can also think of it as being like a remodel (because it adds to your quality of life and because furniture lasts a very, very long time — many decades, even, if it is built well).
2. Being a spenthrift. As with all of this week’s previous Top Ten Lists (here, here and here), we leave the Whole Shebang’y items to the last two entries on the list. We begin with a bit of language fun, by noting that there are at least two words in the financial lexicon that give everyone pause. The first is sanguine; it means optimistic, though most people hear it as sounding like it means pessimistic. The other is spendthrift; if you’re a spendthrift, then you spend money like it’s goin’ outta style and like nobody’s business, even though most folks, no doubt because of the inclusion of the word thrift in there, hear the phrase as being akin to thrifty and therefore as meaning good with money (and, as a non-financial aside, please also be careful when using the word peruse because, if you’re like most folks, then the odds are quite high that I’m correct when I say, I do not think that word means what you think it means). By definition, then, spendthrifting sucks cash. And, also by definition, spendthrifting sucks cash in a very cash-sucky way.
1. Rainy days. Having bad luck, too, sucks cash. Almost every trial and tribulation that comes our way has some sort of de-trial and de-tribulation response with some handsful or more of dollars attached to it, don’t’ch’ya think? You say you’re sick? That’ll cost you. You say someone stole your car? That’ll cost you too (it’s rare to come out whole from a car insurance claim). Or you say you lost your job? That’ll cost you beaucoup bucks (as in dollars sucked away before you even get a chance to earn them). Why, even the ultimate trial and tribulation, I’m sorry to say, costs money, i.e., from simple cremations to elaborate funerals, you should please be prepared to whip out the plastic, even though you would really rather be doing something else entirely.