At Trucker CFO, we stress the importance of developing a plan for your business and strategies that will help you in achieving your goals. Many of the same principles that apply to operating a profitable small business also apply to successfully managing your personal finances. The bottom line with managing a business or managing a home budget is that you need a personal financial plan.
If you are an owner-operator or you own a small trucking operation, especially if these entities are family-owned, the approach you take with your personal finances can ultimately impact your business – in either positive or negative ways. In previous blogs and podcasts, we’ve talked about business entities and taking the proper steps with your business, including making sure that you have set up a separate bank account for your business.
With this blog, we are going to focus on various aspects of personal finance. First of all, personal finance covers a great deal of territory. There are monthly budgets, which are rooted in income and expenses. Credit cards and easily accessible loans have been around for years. Some folks will get involved in different types of investments. While these are some of the key considerations related to personal finances, there are many others, including being ready for those rainy days and emergencies that happen in life. Just like your business, there are many factors that can impact the health of your personal financial situation.
Addressing Existing Debt
When examining personal finance, we can begin by asking some simple questions: Do you have what you consider a personal financial plan? How would you characterize your personal financial health? If you are a business owner, have you been able to create a well-defined “wall” between your business finances and your personal bank account? Are you able to cover your household bills and other personal financial obligations each month? Are you carrying high balances on credit cards or loans? Do you have overdue bills? Do you have or are you able to create a savings or emergency fund?
For those people who find themselves in situations where they are carrying debt and want to eliminate it, we recommend that you take the snowball method of paying down your debts. Let’s say you have multiple credit cards with balances into the thousands or even the hundreds and you want to eliminate that debt. With the snowball method, you start with the smallest one, pay that off, and as you pay the first balance off, you would then take the payment that you are making toward that credit card or that debt and apply it to your next debt.
Through this approach, you maintain your minimum payments while also being able to focus on paying each balance off one at a time by applying the additional funds that are freed up by each paid off account to your next smallest-level balance you are trying to eliminate. It’s essentially like rolling a snowball down a hill that becomes larger and more powerful through the increased funds you are able to apply debt because you have eliminated other debts from your monthly budget. If your income remains stable, you’ll have better financial health and, once all the debts are paid, have additional money in your pocket.
Building An Emergency Reserve Fund
If you are able to execute a plan to become debt free within your personal financial plan, you will have some options on how you can use that money. With our clients, we talk to them about the value of building an emergency fund with their personal finances.
Most owner-operators and fleet owners are familiar with establishing a maintenance reserve fund for their trucks. For those who are not familiar with this strategy, the maintenance reserve is a separate account that is part of your expense budget, receiving regular payments. When maintenance is required for your truck, whether it’s your regular PM visits or it’s a surprise repair, you would use funds from your maintenance reserve account.
On the personal financial side, the best practice with building an emergency fund would see you develop a plan with regular monthly payments into this separate account that is only used in case of emergencies. If you make monthly contributions to your emergency fund, you’ll be able to build up your account over time. When an emergency arises, like taking your dog to the more costly 24-hour veterinarian service on the weekend, you’ll have an account that you can access – paying from your savings rather than taking a hit on your bank balance or having to use a credit card.
At Trucker CFO, we recommend that people build up an emergency fund which can cover your expenses for a period of at least 90 days.
Investments & Your Personal Financial Plan
At the start of 2023, we are in an environment where investments are for the most part down. We are seeing contractions when it comes to the stock market, and we’ve also seen a lot of trucking professionals who have gotten into crypto and the do-it-yourself type investment plans. Rather than going through traditional routes with an investment professional, we are seeing more and more folks who are trying to do it on their own. Some people have even taken investment classes. But here’s the thing, DIY investors have typically lost money in the market.
Let’s be very clear in stating that investing can be a great strategy for growing your overall wealth. Investments, whether you get involved in the markets or other opportunities, are generally most successful with a long-term strategy. There are always risks with investments, including the fact that there are down markets.
In our experience, investments require time, patience and planning. We’ve seen enough in recent years to reach the conclusion that the DIY approach is NOT the best when it comes to the process of finding the right investment or getting into the market that is the best fit for your financial situation and your overall goals. If you are considering risking some of your hard-earn dollars in the effort to have more overall wealth, you should seriously consider finding investment professionals who can advise and work with you.
Financial Planning For Your Future
In the trucking industry, it’s very easy to become a prisoner of the moment. We are rightly focused on today, making sure our businesses are profitable and that we can make good on our monthly obligations – both on the business side and the personal side. While we recognize the importance of what’s happening today, we should also make sure we are not ignoring the tomorrows ahead. How often do you take time to think about the future? Are you in a situation with your business (and by extension your personal finances) that you don’t have emergency funds in place? Are you contributing to a retirement plan?
We recognize that life on the road is both rewarding and challenging. And, with all due respect to the Allman Brothers’ song Midnight Rider, the road unfortunately does not go on forever. At some point, you are either going to want to retire or you’ll be in a position where you need to call it a career and put down your keys. Being prepared for retirement certainly has its benefits. Having a personal financial plan for the future and executing that plan will place you in the position where you can best dictate when you want to stop working.
If you are an owner-operator, independent contractor or fleet owner, you have to first make sure that you are paying yourself. This is how we make sure that we can address the personal finance needs for today.
Now, when you are paying yourself, we advise our clients to use the 80-20 rule when looking at your personal income that is coming from the business. You would take 80 percent of those regular payments to yourself through the business and apply it to your current personal finance needs. The remaining 20 percent is set aside. If you have eliminated your debts and you have built an emergency fund that can cover your personal needs and your business needs for 90 days, you should start looking at using that 20 percent set aside for your retirement plan. Of course, investing can be a part of building wealth for future use in retirement.
At the end of the day, you want to win the money game. This is the goal of strong financial planning – the kind that looks at both the business and personal sides of the equation. You want to be in the best position to take care of your financial obligations today while building a path that will ensure a good life for your future self.
Important Notes on Equipment Purchases
In addition to the changes that have happened in the post-COVID equipment market, there is still the very human temptation to want to roll down the highway with the baddest, shiniest ride in trucking. While there’s definitely a great feeling in having a ride with the chrome and other features that make you the envy of the interstate, you should always be looking at your short-term and long-term financial goals. When it comes to your truck (or trucks, if you are a fleet owner), it’s a matter of considering what you need vs. what you want.
For many people, the truck they need is the truck they want, and that’s an ideal situation. The key is staying disciplined when it comes to making financial commitments with trucks. As always, you want to make sure that the financial decisions you are making are not putting you in a risky position.
Make no mistake, there is a cost to securing dependable equipment that fits what you need the truck to do and fits your lifestyle. At the same time, you should not enter into a deal that will place you in a risky debt situation just so you can have that head-turning, cool-looking truck.
One of the frequent questions we get at Trucker CFO related to equipment comes from trucking professionals contacting us after their truck has fully depreciated. They will ask us about the benefits of getting a new truck so they can depreciate the equipment and get a tax write-off. In this situation, there are questions we will ask in return. The main question we ask is the following: What is the true cost of ownership?
You have to consider the condition of your current truck. Has the truck entered the part of its life cycle where you are consistently making repairs to it? If so, a new truck may be the route to take – allowing you to eliminate those repair costs and have another depreciation cycle.
Now, if you no longer have truck payments and you’re not having to spend significant dollars on repairs each year, the cost-benefit of keeping your current truck and paying a little more in taxes can, depending on your tax situation and personal financial plan, far outweigh returns seen from tax deductions through the depreciation on new vehicles.
It can be easy to get caught in the line of thinking that tells us, “I need to pay less money to the IRS.” The reality is that you should want to be in a position where you can pay yourself more first. What purchasing and operating strategy is going to put more money in your pocket – even if that strategy means your tax bill goes up a little more? That’s the key question. Your overall approach to your business should not be to go out and make purchases that cause you to make less money just so that you don’t have to pay Uncle Sam. You should always step back to consider all the factors involved in a cost-benefit analysis.
We Can Help With Your Personal Financial Plan
Whether it’s with your equipment purchases, planning for retirement, investment strategies, building an emergency fund, or eliminating debt, the goal is to put your business and place your personal finances in a position where you can win the money game.
Do you have a plan that will help you win the money game? At Trucker CFO, our team is ready to listen. We want to talk to you about the goals that you have set for your business. We can help by giving you some perspective from our time in the trucking industry and we can connect you with the right resources that can help you build plans that address today and the future. We invite you to get connected with the Trucker CFO team.