Mr Pratt’s most recent blog discusses using debt properly. Now, okay, my mind goes immediately to the song, ‘Neither a borrower, nor a lender be. Do not forget, stay out of debt.’ Which then led me to wonder where that came from. I knew it was from Shakespeare’s ‘Hamlet’ (Polonius counsels his son, Laertes in Act-I, Scene-III of William Shakespeare’s play, Hamlet by saying, “Neither a borrower nor a lender be; / For loan oft loses both itself and friend.” But what about the tune?
Completely surprised when i discovered that it was created and made famous on the TV sitcom, Gilligan’s Island, which i watched religiously when i was young. SO FUNNY! It is sung to the tune of the Toreador Song in Bizet’s Carmen.
The Bible also has advice on debt and teaches us to guard against being in debt, likening it to slavery and bondage. However, debt does not seem to be a sin, but a tool to earn money wisely, but counting the cost before taking on the burden.
May 9, 2018
from the Ranching for Profit School
A lot of people tell me that they want to be “debt free.” They are tired of making big interest payments on land, livestock, machinery and their operating note. They have had too many sleepless nights worrying about making the next payment. They believe that if they didn’t have to borrow money they would be more profitable and financially secure.
But the proper use of debt makes us more profitable, not less. And being debt free doesn’t make us financially secure. In fact, for most of us, short of winning the lottery, the appropriate use of debt is our only realistic path to financial security.
The problem isn’t debt, it’s our misuse of debt. The two most common ways we misuse debt are:
We put finance first and economics a distant second
We use debt on the wrong things.
Using debt effectively begins with understanding the difference between economics and finance. It boils down to this: In economics we ask, “Is this profitable?” In finance we ask, “Can I afford to do it?” If we are going to be smart about our use of debt, economics must come first. If it isn’t profitable you don’t have to worry about how you’ll pay for it, because you shouldn’t do it in the first place.
When RFP grads evaluate the profitability of a livestock enterprise they include opportunity interest on the herd as a direct cost in the calculation. If the enterprise has a healthy gross margin it tells us that borrowing money to expand the herd will increase profit. If we haven’t included opportunity interest in our calculation we can’t be sure if expanding the herd is a good idea.
The other problem is that people use debt on the wrong things. There are two primary places where we put money in our businesses: fixed assets and working capital. Simply put, fixed assets are things we intend to keep (e.g. land, cows, infrastructure, vehicles, equipment). Working capital is the money tied up in things we intend to sell (e.g. calves). Most of us have most of our money invested in fixed assets. This is the biggest financial problem in agriculture. It’s a problem because when most of our money is tied up in things we intend to keep, we have relatively little to sell and generate very little income relative to the value of our assets. Making matters worse, a lot of the income that we do create gets spent maintaining the fixed assets. That’s why most ranchers are wealthy on their balance sheet and broke in their bank account.
Borrowing to buy fixed assets may be a smart long-term investment strategy, but it might cause you to go belly-up in the short term. We’d be better off to use debt to buy assets that directly produce income.
We shouldn’t be afraid to borrow money, provided the economics of our enterprise is rock-solid and we use the borrowed money to buy income producing assets.
Investment – an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value.
Job – a paid position of regular employment. a piece of work, especially a specific task done as part of the routine of one’s occupation or for an agreed price. Everyone has goals in life – some will involve being financially secure. If you are interested in building financial wealth, there are a few basic premises which need to be incorporated into your plans.
1) Your saved dollars must be put to work!
2) Break free from the bondage of financial slavery by changing your spending habits
3) Invest in yourself – education or your own business
4) Learn to manage the money you do have – more money will not necessarily fix your financial problems
5) Debt is a hard task master – avoid it!
6) Use your income from a paid job to make investments that will gain in value while you continue your paid job. Later you can retire from your job and enjoy your investments.
Many, many economic experts have different ideas about how to invest, so it’s up to you to decide who or what you want to invest in.
A quick search on the internet with the above phrase will yield a lot of sites with tips on getting out of debt. But that is just a start – once you’ve gotten out of debt (completely), then the life skills learnt should encourage and propel us into living securely.
These are just a few articles on simple, basic, no-nonsense, common sense practices to get out of debt. Evaluate every single purchase. From a previous blog, i wrote about identifying the ROI (return on investment) and/or whether it is an appreciating or depreciating asset.
There seems to be a resurgence of retirees wanting to get back to a ‘simple’ life of growing their own garden and/or raising their own animals for food, milk, and/or fiber. Interestingly, it also seems to attract the young set as well with high hopes of being self-sufficient on the land. Nothing wrong with those ideals, but our American culture and requirements are different than what they were 100 or even 50-60 years ago. Many of our expenses are out of our control (health insurance, liability insurance, our reliance on electricity, phones, internet, medical expenses are out of sight, vehicles, petrol, etc, etc), so the ‘farm’ whether it is a hobby size or much larger needs to not only cover these expenses, but operating expenses as well. In other words, one must turn a profit to be sustainable. Don’t forget that ‘simple’ certainly does not mean easy.
I’ve blogged on this before, but one thing that is a killer to many striking out in an agrarian lifestyle is to get FAR TOO MANY irons in the fire. Focus on what you like to do and that which will also turn a profit quickly. After you become financially successful as to being out of debt and putting away a bit of savings, find other ‘holons‘ which will complement or add value to the core activity. Don’t be distracted by get-rich schemes – they do not exist in agriculture. If you have a town job – hang on to it until the farm is a going concern. Doing both is hard – no doubt – but staying out of debt is tantamount to being successful.
This type of operation is typically termed ‘holistically managed’ and there are resources to help you determine a course of action. Our first introduction to this type of thinking was through Holistic Management Resources now known as HMI, Holistic Management International. This link will take you directly to some free downloadable planning tools and and teaching materials. Allan Savory and his wife, Jody Butterfield, started HMI, but have now moved on to start a new organisation called Savory Institute. The Savory Institute website has numerous videos and papers for your perusal.
Marketing – where will you sell your product?
Equipment – how much will the initial investment be? How often will it be used? Does it have multiple uses? How can you make money with what you already own? If there is equipment you don’t use, consider selling it.
Time – when will the cash start flowing back to you?
Weather – Ag enterprises look so easy on paper, but consider that you have no control over the weather and inclement extremes can bring diseases in both plants and animals as well as drought and flooding, damaging hail can destroy thousands of acres of crops in just minutes. Be prepared, both financially and mentally, for complete failures and steep market price declines.
Government – you also have no control over government policies as it picks winners and losers.
Don’t spread yourself out to a lot of enterprises – especially those that are not related – you’ll be exhausted all the time and seldom see a financial reward. Also try to purchase multi-purpose equipment.
Learn from others’ failures, mistakes, and accomplishments. Your situation may be different, but there is no use setting up the same hurdles others have taken down. Some practices simply DO NOT WORK in some or all locales and situations.
Hindsight, of course, is much clearer as to making business decisions, but there are basic principles to be followed.
What is your dream job/career/life? And how are you moving towards it? Have you already experienced your dream job and found it wanting? Why?