Emerging from my Personal Great Recession

October 14, 2011 1:59 PM

The last eighteen months have been brutal for me and my small company. The company became over-reliant on a single client who then stiffed us for a lot of money. To avoid layoffs, I burned down the company’s reserves, then the company’s credit, then my own savings, and then my own credit. Promised payments never arrived, layoffs ensued anyway, productivity collapsed as staff panicked and I began living a crazy-frugal lifestyle. Meanwhile I worked hard to reboot the firm and project to friends, family and competitors that everything was under control: stress city. Now, today, comes the payment I negotiated. It’s enough to pay off the company’s debts, return me to the payroll and reimburse myself for enough of the money I loaned the firm to pay off my credit cards. But it’s really weird, Metafilter: practical and behaviorial economics questions within.

And probably some snowflakes too…

I have damaged my personal credit during this ordeal. To improve my score, is it best that I pay off the cards all at once or is there some other tactic that’s more effective? And what about for the firm?

It may make sense for me to postpone repaying some of the firm’s debts in favor of rebuilding reserves. And, of course, I would like to repay myself the rest of the money I loaned the company. For what it’s worth, the firm is now right-sized for current and projected business and enjoys a diversified client base; the future looks… okay. Any insights into how to allocate the money among these three goals (pay off firm debt, build reserves, repay me)?

There’s a lot of pent up demand in my life right now, not only for stuff—I have probably spent less than $200 on myself in the last year and many things are a little shabby as a result—but for the way things used to be, when I had a cleaning service and didn’t secretly cut my own hair or scout garage sales for things to resell on e-Bay. Ever since I learned the check was on its way, on Monday, I’ve been a little PTSD-ish. I’ve lost my sense of what’s reasonable. How can I recover a sense of proportion?

And in a related vein, how can I make better choices now that I can afford to have them? This week, while traveling for business, I found myself wanting to do things like pay $20 to check my bag just to experience, once again, what it feels like not to worry about every dime. Two minutes later I would be sternly admonishing myself not to spend $2 on the NYT for the plane since I can read it later on line. Once on-line I started looking at Maseratis since I legitimately need to replace my ancient car. I don’t want to become a profligate spender but I don’t want to be a cheapskate either.

Since I’ve gotten so good at living on nothing, I’m considering siphoning off a hefty percentage of my (reinstated) take-home pay into retirement savings. And yet I know I no longer see the post-poned maintenance around the house or my down-at-the-heel shoes because for months now there’s been no money available to deal with these sorts of issues. How can I re-learn to see what really needs to be fixed?

The stress and accompanying insomnia, long hours, poverty, etc. mean that I gained weight, quit exercising and failed to maintain friendships. I’d like to redirect the energy I devoted to survival to improving my performance in these three realms. Any tips?

Thanks, as always, for your help.

posted by anonymous to Work & Money (14 answers total)

An accountant will know how best to structure things to avoid any unexpected tax liabilities, and provide some emotional distance.

On the personal side: pay yourself a wage, create accounts for short-, mid- and long-term goals. Perhaps budget yourself a single day of splurge to get it out of your system.
posted by holgate at 2:08 PM on October 14, 2011

Just a bit of encouragement here: You were at the brink of ruin and came back, thanks to persistence and hard work. You did everything you could to protect your people, which a lot of business people would not have done. And yet, you don't sound like you're very proud of yourself. You should be crazy proud of yourself.

Go out tonight to your favorite restaurant and have something delicious. Then make an appointment with your accountant to figure out specifics. Good days ahead.
posted by jbickers at 2:15 PM on October 14, 2011 [49 favorites]

I don't have any good advice, but it seems like it might've actually been a helpful reset on your personal pattern of spending.

While you certainly need to take care of yourself and your family, maybe a good idea would be to see if you can live comfortably with these sorts of austerity measures mostly in place. Don't try to find ways to bring your personal spending back to where it was before. It could both help you build savings for the truly important stuff *and* make you less likely to lose your mind the next time you hit a rough patch.

Also, I'm not sure where I've seen this, but I feel like I've seen in several places a bit of advice for the newly wealthy: Don't do anything for a little while. No major purchases. No new house, car, etc. Just hang tight, absorb your options, and don't accidentally fuck yourself by making the mistake of confusing a lot of money with an infinite supply of money. Then adjust your lifestyle.
posted by chasing at 2:17 PM on October 14, 2011 [2 favorites]

I have damaged my personal credit during this ordeal. To improve my score, is it best that I pay off the cards all at once or is there some other tactic that’s more effective?

I assume you missed some payments? If so, paying the cards off all at once or over time won't matter in terms of what your final credit score will be. Between now and when you pay them off, your utilization ratio (your current outstanding balance versus your total credit limit) will negatively affect your score until you get your balance under 10% or so. But the one that mainly hurts your score is the missed payments, and for that how fast you pay down your balance doesn't matter at all, you just need to keep any accounts you have open paid on time and eventually the old delinquent payments will drop off of the time horizon that they look at to calculate your score. Also, when you pay the cards off, it helps your score slightly to keep them open rather than closing them (although not a lot usually).
posted by burnmp3s at 2:18 PM on October 14, 2011 [3 favorites]

Get thee to a financial advisor, to whom you can show specific numbers, and who can help you draw up a plan that addresses all of these points.

The internet shouldn't answer this kind of question for you.
posted by softlord at 2:39 PM on October 14, 2011 [2 favorites]

Anonymous - what's the upside?

It’s enough to pay off the company’s debts, return me to the payroll and reimburse myself for enough of the money I loaned the firm to pay off my credit cards.

And beyond that? In 1985 I started my first company and I made it until 1991 when I arrived at that magic place where I had a check coming in that could pay all of the company's debts and I could walk away. I paid my debts and walked away.

At some point you have to ask yourself: is there a long term benefit - will things get better? - or is this business just one struggle after another?

One check that puts you in the black doesn't mean you won't again be in the red in six months.

The stress and accompanying insomnia, long hours, poverty, etc. mean that I gained weight, quit exercising and failed to maintain friendships. I’d like to redirect the energy I devoted to survival to improving my performance in these three realms. Any tips?

Again what is your upside? You should only accept downside if there is an upside.... the bigger the sacrifice the bigger the reward. If there is no reward, then what are you doing?

Austerity isn't a short-term strategy, it is a lifestyle. Here I am now on my third company still somewhat struggling and living as frugally as possible. The recession hasn't bothered me in the least because I've been living in a recession since Reagan was in office. If someone handed me a million dollars tomorrow "Maserati" would not be my first thought: knowing i could make payroll for the next year would be. And that would be more satisfying than any car.

It is a crazy thing really to deal with millions of dollars in my business and then personally wonder if I should buy a new back wheel for my bicycle or try to straighten it myself. I'll fix it myself of course. It's my only mode of transportation other than the bus.

For me I came to the conclusion that I like hardship. I prefer struggle over comfort so this way of life sort of suits me.

It seems like you have the dream of making it big. Nothing wrong with that, but do you have a plan for it? Is it reasonable and rational with your current business model?

If so, then good. If not then you have an opportunity to walk away without screwing someone else and that too is something of value.

Good luck.
posted by three blind mice at 2:45 PM on October 14, 2011 [1 favorite]

Just very briefly, the stuff about the bag check fee and the NYT - that panic and indecision is down to not having a budget. I realise you've been operating with a budget of 0 for the last year, but that isn't sustainable. If you attempt to do that, you end up buying a Maserati. It is cost inefficient (to say the least) in the long run.

Nthing financial advisor. You need one who is geared to the nitty gritty of personal finance and will tell you how much discretionary income is prudent but comfortable for your (new, adjusted) income level. When you know you can blow 1K a month on lunches, lattes and iPads and still be in budget, you buy the shoes and drink fewer lattes that month - guilt free.
posted by DarlingBri at 3:30 PM on October 14, 2011 [1 favorite]

As far as regaining perspective, most of the things you mention were unnecessary in the first place. If you look fine and they way you want to when you cut your won hair, then why would you have someone else do it? If your ancient car in good working order? If so, you don't need a new one, much less a Maserati. Why WOULD you spend money on a paper NYT that's a waste of paper AND you can read for free (also, you know they usually have newspapers/magazines on board they'll give you to read, right?)? I guess you need good, normal shoes as a CEO ro boss or whatever, but why not just have them repaired? If you go to a garage sale and see something you think you can pick up a few bucks on, why wouldn't you?

It sounds to me like you picked up a whole bunch of new skills that are still useful. Just because you CAN spend money doesn't mean you should, especially if doing so doesn't really change anything except adding more waste to your life.

Thanks for being a good business owner to your employees, by the way.
posted by cmoj at 3:52 PM on October 14, 2011 [2 favorites]

You just earned something priceless. The first thing you should do is pat yourself on the back, mister.

I pulled a family business out of the tank once under similar circumstances and it made me an instantly mature businessman.

Don't worry about perspective, balance, PTSD, woulda-shoulda-coulda. Do what you just did, act according to the demands of the present, prudently applying your funds in a manner that meets the most important goals, keeping some ammo in reserve for the unexpected, and enjoy the feeling of dodging a bullet. Life is good for now.

I would thoroughly self-analyze the affair, though. We used to call it a post mortem. Nothing extreme, but look at the highlights of the circumstances that led to the problem, the few major mis-steps, the timing that would have improved things, and what your best moves were. Don't obsess over it; just recognize those things as they hold the key to future good moves.

Congratu-frigging-lations, sir. I'd love to hear all the details! Rock on.
posted by FauxScot at 4:04 PM on October 14, 2011 [1 favorite]

Credit will take time to recover, depending on how much and what kind of damage you did, it will not recover faster just because you paid everything off at once. Credit companies look at how consistent you pay your bills, not how much of your debt you pay back at once.

That being said, pay back the bills or debt that has the highest interest first. It doesn't really matter if it is personal or business, just pay back the highest interest loans.

I wouldn't go spending on things that are unnecessary, you still have debt, right? I would go eat well, buy a nice pair of shoes, and get some nice clothes. If you need a car, get a car, but you don't NEED a Maserati. I am saying that as a person who would love a Maserati and above all, believe that if you can afford it, get it. You can still get to where you need to go with a nice Audi or a nice Mercedes, right?

You know what is sensible, you don't really need advice from us. Pay yourself like you pay your employees and spend according to that salary. Everything extra should go back to the business and pay debt, rebuild reserve. Give yourself a bonus at the end of the year when everything else is paid for and THEN go nuts with your bonus money.

I am guessing you do have an accountant for your business, I hope you will ask him or her to look over all of the finances and help you divide the personal and business monies. In the future, it will be smarter to not co-mingle your business and personal monies. If you ever get into a situation where you have business debt, you will not sacrifice your personal credit. Bankrupting your business is much easier to recover than bankrupting yourself.

I have my own business and I think of my own needs last, but that is the way I run my finances. I usually count the money at the end of the year and divide the money then (bonuses, etc.) There isn't anything that I really need that I have to have NOW except food and shelter so January is usually the time I would splurge.

Also, I'm very happy that you have recovered well!! Best of luck!
posted by Yellow at 4:10 PM on October 14, 2011 [1 favorite]

Besides your own retirement account (and you have one, right?), investigate disability insurance for yourself. Because if you can't work due to something major, the whole shebang is fucked.
Don't mess up your own credit again--the LLC or whatever can take the hit, not you. Your business can lease you a car (I like my new Fiat) which makes more sense than you buying one with bad credit at a big interest rate.
See if you can find a business mentor who can help you put this stuff in perspective. Sometimes those civic organizations--Lions, Kiwanis, Chamber of Commerce have amazingly helpful resources. I found a retired guy who gave me great advice.
And budget a splurge for yourself. Massage, dinner, small item as a reward. You'd do it for an employee who saved the day, right?
posted by Ideefixe at 4:29 PM on October 14, 2011

It may make sense for me to postpone repaying some of the firm’s debts in favor of rebuilding reserves. And, of course, I would like to repay myself the rest of the money I loaned the company. For what it’s worth, the firm is now right-sized for current and projected business and enjoys a diversified client base; the future looks… okay. Any insights into how to allocate the money among these three goals (pay off firm debt, build reserves, repay me)?

Running a certain amount of debt for a business isn't unacceptable so long as the money is making more than it costs to borrow. If that's the case, and you can be sure of it, fine. If not, you're wasting money (the interest) because you've gotten confused about your corporate credit being a reserve, too.
posted by rodgerd at 6:20 PM on October 14, 2011

I think the way you're thinking about this, while understandable (and good on you for pulling things back together and making tons of sacrifice for getting here), is backwards.

Your goal when it comes to finances should never be to look around, figure out what's normal, and then do that. Instead, your goal should be to look at how much money you have, what your expenses are, and what your goals are, and then align all those things so that they work together, and then, internalize that as normal.

The types of spending you're worrying about now are very, let's say, emotional in nature. You're wanting to relieve the tension of having needed to watch every dime, and so in your emotional state, you're feeling like you want to not watch your money at all.

What I would suggest you do is first of all (assuming you can really afford it), is go buy yourself a nice dinner. Take a good friend, romantic partner, whatever, someone who has been awesome to you in some way, and pay for them, too, of course.

Then, you do what people do, you make a budget. But don't forget to tailor it to your goals and your needs. It seems like part of your needs (and I think most people are like this), include having a certain amount of money to spend without caring where it goes.

The way I do this, is I make a spreadsheet. At the top, it has a column with my salary, divided by 12, and multiplied by a factor that accounts for taxes. Beneath that a section lists each of my major monthly expenses (food, rent, utilities & bill, and student loan debt are the major ones for me), counting savings as an expense. I subtract the expenses from my monthly salary, and then that produces a number. That number is my fun money, in other words, the amount of money I have left over that I can spend on whatever I want.

If the fun money number is too small, I do things like tweak my savings rate or decide to spend less money on food, or whatever.

If all this stresses you out too much, and you're still having lots of emotions around it, I think it would be helpful to see a therapist to help process your feelings.

One final point is that whenever your means improve, you should strive to increase your standard of living very very gradually. Doing this will help make sure that you continue to live well below your means, which is the real ticket to not having financial worries. (Well, that and job security, I suppose, but living within your means is the one you have the most control over.)
posted by !Jim at 7:43 PM on October 14, 2011 [1 favorite]

I really feel you on this (as you can see here). Congratulations.

On questions #3-5, I think the idea of saving until you have paid down all the debt and then have a nice thick reserve (both business and personal) is the best idea. It might be better (both psychologically now, and for your financial future) if you stay in Depression mode until you have enough saved that you feel confident that next time this happens, you won't have to suffer like you did.

For rationing your optional spending now that you do have the option, you could make a budget as suggested above. An alternative would be to keep your budget at $0, but slowly address the most important shortfalls (like worn out shoes). What I do now is to put the things that I really, really want on a short list (I actually put it on paper, but mental might work), and if they stay on that list for about two months, I start trying to work them into the budget. If I wait, I forget about the things that won't make a big difference in my life. I'm not talking mega-luxuries. I'm talking, over the course of 9 months: running shoes, a haircut, and gardening shears. Next may be a cheap battery-powered tape deck.

On question #6, you clearly still have some intensity and adrenaline left from this situation. Could you redirect that toward losing weight and getting back in shape? Maybe you could pay for running shoes now, or join a gym, and work out every single morning. It could be your new thing? As for friends, during this challenging time when I have a survival mindset, it's easier for me to bond with people over helping them than over chit-chat.

On questions #1 and 2, you know best what the company needs in terms of reserves vs. debt reduction. In general, I'd pay off high-interest debts first, then build up reserves, then repay yourself any zero-interest loans you gave the company. Then I'd develop structures to keep the finances separate for legal reasons (IANAL but I believe that if the LLC / inc. entity gets sued, the person who sued can come after your personal assets if you've been comingling assets).

For repairing your credit, if you cannot repay all of your credit yet, then at least analyze what percentage of your credit you're utilizing on each credit card and bring all the amounts owed down in tandem: reduce utilization on each card below 50%...40%...30%...10%... That is, unless one card has a much lower or higher interest rate.
posted by slidell at 8:50 PM on October 16, 2011