How to make better choices managing money and reaching financial goals
This week, I’m joined by Lynda Moore, The Money Mentalist. Lynda’s background is in accounting, so she understands numbers. She also studied under Professor David Krueger in the USA to focus on money psychology. She now combines two skill sets as money mentor/coach, working with business owners, couples and individuals to get an understanding of how they think, feel and behave with their money, how they can make better choices to reach their financial goals. Mōrena, Lynda, welcome to the podcast.
Transcript
Lynda Moore
Good morning. It’s lovely to be here.
TB
So, Lynda, how do people’s attitude towards money change when it comes to tax?
Lynda Moore
There’s a bit of a spectrum to it. At one end of the spectrum, you have people who are kind of terrified of the tax department and will do anything to make sure that they make those commitments to the IRD. Whether or not they can afford to do that in terms of cash flow and other things going on.
And at the other end of the spectrum, there are those who kind of go, “It’s just the tax department. I’ve got other things to do” whether it’s right or wrong and what I think they should be doing with their money. And then somewhere in the middle there, you’ve got, I guess, what you call good compliant tax people who know what’s coming up, and plan for it, and they manage their tax really well. I tend to work with people who are kind of at either end of that spectrum.
TB
So is there any particular type of business or person who consistently gets into trouble with tax in your experience?
Lynda Moore
It’s not a particular industry or anything like that. It’s more about the business owner and it’s more about the money, personality, the mindset and their style. For example, if you have a business owner who has the money personality of being a spender, then it will be much, much harder for them to save for tax, in fact it might not be on their radar.
Whereas if you have the polar opposite, which we call the ‘Hoarder Personality’, they are really good money managers. They are likely to be the ones who will have their tax saved. So, when their accountant sends out a tax letter, there is no stress, the money’s there, they’re sorted.
So, the problem clients seem to be more sort at ‘The Spender’ end of the spectrum. If you use me as an example, which I’m quite happy to do, my money personality is an ‘Amasser/Spender’.
Business owners need to have some ‘Amasser/Spender’ in them because you need that to grow a business. So, if I’m talking to someone who is a business owner and I see an Amasser personality, I’m kind of like ‘Why are you in business?’
With a Spender, we find it a little harder to put that money away for tax because they will spend in other areas in our business to grow it. Whereas an ‘Amasser/Hoarder’ will make sure they’ve got their tax money tucked away and then they’ll start to grow the business.
So, we kind of look at it from slightly different aspects. And please bear in mind these are kind of generalisations. They are a little different.
TB
So what stage do you get involved? Are you lucky enough to get in at the beginning or is it “Help Lynda, we’re in trouble!”
Lynda Moore
It can actually be a bit of both, because generally clients will come to me when they’re looking and they’re saying “So, my accountant has just told me I’ve made all of this profit. I don’t know where it is. So, my neighbour down the road, he’s just bought a boat and I can’t afford one. But my business is making lots of money. What’s going on?”
So I see that disconnect between where they’re told they made a profit and got a big tax bill, but they haven’t got the cash either in the business or in life. And then it’s finding the overall picture of what’s going on in your business and what’s going in your life that’s lead you to that.
Or I also come across the client who’s going “I’ve just started a business. I want to make sure”. And sometimes it will be “I’m going to leave my job and start a business, but my partner is really worried how are we going to live.” In which case we start with that process first and we make sure that a new business owner understands the ‘tax holiday’, and you need to save because in year two you’ve got a double whammy. So again, I get both ends. I get experienced business owners and I get newbies asking questions.
TB
You touched on the ‘tax holiday’ there, the first-year issue. This is something I see quite a bit of, and I think every accountant experiences quite a bit. That first year of business when provisional tax isn’t payable and you just have to wait till terminal tax, which is a year down the track. And lo and behold, what comes around you’re into provisional tax for that year as well. So essentially, you’re paying two years at once.
That’s a very hard thing to manage with new businesses. And I imagine for the spender type client, that’s a horrendous problem. And that’s when they immediately run into quicksands. How do you address that?
Lynda Moore
Well, I think it’s an understanding from the business owner. I think quite often they don’t go to an accountant or get advice when they start the business. It’s like, “Oh, we’re going into business”. And because as an employee, you don’t physically pay the tax they don’t have that mindset and that attachment of “I have to physically pay tax”. You kind of do with GST, but not so much income tax.
So unless they get advice early and are told how to structure the business and put away money for tax, it’s not going to happen until year two. And that’s when they’re going to get a horrendous shock when their income suddenly drops significantly because they can’t find that tax.
TB
Saving for taxes isn’t easy. So, what’s your tips to for in that regard? What do you tell your clients that this is what’s going to happen and how to organise themselves?
Lynda Moore
It comes down to “You’ve got to know your numbers”. So whether you can do that yourself through your accounting system and once you pull out your profit and loss. Alternatively, you ask your accountant “I just need to have a very simple profit and loss once a month”.
For the clients I work with, I start out with the basic company tax rate of 28%. So whatever system you’re using even if it’s not 100% accurate just put 28% of the profit away into a separate bank account.
If you are a spender use a different bank so you can’t transfer from one to the other. And give that account a nickname. Call it the ‘My tax savings account’. Because then your brain looks at that and goes, “Oh, that’s for tax. That’s not my holiday in Fiji account. It’s the IRD account”. And by naming this account for tax, you associate it with that.
So it doesn’t matter what you want to save. If you want to save for a holiday in Fiji, have a Fiji savings account. But if you give it a nickname that associates with what you’re saving towards, you are more likely to do it and you are less likely to dip into it.
TB
Wow, that’s quite interesting. I’ll just pick up a point you mentioned there. People probably get the hang of GST quite quickly. What’s your recommendation around paying GST? My preference is to go two-monthly because you get used to saving for and getting ready for it. Six-monthly returns you get a shock, as you’ve suddenly got to find $30-40,000 which is often gone because. GST is more often than not used as working capital in a small business.
Lynda Moore
If I see very few people putting away GST money versus putting away [income] tax money. And again, if you have that right attitude you are that hoarder sort of personality you can save up to six months GST. But more often than not, it doesn’t work.
For me, what I do, because I run my business through Xero, when I’m doing my admin, I just look to see how’s my GST accumulating and whether I need to pull a little bit of money out of my working account into my GST savings account. And then when I come to month-end and my monthly report, the first thing I do is pay myself first. I put away 10% of my profit into a separate account which is my “Building up profit for business development.” Then my tax money goes into the tax savings account. And it’s just part of what I do when I do month-end reporting.
Now, if you’re a business owner, you need to ask your accountant to send you a profit and loss report or three little lines to say this is what it looks like. Bear in mind, I’m an accountant and I love my industry, but I don’t understand why some accountants don’t simply send a little email. If you’re doing the client’s GST, why can’t they just add three lines that says, ‘Hey, you made this much profit, put away this much tax.’ You know, they’re sending a GST report so why just add that in? Because it’s an important piece of information.
TB
That’s a really, really good point. It touches on an issue I think the industry is struggling a little bit with, that there’s resistance around costs. So accounting is basically seen as a cost so everyone’s driving it down and there’s offshoring going on as well.
So the mentality I think that is needed for business advisers, accountants and tax consultants is to flip that round and be proactive and say “Here, this is what we are seeing”. I mean, the GST returns are a really good example, as you just pointed out. Every two months, an accountant who’s working alongside a client can say, “Hey, this is what we’re seeing. Where are you at? And you need to be doing X, Y and Z.”
But there seems to be resistance both in the industry to take those steps forward and from clients to want that sort of advice. Until then, suddenly everything blows up and fingers are being pointed everywhere. How do you address that?
Lynda Moore
I think for some reason, there seems to be a bit of fear about going to talk to the accountant. One, because you think you’re going to get billed for it. And secondly, the feedback that I sometimes get, particularly when I was an accountant in practice as well, from women in business, is they don’t understand what they’re being told, and you know they feel like they are being talked down to a little bit.
It’s not every accountant. There are some amazing accountants out there, and I know a number of them. And I think it’s a matter sometimes, that once you have that business relationship, you had those for life. Whereas sometimes your business changes, the practice changes, you know. And maybe sometimes you don’t suit that type of accountant for whatever reason. And it’s time to go and find someone who else does suit where you are. It’s not like we now have a fear of changing banks. And finally, the client feels “I don’t know what to ask”.
That’s a really good point about communication because it leads on to something that’s we’re seeing more of now and I’m sure you might have seen it as well. Inland Revenue’s Business Transformation has been built around directly interacting with taxpayers or ‘customers’ in its jargon.
Are you seeing that as well? And how do you deal with that from your end? Is it a case of over-communication? Now we’re going from one side – where you talked about accountants don’t communicate as well as they should – to Inland Revenue’s telling you everything every day. It’s a bit much, isn’t it? How do you address that?
Lynda Moore
It’s really interesting because as you said it’s gone from one extreme to the other. I did have one client who’s in this “I’m terrified of the IRD” category who thought they had to pay this huge sum of money. But it was actually one of those little letters that said “It’s due over the next six months” and they paid it all at once. And I’m like “You can’t get that back.”
So I think sometimes what happens is “Oh it’s from the IRD, I’ve got to do something about it”, or “I’m just going to ignore it”. And again, I see that sort of polar response. It’s almost like when you get on someone’s mailing list and they email you newsletters too frequently, and you just shut down.
So I think there’s certainly some clients who’ve done that, which is also dangerous because they could miss something that’s important that they need to deal with. But they’ve gone into that mode “It’s just the IRD sending me more stuff that I don’t need to worry about or deal with”.
TB
Talking about anxiety, right now, how are people feeling out there?
Lynda Moore
All over the place I guess is the best way to describe it because, and I don’t know about you, but when I set my goals for 2020, there was not a pandemic in my planning whatsoever. You know, everyone was kind of going, “Oh, 2019 wasn’t that great but 2020 is going to be absolutely amazing.” So, we were in that kind of head space looking at it really positively. It was going to be a great year.
Then we had this pandemic and we hit lockdown. So, with financial anxiety you go into the state of Flight, Fight or Freeze.
Now, what a Freeze person does is they basically go “Life’s just too hard. And I’m just going to be an ostrich.” And they will just put their head in the sand and it’s all just too hard. They don’t know what to do, how to respond, how to react. When you go into that flight mode, you just want to hide from things. You’re not quite sure where to take advice. You might find yourself going all over the place and going on this roller coaster of emotions where you think things are okay, “I’ll start doing this” and then “Oh hang on, I’ll go down this path”. So you’re a bit like scrambled eggs and you just don’t quite know what to do.
And then you get the ones who go into Fight mode. Now, these are the ones who will ring the bank, the accountant, and they’ll be angry. That’s the usual kind of fight response, you get into the space of feeling angry and frustrated. When you’re in that mode you can make some really bad decisions because your view is really narrow, and you can’t see a lot of options and you will take an option that’s in front of you. And it may not be your best option. So, there’s potentially a few really bad decisions being made at the moment.
And also because there’s so much coming through from the media. We’ve got the Reserve Bank going “We want you to do this to keep the economy going”. We’ve got banks going “We’ve got lots of cheap money, but we’ve got responsible lending to think about”. And then you come down to your own business and your own household, and you’ve got to look at what is best for you. So it’s very confusing, all these layers of information.
So you are going to go through all these emotions and what you want to do is get into the action space. This is where you take a deep breath, sit down, do some planning and bring it back to you, your business, your household and what you need to do for you.
And it does sound a little bit harsh, but it is about looking after everyone else’s business as well. Put yourself first, because if your business falls over, you can’t help another business. You can’t help your family. You can’t pay your mortgage. So you do need to put yourself first. Make sure you’re secure, and you’ve got all the support you need.
And I guess that’s the other flip-side. Right now, there’s a lot of support out there. You’ve just got to go and look for it.
So that’s my best advice right now to business owners. Put yourself first. Your numbers are your best friend, your accountant, your bank manager, your support network of experts – not your mate down at the pub. Your experts are your best friends right now. Use them. Use them.
TB
Inland Revenue has a role right now because they’re administering the Small Business Cashflow Loan Scheme, which I am a big fan of, as I think for a lot of small businesses, it’s a very vital tool. But it’s not a grant, you know, they’ve got to commit to repay it. And then we’ve got these wage subsidies as well going around.
We talked a few minutes ago about some of the confusing messages we get from Inland Revenue. But how have you found it and the Ministry of Social Development in that space with the loan schemes and wage subsidies? It’s probably been very helpful for one or two of your clients I would think.
Lynda Moore
Oh, definitely. It has been very, very helpful. And certainly, the clients that have had to go to IRD for support have got that support. They’ve been able to put some arrangements in place and things like that. But bear in mind, I’m an atypical accountant as I’m not dealing with hundreds of clients, I deal with those who come to me who are looking for a mentor and coach.
But certainly, I am finding it seems to be a lot of help and support and it is giving a little bit of peace of mind to some clients. I’ve also had a client come to me and go “I actually think I do qualify for the wage subsidy, but I’m actually not going to claim it because I’ve got other resources and let someone else have it.” She looked at it very much from a values-based decision rather than “I just need the money, I’m going to take it”. I think it’s really great that there are people out there who are looking at it like that.
TB
Just thinking we’ve got an election coming up and all that hoopla going on. Last week I talked about National’s small business policy. https://www.interest.co.nz/business/106800/week-tax%C2%A0covid-19-related-measures-tax-losses-and-airbnbs%C2%A0national-releases-its
What would you like to see from the parties in terms of tax or small business policies coming forward for the election?
Lynda Moore
Yes, interesting question. I’m just starting to think elections and what’s happening now.
To me, that whole thing of the tax holiday is something that needs to be addressed. Whether it’s “you have to pay it to the tax department now” I don’t know, because what I see coming through to me as being the biggest issue is this year two in business and suddenly finding that tax. So, if there’s a solution for that. I know businesses in the first year tend to need that cash flow. But if there was something that at least encourages paying something towards that first year’s tax bill, I think that would actually help a lot of businesses because it would force them to think about tax.
TB
There’s a couple of things that Inland Revenue does have now which would help, the Accounting Income Method, AIM, https://www.ird.govt.nz/income-tax/provisional-tax/provisional-tax-options/accounting-income-method-aim
and the GST ratio method. https://www.ird.govt.nz/income-tax/provisional-tax/provisional-tax-options/ratio-option But the take up of those has been very, very low because they’ve been so circumscribed by Inland Revenue. I think it’s been more concerned about the system being rorted rather than this. Those two options get clients into the groove very quickly of making regular payments of income tax and GST. I agree with you on that.
So smoothing out the transition into business and regularly paying tax would be good. One thing I recommend to some clients where we know the cashflow is predictable enough, is to actually put them on Pay As You Earn. So their personal tax is dealt with. You do lose some of the flexibility around the shareholder employee regime. But you deal with that paying tax matter.
Lynda Moore
I was going to say, if I have clients who are absolutely hopeless with money, PAYE is what I would suggest for them as well for that very reason. I just know they’re not going to be able to cope with provisional tax.
TB
Yeah. Provisional tax requires a lot of discipline. Any final tips for business owners? What’s Money Mentalist’s favourite tip?
Lynda Moore
My favourite tip is whatever you do, understand your money personality and your money behaviour and then surround yourself with people that complement it.
So go back to my Amasser/Spender personality and wanting to spend my way to growth. My lovely partner Simon, is the Amasser/Hoarder. He is the one who goes “Honey, are you really sure this is a good idea? Why don’t we do it this way?”
So it’s a balancing act of me wanting to put my ears back like a racehorse and go and “Hey, let’s explore other options.” So know your money style and know your numbers. Just know your numbers. How much income are you replacing? How much do you need to sell/earn to replace that income? Don’t go into it blind.
TB
“Know your numbers.” That’s very good advice. Couldn’t agree more.
Well, thank you very much Lynda Moore. That’s been fantastic.
That’s it for this week. Thank you for listening. I’m Terry Baucher and this has been The Week in Tax. Please send me your feedback and tell your friends and clients until next week. Ka kite āno.