#Budgeting, #Household Math - Budgeting - what happens if the numbers add up to bad news?

Question

I've done the steps of listing out my expenses, putting in the numbers, and then identifying my income and it turns out my expenses are higher than my income. What now?

Answer

First verify the numbers are correct. Then begin to address areas that can be improved. Lastly, be open to change - if there's a large deficit, you may have to be open to things such as government assistance and the like.

Analysis

Before we get into what might you do to adjust your living situation, let's first verify that the budget is accurate. Ironically, the bigger the difference between income and expenses, the easier it'll be to verify the numbers.

If the difference is quite big and it has been happening for some period of time (and the budget is accurate), then the money that you've been spending has to have been coming from somewhere. Are your credit card balances increasing? or is there a running balance on your cards? Is your bank balance or investments balance decreasing? Are you borrowing larger and larger sums of money and having difficulties paying it back?

Again, the bigger the deficit and the longer the period of time this has been the case, the easier it'll be to see where the money is coming from. (If it turns out your bank, investment, and debt balances are not changing, then it may be the case that something has been left out of the budget or there's a math mistake).

Let's say you've verified the numbers and they are correct - expenses are higher than income. What can be done?

First off, stop and breathe. Be proud of yourself for bringing the situation to light. Coming to grips with a difficult to accept situation is praise-worthy, so take a minute and give thanks that you now have the knowledge that your financial health isn't what you thought it was.

Ok - now we can address the situation. What is the magnitude of the deficit?  If it's small then it may be that eating out a little less or other types of luxuries can be cut back and that will solve the problem.

With deficits that are larger, it'll require more work. For some people, it may require obtaining outside help, such as public assistance, to be able to keep some version of your financial life intact. For others, it may require a severe downsizing or moving from a high-cost location to a lower-cost location.

Again, the most important thing is to work with what is known. The worst thing to do when faced with a deficit in the budget is to ignore it and pretend it doesn't exist. That is the road to disaster.

So what if income is higher than expenses? Great news! Now - did you verify the budget is correct by checking your bank/investment/debt balances? Are they moving in the correct directions? If so - good! If not - you've missed something!

With the budget numbers in front of you, do you see anything that looks like you could do better? Is the dining out budget too high or is it right on? Are there opportunities to save even more money?

With all of this, remember that the budget is a living document in that it should be changed when there is a life change.

This post is part of a series on budgeting - Budgeting 101

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As always, questions and comments always welcome!

#Household Math - High school, career paths, and financial outlooks...

Question

For a high school student who's thinking about the future, it seems to me (a parent) that there are three basic choices: working straight out of high school and getting into some sort of un- or limited- skill labour; going to university and (presumably) learning some sort of skill that can translate into a job directly (ex. accounting), and going to trade school and learning some sort of trade. What are your thoughts on this?

Answer

Before talking about potential net earnings, I think it's most important to talk about the desires and nature of the student. That said, and with some very basic (and perhaps widely inaccurate) assumptions, the trade school grad does best over time. However, going to work straight out of school and being able to get a good wage gives that person a leg up over the college graduate for close to 20 years.

Analysis

There's quite a bit to unpack here, so let's take it step by step.

My first thoughts don't go to finances but rather to happiness - where is it that any given person will be his/her happiest. This is an individual decision that will be guided heavily by the interests and desires of that person. For instance, I know that at that age, the thought of doing anything other than going to University was a non-starter. Thankfully, I had a scholarship that covered many of the costs! However, as I've grown older and worked with students, it's become clear that for many students, it's a better choice, due to their desires and temperament, that another choice such as a trade school would be far more desirable. It used to be the case that a college education was a guarantee to a good job but that hasn't been the case for many many years. For example, Lululemon, the clothing retailer, only hires college grads as sales people. How are they able to do that? Because there are so many of them that can't get jobs in their chosen fields that Lululemon can be extremely choosy in who they hire.

Let's say for arguments' sake that the choice really is up in the air - the student is planning a future and that all of the three choices (working, university, trade school) are appealing. We can now look at this in terms of finances.

I'm going to make a lot of assumptions on this question, so if you spot an assumption that needs adjusting, please do point it out!!! For ease, I'll assume a 2000 hour work year.

Working straight out of school

This part of the question needs a heavy dose of assumption. I'm going to assume that a limited-skill job can be obtained - something that brings in the following amounts:

$14/hr for the first two years
$16/hr for the next two years
$18/hr for the next two years
$20/hr for all years thereafter

University

This part of the question also needs a heavy dose of assumptions. I'm going to assume that the cost of University is all borne by the student and is all paid for with loans. I'll set the loan interest at 10% per year for 10 years. The cost of university I'll assume to be $20,000 per year for four years, all in (tuition, lodging, food, books, lab fees, etc) (public schools being a bit less and public schools being potentially considerably more). Coming out of school, I'll also assume a skill has been learned that will pay $40,000 entry with a 5% raise per year afterwards.

Trade School

And time for more assumptions... I'll assume a trade school is one year and $20,000 all in, with the same repayment schedule as for the university (10 years, 10% interest). I'll assume the graduate is able to get a job for $20/hr starting and receives a raise of $5/hr after two years (I'm assuming moving from an apprentice to a journeyman) and then 5% thereafter.

I'll use a spreadsheet to figure out the results over time.

https://docs.google.com/spreadsheets/d/1_SpdTjdH2DJr8grYs8Mfl90crsECIih8mVvo5YozoII/edit?usp=sharing

And so again - these results are the result of the assumptions made and one or more of them may be wildly off, depending on individual circumstances - please take that into account if using this as a basis for decision making! Or let me know your particular circumstances and I can adjust the sheet appropriately.

If we project the net earnings of these three tracks over the course of 30 years, we find the following:

At year 4, the Trade School graduate overtakes the person who started working straight out of school.
At year 19, the University graduate overtakes the person who started working straight out of school.

In terms of overall earnings over the course of 30 years, we have:

• Working straight out of school = 1,152,000
• University = 1,920,538
• Trade School = 2,782,456

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Questions and comments always welcome!

#Household Math - Searching for better income and the financial impact of the search...

Question

Let's say someone is earning $18/hr, working 40 hours per week. That person really wants to earn $20/hr but is unable to get that raise with their current employer. If the person quits work to seek out a $20/hr position, how many hours will have to be worked at the $20/hr job to make up for the lost $18/hr?

Answer

The answer depends on the time unemployed. It takes 9 hours at the higher wage to make up for every hour of being unemployed, 9 days for each day unemployed, 9 months for each month, etc...

Analysis

This question hinges on the time the person is out of work looking for a higher paying job. We can find an expression that will give us that relation.

Let's first look at the money being lost by looking for a new job. That can be expressed as 18N, where N is the number of working hours you aren't working (you are uNemployed).

Each day, where N = 8, you lose $18 X 8 = $144

Ok, so now to the amount of money you'll be making. We need to see that, once we're working again, we can essentially look at it as earning the $18/hr, plus earning an additional $2/hr that will make up for the unemployed time.

For each hour where that person could have been earning $18/hr, it'll take 9 hours for the $2/hr to make up for it. And so it'll take 9 days for each day of being unemployed.

If it takes a month to find the job, it'll be 9 months.

And so the message here is this - if the job search is liable to drag on, it might be advisable to find alternate means of earning more income.

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Questions and comments always welcome

#Budgeting, #Household Math - Budgeting - Why?

Question

Why should I budget? What's the point?

Answer

Much like a doctor's visit when you feel ill or are having a check-up, a budget acts that way for someone's financial life.

Analysis

There are many ways to talk about budgeting and finances that keep the topic strictly focused on dollars and cents (or whatever the names are for your particular currency!). But I'd like to talk about it in a more holistic fashion.

Let's talk about "health". What does it mean to be "healthy"?

Probably the most common way "health" is referred to is with "physical health". When we're ill, we reach for some sort of medicine (whether traditional, Eastern, Western, alternative, or whatever modality you typically reach for) or perhaps go to see a medical professional. Perhaps we even see the doctor once per year for a physical to help find illnesses that are lurking silently within our bodies.

There are other types of health as well. Mental health, for instance, refers to the health of the mind, the intellect, and the emotions. Spiritual health refers to feeling a healthy connection to God/the Universe/Life/whatever name you choose to refer to it.

All these different types of health all impact one another. For example, poor physical health can lead to depression (poor mental health) and poor spiritual health ("Why do bad things happen to good people?"). Each of these factors can impact the others.

And so now let's talk about "Financial health". Being unhealthy financially can (and I'd argue, will) impact your other health aspects: physical, mental, spiritual, and others. And conversely, being unhealthy in other areas of your life can (and again I'd argue, will) affect your financial health.

Aside from the more obvious examples of how your financial life can be impacted (physical sickness making employment difficult, reducing income and increasing medical bills), there are the sneaky ways that financial health can be impacted. One example is of "retail therapy" - spending money in order to feel better. And this type of therapy can sneak up on us - online shopping, buying large amounts of "comfort foods" and "comfort drinks" - think high fat, moocho-yummy coffee drinks all the way up to alcoholic drinks - and other types of purchases. All of this can turn into a vicious cycle where spending is conducted to counteract the feeling of depression from an unhealthy financial situation.

And this is where a budget can help.

A budget is akin to going to the doctor - it allows for an examination of what is going on in someone's financial life, to have facts and not feelings on something (it's far better to know that way too much money is being spent on Starbucks than simply feeling that it's the case).

A budget is also akin to getting a physical - financial health can be examined and areas found that can be tweaked so that even better financial health can be achieved.

This post is part of a series on budgeting - Budgeting 101

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As always, questions and comments are always welcome!

#Budgeting, #Household Math - Budgeting... What's it good for?

Question

It's great that I read everywhere about the need for a budget, but what is it?

Answer

A budget is a tool that people use to figure out their financial health.

Analysis

I like this definition enough that I'll repeat it:

A budget is a tool that people use to figure out their financial health.

The most basic question that can be answered is "Am I living within my means?". More complicated questions can also be answered, such as "Can I afford that expensive thing?". Questions involving more involved financial questions, such as "At what age can I retire?", will probably require a Personal Wealth Plan of some sort - simply analyzing monthly spending probably will be insufficient to answer that kind of question.

The main idea behind the budget is to see where your financial strengths and weaknesses are. Where there are financial weaknesses, you can then develop strategies to deal with them. For instance, if it turns out expenses are higher than income, the budget can identify that that is the case and then steps can be taken to address it.

To budget, we look at the two sides of financial life - Money coming In and Money going Out. In future posts, I'll reference topics in the post about the Statement of Cash Flows for a business because there will be some overlap in concepts.

The first place to start is to think about your expenses and how often they occur. For most people, the big expenses occur once per month (rent/mortgage payment usually being the biggest of them all). And so, in general, it's best to work with a budget that looks at a monthly timeframe (we'll deal with non-monthly expenses and incomes in their respective sections).

I think the last thing to say about what a budget is is that it's something that can be quite individualized. Depending on how exacting you'd like to be can greatly affect the budget. What are the items you want to track? What are the items you don't want to track? Generally if there is a lot of guilt and shame involved, like perhaps the "amount of money spent at coffee shops" or "the amount of money spent online shopping", those are items that need the most attention!

In future posts, we'll talk about the How of budgeting...

This post is part of a series on budgeting - Budgeting 101

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As always, comments and questions are welcome!

#Budgeting, #Household Math - Household budgeting - Needs vs Wants...

Question

What do you mean, when talking about buying stuff, by Needs and Wants?

Answer

While there are many different opinions on what this means, my own take on it is that Needs are the rational, left-brain framework of what it is that we're looking for when buying something, and Wants are the creative force that actually make the decisions.

Analysis

Before I dive into this question, let me preface it by saying that this is my own thought in this.

It seems to me that, even when we scratch the surface of this topic, that things can get pretty muddled pretty quickly. Why? Follow me down the rabbit hole...

Let's talk basics first. What is it, at least according to Maslow (here's a link to a wikipedia article about him and his theory), that we need? First come the physiological needs, such as Food and Shelter. So let's dive in on shelter.

We know we need shelter so let's now collectively visit a house (envision whatever type of house you'd like). So here's the question - do you need that particular house? And the answer should be pretty clear - no, you don't need that particular house. And in fact we can do this exercise for any given house, condo, apartment, shack, cabin, or hole in the wall. At some point, to make a decision as to what we'd like for shelter, we need to act on Want. Which runs counter to what people say you should do so as to be "financially responsible".

But it's true - in order to meet Needs, the actual decisions are made based on Wants.

And let's face it - Wants are fun! Wants are cool! It's Wants that put that kickin' stereo system in the black Corvette you just bought. Whereas Needs are just... boring. Rational. In a way, you can even look at Needs and Wants as the different sides of the brain fighting it out: the Left side dictating Needs and the Right side swimming in the glorious glow of Want.

It's when we act on Want too much that people get into trouble (we Need to keep a check on our Wants!). I think Needs help to establish a framework for certain Wants (such as a "nice house" or "a cool car"), but they also need to act as a limiting impulse on the relatively expansive feeling of Want. Because if we give in to Want too much or too often, we'll lose sight of the Need we're trying to fill.

And so purchases should be made with both sides, if not in total agreement, at least being allowed to chime in and argue their respective sides. For example, when buying a car, identifying the Needs surrounding the purchase (means of transport, protection from the elements, move many people plus cargo, practical, not too expensive, good with gas, etc) and also the Wants (good acceleration, cool colour, sporty, fun, etc) and finding a balance that is manageable.

This type of activity, of taking time to full consider a purchase from a Needs and a Wants standpoint is an aspect of what is often called "Being Mindful".

This post is part of a series on budgeting - Budgeting 101

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As always, comments and questions are welcome!

#Accounting, #Household Math - Moving the accounting into the home...

Question

Do accounting principals apply to my personal financial life?

Answer

Absolutely! See below for a few ideas...

Analysis

Bookkeeping and accounting really only refer to the tracking of financially-related transactions over the course of the life of a financial entity. That entity can be a company, a government, or a person/family - to anything that conducts any sort of business, accounting applies. Of course, as the complexity of the entity increases, so do the challenges of recording those transactions and making sense of the resulting information.

One of the ways we see how this applies is in the preparation of tax forms. When filling them out, you are essentially asked to account for income that's been made (from various sources and it matters where money comes from because the tax treatment can change based on the source). Alongside that, you are also asked to account for specific types of expenses - say for instance mortgage interest - because those monies spent are treated as deductions (and again, the reasons for those payments will determine how the tax calculations are done). For most people, taxes are a nightmare requiring frequent sleepless nights, gathering information. However, if an accounting system is implemented and used throughout the year, the burden (physically and mentally) of filling out the forms would be greatly decreased.

Another place accounting shows up in a household is through budgeting (company's call it financial forecasting or some such other term). What is anticipated that will be made in income? What is anticipated that will be spent? Is the income number bigger than the expenses number???

And one more place I'll mention is in the area of Needs vs Wants - or the making of financial decisions. For instance, while there is a need for a car, does that mean you need the newest Mercedes? On the other hand, is it financially better to buy an old clunker, given that it'll need more repairs and work?

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Comments and questions always welcome!