#Household math, #Investing - Paying in instalments or all-at-once...

Question

I pay $1,300 rent per month. If I pay a year's worth of rent at the signing of the lease, I'll pay $15,000. Is it worth it?

Answer

It depends on your particular circumstances. See below for a discussion:

Analysis

Let's first look at the numbers.

You are paying $1,300 per month, which over 12 months is $15,600 per year. If you pay $15,000 all at once, you end up saving $600 over the course of the year, or $50/month.

The question is - is it worth it?

I'm going to assume that there's little to no risk of wanting to leave or break the lease or anything like that that would cause you to want to no longer live in your apartment. And so I'll further assume that you'll live in the apartment for the full year.

One thing people will often look at is the "dollar value of savings", which in this case is $50 per month. A lot of people would stop right there and say that paying $15,000 all at once to save $50/month isn't worth it - in fact it makes no sense at all. However, I disagree with that assessment - what's being saved is $600/year (it's important to make sure the time periods with both the cost and the savings are the same time periods!)



Let's look at the percentage savings, which is the $50 savings per month divided by the $1300 monthly rent (we could also do this on a yearly basis with $600 and $15,600 - again, we make sure the time periods on cost and savings is the same):



So roughly a 4% savings.

Is a 4% savings worth it?

Keep in mind that a savings account only earns about 1.5% or so and a checking account even less, so if you have the money and it'll sit in the bank otherwise (or worse yet, it'll just get spent), go ahead and pay the rent up front.

However, if you have the ability to invest the money at a rate that is above 4%, and you have the ability to otherwise make your rent payments, then I'd say invest the money and pay the rent in instalments.

So let's walk this through:

• if you have the $15,000 available, can invest it at above 4% per year, and have a source of income that will allow you to pay your rent (and all your other expenses), then invest the $15,000 and pay the rent monthly, and
• if you have the $15,000 available, but either can't invest it at above 4% per year or don't have a source of income that will allow you to pay your rent (and all your other expenses), then pay the lump-sum rent (you'll effectively be getting a 4% return on that money)

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Questions and comments always welcome!

#Physics, #Household math - Light reduction through screen doors and windows...

Question

When I have my window open, it's always so much brighter when the screen is open as well. Why?

Answer

Diffraction of light 

Analysis

First off - great question! I'd never really noticed just how much the light is dimmed in my house until I did a quick comparison of having the screen open and shut.

So ok - what's going on?

As far as I can tell, there are 3 things going on:

• The wires that make up the screen catch debris.

Now, I'm not claiming that your screens are dirty, but I'm realizing that mine are, so I'll be back in a minute after I wipe them down... and I'm back. And the light still dims noticeably. Another explanation is needed.

• The wires block light.

Depending on the type of screen you have with the size of the holes and the gauge of the wire, any calculation will vary in results. I did some searching online to see if there was a standard size for wire screens and I found that there are several different kinds of metal mesh screens. So what I'll do is use my screens as at least an approximation of what you may be experiencing.

I found that my screens have, per cm^2, 7 wires in one dimension and 9 in the other.

The width of each wire can be quite hard to find (I couldn't find a figure online). One way to find the measure of a small amount is to measure many of those things together and then divide by the number of elements. In this case, I am fortunate enough to have a cat who likes to climb the screens, bending them in places where I was able, to a rough degree to measure a number of wires compressed together. I found that roughly 5 wire widths are equivalent to 1 mm, or in other words each wire is roughly 0.2 mm per wire.

We can then do some multiplication to find the area of wires per cm^2:

7 X 0.2 X 9 X 0.2 = 1.4 X 1.8 = 2.52 mm^2

Keep in mind that 1 cm^2 is the same as 100 mm^2, so the area of wire to space is 2.52 / 100 = 2.52%

But let's face it - the amount of light that comes through the screen is less than a very small 2.52% reduction. We need another explanation.

• Diffraction

And here's where physics comes into play...

Light is a funny thing. You'd think that, knowing that only 2.52% of the area of a window is blocked by a screen mesh, that 97.48% of the light would just zoom on through. If light only acted like a particle, this would absolutely be the case and we'd have much brighter rooms when the wire screens are closed.

Here's the thing - light also acts like a wave and it's this form of light that gives rise to the light reduction. Here's how it works:

Ambient light consists of a whole bunch of different colours (or wavelengths) and they vibrate in all the ways possible (think of it this way - when you shine a flashlight at something, some light vibrates up/down, some left/right, etc. In fact, if you think of the circular shape of the flashlights' light, you can pick any given spot on the "clock" of that circle and the light will vibrate through that spot (say 2 o'clock) and also through the opposite side (8 o'clock).

All these vibrations come streaming towards your window and some of these vibrations "bump" into the wire mesh and scatter (and the tighter the mesh, the more apparent this effect will be). Gone are the lovely beams of light streaming into the room and instead the light heads off in a gazillion different directions. Let's face it - the screen mesh acts much like a cloud - it scatters light in a way so that we don't get lovely beams but rather a medium-glow. And just like a cloud, there doesn't need to be a high density of things blocking the light to scatter it.

If you are of a mind to learn more about diffraction (and this article in particular deals with laser light, which is different from ambient light in that the laser light is all the same colour and vibrates in same direction), here's an excellent paper on it:

http://www2.optics.rochester.edu/workgroups/berger/EDay/EDay2008_Diffraction.pdf


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Questions and comments always welcome!

#Household math, #Investing - The Rule of 72

Question

I've heard of something called the Rule of 72 but I have no idea what it is.

Answer

It's a quick calculation used to figure out how what factors are needed (in terms of time and average return) needed to double your money.

Analysis

There are two basic factors that play into how an investment (or group of investments, such as a mutual fund portfolio) will do over a substantial number of years:

• the average rate of return, and 
• the number of years the investment is held.

So let's say for a minute that I have an investment and I anticipate making 6% per year on it and I plan on holding it for 12 years. Well... so what - is there some way to get an easy to understand number from these two details?

This is where the Rule of 72 comes in. It gives a quick answer to the question of "How long will it take to double my money". We take the average rate of return without the percentage mark (so in this case 6) and multiply it by the number of years to be held (in this case 12) and then multiply them together:

6 X 12 = 72

And so at the end of 12 years we can anticipate that our money would have roughly doubled.

We can work this another way - if we wanted to know the number of years we had to hold an investment for it to double at a 6% average return, we can divide 72 by 6 to get 12 - which is to say that every 12 years we can anticipate our investment doubling.

This becomes a very powerful tool when young people are first looking at putting some money away for retirement. For instance, if at age 25 someone puts $10,000 into a retirement account and anticipates 6% return per year, we know that every 12 years the money will double. If the person wants to access that money at age 60, it'll double 60 / 12 = 5 times. And so the value of that 10,000 will have become $320,000.

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Questions and comments always welcome!

#Current Events, #General Science, #Economics, #Household Math - What's a carbon tax?

Question

I've been reading in the news about something called "Carbon Tax". What is it?

Answer

It's a tax on the carbon content of a fossil fuel product at the point of production (or importation).

Analysis

Like most things that are called a "tax", how we look at what it's supposed to accomplish will change the answer. So let me see if I can cover a few viewpoints.

Let me first cover what the tax is first. In essence, it's an amount of money charged by the government on the production of fossil fuels, and the amount of that money charged is dependent on the amount of carbon present in the fuel. For instance, Anthracite (a form of coal) has the highest levels of carbon and natural gas the lowest (according to www.carbontax.org on their webpage on this topic).

One argument for implementing a carbon tax is that the money collected is supposed to be used to defray the costs of the climate change that the burning of the fuel creates. Governments, however, have globally demonstrated an unwillingness, if not complete inability, to spend money targeted to one thing purely on that thing. Instead, the money generally is simply seen as another revenue source that can be spent as desired. This argument, while utopian, ultimately just doesn't pan out.

Another argument for the tax is that it can act as a deterrent on the use of fossil fuels in favour of alternative energy sources or simply reducing energy use. So where would the tax be most noticed by the average person? The gas pump - the carbon tax is passed onto the consumer, who then pays a higher cost for gasoline. Also, the cost of freight also increases since so much of it is fuelled by gasoline and diesel.

A problem here is that alternatives to gasoline fuelled cars are not exactly widely available. Yes, there are things like bicycles and motor scooters that use no and little fuel, respectively, but distance, climate, and use considerations can eliminate them from serious contention (I live in Chiang Mai, Thailand which is a busy metro area. The predominant vehicle here is the motor scooter but it's warm year-round, travel distances tend to be short, and they are used in ways that would never be considered legal in Western countries (multiple riders, stacking goods on the floor of the vehicle, etc). Electric cars are still very expensive and the existent infrastructure often doesn't make them good choices as an all-round car.

Another problem with the "deterrent argument" is that politicians often don't set the carbon tax high enough to act as a deterrent. And so under the guise of a very low carbon tax, politicians feel they can claim the high ground on doing something about climate change, when in fact they are doing very little.

And yet another problem is the idea of "cap-and-trade" policies. The idea here is that a business hit with carbon taxes (say a refinery) won't reduce their pollution, but instead will be able to pay for offsets to their carbon tax and do it in such a way that it's cheaper to buy the offsets rather than pay the actual carbon tax. These last two arguments are better fleshed out here.

Critics point to all these problems and claim that a carbon tax essentially adds up to an unfair tax that hampers competitiveness in the global economy. And so they think that the carbon tax system ought to be scrapped.

And now for my opinion on the whole thing.

The problems with carbon taxes outweigh the benefits - a tax that gets collected that doesn't accomplish anything other than giving government a veneer of climate action and protection is merely a distraction. It's smoke and mirrors - a government will claim to be pro-environment by enacting a carbon tax, thus giving it room to pollute (such as building more oil pipelines). And so I don't like carbon taxes.

However, I do believe that actions need to be taken to reduce pollution and the best way to influence consumer choice is financial. And so programs that help support alternate energy production (such as solar - imagine every rooftop being a solar energy collector) and products that use those alternate sources rather than fossil fuels (such as electric cars) should be supported.

#Budgeting, #Household Math - Tracking spending...

Question

My budget has been written up and everything looks good. So I'm done, right?

Answer

Ummm... no. Now it's time to execute the plan that you've created.

Analysis

It's absolutely fantastic that you've gotten your budget squared away and things look good on paper. Think of the budget as a financial plan - it lays out what you intend to spend over the given month. Now it's time to act on that plan.

There are many ways to accomplish this - some people prefer a more detailed level of bookkeeping while others prefer way less detail. Whatever system works for you, that's the one you should use.

For the more detailed people, receipts are going to be your friend. When you buy something, make sure to get a receipt. If you don't get a receipt, perhaps carry a piece of paper or small notebook to notate what was spent. When you get home, make sure to record those expenses onto a spreadsheet or perhaps a bookkeeping program such as Quickbooks.

For the less detailed people (and I fall into this category), figure out how much you can spend each day and put that amount of money into your wallet. That is what you can spend and when it runs out, your spending for the day is done.

As you track your actual daily expenditures, you may have to tweak your budget to have it match your spending. Alternatively, you may have to tweak your spending to stay within budget.

In the process of recording your expenses, you can record expenses that will have an impact on your tax reporting. This will significantly reduce the stress of doing your taxes at tax time.

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

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Questions and comments always welcome!

#Budgeting, #Household Math - Credit Cards...

Question

What is your opinion of credit cards?

Answer

Analysis

I've tried writing the first sentence to this analysis a few times but eloquence is abandoning me. Elegant writing will simply not produce what it is that I'm trying to say, so I'll go with the simply statement of:

Credit cards are bad.

Actually... let me rephrase that. If you are a purchaser, they are bad. If you are a retailer, they're great. Why? Because studies have shown time and again that people who use credit cards are willing to spend more for products and services than people who use cash.

For whatever reason (this article proposes a few ideas), people spend more when using credit cards than when not. In fact, people are so programmed into this that even when paying by cash, seeing a sign that says that credit cards are accepted will help increase the spending of the average shopper.

One thing that the article above cites is that those who buy with credit cards will tend to focus on the benefits of the purchase. Those who buy with cash tend to focus on the costs of the purchase. It would seem that when the "burden" of paying for something is greatly reduced, now to the point of tapping the credit card on a reader or pulling up a QR code on a phone app for many purchases, it takes away the thoughts on the cost of the purchase. Purchasing in this manner, focusing on the benefits with little regard to costs, is Impulse Buying, and if it isn't the number one reason why people can't stay on a budget, it has to be in the top three.

Staying on a budget requires something that used to be called "sober consideration" - and maybe it still is. It requires a plan and then, far more importantly, execution of that plan. Credit cards act to circumvent that plan, making it far too easy to buy things and to add on to purchases already being made (ex. what's the cost of another drink when dinner is going to be expensive? What's the cost of buying that appliance insurance plan when the cost of the appliance is going to be so much?)

And so, bottom line - credit cards are an occasional necessity but as an integral part of daily life, credit cards are a financial disaster either waiting to happen (or already happening).

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

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Questions and comments always welcome!

#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 - Income

Question

I've done the budget process for expenses. Now what?

Answer

Let's now add income to the budget...

Analysis

It's time to add in the Income numbers into the budget and oddly enough this can be the harder part of the budgeting process.

With expenses, we want to identify all the expenses we incur over the course of a year, then display that on a monthly basis (we've done that part in prior posts). We use the Accrual Method to identify expenses as they are incurred so as to prevent surprises. Surprise expenses are no fun.

With income, we want to identify it as it's received - the Cash Method. One of the tendencies in budgeting is to project a rosy future where the promised raise at work is a sure thing, where that tax refund will be large, where a long lost relative died in the Congo ages ago and selfless lawyers have searched for years to find the heir - and it's you. We don't want to budget that in - if it happens, great and if it's periodic, we can budget it in (if the raise does indeed happen, adjust your budget!). Surprise income is a good thing.

For most people, income starts and ends with a salary. When we budget, we're going to want to budget the "take home pay" - not the gross pay. It's great that you have a job that pays $50,000 per year, but if you only take home $40,000 of that, that's what goes in the budget.

This also goes for people who receive pensions and other sources of periodic payments. Include what you know you are receiving. If and when an announcement comes that it's being changed, adjust your budget accordingly - if it's good news and the pension is going up, adjust the budget when you actually have that first payment in the bank. If it's bad news and it's going down, adjust the budget immediately and see if you'll need to change anything in your lifestyle.

Another common way to "overstate income" is to look to bank interest and other sources of investment income like that. Unless you have your finances set up to be living off of investment income (and we'll talk about that below), don't include it.

Ok - people who live on investment income, people who own a small business, or otherwise whose income varies. It's important to pick an income number that focuses more on the lean months than the rich ones - and it may be the case that budgeting into the expense side of things a "float" that income overages can go into and that reverse during the lean months. Doing something like that will require constant vigilance on that account - it's been set up to be there when income is lower, so you need to make sure it's nice and full when income is plentiful.

I've updated the budget example here:

https://docs.google.com/spreadsheets/d/1kCtMSNnKUXhvJT9yif5wtl5jbEsmyFz9mQ-IV62_U4g/edit?usp=sharing

and you'll note that we have a situation where the income is less than the expenses. We'll talk about that situation in the next post.

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

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As always, questions and comments are welcome!

#Budgeting, #Household Expenses - Budgeting for Expenses - Putting in numbers...

Question

I've made my list of expenses. Now what?

Answer

Let's add some numbers! 

Analysis

In my last budgeting blogpost, I talked about identifying all the expenses and ways that money leaves your pocket. We want to look at the budget over the course of a sensible and useable timeframe, and that's usually one month.

The overall idea here is to budget for expenses using the Accrual Method - as soon as you are obliged to pay an amount, that should be recorded in your budget. This is why credit card payments will not make an appearance on this budget - we don't care how we pay for something, we only care that we need to pay.

Some items in our list of expenses are very easy to figure out monthly. Rent, mortgage payments, car payments, and the like are usually a single monthly payment and are easy to put into our budget sheet.

Some expenses are monthly but fluctuate. Electricity costs, for example, fluctuate based on the season (when it's colder, the costs go up). For costs that fluctuate, cycle, or otherwise change significantly over the course of the year, I'd recommend adding up the amount spent over the course of a year, then dividing by 12.

Other expenses are yearly. For instance, when paying insurance costs, I tend to pay a yearly lump sum, which results in a bit of a discount. Again, drop those costs into the yearly column and divide by 12.

And for costs that are every few months? Find the costs per year and divide by 12.

Here's an example:

https://docs.google.com/spreadsheets/d/1bDvJ0qpCvjIGNMs9AhliwCIlYY8XLLP8dnXbH1TxueE/edit?usp=sharing

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

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Questions and comments always welcome!

#Economics, #Household Math - Question about Bulgarian currency (or any currency really...)

Question

I'll be travelling to Bulgaria soon. How do I find information about exchange rates?

Answer

Check out the XE app. I've got it loaded on my phone and love it.

Analysis

The Bulgarian currency, according to my Google search, is the Lev.

There are many different ways to find current exchange rates, but one of my favourite is through the XE app, which you can find here:

https://www.xe.com/apps/?WT.seg_1=XMX-180x150-XHOM-ADL-XX-V01-170614

(and the Bulgarian Lev is one of the supported currencies on the XE app...)

A quick FYI, the Lev has the following mid-market rates (1 of the following currencies gets you this many Lev):

1 USD = 1.71 Lev
1 GBP = 2.19 Lev
1 EUR = 1.96 Lev



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Questions and comments always welcome!

#Budgeting, #Household Math - Budgeting Basics - Expenses

Question

How do I budget for expenses? 

Answer

This will take a few posts to do, but in this one we simply identify all the possible outlays you experience and put them in a spreadsheet.

Analysis

As we start preparing a budget, it's important to first identify where money goes. Do you pay rent or a mortgage? Pay for a car? Insurance? Gas? Or perhaps transit - maybe a daily fare or a monthly transit pass? Utilities? Cable? Phone (landline and/or mobile)? Food?

Let's first list out those items that you know about into a list (we'll be modifying the list, and so using a program like Excel (PC), Numbers (Mac), or Sheets (Google - it's free and can be used online). Here's a sample:

Mortgage
Condo Fees
Condo Insurance

Water
Electricity
Gas (Note: the heater and stove are natural gas)
Cable

Phone, landline
Phone, mobile

Groceries

Dining out

Auto payment
Auto insurance
Auto fuel
Auto maintenance, repairs


And perhaps you have other expenses that need to be added into this list. If you think of it, write it down!

Once you've done that, take a look at your credit card statement for the past few months. Do you see things there that aren't on the list? Clothing? Add it. Video games? Add it. Go ahead and put in all the categories you think of.

I've built a google spreadsheet to follow along with these posts (it's view only):

https://docs.google.com/spreadsheets/d/1ZxwZz7Nn5ZYVV-x6HgPavTP6wkfIswP8-NTvV9gTTR4/edit?usp=sharing

In our next step, we'll add numbers.

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

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As always, questions and comments 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!

#Household math - Which is the better value? Loose tea or tea bags?

Question

There's a lovely tea shop I go to sometimes. Which is the better way to buy tea, loose or in bags? The instructions say to use 3-5 g of loose tea in a pot. Here's a photo I took to help:

Answer

Financially, under my assumptions, the tea bags are a better way to go.

Analysis

First off, and probably to the dismay of tea lovers around the world, I'm going to assume that the tea experience from loose leaves and from a bag is the same.

In order to understand the financial aspect of this question better, we need to express the tea usage in terms of servings. I'll assume that 1 tea bag is a serving and that it's equivalent to the 3 - 5 grams mentioned in the question.

I'm also going to assume that the price points on the teas are for the same categories of teas (the selections of Lesser, Medium, and More Expensive teas are the same).

Let's chart out the cost per serving:

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As always, feel free to ask a question!

#Household math - Which size is the better option?

Question

While shopping online for tea I found a type of tea I like with 2 options for buying it: 16 bags for 134.30 of my currency and 24 bags for 169.89 of my currency. Which is the better option?

Answer

It's far cheaper to buy the bigger box assuming you are actually going to drink the tea. If you are more of a tea collector than a tea drinker, it's better to buy the smaller box.

Analysis

To answer this type of question, we need to set up equal terms so that we're comparing "apples to apples". One way we can do that with this problem is to look at the price per tea bag. We can set up the math for this in this manner:

Price / number of tea bags = price per tea bag

For the two options:

134.30 / 16 =  8.39 units of currency per tea bag

169.89 / 24 = 7.08 units of currency per tea bag

There is roughly a savings of 1.30 units of currency per tea bag, which is a big savings (when looking at this in percentage terms). To look at this problem in that way, we take the savings and divide by the better price per unit:

1.30 / 7.08 = 18.4%

And so the first method of buying the tea is wildly more expensive than the second.

The only caveat on this result is that, if you are like so many people who do more collecting of tea than of drinking it, then buying less is better. However, if you are intending to drink the tea, it's far better to buy the bigger box.

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Please feel free to ask a question!

#Household math - Which is the better way to pay for an online school when dealing with referral credits?

Question

I'm looking at joining an online school website that has over 22,000 courses in all sorts of different topics (I'm interested in some portion of them that relate directly to my interests). The cost for joining this website is $15/month but if I join for a year, I pay $99. To make things more complicated, I have 2 coupons for 1 month off each (one is the usual offer from the website and the other is as a referral coupon - I got one and the person who referred me also got one). What's the best way to join the website?

Answer

It's best to subscribe for a year, unless you are going to receive 2 or more referrals every month. 

Analysis

This is an interesting question because of the twists and turns in what's available in terms of options. The key is going to be to put everything on equal terms so that we're comparing "apples to apples".

Let's look first at what happens if we look at the options without regard to the coupons. We're comparing the regular monthly cost of $15 vs the monthly cost of $99 over 12 months, which is $8.25 per month. Clearly it's better to pay less per month! But... what if you don't use the site for all 12 months? What's the number of months that'd you have to use the site on the yearly plan to have it cheaper than paying $15/month?

We can find that by dividing the yearly cost of $99 by the monthly cost of $15. This gives 6.6, or in other words, it's better to pay by the month if you'll use the site for 6 or less months. For 7 or more months, it's better to pay the yearly amount.

Now let's look at the coupons. When paying by month, the coupons give 2 free months (and so for the cost of 1 month for $15, you get 3 months). When paying by year, you get 14 months for the cost of 12. What that works out to be is, when paying monthly, $15 for 3 months is $5 per month. When paying yearly, $99 for 14 months, that's $7.07 per month. And so there appears to be a better financial result to pay for 1 month and pay $15, use the site for 3 months, then change over to a yearly plan. However, that ignores a couple of factors, and so the best way to calculate this is to calculate the monthly cost over the course of the annual plan, then look at the associated monthly cost.

Using the yearly plan, you get 14 months for $99. Using the monthly plan first and then paying for the year, you get 15 months for $15 + $99 = $114. To compare the two, we divide the $114 by 15 (to get the per month rate), then multiply by 14 to get to the same number of months under the yearly plan:

And so it's best to pay for the year and get the 2 free months added on.

The one exception to this would be if there is an expectation of receiving 2 or more referral codes per month. If that's the case, it'd be better to stay with the monthly plan until the likelihood falls off of getting those referral codes. At 1 referral code or less per month, it's better to pay yearly.

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As always, feel free to ask a question!