#Budgeting, #Economics - Why is it that governments can run huge deficits for years? Why can't I?

Question

So my budget has a deficit - I apparently spend more than I earn. But governments do it all the time. Why can't I?

Answer

There is a world of difference between using a currency (people/companies) and issuing a currency (governments).

Analysis

There is a world of difference between the way money flows affect a government/country and the way they affect a person/family.

With a person/family, and even with a company, financial health is dictated directly by the ability to have more income than expenses. When expenses are bigger than income, and particularly when we're talking about a long period of time or a large deficit income, then assets will decline (bank balances, investments, etc, will drop) or liabilities will increase (bigger and bigger credit card balances, bigger loans from the bank, etc). And unfortunately there's really no way around it - if expenses are higher than income, there's a problem that is either front and centre or is waiting in the wings.

A government is a different animal. While people/families/companies use money, governments issue it. From that situation comes how governments can operate at a deficit for so long.

Think of government's operations this way - when governments take in money (taxes are one frequent way), they are taking money out of the nation's monetary system. When governments spend money (whether on the military, a social safety net, or any other way), money is put into the nation's monetary system. One of the goals of government is to maintain a healthy balance between taking money in putting money back into the system.

So what happens in the case of a government that is constantly spending more than it's taking in? Let's walk this one through to see what happens:

• Government spends more than it takes in, which puts more money into the economy 
• More money in the economy means that businesses and people have more money (on average) to spend
• With more money to spend, businesses and people desire to buy more things
• Demand for things to buy (more and more buyers) goes up, also risk tolerance increases (which basically means that more and more people will be willing to put more and more money into stocks and investments that are riskier and riskier)
• With demand increasing and supply not catching up, prices rise (which is called "inflation")

Inflation is a topic unto itself, but suffice it to say for now that low inflation is a mixed bag of good and bad and high inflation is (pretty much) all bad.

And so when governments overspend on a routine basis, there are ripples throughout the nation's economy, some of which are good and some which are bad. When people and companies do it, they simply end up in a bad situation.

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As always, questions and comments 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!

#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!

#Accounting - The Statement of Cash Flows

Question

If "cash is King" like you said in your earlier post, then is there an accounting statement that shows cash use by a company?

Answer

Yes there is - the Statement of Cash Flows

Analsys

I did previously state that there is an adage in business that "cash is King". And you are absolutely right that there needs to be a report that shows the cash condition of a business. To that end, a report was created that is called the Statement of Cash Flows and it specifically tracks the cash activity of a business. Since it is a report that shows change over a period of time, it is akin to an Income Statement in that it shows a range of time rather than a snapshot of a status (like the Balance Sheet).

The way the report works is that it starts with a company's Net Income number, which is generated under the accrual method of accounting. It then dissects that number, looking at all the changes to cash (and, in fact, the entire balance sheet) due to Operations, Investment activity, and Financial activity.

In the Operation section of the report, all the changes that happen on the balance sheet (say for instance that Receivables increase by $10,000, that number is backed out. If Payables increase by $10,000, that activity is also backed out) that relate to Short Term assets and liabilities (short term meaning those assets and liabilities that are anticipated to be held for one year or less).

In the Investment section of the report, all the changes that happened related to the Long term assets are shown. This will relate to the purchase and sale of fixed assets and other long term assets.

The Finance section of the report shows all the changes related to Long term liabilities and equity, such as changes in bank loans (acquisition of new funding and the paying off of balances), and also changes related to the issuance/cancellation of shares.

All these changes are applied to the cash balance at the end of the prior term and results in the new cash balance (at then end of the current term).

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Comments and questions always welcome!

#Accounting - What's a Balance Sheet? What's an Income Statement?

Question

What's a Balance Sheet? What's an Income Statement?

Answer

They are the two most basic accounting statements/reports. The Balance Sheet answers "Where are we right now?" and the Income Statement answers "How much did we earn over a given period of time?"

Analysis

 I've talked about T accounts and Debits and Credits in prior posts. The Balance Sheet and Income Statement arise directly from the activity recorded in the T accounts.

When preparing an Income Statement, we look at a period of time. For instance, a statement that is being done to show the activity for the year ending December 31, 2018 will be titled "Income Statement for the year, ending December 31, 2018). The report itself lists Sales and other Income related to the ordinary course of business (natural Credits) and subtracts from that Expenses and other costs related to the earning of that income (natural Debits).

When preparing a Balance Sheet, we pick a date that the statement will be of. For instance, a statement that is being done as of December 31, 2018 is titled "Balance Sheet as of December 31, 2018" (exciting stuff, right?). The report itself lists Assets on one side (the natural Debits) and the Liabilities and Equity on the other side (the natural Credits). The activity from the Income Statement is listed as a change in Equity.

Together, the two reports show a company's activity from ordinary activity and can be of tremendous help in guiding management and other decision makers on the health and activity of the business.

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Feel free to ask a question!

#Accounting - What's a T account? Why use them?

Question

What's a T account? And why use them?

Answer

A T account is a simple but effective way to organize the activity in any given account.

Analysis

Let's first talk about accounts. An account is a way to gather similar activity in one place. For instance, over the course of a year, let's have Sample Co. have a number of sales throughout the year. We can sum up those sales to see the sales activity for the year. For an example, let's have Sample Co have sales of $100,000 for the year.

This $100,000 sales figure is made up of smaller sales throughout the year. We list them individually as they happen. A part of that list might look like this:

$500
$1000
$250
$300

and so on.

Some transactions will increase the balance of the account and some will decrease that balance. Take the account Cash for instance - as sales are made, cash comes into the company. As inventory is purchased, salaries are paid, and other outflows are accounted for, the balance of the account decreases.

One way to show this would be to list out all the transactions in a single list:

 $1,000
-$350
-$15
-$25
$300

and so on. Which can get messy.

Another way to look at the accounts is to put all the amounts that increase the account in one list and all the amounts that decrease the account in another list. To save space and to keep things organized, we can draw a T, put the account name above the crossbar of the T, and have amounts on one side of the T's vertical line increase the account and on the other side put those amounts that decrease it. It'll look something like this:


        Cash
------------------
$1000 |
           | $350
           | $15
           | $25
$300   |

~~~~~

As always, if you have a question, please ask!

#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.

~~~~~

As always, feel free to ask a question!

#Admin - A new blog, a new beginning, a new conversation on math-y topics!

Hello one and all and welcome to Math Fact-orials!

In this post, the first of this blog, I'll talk quickly about me, this blog, what I hope to achieve, and all that.

About me

I love thinking and learning and sharing what I'm thinking and learning. Most recently, I was a Hero and Featured Answer Reviewer (Algebra, PreAlgebra, English Grammar) with www.Socratic.org, with (at the time of this writing, with roughly 2 weeks of life left in Socratic):

- over 890,000 views,
- 2400 answers, and
- 700 edits of existing answers.

But since that website is currently scheduled to be shuttered mid-August 2018, I've decided to start my own Question and Answer site (i.e. this blog) that will focus on things I find important/interesting/fun/etc.

Some more things about me:

- Formerly a Certified Public Accountant (in the USA) and a Chartered Accountant (in Canada)
- Holder of a Life Coaching certificate
- Spent a few years in the US Navy as a Supply Corps officer

About the blog

While I don't want to set anything in stone (this is a living blog after all, so it will morph and change as I do), there are a couple of areas I'll tend to focus on at the start: Combinametrics (or the number of ways of doing/arranging/organizing things) and something I'll call Life Math - this will encompass things like Business Math, Budgeting, Investing, Accounting, Financing, and all those non-sexy math topics that academics tend to shun. Life Math, by its very nature, is a bit more "squishy" than academic math - there typically are more "squishy" answers than in academic math. For instance, is a 10% discount on a shirt a good discount? It might be, but then again it might not be - it's up to the reader to decide. But in these kinds of questions and answers, I'll do my best to lay out some things to think about.

I intend to right about how to approach a problem as the first part of any blog post, and then to have an "Answer Key" below, which will show the various answers with changes in the starting facts. For instance, if a shirt that costs $30 has a 10% discount (with a final cost to the customer of $27 before sales tax), the same process will work if the shirt is $40 and there's a 20% discount (with a final cost of $32 before sales tax).

Questions are very welcome!!!

If you have math questions, please do ask! Post a comment (I approve all comments) and I'll be sure to respond and write on the blog in response. No names/specific locations will be used and so don't worry about anonymity!

And I think that just about does it - so Welcome! and I hope to hear from you.

Parz

Update, 22 Aug 2018

Through editing and updating the organization of the blog, I'm hoping it'll be more useful (and easier to find the information you are interested in!). Links, labels, and subjects are all being edited, reworked, and otherwise made better. Get ready for Math Fact-orials 2.0! (or maybe just 2!... - factorials and decimal points don't get along very well...)