#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, #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!

#Admin - A bit of admin...

Math Fact-orials has been up and running for roughly 3 weeks and already been hitting milestones I didn't think would be possible so soon, including having nearly 1,000 page views!

I owe much of this success and exposure to two audiences: former users of Socratic.org (which is now a read-only site) and the art community of Sketchbook Skool.

Socratic.org is where I cut my teeth on answering questions online, where I found my love of all things factorial, and saw in action how topics such as budgets, household math, finance, accounting, and so many other topics that are important to people are ignored by academic math sites. One of my main goals is to bring household math into a place where people can use math as a tool and not regard it as a nightmarish exercise in frustration (I feel like I can hear people, whether consciously thinking or unconsciously feeling something like: "Please... whatever we do... whether we choose to buy the new car or lease it... don't make me figure out which one is actually better! Make the numbers stop dancing in my head!").

With that ideal in mind, I've been posting here and there about budgeting and will be adding a few more posts to that conversation. There are already a few posts about household finances and more will be forthcoming (both from me and from you - my readers!)

Sketchbook Skool's response to the post about the numbers of trade items and also the number of unique trades has been nothing short of phenomenal. A thousand and one thank you's to Aleesha, my artistic wife, the source of many of the questions on the blog, and the inspiration for the blog post about Sketchkon and who put the post onto Sketchbook Skool's Facebook page.

Looking ahead, I've found a way to satisfactorily put equations that look like equations onto the blog (thanks to latex.codecogs.com) and so that is what I'll be doing over the course of the next few days. I'm really looking forward to seeing math rendered the way it should look! 

I'll also keep on with Socratic.org Sunday throwbacks, where I'll grab questions and answers from a host of different topics that seemed to grip people's attention. This week's question will be Why Are Arteries So Much Thicker Than Veins?

I'm extremely grateful to my current, past, and future readership and I hope that as the readership grows and develops, the blog can do so alongside so that it is always meaningful and helpful. And the best way to help make that happen is to send me emails, leave comments, and ask questions! 

#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!