Monday, December 19, 2011


A number of months ago, I was asked to serve as the chair of our stewardship team at church.  This event, in itself, is a short story about God's will and the Holy Spirit.  I went to bed the night before my decision was due telling God that I wasn't his man, that there were too many problems with the finances and that I was too nice to address them head on.  I was thoroughly discouraged as I lay my head down on my pillow that night.  During the night, however, I had a very clear dream of serving in that role, addressing the very problems that I feared with even temperament and grace.  I woke up feeling encouraged.  I believe the Holy Spirit worked in my heart through my dreams to encourage me and inspire me to service.  I woke up with a mission and a vision:  sort things out with our finances and improve the accountability and accuracy of our record keeping.

One of the responsibilities of my new role is writing for the church newsletter when I am able.  I thought I would publish these notes here as they invariably deal with finances and are more geared towards Christian living than the largely neutral tone of my other financial articles.

December, 2012 Newsletter (updated and edited)

I hope you enjoyed Christmas in all the ways that matter.  Did you make any New Year's resolutions this year?  How's that going?  Sticking with them?  If not, I'd like to suggest one or two.  

We derive a lot of comfort from our possessions, don't we?  Warm coats are especially comforting in Winter, as is a well insulated home with a heater that works.  And a pantry with the basics in stock is always a welcome thing.  Perhaps this past Christmas, you've been made aware of those who go without or are less well off.  I suspect a lot of us are one paycheck away from having to do without, ourselves.  Indeed, many Americans live paycheck to paycheck making thoughts of tithing or charitable giving far removed from daily life.  For some, this is a cause of stress and can bring strife into marriages and even friendships.  Asking to borrow money from a friend can have lasting repercussions on a friendship: that feeling of a debt owed, the shame of being unable to pay it, the awkwardness in each meeting with that friend... being a borrower is a tough thing.  How fortunate are we that we have one friend who has paid our debts who doesn't charge interest or ask to be repaid.  We can look at our Lord and Savior without shame! Amen.

Then there's the debt to credit cards, when we're charged interest by a bank.  Interest you earn is great - it compounds slowly over time and grows your investment in a predictable and low risk way.  Interest you pay on credit also compounds, but adds to your debt if you only make minimum payments.  Are you in debt with credit?  Can I encourage you to begin digging out by paying more than the minimum payment?  If the minimum payment is $25.00 a month and you can afford to pay $5 more, you'll be chipping away at that debt a lot faster than you were, and on your way to being free from debt.  If you can double it, even better.  If you can pay off your card each month, that is ideal.  Carry no debt if you are able.  Getting rid of a sin debt is easy - we give it to Christ, lay it at the foot of the cross, and walk away.  Financial debt though is a bit more difficult to shake.  Getting out of debt is like the battle for holiness in our lives... little by little, persistence and consistency wins the race.  

If you're already living without a credit card (I commend you!) but you still find yourself in a holding pattern on needed expenses (food, clothing, shelter and transportation) -- living paycheck to paycheck -- I encourage you to start a savings account, even if it's a minimum deposit to open it.  If you can tuck away $5 or $10 a week, do it right when you get paid.  You may have to give up some treats or sweets or find cheaper alternatives, but the rewards of diligence accumulate and pay off.  Pay God first, then your bills and put whatever is left, or a set portion of it, in savings.  Building savings and getting just one paycheck ahead gives you enough breathing room so that your finances will not distract you so much from your worship life or bring discord into your quiet time before God.  I'm definitely not saying that you should seek peace in a pile of cash.  On the contrary, the Bible is clear that storing up here on earth where moth and rust destroy and the thief  breaks in and steals is by no means security, and that's not what we're talking about here.  We're talking about stewardship... setting aside just enough for tomorrow so our finances are not a distraction from a life lived in service to Christ.  

Why am I encouraging you to manage your money this way?  Because once you free yourself from the paycheck to paycheck cycle and the fear of the world, you will no longer have a problem being a cheerful tither and acts of charity will now seem possible without the worry that a bill will be late or you'll be short on food.  Don't mistake this as me saying you shouldn't tithe if you're poor.  Financial teacher Dave Ramsey says he has tithed into and out of bankruptcy... it's a choice he made to remain faithful to God even when times weren't their best. Also don't take away the message that conquering our financial situation conquers all fear.  Only your faith in Christ can do that. But when we take some simple steps in discipline, we are more at ease and more naturally cheerful in giving God his first fruits, and we build the discipline we'll need to manage our affairs with the remaining 90%.  It is then much easier to remember where our eternal security is; not in the crude matter of our current existence, but in the Salvation of Christ Crucified.

Building cash discipline builds a disciplined life.  It will also improve your discipline in pursuing the things of God.  Check out Proverbs 13:18 and 19:20, and have a blessed month!

Tuesday, December 13, 2011

Self Employed, Salaried or Hourly?

It might seem like an odd question given the difficulty many people are having landing a job these days, but I suppose that also makes it a great time to be thinking about it.  Should you shoot for a salaried position, an hourly pay scale, or go self employed and reap what you may?  I've done all three and I hope my experiences and reflection on what it has been like are helpful to the reader.

Self Employment

I've started three businesses in my life.  One still remains.  Owning your own business is an interesting, and at times, terrifying experience.  You get out of it what you put into it.  If you fail, it's no one's fault but your own.  If you succeed, you have tomorrow to contend with and striving yet again for success.  You're responsible for your own taxes, your own medical plan (if you chose one), insurance (if required) and so forth.  You have to be part salesman, part accountant, part customer service manager, and all CEO, laborer and gopher (unless you've got kids).  If you are good at what you do, you may be lucky enough to be able to hire some employees to help out... and then you have to worry about their taxes, their benefits (if you decide to offer them) and managing their time as well as your own.

Being self employed, once upon a time, was a very simple thing.  It's what most people did - learn a trade or skill or specialty, open up shop in your kitchen, barn or front room and set about making a name for yourself.  These days, regulations and laws intended to keep large companies in line make it so difficult to run a small business it's practically punitive and certainly provides much discouragement trying to make a go of it.  But, if you can keep yourself straight with the tax man and keep your customers happy, a little careful planning can take the one-man shop a long ways.

As a self employed individual, I was also contracting hourly.  I prefer hourly wages as it more accurately rewards my efforts and investment of time.  If I need more money for some big expense, I can drum up a bit more work to cover me.  If I am doing fine and don't need to kill myself, I can take every other Friday off.  Money exchanged for value on a scaled basis is very equitable, especially if you take the view that you negotiate what you need and reject that which is too low.  You're in charge.  Proceed with three parts confidence and one part fear and you'll do just fine.  You'll probably like the boss, too.  If you can't get a job due to a past criminal record or bad credit or just a lack of experience and resume, starting your own business can be a great way to establish yourself and build your own success.

Hourly Wage Earner

Working hourly for someone else, however, is another matter.  Especially where you're restricted to a set number of hours or expected to put in the minimum while observing unpaid vacation days.  Self employed, all vacation days are "unpaid", but you build that into the rate you charge. Being employed by someone else on an hourly basis takes a bit more negotiating, a willingness to walk away from the job if they're not meeting your expectations or needs, and a willingness to bend to their schedule rather than one you set.  You still have the equitable value for money paradigm, but you're likely viewed as just hourly labor that can be replaced easily.  It takes special care to build and maintain a good relationship with your employer so that you are the preferred choice for hourly work.  So, even if you're employed as an hourly worker, treat your employer like a customer and they will treat you like a preferred vendor.  Unless of course they're just exploiting you... in which case, walk.  No skin off your nose.  Don't be a chump.

Salaried Employee

Working salaried is a different mind set.  You're paid the same amount whether you work 8 hours or 12 hours a day.  Overtime is likely not paid (you're probably listed as exempt) unless you specifically negotiate it in your hiring package to be paid for OT.  Being salaried, the value for money exchange isn't as direct, but it's there.  You have to have a much longer view and should definitely be talking about performance bonuses and the like.  Working harder, earning more for the company should be rewarded.  Ask for it.  As a salaried individual, you have to advocate for your career more than yourself as a service provider but the relationship should still be viewed as a customer relations effort on your part.  Never fall into the trap of assuming you are indispensable just because you're a salaried employee (or associate as many companies call them these days), or the trap of assuming you are owed something you are not or that you are above certain work. 

In all cases, be humble but be honest - if you think the pay isn't fair or the work isn't your thing, say so, but be willing to try your best working at new things.  It always pains me when I hear someone say "I don't do that" or "it's not my core competence, so no thanks" when offered a chance to do something different.  I prefer to say "it's not my forte but I would really enjoy working on that with you.  Can you give me a (few hours / days / a week) to come up to speed on that (system / technology / process)?"  Opportunity knocks.  Don't send it away.  Realize though that not being the expert puts you at a disadvantage.  You'll need to have built a strong relationship with your customer to get the nod in a situation like this.

Where are you?

So, which is best?  It's up to you.  How do you work best?  Are you more motivated by the security you have with a steady paycheck in a salaried job, the reward for your every effort of an hourly wage or the many exciting things you get to challenge yourself with being self employed?  Knowing the answer to that will prepare you to find, or better yet - create, the perfect job for you.  Good luck, God speed!

Sunday, July 10, 2011

Save $495 or More on Your Family Vacation

We're just returned from a nice (and I'd like to think well deserved) family vacation.  It's a rare occurrence but careful savings, planning and judicious use of my allowed vacation days permitted it.  I formulated some cost saving tips along the way and present them here for you.

1. Look for discount programs

During the course of our trip, I was struck by the cost of some of the historical sites we toured.  I fully understood the need to charge admission to preserve and maintain services at these sites, but it was still a bit of sticker shock.  Fortunately, at the second site we visited (where I made some comment on the cost) the cashier informed me that my passes could earn me a face value discount on a "family heritage membership".  This was basically a free pass once paid ($65) to all other Michigan historical Park sites.  It saved us $30 something on the last day there when we didn't have to pay a cent to enter a fort for a 4 hour tour.  Wherever you're headed on vacation, check into group rates, multi-site rates like this, or other discounts.  Our Sam's Club membership got me 5% off at our hotel too, which worked out to maybe $25.

2. Use

Knowing where the cheaper gas was told me when to fill up, when to take a partial fill up and when to let the tank run a bit lower.  Carefully checking our map for distances we would travel, understanding our MPG and where the cheaper gas was allowed us to save some money.  I only got hosed when returning the SUV we borrowed - I wanted to turn it in with a full tank and gas was $3.99 nearby.  But the rest of the time, we got gas for $3.49 to $3.69 which was $.32 / gal lower than what we saw at worst.  I would guess we saved close to $60 with this.

3. Watch out for summer rates

Peak rates at hotels and restaurants seem to be designed to make maximum profit for the businesses and provide normal service to you.  We learned quickly to drive 19 minutes down the road to a less trendy destination to buy Subway sandwiches and make two meals out of them rather than eat a $50 dinner at a restaurant in town.  I even tried going low key to a Family Diner and wound up with a $60 tab.  Popular vacation destinations KNOW they are popular and stand ready to avail themselves of your vacation dollars.  So - take a cooler, buy ice and pack in as much food as you can for cheap.  Eat out of your ice box and save $150.

4. Stay with friends or family

We used my folks house as a bookend base camp to our vacation, spending 4 nights with them and 3 in a hotel.  This saved us 4 nights of rental which I was able to partially use to upgrade us to a beach front view.  Showing up last minute without a reservation to town crammed with partially filled hotels also enabled us to save $60 on our first night as all they had was a suite.  They gave me the next lowest room rate when I mentioned the price was more than I wanted to pay.  I would normally pay $89 to $110 for a modest two queen unit for my family of four for 7 nights, which would usually work out to $500 - $770 a week for hotel.  We spent $547, saving maybe $230 by taking advantage of the folks (I did buy my dad lunch and bring them some fudge!). 

So, last year, I spent $2200 on our family vacation through Kentucky.  That's a lot of change, but it was totally in hotels, restaurants and a destination a day.  This year we did the same program for about 4 days and three nights with lots of time spent with family on either end and I figure we spent about $1200, saving me $1000 over last year.  With the tips above, I can track for sure a savings of $495 over doing things the same way we did last year.  I guess the difference is in the different destination and some things I'm not tracking to the penny above.

So - if you haven't had a vacation in a while, take these tips in hand and maybe you can enjoy a relaxing week away for less!

Wednesday, June 1, 2011

When NOT to Save

Say what?  Yes, there are times when saving cash is not the absolute best way to hedge your future needs.  So let's backup and look at WHY we save cash in the first place.  Having a cash reserve shields us from sudden unavoidable expenses, like insurance deductibles (ding - paying that one on an MRI right now... oh yee-haw).  As a person committed to your own fiscal liberty, you should prefer paying cash (or interest free payments, like some hospitals will offer on big bills) over credit card debt any day because, as we have discussed, debt is the metaphorical equivalent of leprosy.  We also save cash to buy what we need in the near and medium term.  Food, home repair items, etc.  You can put it on your plastic as long as you have that non-negotiable discipline to pay it off every month, but paying cash bypasses the "oops - forgot to mail the payment on time" which means you getting hit with interest. Cash good - debt bad.

Hedging against future expenses is a good, sound doctrine and I can't recommend it enough times to you.  But, believe it or not, there are times when saving is a liability.  One scenario - you're not using a bank but a non-fire-rated safe and your house burns down.  Doh.  Two, harder to notice, the value of your currency is tanking and driving up commodities.  Great time to NOT save.  Why?

Let's look at those commodities: wheat, rice, brass, copper, lead ....   These are things that have intrinsic value - much more so than paper money - which you can buy now as prices are rising and use later (instead of buying later) when prices are high.  Some things you might be enterprising enough to buy low now and sell high later when the items become particularly popular.   Wheat and corn futures were going through the roof this spring.  I myself don't use a huge amount of wheat products, but a friend likes to bake bread.  Talking it over, I shared with him what I knew about wheat rust and current efforts to secure a rust resistant strain as well as the market pressure to produce more corn (for ethanol), which reduces the acres of wheat planted, driving up the futures (projected contracts to purchase from farmers at harvest time).  So my buddy got a 5 gallon bucket, went to the bulk store and socked away enough wheat flour to last him a few months till things shaped up.  Smart move.  He bought low and will be making his bread (good stuff, by-the-way) at the purchase cost "today" rather than the future market price which will be higher.

If I had been taking my own advice, I might have bought more corn seed last fall instead of shelling out several dollars for an envelope of sweet corn seeds this spring.  Corn meal might have been a good buy-and-freeze food item as well.

So, be paying attention to the costs now and projected costs later of the things you buy and use regularly.  Costs appear to be going up, even a few percentage points?  Check that against your savings rate.  Right.  If you can buy and hold and save 5%, you're beating most savings accounts right now by 4.5%.  Good time to buy rather than save, I'd say. 

Not sure if food prices are going up?  Just watch what Wal*Mart says about it's future projected earnings.  Sometime they will even come out and tell you - expect to pay more in the coming months.  We're already paying more, just not seeing it.  Notice how frozen pizzas have been going on a diet lately, but cost the same?  That's one way the seller can keep their price constant and appear to not be charging more but in effect sell you less, offsetting their cost increases.  Sooner or later, though, we'll realize a 3" square of 'za shouldn't cost $4.

That's not to say you STOP saving. You simply take a percentage of your money you normally save and redirect it to commodities you'll be using during the projected price peak.   I mentioned at the top of this story that a weakening currency is another time to not save.  What then?  If practical for you, it's not a bad time to invest in another currency.  The British Pound Sterling is a historically very stable currency, typically out trading the US dollar.  If you see a sudden down turn in the dollar, and you can use a variety of indicators to help you see this - oil being a good one - buying into a more stable currency can help you weather the storm.  If you see confidence returning, sell off your foreign holdings promptly so your profit is maximized before the dollar rebounds too much.

You can also purchase physical assets.  Believe it or not, aluminum is a decent investment, as is copper.  Just keep it locked up and don't talk around too much - it's also all too easy to steal and turn in for recycling money and not all recyclers bother to check to see if the item is stolen.  Buying shares in copper or aluminum funds or futures contracts themselves (more volatile, require more attention and trading skill to profit on) is a fairly good way to insulate your cash value.  You can typically profit as the dollar declines.  Silver is a good recent example.  I bought in at $14 or so about three years ago and sold at $22.  Profit.  If I'd held on till this past May however, I could have sold at $40.  The indication here is that, against silver, the dollar continues to be less favored (weaker) and buying into the metal is a better place to park cash.

FYI - $40 is about the historic high for silver set back in the 1970's.  It's not the best price to buy at, as a result - that would be buying at the historical highest value hoping it reaches unprecedented heights so you can sell and profit.  Check around, see if you can find something not presently trading at a historic high but shows a little upward movement trend over the past several quarters and consider that as a medium term investment.

Now - let's level set this for a moment.  The advice I'm giving above is ALL experiential.  I am NOT a licensed broker and can NOT give you investment advice.  I'm telling you what I observe and think about things.  IF you think you should be investing, get a GOOD financial adviser.  I recommend Raymond James & Associates as being the best bang for the buck, most risk adverse and willing to listen.   This is not a paid advertisement. I use them and trust them and have managed to put together a growing retirement fund with them.

Take home points: watch the value of the dollar, be familiar with commodities you buy regularly, decide when it's right for you to over-purchase as away to preserve your cash value as opposed to just saving.  Use a licensed adviser and/or broker if you want to get into the markets.  Finally, cover your bases first - make sure you're not hurting your ability to pay your bills and save for the known unforeseen items (add up all of your insurance deductibles and make sure you SAVE that at the very least!)

Wednesday, May 18, 2011

Cash Discipline

I asked my sister, with years of experience in the food industry, what the biggest challenge for people entering the workforce is.  Answer: cash discipline.  Well, not in those exact words, but basically, tracking what you earn.  Why is this important?  If you don't know what you are taking home, you don't know what you have and hence can't; effectively budget, pay taxes accurately or save.

Don't get me wrong - you could *guess* at these things and probably do alright, but would you want to wing it all the time? (sure - makes life more exciting).  Would you want to OVER pay your taxes or fritter away your money in an unstructured fashion and have NO savings?

Being wait-staff means highly variable income, much of it paid in cash.  While it's tempting to put that in your wallet or purse and just live off of it, it is a very shaky way to manage.  The suggested solution is to pick up a Ledger book at Staples or Office Max or Office Depot or whatever you've got. They can run from  $5 on up.  All you need is a simple tabular format where you can write the date and the amount of your take home.  At the end of the month, you know what you made and what you have to work with and you can start budgeting, saving, setting aside for your taxes, etc. 

The trick is to do this at night when you get off your shift and have the money in hand.  Don't put the money in your stash till after you've recorded it.  Trusting it to memory later will certainly lead to error.  Get in the habit of doing this and you'll take a lot of guesswork out of your future and reduce your long term stress.  Sometimes the IRS will ask you to pay quarterly or monthly taxes depending on your income.  Sometimes you don't have to come up with it till the end of the year.  Fact of the matter is, these days, the IRS is going after not just more of the big fish but ALL the fish.  So if you keep accurate records and hold your projected owed taxes back on your cash take home, you'll be prepared to pay that tax bill instead of struggling to come up with it. 

You might be tempted to not report cash.  Consider the liability this presents.  The IRS likes to find out about this stuff WAY down the road and assess penalties.  With interest.  Trust me, I speak from experience (one time!) when I say that this is no joyful bit of news to receive. Pay what's due when it's due as, unfortunately, our overlords demand it and will make us pay pay PAY later if we don't.


Wednesday, May 11, 2011

The Law of Unintended Consequences

If you've been reading along, you may have caught the fact that individual spending habits are what drive the spending habits of a society.  This applies to borrowing and savings.  We tend to tolerate, as a whole, that which most of us accept on our own account.  So if I'm OK with maxing out my credit card and paying the minimum, I'm likely to view government spending on borrowed money as "normal" or "acceptable".

So, our views of money as a society tend to influence the way our governments handle money.  This is more or less true depending on the amount of influence the populace has over its government.  The reverse is true as well, however, and often not in the same way.  Let me explain.

Government use of public funds influences private money use in often unforeseen ways.  Two recent news stories caught my attention.  One was a proposal to levy a tax on parents of overweight children, presumably due to the increased public health burden these children would come to represent during the course of their lives.  The other was a plan by the Irish government to tax private pensions in order to, ostensibly, grow jobs. 

Now - being cost averse as a rule, what do you suppose the reaction in the general public would be in these two seemingly disparate cases?  Well, I suspect the intent of the first proposal is to induce parents to provide better nutrition to their children and take an active responsibility for the health of these kids.  In practicality, though, many children were set on a path to obesity from the start due to their genetic sugar thriftiness.  Our western diet is packed with sugar.  Many Latino and other children with Native American or Mezo-American heritage have a thrifty gene that makes optimal use of low glucose food sources and defaults to storing as fat the over abundance of high-glucose sugary foods.  Obesity and diabetes are common in these population groups as a result.  Nothing short of a whole-sale diet change to now hard-to-obtain, low-glucose and slow burning glucose foods will help these kids.  For a low income family, that option is going to be hard to come by.  Taxing them is less likely to produce a healthy diet choice and more likely to see parents unintentionally mal-nourish their children in an attempt to avoid the tax.  Income level apart - I think that would be the unintended consequence in this case.

To the Irish proposal to tax private pensions in order to fund job creation spending on the part of the government, there seems to be a bit of a competing interest here.  Ireland, in the 80's and 90's made itself a choice technology center for manufacturers via tax incentives.  This worked fabulously well but resulted in a tech-heavy economy which suffered with the periodic down-turns in the economy.  So, now the plan is to spend money, probably on enticements or special programs, to try to stimulate more job growth.  That alone may well succeed.  However, funding it via a tax on private pensions has an obvious souring effect.  If you live in the EU and can easily choose from among many countries to work in, would you choose Ireland if you know your private pension will be taxed?  The unintended consequence here is likely that jobs, at least those with private pensions as a part of their compensation, will not be grown but will in fact be repelled or driven away.

So to, on an individual level, we are faced with the often painful law of unintended consequences with the power money has to serve as incentive towards or away from a behavior.  Have a coupon for $10 off your purchase of $100 or more?  Well, that's a nice 10% off (or less).  But it's 100% more than you are likely to spend when you are not presented with the enticement of a coupon.  Signing up for coupons or club memberships is nice - you can find good deals.  But if you're susceptible to the sway of coupons, having more coupons at your disposal may mean you spend more money on things you didn't really need or want in the first place, just to "save" 10%.

Two take home points to consider then.  One, be aware of the power of money to persuade, both positively and negatively.  Two, when you hear an offer or proposal, think through all the possible unintended consequences.

Monday, April 11, 2011

How Much can a People Afford - Revisited

A while back I wrote a little bit about how a municipality, as an example of volatile income, must manage it's expenses over time.  I concluded with "either you cut expenses, or you take on debt".   Chatting with a friend today it came to me that I missed one: find alternative income sources.

That should have been obvious - what's the first thing a public body in trouble tries to do?  Raise taxes.  I did list taxation among the various sources of income for a municipality, but neglected to touch on this point.  More on that in a moment.  The other way to increase revenues is to get the economy moving or appeal to the community to do so, or in some way chip in.  Driving up tourism with an advertising campaign or attracting large businesses with huge pools of employees by offering a tax break to the firm for relocating, closing a few streets for a new festival (think permits, taxes, parking tickets and passes that all can generate revenue.)

I seem to remember as a kid there being local, volunteer "friends of the fire department" or "neighbors of mytown PD".  Maybe I'm imagining it, but it seems like there used to be a quasi-grass roots approach to fund raising for public services in lieu of raising taxes or cutting services and jobs.  The Policeman's Ball, the Fire Department Chili Cook-off, bake sales, pancake breakfasts, ice cream socials, benefits, community yard sales, and so on.  Granted, in a city of 750,000 people, with 300 officers on your police force, making up a shortfall that may cost you 1/3rd of your force with bake sales is a bit of a stretch.  But turning over the city park for a music festival where proceeds go to the PD, and having a "support your local police" donation box at every community service event attended by a police officer would be a start. 

So, the point is, sometimes a mayor has to get creative, especially if the turnips are already looking pretty dry.  Which is my way of segueing to tax increases.  As many economists and historians have noted, taxation has the effect of retarding the activity that is taxed.  For one, people have a natural aversion to paying taxes.  This is increased when there are myriad available deductions that have been carved out for special groups of people by their elected representatives.  If you offer loopholes, people will try their best to slip through them.  It's human nature and only makes sense because it has the legitimacy of law.  Of  course I'm referring mainly to income tax here.  Business tax isn't much different.

Taxes on commerce and trade are a suitable thing.  Trade and commerce benefit from things like roads and crime reduction.  More broadly, infrastructure and services.  Really, they benefit everyone, but so goes the rational when politicians cast their gaze upon one constituency or another.  So lets go back to the scenario outlined in the first article where local revenue has taken a sudden dip due to a down turn in the economy.  If I elect to raise taxes, what is the likelihood that it will have a positive affect on this trend? 

Some numbers to consider:

I own a shoe store that grosses $75,000 annually and nets me, the sole employee about $30,000 in profit after all expenses.  I pay my personal income tax on that and probably wind up with about $26,000 at the end of the year.  Part of my expenses is the local 3% commercial tax, or $2,250.  Business takes a bit of a down turn due to a sagging economy and my revenues this year only see me gross $60,000.  My commercial contribution to the city government is going to go down to $1,800.  Lets just pretend this is typical for all businesses in my city.  This means the city has taken a whopping 20% hit to its revenues from the commercial tax alone.  In an attempt to balance the budget, the mayor and city council after much deliberation and impassioned pleas from businesses and the police and fireman's unions decide to raise the local commercial tax by 1%.  This will give them $2,400 on my $60,000, which is a lot better than the $2,250.  It will allow the city to pay some debt, build the rainy day fund and keep services at current levels.  The police, fire and residents are happy.  But business just took a pretty hefty hit.  When my revenues went down to $60,000, my take home went from $30,000 to $15,000.  When the tax rate went up, it further dug in to me for another $150, reducing my total take home to $14,850.   Now, if I've been planning well all along, I can weather the storm for a while, but you can see how the tax increase has just made things a bit tighter for me.  With the increased burden on business, the long term survivability of businesses decreases.  If a down economic cycle is protracted, I may have to close up shop, which means the city will get $0 next time around. 

Now, we can say that it's the down economy and not the tax increase that has put me out of business, but the tax increase certainly hastens that eventuality.  If this kind of balancing goes on for a long time and becomes the new normal, I may likely look afield to friendlier tax terms in other cities.  Then the city loses my commercial income, my personal income, my local economic impact through the buying of my services and goods... and gains an empty hole in the strip mall where my store used to be which sends a disheartening message to everyone who sees it.

So - balancing the books on a large and volatile scale... no easy task.  But I think there's one thing we can conclude - a positive community spirit and attitude can make things a lot better.   Especially a willingness by an administration to be creative and appeal to the population for support rather than legislate it.

A good historical example of this goes back to WWII.  The US ran up the biggest debt in its history to fund war efforts.  To finance this debt, the government SOLD war bonds.  Advertisements encouraging people to do their part to win the war touted the war savings bond as a way to do it.  This is an interesting approach vs borrowing from another country or raising taxes.  A purpose specific bond offers many benefits to the public.  First, the chance to invest money with the promise of a return.  Second, the positive feeling of buying into something voluntarily rather than being coerced into funding it against your principles.  Third, by keeping the debt "in house", the influence the ownership of that debt would command if owned in aggregate by a foreign power is neutered.   As a citizen of spare means, I don't have to buy a bond.  As a citizen of extravagant means, I can buy a bunch and earn a good return.  This is a free, open and positive way to finance a debt.   Bonds typically have more favorable terms for the borrower, vs. loans, as well.

Getting a municipal budget to balance is tricky when so many factors play into the equation, but creative governance and engaged public can pull through tough times, given the chance to collaborate.

Saturday, April 9, 2011

Cash Flow Types

Not everyone can easily live within a budget.  There are a few types of cash flow model I want to present to you with names so you'll recognize which you fall under when you see it.  Being able to recognize your cash flow model will help you determine what kind of budget you'll be able to lay out and how easy or difficult it will be fore you to stick to.

The two driving factors are Income and Expenses.  We have either a Variable Income or a Fixed Income, and we have either Variable Expenses of Fixed Expenses.  This gives us four types, any of which we may move between during the course of our lives.

Four Patterns

Fixed Income, Fixed Expense   (FIFE)
Variable Income, Fixed Expense  (VIFE)
Fixed Income, Variable Expense  (FIVE)
Variable Income, Variable Expense  (VIVE)

The acronyms, FIFE, VIFE, FIVE and VIVE actually have some helpful mental cues to them.  FIFE is like pleasant music - it is the least stressful because you can plan your budget to a penny and not worry about deviating from it.  It is also the least likely to be encountered unless you are a VERY frugal pensioner, have a stable job and simple life, or recipient of a trust.  VIVE on the other hand is like it sounds... vivacious - exciting and a bit dangerous.  When all things are variable, you have a much harder time planning, but it is possible.  This is what small businesses typically encounter.  VIFE is what the self employed typically see - job to job income, regular house payments.  FIVE is typical of pensioners with medical problems, families with children and so on.

Each of these cash flow types can be handled with some degree of budgeting and planning.  We don't have to face these different modes of cash flow on a hand to mouth basis, but it takes a lot of discipline and some good foresight to get in front of and stay on top of.

Let's start with FIFE as that's the easiest and most common for college grads and single or married working folk with no children.  With a fixed cash flow, planning is as simple as setting a budget that keeps you within your means, covers the basics like rainy day savings, giving, debt reduction and having some fun, and then sticking to it.

Later in life, you may find yourself with debt but unemployed - ala VIFE.  Your income has just become variable (with a minimum threshold of ZERO or at least unemployment benefits) but you still have expenses. Planning in this situation is going to be a little tricky.  First thing, start looking for work and take anything that pays.  If it's not "your thing", make sure your clear with the employer that it's short term and you're actively seeking your ideal job of "x".  Then you need to look at what you've got saved, what your monthly expenses are and how long your savings will pay those expenses.  This gives you a timeline for other planning activities outside of finding a job - namely asset and debt reduction.  This typically means getting rid of things that are a source of ongoing expense.  You might have to sell your car, move to a cheaper apartment or in with friends or  family.  Consider renting a room instead of a whole place all your own.  Definitely cancel the cable and if you have a cell phone and can go to the library to check your email, get rid of you phone plan for now as well.  Or ditch the cell phone plan and go to a prepaid phone, which is typically cheaper over the course of a year.  Be resourceful and don't cling to material possessions.  The temporary security they bring you is easily destroyed by the debt you might take on to keep them.  Keep your credit card tucked away for emergencies only.  Don't use it as your own personal bail out, you'll just bury yourself in debt maintenance and, as Ben Franklin said: "he who takes a debt gives another control over his liberty."

Hopefully, you're making your full time job finding the right paying job, but your part time occupation is going to be handling your expenses with dwindling resources.  This is a great time to make some life changes regarding the standard of living you've adopted.  Do you really need all that "stuff"?

Another challenging but equally approachable cash flow model is FIVE.  You have a fixed income but your expenses are variable.  Maybe this is because you have kids and they have random registration fees for sporting clubs or need extra supplies for school projects.  Or perhaps you are on social security or a pension and you are having the usual old age symptoms of random Dr. Visit here, random prescription there.  The important thing here is that you have finite resources.  So you need to plan according to that with a reasonable allowance for expected variables.  Usually we would add up our expenses and subtract from our income.  But to manage the variables, we're going to have to determine a min and max range that is expected.  Add up all the variable costs for the past few years and average them to get this range zeroed in.  Then, in your budget, set aside enough each month to cover the necessary variable expenses.  If this leaves you in the red, look to your fixed expenses for things you can restructure, down-size or eliminate until you have a comfortable monthly budget that will absorb your variable expenses over the course of the year.

Finally, VIVE.  This is more common to small businesses or self employed people who own a business that has a lot of consumables or inventory that experience variable or seasonal demand.  My sister is a bakery coordinator.  Her job is to look at the amount and types of bread being bought month over month at each location she manages and determine how much bread of each type to buy materials to make in the coming month.  This is a complex projection model that is heavily data driven and requires a lot of planning.  The full detail of this is beyond the limited scope of this article and I hope to write something more comprehensive with my sister's aid in the future.  My take on the VIVE cash flow model, though, is that in addition to projecting your expenses, you need to be projecting your income as well based on trends.  This means a LOT of data gathering which in itself can overwhelm a small business, which should give some idea as to the value of a good accountant and solid book keeping practices.

Summing it up, regardless of your cash flow type, you will want to use a budget to keep your expenses inline with your income and to plan for the future.  That's the big thing - the future is what we're all heading for, so let's get there in the best shape possible. Have questions or feedback? Leave a comment!

Tuesday, March 29, 2011

Time Management - With a Budget!

Yeah - I love budgets.  I guess because, being a scatter brained ADHD type, I gravitate towards systems of imposed structure that help me get through the day.  I don't exactly use a time budget, but my kids were recently complaining about not having any time to play after school.  So I created a time budget for them.  It's a lot more complicated than our example, below, but the premise is the same.  Like someone living on a fixed amount of income, we all live on a fixed amount of time.
As a reminder - if you live on a fixed income, you can't succeed without a plan for using that income unless you're just really well off or darn lucky.
This was something of a revelation for my oldest.  We had been talking about money and budgets and why we don't just buy a horse, swimming pool, hot tub, 20" telescope or Mr. Fusion portable fusion reactor on a whim.  So when I used the budget analogy - they immediately got what I was saying... though it REALLY clicked for them once they saw it in print.

Their schedule, like I said, is a lot more complex.  I even extended it to a whole week as they have a different set of classes and tasks on each day.  Here though, is the basis and close to what I had for a personal time budget about 9 years ago, before kids and a different job.  Starting with the universal 24 hours allotted to each human on the face of the earth, enumerate your daily activities and subtract the amount of time for each.  Ooops - I skipped getting ready for work.  Toss in another 30 minutes and take it out of my free time.  Hmmm... that leaves only 4.5 hours at the end of the day for puttering around the yard, playing with the kids, hugging my wife and petting my non-existent dog.... which is why many of us love our Saturdays.

My kids were pretty amazed when I showed them their personal amount of remaining free time each day... usually around 6 hours.  I saw whites of eyes when I pointed that number out.  "Really?!"  Yes - really.  For kids, this kind of illustration helps underscore the importance of getting your work done in the time allowed.  The day after the budgets were published, amazingly, all the school work got done during school hours rather than being drug out till bed time or into the weekend. For adults, well, we go to work no matter what and typically stay there till quitting time.  But the same rule is true for all of us - if you don't get it done during normal hours, you have to deal with Over Time (many of us don't get paid for that!) or even worse, HOME WORK.  Bleh!

So, if you want to be really type A, you could make a time budget for your Saturday but I would caution against it.  Consider Saturday your mandatory set-aside savings in the envelope marked "PLAY" and don't mess with it - just smile and use it.  But if you've got kids who are struggling with school and keeping on top of the work load, consider a daily time budget for M-F and include Saturday with chores, sports, etc. so they can see a value and appreciate what free time they do have.   Maybe they'll spend it less on Wii / X-Box and more on time doing something really interesting like asking you how something works?  A parent can hope.

Tuesday, March 15, 2011

Sample Budgets: Bob Barely and Tom Trending

It distresses me when I hear a friend talk about living pay-check to pay-check. I know that massive joy and stress reduction await them if they could just get to the point where they are one pay-check ahead. It makes getting to two, three or four pay-checks ahead so much easier. Budgeting, or lack of, seems to be the most common culprit. Many of the people I know have the money they need to make ends meet, but because they lack a spending plan, they don't plan where their money goes and it just "goes"! So, today I wanted to look at the question: where does it all go?

Below is our first sample budget. I chose a median income of $24,000 a year. For an individual starting out of college in that first "real" job, this is a pretty average take-home. It also provides a bench mark for you to consider. If your take home is half that or twice that, you can afford half or twice the amounts I list below.  Let's call this first budget "Bob".  Note that periodic expenses are averaged to the month.

So, Bob has a pretty decent apartment or a moderate mortgage payment there at the $800 level (for most of the US outside of over priced markets.)  Bob has a nice broadband package that lets him watch streaming internet video, he's got a new car that he makes payments on, nothing too fancy.  He's paying the minimum on his credit card balance, diligently puts $150 away in savings each month and has a tremendous $35 left over to take his girl out to dinner once a month.  Three times if they go for the dollar menu.  Bob isn't doing too badly.  He has some discipline with the monthly savings but that credit card is going to bleed him out over another three years or so.   Bob is pretty much living pay-check to pay-check with a minimal buffer behind him - hence he is Bob Barely, as in barely getting ahead.

Let's look at budget "Tom".  Tom is like Bob in most respects but he's been willing to do with a bit less today so that he might have a bit more in the future.  Let's see what his budget looks like.

Tom opted for a slightly less spacious property to live in and is saving $200 over Bob.  He's not going to be having a family Christmas party in his 750 sq. foot apartment, but it's only costing him $600 a month and he's a bit closer to work (we'll assume.)  He's opted for the slowest DSL plan available and is saving $22 over Bob.  Tom buys pretty much the same groceries as Bob, but he's allowed himself to have a less than perfect set of wheels, opting to buy a used car for which he paid cash and spends an average of $100 a month in maintenance (the car needed a new muffler, brakes and timing belt this year.)  Tom pays his credit card off each month and hasn't had much outside his budget so it's at 0 per month -- he is "MR. DISCIPLINE". As a result of these cost cutting measures, he's able to save $400 a month AND have $127 left over to play with.  His girl gets to have dinner each week and watch a DVD back at casa de Tom! :-)

Bob will save $1800 this year which he'll be able to use to wipe out his credit card if he's smart, adding $20 to his play budget next year.

Tom Trending will save $4800 this year.  He can keep adding on to that for a few years and have a decent down payment on a house or he can buy a nicer car or move to a nice place or spend it on a nice trip... it's amazing how many neat things you can do when you are disciplined with your cash flow.  A waiter once said something to that effect to me, "Life can be a lot of fun if you're careful with your money." He was like Tom and was telling me how he was preparing to take 4 months off to travel Europe using his savings.  When he came back, he planned to go back to being a waiter and living his minimalistic life style again.

So, key points: having a budget is useful.  Sticking to it is more useful.  Using it to tune your cash flow really makes it worthwhile.  It all takes discipline, to which end I hope you find the above encouraging.

Sunday, February 27, 2011

Forbes analyzes USA, Inc.

I wanted to pass this along as recommended reading. Our government has been unique in it's level of transparency, fiscally speaking, from a historical perspective. Being that there is so much data available to analyze, it is refreshingly (can't say simple) approachable a task to analyze where we've been and the fiscal trajectory we are on presently. Please read: USA, Inc. [forbes blog] [read online] [ipad] [in print from amazon]

I hope to be able to buy the amazon copy myself as it sounds like an excellent text to have in the class room. I will no doubt be reading this in the coming year, digesting it and applying it to the lessons I try to provide here. If you're wanting to be a good student of economics, it looks to be essential reading.

Wednesday, February 23, 2011

How much can a People afford?

I really don't want to come across as taking a side on a political issue. I have written extensively on politics in other venues and don't feel the need to do it here. So, read this as simply exploring the mechanics of taxpayer funded services. This is presently a hot topic. We see in the news here in the US many states trying to grapple with their budgets and huge debts and deficits. First let's talk a bit about what each of these is for clarification, then we'll look at how they happen and what it means for you and me.

So a deficit and a debt are two different things. Readers of Fiducate will know that a debt is money you owe - and more to the point, money you pay interest on to the lender. A deficit is the projected or actual difference between what you have budgeted and what you have coming in. For you and me, this might be what happens when we suddenly lose a job or take a pay cut. Our budget might have been nice and tight, ensuring we pay the bills, set aside savings and stay out of debt. But then our income level changes (downward). We suddenly have a deficit - more money allocated to go out than we have coming in.

Unless we want to go into debt as individuals (and get stuck in that life sucking trap paying interest and minimum payments for 20 years) we have to go back to our budget and decide what gets cut. Either we stop saving or we reduce expenses. In extreme cases, we may have to downsize our apartment or move to a less nice neighborhood to get a cheaper rent. In any case, we have to cut spending OR take on debt, which, as we know, has the effect of increasing our spending (by adding an interest payment to our budget line items) over the long haul.

So, for a municipal (local) or state or even federal government, how does this all work? Let's start by looking at the budget in general terms. A governmental body doesn't get a pay check like you and me, they typically are funded through taxation and fees. Taxes, as you no-doubt have observed, come in many forms. We pay income taxes, property taxes, sales taxes and sometimes special taxes called assessments for local improvements like sewer, public water or street repairs and construction. Then we have fees: building permits and inspection fees, dog licenses, car registration fees, some times you pay a fee to use your state or local parks and so on. Then there are those fees we all love to hate - parking tickets, fines for local code violations and you can even go down the list to fines or penalties you may pay for breaking the law. All told, it's pretty much a grab bag of income sources. It is volatile to be sure. Consider that revenues from income and sales taxes are going to be directly impacted by the employment rate and volume of sales. When those things go down, so too do the monies derived from them.

Recall the different scenarios I laid out in The Hows and Whys of budgeting for individual incomes. Some of us have a stable income, some of us do not. Do you remember what I said you would need to do if you have a variable (unstable) income?
But if you own your own business or have a job, like sales, where the pay tends to rise and fall with the season, you'll want to consider your total yearly income.
That's right, you need to average your income over time to come up with a realistic budget. For a municipality that has the potential for huge swings in income, historical averaging is a good way to plan for the future. Any city, county or state that has been around for more than 10 or 15 years has been through at least one boom and bust cycle. That's plenty of time to see where the peaks and valleys are in terms of income. This information ought be used to average out what the effective income and outflow can be safely assumed to be.

So, for example, if I am the mayor of Anytown and I know that our tax revenues bottomed out at $1.2 million in 2001 and peaked at $3.4 million in 1999 and just a while back in 2009 we again saw a dip down to $1.5 million, I have a pretty good scatter chart to work with to establish a trend line. The trend line will describe my average projected income year over year. The trick for me as mayor is to keep my expenses BELOW that line each year. Like a smart individual, anything that comes in above and beyond that line is going into the savings fund for future down-turns in the economy. Just because we have an off-year, I still want to be able to keep my fire and police and emergency services running, the streets lit and repaired and so on. If I plan carefully, I'll be able to do this. If I have a short term view of things, however, or decide to spend all of my income each year, I leave nothing for when the economy goes in the tank and have a hard choice to make: cut services or take on debt.

Unfortunately, many state and local governments over the past several decades have chosen to take on debt all too often (in my opinion - you can decide for yourself if you agree - I suggest looking at how many of these are filing for or about to file for bankruptcy and default on their debts though). There are actually two nasty things about debt. We already know about the interest, but the worst bit is the over-reach it allows. Over-reach is when you buy or establish more legacy services than you can realistically sustain. This is made easy by cheap credit (low interest) and the willingness to borrow. It's politically very expedient and easy for me to agree to any terms, as mayor, that any of my public service unions bring to the table if I'm willing to over-reach. It takes some discipline, though, to have to say no to expansions in expenses and resist credit and the pain it brings later.

So - what can we afford? Only so much as we have coming in and/or have saved for.

What do we have to do when we run out of money? Stop spending or borrow - which is really just more spending. The obvious answer is stop spending.

Can a government just pull the plug on critical services? Emphatically, no. And that's the problem with over-reaching. Once you establish a level of service, especially in the public sector, you are going to have hell-to-pay to roll any of it back. It can be politically damaging to do so. But, if your goal is to keep your town, village or state from totally defaulting on its debts (making any future borrowing VERY expensive), cuts have to be made.

Some recent history illustrates the drastic side of this. In the State of Michigan, Flint and Detroit have had such a dramatic down turn in their local economies that they have had to actually SHRINK the size of the cities to keep basic services up and running. By reducing the extents of the city limits, they are reducing the miles of roads they maintain, the numbers of parks they keep in operation and the number of street lights they keep on all night, but they also remove some far flung properties from the property tax pool. It's a delicate balancing act trying to keep the city viable while providing a reasonably decent level of service.

Anyway, there you go. I hope that aids your understanding a bit without being too leading in terms of opinion. There are some (not as fiscally literate as you, since you read this blog) who think running up debt or even defaulting on debt is OK as long as there are no job cuts, pay cuts or reductions of services. The trouble with that is the same as for an individual in terms of credit worthiness... if you default on your debt, getting future credit when you REALLY need it becomes impossible. Just to put it in context, if a state can't agree to cut some public union jobs today and insists on keeping everyone to the point where they have to take on debt and persist till the debt is defaulted on, the next time the economy sours unexpectedly, that government body will not be able to get a loan. Then it won't be whether you cut a job or not, it will be time to shut the lights off and lock the doors... the government is out of business. Not exactly ideal for a whole host of reasons. That's why fiscal conservancy is important all the time. If you fail to plan for the future, the future will have you for lunch.

Monday, February 14, 2011

The Discipline of Living with a Budget

This comes up frequently with me: see it, want it, see price, begin justifying the expense. I bet you've been there too. Once you're living on a budget, that initial interrupting gut check starts to take hold every time money starts to levitate out of your wallet. You have a choice to make at that point: stick with your budget, or blow it just this once... because it's really really worth it! Well, if you plan to keep on track to get out of debt or pay down the mortgage or save up for a dream vacation or kids college, you don't have the luxury just now to blow the budget on that something extra.

How To Handle It

If you're good, you've been BUDGETING a small amount to set aside each month in your Play Money account. That's the way to handle these spending urges - plan for them. As I said, though, it takes discipline - both to save and to resist the urge to over spend. The good news is that all of this gets easier as you go along. The first time you are confronted with the urge to splurge, it's going to be tough. Spending is a habit forming activity. I believe people can literally become addicted to it because it feels good to have power to do what you want and that mild euphoria may be the only joy some folks know. (You can, by the way, know real joy by knowing Christ - email me if you have questions.) And so, spending becomes their fix and it's hard to break away from the only source of joy they've known.

For some people, it literally takes a religious conversion to get over this addiction. Some folks have a pathological personality and will swear up and down they've changed, but without a real change of heart, like giving your life over to God, you'll go right back to your hang-up when it suites you. A tremendous number of people around the world who have gotten religion draw strength from their faith in something bigger than themselves. The belief that we can be strengthened by the creator of the universe is very empowering and can really help beat spending addiction as well as other addictions.

So - we need the power to say no, the discipline to say no, and then the plan of action for how we can afford to say yes at the right time without sacrificing our future or the future of our family. It's not something you're going to learn overnight. It will take premeditation and practice to resist compulsive buying again and again till it becomes your new habit.

The Benefits of Waiting to Buy

Like many things that plead with us to jump in NOW (sex, relationships, fitness club memberships) there are not inconsiderable benefits to WAITING. Decisions made in the heat of the moment are often regretted when we sober up and/or calm down. Carefully considering the merits of something, like a purchase, before we invest is well worth while. It gives us time to comparison shop, weigh the real value of what it is we think we need or want and look for less expensive alternatives. I believe that if we give things time, God leads us to the right thing in the right time at the right price.

A couple of good examples from my own life: this weekend I've been really hot on the idea of getting an SSD (Solid State Drive) for my computer. They are NOT cheap. That fact alone has kept me from logging on to a computer hardware website and popping in my credit info. Taking the time to consider the alternatives, I became aware through a contact that there are hybrid drives that combine a SSD cache with a standard hard drive for 80% the performance of an SSD (the main attraction for me is the speed they offer) at less than a quarter the price (SSDs are VERY expensive right now). Given the time to consider my options, I found a much better alternative. The more I think about it though, the more I realize, I really don't need a huge speed boost. The stuff I have works fine, in fact!

I also recall buying my current car. For a while I had wanted something a bit more upscale than the rattly Ford Probe I had been rolling around in for 8 or 9 years. I took my time - about 3 years - saving the money. By the time I was really convinced it was time to say goodbye to the Probe, I had enough money saved to pay CASH for my current ride. That gave me a huge advantage when shopping. I was able to go looking for a good quality used car and cut right through the "I can get you into this car for just $199 a month!" hype and tell the sales guy "Look - I'm going to pay cash. Don't bother telling me about the monthly payment because there won't be any. Tell me how low you can get the total dollar amount on this car out the door, cash in your hand, right now." You could hear pins dropping a block away. It felt REALLY good. And, I had no pressure from the sales guy. In fact, his tone changed. He helped me sort through their selection to find the one car that had the best mileage, wear, tires and ride. He calmed down and took his time to actually be a help to me instead of an unpleasant bump in the road to getting an upgraded car. We both then took our time because he knew he had a sale and I knew I was going to get what I wanted: a quality used car.

Fools rush in. Are you a fool? I didn't think so. Next time you get that itch to buy BUY BUY!!!, remember the words of brother Dave Ramsey: "If you're willing to live like no one else today, you can live like no one else tomorrow." Wait - be patient - consider your options and resist the urge to splurge!