Real World Finance$

This past week has been amazingly busy for me.  Work has been full of planning meetings as we are moving towards a conversion of our custom software to a new programming language and from a actual application to a web based function.  In addition, my own company is preparing to leave for our trade show a week from tomorrow, so we’ve got brochures to finish a booth that just got done and is being packed for shipping as well as our final draft of the patent application that just got filed today.

With all that going on, I just haven’t had much time to get in here and write any posts this week.  I have been working on our budget some and we have been doing really well at cutting back on our spending again.  We just filled the car up with gas last night.  It had been 13 days since our last fill-up  and we bought less than 9 gallons and paid less that $18 (it was $2.179 per gallon).  Of course, as we were on our way back home, we saw it for 2 cents cheaper a few blocks from our house!  It always seems to work that way.

I did a quick look at our net worth coming up on the end of the month and while our debts will be down again this month, our assets are down even more thanks almost entirely to the stock market.  Still no worries, we actually have some money back in the savings account now and I start teaching a new class next week and will have some extra paychecks the next 3 months.

Hope you all have a nice Halloween.  Hopefully next week won’t be quite so busy, but don’t count on it!

6 a.m. this morning, the alarm goes off and NPR starts playing.  Market news comes on and the first thing I hear is about how markets in Asia and Europe have gone down while I was sleeping.  Because of that, they are saying the US market is going to go down today too.  Guess what, it did!

I guess I’m still not sure why people continue to sell off stocks at such a loss.  What is everyone afraid of?  In reality, no one loses money in the stock market until they sell their shares.  Those who are in retirement and selling now are the ones hardest hit.  The rest of us have no reason to panic and sell.

Should the stock price of a financial institute on the brink go down?  Sure.  Does the stock price going down have any real effect on whether the business will survive?  Not a bit.  The company doesn’t rely on the price of the stock to do business.  A piece of stock was sold to the general public as a right to future earnings of the company.  If they company isn’t going bankrupt tomorrow, then they will have future earnings and the stock price should be worth something.

Should we use the stock market index to determine the value of our economy?  No.  If more people were taking a long term look at company profits, the prices of the stocks in general would reflect their value.  Instead, people are panicking about a single point in time and taking a sky is falling mentality.  We tend to do just the opposite when things are good as well.  Just because times are good doesn’t mean they always will be.  A more moderate approach is needed.

The current stock market downturn is nothing more than the pendulum swinging the opposite direction.  When times are good we buy buy buy because everything is going up and it’s always going to do that of course.  When times are bad we sell sell sell because everything is going down and it’s always going to do that of course.  It’s those people who have the sense to do just the opposite that are the true wealthy investors.  They buy low during panicked selling and happily sell at overinflated prices when everyone is euphoric.  These prices we see today aren’t truly indicative of the value of the companies, only the present panicked fear of those who think the sky is falling.  For the market to be truly making this big a decline there have to be 2 things.

1. People who are scare and willing to sell their stocks to take a known loss now rather than an unknown in the future
2. People who are willing to relieve the people above of their fears knowing they can sell things back to them at a much higher price in a few years when their mood swings the other way.

Hopefully, you can be part of the second group.

I’m sure I haven’t spent much time on this topic, but considering the recent post over at Get Rich Slowly about
How Low Can You Go? Cutting Back to Minimum I was a little inspired to spend a few moments on this.

I have to admit though, that my wife is the brains and brawn behind much of this. Here’s just a few things we have done over the past year to save some money and try to be more eco friendly.

• CFLs - Yes, those good old compact florescent light bulbs. If you haven’t looked at these lately, they aren’t your father’s CFLs. There is a much wider variety out now that have a much softer light and you can’t really tell you’ve got a florescent light in. Plus, I LOVE that I haven’t had to change a light bulb in ages.
• Cleaning Spray- My wife has found some recipies using regular old white vinegar (which is amazingly cheap) some essential oils (for scent) and some other stuff that I don’t remember to make a very effective general household cleaner.  She uses it for sinks, counter tops, floors and all kinds of other stuff.  Trust me, it’s MUCH cheaper than the $4 bottle of stuff you buy at the store.
• Laundry Soap - Another home brew concoction my wife found a recipe for.  She uses Borax and Washing Soda to make powdered laundry soap at a fraction of the store cost.  It’s also more powerful because it doesn’t have all the fillers you find in most detergents.  Having had a college instructor who was once a divisional director for a large conglomerate that made laundry detergent, having fillers makes people need to put in more which makes them feel better about the cleaning.  Evidently our psyche is such that we think more soap is better, even if a little will do the job.
• Curtains - My wife is nearly finished with this project as well.  The curtains in our bedroom for the last 2 years have been old bed sheets (attractive I know).  She had bought some fabric and made camo curtains for the boy’s room, but ours has still been lacking.  She dug out her boxes of fabric that have always been intended for quilting and has pieced together some beautiful curtains in her favorite colors.  She just needs to put on a backing to help block the light (she bought that yesterday when the fabric store had a 40% off 1 item sale) and then we’ll be all set with some wonderful custom curtains with stuff we mainly already owned.
• Garden - It’s amazing what you can grow in such a small space in your backyard with a few bucks worth of seeds.  Our only fertilizer was a bag of crushed up, lump charcoal we mixed in when tilling the soil.  We were awash with wonderful fresh tomatoes, peppers and cucumbers.  Our counter top is also getting pretty crowded with acorn squash as well.  Oh, and I should mention, we rarely had to water the garden (though we aren’t on a meter, so it doesn’t technically effect our bill if we do).  We’d like to get a rain barrel attached to the garage so we can water with that next year as well.  To boot, we did almost zero weeding and things still grew just fine.

All little things you can do that not only save you a few bucks here and there, but they can also save the environment a bit as well.

As I have started making plans for our budget for the coming year, I’ve thought back to some business accounting courses I’ve had (and taught).  There’s one crucial thing you have to remember when you get to your total budget:

THE BUDGET IS ALWAYS BALANCED

If you spend less money than you bring in, then the remainder should go a budget line for savings.  If you are spending more money than you make, the remainder either has to come from savings or from new borrowings.  If you don’t plan those at part of the budget and realize the consequences, you are merely fooling yourself.

I did a quick search last week for the budget of the US Government.  I found this website that has the details and even has a ton of historical spreadsheets that you can download with details of past budget performance.  Being the number junkie I am, I naturally downloaded anything I could and I’ve looked through some of it.  First, it’s really a misnomer that we have a budget deficit or surplus.  A deficit just means we had to borrow more money to operate that year and a surplus means we were able to pay back some of our past borrowing.

The frightening thing is that, according to the data, the actual approved budget has only shown a surplus 3 times in the last 50 years (1960, 1999 & 2000).  And don’t get me started on the whole section of the data for “off-budget” dollars.  What the heck is that about?  Especially considering they have estimates for it going forward.  I can understand some new thing not being part of the budget some year, but don’t you know for next year it will be there?  Shouldn’t you be actually planning on that going forward?  Considering the off-budget portion is about 1/3 of the on-budget (or 1/4 of the total) I think someone should start consider budgeting for that revenue and expense.

Of course, in the end, our government is behaving the way of it’s citizens.  After all, it’s citizens that are running the government.  We spend and get in debt then raise a stink when the government does the same thing.

Here’s some tips for you to create your own budget at home.  We’ve done okay with ours this year in total, but individual categories vary wildly.

1. Start by planning for your revenue (or income).  I like to be a little pessimistic here.  I’m a contractor and not a salaried employee, so I typically plan for me to actually work about 45-46 weeks a year and not a a full 50-52.
2. Next, I’ve been using the 60% Budgeting method I described here.  I divide my expenses up into Committed Expenses (60%), Long Term Savings/Debt (10%), Retirement (10%), Fun (10%), and Short-Term Savings (10%).  It helps me focus on categories of budget rather than the minutia details when it comes to our performance.  I can always drill in deeper if something needs to be reviewed, but otherwise just stay at the top level if everything is okay.
3. I’ve adjusted my percentages some as we are spending less on retirement and short-term savings in order to spend more for long-term savings (which is strictly debt repayment) at this point.
4. Short-term savings, however, is still a very crucial point.  Don’t ever leave yourself with a budget that has 100% of your money accounted for.  You should always have a “slush-fund” of money you think you might spend, but isn’t allocated to anything.  This helps cover emergency car or home repairs  that may happen.  It should end up in a savings account in the mean time.

From a personal perspective, there is always the question of whether to do your budget as before or after tax.  Personally, I like to do mine before taxes so that I can try and pay as little as possible during the year (not getting a large refund later) and plan to pay off debt and put money in savings.  Others prefer to have higher taxes withheld and then budget for after taxes, using their return as a bonus to pay off things in a lump sum.

So, make your choice and sharpen your pencils!

I reviewed and made some updates to our goals for the year recently. Part of the updates have to do with the way the stock market has performed this year and part has to do with the fact that I chose to not teach as much this summer as I had earlier in the year. Here are the updates and our status on them as of the end of September.

• Credit Cards - I had originally hoped to get that balance down to -$40,000. I’ve changed it some, but still hope to get $10,000 paid off on it this year. It’s still a bit of a stretch at the current pace, but we should hopefully come close to that.
• Net Worth - Much of this has to do with the market as well. If you look at the numbers on the retirement section below, you will understand why (not that you don’t already). But I actually calculated that if we had gotten a small 3-5% return on the market so far this year, our current net worth would be $3,000-$4,000 higher than it is currently. So, we won’t make our orignal goal of zero net worth until next year, but we will still make it none the less.
• Retirement - Yikes, this has been a disaster this year. I’m still hoping there will be a bit of a market recover here soon. October has been rough and the number looks even worse than the end of September (the current balance is shrinking down below $9,000 at present). I still have nearly $2,000 of contributions coming out my paycheck yet this year, so some small market corrections and I just might make that goal yet.
• Cash - Last month should have been the low point since we just got back from vacation (missing a full week of work unpaid) and I hadn’t been teaching for a while. I’ll have some better paychecks the rest of the year and I start teaching another class in about 3 weeks, so this should get back up, though not as high as my original goal of 10k by the end of the year.

Anyway, probably some more realistic goals in this economy. I suppose I’ll have to start thinking about goals for next year as well.

Something has been bugging me for a while in all this credit crisis we’ve been having.  The government keeps doing what they can to stimulate the economy and get us out of the credit crunch.  They keep trying to get more money into the hand of the banks to free up the credit market and more money into the hands of consumers to encourage us to spend.

Isn’t it the spending that got us into trouble in the first place?  It was too much credit that lead to the defaults that worked it’s way up to banks not wanting to lend money to each other.  If Americans had been saving more of their income and spending  less, then the banks wouldn’t have reached this crisis in the first place.

Of course, if that had happened, our economy wouldn’t have had the great boom we have experienced the last decade or so.  If avoiding the bust means avoiding the boom, I think we should consider that option.  But, let me run through the scenario to make sure I’ve got this right:

1. Economy is booming and people are spending more money than they make, borrowing the rest from the bank.
2. The banks lend out lots more money to people than the people are putting into the bank to save.
3. Banks run out of money to lend because the lent it all out already.
4. Banks go under.
5. The government gives the bank more money to try and stimulate the economy back into a boom (see #1)

Maybe it’s  just me, but I’m thinking we need to consider how to get out  of this little cycle.

Madam X over at My Open Wallet just posted some information on The Candidates’ Economic Proposals: IRA & 401k Withdrawals.  Both McCain and Obama seem to think allowing people to withdraw their 401(k) or IRA funds early with no penalty will help stimulate the economy by getting people money to spend to cover this difficult time.

Excuse me, but aren’t those funds in the stock market?  Doesn’t the average consumer typically judge our economy by whether the stock market is up or down?  So, you think that allowing people to take MORE money out of the market without being penalized is going to HELP?  I’m flabbergasted is all I can say.

What a great way to really send the stock market into an all out tail spin.  People who are already afraid of the market would now have access to pull everything out causing an even further decline.  Their worst fears will be realized as a self fulfilling prophecy.

Does this idea scare other people as much as it scares me?

That’s right folks, it’s that time of year again.  If you haven’t started yet, you should be considering it before long.  I like to start early to allow myself time to make actual adjustments to our spending prior to the end of the year.  I’ve done quite a few posts this last year on the topic of budgeting and how we do our budget.  You can see them all here.

Not only am I working on my budget at home, I’m getting ready to present our next year budget to the local neighborhood association (for which I am the Treasurer).  Between those 2 budgets, my head seems to be swimming with numbers lately… and it’s kind of fun!  I know, I’m weird that way.

Anyway, I’ve already started picking out a few areas where I think we can save money in our budget this next year.  The biggest question at this point is still where my income will be coming from.  I know I have my current contracting job and it should be quite safe through all of next year if I choose to stay, so that’s what I’m basing the income from.  I’m hoping to be able to supplement that by sometime early next year with some income on my own business (you can take a sneak peek here) and possibly start working full time for myself by the last half of next year if things go well.  So, here are the areas of our budget I plan on address over the next few months to see what can be done.  I’ll give more detail of each area as we make decisions and move forward.

• Income - As I mentioned above, this is based on my current job only.  I don’t plan on any less than this.  Also, as a contractor, this amount includes me being away for 5-6 weeks during the year on holidays and vacation and factors in the 401(k) match.
• Medical Insurance - Anyone who’s read much of this blog will realize I’m not a big fan of my current medical insurance.  I’m very strongly considering going to a private HSA plan this coming year and upping our deductible from $2,000/$4,000 to $10,000.  I’ve already started investigating this one as open enrollment is coming soon.  I would especially like to make this change with the anticipation of working for myself.  That way I already have it in place and won’t have to do it later.
• Life Insurance - This is something we drastically need to get added to our budget this year.  It’s not a huge expense at our ages, so we need to get moving and protect ourselves.  We have some unique needs in our estate planning, so it should prove to be an interesting investigation.
• Cell Phones - A line of budget that is no more, only because these are now business expenses.
• Irregular - This area is going to get more detailed next year based on our spending this past year.  I’ll be splitting that up to include our HSA funds, vacation and home repairs.

So, there’s the basics.  Stick around to see more details and see what other areas we delve into over the next couple of months.

I finally did it last Friday.  For the past several months we have done nothing with the daily newspaper.  We pay $15 a month for the paper (Thursday to Sunday), and if it makes it in the house from the porch, it sits in it’s bag for a couple of weeks until I go through them and put them into recycling.  Well, Friday I called and canceled.   As luck would have it, the twice weekly local “free” paper they deliver is also going to a $20 annual subscription starting in November.  So, our lawn will shortly not be cluttered by unwanted newspapers.

I talked to my wife over the weekend after thinking about this for a bit.  That $15 a month adds up to $180 a year.  I realized that we spend a LOT of time watching the local PBS station (we don’t have cable) and listening to the local NPR radio station.  Well, we decided that we will take our saved $180 this year and divide it up between the two.  After all, we had been willingly spending money on news we didn’t want and getting what we did want for free.  We’ve talked about supporting our public broadcasters in the past, but never actually did anything about it.  So, we’ll have that money set aside and ready to give by early next year.  Just our small contribution to pay for what we actually use.

As I mentioned yesterday, we are working to get back on track with living within our budget. We have been a little more lax over the summer months and leading up to vacation. Now we’re back and the bank account has dwindled. Today was payday, so the bank accounts are back up a bit.

If you’re not familiar, I have my paycheck split between 2 different checking accounts based on how we plan on spending the money. For things we woud normally pay for out of pocket (groceries, gas for the car, etc) we have an account at National City (NCC) which has several local branches. I calculated the amount we “should” need every 2 weeks between paychecks and have it directed there. The remainder goes into our online account with E*Trade (ETFC). There we pay all of the bills electronically. Because we also have a savings account there, we can transfer money temporarily over to savings when it’s not needed (such as most of the bills being due in a single pay period).

So, this last 2 week pay period ended yesterday. I checked our NC account online yesterday morning and noticed the our projected balance at the end of the day, after pending charges clear, was $-3.10. Not good. Of course, there is an Overdraft Protection account that would cover the difference and I could pay that back off this morning and likely not end up with interest charges. I was stuck on principle though, I didn’t want to use it. I let the wife know and she made a quick trip to the bank (about 1 mile) and deposited $5 cash for good measure.

Now, there have been a couple of times I knew we had a special purchase coming up and I transferred some extra from the savings account to make up the difference, but I didn’t do that this time.  Often, when it gets to a new pay period, I transfer anything left over from our “allowance” at NC back to the savings account, so an occasional transfer back doesn’t bother me that much.

So now I’m torn.  We really need to watch our spending more carefully, but I also don’t want to have to feel like a dictator about stuff.  I’ve been trying to think of a way to involve the rest of the family in just tracking how much we spend every 2 weeks to make sure we don’t have a repeat of yesterday.  I’m not concerned about WHAT we spend the money on, just that we watch more closely HOW MUCH we’ve spent.  I know some people would say we should just use cash, but I don’t feel comfortable with that were we live.  I’d much prefer to continue using our check card for most every purchase and finding an easier to keep track of our status from day to day.

Anyone out there have any suggestions?