CAN I AFFORD TO BUY IT?
By Jim “Gymbeaux” Brown, August 3, 2016
You are about to load up your shopping cart, a real 4-wheel type or on your Internet page. Have you asked the Million Dollar Question? CAN I AFFORD TO BUY IT? If the answer is YES; how do you know?
I have found that most people, even in today’s world of high technology, DO NOT HAVE A WORKING BUDGET for their home and some not even for their businesses, especially independent contractors. When you have a desire to purchase something or if you have an emergency, how do you really know if you can afford to pay the price if you have no idea what your income versus expenses really looks like?
It is very simple. You identify every expense you have during a year, EVERY EXPENSE, overlook nothing. As an example, if you have children and friends who you typically buy gifts for whether it be for birthdays, anniversaries, Christmas, or whatever, you have Gift Expenses. Do you know how much you spend EVERY YEAR on gifts for others? If you have never added them up, you are in for a REAL SHOCK! I know because I have 4 children, 9 grand children and 2 great grand children. If we purchase gifts for just their birthdays and for Christmas that is 16 gifts a year not to mention any significant others, ourselves, other relatives, births, etc.
More expenses: Home or rent payments, and all types of insurance like Homeowners, Renters, Autos. All utilities like electricity, gas, water, sewerage, garbage collection, and cable television. Telephones. Student loans. Personal loans. Emergency money fund. Retirement fund. The list goes on and on depending upon your life style. Have you taken account of ALL of your expenses and put them to paper or computer? If not, how can you possibly answer the question, CAN I AFFORD TO BUY THIS?
Next step is to account and make a list of all types of income. If you are a member of a family you probably have more than one income earner in the family and you probably have more than just one type of income per earner. As an example, you may have more than one job and other members of your family may as well. If you are eligible, you may also have retirement income, social security income, disability income, investment income, etc. Have you listed them all and added them up to see what your total annual income really is? Remember, it is possible to earn non-taxable income so the income you report on your Federal and State Income Returns may not be your ACTUAL annual income. As an example some disability income is non-taxable. You want to list every source of income and the respective amount.
This Nugget is for everyone but especially young people. You want to learn more about managing your money when you are young while it may be very simple and straight forward. As you grow older it becomes more complex and difficult to maintain IF you haven’t started from the very beginning and then constantly maintain your budget to insure it is always up to date and accurate.
I have created a Microsoft Excel Spreadsheet Template to track your monthly expenses and income and it will calculate your monthly balance, either positive or negative as you enter the numbers. If you use the spreadsheet you can very easily answer the question, CAN I AFFORD TO BUY THIS? Unfortunately the blog program I use does not enable me to attach the spreadsheet to this Nugget. If you would like a copy that you can modify and complete as you wish, send an email to JimBrown@gymbeaux.com and simply put SPREADSHEET in the subject line.
This additional note is more for the young folks who read this Nugget. Not everyone works on a per hour wage system. Whether you do or you do not, your real income is BEFORE TAXES so what you indicate as your total monthly or annual income does not include the amount you pay in income taxes. Always keep that in mind. Here is an additional test to determine if you can afford to buy something. Calculate your annual income as a per hour income no matter how much you make during the year. Do it if for no reason other than simple curiosity. Here are two examples:
Most people think in a 40-hour work week term even though a great many work more than 40 hours and many more work less than 40 hours. But for this purpose, think about a 40 hour work week, 8 hours per day. There are 52 weeks in a year therefore the average person who works 40 hours a week, works a total of 2,080 hours a year not including any vacation time and I would assume you are still being paid for. Using these numbers, calculate your per-hour wage.
If you earn $36,000 annually, that equates to a $17.30 per hour worked. If you earn $100,000 annually, that equates to $48.07 per hour. One more, $250,000 annually equals $120.19 per hour.
Now think about this. You go to a doctor’s office and you sit and wait to see the doctor, or you sit and wait to have your car repaired, or consider anytime you sit and wait to have something done. Let’s say it is a doctor and you wait one hour just to see the doctor. In effect you are paying $17.30 to wait to see the doctor if you earn $36,000 annually. If you earn $250,000 annually that one hour wait is like spending $120.19 just to wait to see a doctor. If you want to buy a $120.00 item like a sports coat or dress, how many hours would you have to work to pay cash for the item? At $17.30 per hour, it would take you 7 hours of work to pay cash for it. At $250,000 it is hardly worth concerning yourself over but, and this is a HUGE BUT, if you read the Millionaire Next Door you will discover that millionaires worry more about what they spend their money on than you would ever imagine. For example millionaires who have worked to attain that status as compared to winning the lottery, typically do not live in the biggest and best homes in town. They do not dirve the most expensive cars. Paying top dollar for every item they buy is NOT how they became millionaires! I attended a course designed for independent contractors on prepareing income taxes. It was truly amazing. The purpose of the course was to teach independent contractors, like real estate agents, to keep MORE of what they EARN and pay LESS towards federal income taxes. One item of significance was to NOT buy a brand new car. He not only suggested buying a used car with low mileage he demonstrated how that affects your bottom line of personal profit by doing so. In short, why max out your expenses because you can? At least at this moment in time why make the decision to buy the biggest and best of anything because we all know, “things” change and so does your income. I recommend using the “waiting time” to advance your personal knowledge of what you do to earn income in the career you have chosen by reading a book or a book on your tablet or smart phone.
You should establish a primary goal of creating a savings account that you can access when needed. For example, buying a home may increase your total net worth but if you need immediate cash for any reason, you would have to take out a loan against your home to access your wealth that is tied up in your home. You want to have at least 3 months of your income available to you in the form of liquid cash like a savings account or anything you can access within 24 hours. Another example. I live in a hurricane area of the country. You may have to evacuate for any length of time – short or long term. If the hurricane hits directly in your area, is it possible that you may lose your source of work income? The answer is yes unless your place of employment has arranged for some type of loss of work insurance for you or you have done it for yourself; most people do not provide that type of insurance on themselves. Therefore if your place of employment is a total loss, what will you live on until you can find additional employment and that would prove to be problematic if you plan to return to a devastated area. What if you simply lose your job? Either way you need to have money to live on. Where do you plan to get money if you have not planned to save the money you have already earned. That is why most financial planners suggest you should have in a savings plan at least 3 months of income as a MINIMUM. Do you have that now? If not, why not? Most people spend more than they earn as if nothing will ever change. Gary Keller, co-founder of Keller Williams Realty, teaches the best advice when it comes to financial management, LEAD WITH REVENUES (INCOME), NOT WITH EXPENSES (DEBT)! Or in other words, think twice before going into debt to buy anything with the possible exception of buying a home to live in. Therefore, on the spreadsheet, there is an expense item listed as EMERGENCY MONEY. It is highly rcommended that you pay yourself first (about 10% of your monthly income) to insure that you will have that emergency fund whenever it is needed.
Fewer and fewer people work at companies that provide long term retirement pensions and it becomes the responsibility of the employee to begin at the earliest stage of their working life to create a program to put aside enough money so that one day you will be able to retire. One of the best ways to insure you keep pace with inflation over time is to always set aside (expense) a pre-determined percentage of your income AND any increase in your annual income just for retirement. By this I mean if you start out working for $17.30 an hour and you receive an increase of just $2.00 per hour, you should increase the amount you are setting aside for retirement by a percentage of the increase. Let’s use 10% as an example. $2.00 per hour equals $80.00 a month. Therefore you should add 10% or $8.00 a month to your RETIREMENT FUND! It may be a small amount but it gets you into the habit of keeping up with the cost of living increases (inflation) over time. If you are at the $100,000 income level and you get a raise of $5,000 annually; if you made the decision to set aside 10% of the increase for retirement, you would add $500 annually or $42.00 a month to your RETIREMENT FUND. DON’T TOUCH THE MONEY YOU HAVE SET ASIDE FOR RETIREMENT! PERIOD! I would strongly recommend talking to a financial adviser to find a place to invest in your future retirement that would be NON TAXABLE until such time as you use the money you set aside.
It has been a very long time since I was in junior or senior high school. Back then, none of this was ever taught in school and I seriously doubt it is being taught today. If it were, more people would be doing it from their earliest of beginnings in the work force. Are you doing any of these things? Hopefully yes but sadly few are. Don’t let that be you.