To Read or Not To Read

 

TO READ OR NOT TO READ,
THAT IS THE QUESTION
By Jim “Gymbeaux” Brown, August 2023

Disclaimer.  If you KNOW that you have your financial house in order, there is probably no cause to read this Nugget. If you are UNSURE if your financial house is in order, you probably should read this. If you are CERTAIN that your financial house is NOT in order, this should be a MUST READ! If you are between the ages of 26 and 30, I’m guessing that this is a MUST READ as well.

As I write this, I am 78 years old. soon to be 79. One thing I know with certainty is that during my formal school years from 1950 through 1965, personal finances were never taught in ANY class that I attended.  There was never a mention of properly maintaining a check book or the 8^th wonder of the world: the importance and value of COMPOUND INTEREST.  But neither of those two subjects is what this Nugget is all about.  Check out the 8^th Wonder of the world at: https://www.breezejmu.org/business/compound-interest-the-eighth-wonder-of-the-world/article_11a24ebe-9e77-11eb-ba00-33aaec328747.html#:~:text=Albert%20Einstein%20once%20described%20compound%20interest%20as%20the,principal%20balance%20is%20reinvested%20and%20generates%20additional%20interest.

HERE’S THE DEAL!  YOU are NEVER too OLD to LEARN new THINGS!  I taught myself the value of knowing where I FINANCIALLY stood at any given moment by creating my personal Profit and Loss Statement.  I know when I can afford to buy something, and when I should put it off.  I knew that we as a family were in a position as to when we could financially retire back in 2012.  How did I know that?  Because I knew what our income would be AFTER retirement and I knew what are expenses would be AFTER retirement.  We knew that we were not going to be “independently wealthy” but we would be okay.  We would be able to pay our bills and still afford to buy things when we wanted to.  In fact, we were debt free except for the routine monthly expenses we were required to have like insurance and utilities but the key word is REQUIRED.  A funny thing happened once I created our EXCEL Spreadsheet Profit and Loss Statement.  We began to question every purchase we made as to (1) is it a required item, or (2) do we need it, or (3) is it a “nice to have” item, or (4) can we live without it?  You would be surprised at how many times we chose NOT to buy something using this process thus saving us money that could now be put to even better usage. 

As a teachable moment, JoeTye.com created something called The Direction-Deflection-Question or (DDQ).  It is so simple to use and doesn’t cost you a dime yet it is one of my most valuable tools you could ever use.  You ask yourself a simple question.  “Is what I am about to spend money on, leading me TOWARDS my financial independence (or my financial goals), or AWAY from my financial independence (or my financial goals)?”  If the answer is YES, go for it.  If the answer is NO, walk away from it. 

Here's a FUN TECHNIQUE to just ask yourself before making a purchase.  If you know how much money you have left over at the end of the month and that you can actually afford to buy something and pay cash for it, ask yourself this:  How many hours would I have to work to pay for this item?  Think about buying a $100 jacket.  If you are at minimum wage, say, $12.00 an hour, you would have to work 8.33 hours just to pay for it.  Is it worth that kind of effort and time?  If you made $50 an hour, it would take just 2 hours to pay for it.  Much different situation is it not?  You cannot make that part of your decision process WITHOUT FIRST KNOWING HOW MUCH MONEY YOU HAVE AT THE END OF THE MONTH THAT IS NOT OBLIGATED FOR SOMETHING ELSE!  PERIOD! 

This Nugget is about getting your  financial house or your financial paperwork life in proper order.  The following are subjects relating to this topic but only one will be addressed herein and that is your FINANCIAL HOUSE! 

• Income
• Expenses
• Taxes
• Personal Wills
• Revocation of Power of Attorney
• Durable Power of Attorney/Mandate for you
• Durable Power of Attorney/Mandate for your significant other
• State Health Care Power of Attorney
• Declaration regarding artificially prolonging life
• Personal/Family Profit and Loss Statement

Okay, I agree, if you are in the age group of 16 to 30, some of the topics may at first appear to be a reach for you but I assure you, no one knows for sure when their final days on the planet will come to an end.  You owe it to your next of kin and family to be ready for when that day comes and it WILL come to us all! 

This Nugget will address the last item on the list, Personal or Family Profit and Loss Statement.  Answer this one question, especially the younger folks reading this. If you were in need of purchasing a new or used car or have the opportunity to purchase a home, how do you know you can afford to purchase what you are considering buying?  If you are further along in your age bracket and are considering retirement, how do you know you can afford to retire?  For most people they rely on the guessing game.  I think I can afford it and then they follow that up with, and I hope nothing goes wrong after I do.  That to me means they are financially on the bitter edge and may be able to afford the cost but ONLY as long as no additional costs suddenly and unexpectedly pop up.  Hopefully this Nugget will help with your decision process in regards to “can I afford to buy this item?” situation.  Here is a personal example of how things can unexpectedly change.  We retired on a more or less fixed income.  We received some annual increases but they were very limited in the amount of the increases.  Still, considering everything, we felt very comfortable retiring in 2012.  Then came a change in Presidency and COVID both at the same time.  The world economic picture changed almost overnight.  Prices have jumped to where it has been reported that Americans are spending between $5000 and $9000 MORE each year than they did in 2019.  That is hard to predict when you make retirement decisions 8 or 9 years earlier.  That is the WHY you need to track your expenses and income. 

Keep in mind what Gary Keller co-founder of Keller Williams Realty International both said and wrote about.  LEAD WITH REVENUE, NOT WITH EXPENSES!  By that he means pay cash or the equivalent of cash and NEVER charge something on credit unless you absolutely have to! 

There is a very simple and easy to follow Two Step Plan to help you get your Financial House in order:

STEP ONE

If you have a significant other (I hate that phrase), you both need to participate in the Step One exercise.  If you have a checking account, you need to access your past several months, preferably a year’s worth of monthly check registers.  Then, with pen in hand, begin making a list of every KNOWN or EXPECTED expense for the past several months but preferably for a year.  Why a year?  Because some expenses occur annually, quarterly or semi-annually and you need to know what those are.  Two words to sear into your mind:  EVERY EXPENSE!!!!!  Forget none.  I wish I could attach files for you to access on this Blog page but I cannot, it only allows photo and video files.  I have three files related to this Nugget, the Spreadsheet, the Expense Worksheet and the Income worksheet.  If you want them and I hope you do, send me an email to JimBrown@gymbeaux.com and the files are yours.  Just put WORKSHEET in the subject line; it makes it very easy to send all three in one email back to you.  If you are reading this as an email from me, the files will be attached. 

What are you looking for? 

NOTE:  If any of the following items are paid via an instrument like a home loan and the item is included within the mortgage payment such as Homeowners Insurance, do not include that item (Homeowners Insurance) in your list below.  You want to include ONLY those items that you will have to write a check for. whether it is once a year or every month.  This means that when you pay your monthly mortgage as listed below, you are also paying your homeowners insurance and probably your city and state taxes, if they apply, as well. 

• Rent/Mortgage Payment, known amount or average amount, whichever applies
• Utilities:  Water, sewerage, trash, electricity, gas to the home, list them separately unless paid as a group of services being provided on one statement
• Cable TV
• Internet
• Telephone, landline (if they still exist by the time you read this)
• Telephone(s), mobile
• Homeowners/Renters Insurance if not paid through monthly home loan or included in the rent
• Flood Insurance (as applicable), MONTHLY amount even though it is typically paid annually
• Health Insurance
• Dental Insurance
• Pet Insurance
• Termite treatment/monthly contract
• Car(s) payments, monthly loan payment amount
• Car(s) Insurance, MONTHLY amount paid even if you may pay it annually or semi-annually
• Gasoline, for cars and anything like lawnmowers and other yard equipment
• City Taxes,  MONTHLY, usually included in Mortgage Escrow payment and paid annually
• Charity Donations:  Known or estimated like church donations, Tunnel 2 Towers, etc.
• Groceries, this you will need to estimate but over time you should pretty much know
• Entertainment costs, eating out, movie tickets, how much will you allot to this category is up to you
• Gifts, most people forget this item.  Birthdays, Anniversaries, Graduations, Easter, Thanksgiving, Christmas, these add up very quickly depending upon the size of your family.  If you don’t know, give it your best estimate but make certain you include a monthly amount to budget for
• Student Loan(s)
• Credit Cards.  This will be the most difficult to calculate because it changes monthly.  Number one life lesson is to pay cash for as much as you can. Charge only what you MUST or because it is convenient.  BUT…PAY THE CARDS OFF EVERY MONTH IF YOU CAN, otherwise the monthly payments will go on forever!  Review the past 12 months and create an AVERAGE MONTHLY PAYMENT for each card that you use.  List them separately so you can track them

Any other KNOWN expense, monthly or annually, that you can identify. 

What you are creating is an AVERAGE MONTHLY COST OF LIVING.  Do you know what yours is at this very moment in time?  If not, how do you KNOW you can buy a new or used car?  How do you know you can afford the cost of having a pet (trust me it is more expensive than most people think)?  The big one is this; how do you KNOW you can afford to buy a home?  As a retired real estate agent/broker of more than 33 years’ experience, I can tell you that it can be a shock to the system when you apply for a home loan with a mortgage company.  They want to know everything about you before someone will take a chance and loan you the money because they have looked at your finances (profit and loss statement) and made the decision that you can afford to make the payments OR NOT!  History has shown, however, that a lot of home loans have been issued to people who could BARELY make the payments and as stated above, hoping that nothing major will happen to them making it difficult if not impossible to make the payments on time.  When that happens, the home is foreclosed on and it costs the borrower a great deal of frustration and grief.  It is a much more efficient process if you walk into the mortgage company and hand your Profit and Loss statement to the loan officer showing that you have thought this process through and you are ready to buy a home. 

Now that you have identified your EXPENSES, it is time to identify ALL of your KNOWN INCOME. 

Net Work Income(s).  Regardless of how you are paid, you need to calculate how much that amount is on a MONTHLY basis.  How much of your total income do you take home each pay period but represented as a MONTHLY amount.  How much total income does your household contribute to the total income such as your significant other or if you have a dependents or guests that live with you who pay rent to you to do so.  This is extremely important for business owners and independent contractors whose incomes fluctuate wildly depending on the business’ profits or sales made.  This is when you take your last 12 months of KNOWN income and divide by 12 to get a MONTHLY income for this exercise.  (While you are at it and just for the fun of it, estimate the number of hours you work each week for people in this category, let’s say 40.  Divide your monthly estimated income by 40 and you get an HOURLY RATE and that may shock you when you do.  I found this especially true for real estate agents who typically work a lot more than 40 hours a week.  The hourly rate is not needed for this exercise, just fun to do.  When you do discover your “hourly rate”, you may then make better decisions as to how you spend your non-working hours, like cutting the grass.  I may be more beneficial for you to spend that time at work and hiring someone to cut the grass, if you know what I mean.)

• Rental Property(s) Income.
• Insurance Settlements
• Inheritance Incomes, sometimes this may be a monthly amount, do not include a one-time amount that you may have acquired
• Interest Income.  Savings accounts, stocks, bonds
• Annuities
• Social Security Income(s)
• Retirement Income(s)
• Investment Income(s) 

You MUST identify every penny that comes into your home for this exercise.  You cannot calculate an accurate profit and loss statement if you do not know all of your expenses and all of your incomes.  I have created a worksheet for this purpose as stated above. 

STEP TWO 

For those people familiar with EXCEL SPREADSHEETS, this next step would be a piece of cake to accomplish.  I made it easy for you by creating an EXCEL SPREADSHEET TEMPLATE specifically to create a Personal Financial Profit and Loss Statement.  As stated above, I cannot attach the file to this Blog.  You can email me as stated above and I’ll send you the Spreadsheet Template.  If you are reading this as an email, the files are attached.  It is pretty generic but if you have EXCEL skills, you can very easily adapt it to your more specific needs and make the template sing its song to you.  Suffice it to say that as a starting point, the template should work beautifully for you.  For people NOT familiar with EXCEL, my initial advice would be to become familiar.  There are online courses you can take.  You can find them by doing a simple Internet search.  Even so, the spreadsheet is relatively easy to navigate.  

IMPORTANT NOTE FOR EXCEL BEGINNERS.  Save the template on your computer or flash drive and keep it separate from your financial files.  If you were ever to make a mistake working the spreadsheet and lose the file, you can always retrieve the original template.  Then as you begin to add data, periodically save what you have entered. I say this because I have done a lot of work on various things without saving as I go and then suddenly you get a burp in your power source and you lose everything you have done.  The second reason is that there are EXCEL codes embedded in some of the cells.  If you accidently erase them as you work, you can always recall your saved template file and continue your work.  I would NOT save the file as a completed spreadsheet as a separate file every time you make a change.  You will be saving files you never access again, ever.  Keep the one file.  When you make a change, save THAT file only THAT file to preclude needless files building up on your computer.  Your Spreadsheet is IMPORTANT INFORMATION.  I would highly recommend keeping it on your computer but ALSO keeping the most current version on a flash drive.  If you ever lose your computer to a crash, having the flash drive is priceless.  I know this because… 

Take each expense item and enter it on the EXCEL Spreadsheet.  In the first column you can change the name as you wish such as entering Sam’s Club or COSTCO.  The second column is for the known DUE DATES and is listed only as a reminder.  The third column is for the most recent BALANCES.  The fourth column is to indicate the DATE of the last known balance.  The fifth column is the meat and potatoes of the spreadsheet, this is where you put the numbers you have identified as your MONTHLY EXPENSE for each category. The sixth column is exactly what it indicates, any NOTES you may want to include.  For example, on my spreadsheet, I indicated at what rate my home loan was issued at such as 3.75%, just for information purposes. 

The next section on the spreadsheet is where you enter your various types of income.  I believe it is important NOT to lump them all together as one figure because these numbers change over time for each category as you get promoted or receive pay increases, etc. 
The embedded formulas within each cell automatically do the calculations for you.  It will calculate your total monthly expenses, figure in your total monthly income and then calculate for you the net income or the net loss; hopefully it is a large net income. 

NOTE:  I have modified my own spreadsheet many times.  I have added sections where I list specific expenses that are automatically paid through the credit union that we belong to either by direct payment or by snail mail checks being mailed by the Credit Union.  I have also listed all of my credit cards that remain active and what the credit limit is.  Why do I do all of this?  I assume that the day will come when someone other than my wife or I will have to look at our finances because we are either incapable (God forbid) or we have passed.  Having access to this information just makes it much easier for our Next of Kin to be able to close out accounts, notify people that need to be notified and then disperse whatever is left.  As I said earlier in this Nugget, you never know when your day will arrive, so plan ahead!  Teachable moment.  We keep all of our credit cards at a monthly zero balance.  It’s okay to charge something but only charge it when you know you can pay off the entire credit card balance when it comes due.  I keep several credit cards because we live in a Hurricane Prone area and having them is priceless when you have to evacuate on a moment’s notice. 

Good luck!  If you have any questions, you can email them to JimBrown@gymbeaux.com and I’ll do my best to answer them.