One of the worst possible things you could do in any joint financial venture is to not communicate.  I am aware of various families where the two people with access to the banking information don’t know one another’s financial actions.  This has happened in my own family a few times, but not once has it happened to the point of bouncing a check.  We’ve had to go without a few times, but even at that point in time, its been with a united front.

Questions for the sexes:

To the men: as a man why would you not talk to your wife/girlfriend/partner/entity/being about income, expenses, debts and financial opportunities?

To the women: As a woman why would you not talk to your husband/boyfriend/partner/entity/being about income expenses, debts and financial opportunities?

If you have knowledge but no action: you’re being foolish.

If you’re acting without knowledge: you’re being foolish.

A wise person acts with knowledge.

My problem in the past has been that I had knowledge in some areas and didn’t act on it, and that I had action in other areas where my knowledge was immature at best. The combination of those two really set me to being a well-defined fool with my money and time. I’ll own that mistake and the consequences, I don’t want you to think I know everything at all. However, I understand that mistake and am moving forward with the direct purpose of beating the old Randy and taking a new position of learning more and acting with that knowledge (and that doesn’t necessarily mean acting more!).

Acting more may sound like a good idea given the above syllogism, but the truth is that you may be wiser to act less, but with greater certainty based on better knowledge. To give an example to this concept I would propose that the concept of “Jack of all trades but master of none” comes into play. If you are trying to learn more about too many things at once and actually attempt to act on those many things you’re bound to come up short because knowledge is not knowledge if you don’t have it clearly defined in your mind. A lack of clarity makes knowledge more along the lines of factoids.

If you invest in something you don’t know you are actually increasing your risk level. If you fail to act when you know something is going to take place you are willfully engaging in a very, very high risk activity: apathy or laziness. Find the balance between the two things and push yourself to that goal! Wisdom is knowledge applied.

I just checked my bank statement and I had been given $4.16 in interest for one month’s amount put into that account.  That account gets 5% interest yearly.  What’s inflation for a year?  The nationally published inflation rate is supposedly 3%, which means that you are making $30.00 less in dollar value per thousand dollars every year.  Sure, you will hopefully get raises that deal with inflation (and hopefully more) but you’ll also need to be looking to not spend or save that amount to get ahead of the game with any new income or at least get that money into an investing tool that makes up for it.  Practically speaking a five percent return on money that is losing value at three percent means that 1,000 will get you $1018.50 in value when all is said and done.  Rinse and repeat.

Looking at inflation like that helps explain why financial advisers are always talking about investments that make 10% or various other amounts: you can’t afford to retire on a 5% interest rate and have any losses!  Take a look at your investing strategy in light of your own practical inflation and see where you can shore up any losses and keep making progress - but don’t forget about inflation because its very real and it can be very costly!

I was raised in church.  During that growing up time I was told over & over again that money was either good, evil or neutral by various people.  Upon getting older I examined things closer and to my own satisfaction.  My conclusion is definitely that money is not evil.  Money, being a tool that represents leveraging power in various trades, is just a tool.  The person who uses the money can set the money up as a tool that will be powerful as a working agent to achieve financial goals or can be used to frivolously spend away in foolishness.  Having seen successful investment and having spent on stupid things I feel comfortable saying I’ve seen both sides of that pendulum swing and have determined ever more fully that the tool needs to be respected - just like a table saw that could cut wood efficiently and excellently or cut off digits and limbs.

If you’re looking for the root of all evil you have to look no further than the snake in the garden of Eden who took one of the very few things that had actual value at that time (knowledge) and cheapened it for his own gain.  There is very little after that which does not follow this very same pattern of value, respect of that value, and someone else trying to leverage that value for some other gain.  Money isn’t evil, but its use could be.

Practically speaking you, as a reader of this blog, have ascribed value to this blog by esteeming something in this post or the broader range of posts as having value.  You read the posts and then evaluate them.  If this blog doesn’t contribute to your general knowledge then you reject it and move on.  Money, which is traded internationally, is a similar currency.  Its wickedness is only in its use.  A drug dealer exchanging narcotics for financial gain certainly makes a bad choice but the leveraging power of the money is not able to make the tool of cash evil.

How do you value money?  Is it something to be lorded over others?  Is it something to be greedily horded?  Is money something to be thrown out because it can lead to frustration?  No, it is to be respected, managed and used as a tool responsibly.

My wife and I had a garage sale this last weekend.  We’ll probably have another one before summer is out if we can make time.  We’re doing a second round of purging.  We picked up Peter Walsh’s book, “It’s All Too Much!,” and its further modified our perspective on our possessions.  My wife had already done a good first round but after reading the book she’s starting a second round.  We have more stuff than is needed and its just adding to the pressures in our daily lives.  One of the points in the book is that when we have too many possessions they distract us from our handling life in a less stressed out fashion as well as slowing us down from achieving what we need to achieve.

Right now we’re spending time focusing on our finances.  We don’t want to focus on them as intensely moving forward but until they’re in order we get to.  This book has helped us understand that we need to get rid of some of the other distractions inside of our home so that we can stay sharp on the things that count.  We want to pour ourselves into our daughters lives, we want to go visit other family that counts.  Next year we’ll be married ten years and we want to take some vacation time to go have a romantic getaway together for our anniversary.  All of those require us to dump the stuff and focus on what counts.

This book gets a seven star “Shake It or Leave It?” rating!

Nickel, author of the Five Cent Nickel blog, was guest authoring on the Get Rich Slowly blog about starting & raising a family on a budget and he made the following comment:

Debt’s a funny thing in that it’s both a byproduct of and a contributor to living beyond your means.

This simple sentence caught my attention because it has perspective. The credit card companies want you to have the perspective that credit cards extend your means. They do if you consider debt to be mean, and I do. What is your income? What is your outgo? Do you justify your expenses by need or by want?

Determining Your Income

Determining your income should be pretty straight forward.  Your income is the amount of money you receive from an employer or from commissions after taxes have been taken out or set aside.  If you get one paycheck from one place every two weeks, or twice a month then your income is more than likely that amount. Assuming you have your withholding configured appropriately at your employer you should be able to determine that value with ease. If you’re self employed, a contractor or have multiple incomes from multiple sources (like buying & selling on eBay.com, or Amazon.com).  At that point in time you may find it incredibly helpful to maintain a spreadsheet of your income, or use software such as Quicken to track your income (and outgo).  Most banks allow you to download your financial records online to be imported by your financial tracking software.

I’m a contractor so in my case I have to calculate what my quarterly taxes will be given a constant pay cycle (which fortunately I have) plus any side jobs I may get (which fortunately I have), and then the left over amount is my income.  Because taxes can vary by income and from state to state it is outside the scope of this blog post to go into the nitty-gritty details.  You will probably want to hire an accountant if you run into the need to manage a complex multi-income budget.

Determining Your Outgo

Outgo is the money you spend out of the amount that  you had as income.  Hopefully.  In the case of a person who is living beyond their means, this is a pretty important step to calculate!  Figure out all of your outgoing bills that are constant.  The outgo is the sum of your bills and expenses for the month.  Now, the tricky part is figuring out your yearly bills such as car registration, drivers license fees or whatever state or local fees you may face that are tied to an annual cycle rather than a monthly cycle.  Divide those yearly bills by 12 to calculate what you’d need to set aside monthly.  The total mount that you have to set aside or pay monthly will be your outgo.

Determining Your Means

To determine your means calculate your income and then calculate your outgo and subtract the outgo from the income.  For example:
Income: $3,000.00
Outgo:  -$2,500.00
Means:     $500.00

But that’s just the rudimentary stuff.  You’ll want to budget money for saving and investing for retirement.   That could take up the rest of the $500.00 or you may choose to do something else and split up the $500.00 to put some aside for retirement, and some aside for spending money.  Before you jump on the spending bandwagon you’ll want to figure out your retirement needs and set investment goals.

Bonus Tip

Take any money that you would have put into a normal savings account for annual bills and put that money into a high interest savings account along with your normal savings chunk - it’ll help you eek out just a few more dollars!

If you read other finance blogs you may have noticed that Trent at The Simple Dollar is on a diet and that NCN at No Credit Needed is on a diet. Why would people interested in personal finance also be interested in diets? Because its part of a lifestyle perspective. I’ve lost 24 pounds since December last year. I’ve been on a self-inflicted diet (its not associated with a book or a plan) and its been a slow process, but its part of what makes each day exciting, I get to wake up in the morning and see if my frugal lifestyle has been beneficial in the bank and if my frugal eating has been beneficial in the bathroom (on the scale). Its a lifestyle of self control and long term thinking. Each of the financial authors that I read tends to have some sort of practical thrust that lays out the benefits of self control in spending, but that spills over to self discipline in reading (whether its in Trent’s book reviews, NCN’s or my faith, or your reading blogs), self discipline in food and self discipline in simply observing things around you to notice where others are racing headlong into instant gratification verses long term preparedness.

Self control is not something that marketers want you to have. They’d love for you to impulsively buy things, impulsively drink things, and then make a long term habit of those impulses. My dad, who has been many things professionally in his adult career, has an MBA and has spent a lot of time in the past working on marketing materials. He also spent a lot of time with me explaining marketing in the past so that I could identify the stupid from the creative from the important. There is value in the self disciplined individual standing in the middle of the stream of compulsive, impulsive or repulsive habits, products and people and identifying that you’re not headed that way. It feels good, its probably healthier, and it makes you an anchor for friends, family and a landmark in the shifting scenery.

Where You Might See Net Worth Used And What Does It Mean?

If you’ve read any financial books or used Quicken or some other financial software you’ve probably seen the Net Worth term before. Bill Gates’ net worth is apparently public knowledge based on the fact that money magazines publish estimates with annual regularity. Your Net Worth is an estimation of what your assets and liabilities add up to (or subtract down to in some cases). The problem with just looking at a net worth number is that its an estimate. The value of a house or a car may fluctuate (and in the case of many cars, they’ll go down over time unless you’ve got some sort of collectors vehicle). Your cash may be tied up into an IRA in some cases, which means you don’t have access to that without being penalized, so you may have a net worth that is $10,000 dollars due to equity in a home being outweighed by credit card debt, but you have access to only $2,000 in actual cash.

The concept of Net Worth also entails you needing to know about your assets and liabilities on a more intimate level than being able to say, “I have a house and a car and a boat and stocks and mutual funds.” You need to consider the cost of liquidating these assets as well [definition: liquidate means to turn from a physical object like a house into cash]. On the television show “Flip That House” they often show some very, very crude math at the end of each episode showing the flipper having made hundreds of thousands of dollars. Often after months of not selling the house the house sells for a lower price and the flipper is out months of mortgage payments, capital gains taxes as well as any real estate transaction fees. If the market is sliding in the area of the flip the value of the house could go down further. I’m not suggesting that all house flippers lose lots of money, but more that generalizations in net worth make the estimation farther from the truth of your actual asset value.

Calculating Your Net Worth

Make sure that you have a list of some of your valuables including any jewelry or high dollar collectibles and count all of your debts. Adding those values together will give you a general idea of what this looks like.

Example Lists

If you look at the above pretend asset verses liabilities table you’ll notice that there are a lot of reasons to think this person is doing well, and they have a positive asset value, which is good.  However, their longer term growth in value is more limited because they have very little that is likely to appreciate in value like an investment.  The $2,000.00 doesn’t earn a large amount of money, even with a high yield savings account.  This person is heavy in assets that won’t earn value like other things.  The rist of a viper losing value is as far away as an accident.  Evaluate your net worth and see where you stand.

As a nearly thirty year old I’m reaching a tipping point in my life. That has raised my own awareness of the need for change. Part of that change has come in the form of financial changes but more recently I’ve also realized that this involves philosophical changes about ’stuff.’ Recently Merlin Mann has declared a war on clutter that is similar to his war on distractions for Getting Things Done, but in the greater scheme of things is also similar to a philosophy in life that I’m cultivating: If You’re Not in ‘The Zone’ you’re not getting anything done wherever you are. Intriguingly you can actually not be in the zone for vacations and relaxation times as well. This is part of a life strategy that involves taking charge:

1. What are your goals?
2. Are you prepared with information to address those goals?
3. Are you focused on those goals?
4. Is anything distracting you from those goals?
5. What can you do to get focused on those things and eliminate distraction?

If its stuff: get rid of it. If its time management distractions: get rid of them. If it is debt: get rid of a debt-ridden lifestyle. Get in the zone and stay there no matter what compartment of your life it is!

In my life I’m addressing all of these things in various ways - I’m determined to run as efficiently as possible.   I’m going to run like a racing team - I want to run like Lance Armstrong with the best focus possible, it’ll make cutting out the crap a benefit and not an emotional trip.

I haven’t set my financial goals yet, but I’m going to attempt to do that within the next week or so. There are several things that need to be taken into account when considering financial goals:

1. A guessed rate of inflation
2. The cost of living for your current standard of living
3. Expected interest return on your total investments upon age of retirement

The upside is that you can set some guessed numbers here and start to work out where you really need to be, there are calculators online as well that will help you estimate these things as well [click here to do a Google search for retirement calculators]. The downside is that this is going to be an algebraic equation that has no known numbers and you’re dealing with all variables. However, there are strong, well established numbers that you can use. For example you could use 3.5% as the average rate of inflation, you probably know what your current cost of living is, and you can optimistically assess various investments with the assumption that there will probably be other investments like it upon your retirement (and more than likely those same investments will still exist).

A rough look at my current investing and retirement calculations tells me that I’m going to die working. I will never be able to retire in with my current spending, saving and investing goals. That means I need to change my goals! According to one calculator I should save 6.145 million dollars before retiring. At my current rate of savings and conservative interest on my IRA I will never reach that in my lifetime.

Setting Your Own Financial Goals

Now that I can see I’m not going to be able to cut it with my current strategy I’m convinced that I need to wipe out all debt (duh!) and aggressively feed my investment pyramid so that I can retire with my wife and live at a comfort level I’m used to. Because I know things change financially due to job changes, medical needs and life being complex I’m going to have to set a goal and then revisit it over time to make sure its realistic and that I’m on course to achieve those goals.

My personal goal is to have roughly 6 million dollars in savings for retirement. I’m not confident that I can do it now because I don’t know enough now about how to invest and reach those goals, but if you’ll read along with me and we learn together we’ll set some goals and find ways to refine them and achieve them!