Monthly Archives: October 2015

Personal Finance

Drawing a Picture – Part 1

Last week I laid out what it takes to get a plan together.  Let’s start breaking it down and getting a little more detailed about each piece. I don’t want to be overwhelming, so we’ll focus on one topic per post.

The Balance Sheet

Why in the world would a household need a balance sheet?  That’s something for businesses.  Well, need may not be the correct word.  Want may be more appropriate in this case.  I want to see what I have that’s working for me and what’s costing me money.  Having a reference handy each month keeps me up to date.

Balance sheets are quite simple.  It’s a method of tracking our assets and liabilities.  Now, these two concepts were something I was never taught growing up.  I had a vague idea that an asset was something you owned that had value, like a house.  Liabilities were also foreign to me.  I thought of that as simply debts owed.

I think about it a little differently now.  It’s still pretty simple, but I have a clearer understanding.

Assets

These are the things we own that can be used to generate income.  For example, I could list a piece of jewelry as an asset since it can be sold to generate income.  However, that’s not the best type of asset to have.  I want to generate regular income from assets so I look to investments such as stocks, bonds, rental properties, or a even business.  These types of assets can be grown over time and potentially generate enough income to cover my cost of living.

Liabilities

Those debts or obligations we owe that cost money every month are liabilities.   Loans and credit cards are probably the most common.

Adding it Up

So all we have to do now is take the total of our liabilities and subtract it from the total of our assets and bingo… Net Worth.  Easy Peasy.  There are some good templates for this in Google Sheets.

*The Home as an Asset

There’s a lot of talk about home ownership being a major investment.  In my case, I consider it more of a liability since I still have a mortgage on it and it costs me money every month from maintenance costs.  We bought late in 2009 and our estimated value has only come above what we paid in the last couple of months.  If I calculate all of the interest paid on the loan (and ignore maintenance costs), I’m still about $40k in the red if I sold at today’s estimated value.  That’s a terrible return on investment for the time held.  Of course, it’s not a loss until you sell 🙂

Cheers!

-cb3

 

Personal Finance, Strategy, Tools

Architecting the Future

The other day I was thinking about this blog and it occurred to me that it’s all well and good for me to be posting monthly progress updates and tracking how I’m doing, but what does that do for you?  On the surface, it helps to show you that it’s possible to come from behind and start making progress.  I want to show you how I set myself up to succeed.  Let’s get started.

State the Problem

In most engineering problem solving exercises, we start by defining the problem.  If we don’t have a clear idea of what it is that we’re trying to solve, then we’ll never have a way to measure if we’re successful.  We don’t have to start with a lot of detail at this point.  Let’s just establish a good high level statement.

For me, it would look something like this: “I am a 40 year old engineer with a good salary, a wife, and two kids.  We are a single income family.  We have a mortgage, car loan, student loan, and some credit card debt.  We contribute to 401k, but other than that don’t save much.  It often feels like we are living paycheck to paycheck.”

That’s a nice concise statement about the current situation.  Now we are centered in our situation and can move on to the next step.

Draw a Picture

Getting a visual representation of the situation can be very helpful.  In the case of personal finance, we’re not really talking about literal pictures but we do need to gather as much data about our situation and lay it out in an easily viewable manner.

There are tools that businesses use to view their financial situation and I believe we can adopt the same for ourselves.  A budget is nice, but it shouldn’t be our only tool.  Let’s take a look at building a balance sheet and a cash flow sheet.  Google Sheets has some nice templates for these and I will cover each in more detail in following posts.

For now, we’ll just establish what each one is and what it can do for you.  The balance sheet is a list of your assets and liabilities or quite simply the things you own that have value (assets) and the things you own that cost money (liabilities)

The cash flow sheet will show your income and expense for a period of time.  I track it on a monthly basis.  Where budgets establish how much you should spend on each category for the month, cash flow will show you how much you did spend.  It’s important to know both.

There are also online tools available that will help you aggregate all of this data and give you visual representations.  I currently like to use Personal Capital for this.  You can set up your account there and link it to all of your relevant financial accounts.

List the Requirements

The requirements document lists all of the goals for the project.  I like to think of it as a checklist that I can go down and when everything is marked off, I’m done.  Sometimes the requirements change mid-project and we need to adjust.  That’s OK.  In project management terms, I feel like we should take a more agile approach to this anyway.

I started my list with the longest term goal at the top.  It looked something like this:

  • In ten years, when I’m 50, I’d like to be financially independent.
  • In five years, I’d like to be able to step down a notch to less stressful work
  • For 2015, I want to accomplish the following:
    • Reduce overall debt by 10%
    • Invest 10% of my earnings
    • Reduce the amount of credit card interest paid to $0

It’s a simple start.  I like that.  Sometimes if we make things too complex or start with too may requirements, the project will feel overwhelming and we’ll never get started.  Start small and build over time.

Design a Solution

Here is the not-so-tricky tricky part.  We have a problem.  We have a picture of our current conditions.  We have some requirements for the solution.  How do we solve the problem?

I think there are a lot of approaches that could be employed here.  There are really only two options to consider:  Make more money and have less expense.  Of course, there are a lot of ways to go about those two things but it really is just that simple.

There are a ton of other blogs with great ideas for both sides of the equation, so I won’t get into that here but maybe I will in some later posts.

It’s All So Much

This may be the longest blog post I’ve ever written.  The long and the short of it is this:  Understand your situation, determine what you want to achieve, then formulate a plan for getting there.

Cheers!

-cb3

 

Expenses, Goals

September 2015 Progress

 

As discussed in my previous post, we had a significant extra expense this month in the form of a major vet bill.  On the one had, I’m happy that my wife was able to give the gift of sight back to her beloved pet.  On the other, I’m a bit embarrassed since this might be the single most 2%, privileged, or frivolous thing I’ve purchased.  I would never be able to explain such a thing to my grandfather.  He’d laugh and call me a knucklehead.

On top of that, we saw our highest outflow for food/household items in September at $1149.  Dining out was also high at $600.  There was also some repairs needed for my truck and that cost me an unexpected $900.

Goals are still mostly on track, but we may see a small interest charge in November.  Here’s how we stand:

  • Reduce overall outstanding debt (including mortgage) by 10%.
    1. At the end of September, overall debt reduction is 8.69%.  Still on track.
  • Make contributions to investments (taxable and retirement) of 10% of salary.
    1. Combined saving in investment accounts is 10.71% of income.  This includes 401k, IRA, ESPP.
    2. This may be impacted by the additional cost of major vet surgery.  My wife agreed to use her savings for this procedure, so I may have to draw some out of investments to cover or face an interest charge.
  • Eliminate any monthly interest payments due to credit cards.
    1. We maintained $0 in credit card interest in Sep. for a six month streak.
    2. We added approx. $3200 to a card with a $0 balance to pay for the vet surgery.  I have an RSU grant coming in Dec that will cover this, but we may be faced with a month of interest before that money is available.  I’ll calculate the estimated charge and see if it’s worth pulling out of an existing investment before we get charged with interest.

Total expenses for September were $12,241 with the addition of the extra vet expense.  With no additional income in September, this put us in the red by $3880.

I need to recommit to live a little more frugally for the rest of the year.  I personally am cutting out alcohol until the holidays to help reduce expenses.  I also need to help solve the grocery planning struggle so that we can consistently plan meals (Planned meals definitely helps combat dining out)

Here we go!

-cb3