MONEY: A USER GUIDE
eOrientation.html
Book I: How To Make Ends Meet
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1: ORIENTATION
(The purpose of the orientation is to provide context in which the process can be understood.)
PART ONE: ORIENTATION
Curiosity got the best of me this week; I decided to investigate a popular social media site I had been hearing about. On it, there was a post from a high school junior who had started his first job and was seeking advice on how to save money. One of the replies mentioned the b-word (budget), so I couldn’t resist. I wrote:
As a high school junior, working and earning money, living with your parents, with no financial responsibilities to speak of, and no debt, you are in a most enviable position. If you learn how to handle money properly now, before you get out on your own, you may well be able to avoid the pitfalls people encounter at that stage in life.
First, let me commend you for having the presence of mind, at your age, to even think about putting together a plan. That doesn’t occur to most people until they are hopelessly mired in debt. But look at you, epicenter of the demographic primed to benefit most from prudent spending practices, and headed in the right direction. Kudos, my friend. If you’ve got fifteen minutes, I can lay it all out for you.
- You Are Here →•
Normally, when I counsel someone, I have begin with a bit of information-gathering - an initial assessment - to get a understanding of what s/he is dealing with before we can strategize and come up with an escape plan. But you, grasshopper, are clean slate. You don’t need an escape plan. The world is your oyster. All you need are pearls. Let's examine a few basic concepts.
- Success
- Success is measured not in things but rather, by the degree to which you are able to live life on your own terms.
- Need
- Humans have needs - biological, emotional, intellectual. Healthy human growth follows when needs are satisfied in the proper order.
- Money
- Money fulfills its purpose when exchanged for need satisfaction.
- Priority
- At any given moment there is one, and only one, pre-eminent need. The prudent spending choice is that which satisfies that pre-eminent need.
What I would have you do first is devise a Spending Plan, one that meets your needs without exceeding your income. Simply, calculate:
- Income (per month),
- Expenses (per month), then
- Income minus Expenses.
If the difference is greater than or equal to zero, you’re good to go. If not, well, then you’ll have to make some changes.
Pay attention to what you spend your money on, and do the right thing, and in a very short while you’ll have a good grasp on the solution.
Your Preliminary Draft, the one that results from the initial self-examination, will show where you are right now. Your Final Draft will describe where you want to be. One depicts the past, the other dictates your future. It may take several draft revisions to produce a sound Spending Plan.
Most people have little control over how much they make, but complete control over how much they spend. So, in draft revisions, you’ll focus on expenses, reducing or eliminating the lowest priority items first; the Non-essentials. What do I mean by that?
The purpose of every expense is to satisfy a specific need, and each thing we feel we need will fit best into one of three categories: Essentials, Requisites, and Non-essentials. Essentials equate roughly to "needs", Non-essentials, to "wants", and Requisites are necessary only by association (to an Essential). I’ll give you an example.
The highest priority need, for any species, not just human, is to survive. A gorgeous sunset may be a pleasure to see. But you have to be alive to see it. Imagine you're in Tanzania. The sun is going down over Kilimanjaro. The air is warm and dry. Out of the corner of your eye, you spy a hungry lion approaching. He's probably not coming to watch the sunset with you. You gonna hang around awhile?
A less important need, but necessary nonetheless, is motility; Transportation. One has to be able to get from here to there: to eat, to earn, to escape hungry lions. But there are various froms of transportation from which to choose. The appropriate choice depends on the circumstances. For example, if you live in NYC, you may not need a car, so your list of expenses would not incude a car payment. Nor would you have expenses associated with car ownership; gas and oil, insurance, maintenance, registration, etc.
But, suppose I’ve completed my Final Draft and it includes a car. The car would be an Essential. Registration and Insurance (required by law) would be Requisites, as would gas, oil, and maintenance; Requisites, that is, by virtue of association. The pin-striping and mag wheels? Non-essentials. There is certainly nothing wrong with non-essential purchases. Gifts, entertainment, vacations, et al. are the spice of life. But, in the larger scheme of things, not a priority.
Typically, when satisfying a need, there are options: Transportation, for example. Bicycles, scooters, car-pooling, public transportation, etc. are all less expensive than car ownership. The prudent choice is the practical choice. Jay Leno doesn't drive the Shelby GT to the bathroom. There is a mode of transportation to suit every pocketbook. The key to Making Ends Meet is always choosing the least expensive solution, befitting your set of circumstances.
For a fuller discussion on need satisfaction, see Appendix B: What Would Maslow Do?
But it's time now, to strap on the tool belt.
Step Two: EXPENSES
The amount you spend
- Monthly Payments Look at the table below and see whether you can interpret what’s happening.
Every expense for which the Shaws gets a monthly statement is listed on the Monthly Payments table. The costs are easy to estimate because they are due and paid the same day every month, typically for the same amount. The amounts seldom change. If they do, the table is edited, and recalculates itself automatically.
- Occasional Expenses
- If it’s not a Monthly Payment, it’s an Occasional Expense.
- The Occasional Expenses table is for scheduled expenses that are not paid monthly, and for non-scheduled expenditures. Occasional Expenses are not so easily estimated as are Monthly Payments because, in many cases, one doesn’t know for certain when they might occur, or for how much.
- You know you’re going to need groceries, for example. But you might go on Wednesday, or you might go Thursday, or you might wait until the weekend. You might just need bread and milk, or you might want to stock up for the apocalypse.
- While Monthly Payments costs are estimated per month, Occasional Expenses costs are estimated per year - the reason being, some of them, like auto registration, income taxes, etc., only come up once a year. And some expenses are even less frequent.
- Weddings! Most people don’t get married more than three or four times in their lifetime. But seriously, wouldn’t it be better to save $50 a month, starting when your daughter is born, than try to come up with $15,000 in five months!?
- To estimate non-scheduled Occasional Expenses requires some due diligence. If you pay by cash, you’ll need to rely on memory to determine how much you spent. If you use a debit card or check, you can go back through a couple months bank statements and pin down an accurate estimate. If you use credit cards, you can do the same with a couple months’ worth of credit card statements.
- Whether you incur costs weekly, (allowance), biweekly (daycare), monthly (membership dues), quarterly (auto insurance) or annually (auto maintenance), or sporadically (bail), the Occasional Expenses table conveniently converts it all to a monthly amount; order out of chaos. The big picture comes into focus.
CIE
PRIORITY
BOTTOM LINE
Before I started handling the finances this way, we may have had, at any given time, as much as $300 in the bank.
Now, because I save in advance for the expenditures I intend to make, our bank balance never falls below $5000. Let's do the math.
My wife and I pull down $59,460 a year from Social Security and employer annuities, and we spend it all. If we save in advance for expenses, what's $59,460 a year divided by 12 months?
We applied for a mortgage recently. We had to submit two months’ worth of bank statements. The balance, each month, was right at $11,000. We didn't get there overnight. It took five years. We had a plan. And we stuck to it.
Now we're looking into the future. We figure we can come out ahead on Social Security if we exceed our life expectancies, and we can stiff the bank on the mortgage if we die before it’s paid off. I call this the poor mans diversified portfolio.
It would appear that the Shaws have been spending more than they earn. This could explain why they can’t seem to get their shit together, financially. It’s probably why they both resent each other for living. You se, that bottom line? If it was black, they’d still love each other. But it’s red. And when it’s red, it’s always the other guy’s fault - until yu’uns take a look at the tables.
CONCLUSION
Before I learned to handle the finances responsibly, we may have had, at any given time, as much as $300 in the bank.
Now, because we save in advance for the expenditures we intend to make, our bank balance never falls below $5000. Let's do the math.
My wife and I pull down $59,460 a year from Social Security and employer annuities. And we spend it all. Get your calculator, and divide $59,460 a year by 12 months. Now, add the $300 buffer, the minimum balance we keep in the checking account as protection against NSF charges and late fees.
But wait! There’s more!
We applied for a mortgage recently, and had to submit, along with other documents, two months’ worth of bank statements. The balance, each month, was right at $11,000!
We didn't get there overnight. It took five years. A couple weeks to come up with a plan, and five years of sticking to it, and refining and improving it.
Now we're forecasting the future. We can look ahead and see when loans will be retired, and make plans for the money we no longer have to make loan payments with.
We realized we could come out ahead on Social Security by living longer than we’re expected to, so now we plan to exercise and eat the right kind of foods.
Plus, we figure we can get back way more than our share of the $2,000 it cost every man, woman, and child in America to bail out the banks that were too big to fail - after they sold houses to millions people they knew damn good and well couldn’t afford them - by dying before our mortgage is paid off. Heh, heh. I call it the “poor mans diversified portfolio”.
I leave you with this final thought: that success is measured not by the width and breadth and scale of our possessions but rather, by the caliber and scope of our influence, and the extent to which we are able to live life on our own terms.
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