How To Improve Your Finances

Preamble. In what follows I make assumptions that do not hold for many people. Among the most glaring is that my intended audience is gainfully employed and/or they have enough passive income each month to meet basic needs with some left over. Another assumption is that everyone can improve their finances. If I’m wrong about you, I bet you know someone, maybe a young adult child of yours for example, who could use some help building wealth. Consider forwarding this to them if you think it merits it. Thank you.

Official start. Ever wonder why don’t more moderate to high earner families have more long-term financial security to show for all their hard work? In part because financial analysts and advisors make things more complex than they have to so that people will hire them to manage their money.

As a result of needless complexity, and the associated pursuit of the perfect portfolio, people loose focus on what matters most when it comes to building wealth over time, that is, how much they make and spend month-to-month. If asked, how much do you spend on average each month, how precise would your answer be?

Not nearly as precise as it would be if you backward mapped your expenses. Backward mapping, in contrast to budgeting, entails spending regularly without much attention to detail, then totaling everything up after the fact, or more specifically, at the end of each month. Think of it as an x-ray of current spending.

My expense spreadsheet has 7 columns and 12 rows. The columns are for 1) our primary credit card; 2-3) secondary credit cards used less often; 4) cash/checks/wired payments; 5) one-time expenses divided by 12 which include property taxes, home/auto/umbrella insurance premiums, and professional tax preparation; and 6) medical and dental insurance premiums; and 7) a column where I write what the largest expense of the month was in order to see the most expensive outlays of the year in-a-glance. The 12 rows are for each month of the year.

How to build in one-time expenses like a car purchase or new roof? If I buy a $36k car and sell a $12k one, at the end of the year I’ll increase the average monthly total for that calendar year by $2k.* Or maybe I’ll increase it $1k for two consecutive years.

We’re super lucky that we don’t have to budget. With backward mapping though, which doesn’t require much time with credit card statements and most other financial records on-line, I can tell you within a couple percent what our annual burn rate or overhead is. That’s half the battle.

Then comes income. Probably the younger you are, the simpler it is to tabulate. In my advanced age, my income spreadsheet has several columns because in addition to my salary, my university contributes to my retirement fund each month, and then there’s monthly interest from cash and bond investments, and quarterly dividends from stock investments. The wider your income spreadsheet the better. I know, I know, I need a “side hustle” column. I feel younger just for having written that.

Same as with expenses, I keep a running total month-by-month. Here I can be even more accurate than with expenses, even to the dollar. As a result of these monthly calculations, in two weeks, it will take me about 15 minutes to solve for “C” knowing “A” is expenses and “B” is income. If my income exceeds my expenses, “C” will be a positive number. If my expenses exceed my income, like for the federal government, “C” will be negative. Whichever it is, I will carry the number forward and keep a running total from year-to-year.

Building wealth depends upon creating savings on a month-by-month basis much more than fretting about what the market is going to do tomorrow and trying to craft the world’s most perfect portfolio. By far the best way to increase your net worth by $1,200 a year is to make sure your income exceeds your expenses by $100 month-after-month. By far the best way to increase your net worth by $12,000 a year is to do everything in your power to make sure your income exceeds your expenses by $1,000 month-after-month. By far the best way to increase your net worth by $120,000 a year is to make sure your income exceeds your expenses by $10,000 month-after-month.

If that’s so obvious, why do people spend way more time studying stock market gyrations than figuring out how to limit their expenses and increase their income?

If you do well and end up with a surplus of $1,200, $12,000, or $120,000 at the end of the year, invest 50% of it in low cost bond index funds and 50% in low cost stock index funds (+/- 25% based upon your age and risk tolerance). And repeat.

Invest knowing that the most credible analysts in the financial sector seem to be in agreement that future returns will likely pale in comparison to historical ones. For example, here’s Vanguard on 2019 and beyond:

“U.S. fixed income returns are most likely to be in the 2.5%–4.5% range, driven by rising policy rates and higher yields across the maturity curve as policy normalizes. This results in a modestly higher outlook compared with last year’s outlook of 1.5%–3.5%—albeit still more muted than the historical precedent of 4.7%. Returns in global equity markets are likely to be about 4.5%–6.5% for U.S.-dollar-based investors. This remains significantly lower than the experience of previous decades and of the postcrisis years, when global equities have risen 12.6% a year since the trough of the market downturn.”

Subtract 2-2.5% for inflation and another percent for taxes and returns may be 1-3% above inflation. And that’s not factoring in people’s tendency to trade too much with the associated costs that brings. Good luck depending upon your investment smarts to grow wealth.

Building wealth depends upon maximizing income and minimizing expenses a little or a lot. Of course, that depends upon more than using my suggested spreadsheets. Most likely, among other things, it depends upon the degree to which you grew up with role models who lived below their means; how specialized your knowledge and skills are; whether you live in a modest neighborhood; and ultimately, your capacity to delay purchases.

Lastly, one thing your financial planner won’t tell you. Personal wealth won’t amount to much if we don’t revive the Common Good. For us to flourish we need a federal government that can pass budgets without threatening to shut down. We need political leadership that young people can aspire to. We need labor unions to protect workers’ interests. We need health care that doesn’t penalize people of limited means or those with preexisting conditions. We need to partner with other countries to reduce greenhouse gases and global poverty.

Absent commitment to those things, wealth will elude us.

*get a load of this story

Make Cars Great Again

By weakening fuel efficiency rules. Thank you Trump Administration for correcting the errors of the Obama Administration and helping keep cars affordable. And safer. All while continuing to protect the environment. And thank you for soliciting “all interested parties to weigh in with their views”. Very cool. Very democratic.

My view is totally sympatico with yours. Put me down for a “yes” vote on the weaker rules. Goals should be achievable, and you’re right, electric vehicles are for losers. In particular, this really resonated with me:

“Some data conclude that nearly half of consumers who purchase an electric car do not buy another because of challenges with range and recharge times.”

When it comes to things like your Environmental Protection Agency’s track record and your courageous questioning of climate change science, your administration has earned my trust so the phrase “some data” is good enough for me!

And I also agree that subsidies for electric vehicles are for losers best left to European and Chinese businesses who will never truly grasp capitalism’s allure. Please know my free-market invisible hands are clapping for your commitment to Big Oil having a more level economic playing field.

“. . . keeping in place the standards finalized in 2012 would add $2,340 to the cost of owning a new car and impose more than $500 billion in societal costs on the U.S. economy over the next 50 years.”

Again, thank you, $2,340, is not chump or even trump change. About $200 a year over 12 years of car ownership is a hell of a lot to ask for things as boring as markedly improved gas mileage and slowing climate change. Wouldn’t the typical electric car owner save more than $200 in gas costs? Sorry, strike that from the record. I’m sure there’s some more sophisticated math you have used that I probably would not understand. If you say it doesn’t “pencil out”, then it doesn’t pencil out. And “$500 billion in societal costs over the next 50 years?! No way can I do that math, but again I trust you that the “societal costs” are super scary things like more liberals feeling emboldened about spotted owls, more illegal immigrants invading our country, and more Democrats invading Congress.

“Due to these increased costs, Americans are holding on to their older, less-safe vehicles longer and buying older-model vehicles. The average vehicle on the road today is 12 years old, and data from the National Highway Traffic Safety Administration shows passengers are likelier to be killed in older vehicles than newer ones. In each of the past two years, more than 37,000 lives were lost on our roads. A key goal of this rulemaking is to reduce the barriers to enabling Americans to purchase newer, safer, cleaner cars.”

Initially, upon hearing that your Administration wanted to weaken fuel efficiency standards, I wondered why. I thought if America’s engineers were even a little great, the Obama goals were appropriately aspirational. I apologize that a part of me even wondered if you might be currying favor with Big Oil and Big Automakers, but upon just a little additional thought, that struck me as entirely too swampy a thing for your team.

I’m embarrassed that I pre-judged you. Of course, your first and foremost concern is our safety. All of your improvements to our infrastructure point to that. My cynicism got the best of me. I will do better going forward in my more affordable, safer, cleaner car.

Lastly, your editorial didn’t really touch on the “continuing to protect the environment” from the intro, but that’s okay. I understand word limits and trust you to be good for that. Again, to be clear, I am down with your downgrading of our fuel efficiency standards. And I look forward to your administration’s additional bar lowering pronouncements in the near future.

2118 Thinking

Easter service at Good Shepherd Lutheran brought a surfeit of babies. One particularly endearing one craned her neck to look up at the ceiling lights one minute and head butted her grandpa the next. The red-headed one, sadly, didn’t get quite as much attention as the blonde head butter.

Those babies may live until 2118, which prompted me to think how differently a President might govern, a Congress might legislate, and a Judiciary might rule if they focused their attention on the later years of Good Shepherd’s littlest Easter service congregants.

What if our news cycles were ten years long and all of us adopted 2118 thinking?

We’d reign in our federal debt, we’d conserve natural resources, and we’d focus on reducing global poverty. In contrast, the Associated Press reports, “The Trump administration is expected to announce that it will roll back automobile gas mileage and pollution standards that were a pillar in the Obama administration’s plans to combat climate change.”

Is that what he means by “Make America Great Again”?

 

 

Friday Assorted Links

1. No rules recess. “Parents don’t tend to sue schools.”

2. In Fight Over Science Education in Idaho, Lawmakers Move to Minimize Climate.

Today’s science lesson—apparently, there are lots of invertebrates in the Idaho state legislature.

3. What $1.4m buys you in London.

4. Has a Civil Rights Stalwart Lost Its Way?

“William Jacobson, a law professor at Cornell and critic of the SPLC, says the group has wrapped itself in the mantle of the civil rights struggle to engage in partisan political crusading. “Time and again, I see the SPLC using the reputation it gained decades ago fighting the Klan as a tool to bludgeon mainstream politically conservative opponents,” he says. “For groups that do not threaten violence, the use of SPLC ‘hate group’ or ‘extremist’ designations frequently are exploited as an excuse to silence speech and speakers,” Jacobson adds. ‘It taints not only the group or person, but others who associate with them.'”

5. Will Millennials Kill Costco?

Only One Border

Imagine everyone in the world agreeing to limit their long-distance travel to mitigate the problems associated with climate change. Specifically, imagine everyone agreeing to only cross one border whether state, provincial, or national, in their remaining days on earth.

For example, living in Western Washington State, I could choose to travel only to one of the following places for the rest of my life: Oregon; Idaho; or British Columbia, Canada.

Even though I was born in Idaho, I’m more familiar with and fond of Oregon and British Columbia. Which brings me to a very difficult decision. Oregon has an abundance of beautiful terrain to recommend it. And I still haven’t played Bandon Dunes or any of the adjacent courses. And of course there’s Shakespeare outdoors under the stars in Ashland, cycling in the high desert, running the Deschutes River trail, Batchelor, Hood, the Three Sisters, Crater Lake. Don’t just take my word for it, give this guy’s work a look-see.

Despite the difficulty knowing I will never cross the Columbia River again, I’m going north to British Columbia. For the rest of my life. As much as I like Oregon, I love British Columbia. Victoria, Vancouver, Whistler, the Okanogan Valley, Penticton. Barely scraping the surface of the southernmost part of the province has been enough to tip the balance.

The GalPal and I will stay here a few nights. Here too. And we’ll make regular visits to our private suite at the Hotel Grand Pacific in Victoria.

Part of it is a feeling I get in B.C. I’m sure I idealize it, but I like knowing there’s less gun violence, a progressive head of state, a single payer health care system, and often a self-deprecating sense of humor. I hope some of my Washington State friends are down with my decision. It would be a lot more fun to have some company along for the many, many ferry and border crossings in my future.

 

The Gray Lady’s Downward Spiral

The New York Times is known as the Gray Lady. Today the Gray Lady ran a sad, sick story on its front page. Titled “U.S. Report Says Humans Cause Climate Change, Contradicting Top Trump Officials.

This is really your fault. Instead of subscribing to the NYT, you just read it online for free, which means the Gray Lady can’t afford fact checkers anymore. So they’re just making shit up.

How do I know this? Because in the middle of this morning’s run, as I climbed up out of Woodard Bay, a blizzard began. Now that’s hyperbole, but PressingPause can’t afford fact checkers either, so I exaggerate at times. In truth, it was a very steady snow, huge wet flakes, that I swallowed to quench my thirst.

Obvi, if it dumps snow in Olympia, WA on November 3rd, there’s no global warming. Also, how dare the Gray Lady contradict “top Trump officials”! Who does she think she is? We know. A sad, sick lady in decline.