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

How About a Vehicle Mileage Tax?

To deal with population growth, traffic density, and global warming.

From Slate Magazine.

Looking for a way to raise money for roads and public transit, San Francisco Bay Area transportation officials have decided to look into a novel idea: Taxing drivers for every mile they drive. The hypothetical tax—which at this point is only being studied as part of a long-range plan—could run from as little as a penny to as much as a dime per mile, perhaps depending on the time of day, according to the Associated Press.

The VMT (vehicle miles traveled) tax, the thinking goes, would not only bring in new revenue but encourage people to drive less. The San Jose Mercury News reports that small pilot tests of a VMT tax in cities in Oregon and Washington have shown “encouraging” results, with drivers reducing their total mileage to save money.

Sure, but how does the government propose to keep track of the number of miles that every driver drives? Under the idea being studied by the San Francisco-area Metropolitan Transportation Commission, the Mercury News’ Mike Rosenberg explains, “Drivers would likely have to install GPS-like trackers on their cars to tally travel in the nine-county Bay Area, from freeways to neighborhood streets, with only low-income people exempted.”

Oh but don’t worry, the government would never dream of using these tracking devices for anything except tallying the total number of miles you drive. “The last thing we’re interested in is where you go and what you do,” a commission spokesman told the AP.

Here’s how a free-market, true believer, business friend of mine responded to the idea in an email:

Now there is a great plan – lets get people to drive less so more businesses can fail.  Oh, if more businesses fail that mean less tax collections, and therefore leads to higher unemployment.  But wait, we can raise taxes on the successful companies and the people who buy from them can be taxed higher also….I am sure the idiot who proposed this plan, failed Econ 101.  Government can not collect more from a soft economy without slowing it down further.

That same friend often tells me I don’t know shit about business, but even as clueless as I am, I can’t help but wonder why the correlation between miles driven and economic growth is so obvious in his thinking. The pilot studies show people actually save money as a result of driving less. And can’t we presume they spend most of their savings? Albeit at places like Amazon.com. And would the miles driven/economic growth correlation, whatever it might be right now, weaken if urban planners designed more walkable and bicycling friendly neighborhoods, if people began carpooling, or taking public transportation, and/or cycling, and if people purchased even more of what the need and want on-line?