Monthly Archives: June 2016

FIRE.010 Tracking our spending

Let’s get down to it. How do you know where you stand? How are you doing? How can you possibly know if you’re doing well financially (hint: it’s not your income) or falling behind and not realizing it? What is “behind?” Can you compare yourself to your friends, your co-workers, your family, the articles online? Nope. There is really no direct comparison. You must create your own scorecard. I personally have money “report cards” from my whole adult life.

I started tracking my money in high school. I was not some penny-pinching nerd—though I probably am now. I just noticed how my allowance would always run out before the end of the week (I did not work when I was in school).  See, my parent always had a “budget book” on the counter. It wasn’t for planning a future budget, but actually a spending log from past actions. I would always see how they wrote in their spending at the end of each day. It seemed it only took a minute per day. I never paid much attention to the act of their logging their spending. I definitely never thought about what they did with the book at the end of the month, year, etc. Yet, I did know they could look back to see when they had purchased something and what it costs.

So I guess instinctively I just grabbed a spiral binder and wrote “October” at the top and wrote down what I spent each day, if I spent anything at all. My parents taught me by example. Within a couple weeks, I was able to see how much I spent hanging with friends, eating out, buying stupid items, gas, etc.   Did I mention I did this when I was 17—doing something that NOBODY seems to do. (Side note: this was the 80s, there were no debit cards or online transaction histories, and all my items were cash. It’s so easy now.)

What’s exciting nice about this topic is that it’s never too late to get a handle on your spending. You can start tracking any month. Bonus: the less money you spend, the easier it is to track your spending (who got your money). Yes, I know seeing “$68 at Target” doesn’t tell you what you bought, but it does tell you where it went. If you had unlimited time, then you could break down each receipt into major categories but a detailed/overall idea is extremely valuable.

My tips: Basic: Just create a list of spending for each month, ATM withdrawals, debit card, credit card transactions, and autopay bills. Keep a running total for the month. You could even track from payday to payday. This cannot be a one-month activity because there will be large, surprise bills in your life. Those large bills are part of normal spending patterns in life. They must be part of your cash flow plan.

Intermediate: migrate the basic list into columns for a few categories Fixed/required-mortgage/rent, insurance, utilities. Variable/Semi required-cell, internet, TV, even medical. Variable-food in, eating out, Household, HH Misc, gas, auto maint, entertainment/travel, misc spending. I spend about 1-2 hours each month putting this together. That time has proven so valuable over the past 20+ years.

Advanced: break down each receipt into the categories. I find this is far less valuable if you aren’t spending every penny of income. 100% detail is not required If you’re saving money, then you have a handle on being cash flow positive.

Here are some things we’ve learned:

  • We know where our money goes.
  • We know when we’ve had large expenditures and can use for historical tracking years into the future.
  • We can evaluate any of the large spending items. We can make vehicle ownership decisions based on costs.
  • We can easily tell when we’ve done a little over indulging. And can get back on track.
  • We know our travel expenses by trip.
  • At the beginning of each month, my wife knows if I’m going to be in a good or bummed mood for the next few hours. Not by the amount as much as by the items.
  • Very interestingly, we tend to spend close to the same amount each year, even as income increase. And our personal rate of inflation seems low based on being quite consistent over the past couple decades. Most importantly, that spending amount has been below our income amount.

So, back to my question, where do you stand? The most important part of your financial foundation is your cash flow, your Personal Profit & Loss statement. Cash flow based off (net) income vs expenses to determine your money trajectory. Are you spending less than you bring in and allowing your savings/net worth to grow? Are you falling short each pay period? How much money do you spend on food (in house), on food (eating out), on gas (don’t buy a higher MPG car, just combine trips if you can), on quick visits to Target or Costco? There is no doubt in my mind that you would be shocked at where you money goes. If you want a copy of my intermediate level tracking spreadsheet for any idea, just email me. It’s a simple document that allowed for life-changing decisions, year after year.

Would you go to the gym for an hour once a month if you were told it would drastically help your health? Tracking your spending for one hour a month helps your financial health, which can ease your stress, which can even help your physical health.

FIRE.009 Think 60

Why do you think normal retirement age is 65, 66, and early is 62ish, and late may be 69+?
Having been freed from my 8-5 job, I’ve had time to reflect on many, many thoughts. My newest thought is to “think 60.” The more I thought about “think 60,” the more I realized it can take many perspectives.

Let start with—Live each 60 minutes, Obviously days get super busy and the hours fly by and you can miss so much—so much enjoyment—while you push through your daily activities and responsibilities. Stop, or slow down, take a breath and realize the 60 minute you are living in. I’m not zen (yet) but I’m sure this is a big part of the “be in the now” idea. Yes, you can be busy and spend a few hours on a task, but take the time to value your efforts, whatever they may be at the moment. Hopefully, you are able to find enjoyment or at least some satisfaction in the task.

OK bigger picture, If you’re young, think like your 60 years old, be smart and wise. What would the older you say to the younger you? Would you say “don’t miss your life going by?” Would you say “try harder” “save more” “live more” “keep the future in mind” or something else? What can you do while you’re younger to set yourself up for a great 60 and beyond?

If you’re older, think like you’re only 60 years old, be young at heart. I know we all heard “sixty is the new 50.” Maybe people say that because once they hit 60, they realized they aren’t old. Maybe these people realize that today’s 60 year-olds are younger at heart, more active, more interested in new things, still setting goals, still looking onward. Don’t let your age number slow you down. Don’t let slower people who happen to be around you slow you down. Find people that are younger than you—maybe those who are free—and hang out with them. Challenge them in a way that challenges you.

So why do you think 60 could be an important number for you? Maybe that’s when true wisdom settles in for so many people. You often hear “old and wise,” why not be proactive and become young(er) and wise(r)? If you’re reading this, you surely are a thinker, unless Google screwed and sent you here incorrectly…

FIRE.008 Health, Happy, Family

Quick, concentrate on your foundational priorities. What are they? Do you embrace each of these every day? Maybe multiple times per day?

I’ve mentioned before that when I go to bed, it is my favorite time of the day. NO, not for the reason you may be thinking about. I find that I think clearly for those 10-15 minutes before I fall asleep. Maybe it’s because I’m relaxed knowing tomorrow is all mine—my day, my schetchle, for my things (yes “things”) But it is also because I think about the day behind me, very often a day that I’ve truly enjoyed. Quite possibly a day in which I learned new skills or knowledge, or maybe helped someone with something they needed.

To be truly transparent, I feel like I need to give more. I believe there is much more I can do to help others. Doing more for others is a goal of mine. I once heard of someone’s goal to help three people each day. It could be something nice to do—even small task like answering a question—or fixing/helping with something. I like to do this with my technology skills. I speak to groups, I help people with their computers/devices, I even starting writing my thoughts on this blog to help give others a different perspective.

To get back on topic, I’ll review my current three important aspects to my life:

Health—this is VERY important, absolutely foundational—to maintain good physical health so you can enjoy your life to the best of your abilities. If your health is poor, you may have increased stress, require additional effort to perform tasks, or live/suffer in pain. Your health level depends on your specific body, but you can improve any level of health. Being strong and energetic allows so many opportunities for me. At a moment’s notice, I can go for a run or bike ride with friends. I can jump into a pickup hockey game or take my paddleboard out. I can go for a hike in the mountains by my home. I can get out, get active, enjoy nature, enjoy the world outside—basically do what I want. It’s much better than looking out the window from my old work cubical, even if my desk had a great view.

Happy—Are you working to keep your attitude in a positive, healthy perspective? This makes so much of your day and life the best it can be. Yes, I’m a cautious, even skeptical person, but I see the good things in life. I find life great and wonderful. I consciously look to “find the positive” in situations. And yes, that can definitely take effort. I work every day on positive. (Yes, that sentence is exactly how I meant it) Everyone has different happiness items, think what makes you happy—all the many ways for you to find happiness.

Family—If you strive for good health and happiness you should have the energy and desire to give more to others, your family first—in a manner that they deserve. When it all comes back to basics, your family loves you more than anyone. It’s your job to love them back more than anyone else.

If these three priorities don’t fit your life, what are your top 3 priorities? How do they help you live better, and make you better?

FIRE.007 Check my Math – Monthly Retirement Savings

First, I’m sorry for laying this out. Do you put a small amount of each and every check into your “retirement” account? Do you feel good that you are planning for the future? Ummmm, Check my math:

Say someone saves $50/check = $100/mo into a retirement or savings account. That amount rounds to just over $1000/yr.

Say your family is in the middle of the middle class-ish. Maybe you spend $3000 or $4000 per month.

Here’s my simple math. Saving $50/check=$1000ish/yr—you have to save for 3 to 4 YEARS to pay for ONE MONTH of retirement, ONE FREAKING MONTH (ignoring pension or possible social security in retirement—ignoring growth/compounding as well)

So to pay for one year of retirement spending at the savings rate of $50/check, it will take 30-40 YEARS of small monthly savings to live one year in retirement.  That’s a lifetime of savings for a very, VERY short retirement.

I know what you’re saying, and you’re right—your money will compound and grow with the rule of 72. Yes, that is true. And it’s also true your expenses will compound with inflation using the rule of 72 as well. Hopefully, inflation is far lower than your rate of return/growth.

OK, now forget your far off “retirement.” What if you have an emergency now? Bad stuff happens. Job loss, medical bills, family crisis, car problems, house breaks down, natural disaster… If your emergency fund is built at the same $50/check rate, it will take 3-4 years to save 1 month’s equivalent spending in your emergency fund. Better hope for the best for 30-50 months to get a little cushion built up.

Simple example:

$50/check = $100/mo =  $1000+/yr * 4 years =  $4000 saved for one month of bills

This simple calculation does not include investment growth or inflation raising the cost of items/living.

This is why financial people say you should save 15% of your gross pay (not take home pay).  $50 is nowhere near 15% of your paycheck.

I grew up hearing about saving 10% of your gross income, yet I believe that was when a company pension covered much of a retirees bills. Not too many company pensions setting us up for retirement.

In a perfect world, the above household would retire with 25 times their pre-retirement income spending amount in savings. You will often see “25X” used for the 4% Safe Withdrawal Rate calculations. …More on that in the future.

 

So, Increase your damn savings rate! Push for 1-2 months spending amount in your emergency fund (in your Roth IRA) in the next 12 months or so. Having a solid reserve feels amazingly good.

FIRE.006 Saving Early/Often, Invest wisely—My Life Lessons

If you found $100 on the ground, what would you do with it? That’s tough even for me since the smallest amount seems insignificant. I may pop it into savings. I may buy something that I’ve been thinking about buying and watching the deals. Maybe spend $50 and save $50?

What if you found $1000 on the ground (maybe it had a note that says “enjoy” implying it wasn’t lost)? That is much easier for me—I’d definitely save it for my future enjoyment. For some reason, a nice big chunk of money feels great when I save it. Maybe that’s why I feel some people tend to save more of their tax refund than a pay raise which is divided over 24-26 payments?

What determines how you decide to spend or save? That is by far the most important financial question you could ever answer. It starts with your very first dollar and probably only ends with the last spending option you have in your lifetime. How do you value your “enjoy life now” decisions? Please DO NOT live poor today in an attempt have a great future, unless of course you enjoy the extreme frugal lifestyle/challenge. We don’t know what will happen in the future. Also, everyone has a different type of enjoyment. Finding your family’s balance may be the key to lifelong happiness.

So back to saving. I had an unfair advantage from the start. I was one of about 500,000 lucky people who received a $1000 “gift” in 1982. The state of Alaska started sharing their oil wealth with residents, every year. But, my parents made me save my $1000 dividend in a new investment account. It sucked not being able to buy something cool like ALL my friends were doing in grade school, junior high, etc. Yes, I did get something good for my birthday and Christmas, but I had to wait until those special days. So each year my dividend was forced saved into my account and I wasn’t really sure why. When I turned 16 and wanted a car, I was sure that money—which was now into the THOUSANDS—was going to come to good use. NOPE, I had to get a basic $1000 junker car. In retrospect, that may have been a smart plan because a 16 year-old driver on icy roads, could lead to a serious crunch—which I did not. Over the next dozen years, these dividends climbed into the 5 figure range. Thank you oil revenues.

This is where my part of the savings habit gets interesting. I started my first summer job when I was 13 (I never told them I wasn’t 16) and earned almost $100/wk. My father told me he would match what I earned, I presume to encourage me from being lazy. He was shocked that I earned about $900 which he matched. I immediately saved his “matching” money and spent my hard earned income. I did this for the next 4 or 5 summers. The “parent match” can be a HUGE motivator, and if directed into a Roth IRA, a huge windfall in the future.

This is where I present a unique perspective my parents had on working. They didn’t mind my summer job, but did not want me working (for peanuts) during the school year, taking my focus away from studying. They said, “school is your job.” I didn’t mind that strategy because school was easy enough and I had my nights, weekends and holidays free. I also never fell into the income/spending mode that so many of my friends did with their paychecks. I had a small allowance to manage (track and spend) so all was well. Turns out sticking to, and completing my educational goals have been rewarding. I always had the education and experience to allow me to apply for any position—unlike some of my less educated peers. I believe my education level in my HR file, my experience, my great performance reviews and my positive attitude (I didn’t let work stress me out because I always had a money cushion) helped me avoid over half a dozen RIFs that affected many people I worked with.

My work experience started when I got a laborer job my second year in college. In my third year of college I shifted into a part-time professional technical job which set up my entire future. I still feel I had a great path. There’s a quote that resonates with me “the harder I work, the luckier I get.” Putting yourself into positions of challenge, may just lead to wonderful opportunities.

Throughout every job and EVERY paycheck, I’ve saved, we’ve saved. 20+ years of saving together adds up. 20+ years of anything adds up. Think of exercising for 20 years. You will be fitter and hopefully healthier. Think of 20 years eating crappy (I did) and your body will be, well crappy.

It’s never too early to start saving. It’s never too early to invest wisely. If only I knew about total market index funds (low fee, of course) instead of savings accounts, money markets, CDs, and bonds (which paid well in the 80’s and even 90s) I would have been Financially Independent YEARS earlier. It’s never too late to learn anything. You can save and learn now.

By the way, over 30 years later, that $10,000+ forced savings now makes up the foundation of my FI. Not just in dollar value, but in delayed gratification lessons and buying basic items to solve my needs instead of flashy/shiny new items. I’ve only come to realize this lesson in the past 10+ years. THANK YOU to my parents!!!