Sunday, April 21, 2013
Are You Lost? (Part II)
Your finances are a vector, a quantity with both magnitude and direction. Your instantaneous net worth is constantly growing and shrinking, affected by both external forces as well as your behavior. In calculating the two components of your net worth you now know your location on the financial map. Since your finances can’t stand still, take some time to determine their current direction and velocity. I will now ask you to track your expenses, to the penny, no excuses for one month. If you are like most Americans, you know what is coming in your paycheck. Even most of our country’s commission sales force has a monthly “draw” that buffers the irregular nature of their income. If you are an independent small business person you will need to make a similar record of your daily inflow. Take a little spiral notebook with you everywhere you go. If you use a debit card for most of your purchases, your bank will keep this initial record for you. When you spend even a penny record the amount and the nature of the purchase. At the end of the day take that list and transfer it to your monthly total sheets. Guess what? I am not going to tell you what categories to use. I will let you discover what makes sense to you, remembering that the purpose of this exercise is complete honesty. What point would there be in finding ways to game your own system or telling lies that hurt no one but yourself. Ask, “What categories would make the most sense given the way I actually live my life?” For example, food is a universal category, but how to break it into its component parts? In my case it might look something like this. Food 1)Grocery Store Food – generally food that requires some effort to prepare, including raw vegetables, microwave dinners, fruit juice, and even boxes of crackers would fall into this category. I often put cheese on my crackers. I would not bother to separate toilet paper from my grocery bill, too much effort. The important part in selecting sub-categories is consistency and self awareness. 2)Convenience Food – This would include lunch at the cafeteria, vending machine snacks, fast food, and meals at restaurants (including the cost of tips and drinks) 3)Beer – Since I drink my beer at home in the evening rather than in a tavern, it makes more sense to me to include it as a separate category under food, a part of my caloric intake. Since I am trying to lose weight, this calls out this expense in a manner that also is mindfully reminding me that this practice is affecting my weight. If you want to include all alcoholic beverages under entertainment that is perfectly OK. It is your expense register. Utilities: If you live in an all electric apartment and have a fixed price land line or a fixed price cell phone just one category for all utilities may be enough. If you live in a house it gets more complicated. 1)Electricity – Air conditioning in the summer will be the big “draw” (engineering humor) 2)Natural Gas – Keep your eye on heating costs in the winter 3)Cable TV – One of my two favorite expenses that can be controlled or eliminated. 4)Cell Phone – The other expense that can be controlled or even (gasp) eliminated. 5)Water – Usually this expense is not too high or too controllable. Choosing not to flush the toilet every time is a little too extreme even for someone like me. You will find that keeping an expense record is an iterative form of budgeting. Since there is a certain amount of pain associated with recording an expense, then looking at what you have done over the course of the day with mindfulness, you will quickly discover behaviors you wish to change. You will begin to ask yourself important questions. Do I want to spend $10.00 a day on coffee and a danish? Do I like how it feels to pay a $30.00 late charge to the credit card company? Did I really “deserve” a car with a $500 monthly payment when I only take home $2,000 a month? If you are honest with yourself, I expect your behavior at the end of the month will be different than your behavior at the beginning of the month. You are now ready to start budgeting, either a quick and dirty form of budgeting for the lazy or if you are generally successful in achieving your goals with money or something more radical if you need it.