May 052019

Those who know that I’m a CPA will occasionally ask me a financial question or two. If it’s an objective question, such as how much is the standard deduction for a married couple this year, I answer directly. It’s $24,400 for 2019 by the way. For many other questions such as what should I do with my tax refund or where’s the best place to invest my money these days, my default response is always the same: it depends.

The reason is that not everyone has the same financial situation with the same goals and the same needs. Everyone’s financial picture is unique. What is true for me may certainly not be true for you, and vice versa. Also, things are not always what they appear to be. I may appear to be doing very well financially but in reality I may very well be, as they say in Texas, “big hat, no cattle.” Or, my modest spending habits may suggest that I have limited means when, in fact, I am financially independent.

Further complicating matters is the fact that our personal finances are probably the most secretive thing about us. I am much more likely to share my medical statistics or other deeply personal information with you than how much is in my bank account or how much I owe on my credit cards. This is usually because we are insecure about our financial knowledge or just plain embarrassed about our financial situation. We have a natural tendency to compare ourselves to others – to equate our financial net worth with our personal self-worth – and we’re reluctant to appear weak.

If you don’t share a few personal financial details with me, however, I can’t really give you good advice about what to do with your money. In the financial arena, one size does not fit all. What our parents or coworkers or neighbors do with their money not only does not apply to you and me because our finances are different, but may not even be working for them.

How we manage our financial affairs depends on how much money we’ve saved, how much consumer debt we have, how well we’ve protected our assets, how many children we have, our job security, and so on. No one on a web site, or in a magazine, or at a backyard barbecue can give us any advice about our unique money management unless they are as familiar with our financial condition as our doctor is with our medical history.

Many of us though, lack basic knowledge about our own financial condition. We collect paycheck after paycheck, put some money aside, buy a few things with our credit cards and think about what’s coming up in the future. But very few of us actually take stock of our financial condition on a regular basis. We’re very familiar with the weeds but we don’t have a very good view of the big picture.

Any financial advisor will tell us that the first step in a sound financial plan is preparing a statement of financial position, a balance sheet, that details all of our financial assets and liabilities. This statement also calculates our net worth, which is a term that I’m not overly fond of. Many of us, consciously or not, equate our financial worth with our self-worth and the term “net worth” simply reinforces this erroneous view. We are much more than the net sum of what we own and what we owe. In business the balance sheet is called the Statement of Net Position and, while the term net worth is a standard one used in commerce, I prefer the term Net Position when putting together a balance sheet for individuals, especially if it’s for our own use.

It isn’t very difficult to construct a balance sheet. In a nutshell, we list the current market value of everything we own, and subtract the current principal amount of everything we owe. The difference is our net position. Much of the information — for cash, investments and liabilities — is available from our most recent banking, credit card and mortgage statements, or can be gathered from online sources. For items such as furnishings and jewelry, we need to estimate their current market value.

Sample worksheets in Microsoft Excel and Adobe Acrobat formats are included at the end of this article. For those who are not spreadsheet-oriented or do not have a copy of Microsoft Excel available, the Adobe Acrobat pdf version serves as a useful guide. It’s important to note that financial and accounting standards apply when assembling personal financial statements for outside parties. The sample spreadsheets included here are simplified versions intended to kickoff financial planning and do not conform to these standards.

We will explore the individual components of the balance sheet in future articles. For now, listing the current market value of all assets and the principal balance of all liabilities is enough to calculate net worth, or net financial position. Regardless of what we call the bottom line, not only can the net sum of our assets and liabilities be eye-opening for us, but the very exercise of putting together a balance sheet can be an enlightening experience.

Apr 282019

We’ve all heard the expression, “time is money.” When used in a work setting and directed at those who are goofing off it’s an appropriate admonishment. For those who fail to recognize money as a tool, however, this expression epitomizes the attitude that any leisure activity is not only wasted time, but also a wasted opportunity to make money.

Leisure time can be very productive, especially when it is used to better our health, strengthen our relationships, or simply to recharge. When we recognize that money is a tool, we don’t need to feel guilty about taking time off from money-making. As Aristotle said, money-making is not a goal in itself. It is a means to an end.

In many cases time does, indeed, equate to money. Just as often, if not more so, the reverse is true: money is time. Whatever we do to make money requires time, and time is more valuable than money because it is the one commodity that we can never replace. Time is a non-renewable resource. Once we trade it away to do things, like make money, we can never get it back.

For those of us who enjoy what we do for a living, and hit the floor with enthusiasm when the alarm goes off in the morning, we may not mind trading time for money because we don’t envision a better alternative. We would most likely choose to do the same thing whether we were paid or not. More of us, however, would rather be doing something other than what we do to bring home a paycheck.

Regardless of whether we race out the door in the morning or reluctantly drag ourselves out of bed, as long as we are dependent on a paycheck we are trading our time for money. That is, we are trading present time. With our spending habits, on the other hand, we are trading future time.

Each time we make a purchase we are trading future time to pay for that item. We will either have to work longer to pay off the debt we incur, or we will forego the opportunity to save the money that we’re spending, and delay financial independence. And being financially independent means we are no longer required to trade our time for money, although we may still choose to do so.

It’s relatively simple to quantify how much present time we are trading for a purchase. Let’s assume that we’re considering buying a brand new 6D 144-inch television with holographic projection and direct-to-tympanic membrane sound for $2,000. Our current 48-inch television is only a couple of years old and in excellent condition, but this new TV is the latest and greatest gadget that is popping up in living rooms throughout the countryside. If we’re a typical worker in the United States who takes home about $20 per hour after taxes, we will have to work 100 hours to pay for that new television, more if we use our high-interest credit card for the purchase. That means that even though we already have a very decent television, we are considering trading two and a half work weeks to purchase a better one.

Perhaps we’ve already budgeted and saved the money for our membership in the gadget-of-the-month club. In this case, the television is already paid for and we’re trading future time because we are choosing to forego saving $2,000 in favor of installing a video entertainment system that will spark the jealousy of every self-respecting neighbor.

Calculating future time is a little more complex because we have to take into account the time value of money — that is, we will direct our $2,000 to an investment that earns interest or appreciates in value. Managed properly, those earnings will then earn interest or appreciate in value. This will continue, on and on, until we turn our investment into cash.

Let’s assume that we plan to work another 20 years and our investments are currently earning 5% each year over and above inflation. If we invest that $2,000 instead of spending it on a vision-exploding, ear-shattering television, we would have another 5,300 of today’s dollars in our nest egg after 20 years. That’s the equivalent of 265 hours of take-home pay, or 265 hours of future time.

If we did this, say, for just one purchase every year for the next 20 years, using our saved money to purchase that not-quite-necessary luxury item, and recalculating the time value of money for each different period, then we would have spent nearly 3,700 hours of work time. Another way to look at it is that we’d have to work for money for nearly another two years to pay for those gadgets.

This is not to say that the gadgets aren’t worth another two years of work time, or that we should give up all of the things that make our lives more interesting. For many of us, the ability to purchase extras for ourselves and our families makes work life more palatable, especially if we can afford to buy them without burying ourselves in debt. There is no compelling honor in spending our lives working endless hours, and there is no distinctive shame in using some of our earnings to make life more enjoyable.

The important thing to remember is that we’re giving up time in exchange for dollars, and when we use those dollars for purchases we are also trading days, weeks or even years. If we can integrate this perspective into our financial lives, it will add a new dimension to our decision making and allow us to be better prepared when the future arrives. Financial independence isn’t really about money; it’s about time.

Apr 202019

Our childhood observations of how our parents handled their finances, combined with whatever formal or informal education we may have received, form the foundation of our relationship with money. Growing up in an environment of scarcity leads to a different attitude toward money than growing up in an environment of abundance.

Scarcity or abundance, or something in-between, gives us an early direction for money management. What we don’t realize as children however, is that scarcity or abundance may have only been a perception. While our family’s financial condition may have been just as it appeared, we learn as adults that our perceptions do not always reflect reality.

Those who manage their money well and are financially secure often live very modestly. Conversely, those with the biggest houses, the newest cars and the most expensive clothes may very well be living payday to payday and have relatively little accumulated wealth.

This contradiction between appearances and reality is something we should keep in mind when we give in to our natural tendency to compare ourselves to others based on apparent wealth. We tend to allow our financial condition to become intertwined with our notion of self-worth. We value our lives in terms of how many material possessions we own or how much cash we have in the bank.

The link between self-worth and material possessions can lead us to regard the accumulation of wealth as a goal in itself. We work harder and harder to stockpile more money and more possessions, and we often throw our lives out of balance to do so, jeopardizing other important areas like our health and our relationships.

To properly manage money throughout our lifetimes we need to recognize it for what it is. Money is a tool. Money is something that human society created, long before recorded history, to facilitate exchange. Money simplifies our lives. It allows us to sit in one part of the world and purchase the latest widget without having to deliver two goats and a camel to another part of the world. Money has value because of the opportunities it gives us to make our lives more secure, more meaningful, or more enjoyable.

As for the money-making life, it is something quite contrary to nature; and wealth evidently is not the good of which we are in search, for it is merely useful as a means to something else.

Aristotle, Nichomachean Ethics

Of course, we need to dedicate some portion of our lives, and make some sacrifices, to provide security for ourselves and our loved ones. The classic model was depicted by the psychologist Abraham Maslow in his hierarchy of needs:

While we certainly need to focus on accumulating money to provide for the survival and security needs in the lower levels of our personal hierarchy, it doesn’t take much more in the way of financial resources to achieve our goals in the upper levels. In fact, everything we do to stockpile more money after we have set and achieved our goals for survival, safety and security is just for sport. Unless, of course, our goal is to dedicate our lives to earning as much money as possible so others can spend it after we’re gone.

Once upon a time, money actually had intrinsic worth as it was comprised of precious metal or other natural objects with objectively determined values. As society evolved and currency developed, paper money itself was backed by something of value. Until 1976, paper money in the United States was backed by gold. Nowadays, money is valuable only to the extent that others will accept it as a medium of exchange.

Not only is money no longer backed by something of value, it is becoming increasingly less tangible. We go to work every day and in return our employer or our customers deposit money into our bank accounts. The utility company emails us an electronic bill and then automatically deducts its payment directly from that bank account. We need only click a box on a computer screen when we purchase something and money is removed from that same bank account in return for the item. The rise of crypto-currencies separates money and value even more.

The digitization of money and the decline of the use of currency makes money seem less real, which has both bad and good effects. In the days when hard cash was used for nearly all exchanges, when we had to touch it and count it, we seemed to have more control. We could see our money coming in and going out. If we spent too much we could feel it dwindling in our pockets. The act of physically writing a check reminds us much more of what we’re doing than pulling a card from our wallet or clicking that box on the computer screen.

On the other hand, the more that money becomes detached from intrinsic value, the more it reminds us that all we have are promises from others to give us things in return for our money. The digits coming in and going out of our bank accounts have no inherent value other than the willingness of others to accept them in exchange for what we want. And it is certainly true that the more we sacrifice and give up to make more money, the more we are trading real things for promises.

Whether it exists as something tangible or something electronic, the nature of money remains the same. It is a medium of exchange. It is a tool. And a tool is worthless in and of itself. It only has value if we use it. If we use it well, we will accomplish our goals. If we misuse it, we can cause a lot of damage that will require a lot of time and effort to fix.

Mar 172019

The principles that are common to all spiritual teachings – presence, responsibility, oneness, balance, equanimity and simplicity – are not just lofty metaphysical goals. They are also guidelines for effective daily living, and we can apply them to ease the stress of life and make ourselves more content.

Many people struggle with personal finance. Money is the most common medium we have to interact with society, and it impossible to survive without it. The better we manage our money, the more fulfilling our life experiences and more peace of mind we have. Unfortunately, many of us don’t manage money well.

Our approach to money management begins in childhood. How our parents managed money and the way they lived form the early foundation of our money philosophy, and we either adopt their approach or rebel against it. The more our parents gravitated toward frugality or extravagance, the more likely we are to move toward one extreme or the other.

Our money management skills are further developed through education, either formal or informal. We may learn some basic financial knowledge in school, or we may learn through the examples of others who are really good, or really bad, at managing money.

The attitude we develop toward money in childhood combined with any formal or informal education we receive, determine how well prepared we are when we begin receiving regular paychecks and have to manage our own money. We may become rather adept at financial management, or we may never seem to “keep up” or “get ahead.”

Those who lack a sound foundation in financial management tend to struggle with money, and these struggles can lead to insecurity and self-doubt. As the struggles continue and intensify in adulthood, so does the insecurity. This is, perhaps, why money is one of the most taboo subjects. We are much more willing to tell others the results of our latest medical procedure or how often we have sex than we are to disclose how much money we have in the bank.

Everyone can learn and apply sound financial practices. It is true that some of us are good with numbers and some of us can retain more book knowledge, but prudent money management doesn’t require advanced math skills or an extensive financial vocabulary. We can control our finances by understanding a few basic concepts and having the discipline to employ them in our lives. And we can begin by remembering those core principles of effective daily living that have been passed down to us.

Presence: The first step in taking control of our personal finances is to be aware of our financial situation and recognize the need to regularly assess that situation. We simply can’t ignore that bills are coming due, that our debt is piling up, or that we are not saving enough for the future. We just can’t manage our money effectively until we step back and get a good view of our financial picture.

Responsibility: We can’t control our finances if we let someone else do it for us. Money management is too critical a part of our lives to delegate to others. We can seek advice, and we can follow a program developed in cooperation with someone else, but money management is a basic part of living. To effectively control any aspect of our lives we need to take personal responsibility for our affairs. Regardless of how many advisers we enlist, we must make our own decisions about our own lives.

Oneness: Financial planning and money management affect others as much as ourselves. We need to communicate with our spouses and children if we are having difficulties. Everyone needs to be involved to successfully carry out a plan. Reaching our goals is much easier when everyone is aware of those goals, and the reasons for them, especially since others can offer solutions which we may not have considered.

Balance: As with all aspects of life, sound financial management is a balancing act. We must find the optimum balance between what we need and what we want, between taking care of our current situation in the short-term and providing for our future needs in the long-term. Most importantly, we need to realize that money is just one of the important aspects of our lives, and it must be balanced with other areas so that our pursuit of financial success doesn’t jeopardize our health or our relationships.

Equanimity: To paraphrase Ebenezer Scrooge, “I can think of nothing better for my welfare than a night of uninterrupted sleep!” Money problems cause us to worry, and lead us to question every financial transaction during the day before keeping us up at night. When we take control of our finances, we are comfortable with the assessment of our current situation and the plan that we have put in place to better it. We no longer panic if the furnace breaks down or the stock markets decline. Living according to our plan, and seeing the steady progress we are making, gives us the peace of mind to sleep at night.

Simplicity: We live in a time of ever-increasing complexity. We are constantly confronted with nearly infinite choices and varieties of the most commonplace things. This is partly due to being human, and partly due to the markets that aggressively compete for our money by offering us unique and ever-evolving opportunities. We cannot effectively manage our money if we don’t understand what our money is doing. We need to dig deep, underneath all of that complexity, to discover what is truly valuable — basic principles and guidelines that, once understood and applied, lead us to success and contentment.

Sound money management is really just common sense. Following a few fundamental principles can lead to financial security and put our minds at ease. Unfortunately, there is so much noise distracting us that the basic knowledge and skills we need to survive and thrive have become uncommon sense.