9 Nine.docx

Nine Many Americans work for a business, company, or corporate entity that pays them an income in exchange for their skills and labor. We all hope the company we are employed by is successful for many years to come, keeping us employed. A business provides its employees with a job and a sense of fin...

Nine Many Americans work for a business, company, or corporate entity that pays them an income in exchange for their skills and labor. We all hope the company we are employed by is successful for many years to come, keeping us employed. A business provides its employees with a job and a sense of financial security. A business can manufacture a product that entails the purchases of raw materials from suppliers to produce or a service that requires the labor skills of their employees. The business then sells the product or service to third parties for more than it cost to make or produce for a profit. Profit is one critical component of the business equation that keeps the business’ doors open. We touched on this in the previous chapter, employees sell their labor to the company for an agreed-upon wage, this represents the employees’ profits from their labor. The employee’s labor ideally needs to be sold at a price somewhat higher than the employee’s monthly necessary overhead expenses after taxes. The amount above their monthly overhead expenses or savings would be their profits. These are the critical driving components to the company’s success as the business grows and does well and so should its profits and employees’ incomes. The employees should be running their households like businesses which depend on the revenues from the sale of their labor. This revenue drives and lubricates the engine of their household. It is imperative that the employee understands how to run their household like a business and as the head of your household, you are forced to wear many hats. You must see yourself as the CEO, President, accountant, manager, secretary, scheduler, accounts payable, janitor, cook, and any other personnel required. If you have a significant other or partner, your income should be increased, and the duties are shared between two people. However, if you have children or pets this adds a whole new level of complexity and responsibilities to your business and this needs to be managed efficiently. Many times, these additional ‘beings’ have non-earning responsibilities. Let’s look back at how you are managing your take-home income with respect to monthly expenses. Do you earn a ‘Living Wage’ income that allows you to meet all your monthly overhead expenses? If you answered yes, in percentages, how much of your monthly income is used to cover overhead expenses? What amount of income does your present lifestyle require to provide you with a comfortable living? Are these additional comforts the best use for the money you have over and above what you need for your overhead expenses? Could some of this ‘comfort’ money be saved for a rainy day in a savings plan? These questions are asked because most people use different techniques when they create their monthly overhead expenses. They get a job and search for an apartment, hopefully, in close proximity to their place of work. They begin to turn on the utilities; electric, gas, and cable services creating monthly bills. The only utilities you have some control over are the cable/Internet and cell phone bills. Your cable bill is more of an a la carte choice, with option packages from $80 to $349 per month. Your other choice expenses are food, renter’s insurance, clothes, transportation, personal care, etc., here making the right choices are critical. The book provides you with strategies to determine and understand what percentage each of these monthly expenses takes from your net income. This information is necessary for understanding what you really can and cannot afford. Do you have some discretionary or leftover income after you pay all your monthly expenses? Is there enough income available for the purchase of a vehicle and or to put into savings? If there is money available for a vehicle, what would be your maximum budget amount for this vehicle, auto insurance, repairs, and gasoline? The total costs associated with owning a vehicle include many other components other than the ability to make car payments. These ancillary costs are things are insurance, gasoline, wear, and tear repairs items, and basic maintenance. The wear and tear items are things such as front and rear brakes for about $500 and a set of tires for about $800 after driving about 30,000 - 40,000 miles. These are recurring expenses so plan and budget for them, so you are not surprised when the time comes for their replacement because they come sooner than you think. So, let’s try to solve this complex financial puzzle. How do I pay all your monthly bills with the little bit of money you bring home in my two paychecks monthly after taxes? The simplest answer would be to make sure you are properly managing your money by ‘living within your means’ and not over-extending yourself. Again, ‘living within your means’ means, what you spend each month is equal to or less than the amount of money you bring home each month. For most people, this is a lot easier said than done. You have to first give up that mindset that, ‘you have to keep up with the Jones. It’s an old school saying, ‘don’t worry about the materialistic things your friends and neighbors have and are doing, just focus on what you can comfortably afford on your income and live accordingly’. The use of credit cards and personal loans will allow you to buy more ‘things’ than your income would allow you to purchase. Your happiness comes from within, not from the material possessions you own. Please don’t let your ‘want’ for materialistic possession define who you are. If you are happy with yourself, you won’t need to spend money on excessive materialist things. It’s not always that you don’t make enough money to pay all your bills, many times it’s that you’re not spending your money wisely and on the right things, what you need. Let’s look at this illustration. You have planned a big event at your home and have invited forty-four guests. You purchased six large pies to serve for dessert, but fifty-two guests showed up. That’s an additional eight people or 18% more than you prepared for. Your original plans were to cut the six pies into eight slices each to have forty-eight slices. One slice for each of the guests with four slices left over. The six pies represent your monthly income, and the forty-four guests represent all your overhead monthly expenses. The four slices left over would represent your savings or about 9% of your take-home income. Feeding the eight unexpected guests represent spending more than you earn. You must now pull out your four saved slices from your savings, but you are still four slices short. You now have to decide to either purchase a seventh large pie which would represent emergency expenses and needs to be paid for by dipping into your savings account or with a credit card. This may exhaust your savings, but these eight guests could end up with a full slice. Your other option is to provide the unexpected guest with only half of a slice. In essence, the eight additional guests will receive slices that are half the size of the invited guest but at least they will get some dessert. Somehow somebody may have to sacrifice, or you could have cut the original six pies into sixteen slices, and everyone would receive half a slice making ninety-six total slices. This way some guests could have a second slice and there would be less waste from those who couldn’t finish an original full-size slice of forty-eight leaving you with a few half slices to save. If you wanted everyone to have the same full-size slice you will need to incur credit card debt by purchasing another large pie. If you are on a budget ‘living within your means’ buying an additional pie on a credit card would throw your budget out of sync. You were able to come up with four of the additional slices by using your saving for that month and reducing the slice sizes. Creating credit card debt is usually not your best option especially when there are other options. The better option would be to cut the four slices from your savings into eight slices and give the additional guest half a slice. Save your credit card uses for emergency expenses such as medical or vehicle maintenance not on wasteful purchases. The message is there are usually options that don’t create debt. This example, it shows how breaking your budget for nonemergency expenses, can cause you to create unnecessary debt. This debt may later cause some of your bills to go unpaid or make partial payments for many of your overhead expenses because you are over-extended. If you make credit card payments lower than the minimum amount due are not permitted without late fees, and interest charges and can have a negative impact on your future credit rating. This simple act of not planning or sacrificing in order to have ample savings can have costly consequences for you in the long term. Some experts say your financial goal should be to have at least four to six months of overhead expenses saved and set aside for ‘rainy days’ before you reward yourselves with vacations and other costly ‘want’ purchases. Ideally, those savings should equal a year of expenses. These are examples of how unexpected emergency expenses can kill your budget, completely throwing it out of whack and stressing you out. When emergencies occur, you must make them your immediate priorities. Your immediate attention to resolving the crisis at hand is to mitigate any further losses from occurring. You realize you can’t anticipate everything that might happen, the theory is to manage and control all those things you can control. For instance, does your annual budget have a proactive savings component built in that allows you to replace your vehicle within 6 - 8 years old or 150,000 miles, if necessary? This is why you have saved so that you are prepared in the event of an emergency. Planning other essential appliance purchases such as a refrigerator washer, dryer, and other appliances have a life expectancy and may need to be replaced every fourteen years. These appliance replacements would take place five to eleven years after you have paid them off if financed. Why fourteen years? If you do your research, you will find the average life expectancy for these appliances is about fourteen years, other appliances may be different. Please, do the research. To justify the purchase of a washer and a dryer, assume you are washing five loads of clothes per week, 52 weeks a year that would be 260 loads per year. In fourteen years or the life expectancy for the washer, you would have washed 5 x 52 x 14 equals 3,640 loads of clothes. What does it cost you annually to wash 260 loads per year at your local laundromat? At $2.50 per wash load, it would cost you $2.50 X 260 loads per year or $650 annually. The cost of drying your clothes at $1.50 per load would be $1.50 X 260 equal $390 annually. The use of the laundromat will cost you an annual grand total of $1,040 ($650 wash + $390 dry). Let’s see how much you would spend at the laundromat over fourteen years. Using the calculations from above $1,040 per year ($1,040 x 14) over fourteen years would bring your grand total to $14,560 spent at the laundromat with no price increases. Provided you have the space available in your home, this illustration verifies, and cost justifies that you could afford the purchase of a washer and dryer even if you had to finance it. The washer and dryer purchase would be $1,200. If we add the cost of electricity, gas, and water of estimated at $250 per year, or $3,700 over fourteen years. That makes the total cost $4,900 ($1,200 + $3,700) for appliances and utilities in fourteen years. This shows that owning a washer and dryer would save you over $9,660 ($14,560 - $4,900) over fourteen years versus using the laundromat. The cost of a laundromat is just about three times more expensive ($14,560 divided by $4,900 equal 2.97) than the cost of owning your own washer and dryer. This doesn’t include your time, commuting time to and from the laundromat, and waiting at the laundromat. While at home you can multi-task while doing the laundry, you can clean, watch TV, prepare meals while washing clothes, and or take a well-deserved nap. It’s a much more efficient use of your time. Here are the major differences between an ‘emotional/want’ purchase versus a need purchase. If you buy a washing machine you may only need four different features; load sizes, timed washes, temperature wash settings, and fabric type settings you may pay about $600 for the sale. If you are the type who ‘wants’ all the electronic bells and whistles, you may spend over $1,200 for the washer. The electronic features require several mini-computer circuit boards that are costly to repair. They both only come with one-year warranties from the manufacturers. If you purchase the more expensive model, you may be inclined to purchase the extended warranty contract for an additional $70 for three years, covering the unit for the second, third, and fourth years. You would be inclined to purchase the extended warranty again for years five through seven, then again for years eight through ten. Most people would continue with the extended warranty for years, eleven through fourteen. That would be $70 x four contracts for a total of $280. Now, you’ve spent $1,200 MSRP ( Manufacturer’s Suggested Retail Price) for the unit plus $280 on warranties for a total of $1,480 for fourteen years to be under warranty. If you purchase the basic washing machine many consumers may choose not to purchase the extended warranty, saving an additional $880 over the more expensive model. That additional $880 you’ve paid for the high-end model could buy you a new washer if it didn’t last fourteen years. If the washer lasted fourteen years your next washing machine is free for the next fourteen years. It is advisable to plan and budget to replace your appliances after fourteen years. Now, let’s look at the cost per wash if you take the 3,640 number of washes over fourteen years and divide it into the price of the two washers. The basic washer would be $600 divided by 3,640 washes equals $0.165 or 16.5 cents per wash. The high-end luxury washer with all the bells and whistles and warranty would be $1,480 divided by 3,640 equal $0.4065 or 40.7 cents per wash or 2.5 times more. Both washers do the exact same job of washing your clothes, except the basic unit cost per wash is about 60% less and fits much better within your planned budget. The upgraded series line of appliances with all the fancy electronics cost at more than double the price of the basic washer and comes with a three-year warranty. When the warranty ends, if an extended warranty is not purchased the repairs are much more expensive due to all the electronics and circuit boards versus the basic mechanical unit with the manual turn knobs. The upgraded model’s cost per wash is $0.24 more than the cost per wash of the basic washer. Is it worth the additional cost of a quarter per wash? Oh, by the way, you can receive similar savings from purchasing the matching basic dryer as well. This is a classic example of ‘living within your means’ and buying what you need versus what you ‘want’. You may want to consider replacing your washer and dryer or other major appliances before they actually fail. This means you need to start the research on product life expectancies in advance so you have knowledge of which of your appliances will need to be replaced before they start to fail. This will give you the power and opportunity to shop and replace them when they are on sale at 30% - 40% off the MSRP. This is how you are always increasing the purchasing power of your money. Most people stay with the same manufacturer’s brand if their products have served them well. If you decide to play Russian roulette after fourteen years by not replace your appliances before they fail. Now, that would be a bad decision because they all would eventually break down. You may end up having to purchase new refrigerators at the full retail price if they are not on sale when they break down and need to be immediately replaced. You would be losing the opportunity to save 30% - 40% off $1,200 or $400 if it was on sale. Remember, as the CEO of your home business you must make executive decisions and replace items when you determine that you have received the product’s useful life and your money’s worth out of the unit. After fourteen years you have got your money’s worth, time to let it go. By doing the necessary product research, from reputable resources, you can make the best decisions in your selection of the best manufacturers. Confirming you selected the best model number with the highest reliability and customer satisfaction ratings. Remember it’s your money, the more time you spend in the pre-purchase phase the higher the probability of making the right decisions and the less likely you’ll have problems with your purchases sooner than later. Research the benefits offered by your credit card issuers. Many credit card issuers offer a double the manufactures warranty benefit when you use their credit card to make electronics and appliance purchases. There are wholesale membership clubs that offer additional year warranties on large electronic purchases. Since large screen 4K HD televisions are complicated electronic devices and very costly to repair, therefore you may want to consider their extended warranty offers. If you call your local TV repair service center or research it Online, you will find that it cost about 60% to 75% of the cost of a newer TV just to repair your old malfunctioning TV unit. Remember if you decide to replace your TV, the new TV comes with a full warranty. Hopefully, this knowledge will help in your decision whether or not to purchase an extended warranty, my experience says go for it. The importance of research is ‘priceless’, another method to increase your money’s purchasing power is by having patience. The law of Retail is, ‘Everything goes on sale at some point in time’. Take the time before your purchases to plan, to research the quality, reliability, and price. Having knowledge of the MSRP will give you a starting price point to evaluate and determine what is a good or a great sale price. Here comes that word mentioned several times before and will be mentioned several more times, ‘Patience’ allows you to save dollars. When you plan your purchases, it gives you time to understand the retailers’ sales cycles. We all know the largest sales day of the year is the day after Thanksgiving, a.k.a. ‘Black Friday’. It is called ‘Black Friday’ because it is the day when all retailers’ sales will be so tremendous it will take their businesses from being in the ‘Red’ with sales below expectations and bring them into the ‘Black’, a state of profitability. The color ‘Red’ indicates the business for the year has not been as profitable. The sales starting from the day after Thanksgiving until Christmas will bring their business into a much more profitable status or in the ‘Black’. The retail industry has trained many consumers to have patience and wait for ‘Black Friday’ for the best sales of the year. This is a huge opportunity for you to maximize the purchasing power of your dollars. If you have planned any major purchases, you’d like to make this year, this is the time to purchase them. You had the opportunity to monitor and track the price drops of your desired items to confirm the price between Thanksgiving and Christmas are the best prices. Many times, TV sales prices will continue to be very aggressive up until Super Bowl Sunday which is always in the coming February of the next year. It’s also a great time to purchase computers and other Tech devices. Many electronic product manufacturers will be introducing a new model during the Christmas holiday season for those consumers who must have the newest, latest, and greatest models. Electronics manufacturers are anxious to reduce their inventory of last year’s models as soon as possible. Sometimes these sales are for very short durations, but the savings can be an additional 10% to 20% off previously best-advertised prices. For example, you may be able to purchase an original MSRP $1,099, a 65-inch Premium UHD 4K TV with four HDMI cable input jacks that come with a 3-year manufacturer’s warranty for as low as $699 that’s a $400 or 36.4% savings off. The four HDMI input jacks allow you to connect a cable box, Blu-Ray DVD player, a surround sound bar, and other external devices. As you can see how research, planning, sacrificing and patience do pay off in the long run because you know the product specifications and requirements to meet your needs. This way you don’t overbuy a model that has options you don’t need or more importantly buy a product that doesn’t meet all your option requirements. If you don’t plan or have the patience to wait you would have spent the same amount of money for a lesser quality brand 65-inch, HD 4K TV, with just a one-year warranty and only two HDMI cable input jacks. Simply having patience is how you increase your purchasing power substantially and at the same time treat yourself to a theater-quality product. Now you are getting what you ‘want’ for the price you ‘need’ to spend and remaining within your budget. Getting back to you, developing your own sense of patience, and training yourself to never pay price full price for any item you don’t need immediately. Things like a ruined tire, a dead battery, or a broken refrigerator/freezer are the kinds of emergencies that need immediate replacement and are done in order to mitigate or reduce any additional expenses. These life emergencies are always fortuitous, they happen by chance, and these events are totally out of your control, and your ability to plan for or anticipate. If your washer or dryer fails, you can wait a week or two by letting your clothes pile up while waiting for these items to go on sale. The chart below is another example of what amount of income you need to earn in order to substantiate your monthly expenses and lifestyle. Your living expense numbers will vary based on what part of the country you live in. It will be different for the Northeast, Southeast, Northwest, Southwest, and Central parts of the United States. You may need to adjust your specific income and overhead expense numbers accordingly where necessary. The below example chart is just an illustration of what your monthly budget might look like. You can change or modify these numbers to better tailor them to reflect your actual personal current situations. Please consider using a ledger, notebook or some type of software spreadsheet solution system that will allow you to easily make the necessary changes when you need to adjust your budget. This will allow you to track and make any necessary changes systematically and intelligently. MONTHLY LIVING OVERHEAD EXPENESES Actual Actual Family of 1 2 1 EXP 2 EXP Rent ** 1000 1400 Tax/Ins 25 25 Water 0 0 Electric 50 50 Nat Gas 125 125 Public Trans 100 200 Auto/Ins* 300 300 Petro/Rep 100 100 Cable/Int 120 140 Cell Phone 80 100 Food 180 250 Med Benefits 75 125 Personal Care* 50 100 Meds/Misc 50 75 Hair/Nails 50 150 Entertain/Sports 25 50 Clothing* 50 100 Spirits/Cigs 0 0 Savings* 0 0 Student Loan* 0 0 Credit Cards 50 50 Supple/Gym 0 0 Total Expenses 2431 3342 Pre-Tax Mthly Pay 3160 4345 Add Your Annl Inc Required Income 37924 52140 Make a list of your monthly overhead expenses and all elective expenses prioritizing them in the order that they must be paid. There are monthly expenses you may have which are not listed. That’s why it’s important to plug in your personal expense numbers to make this example reflect your current situation to give you the best snapshot of your income-to-expense ratio. You should add another column to the right to add your planned budget changes in those expenses which are not monthly overhead expenses to see how they impact your monthly totals. If you live at home or in an apartment with a roommate and are thinking about going out on your own this is an excellent tool to plan your total expenses. It will help you forecast ahead of time before you step out on ‘faith’ what your monthly minimum take-home income needs to be before you make a bad financial move. Your life insurance requirements should always be re-evaluated as your financial responsibilities are constantly changing. This ensures you always have adequate insurance coverage. This will enable you to continue to live your current lifestyle in the event there is a 50% temporary or permanent loss of your income stream. The purpose of insurance is to provide you with the resources at a time of need and give you time to plan your next financial decisions that you have determined to be necessary without the stresses of using up your savings or retirement funds. Many people say they can’t afford insurance, others say they can’t afford to have insurance. The younger you are when you purchase Life Insurance the lower your monthly premiums. If you think you can’t afford it now, it will be harder and more expensive at an older age. Consider using some of the money you will save using some of the suggested strategies recommended in this book to maintain an adequate amount of needed insurances to protect your future financial security. Insurance: Insurance instruments provide financial security in the event of a financial loss. Disability insurance replaces a portion of employee income when they can't work because of an illness or disability. For the most part, disability insurance will not replace all of someone's income. Instead, it will provide wage replacement benefits that cover, on average, up to 60% of employee earnings. Health and Life insurance provides an infusion of cash for dealing with the adverse financial consequences of the insured's illness and death. Having adequate Insurances are means to ensure your beneficiaries have the best opportunity for a financially secure continuation of their lives in your absence. Life insurance enjoys favorable tax treatment, unlike any other financial instrument. Death benefits are generally income-tax-free to the beneficiary. The primary advantages of whole life insurance are: Protection for life – It doesn't expire or go down in value. Level Premiums – The rate you pay for your policy will never increase. Cash Value – A portion of your premium builds cash value which can be borrowed against. Definition If your monthly income-to-expense ratio doesn’t permit, you to save at least 10 percent of your take-home income do the best that you can. Some of you may need to consider consulting a financial and insurance adviser. Please C.Y.A., that’s not what you think. It’s to Cover Your Assets. Insurances can be that blanket of security you need throughout your life to protect your assets as you begin to accumulate them and move toward your ‘American Dreams’. If you are fortunate to have purchased whole life insurance and never have to use it, it will accumulate a cash value which may come in handy in the future if you may need to borrow money. If you have the misfortune in your life to need to borrow money, you’ll be glad you have it. Some people say, “Life insurance is the only gamble or lottery you or your beneficiaries are guaranteed to win”. All types of insurance have the power to ease the financial burdens at a time of loss. Not enough people believe Insurance is a sure bet and well worth the cost to ensure your beneficiaries would have the opportunity to move forward with their lives without the uncertainty of financial challenges and difficulties. Life insurance is a good investment because it ensures your assets have a financial backup plan. Another financial money pit that needs to be addressed is if you ever have a need to rent a storage unit. Here are a few tips to make sure you don’t get caught up in the ‘storage money trap game’. Please take inventory of all the items you think you want to put into storage. Ask yourself do they have sentimental value, or is it just stuff I don’t have space for now? Then you have to put a realistic dollar value on these items, are your items worth $2,500, $5,000, $10,000, or more? Please make sure you have personal property insurance on your items in storage. If you have a rental or homeowners’ insurance policy many of them will cover your items in storage. Otherwise, you need to purchase insurance coverage from the storage facility or a third-party insurance agent, whichever is less money. Rule number one is never to spend more than the value of the items in storage to keep them in storage. Determine the depreciated value of your items. Could you have replaced the items for the cost of XX months of storage rental fees? For example: if you feel your items are worth $5,000 and the storage unit costs $250 per month. If you keep your item in storage for 22 months, you would have spent $5,000 in storage fees. However, the true or depreciated value of your items at 40% may be only $3,000, so you spent $2,000 more than the items are worth. Here's an option, if you had considered selling your items for $2,500 to $3,000 rather than putting them into storage you would be better off. The revenue of the items is $2,800 plus savings from not using the storage unit for one year is $3,000. Your total received from this option is $5,800, enough to buy new items later. This would eliminate the possibility of needing to keep the item in storage for long periods of time and plus the two-moving cost to and from the storage facility. As CEO and running your home as a business, these are just some of the things you need to plan to reduce expenses and maximize your savings. Running your home as a business requires you to be on top of things that have the potential to get out of control. Efficient planning, budgeting, and sacrifices always keep your best financial long-term interests front and center in all your decisions. The lesson learned here and throughout the book is that the amount of money you can save is constant and fixed; it does change because it is based on your income. Your challenge is to develop ways to find parts of the ‘Treasure of Savings’. This can be achieved by increasing your financial literacy knowledge, which provides you with the life skill tools to change your financial future. This is achieved by using this knowledge to make the best financial decisions to maximize and increase your money’s purchasing power to create many saving opportunities.