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Practicing Significance Glorifying God by fulfilling your own unique purposes through the never-ending action of acquiring, using, and sharing diverse resources. |
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Personal Finance
“In a consumer society there are inevitably two kinds of slaves: the prisoners of addiction and the prisoners of envy.” Ivan Illich
“It’s not a matter of life or death. It’s more important than that.” Unknown
“Money doesn’t come with instructions.” Unknown
“What we have here is a failure to accumulate.” Earnest
“The borrower is a servant to the lender.” Solomon
Introduction
Personal Finance is a lesson on the basics of how to manage your personal financial resources. Closely managing your financial affairs takes time and effort; however, you will be rewarded with a more stable family, more financial security, fewer worries, and more free time. At the start of 2005, consumer debt was at an all-time high, savings rate at an all-time low, and personal bankruptcies at a record level. Yet, 75% of Americans believe they are doing an excellent job of controlling spending. This self-deception will cause untold millions permanent damage.
Why Worry About Personal Finance?
As a CEO of two publicly traded corporations, I knew it was imperative that our companies make the same basic financial preparations as any successful corporation. Many corporate failures occur because, like most of us as individuals, businessmen don’t want to believe that the basics apply to them. Appendix 1 shows a brief list of some of those preparations. As you can see on Appendix 1, the check list is broken into three parts: planning and purposes, personnel, and financial. The Practicing Significance series of lessons cover all of these same areas on a personal level. This lesson concerns the personal finance aspect of preparation. It is assumed that you have already done the lessons on finding your purpose, setting goals, and making a life plan. Without having those guidelines, you cannot optimally use your financial resources. Do you remember the financial aspects of your goals and life plan? For some of us just getting to next week is currently a goal. For some of us the attainment of vast wealth is a goal (if that is your goal read Appendix 10. Some people are wealthy in the riches of this world, but their trust in money has robbed then of spiritual wealth.). One goal that I think is applicable to most people is the attainment of financial freedom. One definition that was given to me many years ago is, “Financial freedom is when I save 10%, give 10%, live on the other 80%, and have no debt”. Financial freedom allows us to use our money wisely without being controlled by our money.
For purposes of this lesson, personal finance means examining and accounting for our income, expenses, assets, and liabilities. For most of us, personal finance either allows us more freedom to pursue the other aspects of a significant life or traps us in a life of fewer options. My family has two sayings about money. “Money is stored labor” and “Money is only good to give you more options”. We do not believe money is inherently good or evil, but that it can be used in good or evil ways.
Virtually all of us feel some kind of constraint concerning money. Some of us don’t think we have enough, some are preoccupied with taking care of what we have, and some are trying to acquire more than can be spent in ten lifetimes. Whatever your situation, remember that money seldom stops the ability to practice significance. It may limit the options, but will not eliminate all the options. Again, money seldom stops the ability to practice significance. However, a preoccupation with money or a love of money can often stop the ability to be significant. Whether we have too much or too little, there are certain actions that we should take.
Your Attitudes, Beliefs, and Hang-ups
Have you ever wondered why you think about money differently than your spouse and friends? Your attitudes, beliefs and hang-ups drive your actions and likely cause conflict with others who are affected by your financial decisions. Studies show that your attitudes were probably formed in childhood primarily by your parents, and secondarily by your church, friends, and community. Do you feel guilty for having too much or too little? Is your self worth influenced by your net worth? Are your financial goals your own or those of your parents? Do you believe that your priorities are reflected by how you spend your money? It would be worth your time to examine your underlying attitudes about money before going further. No matter what your or their ages, your children are learning financial habits from you. You are creating their financial D.N.A. with your decisions. If you are married, it would be helpful to have several discussions with your spouse too. If you understand each other’s assumptions, you will be much more likely to agree to common financial goals. Some websites to consider might be: www.sevenstages.com, www.suddenmoney.com, www.themeadows.org, and www.crown.org.
Personal Accounting
There is a reason all successful businesses have good financial accounting. Without knowing where they are, how can they plan for the future? For the same reason, as individuals, we also need to have good accounting. Good accounting will allow us to quit being preoccupied with money and move on to more important things. It may truly be a case of “you shall know the truth and the truth shall set you free.” If you are one of the few who already have excellent personal financial records, congratulations! For the rest of us, the following is a necessary, if unpleasant, part of getting our financial houses in order. In order to get the information you need, you will probably need to get out checkbooks, tax returns, receipts, etc.
· First, we need to know how much income we have. A model for this is shown in Appendix 2. For many of us, this will consist solely of having a current W-2 from our jobs. For others, it will include knowing income from dividends, pensions, retirement accounts, etc.
· Second, we need to now how much money we currently spend. A model for this is shown in Appendix 3. This is a difficult set of numbers for most of us to determine. For the most part we often don’t keep receipts on our expenditures, and many of us live on cash from ATM machines. As you will find, it is very difficult to change your income, but it is easier to change your expenses. In fact, most of the people I know who have their finances in order are the ones who tightly track and control their expenses.
· It might be interesting to examine Appendix 3 with your spouse or a trusted friend and see if you can reduce your expenses. A short list of ways to reduce expenses is shown in Appendix 4. Many people find freedom in living a frugal life-style instead of fighting the relentless onslaught of consumerism.
· Next, we need to be able to budget for the future. This budget should be based on the income and expense statements you now have. This budget is one of the main documents to help us plan. If you are married, take the time to do the budget with your spouse. If you both don’t agree, it isn’t going to happen. A model budget is shown in Appendix 5. Making a budget and living within it is the absolute key to success. It is so important that Crown Financial Ministries has volunteer budget counselors throughout the country who offer their services at no charge to people who will establish a budget, get out of debt, and honor God through their finances. You may contact them at 601 Broad Street, Gainesville, GA, 30501.
· A critical part of staying on financial track is to reconcile your future income and expenses against the budget on a regular basis. This reconciliation will help keep us from lying to ourselves, and may eliminate needless, fact less arguments with the spouse. A model is shown in Appendix 6.
· Next, we need to understand the things we own and how much we owe. Once again, try to be realistic…. deceiving yourself defeats your purpose. By keeping balance sheets on a regular basis, it is easy to see whether we are making financial progress with time, or are going backward. An example of a Balance Sheet is shown in Appendix 7.
· Experiment with your Balance Sheet to see how you can vary the form of your assets. By varying their form you may be able to increase your income, reduce taxes, reduce your risk, increase your liquidity, and reduce your maintenance time and expense. Examples are shown in Appendix 8.
· Appendix 9 shows some relationship of income and assets. It explains why a friend of mine says his wife has a “million dollar job.” It shows why income-earning potential (your talents and abilities) is one of your most valuable assets.
Maybe you already keep good financial records. If not, it would be a good time to get your records in shape. Record keeping takes time, but not keeping accurate, timely records can be devastating to you and your family. Just ask the Enron or WorldCom shareholders.
Aging Aspects of Personal Finance
In the first half of our lives, we typically came to some sort of agreement about which spouse keeps track of income and expenditures, and who controls the purse strings. At the time of retirement, the retiree may intentionally or unintentionally try to change the arrangement. In order to reduce conflict, an honest and open discussion about this topic should occur as early as possible.
A crucial aspect of financial planning has to do with aging. In his book, You’re 50, Now What, Charles Schwab advises to “plan to live to be 100”. Never before has a large population segment had that situation. When you plan to live to be 100, it dramatically changes how you view life insurance, long-term care insurance, when to retire, how much you get to spend, and how important good health is. This one thought should be involved in all financial planning, “plan to live to be 100”.
Credit Counseling
Many Americans have so much debt that their lives are seriously impacted. In October 2003, the national average of consumer debt per household was $18,700. The average household spends 18% of after-tax income on debt service, yet saves only 2%. At best, high debt causes stress, and at worse causes bankruptcy and failed relationships. Experts blame the high level of debt on easy credit, lack of self-control, low interest rates, peer pressure, and ignorance.
Although there are many advertisements on television about solving debt problems, the only method we advise is to take a course on personal finance by Crown Financial Ministries. These are taught at churches and their only goal is to help you get out and stay out of debt.
If you choose not to take such a course, another step is meeting with a legitimate (some are not) credit counseling service that provides counseling and education on budgeting, credit, and debt resolution. Some of these services are provided free of charge from non-profit agencies while others are fee-based. In a nutshell, the answers usually begin with spending less, eliminating credit cards, and changing bad habits. This is another area where spouses need to support each other. Three sources to consider are:
1. The National Foundation for Credit Counseling. 800-388-2227. www.nfcc.org
2. Association of Independent Consumer Credit Counseling Agencies. 800-450-1794. www.aicca.org
3. Debtors Anonymous. www.debtorsanonymous.org
Conclusion
Closely managing your financial affairs takes time and effort, but you will be rewarded with a life of fewer worries, a more stable family, more financial security, and more free time. For most of us, personal finance is a condition which either allows us more freedom to pursue the other aspects of a significant life or traps us in a life of fewer options.
Additional Resources
Charles Schwab You’re 50, Now What,
Ernst & Young’s Personal Financial Planning Guide
Ron Blue www.ronblue.com
Crown Financial Ministries www.crown.org
DISCLAIMER: The content presented herein is presented as general information and is not intended to be a comprehensive overview of all of your financial options. Nor is it meant to imply any endorsement of any type of financial plan, product or service. Investing and spending money is a complicated and serious process that is constantly affected by conditions in the marketplace and changes in tax law and government policies. There is no guarantee than an investment product bought today will perform the same from year to year. You should research your choices as thoroughly as possible and, when in doubt, consult a trusted professional advisor.
APPENDIX 1 – BRIEF CHECK LIST FOR A BUSINESS
PLANNING
Mission Statement (Purpose for existing) _____
Goals _____
Strategies for achieving goals _____
List of competitive advantages _____
List of constraints _____
PERSONNEL
Employee handbook with rules of conduct _____
Job descriptions for each employee _____
Time schedules for employees and management _____
Evaluations of personnel _____
FINANCIAL
Annual Revenue Statement _____
Annual Expense Statement _____
Budget _____
Reconciliation of Budget to Actual _____
Balance Sheet _____
APPENDIX 2 – REVENUE STATEMENT EXAMPLE
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Annual Gross Salary/Commissions |
$60,000 |
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plus: Bonuses |
+ 6,000 |
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less: Federal Income Tax |
- 12,000 |
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less: State Income Tax |
- 3,000 |
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less: FICA, etc |
- 1,500 |
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less: 401-k, etc |
- 6,000 |
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Net Annual Salary/Commissions |
$43,500 |
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Income from rents, dividends, bonuses, etc. |
$10,000 |
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less: income taxes, expenses, etc. |
- 6,000 |
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Net Income From Other Sources |
$ 4,000 |
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TOTAL AVAILABLE ANNUAL REVENUE |
$47,500 |
Note: The data for the above is derived from last year’s W-2, and other personal records.
Note: According to the Federal Reserve, the median family income in 2001 was $39,900.
APPENDIX 3 – EXPENSE STATEMENT EXAMPLE
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Annual Expense |
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Rent/house payment |
$8,500 |
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Electricity |
2,400 |
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Natural Gas |
1,200 |
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Telephone |
1,100 |
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Sub-total |
$13,200 |
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Automobile Payment |
$6,000 |
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Automobile Insurance |
2,400 |
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Automobile Gas |
1,200 |
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Automobile Upkeep |
1,800 |
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Sub-total |
$11,400 |
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Food |
$9,000 |
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Medical |
2,000 |
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Clothing |
2,000 |
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Sub-total |
$13,000 |
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Donations |
$4,500 |
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Miscellaneous |
$5,400 |
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TOTAL ANNUAL EXPENSES |
$47,500 |
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Note: The above list can be made much more detailed. Data is derived from records, receipts, check books, etc. It’s very difficult to track cash, so most people have lots of miscellaneous.
APPENDIX 4 – WAYS TO REDUCE EXPENSES
Study ways to reduce taxes. This is often the largest expense you have.
Study about the subject of saving
Refinance house mortgage
Eat at home, eat less, and eat healthy
Entertain at home instead of at restaurants
Reduce entertainment outside of house
Exercise to stay healthy at the municipal center or YMCA instead of an expensive health club
Maintain your car and house regularly, become a do-it-yourselfer
Buy used cars
Barter/trade your services and stuff
Don’t buy stuff
Vacation nearby/impose on friends and relatives
Get music, books, and magazines at library
Don’t impulse shop
Add insulation to your house
Keep and study receipts/keep good financial records
Don’t carry much cash
Make it inconvenient to spend money
Less snacks, coffee, and soft drinks (saves money and is more healthy)
No subscriptions or gadgets
Reduce destructive habits – smoking, alcohol, fast driving, junk food
Use a discount stock broker
Buy used stuff
Don’t use credit cards or ATM machines. Cut up and cancel cards if you need to do so
Send the kids to a local junior college for the first two years
When your children are in junior high, start working together to learn about college costs and scholarships
Shop at Costco, Sam’s, or a similar type of discount store
Make it a mission to never pay full price
Instead of buying “brand name” merchandise, add money into your children’s college accounts
Drink tap water (it’s just as healthy as bottled water)
Take coffee to work instead of stopping for “designer” coffee
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2002 Actual |
2003 Budget |
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Annual Gross Salary/Commissions |
$60,000 |
$62,000 |
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plus: Bonuses |
+ 6,000 |
+ 6,200 |
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less: Federal Income Tax |
- 12,000 |
- 13,000 |
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less: State Income Tax |
- 3,000 |
- 3,000 |
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less: FICA, etc. |
- 1,500 |
- 1,800 |
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less: 401-K, etc |
- 6,000 |
- 6,200 |
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Net Annual Salary/Commissions |
$43,500 |
$44,200 |
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Income from rents, dividends, bonuses, etc. |
$10,000 |
$11,200 |
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less: income taxes, expenses, etc |
- 6,000 |
- 6,700 |
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Net Income From Other Sources |
$ 4,000 |
$ 4,500 |
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TOTAL AVAILABLE ANNUAL REVENUE |
$47,500 |
$48,700 |
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Annual Expenses |
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Rent/house payment |
$ 8,500 |
$ 8,300 |
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Electricity |
2,400 |
2,600 |
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Natural Gas |
1,200 |
1,600 |
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Telephone |
1,100 |
1,100 |
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Sub-total |
$13,200 |
$13,600 |
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Automobile Payment |
$ 6,000 |
$ 6,000 |
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Automobile Insurance |
2,400 |
2,500 |
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Automobile Gas |
1,200 |
1,400 |
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Automobile Upkeep |
1,800 |
1,800 |
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Sub-total |
$11,400 |
$11,700 |
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Food |
$9,000 |
$9,200 |
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Medical |
2,000 |
2,000 |
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Clothing |
2,000 |
2,000 |
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Sub-total |
$13,000 |
$13,200 |
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Donations |
$4,500 |
$4,500 |
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Miscellaneous |
$5,400 |
$5,700 |
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TOTAL ANNUAL EXPENSES |
$47,500 |
$48,700 |
APPENDIX 6 – BUDGET RECONCILLIATION EXAMPLE
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2003 Actual |
2003 Budget |
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Annual Gross Salary/Commissions |
$61,666 |
$62,000 |
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plus: Bonuses |
+ 3,000 |
+ 6,200 |
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less: Federal Income Tax |
- 11,800 |
- 13,000 |
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less: State Income Tax |
- 2,800 |
- 3,200 |
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less: FICA, etc |
- 1,500 |
- 1,600 |
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less: 401-K, etc |
- 6,166 |
- 6,200 |
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Net Annual Salary/Commissions |
$42,400 |
$44,200 |
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Income from rents, dividends, bonuses, etc. |
$10,000 |
$11,200 |
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less: income taxes, expenses, etc |
- 5,500 |
- 6,700 |
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Net Income From Other Sources |
$ 4,500 |
$ 4,500 |
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TOTAL AVAILABLE ANNUAL REVENUE |
$46,900 |
$48,700 |
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Annual Expenses |
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Rent/house payment |
$8,500 |
$8,300 |
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Electricity |
2,400 |
2,600 |
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Natural Gas |
1,800 |
1,600 |
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Telephone |
1,100 |
1,100 |
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Sub-total |
$13,800 |
$13,600 |
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Automobile Payment |
$6,000 |
$6,000 |
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Automobile Insurance |
2,600 |
2,500 |
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Automobile Gas |
1,200 |
1,400 |
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Automobile Upkeep |
1,000 |
1,800 |
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Sub-total |
$10,800 |
$11,700 |
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Food |
$9,300 |
$9,200 |
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Clothing |
3,000 |
4,000 |
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Sub-total |
$12,300 |
$13,200 |
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Donations |
$4,500 |
$4,500 |
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Miscellaneous |
$7,000 |
$5,700 |
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TOTAL ANNUAL EXPENSES |
$48,400 |
$48,700 |
Note: The $1,500 difference in 2003 Actual lessens savings or increases debt
APPENDIX 7 – BALANCE SHEET EXAMPLE
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ASSETS: |
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“Liquid” (available quickly) |
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Cash |
$ 2,000 |
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Savings account |
1,500 |
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C.D.’s |
5,000 |
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Stocks and bonds |
45,000 |
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Sub-total |
$54,500 |
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“Illiquid” (not available quickly) |
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House value |
$130,000 |
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401-K (Net after tax) |
63,000 |
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Cars |
14,000 |
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Sub-total |
$207,000 |
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TOTAL ASSETS |
$261,500 |
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LIABILITIES |
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“Liquid” |
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Credit cards balances |
$8,000 |
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Other short term debt |
3,000 |
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Sub-total |
$11,000 |
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“Illiquid” |
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House mortgage |
$115,000 |
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Car note |
18,000 |
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Sub-total |
$133,000 |
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TOTAL LIABILITIES |
$144,000 |
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NET WORTH |
$117,500 |
Note: The average family net worth in the USA for 2001 was $86,100.
Most of that net worth was the equity in the home.
Note: Do not include personal items such as furniture, clothes, appliances, jewelry etc. in assets. They are worth only a fraction of original cost, and you likely won’t sell them anyway. Yet, most people spend lots of money on personal items.
APPENDIX 8 – CHANGING THE FORM OF ASSETS
There are many reasons to change the form of your assets. These reasons include:
· Reducing risk
· Changing the income
· Changing the taxable nature
· Changing the tax timing
Example 1: Sell 1000 shares of a high risk/growth common stock paying no dividends and purchase municipal bonds of Dallas, Texas paying 4 %/year free of federal income tax. This will reduce risk and volatility; increase income; decrease growth possibilities.
Example 2: Sell your house and move to a smaller house. Invest the difference in bonds. This will convert some of your home equity into an income paying instrument. Hopefully you might even have lower maintenance costs and utility bills.
Example 3: Donate a book collection worth $1,000 to a charity of your choice. You will have more room on your shelves and will receive a cash refund from the IRS for up to $450.
APPENDIX 9 – RELATIVE VALUE OF ASSETS AND INCOME
A respected estate lawyer calls his wife’s primary school teaching position a “million dollar job”. Is he joking, or does he have an extraordinarily clear vision of value?
In January, 2003, interest on a medium term CD was approximately 4.5%. Annual interest on $1,000,000 would be $45,000. After income taxes of 45% if in a high income bracket, including state and federal, $24,750 is remaining. In other words, the after-tax value of $1,000,000 is $24,750 annually.
In January, 2003, an experienced teacher in many states might have an annual salary of $30,000. At the lower tax rate of maybe 18% average, the teacher would have approximately $24,600 remaining. Even without a summer job, the teacher has a million dollar job!
People’s jobs are usually their most valuable “asset”. Keeping a job is often the most critical financial objective for many people to accomplish.
The above example clearly shows that on an income basis, it is easy to see a relative relationship of assets and income. It makes it even clearer why money is just stored labor. It also shows why it is so valuable to acquire assets that can supplement or replace income from a job.
APPENDIX 10 – WARNINGS ABOUT WEALTH
Mat. 6:19-21 – “Do not store up for yourselves treasures on earth, where moth and rust destroy, and where thieves break in and steal. But store up for yourselves treasures in heaven, where moth and rust do not destroy, and where thieves do not break in and steal. For where your treasure is, there your heart will be also.”
Mark 10:21-24 – Jesus looked at him and loved him. “One thing you lack,” he said. “Go, sell everything you have and give to the poor, and you will have treasure in heaven. Then come, follow me.” At this the man’s face fell. He went away sad, because he had great wealth. Jesus looked around and said to his disciples, “How hard it is for the rich to enter the kingdom of God!” The disciples were amazed at his words. But Jesus said again, “Children, how hard it is to enter the kingdom of God! It is easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of God.”
Mark 8:36, 37 – “What good is it for a man to gain the whole world, yet forfeit his soul? Or what can a man give in exchange for his soul?”
Luke 12:15 – “…Watch out! Be on your guard against all kinds of greed; a man’s life does not consist in the abundance of his possessions.”
I Tim. 6:6-10 – But godliness with contentment is great gain. For we brought nothing into the world, and we can take nothing out of it. But if we have food and clothing, we will be content with that. People who want to get rich fall into temptation and a trap and into many foolish and harmful desires that plunge men into ruin and destruction. For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs.
James 5:1-3 – Now listen, you rich people, weep and wail because of the misery that is coming upon you. Your wealth has rotted, and moths have eaten your clothes. Your gold and silver are corroded. Their corrosion will testify against you and eat your flesh like fire. You have hoarded wealth …