Common Cents # 9 Investing

Common Cents # 9 Investments

Last week we discussed that part of everything we make is ours to keep. The idea is that ten percent of what we make should first be given away to Non-Profit works we support or for the Believer, returned to God. The second ten percent is ours to keep. That means invested and not spent.

Even if we agree with this concept, it is not always possible to implement it with our next paycheck if it has not been our strategy before.  The first thing we must do is to look at our current percentages and see, over a period of time, when these goals can be achieved. 

When we write a check, pull out some cash or a credit card, we are doing one of two things: spending or investing. If the item we are paying for is consumed, such as food, gasoline, or electricity, it is spending. If we can get our money back later, hopefully after it has grown a little, we call it investing.

There are a few areas where the line is blurry. For example, if we are making a mortgage payment on a house, the part that is interest, taxes, and insurance is spending. But the part that goes to increase our ownership in the house, paying down the balance, might correctly be considered investing. If at a later date we sell the house, we will most likely get that money back, probably increased by inflation. So in that case our home may well be a good investment. One does not really know until it is sold.  However, we do know that rent paid is just spending.

So, what about other investments? Anything that we can easily sell for at least as much as we paid is considered a good investment. We sometimes talk about investments in terms of liquidity. Liquidity is a clever word that means how easily an item can be sold or converted to cash. A stack of one hundred dollar bills is very liquid, they can be spent right now. A house is not very liquid because it could take months to sell.

A good place to park our money where it is reasonably secure, at least in the long-run, and is quite liquid is the stock market. If we get really excited about investigating companies and making decisions about their long-term viability and feel we want to be part of that company, buying individual stock may be what we do. For most of us, we would rather make small investments in a large number of companies over a large number of industries and let professionals pick the individual stocks. We call this shopping cart of stocks a mutual fund. Anyone can go to one of the many web sites operated by mutual fund companies, choose a fund, write a check or transfer the money and become a proud owner of a chuck of the American (or world) economy. One can also go through a stockbroker or financial planner. Many people who work for a company with employee benefits can have money deducted from their paycheck and invested in mutual funds through a program such as a 401(k) retirement plan.

Setting up an account with an online brokerage company and putting in a small amount every month is one the smartest things we can do. As we have seen in the past few months, the stock market can be volatile over the short term with big swings in prices in just a few days. However, the long-term trend over five years, ten years, or more has proven to outpace inflation and increase in value.  Understanding our tolerance for risk is required and investments made accordingly, but the stock market is an essential part of long-term financial success.

Next week I will talk about some other forms of investing such as collectibles, musical instruments, and vintage cars.

Common Cents # 8 The Richest Man in Babylon

Warren Buffett is one of the richest people in the world. He is free with advice about finances to anyone who asks. A reporter recently asked him why more people don’t follow his advice. He answered, “Most people don’t want to get rich slow.”

There is no shortage of information about accumulating wealth from well-known books like, “The Millionaire Next Door,” “Rich Dad, Poor Dad,” and maybe the most famous, written 100 years ago by George Clason, “The Richest Man in Babylon.” The basic point of “The Richest Man in Babylon is “Part of everything we make is ours to keep.”

Let me be a little more specific. Those of us who strive to be people of faith know that the Bible asks us to give the “First Fruits” of our labor to God. This is generally understood to be 10% of our income, off the top, to things that glorify God. If you are not a believer, you can still give generously to organizations who are doing the things you want done: schools, arts organizations, health research, animal rights, and so forth.

The next 10% is ours to keep. The best way to do this is to put 10% of our income away where it can grow protected from inflation. One obvious vehicle is the stock market through mutual funds. Having our employer take money out of our paycheck and put it in a 401(k) or retirement fund is the least painful way to do this. If we do not take advantage of 100% of any matching funds, we are leaving money on the table. Putting money in an individual IRA every month is another great way to pay ourselves first. Investing 10% of our income over a fifty-year career will make a huge difference in our available choices when we decide to stop working.

The next 30% or so of our income goes into shared funds to pay for things like schools, parks, streets and highways, police and fire protection, and national defense. We call these payments taxes. The taxes are in several forms such as Federal Income Tax, State and City Income Tax, property tax, and finally, sales tax on the things we buy. The money goes to benefit everyone.

That leaves 50% of our income to create a Spending Plan for ourselves and our families. For most people the biggest chunk is housing in the form of rent or a mortgage, utilities, and maintenance. Food is a big item as well as transportation. 

If we pay attention and spend our resources on what we truly need for our housing and transportation, and we are disciplined with shopping for groceries and eating out, there will likely be some money remaining for clothes, entertainment, and travel.

I listed these expenditures in this order for a reason. By priority the list is: giving, saving, taxes, housing, food, transportation, everything else. The government won’t let us forget about taxes, and I have found that giving and saving are too often set aside, particularly saving. To have a great financial future, always remember that part of what we make is ours to keep. 

Common Cents # 7

Common Cents #7 - Where Are We?

George Gruhn owns Gruhn’s Guitar in Nashville and is considered to be the world’s foremost authority on guitars. He started his business when he was in Graduate School at the University of Tennessee in 1971. He currently hosts a weekly Zoom-cast on Friday afternoons and I’ve really been enjoying hearing his interesting ideas, honest opinions, and personal stories from his many years of being in business.

Mr. Gruhn answers questions that people send in on a wide range of subjects. Recently a writer asked if he had any regrets after 50 years in business or if there was anything he would have done differently. He immediately said that he wished he had taken business courses in college, or at least hired a business manager early on. He said if he, or someone on staff that he trusted, had been better versed in things like insurance, taxes, and accounts payable, he would have been much better prepared to face the highs and lows of the business and the economy in general. If we own a business, the details and skills of operating the business are just as important as the actual service it provides or product it creates.

I have been a business owner for 55 years. For 45 of those years the business has been photography. I have never claimed to be the world’s greatest photographer. In fact, I spend much of my time studying other people’s photographs and searching for ways to improve mine. I have been able to make a living in photography because I was a businessman first. The product I sell is photographs.

During the years that I was a tax professional, many of my clients were small businesses. It was amazing when a client would come in with incomplete records, disorganized records, or in some cases, no paperwork at all. They had no idea how they were doing and had no clear way to make wise business decisions without adequate data. A lack of contemporary records or inadequate records is also the fastest way to get audited. If a business cannot provide organized records and receipts with adequate documentation to the IRS to support the tax return, it will lose the audit process every time.

Even if we do not own a regular business, our households should be considered to be small businesses. My wife and I consider ourselves “Jim and Louise, Inc.” Though we are not actually incorporated, we could be; we keep detailed records as if we were. We have current balance sheets, monthly income-expense statements, and keep an ongoing account of projected cash-flow. We do this for both our personal finances and for my photography business.  It takes less time than one might think once the files are set up with the information that one needs to be recorded.

If we look at a map to see how to get to where we want to go, the most important thing is to determine where we are now. The big advantage and the beauty of GPS is that it shows where we are now. The direction we want to go in our financial life is the same.  A Balance Sheet, sometimes called a Net Worth Statement, is where we are now. It is a snapshot. It is a list of what we own, our assets, and everything we owe, our liabilities. Subtracting the liabilities from the assets gives our net worth. Its usefulness comes from having a series of balance sheets over time to see if our net worth is increasing or decreasing. We can increase our net worth by either increasing our assets or lowering our liabilities.

Deciding where we want to go in our financial life becomes possible when we see where we are now, and whether we update the numbers ourselves or pay someone like George Gruhn wished he had, it is valuable information for our progress toward our desired goals.

Jim Mathis 

Common Cents #6

Common Cents # 6 for June 1, 2020

 

Let’s talk about cars. Some places where public transportation is quick and reliable, cars are a luxury. For most of us they are a necessity. For most people, an automobile is the second most valuable piece of property owned after the cost of their house or apartment lease.

Cars can tell other people about one’s lifestyle and personal taste, or it can simply be a way to bring home groceries.  It can represent a ticket to freedom or it can be a heavy weight of responsibility and expense. Because it is a costly and depreciating asset, it is important to know how we view our automobiles and seek ways to be wise with purchasing, maintaining, and then selling our car.  

So how do I go about buying a car? There are four tiers and a wild card. The top tier is a new car from a dealer. Driving a new car off  the lot with a new car warranty is about the safest way to have dependable transportation for the length of the warranty, providing that the car is correctly maintained even as a new vehicle.  The argument against buying a brand-new car is high first year depreciation. Since most new cars are sold at a discount and feature special financing, rebates, or longer warranties, first year depreciation is not as big a deal as most people think, especially if the car is owned for many years.

The second tier is Certified Pre-owned or CPO. This low mileage one or two-year-old car would be purchased from a reputable new car dealer that has essentially a new car warranty. This often proves to be an excellent choice.

The third is a used car from a respectable dealer, often connected to a new car dealer. The dealership has likely checked the car to know that it would be good for their used car sales reputation, even though it does not provide the owner with a long or robust warranty.

The bottom is a “Buy Here, Pay Here” dealer who specializing in selling high mileage cars to people with bad credit. The worst of these dealers make their profit by selling the same car over and over again and the buyer usually feels like the victim because they are. Don’t go there.

The wild card is buying from an individual. It could be a great car, or it could be one that is just one expensive repair after another. Always beware.

What kind of car should I buy? There are literally hundreds of makes and models to choose from.  Add trims and options and the choices are mind-boggling.  A few people really do need a pick-up for work or a hobby, most people don’t. The fact that pick-ups are the largest selling category is a recent North American phenomenon which somebody will write a book about someday. If we need to haul things, a van or SUV may a better choice to eliminate the problem of inclement weather.

Many people like SUV’s because of their versatility. These are really just tall station wagons. Station wagons are currently out of style in the United States, though station wagons are still the most popular body style in many countries. Today, 52% of all cars sold in France are station wagons.

Sedans come in every size and price range. If our goal is to get to work every day and stop for groceries on the way home, we don’t have to spend a lot of money. Since my wife and I think a good time means getting in the car and driving 3,000 miles, our requirements are for a car that will eat up the miles without beating us up in the process. That means a nice car with a comfortable riding experience.

Some people would rather go for a drive than fish or play golf. They would gladly give up utility for driving pleasure. They would want a car that is fun and responsive to drive. That might be a true sports car like a Porsche or Corvette, or a sporty car like a Mustang or Camaro.

If we are in need of new car, we need to think carefully about what our needs and values are. How important is being able to drive long distances without getting tired? How often do I need to haul a bale of hay? Do I need to pull a trailer? There are no right or wrong choices. I heard somebody say that if you can get out of your car and walk away without taking a glance at it over your shoulder and smiling, you bought the wrong car. I am in that camp. Style is important too.

The most basic way to understand the expense of owning a car is “cost per mile.” The biggest expense is generally depreciation. By looking at the value of a car on Kelly’s Blue Book (www.kbb.com) on January 1st and again on December 31^st one will be able to see how much the car depreciated or lost value during the year, or over several years. Add to that amount insurance, taxes, maintenance, and fuel and divide by the number of miles driven. Typically, this will be between 10 and 50 cents per mile. If we only drive 2,000 or 3,000 miles a year, the cost will be closer to $2.00 or $3.00 per mile. The easiest way to lower our cost per mile is to drive more. Using this calculation, cars are made to be driven, not parked.  Maintaining the car to keep it in the best possible condition is always money well spent.

Knowing when to sell a car is also an important financial consideration.  We want to have received good value from the automobile during the time we owned it, but keeping the car too long can be very costly if we end up spending more on repairs than the value of the car.  When a particular car has been a part of many wonderful memories, it is difficult to part with this big, shiny companion.  If the car owner has not developed a sentimental attachment to the car it really makes it easier to trade or sell the car to the next owner.  Really keeping up on the car’s Blue Book value should be part of the decision, and some hard decisions just have to be made. 

I have always had a love of cars, and you might also enjoy a link to a song I wrote a few years ago, “What Would Jesus Drive?” (VIDEO)

Happy motoring!