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! 

 

Common Cents #5

 Common Cents Issue #5

As I talk to people, it becomes clear that our views about money and the way we utilize our resources can be the most common source of strife in relationships, especially marriage.  Surveys show couples that argue about finances at least once a week are thirty times more likely to get divorced than those who don’t argue over money. High levels of debt and failure to communicate about money issues are the leading causes of stress and anxiety in family relationships.

It appears, though, that lack of money is not the cause of divorce as much as the failure to communicate about how the money we have will be spent. The old joke, which isn’t very funny, is about the guy who is afraid that when he dies, his wife will sell his stuff for what he told her he paid for it. Fill in the blank for your “stuff”, whether it is guitars, cameras, boats, or guns.

I know of men who complain about the hundred dollars a month their wives spend on shoes, and then try to sneak in a $1,000 shotgun without her knowing it.

To begin to resolve this major source of conflict, there must be an understanding of how much it actually costs to pay the monthly costs of a family’s basic needs. This can only be arrived at by communication of what those financial commitments truly are.  Then, allotting a certain amount of discretionary money to each person for them to spend as they wish should be considered. There must be a clear understanding of how much money is spent on things like housing, food, transportation, insurance, and retirement savings. Then, one can discuss how much can be spent on travel, eating out, or “toys.”

One way my wife and I have found to accomplish this is to have regular “business meetings.” A business meeting indicates that it is not a time filled with high drama or emotions, but rather is just look at the numbers and how they add up.  We discuss what has happened since we last met and we plan what we expect to do until the next business meeting is held.

We have an Annual Meeting on January 1 of each year. We plan for an all-day meeting, but a few hours are often all we need. We look at what we had planned for the previous year and talk about our successes and what was not able to be accomplished.  We talk about the next year’s vacation plans, investments, and when we would like to make major purchases like a new car or a home remodel project. Some of these things are planned years in advance; others don’t need so much lead time. It is at our annual meeting where we realign our priorities and make overall long-range decisions. Buying a new house, changing jobs, or starting a new business would all be topics for the annual meeting discussions. Most of the best decisions we have made have taken place in this manner.

We also have quarterly meetings which are shorter and involve seeing how we are doing on the annual plan. We look at our quarterly income and net worth statement to see if we are on track or see if we should make any adjustments to our spending plan. Sometimes we have to make major changes to the annual plan. This year, for example, the worldwide pandemic drastically changed our plans. Mainly we just pushed some things planned for 2020 into 2021. No big deal, no panic, we just lost a year on some travel plans and will adjust other items as needed.

We have monthly meetings which are shorter yet, ten or fifteen minutes, to discuss things like unexpected expenses or to generally check in. If one of us is planning to buy some new clothes or some other item is needed, we talk about it at the monthly meeting so there are no surprises the next month. I might say something like, “I need some new running shoes, should I wait until next month, or is this month OK?” The discussion would be about what other expenses are coming up that are more urgent. This is primarily to manage cash flow.

The point is that the business meetings are not emotional. They are matter of fact, this is where we are, this is what we need to do to get where we want to go.

We haven’t always done things this way. The years when we had no idea where we were financially or which way we were going were so uncomfortable to us that we have adopted this strategy and it has worked well for us. We have learned that business meetings and frank talk about money are essential to a long and happy relationship.  It gives us both ownership of our financial life and a strong partnership in this area of our life has led to trust and confidence that our plans will be accomplished.

Jim Mathis

 

Common Cents #4

Let’s think about retirement funding. Assume that at some time in your life you would like to a have a steady stream of income without working every day. Most people envision this happening sometime in their sixties. It doesn’t happen by accident. For U.S. citizens, a core part of this is the national pension plan, Social Security. The amount of money we receive from Social Security is based on our best forty quarters of work. If we did not pay into Social Security for at least forty quarters, zeros will be averaged in, which will substantially lower our benefits. For me, I paid in the maximum amount from 1985 through 1995. That means my Social Security is paid up, no matter how much I made the other years. An important determining factor of the amount of Social Security we receive is how old we are when we begin drawing from the Social Security fund. We can start any time after age 62, but the monthly amount increases for each month we wait until age 70. Some people will tell us to start as soon as possible so we get the largest number of checks over our lifetime. Others will say to wait as long as possible to increase the size of our monthly checks when they do begin. Unless we know the precise month we are going to die, these are impossible projections to make. The Social Security system was not intended to be a person’s only income. Most of us will need an additional source of income if we want to do more than merely survive. My mother worked for Southwestern Bell, part of AT&T, for over forty years. The company provided a lifetime pension based on her salary at retirement and life-long health benefits as well. These benefits were a primary reason she worked there. The company also knew this was the best way to retain employees over a long period of time. These types of pension plans, called defined benefit plans, are virtually non-existent in today’s world. Most of us now have to take retirement planning into our own hands. Many companies help with programs such as 401(k)s. These defined contribution programs are completely different than the old defined benefit plans. Defined benefit means you know how much you are going to get, but they have no cash value. You can’t cash them in for a large lump sum. Defined contribution means it is our money and we can put in any amount we want into a variety of financial instruments. It is still ours. What we get back depends on what we put in. Taking it out too soon can be very costly. When I was 25 years old, I went to a seminar about a new program called Individual Retirement Accounts or IRAs, which allowed individuals to put money in an account and deduct the amount from our gross income for income tax purposes. It would then grow tax free until we took it out, presumably at retirement age. It would be taxed as ordinary income when withdrawn. The idea of money growing tax free for forty years was amazing. Compound interest has been called the “Eighth Wonder of the World” because of the incredible compounding effect. We put in $500 into a Mutual Fund Account that first year and put money into an IRA every year after that we had income. That one thing has made all the difference in our financial lives and has given us the flexibility to make decisions based on our hopes and dreams through the years rather than limiting our lives to what our Social Security alone would be able to provide. The best time to start saving for retirement, of course, is when we receive our first paycheck from our first job. The second best time is today. Maybe a later discussion should be about the importance of paying ourselves first.

Jim Mathis

Common Cents #3 Inflation

Inflation Any talk about saving and investing for retirement or any other reason must start with an understanding of inflation. Inflation is the tendency for things to cost more in the future, or more specifically, for money to be worth less. Inflation is not a bad thing unless it is out of control. In fact, it is an important driver of the economy. A good example is real estate. We buy a house to lock in our housing cost because the house payment will be the same every month for years to come. Rent, on the other, is constantly being adjusted upward for inflation. Without inflation, or worse the opposite, deflation, we would not be buying houses because we would be expecting rent prices to go down. Furthermore, we expect our house to be worth more when we get ready to sell down the road because of inflation. This principle applies to everything we buy to some degree. Without inflation, the economy would slow dramatically.   I think it is important to consider the impact of inflation in all of our spending. There is a nifty calculator online that gives a lot of insight and understanding. It is usinflationcalculator.com The idea is to put in two dates and a dollar amount, and the calculator gives the price in the new date dollars. For example, I bought a new Ford pickup in 1971. I remember clearly the cost was $4100. I told the dealer I wanted a truck with the biggest engine available and no other options. I got a barebones hot rod work truck. By plugging in $4100 and 1971 into the inflation calculator, I got $26,130 in 2020 dollars. That is about the same price as a stripped-down F-150 today, if there is such a thing, because new pickups are better and more luxurious in every way than they were 50 years ago. Another example, I bought a bass guitar in 1969 for $425. In today’s money, that is $2989. Vintage Guitar Price Guide states its current value at $2850. That tells me that it hasn’t cost me anything to own it, and it has brought a lot of joy over the years. That makes it a “Good Buy.” Our personal inflation rate may be somewhat different than the amount stated by the government. For example, my spending habits are probably not the same as everybody else’s. If I drive 50,000 miles a year, the price of gasoline will affect me a whole lot more than the person who only drives 5,000 miles a year. My 1971 Ford got 12 mpg. If a new 2020 Ford gets 24 mpg, the costs per mile have been cut in half, especially considering that the cost of gas, adjusted for inflation, is less now than then. If I were a vegetarian, the price of beef would not affect me, but the price of broccoli might. When making investments or deciding where to store our money, inflation must always be considered. Money in a checking account or even most bank savings accounts is losing value in terms of purchasing power. We must subtract the inflation rate from the earnings to figure our actual return on investments. We can only guess what inflation will be like over the next 20 or 30 years, but if we are making retirement plans, locking down costs and making our money as inflation proof as possible is the best idea. The impact of the Covid-19 Pandemic on the inflation rate will be important to consider, but that will be just one factor to watch as we make decisions on what to purchase, what to save and invest, and how our resources are best used over time.

Jim Mathis

Common Cents #2

A topic that has been asked to be discussed by several of you is the issue of planning for retirement. It seems interesting to note that there is no reference to retirement in the Bible except for a comment about the Levites who were set aside to serve at the temple and instructions that older people should instruct younger people in knowledge and skills that they had acquired. Through most of history, people worked until they were unable to do so, and then their families took care of them until they died. The idea that the government had some responsibility to take care of seniors first started in Germany in the 19th century. Largely to combat unemployment among younger people, it was suggested that people above a certain age be paid to stay home. Chancellor Bismarck came up with the age of 70 which was later lowered to 65, and the world’s first old age pension was signed into law in 1889. There continues to be much speculation about how that age was determined to be the correct time to end one’s working life. All industrialized countries followed suit until the United States became the last to enact Social Security in 1935, 46 years later. Social Security was passed only after it was pitched as a means to keep old people from becoming homeless, and that it would be completely self-supporting, outside of the Federal budget. The Social Security system continues to be self-funded by payroll deductions separate from income tax and the federal budget. Adjustments to contributions and distributions are calculated regularly to maintain the fund. Social Security was never intended to be a person’s sole source of income; each person has a responsibility to provide for themselves as well. When planning a “When?” for retirement, a first question might be “Why?”. Certain professions become hard to maintain as we get older. For example, there are not many professional football players older than 40. Musicians, on the other hand, can play well into their 80’s and beyond. Depending on the stamina and competence of surgeons, their working career is likely shorter than that of an office worker. So, an arbitrary number like 65 or 66 doesn’t make much sense for most people. Instead, we need to decide if there is something else we would rather be doing if we do not continue our current occupation. As objectively as we can, we need to be considering what we want to accomplish or see or attempt while we are able to do so. If we feel that we are still contributing to our current endeavor and we enjoy doing the work, why quit? Do we need to take a time away, a sabbatical? One goal might be to get to a place in life so that we are not just working for a paycheck but working to do things that we want to do, things that need to be done. A lot of people start businesses or new careers in their 60’s or later. There may be something that we have been longing to do and the check from Social Security or a pension fund may be just the boost we need to get on with our plan. Whatever the reason, just “not wanting to go to work” may not be the best reason. A long vacation may be in order while we plan the next phase of life. I’ve expanded on these thoughts in a book, “The Fourth Quarter” I wrote a few years ago when I hit that magic age of sixty-five. By the way, I’m still doing photograph restoration and photography because of what I learned about myself during the research for that book. I’m also doing a lot of other new things, too.  Having adequate financial resources to pursue new endeavors is another topic, and it will be good to discuss that with you in the weeks ahead.

Bismarck Jim Mathis