Haves and Have-Nots - Priorities

My second major financial lesson came when I was a junior in college. This time, no one sat me down and patiently explained anything. This was strictly a sink or swim scenario.

As a part of my parents’ divorce agreement, my father agreed to pay for half of my sister’s and my college educations. My mother believed a college education was important, so agreed to pay for the other half of my tuition, room and board. Throughout college, I worked summers and part-time during the year, as I was responsible for paying for books (not inexpensive, but a small outlay compared to tuition), and whatever I needed for spending cash and to maintain a car.

After a slow start, I had finally adjusted to college life. By my junior year, I’d begun to enjoy the upper level classes I was taking much more than I had the preliminaries. I’d lightened my class load a little from the recommended level so I could concentrate better. I was comfortable, with enough money in my pocket to afford a few things for entertainment, less than some of my peers, more than others. All in all, life was pretty good.

I’d just finished my finals for the winter quarter and had registered for my next set of classes in spring. As I had for each of the previous eight quarters, I called each of my parents with a copy of the classes I’d registered for in hand, which also served as a bill from the university. I would forward each of them a hardcopy later. There was only a week to pay the bill and hold my classes.

My father promised to send the money without much comment, as he usually did. I don’t remember, but think he sent a check for his half straight to the university. My mother, on the other hand, said something completely unexpected when I told her how much was due.

“I don’t have it.”

I asked what she meant. “I mean I don’t have any more money to pay for your college.”

That statement came as quite a shock to me. Up to that point, she’d given no hint that there was any problem, any possibility of my needing to find an alternate source of funding. The previous quarter, everything was fine. This quarter, nothing. To this day, I don’t know what happened. She has never given me an explanation.

And honestly, even at the time, the why didn’t concern me as much as the how, as in how was I going to pay for spring quarter, or the remainder of my degree. Once the shock wore off, I was angry, not so much at having to pay that portion of the rest of college myself, but in having her put me in a position where I had one week to figure out how.

Suddenly I found myself in the deep end of the pool.

So I sat down and reviewed my abysmal financial situation. Even though I was working part-time and had some money in my bank account, it was nowhere near enough. My grandmother gave me a small gift each fall, basically beer and pizza money, but by spring that was almost gone. There was nothing legal I could think of to raise that type of cash in a week. I’d already cut back on meals from three to two each day to save my parents a little money. I’d just moved into a campus apartment because it was cheaper than the dorms, which also meant I’d be cooking for myself rather than eating in the cafeteria. That meant food had also become my responsibility. My father wasn’t about to pay for anything without campus paperwork attached.

I knew I couldn’t ask him for money, even a loan. He would have told me to abandon my degree and join the Army, which had been his preference from the beginning. His parents didn’t have that type of cash to lend. My mother’s parents might have, but I assumed that they knew her situation and were unable or unwilling to help (I now know I was wrong about that). Financial aid was out of the question as my parents made too much money.

Still, I was desperate, so I went to the Financial Aid office to see if they had any advice. Fortunately, they did. First, they said I qualified for two government-backed student loans, one small, one large. The smaller one was nearly automatic and able to be processed by the university. Between that and my savings, I was close to what I needed for the quarter but still significantly short. The second, larger loan had to be issued by a bank, who needed financial information on both of my parents even though neither of them was cosigning. I had my all father’s information. Which meant turning back to my mother, who, after some convincing, came to the bank with me. I remember her surprised expression when she learned I’d come up with an effective plan so quickly. Regardless, she provided the information I needed which helped secure the loan.

Disaster averted with only a couple days to spare.

That episode left its mark. From that point forward, I became very aware of every expense as most of them were now being paid from my account. I lived in mortal fear my father would pull his funding next. So I slashed my discretionary spending. I learned to cook meals from scratch as it was cheaper eating processed food. I discovered the power of buying meat in bulk and storing it in the freezer.

As I paid more attention and scrimped here and there, I discovered that I ended up a little more money than I thought. When I graduated, my bank statement showed I had one-quarter of the money from those two loans still in savings where everyone I talked to, including Financial Aid, said I would need to apply for a second and maybe a third larger loan from the bank. I’d survived five quarters on that initial cash infusion supplemented by what I’d earned working.

I attribute most of that to thinking differently about how I spent my money. Since then, I’ve mentally divided out the items on my budgets into three categories: Needs, Wants, and Nice-to-Haves. You can think of them as necessities, modern conveniences and luxuries.

Needs are things I can’t live without, at least not easily or legally. Things like rent or mortgage payments, groceries, utilities (electric, water, trash). Necessary, in other words. On my current list, that would include Property Taxes.

Nice-to-Haves are the next easiest to define. They are things I could live without, and once did. Netflix and Amazon Prime would be two examples from our current budget.

Wants fall somewhere between the two. These are things I can probably live without with some effort but wouldn’t necessarily want to try. The things that make modern life, well, so darned convenient. For me, with pretty severe allergies, a lawn service falls onto that list.

Not all the categories in our budget neatly divide along these lines. A phone is a necessity (though I have lived without one for several months). A cell phone is a convenience. A 4G iPhone is a luxury. Some house maintenance is a need (appliances, AC, pest control in Florida), some is a convenience (most interior and exterior). Home renovations, improvements and upgrades are a luxury. Credit cards are a convenience, though increasingly hard to live without. A lot of what I pay for with them are luxuries (movies, dinners, Starbucks), but some, like groceries, are not.

One car is a necessity for most American couples. A second car and all the expenses that go with it (gas, insurance, maintenance) is a convenience (a few would argue that a first car is, too). You probably know at least one couple that gets by with only one car. I know several. I also know people who chose to live where they can bike to work, though they still own at least one car.

Which brings me to insurance. This is a hard one. As I said in the previous essay, insurance as listed in our budget is not our premiums (which are automatically deducted before Karen’s take-home pay). It covers our co-pays and deductibles. Basic health insurance falls on my list as a need. But it’s similar to home maintenance in a way. Some things I can put off for a time (like painting the outside of the house, or an annual checkup), but it doesn’t take long before I find I am only robbing Peter to pay Paul.

For us, getting our eyes checked is close to a necessity each year (Karen once had a retina issue). New lenses for our glasses may or may not be a convenience in a given year (depending on how much the prescription has changed). New frames are more likely a luxury unless they are in disrepair. Designer frames definitely are. Chronic medical expenses drift higher on my priority list. If I had high blood pressure, diabetes, high cholesterol, or a number of other chronic health issues, there is no question their care would be a necessity.

When Karen was young, healthy and single, she briefly slotted health insurance as a luxury due to the circumstances of her job. With our age and her medical history, health insurance is now a necessity for us both. The thing I am always careful of is saving a little now and paying a lot more later because I ignored a problem. Spending money on dental cleanings may seem like a convenience, until I end up needing a filling where I wouldn’t have, or a root canal where a filling might have worked (which thankfully, I’ve never had to).

There are no strict guidelines for me. I customize this parsing to my individual circumstances at the time. If my job required me to be available anywhere, anytime, a cell phone might be a necessity. If I had kids in school, Internet would be a necessity, as would be a reasonably decent computer. Right now, they are conveniences.

I know some of you might think that I’ve cracked a door open and will be tempted to kick it in to justify all the things I want by listing them as necessities or conveniences. I know a lot of people who see their iPhone as a necessity because they can’t stand to be out of touch. All I’ll say is that people who are serious about their personal finances don’t.

We are all adults (and if you are reading this and aren’t, I’ll treat you like one anyway). I know in my heart where things should fall. I may not like it, but I know. But there is no referee in this game. I am the only judge.

This tripartite categorization is just a lens through which to examine where we are so I can get us to where we want to be. While it’s not rigid, it can be as unforgiving as a Roman Triumvirate.

I’m guessing you know exactly what’s coming. Simple economics, the kind you all know, says if I am living on borrowed time, the first place I look to save money is under luxuries.

But here is where I’ll fool you. Unless I need money tomorrow, I don’t cut anything yet. Placing whole items on the chopping block is a drastic measure, one I only use in a drastic situation. Remember what I said about austerity in the first essay? Yeah, it still rarely works long-term.

A number of years ago, a friend of mine was diagnosed with high blood pressure. His doctor gave him two options. He could cut all the salt out of his diet, or he could take a pill each day to keep it under control. He didn’t do well with pills in general and didn’t like the idea of being on daily medication for the rest of his life, so he decided to try the first option. What he found as he tried this approach is that salt is in everything. Processed food is the worst, followed by any prepared meal you buy out. But he soldiered on, replacing the salt shaker on his table with mixed spices, diligently cutting out anything with salt on the label, including staples in his pantry like soup and bread.

I remember a conversation we had at some point when he was in the middle of this experiment. I said that I admired what he was doing, but thought that he was doing it the hard way. He got an odd expression and gave me a look that said he hadn’t thought of it like that before. To him, trying to change his habits was easier than trying to remember to take a pill every morning. Most people would have relied completely on medication to take care of the problem, changed nothing in their lives and forgotten about it. By trying to cut out all his salt, my friend gained valuable knowledge about the all the ingredients of his food. By reading all the labels, he learned about more than just salt. That experience taught him exactly what he eats and what is in his food.

I think it also showed him how difficult carving out salt alone was for correcting the problem. Slowly, his blood pressure came down. Some, but not enough. After a time, he was forced to go on blood pressure medication anyway. Today, he relies on a more balanced, sustainable combination of diet and exercise to keep his dose of blood pressure medication to a minimum. As a part of that, a few of the habits stuck with him, like substituting spices for salt whenever possible.

If I find myself on borrowed time in our budget, as we were close to when I first left engineering, I know I will need to eventually end up chopping away, perhaps not stopping at luxuries. But initially, that’s not the way I roll.

For most people, cutting expenses is like a starvation diet to lose weight, unsustainable. It’s a juggling act, temporary at best, until they build up a little money. Then they see that money sitting in their savings, a white-hot spot of gold waiting to burn a hole through their account. That’s when they’ll most likely tell themselves they deserve a treat for all their hard work and make up for anything they’ve saved by cutting out luxuries with one big purchase. And that puts them right back where they started.

From experience, I’ve found there is a smarter way to approach it.

You are probably thinking that this is the point where I tell you that we lived in privation for years in order to save money. Be prepared for disappointment. We lived simply, but didn’t sacrifice every luxury. In fact, rarely did I feel deprived. Saving is like dieting in that way. If you go for crash starvation, you are more likely get frustrated and binge because you feel you deserve it. If instead, you opt from a slower, steadier reduction in calories that has a few treats built in, you are more likely to change your habits and keep off the weight you lose.

In college, that translated to three luxuries: beer, pipe tobacco and coffee. None of them did I have every day. Most I could only afford once a week. Take coffee. Back then, I didn’t have coffee each morning (I didn’t pick up that habit until almost a decade later). Breakfast during the week was something quick, easy and cheap, cereal and juice, something I could get on the go. But every Sunday, I spent a little time making myself a full breakfast, bacon, eggs, a bagel with butter and honey, yogurt on occasion, juice and coffee. Not just any coffee, but one (at the time) I thought of as premium, International Coffee with chocolate. I know, by our standards today, that’s not exactly exciting and probably a toxic hazard, but when I sat down with my mug every Sunday morning, it was decadent. Certainly better than anything my friends drank.

It was a similar story with beer. Instead of buying whatever was on sale the cheapest each week, I sprang for a six of Heineken when I went shopping once a month. Knowing that when it was gone, it was gone allowed me to savor each bottle rather than just pounding down a can or two until it killed the flavor (if whatever was on sale actually had flavor, which it usually didn’t).

The pipe was limited to a bowl a week, two if I was feeling indulgent, a smooth, light tobacco called Fog Cutter (Black Cavendish) from a shop several miles away. I’ve never found anything quite like it since, though I’ve sampled any number that were close.

Those three luxuries always had me looking forward to the weekend, and savoring them when it arrived. During that year and a half, I never felt myself wanting. In fact, I felt quite content. There’s a psychological principle at work here. You won’t miss what you already have (you may want more of it, but that is a somewhat easier impulse to control).

The one other luxury I allowed myself was books. Paperbacks, mostly fantasy or science fiction. They were mostly metered out from gift certificates received at Christmas or my birthday. Or borrowed from friends or the little library I’d helped start for the science fiction club on campus.

The power of the need, want and nice-to-have system for us comes not just in budgeting and cutting back.  It comes in evaluating every purchase we make. Do we Need this or just Want it? Or will it just make us feel good for a little while as a Nice-to-Have?

A friend of mine in college had a great expression, “If you had everything in the world, where would you put it?” I’ve found that question to be useful in evaluating purchases. Do we have a place to put it? Will we actually use it, or do we just like the idea of having it? Will it just sit on a shelf taking up space until we give it away in the next closet cleanout?

Another question we end up asking is, do we have to buy it right now, or can it wait? Is what we have currently a serviceable solution? Are there alternatives or upgrades we haven’t thought of?

Again, I am not saying we try to pinch every penny until it bleeds. We don’t. What we are trying to do is make rational decisions not submit to impulse buying, which is very easy to do.

Let me give you an example. Of course, it involves gaming.

Last year, I reacquainted myself with wargaming which has been a hobby and pastime since I was around 16. Wargames in general take up a lot of table space. Depending on the game, they can require a surface 3-5 feet long. That’s bigger than our dining room table. I’ve had a 3.25’ square game table for a long time. But in the past year, I saw a number of fellow gamers post links to dedicated, custom built gaming tables. The problem is, custom means built-on-demand which translates to around $3000 with a 4-6 month wait. But they are recessed, felted, have covers, drink holders, all the bells and whistles. Some even come with outlets and USB charging station.

Now as much as I enjoy gaming (to the point people have openly questioned my game purchases, lifestyle and psychological stability), I cannot justify spending $3k on a table. And at 3.5’ x 5’ I’m not sure where I’d put it. That’s big enough that I’d have to dedicate a room which requires a major house rearrange. But a couple of my recent purchases would not fit on our existing gaming table.

Karen and I talked and came up with a few options. First, I could have her build a table from scratch. She is handy with tools and has built us bookshelves and cabinets in the past. I have full faith she could do it, and for a fraction of the price. We even know a guy who could set us up with some beautiful exotic wood.

Option two was to purchase a new dining room table. We recently found ourselves at Goodwill and spotted a perfect candidate. A 3.5’ x 6’ surface of thick, chunky planking bound with iron. $350. The only problem would have been that I’d have to hire 4 day-laborers and a truck at Home Depot just to get it in the door. But still a bargain. We could have willed this table to Karen’s nephew when we died (he is also a gamer). It would have lasted at least that long.

Option three was Karen’s. Buy a 4’ x 4’ piece of 1/8” plywood, varnish it and use it as a table topper when we need it, storing it against a wall in the library when we don’t. Total cost, including varnish, brushes, wood, and non-skid rounds to keep it from sliding, under $20. Home Depot would even cut the wood to size for us (we wanted it as wide as the current game table just longer).

That’s the option we chose. A $20 solution to a $3k problem. And when we picked up a game without knowing that it required an extra 9” of space? I took the leftover piece of plywood, cut it, varnished it, devised a support system from aluminum support slats and cobbled together blocks, and voila. An even bigger table.  Extra cost? Maybe $5. And if we need something even bigger (I am eyeing a game with a 4’ x 6’ map, don’t judge), we can do it again with a larger piece of wood and still not even approach the $350 of the middle solution.

Now putting this in context. We Needed a bigger game table if we wanted to play certain games (again, don’t judge). I Wanted the iron bound, oak table we saw at Goodwill because it would last a lifetime and a half at least (and looked like an iron-bound dungeon door laid on trestles). A dedicated, custom, covered, mahogany game table would have been a Nice-to-Have. Could I have afforded it? Yup, right out of my personal account without even blinking hard. But did I want to?

The funny thing is that because we put our own imagination, labor and love into the topper, and it matches our existing office furniture, we value it more than we might have the custom gaming table. Maybe because only part of that would have been a solution to a problem. The other part would have been a status symbol.

Which brings me to perhaps the point of this essay. Keeping up the Joneses. We all feel it, and do it to one extent or another. We all want to brag we have the biggest, best, or shiniest toy. Yeah, we are all just kids at Christmas comparing our haul with our friends as if it describes our value.

But the thing is, that endorphin hit doesn’t last. It never does. In fact, it’s more likely that peak leads to a trough later down the road. And to get that same high feeling requires bigger and “better” status symbols to share.

For me, financial independence comes by recognizing and managing that psychological urge. Note I said managing, not eliminating. First, I don’t think it’s possible. Second, I think it’s counterproductive to try. Third, we all Need things that make us feel good, or special, or unique. All of us. It’s in our DNA.

Again, when I was a kid, Izod polo shirts were all the rage. You might remember them as having the little alligator sewn over the breast. They were the status symbol worn by the preppies at my school. My mother couldn’t afford Izod. But, oddly, Sears had a knock-off whose name I don’t remember. Instead of an alligator, it had a dragon sewn on the breast. Ok, Sears, I get it, but DRAGON! How cool is that?! I was the only kid remember wearing them, and proudly so. That little dragon said more about me than any cloned alligator ever could have. I owned it and in doing so made it my own. No one dared make fun of me, at least to my face.

Which brings me to the final point of this essay. Every now and then, I look around, usually in the lead up to a hurricane but not always, and pick out exactly the things I couldn’t live without. I don’t mean the necessities like food, shelter and clothing; I mean the items that if I lost, I would mourn and not be able to easily replace. I mean the things that if I were to become a refugee that I would want to take with me.

Now I know that seems extreme, but it’s a useful mental exercise. It tells me which things I own are truly important to me. (Obviously, for the point of the exercise, I don’t mean living things like Karen or the cats, or ephemeral things like memories. I mean physical stuff).

A friend of mine grew up in a military family, which meant as a kid, he and his brothers moved around a lot. The US military is a no-nonsense organization. They don’t give their people a whole bunch of shipping space when they move personnel around. So my friend’s father laid out to each of them exactly how much room they had to bring their personal belonging each time they moved. In general, it was about the size of a footlocker. Most of us who remember being kids packing for a trip remember how devastatingly hard it could be to part with anything we owned, even for a short time. Imagine having to cull all of your belongings into the space of a footlocker every 2-4 years. He had to make the choice or his father would make it for him.

Anyway, the one thing my friend consistently chose to fill his space was comic books. He hauled those things all over Europe and beyond. Obviously, he valued them enough to take up precious space in exchange for other things he had collected and also valued. And in the end, because he had sacrificed for them, he likely valued them more. I suspect so as he still tells the story some fifty years later. They are integrated into his personality and unique profile though I don’t think he still has them. What matters is that they were important to him at the time.

Which is the final lesson for me. We are not cast in concrete; we adapt and evolve like oaks. Just because I valued something twenty years ago does not mean I have to value it still. Times change, as do people, their tastes and their priorities. It’s ok to let that go. But more on that in a future essay.

So, for me, when I lust after that shiny, new Nice-to-Have, I have to ask myself, if I only had so much space to evacuate my life, would it make the cut? For the many things I’ve wanted over the years, and some I’ve bought, the answer was sadly, no. A lesson I continue to learn as I swim deeper into this life.

© 2019 Edward P. Morgan III

Big Data - Budgets

My financial education began one afternoon when I was maybe twelve. My parents had divorced two years before. That event alone had shaken my view of our family’s position on the economic ladder. At school the year after, I paid reduced prices for lunch based on economic need. I remember the long looks and negative commentary from certain teachers in my elementary school. We qualified for free lunches but my mother refused to enroll us. She believed that we wouldn’t value something unless we paid at least something for it. I think part of her decision was pride.

Even that change didn’t sink in right away. My sister and I were kids. By the time we were both in middle school, my mother was working. We thought were back where we started. We weren’t. A teacher’s salary doesn’t replace an engineer’s even supplemented by child support.

That day, my sister was asking my mother to buy her something she wanted, clothes as I remember. She was a couple of years older than me, at an age when many girls begin to focus on their appearance and their peers. My mother told her we couldn’t afford whatever it was she wanted. My sister would just have to save her allowance until she could afford it. My sister didn’t believe her and said so.

My mother then did something unusual. Instead of getting angry or just telling my sister that’s the way it was, she sat us both down and laid out the household budget. She walked us through her take-home pay. She added in the child support from my father. She subtracted off the mortgage, the car payment, the utilities, groceries, gas, school lunches, our allowances and showed us what was left for all the other expenses of the month, like clothing. As I remember, it wasn’t a lot of money, and somewhere near the price of the item my sister wanted. I’m not sure my sister believed the math, but I did.

It is a lesson I have not forgotten. To this day I keep a budget, using only slightly more modern technology than my mother’s father. He kept an accounting notebook in his desk, recording each piece of information in neat, orderly columns. I use an antique spreadsheet program. Where he updated his budget every week, I update mine once a year.

At its very simplest, a budget is third grade math, addition and subtraction. You add all your income and subtract all your bills and payments. If your income is greater than your expenses, you have savings. If your expenses are greater, you’re living on borrowed time. It’s that simple.

It’s so simple, in fact, that most people never bother to write one out at all. Many people will tell you they know how much money they have to spend in any given month. A few can balance the numbers in their head. More just glance at their checkbook register, sometimes remembering what bills are due within the next week. And an amazing number of people never bother to even balance that register against their monthly statements. The majority get by with that ad hoc strategy all their lives, at least until a financial crisis hits.

If it’s so simple, why bother with it at all? Economics 101: Knowledge is power, and power creates money. (It’s probably not economics; it’s more politics, psychology or military strategy, but you get my meaning).

If personal finances are an adventure, a budget is the map. At the center is a signpost reading “You are here.” In reality, it is more like a GPS. It not only tells you where you are, but where you’ve been. And if you’ve programmed in a destination, it can help you get there, though it won’t call out directions unless you ask.

You probably have a good idea how much extra money you have in a month. But do you know how that varies month to month throughout the year? Does that depend on whatever crisis arises in any given month? Do you know how much you are spending on maintenance for your house in any given year? How much of a pinch rising gasoline prices put on you in 2007? Do you know whether that new calling plan is actually saving you money (yes, they still exist)? Does the cost of repairing your old car cover the loan payments for a new one or are you better off keeping the one you have? Does your Sunday paper pay for itself? Can you tell whether your water-heater might have a problem? Your AC? Your toilet?

(And what about the airspeed of an unladen swallow? Wait, it can’t tell you that. Aaaah!)

I’ve used two types of budgets in my life, short-term and long-term.

When I say budget, I mean backward looking rather than forward looking. Where money went, not a Soviet 5-year plan of where I want or plan for it to go. So based in reality rather than informed speculation. I see that as a critical distinction. Many people get frustrated when their (often unrealistic) projections don’t match reality.

I started keeping a long-term budget when Karen and I were renting a house back before we were married. We entered the experience as an experiment to see whether we could or wanted to afford owning a home of our own. Instead of relying completely on the landlord to do all the repairs, we took on some of the minor ones ourselves, did a little DIY like painting with their permission and noted the big things that went wrong.

This first long-term budget was a way to see if we really had enough money to afford the added expense a house brings, not just a mortgage payment but all the maintenance and upkeep that goes with it.

We found we did and bought a house after 18 months of renting that one. The house we’re still in now.

When I first started, I updated my budget at the end of every month. Over time as I grew more comfortable with where we were, I deferred updates to every quarter. Almost thirty years later, I only enter numbers into our budget spreadsheet at the end of the year. By now, I know our bills like a well-worn book. If one comes up looking odd, I pull up our spreadsheet and browse the historical data to see if something truly is amiss.

A long-term budget is what people think of as the classic budget, a month over month record of household expenditures. Mine is a grid. The left-hand column contains the following categories (with subcategories in parentheses, each on their own line):

Electric (kW-hours)

Phone

Water (gallons)

Trash

Cable (internet)

Groceries (coupons)

Credit Card

Gas

Insurance (auto/registration, dental, eyes, medical)

Property Taxes/Insurance

House Maintenance (AC, appliances, cars, exterior, interior, lawn service, pest control)

Pets (food, vet)

Charity

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Total Expenses

Across the top of the budget are the months of the year (Jan, Feb, Mar, etc.). I just fill in the appropriate box for each month. In our spreadsheet most categories automatically add their subcategories into a total (House Maintenance, Gas) so I don’t have to. All the categories are added into the Total Expenses for each month.

In those first budgets the line for Property Taxes/Insurance was Mortgage or Rent (property tax and insurance was included in our mortgage payment). When we paid rent in apartments, things like trash and water were included but when we rented the house, those were ours to pay. At points, we’ve had other categories that no longer apply (Propane, Long Distance under Phone, Newspaper and TV). There are subcategories we could add now (Netflix and Amazon under Internet which used to be a subcategory under Cable).

Mostly, it comes down to what I think I might want to know going forward. As long as it covered all our basic expenditures, the only thing required is that the document fit my needs.

For us, House Maintenance (exterior) includes any gardening or landscaping (including Karen’s tools), structural repairs like a new roof, windows or doors, and outdoor painting. Interior includes things like wall paint, new furniture (even my throw pillows) and repairs or remodeling. Cars for us includes any repairs along with oil changes and other regular maintenance, basically anything that’s not gas. For Insurance (dental, eyes, medical), I’m not talking about the premiums that are automatically deducted from Karen’s paycheck, but our out-of-pocket co-pays and deductibles. If we paid premiums from her take-home, we would those to add that category. Insurance (cars) is our premiums as well as registrations and AAA.

A note on House Maintenance for those of you who don’t own a home. Most financial experts say to plan on annual house maintenance running roughly 1% of what you paid for the house. So that’s $1000 a year for each $100k of the purchase price. I’ve found that to be pretty accurate for us, though over time we have had to base it on the current worth of the house rather than what we paid. That only includes things that must be maintained or replaced, not upgrades, redecorating or remodeling. Of course, like the S&P returns I discussed in the first essay, these expenses don’t conveniently average out year over year. So as a rule of thumb, we try to keep an emergency fund on hand that covers at least the most expensive maintenance. For us, that is a new roof, followed by an AC.

From the beginning, we’ve used US Savings Bonds to cover this rather than keeping the money in a savings account for a couple reasons. First, there is less temptation to spend that money because it’s harder to get to. Second, those bonds earn more interest. We’ve used CDs in the past, but I don’t like the penalty for early withdrawal. Neither of those interest rates is anywhere near S&P returns, but again, both are guaranteed and not subject to the vagaries of the market. More on that in a future essay.

Some of you are probably asking yourselves, what do kilowatt-hours (kW-hours) of electricity and gallons of water have to do with our budget? Strictly speaking, nothing. But when I am reading numbers off of bills and typing them into a spreadsheet, one more really doesn’t take much longer.

These numbers allow me to compare things more easily from year to year. The cost of electricity goes up, but with kW-hours, I can tell if our consumption jumped in a given year. A big jump in summer might mean an AC problem. An average jump, slightly higher in winter, might point to an issue with the water heater. I can also tell how much of a difference setting the AC thermostat one degree higher or lower makes.

A jump in water consumption might mean a plumbing leak. When we were on a minute-based long-distance plan, I input minutes used so I could see if we were routinely over or under the allocation of our plan, and maybe change it to one that’s more cost effective. When we had a Sunday paper delivered, we could tell whether the grocery coupons inside paid for it and more. (Hint: they did for a very long time).

(Ah, maybe he’s not just number-crazy or anal-retentive. Ok, too early to judge).

As an aside, our power consumption (along with a nifty bar graph of our usage from the past year) and gallons of water consumed (with a less nifty column of numbers) are prominent on our electric and water bills respectively. Our grocery store prints our coupon savings right on the receipt (separate from sales and specials) which is convenient.

I have never had any entries in the budget for Income. That’s because in general, Karen and I have been salaried. If our take-home pay varied significantly month-to-month (if we worked hourly or freelance), I would input that as well. Currently I compare Total Expenses to Karen’s base take-home salary for the month.

Now, here’s the first trick I use with budgeting. Karen gets paid every two weeks. At different points in my engineering career, I was paid weekly, biweekly and monthly. Currently, we round our monthly income down to two paychecks. When I was paid weekly, I rounded it down to four. That leaves us two (biweekly) or four (weekly) extra paychecks a year as money we don’t see. What we don’t see we don’t miss.

And note that I said base take-home salary. That’s the second trick I use in budgeting. I never consider any overtime or bonuses. We have each occasionally gotten one or the other, but I never included either in my income calculations. Again, all that becomes bonus money. So if we didn’t receive a bonus one year, or our overtime got cut, we were never caught short. Believe it or not, I worked with a number of engineers who depended on 10 hours of overtime a week just to pay their mortgages. They ran into a real problem when the contract ran short of money and overtime got slashed.

By basing my calculations on our base take-home salary that is two to four paychecks short, I’ve created a 7.8% annual buffer for emergency funds, savings or just bonus money. Money I can put to better use.

If you remember from the first essay, 7.8% is pretty close to my 10% S&P marker. And essentially created out of thin air. Ok, it’s actually an illusion. But as I said in the first essay, part of our philosophy is that if you don’t see it, you won’t spend it which actually does free that money up. That psychology is important. You will see it becomes a theme.

As well, that 7.8% is the entry point of living below our means, which as I said, I see as the key to our financial independence. Yes, it’s an illusion. But as long as it’s an illusion we want to believe, we will. And that’s all magic is, wanting to believe.

Another aside on the way we organize income. This is more esthetic than functional. But it does have an impact on the way we see our money.

When Karen and I bought the house together, we weren’t married, so we treated the arrangement in the same way we had as roommates. We each had our own separate checking and savings accounts but for ease we opened a new checking and savings account for the house. We each placed a set amount per month into that joint account. We based that number on our record of expenses from renting the house before along with adding in our new expenses. We paid all our shared bills from that account. Basically, all the items I listed off in the budget above.

We each contributed half to household expenses, including building up a small reserve in our joint savings as an emergency fund. We did this with automatic transfers from our personal accounts where our individual paychecks got deposited so we didn’t have to think about it (again, if we don’t see it, or in this case have to think about it, we won’t spend it). Anything each of us had left over at the end of the month was ours to spend as we pleased.

When we got married, that changed. We shifted the arrangement so that all of both of our paychecks were deposited into the joint account and then created automatic transfers of an equal allowance to each of our separate accounts.

We did this because when we were living together, we saw it as a limited partnership. Without that marriage certificate, each of us was free to walk away at any time. Keeping separate books and paying our share out of separate accounts made sense to both of us. Any overtime or bonuses were ours to spend alone.

After we got married, we shifted our view to something more like a corporation. Everything from both divisions got pooled together for operating expenses, with each of us getting enough side cash to buy gifts, treats for ourselves or lunches out without having to consult the other or potentially disrupt the joint accounting. If we ended up with extra money in house savings over time, we jointly decided how it got spent.

There is a distinct psychology behind all this that I’ll get into a bit more in a future essay.

As I said, I tally our budget out once a year using an Excel spreadsheet that Karen and I designed (which started in Lotus 1-2-3. I told you it was an antique). Now there are numerous other programs, off-the-shelf or online, which do all that but at the time this was our best option. We already owned a license for Lotus from work Karen did. I could have just used pencil and paper with a calculator as long as I double-checked my math, the same as I do with our taxes.

It usually takes me 2-3 hours at the end of December to input the data for the year. I sit down with all the bills from the previous year, sorted into piles by company and category, then input the numbers. Anymore, Karen reads them off for me. For the few items which don’t have statements, I pull what we paid out of our checkbook register.

As a final aside in case you are wondering, a year’s worth of paper bills for us takes up a 9” x 12” x 2” tray plus a standard envelope for the grocery receipts. We keep the grocery envelope by the bill box and put in receipts as we get them. We used to have another for Home Depot receipts for the house, but now we just pull them off our credit card statements, along with highlighting a number of other categories.

Each year, I have to make sure the spreadsheet doesn’t double charge for line items we pay for with the joint credit card (like groceries and most maintenance). But in the end, the budget just an estimate, not a financial ledger. In general, better an overcharge than an undercharge.

Most financial experts recommend you keep a full set of bill receipts for at least a year. I keep filed bills for one full year (the year before current) and shred the prior year’s unless there is a dispute (which I hang onto for five or longer). House maintenance receipts for major work we keep forever (things like AC repair or carpet replacement where we want to know who did the work, when it was done and how much it cost). We also keep a book with notes by year on what was done, mostly to satisfy our curiosity when one or both of us can’t remember.

All that, along with our financial account statements, easily fits in a two-drawer file cabinet. I could likely cut it down to one if I had to. And yes, I still stick with paper copies everywhere I can. We don’t pay bill electronically, mostly from momentum. Though as a side benefit for us, it’s harder for an anonymous stranger to hack an air-gapped paper file cabinet.

But as I said, when I started this, I didn’t have a full year’s bills saved. I just input as many months as I had, at the time only one or two. I built it from there forward. I’ve found a year is the best baseline because some bills, like electric, vary significantly month to month, while others, like home or car insurance, only get paid once or twice a year. For us, the water bill only comes every other month. Trash only bills us every three. I’ve known several people who get caught short when they forget something like their car registration, insurance or property taxes are due in a given month.

When I’m done inputting numbers, I print out a one-sheet summary, compare it to the year before and file it with other summaries dating back almost thirty years. The summary contains all the categories I listed above, where I have the program average the expenses monthly. If I see something jump from year to year, Karen and I discuss it, first to try to see if we can understand why, then to see if it is something we can or need to change.

I compare that summary to our income in a few different ways as a redundancy check.

First, I look at our joint savings at the end of the year to see if it has grown or shrunk. In general, it stays stable or grows a little. Because it’s a closed system with no other eternal inputs other than her paycheck (and her intermittent flexible savings account payments plus any tax refund), that is a good, instantaneous health check.

Next, I compare the monthly average to what I know goes into our joint savings and checking each month (based on two biweekly paychecks). The budget averages should be equal or lower.

Finally, I work our W2s backwards, taking her gross salary, subtracting off Social Security, Medicare, taxes, retirement savings, and insurance premiums (but not her flexible savings account money since we get that back), and dividing what’s left by 12. That should be greater than or equal to the monthly average from the budget. Ideally, I should be able to divide that number by 13 (to account for the 7.8% buffer) and have it come up the same, greater than or equal to the monthly budget.

Fortunately, for us, comparing those numbers has never come up in the red. That would have meant we were either underwater, or, with the 7.8% buffer I talked about earlier, skating a very thin line. Neither would have been acceptable to me. Both would have required either cutting back expenses or expanding our income.

But there have been individual years we’ve had to dip into savings to keep on an even keel, whether from replacing a roof, an AC, a car, or upgrading the windows. Which is exactly why we keep an emergency reserve. The real trick is remembering after drawing it down to build it back up.

In general, we dip into joint savings four times a year, when we pay property taxes and homeowners insurance, fund our IRAs (more on that in a future essay), and at Christmas. This is where that 7.8% buffer comes in. But in the end, it all has to balance out with the numbers in the black.

With that long-term budget, I had a baseline for what we were spending to see where we could cut back if we needed to when we transitioned from two incomes to one. I used it again when Karen was under threat of being furloughed for 30 days a year without pay, which would have meant losing one full month of her salary. I’ve used to as a baseline to determine where we’ll be when Karen retires, and will use it again when she actually does. A lifelong exercise.

Now that I have a map telling me exactly where we are, I can use its newfound wealth of information to navigate the shoals and shorelines to get to where we want to be. In the next essay, the real adventure begins.

© 2019 Edward P. Morgan III