Financial Math II: Averages and standard deviations

GDvsS&P5001996to2012This Part II of my series on financial math. Previously we talked about some simple math tricks that can help you think faster on your feet.

In this post, I want to talk about some key statistics that get thrown around and how to parse them. I’m sure many of you have read this famous quotation:

There are three kinds of lies: lies, damned lies, and statistics. –Benjamin Disraeli (according to Mark Twain)

Statistics are what happen when we try to look at a whole batch of data points and spot some sort of trend, correlation, or conclusion. The reason they have to be looked at with a discerning eye is because people will either knowingly (or unknowingly) perform some sort of statistical calculation and then TELL us what it means. What they tell us and what the numbers actually mean can be very different.

rodin_thinkeLet’s introduce an example. Whenever you take a collection of data, such as amount of income earned by every person, and average it together, you can produce a couple different outputs. One is known as the mean. This is when you add all income and divide by every person. In these situations, it is easy for a small group of either very high earners or very low earners to skew the metrics one way or the other.

But if you instead take the entire collection of people and split them into two groups, right down the middle, and look at the mid-point, this is called the median. The median and the mean might be very close together, or they could be far apart.

By itself, these two different statistical values hold no bias. They simply show a slightly different perspective on the spread of income. But people can pick and choose which particular data set to show when making a point. They might choose the data set that better trumps their point of view.

Continuing with our current example, when people calculate such values, the purpose at hand is usually to deduce, where do I fit in? And that is why using the mean, which can be heavily skewed based on outliers, tends to not be as good of a statistic as the median when it comes to predicting things like that.

Another factor we want to know is how spread out is the data from the mean. To do so, we commonly use the standard deviation. If we tried to average the difference of each person from the mean, we would actually reach zero. That’s because half of the data points are greater and half are less than the mean, by definition. So to come up with something of value, we instead square the difference, average that, and take the square root. (In science, this is known as the root-mean-square).

Much research has been done that shows that anything with one standard deviation of the mean has about a 68% chance of success. Two standard deviations = 95%. Three standard deviations = 99%+.

Because standard deviation is so easy to calculate, you should always ask for it whenever someone, such as a financial planner or whomever, attempts to woo you with averages. “The average performance of this fund is 18%.” “What’s the standard deviation?” If they scramble from answering that, it’s a sign that you should probably run.

You see, the bigger the gain, the bigger the risk, and the probably the bigger the standard deviation.

You can see an example in a blog post I wrote for Dr. Dave. In it, I compare the average performance of the S&P 500 compared to an EIUL. To do an analysis, I figured that most people will have about 25 years to get serious about saving in either plan in order to “catch up” if they are late to the game. So, what if I looked at EVERY 25-year window of the S&P 500 going back to 1950, calculated it’s actual performance, and averaged them together? On top of that, let’s find out what the standard deviation?

Turns out, we have a 68% chance of landing somewhere between 4.77% and 9.53% in total growth. If we don’t do so well, we might barely be grazing past inflation. Or we might be well ahead of it. For something in which we only have one shot, I don’t really care for those odds.

Compare that to an EIUL, for which we must trade in a certain amount of highs to avoid certain lows. Turns out in that scenario, we have a 68% chance of landing somewhere between 7.52% and 8.84%. The 8.84% is certainly lower than 9.53% of the S&P 500. But in exchange we are almost three points higher than the low point, meaning our odds are pretty good of beating inflation, a key factor for investing in EIULs.

Neither of these stats factor in costs or how much cash you can put away. Remember, you can always clobber returns rates by putting away more money. The key is that means and standard deviations are important statistics you need to understand if you plan to take an active role in investing.

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Financial Math I: Rule of 72 and other fast math

When making financial decisions, it’s important to understand how financial math works. This is the first of a short series where I hope to cover some financial math basics.

Rule of 72

For starters, when we are faced with an opportunity, it’s good to be able to quickly assess if it’s worth spending more time investigating. We often call these “back of the envelope estimates”. Without a spreadsheet can we get a ballpark estimate of the value of something?

One of the most well known mathematical devices is the “Rule of 72″. The formula provides a way to see in what time frame and with what interest we can double our money.

Interest x Years = 72

For an example, imagine we had an account growing at 10% annual interest rate. Take the 10, multiply if by 7.2, and you get 72. This means that in 7.2 years (approximately), our money would double.

You can flip things around. If we wanted our money to double in 10 years, we would need at least a 7.2% interest rate.

If you wanted something to double in six years, you would need 12%. 3 years? 24%.

To generalize, any situation that involves the compound interest effect works here. It’s also important to recognize this is only an approximation, and the further you get away from the middle, the less accurate it is. Rule of 72 may say that 2% takes 36 years to double, but this is much less accurate than 7.2% and 10 years. (BTW, you can swap the two such that 7.2 years and 10%.)

This type of quick math can help you. If you hear some investor advertise that there is no risk in doubling your money in six years. In your head, you can quickly deduce he is suggesting 12% growth. Sorry, but that is 3x what people average when using mutual funds. In real estate, this is definitely doable, but it requires either a lot of cash to mitigate the risk, or it requires taking on debt. None of this is risk free.

Gains and Losses

I’m always hearing things like “The Dow is up 5%” or “The NASDAQ is down 10%”. People seem to think that growth and losses are arithmetic, i.e. pluses and minues. They aren’t. They are multiplicative.

If you had $1000, to grow it by 10% means you multiply by 1.1, another way of saying (1 + 10%) or (1 + .10). $1000 x 1.1 = $1100.

To reduce by 25% mean you multiply by 0.75, another way of saying (1 – 25%) or (1-.25). $1000 x 0.75 = $750.

Why is this important to understand? Because combining multiple gains and losses together involves multiplying all of the factors together, not adding them. When you have a 10% gain following by a 25% loss, what is the result? You might think 10% – 25% = -15%, but that isn’t right.

Instead, let’s take what we did earlier (1.1 and 0.75) and multiply them together. 1.1 x 0.75 = 0.825, or -17.5%. That loss (-17.5%) is actually greater than you would get if you just subtracted one from the other other (-15%).

It’s important to know that getting 10% each year for three years doesn’t add up to 30% gain. Instead, it’s 1.1 x 1.1 x 1.1 = 1.331 or 33.1%. This is power of compounding. But when we suffer losses, the effect is equally drastic. And people often don’t realize just how hard losses can be on overall performance.

Understanding this basic tenet of gains and losses is critical to building spreadsheets that evaluate things that are more complex. And the more you use this mechanism, the more you notice how people like to quote “Your investment will average x%!” You will be able to size something up and ask, “Hmm, if I multiple by 1.xx every year, do I really get what they just advertised?”

That’s enough for starters. Tune in for future posts about more financial math.

Time to pay real estate taxes

DSCN0002That time of the year has arrived. I must send in checks paying property taxes on my rental properties. Last year, I contacted my lender and requested them to stop escrowing money to pay for taxes and insurance. Instead, I would pay it myself. This way, there is no confusion and quandary over how much money to set aside in escrow on top of pure P+I payments (principal and interest).

This has simplified things for me, because I can see exactly how much is owed on each unit. I don’t have parts of my net work tied up in escrow accounts that might be stocking up too little or too much. Instead, I have an annual cost that has to be paid and is instantly reflected when I make the payment in my net worth tracking spreadsheet.

As I wrote four hefty checks, it is a bit challenging, since property taxes in Texas are a bit steeper than Tennessee. But knowing that my tenants are paying off the mortgages at record pace and I’m earning top rent, I feel good that I’m developing strong, cash flowing assets that will build strong retirement wealth down the road. And I’m constantly reminding myself that real estate is one of the strongest investments one can make in growing wealth.

Happy investing!

Why EIULs work and VULs don’t when building wealth

booksA friend of mine who occasionally pings me with financial questions asked recently about VULs. He appears to be getting prompted to investing in them. It would appear my past blogs about EIULs causes him to ask a financial advisor about them. In response, it would appear they have countered with suggesting VULs instead.

I wrote a detailed response to him, but thought why not share it here as well?

The problem with VULs

I don’t like VULs at all. To start things off, what are VULs? They are Variable Universal Life insurance contracts. An EIUL is an Equity Indexed Universal Life insurance contract.

VULs take the idea of universal life insurance (which would be the same idea as an EIUL) but instead of using indexed investment options for the cash value, they instead use mutual funds. My whole retooling of wealth building was to get away from mutual funds. Mutual funds have historically had high costs and lackluster performance.

As part of the question I received, my friend included quotes on the cost of insurance. It appears the agent was trying to point out how inexpensive things would be on the insurance side of things.

Hate to break it to you, but cost of insurance is something regulated by each state. Essentially to buy $1000 of pure life insurance costs the same despite the company you go to. Things like fees, profits, etc. are where different companies can vary things. Different companies manage cash value investments differently. The funds, options, indexes, etc. are different for every company. Different companies offer different degrees of customer service and different ratings when it comes time it either loan out money pay up on claims. Different companies can offer different ways to loan you cash from the cash value part of your policy. But the actual cost of insurance is the same.

So in essence, when evaluating a life insurance company, you should basically subtract out the insurance aspect of things instead look at how well such a company has done on the investment side of things.

For any universal life insurance policy, the agent has a fundamental option to either write up the policy where they either maximize or minimize the death benefit based on IRS regulations. Minimum face value causes maximum cash value growth, and that is what we want. Even if you have no children, no spouse, and no family, these contracts are great places to load up with cash that you can get your hands on when needed, over the long haul.

The financial coach/agent that I learned much of this from runs a blog at http://shaferfinancial.wordpress.com. He was actually a PhD in statistics and psychology before entering the financial/industry. He is driven by evidence and actually has an undergraduate degree in finance. Most financial planners are trained in sales. Dr. Dave’s views on wealth building tend to not follow traditional sales routes but instead focus on evidence of success. If you visit his site and search for VUL, you’ll find some detailed analysis of them and why they don’t work.

I talked to him two years ago and said, “Here’s the money I want to invest. What would that look like at retirement?” He put together a plan and we discussed it over the phone. We made some adjustments and over a five month period put it in action. It’s been doing good so far. One things that I solidly know is that my cash value will do nothing but grow. It won’t drop in value at the next market correction like a VUL would. Therefore when the recovery begins, I will have more cash value to grow from than mutual fund investors.

Do you have an illustration or a quote from an agent? Contact Dr. Dave and ask him to look it over. He has written thousands of them, and knows the lingo. He will surely be happy to point out the pros and cons.

Whatever you do, given the long term nature of this vehicle, take your time until you understand it completely.

FYI: I don’t receive a nickel of cash for writing this opinion on EIULs nor Dr. Dave.

EIULs work, but only when given enough time

I’ve written here MANY times about EIULs. They are great. Their fundamental concept is that you get to buy European style options on various stock or bond indexes. This means that if the index goes negative, you don’t lose your money. If they go positive, you lock in a gain FOREVER. And your gains can in turn generate more locked in gains in the future.

But EIULs require time to do their magic. I just added a new worksheet to my net worth tracking spreadsheet. I have been plowing money into my EIUL since early 2012. That’s perhaps 2 1/2 years worth. In my main spreadsheet, I have the annualized growth rate of my entire net worth tracked to the month. I wanted the same thing on the accumulation value of my EIUL. So I got to work.

Well guess what? After 2 1/2 years, the annualized rate is currently at -4.15%. That doesn’t sound good, ehh? Well, there are several factors to consider. For starters, this worksheet lists the amount of money sent in to Minnesota Life. That means, by definition, a certain sliver of that money is taken out every month to fund the insurance tied to my EIUL. That’s a loss. Some more gets routed towards profits for the agent and the company. What’s left is sent to my cash value to accumulate and, in turn, generate credits.

I have certainly been racking up credits. I have scanned things back over the past couple years, and with the boom in the market, the caps are getting hit. But it doesn’t mean there has been enough cash value YET to overcome the fixed costs of maintenance as well as cost of insurance.

To double check things, and make sure I still understood what was going on, I dug up the original estimate sent by my agent. I can see where he estimates amount of money put into the plan every year alongside estimate accumulation value. I checked each year, and noticed that sure enough, it actually doesn’t go positive until Year 8.

Year 8? YIkes?!? Is that bad? Well, don’t forget, this is an estimate that predicts by the time I reach retirement and stop putting money in, I will have worked things up to an annualized growth of about 8%. Given that the Dalbar Report shows people doing less than 4% with mutual funds (which may yet require taxation after the fact), that sounds pretty good.

What is important to notice is that my growth rate has been moving slowly towards the positive. This is partly impacted by the fact that I just don’t have a big cash value YET. But as it grows, my ability to lock in bigger and bigger gains, and be immune from market shock will also kick in. For people that want to see big returns in five years or less, EIULs are not for you. But given 20 years+, this should result in a nice, steady, slowly accumulating and slowly beat-the-heck-out-of-mutual-funds results.

Happy investing!

To build wealth, you sometimes need to fight emotion with emotion

graph_up2It is highly documented in multiple studies that when people see their portfolios take a 30%, 40%, 50% (or higher) hit, they freak out and sell. This has been the emotional reaction of people for decades. It’s the reason the stock market and S&P 500 may average 7-9%, but people average less than 4% in mutual funds.

Essentially, research shows that immediate pain can quickly overcome prolonged success. We want to end the pain NOW. So we sell to prevent further loss. Hence, losses get locked in. A concept I learned about from Tim McAleenan Jr. is to combat this with positive emotions.

Try this on for size. If you buy shares of Coke (KO), follow up by buying a 2-liter, a six pack, and perhaps some other knick knacks of Coke. Take these things and set them up on a visible shelf, perhaps in your office. Then when you get your first dividend check (if you can secure a printed one, if not print out a statement from your broker), frame it and add it to your collection. Then, everyday you will have a visual reminder how your holdings in KO are earning you money every single day for simply waking up and joining life.

When the next crash comes (and it certainly will), you will have a bit of solid, positive emotional energy built up. And you’ll soon discover that your holdings in KO continue to yield dividends despite the drop in market price. The big key is that someday, if you hold steady, you’ll collect enough shares, that the market loss you feel will actually be less than the total value you have accrued.

Crazy things can begin to happen. Crazy GOOD things. When you weather a few drops in the market and see KO holding its own, you begin to see these price dips not as tragedies, but instead, opportunities. When KO takes a significant beating in share price because some newbie investors are freaking out and dropping shares that have been paying increasing dividends for 50+ years, it may be YOUR chance to get more. (Which incidentally requires that you have some amount of cash on hand.)

Now don’t assume this article is all about buying Coke. Instead, it’s about recognition that you WILL feel negative emotional reactions when the stock market plunges in the future. To handle things, we need not only objective financial analyses to properly handle them, but emotional mitigators as well.

Good luck!

Buying heavily discounted positions in BP…for my kids

bpAfter recently getting a hefty tax refund, I decided I had enough cash to buy my kids a starting position in BP, aka British Petroleum. Why?

  • They are paying about a 5.8% dividend.
  • They’re balance sheet of assets and earnings in dollars is about the same as when they were trading at $60+/share.
  • They have already doled out much in payments regarding the Deep Horizon oil spill from 2010.

Essentially, they are still at risk of having to pay out more damages, but the odds are shrinking as time progresses. It might take more years to wrap this up, but that hasn’t stopped them from continuing to produce. When other investors get more emotionally comfortable, the price will in all likelihood rise back to that $60/share range.

I own a small piece of BP in my IRA. The place where I wanted to apply more cash was moving pieces of that refund into my children’s trustee accounts I set up a year ago. Essentially I can buy them a block of BP stock, set it on DRIP to auto-buy more shares as the payouts come, and let it auto-grow over the years.

Does this sound suspicious given that I am not myself buying more BP? I understand your position. If it was so glorious, why don’t I buy some myself? The truth is that I’m working on another investment that simply takes time to become available. So I have to sit on that cash until the time is right. As to buying for my kids what I buy for myself, already done. VNR, BP, and CVX are stocks I own and that I have also bought for my kids. The other thing I’m looking to investing in isn’t an option for them without setting up more complicated structures. So in the meantime, I am happy to buy chunks of stock in companies that have performed well for years.

I believe BP is suffering an emotional roller coaster not tied to the their actual value. When they return to the $60s, then the equity position I have just bought for my kids will rise 50%. Awesome!

Stay tuned!

2013 taxes filed…whew! Say what?!?

TaxesThis past Wednesday, I finished filing my taxes. What?!?! Wasn’t that due back in April?

Well, yes and no. Income taxes in the United States are due April 15th. But you are able to file for a six month extension. As I’ve blogged before, my taxes are too complicated to get done in time. So my accountant has been chugging away, and we finally wrapped things up on the given deadline, October 15th.

And the celebration is that I got a big refund! How much? Well, I don’t publish actual numbers on this site, but try 4% of my taxable income. Now you go and calculate how much that would be for you, and tell if that wouldn’t make you happy.

Filing complex taxes is no small feat. Even though my CPA is well versed in real estate, LLCs, tax deductions I never knew about (like fees for pre-school for my kids), I have to produce all the paperwork for him to scour. This included closing HUD forms for buying and selling houses last year. One was missing. And then I remembered: we couldn’t make it to the closing and my father-in-law had been empowered to sign for us. I contact my agent, who gave me the title company’s number. I left a message and they fired me a copy of the HUD.

I was about to throw in the towel on child pre-school deductions given that I couldn’t find the church’s EIN number. But my CPA had checked some published registry and found them, cross checked against the street address I supplied. Woot!

Moral of the story: know where all your financial paperwork is. And don’t forget to keep email addresses and phone numbers for the people that can find critical bits for you.

So what will I do with this extra cash? Stand by. I’ll let you know.

How to evaluate a cash value life insurance policy

Every day that I turn on the radio, I hear cash value life insurance get denigrated. The problem is, the comments are highly generalized and rife with big assumptions that aren’t always true.

First of all, let’s back up and look at what cash value life insurance is compared to term life insurance. Cash value life insurance is also known as permanent life insurance. Some people also call it “whole life”, because that version has been around for decades. But there are other types that are NOT whole life.

Boiling things down, cash value life insurance is designed such that the face value of the policy can be paid when the policy holder dies. So how DOES it work? Basically, you buy a policy with a given face value. Imagine we picked a policy that offered $100,000, payable upon death to the beneficiary. So how can an insurance company come up with a way to guarantee paying this amount of money at some random time in the future? They collect premium payments form you, and use part of it to buy some immediate term life insurance and the rest is set aside to build up “cash value”. As more and more premiums are collected over the years, the cash value builds up.

The cornerstone of cash value

What is cash value? Essentially, it provides a cornerstone of the face value. Imagine you had built up a $30,000 cash value to back the $100,000 face value. At that point, 30% of the insurance is covered by the cash value, meaning the insurance company only needs to buy an additional $70,000 of term life insurance. At a certain point, they no longer have to collect premiums from you. Instead, interest from the cash value can be used to fund term life insurance making up the difference.

This is what leads to haughty TV and radio show hosts balking at how insurance companies “only pay you the face value” and “keep the cash value for themselves”. Ahem. If you have a $100,000 policy backed by $30,000 of cash value, where do you get the idea that they owe you $130,000?

This is just the scenario I heard the other day on the radio. Most of the time, the dollars aren’t mentioned. Instead, the radio personality seems to imply that you could have racked up $50,000 of cash value, and yet only get paid something smaller, like $25,000. That WOULD be horrendous. What they don’t mention is that the face value is typically HIGHER than the cash value.

Some real numbers

The only real numbers i often hear on various shows is how cheap term life insurance is compared to cash value. Like how dollar for dollar, term life costs 5% of cash value life insurance.

In a rare moment, I heard someone call in with numbers precisely matching what I’ve said so far. This caller had paid $20,000 in premiums over 25 years, and built up a $30,000 cash value, backing a $100,000 face value policy. His primary concern was that if he cashed in this policy in order to ditch it, he would get the first $20,000 tax free. It would be consider return of capital and not cost a cent in taxes. The host tried to say people almost never have tax consequences. But in this case, he would be facing a $10,000 profit. This is where he would need to talk to an accountant. I don’t know if that would be long term capital gains, or something completely different.

The talk show host couldn’t believe his ears. He repeated his usual complaints about how you never GET the cash value. And then I heard the caller reveal the face value of $100,000. When he dies, his wife will ONLY get $100,000 and not the additional $30,000. Instead, the insurance company is keeping that money for itself! Sorry, but that is grossly wrong. At this stage, the insurance policy has $30,000 in cash along with an additional $70,000 of actual insurance. Liquidating everything would result in a combined total of, surprise, $100,000 to pay out. There is not pile of gold left behind that the insurance company dumps into a giant vault and begins to swim in like Scrooge McDuck.

HINT: Insurance companies gear things such that they rack up their maximum profits at the beginning not the end. Term life insurance policies tend to get cancelled within a couple years. Same for many policies. Things change and people stop paying premiums. Insurance companies aren’t dumb. They want to rack up their profits early and move on.

What really stunned me was how the talk show host failed to look at the actual growth of the caller’s insurance investment. The caller has the opportunity to borrow against the cash value, perhaps to fund retirement. In that event, imagine they could borrow the entire $30,000. It’s usually something less to avoid collapsing the whole policy, but let’s assume they can take it all. We should be asking, what was the rate of return on that?

Actual yield of a whole life policy

If the caller invested $20,000 and accumulated $30,000 over 25 years, we can easily calculate the annualized growth rate. Simply take $30,000/$20,000 and take the 25th root. Result? 1.6% annualized growth. THAT is the indicator that this policy was horribly set up. THIS is the reason I would dump the policy and instead take the cash elsewhere, like buying up a big chunk of VNR stock.

With $30,000, the caller could buy roughly 1350 units of VNR. That would yield $283.50 every month, resulting in a hair over $3400 annually. In ten short years, the caller could easily double his money due to VNR’s 7.5% yield. This is much better than the dismal 1.6% yield which isn’t even keeping up with inflation. And this analysis assumes no growth in distributions from VNR.

Or take this $30,000 and buy KO, WMT, GIS, or a dozen other solid companies you have known about your whole life. Or perhaps buy a real estate note. Anything is better than 1.6% in my book.

Thankfully, the EIUL I have setup is designed properly. The face value has been dialed back to the minimum amount allowed by the IRS. This means that the cash value will grow much faster than 1.6%. My agent plugged in a estimate of about 8% based on a 20 year look minus 10%. This paints a very conservative estimate. 8% of growth is certainly possible even though mutual funds are averaging 4% thanks to an EIUL’s ability to guard against market drops.

Happy investing!

First step towards building wealth? Budgeting your income and expenses

habit-saving-moneyI want to put something out there. If you have read this blog site over the past couple of years, you might think I have everything together. Whereas I feel confident in my approach to growing net worth, something I have struggled with for years is how to run a proper budget.

You see, years ago when I entered the work force as a newly minted software developer, I started making decent money. I wasn’t a big partier. My idea of vacation was to visit my parents at Christmas and Thanksgiving. Hence, I didn’t spend big money. It never entered my mind to spend the big bucks to go to JavaOne or some other convention.

Essentially, I made enough money and spent little enough that i didn’t HAVE to run a budget. My checkbook would fill up with money and I would only use what was needed. At one time, I called up my bank and asked if I could automatically move some into a savings account. This was pre-Internet banking, and they said “no problem!”

I could go on about the golden years, but the sum issue is that when I got married a few years ago and we had kids, all of that went out the window. We suddenly discovered as a couple, that there wasn’t “enough money” at the end of the month. I had big savings that kept us from crashing. But I knew that dipping into long term savings was not the path to success.

Budgeting is communicating

And then I learned what is SO HARD about budgeting. The task itself isn’t hard. You track incoming and outgoing money. The hard part is communicating with your spouse. Because that what a budget really is. A tool to communicate.

Many studies have been done, and it reveals that money is one of the biggest (if not the biggest) issues that causes issues in marriages. My wife and I had different backgrounds with money. To bring up the subject caused her stress. For me, I initially was too concerned with making her happy, so I would push off issues about overspending until the worst opportunities.

We would go clothes shopping for the kids, and my mind would be filled with, “Can we afford this? Can we afford that?” Meanwhile, my wife was trying to pick the best things. Then we would go out to eat, and my heart would sink as the thought of all that money we were spending.

We tried several things to get onto a budget. It required experimentation, talking, letting go of assumptions, and lots of separate, small talks. Eventually we forged a path and got going. I felt relief.

Nobody’s perfect

As I hinted at the top of this article, I’ve never been rock solid on budgeting. In the past year, we had actually gotten off budgeting. Several changes happened like a new baby, moving into a new home, and seeing my paycheck change from every 2 weeks, to twice-a-month, and back to every 2 weeks. It was enough to cause the budget worksheet to fall by the wayside.

But last month I knew we had to get back on course, because I had already paid our primary mortgage using emergency cash reserves twice this year. That was a red flag that we were again off budget and not communicating with each other about money.

I steeled myself to dig up the old worksheets, update the values, and hammer out a new one with revisions. After about two weeks of effort, my wife and I had a new one to embrace this month. And I already feel like we are moving back to the right path. I feel like it’s only fair to share with my readers that no one is perfect, including me. If you have tried budgeting in the past, but failed, I implore you to try again.

Ideas on budgeting?

To wrap up this post, I wanted to at least describe the way our budget works. You don’t have to do it this way. Do what works. But if you have no idea, let me at least give you an idea to consider.

I have a spreadsheet where the first column lists the total income I expect to receive. The next few columns are critical items including: mortgage (or rent), utilities, groceries, insurance, and gas money.

After that are less important things like: clothing, dining out, date night, household. The last column is dubbed “Misc” and essentially contains whatever the final balance of money is left after everything else. If you have other things like debt or savings, put them on your budget as well.

Essentially, plot out every nickel of money until it’s all accounted for. Then when you spend money throughout the month, I subtract it from the relevant column. Every little bit of money I charge to the debit card results in a deduction from this worksheet. I can see instantly how much money is left in any category. If we are about to run out, then my wife and I must decide where to reallocate money. And if there is no more money, perhaps in dining, then that’s the end of dining for the month.

No one has to tell the other “you can’t spend that!” Instead, we use the worksheet to handle it. And if we run into funding issues, we work it out together. At least, that is the plan. Reality doesn’t always work according to plans. So we’ll keep on working at it, hopefully better with each month.

And good luck to you as well!