Wednesday, February 8, 2012

Looking at the Pricetag

In my last post I mentioned projecting out our finances on a five year basis.  A reader asked how we could do this without knowing the variables.   Yes, it is entirely true that there are many changes that can and do happen in a five year period that we cannot anticipate.  This makes it even more important to look at the true price tag before committing ourselves to ongoing expenses. 

Businesses over the years have developed a method of increasing sales commonly known as "the monthly payment plan".  This enhances their sales and the consumer is also benefited because they do not have to come up with a large sum of money at one time.  This allows us to "work it into our budget" and be able to have the product or service without feeling the pinch.

One of the goals of In The Trenches is not only to get one through the tough times but ultimately to lay a firmer foundation to withstand any of the ups and downs of the future without the crisis we have experienced in the past.  No plan can ever anticipate all possibilities or assaults, ask anyone who has gone through a major health issue or a natural disaster.  However, we can be more prepared for the normal fluxuations and possibly even a temporary job loss if we realize that there will be changes.  Farmers recognized and lived under this lifestyle principle because the majority of the harvest came in only once a year.  Even now when we have gone away from the agricultural living many jobs are seasonal and the workers need to plan on a few months of income followed by months of lack.  Consider the ski resorts, vacation industries, construction business, and even retailers who survive all year waiting for "black Friday". 

When we look at our anticipated income and expenses first on an annual basis and then on a projected five year basis the picture is enlarged and we begin to be able to see the forest through the trees.  I first discovered this when the Social Security office sent me a form that had all my years salaries listed.  I quickly added up all the income I had made and was surprised, no, shocked.  So I quickly did a balance sheet of assets and liabilities to see how much I had held on to.  Fortunately the excercise ended up making me feel okay about things, in fact, I was pleased that I had been able to do things in such a way that a large percent of what I had earned was reflected in durable assets.  If you are scratching your head and don't know what I'm talking about the free worksheet button will give you a copy of a blank balance sheet.  They are really very simple and don't have to be exact.  Example:  You owe $2,000 on your car, it is now worth $6,000.  Your net worth on that vehicle is now $4,000. 

Back to the monthly payments.  I'm going to keep this simple not because I don't think you will get it, I'm sure you will.  It is simple so I can best figure out how to state my point. I have to use a calculator for the simplest of math.  I used to be able to run a 10 key far faster than I can think. Four examples spread over 5 years:

$25 x 60 months= $1,500
$50 x 60 months= $3,000
$100x60 months= $6,000
$2,500 x 60 months= $150,000

Now we can play with these for some ideas.  First, let's say your current take home salary is $2,500 per month.  That's $30,000 per year. Not a big household salary but one that many are living on.  Given that you are not expecting many changes the total would be the amount of your take home pay.  Now by taking all your expenses you can see if you will be ahead, break even, or farther behind at the end of five years.  The outcome can help you decide if you need to make some changes now.

The $100 number is close to the monthly payments I have heard some are paying for cell phones, internet service, or superduper cable.  They feel they can afford it or have been caught in a three year agreement and cannot cancel without still being liable for the payment.  It's certainly the choice of the individual but at the end of five years do you really want to say that $6,000 was spent and there was nothing to show for it?  I like a little t.v. also but am more than satisfied with the minimal program.

What about the minimum credit card payments where only the interest is paid and at the end of five years almost the same balance remains.

How about those morning coffees.  Only $1,500.  (Yes, we know from my previous posts that this is one of my own weaknesses)

Yes, it sure does take the fun out of almost everything.  But, that is only the first step.  Now having taken a step back to look at things adjustments can be made, or not, depending on your priorities.

Once this becomes a habit of thinking each income or expense can be evaluated based on it's long term results rather than the short term monthly payment amount.  Taking that same $25 which at one time did not seem like so much can also result in a tidy little savings account as the time passes. 

Just as a little tree can grow into a mighty fir so our small choices also grow into large ones if we do them often enough.  For more on the subject please read the chapter titled Critical Choices on page 32 of the free version of In The Trenches on the right.

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