National Debt Thoughts
So today in the US Today there was an article that talked about how the National Debt, which is approximately $15.2 trillion is pretty much equal to the nations yearly GDP. What is GDP? GDP is Gross Domestic Product which is the market value of final goods and services produced for a country over a specific period of time. As of September, the last reported GDP estimate, the amount the United States produced was $15.17 trillion. Can you believe we owe nearly the same amount that we produce? It is very difficult for me to imagine that a country so well off, so educated, so innovative and motivated that we just keep borrowing money...for everything! I talk about living within your means in this blog and I am pretty certain that those smart people in Washington all live within their means as well. So why is it that those smart people keep spending money that we don't have?
These are great questions, at least I think they are. One of the ways that the country can overcome this is to raise taxes. Well certainly that is a solution, however, think about what that will do to your personal life. Isn't there a saying that goes something like "I live to work not work to live?" Well, if taxes go up because those smart people in Washington feel like they need
New Year's Resolution...Budgeting?
Happy New Year! I hope everyone had a wonderful holiday and a happy new year. As we set new year resolutions, can I make a suggestion? I suggest we all incorporate budgeting into our resolutions whether you are currently a budgeter or not. You can always improve if you currently do this. Let me share a recent experience I had with my own personal budget. Earlier this week, my wife and I put an offer on a house. We were very excited and looking forward to life in our own home with a yard. After we put in our offer, the sellers countered and my wife and I talked it over. We were about to counter the sellers offer and then we decided to put the payment into our budget to see how it would affect our standard of living. With a very nice interest rate we thought for sure we were golden and had room to work with. After putting in the payment, our budget showed that we would be losing money on a money basis had we countered and potentially bought the home. We were absolutely devastated. We played around with the budget many different ways and no matter what we did, it just didn't make sense to buy the home. Had we not had a budget, we could have been in over our heads in a home that we couldn't afford. That would have been much worse than the pain we felt when we realized we couldn't afford the home. Budgets may be a hassle from time to time but you will thank your budget in the long run if you can discipline yourself and follow it. Master your finances and set-up/follow your budget.
Personal Financial Information
As I have been talking about budgeting and getting a handle on your finances, there is more to budgeting than just tracking your income and expenses. Although it is nice to see how much you have saved throughout the month, I think there are some other things you can track/calculate to help you much better understand your financial situation. I find this information both interesting and informative. I told my wife I was putting together this information and she just said that I was crazy. Have you ever shared something with a significant other, thinking that they would be interested, and they just don’t find it as interesting as you do? Well, if you have, I can empathize with you. I will highlight some things that will help you better grasp your financial situation.
Balance Sheet
A balance sheet, it is a crazy accounting term, that accountants, financial analysts, and many others look at to understand a company’s financial position. So what is a balance sheet you might ask? A balance sheet is in essence a net worth statement. This report will help you balance out your finances. This report is set up so your Assets = Liabilities + Net Worth. It provides a snapshot of where you are financially at a specific point in time. A balance sheet contains 3 main sections. Those sections are Assets (what you own), Liabilities (what you owe), and Net Worth (Assets less Liabilities). Even though a balance sheet is a snapshot in time, there are many things you can derive from this report. There are financial ratios that show how well you can cover your remaining debt, how well you can survive if you lost your job or were no longer receiving income, or even debt ratios to give you an idea as to how much you may be able to borrow for a car or house.
Assets – Think of assets as anything you own. As you set up this section of the balance sheet, you will want to record these items at their fair market value. What is fair market value? Fair market value is what a willing buyer today would be willing to spend to purchase these items. Do not record these items at the price you paid as that doesn’t accurately reflect what the item is worth. Also, if you have a car loan or mortgage, don’t list them here. Those items will be in the liability section because you don’t own them yet. Let’s set this section up into 3 different sections:
1. Liquid Assets:
a. Cash (cash on hand, checking/savings account, money market accounts, bonds, and certificates of deposit)
b. Money that is owed to you – This would be like an accounts receivable meaning you have provided some kind of service or sold a product and someone owes for that service or product. A nice tax return could be here until it is received. Once it is received, the amount would then be accounted for in the cash area.
2. Tangible Assets:
a. Home, condominium, or other type of real estate that you reside in
b. Automobile, boat, bike
c. Personal Property such as jewelry, collectibles, antiques
d. Additional “Big Marketable” items
3. Investments:
a. Stocks
b. Mutual Funds
c. 401(k), Roth IRA, Traditional IRA
d. Real Estate
Liabilities – Think of liabilities as items that you owe money. I think of this section as one that you want to minimize. This is all cash outflow. Since these are liabilities, you should want to only have to owe on items that you need, know you can afford to pay them off, or that you are investing in that will generate cash flow to increase your assets. This is an area that you want to properly manage because if you don’t, you could get into financial trouble. I have been taught that there are only three things one should incur debt. Those are a home, a car, and education. Items that is very difficult to pay for with cash up front. This section is best analyzed in two different categories: Short-Term Liabilities and Long-Term Liabilities.
1. Short-Term Liabilities (debt owed within a year)
a. Variable lines of Credit - Credit Card Payments, Department Store Charge Cards
b. Current portion of Long-Term Debt – This would include a year’s worth of car and/or house payment or a student loan. I suggest calculating this as it can help with the budgeting process
c. Tax Payments
d. Money you owe to someone else – this could include a family member, doctor, hospital, accountant, etc.
2. Long-Term Liabilities (debt owed greater than a year)
a. Mortgage – This would be the difference between the outstanding amount of the loan and the current portion that is recognized in the short-term liability section
b. Home Equity
c. Car Loan - This would be the difference between the outstanding amount of the loan and the current portion that is recognized in the short-term liability section
d. Student Loans - This would be the difference between the outstanding amount of the loan and the current portion that is recognized in the short-term liability section
e. Other Long-Term Liabilities
Net Worth – This is the difference between your assets and your liabilities (Assets – Liabilities = Net Worth). As with your budget and your profit and loss statement, you want this to be positive. Whether your net worth is positive or negative, your net worth amount will tell you whether or not you can cover all your liabilities if you converted all your assets into cash. If your net worth is negative, then you need to figure out how to spend less than what you earn.
I will provide a balance sheet template shortly that you can use and change to fit your needs.
Economic Indicators
As the last couple of years have passed, there have been many events that have transpired that indicate a recession, economic growth, a recession...again, slow economic growth, economic stability, etc. In the news, there are certain indications or events that economists or investors focus on to gauge if the economy is growing or not. Some of these indicators are national or around the world. It is amazing to think that turmoil in Libya or Greece can affect the economy in the U.S. If you are heavy into this type of news then you are aware of how all these factors can affect what happens in the United States and ultimately to your budget. If you are unemployed or underemployed and hoping that more jobs or opportunities will become available, these are some of the things you will want to look for.
Jobs Report - Each month, usually around the first Friday of the month, there is a jobs report that is released. This report shows how many new jobs were added during the month. If there is a significant amount of jobs created in the month, then the economy tends to show progress towards growth. Why does this report carry weight? Well, if jobs are being created, then that means that companies are willing to hire. This is a benefit to the economy because more people are working and making money which can then be, eventually, pumped back into the economy through product/service sales.
If the jobs report doesn’t show significant growth or posts new jobs less than expected, the economy tends to retract. If less people are working or companies aren’t hiring like many think they should, then confidence in a growing economy is stalled.
Retail Sales – On the first Thursday of the month, retail companies, not all, report their monthly sales and show whether their sales grew over the same time period last year. This is also a factor that is monitored to determine how well the economy is doing. Again, if retail stores are growing their sales year over year, then it is a pretty good indicator that consumers are willing to open up their wallets and spend money. It is like a ripple effect. If retail outlets are reporting consistent year over year growth, then in theory, they should be reporting position financial information. As companies see consistent growth, even if it isn’t huge growth like 10-15% each month, these companies begin to regain their confidence in the consumer and in the economy. As this confidence builds, companies are more likely to hire more employees and that can only help the economic situation.
Why else is it nice to see consistent growth among retail companies. Well, if you happen to invest in retail stocks, then this is positive information. This is one factor among many that investors and Wall Street look at. Investing in stocks and other financial securities is for another day but I thought I would add that in as I work in the retail business.
