Monday, November 3, 2014

Step #6 Economizing

This step separates the men from the boys and the women from the girls. This, again, is going to require some lists and complete honesty. The honesty is with yourself and with those financially entwined in your life. As you are probably aware, one of the major causes of separation and divorce in marriage, break-ups in other kinds of domestic relationships and business relationships is MONEY! Finances are one of the main building blocks of any kind of stable life regardless of whether one is single or married, a sole-proprietor or a partner in a small business or on the management team of a huge global corporation. There is one simple principle to keep in mind here. If you are in debt, you are not and cannot be free until you are out of debt.

Let’s begin by listing all your financial assets and what they are realistically worth. We know certain basic things about finances.

1. While real estate has tended to appreciate over time that can change at any time and just did, to the detriment of a lot of people, many who have already lost their homes and more who will in the future.

2. Most tangible assets depreciate such as automobiles, RVs, boats, motorcycles, time shares, furniture, clothes, jewelry, books, electronic devices, especially computers, tools of your trade and so on.

3. Over the long-term, the stock and bond market outperforms the real estate market, but investing in the “markets” is, always has been and always will be a major risk and you have to be able to tolerate that risk. It would be nice if we knew the future, but to the best of my knowledge, no one has ever passed Crystal Ball 101.

4. No matter what we want to believe, prices continue to increase and most incomes do not keep up with it.

5. Marketing is a science designed to separate the public-at-large from the hard earned money they earn and attempt to preserve for a rainy day.

6. Credit is NOT your friend. It is the friend of the huge banking conglomerates. No one who loans you money in any form really cares about how much that new home, car, pair of shoes, etc. will mean to you. They only care about how much they will earn from your often ill-guided wants and desires. Losing your home, car or whatever is none of their concern.

7. We live in a society of gluttony and instant gratification. The vast majority of the 7+ billion who inhabit this world live for a year on less then you make in a single week. Yet, we never seem to have enough.

The List Of Assets

We could keep adding to this list, but let’s move forward at this point. List all your cash on hand, money in checking, savings (most people don’t have any or very little), money market accounts, CD’s, IRA, 401K and other retirement accounts, investments in stock, bonds, commodities, currency, precious metals, real estate (including your own home, vacation properties and investment properties), vehicles, jewelry, art, collectibles, furnishings, clothes, tools, toys, college funds, pre-paid funeral arrangements, possible future inheritances you know about for sure and anything else you can think of that has value.

Real World Value

Now, next to each item place a real world value. Some of these will be easy, of course. If you have $500.00 in a checking account and $1,000.00 in a savings account, that is their current real world value, assuming the currency won’t collapse and become worthless or runaway hyperinflation doesn’t make a dollar worth a dime. It will be more difficult on most of the other items on your list. For example, your home is a best guess since many factors will determine the real value including changes to your community, foreclosures, closing or opening of a school that serves the community and so on. You may have paid $60,000.00 for a Hummer H2, that by normal depreciation might be worth $40,000.00 when it’s four years old, but then again, with gas prices in the range of $3.50 to $4.00 per gallon and the Hummer averaging, perhaps, 8 to 12 miles per gallon, the market may have tanked and its value may only be $15,000.00 to $20,000.00. This is where the realistic and honesty factors come into play. Don’t kid yourself. It won’t hurt me and it won’t hurt anyone outside those directly intermingled in your finances, like your spouse, children, business partners, etc.

Another thing that has to be taken into account at this time is your marital/relationship status. Are you single or married? Are you in a domestic relationship – romantic or for convenience – and do you own any of these assets in joint tenancy? Do you have joint bank accounts. Does your spouse (male or female) have any claim to any retirement accounts or pensions you have should the relationship dissolve? Do you have disability insurance and/or long term care insurance and/or health insurance if something unthinkable happens? If so, is it adequate to cover all the bases? By the way, I’m not a credit counselor, insurance professional or certified financial planner. I’m simply a guy who has lived for 67 years at this writing and watched untold numbers of people go down the tubes due to business downsizing, closings, car accidents, work related accidents, home accidents, health issues like heart attacks, strokes, cancer, divorce and so on. It’s that Life 101 thing again.

Fire Sale!!!

Next, make another column on your Asset list and call it, Fire Sale Value. If this sounds familiar, I hope you went back to Step #3, Personal Inventory. It will help you speed this process. In this column you’re going to come up with values for your assets based on the worst case scenario where you would need cash fast to cover doctor bills, gambling debts, to put food on the table, a flood, earthquake or wildfire destroying your home, business, etc. and insurance isn’t enough to cover your losses or whatever other unforeseen and heretofore unthinkable event could befall you. Okay, I know, this only happens to other people. It will never happen to you. That’s what “they” all said, too. Is the grass really all that much greener on your side of the fence? Have you really dotted all your i’s and crossed all your t’s? DO NOT be optimistic with these valuations. Mostly, even your most conservative guesses are going to be optimistic, at best. Go visit that pawn shop with your jewelry, computers, stereo’s, TV’s, etc. and get a real idea of their fire sale, worse case scenario value.

Gee! This is pretty depressing isn’t it? There are so many more scenarios, but we’re going to move on. Remember, being free, ultimately, is going to mean detaching yourself from “stuff” and money and determining the basic core values that are really meaningful and valuable to you. But, we’ll look at that a little later.

What Do You Owe?

Start a new list and title it “Liabilities.” Now, you’re going to list every single thing you owe no matter how much or who you owe it to. Start off with your home and vacation property mortgages, The main thing right now is to consider how much you owe on the principle amount borrowed. Then go to your vehicles (all of them), toys, tools, credit card debt carry-over, home equity loans, signature loans, other secured loans, student loans, loans from family and friends, gambling debts (oh yeah, don’t hide from them, if you have them, list them), loans on investments, real estate properties, business loans and lines of credit you’ve personally had to guarantee, medical bills you’re paying off, deficits in investment accounts and so on. You probably didn’t think your list could be this long. Surprise, you’ve been kidding yourself like most people do. When you get to the bottom of this list (and you’ll probably continue remembering little things you forgot), tally up the total. Ouch!

Reality Time

Now, here comes the real eye opener. Subtract your liabilities from your assets. If the resulting number is a positive number then that’s how much you’re worth (and remember, if you’re married, you really only worth half that much). If the resulting number is a negative number then face it, you’re bankrupt.

I told you this might surprise you when I outlined the 12 Steps for Living Free. You (like most people) don’t want to look at reality, so you typically skip over things and conveniently forget to list them. This certainly isn’t a full and necessarily accurate balance sheet that an accountant can prepare for you if you give him or her ALL the information they require, but it’s accurate enough to give you a pretty good idea of where you really stand in life.

I hope you came out with a very, nice, large positive number. The reality is that most people are 90 days away from bankruptcy. A major illness, loss of a job, natural disaster or any of a number of other events could pull the rug out from under you if you’re like most people.

But, there’s more. OMG! Haven’t I made you miserable enough? Sorry! The facts are the facts and reality is reality. We’ve only examined the assets and the liabilities – and don’t forget to subtract the liabilities from both the “realistic” valuation and the “fire sale” valuation of your assets. The pictures could be and probably will be very different.

Time To Crack The Nut

Now, we have to add in the cost of day-to-day living. Your assets and liabilities don’t address those added expenses. So, it’s time for another list you can call Monthly Living Expenses or Monthly Overhead (a bit more business-like term).

Here are many of the items to include on the list, though not all of them, certainly. Let’s start off with the more mundane necessities like food, clothing, transportation, job related expenses, school related expenses if you have children, prescription and off the shelf medications, supplements and vitamins and similar items. Next, let’s add a big category, insurance. Make sure to list the monthly premiums (or if you pay them quarterly or some other frequency, calculate the monthly cost) for life, health, car, house/homeowner/renter, disability, long-term care, dental, RV (if you have one), vacation property, flood, title and any other forms of insurance you carry for yourself and your family’s security.

Then there are utilities like gas, electric, water, sewer, telephone and cell phone. You can add entertainment like cable or satellite TV, Internet, Netflix, book purchases online or at stores, theater tickets, movies, concerts, dining out, dinner parties and vacations. Don’t forget monthly expenses for the kids that may have to do with school sports programs, concert trips, field trips and such. Also, remember you have federal and possibly state income taxes, and various other local, state and federal taxes you are required to pay.

And the last major category is monthly debt service. This can be a little tricky because you may pay some of your other categories with your credit cards, so you’ll need to separate these so you don’t list them twice. But, most will be pretty clear cut, your mortgage payment(s), car payment(s), secured loan payment(s), signature loan payment(s), and so on. If you have money withheld from your income to be deposited toward any of your retirement or pension accounts, that is money coming out of your income each month, so count it as part of your expenses. It does have the benefit that it is increasing the value of your assets on the other side of the ledger.

Add all the dollar amounts on this list together and this is your monthly “nut” to crack. Subtract this number from your total income (that you can count on) each month. Now, you know how much you have to go to savings or for some discretionary pleasures. This is what you NEED to maintain your lifestyle just as it is today with no significant improvements. And, if your income doesn’t keep up with the increasing costs of things like health insurance, utilities, gasoline, food and so on, then at some point in time, you’re going to have to dip into your savings account to finance today’s lifestyle. This is called deficit spending. If you want a good example of exactly how this works, watch the evening news about how the U.S. government operates and what the impact of this kind of spending formula has had on Greece, Portugal, Ireland and Spain, to mention a few.

Sure, you knew all this. I’m not trying to insult your intelligence. But, are you operating like the U.S. government or like the Coca Cola Company? The government doesn’t produce anything, they take money from taxpayers – allowing all kinds of special concessions to all kinds of people with “special” interests or needs. Then they spend that money wantonly and simply borrow more when they don’t have enough. How long can this be a FREE country if we keep adding to our $14 trillion debt – sooner or later someone has to pay the piper. How long can you continue the illusion of being free if you owe massive amounts of money. At some point in time the U.S. government won’t be able to borrow any more money and neither will you. On the other hand, the Coca Cola Company operates on a simple formula – they take in more money then they spend. What a concept. And, it works.

It’s Show Time

So, now we’re to the bottom line of this step, Step #6 Finances. What is it going to take for you to get to the point where you can say you’re financially free? You may have noticed that there is an interconnecting pathway within these steps. While each is distinctively an individual step, action from various steps will definitely impact the other steps.

How do you define living free in financial terms in your life? If you are part of some kind of partnership like a marriage, domestic relationship or business partnership, do you see eye to eye with your partner(s)? If you are single and self-sustaining and self-supporting your choices, decisions and actions are much simpler then if two or more individuals have to come together on dreams, philosophies, choices and actions.

I stated it earlier, you can’t be in debt and be free. So, if you are in debt (and unfortunately, very few people aren’t in some form of debt situation), how can you eliminate your debt? If, after you created your asset, liability and overhead lists you, find yourself in a reasonably healthy and positive financial situation, can you simply go through the downsizing process, simplify your life, sell off high value (and possibly high debt) assets to clear those liabilities off your books? Perhaps you can work with a credible and highly reputed financial planner to create a plan to lower your monthly/annual overhead and apply the income that was paying for that higher overhead to paying off debt and reducing your liabilities. Those are two likely scenarios. Each will require a plan and a reasonable time line to execute and accomplish.

If you’ve been kidding yourself for more then a couple years and now, after being brutally honest and evaluating your actual financial position, you realize you’re not likely to get out of your liability position during this lifetime. You may have to consider drastic measures. If this is a realistic scenario, it’s important to accept that your assets will most likely be attached when you die and there will be no estate to leave your kids. You’ll never be able to stop working as hard as you are now. You’ll never be any freer then you are now. You’re doomed to the life of a wage slave, even if you own your own business. Then what? You could quit everything and abandon your home and lifestyle and just go off the grid. I don’t recommend this kind of action. Maybe you could just sell off whatever you can, take the money and leave the country and start all over again in a different country. Sure, that’s possible. But, we’re in a global society and your anticipation of privacy is pretty slim. Your records will follow you and catch up at some point in time unless you can do a very successful change of identity. Frankly, This isn’t a great idea, either. Bankruptcy is yet another alternative. If you’re in this kind of situation, let’s face it, sooner or later you’re going to default and your house of cards will collapse. The longer you go on, the more hopeless the situation will likely become and the more people you’ll potentially hurt. So, why not consider just doing it, getting it over with and starting out fresh.

Call In The Cavalry

Now I’m going to make this very emphatic – DON’T DO ANYTHING UNTIL YOU GET PROFESSIONAL LEGAL AND ACCOUNTING ADVICE! I am not a legal, accounting or financial professional and even if I were, I don’t know your specific circumstances. It’s absolutely vital that you seek the appropriate professional help. Take your lists with you. Tell them everything about your life, lifestyle, job/business as well as your “partner(s)’s if you have one or more. Tell them your dreams and aspirations. Explain how you plan to live your “new” life free, frugally and fiscally responsibly. Give them an idea of the time line you’ve tentatively established.  

Tell them what actions you’ve taken to date. For example, explain that you’ve eliminated your wired phone lines, gone to a flat rate cellphone service, cut the cable service to the most basic service, restructured and re-shopped your various insurance policies and reduced your insurance cost by 30% (or whatever). Indicate that you do more shopping at Walmart instead of the high priced supermarket and Nordstrom’s and cut you food and clothing bills by 50%. You only have someone in once a month to clean the house instead of weekly and don’t plan to have anyone once you downsize to a smaller home or apartment. Show them you’re willing to take on more of the direct work yourself by letting go of the lawn service people and mowing your own lawn. Additionally, indicate what other actions you plan to implement to reduce your overhead and simplify your life. Perhaps, you’ve closed six of your eight credit card accounts and use only one with the other as a back-up for emergency use.

Like everything in the 12 Steps for Living Free program, nothing is an overnight process. You took actions over a period of time to “imprison” yourself in the lifestyle you’re seeking to shed. You have to pay the price to extricate yourself. However, each small step you take is one more step toward the living free lifestyle you’ve identified for yourself. I compare it to losing weight. You didn’t gain all the weight you may desire to eliminate in a day, a week or a month. It happened a little at a time over a period of time. The same is true when you want to lose the weight. If you want to lose 30 pounds and you set a goal to lose one pound a week, you’ll reach your desired weight in 30 weeks. If you go on a crash program, you may lose it, but it won’t be a healthy loss and it’s virtually certain that you’ll regain it just about as fast as you lost it because you didn’t actually modify your lifestyle.

I told you I cut my overhead by about 80% in one day. But, that was my combined personal and business overhead (which in my case are basically synonymous). However, I began the plan for that to happen a couple years in advance of the actual event. It was little steps. It was little modifications in my lifestyle and my business operations. It was a process to become a reinvented person. And that’s exactly what you’re going to do. I’m not unusual in what I’ve accomplished. There are many people like me and I meet more of them all the time. None of them want to go back to their old lifestyle (me included). It’s an ongoing process for all of us. And, here’s the simple fact. If I can do it anyone can do it and most especially you.

Next time, you’ll be adding another process, Step #7 Avocation, to the 12 Steps for Living Free and it’s going to dovetail right into Step #6 Finances.

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