Print

Please login or register.
1 Hour 1 Day 1 Week 1 Month Forever
Login with username, password and session length

[Zuzanna Alondra]

I'm mildly stealing Miz's idea with the first aide thread and being a paramedic in real life (and a reminder to finish some of the thoughts there).  I’m curious about a more public place to post it, but not sure where.

Zu's an artist, but I, the player am an accountant, specifically a tax accountant.

In being such I get asked often for help with things like budgets, tax advice, how to make more money, how to balance a checkbook, how retirement plans work.. and how to get rich.

The problem with “Get Rich” books and schemes is the general mental definition of “rich” most people have.  I often hear people say statements like, “If I had XYZ amount of money” or “If I won the lotto” I would be rich.  So then I ask them if they were “rich” what they would do and I get a list of things they would buy that actually cost more than the average lotto winnings.  I have seen cases where people won the lotto, spent it all on one hell of a fun year or two, and then when they find out lotto winnings are taxable income… loose it all to Uncle Sam and end up filing bankruptcy, leaving them even poorer then when they started.

Being “rich” is not a dollar amount, but it also ain’t that flowery “Your rich if you’re happy” fluff either – because if you can’t pay your rent, your going to be stressed.  So after reading many books and seeing the reality that no set dollar amount will ever tip the scales to “rich” I have come up with the following definitions of high, middle and low income people.

Rich Income:  When you make enough money from your investments and “stuff” that you don’t have to work anymore and still can afford all your average expenses.

Middle Income: When you make enough money from your investments and working wages from your job to afford all your average expenses and put a bit aside toward paying off debts or increasing your investments to be able to reach “rich”.

Low Income:  When you make just enough or less then you need to afford your average expenses.  If you are in this category it is often to review your average expenses to see if there is wants instead of needs in your budget – this will be briefly discussed later.

Average expenses are defined as your monthly bills + reasonable payments on any debts (not all debts are bad) + a little for the “good things in life” which vary per person.  Some define this as going on trips around the world twice a year, others are content with going out to dinner once in awhile or buying a new video game.  The “good things” should be as simple as possible – as money won’t buy happiness if you keep wanting more, often the beggar is happier then the rich man because they can stop to listen to the birds once in awhile and have more time to enjoy life.

So – now how do you get rich?  What’s the secret?
The secret as defined by the author of one of my favorite series “Rich Dad Poor Dad” is to get your passive income (make your money make money) over your average expenses.  For people who don’t have a lot of money to invest, one of the best ways to start toward this goal is to get their average expenses down by realizing what is a need and what is a want and make it a lifestyle change.

Lesson One toward being Rich:  The Want versus The Need.

An example I try to follow of this is my mom.  She makes a very healthy income (I know, I did her taxes this year) yet still she buys her food from the dented can store, buys in bulk and gets her clothes at garage sales.  She won’t pay more than a dime over what she has too to get anything.  I finally said, “Mom, you make three times as much as me, you can afford to get Tillamook cheese (a brand of really tasty local cheese in the Western US), it’s only $2 more than the store brand Mom…”  Why does she still penny pinch?  The answer: because she made it a life style.  She hardly thinks about it and doesn’t feel “poor” for not having wants.  Back when she was “poor” she evaluated her needs and wants.  She knew she needed cheese, she also knew she wanted Tillamook.  But by finding the cheapest way to meet the need she could take that $2 and toss it toward an investment or debt.  While these little corners don’t seem to add up to much, I sat down with her and looked at my own budget, went shopping with her a few times and watched as she wouldn’t let me put anything in the cart without exampling why it was a need (which meant over half was put back on a lot more trips then you would think) and was shocked.
My husband and I went from “poor” when we were both working to almost reaching a point of mid-income on his income alone just by cutting out wants that we didn't really want after all when we saw how much they all added up to.


If anyone found this interesting other topics I can detail and often do is:
Getting Rid of those Pesky Credit Cards
Lowering your bills (including your mortgage)
Good Debt versus Bad Debt
Improving or establishing credit
Giving the least cash to Uncle Sam
Or whatever else folks ask questions on.

The Shameless plug that shall forever follow the end of all accounting advise posts:
I’m a cheap, penny pinching accountant – so I offer my services for more personalized advice for some isk at a fair value in one of two ways:
1.   674.02M isk per hour (My office charges $40 an hour to talk to me, plexes are $34.99 for 2, plexes sell in Rens for 294.8M as of 4/12/2010)
2.   Be a role-playing PvPer who would consider joining an awesome pro-matari terrorist organization and ask me in our OOC channel – by the way, Du’uma Fiisi is always recruiting.

**Just a note to clarify the shameless plug is a joke - serious post and ask questions folks!  My only fee is a sense of humor**

[Casiella]

We "rebooted" our lives last year: I spent a good portion of 2008 / 2009 without income and we used up our savings. Not that we didn't have any, actually, we had a considerable amount. But it only goes so far.

So we ended up living with my in-laws for four months before renting the house next door (quite literally). It's a much smaller, older home, in a working-class immigrant neighborhood. That makes sense, since my wife and her family are, um, working-class immigrants.

And I'm much happier now. We have far fewer bills, the in-laws have not been the nightmare I would have expected, and even though I'm working again and making slightly less than before, we have a lot more income to put towards saving again since our expenses have come down so far.

Just my contribution.

[Zuzanna Alondra]

We "rebooted" our lives last year: I spent a good portion of 2008 / 2009 without income and we used up our savings. Not that we didn't have any, actually, we had a considerable amount. But it only goes so far.

So we ended up living with my in-laws for four months before renting the house next door (quite literally). It's a much smaller, older home, in a working-class immigrant neighborhood. That makes sense, since my wife and her family are, um, working-class immigrants.

And I'm much happier now. We have far fewer bills, the in-laws have not been the nightmare I would have expected, and even though I'm working again and making slightly less than before, we have a lot more income to put towards saving again since our expenses have come down so far.

Just my contribution.

Sounds like this is a perfect example of realizing a true need.  You needed housing and such, but found your savings was dwindling. Then you realized you could fill that need cheaper. It sounds like finding a little house in a smaller neighborhood worked wonders for you.  If I am misreading this please do correct me, but I'm using you as an example now. Maaahahaha.

People often get in the trap of living above their needs.  They *want* a nicer home, bigger TV, new car - and go get these things.  Then once the bills come in and they can't afford the simple little pleasures in life because of all these "big" expenses, they come to resent the thing they thought they wanted.

I'm guilty of this myself - I daydream constantly about getting a 3+ bedroom house so I can have a dining room separte from my living room (and therefore a couch).  But if getting that house meant I couldn't afford to keep a full tank of gas in my car and go driving for fun and couldn't afford to buy more fluffy yarn (I knit while mining on my hulk alt or camping a gate) then is it really what I want?

Sometimes all it takes is taking a step back and listing out the things you do day to day and see if having "x" fancier thing will impact what you *really* do (My video game systems literally have dust on them where as I feel like I am constantly picking up another coloured pencil, a few bead or yarn for my crafts - so do I *really* want an Xbox to add to my gaming collection?)  This of course is less related to Casiella being my example - but only because I don't know what things trying to stay in the house she was in would of cost her from loss of the "smaller" enjoyments in life.

[Casiella]

Sounds like this is a perfect example of realizing a true need.  You needed housing and such, but found your savings was dwindling. Then you realized you could fill that need cheaper. It sounds like finding a little house in a smaller neighborhood worked wonders for you.  If I am misreading this please do correct me, but I'm using you as an example now. Maaahahaha.

Sort of. I mean, we couldn't afford the rent anymore (fortunately we didn't have a mortgage situation). So we had to move out when we'd used up what remained of our savings, despite having that 6-month cushion everyone recommends.

But as part of that, we downsized to one car, for example. Living next door to the in-laws makes it easier to share available transportation (and trips to the grocery store, etc.) I take my lunch to work more often, pay half the rent, but still allow myself the occasional Starbucks. And yeah, EVE kept going because I could pay for it with PLEXes. Yay IG trading!

So, while the initial adjustments came because we had to make them, living back in the part of town where I grew up has reminded me that driving a luxury car and living in a new house in a nice part of town didn't matter a lot for us. (Well, I miss the car, but ah well. Maybe later.)

Remember: the ghetto always takes you back.

[Zuzanna Alondra]

...fortunately we didn't have a mortgage situation.

Interesting point you bring up there - mild of tangent - alot of people seem terrified of mortgages - but I'd like to point out for others that even with the market as it is - you can normally sell a house pretty easy if you sell it for a reasonable price.

If you pay rent you are paying for your landlord's mortgage.  Literally.... 30 years later he hasn't had to pay much of that mortgage at all and he's got a free house - you've got nothing.  For people that are planning on living in one town for more then say three years and have the credit - seriously look into the cost of buying.

Rent = Mortgage + Insurance + Property Taxes + some utilities + markup for repairs + $100-$200 more to line the landlord's pocket.  Trust me - I know, my parent's have five rentals and if all goes well - 6 or 7, by the end of this year.

Plus the Landlord gets the equity from the mortgage being paid off - you get nothing in the end.

Sounds like renting was smart for Casiella here - but in general when you pay rent your buying a house for someone else.  There are some debts that are good debts.  If your credit is too poor to buy a house - I can give examples for how to fix that as your credit score itself is actually not tied to the amount of income you make.

Remember: the ghetto always takes you back.

And often people will find they are happier then with people that are real then being in the rich neighborhood where everyone has lost touch with reality.  Maybe someday you can get the car, but stay living near family - sounds like you have a good head on those shoulders.

[Zuzanna Alondra]

And yeah, EVE kept going because I could pay for it with PLEXes. Yay IG trading!

Perfect example of finding a way to take care of needs while keeping a want - I love Eve.  Only MMO I know of that if your stubborn enough you don't have to pay for.  Part of why I stayed here - because no matter how poor I get - unlike WoW - I never have to leave Eve unless the internet gets turned off.

[Zuzanna Alondra]

So - now a brief rant on the next concept: NET worth.

Everyone wants to be rich, everyone looks and says, "I want that" and "I hate being poor." but what most people don't understand is that when all is said and done you are likely living above your means.

To save an epic rant of examples - a pictures says a thousand words and this comic strip defines the concept perfectly:

http://www.wrongwaycomics.com/48.html

Scary to think the person closest to be rich and being able to find "happiness" financially is the homeless guy.

[lallara zhuul]

Just a little bit that may give you some insight.

http://en.wikipedia.org/wiki/Maslow's_hierarchy_of_needs

[Benjamin Shepherd]

That gave me a laugh Zuzanna, so true. So many Americans think they can invest in loans they already wouldn't be able to afford, not to mention the crapload of credit cards that the average family has.

It's pretty simple to avoid the economic slump that forces people out of their homes: Don't buy what you can't afford. Get a car, an apartment, and ONE credit card if you need it. Then you save for ten years, and by the time you're in your early 30s, you can afford fancy things. That's just the basic premise but it's still easy to save.

[Wanoah]

I've always been terrible with money. I don't think that will ever change now because I am fundamentally terrible with numbers. They simply don't stick in my head. They don't interest me enough to live more than a few seconds in my brain. So I have always overspent - often without realising - and I have never really saved. I have little to show for it, but I have had a good time.

Still, you really can't stay bad at money forever. It puts you in a hole. Being broke is depressing. It's probably much much worse when you just want to retire too. Sooner or later, you have to address things.

I led a profligate and disordered life. I found that tightening my belt and trying to budget always failed. I could get really anal with the budgeting stuff, and spend loads of time figuring stuff out in Excel. It would always go wrong because the numbers I needed to know never stayed in my head and ultimately, would never add up. Sooner or later, I'd be 5-6 pints down and I'd rediscover that generosity of spirit I was trying to suppress. Quiet nights out would turn into epic nights out. Then the car would need a service, home insurance would be due for renewal, and shit, it's my grandmother's birthday. I would reach for the credit card.

I abandoned the more traditional idea of budgeting. It doesn't work for me. My personality rebels against it.

What I discovered and applied was a more general principle for finance. This isn't about budgeting every last penny, or about trying to get rich in monetary terms. It's about a healthy balance. It's about budgeting for happiness. I don't care about wealth; but I do want to be comfortable and happy and not thinking about dull money shit. This is it, and it's real simple:

50/30/20 split

Spend no more than 50% of your income on needs. For me, this further breaks down to 25% on rent and 25% on regular bills and food. When I started, I was spending maybe 55% of my income on the basic cost of living. I moved house to peg this back to 50% - quite a big change that has actually transformed my life in all sorts of positive ways. It's really useful to know that you should spend no more than 25% of your income on housing too: gives you a sensible price range. It's probably a good indicator of poverty if 25% of your income doesn't cover housing costs at any level.

Save 30% of your income for the future. Or if you have debts (I do) then use 30% of your income to pay the debts off first. I had ended up spending almost 40% of my income simply servicing credit card bills and loans. Gradually, combined with the effects of inflation, my disposable income was squeezed to almost nothing, and that is a massive trap.

Spend 20% of your income on wants. You can also try saving some or all of this 20% for larger items that you need in the short to medium term. Don't want anything? Boring! Save it then, I guess. This is the really important bit of the budget - the holy grail. You need this for doing the things that you enjoy. If all your money goes on paying bills and surviving, your life will likely be a fairly grim affair. Going out, socialising, taking trips, and the like are essential. Unless you are exceptionally disciplined, disregarding this stuff will always make you miserable and will always lead to any financial planning based on spending all your money on necessities and repayments ending in failure.

It has taken a fair bit of effort to achieve this balance, but the net result after approx 18 months has been quite impressive for me. I still have no savings, and those lovely bank stocks are still utterly worthless () but I should be entirely debt-free in roughly 2 years, at which point I can start saving for the long-term. All my bills are automated, and disappear from my account the day after I get paid. I have no money worries, and I have reclaimed that vital 20% disposable income that allows me to enjoy life.

[Zuzanna Alondra]

Wanoah - You have done an incredible thing that most people can't do.  *high fives*  Hell I won't even have my debts paid off in two years.

My version was I wasn't allowed to touch the bank account, I get a $100 cash at the beginning of the month for "the little stuff" and when it's gone, that's it.

Once those debts are paid off we should talk about passive income *grins*

[KillJoy Tseng]

Hmmm... *grabs calculator*

Looks like about 50% of income to rent and petrol to get to and from work.

... well, that's not happy.

[Wanoah]

Wanoah - You have done an incredible thing that most people can't do.  *high fives*  Hell I won't even have my debts paid off in two years.

My version was I wasn't allowed to touch the bank account, I get a $100 cash at the beginning of the month for "the little stuff" and when it's gone, that's it.

Once those debts are paid off we should talk about passive income *grins*

I'm not counting any chickens just yet.

And yeah: passive income sounds good. ^^

Hmmm... *grabs calculator*

Looks like about 50% of income to rent and petrol to get to and from work.

... well, that's not happy.

Yeah, that doesn't sound good. Rising fuel costs were another incentive for me to move within cycling distance of work. I really can't overstate how much this has improved my quality of life. More money + more time = happier Wanoah.

[Zuzanna Alondra]

Yeah, that doesn't sound good. Rising fuel costs were another incentive for me to move within cycling distance of work. I really can't overstate how much this has improved my quality of life. More money + more time = happier Wanoah.

Not to mention cheaper then a membership at a gym and will keep your figure nice... I wish I lived close enough to bike to work, but in the mean time I am actually looking forward to going back to an old sunny day activity.

Where I live it's a good 25-40 min bike ride one way to the gas station if you take the pretty route (15 by the main drag which isn't nearly so pretty) and when you get there you get a glass of water or a small soda and talk to the locals for ten about how much the casino sucks... then you ride back home and stop to watch the model airplane field on the way back.

But I digress there... the point was drawing attention  to a life choice that caused a need to be filled for less - and was more fun.

I also challenge anyone who's got credit card debt to  look at their apr's and highly consider paying even $10 bucks a month more then you would of on your  highest interest card. 

[Mathra Hiede]

A couple of good examples, is myself and perhaps my best mate.

We are both young (under 20 >_>) Love cars, and have recently taken out loans of similar amounts (aprox $7k AU) and bought ourselves nice cars which have so far required little to no maintenance work that we can't do ourselves.

Now, we both have relatively stable jobs, he works more infrequently than I, but earns alot more.
I work almost the same shifts week in week out and make a pretty consistent income.

Now, a little while down the track though, my mate is really struggling for cash - every time he earns a chunk of money its "Oh, I want THIS bit for my car, but I need THIS bit and then this and this and this..." etc and as a result has come close to defaulting on the loan a couple of times, which would devastate him as that car is what he lives for really

However, myself - I work hard, I spend a little money on fuel travelling to and from work, some on EVE  as really I CBF to make enough ISK for plexes and I can reason this out for all 3 accounts (bear with me )
I easily make my payments, I have enough money to occasioanlly go "Ohhh yeah, that would be nice, I might just go get that" and although I have two VERY large credit cards, I only use them when I know I have the money either coming in or in my account to pay it back.

In the end, I enjoy a more comfortable life, I don't have to borrow from mates to pay for a drink and I can plan long term as my accounts top themselves up again and plan for the things that I really need AND want and thus, my outgoing expenses are such a small amount compared to income that I really can afford 3 accounts on EVE, the occasional plex and just enjoy things at my own pace.
My mate? well he keeps on running out of cash, not getting anywhere and unless forced too probably will take twice as long to pay out the loan as I will.

TL:DR
Financial planning works damnit!
And it helps to control your wants and needs by such an enourmous margin that you will be surprised at the end results.
Like, alot.