Category Archives: Building Wealth

Financial Friday: The Balance Sheet and Income Statement

This is part of a weekly series on personal finance and wealth building.  If you care to read the first one, click here.

The first step of the trip from where you are now to where you want to be is understanding how to tell where you are.  For wealth, that’s a Balance Sheet.  You also need to know how that’s changing over time, which is where you need the Income Statement.

Many financial ‘experts’ poorly or incorrectly explain the balance sheet, assets, liabilities, income, and expenses.   I’ve seen one go as far as to suggest your house isn’t an asset (and then suggest a good way to get rich is to invest in real estate).  While I’m not presenting a lesson in Finance, these are pretty much the same tools you would learn to use in a Finance 101 class. Continue reading


Financial Friday

This is an inaugural post in a weekly series on personal finance and wealth building.

Managing your personal finances and building wealth can seem a daunting task.  It did to me about 12 years ago, when I was over my head in credit card and auto loan debt, renting an apartment, and struggling to pay the bills, even though I had a pretty decent paying job.  With the help of my now wife, I figured out how to dig out of the hole, and in a short time turn my negative net worth into what many would consider a positive net worth.

Lots of folks make lots of money selling books on how to get rich.  Some of those books have outstanding advice, some aren’t worth the paper used to print them.  Much like the fitness and strength training world, a lot of effort goes in to making something pretty simple look really complicated.

There are only a few basic steps to building wealth.

Get Out of Debt

One of the most valuable lessons I got out of my Finance classes in graduate school was don’t pay interest on depreciating assets.  That means exactly what it says – when you purchase an asset that will depreciate (clothing, cars, televisions, computers) pay for it up front, not on credit.  I know this sounds easier than it is (simple doesn’t mean easy, trust me), certainly when it comes to items with high up front costs.  Not everyone has the $25,000 it takes to buy a car.

Most people are already in debt.  They carry a balance on their credit cards, they have one or more car loans.  In order to build wealth, you have to eliminate these debts.  (I’ll address appreciating assets and debt later, but for now, ignore your mortgage if you have one).  Your net worth only goes up as your income exceeds the expenses of your liabilities.  Which leads us to… Continue reading

Seth Goodin on Pennies and Dollars

This is an outstanding read!  Well said and concise.

My perspective is similar – although I think from a personal finance standpoint, sometimes you need to start with the pennies to learn good habits.

Pay attention, now.

I’ve already suggested you plan to pay for your own health care.  This weeks good news notwithstanding, Congress is a big fan of taking control of things, and healthcare is one of those things they are after.  Might not be this year, but it might be in your lifetime.  If I’m wrong, you’ll be sitting on a pile of money later in life, not a bad thing.

Well, maybe not a bad thing.

Ron Holland suggests you also prepare for the government to take control of your 401k.  I heard a bit about this, but didn’t have a chance to blog about it, so I’ll just give you what Ron said:

Each year, the government will put $600 into a Guaranteed Retirement Account for you and every other working person in America. If $600 amounts to more than 5% of your annual compensation (if you earn more than $12,000) you will be required to contribute 5% of your total annual compensation to the GRA. The Feds will promise to pay a 3% “inflation adjusted return” on each GRA, based on the government’s Consumer Price Index. When you retire, you receive a portion of the account each month. Then — get this — when you die, your heirs receive only 50% of what’s in your GRA. The rest goes to Uncle Sam. Remember, this is the good news!


Following the introduction of Guaranteed Retirement Accounts, the next step will be to cap the tax deduction for annual contributions to existing private retirement plans at 5,000. (Many Americans will support this, given the hostility to the well-publicized Wall Street mega-bonuses and retirement plans.) Next will be a tax on every retirement plan’s income, to provide an immediate flow of revenue to the Feds. Finally, there would be a prohibition on buying any non-U.S. investment for any retirement plan.

He goes on to describe the scenarios required to get something like this into law (a significant event like a terrorist attack), and how it would be implemented.  Given there was serious talk of this kind of action in the news, I wouldn’t be too quick to write the idea off as just a conspiracy theory.

I’m not saying you should stop using a 401k, but I am saying you might want to plan your retirement using a variety of tools, not just a 401k.  I certainly do.

Financial Planning for ObamaCare

Scott Gottlieb at AEI thinks only the very rich will be able to buy their way out of ObamaCare.

The very rich, of course, will be able to buy their way out of ObamaCare. Many of the best doctors will go cash only, opting entirely out of the Obama program, to cater to a wealthy clientele. But only the truly affluent will have the cash to escape.

The vast rest of us will be locked inside the new system–stuck with the same collection of government-decreed medical benefits.

The only reason I’m not going nuts:  I fully plan to be in the group who can afford to buy our way out.  My financial planning now includes putting money aside to pay for my own healthcare.  I do not want to ever have to rely on the government to take care of me.

I suggest you do the same.

Quickie on Mutual Fund Investing Strategies

From Investopedia, a short read on strategies for managing your mutual fund portfolio.

I gotta admit, we tend to be ‘buy and hold’ with fairly infrequent rebalancing (annually). We should probably change that – we need to pay more attention to how our money is working for us.  As with anything, it’s about discipline.  I’ll have to send this to our financial planner to see what she says.

Value means more than just dollars

The Simple Dollar has a nice post up on the value of frugality, I thought I might add a bit on the subject of value, dollars, and time.

The writer at The Simple Dollar was asked:

I don’t see why I should spend fifteen minutes making a batch of homemade laundry detergent just to save a few bucks when I could spend that fifteen minutes building my career. Most “frugality tips” seem like a waste of time.

There’s a pretty simple way to look at this, and the poster points it out pretty well. If the value of the 15 minutes is higher than the value of the laundry detergent + the cost of purchasing detergent, then certainly your time is better spent doing something else.  (BTW, the cost of homemade detergent is higher than just 15 minutes of time!)

Another example:  My employer pays me about $50 an hour (it’s more complicated than that, as I don’t ‘do’, but rather ‘manage’ and ‘think’ and ‘plan’, so my employer is paying me more for my work product than my time, but time is the simplest way to look at things for our purposes). That’s as good a starting point as any to value my time.  I hire someone to clean my house every two weeks, and pay her $80. $160 a month just on housecleaning to some is an extravagant expenditure… but do the math. It would take me about 3 hours to clean my house.  Thats $150 of value of my time, assuming I like cleaning as much as I like my job, which isn’t true at all.  I would charge you $100 an hour to clean your house (which is why I don’t run a housecleaning business).  So $160 a month to get back 6 hours to do something I want to do, is a huge bargain for me.

It isn’t all about dollars, frugality of time is as important, isn’t it?

If that’s the case, be honest with yourself about it. It’s not just about earning money, it’s about personal enjoyment, and you’re accepting that the return is less (or possibly nonexistent) because you enjoy doing it. That’s great, but it doesn’t mean that the frugal task has any less value.

Here’s an example. One of my cousins is a meticulous housekeeper, to the point of being obsessive. Yet she enjoys it. She’d far rather be doing that than engaging in other activities. Sure, it serves as great maintenance on her home, but it doesn’t put much financial value in her pocket. What it does do is make her feel good when she sees her sparkling clean house. She often chooses that for a Saturday afternoon instead of networking within her career.

Everyone has differnet values for time, as well as values for enjoyment.  I was making small talk with a friend’s husband a couple of weeks ago, and we got on the subject of wine (to his credit, we were meandering around for something to talk about other than the weather, and even though he’s not into wine, he at least sounded interested so we could not stand there in silence while the ladies were inside going on about weddings or shoes or whatever).  We were discussing the cost of wine, and how hard it is for me to spend more than $30 on a bottle for something I’m just going to drink.  I was a bit uncomfortable, as I had recently purchased a $70 bottle of wine.  He pointed out he would regularly spend $200 on 4 hours of golf, and that it’s worth it because he loves it.  He then just asked me if I really liked the wine.

Made that $70 look like a value play.

Don’t focus on the numbers, focus on the value.  Sure, the basics still apply – if you are in debt and want to build your net worth, you may need to give up golf and wine for a while.  But once you are comfortable and on track with your goals, use more than just dollars to measure value.  You’ll find bargains everywhere.

The Emergency Fund Fallacy

As a full disclaimer, I am the anti-guru. I saw a post on a blog a couple of days ago from a self proclaimed expert explaining the need for an ‘Emergency Fund’, and I thought a post might be in order.

In plain language: if you have any consumer debt (credit cards, car loans, etc), you should not have an Emergency Fund if your goal is to increase your net worth. There is no reason to pay interest to save money.

Lets say you have $10k in credit card debt, and you are paying 20% interest on that debt. You decide you need 6 months after tax in the bank as an emergency fund, in case you get laid off, or hit by a bus, or mauled by a dog, whatever. You make $60k a year, so you need about $20k in the bank.

Think about that for a minute. How long would it take you to save $20K? And you want to not pay off your credit cards for that long? A significant “EF” is a huge mistake if your goal is to increase your net worth.

If your goal is to increase your net worth, you have to get out of debt. If there is no direct need for the cash (what are the actual odds you’ll need the fund?  If they are high, then it’s not an emergency, it’s something that should be in your budget), pay off your credit cards and your car loan, THEN gather 6 months cash.

My suggestion is to have a 2 week cushion over your budgeted needs so you aren’t literally paycheck to paycheck.  You don’t want the timing of due bills doesn’t create any issues.  But more than that, you are paying interest on money you don’t need to just sit there.

If you do find yourself in a position you need more than a paycheck’s worth of cash for something (the transmission is shot, need to repair that roof leak), use the available credit you’ve created by paying off your debt. You are still better off, because you haven’t been paying interest on that money while it sat doing nothing, you only have to pay interest on it while you need it.

If you are disciplined, it won’t be long before you are out of debt and paying for those emergencies with cash you have saved.  Saving while you are in debt or while you rack up more debt is the main reason people struggle to build wealth.

TurboTax Rules


$70 plus $20 to efile my state return, versus $700+ to have my accountant do them, and it didn’t take me any longer, because the packet I had to fill out for my accountant was pretty much the same as the questions TurboTax used.

I used the Home and Business version (got it at BJs on sale), I really couldn’t be happier.  Given the small odds of an audit, and that we tend to have solid documentation, there’s no way we’ll use an accountant again unless they are providing some serious tax planning value over what the software provides, and ours wasn’t, at all.

%d bloggers like this: