money

January Financial Update

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Life is different these days. Our 3rd child was born on Thanksgiving, and we’ve been finishing up some projects around the house. We’ve had a few things happen with rentals, and, basically, I’m just tapped out to keep up with blogging. Mr. ODA asked me what our net worth is at these days, and so I’m updating our spreadsheet.

“JANUARY”

It’s January, so that means I have to create my two main Excel workbooks for the year: the paycheck to paycheck monitoring of our expected income and expenses, and the management of each rental property. The paycheck to paycheck spreadsheet is where I have a line item for each house’s rental income each month, each house’s mortgage payment (where applicable), and then all our bills owed (credit cards, utilities, investments). I break this down by paycheck because that’s the easiest way for me to make sure I have enough income to offset the bills owed during that two-week period. That worksheet in that workbook feeds my net worth calculations, where I also update loan balances. There is actually several tabs in this workbook, but those are the main two. I finally got that all set up today. I haven’t even started creating the investment property workbook.

January also means I have to go through last year’s investment property workbook to verify all the expenses listed are supported by receipts, that all receipts I have are recorded, and that my income is accurate. Then I read off the data to Mr. ODA, who enters it into an online tax portal to file our taxes. I haven’t started that daunting task either.

RENTALS

We had one of our properties flooded by a burst pipe. That’s a mess and is hardly making progress because the tenant’s renters insurance can’t get the tenant property out of the house. We had an electrical issue with a hot water heater in another property. That got fixed, but now I am in a position where I have to fight Home Depot about their shoddy installation a year ago and have them reimburse the cost of rewiring. I finally moved forward with the judgement against a tenant for destruction of property, and our attorney established that collections account.

Surprisingly, we didn’t have any issues with rent payments in December or January. Usually I hear from one or two houses that they need a couple of weeks to pay all of rent. While not everyone was on time, they communicated well and were only a few days late. One tenant reached out and asked if they could pay rent on the 6th (since that’s Friday, and pay day); I told them not to worry about the late fee and that would be fine. Little gestures like that can make a big difference for your tenant’s life.

I sent a letter to our property manager for the KY houses that we’re releasing them at the end of this month, so that’s a new development that is taking my time as well. You’d think my property management company would have a way to communicate this change with the tenants, but alas, that would be too logical. Wish me luck while I add 3 more houses under my own purview. While we moved to KY two years ago, it was easier to maintain status quo with having a property manager. Unfortunately, it has taken too much of my effort to manage the property manager and to fight for our money.

PERSONAL

We finished our master bathroom in the home we bought over the summer (and the room we gutted immediately… only took 6 months to get us to the finish line… and by finish line, there’s still paint touch ups to be had). We bought all the supplies to gut and renovate the basement bathroom in this house. Mr. ODA built a bench for our kitchen table so that we have more seating easier. We made the plans to get the mudroom bench and shelves in, and hopefully those supplies will be bought this weekend.

Truthfully, while I updated most of my net worth spreadsheet in December, I never posted it because I don’t even know where all our money is. When we sold our personal residence at the beginning of November, we were handed a large check. In the past, that check type mostly went towards a downpayment on a new house, but that wasn’t the case this time. Mr. ODA immediately started investing that money in short term treasury accounts that I can’t even begin to explain. Between that account, another savings type account, and our regular investment account, I can update what I see online, but I don’t know what I may be missing. I’m hoping Mr. ODA will chime in soon to describe the type of investment decisions he’s made.

NET WORTH

Several property value assessments declined over the last couple of months. So while our investments are on the upswing from November’s update, those updates to property values have caused a decrease to our net worth.

Reaching Goals

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Whether you have a lofty goal of paying off a mortgage or a short term goal of not struggling to pay rent each month, it helps to establish a plan. The first step should be learning your relationship with money instead of mindless spending paycheck to paycheck. Last month, I mentioned budgeting and how it can lead to overspending instead of spending wisely. I also mentioned the envelope system and not liking it.

The envelope system is where you establish your spending categories and put cash in the envelope each month. When the money is gone from the envelope, that’s it. Don’t borrow from another envelope. If there’s money left over in an envelope, it can be added to next month’s envelope to increase your spending, or you can use that money to treat yourself to something. In few articles that I read did I see that the extra money should be put towards your goal.

THE GOAL

The first step is to write your goal down. What is it? How long do you think it will take to reach it? I’ve learned that establishing interim goals helps reach the bigger goal that may seem too lofty.

The second step is to track your expenses. Look at what you’re spending your money on. Start categorizing your spending. Can you see that you’re spending more than you thought on something other than essentials? Is hitting up the drive through several times a week costing you more per month than you realized? Have you purchased decorations for your home that aren’t on display, but you’re scraping together rent or mortgage for the beginning of each month? Are you paying up-charges and delivery fees for a meal delivery service instead of going to pick it up yourself (or cooking your own meal)?

MONEY RELATIONSHIP

I have experience living paycheck to paycheck. It’s not like we’ve always been in a position where we’re not worried about how to pay our bills. I thought if I shared two defining stories from our finances, it may trigger an idea for you.

College

I lived on campus for the first two years of college. My parents were paying my tuition, and they said that either I needed to take out a loan to pay the following year’s room and board, or I had to be a Resident Assistance to get free boarding. I didn’t want the responsibility and having to be in my dorm so much to be an RA (I never researched it; I was just 20 and knew everything.). I decided the best approach was to live off campus because I’d be able to pay my living costs monthly instead of in two large chunks at the beginning of each semester. If I broke down the monthly cost of the ‘room and board,’ it was $1533 per month (and only for 9 months of the year). I figured I could live for less than that, while paying month-to-month as I earned income, if I moved to an apartment. My rent off campus that first year was $650/month. My utilities were about $150/month in the winter. I don’t know how much I spent on food, but I know it was the bare minimum. It wasn’t that I was purposely trying to be debt-free and a hero; I just simply didn’t know how to get a loan, so that wasn’t an option to me.

I had a job at JCPenney. I was making 5.15/hour (minimum wage in 2006), and I worked outside of my school schedule as much as I could. I was able to pay my rent every month because that was my priority. I dipped into my savings from my summer jobs, but I mostly changed my lifestyle. I packed my meals with peanut butter and jelly sandwiches for when I was working. I ate pasta for dinner. I didn’t go to restaurants often. I wasn’t in a phase of life where I wanted to go to bars, so my social life was hanging at my boyfriend’s house, where he lived with 3 other guys, drinking cheap beer and watching tv. I made sacrifices in my spending so that I could pay rent every month. I didn’t want to pay a late fee every month. If I could just barely afford $650, I certainly didn’t want to owe an extra $65 because I couldn’t pay rent by the first of the month.

There is one caveat in my story that first year. Since I was making just what it took to have a roof over my head and food in my stomach, I chose to forego heat. Do you know where Albany, NY is? It’s into freezing temperatures in October. It was fine – I had sweatshirts, sweatpants, socks, slippers, blankets. I lived on the first floor of a two story home, so that helps keep the temperature reasonable into October, but I knew I couldn’t last through the days of teen temperatures without eventually turning the heat on. My parents found out that I didn’t have my heat on, and they sent me $100/month to cover that. So I did get assistance. They sent me that for 6 months to cover my utilities, and that was the last assistance I received.

My parents paid my tuition, which was $2,175 per semester in 2004. Yes, less than $5,000/year for my college education.

Buying a House

Mr. ODA and I wanted to buy a house and settle down. We had each been part of a training program at work that would end with our placement anywhere in the country, so we weren’t in a good position to purchase a house in Albany, NY. Mr. ODA got placed in Pennsylvania, while I was still employed in their NY office. It wasn’t handled well, so we started looking for other options. I accepted a job in Washington DC, and Mr. ODA went to Sterling, VA; we moved to an apartment in Fairfax, VA to live in between those two places. We chose an apartment because we didn’t know anything about Virginia and needed a place to live while we scoped it out.

This wasn’t a scenario where we couldn’t afford to live, like my college example. This was a situation where we set a goal, and to achieve that goal, we needed to spend less.

Mr. ODA was saving and preparing for a house in the $150-200k range, not the $350-500k range as a first time home buyer. So we needed a plan to come up with over $70k worth of the downpayment and closing costs.

We set a goal of spending no more than $5/day/person on food. We ate a lot of peanut butter and jelly sandwiches, pasta sides, chicken nuggets, canned vegetables, etc. That threshold meant we weren’t paying to go out to lunch at work. We were eating the bare minimum at dinner. We were eating any leftovers that were in the refrigerator. We didn’t have a desire or lifestyle where we would want to go out for a drink or buy a lot of things, so it wasn’t hard to scale back in that area. After a month or so of doing this, we decided that happiness should be part of the equation too, and we started going out to a restaurant no more than once per week.

This isn’t a magical story where we went from $10k in savings to $75k in 6 months, but we were able to increase our savings a decent amount. We each took a residential loan from our retirement accounts, and we borrowed $5,000 from Mr. ODA’s parents. We didn’t expect to find all the funds needed, but we were able to decrease the amount of money we had to borrow from our retirement accounted by changing our spending pattern.

Our rent at the apartment, including utilities, was over $1800/month. When we purchased our house, our mortgage was $1576 and our utilities averaged $150/month.

REACH THE GOAL

If you don’t know where your money is going, you don’t know how to get your money to work for you. If you don’t take the time to evaluate whether or not you’re spending wisely, then you don’t know if there’s wiggle room in your budget to put you in a position that you’ll be more comfortable. Create a relationship with money. Know where each dollar is going. Determine if you should make changes to your spending to reach the goal, or if you should find a way to create additional income.

There’s usually a way to create more room in your budget with your spending. Some examples are to eliminate alcohol purchases, reduce your restaurant spending (whether it’s not going to restaurants as often or it’s changing how you order – do you need the steak; do you need a soda, or could you get by with water and drink a soda at home), reduce your home decor type purchasing, put your heat down a degree or two.

Instead of complaining that there are bills to pay, change your mentality to take control of your money instead of it controlling you.

Budgets and Overspending

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I’ve rewritten this several times over the last two months, constantly afraid of who I’d offend. Instead, I’m just going to share my raw observations and hope it makes sense to the people who need it. Plus, what’s a better time to discuss budgets than the first post of the year? I actually have quite a few posts related to budget planned. So we’ll start with why I believe budgeting leads to overspending.

I don’t like budgets in the sense of the word’s common understanding. A literal definition of the word is, “an estimate of income and expenditure for a set period of time.” In this context, I’m all for a budget. I have a detailed (over-the-top, probably unnecessary) spreadsheet that I use to manage our money. In any given two-week period, since 2012, I can tell you my projection of money-in and money-out. I make sure my expenses are covered.

ENVELOPE SYSTEM

The extreme version of budgeting (in my opinion) is the ever-popular “envelope” concept. It’s simple: you decide on your monthly spending categories, and then you put your cash* in the respective envelope to pay your bills. (*Please don’t pay for everything in cash!) When you run out of money in a given envelope, that’s it for the month. There must be a way that this works for enough people that it keeps getting touted as a great idea, but I’ve seen it fail. You’re creating a dependency on these envelopes instead of an understanding of your finances.

What happens with any leftover money in the envelope? The articles I’ve read about this system literally tell you to celebrate if you come in under budget. No. How does taking your extra money and spending it frivolously get you to your goals faster? Or it tells you to add it to next month’s envelope (e.g., if you have $50 left over in this month’s envelope for groceries, put it in next month’s envelope and now you have $350 instead of $300 to spend on groceries). How are you creating discipline and an understanding of budgeting if you can splurge next month? Now you’ve spent an extra $50 in month 2, but you need to scale back to $300 for month 3. That’s not creating a routine.

I want you to create a relationship with money.

RELATIONSHIP WITH MONEY

We don’t budget in the colloquial sense. We have a relationship with money. I make sure that my mandatory expenses are taken care of (e.g., mortgage payments, utility bills). Everything that can, goes on a credit card. When it comes to paying off the credit card every month, it goes back several steps.

My thought process is cemented in whether or not the value of an item is worth it to me. When I’m about to buy something, I take the time to think:
1) Is this item worth the price I’d pay for it?
2) Will this item serve a need (not a want)?
3) If it’s a want, will this item bring me enough happiness that I’m willing to spend this amount of money on it?

Want to know something I recently struggled with? For years, I’ve wanted a desktop tape dispenser. Years. I don’t even think about it until I’m wrapping Christmas gifts. So once a year, I have tape, but I wish I had a desktop tape dispenser. I never bought it. I thought, I can struggle through needing two hands for my tape dispensing needs for a couple of days out of the year. I thought, if I buy a desktop tape dispenser, then I need to buy a different kid of tape than I already have on hand. Every year, I just dealt with it because it wasn’t worth the cost to me to invest in something that would make things marginally easier for me for a few days of the year. This year, after wrapping more than half the gifts, I decided enough was enough. I purchased 6 rolls of tape for 9.99 and a dispenser for 4.22. I’ve been wrapping gifts outside of my parents’ house (where there were tape dispensers) for more than 15 years. I’ve struggled with the decision to purchase a dispenser every single year, and it finally got to the tipping point this year. All that thought process, over all those years, to spend less than $15.

That’s my thought process for every non-routine purchase. Instead of putting cash in an envelope marked “something for me” each month, I’ve trained myself to manage our money from the purchase point instead of an envelope full of cash that I mindlessly spend down. I can make an informed decision on whether or not I need or want something. I’m taking the time to decide whether this is going to bring me long-term happiness, short-term happiness, and whether the cost of the item is worth it. Had that tape dispenser been $15, plus new rolls of tape for $10, I probably wouldn’t have bought it. Because at that point, I’d be happier with a new shirt or new pants for $25. So I would have decided that my $25 is more valuable to me than to spend it on tape. That doesn’t necessarily mean that I go out and buy a shirt arbitrarily; it just means that I’ve decided that the value of that money is worth more to more towards something else than this item I’m currently contemplating.

OVERSPENDING

I see it over and over: people who budget seem to be the ones buying things they don’t really need. Instead of changing your mentality to be whether a purchase is necessary or is worth the price, the decision becomes “I have $300 left over, what can I do with it?” I see people have their sights on a product that they want. They build it up in their mind that it becomes unattainable, so when the extra money is there, they splurge on it. But did they ever step back and ask if it was really necessary or if their money could be put to better use in their overall wellbeing?

There’s a time and place for splurges. I understand that buying something you want makes you happy, in that moment. What if you thought: does my happiness in buying this gaming console outweigh the anxiety and frustration that I can’t pay my bills in a couple of weeks?

If you struggle to pay your rent month-to-month, then a large influx of money should be earmarked for future bills, not to splurge over and over again. An envelope system creates a reward-driven desire to your spending. The goal should be a more comfortable lifestyle where you’ve set yourself up for success instead of a groundhog-day-struggle to make ends meet.

There have been several instances that I’ve seen in the last couple of months, but the one that really has been weighing on me happened in October when I was working.

I was working at the racetrack. It’s temporary work – working during the race meets and possibly during their horse sales. The Fall meet was 17 days. Depending on where you’re working, you can make some really good money. I happened to be placed in one of those locations, and next to me was a young girl. She complained of having to work two jobs and not getting a day off all month because she was working two jobs. She also shared that she struggles to “make a decent living,” and that she borrowed money from a friend to be able to pay rent on October 1.

The first day, we made over $400 in tips. The second day, she asked how we celebrated making that amount. I bought the Hatch sound machine. I’m going to assume that most of our readers have no idea what that is, but it’s a sound machine and a light that can be programmed for different needs (for instance, I wanted it to give our toddler the signal that it was OK to get out of bed). It’s $60. I had already looked into several options, and I had already determined that I was in a place in life where it was worth it to me to spend the money on the original than to attempt to buy a knock-off that doesn’t work great for $40. Personally, I was going to buy this thing regardless of what I made while working, but I used that as my example on what I splurged on with our unexpected earnings. She shared that she took her boyfriend out for a steak dinner. One celebration isn’t going to break the bank, but it became a routine. It wasn’t until the middle of the month that she said she had paid her friend back for helping her pay rent. That $150 you spent on one meal could have been prioritized to keeping a roof over your head, or being a good friend and paying your debt.

So often, I see someone else blamed for one person’s mistakes. It’s the greedy landlord’s fault that you need to pay rent. It’s the government’s fault for not increasing minimum wage. What if you stepped back and looked at your decision making? Did you buy the new gaming console and then struggle to pay rent on the first of the next month? Did you go to Costa Rica and then struggle to pay rent on the first of the next month? Did you buy that new gaming console, and not add to your savings for future planning? The televisions in our house aren’t huge, but they work. I don’t have a need to replace a working television simply so that I can have the newest technology and the biggest screen.

If you don’t create a relationship with money and an understanding of how to make informed decisions, you may end up with unnecessary expenses with money that could have been more productive. It’s time that you step back and look at your entire spending picture to know whether you’re truly budgeting and learning, or you’re mindlessly spending money because you’ve accepted that’s the cost.