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Archive for February, 2009

Calculating Income vs Expense

Sunday, February 15th, 2009

I know what you are thinking…Sounds easy right? It’s just one number divided by another. In reality, it requires detailed bookkeeping to track all of your income, investments, loan accounts, and bills. But what about your mortgage–is the principal really an expense? How about that employer stock grant program that awarded you 50 shares for a price of $26.22 but withheld 18 of the shares to pay taxes, that you then sold the remaining 32 for $28.19 two months later? Not so easy, is it?

To properly compute the ratio, you need to build an income statement. An income statement is a document that tracks the inflow and outflow of cash over some set time period – usually a month, quarter, or year. For personal finance issues, a month is a good resolution to use.

The income statement contains two main parts – one for all the cash that comes into your household, and one part for all the cash that leaves your household. Transfers don’t count. So if you contributed some of your pay to a retirement account, it really doesn’t belong on an income statement. What does belong on the income statement is gross pay, not your net. Remember to include interest from bank accounts, dividends from stock, 401(k) employer match, and realized capital gains. Unrealized capital gains will affect your balance sheet, but should not show up on your income statement. All numbers should reflect pre-tax amounts. We can account for taxes in our expense column.

This second part – expenses – is usually the longer column in the balance sheet. Aside from your regular bills, be sure to include all of your monthly insurance costs, income tax, and payroll taxes that were deducted from your paycheck (even if they were in the form of stock); and any interest you paid on a loan. This brings us to an important point:

If your car payment was $460, then only the $60 or so that went toward interest on the loan was really an expense. The payment to principal was simply a transfer of your cash into equity in your car. Remember that transfers don’t count. The same concept applies to your mortgage and student loans of course. Keep in mind though, equity you build in a home tends to stay put or grow, but the equity that’s put into a car tends to evaporate over the next 5-10 years. It’s like filling up a bucket with a big hole in the bottom.

So after you’ve tallied up all of your gross income and all of your expenses for the month, you’re finally ready to divide one by the other. Hopefully, the ratio is greater than 1. Otherwise, you’re living well outside of your means and eroding your existing net worth.  It seems like its simple, but its amazing how difficult most people find it in practice.

Business Travel Guide Part 1

Monday, February 9th, 2009

I am sitting on an airplane as I write this on the way to beautiful Dayton Ohio. Ok maybe not beautiful Dayton Ohio, how about “At least its not Cleveland.” The day started rough because Jackson has been sort of fussy during the days so I am not thrilled to leave Lauren to deal with everything at home while I am gone, but such is life. In any case, I got to the airport and parked. It was fairly empty but it brings me to point number 1.

1) Know your airport and allocate time to park
Unless you are flying out of an easy airport on a sunday morning, you are going to have an adventure trying to park. Figure out if your airport has plenty of parking, and if it doesn’t plan accordingly. I flew out in late fall one time and my buddy from work that I was with and I had to park far away and nearly missed our flight. Then as a bonus, when we got back we had to walk a mile to the far parking in the middle of freezing rain at midnight. Convinced yet?

I made it into the terminal with a ton of time to spare and came up to security. I put my stuff on the conveyor and walked through the screener. This brings us to point number 2.

2) Know the toiletry/packing rules (and follow them)
I have flown out of DIA on average of at least once a month for the past year. I have always just kept my toilettries in my black zip up bag despite knowing the rule about the plastic bag. I have never once had a problem with it…until today. The screener pulled my luggage off the belt and said “meet me over at the table.” So I put my shoes on walked and walked over to the TSA station. Everyone knows this is either going to be 1) quick or 2) painful. You guessed it, pain. The highly trained, polite, unassuming TSA employee started ripping things out of my suitcase while verbally berating me.

Him: “Did you even bother to read the sign?”
Me: “Sorry, Ive never had a problem with this befo…” (he interrupts me)
Him: “Um hello, so if you were smart you would read the sign and then, oh if there was a plastic bag around somewhere you could start packing your toilettries in it. Oh look, there is one.” (pointing to a plastic bag).
Me: silence (I start packing up the toiletries)
Him: “Do you talk? Yes? No? Anything?”

This entire time he is just taking stuff out and throwing it on the table. This was thrilling since I spent a good amount of time ironing things this morning and rearranging them since my carry on is fairly small.  We then had a little exchange about my shaving cream which was apparently .5 oz over the limit or some such nonsense.  Finally, this:

Him: “So?”
Me: “Yes, I got it. I will never again put my deodorant in my carry case instead of a plastic bag.”
Him: “I hope you learned something.”
Me: “Yes sir I did. Thank you for serving and protecting me. I can’t tell you how much safer I feel right now than I did twenty minutes ago.”
Him: “Good. You know better now.”
Me: “I will spread the good word.”

I guess they don’t teach sarcasm recognition in TSA school. Finally I was on my way to my Gate. This brings me to my next point.

3) If you can, fly Frontier or a similar airline. Avoid United.

Bigger seats, personal TVs, better service, 66% chance of sitting on an aisle or window. Those are just a few of the reasons. All you really need to do is fly United once and you will understand. I like to pick one airline and stick to it, its a great way to build bonus points for your personal travel for free. There are other reasons to stick to one airline such as frequent flyer status. I now get to pick where I sit on every flight, including the super extra roomy exit row. Bonus: if you read TPS faithfully you know that with the current bankruptcy you should have bought some frontier stock. And hey, why not help your business that you own a piece of.

Business travel is always stressful, but we here at TPS are here to make it managable…to be continued tomorrow…