Time Stamped Show Notes
[2:01] Matthew and Leslie are doing better than 50% of baby boomers from the perspective of retirement funds. Matthew and Leslie’s assignment was to calculate their net worth and then create a list of debts with interest rates and monthly payment amounts. Finally, they were to analyze the last three months of their bank statements by giving each expense a color category. Green is “must pay” items, yellow is “needs”, orange is “wants”, purple is “total splurges” and blue is “savings or debt pay.”
[4:49] Matthew and Leslie do not have credit card debt since they pay it off every month. Their Honda gets paid off in August. Matthew is still trying to secure a better job to help them in their debts. He is also conserving cash in case they need it later on. When they reach the $10,000 mark in their bank account then they can put $1000 into their E-lock account. They recently put $1700.
[6:33] Matthew’s goal was to pay off everything except the mortgage within 20 to 25 years. Their mortgage would extend to 30 years. If Matthew and Leslie continue paying the same output of cash towards debt without reducing it, then they will be able to clear debts faster. Once they finish paying the car loans they still need to pay the same amount of money in order to finish the student loans in six years. The E-lock interest is high and therefore Leslie’s suggestion was to pay it off first and the focus on the others. Matthew and Leslie would also be spending more on their children’s fees next year. Matthew did not have a job in the summer which was expensive for them because they had to take their children to the camp.
[10:04] Looking at numbers helps to understand finances without fluffs. There is never a perfect scenario to allocate money because things come up and life happens. It is always great to have a plan but there should be room for unexpected expenses along the way. This prevents discouragement when one is not on track.
[10:55] Paying small debts with less interest creates an environment where you think you are making progress but paying debt with a higher interest rate first means less total money out of pocket. Leslie prefers to pay the one with a higher rate and clear it, then transfer the extra money to another debt. It would take six years for Leslie and Matthew to pay their students loans. That’s a lot of cash flow going out considering their eldest child will be joining college at that time. Their plan is for their child to get a scholarship. Leslie wants their children to have an idea of what they want to do and pursue it rather than spending four years figuring out what they want to do.
[13:09] Mike Michalowicz, author of Profit First, says that people tend to do bank account accounting these days. This means people just look at their bank balance to see how much they can spend. He recommends that people should have different bank accounts for different purposes in order for bank account accounting to work. Matthew and Leslie don’t have actual physical bank accounts but they charge everything and at the end of the month they pay it off. They also put the mortgage in the must pay as opposed to the debt, however if they put the mortgage as a debt then their operating expense becomes 53% as opposed to 75% when they treat mortgage as an expense. According to Matthew, the operating accounts should be green, the splurge account should be purple and the debt pay account should be blue.
[17:43] What Matthew basically does is an income statement where the money in total is divided by each of the major segments money out. In that way, he is able to see how much they are getting every month. Doing this annually helps to know how much they are paying in tuition, school expense, insurance and other expenses. They are now able to know how much they need to save and how much they have to spend more. Leslie says that the $450 they allocate for their splurge account is more than enough for them. Allocating money to different bank accounts where the money is specified for something helps a lot. Leslie says that when Matthew gets a stable job, she would want to pay out the debts significantly faster and in that way they can increase their splurge money.
[22:39] Matthew and Leslie need to save at least three months of Matthew’s salary in case the worst happens. When they are not burdened out they can take out from operating account and debt pay. The problem with the three month is, it is dependent of month four being good. Last year Matthew did not strike gold till month 10. However, if they got to $15000 in savings, then they would at least be comfortable.
In January 2018, Matthew received a hefty severance package which they burned out quickly. He is therefore not sure that limiting savings to a certain number is feasible since he will continue paying the debts but not at an accelerated speed. He however agrees on putting some money in reserve but not in form of cash but in form of other investment vehicles. Being secured from a savings perspective or job perspective is equally good.
[27:53] Seeing the numbers all there enables Matthew to visualize all the things, anticipate and plan for all the things. His only concern about the different accounts version is keeping on top of moving money in and out at the right time and the right payments. Having multiple accounts means paying more fees because of moving money in and out. Going through the numbers was a good exercise for Matthew to see how they are spending and talk about the different aspects of spends and money out.
[30:45] Matthews goal was to pay all debt. Leslie goal was to buy new furniture and redo the basement. Their joint goal was to have Matthew get a job that he feels confident and is secure. Matthew thinks that there is a ways they can fulfil both of the financial goals simultaneously. Leslie wants them to enjoy the life that they have now.
[33:35] The major point of doing these exercise is to find a way to achieve one’s financial goals. Sometimes people think that there is no extra but each $10 adds up and we can easily reallocate it to reach our goals without even having a major effect on one’s standard of living.