Playing Defense with your Finances

The four most expensive words in the English language are “this time it’s different.” ~ John Templeton

Influenced by YouTube commercials featuring folks with big houses and expensive cars, my ten-year-old son recently asked me, “How do people become wealthy?” I responded with a discussion about the difference between consumption and wealth and as I did so, couldn’t help but reflect upon some of the lessons I learned from my parents. 

Given the recent attention on the economy, I thought I’d share three of those lessons.

Live below your means

Funny thing about spending less money than you make, it turns out to be a great way to save money without thinking about it. For this reason, I believe our time is better spent focusing on our “spending plan” rather than our “savings plan.” Some may argue this is a simple matter of semantics but I can say from experience, if you focus on the side of the equation you can control, it becomes easier to weather those inevitable rough patches that wipe out your savings due to an unplanned emergency. 

Plan & budget

For the short- and long-term, my father was consistent and methodical when it came to planning his financial future. He did it “old school” while at the office on Saturday mornings with a pen, engineering paper, and lots of highlighters. If I happened to visit him while he was doing his planning he’d always take the time to show me his system and impress upon me the importance of having some kind of plan and regularly revisiting it. Those discussions, by the way, were never about becoming wealthy or acquiring fancy houses or expensive cars; rather, they were about taking care of the family, saving for old age, and minimizing the odds of dying poor. 

Play defense

Despite recent changes to our tax laws, it’s still worthwhile paying attention to ways in which you can legally reduce the amount of money the government takes from your paycheck. I once overheard someone say, “I’m proud to pay taxes…I could be just as proud for half the money.” For example, diverting money from your paycheck into a 401K is a great way to reduce your taxable income. Or, if you earn less than $56,000, look into taking advantage of the earned income tax credit. It doesn’t just cut the amount of taxes you owe; it can also result in a refund. Seems like some great ideas. 

When playing defense with your finances, most people tend to think only about their income tax, however, as I wrote about earlier there are plenty of other taxes we should pay attention to. Did you know that Arizona’s annual vehicle tax is reduced* 16.25 percent for each year a car ages? Given this, it makes a whole lot of sense to buy a used car. For example, a new vehicle that costs $25K would be assessed a $420 tax in the first year and $363.06 in the second year for a savings of nearly $60. While $60 might not seem like big savings, each one of these adds up quickly. Don’t even get me started on compounding interest over time on those small savings. 

Property taxes are often wrapped up in mortgage payments, and therefore, often get overlooked when trying to manage your spending plan.  One obvious measure is to make sure you don’t buy more house than you need. Another thought is to look at homes located in historic neighborhoods, many of which offer tax savings provided you don’t alter the exterior of your house. 

These lessons, although just as applicable today as they were when I was a kid, are not practical for everyone. 

Consider that despite improving economic conditions**:

four in 10 adults are not able to pay for an unexpected expense of $400 without selling something or borrowing money

Federal Reserve Board’s recent Report on the Economic Well-Being of U.S. Households

Indeed, telling someone who is working two minimum wage jobs and supporting a family with medical bills that they should live below their means (or buy a house in a historic neighborhood) is likely to result in more than an eye roll. Although probably not the audience of this blog, if you fall in that camp or know someone who does, I’ll offer up a recommendation next week.

A good time to check out for the week. Before leaving though, how about some music for our Manufacturing Peace of Mind™ Spotify playlist? One of my gym partners recently complained about some of the music on a workout playlist I had queued up (It was too jazzy for her…and it went on and on from there). So, in looking for some new tunes to suit her palate, I came across a song by Bishop Briggs I’d like to share. I know nothing about the artist or the song but it makes a great addition to my workout playlist…right next to Johnny Cash.

Cheers…xian

*The tax is based on an assessed value of 60% of the manufacturer’s base retail price reduced by 16.25% for each year since the vehicle was first registered in Arizona.

**According to the Federal Reserve Board’s recent Report on the Economic Well-Being of U.S. Households 74 percent of adults reported they are doing at least “OK” financially.

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