Jump to content
Objectivism Online Forum

Chewing on a Financial Problem

Rate this topic


prosperity

Recommended Posts

I am trying once again to simplify my own personal budget because I'm tired of dealing with each individual expense as a separate "problem", and so I have a few ideas (I'm also trying to finish this so that I can finally provide a good solution for my own clients). Actually, I've been at this for a few years and have come up with something of a solution, but I'm going back and finding that there are a few things that I don't know how to explain and that perhaps I am doing incorrectly. However, I'm getting hung up on the process and hitting a few roadblocks.

Example, and I am just using this as a hypothetical, let's say an individual has a number of expenses (you can fill in the dollar amounts for each particular, as it doesn't matter):

1) mortgage

2) credit card

3) water bill

4) gas and electric bill

5) personal loan

6) car loan

He sees several particulars that are similar, and groups them together so as to deal only with a smaller number of particulars:

1) mortgage

2) credit card

3) water bill

4) gas and electric bill

5) personal loan

6) car loan

Now his list looks like:

1) water bill

2) gas and electric

3) loans

The process continues until, conceptually, there are as few items to deal with as possible. Ordinarily, this looks like a process of reduction, however, the dollar amounts associated with the particulars do not go away. So, you have to add up all of the individual expenses and assign them to "loans" (after all they have to be paid, which I think makes this a quasi epistemological problem, and probably moreso a financial problem, but it's in this section of the forum because it might be epistemological - I don't know for sure).

For a moment, we are not dealing with the logistics of how to handle the particular expenses, making sure they are paid on time, etc., as I believe I have a solution for that...I'm just trying to figure out the process involved above.

So, the question is...what is the process involved here? Am I making improper associations for the purpose of budget simplification?

Thoughts? Ideas?

Link to comment
Share on other sites

Seems like you're making it more complicated. It's fine to group debt under one category, but since you have to do all the math for the payments either way, what benefit do you get from trying to reduce 4 debts into one category? You've added a layer, not simplified. After all, each loan has its own amount due, and you can't very well set a budget amount for all 4 in total without knowing the budget amount for each individual item.

Link to comment
Share on other sites

Seems like you're making it more complicated. It's fine to group debt under one category, but since you have to do all the math for the payments either way, what benefit do you get from trying to reduce 4 debts into one category? You've added a layer, not simplified. After all, each loan has its own amount due, and you can't very well set a budget amount for all 4 in total without knowing the budget amount for each individual item.

Thanks,

I was trying to keep the logistics of payments out of this particular part, but it's really a matter of consolidating payments. I'm not suggesting that you ignore the payments altogether.

You do have to pay attention to them and there are several ways this can be done and it would simplify the process not complicate it. For example, with most banks, you have the option of online bill pay services. You can coordinate all of your loan payments for the same day each month. If you earn at least as much as you spend, you should be able to reorganize those payments.

The benefit is simplicity. Instead of managing 20 individual expenses, you only really need to look after a handful. The physical action of making those payments is a technological problem that is easily overcome with bill payment services, or credit cards that are paid in full every month (to remove the restriction of payment timing).

For example, let's say that you were to charge up all of your monthly bills on a credit card every month (or as many as you could) and then just paid the credit card bill. The amount of time you spend on daily/weekly/monthly finances is cut down to perhaps 5 minutes a month instead of maybe 1/2 hr a week writing checks and balancing your checkbook.

Link to comment
Share on other sites

For example, let's say that you were to charge up all of your monthly bills on a credit card every month (or as many as you could) and then just paid the credit card bill. The amount of time you spend on daily/weekly/monthly finances is cut down to perhaps 5 minutes a month instead of maybe 1/2 hr a week writing checks and balancing your checkbook.

This is a good idea, but I'm not sure a credit card is the best way to do it. Does your bank have an online bill payment option? Washington Mutual has a service where you enter who you pay bills to, then each month it's just a question of saying how much to pay and when to send the check. It reduces bill paying to, as you say, about 5 minutes a month. (It's literally just, $50 in the box next to X, $45 in the box next to Y, etc., and then "send right away". The checks are printed and mailed by the bank, automatically. Done.)

Link to comment
Share on other sites

I'm curious why you bother to make a budget at all if you aren't going to spend time on it determining where your money should be going. Are you really talking about a budget? Or just a spending report after the fact?

I ask because it is a household routine for us to, every week and every month, make sure we make every single dollar that leaves our house sit up and give an accounting of where it's going, before it goes - so what you're talking about seems more like something I would have done when my personal finances were well and truly out of control. I do not mean to imply yours are out of control, however - I'm just trying to understand the context you're operating from.

This is a good idea, but I'm not sure a credit card is the best way to do it. Does your bank have an online bill payment option? Washington Mutual has a service where you enter who you pay bills to, then each month it's just a question of saying how much to pay and when to send the check. It reduces bill paying to, as you say, about 5 minutes a month. (It's literally just, $50 in the box next to X, $45 in the box next to Y, etc., and then "send right away". The checks are printed and mailed by the bank, automatically. Done.)

Oh on that line, we get e-bills from utilities, phone, etc. I go into my online bank account and click "pay now" on all of them, and am done (except for where I then record everything painstakingly in quicken).

I think I'm just not understanding the question...

Link to comment
Share on other sites

The benefit is simplicity. Instead of managing 20 individual expenses, you only really need to look after a handful. The physical action of making those payments is a technological problem that is easily overcome with bill payment services, or credit cards that are paid in full every month (to remove the restriction of payment timing).

I can definitely understand that type of simplicity; setting up one bank account, having all of your client withdrawals out of that one account, then all you have to do is add up the expenses and make sure you have enough cash in that account to pay all the bills. I'm not sure why you would need to consolidate it down to the categories you listed -- I mean, what difference does it really make if the money going out for your clients is for loans or for utilities or for rent, as long as they all get paid.

One thing Prosperity and I were talking about privately was the relationship between algebra and concept formation. As he mentioned in his first post, he wants to know if going from credit card, auto payment, and personal loan, and putting it all in one category -- i.e. loans -- is like concept formation. Well, sure one has to go from particular owing of people to the wider abstraction of loans, but I don't think getting a computer to do that is the same as concept formation. In other words, is the equation: X + Y = Z like concept formation? Going from 1 or 2 or 3 or 4..... X and similarly for Y is like concept formation in that you are omitting the measurements, the specific quantities and retaining the process of addition.

But what I was saying is that no one has yet come up with the clear epistemology of sentence formation, so we don't know explicitly yet how we go from individual concepts to sentences -- which I think obviously involves more than just measurement omission. I also don't think it involves measurement specifying, as in "The black dog wagged his tail" where "black" is more specific than not stating a color, wagging is more specific than saying he moved, etc. But we don't really know how this works.

Miss Rand thought there might be a tie-in to mathematics in sentence formation, but she never got far on that enough to publish it. I hear some other Objectivists are working on that, but I don't know about their progress.

So, Prosperity's question is about epistemology and not specifically about finance payments, but I don't have a specific answer for him. I suggested he start a thread so it can be discussed.; maybe someone has thought about the issue or has heard of some specific work on it.

Link to comment
Share on other sites

I'm curious why you bother to make a budget at all if you aren't going to spend time on it determining where your money should be going. Are you really talking about a budget? Or just a spending report after the fact?

I ask because it is a household routine for us to, every week and every month, make sure we make every single dollar that leaves our house sit up and give an accounting of where it's going, before it goes - so what you're talking about seems more like something I would have done when my personal finances were well and truly out of control. I do not mean to imply yours are out of control, however - I'm just trying to understand the context you're operating from.

Oh on that line, we get e-bills from utilities, phone, etc. I go into my online bank account and click "pay now" on all of them, and am done (except for where I then record everything painstakingly in quicken).

I think I'm just not understanding the question...

Actually, it's quite the opposite. I have no idea where you would get the idea that this would be a tactic for someone "out of control". Yes, it is a budget, you make a 12 month plan in advance. So, rather than going back every month, you are attempting to make a decision about the next 12 months. It can be revised, though, like any plan, as new information comes to light.

That aside, I am trying to determine if this represents some type of concept-formation applied to finance, or if this even represents reduction. Basically, as I asked before...what is the process?

I'm still wrestling with the idea of whether it is necessary, though I I do have an overwhelming number of thoughts that would suggest that simplifying the budgeting process by looking at only a few items would be beneficial. Using excel, one could very easily - if one knew what they were doing - extract percentages for every group and this may make it easier to work towards one's goals - specifically, one's goals in terms of saving money.

Edited by prosperity
Link to comment
Share on other sites

Like Greebo, I don't think I fully understand the question. From Thomas's post, I glean that question might be this:

is it useful to combine detailed categories of expense into a smaller number of broader categories?

In general, the answer is "yes", because it is easier to think about a smaller set of categories.

The devil is in the details though: what is combined into what. The guiding principle behind the grouping would be: the purpose of the person doing the grouping. For instance, grouping all loans into one major category may be useful for one purpose but pointless for another purpose.

I'll stop here, because I'm not sure if I'm addressing the right question.

Link to comment
Share on other sites

Like Greebo, I don't think I fully understand the question. From Thomas's post, I glean that question might be this:

is it useful to combine detailed categories of expense into a smaller number of broader categories?

In general, the answer is "yes", because it is easier to think about a smaller set of categories.

The devil is in the details though: what is combined into what. The guiding principle behind the grouping would be: the purpose of the person doing the grouping. For instance, grouping all loans into one major category may be useful for one purpose but pointless for another purpose.

I'll stop here, because I'm not sure if I'm addressing the right question.

Well...the purpose here is to simplify the process of budgeting and general money management. To deal with the fewest number of particulars as possible and to reduce the time commitment of paying bills and keeping track of income as possible. That was my initial goal.

Link to comment
Share on other sites

Well...the purpose here is to simplify the process of budgeting and general money management. To deal with the fewest number of particulars as possible and to reduce the time commitment of paying bills and keeping track of income as possible. That was my initial goal.

Sorry, that is a better description of what you want to do. Originally we got into concept formation and reduction and mathematics.

I would think you could come up with an algebraic expression, something like:

L + U + R = P

Where L is for loans, U is for utilities, R is for rents, and P is for payouts.

I suppose you might want to break them down that way perhaps for tax purposes (utilities might be tax deductible, or something like that). But this is more really an algebra problem than concept formation problem. So long as the particulars for each client are constant (or really even if they aren't) you could add up all of the loans=L all of the utilities=U all of the rents=R somewhere within the background of the program. These could then be displayed as one formula similar to the one shown, and all you would have to do is set up each client account for auto withdrawal and make sure you have enough money in your payout account to cover P.

I would think someone would have made a program like that for finance manager, but maybe not.

Link to comment
Share on other sites

I think one thing that might have gotten Prosperity off track at the beginning of our conversation was that he was thinking that "1" was a particular, so that inputting the numbers into an equation was like reduction (going from the abstract to the particular one could point at). But actually, all numbers are abstractions, not particulars. After all, even "1" can refer to any number of different things that there are only one of: 1 dog, 1 cow, 1 apple, 1 skyscraper, 1 airplane, 1 inch, 1 dollar, etc. In finance, one is used to dealing in the units of the economy (i.e. dollars), so 1 means 1 dollar. But one has unspecified units of measurement, making it an abstraction, rather than a particular. It only becomes a particular if one talks about 1 something -- i.e. 1 dollar, and if one has a dollar on the table one could point to it, reducing the concept "one" to that dollar.

I think to do what you want to do, you would just need a matrix of clients and their particular payouts categorized (and subcategorized) and then line them up and add them up, so that at the bottom of the Excel sheet, one would have, in effect, Client1loan1loan2loan3 (client1loan) as a row (where client1loan=loan1+loan2+loan3), and in the column one would have client1loan, client2loan, client3loan (loan), where loan=client1loan+client2loan+client3loan.

So, as i understand the problem, and not being an expert at Excel at all, that seems like an easy way of doing it, so on a monthly basis (the loan amounts presumably wouldn't change much) and then at the bottom you would have the formula I showed above:

L + U + R = Pm (monthly payments)

To have it set up for a year, it would simply be:

12(L + U + R) = 12 Pm = Py

I don't know if you can actually do variables in Excel, or algebra, but you can do something like it.

The only difficulty for me would be learning to use Excel. I have done some minor tasks using Excel, but I don't use it for record keeping. What can I say? I have a checkbook and i pay my bills monthly, but I don't use any fancy software to do that :)

I don't know enough about financing, either, to answer why you need to break it down into subcategories for each client (loans, utilities, rents, etc.)

Link to comment
Share on other sites

I think one thing that might have gotten Prosperity off track at the beginning of our conversation was that he was thinking that "1" was a particular, so that inputting the numbers into an equation was like reduction (going from the abstract to the particular one could point at). But actually, all numbers are abstractions, not particulars. After all, even "1" can refer to any number of different things that there are only one of: 1 dog, 1 cow, 1 apple, 1 skyscraper, 1 airplane, 1 inch, 1 dollar, etc. In finance, one is used to dealing in the units of the economy (i.e. dollars), so 1 means 1 dollar. But one has unspecified units of measurement, making it an abstraction, rather than a particular. It only becomes a particular if one talks about 1 something -- i.e. 1 dollar, and if one has a dollar on the table one could point to it, reducing the concept "one" to that dollar.

I think to do what you want to do, you would just need a matrix of clients and their particular payouts categorized (and subcategorized) and then line them up and add them up, so that at the bottom of the Excel sheet, one would have, in effect, Client1loan1loan2loan3 (client1loan) as a row (where client1loan=loan1+loan2+loan3), and in the column one would have client1loan, client2loan, client3loan (loan), where loan=client1loan+client2loan+client3loan.

So, as i understand the problem, and not being an expert at Excel at all, that seems like an easy way of doing it, so on a monthly basis (the loan amounts presumably wouldn't change much) and then at the bottom you would have the formula I showed above:

L + U + R = Pm (monthly payments)

To have it set up for a year, it would simply be:

12(L + U + R) = 12 Pm = Py

I don't know if you can actually do variables in Excel, or algebra, but you can do something like it.

The only difficulty for me would be learning to use Excel. I have done some minor tasks using Excel, but I don't use it for record keeping. What can I say? I have a checkbook and i pay my bills monthly, but I don't use any fancy software to do that :)

I don't know enough about financing, either, to answer why you need to break it down into subcategories for each client (loans, utilities, rents, etc.)

Thanks,

This would be for personal budgeting. Simplify my own, and then share that with clients.

The reason I was thinking in particulars was not the numbers, not the dollar amounts, but the individual expenses, like "water bill", "gas bill" "electric bill", and so on. I can point to those and say "by water bill, I mean this", but still...that water bill references a service being provided which implies all the pipes, electronics, back office people, etc that make that service possible.

As far as the algebra part, I understand what you are saying, but I think you are adding in some things that I was not considering. The purpose was just to develop a personal budget that was simpler than what I am used to using (and I think most people are using).

Something I see regularly is individuals using either MS Money (in simplistic terms), the envelope method, or they just balance their checkbook. In all these cases, they're dealing with every expense as a unique financial problem, always checking their account balance, not sure if they have enough money to pay this bill or that. In short, they're not really organized.

Now, I have a budget, but in the past, it was awfully complicated and I found myself spending a fair amount of time on it. I didn't mind too much, but there were other things I wanted to do besides starring at a computer screen and writing checks. So I started thinking about whether or not it could be simplified, still accomplish the essentials of a budget, and yet not take up more than a few minutes a month to "manage".

The devil is in the details though: what is combined into what. The guiding principle behind the grouping would be: the purpose of the person doing the grouping. For instance, grouping all loans into one major category may be useful for one purpose but pointless for another purpose.

Could you elaborate on this a bit (bold)?

Link to comment
Share on other sites

Could you elaborate on this a bit...
The basic purpose of a budget is: planning and control. Part of this is that one wishes to weigh some expenses against each other. For instance, weighing all "loans" (including credit cards) against (say) utilities is unlikely to give you detail you need to decide: "do I want to spend more on this compared to the other?" OTOH, I suppose one could think of a counter example, where it would be relevant to know how much flows from various "loans".

I think a useful way to classify expenses is "Controllable" and "Non-controllable" (or "Non Discretionary" and "Optional"). In the long run, everything is controllable. However, one can decide that -- barring something unforeseen, you are going to view certain expenses as fixed, within a specific time-frame. Take one's mortgage payment. When one is buying a home, one might work out what type of loan makes sense. Perhaps one might review any possible changes every couple of years, barring some unexpected change. Similarly, suppose one has planned on sending one's kid to a private school, after doing some calculations. If nothing changes, there's little point revisiting that expenditure each month.

Something I see regularly is individuals using either MS Money (in simplistic terms), the envelope method, or they just balance their checkbook. In all these cases, they're dealing with every expense as a unique financial problem, always checking their account balance, not sure if they have enough money to pay this bill or that. In short, they're not really organized.
I know that some people use one account from which they pay almost all their routine expenses that they do not plan to revisit every month. This might include mortgage, car loan, utilities, city-taxes. Sometimes, they even use that account for things like groceries... it really up to each individual. The main thing is to figure out the ups and downs of cash-flows. Then, one can decide on a minimum balance that does not force one to constantly check this account. Then, they use some other account -- often a credit card that gets paid off from the first account -- for things that are discretionary or unexpected. Sometimes, people will have multiple credit cards, and use one specifically for things they consider fairly discretionary: a special meal outside, a trip to the movies, a new outfit. If everything that is fairly discretionary is on that card, then one can budget in terms of that card; then one only needs to check a single balance.

So, one might end up with budget grouping like this:

- Bank Account for almost all routine payments $ xxx

- Master Card for some monthly necessaries $yyy

- Visa Card for discretionary things $zzz

Still, when one does a more long-term budget, then this grouping is not that useful.

Link to comment
Share on other sites

I think a useful way to classify expenses is "Controllable" and "Non-controllable" (or "Non Discretionary" and "Optional"). In the long run, everything is controllable. However, one can decide that -- barring something unforeseen, you are going to view certain expenses as fixed, within a specific time-frame. Take one's mortgage payment. When one is buying a home, one might work out what type of loan makes sense. Perhaps one might review any possible changes every couple of years, barring some unexpected change. Similarly, suppose one has planned on sending one's kid to a private school, after doing some calculations. If nothing changes, there's little point revisiting that expenditure each month.

In terms of decision making, i.e. controlling where your money goes, this (discretionary vs. fixed) is probably the most essential characteristic.

In terms of planning out cash flows properly, you might also consider whether the expense is fixed by month or variable by month. A biannual property tax payment might be saved for (and hence planned for) well ahead of it's occurence for instance, otherwise you might risk in any period depleting your reserves. That would be as opposed to a monthly $75 cable bill which requires hardly any planning since you would expect to always cover it out of any cash inflows for the month.

Link to comment
Share on other sites

In terms of decision making, i.e. controlling where your money goes, this (discretionary vs. fixed) is probably the most essential characteristic.

In terms of planning out cash flows properly, you might also consider whether the expense is fixed by month or variable by month. A biannual property tax payment might be saved for (and hence planned for) well ahead of it's occurence for instance, otherwise you might risk in any period depleting your reserves. That would be as opposed to a monthly $75 cable bill which requires hardly any planning since you would expect to always cover it out of any cash inflows for the month.

So, as opposed to grouping by function, you are grouping by frequency? Why would you say that this is "essential" while function is not?

By the way, I'm not saying I disagree, I'm just interested in your reason.

Edited by prosperity
Link to comment
Share on other sites

So, as opposed to grouping by function, you are grouping by frequency? Why would you say that this is "essential" while function is not?

By the way, I'm not saying I disagree, I'm just interested in your reason.

Not by frequency, by variability of payment amount. The biannual tax was an example of a fixed expense. Because it is biannual, and you typically budget on a monthly basis, your monthly budget would prorate the biannual amount into a monthly set-aside, to be paid in lump every six months. Because it is fixed, you can plan on an exact amount to set aside into savings every month to cover. If an expense is variable, you have to account for income to cover the average, as well as savings level to cover the the maximum payment.

Ideally, you would construct a budget based on categories of function (e.g., "household", "entertainment", "auto", "work-related", "paycheck", "royalties" etc), amount (fixed vs. variable), and frequency (e.g. "monthly", "bi-weekly", "annual", "occasional"). And possibly others, like "self"/"spouse" etc.

There are five things a budget should allow you to do:

Identify what you spend on and how much (including average/max/min per period),

Adjust ("what if?") how much you spend on what items and categories,

Correlate and coordinate your outflows to your cash inflows on a fixed (e.g., monthly) periodic basis,

Plan payments, savings levels and investments accordingly, and

Evaluate planned v. actual cash flow.

If you can't do all of these things, your budget is not doing its job.

Link to comment
Share on other sites

Kendall mentions that this is for the specific purpose of planning out cash flows. For other purposes, other groupings are more useful.

Exactly, agrippa has it explained well.

Budgeting is really not about categorizing your spending as much as it is about planning cash flows, and projecting your values out into the future. To that end, discretionary/non-discretionary and varability are both important to planning cash flows.

Link to comment
Share on other sites

I think I get what you are trying to do here, and I do something similiar. However - one thing I would not (and do not) do is roll up credit cards with other loans that are backed by assests such as a car or house.

While you are trying to simplify things, don't let the small detail of how much you are paying on your assets as opposed to just revolving credit. Those asset based loans will go away some day, but revolving credit can keep going, and going and going. I think it is always important that someone can take a quick glance at their budget and see what is going towards basic LIVING expenses, Revolving debt, and loans for assets they have aquired - and of course the discretionary things, etc.

This snap shot budget can give you a quick idea of how you are doing - whether "in control or not" so that you have an understanding of how much you have going out towards so called "good debt" and "bad debt".

By the way - there is an interesting personal finance blog called www.getrichslowly.org that has a lot of great information on it.

Link to comment
Share on other sites

Not by frequency, by variability of payment amount. The biannual tax was an example of a fixed expense. Because it is biannual, and you typically budget on a monthly basis, your monthly budget would prorate the biannual amount into a monthly set-aside, to be paid in lump every six months. Because it is fixed, you can plan on an exact amount to set aside into savings every month to cover. If an expense is variable, you have to account for income to cover the average, as well as savings level to cover the the maximum payment.

Ideally, you would construct a budget based on categories of function (e.g., "household", "entertainment", "auto", "work-related", "paycheck", "royalties" etc), amount (fixed vs. variable), and frequency (e.g. "monthly", "bi-weekly", "annual", "occasional"). And possibly others, like "self"/"spouse" etc.

There are five things a budget should allow you to do:

Identify what you spend on and how much (including average/max/min per period),

Adjust ("what if?") how much you spend on what items and categories,

Correlate and coordinate your outflows to your cash inflows on a fixed (e.g., monthly) periodic basis,

Plan payments, savings levels and investments accordingly, and

Evaluate planned v. actual cash flow.

If you can't do all of these things, your budget is not doing its job.

Well, that makes sense - except I'm not sure I would go so far as to budget according to frequency. At this point, it does not seem that there is "one way" to simplify a budget, which is good to know I suppose.

So far I've been able to create a 12 month plan (it worked for the last 12 months) and focused mainly on "target income". In other words, I didn't really worry about how much was "going out the door" after the budget was made, I just worried about hitting "target income" for the month. It was fairly simple but was focused mainly on expenses, and left out explicit projections for savings and a few other items.

It worked fine for the most part but I ran into a few snags for example when gasoline and food prices jumped up unexpectedly...which is why I was hesitant to teach this approach to clients (thought there may be a solution that I hadn't thought of or missed for such unexpected instances - which may just be to accumulate savings specifically to offset budget deficits, but also didn't have an explanation for the process so I wasn't sure if what I was doing was "good in theory", I was sort of "flying blind" in that respect. The other side of this problem is that there may not be a solution because the spike was due to Government intervention and you can't really make bulletproof plans when there is a lack of certainty about how the world around you will operate).

...so it worked for me for the most part but I didn't have any credit card (or other) loans and very few variable expenses. Whether this would work for someone with a lot of variables, I'm not sure. I think that could probably be solved though by averaging the variables to come up with a fixed amount...provided you had savings to cover the highest possible/projected expense (like you alluded to).

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
  • Recently Browsing   0 members

    • No registered users viewing this page.
×
×
  • Create New...