ref: Guide to Personal Finance; Sal Nuccio;
Harper + Row, 1967; LCCCN 65-21019
The essentials of estimating Value involves Forecasting Expenditure and Revenue Streams followed by discounting
to Value at a particular point in Time. Discounting requires Compound
Interest [Calculations ]
Only interpersonal relations are more
complicated and important than personal finances. It is especially easy for personal finances get out
of control, especially if you succumb to advertising, the abundance of consumer
purchasing and credit opportunities. E.g. I keep getting personalized cheques in the mail from MBNA advising me of their low rates
and that I have a certain amount of credit. I consider this an invitation for
someone to steal using my name. This is a modern danger.
The essence of personal financing is to
keep expenditures and revenues in balance over your lifetime. Obviously
there are several different periods in life. A
strategy for one period may not be suitable for succeeding ones. Remember that
"When prudently used credit can be a blessing - few homes could be bought
without it." But "credit buying is expensive." Credit
agencies like Banks are in business to make a profit from your borrowing. They
usually reward your poorly if you lend them money.
Remember
that local tax levels and rules greatly effect the net value of incomes and expenditures. Be aware of these rules, especially those for income taxes and their effects on net costs, etc.
Use the following information at your own
risk. It is given without prejudice. Most of the following comments are common
sense.
Budgeting is a means of introducing
discipline into expenditure and revenue patterns. It can be done on a piece of paper, on a computer or
in your head.
1. "Set Goals. Establish realistic short-term and
long-term objectives"
2. "Estimate total income for the year, including
savings interest, dividends, pensions, and money from all sources." (note:
the estimated income should be net after tax so that you are not deluded
into thinking that income taxes, etc. are not important)
3. Estimate expenses for the year. "Spread fixed
expenses. The year's total for large periodic bills, such as those for taxes,
rent or mortgage payments, utilities, etc.... should be divided by the number
of budget periods, facilitating regular savings in a reserve fund."
4. "Estimate flexible expenses: clothing, furniture
and equipment, charitable contributions, etc... This total should be spread
over the budget periods."
5. "Estimate regular living expenses."
6. Plan repayment of outstanding bills, loans, debt, etc.
"A tenitive budget should now be drawn. Total expenses, about
the same for each budget period, are then matched against (net) income. (note: the previous comments are based on an assumed steady
income and expense flow. There are many situation
where the income and expenses are out of phase, and appear in sometimes regular
or random times. A budget can be
implemented on a piece of paper, columnar pad, Spreadsheet xcel
Calculator, a financial program like MS
Money, Quicken, etc.
1. Save and Invest around 10% of your income.
2. Never let
bad debt (lines of credit and credit card balances) approach 20% of your after
-tax income.
3. Calculate how long it takes you to earn the money (including costs of credit) after taxes
to pay for an item before buying it on credit. ( Know the effective
Interest Rate and terms of credit before using credit. Also use
Capital Recovery Function (CRF) to calculate amounts of
payments. or other compound interest function
that fit your situation. )
4. (if possible) Pay off your credit card each month in full.
5. Avoid hidden
financing costs by not buying on credit.
6. Avoid
financial products with high fees or commissions.
7. Don't invest
in anything you don't understand.
8. Never do
business with storefront cheque cashing
outfits or advance tax refund services.
9. Never buy on
impulse - leave a store and take at least a full day and a night to think over
a significant purchase.
10. Never spend
money ( just) to make yourself feel better.
"A surplus of income
over expenses can be used as savings toward
goals. If the surplus is too small, or indeed if it is a deficit, expense items
items must be trimmed wherever possible." See
Note on saving for the Future, RSP, RRSP, and RRIF.
It is important to realize the differences
between before, and after Income Tax amounts. There are few sources of income that are not taxable,
and it is important to understand what an increase or decrease in income really
means. To assist in gaining understanding a table of Canadian marginal tax rates is available for 2001.
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End to date: 071227, ams