To sum it all up in one word, unimaginable. The financial events of this week have been nothing less than a roller coaster. I would like to say that I’ve never seen a week like this in the North American stock market in my life, but that would be a tremendous understatement.
Lets summarize, on Monday the American Insurance Group (AIG), one of the worlds largest financial institutions was in such risk of bankruptcy that the US Federal Reserve offered 85 Billion dollars for an 80% stake in ownership. To put this into perspective, a US bail out like this has not happened since “The Great Depression.” On the same day, Merrill Lynch was rescued from Bankruptcy with a buyout from the Bank of America, and Lehman Bros another very large American financial institution that is more than 160 years old was rescued with a 50 Billion dollar bailout. And this doesn’t include other financial institutions in dire straits such as Washington Mutual (the largest Savings & Loan in the US), Morgan Stanley, or Wachovia. With all of this news the TSX was down nearly 600 points, and its US counterpart, the DOW Jones was also down nearly 300 points. It wasn’t until the US Federal Reserve along with the Bank of Canada, and many other Western governments pledged up to another 247 Billion dollars to ad liquidity to the North American markets that the stocks recovered with the TSX up 848.42 points, and the Dow Jones up 368.75 points.
Then on Saturday Sept 20 the US Fed continued its work to try and prevent an all out collapse of the market by announcing an additional 700 Billion dollars in relief. To put all of this in perspective, Forbes.com says that Warren Buffet, the worlds most famous investor and wealthiest man is worth 62 Billion dollars. The amount of aid offered this week to the North American markets is greater than 17 times his wealth.
So what does this mean to you and me? Well the first response by the banks to all of this is to tighten up credit. This means that we will need to save a larger down payment to purchase the house we want. This is likely to bring down housing prices because there will be fewer buyers able to purchase homes, and that starts with the pricier, and more unique homes. Next, those of us with less than 20% equity will have difficulty trying to borrow more money for things like a new car, or home renovations.
In response, now is the time to pay down consumer debts like credit cards, and unsecured loans. Now is the time to put together a personal budget and look for ways to reduce spending, and only if you have a large amount of available cash, now is the time to look for bargain investments.
Saturday, September 20, 2008
Saturday, September 6, 2008
Budgeting in Four Simple Steps
Which of these statements best describes you when it comes to budgeting:
a) I keep a very detailed and balanced budget that I review every month.
b) I have prepared a budget but I rarely look at it.
c) It sounds like a good idea, but I just don’t know where to begin.
Most of us would say statement c) best describes how we feel about budgeting. In fact depending on which study you read the percentage of people that actually follow a budget ranges between 1-5%. I would like to recommend a few ideas that might help us get started, and alleviate any fears that we may have with keeping a budget.
First let me start by making this statement: “A budget is the most significant and simplistic tool to creating wealth.” Let me explain. In its most simple terms a budget is nothing more than a rule of measure. To know if we are on track financially we need something to measure our current financial status against. Stated another way, if we were to embark on a journey across the country would we not first plan our trip? This is the significance of a budget. To meet our financial goals we need a plan of how to get there. I would like to offer four suggestions to assist you with your plan.
1) Start to Track Spending
The first place to start is by tracking your monthly spending for the next two to three months. This allows us to average out monthly spending, and isolate or eliminate one time purchases. Expenses should be categorized into fixed or variable. Fixed expenses include those that are recurring and cannot be easily altered such as mortgage or rent, car payments, utilities, and anything to which you have a formal contract. Variable expenses can be more easily manipulated. Examples include groceries, fuel, clothing, gifts and donations, and all of our miscellaneous spending.
2) Create a Realistic Ideal
I know, I know, a realistic ideal. Is that not the definition of an oxymoron? The goal however is to recognize that for a budget to work it must be realistic. This means that we cannot just expect to cover a budgetary shortfall by increasing our income 25%, and it often takes time and sometimes money to alter our fixed expenses. It also means that we need to create an ideal, or a goal that will challenge us. The result is that we want to first list our current income, subtract our current fixed expenses, and then subtract our variable spending. Once this is done we either have a surplus to which we should invest or a shortfall meaning that we need to alter our variable spending to eliminate this shortfall.
3) Wiggle Room
Some people call it “mad money,” I simply call it Wiggle Room. What I mean is that we need to ensure that we build room for error into our budget. What we are trying to do is eliminate the #1 excuse budgets fail, which is because we get discouraged. If the budget is too tight and we fail the chances that we continue are greatly reduced.
4) Review Monthly
The final step is simple. We need review our actual spending compared with our budget once a month with an accountant or family member we trust. This will ensure that we follow the plan we have created.
I recognize that for some of us this comes easier than for others, but I believe that when we consider these simple steps, and recognize the significance that a budget will play in our lives the process becomes easier.
In fact I would like to put forth this challenge to all of us: First, create a list of 5 financial goals that we would like to achieve in the next 12 to 24 months. Be specific. Second, follow the steps I’ve outlined above to create and maintain a budget that will help you achieve those goals. Third, show your goals and budget to an accountant or family member you trust, solidifying your plan, and allowing them to encourage you.
Please feel free to contact me regarding any questions that you may have, or if you would like assistance in creating a budget. I would also love to hear from you regarding your own goals, plans and achievements. You can contact me by email at accounting@birchent.org or by phone at 778-786-1440.
___________________________________________________________________
Matthew Birch has ten years of accounting experience with dozens of companies varying in size from 1 to over 100 employees. He has worked with organizations in many different industries ranging from service to wholesale and retail sales and from construction to manufacturing. Serving the accounting needs of Vancouver and the Fraser Valley Matthew owns and operates Birch Accounting & Tax Services from his home in Clayton Heights Surrey. To contact Matthew regarding any of the services offered by Birch Accounting & Tax Services please call 778-786-1440 or email accounting@birchent.org.
a) I keep a very detailed and balanced budget that I review every month.
b) I have prepared a budget but I rarely look at it.
c) It sounds like a good idea, but I just don’t know where to begin.
Most of us would say statement c) best describes how we feel about budgeting. In fact depending on which study you read the percentage of people that actually follow a budget ranges between 1-5%. I would like to recommend a few ideas that might help us get started, and alleviate any fears that we may have with keeping a budget.
First let me start by making this statement: “A budget is the most significant and simplistic tool to creating wealth.” Let me explain. In its most simple terms a budget is nothing more than a rule of measure. To know if we are on track financially we need something to measure our current financial status against. Stated another way, if we were to embark on a journey across the country would we not first plan our trip? This is the significance of a budget. To meet our financial goals we need a plan of how to get there. I would like to offer four suggestions to assist you with your plan.
1) Start to Track Spending
The first place to start is by tracking your monthly spending for the next two to three months. This allows us to average out monthly spending, and isolate or eliminate one time purchases. Expenses should be categorized into fixed or variable. Fixed expenses include those that are recurring and cannot be easily altered such as mortgage or rent, car payments, utilities, and anything to which you have a formal contract. Variable expenses can be more easily manipulated. Examples include groceries, fuel, clothing, gifts and donations, and all of our miscellaneous spending.
2) Create a Realistic Ideal
I know, I know, a realistic ideal. Is that not the definition of an oxymoron? The goal however is to recognize that for a budget to work it must be realistic. This means that we cannot just expect to cover a budgetary shortfall by increasing our income 25%, and it often takes time and sometimes money to alter our fixed expenses. It also means that we need to create an ideal, or a goal that will challenge us. The result is that we want to first list our current income, subtract our current fixed expenses, and then subtract our variable spending. Once this is done we either have a surplus to which we should invest or a shortfall meaning that we need to alter our variable spending to eliminate this shortfall.
3) Wiggle Room
Some people call it “mad money,” I simply call it Wiggle Room. What I mean is that we need to ensure that we build room for error into our budget. What we are trying to do is eliminate the #1 excuse budgets fail, which is because we get discouraged. If the budget is too tight and we fail the chances that we continue are greatly reduced.
4) Review Monthly
The final step is simple. We need review our actual spending compared with our budget once a month with an accountant or family member we trust. This will ensure that we follow the plan we have created.
I recognize that for some of us this comes easier than for others, but I believe that when we consider these simple steps, and recognize the significance that a budget will play in our lives the process becomes easier.
In fact I would like to put forth this challenge to all of us: First, create a list of 5 financial goals that we would like to achieve in the next 12 to 24 months. Be specific. Second, follow the steps I’ve outlined above to create and maintain a budget that will help you achieve those goals. Third, show your goals and budget to an accountant or family member you trust, solidifying your plan, and allowing them to encourage you.
Please feel free to contact me regarding any questions that you may have, or if you would like assistance in creating a budget. I would also love to hear from you regarding your own goals, plans and achievements. You can contact me by email at accounting@birchent.org or by phone at 778-786-1440.
___________________________________________________________________
Matthew Birch has ten years of accounting experience with dozens of companies varying in size from 1 to over 100 employees. He has worked with organizations in many different industries ranging from service to wholesale and retail sales and from construction to manufacturing. Serving the accounting needs of Vancouver and the Fraser Valley Matthew owns and operates Birch Accounting & Tax Services from his home in Clayton Heights Surrey. To contact Matthew regarding any of the services offered by Birch Accounting & Tax Services please call 778-786-1440 or email accounting@birchent.org.
Saturday, August 30, 2008
A Change of Fortune
The last five years have been fabulous! Isn’t that true? Anyone who has owned a home during this time has recognized an increase in value, which in many cases has been double our original purchase price. Additionally many people have taken advantage of increased equity, and relatively low financing rates to pick up an investment property, or quick flip a pre-construction condo or townhome. I know that I’ve been a part of some of these activities, and it’s been very profitable. Hasn’t it?
Wait just a minute though. Maybe it hasn’t been all that profitable. Yes the there were a few years when you just could not lose. There were too many people wanting to get in on the action. They had been renting all their lives and now realized that they could afford to purchase their first property. Or maybe it was because family sizes are getting smaller and hence there are more people wanting to purchase smaller properties. Or maybe it’s all those foreign dollars coming here to purchase a property in Vancouver because of the Olympics. What about the investment component? How many people just decided that it was time to try out their first investment, a pre-construction flip, or a rental?
It seems, we all learn, that what goes up must also come down. Okay maybe it’s not a down market. That’s what is happening south of the border, not here. They are the ones that overspent and were offered ridiculous mortgages - to people that could never afford them. But then again, what if it happens here as well? Would it not be better to be prepared for such an event, than to react after it has happened? And if that doesn’t happen here would we not sleep better knowing that we had a plan anyways?
If during these years we have taken out equity for consumer spending, or purchased additional properties that are now on the market but not selling, then maybe we have to admit that for the first time in recent memory the good years are over. Now is the time to put together a budget and watch our spending. Now is the time to take a reduction in the selling price of the property that we are trying to sell so that we can get rid of those extra monthly mortgage payments, even if it means settling for a loss. The upside? Have you ever heard the phrase “In a down market cash is king”? Well it is true. Cash will keep you afloat if you cannot get more credit. Cash will allow you to expand your business when others are contracting. And cash will allow you to find bargain investments when everyone else is being forced to sell.
In the coming weeks I will expand on some of the topics that I’ve touched on here starting with a budget. We all know that keeping a budget is an ideal way to manage our finances; the difficulty is that for most of us we just don’t know where to start.
Thanks for reading,
Matthew Birch, CMA
Birch Accounting & Tax Services
778-786-1440
matthew@birchent.org
www.birchaccounting.com
Wait just a minute though. Maybe it hasn’t been all that profitable. Yes the there were a few years when you just could not lose. There were too many people wanting to get in on the action. They had been renting all their lives and now realized that they could afford to purchase their first property. Or maybe it was because family sizes are getting smaller and hence there are more people wanting to purchase smaller properties. Or maybe it’s all those foreign dollars coming here to purchase a property in Vancouver because of the Olympics. What about the investment component? How many people just decided that it was time to try out their first investment, a pre-construction flip, or a rental?
It seems, we all learn, that what goes up must also come down. Okay maybe it’s not a down market. That’s what is happening south of the border, not here. They are the ones that overspent and were offered ridiculous mortgages - to people that could never afford them. But then again, what if it happens here as well? Would it not be better to be prepared for such an event, than to react after it has happened? And if that doesn’t happen here would we not sleep better knowing that we had a plan anyways?
If during these years we have taken out equity for consumer spending, or purchased additional properties that are now on the market but not selling, then maybe we have to admit that for the first time in recent memory the good years are over. Now is the time to put together a budget and watch our spending. Now is the time to take a reduction in the selling price of the property that we are trying to sell so that we can get rid of those extra monthly mortgage payments, even if it means settling for a loss. The upside? Have you ever heard the phrase “In a down market cash is king”? Well it is true. Cash will keep you afloat if you cannot get more credit. Cash will allow you to expand your business when others are contracting. And cash will allow you to find bargain investments when everyone else is being forced to sell.
In the coming weeks I will expand on some of the topics that I’ve touched on here starting with a budget. We all know that keeping a budget is an ideal way to manage our finances; the difficulty is that for most of us we just don’t know where to start.
Thanks for reading,
Matthew Birch, CMA
Birch Accounting & Tax Services
778-786-1440
matthew@birchent.org
www.birchaccounting.com
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