The ten percent solution

Yogi Berra once said “Baseball is ninety percent mental and the other half is physical.”

This begs the question –How do we mentally reconcile all the disparate and often contradictory financial rules of thumb we hear? 

We should have 6 months of rainy day fund, no make that year, no wait 8 months is now good.

You should spend 25% of your gross salary on this but 10% of your net on that.

If you Google financial advice, you will surely come across the rules but how should that apply to you?

Now, in true disclosure I would say I am in the ‘rules don’t apply to me’ kind of guy.

The real problem with budgets and percentages is that yes, they work perfectly in a closed environment like a laboratory but for most all of us, not so much in an open environment or what we scientist types like to call real life. Kind of like John Lennon – “Life is what happens while you are busy making other plans.”   

So what is the proper ratio for you? I recommend you try some experimentation and also think of speed and pace. In other words, sometimes a ratio could and should vary.  It eventually may average out but it is not always a constant speed. Sometimes you may spend like a sailor on shore leave and other times you ‘lay low’. It’s what we call human nature. 

Who should you listen to?  Anyone that resonates with your core values.  Pick and choose but don’t be afraid to question. When you hear or read financial advice you may assume you are getting the truth but it could be biased with a point of view such as from a bank or investment type.

I like to read books on economic issues facing our country and I will hear a noted economist espouse absolute crap.  As a matter of fact in the DC area I live in, it is a common practice to hire statisticians and economists to support virtually any point of view.  As they say, there a lies, damn lies and statistics.

Some examples of the right ratio you may have heard are housing as 25% of spendable income, the 60% Solution is a budgeting system created by former MSN Money’s editor-in-chief, Richard Jenkins. The name “The 60% Solution” originates from Jenkins’ suggestion on spending 60% of a household’s gross income (before taxes) on fixed expenses. Fixed expenses includes federal, state and Social Security taxes, insurance, regular bills and living expenses- like food and clothing, car and house payments.  The other 40% breaks down as follows, with 10% allocated to each category.

But the problem is that all households are not created equal. Different starting points, different values.

So the next time you trying to find the right percentage, realize that you are not average.

If someone has their head in the freezer and their feet on fire, on average, they are comfortable.  Don’t be average!

###Can you translate that for me please David Draft

In a scene from the movie Philadelphia, starring Tom Hanks and Denzel Washington, there is a memorable scene with Denzel as the attorney telling a witness on the stand to explain it to me like I’m an eight year old.

Speaking from personal experience, we tend to infer a meaning that the speaker might not intend.

Whenever I hear information on money, I need to go through a process to see how it might relate to me.

Often my mind goes to an old, white New Englander saying “you can’t get thera from hera”

An expert can translate and understand ‘spaghetti logic’ people often have about their money.

“I got a cash advance for my business trip, used that to pay my Visa bill then was going to use some of the money in my commission check to pay my electric bill and the business trip reimbursement when it is due in @ 6 weeks” ….. ahhhhh!

There is a real problem when we try to use categories to track our spending and to quote another movie title, it is “Lost in translation.

I suggest we think of money as either ‘there or not there’. Once it is gone, it really does not matter what we spent it on.

If I spent $500 on paper plates or I spent $500 at Morton’s, the only difference is a shift in assets and liabilities, right? I now could have $500 worth of paper plates. Now if that is important to me such as inventory or utility value. However if I stuck them all in a storage unit and never used them, I have no assets.

The whole manner of categories is best described as sometime useful and often not.

I suggest very high level view such as income, bills, expense, savings and drill down only when needed.