Tuesday, October 30, 2012

Look Both Ways Before Crossing the Street

In my recent journeys to increase my knowledge base in Finance to accelerate my effectiveness as a volunteer director at Cooperative Center FCU, aid in grassroots community economic development, and enrich myself as small business owner, I was recently tipped off about a website that published a 52 week blog tutorial on macro economics called Modern Money Primer. It was written with the average person with no degree in economics in mind. Though I have a business degree and a geeky affinity for big picture theory, I still find it challenging—but you got to start somewhere, right?

In this day and age, more so now we need an educated and activated civic populace-- neighbor to neighbor reaching out and working together. We all need an adequate understanding of economics as it is the primary driver of politics. We are in the middle of a severe financial crisis and we need to face this and each of us put ourselves in a stronger position to sift the good ideas from the bad. Together we can put the pressure on in our local government to get our local area heading in the right direction. Before we can change things we have to know what we are talking about. 

MMP Blog #2 "Basics of Macro Accounting" explores the intimate connections between the Private Sector (Households & Businesses), Government Sector, and Foreign Trade Sector. All must balance with each other. If there is to be a surplus in one sector, there MUST be a deficit in another. Anything else is either magical thinking or political deception.

Domestic Private Balance + Domestic Government Balance + Foreign Balance = 0

What this shows is often missed in the debates over the deficit. Everything must equal out in the end. This is also basic financial accounting theory and practice- if you add money to one account you have to take money from another account. Every transaction has a debit and a credit. This is also true at the macro level in regards to the national economy, federal budget, and foreign trade. All these terms being thrown around in the debates, taking on buzz word status, are being misused, such as balanced budget, job creation, unemployment, GDP. I am not choosing sides, both democrats and republicans are guilty. But who pays the price is the people as recovery is delayed by inaction and misleading debates. 

For example, if households run a deficit (spending more than we earn) as we did between 2000-2007 maxing out our credit cards, taking on a 2nd mortgage, etc then surplus is made up in the other sectors Government and Foreign. When the government runs a deficit, as it has since the global financial crisis, we are able to run a surplus in the other sectors-- see MMP#5 The Case of the Great Recession of 2007

We have to look at both sides of the equation to find a balance that fuels an economic recovery and a vibrant local business climate. We can't slash government spending because it affects households and businesses. Creating surplus in the private sector, growing the economy, increasing employment and raising real wages requires deficit spending somewhere else. Everything is interconnected. As it is highly unlikely that we will get China and other countries to take trade deficits with us, then the surplus must come from the domestic government sector.  Again, "the sum of deficits and surpluses across the three sectors must equal zero." Watch what you ask for and please look both ways before crossing the street.

Friday, October 19, 2012

Budget Today for Taxes Tomorrow

Did you promise yourself last year that you wouldn't wait again until April 15th to pay your self-employment taxes? Do you wait and use next year’s income to pay the prior year’s taxes? If you haven’t already started to set money aside for your year-end and quarterly tax payments, then today is the day!!!

Here are a few tips that could help get your thinking straight on this: 

1) Set a Budget: Keeping a monthly budget can make a huge difference in whether or not you follow through on these promises to yourself.  It's important to get all your numbers laid out so you can see exactly what you are doing and can make clear-headed decisions that won't make you an accomplice in your own pain and stress. Cash Liquidity is essential in a credit-poor economy, but you must plan ahead and budget to build up ample cash reserves. Writing on Home & Business Budgeting for the New Economy is a primary emphasis of Numbers Speak Louder Than Words. 

2) Keep Your Numbers: Keeping your numbers on a monthly or weekly basis will free you up to not only save for your tax liability, but even more you will develop a keen awareness of the key indicators that could make or break your business. I can't stress it enough the importance of working towards having in-depth accounting. If you look only at the bottom line you will be missing out on the details that are specific to your business and industry. 

3) Move Your Money: Transfer the apportioned amounts out of your operations/spending account RIGHT AWAY. Put it in an account that you won't touch until it's time to pay your taxes. 

4) Get Help: Don’t do this alone. If this seems like a daunting situation, don’t do it alone. Get support-- voicing your goals and intentions to another human being increases the likelihood of success. “Book Ending” is a simple technique where you tell someone your goal or task before you start and then check back in after you have completed it.

Like it or not make payments or set aside this money as you go, so you won't get in a jam come April 15th. Drama and crisis is avoidable in this case (as it is in most cases)… not to mention the late fees and penalties. 

I know it’s easy to say, but harder to do. Let this year be different.

Thursday, October 18, 2012

Now You See It, Now You Don't

Here is a technique that I use to help myself stay conscious of what I am doing. I have direct deposit for one of my clients so on payday I go online and make sure my paycheck was deposited. As soon as I see the amount is there, I transfer what I don’t need into savings. Now you see it, now you don’t.

This helps me to stick to my budget. And helps me to be conscious every time I spend money. I have noticed with some of my clients that out of necessity we pay more attention when money is tighter. So why not use this technique even on weeks when we may not have to. 

This is a chance for me to mention a paradoxical concept I came across that continues to inspire and fascinate me… Employing constraints in your life, can engender freedom.

Learning Happens
I first got this concept from Edward Yu. A good friend and my personal trainer. He kicked my butt on a daily basis. And our early trainings ended up becoming the grist for his book: The Art of Slowing Down. What he would use to trick me out of my less-than conscious habits. Is what he called "constraints". 

“Walk on the 2nd metatarsal,” “Walk on the heal,” "Walk on the toes," "Now walk normally." These guidelines helped me feel how my body was moving. I was learning proper alignment and what it felt like from the inside-out. We would incorporate Tai Chi slowing down to improve our speed by creating more efficient, effective running. 

Edward would suggest various constraints while we warmed up and did our running workouts to focus us, his students, in class and break us of our bad habits. By maintaining the constraints you move out of the habitual movement and awaken new neural pathways in the brain. 

The problem is we can fall easily into our habit posture and running form. The body (and mind) go automatically to the path of least resistance and we need mental and physical reminders to prop us out of this less than conscious state.

Rules to Find Freedom
With home and business budgets constraints achieve the same powerful affect. They wake us up out of our habits and keep us in alignment with our goals. 

With home budgets we slow down what is happening so we can gather the info we need to make better decisions and have the alignment to be more efficient and effective. We invite constraints into our daily life on what we are spending so we can save more and achieve our dreams. Though they seem like pain at first these constraints allow greater freedom and range of motion in our life.

When we overspend and have nothing in savings for emergency, when crisis hits we are much more stressed and vulnerable in the situation. Which would you rather have the constraints of a budget that enables you to save or the constraints of 29.99% APR breathing down your neck because you burned thru your cash and had to use credit?

Whether you use keep the balance in your spending account intentionally low or checking your budget before you leave the house can be helpful constraints to release the weight of worry about money. We can find freedom in surrendering to the budget that we have developed and trust that with this greater awareness and courage to follow our action plan we will arrive to a sound place with our money.