I went through six months of Leif’s finances (January 2013 – June 2013) and made some pretty charts in an attempt to diagnose the sickness in Leif’s financial avatar. I’ll start with the good news. Income.
Leif makes a healthy income in a profession that is more recession-proof than most and as an independent contractor, he can choose to work essentially as much – or as little – as he wants. These initial facts mean Leif can turn his financial avatar into a black belt ninja within an astoundingly fast time frame. Sports fans will sit in wonder and whisper that he was taking steroids.
The problem with this chart is that, as an S Corporation, Leif is supposed to deposit his share of Civilization* monthly, so his first expense of the month is something most people have taken out automatically – income taxes – and hence don’t have to think about. Leif acts like he’s one of those people, but receives a rude awakening when tax season comes around.
Here are Leif’s expenses.
The two large jumps in January and April are deposits to the government. Here are the charts together.
Leif thinks he’s spending less than he earns, because in the months that he’s not paying back-taxes, he is accumulating capital and his bank accounts appear healthy. But just because has has money doesn’t mean he has money to spend. The capital he generates is not enough to entirely make up the deficits when his tax bill is due. Luckily, and more likely his saving grace, Leif also automatically has some cash siphoned off into another account. He doesn’t realize he’s falling behind because he’s consistently paying Uncle Sam late. The chart above looks scattered and randomized and there is clearly no goal he’s working towards. The sickness shows through in the charts. Leif is violating the number one rule of personal finance. Spend less than you earn. Make your income line consistently higher than your expenses line. He doesn’t quite realize he’s violating this sacred rule because of the inefficient way he pays his taxes.
Here’s Leif’s chart with the savings line included.
Actually, seeing it in chart form makes me realize how pathetic that savings line is. Your savings rate represents exactly what it sounds like. It will be what saves you from life’s unlucky dice rolls. It will give you more control over your existence than almost any other action you can take.
Here is another visual way to look at Leif’s situation, a power point presentation I made for him with detailed numbers. The numbers don’t lie. As a way to show him how much money he could afford to spend, I made him live on cash for a week with the suggested amounts in the presentation. I’ll post my suggested budgets for Leif (and his projected charts and happy consequences if he follows my advice) in another post.
Leif's Presentation Click the space bar to flip through the slides.
And finally, here is a glimpse of Leif’s homework for that upcoming week.