Sunday, November 30, 2014

Suffering though the microwave hallway

The beginning of every single month is always the worst time for me because it is always the busiest part of every month.

I've been working towards a major goal for the last 4 years. And after another 17 months, I will have achieved my goal and I'll figure out what I want to do after that.

In the last 4 years while working towards this goal, I've had times where I've wanted to shoot myself in the head, drive my car off a cliff, or just give up everything I've worked on just to live in a van in the desert.

What is the best way I could describe this struggle? I would say it would feel like the time I was playing Metal Gear Solid 4 and crawling though the microwave hallway.

It is a pretty moving scene. You have to navigate through a heat filled energy draining hallway in order to get to upload a virus to a computer. This scene happens right after Snake suffers a heart attack so you start out moving in the hallway at half speed. You want to move through this hallway as fast as possible but you don't have the option to run.

As you move, you notice your life bar is decreasing which urges you to try to move as fast as possible. But you can't run. As you progress, the nano machines in Snake's body start malfunctioning and Snake's body starts shutting down. You start limping at that point. All the while your life bar keeps depleting.

After some time, it keeps getting worse. Snake falls to the floor and your control stick stops working. To move Snake through the hallway, you have to start mashing the triangle button. So Snake starts crawling on his hands and knees to get out of the hallway.

By this point, the life bar is almost completely depleted. You might not be sure if it is empty or not but there is just one small little line left. You then notice that you stamina bar is depleting as well. You aren't sure if you are going to die in this hallway or not. Can you make it out in time?

Snake keeps suffering as the nano machines keep breaking. Snake falls to the floor again. You have to mash the button really hard just to get him up and moving again. So you see Snake move, he is crawling on his belly now. Using the shifting weight of his body to pull him forward. In order to hurry Snake along, you start getting pain in your thumb from mashing the button.

Eventually, you see the exit open and it looks like you have enough stamina to make it out of the hallway. But then Snake falls again. As the camera zooms in on his face, you mash the button to get Snake to drag his arms forward to try to make it out. Your stamina completely empties as the camera fades to black.

And you are left wondering. Is it over? Did I make it? Did I die?

Then the now loading screen comes up and you are glad you don't have to redo the hallway part.

Anyone working towards a really important life goal, realize that it is going to suck. It is going to feel miserable, isolating, painful, and probably lonely. You will have to make intense sacrifices. But, just like Snake in that hallway, you have to keep going and get out of there. You may be stuck in a situation where there is no other option. You have to either make it happen or perish trying.

Saturday, November 29, 2014

Testimony of an accounting major

It's felt like forever since I graduated college. I wanted to write this for the people who are deciding to go to college but don't know what to major in. I also want to write this for the students who are one or two years in but haven't decided on a major yet.

First off, I would encourage people to go into the trades like plumbing, construction, or mechanics. The reason for this is that these usually only require a two year certification. A lot of college will be a complete waste of time.

I went to college for accounting, yet I was taking classes like American Folklore, Introduction to Film, Nutrition, and Psychology.

If you must go to college, make sure you pick a major in STEM or with good employment prospects.
Make sure to research starting salaries and if you are likely to get hired upon graduation.

I did none of this when I left high school. I guess I just got really luck.
The whole reason why I chose to major in accounting was as following.

I wanted to be a business major and accounting stated with an A.

Ok, it wasn't that simple of logic but it was pretty close. I chose accounting after figuring out not what I liked in high school but what I loathed.

I absolutely hated, English, foreign languages, chemistry, and physics. This didn't leave me with very many options. My logic was that all I had left was business and majoring in business would be a safe bet because America is full of businesses. BUSINESS. I'm going to major in BUSINESS.

If I had to do research for job prospects today, accounting is okay and pretty safe.

1. You can become a staff accountant with just a bachelor's degree. You don't need advanced certifications, a master's degree, or pass a $600 test.

2. According to payscale, the median salary for a staff accountant is $44,500 a year.

3. There is room to advance and get promotions to senior accountant, accounting manager, CPA, controller, etc.

As for getting the degree, it wasn't too painful. It actually seemed like the path of least resistance for me in college. Keep in mind these may be different for where you go to college.

1. I was not required to take any higher level math beyond basic algebra and statistics.

2. I was not required to take a foreign language.

3. I was not required to take complicated science courses such as chemistry and physics.

I was require to take a lot of useless classes but that would have been the case with any major I took. Out of 120 credit hours I needed to graduate, only 24 credit hours were accounting classes.

These are the accounting classes I took. Your experience may vary.

1. Principles of Accounting 1
This class is an overview of accounting in general. You learn what assets and liabilities are. You learn what information is listed on the 4 basic financial statements. You learn how to make basic journal entries. You learn about the concept of how assets depreciate. You also learn how bank reconciliations are done and how to do a break even point analysis. I also remember learning how to calculate cost of goods sold and how to make adjusting entries.

2. Principles of Accounting 2
This class is more or less finance. What that means is that 70% of this class is time value problems. You may use a financial calculator or tables in the back of the book to calculate problems about the present value or future value of a dollar. You learn about how to calculate the value of annuities and investments. I remember drawing a lot of timelines because some of the questions get kind of complex.

3. Professional Accounting
This class was very much a filler class. Luckily it was just one hour. You learn how to network, interview, and find a job in accounting. Unfortunately, they didn't give the best advice. Networking is absolutely terrible. Thank you cards and follow ups don't work. To find an accounting job, I had to apply and apply a lot.

4. Intermediate Accounting.
This class is an expansion of Accounting 1. You learn more FASB and IFRS concepts and how different situations would be treated. You learn more complex topics like how to handle accounting for leases. You delve further into creating depreciation schedules for different assets. You handle more complicated journal entries.

5. Transaction Analysis
This was a one credit hour class I took. It was also an expansion of Accounting 1. I do recall we went further into adjusting entries.

6. Cost Accounting
What I remember most about this class is variances. We took various figures and calculated ratios to determine why a result happened. If we use lower quality materials, we may produce a cheaper product but it breaks down faster. This class would be more relevant to me if I would for a manufacturing company. When you hear cost accounting, just remember variances.

7. Database Accounting
We used Microsoft Access to look for errors in accounting systems. This class was very light in actual accounting. What this class focuses on is showing you how to calculate different values on accounting systems using accounting software. I clearly remember creating queries to calculate cost of goods sold. You will also go into making flow charts.

8. Tax Accounting
We learned how business are taxed and how different entities are treated differently by our tax code. Tax law makes absolutely no sense and has no logic. Our professor said so himself. All you can do is memorize it. Which is completely not how the real world works. You can't memorize tax law. In the real world, we do research to find out how things are taxed. It is for this reason our professor let us take 3 note cards into our exams. This class has no actual accounting in it. No journal entries, no depreciation, no financial statements, no ratios.

9. Financial Statement Analysis
You learn how to take the financial statements of different companies and learn how to calculate different ratios to determine information about different companies. Some useful ratios are the current ratio, debt to equity ratio, and employee turnover rate.

10. Audit
This class was a pain. You learn assertions about how audits are done. Once again, there is no actual accounting here. You learn about different audit cases and how to handle different situations.

Accounting wasn't the easiest major. It was very methodical and process driven. It can be very repetitive and tedious. This is the case in college and actually working as an accountant. Keep in mind that when you first start working as an accountant, it is very likely that you won't use 80% or 90% of all the stuff you learned studying accounting (the 24 accounting hours I mentioned).

If you don't know what you want to major in, I would still recommend accounting.

Friday, November 28, 2014

Don't take the unemployment rate at face value.

The media will use the unemployment rate as one figure to indicate how well the economy is doing. If the unemployment rate is low, that is a good indication that the economy is recovering. This isn't necessarily the case though.

The average American thinks the unemployment rate is the total number of people not working divided by the sum of people not working and people working. What a lot of people might not realize is that the unemployment rate is calculated as follows.

Total number of people that are looking for work divided by the total labor force (people not working who are looking for work and people working.

If people stop looking for work, they aren't counted in the unemployment rate. When a man gives up on looking for a job, this actually makes the unemployment rate go down. We can take a look at this mathematically.

Let's pretend the total labor force is 100 people. Out of that hundred, 10 people are looking for work and 90 people are unemployed. Our unemployment rate is 10% (10/100).

After a few interviews, Bill gets a job manufacturing plastic flamingos.

Bill is now employed. Our total labor force still has 100 people. Out of which, 91 people are employed and 9 people are unemployed. Our unemployment rate is now 9%.

This is what we want, we want as much production as possible. However, let's see what would have happened if Bill just gave up.

So, instead of continuing the job search, Bill gets discouraged after 20 job interviews and 20 rejections. Bill decides to stop looking for work and either moves in back with his parents or goes on the government dole.

When Bill stops looking for work, he is removed from both the unemployed number and the labor force number.

Now our labor force is 99 people. Out of which, 90 people are employed and 9 people are unemployed.

The unemployment rate is now 9.09% (9/99).

This rate is still lower than the initial rate of 10%.

When looking at the unemployment rate, it is also useful to take a look at the labor force participation rate. The last time I checked, the labor force participation rate reached a peak in 1999 or 2000 at more than 67% and it has been declining ever since. Today the rate is at less than 63%.

These figures can be found at the Bureau of Labor Statistics.

Thursday, November 27, 2014

You are never going to escape risk

An old saying goes that there are only two things guaranteed in life. Death and taxes.

These are the only two guarantees you get in life. You can plan everything else and it might not go as planned.

When I think about this in the term of financial planning, I realize that there is no perfect go to investment or strategy. Everything has an element of risk, some much more than others.

1. Starting up your own business.
This is one of those risks that can go really wrong but it is easily avoidable. You only face the risks if you start your own business. If you don't make enough money in sales or services, you face the risk of going bankrupt if you are a sole proprietor. You also face legal risks if someone gets hurt on your place of business and you get sued. These risks can be mitigated by incorporating your business and making it a separate entity but then there also comes the frustration of complying with government regulations and paying and filing taxes correctly. If you don't run your business the way the government wants you to then you face the risks of being audited by the IRS and paying fines.

2. Stocks
When most people want a way to make money by doing nothing, they throw it into stocks hoping the values go up and they can sell it at a higher price for a profit. Obviously, you take a risk if your stocks plunge in value after you buy them. The biggest risk is if the company goes bankrupt and you lose all the money you paid for the stocks and have no way to recover any portion of it. Just like owning your own business, this risk only exists if you invest in stocks.

3. Real Estate
The risks that come with real estate are very similar to owning your own business. The most common ways people try to make money with real estate is fixing up a house and selling it for a profit or owning a house and renting it out. In the case of a fixer upper, you may have to spend a few months or a year fixing up a house and then you have to find a buyer willing to buy at a high enough price. An underestimation of how much it takes to fix the house and an overestimation of how much you think you can sell it for can result in losses on your original investment. When it comes to rental income, you need to have reliable tenants. Jerk tenants may end up not paying rent and not leaving or trashing up the house.

4. Government sponsored retirement plans (401k, IRA, etc)
Most people invest in these plans because these are the "smart" things to invest in because of tax benefits. The risk you face here is that these programs invest money mostly in stocks and you don't know what the performance will be in the future. On top of that, these plans can come with administration fees that have to be paid every year despite how well the plans perform. Lastly, a bigger risk is that the federal government is fiscally irresponsible and may decide to nationalize these plans, rescind the tax benefits, or just steal this money to help pay off the national debt.

5. Gold, silver, and other precious metals
These precious metals are commodities. The only way you can really make money with precious metals is selling them for a higher price. Just like stocks, you don't know how they will perform in the future. The additional risk comes in the fact that precious metal is real. If you order precious metals, there is a risk that it is counterfeit. The other risk is storage. You want to make sure to have a safe place to store the items otherwise someone could steal your metals.

6. Bank deposits and fiat currency
Even just holding cash, CD's, and bank accounts hold risks. The federal government has the power to print off more money which indirectly leads to inflation. Just holding currency for years will result in the loss of purchasing power. Now, bank deposits hold the risk that they can be stolen from you from the federal government if you owe back taxes, child support, etc.

Realize that, no matter what you do, there is always some risk that comes along with it. Don't let risks stop you from living your life but just be aware of the risks you face and do the things that you can to mitigate the risks.

Tuesday, November 25, 2014

Important calculation regarding the life versus leisure tradeoff

One very key factor playing in to how well you can enjoy your life is going to be your financial position. Early on in life, young kids are likely to be saddled with debts and obligations and have a very big need to work and accumulate resources to pay those debts off and then start building up wealth.

Ideally, with a lot of hard work, careful financial planning, and avoiding traps; a man can accumulate a good amount of wealth. An amount of wealth that would sustain him for a long time. At this point, his need to work and accumulate resources may not be as great as when he was younger.

This could happen to a man in his 30's, 40's, 50's and onward.

He may come to the point where he won't need to work as hard and decide to take an easier, lower paying job with less hours to increase the amount of leisure time he has.

When thinking about this, he should really consider how much money he makes per hour. Actually, a better way to put it is how much money does he get to keep per hour dedicated to working.

To do this, take your total paycheck after taxes and divide it by the amount of hours you work per pay cycle.

My first job, I made a salary of $28,600. While most people wouldn't consider it a good paying job, it was still better than a lousy job. I was paid weekly and my paycheck after taxes were taken out was $445.34 per week.

Each week, I worked 40 hours. So divide $445.34 by 40 hours and that comes out to be $11.13 per hour.

This isn't all of it though. Each week I spent 5 hours at lunch. Even though I wasn't working, I would have much rather been at home sleeping. So I'll add 5 hours to the calculation.

$445.34 divided by 45 hours is $9.89.

The result is a little disheartening, but it actually gets worse. I had to commute to get to work. Had I not been working, I would have been doing something enjoyable. So add the commute time to the equation.

I had to commute an hour and a half each day round trip. Over one week, that is 7.5 hours commuting. So the time spent inside the office and commuting for one week equals 52.5 hours.

$445.34 divided by 52.5 hours equals $8.48.

To put this into perspective, minimum wage where I live is $7.25. If you make less than $5000 a year, you are not required to pay state income tax so your tax burden would be close to 0. I would think the only money you lose is the money taken out for social security which is 2.5% if I recall correctly. So, without factoring in the lunch break and commute time, each hour of work would yield a man $7.07 per hour. Factoring in the lunch and commute will drag this figure down.

When comparing jobs, most people only consider the salary. And when you are young, you need as much money as possible to start establishing yourself in the world. However, when you do become established, you have the option of factoring in a few more things.

Not only do you consider the salary, but you should also consider the amount of hours you spend working as well as the time you spend commuting.

When I finally got a good paying job, I had the expectation that I would have 40 hour weeks.
I was very mistaken.

People who do have good careers can expect to work in excess of 45, 50, 55, or unfortunately 60 hours a week. My successive jobs also had me commuting farther than my first sometimes causing my commute to increase to an excess of 10 hours a week. Ultimately, this increases the amount of time that you dedicate to work while the amount of money you make stays fixed resulting in a lower ratio of money to hours worked.

Why then do we put up with this? Be forced to work more hours to make more money.
Oh yeah. It is because we need the money.

So, to escape this rat race, I have a very general strategy.

1. Work as hard as you can to accumulate a lot of capital and make sure you save it
2. After you save up enough capital, go Galt.

When you have a lot of capital, you have much more options available. Money is a resource just like anything else in life. If you have a lot of it, your demand for more goes down. In contrast, you will have a higher demand for leisure.

If you get well established, you could leave your high paying and stressful job for a lower paying less stressful job with less hours.

It is up to each individual to decide what balance they want to have.

There is one last thing I want to mention. These concepts only look at the money that gets earned. Switching jobs can lead to an increase or decrease of your living expenses. This is really important to consider if you job is currently providing you with health insurance. You want to make sure to take the benefits in consideration if you want to leave your job as an engineer to work part time in a restaurant within walking distance from your house. I guess I can try to expand on this in the future though.

Sunday, November 23, 2014

How much do you have to write to make blogging your job?

Everyone wants to find an easy way to make extra income or get a job that requires little to no effort. Unfortunately, nothing in life ever comes so easy. Its not like you can just slap some banner ads up on a website and get instant ad revenue.

But there are many people that I follow that have turned blogging into a full time job thus completely freeing themselves from having to work a 9-5 office job.

After listening to these men, it made me really want to try it out. Start up a blog and see where it goes from there.

I started out November of last year and here are my following results.

Posts 79
Total Views 6000
Total money earned $.92

92 cents earned. Well, its progress. Better than a goose egg.
To be honest, I'm much more interested in looking at the page views. They kind of feel like the achievements or trophies you can collect when playing video games.

So, from the older wiser men, the key to being a successful blogger is to do the following.

1. Write a lot
2. Network a lot
3. Develop a large following
4. Create a product you can sell to a loyal following
5. Monetize your content

Taking things one step at a time, I'll focus on topic number one.

I was listening to Matt Forney say that you have to write a lot. It pretty much has to be a full time job. If you don't put in the effort, then you won't get any money.

So I was wondering how much is alot?
I know that it is more than I am doing right now, but how much more.

How could I find out?

Easy. I could just look at a successful blogger and see how much they wrote. The sidebar of blogger will breakdown how many posts the writer wrote year by year. So, I decided to check out CappyCap's history.

In his first year, 2005, he had 151 posts. That comes out to 12 to 13 posts a month.

In years 2006 to 2011 he had a range of 400 to 700 posts per year. That would make it 33 to 58 posts per month.

In 2012 to the current year, he has been making 900 to 1000 posts per year. That comes out to about 80 posts per month.

So when Matt Forney said you have to write a lot, it will become a full time job.

It is going to be a long road ahead but let's see what happens.

Saturday, November 22, 2014

Extra benefit to practice minimalism

One benefit of minimalism that I haven't heard people talk about is that minimalism lessens the effect that you feel from inflation.

Well, theoretically anyway. In practice, you can save money just by not buying stuff that you don't need or buy cheaper substitutes.

Everything about this next example is completely theoretical, it is not a reflection of how the real world actually works.

Andrew's cost of living is $15,000.
Boco's cost of living is $25,000.

For the year of 2015, we will assume the inflation rate is 3% (not unreasonable).

Let's assume that the price of every single thing increases by 3% (not how the world works but this is just theoretical).

Assuming that Andrew and Boco bought all the same stuff for 2015 as they did in 2014 (also not how the world works), both Andrew and Boco's expenses will increase by 3%.

Andrew's cost of living is now $15,450.
Boco's cost of living is now $25,750.

In this case Boco's cost of living increased $300 more than Andrew's did.

This example only looks at cost, It does not take into account the money that Andrew or Boco make. If the cost of everything in 2015 increased by 3% then the cost of Andrew and Boco's labor would increase by 3% and theoretically, their salaries should increase by 3%. If this is the case, this would negate the effect felt by inflation.

However, if Andrew and Boco's salaries do not increase in 2015, Boco feels the effect of inflation worse than Andrew does.

In a more extreme example, let's throw Charlie into the mix.

His cost of living is $40,000.

Making all the same theoretical assumptions from above, Charlie feels inflation worse.

Due to a 3% increase of inflation in 2015, his cost of living for 2015 is now $41,200.
Charlies cost of living increased $750 more than Andrew's.

To conclude this example, having to buy less stuff will make you less vulnerable to inflation compared to someone who has to buy more stuff.

Now back to the real world.

As a response to higher prices, the easiest way to save money is to just not buy stuff that you don't need. If you would like to buy the next new tablet or cell phone, think hard if it is really worth the couple hundred bucks.

The second way to save money is to find a cheaper substitute to what you already buy. If absolutely need a new electronic, don't buy the top of the line product but instead buy the cheapest one that suits your needs.

Both of these methods will affect your finances much more than inflation.

Friday, November 21, 2014

W-4 Reminder

While this may seem like common knowledge, I am surprised how many people don't know what the W-4 form is. This is a small reminder.

When you take any job as an employee, you will have to fill out some paperwork on the first day and the W-4 will be included in the list.

The W-4 is the form that determines how much money your employer withholds from your paycheck. The amount that gets withheld from you paycheck is the amount that goes to the federal government, state government, and social security.

Not all employers will explain this to their employees. When you fill the form, you have the options to claim allowances. The more allowances that you claim, the less money that gets withheld from your paycheck.

Keep in mind that however you fill out the form, it will not affect the amount you actually get paid.

If you claim no allowances, you will have the most amount of money taken from your paycheck every cycle. Most likely, this will lead to more money being withheld from you within a year and you will most likely receive a large refund when you file your taxes. Conversely, if you claim an many allowances as you legally can, you will have the smallest amount of money withheld from your paycheck and you can expect to receive a very small refund at the end of the year or possibly owing money to the federal or state government.

Which option is better? It depends on the person.

Personally, I like to receive the most money from my paycheck every cycle. I'd rather have more money all year round rather than just wait for a large amount in February. I'd rather pay the government money owed.

People who are really hard pressed for cash may also prefer having the most money in every paycheck.

If you want to change the amount that is withheld from your paycheck, I think you can talk to your employer and request to change your W-4. A good reason to update your W-4 is if you get married or have children because you will be able to claim more allowances if you wish.

Monday, November 17, 2014

Retirement Planning for Minimalists

In an ideal world, we would have perfect information and would know exactly how much to save for retirement, how many years we have to work, which investments to purchase, and how long we would live.

We don't have these things, so the best we can do is make estimates. However, if a man wants to limit the time that he has to work, I would recommend the following suggestion.

Retirement planning would go something like this.

1. Accumulate a large amount of capital as soon as possible.
2. Put the money into safe investments (fixed income) first and maybe riskier investments later
3. When you have more money than you need for the remainder of your life, start depleting your wealth.

In further detail:

1. You want to accumulate a large amount of money relatively fast if life because you want to have as much money producing more money (interest, dividends, etc). To accumulate a lot of money, you have to do at least one of two things. Either make a lot of income, spend as little money as possible, or preferably both. Make sure to pay off all debts though.

2. Ideally, you want to get to a point where you have a great amount of capital that your money can produce money by itself. Ideally, you would be making money by doing absolutely nothing. Safer returns provide much less rate of return but I would want to have a good safety net first before throwing money into riskier investments. If you can make your annual living expenses with just interest or divided income, you are in a great spot.

3. This part is advice for minimalists but more so for people who intend not to marry or have children. Without anyone to pass on your money to, you have no reason to accumulate anymore wealth than you need for a lifetime. If you get to a point in your life where you estimate that you have enough money to live for the rest of your life, you can start depleting your wealth to the point where you don't earn anymore interest or dividend income. You can deplete all the principal savings as well. The tricky part about this is that you don't know when you will die. If you deplete your wealth to soon, you may run out of resources to protect yourself. If you wait too long to deplete your wealth, you could end up dying before getting to enjoy your wealth. Most likely, we will all die with something to pass on to someone else or the state.

We can't know for sure how the future will play out but I encourage everyone to plan for it. This is a basic way to plan for it.

Saturday, November 8, 2014

Basic lifetime financial planning.

Your finances will have a big impact on the quality of your life. The average American will spend most of his life working. Most people don't really enjoy their jobs though. I've always thought that to increase your quality of life, you want to cut out as much frustration and consternation from your life.

With this thought, I came to the conclusion that you want to try to keep the amount of work you do in your life to the bare minimum. At least, work that you hate doing.

The obvious issue is that most people need to work to make money and survive. So, how much does a man have to work in his life?

It depends. Probably a better question to ask is how much money you are going to need?
How much money will you need for the rest of your life?

Most people would brush off the question because they would claim that
"No one can predict the future"
"Only God knows"
"Life is full of uncertainty"

Yes, it is next to impossible to predict the exact dollar amount you will need until you die. However, since personal finance has such an impact on a man's life, it seems insane to not even try to figure out the answer.

While we cannot get a fully accurate number, we can make estimates and get some sort of idea of how much money we will need to accumulate and how much we will have to work in our lifetimes.

This is a process that is ongoing. You have to keep doing it. When you are young, it is difficult to get a good estimate of how much money you need because you have so much life to live. It is like hitting a target from 1000 yards away. However, as you get older, you have less life to live and that target gets closer and closer.

The first thing you want to do is estimate your lifespan. Men here in America live an average of 79 years. If you believe yourself to be in better or worse health than the average American, adjust the average. If you take good care of yourself, it is reasonable to make it to 85 or 90 years old.

When you have your estimated life span, go ahead and subtract your current age. If you estimate to live to age 85 and are currently 30, you have an estimated 55 years left to live.

The second thing you want to do is estimate how much money you spend (or need to spend) within a year. This figure may be difficult to come by depending on how much effort you want to put into it but I'll go into that next time. For this example, lets use $15,000 as an estimate.

At this point, multiply the estimated needed money per year by how many years you have left to live.
In this example $15,000 * 55 = $825,000.

This is how much money Bill is going to need for the rest of his life. But this doesn't account for how much money Bill has right now. For this example, lets say Bill has $25,000 and no debt.

Subtract $25,000 from the $825,000 and Bill needs another $800,000 to retire today at the age of 30.

This really is the basic of basic of personal financial planning.

1. Estimate your life span and figure out how many years you have left to live.
2. Estimate how much money you will need per year.
3. Multiply the two figures to find an amount.
4. Subtract from the total how much money you actually have.

Doing this planning gets you some sort of idea of how much money you need. This number may vary greatly in the long run for several factors.

1. You may live longer or shorter than you expect
2. You will face life changing events that will change how much money you need per year
3. You may face some sort of catastrophe that makes financial planning for you useless
4. Our country/currency/economic environment falls to pieces
The list can just go on from here.

At the age of 30, it is like trying to hit a target that is way far away. But it is important to always be aiming at and trying to hit that target.

The estimates can be as complex as you want them to be as well. You can adjust the calculation to factor in things like inflation, acquisition of real property, family members etc.

Sunday, November 2, 2014

How much an increased minimum wage would cost McDonalds

Back in college, I had one professor that told us an interesting lesson.

Don't take anything at face value. Everyone has an agenda. You will be lied to by the government, the media, your parents, and me. Go do your own research and determine what is true for yourself.

Lately, there has been some media coverage about fast food workers demanding a higher wage. I think they were fighting for $15 an hour. I think even the national government was considering increasing the minimum wage up to $10.10 an hour.

Conservatives say that higher minimum wages will destroy jobs and liberals say that everyone deserves a living wage. With that being said, I was wondering how much an increase of the minimum wage to $10.10 an hour would cost McDonalds.

First I had to look up what the average minimum wage is in America. That information can be found here at the National Conference of State Legislature. The minimum wage varies from state to state a little bit but for the most part, the minimum wage is $7.25 an hour. If the national government increases the minimum wage to $10.10, then each hour worked by a minimum wage employee would cost an extra $2.85 per hour. This estimate is a little over stated because the mean minimum wage is slightly higher than $7.25 per hour. For that sake of simplicity, I will use $7.25 per hour as the minimum wage.

The second thing I had to find out was how many McDonald's employees in America make minimum wage. According to stastita, there are 14,267 McDonald's restaurants in the United States. According to Macroaxis, there are a total of 440,000 employees working at McDonald's in the United States. On average, this comes out to be about 30 employees for every restaurant.

If the minimum wage is increased to $10.10 an hour, McDonald's would only incur extra costs for each employee that makes less than $10.10 an hour. With 30 employees per McDonald's, I initially estimated that 20 of those employees work part time for minimum wage. However, I found a figure from McDonald's that states that about 80% of their employees work part time for an hourly wage. I'll stick with my initial estimate of 67% of McDonald's employees making minimum wage. This part of the estimate will be under stated.

At this point, I decided to plug in some numbers.

Extra wages due to increase of minimum wage * 20 employees per McDonald's * total McDonald's in America = Extra cost of labor per hour for McDonald's.

$2.85 per hour * 20 employees * 14,267 McDonald's = an extra $813,219 per hour for labor.

Assuming each one of these 20 employees per McDonald's works 20 hours a week, the extra cost of labor per week comes out to be $16,264,380.

Assuming each one of these employee works this rate for each week of the year, the extra cost of labor for the whole year comes out to be $845,747,760.

An increase of the minimum wage to $10.10 would cost McDonald's $846 million if McDonald's decided to absorb the cost.

This figure does not mean very much by itself, so lets compare it to McDonald's net income.
So, according to McDonald's income statement, McDonald's 2013 net income was $5,585,900,000.
Roughly $5.59 billion.

If in 2013, the minimum wage was $10.10, an extra $846 million would have been added to operating expenses and subtracted from net income which would leave the net income at $4.74 billion.

$846 million out of $5.59 billion is slightly more than 15%.

An increase of the minimum wage from $7.25 to $10.10 is almost 40%.

A 40% increase to the minimum wage would cause McDonald's a loss of 15% to net income.

Should the federal minimum wage increase to $10.10, McDonald's would not just sit there and absorb the loss. McDonald's would have to either increase prices or fire employees and shut down some locations.