Tag: financial basics

Smart Account Choices Juice Long-Term Growth

Smart Account Choices Juice Long-Term Growth

Compound interest allows your investments to grow exponentially in value.  This post provides six online compound interest calculators to help you understand the benefits of compound interest on the future value of your investments.  Importantly, you can see the impact of income taxes on the 

Don’t Sweat those Mortgage Terms

Don’t Sweat those Mortgage Terms

A mortgage is key to buying a residence for most people.  Mortgage loan documents are often lengthy and full of technical terms.  As such, many people either don’t read them in their entirety or don’t understand the details.  As with all contracts, I recommend that 

Rental Property: Real Life Experiences

Rental Property: Real Life Experiences

Many people view residential rental property as a great investment.  I’ve never had any interest in committing the time I perceive is necessary.  I’ve also not made much money on my residences.  As such, I haven’t seriously considered the purchase of investment property.

To get the true story, I interviewed three of my friends who are, with varying degrees of success, real estate investors.  I was quite surprised to learn that, in spite of the problems they faced, they all agreed that buying rental property has been a great financial decision.  In this post, I’ll provide insights into the financial benefits of real estate investing, along with the time and expense commitments.  Lastly, I’ll relate some of their “ugly” experiences and the lessons you can learn from them.

Introduction to Interviewees

I interviewed three friends, all of whom have owned rental property, to get their insights.  I’ll refer to them as K, J and B.

K and B are both retired now, but started owning rental properties when they were working as professionals in the insurance and manufacturing fields, respectively.  J and her husband are also both retired.  J’s husband was a building contractor for most of his working career and J is very handy and creative, so they both have lots of hands-on skills that are helpful to landlords.

K and J have had very positive experiences with rental property, though J has had a few significant problems.  B, on the other hand, had a terrible experience.  You’ll see most of her inputs to this post in “The Ugly” section towards the end.

What Rental Property Do They Own

K owns five properties in multi-family, multi-story properties.  The buildings range from ten to 100 units.  In the largest building (with 100 units), there is a front desk attendant.

J started with single family homes, but then invested in a triplex.

B owned a brand new townhouse in an association.  She rented it out when asked by her employer to take a two-year assignment overseas.

The Good from Rental Property

My friends reported many good things about owning rental property, including fulfilling their motivations for owning rental property and providing a return on a diversifying investment.

Motivation for Buying Rental Property

Neither K nor B intentionally bought their first properties as rentals!  As indicated above, B rented out her own residence when she was working and living outside the country for two years.

K bought a place in downtown Boston near where she worked.  She worked 22 miles from home, so planned to spend the night at the condo when it was snowing or she needed to be in the city until late.  K decided to rent the condo only when she realized the current resident was paying good money each month in rent until her lease ran out.  She decided using the apartment as a rental property was a much better idea than having a place to stay every now and then.

J, on the other hand, bought rental property intentionally for that purpose.  She wanted a more dependable monthly cash flow to supplement their retirement saving. Also her husband being a contractor was a big plus for purchasing properties that needed remodeling.


For both J and K the biggest advantage, by far, is financial.  J appreciates the rental income to support her retirement and the ability to build equity.

K has been fortunate to own in Boston where there is a low supply and a high demand for housing due to the plethora of colleges/universities.  Therefore, rents continue to increase and the market value has more than doubled on each of the units.  And she has a “free” place to stay in Boston for those rare times when the tenants vacate an apartment early.

Investment Returns

Both K and J say that the returns on their investments have met or exceeded their targets.  K says, “Our decision to have rental properties in Boston is the best financial decision we have made.”  J points out that, “the longer you own the property, the better the return.”

In addition, rental property returns aren’t highly correlated with many other common investments, such as stocks and bonds.  It therefore adds diversification to portfolios.

The Bad from Rental Property

To attain the nice investment returns from rental property, you need to commit a combination of time and money.


The main costs of ownership are the original investment, insurance, property taxes, maintenance, and repairs.  The original investment will be either the full cost of the property or the mortgage down payment.  In either case, you’ll have closing costs both when you buy and sell the property.  If you have a mortgage, you’ll need to make the mortgage payments.  Depending on the type of property you own, you may have condo or homeowner’s association fees.

K also pays for cleaning and touch ups between tenants – things like broken refrigerators, plumbing problems, etc.  Through the years, she has had assessments for building improvements – the lobby was refurbished, elevators updated, laundry room refreshed, etc.  Before these capital improvements were implemented, the condo board researched and obtained the support of residents to allow the costs to be assessed.

Most rental-property expenses, including those for cleaning or for assessments, are deductible from your income for tax purposes.

Time Commitment

K and J take different approaches to splitting their commitments to their rental property between time and expense.  K’s husband takes care of all of the time commitments which are primarily paperwork (property taxes as well as income taxes).  These activities take an hour or two each month.  And the inevitable problems (water leaks) don’t really take a lot of time, but they are random and can happen (for example) when they were hiking in Slovenia which is annoying!  They have a property management company (see next section), but sometimes they have to provide input.

There were three women living in one of K’s two-bedroom apartments.  For some reason, two of the three women didn’t get along at all.  They would scream and throw things at each other.  One of them kept calling K’s husband to ask for advice.  He never understood why they called him!  Finally, one of them moved out, ending that time commitment.

J’s husband, on the other hand, takes a much more hands-on approach and commits much more time.  Up until recently, J and her husband did not use a property manager.  During that time period, she and her husband spent a lot of time on maintenance and cleaning in between renters.  They also spent time advertising, meeting with prospective renters and checking references whenever there was a vacancy.

Damage Stories

Both K and J have had tenants damage their properties.  Here are a couple of their stories.

The tenants in one of K’s apartments were frying chicken and forgot about it.  There was a rather large fire.  It was extinguished, but it caused a few thousands of dollars of damage.  The tenant’s parents paid for 1/2 of the damages.

J had a tenant who hadn’t paid his rent in several months, as he had lost his job and didn’t have enough money.  After many attempts to contact the tenant by phone and email, J and her husband entered the house.  They found all sorts of damage to the house and were confronted by the local police on their way out!  The damage was done by the tenant’s son who stayed in the house while the tenant was on vacation.  The police arrived because the tenant reported that there were trespassers on the property.  Because J and her husband could document that they had tried to contact the tenant numerous times, they were considered to be in the house legally.  The tenant was willing to move out, but wanted his full deposit back.  He tried repairing the house, but made it even worse.

Property Management Services

K and B use property managers, whereas J hasn’t until recently.

Using a Property Manager

K used the woman who sold her the properties as a property manager for many years.  K paid her based on the rental property management services she used.  For example, the manager might tell K to purchase new blinds.  The manager would order and install the blinds and then charge for materials and labor.   The manager would also solicit tenants for apartments with a non-renewing lease.

In the future, K plans to use a “real” property manager rather than the informal arrangement she had previously.  The new manager charges from 3% to 7% of monthly rent depending on how much service is needed.  K has chosen the 3% option because the 7% option is a truly hands-off, i.e., the manager will collect rent, pay vendors, etc. and provide a monthly statement of accounts for her review.  With the 3% option, the property manager is the first point of contact when, for example, the refrigerator stops working.  He will assess the situation then call with his recommended solution (e.g., buy a new refrigerator).  Once K has agreed to a solution, he’ll arrange it all and send the bill.

Property Manager Prices

Property managers have different rates depending on how much or little you want them to do.  J provided me with the pricing plan for a local property manager.  The prices ranged from 2.9% to 11.9% of annual rent, plus a set-up fee of about $200.  For 2.9% of rent, you get advertising, property showing, tenant screening, and a six-month tenant replacement guarantee.  At the middle price point, the management company also provides rent collection, maintenance coordination, online account access, 24/7 emergency response and bookkeeping.  At the high end, bill pay, move-in and move-out videos and much more extensive reporting are provided.

B’s property manager charged $250 a month to collect rent, pay mortgage and HOA dues.

Doing It Yourself

J and her husband have managed their properties themselves for the past 10 years, but recently hired a property manager.  J says, “Managing your own property is a huge time commitment, but can save a lot of money if you’re willing to put in the time and do the work yourself.”

Cautions and Advice

K and J both agree that the single most important rule in renting is to have good tenants.  If you aren’t careful, renters and their pets can cause damage.  K would never ever allow pets in her apartments even with a healthy security deposit.

J prefers multi-family properties as she always has income from at least some renters.  With single family homes, there were sometimes a month or two with no income.

J also recommends being flexible with your plans. Sometimes, financially, it is better to keep a rental or sell it depending on the market and your own situation.

Along the same lines, K suggests being flexible about tenant improvements.  One time, the daughter of a CIO of a major investment firm was living in one of her apartments (the one with the chicken fire) while she was an MIT student.  She really wanted hardwood floors in the apartment (it had carpeting at the time), so her dad paid for half of the cost of installing hardwood floors throughout the apartment.  Of course, K and her husband said, “Yes!” The tenant also wanted to paint her bedroom a rather dark purple color (for which she paid) and K and her husband agreed to that.  While it sounds like a hideous color, K actually liked it and it is still the same color today.

Other Things That Can Go Wrong

Lief at Physicians on FIRE started quickly with his investing in real estate.  He “lost everything” due to a combination of his timing in the real estate market, his rapid entry into the market and his lack of understanding.  Learn more in his post.

The Ugly from Rental Property

Sometimes, rental property can be much more problematic than damage from small fires and tenant’s adult children.  B’s story is really ugly, but had some benefits nonetheless and several lessons learned.

What Happened

B hired the father of a friend as a property manager to handle everything while she and her husband lived in London.  Everything seemed to be going smoothly until an awful phone call from her mortgage company saying it was foreclosing on her condo.  The property manager had been in business for 30 years.  Unfortunately, his accountant had slowly been embezzling small amounts from prior clients for years.  When B’s account arrived, the embezzlement started immediately, including not paying any of her bills and taking all the income.  Within three months, B received the foreclosure notice from her bank!!!  She fired the property manager and, to salvage her friendship with his daughter, paid the missed mortgage payments and fees herself.  It took seven years before B and her husband’s credit recovered.

Other Issues

In addition to the financial issues, B’s neighbors and friends called to complain about the noise from the renter’s Harley Davidson motorcycle.  There was physical damage to her home as well.  A small (less than 15 pound) dog chewed all of the floor trim and peed frequently in the bedroom.  B and her husband had to have the floor trim throughout the condo and the flooring and sub-flooring in the bedroom replaced.  To top it all off, there was a leak under the master bath sink that was either never seen or completely ignored.  As a result, B and her husband had to replace a living room wall and have the resulting mold mitigated.

Light at the End of the Tunnel

In spite of all of these problems, B and her husband still had a positive return on their investment as they were able to sell the property for more than twice what they paid for it after four years.  By renting out the property, they were able to retain it and benefit from the appreciation.   Even with the damage to their credit rating and repair expenses, it was an excellent financial decision to retain the property and rent it instead of selling it.

Lessons Learned

B has several pieces of advice for those who own rental property based on her experience.

  • Require bi-weekly cleaning (and inspections) as part of the rental contract. B now owns a property purchased specifically as a rental.  She has hired a cleaning service and put the cleaning supplies under the sinks so the cleaners will see and can report any leaks.
  • Clearly state in the contract that no pets, motorcycles, loud vehicles or onsite vehicle repairs will be allowed.
  • Install moisture detection sensors.
  • Pay your own bills.
  • Have a legal review of your rental agreement with clear expectations and boundaries that would cause eviction or fees.


Rental property can clearly be a profitable investment, providing both cash yields and asset appreciation.  However, as with any investment, it is critical that you understand the risks and mitigate them to the extent possible.  In addition to the risks identified above, there is also the possibility that the value of the property will decrease either from general housing market trends or deterioration in the city or neighborhood in which it is located.

Property and Casualty Insurance

Property and Casualty Insurance

Protection against loss is critical for everything you do, including running your own business or earning money from a side hustle.  The primary tool for mitigating business risks is property-casualty insurance.  There are many insurance policies within the realm of property-casualty insurance, each with its 

Do I Really Need to Budget

Do I Really Need to Budget

I wrote a guest post for The Smart Investor about deciding if you need a budget.  Here is the start of it, to read the entire post, click here. Budgeting is critical to your financial health, especially when you are just getting started handling your 

Picking Stocks

Picking Stocks

Many investors create their own portfolios by picking stocks in individual companies. As discussed in my post on the basics of stocks, picking stocks in individual companies is one of several strategies for creating an investment portfolio. Alternatives to picking stocks in individual companies include buying mutual funds and exchange-traded funds. I’ll talk about those strategies in another post.

When I first started investing in the early 1980s, mutual funds were quite common but index funds and exchange-traded funds, while they existed, were not well known. I started my investment story by picking stocks in individual companies. One of the best books I’ve ever read on investing is One Up on Wall Street by Peter Lynch, originally published in 1989.

Confirmation of Independence: I have no affiliation with the author or publisher of the book I am reviewing. I do not receive any compensation for recommending it or if you purchase it.     I truly think it is a great source of investing information.

Lynch was the manager of a very successful mutual fund, the Fidelity Magellan fund, from 1977 to 1990. During that time, the fund had a 29.3% annual average return or more than twice the average return on the S&P 500 over the same time period. If you are considering picking stocks in individual companies, I recommend his book even though it is quite dated. It references companies and trends with which you may not be familiar, but the fundamental concepts are still relevant and it is a quick, easy read.

In this post, I’ll essentially provide an overview of some of the key points I learned from One Up on Wall Street and illustrate them with some personal examples when I can.

Picking Stocks in Companies You Know

One of the first concepts that Lynch introduces is that you are your own local expert. You are familiar with the business in which you work and shop. You are a consumer and you can observe trends in the area in which you live. By watching the world around you, you can identify possible investment opportunities, possibly even before the “market” or “experts” discover them. In many cases, if you identify a trend very early and invest in a company that will benefit from it, you can earn a much-higher-than-market-average return on your investment. In fact, Lynch points to this opportunity as giving individual investors a better chance of beating the market than professional investors who have to invest larger amounts so tend to purchase more mature companies.

Our Kids’ Choices

To illustrate what I mean by “invest in what you know,” I will use an experience we had with our children as an example. When they were in their early teens (probably around 2004 or 2005), we gave them each a very small amount of money to invest. Our son, who was very interested in trains and large equipment, chose the following companies:

  • Microsoft
  • John Deere
  • Canadian Pacific Railway
  • Canadian National Railway
  • ASV – a company that makes skid-steer loaders.

Our daughter, who was much more aware of what was happening in the retail space, chose the following companies:

  • Apple
  • Nordstrom
  • JC Penney
  • Target
  • One other company that I don’t recall.

How it Turned Out

I don’t remember exactly when we started this exercise, so have looked at the two- and five-year average annual returns starting on January 1, 2006. By using two-year returns, I have excluded the impact of the market decline in 2008 and early 2009. The five-year returns go through December 31, 2010, so include the market decline and part of the recovery.

The S&P 500 averaged a 4.5% increase per year during the two-year period and was essentially flat for the five-year period. By comparison, my daughter’s stocks increased at an annual average rate of 9% over the two-year period and 8% over the five-year period. My son did even better, with annual average returns of 15% over the two-year period and 9% over the five-year period.

What is even more impressive about my son’s returns is that his returns were dragged down significantly by a single company – ASV. When my son bought it, the company had its own patented suspension system for its tracks. As I recall, not too much later, it had a change in management. The new management decided to license the patent to Caterpillar. Unfortunately for ASV, Caterpillar’s much larger market share caused a large reduction in ASV’s sales that couldn’t be made up by the licensing fees. Over a several year period, ASV’s stock price went down by about one-third. This experience illustrates another lesson when looking a company’s fundamentals for investment decisions – carefully follow the decisions of any new management teams.

Without ASV, our son’s returns were much more impressive – 19% over the two-year period and 13% over the five-year period.

Don’t Invest in What You Don’t Understand

A related concept, but somewhat different one, is to avoid picking stocks in companies and sectors you don’t understand. Lynch has all sorts of great examples of why people buy stock in companies whose business they don’t understand – hot tips from a “rich uncle,” aggressive buy recommendations from a broker and so on and so forth.

Not understanding a company’s business can be everything from it having a very technical focus to not being familiar with its marketplace (i.e., to whom and how it sells its products) to being so diverse that it is hard to figure out what drives profits.   Essentially, his advice is that, if you can’t explain to someone what the company does in a few sentences, you shouldn’t buy its stock.

One Example of My Choices

I fell into that trap. We had a little extra money many years ago and decided to take some risk by making a very small investment in a private placement. When a company sells its stocks to a small group of investors and not the general public, it is called a private placement.

The two choices we were offered were a company that was marketing telemedicine to the Veterans Administration and a barbeque restaurant that was just opening its first locations. Our assessment was that the restaurant space was grossly overcrowded and that telemedicine would catch on quickly with the aging population and increases in technology. Not understanding that the telemedicine company didn’t actually have any customers or the challenges of getting a contract with the Veterans Administration, we made a very small investment in it.

Were we wrong! Many years later, we wrote off the entire value of the investment in the telemedicine company as it had become worthless. The restaurant was Famous Dave’s.

Ten Baggers

One of Lynch’s goals is picking stocks that are ten-baggers. These are companies whose stocks appreciate to at least 10 times what you paid for them in relatively short periods of time. By identifying trends in your local area, you are more likely to be able to earn the high returns associated with companies that start small and grow rapidly. As an example, consider the increases in Apple’s stock price.

Annual price change for Apple stock

The picture above shows the annual appreciation of Apple stock from 1981 through 2018. If you had owned the stock during any of the years circled in green, you would have more than tripled your money in two years. Not quite 10 times, but 3 to 5 times in 2 years is still a return anyone would envy. If you look at the returns in more recent circled in orange, you’ll see much more modest appreciation. The returns were still very attractive, but much lower than the earlier period.

Lynch points out the benefit of having just one ten-bagger in a portfolio with otherwise mundane performers. For example, if you invest the same amount in 9 stocks each having a total return of 5% per year, your total return in 5 years will be 27.6%. If you add a ten bagger to the mix, your total return increases to 115% or 16.5% per year.

Although our daughter didn’t have any ten baggers, her portfolio benefited from a similar effect. From 2006-2010, her three retail stocks had an annual average return of -1.6%. Apple, on the other hand, was almost a 4.5-bagger (its price at the end of 2010 was 4.4 times its price at the end of 2005). The addition of that one company to her portfolio increased her return from -1.6% to +8.2%!

Do Your Research

Once you’ve identified a company with an appealing product or service, it isn’t time to buy yet! Lynch suggests looking at the company’s financial statements and several financial metrics.  The importance of this step is illustrated by the price volatility observed in GameStop and other companies’ stocks in January 2020.  I’ll talk about a few of them here.

Percent of Sales

The first thing to check is whether the new “thing” is big enough to have an impact on the profitability of the company. To illustrate, let’s look at two companies that make widgets. Company A makes primarily widgets, so 90% of its sales is from widgets. Company B makes a lot of things. Only 5% of Company B’s sales is from widgets. A new thingamabob has been designed that will double the sales of widgets with no impact on the profit margin (percent of sales cost that turns into profit). Company A’s profit will increase by 90%, whereas Company B’s profit will increase by only 5%. Because stock prices are driven in large part by estimates of future profitability, you would expect that Company A’s stock price would increase much more if it added thingamabobs to its widgets than Company B’s stock price.

Future Earnings

For many reasons identified by Lynch, stock prices don’t always move in line with earnings. Nonetheless, the more that earnings increase, the more that the stock price is likely to go up. Lynch suggests that you make sure you understand how a company plans to grow its earnings.

Ways to Increase Earnings

He identifies the following five ways for increasing earnings:

  • Reduce costs
  • Raise prices
  • Expand into new markets
  • Sell more product to existing markets
  • Revitalize, close or otherwise dispose of losing operations

If you plan to hold the company’s stock for a fairly short time, any of these ways of increasing earnings could provide nice returns. I tend to buy and hold my stocks for a long time (over 25 years in several cases), so I prefer companies whose growth strategies include expanding into new markets or selling more product to existing markets. The other three approaches tend to produce one-time increases to earnings that can’t be replicated over and over again.

Expanding into New Markets

One of the most common ways existing companies expand into new markets is through acquiring other companies. There are many companies that have grown very successfully through acquisition.

Berkshire Hathaway

One such company is Berkshire Hathaway, whose chairman is Warren Buffett. Over the past 40 years, Berkshire Hathaway has purchased such companies as Burlington Northern, Dairy Queen, and Fruit of the Loom, among others. The graph below shows the value of $1 invested in Berkshire Hathaway (stock symbol: BRK-A) since 1980 as compared to a $1 investment in the S&P 500.[1]

Comparison of S&P 500 and BRK appreciation

Clearly, Berkshire Hathaway has been highly successful in its acquisition strategy.

General Electric

Other companies have been less successful with their expansion and acquisition strategies. One such example is General Electric (GE). When I was young, I thought of GE as primarily manufacturing appliances and light bulbs. The graph below shows how the value of $1 invested in GE increased between 1962 and 2000 as compared to the same investment in the S&P 500.

Comparison of GE and S&P 500 appreciation from 1962 to 1999

Clearly, over that time frame, GE was very successful. In fact, my in-laws bought a few shares of GE for each of my kids when they were young (in the 1990s) because it was considered such a great, stable company.

Over the past 20 years, it has expanded its operations into loans, insurance and medical products and related services.   In hindsight, it appears that GE wasn’t sufficiently familiar with all of the business it entered or acquired.  It also used a lot of debt to finance its acquisitions and expansions.  As a result, its stock price suffered. The graph below shows how much a $1 investment in GE’s stock has changed over the past 20 years as compared to the S&P 500.[2]

Comparison of S&P 500 and GE price appreciation since 2000


From 2000 to late 2019, Berkshire Hathaway’s stock price went up by a factor of almost 5 while GE’s stock price decreased by more than 50%. Interestingly, GE’s new CEO (hired in 2018) announced a transformation plan that includes selling several of its businesses, allowing it to focus primarily on “safely delivering people where they need to go; powering homes, schools, hospitals, and businesses; and offering more precise diagnostics and care when patients need it most.”[3]

You’ll want to make sure you understand which new markets a company plans to enter, think about whether management has sufficient experience or expertise to expand successfully and understand how much debt the company is using to finance these expansions.

P/E Ratio

The ratio of the price of a company’s stock to its annual earnings is known as the P/E ratio. A P/E ratio is one way to measure whether a company’s stock price is expensive. A rule of thumb mentioned by Lynch is that a stock is reasonably priced when its P/E is about the same as its future earnings growth rate. He acknowledges the important point that the future earnings growth rate isn’t ever known and that lots of experts spend a lot of time incorrectly estimating the earnings growth rate.

Nonetheless, you can at least look to see if a company’s P/E ratio is the right order of magnitude. For example, if you are looking at a company that slowly expands its sales in its current market, its earnings growth rate might be 5% to 7%. If that company’s P/E were 25, you’d know it was expensive. If the P/E ratio were 2, it might be an attractive buy. So, it isn’t necessarily important to know whether the company’s earnings growth rate is going to 5% or 7%, but rather whether it is likely to be 5% or 25%.

Schwab has an entire post on using the P/E ratio as part of stock analyses.

Debt/Equity Ratio

Companies can get cash from three sources to finance their operations – equity (selling shares of stock), borrowing and profits. Long-term debt is the amount of money that a company has borrowed, other than to meet short-term cash needs (such as through a line of credit). Long-term debt frequently is in the form of bank loans or bonds issued by the company.

The ratio of the amount of long-term debt to equity (the difference between assets and liabilities which is an estimate of the value of the company to the stockholders) is known as the debt-to-equity ratio. There are both advantages and disadvantages to a high debt-to-equity ratio. Let’s look at an example.

Company A has $100 of profit before interest (and ignoring taxes) and $60 of interest payments, for net income of $40 ($100 – $60). Company B is the same as Company A but it has no long-term debt, so its net income is $100. If profit before interest went down by 40%, Company B’s net income would also decrease by 40% to $60. Company A’s net income, though would go from $40 to $0 or a 100% decrease. The primary disadvantage of debt is that it magnifies the impact of bad news. The 40% decrease in profit before interest turned into a 100% decrease in net income for Company A with all its debt. This magnification is called leverage or debt leverage.

On the plus side, increases in profits are also magnified. If Company A’s profit before interest increased by 50% to $150, its net income would increase by $50 to $90. The percentage increase in net income in this case is +125% as compared to the +50% increase in Company B’s net income.

Other Metrics

Lynch discusses several other things to check on a company’s financial statements before making an investment.   I talk about one of them, the dividend payout ratio, in my post on investing for dividends. I’ll let you read One Up on Wall Street to learn more about the other metrics and to get Lynch’s views and examples on the ones I’ve discussed here.

Create Your Story

For every company in which you invest, Lynch recommends that you create a story. There are two parts to the story.

Two-Minute Story

First, you should be able to describe the company’s business in what I would call an “elevator speech.” That is, it is important to be able to explain to someone else what the company does and why you think it will grow all in two minutes. If your explanation takes longer, it is likely an indication that the company’s business is too complex to benefit from a trend you observe or you don’t fully understand its business.

Additional Details

Second, you’ll want to have a story for yourself that includes a bit more detail about what you think will cause earnings (and hopefully therefore the stock price) to increase. Is it one of the one-time actions, such as cutting expenses or increases prices, or a longer-term plan to increase sales?

If the former, you’ll want to monitor the progress of those actions. Are they being implemented? Have they been effective? Has their full impact been reflected in earnings and/or the stock price? If the company’s plans don’t come to fruition or they were successful and reflected in earnings, you’ll want to evaluate whether you want to continue to own the company’s stock or whether it is time to sell it.

If the latter, you’ll want to understand what steps the company plans to take to increase sales. You can then monitor the company’s progress towards those plans. If it doesn’t appear to be on track, it might be time to considering selling the stock and investing in another company.

Final Thoughts

As I re-read Lynch’s book in preparation for writing this post, I was reminded how many useful tidbits he provides in it. Interspersed among the anecdotes are lots of lists, checklists and guidance on everything from identifying a company in which to possibly invest to determining the company’s growth pattern to reading financials to designing your portfolio. If you plan to start picking stocks in individual companies, I highly recommend One Up on Wall Street by Peter Lynch as a good first book on the topic. If you are looking for a shorter source for similar information, I suggest this post from Schwab.



[1] Taken from Yahoo Finance, November 8, 2019.

[2] Taken from Yahoo Finance on November 8, 2019

[3] General Electric 2008 Annual Report, https://www.ge.com/investor-relations/sites/default/files/GE_AR18.pdf, p3.

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How to Budget Step 9 – Monitoring your Budget

How to Budget Step 9 – Monitoring your Budget

You may have thought you were done when you created and balanced your budget.  However, there is one very important step left in the budgeting process – making sure you are living within the guidelines set by your budget, i.e., monitoring your budget.  That is, are you earning as much income as you planned? Are you limiting your expenses to the amounts in your budget?  Did you put aside the savings you included in your budget, whether for expenses you pay infrequently, for retirement or something in between?

In this post, I’ll tell you how to use a new, budget-monitoring worksheet to compare your budget with your actual income and expenses.

Entering Your Budget

Since the purpose of the spreadsheet is to compare your actual expenses with your budget, the first thing to do is to enter your budget.  Most people find it easiest to monitor their budget on a monthly basis, even if they created an annual budget.  If you created an annual budget, you’ll want to divide all of the values in your budget by 12.

Once you have your monthly budget, you’ll enter it on the Budget Monitoring tab of the budget-monitoring spreadsheet at the link below.  Note that this spreadsheet is different from the one you used to track your expenses and create your budget, though many aspects of it will work the same as the budget creation spreadsheet (named Budget Template).

Enter Your Category Names

To enter your budget, enter the names of the categories from your budget in Column A starting in Row 8. Here are three different ways you can input your category names:

      1. Type the names directly into Column A.
      2. Use Excel’s copy and paste features to copy them from your Budget Template spreadsheet.

    a. On the Budget tab in your Budget Template spreadsheet, highlight all of your category names by putting your cursor on cell A11, holding down the shift key and moving the down arrow until all of them are highlighted. Let go of the shift key.

    b. Hold down the Ctrl key while you hit C or hit the copy button if you have one.

    c. Go to the Budget Comparison tab of the monitoring spreadsheet.

    d. Put your cursor in A8.

    e. Hold down the Alt key while you hit E, S and V or hit the paste-values button if you have one. If you just use a regular paste button, you will get errors because the cells from which you are copying have formulas in them.

    3. Link your monitoring spreadsheet to your Budget Template spreadsheet.

    a. Put your cursor in A8 of the Budget Comparison tab of your Budget Monitoring spreadsheet.

    b. Hit the equal sign on your keyboard.

    c. Go to the Budget Template spreadsheet.

    d. Go to the Budget tab.

    e. Put your cursor in A11.

    f. Hit Enter.

    g. Excel should return you to cell A8 of your Budget Monitoring spreadsheet.

    h. Hit the F2 (edit) key.

    i. Hit the F4 key 3 times. Hit Enter. There should now be no $ in the cell reference.

    j. Copy the formula in A8 and paste it in as many cells in Column A as needed until all of your category names appear.

When you enter the category names, make sure that the row with the total amount of income is called “Total Income,” the row with the expense total is called “Total Expenses,” and the difference between those two values is called “Grand Total.”

Enter Your Budget Amounts

Next, enter the monthly budget amounts in Column B next to each of the category names in Column A. You can use any of the three approaches described above for the category names. If you have an annual budget, you’ll need to divided the values by 12 before copying them if you use the second approach or add “/12” (without the quotes) in step (i) before you hit enter if you use the third approach.

Entering Your Actual Income and Expenses

You can enter your actual income and expenses using the same instructions as were used for entering them in the Budget Template spreadsheet.  See my posts on tracking expenses and paychecks and income for more details or review the instructions at the top of each tab.  Be sure to use the same category names as you used in your budget so all of your income and expenses will be included in the Actual column on the Budget Comparison tab.

For monitoring your actual income and expenses, you don’t need to enter the number of times per year you receive each type of income or pay each bill since your goal is compare what you actually received and paid with your budget.

Options for Expenses You Don’t Pay Monthly

Here are three different ways to monitor expenses that you don’t pay monthly:

  1. Enter them in the Monitoring Spreadsheet as you pay them and keep them in mind as known variances from your budget each month. This approach is the easiest to implement but also the least helpful for comparing your actual expenses to your budget.
  2. Adjust the budget amounts to reflect the amount of those expenses you expect to pay in each month. For example, if you pay your car insurance bill four times a year in March, June, September and December, you would
    • take your budget amount
    • adjust it to a full year if you budgeted on a monthly basis by multiplying by 12
    • divide the annual amount by 4
    • include the result in your budget for March, June, September and December
    • put 0 in your budget column in all other months

This approach is a little more complicated to implement, but will make comparing actual expenses with your budget much easier.

  1. Add an expense transaction every month equal to 1/12thof your annual expense on the Bank Transactions, Cash Transactions or Credit Card Transactions tab. In the months in which you actually make the payment, you’ll enter 1/12th of your actual annual expense.  If the total of the amounts you set aside in previous months differs from the amount you actually pay, you’ll need to include this difference in the actual payment amount in the month you make the payment. This approach is equivalent to moving money from your checking account to your savings account in every month you don’t have this expense and moving it back to your checking account in the month in which you pay the expense.

You can also use any one of the above approaches for income you don’t receive monthly.  If you use the third approach, you’ll put 1/12th of your actual annual income on the Income tab.

Monitoring Your Budget – What Happens When Your Actual Isn’t as Good as Your Budget

There are many reasons why your actual income and expenses might look worse than your budget.  You may have been planning to work overtime or get a second job to increase your income.  Those lifestyle changes can be challenging, so you might not have done them.

More likely, you spent more than you budgeted, either due to an emergency, an impulse purchase or difficulty in breaking long-standing habits.  Emergencies happen to everyone.  If possible, you’ll want to include building or re-building your emergency savings (see this post for more on that topic) in your budget. While overspending your budget can be problematic, especially if you do it continuously, don’t be too hard on yourself. Changing your spending habits is really hard.

A Few More Words about Budget

Congratulations!  You made it through the entire budgeting process. As I said in my first post on budgeting, staying on a budget is like being on a diet.  Just as every calorie counts, so does every dollar spent.  Sticking to your budget will increase the likelihood you will meet your financial goals, so do your best!

Download Budgeting Monitoring Spreadsheet Here

How to Budget Step 8 – Refining your Budget

How to Budget Step 8 – Refining your Budget

Very few people have a balanced budget on the first try.  This week, I’ll talk about how to refine your preliminary budget if it isn’t in balance.  I have been very fortunate in that it has been a long time since I found it challenging