Step 5: Making Life Energy Visible

 

How do I create a wall chart?

 

Following is an approach to the wall chart that you may find useful. (Courtesy of Gregg Raymond and Penny Yunuba.)

 

Overview of lines to be created:

For A 2-Line Wall Chart	For A 4-Line Wall Chart
1. Total Income	1. Total Income
2. Total Expenses	2. Total Expenses
	3. Projected Income after Financial Independence
	4. Projected Expenses after Financial Independence

 

Suggestions:

1. Look at the general instructions on how to create a wall chart in Your Money Or Your Life on pages 146-148.
2. To create a 4-Line Wall Chart, complete the Nest Egg Work Sheet before calculating your projected income.
3. The following information may be helpful in deciding what to include in each of the lines:

 

Total Income include:

 

• Salary/wages
• Child support
• Alimony
• Social Security
• Rental income
• Pension income
• Gifts /inheritances
• Income tax refunds
• Refunds
• Cash prizes
• Winnings from gambling
• Employer's contribution to pension fund
• Dividend income
• Capital gains income
• Interest income on savings accounts
• Money found
• Repaid loans
• Interest income on investments
• Bonuses
• Mail-in rebates (when received)
• Proceeds from garage sales
• Proceeds from sale of arts, crafts, etc.

 

Total Expenses include:

 

• Taxes
• Mortgage payments (both principle and interest): See "Special Cases" below
• Life insurance: See "Special Cases" below

 

Do not include savings. Although it may not be clear in Your Money Or Your Life, do not treat savings as an expense. Savings are reflected in the space between the Total Income and the Total Expense lines on your wall chart.

 

Projected Income include:

 

• Social Security income
• Pension income
• Projected rental income
• Income from investments

 

Directions for calculating your Projected Income (estimate your Net Nest Egg using the Nest Egg worksheet):

1. Choose a rate of return that you expect to get on your investments. For example, bonds 5%; stocks/mutual funds 10%. (Express 5% as .05 and 10% as .10).
2. Take the percent you anticipate, and divide it by 12 to get the projected return per month.
3. Multiply your projected return per month by your Net Nest Egg to get your projected investment income per month.
4. Add this income to all of the other projected sources of income for your total Projected Income per month.

 

Projected Expenses include:

• Projected taxes
• Expenses that probably will increase after you leave your paid job (e.g. health insurance)
• Expenses that probably will decrease after you leave your paid job (e.g. work clothes and commuting costs)

 

Do not include: Any on-going savings. Loan payments for any assets that you will be selling to help you achieve FI.

 

Directions for calculating your total projected expenses:

1. Non-tax portion

               a. Look through your current Total Expenses, excluding taxes and quantifying likely increases and decreases as reflected in your After FI column

                in your monthly Fulfillment/Alignment questions.

               b. Be sure to look at real hourly wage calculations when doing this step to see that all the perks and all the expenses are considered in your

                Projected Expenses.

     2.  Tax Portion

             a. Look at your Projected Income (post FI) and guestimate your combined federal and state tax rate.

             b. Multiply the tax rate by your Projected Income to get your monthly projected tax expensess

     3.  To calculate your total monthly Projected Expenses, add the non-tax portion to the tax portion.

 

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Should mortgages and life insurance policies be counted as expenses or investments?

 

 

We consider mortgage payments and life insurance policies as expenses. Some people consider their life insurance policy and their house as investments and do not want to count them as expenses. However, we consider them as expenses because they have to be paid each month, whereas pure savings are completely discretionary. Following are additional suggestions for listing mortgage payments and life insurance premiums: (Courtesy of Gregg Raymond and Penny Yunuba.)

 

Mortgage Payments

If you plan to retain your house when you retire

1. List the principle and interest under Total Expenses, and include ongoing payments under Projected Expenses.
2. Do not list the value of your house as usable for FI on your Nest Egg Work Sheet.

If you plan to sell your house and use the money to live on when you retire

1. Include the mortgage payment (principle and interest) as an expense.
2. Under Projected Expenses, include your best estimate of your future ongoing housing costs.
3. If you will be buying a less expensive home with some of the profit from selling your current home, list your best estimate of your down payment (or full payment) for this new home under Adjustments on page 4 of the Nest Egg Work Sheet. Also, include any projected mortgage payments under Projected Expenses.
4. Adjust your Nest Egg calculation periodically to reflect changes in the market value of your house.

 

Life Insurance

If you don't plan to cash in your policy

1. Include your premiums under your Total Expenses.
2. Include your premiums under Projected Expenses.

If you are using your life insurance policy as a tax-sheltered investment and plan to sell it to generate part of your investment income, you can

1. Include your premiums under Total Expenses.
2. Remove it from Projected Expenses since you will be cashing it in and no longer paying premiums after financial independence.
3. Include the estimated cash value of this policy in your Nest Egg calculation each month.

 

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What other wall chart options are there?

 

I have found that people following Your Money Or Your Life have devised ingenious ways to display on their wall charts information that they found helpful to them specifically. Maybe one will be helpful to you too!

 

The Standard Model -- 3 Lines

1. Total Income

    

2. Total Expenses (including taxes)

    

3. Hypothetical investment income using the current 30-year Treasury bill rate

 

Other Possibilities

Income Line

Modification of Income Line: Total income including cost of benefits one would retain if financially independent

Additional Income Lines:

 

1. Total income minus obvious kids' income (i.e. if your children receive Social Security survivors' benefits)

    

2. Total income for each adult in the family

    

3. Total income minus gifts from parents

    

4. Child support and other unearned income

 

 

Expense Line

Modifications of Expenses Line:

 

1. Total expenses minus savings

    

2. Total expenses excluding taxes

Additional Expenses Line: Total expenses minus taxes and non-reimbursable business expenses

 

Investment Line

Modifications of Investment Line:

 

1. Total investments always multiplied by 7.5%, not by the current 30-year Treasury bill rate

    

2. Investment income calculated at 7.5% * net worth. (Assumes 10% average yield on investments but 25% taxes on the yield.)

 

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How do I track debt?

 

Following are two suggestions:

1. Create a chart attached to and positioned under your regular chart. (The 0 horizontal line at the bottom of the regular chart serves as the 0 horizontal line at the top of the debt chart.) This can be used for credit card debt or total debt, including car loans, mortgages, college loans, etc.
2. Keep a separate chart on the wall to track credit card debt.

 

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Should I report my total income on the chart if I have savings taken out of it in advance?

 

Consider making a separate chart for net worth; similarly, in your subcategories you might separately record principle and interest.

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How do I handle quarterly payments to the government for taxes without having enormous quarterly spikes?

 

Establish a separate bank account, and pay equal weekly sums into it in advance.

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