Comments and Observations on 2010 Budget and Lakecliffe Drive

Here's another communication on budgets taken from my archives. I sent this to the president of the association on January 29, 2010. The subject was "Comments and observations on the budget" which was the budget that had been sent to owners such as myself.

It includes my opinion of the situation with Lakecliffe Drive. I had been very vocal in presenting my opinion that there was evidence this street would fail prematurely. This email was one in a series of my articulation of the problems with this street. I had numerous conversations about this as an owner and not only at HOA meetings but also with various members of the board, management and a former Architectural Director. I was also of the opinion that the near term costs of this street, the roofing project and driveways would counter the prevailing argument and beliefs of some owners including board members that "Our fees are unnecessarily high." The numbers and my personal projections, made with the public information of the association had indicated that it would be necessary to either reduce expenditures via something like an "austerity program" or simply build budget shortfalls. A consequence of shortfalls would be an inability to complete these projects or there would be the necessity of special assessments. A board member questioned my conclusions and asked "Where do you get your inside information?" All of my information was in the public domain and published by the HOA or gleaned from my notes takes during the open session of the HOA meetings, which I attended regularly.

On the subject of Lakecliffe Drive, no one can ever say I didn't tell them so. As I frequently state, my crystal ball isn't perfect and so I am cautious about making predictions. In 2008 I was comfortable with my analysis because of the visible evidence. With annual patching the street has survived for four years beyond the January email. Replacement will begin 6 years earlier than the earliest predicted date used by our boards and management.

Interestingly, the July 1, 2010 "Reserve Study and Analysis" commissioned by the board at the time indicated that the condition of the streets was "good" and with an "Effective useful life" of 20 years. Using the most recent repaving date, the streets allegedly had a remaining useful life of 10 years with replacement not to occur until 2021-2022, with recommended maintenance every 5 years. That expert dropped the ball or told the board what they wanted to hear. You can choose. For its part, the board at the time expended no funds on street maintenance, although none had been done for 10 years but was recommended at 5 year intervals. At this time, some sections of the street are beyond salvage and spending money to repair rather than replace would not be a good use of association funds.

The estimated cost to replace the streets in the HOA? Oh, about a half-million dollars. Let's assume we can nurse some of these streets for another 5 years. If so the cost to owners for early failure? About $125,000. That would require an additional reserve contribution of about $25,000 per year, or $78 higher annual fees for each owner. These problems do add up. The good news? The association does have current reserves for asphalt.

Armed with the same public information I had in the fall of 2009 as well as my additional analysis of the street and the budgets the board voted for a 0% fee increase, as I recall. The highlights in the following are mine. At the time I wrote the email I did not have the data of the reserve study. The guesstimate for the replacement of the failing section (Lakecliffe from Salisbury to Briarcliffe) was entirely mine. I assumed that 90% of the curbs were okay, but that the asphalt and base would have to be removed and replaced.

"January 29, 2010
Hi [Madam President]:

Regarding the resale information, a local Realtor provides me with this information on an annual basis. I’ll forward it to you, as it may save you some time. 

On the finances at BLMH, the budgetary spreadsheet indicates that certain “Building Maintenance” items were greater than budgeted in 2009. It was my understanding that funds were expended as part of the roofing and driveway projects, i.e. additional concrete, relocation of gutters, addition of “eyebrow” at entrances, special landscaping to accommodate the drives and gutters, etc. The funds expended for these items were to have been allocated against reserves. Are they actually in “Building Maintenance” for “2009 Actual”? If they are, then the amount for “Building Maintenance” is overstated. Wouldn’t it be better to have a separate category for “annual reserve expenditures”. These are extraordinary and are not a part of annual maintenance. If they are included in ‘maintenance’ the expenditures skew the data, and imply maintenance is higher than it actually is.

As you might be aware, this association has a history of underfunding reserves. I am referring to the entire history of this association. For the period 1978 until roughly 2000 the amounts added annually to reserves were [in my opinion] inadequate. I’ve done studies of this, and have sent letters to management and the board as well as posted on my blog. With the retention of [a new management company in 1998], the board of managers was made aware of this very serious problem and began ramping up reserves in 2000. I have been a unit owner for about 10 years and I am very well acquainted with this problem. Reserves at the time of my purchase were about $300 per unit. To put this in perspective, we are today collecting fees of $330,000 annually for reserves, or $982 per unit. This association presently collects three times more each year than it had managed to accumulate [at the end of] the 20 years prior to 2000!

Here is a link to a website article which includes both some information about “fiduciary duties” as they apply to the board of this association, which is another problem area. It includes a graphic detailing the shortfall in reserves, which accumulated during the period 1983 to 1998. It’s about $1.3 million dollars! Unit owners today are paying higher fees because this association is making up this shortfall. The fee shortfall “peaked” in 2000 and turned around. The association “caught up” and began pulling ahead in 2009. This is shown on the second graph on the website article. The link to the site is:

New Window> http://tinyurl.com/ykbn9wh 

If you are interested in more information on the association fee history, go to:

New Window> http://tinyurl.com/yb8rqbt 

I have another post and this provides more details of how this association achieved this extraordinary shortfall:

New Window> http://tinyurl.com/yb5re8f 

Finally, I have posted several articles on the topic of “Reserves” for this association. They are all here: [Note: the following link will open a complete series of posts on a specific topic. Scroll down to see the earlier posts]:

http://tinyurl.com/yckt2op

As you know, there are two areas of finances in the budget. These are 1) Annual maintenance and operations and 2) Reserves. The proposed budget will hold these constant. That means that certain repairs may not be accomplished when necessary as the reserves may not be available. To hold fees constant means either reducing the amount expended for annual operations and maintenance, or reducing the amount for reserves. There are no alternatives. Does this board have the intention to investigate methods to reduce common area maintenance? Items for “grounds” and “trees” are $182,000.

It is my understanding that “sealcoating” is in question. These funds could be applied to work for the preservation of Lakecliffe. There is a serious problem with that street and it is deteriorating rapidly. If steps are not take to reverse this trend, the association may be faced with an expenditure in excess of $100,000 dollars over the next 5 years.

Finally, I was disappointed to see no forward projection for the roofing and driveway projects. We know the cost per roof and we know the cost per square foot of driveway. Of course, these may change but they are good starting points. The association should know the expenditure year by year to replace these in a timely manner. Why was this not included in the budget information?

Thank you."

Budgeting 2012 - Personal Budget - Part 4

This is number 4 in a series of budgeting.


Why Do This or, the 30 second Sound Bite
Before proceeding, why would anyone budget? Well, financial peace of mind is one reason. Another reason is to have the cash to get the things we are really committed to in life. Another is the need for some savings. Everyone should have an "emergency fund." However, it is not possible to accumulate wealth and that includes savings for an emergency fund unless one is willing to budget.

So a first step to budgeting might be making the decision to save some money for a rainy day, or for that emergency fund. What is an emergency fund and why have one? In a nutshell, it's a savings readily available to cover six to nine months of living expenses. It might be larger if you are planning a large purchase in the near future or if you have a concern about job security, or anticipate large bills in the future. Large bills might include medical expenses on the horizon.

Of course, if one doesn't have a budget, then it becomes difficult to predict what those six to nine months of living expenses might be. Sure, you could say it's six to nine months of income and if you spend every dollar you get, that might be the way to go about it. That's the approach some people used in 2008 when they lost their jobs. There were stories in the media about people who were jobless, but continued their life style including the "extras" and spent their savings and unemployment compensation. When that ran out, they lost their homes.

So it might be wiser to determine what your "living expenses" really are. That is, separate the necessities from the discretionary items. A budget will assist you. What you do after that is your business.

I view having a budget as one of those "ignorance isn't bliss" moments. Sure, knowing what one's finances are will crimp one's life style and interfere with the accumulation of trinkets and "bling." However, it can also empower one to make good choices.

Why Do This or,  the Scary Reason to Budget
There is a book out about debt. Debt is a way to acquire things we cannot otherwise own. It was written by Louis Hyman and the book is "Borrow: The American Way of Debt." Mr. Hyman is a former McKinsey consultant, a Harvard Ph.D. and a Cornell University professor. He was quoted recently in the Wall Street Journal in an article entitled "Debt, The American Way." In the article it was stated that the "American Way" is to "Whip out your credit card, if you've still got one, and enjoy it while it lasts." Mr. Hyman's comment was: "We all know it's going to happen. Interest rates have to go up, and when they do—Kablooey!"  The article stated that "Kablooey" is the "precise technical term for where our debt-addicted economy is headed."

I suppose the point of the article was "budget, or perish." Of course, there are those who will scoff at this. Interest rates will go up? Never! These are the same people who also said "home values will go up, and up, and up, forever!" They also talked about "free credit." If you are still listening to them, or if you have decided you can do whatever it is you wish in life by just pulling out those credit cards, then there is no need to continue reading further. You have already made up your mind. However, for the rest of us who don't currently have a budget, or aren't satisfied with the one we've got, this series on budgeting is for us!

Where to Begin Budgeting and How Much Time Will it Take?
It will take some time to budget, but not all that much once you get organized. There are different methods, including a notebook, or a computer spreadsheet, or specialized software, or a combination of these. I prefer a small pocket notepad for tracking my cash purchases, and a computer spreadsheet and Quicken software. Doing this will take about 15 minutes a day, but when beginning the first budget, it will take a bit more time.

Where to begin?  First, assemble all of the bills and make a brief list by category (Utilities, Condo Fees, Gasoline, Automobile Maintenance, Groceries, Household, Dining Out, Entertainment, etc.). Make a second list using predictive information; in other words, estimates.

Doing a budget requires integrity, rigor and honesty. Skipping some information or categories because they make us uncomfortable will sabotage the budget. Deliberately understating the budget will also invalidate it. The purpose of creating a budget is to control one's finances. It's a tool to support and empower us in making financial decisions. In the USA, which is a consumer society, ALL decisions involve the allocation of time or money, or both. So budgeting is vital.

Without budgeting, small financial changes can, over time, accrue and grow into large ones. A budget provides a means to see those changes by comparing actual expenses to predicted expenses. That was the point of my post on gasoline prices. It's amazing how a change of 10 or 20 cents a gallon can add up and inflict real damage on a financial plan. So too with other utilities, groceries, insurance and so on.

I said it takes some honesty with one's self when creating and maintaining a budget. It is intellectually dishonest to pick and choose information to support one's assertions, or to support one's position. Honesty and a willingness to ask intelligent questions is a requirement, as is doing the necessary homework and preparation.

The Tools
As a starting point, I prefer a spreadsheet on a personal computer; but I'm computer literate and an experienced user. A spreadsheet allows me to use formulas to add the daily amounts spent in each category, for the purpose of showing monthly expenses. Alternately, this can be done with paper and pencil and a calculator. A third approach is software such as Quicken. It's better in the long run, but has a "learning curve."

Whatever method you choose, use one that will let you begin quickly and produce results in the first week. You can always move from paper to computer at some date in the future.

If you are interested in using your PC and have no spreadsheet experience, you can get a book at the library but I suggest you consider an adult education class at a nearby community college. If you get stuck it's very helpful to have a teacher a few feet away.

Remember that the goal is to succeed. So choose a method that will allow you to do so. You can always begin with paper, upgrade to a spreadsheet and then to Quicken software. If you decided to use Quicken, then you should also figure out how to back up a copy of your data to a USB flash memory or external hard drive. If you don't the day will come when you will experience a computer failure, and you will lose everything!


The Two Parts of Budgeting - Estimating Expenses and Tracking Actual Spending
In a nutshell we want to estimate how much we'll spend in the coming year, and compare actual spending to our estimate, and we want to do that weekly so we can make adjustments and corrections to our spending. In a budget, there will be things that don't quite fall into line with our expectations. However, we have a lot of control, more than we might realize. We can adjust our energy use by dialing the wall thermostat up or down. We can control which lights are on and use CFL bulbs. We can make daily decisions about eating out or in, and control gasoline usage by combining driving trips. These are examples. You can certainly think of additional ways to control your costs.

By constructing a budget, we are making a decision to control our spending and adjust our way of life to achieve a goal.

By tracking our expenses, we begin a means of seeing the consequences of changes in our spending. In other words, if we begin to exercise some control over our spending, it will show up in our spending and our monthly budget summaries.

Short Term and Longer Term Budgeting - Creating a Starting Point - Step One
Short term budgeting is as easy as figuring how much pocket money I'll need this week, or this month. Longer term budgeting involves planning for years and decades. It's difficult to do it all at once, so I encourage people to start with an annual budget and expand from there. The goal is to succeed, and to avoid being overwhelmed.

To prepare a budget requires information. That means knowing how much money I am spending each month. It also means knowing the specifics of bills that arrive annually or semi-annually.

If I got out of bed this morning and decided "Gee, this would be a great day to do a budget" and I'd never done one before, the first task would be to collect all of those paid bills, cash receipts and bank statements that I'd put in a box under the desk, and also scoop up all of the unpaid bills. So what I'm doing is getting an idea of past history.

Of course, if I spend a lot of cash, that complicates my life, because I might say "According to my bank statements I took $382 out of the ATM cash machine last month."  That's not too useful. Where did I spend that money? If I did that for a year, I'd spend $4,584 dollars out of pocket. That's a lot of cash, and according to experts, a lot of people do budget this way. It's given Suzie Orman and other financial advisers and experts a purpose in life and a nice living, too!

If I were a large cash spender (and I'm not), then the first thing I might have to do is get a small pocket size notepad and begin writing down my daily purchases.

Step Two
After deciding which approach to use; paper or computer, I'd construct a list of basic spending categories. Here is what a basic list might look like:

1. Mortgage Payments
2. Condo Fees
3. Taxes (Real Estate, etc.)
4. Utilities (electricity and natural gas)
5. Automobile - regular expense (fuel, oil)
6. Automobile - other expense (tires, repairs, etc.)
7. Insurance - required (condominium owner, health care, automobile)
8. Insurance - optional (long term care, life insurance, etc. )
9. Medical expenses (Doctor, Dental, Prescription purchases)
10. Charities and Donations
11. Food and grocery (each week, write down the check number, date, amount on a pad of paper and put it in the folder; if cash, then write "cash" instead of the check number).
12. Entertainment (each week, or each night, write down the check number, date, amount and what for; for example, "video rental," "Neighbors Club outing," etc.
13. Miscellaneous (anything else)
14. Debt (make a list of all credit card balances, auto loans).
15. Debt Payments (make a list of all credit card monthly payments, etc.)
16. Discretionary (contracts for cell phones or cable/satellite TV, Internet service, landline phone). 
17. Other folders might include "School," "Children's Activities," "Clothing" and so on. The better the categories and distinctions you create, the more useful the information will be.
18. Don't get too carried away!

Step Three

If you decide to do this on paper, you'll need two notebooks and an "estimate" worksheet. The estimate worksheet will list each category next to each you will put in an estimated amount for the entire year. How to do that? Take one month's bills and multiply by 12 if you have no other way. However, electricity will be higher in summer if you have air conditioning and natural gas bills will be higher in winter if you use that for heat. So if you can, go to your checkbook and use some "real" numbers from summer and from winter as a guide. The "estimate" will be compared to your actual spending. After a year you will have a good idea of what a real annual budget estimate will look like. The first year will be a guess, but as each month passes you'll have more information and a better idea of reality. With that information you'll have opportunities for more choices.

The two notebooks will be a "budget workbook" and a "scratchpad." The scratchpad is for tracking weekly spending. The budget workbook is for comparing that spending to the estimated budget with one page per month. Summing the pages will provide an annual budget and annual actual expenditure amounts, per category.  These can be compared to see you are doing.

Using the "Scratchpad"

In the "scratchpad" put the current date for the week on the top. You will use one page per week. If you prefer to use Sunday as the first day, then use that date. For example, Sunday February 19. Then write the list of categories from top to bottom.

On the scratchpad you will keep track of your expenses for each week. 

Across the top you will have headings for nine columns. The first will have the category, and it will be followed by the seven days of the week and an "Amount" column. For example, your heading might look like:

Category--Sunday--Monday--Tuesday--Wednesday--Thursday--Friday--Saturday--Amount

You can also list the month and date.  

Then in the Categories column, list from top to bottom, the categories from "Step Two," beginning with "Mortgage Payment."

At the end of each day, take a few minutes to put the amounts spent each day by category. You can list check numbers and amounts, or credit card name and amounts, or cash.  A calculator will be helpful.

At the end of the week, add up the amount spent for each category for the entire week and put that in the "Amount" column. Do this for each category. This information will be copied to the Budget Notebook.

Then turn to the next page in the scratchpad and make a new page for the coming week, and repeat all of the steps for the entire week. 

Using the Budget Notebook

In the "Budget" workbook also make a list of categories. This page will be for the current month, and you will need 12 pages for a year. If you prefer, you can use more pages, but some bills come in once a month and it is helpful to have all of this information on a single page. If possible use grid or columnar paper, or use a ruler to make vertical lines so you have space for five weeks on each page. 

Across the top you will have seven rows. The first will have the category, and it will be followed by five weeks (and partial weeks) of the month and an "Amount" column. For example, your heading might look like:

Category--February 1--February 5--February 12--February 19--February 26--Amount

The first week to fall in February is a short week, and so is the last; both are four days in length. 

Then list the categories from "Step Two." from top to bottom.

At the end of the week, after completing the "Scratchpad" take the amount for each category and put it in the  column for the week currently ending.

At the end of the month, add up the amounts spent for each category and put it in the "Amount" column.

You will then know how much you spent per category for the entire month. You should know how much for dining out, grocery, gasoline, utilities, mortgage, etc. 

Dealing with Cash

Cash can be difficult, in particular if you dip into the ATM machine regularly. The thing to do is to get started. How? Create an envelope for each cash category. Put a name on each one and at the end of the day, take the receipts out of your purse or wallet and put them into the envelope. At the end of the week, add up the bills in each envelope and put that amount on the current page of the "scratchpad" for each category. 

Tricks and Tips to Simplify Budgeting
Don't overdue it. Don't make this task so arduous or difficult that it become more of a chore than is necessary. Attempt to come up with a list of categories that will allow to to seperate each days bills and spending in about 15 minutes.

Tricks include using a different credit card or debit card for different types of purchases. I am not advocating spending more. I am suggesting that if one has several credit and/or debit cards, that they be used for different types of purchases. The statements then become categorized records, and this greatly simplifies certain kinds of record keeping. For example:

1. Restaurants = US Bank Credit Card
2. Grocery = Discover Credit Card
3. Vehicle and Gasoline = CitiBank Credit Card
4. Entertainment and Vacations = US Bank Debit Card
5. And so on!

Let me also say, I don't advocate getting more credit cards unless one has taken into account the possible consequences to one's credit score. Getting a new credit card may lower your score!

More Simplification Tricks for Budgeting
I use Quicken and I track all expenditures. That includes two "cash" accounts, one for me and one for my spouse. When we go to an ATM machine, the amount of cash we take is put into that cash account. We then put in the various ways we have spent that. Starbucks is "dining" and so is Alfie's. We attempt to minimize cash purchases, because cash seems to slip through the fingers. $1.99 for a Sunday Tribune, etc.

On the other hand, some people are dangerous with credit cards. If you feel the urge to spend if you have a credit card in your purse or wallet, then you should probably attempt to stick to cash purchases.

How Much is Tracked?
Using Quicken, every dollar spent is assigned a category; for example, "automobile fuel." It takes a few minutes each month to type in the check amounts, and the categories. Spreadsheets are another tool. So too are manual methods such as columnar writing pads and the trusty calculator! That's how my first budgets were prepared. I also save bills in folders marked "utilities," "general bills," "credit cards," and so on. This allows me to check fact and figures easily, should I need to find the original bill. Each bill has the check number, date of the check and the amount written on it. That too helps.

However, the difficult part is predicting cost increases. I use newspapers, the City of Wheaton website, and even the stuff included with utility bills, etc.

Can this process be simplified further? Yes it can. Many expenses are discretionary, which is to say, completely optional. Restaurants, for example. So it is useful to segregate expenses into "necessary," "adjustable," and "discretionary." Once I have my expenses in these different categories, I can then determine how much more I'll spend in 2012 than I did in 2011.

I can tell you exactly how much I spent on gasoline in 2011, and so on.

Notes:

1. I've tried just about every method of budgeting over the years. I currently use a version of Quicken which is supplemented with custom built spread sheets. My first spreadsheets were with "VisiCalc" and later I went to "Lotus 123" and a related product called "Symphony." For business I used these tools and Peachtree Accounting and later Quickbooks. I've always retained a professional accountant. 
2. I have had my share of financial difficulties. What I have learned is that what is important or significant is how we deal with these breakdowns when they occur. 
3. Budgeting provides a means for dealing with breakdowns. Can we avoid problems? Well, we can try, but "bad things happen to good people all the time" is the expression. 

Budgeting 2012 - Part 3

Barbie: "Math is hard, let's go shopping!" Ken: "Math is hard, let's go play basketball!"

The above comments were part of an article and commentary on why most Americans lack financial literacy. It may be at the heart of the problem individuals have with budgeting.

Dartmouth Professor and economist Annamaria Lusardi has been conducting studies of the financial literacy of Americans. She has prepared reports for the Social Security Administration. She has concluded that we have a problem. For example, many Americans can't calculate simple interest.

Here is an example question: "Let's say you have 100 dollars in a savings account. The account earns 5 percent interest per year. How much would you have in the account at the end of two years?" You can use a calculator if you wish.

Most did not get the answer correct to this and other similar questions in a financial study by Prof. Lusardi. "These are pretty dismal findings, considering the complexities of the calculations involved in many financial decisions."

Professor Lusardi has a blog for those who are interested in her perspective and general knowledge on the subject and what Dartmouth College is doing about it:  "Financial Literacy and Ignorance,  What Do People Actually Know About Personal Finance? Not Much It Seems..."

Clicking here will open a New Window> annalusardi.blogspot.com

Financial literacy programs may create more problems than they solve. How is that? According to Lauren Willis at Loyola Law School, financial literacy programs can increase confidence without improving ability! (Note 1).

So what's the solution? Let me quote Fool.com analyst Morgan Housel: "We do need more financial education that teaches basic numeracy, but that education should first and foremost teach the emotional constraints of finance. After all, it doesn't help to know what APR is unless also taught that bankers selling loans rarely have your best interest at heart." "Understanding compound interest won't help without conquering the social pressures that prevent people from saving money in the first place."

"Common sense is not so common." Voltaire

Notes:

1. Lauren E. Willis, Associate Professor at Loyola Law School in Los Angeles published a paper in 2008 entitled "Against Financial-Literacy Education." That paper points out the problems faced by one attempting to achieve financial literacy, and possible consequences of recent government policies. I am not certain I agree with the professor's position but I do agree that most are not currently up to the task of negotiating on their financial behalf. The paper is at PDF copy of "Against Financial-Literacy Education
2. For Mr. Housel's article at Fool.com entitled "I Was Told There Would Be No Math" click on this link: I Was Told There Would Be No Math

Budgeting 2012 - Part 2

Returning to a favorite topic of members of the association, I continue with Part 2 on "budgeting."

I would think I've posted more than enough on this subject, but apparently not. It's somewhat like a commentator who was giving an opinion on the corruption in Chicago and the state of Illinois; recently Chicago was awarded the dubious distinction of being the "most corrupt" city in the U.S. In that radio broadcast it was stated that "we can make rules, but common sense is another thing."

So what's the problem with budgeting? Is it common sense? The fact that it is work? Or, is it that as a consequence of budgeting, one will discover their financial limits, which flies in the face of a "just do it, and you deserve it" mentality?

Well, first, it is something that some of us do practice. It's also something that some of us do not. For those of us who do budget, we have great difficulty understanding why others do not. This post will shed some light on that, and will provide some incentive to those who don't.

On the other hand, like a rebellious child, some of us will take the position "I won't and you can't make me...So There!" For those, you are absolutely correct, no one can ever make an adult do anything. I'm not even going to try. My purpose here is to provide a few insights, some reasons and benefits for budgeting and to say "If you choose to take a certain path in life, you won't find sympathy from me."

The Professionals
Some of my associates like to watch Ms. Suzie Orman, and I do on occasion listen to her radio program. I only have a "basic" cable TV package which excludes the premium channels and so I only see Ms. Orman on TV during one of her PBS fund drives. Ms. Orman, as you may have noticed, has had a successful career extolling the viewers and listeners to practice a budget.

I consider the fact that she has made a successful career on television as a "financial consultant" and has written several books to be ample evidence of the need for financial advice. On the other hand, the TV shows may be indicative of the need for entertainment at the expense of the misery of those on the broadcast.

Budgeting is like a riding a bicycle. Once you learn how, you never forget. I don't see people on television teaching or promoting the advantages of bicycle riding. However, I do see people such as Ms. Orman, and others, who appear to be making a nice living preaching and teaching "how to budget." I conclude budgeting is a problem.

I again apologize to those who do know how to budget, avoid debt, and have some practical investment knowledge. But here is a secret. Knowing and doing are two different domains. Most of us know what we have to do. Some of us simply don't do that. I don't know why.

Returning to the professionals, what Ms. Orman provides is entertainment first, and information second. I mean, how many times do I have to be told to "skip the morning latte, put the proceeds in a jar each day, and after a year you will be able to take that vacation you have NEVER been able to take!"?

So I apologize to those who will find this post to be simply another rehash of timeless concepts.

The Straight Talk
We live in a consumer society, and we are bombarded with commercials and sales pitches. Some are subtle. Some imply that it's a basic American right to "just do it" or "have fun" etc. Most of these commercials are designed with one and only one purpose; to convince the watcher to part with her or his money. There are all kinds of salesmen and saleswomen. Some are on television, some are in nearby stores. They include our friendly neighborhood Realtor, who may turn around and sue you. Hey, it's a litigious society, which means if you aren't being sued, you are suing someone else, or you are concerned about being a target in a law suit. But too many say "Nope, it would never happen here! Okay, as they say "Being oblivious is bliss." What does this have to do with budgeting? Well, if one never does their homework, it allows them to do whatever they want under the false pretense that "I can afford it." Only someone who does a rigorous budget can know with any certainty at all, if they can in fact "afford" whatever it is they are doing.

Other impediments to budgeting and promoters of the consumer society include friends, neighbors and relatives who promote their personal positions and life styles. "Keeping up with the Joneses" became an American tradition, although the expression can be traced to many English speaking countries. But here in America, we made it an art form, and it made us a consumer society.

Here's an example of "the sales pitch." I've got basic $20 a month Comcast cable and it includes two "shopping channels" which market computers, cameras, electronics, watches, jewelry, clothing, purses, makeup, kitchen ware, kitchen accessories, prepared foods, exercise equipment, tools, vitamins, etc. etc. Viewing these channels is asking for trouble. There is a lot of nice stuff for sale out there. It's useful to be aware that there are experts who do nothing but dream up new and better stuff to sell you and I each and every day. There are billions on the planet making it. It would be easy to go broke attempting to buy all of this "wonderful" stuff. So unless you have an iron will, I suggest you watch something else on television.

That might be step one of budgeting; develop some resistance to "the sales pitch," and just say "no." Oh, but you are "entitled" you say?

Consumptive Habits
What we spend is determined by our consumptive habits and the prices of goods and service in the market place.  Habits may never change but, due to inflation, prices invariably go up, and up, and up. Part of budgeting is recognizing this inflation in the price of goods and services, and then determine methods to  balance this with our ability go generate income. Those on a budget look at the cost of their consumptive habits, and if income falls short of the projections, they then reduce their consumption.

Those who don't budget simply spend until they run out of money. At that point, a decision must be made about who not to pay this month. It is sometimes the HOA association.

We have a choice in our personal lives; we can plan and budget, or not. This is purely optional for individuals, but less so for businesses. In business, we have no choice. If we want to survive we must plan. We also need to track "cash flow" which is a comparison of cash income and spending. It gets more complicated because for a business, the budgeting includes sales projections (income) based on marketing plans. Most businesses can introduce new products, which may be new sources of income. Businesses can also control expenses by choosing different materials, or suppliers. Individuals have less freedom; but we are not powerless. On the other hand, individuals don't have the responsibility to make a business run. That is, unless they are on their HOA board, or involved in upper management of another business.

Your HOA is a businesses, and in Illinois, under the Illinois Condominium Act, our HOA is required to plan and prepare annual budgets. The association is also required to make longer term financial plans and collect additional fees for the reserves necessary to accomplish those plans. In other words, the board must prepare an annual budget for the purpose of maintaining the association.  The goal is therefor not to devise a budget which keeps fees "as low as possible" as the primary goal. Nor is the purpose to design new ways to spend the owners' money. I live in an association where a few of the owners would love to have a clubhouse on the property for parties. But would that be a good use of the owners' money? Spending is consumption and after the basics and keeping agreements, then options may become available. However, in an association, how many owners are willing to pay an extra $50 a month to some day build a "clubhouse?" Not many. Of course, a group of owners can always get together, run their agenda, get elected to the board and hijack the association for their own purposes. It has happened elsewhere, but not here as of today. The future? Well, that's another story.

In the end, the association requires a specific cash flow or income, which is to say "fees" to maintain the standards in the association. If we consider the cash spent as "consumption" then the association is doing exactly what the owners who budget are doing.  Board members of any HOA should be familiar with budgeting and budget practices. Owners don't have to be.

The Value of Budgeting
The real goal of Budgeting is a tool for future planning. It may allow us to keep our promises and agreements and to use our limited financial resources to accomplish the things we really want in life. In an association, those things might require "using other's money" to accomplish my personal goals. What prevents that from happening? Professional management and vows as a fiduciary. However, it is a fact that the professionals are hired and fired by the board of managers. So some associations have great difficulty, and their reserves become "piggy banks" for the personal agendas of the board. I'm not aware of such a situation at BLMH. However, "Where there is a will there is a way." So I'm certain that some owners will one day be elected, and will do their best to spend every dollar in the kitty. Did they do it well? If all of the roofs, driveways and streets are completed, I'd say they did an okay job. If not, then I would say they did it poorly. However, there is a mechanism to correct for these problems or unforseen circumstances, and it is called "special assessments."

Returning to personal budgets, if our personal lives go from bad to worse, financially speaking, then having a budget provides us with information to make difficult decisions. Knowing how we spend our money and knowing how long we can survive on our savings is financially empowering.

If I should encounter unforeseen circumstances in my life, and I do have a good budget, I already know how much I spend monthly and yearly on the "essentials" and I also know how much I spend on the other things, which some call "discretionary spending." Having that information readily available provides one with choices. Some years ago I experienced a terrible financial disaster. I was able to determine almost to the day when I would run out of "cash." I also knew exactly how much I needed to survive. By survive, I mean the real essentials; groceries, basic rent, electricity, natural gas for cooking, gasoline for the car, auto and renters insurance, basic health insurance, and debt (doctors and credit card balances). Everything else was optional. Knowing this gave me the longest possible time I could stretch what money and wages I had. I also had a second budget, which included some "options." If I used that budget, I was going to reach the end of my financial resources much earlier, but I'd have more fun!  I used the "basic" budget and as I paid off debt. Doing so gradually after many months freed up financial resources for some of the "fun things" in life, like a cup of coffee and a donut at the nearby Dunkin'.

Why Prepare a Budget?
The bottom line? One makes a financial plan, and that includes a budget, so as to have some control over one's financial future. That future may be next year, in the case of a basic household budget. However, our lives span decades and our budgets and financial plans must also span decades, and should include various life events which influence our ability to make decisions. Such events include having children, sending them to college, purchasing a condominium and retirement. It should include provisions for one's spouse and young children in the event of untimely or early death.

Why Not Prepare a Budget?
Preparing a budget gives one the information to make informed decisions. The best reason to NEVER prepare a budget was summed up with the expression "to be oblivious is bliss." With a lack of financial information, one can make any decision the wish, and can claim it was a good one.

On that note, I'll end this post. The next one on "budgeting" will continue with "Where to Begin Budgeting."

Inflation 2012 and Budgeting

Before proceeding with "Part 2" of my post on "Budgeting 2012" it's useful to consider cost increases and in particular, inflation. These price changes obviously have a profound impact on one's financial planning, and one's actual expenditures. Some of the price changes are gradual. Some, however, are rapid changes. Such large swings in prices is referred to as "volatility." When prices go up and down, sometimes in large jumps, this can wreak havoc on budgets. Most businesses have forward looking plans. As a business, and in accordance with the Illinois Condominium Act, our HOA is required to. Before considering how to deal with price volatility and inflation, it's important to have some awareness of what they are and just how excessive these changes can be.

So how profound is inflation and volatility? How does it influence a typical budget, be it a personal one, or our associations? What can I do about it?

Inflation and Price Increases or Decreases, and Choice
I could use my electricity and natural gas costs as an example, or food, or other utilities. For this post, I'll use gasoline. It influences most households and certainly just about every business, and that means our contractors. Gasoline is a significant expenditure for our landscaping and snow removal contractors. It is also so for me.

Let me also state that I attempt to purchase gasoline at the lowest available prices. However, if I am in the northern Illinois area, I will purchase gasoline in the City of Wheaton. Why? Well, as I have stated in earlier posts, I attempt to "buy Wheaton" because a portion of those sales, most notably the municipal portion of taxes, goes to the city coffers to pay for some of the services I use. Of course, I am also supporting many local businesses if I purchase goods and services from establishments in Wheaton.

That decision to purchase in Wheaton does mean that I do pay higher prices for gasoline from time to time. That's an example of a personal decision, and that decision does influence how much I spend. Other personal choices and decisions influence other areas of my spending. This includes, for example, decisions pertaining to the use of cell phones versus smart phones with data lines, the setting on the home thermostat, the food I eat, the number of meals purchased in restaurants, the type of cable or satellite TV I have (none, basic, premium, etc.), the types of appliances (refrigerator type, energy star 32" TV or 60" plasma, the efficiency of my furnace and hot water heater), the use of CFL bulbs versus incandescent, and even my vacation and pets, and so on.

In a budget, while it is useful to consider inflation and to assume that prices will increase over time, it is also useful to keep track of real costs. Not all prices move together and in the same direction at the same time. Such tandem price movements do sometimes occur. But prices may vary at different rates for gasoline, other fuels (natural gas), electricity, basic foods, and insurance or other goods and services. The government and various agencies track and publish this information on a regular basis. Some of this is available in the popular media, but it is a goal of these websites to get one to support the advertisers, as is also true with newspapers and magazines. For that reason, many of the articles have sensational headlines and are long on emotion and short on facts. The writers often have a personal bias, or personal concerns and that is frequently reflected in what is written. So most of us get information that is distorted or half-truths.


Using Gasoline as an Example
Here's a chart of the cost of premium gasoline as consumed in one of my vehicles. This is not a "hypothetical example." This is the actual cost of fuel used in that vehicle, per gallon. There are nearly 500 gasoline receipts to support this chart! The chart begins in February of 2005.

The chart shows a trend line, which indicates that gasoline prices have increased at a rate of about 5.25% per year; we could call that the "average increase" or inflation in the price of gasoline, over the period of time in the chart. That's higher than the actual, government published rate of inflation over the same period. But gasoline prices have increased at a rate higher than the government published CPI-U or "inflation" numbers.

The chart  also highlights how prices can vary quite a bit above and below that trendline. It's a good example of what economists call "price volatility." These huge swings can have a large impact on one's budget and can even stress it when those "spikes" occur. In 2011, the average price I paid for gasoline increased about 31% above 2010 prices!  That is substantially higher than the average annual increase of 5.25%.

Later in this post I'll be looking more closely at the numbers behind the chart, and the dollar value of those spikes.

The huge price drop that occurred in the fall of 2008 was during the "Panic of 2008." So who says economic disasters are all bad? Premium gasoline was nearly $4.50 a gallon before the Lehman Brothers and government orchestrated financial disaster. Immediately thereafter it had decreased to less than $2.00 per gallon! So for about 2-1/2 months, prices fell until again increasing. The price of gasoline is determined by the price of oil, and a large part of that is controlled by the OPEC oil cartel, which currently prefers that a barrel of oil be priced at $100. However, consumption, which is to say "demand" also influences the price, as does anticipated consumption. Those who produce or trade in oil are willing to pay a higher price for the raw material if it is expected they will be able to sell it and the products (fuel oil, gasoline, diesel, lubricants, etc.) at a higher price; the opposite is also true:

The above chart is a useful example of the necessity of using methods such as cash savings to adjust for volatile situations, or contracts to hold prices steady, or both! Taking such protective measures is "good business practice." Individuals can't enter into contracts, so we have to rely on budgeting and saving for the future. More on that in Part 2 of the budgeting post.

The Numbers Behind the Chart
My average cost of fuel was about $2.504 per gallon in 2005, and was $3.908 per gallon in 2011. As can be seen in the chart, fuel prices peaked between April and July of 2008, decreased thereafter and began rising at about the average trendline rate, but surged or spike again in 2011, and have decreased since then.

So, while the average price increase per year was about 5.25%, the actual costs to purchase gasoline in any year was sometimes higher than expected from that average 5.25% increase. Why then use longer periods? Because we're making long term plans, and if not, we should be. We will have to deal with short term price changes, but we will also have to deal with the longer and more far reaching consequences. Every one of us expects to retire some day. That means, we will have to replace wages with pension, social security benefits and savings. It would be best to begin such planning early in life.

If we look at the price of gasoline in the most recent two years, that most recent price spike beginning in January 2011 contributed to an a change in price of 24% per year over that two year period!  This is important. So when one begins measuring, and when one ends, will have a profound impact on the data, which means the decisions made from the data. Politicians love to pick and choose data to support their positions. This is intellectually dishonest, but it does win elections. However, there is no place for politics in an HOA. Being a board member most certainly is not a popularity contest!

Here are the costs for gasoline in each of seven years, for 647 gallons of fuel per year, which was about my average annual consumption over that period. I am using a fixed quantity of gallons so that the annual cost below reflects only the changes in the price of gasoline purchased:

1. 2005 = $1,621.
2. 2006 = $1,777.
3. 2007 = $1,966.
4. 2008 = $2,097.
5. 2009 = $1,986.
6. 2010 = $1,930.
7. 2011 = $2,531.

As you can see above, the cost per year sometimes increased, sometimes decreased, and that increase or decrease was sometimes larger than the trend line increase of about 5.25% per year. So what was the annual price change as compared to the previous year?

1. 2006 = +  9.63%
2. 2007 = +10.60%
3. 2008 = +  6.68%
4. 2009 = -  5.27%
5. 2010 = -  2.83%
6. 2011 = +31.12%

What can I observe from this information?

1. Prices invariably increase over longer periods of time.
2. Such increases may come in "spikes or surges" and may not increase at a steady rate. 
3. Prices sometimes decrease for a time, but eventually continue their increase.
4. While economists might talk about "average" price increases, or inflation, the actual annual changes can be much larger!

What conclusions might I make from this information?

1. If I want to plan a budget for the future, it might be a financial mistake to use "average" numbers for determining how much that future annual gasoline bill might be. Or any bill, for that matter!
2. When planning a budget, it's necessary to take into account macro economic data (what is expected to occur with gasoline in the next 12 months, or 24 or 36?).
3. When planning a budget, it might be prudent to build a cash cushion for things that are more volatile, gasoline for example, the price of which can skyrocket for short periods. How "short" is a "short period?" It might be a year or longer! But eventually, costs will revert to a trend line. 
4. Making annual adjustments and calculations and using them to update the information can support the decision making process. 

How Much Did My Gasoline Purchases Actually Change from Year to Year?

Looking at the actual gasoline purchases, how much money am I talking about? Using gasoline expenditures for each year, 2005 to 2011, how much did I spend to purchase 600 gallons per year? I'm assuming that in each year, I would adjust my driving so it would not increase or decrease and would be the same for each year. So how much more or less did I spend each year to buy that gasoline, as compared to the previous year?

1. 2006 = +$156.08 more than in 2005, or $13.01 per month more.
2. 2007 = +$188.49 more than in 2006, or $15.71 per month more.
3. 2008 = +$131.25 more than in 2007 or $10.94 per month more.
4. 2009 = -$110.57 less than in 2008, or $9.21 per month less. 
5. 2010 = -$  56.29 less than in 2009, or $4.69 per month less.
6. 2011 = +$600.71 more than in 2010, or $50.06 per month more!

On a monthly basis, my gasoline cost in 2011 was $50 a month more, each and every month, than it was in 2010! Why such a huge difference? Well, prices had been decreasing for three years. So by 2010 we were below that "trend line" in the graph, which is the expected price at the usual increase. So if I used only one year of data, and assumed in 2010 that prices would "only" increase 5.25% in 2011, and ignored the trend line, I would have been making the erroneous assumption that prices would stay low for another year. Having access to some economic data, which includes the policies of OPEC and oil consumption figures on the planet, as well as long term prices, would have contradicted a "price decrease" assumption.

There are web sites which provide historical gasoline pricing information. These can be used to determine 5- and 10- year trend lines, from which personal decisions can be made. I've included a few sources in the notes at the conclusion of this post.

Using the Information to Plan my Gasoline Budgets

One thing of interest is that while gasoline increases were a reasonably steady rate in 2006 and 2007, that increase was lower in 2008 than in the preceding two years. In 2009 gasoline actually cost less than in 2008, and so too for 2010.

Was that a good thing? Well it did reduce my expenditure for gasoline in 2009 and 2010. Was that a time to celebrate and purchase a new iPhone? Or was it an illusion? In 2011 my gasoline expenditure was nearly $600 more than in 2010! Gasoline prices came roaring back! That $50 monthly increase certainly stressed my budget. Or did it? The extent to which it impacted my budget was influenced by my spending habits, and the budget I used.

I had some choices to make in 2008, 2009 and 2010. My gasoline expenses each month was less than for the previous year. So what did I do with that cash that wasn't spent? Did I save it for the costs next year, or did I spend it? What would happen if instead of spending it, I was rigorous in my budget and saved the difference?

So what was the monthly impact to my gasoline budget in the period 2006 to 2011? Here's how my budget would have looked, and this is how much extra I would have had to find in my budget each month, to pay for the gasoline because of those price "spikes:"

1. 2006 = $5.91 monthly over budget
2. 2007 = $7.98 monthly over budget
3. 2008 = $2.32 monthly over budget
4. 2009 = $18.42 monthly UNDER budget
5. 2010 = $13.36 monthly UNDER budget
6. 2011 = $41.64 monthly over budget. 

It looks like 2011 was a bit tough! But if I had kept to my budget plan, and cut back slightly in some areas in 2006, 2007 and 2008, I probably could have easily made up that $2.32 to $7.98 per month from other areas in my budget. If I went to the further step and saved what I didn't spend in 2009 and 2010 that could have been used in 2011. How would it have turned out? That's a personal decision, but it begins with knowing what our personal tolerance for budget problems might be. Most of us can make some adjustment to handle a monthly budget problem of $10. I do realize that this is an example and in the real budget, all costs would have to be accounted for. But some are discretionary. Vacations, for example. So these can be adjusted, and more on that in Part 2. 

What Else Could I Have Done About My Gasoline Budget?


So what strategy should I use? Could I have saved more, and should I? If we say that gasoline increases at the average price rate of 5.25% per year, then I would need to design a budget that accommodates that price increase, or save some money this year to help pay for that increase in the next. Businesses may adjust their fees annual to compensate for these increases, which are a part of the overhead of any business. Individuals don't have that option. The employed will earn whatever the employer decides is a reasonable wage for the services provided. Retirees will get whatever social security COLA increase that is determined. How businesses and individuals spend their income is a personal choice. As with most choices in life, some can end badly. There is no excuse for poor planning. There are times when we do everything right, and it doesn't turn out. The nature of wisdom is to know the difference.

So in 2006 and 2007 when gasoline prices fell, I could have adjusted my spending habits to put a bit aside for gasoline increase in 2008. So also in 2009, 2010 and so on. All I needed to do was look at the chart, and say "Prices have dropped, and they will recover at some point in the future. Prices will always increase over the long term."

So, how to go about this? That's a personal choice. I can:

1. Use the "average" price increase as a starting point. For example, in 2012 I should expect that gasoline will be about 5.25% higher than last year, if it follows the trend line in the chart. That will cost me about $10.53 a month more. (See Note 1).
2. However, I'm currently paying less for gasoline than I did during the "average" in 2011, because prices are currently lower. How much less? I'm actually spending about 5.36% less per month than I did in 2011. How much is that? About $13.09 less per month. Would it be prudent to put the amount I'm not spending aside each month? Yes, it would be! 
3. How much would be set aside if I did? About $23.62 each month ($10.53 + $13.09). This for the probable gasoline price increases expected this year that I'm currently not spending because of current lower prices.  
4. I can shop around for a gas station at a lower price. (See Note 5).
5. I can also adjust my driving habits. (Drive less, combine trips, car pool). 
6. Of course, I might already be doing these things!

What else can I do, when sudden price increases occur? 

1. If I cannot adjust my driving habits and lower my costs, then I must move money from somewhere else in my budget.
2. I can give up something else, and reduce my spending to compensate.
3. I can take money from savings. 

Conclusion

Budgeting for inflation may appear to be arduous, if one uses the gasoline example and attempts to account for each and every penny. However, there are shortcuts which can help, and there are tools. One thing that cannot be avoided is organization. I would also say that the first year of establishing a budget can be the most difficult. If one has no budget, but simply pays the bills when they arrive, or until there is no money left in the checking account, then planning for the future might be an overwhelming undertaking. If that is so for you, then you probably aren't ready for a position on the board of your HOA! On the other hand, joining your HOA's financial committee might provide you with a wonderful learning experience, and empower you in your personal finances.

Budgeting requires some flexibility to accommodate price changes. There will be more on this in "Budgeting - Part 2."

Here's something to think about. Taking on financial obligations, be it a 2-year cell phone contract, purchasing a car at 1.0% financing, a 2-year satellite TV contract, or even purchasing a condominium establishes a financial obligation. When signing those contracts, there is an assumption that earnings or earnings plus savings will be sufficient to pay for all of those purchases. Be that true or not, the bills will roll in each month until the debt is paid off. In a condominium there will be real estate taxes each year, and there will also be monthly fees. Those will be never ending until the condominium is sold. A question to ask when considering these purchases after making an honest appraisal of one's finances is "Am I mortgaging my future," which is to say, "Am I getting into debt over my head?"

Let me also state that the current economic situation is not a pleasant one. In the past few years, I have heard some say "You have it easier than I do," or "I live on fixed income" implying that others do not. There are other complaints, and I sometimes think many of the complaints of owners can be traced to general concern, great uncertainty about the future, and even fear. The truth is, we're all in this, and we are each aware of our experiences and our personal feelings. Each of us has some empathetic capacity, and every owner at BLMH has paid their dues. As a former A&M director once stated during an association meeting, we each "have skin in the game." I suggest we each honor ourselves and our fellow owners by acting in accordance with that reality.

See Part 2 of budgeting 2012 for the continuation of budgeting.


Inflation Today
So where is inflation today? According to a recent article in Morningstar, by Robert Cahagan and William Martin of American Century Investments: "Inflation has increased notably in recent years. The government’s consumer price index, or CPI, actually declined 0.34% in calendar year 2009, rose 1.64% in 2010, and is up 3.5% for the 12 months ended November, 2011..." That information is easily corroborated by US data, and is why the Social Security Administration has increased benefits by 3.6% for 2012.

So the downward economic slide may be over. Is there bad news? It's probable that price increases will occur. What does that mean for you and I? Well, it's probable that things will cost a bit more in 2012 than they did in 2011! It is useful to consider that the last period inflation was as low as it was last year, and for such a long period of time, ended in 1964!

Low Interest Rates and Stagnant Wages
Another thing to consider is that many of us are not getting a 4% income or wage increase in 2012. So that will squeeze our budgets. Can we dip into savings and take the interest earned? The banks are only offering about 0.74% on one year CDs, and a pittance on normal savings accounts. So money kept in the bank is losing at least 2% per year. All of this is planned by the government and it will keep mortgages low, so people will buy those units that are for sale at BLMH, and elsewhere. The owners at BLMH are paying a price for this government policy. It shows up in your monthly association fees. The association did not earn a normal $155 for each and every owner last year, on its savings. If the association could get a reasonable short term return on "safe" savings, your fees could be about $13 a  month lower than they currently are.

While it is easy for the politicians and the talking heads to vilify the banks, the fact is, with 30 year mortgages available at 3.25%, it is difficult to lend money with the expectation that inflation will be so very low for those 30 years! If a bank or credit union earns about 3.5% on a mortgage, which is money lent using your and my deposits, it's very difficult to pay me what I would consider reasonable interest on my deposited savings. Further, new government regulations require banks to hold more of those savings instead of lending them, and that held money doesn't earn much. So everything seems to be tilted toward very low returns on savings for everyone. In fact, we are at the point where lending at 3.5% with inflation at 3.5% is a losing proposition. If one considers that normal, "long term" inflation may be about 4.0 to 4.5%, then why should anyone lend money for 30 years at less than 4.5% ? This is something that the politicians and others like to gloss over when they make their grand statements. I say it's something to think about.

Returning to the present, it is probable that inflation will "spike" in the future. We don't know precisely when. That's my perspective as a board member. Saying this isn't about being right. It's about financial planning as a fiduciary so as to keep fees "as low as possible" as some like to say, while avoiding special assessments, and maintaining the property. Believe me, in an economic environment with some foreclosures, some delinquent owners and very, very low return on our savings, all of the factors are designed to create havoc with the finances of any HOA. So too for personal finances.

So what about inflation, and future planning? That's a darn good question!

Here is the bottom line; just about everything will cost more in the future than it does today. Is that a terrible thing? I think not, if inflation is "moderate." Why would I say that? Well, the alternatives, which include deflation or hyperinflation, are the consequence of destructive economic events. So if inflation is "moderate" that means that the economy and that includes much of the world economy, is humming along in a more or less normal fashion. No catastrophes!


Notes:

1. Determining the annual increase in gasoline prices can be difficult. In 2000 gasoline cost about $2.00 per gallon according to the Department of Energy. Currently its about $3.50 a gallon. This is in today's dollars. That's an annual price increase greater than the 5.15% annual price increase I used in this blog. If I used 6% per year, then that short fall in 2011 would not have occurred, had I saved the difference each year. On the other hand, I might have had too much in the budget each year. It's a matter of choice, as is all budgeting. 
2. According to Inflationdata.com, the average price of a gallon of gas from 1918 to the present is $2.45 in 2011 inflation adjusted dollars.
3. For a gasoline annual price calculator for your automobile, go to: http://www.csgnetwork.com/annualmpgcalc.html 
4. For gasoline price information, go to:   http://www.fueleconomy.gov/feg/gasprices/
5. For current Wheaton gasoline prices go to:  http://www.illinoisgasprices.com/Wheaton/index.aspx

Budgeting 2012 - Part 1

It's that time to look at my personal budget for the year. This is part 1- of 2- part post. Are there some similarities between our association and the decision making of my personal budget? Let's see.

The "Chicagoland Cooperator" has an article in the January issued entitled "Striking a Tough Balance - Revenue vs. Reductions." The article begins:

"It's the same dilemma that households across the United States are facing. How much money can we afford to pay for the services we want? And should we stretch ourselves thin taking more out of our bank accounts to pay for private schools and that desperately needed vacation? Or should we cut back on restaurants and renovations to add more savings to our bank account?

The same goes for condo and co-op buildings." (Note 1).

I seems the Cooperator does think there are similarities!

Readers of this blog are aware that this association has struggled to maintain a balance. Typical questions might include: Should we spend down the association savings, with the hope that future owners will "ante up" and replace those reserves? Should we risk the need for special assessments? Should we stay the course on roofing and other vital projects, or delay? Certainly if one has a new roof, it might be tempting to say "you can stop now, I'm okay!"

There are and have been a range of opinions among the owners.  Several years ago, in the middle of the recent recession which had the period December 2007 to June 2009, an owner came to an association meeting and argued "What do we get for our money?" That is one question. Others have been of the opinion that we were spending too much and the simple solution was to fire management and maintenance, and replace them with a small army of "handymen." The argument was based on a position that "Anyone can manage a 40 acre association!" Still others argued for continued standards, but at lower costs to owners, which is to say, at lower fees. I guess that implied a desire to spend the savings for reserves on daily maintenance, and put reserve "saving" on future owners.

I have asked in recent years if an austerity program was warranted. I said it this way "What are we willing to give up?" This was generally met with silence, which I construed to mean "nothing," and I said so. That is a really difficult question and I am of the opinion that it might be the "third rail" or at a minimum a polarizing issue at many HOAs. "What am I willing to give up" is also a question when I am pinched in my household budget. It becomes most difficult when one is unwilling to give up anything, or states that everything is essential.

There has been recent feedback in the association but generally it's about expanding programs rather than reducing them. In 2011, it seemed that some owners preferred more extensive landscaping; others would like every scrape or piece of peeling paint immediately touched up. Others want a more extensive mosquito abatement program. Some want every conduit on the property painted. Some want the streets seal coated. Others have been impatient with drainage improvements. It goes on and on.

There is no doubt the association is to be maintained, and with the current board, it will be. We are in an inquiry to sustain a balance. Questions posed include, at what point is such maintenance conducive to unit sales and maintaining of owner property values? At what point have we dipped below minimum standards, and at what point are we overspending? There are a range of opinions among the owners. At one extreme there are those who would say "once my personal issue or agenda is resolved, then spending should cease." I suspect that there are also those who would argue "lower the fees so I can sell my unit." But then what? What about the owners who live here, or the new owners who purchase? What about the 70% of the roofs, or the driveways, or the streets scheduled for repair or replacement?

The question I live in is "How to stay the course, and maintain the balance?" This applies to my personal budget, as well.


Facing 2012
I think the board is very aware of the issues. However, I am a proponent of doing what I can in my own life as a beginning. So in the fall of 2011 I again reviewed my personal budgeting for the coming year, 2012. Of course, part of good budgeting is good record keeping.

In my personal life, there are several aspects to budgeting and they mirror some aspects of the budgeting of the association:

1. Operations and Maintenance
2. Reserves

There is also a third category in my personal budget which I would call "discretionary spending." This includes such things as personal communications, eating out, entertainment, vacations, clothing, automobile, etc.

Here's an example of a discretionary spending decision. I can choose between a $49 cellphone on a $70 monthly plan, or I can go for a "smartphone" such as an iPhone, with full internet access at 4G, etc. An Apple iPhone 4S "no commitment" plan at AT&T is $199 to $399 for the phone with a two year service commitment. Data (email and internet) is another $15 to $45 per month, depending on usage, and unlimited voice is about $70 per month, for a single phone. So I have a choice of monthly fees between $70 and $115 plus a phone cost of $49 to $399. This is for one phone, and family plans are more costly. At additional cost, I can also have a "landline" phone. But at what point are having both cell and landline phones a "necessity" or a "luxury?"

In my case, I have decided to have both. But as a compromise, the family cellphones are not "smart phones" but the basic $49 models, and there are three. One for me, one for my spouse and one for association use. I pay for all of them. We attempt to keep our cellphone usage within the package minutes, and have been successful for about 35 out of 36 months.

In my case, we traded off something else to pay for these cell phones and the monthly services. The argument "I've got to have it" isn't a rational basis for purchase of anything. "Can we afford it" is a rational argument, and "What are we trading off to get this" is another.

This same approach can be applied about internet service, cable or Satellite Dish TV, restaurants, vacation, additional entertainment such as movies, a Netflix subscription and so on. Another question; "At what point do I replace the car with a new one?" That's a thorny issue, because of the "cache" surrounding what one drives. Yes, it's useful to acknowledge this as a "consumer driven" society. $250 a month for car payments may not sound like a lot, but that's $3,000 annually. It's almost guaranteed that the insurance for a new automobile will be more costly than an older one. My "oldest" auto is 8 years old, but it does not cost me anywhere near $3,000 annually to repair, and that includes brakes, tires, battery, air conditioning and heater, and dealer service every 3000 miles or 90 days.  At what point is a vehicle not maintainable? At what point is it a rusting hulk? Is is reliable and does it get me where I need to go? Are the safety features functional? What were the annual maintenance costs last year? Those are some of the questions I ask. Yes, at some point there will be honest "no" to some of these questions, or maintenance may reach replacement cost. At that point, a replacement will be considered, and replacement may be a necessity. Until then, it's another "discretionary" expense.

This approach also applies to eating in. I can prepare really nice meals at less cost than most of the "prepared" stuff, and much, much less than eating out. But eating out is more fun. My spouse and I have a competition for "30 minute dinner meals" which include a range from pastas and stir-fry, hot dogs, hamburgers, steak, chicken breast, fish, etc. and freshly prepared vegetables including mashed potatoes, carrots or green beans sauteed with mushrooms and onions in olive oil, spinach, and of course, frozen vegetables. We do cheat, with previously prepared squash, spaghetti sauce, chili, soups, meat loaf etc. which are readily thawed and heated. We also toss in semi-prepared from Trader Joe's, and organic soups and even macaroni and cheese and the occasional can of baked beans and smoked sausage. A little cowboy food is a good thing!

Not everyone can do this, and I appreciate that working families may not be able or all that willing to cook dinner after a day at work and the after school activities of the children. But these are decisions to be made, and they are elected, not forced upon us.

How we each answer these types of questions will determine our monthly and annual  personal budgets.


Notes: 
1. Link to the Chicago Cooperator Website: 


www.chicagocooperator.com