Finance: The Dollar Stretcher News
Comparing Financial Options
Hello Gary,
I work at the local school. I can walk to work and have little in the way of work related expenses. I have two children heading for a local college. One next year, one in five years. If I can get a job with the college they will waive $5,000 of the college tuition per child per year. If that happens I will have to buy a car and pay work related expenses. I am stretching my brain to tell which is the better deal. Can you please help?
Ronnie
We've all been in Ronnie's position at least once in our lives. How do you compare two different financial courses of action?
Each situation we face is unique. So often it's hard to find an online calculator or other tool to help. Is it possible to learn how to create your own formula to compare two different options?
The good news is that it is possible. And really not as difficult as it might seem. We'll work through Ronnie's question, but we'll also explore how you can create formulas for different situations that you might face.
The first step is to define the question. In this case Ronnie has two joboffers. Her present job keeps her expenses low, but doesn't provide any help for tuition. A different job would reduce the cost of college for her two children, but also increases other expenses. Simply defining the two alternatives helps us to begin thinking about what might be included in our formula.
Next take a sheet of paper. One choice on the left side, another on the right. The top half of the page is for income. The bottom half for expenses. Listing the various components will help you see and understand how each impacts the potential answers.
Then we'll work on each situation to develop a formula to describe it. Let's begin with Ronnie's current job. Since she has a child entering college in 5 years we'll probably need to do a plan that will last for nine years (5 years plus 4 years of college).
Ronnie didn't provide complete figures so we'll need to make some assumptions. For instance, let's assume that her present job pays $40,000 per year and the job at the college would pay $37,000 per year. We'll also assume that the extra 'work related expenses' would amount to $1,200 per year. Finally, let's assume that the auto expenses would be $6,000 per year.
Sometimes you'll know all of the different inputs (like salary and expenses). Other times you'll need to estimate. In this case Ronnie will likely estimate the college's salary, and the other job and auto expenses.
She may need to do a little research to make reasonable estimates. It would be smart to price some cars and call to find out what insurance and operation costs might be. Getting a useful comparison is dependent upon good estimates. So don't shortcut this step.
Let's start with her current job. We'll project income and expenses for 9 years. Ronnie's total income would be 9 times $40,000 or $360,000. She doesn't have auto or work-related expenses. So we won't have anything on the expense portion.
Now we'll compare a job with the college. Her salary would be 9 times $37,000 or $333,000. But, she'd save $5,000 per year in reduced college costs for her kids. So it's the same as if she added $40,000 to her income (4 years X $5,000 X 2 kids). So her total income would be $373,000.
But, she has some added expenses. We estimated the work and auto related expenses would total $7,200 per year or $64,800 over nine years. So we need to subtract that from the income figure. That works out to income after expenses at $308,200 ($373,000 minus $64,800).
Based on those assumptions Ronnie would be better off in her current job ($360,000 vs. $308,200).
Can this model be used for other questions? Sure! Can you do it yourself? Yep! Most problems require you to set up two different formulas. Each should include income and expenses.
One secret is in ignoring the things that stay the same and focusing on the things that change. In Ronnie's case there were differences in both income and expenses. But most of the action was in the expenses.
Another trick is to keep it simple. For instance we didn't include income taxes on Ronnie's extra income from her current job (probably about $400 depending on filing status and deductions). Nor did we include the value of her car at the end of the nine years (probably about $2,000).
That was done for a reason. It needlessly complicates the formula and makes it really hard to focus on the key differences. Also, these tweaks to the formula are less important than the initial assumptions that you make. For instance, in Ronnie's case, a change in the cost estimate to own and operate a car would make a bigger difference.
Remember that this isn't a math exercise. Nor will it give you an exact answer. Rather it's a tool to help you see the choices clearly and to identify any significant financial differences.
You can do similar analysis on any financial question you have. Some are harder than others, but don't be afraid to take a piece of paper and begin to break down the problem. In many cases you'll be able to create your own formula. But, even if you can't, you've still put yourself in a better position to understand the key parts of the decision.
About The Author:
For
more than 25 years, Gary Foreman has worked to manage money
effectively. He's been a financial planner and purchasing
manager. He currently edits The Dollar Stretcher website www.TheDollarStretcher.com and several newsletters. His mission is to help people "Live Better for Less."
While helping clients manage their hard earned money, he applied commonsense, time-tested techniques during the turbulent 1980's. The experience convinced him that you didn't need to hit the lottery to accumulate significant wealth.
Following that, Gary had an opportunity to learn more about how to get the best value for a dollar spent. As the Purchasing Manager for a computer manufacturer, he was responsible for supervising over $10 million in purchases each year.
Today, Gary spends his time editing The Dollar Stretcher newsletters and website. He enjoys the give and take of the internet and likes nothing better than to help people achieve their financial goals.
Gary lives in South Florida along with his wife of thirty years and their two children. When he has a free moment you'll find him restoring a Checker station wagon nicknamed "Two Ton" or cruising a '65 Impala convertible with doo-wops playing in the background.
Comparing Financial Options
Hello Gary,
I work at the local school. I can walk to work and have little in the way of work related expenses. I have two children heading for a local college. One next year, one in five years. If I can get a job with the college they will waive $5,000 of the college tuition per child per year. If that happens I will have to buy a car and pay work related expenses. I am stretching my brain to tell which is the better deal. Can you please help?
Ronnie
We've all been in Ronnie's position at least once in our lives. How do you compare two different financial courses of action?
Each situation we face is unique. So often it's hard to find an online calculator or other tool to help. Is it possible to learn how to create your own formula to compare two different options?
The good news is that it is possible. And really not as difficult as it might seem. We'll work through Ronnie's question, but we'll also explore how you can create formulas for different situations that you might face.
The first step is to define the question. In this case Ronnie has two joboffers. Her present job keeps her expenses low, but doesn't provide any help for tuition. A different job would reduce the cost of college for her two children, but also increases other expenses. Simply defining the two alternatives helps us to begin thinking about what might be included in our formula.
Next take a sheet of paper. One choice on the left side, another on the right. The top half of the page is for income. The bottom half for expenses. Listing the various components will help you see and understand how each impacts the potential answers.
Then we'll work on each situation to develop a formula to describe it. Let's begin with Ronnie's current job. Since she has a child entering college in 5 years we'll probably need to do a plan that will last for nine years (5 years plus 4 years of college).
Ronnie didn't provide complete figures so we'll need to make some assumptions. For instance, let's assume that her present job pays $40,000 per year and the job at the college would pay $37,000 per year. We'll also assume that the extra 'work related expenses' would amount to $1,200 per year. Finally, let's assume that the auto expenses would be $6,000 per year.
Sometimes you'll know all of the different inputs (like salary and expenses). Other times you'll need to estimate. In this case Ronnie will likely estimate the college's salary, and the other job and auto expenses.
She may need to do a little research to make reasonable estimates. It would be smart to price some cars and call to find out what insurance and operation costs might be. Getting a useful comparison is dependent upon good estimates. So don't shortcut this step.
Let's start with her current job. We'll project income and expenses for 9 years. Ronnie's total income would be 9 times $40,000 or $360,000. She doesn't have auto or work-related expenses. So we won't have anything on the expense portion.
Now we'll compare a job with the college. Her salary would be 9 times $37,000 or $333,000. But, she'd save $5,000 per year in reduced college costs for her kids. So it's the same as if she added $40,000 to her income (4 years X $5,000 X 2 kids). So her total income would be $373,000.
But, she has some added expenses. We estimated the work and auto related expenses would total $7,200 per year or $64,800 over nine years. So we need to subtract that from the income figure. That works out to income after expenses at $308,200 ($373,000 minus $64,800).
Based on those assumptions Ronnie would be better off in her current job ($360,000 vs. $308,200).
Can this model be used for other questions? Sure! Can you do it yourself? Yep! Most problems require you to set up two different formulas. Each should include income and expenses.
One secret is in ignoring the things that stay the same and focusing on the things that change. In Ronnie's case there were differences in both income and expenses. But most of the action was in the expenses.
Another trick is to keep it simple. For instance we didn't include income taxes on Ronnie's extra income from her current job (probably about $400 depending on filing status and deductions). Nor did we include the value of her car at the end of the nine years (probably about $2,000).
That was done for a reason. It needlessly complicates the formula and makes it really hard to focus on the key differences. Also, these tweaks to the formula are less important than the initial assumptions that you make. For instance, in Ronnie's case, a change in the cost estimate to own and operate a car would make a bigger difference.
Remember that this isn't a math exercise. Nor will it give you an exact answer. Rather it's a tool to help you see the choices clearly and to identify any significant financial differences.
You can do similar analysis on any financial question you have. Some are harder than others, but don't be afraid to take a piece of paper and begin to break down the problem. In many cases you'll be able to create your own formula. But, even if you can't, you've still put yourself in a better position to understand the key parts of the decision.
About The Author:
For
more than 25 years, Gary Foreman has worked to manage money
effectively. He's been a financial planner and purchasing
manager. He currently edits The Dollar Stretcher website www.TheDollarStretcher.com and several newsletters. His mission is to help people "Live Better for Less."While helping clients manage their hard earned money, he applied commonsense, time-tested techniques during the turbulent 1980's. The experience convinced him that you didn't need to hit the lottery to accumulate significant wealth.
Following that, Gary had an opportunity to learn more about how to get the best value for a dollar spent. As the Purchasing Manager for a computer manufacturer, he was responsible for supervising over $10 million in purchases each year.
Today, Gary spends his time editing The Dollar Stretcher newsletters and website. He enjoys the give and take of the internet and likes nothing better than to help people achieve their financial goals.
Gary lives in South Florida along with his wife of thirty years and their two children. When he has a free moment you'll find him restoring a Checker station wagon nicknamed "Two Ton" or cruising a '65 Impala convertible with doo-wops playing in the background.