Category — Money Managemenet

For the few readers I might have had on this site, you’ve probably noticed I haven’t posted in a few months. This is due to a few reasons, most of which is me brushing up on my programing and business skills for my full time job. The other reason, as you may have guessed from the title, is that I am getting a little tired of writing about personal finance all of the time. I am tired of thinking of little “hacks” to save money. I hate the idea of pinching pennies. To me personal finance isn’t something that you should fret about every day. Personal finance has become something that you just do.

I hate feeling bad about spending money, especially on quality things such as organic food or electronics such as my camera. Reading other personal finance blogs made me feel like I was never doing enough to be frugal or to save more money, and I began feeling burnt out on writing about personal finance.

I have not gone to the dark side of spending money though. Au contraire, I have increased my 401k savings to 20% of my pretax pay, and my wife has budgeted enough to max out her Roth IRA by the end of the year. We still have some debt left, but we have paid off over $26,000 in debt over the past two years, and we are slowly paying off the rest. We are still driving one car, we still don’t have cable. We don’t have iPhones, and we don’t get Starbucks regularly. But we do spend our money on things like organic vegetables and grass fed beef, and I am not going to feel bad about shopping at Whole Foods just because other personal finance authors think Walmart is the best place to buy your food.

The truth, for me anyways, is that if you are doing the right things like saving a decent portion of your income, planning for variable expenses like car repairs, paying down your debt without putting on new debt, and making smart investments, who cares what you do with the rest of your money? If buying a latte every day makes you happy, then why not do it? Because a personal finance author tells you that you shouldn’t?

Should I tell my wife that we shouldn’t save for a vacation because the economy is bad? Nope. As the popular saying goes, life is a journey, not a destination. I want to enjoy my time here as much as possible, and I don’t want to wait until I’m retired to do it. Most personal authors are always saving for some other time. That’s great. But I get 4 weeks of vacation a year, so shouldn’t I use it while I can?

I don’t want this to come off as a rant against saving money. I think more people need to get the basics of saving and investing down and then put those basics into practice. But really, do we need more than the basics? Once you’re saving 15-20% of your income, should you really worry about how much more you can save? Why should I save every cent I can just so I can spend it at some other point in time? Personal finance is all about balance unlimited wants with limited resources, and trying to maximize your happiness.

I will try to write more often here, but no promises. Until then, save and spend wisely!

MSN Money has a list of 8 things your financial planner won’t tell you.

#1 stands out to me since it basically means a financial planner doesn’t have much of an advantage over someone who is savvy about their own money. At least with a lawyer or a doctor you know that they went through years of schooling to get where they are. A financial planner, not so much.

#4 is also interesting, since an inexperienced financial planner (see #1) probably has no basic educational training to draw ideas from. The broader the knowledge of the person doing your finances the better off you should be.

Overall these reinforce the idea that most people should take control of their own finances. Another benefit to managing your own finances is that you can likely start small when you have limited funds, and as your money grows your knowledge will grow. No one cares about your finances as much as you do. Devote some free time each week to studying investments and personal financial management and you will have as much knowledge as most financial planners.

Sounds confusing . . .

Over at the Blueprint for Financial Prosperity they have a great post up on Building Your Financial Network Map. I think this is a great idea for anyone to do to gain a better understanding of how their finances play out.

After doing this exercise you will have a better idea of where your money comes from, how it fits with your accounts, and how that money outflows into various bills and obligations. Hopefully you have plenty of assets that you are building up, and not too many outflows like credit cards and car payments.

A while back I wrote about breaking the credit cycle using ING subaccounts to help readers understand how they could use the idea of a monthly payment to save and use compound interest in their favor instead of paying interest on credit cards and loans.

That was generally written for savings, but I think there is also value in having multiple checking accounts and using them for different purposes. I will use my own set up as an example. We currently have two checking accounts, one for fixed monthly bills such as our utilities and rent, and another for food and gas. I have my direct deposit setup to deposit a specified amount into these two accounts each month according to our planned budget.

Doing this ensures that we have enough money every month to pay all of our bills instead of living paycheck to paycheck hoping that we can come up with enough for the bills. It also forces us to budget better for our food expenses and limit how much we drive, since once the money in that account is gone it’s gone.

The idea of having segregated accounts really comes down to one reason, and that’s to budget. If you can keep all of your fixed expenses in one account and all of your variable expenses in another you can limit the temptation to go over budget on the variable expenses and eat into the money that you are going to need later on to cover your variable expenses.

One easy way to get started is to open an ING Orange Checking account to use for your groceries and gas. You can then use your regular checking account for paying bills such as the utility, rent, and any debt payments (since you’re paying a fixed amount for those, right?). Or, if your regular checking account doesn’t have free bill pay, you could use ING for your fixed payments and have them automatically go out every month using ING’s free bill pay service. It’s really up to you. Another plus is that you will earn interest on any balances you maintain in the account.

After the recent drops in the stock market I thought it might be a good time to take a look at my portfolio to see what has done well and what has not. I also went ahead and rebalanced everything to my original allocations.

The biggest thing I noticed about my portfolio is that my company stock has reached an amazing 38% of the portfolio. My company has done fairly well relative to the rest of the market, which is part of the reason the percentage is so high. The other reason is that my employer match comes in the form of company stock.

This is important for anyone to watch. If you receive your company match as company stock instead of cash you should rebalance your portfolio often to minimize the risk of loss in that stock. What percentage of your portfolio you keep as company stock is up to you, but I prefer to keep a low percentage in my own. If my company does well then I will likely be compensated well at bonus time. If my company does poorly, however, I could loose both a large portion of my portfolio and my job depending on what happens. So for me it’s a matter of risk control to keep the portfolio percentage of my own company stock low.

Here’s a link to my retirement post regarding rebalancing. Have you looked at your portfolio recently? Do you know right now, roughly, how each of the parts of your portfolio have been doing? If not it’s time you take a look.

For the past few weeks my posts have been slowing down. I have reached a point where my finances have become automated and I am thinking about them less. I am still just as interested in paying off debt, but there is only so much you can do within reason. Being frugal is not one of my strong points, so that’s not an area I actively try to work on. And with so much debt to still pay off it’s tough to think about the future.

I try to keep up with other personal finance authors in blogosphere, but to be honest I feel like I’m reading the same thing over and over again. So it has been tough for me to come up with something that I feel is meaningful and worth the time to post.

I do have some ideas for future posts. I would like to do a write-up on the basics of retirement accounts. In particular I will be talking about asset allocation and how to pick funds. I also need to write up book reviews on a few books that I have read recently. If anyone has other suggestions, please add a comment to this post, or shoot me an email with a request. I would love the opportunity to help out, so please help me get some ideas!

Fortune magazine’s recent cover article “Now What?” provides advice for investing in a weak U.S. economy. On a side note, I see that the article is completely free on their website, which is making me rethink my subscription.

The advice from Fortune:

1. Watch your investment fees
2. Invest for dividends
3. Buy into beaten-down companies, if you can handle the risk
4. Consider investing in foreign markets
5. Don’t keep to much money in bonds

I would say this is all good advice. Some of it, especially tips like watching your investment fees and investing abroad, are good tips for anytime. Fees can quickly cut into your investment returns, so it’s always important to consider whether your broker is providing enough to justify the cost. And if you’re paying high fees in a mutual fund you really should reconsider switching to low-cost options like those offered by Vanguard. Looking abroad for investments is a great idea, especially when the U.S. economy is sliding. If you use mutual funds, investing abroad is as easy as buying into a fund that invests overseas. Buying individual stocks might be a little more difficult, and is beyond the scope of this post.

One piece of advice that struck me as interesting was to avoid bonds. Typically investors consider bonds to be a safe choice during a recession. But as the article points out, yields on bonds are not in line with the risk you take on, especially considering the amount of inflation. A good choice for bond investors might be TIPS, which protect you from rising inflation (or at least some of it, since inflation numbers seem to be drastically reduced lately. But again, that’s a whole different post).

If you have any money in the markets, it’s worth taking a look at the article to get some ideas for your portfolio.

This post is part of the financial basics series.

Once you’ve created your spending plan, the next step is to start an emergency fund. At this point it doesn’t have to be huge. $1000 is a good goal for for most people, but you may want to adjust that amount upwards if you live in a high cost of living area such as New York or the San Francisco Bay Area like your truly.
Creating an emergency fund is important for a few reasons. Number one, it is important for peace of mind. Number two, it helps to keep you from charging up more debt. For most people living paycheck to paycheck, random unexpected expenses like emergency car repairs can break a budget like nothing else. This is where the emergency fund comes in. Not having to put expenses on a credit card is a great feeling. And peace of mind is a feeling that no material possession can truly replicate.

But where should I keep this money?

If you’re thinking about saving that money in an ordinary bank savings account, stop that thought right now. Most banks offer atrociously low interest rates to their savers. A much better solution is to keep the cash under your mattress. Just kidding. The best option for saving money that you need to remain both liquid and risk-free is to open an online savings account somewhere like ING Direct, Emigrant Direct, or HSBC online. The only online bank that I have used is ING Direct, and I highly recommend them for the ease of opening a new account and their reputation. The other banks do offer slightly higher interest rates, so they may be worth looking into as well.

One side note, many banks have incentives, ING Direct for instance has a referral program that gives you $25 if you open an account with $250 (although there’s no minimum if you don’t have $250). So if you know someone that banks with them, ask for a referral link to see if you can get some extra cash in your account for free.

Opening an online account has two large benefits. The first is the boost from the higher interest rate. Although rates are relatively lower now after the fed rate cut, when rates go back up the online banks are quick to increase the savings rate. The second benefit for many people is having an account that is one step removed from your checking account, meaning you will have to wait a few days before you can use the money. This should help to eliminate at least some of the impulse spending, and will make it harder for you to use it in a non emergency.

Funding

Once you have your spending plan created and online account funded, you need to fund it. Any extra money in your budget should go to funding this account while you make the minimum payments on any debt. Then you can proceed with debt payoff, which we will discuss sometime soon.

Creating an automatic withdrawal into your emergency fund is important. This automation is what will help you reach you financial goals. Two options are to either create an auto debit through the bank, or to have part of your paycheck deposited directly into your savings account. I prefer the later approach since it makes keeping a check register that much easier, since the money never actually goes into or out of my checking account. It is also nice because you don’t feel like you’re losing money every month, since you never see it come into your spending account.

Next Steps

Once you have reached your goal amount, it is time to pay off debt. There are differing opinions on whether you should continue to fund the account while you’re trying to pay debt off. Personally I think it’s worthwhile to keep the auto withdrawal going into your savings. Seeing your money grow is a great feeling.

Once you become debt free, the next step is to build up a true emergency fund. This fund is one that could see you through months of no job or cover you in a major financial crisis. A good rule of thumb is 3-6 months salary. This can take a long time, but it is an important step to become free from money. Once you know that you can sustain your living for half a year without a job, the burden of living paycheck to paycheck becomes smaller. If you want to pursue a new, higher paying job, the opportunity is out there.

So what are you waiting for? Opening an online savings account is the first step. Do it now! Then start making whatever contributions you can to it, and before you know if the money will be there.

This post is part of the Financial Basics series.

To be Free From Money you must be in control of your money

The first step on the road to financial freedom is taking a look at your spending versus your income. If you are spending more than you make, you will be a slave to debt for the rest of your life. Most people hate the word budget, so I’ll use the term “spending plan” instead.

The first step to creating a realistic spending plan is to know where your money is going. Start tracking your expenses for a month or two. Make a list of everything you spend your money on, and then sum up each category for any given month. Spreadsheets are a very useful tool for for tracking spending and then summing up the total. You will probably want to use a few general categories, like groceries or gas for the car. I think it’s a good idea to create a separate category for non-essential spending like dining out so you can start to see how expensive these habits can be. Make a list of your average utility bills like water, electricity, and gas. Find out the MINIMUM payments due on each of your debts and list those individually. Also be sure to think about your average entertainment expenses. If you go clothes shopping every weekend, include it in the budget spending plan. Like to play golf on the weekends? Make sure you figure out the average cost, including green fees, lunches, or the cost to practice at the driving range. Keep going through your spending to get an idea of where your money goes and create whatever groups you need for your spending plan. When you are just starting out this should be a monthly routine until you refine your spending plan to the point of automation.

Now, sum up everything you spend money on, and compare it to your after-tax income. You’re going to fall into one of two camps: either your income is greater than your expenses, or your expenses are greater than your income.

I hope that your spending is less than what you earn. If it’s not, you need to start evaluating your spending habits and think about where you can cut expenses. Play golf once a month instead of once a week. Shop less. Skip the manicure and pedicure every month, or learn to do it at home. Cancel the cable bill. There are numerous resources on the internet to get ideas for cutting expenses, so I won’t go over other ideas in depth here. But reducing the amount of money you spend is the number one thing you must learn to do if you are going to be successful in creating wealth.

Hopefully your spending plan tells you that you are making more money than you spend. If you are at this point, then you are starting on the right foot. Subtract your spending from your after-tax income to get the extra money you have each month. This amount will be the key to financial independence. This is the amount you will use to start your emergency fund. This will be the amount you use to payoff each of your debts one by one. This will be the money you save for yourself to become free from money. If you can, take a look at your spending and see where you can make cuts. The larger the gap between your spending and income the more you will have to keep for yourself and the better off you will be.

Creating a spending plan is not a one-time thing that you do in the beginning and forget about. It will take continuous refinement as you start to get a grip on where your money goes every month. Every time you pay off a debt you will take the minimum payment out of the plan and add it to the free amount. This free amount will in turn grow larger, allowing you to pay off other debts quicker or reach savings goals faster. You also need to remember to follow your spending plan! Of course this sounds obvious, but so many people who create a plan never actually follow it. And whatever you do, please do not fall into the trap of putting “just one thing” on your credit card every month. You might be surprised at how often you actually put stuff on every month. I stopped using credit cards altogether for just this reason, but you may prefer to keep one around for peace of mind only.

So I encourage you to start keeping tabs on where your money goes. It will be an enlightening experience I’m sure, even if you think you know exactly how much you spend every month. Good luck!