Frugal Living 
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Plug Your Financial Leaks

Financial Leaks = Leaky FaucetsWhen I started working in the summer of 2003, I kept a pretty diligent budget. My friend Melinda sent me her “Budget Bible” excel spreadsheet as a guide and I tweaked it so that it fit the budget categories I was most curious about. I kept up with it for about six months, until I reached a steady equilibrium, and then dropped it.

One of the most valuable parts about keeping the budget was that it helped me identify financial leaks I was otherwise unaware of. I could discover these leaks and easily plug them, saving me hundreds of dollars in the process.

A financial leak is when you have a series of expenses you didn’t know you were spending so much on. They’re often small, irregular, and easily overlooked. Buying a cup of coffee at Starbucks each day is not a financial leak – you know you’re spending that money (and you get something for it, you get coffee in the morning). While some would argue that you’re overpaying, I think we’re all adults here with different preferences so that spending wouldn’t be considered a leak.

A leak is more like an ATM fee every few weeks because you’re getting cash from another bank. You know that you’re being dinged that ATM fee but you might not realize you’re getting dinged as often as you are. A $5 fee every other week is over a hundred dollars a year – that’s a leak that can be easily plugged.

How do you know if something is a leak? You’ll know it when you see it and it’s different for everyone. You might see yourself spending a thousand bucks a year on coffee as a leak whereas someone else would see it as a cost of waking up so early. You might see 5 ATM fees a year and consider it a leak whereas someone else sees it as the cost of traveling. Either way, you’ll recognize it without any problems.

How do you plug it? Usually you just need to add a little more planning on whatever you do. If it’s coffee, buy a coffeemaker (or get a free coffeemaker) and remember to program it in the morning. If it’s ATM fees, remember to get more cash out or try to utilize your credit cards more often. It usually comes down to preparation.

Whatever you do, don’t beat yourself up about it! It sucks to see a hundred bucks frittered away on ATM fees and easy to wonder what could’ve been, but be happy you discovered it now rather than in a year… or never. We all make mistakes, we should be happy to discover them after only a hundred bucks of pain rather than a thousand (or more!).

(Photo: johnx62 )


 Personal Finance 
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50 Financial Skills Every Person Needs To Know

Popular Mechanics created a list of 100 Skills Every man Should Know, which naturally gravitated towards DIY/physical skills like jump starting a car and split firewood. The Frisky listed 30 Skills Every Woman Should Have Before Turning 30, which actually touched on more than physical skills (though #12 is physical :) ), with a handful of financial skills (#17 – #20).

This isn’t a checklist of things you need to necessarily do in your life, it’s just a list of things that you should know how to do (in case the need arises).

(Click to continue reading…)


 Personal Finance 
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7 Deadly Sins of Personal Finance: Don’t Budget

7 Deadly Sins of Personal FinanceBudgeting is one of the cornerstones of a solid financial plan because its essentially the planning, tracking, and managing of your short-term finances. When it comes to budgeting, there are many ways to do it but the purpose is the same – knowing how much you are spending on what.

While I contend that all the deadly sins are equally deadly, I think that failing to budget is primus inter pares, or first among equals. If you were to commit all others but avoid one, this would be the one to avoid.

And with that, our third deadly sin of personal finance is…

Failing To Budget

Failing to budget can be one of the most damaging things you can do to your personal finances. Without a clear picture of how much you’re spending and on what, you’re basically wandering the forest at night without a flashlight. You might know that you want to buy a house in five years, but without an accurate figure of how much you’re spending or saving, you really have no idea whether that goal is even feasible. If it is feasible, you have no idea how much you should saving towards that goal. A budget gives you that accurate snapshot and it’s one of the reasons why an income statement, which lists expenses, is a crucial financial statement for a company.

You can’t improve what you aren’t tracking. You should always be trying to lower your expenses while maintaining the same standard of living. If you frequently shop at a particular store, it’s smart to try to find coupons so you get the same for less. If you like a particular food or drink, it pays to test out cheaper alternatives to see if you can tell the difference. Where you save in one area, you can then splurge in another. With a budget, you can tell where you stand the greatest chance of improvement. You may discover patterns you didn’t know beforehand.

You will automatically improve just by tracking. When I started working full-time, I had a budget where I tracked every expense to the penny. By virtue of doing that, my actions were affected by even recording the expense. I knew of times when I packed a lunch because my dining out expenses were nearing artificial milestones like $50 that month or $100. There was one time I thought about buying a new pair of jeans but stopped myself because I hadn’t spent money on clothes that month. Since I was nearing the end of the month, I figured I’d buy it next month (I never did until much later).

Budgets help you make informed decisions. With a budget and an accurate picture of your spending, you can make an informed decision. If you know you have slack in the budget, you can enjoy yourself more knowing that you’re safe. Friends planning a vacation next month? You can happily agree to go without guilt or concern if you know your budget can handle it. How long will it take for you to build up your emergency fund? With a budget, you now know.

After a few months of budgeting, it’s okay to slack off and not track as diligently. Once you have an accurate picture, you simply need to adjust it to changes in your life. But every once and a while, track expenses for a week or two just to see that there haven’t been any big changes.


 Personal Finance 
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Brief Look at Five Budgeting Systems

Clever Way to BudgetOne of the interesting discussions that came out of the Personal Finance Blogger’s Conference in San Francisco was a discussion of how people budget and some of the budgeting styles. While we didn’t explicitly go over some of the more common budgeting systems, I felt it would be useful if I hit on a few to see where their benefits and drawbacks are.

Personally, I did the Track to the Penny system for a few months until I got a good handle on my monthly expenditures, then I essentially did the Reverse Budgeting/Nothing strategy. In between the two systems, I reviewed my expenditures to see where my spending was going and whether I could make some improvements. I saw that I was eating out far too often, a detriment to both my wallet and my health, so I took steps to start buying more groceries and preparing lunch more often.

(Click to continue reading…)


 Personal Finance 
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How To Put Your Personal Finances On Autopilot

Personal finance is boring, but with a little work and preparation in the beginning and some time spent checking in, it can be put on autopilot. That’s right, just spend a little time setting up your personal finance strategy and then spend a little more time each year just to check in on it, and you can ensure that you’re ahead of the average for your age and live comfortably. While leaving anything on autopilot can be tricky, it’s better to participate and be on autopilot than to not participate because it’s too “hard.” Below is a discussion on the different parts of personal finance and how to put them on autopilot.

Retirement planning: 401(k), Roth IRA

401(k): If you’re starting a new job, it’s been mandated that your employer automatically enroll you into the 401(k) plan if it’s available and allocate your funds into some very basic and safe fund. All you need to do is log in, double check your contribution amount (make sure it’s over the level at which your employer will match your contributions), double check the funds you’re contributing to, and then log out. If you have been on the job for a while and aren’t participating, call up HR for the enrollment form immediately. After you submit it and they set it up, just follow the easy instructions above. Then, just once a year, check to make sure everything is okay and that your allocations are what you think they should be. Do this for 40 years and you’ll be way ahead of the game in terms of retirement funds.
Roth IRA: If you don’t have one, opening a Roth IRA takes literally ten minutes. Some brokerages will let you do auto-deposits every month so divide the annual limit (this year the limit is $4,000, in 2008 it’ll be $5,000) by twelve and set your contribution allocations as you would the Roth and don’t worry about it. You have until tax day to contribute to your Roth IRA for the previous year (you have until April 15th, 2008 to contribute for 2007) but make sure your payments indicate which year they apply to.

Budgeting

The envelope budgeting method is by far the easiest and requires the least amount of tracking and thinking. The premise is that you have different envelopes based on category of spending and that you put how much you can spend in each envelope for that month. As you spend, you pull the money out and when you run out, you no longer spend. It forces you to budget and establishes a simple framework to help remind you. First, open up an ING Direct checking account (email if you want a $25 bonus). I recommend ING because you can open up new accounts within the interface of your first account in minutes, it’ll take much longer at a regular bank. Open up as many accounts as you have “envelopes,” or categories of spending. Link up your local checking account to your ING accounts and have your paycheck direct deposited into your ING. Then, setup recurring transfers from your main account, where funds are direct deposited, to your envelope accounts, which govern spending in a particular category. As you spend money, withdraw the funds from your account and the balances will reflect how much you still have left in your envelope.

Investing

Investing is truly no different than 401(k) or Roth IRA autopilot, the difference is in which brokerage you choose. I have no recommendations other than to say that if you prefer a particular mutual fund (I prefer index funds), then go with one of the larger mutual fund companies like Fidelity or Vanguard. On index funds they simply cannot be beat on fees and that’s all you should care about with index funds. If you want to invest in stocks, you’re on your own because I don’t think you can really put that on autopilot. While I don’t believe in checking your stocks daily, unless its for entertainment value, you have to check in periodically to read news and keep up to date, so it doesn’t lend itself well to putting it on autopilot.

Saving

Finally, saving is again no different than investing or retirement planning because fundamentally all you’re doing is putting money into an account for an expressed purpose. In fact, you should have a goal, a reason to save, because it will help you remain diligent. Mechanically, automatic savings are easy. Many banks have automatic withdrawal features that will let you withdraw a set amount each month from a linked bank account. Simply establish a goal, figure out how long you have, and setup regular and automatic transfers into a high yield savings account to reach your goal. It’s that easy!

Bills

Many companies will let you link up a bank account or credit card so that your bills are automatically paid on time each month. There is one downside to setting this up, a company can then charge you on that method of payment for things you never realized you authorized (here’s an example of an unauthorized billing from a reputable company). The upside is that you’ll pay at the last minute and you won’t pay late, two pretty good reasons to set up auto-billpay. I have all my bills automatically paid this way from my cell phone to my mortgage to my electricity and water bills. The sheer convenience, and I save on stamps, can’t be beaten.

See how easy it is to set up your personal finances on autopilot? One thing to note is that while it may be easy to setup and convenient to simply let it run, you should check in periodically to ensure that everything is running properly.


 Personal Finance 
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What Is Envelope Budgeting?

Envelopes for budgetingEnvelope budgeting is a very popular and very intuitive way to budget your spending.

I had heard the term used frequently but I never really understood what the whole envelope budgeting process was or why it was successful. In fact, I actually thought envelope budgeting meant that you were loosely tracking your spending on the back of envelopes or something like that (I was totally wrong!).

Envelope Budgeting

In envelope budgeting, you categorize your spending into broad categories and assign an envelope to each. You might have one for dining out, one for groceries, one for utilities, etc. You decide how much you will spend in each category for the month and put cash into that envelope. As you spend in the category, you take money out and return the change. If you run out, you must pull from other envelopes.

(Click to continue reading…)


 Devil's Advocate 
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Don’t Budget To the Penny

Devils Advocate Logo
This is a Devil's Advocate post.

Budgets are great, they keep you in line and they help you reach the goals that you’ve set for yourself and your family. The thing is, there’s a point when the budget stops being a means to an end and they start dominating your life… and that’s when you start tracking things to the penny. Listen, if you’re going to budget, experts advise that you track everything but I’m going to give you a few reasons why you should track to the dollar and not down to every last cent.

This particular DA is a little weak in the sense that the “conventional wisdom” aspect, budgeting to the penny, isn’t something that everyone thinks you should do but merely the default approach towards budgeting. Personally I do not budget (anymore), but when I did I budgeted to the penny and felt that technique was a little restrictive. I eventually stopped in part because of reason one. So, in this respect, I am truly the Devil’s Advocate and not merely playing the role for grins and giggles.

If It’s Hard, You’re Less Likely To Keep It Up

Let’s be honest, no one likes to budget in the first place because no one wants to feel like they have to track every single thing that they do because it takes the actual fun out of doing it. Going to the movies becomes “watch a movie, oh yeah I have to put $9.50 in my budget,” and you get a little bit away from the enjoyment of the movie. Also, if you have to track every last penny every single time, you’re probably going to put it off… and put it off… and then maybe not even track it at all! You want to put as few roadblocks in the way of you and your goal, of saving money to do X or pay for Y, and tracking to the penny is a headache that is a potential roadblock.

That Level of Visibility Not Necessary or Useful

$1.05 or $1? $50.87 or $51? Let’s be honest, when it comes to your budget, tracking to the penny really doesn’t get you all that much. Depending on how you opt to do the rounding, at the absolute maximum your budget will be off by the number of transactions you have; on average, you’ll be pretty close to your actual budget. If you always round up, you’ll be off but never short, which isn’t that bad when it comes to budgeting because you’ll “find” money at the end of the month. Unless you enjoy tracking down to the penny (and there are certainly folks who do and there’s absolutely nothing wrong with that), you can see how it doesn’t get you all that much more given the added effort.

That’s Not The Point

The purpose of budgeting is to track your expenses so you know how much you’re spending and what you’re spending it on. If you’re the type of person who blows their whole paycheck and has no idea where it went, budgeting is for you. If you’re trying to find places in your spending to trim the fat in order to pay off debt or save for something, then budgeting is for you. If you just want to keep an accurate picture of where you are, then budgeting is for you. In all three scenarios, tracking down to the penny is absolutely irrelevant and likely to derail your attempts to budget. Getting “close enough,” that is within fifty cents for each transaction or any of the other rounding tricks, is good enough and likely to keep you at budgeting a while longer.

I know there are a lot of readers who budget, so please share your strategies (down to the penny? round up? round down? keep a notebook? anything you want to share!) so we can all learn!


 Monthly Review 
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Financial Outlook – Summary of Spending and 401k Allocation (Jan & Feb ’05)

A lot of personal finance blogs reveal their author’s entire financial picture; so that you can follow them on their quest and help them achieve their goals. I’m not going to give that much information but I think that in order to help me improve my budgeting system, I have to reveal it to the world and have the world poke holes. We’ll track it back to the start of the year. I’ll also give you a look into my 401k as well, percentages of course. In future posts in this category, Financial Outlook, it won’t be quite as verbose as this one.

Expenses Jan. Feb. Target %
Rent 18.66% 18.66% 20%
Utilities 3.87% 5.12% 5%
Meals 4.10% 10.25% 7%
Groceries 2.50% 7.54% 7%
Clothes 0.35% 1.47% 0.5%
Cleaning 0.42% 0.00% 0.5%
Automotive 30.01% 0.00% 2%
Transportation/Gas 5.90% 7.23% 7%
Recreation 4.79% 13.44% 10%
Other 12.84% 0.00% 3%
Savings 16.56% 36.28% 25%
Budget Reserve** - - 13%

* These percentages are calculated against my post-tax income, which already has 20% contributed to my employer’s 401k plan.
** Budget Reserve is simply my safety blanket in the budget for overruns. 13% seems like quite a bit but any excess falls into Savings!

Budget Notes:
Automotive (Jan): Last December, I was in an unfortunate car accident that totaled my car (2000 Acura Integra) at no fault of my own. So I had to purchase a new (used) car, which was a 2003 Toyota Celica, from a private owner in Florida with the insurance company’s funds. But, that also meant I needed to purchase four new all-season tires (since Florida cars don’t know of seasons) which set me back in the Automotive category. Usually that category is very small, consisting of oil changes. I also had to get the tint removed to pass inspection, a $100 ding.
Other (Jan): Usually the Other category is also pretty small too, I try to put anything I spend in a category other than Other. I made a donation to the American Cancer Society and I couldn’t really justify putting it anywhere so it went into Other.
Meals (Feb): 10% is far too much to be spending on Meals. I usually try to keep this somewhere under 7% (achieved in January) and I’ll have to bring lunch to work more often.
Recreation (Feb): I took a nearly weeklong trip for Mardis Gras and a weekend trip to Seven Springs ski resort. I’m allowed to take vacations! :)

I don’t really restrict my spending to a dollar amount but I do try to keep things in range of percentages I feel comfortable with. I want to save at least 20% of my income, 30% if possible, and I trim where I find it easiest to trim. Sometimes aberrations (like Automotive in January) are unavoidable, that’s when the Budget Reserve comes into play. Hopefully overruns don’t exceed 13% and starts to dip into the real reserve, my emergency fund.

Onto the 401k…


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