This is the ninth (and final) part of a series on setting up a financial plan.
The beginning of the series is here.
The previous article is “Financial Tools: Budget Tracking/Planning“.

So here we are, all set up with the right tools to build a better financial future. Hooray! But now that the initial hard work is (mostly) over, it’s time to step back for a moment and get some perspective.

All the plans, account setups, expense reductions and general thinking about money I’ve done in the past few months has changed a lot of my perspectives.

I don’t walk into a store and blindly buy things I want right now any more, because every dollar I spend is a dollar that could be working for me elsewhere. And I’m truly grateful for the change, because it will have a marked positive effect in the future.

But like all new interests, obsessions and endeavours, it’s easy to get carried away and become single-minded about them – checking spreadsheets every 30 minutes, and vowing never to spend a red cent on anything ever again – because it could be invested.

Being obsessed has been good for a few months – I’ve put in a lot of spadework and made a lot of decisions which set me on the right path. But now it’s time to let those decisions and tools work for themselves, and think a bit more philosophically about how my life and my finances mesh together.

For me, the quintessential point to base this thinking around is my snowboard.

It’s actually less than 2 years since I first strapped on a board and pushed my way down the green slopes at Kirkwood, discovering in the process that I was much better on a board than I’d ever thought I could be. That first season was one of discovery (first painful crash, first successful lift exit, first run all the way down a hill without falling on my ass…), and the winter 06/07 season was one of falling utterly, absolutely in love with boarding.

The trouble is that snowboarding is an expensive pastime for a city dweller 3 hours from the nearest slopes. Factor in transport costs (gas or possibly airfares), lodging costs, lift tickets, resort food prices and equipment costs and you’re looking at easily north of $1000 per season.

$1000 is a lot of money, even more if you consider what that $1000 could do with compound interest over 20 or 30 years…

The new, finance-obsessed me could very easily say “look, you should give up the snowboarding and save the money instead,” and, from a purely logical dollars-in-the-bank perspective, he’d be right.

But I love boarding with a passion that’s hard to describe. I want to experience the thrill of whizzing through beautiful winter scenery every second that I can – so much so that we’re still nearly 3 months from season’s start and I can’t stop thinking about it! I was excited this Wednesday by unseasonably early rain, because it dumped up to 2″ of snow on Tahoe and just maybe (superstitiously, unreasonably) promised an early season start or, at least, a good season for 07/08.

To deny myself the joy I get from boarding might allow me to increase that money tenfold in 30 years, but it would also leave a huge hole in my life, denying me experiences, satisfaction and memories which will last forever.

Which, strangely, brings me full-circle to the maxim I used to use to justify burying my head in the sand over money – “Life’s about more than dollars and account balances.”

Although the maxim is the same, the application is different now – I know what my dollars are up to, and I have the tools and the beginnings of the knowledge to maximise that which I choose to save. But I also have passions to pursue, and no wish to turn into Ebeneezer Scrooge.

It’s a delicate balance, one which will require fine tuning for months and years to come. But it’s one I think I’ve settled into already.

The “Snowboarders at Timberline” photo on this post is from frozenchipmunk on Flickr.

This is the eighth part of a series on setting up a financial plan.
The beginning of the series is here.
The previous article is “Financial Tools: Net Worth Planner/Tracker“.
The next (final) article is “Finance: A Little Perspective (and some snow)“.

One final financial tool that I’m finding invaluable – a budget tracker.

One of the things I’ve realised over the last couple of months is that I’ve often spent money without really taking note of where it’s going. This was most apparent when I was trying to estimate my weekly expenditure for my Net Worth Planner. I knew pretty much what I spend, but I had no detailed idea of what on.

The only way to find out was to start detailing my spending down to the last cent, in a way which allows me to review it, and trim any unnecessary outlays. You could do this with a spreadsheet, but that quickly became cumbersome, so I turned to dedicated software for the task.

There are quite a few options out there – the venerable market leaders are Quicken and Microsoft Money (with the former garnering better reviews, on the whole). Since I’m almost wholly mac-based these days, I also tried out a couple of cheaper mac-specific options, Cha-Ching and iBank.

Cha-Ching was the first out of the gate since I picked it up insanely cheaply during their initial introductory offer. It’s a beautiful-looking app, and has some good features (adding “tags” to expenses is a good way to slice them, for example), but it was lacking in the area of tracking cash expenditures, didn’t have enough in the way of simplifications for recurring vendors/payments, and didn’t provide great overviews of expenditure over time. It was very nearly there, but not quite…

iBank, on the other hand, does exactly what I need it to. Managing account transfers is a breeze, the categorisation of expenses turns out to be just as useful (and in some ways simpler) than Cha-Ching’s tags, and the killer feature is the charting of expenses over time. Looking at this, I can see, for example, exactly how my food costs break down, by creating a pie-chart of the last month’s spending for all the relevant categories. In this way, it’s easy to see just how much I’m spending on eating lunch or breakfast out during the work-week, and motivate myself to bring food from home (or eat breakfast there) more often.

This isn’t a recommendation per se – different apps work for different people, but I prefer iBank.

For the first few weeks, I just tallied everything I spent, even cash expenditures (which go against a dedicated “Wallet” account entry). This in itself was a powerful motivator – it’s a lot harder to forget/forgive frivolous expenditure when you have to tally it all somewhere.

The real benefit, though, came a few weeks in as spending patterns started to emerge, recurring (but variable) bills turned up and I began to get a full overview of where my money was going.

The insight has allowed me to re-evaluate all sorts of spending, and has led to some direct changes:

• I changed my DSL and home phone service plans, cutting their monthly cost in half.
• I’ve started cooking batches of food and freezing the majority, taking them to work and saving $5-$10 on lunch each time.
• I was motivated to cancel the gym membership that just doesn’t fit into my lifestyle at present.
• I’ve switched banks, eliminating a bunch of annoying and unnecessary fees (and incidentally earning a much higher rate on my core savings).
• I’ve cancelled a wine club which, while nice, has left a stockpile of bottles which will take me 3-6 months to drink, minimum.

None of these things, in themselves, saves that much money per month, but it’s enough to notice, and over a year it will save me well over $1000. Not bad for 10 minutes each day updating my finance app…

The next step, now that I have over a month’s worth of data, is to build a reasonable budget for myself (which the app can do specifically), and see if I can pare it down further without living the lifestyle of an ascetic monk. We’ll see how that goes…

Disclaimer: I’m not a financial advisor, and I’m just sharing my own financial plans because, well, I like to share. It’s also a good exercise in “thinking out loud”. You choose to follow any advice in these posts at your own risk, though – I’m not responsible if you overdraw or suffer other financial calamity…

The iBank screenshot on this post is from IGG Software’s website.

This is the seventh part of a series on setting up a financial plan.
The beginning of the series is here.
The previous article is “5 Accounts, #5 – 401(k)“.
The next article is “Financial Tools: Budget Tracking/Planning“.

Apologies for the slight hiatus – one day I’ll find the “sweet spot” combination of lifestyle, organisation and motivation to write on a regular schedule. Until then… sporadicity rules…

Last time I posted on personal finance, we wrapped up my summary of the 5 types of account I think I’m going to need for my nascent plan.

With that done, it’s time to look at the tools we’ll need to build and execute that plan.

Today, it’s the turn of the Net Worth Tracker and Planner.

What’s a Net Worth Tracker?

Put simply, a Net Worth Tracker is a spreadsheet, website or application that you can use to track your Net Worth. I like to think of it (somewhat macabrely) as the sum total your beneficiaries would get if you accidentally fell off a cliff tomorrow.

Your “Net Worth” includes every major financial balance in your life – the value of any cars, the equity you have in any homes, the sums of your retirement accounts, savings, checking accounts, wallet, investments and so on; as well as your debts – credit cards, loans, mortgages, etc.

A Net Worth Tracker is an invaluable tool in getting a better grip on your finances because it’s a (maybe sunny, maybe brutal) “quick sweep” overview of your current financial health, and a great way, by filling it in week-to-week (or month-to-month) of reviewing progress towards your financial goals, or seeing the effects of missteps.

How do I build a tracker?

Since I’m lazy, I’d say that the best way to go about building a financial tracker is to use a spreadsheet, and to follow Trent’s instructions over on TheSimpleDollar (which I seem to keep pimping here. Nevermind.)

The rest of this post will make less sense without the context of that one, so go read it now. Trent covers the basics very well, and following his suggestions will get you a basic net worth tracker which is highly useful.

My own practice deviates somewhat from his, though, in two key respects:

(1) I have two trackers – one monthly one (exactly as Trent describes), and one weekly one which, whilst fluctuating quite a bit with the vagaries of rent cheques and salary deposits, keeps me very close to what my money is doing.
(2) I also have a “planner”, which actually lives in the same spreadsheet as my weekly tracker, and follows the same principles, but is projected forward to encompass what I should be doing with my money over the coming year or so.

Making Projections

To build my net worth projections, I have a bunch of extra fields in my “projector”, besides the usual account balances. I have rows to cover paycheques in, payments to various debts, “other income”, rent payments, and weekly expenditure – food, small bills, entertainment… (which I set as an estimated average constant).

My “net worth” projector then becomes a set of formulae taking these money movements into account – for example, the weekly checking account balance becomes [previous balance] – [weekly expenditure] + [paycheck] – [loan payments] – [other expenditure] – [movements to other accounts].

You can also automate other balances with formulae – “Auto loan”, for example, becomes [previous Auto loan balance]-[Auto payment]. If you participate in an employer’s ESPP program or 401(k), you can set up a formula which will increment the value for each week where a paycheck is present.

Once the formulae are set up, I can easily work out the effects of different financial decisions by just changing the amounts in the “in/out” boxes, to come up with an optimum plan for saving, investing and debt repayment.

Stock options (and other investments) can provide something of an uncertainty – they’re subject to movements which are (relatively) unpredictable. For these, I look at the past year’s trend and calculate the value accordingly (so if your investment portfolio gained 8% last year, use that.)

This will give you the “bones” of your financial plan. For rows which aren’t automated, I generally fill them in with a formula which is simply “=[previous column]“. This way, as you decide on the structure of debt payments, for example, you can just alter the relevant columns, and the balances in between will remain.

Now is the time to do that. Look at your debts (particularly those without a structured repayment plan), and your checking/savings balances as the plan predicts them. Wherever you have “spare” money, you should look to insert a payment into the plan, reducing your account balances and your debt load. Once the “Debts” line on the sheet hits zero, things get really fun – you can start taking the money which was going into debt repayment, and push it instead into other accounts. First off should be your Emergency Fund, then any possible increase in 401(k) contributions; finally, you can start building up an investment account.

The advantage of this is that I’ve now done the bulk of my financial planning work for the next year. Every few days I check in with the planner and see where I should be with money movements, repayments and so on. It’s a no-brainer. When the plan says to pay down the auto loan, I pay the damn thing down…

I also build 2 graphs from this spreadsheet – one mapping my actual balances, and incorporating the “net worth” line from my planner (this way I can see, week on week, if I’m meeting, exceeding or falling behind my goals) – and one which maps the entire plan (because looking at how it should pan out motivates me to make sure that it does.)

And that’s the real key here – as well as being a useful blueprint to follow, ultimately a planner is a massive motivator to make the right financial choices, day in, day out.

Once you get it down, it gives you a real, solid feeling of power over your money.

Disclaimer: I’m not a financial advisor, and I’m just sharing my own financial plans because, well, I like to share. It’s also a good exercise in “thinking out loud”. You choose to follow any advice in these posts at your own risk, though – I’m not responsible if you overdraw or suffer other financial calamity…

The “Money” photo on this post is from Monochrome on Flickr.

This is the sixth part of a series on setting up a financial plan.
The beginning of the series is here.
The previous article is “5 Accounts, #4 – Investment“.
The next article is “Financial Tools: Net Worth Tracker/Planner“.

Many times, I’ve heard that “401(k) is free money – you’re mad not to take it!” without really understanding what that meant. After all, a “retirement account” is money that you’re not going to see for 30-50 years… bo-ring. One day, though, you’ll want to retire, and doing so requires a significant investment socked away (current estimates hover around the $1m – $1.5m for true retirement comfort). What does a 401(k) plan get you?

Most plans have some form of employer-matching, so, to take a conservative example (my own company is actually more generous), a 15% employer match means that every dollar you put into your 401(k) immediately becomes $1.15. That means that, even if your 401(k) does nothing at all, you’ve already made a 15% return on your investment on day one. In addition, 401(k) deductions are pre-tax, so a contribution of $500/month works out to appear as a much smaller “dent” in your paychecks (somewhere around $360, depending on your tax situation).

In reality, even a fairly conservative 401(k) portfolio should make 8.5% per year, on average (we’re thinking long-term – 30 years or more here, so individual market ups-and-downs should even out to a good growth rate). This means that in just a year of $500/month contributions, with an employer-match of 10%, your $6000 pre-tax contribution (about $4300 in wages you’re no longer seeing) should be worth in the region of $7150. And the real beauty of this is that the interest you earn is compounded, so as the “capital” in the account grows, every cent is re-invested to begin earning its own percentage gains.

Truly maximising the gains of a 401(k) takes a little more work than this, and year-on-year gains aren’t guaranteed (they rely on whichever underlying instruments your 401(k) is invested in), but over the long-term, stocks have historically appreciated at at least that rate.

In short, if you’ve put off considering 401(k), stop putting it off now, find the “budget room” to make contributions, and start!

It’s also worth taking a look at an utterly brilliant article penned by Philip Brewer over at WiseBread. “Your 401(k) is not an investment” covers good ground on the place of a 401(k) in an overall portfolio, as well as some of the other advantages of retirement accounts. Go read it!

Disclaimer: I’m not a financial advisor, and I’m just sharing my own financial plans because, well, I like to share. It’s also a good exercise in “thinking out loud”. You choose to follow any advice in these posts at your own risk, though – I’m not responsible if you overdraw or suffer other financial calamity…

The “Retirement” photo on this post is from scottwills on Flickr.

This is the fourth part of a series on setting up a financial plan.
The beginning of the series is here.
The previous article is “5 Accounts, #2 – Online Savings”.
The next article is “5 Accounts, #4 – Investment“.

I think everyone instinctively knows that they should have an emergency fund, but like many other pieces of financial advice and/or common sense, it often gets put off or bypassed. The cause is the same as that of most common financial missteps – the fact that our brains simply aren’t wired to think sensibly about the future – why plan for a financial disaster which may never come, when we can live right now?

There are too many things which might require an immediate financial “bridge” – major car problems (if you commute by car), a sudden medical expense, an unexpected layoff… if any of these things “catch you short” you could be seriously stuck, forced to rely on a credit card or a loan to get by, at which point you end up in a fresh new financial hole full of unwanted interest payments.

So if keeping an “emergency fund” on hand is a good idea, what’s the best way to go about it?

Since this is for emergencies, it needs to be accessible in short order, so we want something like a savings account or a money market account which will allow us to withdraw/transfer money immediately. So why not use our online savings account?

There are two needs an online savings account doesn’t quite meet.

1. We want this money to stay “saved” – mixing it in with all the current account sweeping and discretionary considerations muddies the water, and tempts us to spend “emergency” money on non-emergencies.
2. We should be keeping this money around, unused, for the long term. So we need as good an interest rate as we can get, to protect our money from inflation.

A good alternative is an online-accessible money market or high-interest savings account.

There are two accounts which I mentioned yesterday, and which are consistently recommended by finance writers for the purposes of an “emergency fund”:

1. EmigrantDirect’s AmericanDream SavingsAccount (5.05% APY at present)
2. ING’s Orange Savings Account (4.50% APY at present)

These are, like other bank accounts, FDIC insured to $100,000 (meaning you won’t be out of pocket if the bank goes FOOM!), and are therefore extremely low-risk. There really isn’t much to choose between them, although EmigrantDirect’s slightly higher interest rate is obviously attractive, and is the account I’ve chosen for that reason.

ING score highly for customer service, and also offer investment services and other accounts, so if you want to simplify your finances somewhat by consolidating transactions within one bank, that may be an advantage.

So, once we’ve identified our account, onto the next consideration – how big should our emergency fund be? Trent at The Simple Dollar has a pretty good summary of this, taken from his rewrite of a 2006 CNN article containing “25 Rules to Grow Rich By”. His post goes into more detail, but the basic rule he comes up with is this:

Keep two months’ worth of living expenses in a bank savings account or a money market account for each person in your household. So, if four people live in your household, have eight months’ worth of living expenses.

That sounds pretty sensible to me – it covers the worst possible financial calamity (sudden redundancy), and should provide a healthy amount to deal with other mishaps too.
Finally, it’s perfectly possible to build an emergency fund in “stages” – set a first stage target of $2500, say, then focus on other financial priorities for a while before coming back to “boost” your fund to a safer level. Even $2500 squirreled away is better than nothing.

As to those “other priorities”, my main one (investment) is up next…

Disclaimer: I’m not a financial advisor, and I’m just sharing my own financial plans because, well, I like to share. It’s also a good exercise in “thinking out loud”. You choose to follow any advice in these posts at your own risk, though – I’m not responsible if you overdraw or suffer other financial calamity…

The “Savlon” photo on this post is from PrASanGaM on Flickr. Savlon liquid is, in fact, one of the few things in the world I’m allergic to – its fumes cause me to cough uncontrollably and it’ll give me a mild but irritating rash if it comes into contact with my skin. Still, for most people it’s good for emergencies…

This is the third part of a series on setting up a financial plan.
The beginning of the series is here.
The previous article is “5 Accounts, #1 – Checking“.
The next article is “5 Accounts, #3 – Online Savings“.

Last time, we looked at the checking account, and paring it down so that you’re not storing unnecessary money in there. There’s another very good reason for doing this which I didn’t touch on in the last post – practicing frugality.

With only the money needed for your “day to day living” sitting in your checking account, any sudden impulsive purchases have to be planned for. You can’t wander out to the stores and drop $350 on a “spur of the moment” xbox 360 purchase, because the money isn’t available to your debit card (and if you’re seriously impulsive, you’re sensible enough not to carry a credit card around all the time, right?)

Expensive purchases suddenly have to be thought through, weighed against your other financial priorities and then “budgeted” – before you splurge on plane tickets or games consoles, you’ll need to move that money back into your checking account especially.

This is where an online savings account comes in.

Most (if not all) major banks offer them, and they’re usually quick and simple to open.

Ideally, it’s often easiest if your savings account and your checking account are at the same bank, since transfers between the two should be instant, making the money in your online savings account almost as accessible as that in your checking account (just log onto online banking and make the transfer), but just separated enough that you can’t spend it without thinking.

Not all Savings Accounts Are Created Equal

I’m amazed at the range of savings account terms available out there on the market, from the shocking, rat-bastard rip-off at one end, right up to some fairly good deals at the other. It appears that the savings account market is split in two – those consumers who’ll automatically open a savings account with their checking bank (for the convenience mentioned above), and those who are looking for a good rate of return on their money.

Examples to avoid

• Bank of America’s regular savings account – Touted as their “most popular” savings option, this pays 0.20% APY. Pffft.
• Wells Fargo’s offerings, since they think you’re a dumbass – This page makes me kinda angry, not only because the interest rates are a joke for most levels of savings, but they’re actually encouraging you to deposit more than $100,000 in an account by dangling an improved interest rate for balances above that level. You should never have more than $100,000 in an account, because that’s the level FDIC insurance will cover you to if the bank falls over and dies. However venerable and unlikely-to-fold the bank is, they just shouldn’t be encouraging this behaviour.

Cream of the Crop

There are some good accounts out there. If you want the convenience/simplicity of having your savings linked to your checking account, though, you may either be stuck with your current crappy bank (like I am at Bank of America), or need to consider changing to a more reasonable institution. That can be a big hassle (re-arranging bill payments, salary deposits, etc), but may be worth it in the long run. If you shop for a new bank, also consider their policies on ATM fees for checking accounts – these can add up, and make it harder to get to your own money.

So, onto the banks with the best savings accounts:

• CitiBank – A good range of offerings in general, including an ‘e-Savings’ account with few restrictions and a 4.25% APY.
• WaMu – The Online Savings Account is a good deal (5.00% APY, no fees) only if you have a linked checking account.
• ING Direct – Their Orange Savings Account is one of the best in the business, with a 4.50% APY. Bear in mind, though, that they have no physical locations, which may make ING less attractive as a “main bank” to some people.
• EmigrantDirect – With a 5.05% APY, you don’t get much better than their AmericanDream account. However, I’m not going to use that as my “online savings” account – we’ll see why tomorrow.

These are all starting points. If you want to open a new savings account, you really should read all of the fine print, and work out if the terms of the account suit the way you’re likely to use it.

Using the Online Savings Account

Because it offers a better interest rate and separates my money out, my online savings account is the first port-of-call for all my “non-essential” money, and serves two distinct purposes. Firstly, it acts as a “discretionary spending” fund. If I can truly justify an out-of-norm expense (a flight to attend a wedding, say), I can decide to use some of the online savings money to do that.

But more importantly, it allows me to build up “tranches” of money to transfer into slightly less-accessible (but important) accounts over time. The two accounts in question are my “emergency fund” and my “investment fund”, which we’ll cover later in this series. Because I’m looking to build my financial health and net worth right now, the majority of the money in online savings should find itself in one of these accounts in fairly short order.

Over the next six months, I’ll probably keep the balance of online savings slightly higher than necessary to cover any budgetary mishaps whilst I adjust to my new regime. The core principle, though, is that any money I don’t need to spend right now should move further down the “chain” of my accounts into ever more productive places.

Disclaimer: I’m not a financial advisor, and I’m just sharing my own financial plans because, well, I like to share. It’s also a good exercise in “thinking out loud”. You choose to follow any advice in these posts at your own risk, though – I’m not responsible if you overdraw or suffer other financial calamity…

The “Treasure Bowl” photo on this post is from Bob.Fornal on Flickr.

This is the second part of a series on setting up a financial plan.
The beginning of the series is here.
The next article is “5 Accounts, #2 – Online Savings“.

Just about everyone has a checking account, and a lot of people (my former self included) misuse it horribly. In the UK, such accounts are generally known as “Current Accounts”, which is actually a far more useful way of thinking about them.

The upside of a checking account is extremely easy access – through cheques, ATM withdrawals or debit-card purchases, you have a ready flow of money available at all time.

Every dollar you keep in that account, though, is losing value over time. This is because the measly interest rate on checking accounts doesn’t match inflation, which generally runs at 3-4% per year. So $100 kept in a checking account for a year will only be worth the equivalent of $96-$97 in “today’s money” a year from now.

Your checking account should be your primary “monetary interface” with the rest of the world – it’s usually where your paycheck goes, and the account that you’ll use to pay for rent/mortgage payments, groceries, meals out and all the other day-to-day transactions involved in just living. You should constantly pare it down, though.

I want my current account to contain a “buffer” to cover any small unforseen expenses (inpromptu nights out with out-of-town visitors, new socks because the old ones all have holes, a higher heating bill due to a cold snap, etc), plus the amount necessary to pay the upcoming costs I know are due in my budget.

The buffer should be enough that I’m not risking overdrawing – overdrawing on an American bank account is an extremely expensive proposition that can quickly rack up a painful debt. The rule of thumb I’m following is to keep an amount equivalent to an average week’s spending, over and above what I know I’ll be spending between now and next paycheck.

Working out your “average weekly spending” is pretty easy (and you can round up if you want extra security). Just take your previous month’s bank statement, cut out all of the “big ticket” items (rent, loan payments, predictable bills), tally up the rest of your spending and divide by 4.

As each paycheck arrives, I work out the “big ticket” items that are upcoming, and add three times my “weekly spend” – the amount I’ll need to live till next paycheck, plus my “buffer”.

Anything over that amount is “swept” into my Online Savings account. We’ll cover what happens to it there in the next installment…

One final point – I’m still early into this, so I check my spending and balance every day or two via online banking so that I can detect any “overspends” early, and either budget more aggressively (the preferred option), or transfer money back from Online Savings to “cover” myself.

An example

So, say it’s payday. Your checking account currently contains $700, your bi-weekly paycheck comes to $1700, your rent ($850) is due, and you spend about $300 per week on food, entertainment, small bills etc. If you were following my plan, you would budget $900 (two weeks’ spending plus “buffer”), plus your $850 rent, for a total of $1750. This leaves $650 of “unnecessary money” in your checking account, which you should transfer to somewhere more productive.

Disclaimer: I’m not a financial advisor, and I’m just sharing my own financial plans because, well, I like to share. It’s also a good exercise in “thinking out loud”. You choose to follow any advice in these posts at your own risk, though – I’m not responsible if you overdraw or suffer other financial calamity…

The WaMu advert photo on this post is from ThinkingCouch on Flickr.

I’m going to break this up into a series of posts because otherwise it’ll just be a long-assed screed that even I get bored of reading.

First off, there’s two main basics to take care of. Number one, determining the right accounts to keep my financial plan running, and secondly, determining a schedule for distributing money between those accounts.

Once that general framework is sorted out, I’ll need two major tools to keep track of progress:

1. A “net worth” tracker (basically, just a spreadsheet)
2. A way of tracking spending, so that I can pare down unnecessary costs and formulate a workable, sensible budget for day-to-day living.

A lot of what I’m going to cover (how to divide your money up; financial tools) can be found elsewhere on personal finance blogs and other sites, but what I hope to lay out here is a distillation of the best concepts I’ve picked up in my reading so far, from the point of view of someone who (as you may well be) is basically new to this game.

Over the next week or so, here’s what we’ll cover:

The Five Accounts You Meet In Heaven

For the bulk of my future financial machinations, I’ll be using five different accounts. For someone like me, accustomed to “managing” my money through a main checking account and a single online savings account at the same bank, such a spread of “money buckets” seems odd; a little frightening, even.

Nevertheless, a five-account distribution makes a lot of sense, and we’ll cover each of the accounts I’ve identified in turn:

1. Checking Account
2. Online Savings Account
3. “Emergency Fund” Account
4. “Investment Fund” Account
5. 401(k)/Pension

Next, we’ll look at how I’m going to distribute money between these accounts.

Finally, we’ll cover those 2 financial tools:

Net Worth Tracker
Budget Tracker/Planner

The posts will be linked from here, and to one another, so you should be able to jump around the series as the mood grabs you. I’m afraid that some of this will be rather US-specific, since that’s where I am right now. Hopefully the core concepts will mostly translate to wherever you happen to be.

(And once I’ve covered this, I’ll attempt to finish up on some of the productivity stuff I’ve been promising.)

Photo of an old ledger from Peter on Flickr.

If you are starting out investing in stocks and shares, you might want to use a share tipping service. They point you in the right direction, and then it is down to you to decide if you want to invest in what they suggest or not. You might decide not to invest in everything, but it tends to broaden your horizon and show you companies you would never have looked at before. If it is good, it will also keep you up to date with what the stock market is doing.

The site link which followed is useless to me, being a UK share tipping site (I live in California, for anyone late to the game). And even so, there are a couple more reasons why it doesn’t help much.

Personal Finance is about more than “playing the market”

As I mentioned in passing in that previous piece, I’m at a stage in the game where I’ve never really thought about money (and long-term wealth generation) before. Like many twenty-somethings, I’ve earned money and then spent most of it. Couple that with a spell of bad luck and an expensive move across the globe, and when I sat down and computed my current net worth it was a sobering thought to realise that, were I to walk under a bus tomorrow, I’d leave my loved ones nothing but minor debts (life insurance notwithstanding).

Since I’m hurtling towards 30, I really should be making better decisions with my money, a process which involves (in loose order)

1. Paying down those final debts so that I don’t owe a single cent to anyone.
2. Monitoring my expenditure a lot more closely (I have no real idea what I spend my money on each month), and trimming the fat.
3. Starting to invest in earnest in a 401(k) plan (“a pension” for the Brits following along).
4. Starting to save in earnest each month towards a general-purpose “emergency fund” and a long-term investment fund.

I’ve started using a couple of tools to formulate a plan around all this, with the aim of getting all 4 points somewhat covered by January. I’ll share those tools later.

Share tipping sites just aren’t the best way to get 100% value

Even once I get an investment fund up and running, single-share investments on the recommendation of dedicated “share tippers” probably aren’t the way to go. 3 reasons why:

1. If you’re just starting to build up capital, diversification is a good thing. Whilst an index fund is extremely unlikely to deliver the 200%-in-6-months gains which many investors might dream of, over the long term (10 years or more), it’s a reasonable guarantee of good returns, in the 9-12% range (compounded, that makes for good money).
2. We’ve just entered a new period of extreme market volatility, thanks in large part to mortgage-debt worries in both the US and the UK. It may lead to a full-blown crash, or it may simply last a while. As of today, the markets rallied at close again, but more bad news could easily reverse that. Even more reason to diversify, and to avoid short-term gambles which might eat up significant capital.
3. If you’re going to be bullish about putting money into individual stocks, nothing comes for free. A lot of share-tipping sites are likely to pick up on “the next big thing” pretty late, by which point the best possible gains in the stock in question are long-gone (ie, a bunch of people already bought in and moved the price up). If you’re going to “play the market”, the only way to ensure even a middling chance of good returns is to do as much research as possible yourself, and buy-in ahead of the crowd. It doesn’t end there either. Once you’re in, you need to keep researching (Jim Cramer recommends one hour per stock per week) to catch any signs of impending doom.

At any rate, I’m not quite there yet. To give you some idea of where I’m going, though, I’ll share my current financial web reading list.

Personal Finance Advice

I’ve found that most of the personal finance sites, be they individual blogs or professional sites like MSN Money, are pretty samey. The classic “tell” is the number of times they refer to lattes. Yes, lattes – it seems that “cutting out the morning latte” has become so pervasive in the world of “how to save money” advice that all else falls by the wayside. Since I can read a piece of advice as well the first time as the tenth (and don’t drink a latte every morning), this advice is a sure sign of uninventive tedium.

The stand-out in the pack is The Simple Dollar, written by a twenty-something father who hit rock bottom after years of snowballing minor financial mistakes. I’m not at rock bottom (far from it), but the situation he found himself in resonates somewhat, and he writes with incisive common-sense and good humour. The site is also sprinkled with solid book reviews and specific advice in answer to reader questions.

The Financial Markets

I picked up on 5 blogs (out of thousands) which cover a good range of ground. Importantly, most of these provide copious links out to the “cream of the crop” on other finance sites. I may drop one or two of these if there turns out to be significant overlap, but at the moment they’re throwing all sorts of useful concepts my way.

• The Big Picture – A heady mix of not-too-technical analysis, financial humour and intermediate-level advice. Makes me feel a little out-of-depth occasionally, without being baffling. About where I want to be right now – it means I’m learning.
• The Kirk Report – A trader’s personal observations – generally a concise post at market open and market close, with occasional other observations thrown in during the day. A pretty simple way of keeping on top of daily market fluctuations. Bonus points for starting the day each day with a cordial “Good morning”.
  
• Finance Trends Matter – Regular round-ups of interesting finance pieces from all over the web, as well as beginner-to-intermediate studies of current trends (again, containing a wealth of links).
• Abnormal Returns – Most link-aggregation posts, again with occasional intermediate-level in-depth studies of particular concepts.
• The Smart Money Report – 3-4 extremely concise pieces per day, usually quoting the salient part (and linking to) pieces on other finance sites.

I began with another site, Minyanville, which is pretty darned interesting, but I’ve dropped it for the time being because the load was too much (20-25 reasonably complex articles per day, well-written but littered with extrememly complex concepts that I’m not yet at the level of fully understanding). Rather than continue with the blog, I’m going to work through Minyanville’s education section first to get myself a bit further up to speed.

I’m talking about jumping feet-first into a new area of knowledge or expertise, and trying to “climb your way up” through torrents of information, advice and opinion so that you build your own “world view” of the domain in question and possibly, if you invest the right time in the right places, become an expert (or at least a competent amateur) in the field in question.

I think most people have done it at least once in their lives – if only when studying at university or learning a trade. I can immediately think of 3 times that I’ve done it – getting used to the realm of literary criticism at UCL, first learning my way around the internet, perl and linux around 1998, and properly acquainting myself with the rich and impossibly complicated world of independent music, starting last year.

The reason I’m writing about this feeling now is that I’ve just embarked on a new “problem domain” – money.

I’ve not had a stellar track record with the Green Stuff in my life so far. Nothing completely disastrous, you understand (no bankruptcy, no unrecoverable debt, no defaults on bill payments), but I have considerably less to my name right now than I’d like.

Involvement in various startups with bad luck (or bad judgement) and a mildly expensive “life reset” move to America have seen various debts and setbacks which mean I’ve never really got the headlong push down the “savings chute” that I’ve always hoped for in the back of my mind. After some hard work, that situation is finally coming to a resolution and (barring any further disasters), I’m just a few months away from 100% debt-freedom, and a chance to start putting some money to real work for me.

So, as I see it, now is the time to sit down and look at really making that work – finally get an idea of how all the different sharp-toothed cogs of the economy fit together, and how best to squeeze them for a decent return on any money I can set aside in the future. Hey, I’ve got some catching up to do!

As to the Bewilderment Zone, being in the throes of it again is giving me a chance to analyse it, and compare my current loose-footed stumbling with strange financial concepts with my loose-footed stumblings, a year and a half ago, with a slew of interconnected musicians, labels, styles and local music scenes I couldn’t fathom.

Bewilderment is a powerful foe to battle, and I believe it’s the reason that a lot of people aren’t better acquainted with areas like money and investment. Standing at the bottom of Mount Information, staring skywards to the rarified peaks occupied by people who Get It, you wonder how you’re ever going to make it up there. After all, you’re wearing battered Tennis Shoes and you forgot to bring a coat. At this point, another foe – Procrastination – joins the fray. “Climb the mountain tomorrow”, he whispers. “You don’t need to get involved in all that now. You might hurt yourself.”

The thing to do at this point is to turn and look back across the landscape of your life. Look at the other hills and mountains you’ve scaled before this one – it might only be Algebra at age 13, or it might be linux or indie bands – the point is, you’ve almost certainly been here before.

Two years ago, I would have looked at you blankly if you’d said the name Sufjan Stevens. Now I can enthuse on the high points of his work, and that of all the other artists connected to him who are now emerging into their own bright careers.

I made it up that particular mountain, and although the process once seemed daunting I found that as I progressed, it was enjoyable. Not only did I find a bunch of music I loved, I also reveled in each new revelation and the feeling of increased insight as I made it another few inches skyward.

The risks in this new area are, of course, rather greater than in others. Make a wrong turn on the American indie scene and the worst you’ll end up with is a few unlistenable albums languishing in iTunes. Make a wrong turn investing and you can lose thousands of dollars. But there are tools which can help. You can build experimental portfolios on Yahoo! Finance, for example; see how they fare and learn from the mistakes. Utimately, the issue of money is just too important to be laissez-faire about. I’m not looking to be the next Warren Buffet, but I’d sure like to retire comfortably at a reasonable age, and I’m far more likely to do that if I’m a bit clever with my cash while I’m still young enough to benefit.

So here I go again. Sure, I keep forgetting exactly what ETF means (and how ETFs work), but I now at least know it’s a type of fund. A week ago, I wasn’t even aware of subprime mortgages, much less why they matter and why they’re threatening various areas of the American economy right now.

Already, I’ve taken a few steps, and the whole thing is fascinating – the movements of markets, the complicated effects of financial events on other parts of the markets; step back and they become weird insights into human nature and society in general. I may share more on what I learn once I’m a bit further up the mountain. In the meantime I’ll be avoiding Bewilderment and Procrastination and trying not to stumble too much.

The image used at the top of this post is by Klobetime on Flickr, and seemed… eerily relevant