Tag: money hack

Personal Finance Lessons Learnt Part II

Continuing on from my previous post on what’s worked for me over the years.

Pay Yourself First

Paying yourself first is a staple of personal finance recommendations, but that doesn’t make it any less relevant or even easy. In a nutshell, the idea is you don’t pay off debt, build your emergency fund, your retirement and investment portfolios from what’s left over from your paycheck, but rather these things come out first.

Also know as reverse budgeting, the idea is that you don’t set your budget based on your prior spending habits, after all where would that leave you if hadn’t been living below your means? Deeper in a hole.

Rather, you start with your saving priorities and allocate your available cash flow to your highest priority first, then if there’s cash flow left, the next priority, and so on through your main budget categories. I like to think of it as saving buckets, and as one fills up money starts flowing out of that bucket to the next.

Graphic of three buckets with funds flowing from one to the next. The buckets are labeled debt, retirement, goal 1
Forgive the crude clip art 🙂

So in our example to the left first you would allocate your free cash flow to pay off your outstanding credit card debt, then to retirement, then on to your next goal when you had met your retirement savings goal for the year.

An alternative is to set a target date for example paying off your debt in X months, then divide the debt and projected interest by X, do that for your retirement goal for the year, and then allocate any left over to other savings goals. This way while you are paying off your debt you are making some progress against other goals. I would argue that if you have a credit card debt, that interest is so egregious you should prioritize paying that off over everything else, but the most important thing is your system has to work for you.

Employer sponsored plans like HSAs and 401(k)s (or the TSP for those in the military or other Federal service) where the money is literally deducted from your paycheck before you get your hands on it are a great idea, and if you aren’t maxing these out I would strong recommend allocating any future raise to doing so before you start letting lifestyle inflation creep in. Lifestyle inflation will literally kill your chances of being financially independent.

With many employers, you can set up a separate payment of a set amount to a savings account separate from your paycheck deposit account, say a $200 a paycheck deduction that goes into your emergency fund directly. This is a great way to build up saving without having to really think about it.

Other goals, or you if can’t set up an allocation like this, brings me to my next lesson.

Automate Everything

We live in a time when all our financial service providers are trying to win at Customer Experience management. This means they are always looking for ways to make things easier for us as customers. (Well except for companies using dark patterns to trick us into spending more, but that’s another website.)

Because we humans are of limited will-power, time, and attention, take all these things out of the equation. Make it so you’d actively have to stop yourself from saving and investing.

  • Set your 401(k) to annual increase it’s percentage until you’re maxing it out
  • Set up automatic transfers to build your emergency fund
  • Do the same with other goals to separate savings accounts, we have one each for: cash reserves, taxes, travel, property maintenance, dining out (when we started doing this years ago we opened separate savings accounts for each, but now many banks let you set up multiple savings goals/buckets/whatevers within a single account.)
  • Put all your bills on your credit cards, which also helps maximize points
  • Have your credit card bills in turn set to auto-pay, just maintain a cash balance in your checking to cover your average spending
  • While you’re at it set up balance alerts so you know right away if you don’t have the buffer you’d normally want
  • Have all these accounts aggregated on a platform like mint or Personal Capital so you can monitor them all in one place

* I am not a financial professional or consultant, none of this information should be taken as advice for your specific financial and personal situation. Do your own research and form a plan that is appropriate for you.

Photo by Francesco Gallarotti on Unsplash

Personal Finance Lessons Learnt Part I

I have been a saver and investor all my post-Army/post-college life, that’s a good 27 years at the writing of this post, and want to share as much of what’s worked and not, so hopefully you can benefit from it. It goes without saying, but this is really just my opinion, please consider your own circumstances carefully, and seek professional advice if you need it.*

Read about Personal Finance and Investing

The first place to start is what you are doing right now, I highly recommend regularly reading up on personal finance and investing. Read different perspectives, and different authors, see what resonates with you and dive deeper into topics you find interesting.

When I first started working, the web was still in its infancy, so I read the financial press – The Wall Street Journal, the Economist, Money, and the like. I also read the newsletters from my financial institutions – at one time or another I have been a client of USAA, Vanguard, Schwab, Fidelity, E*Trade and they all used to publish newsletters on personal finance tips and planning advice. I always found Schwab’s On Investing to be the best and looked forward to it coming each quarter.

And of course now with the tremendous amount of resources on the web, there’s no shortage of advice (and opinion) – I maintain a list of my favorites on the Resources page.

There isn’t any one thing you will get from all this, it is the grounding you’re after, to learn the language of finance, see how certain topics are generally presented, and look for some contrarian opinions among FIRE bloggers.

Fair warning that you will read a lot of crap, and you’ll also notice that a lot of writers will all write about the same thing, so you will need to read everything critically. But in the process you’ll also start to see through some of the hyperbole in the press, you can think of these as inoculations against following the crowd when the press is screaming about the market collapsing or the bull run extending for X months. “DOW 40k!!!”, “This bear called the last recession, you won’t believe what he says now!” Meh.

Blog forums and comments, and finance sub-Reddits are also good places to connect with others pursuing FIRE or just better personal finances, but tread with caution, and double check any recommendations you get there before acting on them. For God’s sake don’t take anyone’s word for it when it comes to taxes. Read the primary source, at least here in America it’s actually pretty understandable and easy to find on the IRS’s website. I have been surprised to find that it’s easier to read the IRS materials rather than sort thru all the different opinions you’ll find on the internet.

Track Your Spending

The best place to start next is to get a picture of where your money is going now. See what you are spending your money on, and really spend some time thinking about if you are getting the value out of your money. One of the exercises in Your Money of Your Life that has really informed a lot of my choices in life is understanding what you are trading in terms of the hours and energy of your life for a thing you are about to buy. In other words – if I want X, really do the math on how many hours I would need to work in order to afford it (after taxes) – this can be a very clarifying experience and I have passed on a lot of impulse purchases because of this. And while I am a big proponent of being frugal for the benefit it brings your finances, sanity, and lack of clutter, etc. – you will also quickly see that you aren’t going to skip a few lattes into financial independence.

Others have written a lot about frugality and the Big Four, but saving on housing, transportation, food, and taxes is where you will find the fuel for savings and Financial Independence. While I didn’t go the hardcore route exemplified by many millennial FIRE bloggers, my wife and I did make deliberate choices to mange the cost of these like:

  • Renting a little further out of the city – this saved on rent of course, and we were always able to take some form of train into the heart of the city or the trendy parts of town without paying the associated rent to live there,
  • Once we were ready to own, we always put at least 20% down even when that meant getting a smaller house. You save on interest, on insurance, and we never paid PMI, which I just found offensive, as you are paying to insure your mortgage company.
  • We took the higher deductibles on insurance, and contribute the difference to our emergency fund, essentially partially self insuring.
  • We shared one car and took public transportation while we lived in the city (I realize no car at all is better, but we didn’t make that choice.)
  • Bought our cars to own; paying cash or aggressively paid off our loans early, and then driving them as long as possible
  • Buy fresh ingredients and cook at home, which also has health and relationship benefits
  • Hike, bike, and go camping instead of fancy vacations or cruises.
  • Max out tax deferred savings vehicles like IRAs, 401(k)s and HSAs

For me, the thing that tracking really highlighted in the beginning was interest payments, and the amount of just random retail crap we were buying.

Having to look at the interest payments every month helped me get motivated to aggressively pay down debt and not buy things on credit (other than our house.) Since we paid off our credit card debt in 1997, we have always paid them off in full every month. For big purchase we saved up for them first (I know, a novel idea!) in high interest savings accounts set up for specific goals.

As for how to track your spending, there really is no lack of choices, depending on how nerdy you want to get with it, you can build custom spreadsheets to slice and dice the data any way you want. To just get started however, I’d go with an automated aggregator that can pull in all your financial transactions and categorize them for you.

Looking at our random spend also made us really think about whether we really needed things before we bought them and, though it sounds fundamental, stopping yourself in store or online when you are about to buy something and really think about it, what it costs, and how long you’d have to work to pay for it, really helped us really cut our spending. Now it’s not uncommon for us to allow a day or two to pass between when we put something in the online cart and when we actually purchase it. Easily 1/3 of purchases never make it through the filter of a little time.

As for tracking tools there are a lot of options – Mint and Personal Capital are good online options, I’ve used Quicken for just about forever (and MS Money when that was a thing.) There are tons of other options out there, just find something that works for you and see what’s lurking in your spend.

* I am not a financial professional or consultant, none of this information should be taken as advice for your specific financial and personal situation. Do your own research and form a plan that is appropriate for you.

Photo by Markus Spiske on Unsplash