Advanced Personal Finance

My wife and I have a checkered history when it comes to budgeting.  We’ve run the gamut from no budget to our current ’system.’  I’d like to say we do what all the books say and track our spending and make goals and prioritize.  I’d like to say that, but I’d be lying.  We don’t do any of that anymore.

How it all began… 

The history of our budgeting began when we got married and combined finances.  Whether or not to combine marital assets is another one of those endlessly debated personal finance topics that I have no interest in rehashing here.  Suffice it to say we combined our assets (or should I say my wife’s small assets and my liabilities).  After my wife kicked me in the butt and I was born again as a saver, we did what the books (and now blogs) say - we developed a budget (which I euphemistically called a ’spending plan.’)  We tracked spending to the dollar.  We categorized and calculated.

Now let’s be honest - budgets suck.  Bad.  I hate them and so does my wife.  I’ve read all about how you shouldn’t think of a budget as what you can’t do, but a prioritization of what you can do.  It just didn’t click that way for us.  It was like a diet.  And it sucked.

The evolution of a budget

Not only did it suck budgeting, we almost always busted the budget.  So I moved from a hard-core dollar-by-dollar accounting to something like 10 categories of spending.  I hoped that would simplify things enough that it would make budgeting suck less.  It did not.

So then we moved to budgeting by ‘The Force.’  In our version of this method, I made sure we had enough money to pay all our bills, then just let the remainder go.  This was much less sucky, but can hardly be called a budget.  (Incidentally, the only real way to make budgeting by The Force work is if you don’t have any debt.  By this time, we didn’t.)

Where we are now - much less sucky.

My latest embodiment of the budget is something like The Force with a tiny bit of discipline and tracking.  Now, we pay all the bills and fixed expenses (e.g. mortgage, utilities) and have a dollar amount left over.  You could call it our discretionary funds.  It includes stuff that isn’t a fixed amount every month like food, eating out, gas, stuff like that.  Now we know we have $X we can spend on everything not a fixed bill.

At the end of the month, I download a quick report from USAA showing our spending, cross out fixed stuff and tally it up.  If we went over, we know we have to make it up and do better.

I like this system so much better than having a budget.  Budgets suck.

Here are what a couple of other PF bloggers are saying:

Jim at Blueprint for Financial Prosperity takes a look at five budget techniques.

JD at Get Rich Slowly discusses using “Reverse Budgeting.”

Flexo gives his take on budget for those who aren’t excited about budgets.

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Until recently, I worked for one of the few remaining companies to offer a real, old-fashioned pension.  When I quit a few months ago, I did something I’d read you’re never supposed to do.  I cashed out and took a lump sum from the pension plan.  Here’s why I did it.

My old employer is one of the few that still offers a pension (only 11% of private employers still do, according to the BLS and the Fed).  Well, they still kinda offer a pension.  A couple of years ago they stopped contributing to the plan.  You didn’t lose anything if you worked there, you just didn’t get anything more than what was already there.  Since 1985, the commonality of defined benefit plans (i.e. ‘pensions’) has dropped off a cliff.  For most people going forward, retirement savings depends almost entirely on defined contribution (i.e. IRAs and 401(k)s) plans and Social Security.

When you leave a company that has a pension, though, you have a choice to make.  You can either take your pension as a lump sum or take the annuity (monthly payments).  It wasn’t even close - I took the lump sum for four reasons.

1. There were no negative tax consequences of doing so.  I was able to roll the money directly into an IRA without paying taxes or penalties.  This was a biggie.
2. I strongly suspect I can achieve greater returns investing the money myself.  Not because I’m some genius investor (check out my super-duper asset allocation) but because I have a long time horizon and am risk tolerant.  Pensions have a lot of advantages when investing money, but they can’t lose money.  I’m not in the position of having to pay out money every quarter.  With the money in an IRA, I can literally invest in anything.
3. The array of choices for the annuity was ridiculously lengthy and confusing.  Seriously, there were easily twenty-five choices for how you could get the annuity.  I like to think I’m a reasonably smart guy, but I couldn’t make heads or tails out of that list.
4. It is a reasonable possibility that by the time I retire in 30 years that money won’t be there if I’d left it in the pension plan.  Pensions not only suspend contributions like mine did, they also fold completely like several airline pilots’ plans did in 2005.  And while there exists the federal Pension Benefit Guaranty Corporation that’s supposed to insure against it, the PBGC is hurting real bad.

The process itself was pretty straightforward.  Fill out a couple of forms, get them notarized (In my case twice.  Don’t ask.) and tell the pension manager where to send the money.  I actually never saw the money in the form of a check.  Strangely, they could send the money directly to my investment company (USAA) but I couldn’t do that with my 401(k) money.  In the case of a 401(k) rollover, you get a check made out to the investment firm and you send it to the them.  Whatever.

So that’s it.  I was able to put something like $30K into my IRA instead of leaving it with the pension fund.

It’ll be a little something extra come retirement time.

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The Senate recently passed a bill to essentially bail out people involved in the housing crisis.  Builders, buyers, local governments, future buyers, they all get a piece of the pie.  This on top of the taxpayer funded bailout of Bear Stearns. 

I say let’s just go ahead and bail everyone out…of everything.  Did you buy a car you’re having trouble making the payments on?  Here’s some money.  Lots of credit card debt you can’t service?  Here ya go.  Small business facing financial difficulty?  It’s all yours.

Why are those any less worthy than people involved in the current housing and lending trouble?  After all, each made decisions, presumably after considering their own self interest, that turned out to be bad ones.  A good number people in all these groups really didn’t do anything wrong at all.  In an economy like ours, sometimes you lose even when you do everything right.  Fortune doesn’t always favor the prudent.  Why is it, then, that those hurt by housing get special treatment?

This is coming from a guy who is a homeowner.  That means my house has probably decreased in value, too, just like millions all over the country.  But I’m also a faithful taxpayer (one of the just 60% of Americans who pay into the federal treasury on April 15th).  So that’s my money going to JPMorgan/Bear Stearns, Toll Brothers, and Joe Downthestreet.  And it’s real money.  That has to be paid for.

So if we’re going to make those people whole, why not everyone else struggling with their debt?  Are they any less deserving?

If you ask me, the people most hurt by this aren’t even directly involved.  It’s those people who are trying to do the right thing.  Savers have suffered with plummeting interest rates.  Paradoxically, those trying to borrow that money in the form of an auto loan are facing higher interest rates, too.  And it’s making attending and paying for college harder.

Situations like this teach people, if only subtlely or subconsciously, that it doesn’t pay to be prudent and do the right thing.  Feedback like this changes economic behavior for the worse.  People learn recklessness isn’t as dangerous as they thought.  Savers and investors begin to look like suckers. 

That’s a problem because of basic economics.  An economy that wishes to grow must have citizens who invest and save.  And that investment cannot come from outside the country, as is the case in the US today.  That’s just selling the country, bit by bit.

So let’s just bail everyone out.  After all, we all deserve it.

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How would you like to invest in a product that returns high single digit returns that’s as safe as cash or a money market?  They’re called auction rate securities and they’ve been marketed as just that.  The only problem is, as investors are now finding out, these things are anything but a cash equivalent.  Here’s the deal.

An auction rate security is a debt instrument (usually a bond but can be preferred stock) that has its interest rate reset, usually once a week or month, through an auction.

The idea is that an investor will get a better rate of return than in a money market or savings account since they’re investing in actual corporate or municipal debt instruments.  The problem, as this Reuters article points out, is that when there’s a flight to quality in bonds, as there is now, there’s no market for the auction.  In other words, nobody shows up to bid on the auction rates.  Result?  People have lost significant portions of their investment.

It’s clear, then, that auction rate securities are not a juiced substitute for cash equivalents.  Now that formerly-high yield savings accounts and money market funds are paying such low interest rates, I fear more people will get suckered into these things.  It’s a great example of the old saw “if it sounds too good to be true, it is.”

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