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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Now is not a great time to be a saver.  In fact, it’s a down-right lousy time.  Rates on everything from high-yield savings accounts to CDs are way down.  In the meantime inflation is up (though still moderate by historical standards), by even the federal government’s dubious accounting.  Mix that together and what you get is negative real interest rates.  I’m going to explain exactly what that means to you and your finances.

My use of the term ‘negative real interest rates’ refers to the phenomenon when the return from completely safe investments is lower than the Consumer Price Index (CPI) - commonly known as ‘inflation.’ 

So you know exactly where I’m coming from, let me specify a couple of the elements.  I consider ‘completely safe’ to be FDIC insured or US government backed.  For our simplified purposes, let’s take that to mean a high-yield savings account.

While the term ‘inflation’ isn’t technically correct in this context, it’s close enough.  Inflation for our purposes is the increase in year-over-year consumer prices.

Here’s where the numbers are for these elements right now:

• CPI 2007: 4.1%
• Typical high-yield savings account represented by ING Direct: 3.4% APY

If you keep your money in this savings account, after inflation, your real return is a negative 0.7%.

Strategies

A couple of thoughts on how to deal with the situation:

1. Consider saving using TIPS.  Treasury Inflation Protected Securities are essentially savings bonds that guarantee a real rate of return after inflation.  There are all kinds of things to consider when thinking about TIPS (like the tax implications), but for some situations they work.
2. Pay down debt.  I know this may seem counterintuitive but consider paying off high interest debt (think credit cards) at an accelerated rate instead of saving more money.  Sure you need an emergency fund, but if it just gets smaller in real terms, you’re losing.
3. Shift savings/investments into retirement accounts.  If you save and invest outside a retirement account, now might be a good time to bump up the amount you put into that tax-advantaged retirement account if possible.  Your investments inside those accounts will likely be slanted toward a more aggressive allocation.
4. Don’t try to ‘make up the difference’ by seeking out unnecessary risk.  So your super-safe savings are returning a negative real rate.  Don’t lose sight of what those funds are for and why they’re in a safe place to begin with.

That’s just what I could come up with.  Anybody want to chime in with other suggestions?  I’m interested to know how other people deal with negative real interest rates in practice.

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After discussing it for a while with my wife, we’ve decided to open a savings account in our daughter’s name. She’s almost four, and we’ve decided now is the right time to start formally teaching her about money. Up until now, most of her financial education has been informal or came from credit card companies.

To that end, I opened a First Start savings account through USAA. USAA continues to be the most awesome financial services company ever. This product is specifically targeted at kids and getting them to save. It is the best saving account for kids there is (And, no, they don’t pay me to write that. Attention USAA: I’d love to start being paid to write this stuff). Here’s why it’s so awesome:

• No service fees whatsoever (for low balance, etc)

• APY of 2.05%, so they actually earn some interest you can point to

• Better-than-free ATM access (USAA not only doesn’t charge ATM fees, they actually refund the fees other banks charge you)

The plan

My wife and I have tentatively developed a plan for our daughter’s finances.

• Her allowance will be $1 per year of age per week

• She will have to put a portion away to donate to charity. My wife suggested we make giving tangible by having our daughter save her ‘charity’ money and purchase gifts that our church suggests for our sister parish and the local needy. I really like the idea.

• The rest of her ‘pay check’ gets split between savings and spending. Which, in practice, means long term savings and short term, since the amounts we’re dealing with are so small.

I’m still figuring out how I want to do it, but I want to develop some sort of ‘matching’ contribution. The idea is to match her long term savings like an employer might match a 401(k) contribution. I’m thinking the best way to do it is in a lump sum at the end of the year. I figure the impact will be that much greater that way, since the match would be a sizeable amount of money. I’m thinking dollar for dollar is reasonable.

One key thing about this whole allowance business is I’m adamantly opposed to tying it to chores. From everything I’ve read on the subject, doing so is counterproductive. The theory behind not tying allowance to chores is that every member of the family has responsibilities to the family (e.g. setting the table or helping with laundry) independent of any allowance.

I never had an allowance as a kid, so I’m just guessing at this stuff. If anybody has suggestions regarding kids and allowances (what works, what doesn’t, did you have one) I’d love to here them.

(By the way, I opted not to get the ATM card with the account. At least not right now )

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I was walking through the city where I work and in the span of 3 blocks, I passed no less than six different bank branches and one credit union.

I was, frankly, speechless. Who goes to a physical bank any more? I would think that what with the Interwebs and all, the number of bank branches would have actually decreased or, at very worst, stayed stable. But no. I still see banks being built. In one bizarre case, I saw a bank razed…and another bank put up on the exact same plot of land!

Let’s see. Internet banking is

• Faster
• Easier
• Other-people-free

Yeah, I guess I can see why there would be more people banking in person. Ugh.

There’s just no excuse if you’re not using direct deposit at the very least. I remember being a kid and going with Mom to the drive in bank teller every Friday to get cash for the weekend and those boss Dum-Dums. Sometimes I marvel that anything got done when I was a kid. You had to actually plan stuff. You had to know how much cash you needed for the weekend.

There’s just no reason for that in this day and age. But maybe I’m wrong. Maybe something really great is going on in bank branches that I’m not aware of. Maybe they have monkeys riding unicycles for your entertainment while you wait or something. Or maybe the customer service is just that awesome. Uh, maybe not.

(And yes, before anyone points it out, I’m aware there are certain things you need to actually go to a bank branch for. They just don’t happen with the frequency that you’d need hundreds more bank branches.)

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I got a question about emergency funds I’d like to address:

“With rates on savings accounts like Emigrant and ING dropping, where’s a good place to put my emergency fund? I hate seeing my money sit around doing nothing. Thanks.”

My answer to this is simple. An emergency fund is not for making money. Achieving the optimal return on your money is NOT your goal. Having a stack of bills to use in an emergency is.

Putting your emergency fund in a savings account or equivalent achieves the three things an emergency fund is supposed to achieve:

1. It keeps your money readily available
2. It keeps the value of your money constant over time
3. It keeps your money safe

Your emergency fund is not supposed to do anything else, including add to your net worth. Looking for another quarter point in interest should not be your goal. Having the money you need, when you need it, should. Do not make the mistake of losing sight of the objective of an emergency fund.

My first-line emergency fund sits in a money market earning barely over inflation. And that’s just where it will stay.

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