Archive for the 'Budgeting' Category
Wednesday, June 9th, 2010
In looking up some stats for personal savings rates, I found that the Bureau of Economic Analysis (BEA) provides a chart of two separate calculations that track the personal savings rates of US taxpayers:
- The National Income and Product Accounts (NIPAs) method, and
- The Flow of Funds Accounts (FFAs) method
You may find either of these quoted in mainstream media articles whenever there is a big shift or one goes negative temporarily. Both methods have been criticized for the accuracy, in which I won’t go into detail here. The main differences between the NIPA and FoFA methods are outlined in this chart from the AARP paper [pdf] “The Declining Personal Saving Rate: Is There Cause for Alarm?”:
A few things to note:
- When I read “disposable income”, I normally think of what’s left over after paying for food and shelter. In this case, disposable income is just personal income minus “personal contributions to social insurance and personal taxes”.
- Both NIPA and FoFA exclude capital gains on investments, which some say contributes to a “wealth effect” where people will spend more because they feel richer due to growth of investments. (not as much recently…)
- From the chart, FoFA includes the purchase of new assets and investments as personal savings. NIPA includes employee 401(k) and pension contributions as wage income.
- FoFA treats the purchase of consumer durables (cars, major appliances) as a form of savings, while NIPA treats it as consumption.
- NIPA says that paying your mortgage (owner-occupied housing) is savings as imputed rent, while FoFA counts your added home equity as an asset, but your mortgage payment as a liability.
Confused yet? Well, I hope at least you came away with something. The AARP paper goes on to explore various theories for the long-term decline of the personal savings rate. If you’re looking for more, here’s another paper that explores the differences.
Tuesday, June 8th, 2010
For a while now, I’ve been thinking about a better way to publicly track my progress towards financial freedom and also allow easier comparisons between readers. I’m sure some people would miss the net worth updates, but I have reached the point where our net worth fluctuates mainly with stock market valuations and not due to actual improvements to income or savings rates.
First, I started to brainstorm the required data needed for such tracking, each of which I can address in a future post. Once we collect these numbers, I can then put out some numbers and ratios that could be better indicators than plain net worth. Heck, a portfolio of a million dollars is nothing if you plan on spending $100k a year, but if you only spend $40k a year and have a small pension, you could be all set.
- Current Monthly Income (After-Tax)
How much money are you taking in right now? For those with variable paychecks, it would probably be best to average this out over the trailing 12-months or 6-months.
- Current Monthly Spending Rate
How much are you spending? This should also be averaged out over at least 6 months, in order to capture all those irregular bills like my semi-annual car insurance bill, as well as those unexpected expenses that always pop up. For example, in the last few months alone we have had an $1,000 electrician bill and a $500 auto repair tab.
- Current Portfolio Size
How big is your current investment nest egg? If you include your house, then you’ll need to include the cost of renting in your future spending.
- Future Spending Rate
What is your “burn rate” going to be in retirement or semi-retirement? Many online calculators simply assume this is 85% to 100% of your current monthly spending. This can be too generic. For example, in less than 20 years, I plan to have my house paid off. My mortgage is more than 50% of my current expenses! Other items like health insurance premiums will be harder to predict.
- Investment Return
There are many smart folks making educated guesses about future market returns based on both looking backwards and forward. Based on your chosen asset allocation, one can at least attempt a rough estimate of future after-inflation returns. We can’t rely on these numbers, but it’s a good beginning.
- Safe Withdrawal Rate / Retirement Income Rate
How will you create your income during retirement? If it’s going to be from selling stocks or bonds, you’ll have to decide on how much is okay to withdraw each year so that you don’t run out. Will you draw a fixed percentage each year? Adjust annually for inflation? Adjust annually for market returns?
What if you are planning to live off dividends or bond income? What if these fluctuate? If you have a pension or annuity, how will this fixed income change how you draw down other assets?
A simple example would be calculating your personal savings rate, which would be independent of market fluctuations for most people:
Multiply by 100 for a percentage. Hopefully this isn’t negative! Another good ratio might be your portfolio multiplier factor, which tracks how big your portfolio is relative to your planned future spending.
Depending on who you talk to, a Portfolio Size Factor of 25 to 35 might be desirable if you are withdrawing money from a portfolio of 60% stocks and 40% bonds. Adjustments should be made for pre-tax vs. post-tax accounts.
I could post these and other monthly indicators each month, instead of net worth. What do you think? Any other numbers that I’m missing?
Tuesday, May 4th, 2010
I’ve been catching up on my stack of old magazines, and in the process discovering a bunch of new websites. One appropriate site to mention is Bundle.com, which describes itself as the “first money comparison site that lets you see how people just like you spend and save money.” Here’s a promotional video from them which walks you through it:
For example, this is what the households in San Francisco, CA were spending their money on in December 2009:
“House & Home” does not include mortgage or rent, but are things like utilities, home repair and improvements, and phone service. “Health & Home” includes insurance, child care, pet care, and charitable giving. Where does the data come from? Via their FAQ:
With a team of experienced statisticians and data junkies, we’ve compiled, tagged and sorted data from a (still-expanding) collection of sources. Our data comes from the U.S. government, from anonymous and aggregated spending transactions from Citi, and from third party data providers.
Aha, my sneaky Citibank card! This is exactly the kind of data I would think would be recorded and sold from aggregation sites like Mint.com. Now, is it just me, or is there no data available under the “Saving” tab?
Thursday, April 29th, 2010
I’ve been trying to track our expenses better using Mint.com, which means combing through transactions and manually correcting many of the automatic categorizations. I think it’s working, at least in that I hate doing it so much that didn’t make a purchase today so I wouldn’t have to categorize it later.
I found the home page chart greeting me today amusing:
We did pretty good this month, but it would seem like all we do is eat and drive (and in the case of fast food, probably both at the same time). I notice that housing and utilities aren’t included, but I’m not going to tweak the targets until I have a couple months of spending data first.
Thursday, February 25th, 2010
For purposes of this Agreement and solely to provide the Account Information to you as part of the Service, you grant Intuit a limited power of attorney, and appoint Intuit as your attorney-in-fact and agent, to access third party sites, retrieve and use your information with the full power and authority to do and perform each thing necessary in connection with such activities, as you could do in person. YOU ACKNOWLEDGE AND AGREE THAT WHEN INTUIT IS ACCESSING AND RETRIEVING ACCOUNT INFORMATION FROM THIRD PARTY SITES, INTUIT IS ACTING AS YOUR AGENT, AND NOT AS THE AGENT OF OR ON BEHALF OF THE THIRD PARTY. You understand and agree that the Service is not sponsored or endorsed by any third parties accessible through the Service.
Sounds serious! My first thought is that without this clause, Mint could not perform their intended service of being a one-stop shop for all of your online financial accounts. They would essentially have to walk up to every single site and ask for permission to be an official portal for them, yet at the same time be released from liability. That would be basically impossible.
In the end, you are giving up some of your rights in exchange for the convenience of having all your accounts checked for you at once. If you are worried about something going wrong with either Mint, a rogue employee, or a malicious hacker getting access to your personal information, then you might consider limiting what accounts you link.
Along that line, I would think that credit cards would be both the most helpful to link since you can then track your expenses, while also having the least exposure to fraud. This is because as long as you report any fishy behavior to your credit card issuers as soon as you find it, you likely won’t be liable for any unauthorized charges. (And if you monitor regularly with Mint, you’ll be that much more likely to notice…)
However, I for example would be more hesitant to link my Vanguard and Fidelity accounts with the bulk of my IRAs and brokerage accounts, as the benefits aren’t as great. Most of my net worth is stored at those brokers, and any screw-up would be highly stressful. Besides, I can usually check my balances at those sites separately with little added effort.
What do you think?
Friday, January 8th, 2010
It’s Friday, so here’s an easy slam dunk resolution involving emergency funds. If you’ve done any sort of financial reading lately, you know that many folks recommend having at least 3-6 months of living expenses put aside. Given the current high unemployment rates, I personally wasn’t comfortable until I had 12 months of expenses. Not only could you lose your job, but there could be unexpected health expenses, car repairs, or whatever. But that’s not the main point here.
The easiest way to build your emergency fund is to put it on auto-pilot. Your task for today is to schedule an automatic, repeating monthly transfer of $100 into a savings account.
Just about every savings account available allows you to set up an automatic monthly transfer from your checking account. Here is how to do it with Capital One 360′s Automatic Savings Plan. I just chose $100 as a round number, but change it as you like.
(Perhaps you’ve already got a healthy emergency fund. If so, then you can apply this resolution to another specific savings goal, like a new car fund or in our case a pet healthcare fund to replace costly pet insurance.)
Instead of telling you more reasons to do it, I’m going to try to counter any reasons NOT to do it.
- Don’t wait until tomorrow. It won’t get any easier later on, only harder.
- Don’t open up a new account, if you already have one available. If you don’t, one of the fastest applications I’ve seen online is at Capital One 360. Takes less than five minutes.
- Don’t worry about interest rates. It doesn’t matter if your savings account doesn’t earn as much interest as some of the top accounts. This can all be changed later.
- Don’t worry about not being able to keep it up. Start with as much or as little as you feel comfortable. It doesn’t matter if it’s $100 or $1,000. I don’t even care if it’s $10.
The hardest part is starting. You can always change your mind later, it’s still your money. But hopefully, in several months you’ll wake up to a big chunk of money you didn’t even realize you saved.
See the rest of my 2010 Instant New Year’s Resolutions here!
Tuesday, December 29th, 2009
I was catching up on some blog reading and caught an old post from Plonkee about the different ways that couples can manage their finances. The three different methods were categorized as communist, socialist, or capitalist. Rather controversial, eh? Don’t get too excited folks, just read on:
Communist: One Big Pot
According to Wikipedia, communism is a social structure in which classes are abolished and property is commonly controlled. Thus, no matter what each person earns, all their income is deposited into one central joint account, from which all expenses are paid from as well. All assets including property, investments, and cash are owned together.
Socialist: Earn More, Pay More
Under this structure, common shared expenses such as rent and utilities are paid via a joint account. Let’s say one person makes $75k and the other person makes $25k. Then if the monthly shared expenses are $1,000 per month, they would pay $750 and $250 respectively. The contribution is proportional to income.
Separate expenses such as entertainment, gifts, or clothing are paid for out of personal accounts. This allows each person to retain some individual control of their money.
Capitalist: You Pay Yours, and I’ll Pay Mine
Finally, we have the option where purely shared expenses are simply split straight down the middle. Differing income levels don’t change anything; If you make more then you keep more. Everything else is paid directly by each individual. Theoretically, each person is thus incentivized to keep their own expenses down, as nobody else helps to pay for it. There is “my money” and “your money”. This is often how platonic roommates manage their finances.
Just Call Me Karl
Although I usually don’t align myself as communist, I must admit that that is mostly how we manage our money as a married couple. It’s also helpful that we both work and earn comparable incomes (a least for now). We do add in a small “adult allowance” fund where we can spend money on whatever with no questions asked. Besides that, while we definitely don’t always agree on things, I think the combination of open communication and the passage of time has gotten us relatively comfortable with the “one pot” setup.
Now, I don’t think any one type is necessary better than the other, and know couples of each persuasion. I do have one question for the capitalist-types, though: What about retirement? Do you split that too? What happens if one person doesn’t invest adequately in retirement?
Tuesday, December 1st, 2009
No, I didn’t get an iPhone. But I did get an iPod Touch over Thanksgiving weekend. (Hurray for Amazon matching Apple Store Black Friday prices!) I know, I know, as a financial blogger I’m supposed to shun such trendy toys, but it was a gift! My parents got one for my sister as well as themselves, and I am assigned to teach them how to use it when I visit in December.
(I’m excited because my HTC TouchPro2 with my $30 Sprint SERO can be hacked to share it’s 3G connection as a WiFi Router, so I can get my iTouch online anywhere I have cell coverage. Nearly an iPhone!)
Another perk is that now I can review all those personal finance apps out there. I know there are a lot of budgeting apps, the Mint.com app, and various ones for banks and brokerage companies.
What are your favorite apps? Which ones were worth the money, and which ones weren’t? Which free and non-free apps would you like me to review? Share in the comments below.
Tuesday, September 15th, 2009
Yesterday, Mint.com announced that they were acquired by Intuit for $170 million. Not too shabby. Intuit is best known for personal finance products such as Quickbooks, Quicken, and TurboTax. They also released Quicken Online last year, which was basically a direct competitor to Mint.com. Both aggregate your spending and income by automatically accessing the data your financial websites, and analyze your habits for you. However, according to their press release, Intuit intends to keep both of the them separate:
Intuit intends to keep both the Mint.com and Quicken Online offerings, with each serving separate and equally important purposes. Mint.com will become the primary online personal finance management service that is offered directly to consumers by Intuit. Quicken Online will connect Quicken customers across desktop, online and mobile to deliver easy, anytime-anywhere access. This will help accelerate Intuit’s ability to create products and services that make managing money easier for all Intuit customers.
One of the benefits of this deal seems to be that concerns about data safety might be alleviated. Millions of people trust Intuit with their tax returns, which are probably some of the most sensitive data out there, so they might be more comfortable with sharing their financial website passwords with Intuit.
On the other hand, the competition between Quicken Online and Mint.com probably inspired some extra features and also made sure that both services remained free. According to WalletPop, there are “no plans” to charge for either of these services for now. Both sites have improved a lot recently, I just hope that continues.
Thursday, August 13th, 2009
Here’s an interesting graphic of the spending breakdown for the average U.S. consumer. It’s based a theoretical household “unit” consisting of 2.5 people, not individuals. Looks like such a household unit spends approximately $50,000 per year. Click on image for larger version.
I guess taxes are not considered an expense by the government. I’m not sure where leisure travel or vacation spending falls under, perhaps split as transportation and housing?
The image was created by Visual Economics, using information taken from the Consumer Expenditure Survey by the U.S. Department of Labor.
Friday, July 24th, 2009
I was reading an article in Wired Magazine about improving one’s health with new personal metrics devices such as the Nike+iPod kit, which is a neat device that helps you easily track and records details about your running. Did you know that all it measures is the amount of time your foot is on the ground? (That time is inversely proportional to your speed.)
The Hawthorne Effect
In the 1920s, the management at the Hawthorne Works factory decided to try some things to improve productivity. When they improved the lighting, workers assembled parts faster. When they were given more breaks, workers assembled faster. But then, the reduced the lighting back to normal, and productivity was still increased. After months of tinkering, when all the work conditions were set back to the original state, productivity remained higher. The fact that they were being watched was the primary reason things changed.
The idea that the act of observing itself will change the phenomenon being observed became known as the Hawthorne Effect (also known as the “observer effect”), and has since been confirmed by many other follow-up studies.
Application to Personal Finances
While this seems like common sense, it is actually quite powerful to know that simply noting down what you spend every day or month in itself may improve your finances. You could set a budget or analyze trends later, but don’t worry about that for now. Don’t judge your expenses. Don’t try to change them. Just track them.
On that front, online aggregation sites like Quicken Online, Yodlee, Mint, and Geezeo make the data collection easier, just like the Nike gadget takes away the stopwatch and logbook. They all pull up your transactions automatically (if you trust them with your passwords and data). Otherwise, I still see nothing wrong with using simple pen and paper and/or a spreadsheet.
Making a Habit
Nike also found that once a Nike+iPod user uploads five runs to the software, the user is much, much more likely to keep running and uploading data. Maybe it would be good to set a goal of tracking expenses for… 5 weeks? 5 months? We need time to get addicted to the stats!
Wednesday, June 17th, 2009
If you use Microsoft Money to manage your finances, you should know that Microsoft will no longer be selling MS Money after June 30th, 2009. From the Microsoft product page:
With banks, brokerage firms and Web sites now providing a range of options for managing personal finances, the consumer need for Microsoft Money Plus has changed. After suspending annual updates of Money Plus in 2008, Microsoft is announcing today that we will no longer offer Microsoft Money Plus for purchase after June 30, 2009.
But more importantly, your online services will also be discontinued soon. This means stock and mutual fund quotes, tax rate updates, and banking services like their billpay.
For Money Plus Deluxe, Premium and Home & Business customers, online services expire two years after initial activation or Jan. 31, 2011, whichever is earlier; for Money Plus Essentials it is one year after activation or Jan. 31, 2011, whichever is earlier. You can verify your expiration date in Money Plus by selecting Help / About Microsoft Money; it appears to the right of the serial number.
Ditched by Money, but Quicken Wants You
I suppose that this means Intuit wins the desktop personal finance software war. Indeed, it looks like Microsoft has really given up, as their last step is to make it easy for users to move to Quicken.
We’re working closely with Microsoft to develop an easy way for Money users to transfer data into Quicken desktop products. We’re assessing how we can make this capability a reality in conjunction with the release of Quicken 2010 in the fall.
An Intuit representative e-mailed me saying that they are working quickly on making a conversion file that would seamlessly move data from Money to Quicken.
In the meantime, Quicken is directly targeting the Money orphans by offering up to a $50 discount on Quicken products until the end of June: $20 off Quicken Deluxe, $30 off Quicken Premier and Home & Business, and $50 off Quicken Rental Property Manager.
Free Quicken Online & Others
But wait, MS Money says the primary reason they shut down is that many banks and brokerages are offering free aggregation services which provide a similar service. Indeed, there are also standalone aggregation sites like Yodlee, Mint, and Geezeo. And if you want a free desktop finance software with double-entry accounting, there is the open-source GnuCash, though it certainly lacks some polish.
But wait, why didn’t they just do their own online version? Intuit introduced Quicken Online, which is now free and tries to add a little Quicken flavor to the usual aggregation model. More competition would have been good. I guess they spent all their energy on Bing.