On Managing Money
I spend a lot of time thinking about personal finance. Apparently I talk about it a lot too because friends are starting to ask me specifics. For some reason they think I know what I'm doing... I'm not sure if I do, yet, here we are.
First disclaimer: I'm not a financial advisor and what follows is not prescriptive. This is just what I do, and it's always changing. I hope you'll find a nugget of value here but what works for me may not work for you.
Second disclaimer: I'm fortunate in that I make a decent income and have little debt. I have a lot of privilege in how I can use money and I know many people do not share this privilege. I'm convinced almost everyone could be saving more than they think, but I know what I'm able to do is out of reach for many. That said, I try to design my system so money goes to the most important places first. Mastering the highest priorities (like immediate expenses) can set you up for success with those long term priorities (like investments).
How Money Works For Me
It's not easy, but I do my best to think of money as a tool. Not a status symbol or an indicator of self-worth but something I can deploy to make the world better for myself and those around me.
Working for a living means trading time for money. I believe time is the most valuable resource there is. If I'm going to give it up for pay, that work better be damn good (or the circumstances damn dire) and the pay should be treated with respect.
With that out of the way, my system can be broken into four tiers:
- Other stuff
I used to have a custom spreadsheet that handled expense tracking/budgeting and manually entering everything I paid for was a massive pain in the ass. I eventually replaced The Spreadsheet™ with YNAB and I'm a total convert.
You Need a Budget (YNAB)
YNAB's budgeting philosophy is the envelope system. When I say things like "this money is budgeted toward an extra mortgage payment" or "I have a goal to budget $100 a month for dining out" it's managed entirely within app. In YNAB, every one of my dollars gets a job, even if that "job" is to sit in an emergency fund waiting to be deployed when things go sideways.
When my paycheck automatically shows up in YNAB, I give every dollar a purpose in order of priority (immediate expenses being the highest). It's a little work but I have a whole lotta fun with this step and it makes me mindful of where my money goes.
Vanguard has some of the lowest fees in the industry, a sterling reputation and they've been around for a long time. It's investor owned to boot. Their interface isn't great but it's easy enough to use and their support is top notch.
I use Vanguard for ALL of my investments. Luckily, even my 401k is managed through them.
I avoid modern robo advisors like Robin Hood, Betterment and Wealthfront. People I trust seem to like them but, in my opinion, they have yet to prove themselves. They are straight out of Silicon Valley and to be frank I'm skeptical of a lot that Silicon Valley produces. When it comes to my money I don't want disruption, I want a company with a reputation that can only be earned via thriving for decades in this industry.
Or, how I think about the distribution of every incoming dollar.
I budget in one month intervals while thinking in up to decades-long intervals. My main source of income is a twice a month paycheck from my day job and those two paychecks make up most of my monthly budget.
A variety of things happen in a specific order (either automatically or manually) each time I get paid.
For my first paycheck:
- Money is deducted automatically and contributed (pre-tax) to my 401k. Enough to max it out upon year's end.
- I budget money toward immediate expenses like mortgage, groceries, cell phone bill etc. until they're all covered.
- I contribute half of 1/12th of the max yearly contribution to a Roth IRA (max as of this writing is $6000 per year).
- A whole bunch goes toward "true expenses" which are expenses that may not be due that month but will be due within the next year or so. Car insurance for example. If it were, say, $600 a year then my goal would be to budget $50 a month toward this.
- I set aside 15 days (the time before my next paycheck) worth of fun money.
My second paycheck is distributed like so:
- Money is deducted automatically and contributed (pre-tax) to my 401k. Enough to max it out upon year's end.
- If there are true expenses I couldn't cover with the previous paycheck I finish those out.
- I contribute the other half of 1/12th of the max yearly contribution to a Roth IRA. If I stay on track with this I'll be maxed out for the year.
- I save a specific amount (calculated from a predetermined goal) into my emergency fund.
- I budget a little extra toward my mortgage.
- I contribute a chunk of money to an "investment in myself" category. I use this money for things like classes or educational books.
- I contribute a small amount towards vacation/flights.
- Fun money for the second half of the month.
- If there are any "one-off" things I'm saving for (for example right now I'm saving for an iPad), I'll budget some money there.
- If any is left it all goes into either my taxable investment accounts or my emergency fund.
That's a lot but it can be described by a few major categories.
- The rest
First priority is covering expenses, which I'm always evaluating and trying to minimize.
Savings and investments are kind of equal priority and, depending on life stuff, one might be more important than the other. Right now, more of my spare cash goes towards investments.
"The rest" is basically fun money and things like that iPad. I also have a "Stuff I Forgot to Budget For" category that gets some of this.
My goal is always to put 50% of my monthly pay toward expenses/"the rest" and 50% toward investments/savings. This is aggressive but anyone can start small and build up. 95% toward expenses and 5% towards savings is infinitely better than nothing.
If I get any extra money, say from playing a gig or selling something on Craig's List it either goes into my emergency fund or investments.
On Emergency Funds
One of the most important envelopes you can have in your budget is an emergency fund. Ideally it'll contain 3-6 months worth of expenses. I shoot for 10-12. When mine is low I contribute to it aggressively. It's higher priority than investments and sometimes higher than true expenses.
If there is one thing I could impart here it's that investing doesn't need to be complicated and you don't need to pay some shit hawk financial advisor to manage your money for you. There are a few books at the bottom that are great introductions. I wish I'd read them in my 20s.
I contribute to investments in a specific order.
- Roth IRA
- Taxable account
The order is designed to minimize my tax burden. 401k contributions are not taxed so this is maxed out first and foremost. I then max out the Roth IRA because, though the principle is taxed, earnings are not. Also, the principle on a Roth IRA can be withdrawn any time penalty free. Leftovers (if they exist) flow to my low fee taxable account. Money that goes there, along with earnings, is taxed.
My investments are all the same. Index funds. A mix of mostly stocks and some bonds (an aggressive 95%/5% currently). Specifically VTSAX (stocks) and VBMFX (bonds). If you can't afford the minimums for those check out the VTI and BND ETFs.
Keeping up with finance books and blogs helps me stay educated on this complex topic but it's tricky to know what's valuable and what's not.
One thing I avoid like the plague is headlines. Pundits are assholes and mostly they have no idea what they are talking about. Yahoo Finance, Marketwatch, Motley Fool, Business Insider... Generally what I witness from these publications is a fear mongering fortune telling dumpster fire.
At the bottom of this post I'll share books and blogs I've found valuable over the years.
Paychecks are direct deposited. If your employer supports direct deposit, take advantage.
My 401k contribution is taken right off the top of my paycheck. This makes it feel like money I never had and I don't miss it.
YNAB provides automation around expense tracking out of the box. It's important to understand how my money moves and YNAB's connection to my credit card saves the day.
I automate as many bill payments as I can. Electric, Internet, Phone bill, etc. I also automate credit card payments. Once a month my card is paid in full so I never have an interest payment. I never overdraft my checking because YNAB keeps spending in line.
Also, since all cash flow must be approved in YNAB I can tell pretty quickly if there are fraudulent charges on my card.
Here are a few things I know that I could do better on:
I need to automate my mortgage payment and my investment contributions. Right now it's a manual process.
Some bills that require checks could be automated through my bank's Bill Pay feature as well.
There's always more to learn. For example, I need to understand better why some believe Roth IRAs/401ks are preferable to traditional ones.
You can nerd out endlessly on credit cards. Right now I use an Alaska Airlines card and it gets me some "free" flights but there are better cards out there. I would do well to switch.
And, if I couldn't afford to pay my credit card bill in full every month I wouldn't have one.
Wells Fargo is a shitty bank. I should not be using them and I'm embarrassed to admit that I do. I'm sorry. Someday I'll switch.
Bank Of America
Also terrible. I should ditch their credit card.
My Financial Rules To Live By
In no particular order:
- Invest as much as possible.
- Diversify investments.
- Be frugal not cheap (and understand the distinction clearly).
- Spend aggressively on that which brings the most joy.
- Cut frivolous spending ruthlessly.
- Consumerism is the devil.
- Donate generously to important causes.
- Never EVER buy a new car.
- Always have an emergency fund.
- Maximize income.
- Minimize tax burden.
- Avoid interest payments and fees.
- Understand hedonic adaptation and avoid it when possible.
- Pay off credit cards in full every month.
- Every dollar is a vote.
- Learn from financial mistakes, forgive yourself for them and forget about the ones you can't change.
My Most Influential Resources (So Far)
- The Simple Path to Wealth: Your road map to financial independence and a rich, free life
- Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence
- I will Teach You To Be Rich
- The Smartest Investment Book You'll Ever Read
- The Way to Wealth: Ben Franklin on Money and Success
- Poor Richard's Almanac
- What I Learned Losing A Million Dollars
- Fooled By Randomness
- Jack Bogle
- Warren Buffet's annual letters
- Mr. Money Mustache
A Final Note
I'm not perfect. When life is going right I can achieve all of the above, but life isn't always going right and I don't beat myself up when I can't meet my goals. What's most important is that I try my best to stick with the plan, do honest work deserving of my pay and forgive myself when I make mistakes.
If you haven't already, I hope you can discover a balance for yourself. Good luck!