Feb. 22nd, 2013

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Originally posted at my website, view the original at http://www.lupinia.eu/personal/money-management.htm

Personal finance management is something that everyone needs to know as an adult, but that few people are actually taught. And, ironically, people who come from wealthy families, where micro-managing money is much less of a priority, tend to be much better at it. But, it's not impossible to learn. I'm living proof of this. Everyone has their own methods and approach, this is mine.

First, some background. While I currently have pretty decent income, this was not the case as recently as October 2012. I was raised in a lower-middle-class family by parents who were (and still are, in the case of my mom) absolutely atrocious at managing money. It led to a paradoxical upbringing, where we couldn't afford cable TV or vacations, but I had no shortage of Legos. So, going forward into adulthood, no one taught me how to manage money, because they didn't know. The only thing my mom could do was balance her checkbook on a month-to-month basis, which is nothing more than a simple data validation process. I was on my own, and I was awful at it. As I gained access to credit, my terrible financial skills came into stark relief, and when I spent three months making pretty decent pay, it became obvious that I was doing something very very wrong. It wasn't until 2010 that I developed a method that worked exceptionally well for me, and while I won't pretend it made me wealthy, it did take me from being incapable of saving money to having a surplus most of the time, something that kept me out of many disasters in the subsequent years.

And this isn't written from the perspective of a rich yuppie, or at least it's not supposed to be. Until October 2012, with the exception of that three-month period in 2008/2009, I spent the entirety of my adult life (post-2003) living well below the federal poverty line, and as an additional complication, most of that income came from self employment, leading to extremely unpredictable cash flow. In fact, 2004 was the only calendar year where my gross annual income exceeded $10,000, prior to 2012; and even in 2012, I only broke that threshold at the end of the year. I made up for it with support from family, but it dwindled slowly after 2009, until it became almost nonexistant in mid-2012, and even when I had it, it wasn't without a great deal of strings attached. And yet, I never missed any payments, never defaulted on a debt, never went into bankruptcy, and even overdrafts were rare (they've been nonexistant since early 2010, despite having many months with zero income during that period). This stuff is not impossible.

Management and Budgeting

Technically, this is something I've been doing from the start. In 2004, when I opened my first checking account, I started using Microsoft Money to do my actual money management and tracking, and a few months later, I ditched the paper checkbook register entirely. Since then, I've switched from MS Money to Quicken (only because MS Money was discontinued, Quicken is an inferior program), but the theory is the same; use software to manage your finances, to see what you have, notify you of payments, and see in real-time the impact of spending decisions.

Most people I know use their bank's online tools, but that doesn't count, because it only shows you what you've already spent. It doesn't do payment reminders/notifications, you can't enter future purchases ahead of time, and it only shows the accounts you have with that one bank. Plus, even with the best online banking, there's zero possibility to track statistics and trends. Online banking is an important part of the system, but that alone isn't helpful.

Services like Mint.com are close, because they'll show everything under one umbrella, but they're still inseparably tied to real accounts, which makes the savings portion of this post much more difficult.

So, exactly how do I manage my money with Quicken? Obviously, I track all transactions, like a big digital checkbook register. All calculations are automatically performed, and I can enter future transactions as easily as I enter current ones. So, for example, I'll see that I have $800 in my checking account, like I would with my online banking, but I'll also see that there's $450 in assorted transactions coming out in the next few weeks, without having to rely on memory. I also have reminders for every recurring bill and income, which are automatically entered two weeks in advance for automatic payments. Thus, there are no financial surprises for me, and I haven't had a surprise overdraft in years; not because I had enough money to not overdraft, but because I never accidently exceeded my checking balance, I always knew precisely how much was there without having to run mental calculations all the time. Just a quick glance at the "ending balance" for every account is needed.

There are more powerful tools as well, most of which I don't currently use, but they're great to have. For one thing, Spending by Category is eye-opening; want to know how much you've spent on food, groceries, fuel, bills, or hobbies over any given period of time? One click. There are a lot of different flavors of Income vs Expenses graphs as well, which are vital for figuring out the impact of a life change such as a new job, new living situation, new car, or change in pay/hours. I used these tools throughout 2012 to work up budget projections for my job search, because I was entering unknown territory, and needed to know what sort of apartment I could afford, and what my salary requirements were. Thanks to these tools, I could quickly determine what my vital expenses were, vs less important spending, and I spent quite a lot of time tweaking numbers to see what varying combinations of salary and living situation would create. Those projections didn't require a ton of setup; I didn't have to create elaborate Excel spreadsheets filled with calculations, or spend hours pecking at a calculator and scribbling on a notepad. All of it was pre-made, ready to go whenever I wanted to look at it.

The best part, however, is the ability to arbitrarily create accounts for specific purposes. This is something that's vital to how I track my finances, and something that can't be done by anything other than desktop financial software (as far as I can tell). I've used this ability for a variety of purposes over the years, and I've grown accustomed to it in a lot of ways. For example, I use it to track money I owe to people. It's extraordinarily rare for me to borrow money from anyone nowadays, and as a rule, I try to avoid owing money to friends. But, when I do borrow money from someone, I track every penny of it, and a virtual account helps tremendously with this. It also helps tremendously when I'm owed money by someone. It comes in handy for planning trips, especially conventions; all related expenses are pre-calculated, so I can see how much I need and in what timeframe. Similarly, it's great for large purchases. And, if you have accounts at an institution where online banking is tricky or nonexistant (some medical billing firms, Paypal, and some consumer credit banks), it provides a method of transaction tracking without requiring a link to an existing account, and without requiring robust online banking support. Lastly, the main thing I use this for nowadays is tracking savings for specific purposes, but more about that in the next section.

Obviously, you don't specifically have to use Quicken, and the fact that it's PC desktop software is a limitation for some people. But I absolutely recommend finding a tool that fits for you, that has some or all of these abilities. Money management is more than just seeing what you have, it's the ability to play with it to see how to use it to its maximum effectiveness.


As recently as 2008, I used the usual excuses, and believed them 100%. "I can't afford to save money." "I'll start saving once I pay off this loan/credit card/owed money." "I'll save any surplus cash I get." And so on. If saving money isn't hard-wired into you from an early age, starting to do it seems like something only people who make more than you do, no matter how much you actually make. It seems especially impossible if your income is low, and/or your budget is already tight. I've been there, it hurt when I first started doing it. But it's not impossible, no matter how low your income is, and simple math can force you to make it a habit. The trick is percentages, and saving with goals in mind, instead of just the abstract saving for the sake of saving.

In 2010, with no job prospects, I decided to make a serious attempt at self-employment. Instead of just fixing computers on the side, I made it a real business. In preparation for this, I read a surprisingly good book on entrepreneurship, which covered a lot of information on how to be successfully self-employed, and I learned a lot from it. Ultimately, my business failed, but from reading the book, I know precisely why it failed, and the lessons I learned have helped me in my career and life since. One of the most valuable lessons was how to save money, and while this book didn't spend a lot of time on it, the method it covered was wildly successful for me. It also saved me from bankruptcy many times over; when making irregular income, saving is simultaneously more difficult and more important.

To put it simply, the magical method isn't that magical, it's a matter of creating savings for specific purposes. First, in one savings account, select a percentage of every penny you receive that will automatically be saved. Whether it's your regular paycheck or a dollar you found on the street, everything you deposit will be split this way. The percentage can be whatever you want; the book's author recommended 5-10%, but even 1-2% will accomplish the end goal. This savings account is your "wealth" account, which is a cheesy way of saying this account cannot be touched for anything other than purposes which provide financial improvement. The author mentioned business investment, but for those of us who aren't natural entrepreneurs, it'd be more like retirement funds or stocks. Otherwise, that money sits, and cannot be touched for any reason, even a financial emergency.

Step 2, and equally important, is to create a second savings account. Same rules apply, a set percentage of everything you deposit will be split into this account. But this time, instead of the account being a Do Not Touch account, this one is your "gifts" account. It can be used as much as you want, but only for people other than yourself, and only for gifts, charity, or doing things for others, not for money owed to someone. You can use it to take a friend to lunch/dinner, buy holiday gifts, or give to charity. For any other purpose, that money is untouchable, and it especially cannot be used on yourself.

Maintaining those two accounts will, in and of itself, count as saving money. But this method goes far deeper than that. By creating rules and goals to define your savings, and sticking to it, you make saving a habit, and you train yourself to think in terms of money saved on a deep, fundamental level. And unlike abstract concepts like emergency funds and generalized savings accounts, these two account definitions are highly effective at getting anyone to easily save money. The "wealth" account, as cheesy as it sounds, carries a certain weight and connotation, and as it builds, it's hard not to take pride in it. It's no one's money except your own, separate from any obligations or debt, and can counted on to always be there, a great thing if you're accustomed to every penny being allocated for some purpose. And the "gifts" account is extremely practical for anyone; if you often find yourself lacking money at holidays, and wish you had more, this is your Christmas/birthday fund. You'll always have at least a little something for a special occasion. If you're like me and tend to spend everything on others, this helps reign that in, keeping gift purchases controlled and predictable.

As time goes on, you can expand this model to fit your needs more precisely, but I recommend sticking to this religiously for a minimum of six months before trying to change it, unless something is really out of whack. I stuck to it for about a year and a half before I started tweaking things. My original split was 10% to the wealth account, 5% to the gifts account. Nowadays, it's a little more complicated, partly to keep my rather severe impulse spending problem under control. From my regular salary, I put 5% each into wealth, gifts, and "trips & goals", a third account definition I added for large purchases, vacations, conventions, and other big expenses. Additionally, any extra money I receive from things like Craigslist/Ebay sales, side work, gifts, and tax refunds is split with 10% into wealth and gifts, with all of the remainder going into Trips & Goals. This separates disposable income from my checking account, to force myself to think and calculate before making any purchase that isn't part of my standard budget.

There are two special cases in this savings model, debt and emergencies. Obviously, debt is toxic, and should be avoided except as an absolute last resort. But I certainly won't judge someone for their debt. Unfortunately, I also can't offer a whole lot of advice in getting rid of it, but I will say that this savings plan can be used for debt payoff. The rule I set for myself is that I can use the "wealth" account to pay off debt accounts, but I can only do it once per account, I can't use those funds to pay off an account if I use it again after I've paid it off. So, if I pay off a credit card, then use that card again, I can't use the wealth account to pay it off again, I have to do it the hard way. Additionally, that account can't be used for payments, it can only be used for lump payoffs.

As for emergencies, I intentionally didn't mention an emergency fund, partly because the author of the aforementioned book seemed to believe that responsible people don't encounter financial emergencies, and the original book frowns on such a thing. Obviously, that's not realistic, but an emergency fund is a very abstract thing for someone who's , so I created a rule for this savings plan to allow for an emergency fund. Basically, no account is explicitly defined for this purpose, but as long as I don't do it more than once every 2-3 months, I can borrow money from any savings account (except the gifts account) for purposes other than intended, as long as I pay it back as fast as possible. Essentially, it allows me to write an interest-free payday loan to myself. I don't recommend doing this within the first six months of this savings approach, but once you've established the overall savings model as an instinctive habit, this is allowed.

That's really all there is to my money management process, and while every person's needs are different, I hope this will help get you started. When I had little to no income, this process saved me many, many times over. Nowadays, some of this is less relevant to me personally, and I'll spend the next few years shifting towards an actual retirement fund, but the principles are the same, and no less helpful. And, when I had little to no income, these methods were how I managed to always have at least a little cash on hand, without going into the red. So it's relevant to everyone, I think.

I'll put a caveat on this that I'm not an accountant or a CPA, and I have no real training in this sort of thing. Aside from the aforementioned book I read, this is the result of self-teaching and trial-and-error. But it works well for me. And if you're struggling with any of this, I hope it'll help you as well.


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Natasha Softpaw

April 2014

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