You are currently browsing the monthly archive for December 2006.
Update: Finished as you can see.
I’m away for Christmas visiting family, and I took a look at my blog while on my parents’ computer. After seeing the massive pictures fill up the page, I’ve removed all for resizing. They all look great on my high def wide screen monitor hooked up to my MacBook Pro using Firefox, but not so great on my parents’ dialup Dell Inspiron in IE6. I love the high quality images I include at the top of my posts (and I don’t mind the small $ price I pay for each), but they were definitely taking away from the experience as they appeared on my parents’ computer. So, my blog will look a little sad and dull until I get back home to fix the image sizes.
I’m not sure if people get this, I know that I didn’t get it when I first started, but you track your spending habits so that you can plan your financial future. So much focus seems to be on tracking and budgeting that the most important part, the planning, gets thrown out the window or left for “when you have time,” but that’s just backwards. This goes back to your money mentality discussed in previous posts. Your mentality is the greatest single factor in your wealth, and you can’t direct your mentality if you don’t plan or consider what direction matters to you.
Tracking seems like the natural option to come first, but it shouldn’t. But, how can you plan if you aren’t tracking? You don’t know where you are now, so how does planning work? At this stage, it’s probably more about wishful thinking until you actually know what your spending habits are, and if you aren’t tracking, then you could be very surprised about how much goes to certain purchases. Setup expectations about where you think you’re spending your money and allow yourself to be disappointed if you’re off, and encouraged if you’re not. If you have enough unconscious sense about your spending habits to be on mark or above without trying, then you’ve likely instilled good spending habits into your personality.
Expectations are a good general measure for figuring out what you need to investigate if your expectations aren’t met. I focus on how much I’m able to save and invest at the end of each month. If I don’t hit my average mark, then I know I should look at what’s been happening that’s thrown it off. Maybe I threw a big party and spent a bit more because of that. Maybe that’s OK, or maybe it’s something that’s not. You don’t have to track every minute and second of what you’re spending habits are and where you’ll be at the end of the month. If you can’t naturally control your habits and just come out on top each time, then there’s something wrong and usually it’s your mentality.
While I talk about month end expectations, the more important point is with your long term planning. The devil is in the details, but if your adrift with no plan, then tracking does you no good. What is there to learn? What is there to improve? Why change anything if there isn’t a longer plan in place? Do you want to buy a house in 5 years, or a new car, or save some for kids, or vacation, or just be more financially secure? There are plenty of choices, but if you don’t pick one and set your sights on it, then you might as well just not track your finances because you’ll just be wasting your time (as long as you can pay the bills while doing that).
Plan long term, big picture first, then track second, and make your monthly habits naturally controlled. The tracking that goes on is a backup in case you just didn’t notice a new spending habit taking over, and it’s great if you want to figure out how you can squeeze out more money for saving and investing with what you have already. However, don’t let the dullness of tracking keep you from the important task of having a good look forward.
In my last post, I wrote a little about your money mentality. I really can’t stress this enough. At this time of year when everyone is buying presents and giving and getting gifts, and the Christmas Carol is on every channel (or so I remember from when I had cable), money and emotion is at an all time high. Having a good mental outlook for life in general is key in increasing your riches of all kinds.
I want to create (am creating) a personal finance application. I’m doing this for two reasons. First, I hate all of the other options and want something that I’ll use. Second, everyone else just gets it wrong and that’s bad for more than me. The main part they get wrong, though, is the mentality of the application. This is the center and core of what you use and how you use it. This is embodied in the user interface and the functions you use. This is why they’re so bad.
Still, these applications help you with what you need better than all other options. It’s like using a rock to hammer a nail when all you have is a rock and a nail. Gets the job done, but not like a hammer does. These applications get the job done, and they focus on what’s been working. Not always a bad formula, but times are always a changin, and what wasn’t broke yesterday is today.
Where does the mentality go bad? The basic mentality is summed up in the practice of budgeting. Control what you spend and earn. Map it out in boring detail. Then, if you like, we’ll throw in some really crappy planning options. The whole picture is backwards. You don’t start running a race by timing how long it takes to run from checkpoint A to B and then B to C. You eventually do that, but first you need to know where A, B, and C are and how you want to get there. You plan first, then track your progress. This is what current applications and “best” financial practices like budgeting get wrong.
“But, Matt, I plan how much I want or should be spending each month before I track what I’m spending. How is that not planning before tracking?” Months at a time is not planning. This is like trying to drive across country in a fog that only lets you see 5 feet ahead. Plan for the long haul and get your mind off of the money. Month to month planning keeps your eye on the money, and not the real value. Life is full of real value, and money is not it, even though money represents value. If you continually collect flowers in a field because you want a rose garden, you’ll end up with a bunch of flowers and few, if any, roses.
If you don’t have the right mental picture before you start tracking, then it won’t work. Figure out your life first. What matters to you? Where do you want to be? What do you want to do? What do you need to get there and do that? You don’t have to have a 50 page plan. You might even only have a 3 sentence paragraph, but understanding yourself and your happiness is the first and ultimate tool in financial stability. Get this right, and your financial choices should be simple and easy. Get this right, and you won’t have to micromanage your life through your spending habits. A good look forward counts enormously.
The greatest determining factor in your wealth is your mentality. Your perception of money and your personal traits that drive how you use money make up your money mentality. Whether you make a lot or not, the end result is how you think about it. Because of this, I’m general against credit, and most definitely against credit cards. While credit is a great tool for buying a house or car, it’s a terrible tool for almost everything else, and the kind of credit we use for everything else comes from credit cards.
Credit cards are bad. Evil almost. Most people will disagree with me on this, but most people shouldn’t use credit cards. You should have credit cards because that helps your FICO score (and down the road a good FICO score helps get you better loans), but unless there is an emergency and an immediate need that only a credit card can fill, don’t use them. There are two reasons for this, 1) it works against human nature, and 2) it can be very costly to use and can do a lot of damage to those who misuse it most.
Plenty of people will have no problem managing their credit, and credit is useful to many types of people. However, even if you don’t get into any trouble using credit cards, and always pay the max every time, it’s still doing you harm. In the day and age of debit cards, there’s no reason you shouldn’t have one, and no reason that shouldn’t be your primary card.
Credit, especially credit from a credit card, works against human nature in a few ways, but the worst, and that which affects even those who use it correctly, is its effect on the value of money and your mental awareness of your spending habits. Paying using credit from a credit card – now – means you pay with your own dollar…later. Assuming that you always pay your bill in full and don’t incur any interest payments, this might seem like a great asset. However, we as humans are already terrible at understanding the future value of most anything, and especially that of something as intangible as the future value of a dollar. If we were better at this, then we’d be much better savers and investors, but we’re not and hence we’re somewhat bad savers and investors.
The mental price of saying to yourself, “I’ll put this on credit and pay it when the bill comes in at the end of the month,” is more likely to cost you in the long run as it lets you delay the full mental impact of the cost while giving you the full mental benefit of the purchase. Even such a seemingly short amount of time as until the end of the month can cause you to spend more when you don’t need to. The solution that people have come up with to moderate this natural human desire is the horrible practice of budgeting. If only you can create a solid budget and follow through on it you could keep your urges under control, or so you tell yourself. There’s no need to pay that price, and additionally, completely miss the true value of budgeting (what’s the true value of budgeting? – that’s for another post).
Now so far, we’ve only considered those who can successfully use credit cards. What about those who misuse it? If you go without paying the full amount of your bill, then you are falling for second true evil of credit cards. High interest. If you can’t buy something today with the money you have, then wait until you have the money, or get a real loan. At the worst, if you have to use credit cards to pay the rent or electric bill then you’re in really deep shit (oh yes, this can be done). Of course, there will be exceptions that are justifiable, but many of those in the worst situations have fallen to the worst evil of credit as already mentioned which is a distortion of the value of money that causes us to be such bad savers and investors to begin with.
What most people don’t consider is that credit from a credit card is a loan and one with a very high interest rate. When you pay $8.53 for lunch on your credit card, you’re taking out a loan for $8.53 with 18+% interest. If this isn’t paid in full, then you’re paying the interest on that loan for your lunch. There are enough people piping in about how paying only the minimum or anything below the full amount is a terrible idea, and they always like tell you how much a $20 pizza costs if you only pay the minimum. Good, I’ll skim this part then, but quickly, not paying the full amount is probably more expensive than you realize. Doing the math might help you realize this, but the problem is probably bigger than a math equation, and fixing your money mentality is a personal choice. The situation, of course, isn’t helped any by credit card companies and banks offering them, but a discussion on the ethical practices of such organizations is for another time.
What should you do instead?
My advice, and this isn’t for everyone, so consider your own unique situation, is get a debit card if you don’t already have one, and use that as your primary card. Some banks charge to use the debit card as a debit card (entering your pin instead of signing), in which case, you should swipe it as a credit card and just sign your name. Banks are dropping these charges, so it shouldn’t be hard finding one that doesn’t charge you. If you use your pin, then the charge will go through immediately if you have the funds. Otherwise, if you sign, it’ll go through when the store processes the receipt, a couple days later usually, and you won’t receive a bill with all your charges on it that you then write a check for. Either way, it’s near immediate payment, so you’re forced to feel the full mental weight of the purchase.
If you’re used to getting a bill with all your charges, then you might be used to reconciling your purchases using that statement. Now that you won’t be getting this, you should use your regular bank statements, and preferably, you’ll have online access, and you can review your bank account regularly to see how you’re spending your money and whether or not you actually have money to buy stuff with.
You hopefully do more then just read over a piece of paper or check a website when considering your finances. Tracking your spending habits is great, but without any planning, it’s almost completely useless. If all you’re doing is keeping yourself from spending all your money each month, then you’re digging yourself into a hole for the future. I don’t recommend budgeting, but all of the good tools (good in that they work, but honestly they all suck) available today work around basic budgeting concepts, so do what you have to for the time. I’m attempting to innovate, and will hopefully add another option to the personal finance tools that’s much simpler and less time consuming (and much less painful) then using current applications. Until then, you may just have to get by on your own imperfect system (reference: Be the best B student).
In the forums, this is a rather common comment. Someone gets an influx of cash and wants some advice. The response is pretty typical and simple to follow:
1. Pay off credit card debt
2. Pay off other high interest debt (maybe pay down extra on your mortgage or car payment)
3. Max out, if possible, this year’s IRA (Roth preferably, although the type depends on your situation)
4. Invest in the market (get an index fund, or spread it out between your current investments)
5. Try something new – start a business or just indulge yourself a little with a trip to Alaska – Innovate and enjoy it.
The flow is straight forward. Get rid of debt especially high interest debt like any credit card debt (C1). If you’re debt free, then don’t just go out and buy a $20,000 leather jacket. Put it towards retirement and invest the money for the future (C2). Of course, as many financial gurus will advise, don’t forget to treat yourself (C3).
Caveats 1 (C1): If you have a mortgage or car loan that you’re lucky enough to be paying only 2% interest on, then it could be more profitable to invest the rest of the money in an asset that is likely to return greater than 2%. Of course, taxes are always a major factor in this decision, and normally the tipping point to go in either direction is marginal, so the rule of thumb is pay down your debt (especially if it’s debt that you owe friends or family even if you’re getting 0% from that loan).
Caveats 2 (C2): Retirement before regular investing is always a good rule of thumb especially with options like Roth IRAs (a Roth is a type of IRA, and some people can get Roth 401(k)s). However, if you’re saving for a new house or car, then you might prefer putting this money into your preferred saving/investing asset for this purpose.
Caveats 3 (C3): When I say treat yourself, try to think on the level of a nice dinner. If you can treat you self by spending a fraction of that new money, put the majority to other use, and still feel good about it, then do that. Buy fancier coffee for a week or something similar. #5 mentions a trip to Alaska. Traveling is a great way to expand your horizons, and people don’t do this enough, but as with the fancier coffee for a week, try not to blow the whole amount on one thing for yourself. Although, if you’re just saturated in cash, then go right ahead, but I prefer some for of innovation. Whatever you do, keep it simple and don’t get anxious about what you should do. Lastly, try not to feel guilty if you don’t treat yourself much (unless you’re buying $400 shoes every month, in which case, you need to stop spending).