As the 21st century dawned the world was aglow over the Internet. The Internet was going to make the invention of things like TV, radio and personal computers pale in comparison. This technology, like the Industrial Revolution, marked a quantum leap in human productivity. It would forever connect businesses with suppliers and us with everyone else on the planet. We would throw away our TVs and telephones because the Internet was going to supply us with video and allow us to communicate globally at little or no cost. We wouldn’t need libraries, since the Internet would offer free access to all information known to humankind. We weren’t going to need books because we could read anything by anybody any time in any room of the house. We weren’t going to need stores because we could order everything from groceries to jet planes and have them delivered right to our door (or hangar, as the case may be).
What happened? As with many things in life, the promise outstripped the reality. Because of the hype, companies with little more than a stupid idea were able to raise billions of dollars, which certainly changed their world, but not anyone else’s. In many cases, these companies went out of business, leaving small investors holding the bag. (See the chapter called “A Tale of Two Pities”) Result? What felt just a few years ago like a revolution in evolution now feels more like a pyramid scheme.
Hype aside, the truth is that the Internet is a revolution and does represent a quantum leap in productivity. Because in many ways, the Internet has lived up to the promise, especially as it applies to your becoming a 60-Minute Money Manager.
Managing your money in an hour a year means keeping your fingers on the pulse of your financial world. In other words, knowing where your money is, making sure you’re getting what you’re paying for, being able to quickly and accurately comparison shop and avoiding paying for services you don’t need. With a computer and the Internet, you’ll always know where your money is and where it’s going. You’ll be able to do your income taxes in a few minutes every year, and comparison shop for everything from a picture frame to life insurance in less than a minute. Thanks to technology, you’ll be fast, accurate, knowledgeable and in control in a way that was completely impossible just a few short years ago.
Two hundred years ago it took weeks to travel from New York to San Francisco, because the only way of getting there was either on a horse or a ship. Then trains came along, which made the trip much faster. Then planes, which ultimately condensed the trip to its current five or six hours. But while one describes these changes as if they happened in the blink of an eye, the truth is much different. People didn’t stop using horses the instant the first train rolled down the tracks. It took time for the new technology to gain a foothold. It took time for trains to become economically feasible, reliable and safe, and more time for people to become comfortable with them. Only then could less efficient technologies begin fading away. Same thing with air travel. And this is exactly where we are right now with computers and the Internet. Computerized financial management has now proved its worth and is officially accepted as a mode of getting you from A to B financially. Pencil and paper are wagon trains. So is ignorance, because the Internet is chock full of information. So is overpaying, because the Internet is such a great source of comparison shopping. It’s only been within the last 10 years that the trip from Chaos to Control shrank from weeks to minutes.
All aboard! Here are the steps to prepare for your journey.
Step One: Either get a computer or get access to one. If you decide to buy a computer, it doesn’t have to be the latest, fastest, whiz-bang model with all the latest bells and whistles. It just has to be able to run a couple of simple programs. One of the great things about rapidly evolving technology like computers, especially in consumer economies like ours, is that the value of yesterday’s technology is practically zero. So if money is tight, go for yesterday’s technology and you’ll probably get paid to haul it away. In other words, don’t be afraid to buy used or slightly out-of-date. And if only free is cheap enough, go to the local library.
Step Two: Get some personal finance software. Because you’ll want your software to be supported for a long time and have the ability to communicate with other programs (like tax preparation software) I’d advise sticking to one of the biggies in the software business: Intuit’s Quicken or Microsoft’s Money. As with a computer, you don’t need the deluxe version, nor do you need the most current version. Shop around and you should be able to get by with 20 bucks or less. Besides, Microsoft only made $3 billion last quarter, and Intuit (maker of Quicken) only made $70 million all of last year. They obviously need the money more than you.
Step Three: Get that Internet connection up and running. If you want to swell the coffers at AOL Time Warner, pay $23 every month to subscribe to America Online for dialup service. If you want to swell your own coffers, however, pay less. At cnet.com you can do a search by area code that will list all the Internet service providers (ISPs) in your area. In my area code, for example, I found dialup services for as little as eight dollars a month. If you want to surf the web really fast, and are willing to pony up hundreds of extra dollars every year to do it, get DSL or Cable service. But for our purposes, you can use a cheap dialup and be fine.
Step Four: Boot up your computer, install your software, fire up the Internet and start inputting your financial life. This is a time consuming process, and while you’re doing it, you may feel like a nitpicking, anal-retentive, arm-gartered, coke-bottle-glasses-wearing, boring loser. I’m sorry. When I figure out a way to track your financial activity with power tools, I’ll let you know. For now, however, you’ll have to use a keyboard.
That’s it. You’re ready to roll! As you begin to assemble the paperwork that represents where your money is coming from and where it’s going, you’ll soon appreciate why the mere act of looking at things will help you feel more in control. You’ll also start seeing how you’ve made your life so complicated and how to make it less so. First, you’ll input all your checking, savings and investment accounts. In other words, what you own. Then you’ll put in all your credit card and loan accounts: what you owe. Then you’ll tell your program (and yourself) where your money comes from and where it goes. And then you’ll be in the same position as any successful business: able to set goals, fine-tune and review what’s happening to maximize your odds of reaching them. We’re going to go over each of these things in detail. But before we start inputting all your financial information, let’s go off on a brief tangent to discuss general organization.
If your car won’t start, who do you call? What if you’ve got a leaky pipe? You want to find someone to help you build some shelves? Where do you go when it’s time to shop for insurance? A mortgage? How much are your property taxes? Where do you keep all the serial numbers of your electronic equipment? What does your spouse do if you should die unexpectedly?
If you were asking me these or many other questions regarding my household and financial life, I could answer any of them virtually instantly. Because these are some examples of information that I keep forever at my fingertips in spreadsheets. If the word spreadsheet sounds a little hoity-toity, use “list.” It doesn’t matter. I’m just suggesting that if you keep the answers to questions like these in your computer, you’ll spend a lot more time riding your Harley and a lot less rifling drawers and looking for stuff.
Let me give you examples of spreadsheets that I refer to often. The title of one of my spreadsheets is “Household.” Within this spreadsheet are separate pages for mortgage, insurance, property taxes, inventory, vehicle info, vehicle repair and utilities. Whenever I begin some chore regarding my house or transportation, this is where I go. Another spreadsheet is called “Production Equipment and Supplies.” This is where I keep information regarding equipment I use to produce my TV news stories. Here’s an example of how they save me time.
Earlier this week I decided it was time to do three chores: first, one of our cars was running like crap, so I needed to take it to a mechanic. Second, I noticed that the registration for our other car was missing. (How did that happen? Must have been Gina.) Third, I needed to order additional batteries for our production video camera.
First, a mechanic: I went to the car section of my household spreadsheet and there found the names and phone numbers of the two mechanics I’ve used. I also had brief notes regarding what they’d done, what they’d charged and how I felt about them. I decided that Mario at A-1 Service was the right guy for this job because my latest note indicated that he does good work at reasonable prices. I called him up and arranged to bring my car in. That took less than a minute.
As for my missing registration, I had a website address built into my vehicle info spreadsheet that took me directly to the Department of Motor Vehicles website. There I downloaded the form for lost registration and printed it. I sent it in, along with a check for $16. This took about five minutes, much of which was spent on the DMV website trying to figure out which form I needed.
Now, time for camera batteries. These things are expensive, but I already knew where I could get the best price. How? Months before, I’d used a web shopping bot to comb the Internet in search of the best deals. Now all I had to do was open the “battery” section of my production equipment spreadsheet. There I found a link to batteries4everything.com. I clicked on it, copied the description of the batteries I needed from my spreadsheet, pasted it into their website’s search engine, found the batteries, made sure the price was the same as last time and ordered four. The entire process took about two minutes. I could have done a new Internet search to see if I could find them cheaper still, but I didn’t feel like it at that moment. I already knew that the price I was paying was about half of what I’d have paid locally, and that was good enough. While I’m not above scrounging for pennies, I was too busy at that moment to bother.
Now, compare what I just described to what probably would have happened in the days before I was organized and the Internet wasn’t standing by to help me. When it came to repairing my car, I’d have gone into the glove compartment, the phone book or a file folder, desperately seeking Mario. I might have been lucky enough to ultimately find or remember the name of his shop, but I certainly wouldn’t have remembered his name, and I certainly would have increased my blood pressure trying because I like to maintain the personal touch when it comes to services like this.
In the days prior to the Internet, there would have been only one way to deal with a lost registration: call or visit the DMV. I won’t waste words reminding you what that’s like.
When it comes to camera batteries, I’d have been faced with driving either my sick car or the one with the lost registration to a local store so that I could wait in line to pay twice the price. If they’d had them, that is.
Having information like this at your fingertips will keep repairs, maintenance and all manner of errands from becoming more stressful, expensive and time-consuming than they already are. When I’m writing down the names of people and stores I deal with, I don’t record all of them; just the ones who do good work or provide good products at reasonable prices, which automatically eliminates most. But over the months, my list of good people and products has gotten longer in each category, which has saved me huge time and aggravation by having to start from scratch every time I need something. And because I strive to keep my relationships friendly by injecting just a pinch of personal touch, easy with a few notes on my spreadsheets, I probably also end up with better service and lower prices to boot.
When it’s time to shop for a mortgage or insurance, I’m ready because I’ve written down where I got the best quotes last time, and I’ve already got notes and explanations of all the components of every policy I have. Same with mortgage shopping. Because these types of services are shopped so infrequently, not having this stuff written down would mean relearning it every time and starting the whole process from square one. Having it all written down and instantly accessible means less time shopping and more time watching Jerry Springer. And just as important, it also allows my wife to step into my shoes anytime. Me: “Hey baby, I’m going for a motorcycle ride. Would you mind getting a new mortgage while I’m out? You know where the info is.” Gina: “Sure, honey. By the way, where do we keep our list of lawyers?”
Now we’ve completed our little side-trip. Let’s get back to organizing your financial life by inputting everything about you into personal finance software.
Where’s Your Money Hiding Out? What You Own
This part of the process begins by telling your money management software where all your money is right now. You’re going to find it scattered between one or more checking accounts, one or more savings accounts, one or more investment accounts, in your pocket and under your sofa cushions. While you’re inputting all this minutia, be thinking about how to get rid of some accounts. Do you have several checking accounts? Savings accounts? Investment accounts? Perhaps you only need one of each. Because when it comes to being a 60-minute money manager, less is definitely more. In fact, no matter how long you’d care to pore over your financial life, recognize early on that there’s an inverse relationship between your effectiveness as a manager and the number of accounts you’re expected to oversee. So do a better job by eliminating as many accounts as you can. This will not only improve your efficiency, it will radically enhance your speed.
When I reached this step in my quest to become a 60-Minute Money Manager, I found that between my wife, myself and our business, we had three savings accounts, four checking accounts, and 12 investment accounts! And don’t think this has anything to do with being rich. I wish. Most of these accounts had very little money in them. Our accounts had made like bunnies primarily from nothing more than mental meandering. In other words, opening an account here and an account there in search of some short-term bell or whistle, the details of which had long since faded leaving nothing in their tracks but lots of little balances stretched over a plethora of places.
Since I already work about 50 hours a week, I didn’t really need the added hobby of trying to keep up with 22 accounts. So I started hacking away. How? First, by thinking hard about what I really needed, then eliminating things I didn’t.
The first thing I tackled was the four checking accounts. We had one local commercial checking account for our business, another local checking account for personal stuff, a third checking account with a credit union where we used to live and a final checking account with a cyber bank. There’s no question that the cyber bank (we use E*Trade Bank) offered the best deal: no monthly fees, unlimited checking, free online bill paying, debit card, free local ATM machines and interest that rivals a money market fund. So the ideal scenario would have been to just keep that account and get rid of everything else. Except I couldn’t do that because I had to have a separate checking account for our business. In addition, I wanted to be able to make business deposits locally. In other words, I didn’t want to have to use the mail to send my deposits to a distant cyber-bank, and most of the businesses we get checks from won’t deposit electronically for us. So the local business checking stayed. But we decided to get rid of our local personal checking account and the credit union checking account. Two accounts down, 20 to go.
Trimming our savings accounts was relatively easy. Two of them were money market accounts for the business, which I combined into one. The third was with the credit union, which we combined with our cyber checking account. Like I said, the cyber checking account pays as much as most money market funds anyway. Two more accounts down.
Now to the most onerous task in the simplification process: trying to consolidate some of the dozen investment accounts we had. This was kind of frustrating because many of our investment accounts had to remain separate. For example, we couldn’t mingle business investments with personal investments. Both the wife and I had 401(k) rollover IRA accounts from our days when we were employees, and we both had regular IRA accounts as well. Plus, I had a SEP IRA account that also had to remain separate. So I couldn’t do a lot of combining. But I combined what I could, eliminating four accounts. Then I moved what was left into one spot. Vanguard provided a place where I could buy and sell stocks, mutual funds and money markets for all our accounts. In addition, while I couldn’t actually combine many of our accounts, I could combine them for review purposes. In other words, I can now log on to Vanguard’s website and with the click of a mouse see all our investment and savings accounts on one page: Gina’s retirement investments, my retirement investments, our joint, non-retirement investments and our business’s investments. (Again, this isn’t a commercial for Vanguard. While I don’t know this for a fact, I assume that many other no-load fund families offer the same services.) This is a tremendous time saver when review time rolls around.
While I was whittling our accounts down to a manageable number, I also put another time-saver into place. I signed paperwork so that I could move money electronically from one account to another. In other words, whenever our business checking account balance grows too large, I can electronically move money from my local bank to the Vanguard money market. Whenever we need money in our E*Trade checking account, we can move it from either the local bank or the Vanguard money market. And we can make these transfers free 24/7 by simply logging on the Internet. In addition to being able to manually transfer money, I also now have the ability to automatically transfer money as well, both from our local checking account to Vanguard’s money market, and from Vanguard’s money market to the S&P 500 Index fund. In other words, my money moves all by itself while I’m watching TV.
The process of inputting all of your checking, savings and investment accounts will probably be easier for you than it was for me, since you’re probably not suffering from the same degree of attention deficit disorder as I was. In addition, if you’re not self-employed, that will also reduce the number of accounts you have to deal with. But if you’re deciding where to put your money, keep a couple of things in mind:
– In terms of fees, large national banks will generally charge the highest fees and have more of them. As a rule of thumb, you’ll find lower fees at local banks, lower still at credit unions, and lowest with online-only banks. But each of these outlets offers different services, so you can’t go by price alone. For example, if you travel a lot and need a nationwide network of ATMs, you might have to consider a national bank to avoid foreign ATM fees. If you go with an online-only bank, you may have to maintain a minimum balance to get the services you want without cost. If your employer offers direct deposit, you may be able to have your paychecks electronically deposited to your online bank; otherwise you’ll have to mail them…a process that can leave you a bit nervous, especially if you’re living from paycheck to paycheck.
– If you’re borrowing money with credit cards or have other types of loans, you’ll usually pay the least interest at credit unions. This is because, unlike banks, they’re non-profit. Credit unions (along with cyber-banks) also generally offer the highest savings rates. The downside of credit unions is that they may not be conveniently located for you, and you have to be a member to use one. Still, if you’re not a member of a credit union, you probably should be. Find out if you’re eligible to join one by asking people at work and/or people at church. No luck? Surf to the Credit Union National Association’s website at www.cuna.org. Go to “consumer information” and click on “credit union locator.” In many cases, you can tell by the name whether you’ll be eligible to join. (Example: when I did a search, I got “American Airlines Federal Credit Union.” Although I occasionally fly American, I doubt that’s good enough.) Still no luck? Open the yellow pages. If you live in a metropolitan area of any size, you’re almost certain to find one that will be happy to have you as a member.
– Finding the best deals on checking is easy, and so is finding the highest rates on savings accounts and bank money market funds. Simply go to www.bankrate.com. Bankrate offers free, objective information on who’s charging what and who’s paying what. And they get their information by doing independent polling of thousands of savings institutions. Most other web sites display only information from institutions that pay to be represented, which makes their information non-objective and therefore useless.
– To find the highest interest rates on mutual fund money markets (Bankrate only covers money markets offered by banks) check out Imoney’s report. Go to www.ibcdata.com and click on “Top Money Funds.”
– Since money market mutual funds are not federally insured, you might want to take a quick look at how safe your current or prospective fund is. Go to standardandpoors.com, click on “Funds,” then “Money Market Funds.” (You’ll find that the vast majority are AA-and AAA-rated.)
Ok…now that we’ve uncovered and rearranged where our money’s hiding, let’s continue by seeing where our money is going.
Where’s Your Money Going? What You Owe
The next thing you’ll be required to do to become organized is to tell your personal finance software where your money is going. A process that begins with taking stock of what you owe.
This part of the plan was probably a lot easier for me than it will be for most people, because we don’t owe a lot of money. We have a mortgage, which was easily recorded by looking at our most recent statement. But we don’t have a car loan. (We have two cars, the newest of which is a 1982 Mercedes. The older one is a 1968 Mercedes. We do have a 1999 Harley, but we paid cash for that.) And compared to most people, we didn’t have a lot of credit cards. But we still had three, and that was one too many. Gina kept one, I kept one (the one that gives frequent-flyer miles) and the last one got sliced and diced. We probably could have gotten rid of another one, especially since we also have our trusty debit card. But Gina likes to have a credit card of her own “just in case.” (Which means just in case I do something to make her mad she can retaliate by going to the mall and buying a new outfit. Since half of the money she’s spending is hers, I’ve never really understood why shopping constitutes a fitting reprisal. But I’m a money expert, not a wife expert.)
While we’re on the subject of debt, this is a good time to tell you something very important which will reduce your stress, increase your bank balance and make you a better money manager. Here it is: by and large, it doesn’t make sense to invest money when you owe money. If you’ve got money in savings and a balance on your Visa, instead of shopping for the best rates or considering which mutual fund to buy, consider paying off your Visa instead. Think about it. If you’re paying 15% interest on credit cards, paying them off is like earning 15% after-tax and risk-free. And in case you haven’t noticed, that’s pretty hard to do. If you’ve got money in a money market fund, you’re lucky (as I write this anyway) to be earning two percent on it. And if you’ve got to pay 30% taxes on the interest you’re earning, you’re actually only bringing home 1.4%. The 15% interest you’re paying on your credit card, on the other hand, isn’t deductible. You’re out the full 15%. So paying off your debts is almost always a much better use of money than investing it. Are there exceptions? Sure, but not many. If you’re paying six percent on your mortgage, and have enough deductions to itemize, your after-tax cost of borrowing that money is only 4.2%. (If you’re in a 30% tax bracket, 30% of what you’re paying you’ll get back as a reduction of the tax you owe, meaning you’re only out of pocket by 70% of the six percent you’re paying: 70% of six percent is 4.2%.) And it’s a pretty safe bet that over the long term, money you’re putting in the stock market will return better than 4.2% after taxes. In addition, your house is hopefully going up in value every year, and if you’re lucky, by more than 4.2%. So at least in this scenario there’s a logical argument for borrowing. But this argument is hard to make with almost any other debt you have. Credit cards? No way. Car loan? Not likely.
Since it’s pretty obvious that paying 15% while earning two percent is walking backwards, we’re left to wonder why so many of us keep money in a savings account while owing money on a Visa. I believe there are two reasons for this. The first is that human beings as a group are pretty sharp at remembering what we own, but we’re a little hazy when it comes to remembering what we owe. In other words, it feels good to have money in the bank, and it’s easy to forget we owe money on the car we use to get there. We’re optimists by nature, so we tend to look at our savings glass as half full even as we owe a glass and a half to various lenders. The second reason that we save while owing is that’s the advice we nearly always get from securities salespeople disguised as investment advisors. In other words, we’ve always been advised to keep some money set aside for “emergencies.” While there’s nothing wrong with having an emergency fund, when you’re paying interest on debt, the argument gets weak. I have a $19,000 credit line on my Visa. If I have an emergency, I’ll pay 15% in order to access that cash. But why the heck would I walk backwards to the tune of 13% (paying 15%, earning 2%) when there’s no emergency? Keep doing that and I’ll kindle an emergency long before I extinguish one.
About the only exception to this rule is if your prospects for continued employment are bleak. If you’re about to be laid off, then it makes sense to stockpile cash while you can. That’s because you only have to repay a portion of what you’ve borrowed every month, and if you have zero cash with which to make payments, you’re sunk. But if you’ve just celebrated your 15th anniversary with the Department of Motor Vehicles, you’re probably better off paying off debt than building your savings.
Paying off debt instead of adding to savings makes even more sense when you consider being a 60-minute money manager. Because it will also result in a lot less time spent figuring things out. Things like where to put your savings. Reporting what you earn on your income taxes. Deciding whether you should refinance your debt. Figuring out how to make the interest on your debt tax deductible. Making payments on the debt. Worrying about what will happen if you should be unable to make the payments. All this is nonsense. If you owe $5,000 on your Visa and you have $5,000 in the bank, kill two statements with one stone by paying off the debt. Now you can watch Oprah instead of opening envelopes, writing checks and worrying about earning more interest and/or paying less interest. You’ve still got an emergency source of cash, and the math handily proves that you’ve made the right choice. Even if you don’t have enough sitting in savings to completely pay off a debt, it makes sense to divert any extra cash you accumulate on a monthly basis to paying off debt rather than investing. The worst thing you can ever do debt-wise is to make minimum payments. Despite what lenders may imply, minimum payments are in no way related to convenience for you. They are all about profits for them. The longer you pay, the more they make, and that’s all there is to it. So forget what your lender tells you. There’s only one minimum payment on a debt, and that’s the maximum that you can possibly afford to pay.
As you’re recording all your debts and thinking about how to reduce them, here are some things to keep in mind.
– As with your savings accounts, credit unions are one of the best places to have your loan accounts. Non-profit often means lower rates. In addition, credit unions are normally easier to borrow from paperwork-wise. Since they tend to be smaller, community-based organizations, they often have fewer hoops for you to jump through. This applies to every type of loan: credit card, auto, signature, and sometimes even mortgages.
– Consolidating your various loans with a home equity loan makes sense for at least three reasons: these loans are often tax-deductible, they normally have lower interest rates than other types of loans, and consolidating means fewer statements for you to open, examine, file and lose every month. However, you should also keep in mind a pet expression of mine: “Buy a blouse, lose a house.” In other words, when you borrow against your home’s equity, what you’re doing is putting your shelter up as collateral. If you’re borrowing to support a lifestyle that you can’t afford, don’t be an even bigger dope by putting your home at risk. So get your act together spending-wise before you start consolidating. I’ll have more on this topic in the “Bringing It All Together” chapter. .
– If you close credit accounts, you’re not done when you’ve paid off the debt and/or cut up the credit card. You still have to inform the lender in writing that you want the account closed. Otherwise, your credit report will show that you have open accounts when you thought they were gone. This is bad because it will appear from your credit report that you already have too much available credit, which lowers your credit score and makes borrowing more difficult and more expensive.
– Speaking of credit reports, when was the last time you looked at yours? The number of mistakes in credit reports is a national disgrace. Depending on whom you choose to believe, estimates suggest that up to 70% of credit files contain errors. Why does this matter? One reason is obvious: black marks on your credit history make it harder to borrow. But your insurance company could also use your credit report to set your car, life and/or homeowners insurance rates. (They’ve figured out that people who irresponsibly use credit could be irresponsible in other areas…go figure.) Even your current or prospective employer could access your credit report as they decide whether to hire or promote you. If something bad has happened to you as a result of your credit report (i.e., you’re turned down for a loan, a job or an insurance policy) you can request a free copy of the report that caused the problem, providing you do it within 60 days of the rejection. You can also get one free credit report per year if you’re 1) unemployed and plan to look for work within 60 days; 2) on welfare; or, 3) your report is inaccurate because of fraud. Otherwise, a credit reporting agency is allowed to charge you up to $9 for a copy of your report. That’s the federal law. But there are also certain states that have passed laws that allow you to get a free copy of your credit report once every year just for the asking. They are Colorado, Georgia, Massachusetts, Maryland, New Jersey and Vermont. Here’s how to contact the big three credit reporting agencies:
PO Box 740241
Atlanta, GA 30374-0241
PO Box 949
Allen, TX 75013-0949
PO Box 1000
Chester, PA 19022
And while you’re on the web, learn more about your credit report and how to fix errors by going to www.ftc.gov.
– When you’re looking for the best loan rates for cars and homes, bankrate.com can help. As I said before, this web site will hook you up with both national and local lenders so you can see at a glance who’s got the best rates. But don’t stop there. Check with your current lender. Let them know that you’re considering refinancing and see if they’ll match or beat offers from the competition. And ask if they’ll do it with fewer fees and less paperwork. After all, they already know you. Finally, open the phone book, call a few lenders and make sure you’re getting the best possible deal, and don’t forget credit unions.
– When you borrow money, especially on a home, you’ll be faced with a frenzy of fees. Just say no, or at least make them earn the fees by having the lender explain each and every one in enough detail so you’ll understand what you’re paying for and they’ll regret answering the phone. Once you understand the fees, attempt to eliminate, or at least reduce, each and every one. The easiest way to do this is to tell your prospective lender that their competitor isn’t charging that fee, or isn’t charging as much. (Hopefully this will be true, but even if it isn’t, it’s worth a try.) More on this in the chapter on real estate.
– If loans come with fees, try to avoid putting them on the “back end” of the loan by including them in the amount financed. Like minimum payments, this ploy appears to be a convenience for you, but it’s really simply a method of increasing your lender’s bottom line. You probably already know that if you borrow $100,000 to buy a house, by the time you make minimum payments for 30 years, you’ll have paid close to $250,000: $100,000 in principal and $150,000 in interest. Well, if you finance $3,000 of closing costs, you’ll end up paying $7,000 by stretching them out over that same payback period. If you can’t afford the closing costs, then you have no choice. And if rates are really low, fine…maybe you can earn more after-tax by investing that money than you’re paying after-tax by borrowing it. But go into the transaction with your eyes open.
– How do you know when refinancing is in your best interest? Simple. Take the cost to refinance and divide it by the money you’ll save every month. The result is the number of months it will take to recover the cost of the refinancing. If you’re planning on staying in your home for longer than that number of months, you’ll come out ahead.
Where’s Your Money Coming From and Where’s It Going? Your Revenue and Expenses
After you’ve understood, recorded, rearranged, and consolidated your debts, it’s time to see where else your money is arriving from and where it’s heading.
Recording your income is pretty straightforward. You’ll simply plug the numbers into the software in appropriate revenue accounts conveniently provided. If you’re an employee who receives a regular income, you can tell your software how much that is and it will input it for you automatically from that day forward, along with any regular deductions for savings, 401(k), taxes, health insurance, etc. If your income and other paycheck items are less certain due to commission sales or self-employment, no biggie, just tell your software whenever you get a check. In either case, whenever money arrives in your life, you’ll tell your program and it will keep tabs.
Now comes the main event: where your money is going. This will include recurring, unavoidable expenses like utilities, insurance and taxes, and sporadic, theoretically avoidable ones like trips to the mall and single malt scotch. Personal finance programs come complete with expense accounts that will help you categorize your expenses. And if a category that is uniquely you isn’t included, you can easily add it. Tracking where your money is going is the single most important thing you can do to control your financial life. And doing it with a personal finance computer program is especially helpful, because in an instant you can see what amount and what percent of your money is going for what expenditure, making the creation of a spending plan much easier to do. For example, if you find that eight percent of all the money you make is going to pay for your various insurance policies, you can choose to focus on reducing your cost for insurance. If you’re spending $2,500 a month on entertainment, maybe you’ll start thinking of ways to entertain yourself without spending so much. The point is that seeing where your money is going in black and white will instantly get you thinking about whether you’re getting what you’re paying for. If you are, fine. If you’re not, change it. If saving for your kid’s education has a higher priority than renting movies from Blockbuster, this is where you’ll find out. Most of us are never allowed to make decisions like this because we’re not confronting ourselves with exactly what we’re spending at Blockbuster, nor do we spend a lot of time thinking about how much reward we’re actually getting from what we’re buying. Again, while this may seem like a method to generate guilt, it isn’t. If you’d rather let your kids pay for their own tuition by collecting aluminum cans along the highway so that you can watch the latest DVD, who’s to say that’s wrong? Recycling is good for the environment and walking along the highway is good exercise, not to mention a great way to develop fast reflexes. So don’t sweat it: the only wrong decision when it comes to your money is not making any decisions. And the only way to make informed decisions is to be informed.
So, from this day forward, you’ll be recording all your expenses in your personal finance software. Every dime, every day. Will it take time? Yes. But I’m not including the recording of expenses in the one hour per year that it’s going to take to manage your money. Because keeping track of where your money is going has nothing to do with managing your money in one hour a year. It has to do with going through life with your eyes open, which you should be doing no matter how long you choose to focus on your finances.
A tip or two in expense tracking and making it easier:
– In order to keep track of your cash expenses, you’ll need to be able to write them down as you incur them. This can be done with something as simple as a 29-cent, pocket-sized notebook, or as complex as a $500 Palm Pilot. But record them you must, and you must transfer these cash outlays to the appropriate category of your personal finance software every day. You’ll also find that the simple act of recording expenses will cause you to think about them, which in turn may reduce your spending with no effort on your part.
– There’s a hidden blessing that comes along with recording your expenses in your personal finance software. Namely, when you record an expense, you’ll indicate whether it’s tax deductible. Then, when year-end rolls around, you can electronically export this information directly to your tax-preparation software (like TurboTax or H&R Block TaxCut) and prepare your tax return in minutes instead of hours. The ability to do this one thing will practically pay for a computer, not to mention the software, in terms of saving time. More on this in the chapter on income taxes.
– If for some reason you should decide that you don’t want your kids wandering the highway in search of aluminum cans to pay for college, you may find that you want to spend less in some categories in order to save more in others. The trick to doing this is not to deprive yourself, since deprivation takes you down a path that’s difficult to follow. So when it comes to saving money, first focus on things that won’t leave you feeling deprived. For example, if you pay four cents a minute for long distance instead of 10, you won’t have any less fun; there will be no noticeable impact on your life. If you bring your lunch from home instead of eating out every day, there may be a minimal impact, but barely noticeable. If you raise the deductible on your insurance policies, you probably won’t feel like a second-class citizen. It’s little things like this that make saving more money painless. And painless saving is the only kind that works over long periods of time, unless you really choose to focus on changing your belief system about money.
– Speaking of changing your belief system, use a few simple mental techniques that help you spend less money. For example, stop thinking in terms of dollars and start thinking in terms of hours. Start by considering how much money you make for every hour you work. Now subtract 30% of that to account for all the taxes you pay. For instance, if you make $40,000 a year, you make about $20 an hour. Subtract 30% of that and you’re left with $14.00 an hour. The next time you’re at the mall and are tempted to spend $100, stop and think. The store wants you to consider that $100 as $3 per month, the amount that your purchase will cost in terms of minimum payment on your Visa. But what are you really giving up? If you pay cash, you’re giving up seven hours of your life working. (Seven hours times $14 per hour = $98) If you pay with your credit card and make minimum payments, you’re giving up 14 hours of your life. (That’s because you’ll end up paying two or more times what you spend by the time you pay the interest.) So spending this money means you’re retiring one to two days later than you could have. You’re surrendering one to two days of doing someone else’s bidding. When measured against that yardstick, many purchases don’t make sense, and you’re much more likely to leave your wallet in your pocket or purse. And if you choose to spend the money anyway, odds are good that you’re buying something you really want rather than something you impulsively think you want.
– Another mental realization that will positively influence your saving skills is to recognize this simple truth: physical possessions cannot meet spiritual needs. Sound obvious? Let me assure you that it’s not obvious to your subconscious, because if it was most advertising wouldn’t work. The next time you’re watching TV, pay attention and you’ll see exactly what I’m talking about. Car ads that promise you’ll appear younger if you drive a certain car. Toothpaste that virtually promises you a sexual encounter. A diamond cartel explaining that the only true evidence of love is a gemstone. Once you understand Madison Avenue is attempting to convince you that your spiritual needs can be met with physical possessions, you’ll see this parlor trick for what it is and be better equipped to ignore it.
– Want some simple, specific ways to save money? You won’t have any difficulty whatsoever finding them. If books are your preference, you’ll find dozens on the subject, including mine: Life or Debt.
– If websites are your thing, you will again have no trouble finding more than you can ever review. Rather than listing dozens of frugal living websites, I’ll just list a couple. One of the best sites for just about any topic you can think of, including saving money, is www.about.com. For frugal living, go to http://frugalliving.about.com. Along the left hand side of the page, you’ll find a few dozen categories, listed alphabetically, that will zip you to practically every money-saving idea in every topic from appliances to utilities. Some of the suggestions will seem a bit extreme. (Learn what cows have known for years…eating grass is good for you!) But you’re free to ignore those. You’re still guaranteed to find some simple ideas that will save you serious bucks.
Creating a Spending Plan
Whether you’re talking about a shoeshine stand or General Motors, pretty much every business has a plan of where its money is coming from and where it’s going. This involves estimating how much money the business is planning to take in (revenue projections) and how much money it’s going to spend (expense projections). The difference between what a company takes in and pays out is its profit. The amount of this profit is a company-wide goal. In other words, a well-defined target, set out in black and white for all to see. Because for most businesses, profits aren’t the main thing, they’re the only thing. So in every successful business, at least once every year someone sets the profit goal, and someone estimates every potential source of revenue and expenses. And after the year is over someone sees how close projections came to reality. If the profit goal wasn’t met because less revenue came in than expected, someone’s going to be explaining why. If the profit goal wasn’t met because more money went out than estimated, someone’s going to be explaining that. After all the explanations are in, decisions can be made about what to do next.
You may think that non-profit organizations by their very definition don’t fit this mold, but you’re wrong. While it’s true that profits may not be their stated goal, rest assured, they want to make sure their income is more than their expenses. Otherwise, sooner or later they’ll be forced to shut their doors and their non-profit purpose will no longer be served. To prepare for lean times, non-profits need…profits! They may not call them that, but they certainly want to build a cushion to help them through tough times, and taking in more than they’re paying out is the only way to create one. If you doubt that non-profits are serious about creating a cash cushion, listen to National Public Radio or watch your local PBS sometime during a fundraiser. I dare you.
The only type of organization that might accurately say that it has no interest in profits is a governmental organization. Rather than profits, these organizations exist to spend as much money as possible, get as little value for the money they spend as possible and in the process, piss off as many people as possible. But even in governmental organizations you’ll find that there are people whose job it is to formulate goals relating to revenue and expenses. It may not be a big deal if their expenses are higher than their revenue, since they’re in the unique position of forcing additional revenue out of their customers. But it’s important for them to at least pretend to be accountable.
So if goal setting, estimating revenue and expenses, and comparing estimates to reality is so important where you work, why isn’t it where you live? It is. While it’s true that your family wasn’t formed to make a profit, if its expenses exceed its income it will soon be bankrupt, and at least part of its purpose, e.g., food and shelter, will no longer be served. Like any other organization, it needs a cushion to see it through tough times. So business-wise your family is really a non-profit organization, which probably comes as no surprise. The chief distinction between your family and more traditional non-profits is that all of your employees are tenured so they can’t be fired.
The point of all this is that keeping track of what you make, what you spend, and your savings goals is everything when it comes to family finances. Savings are ultimately what’s going to allow you to retire. Savings determine how you meet emergencies. Where, when, or whether your kids go to college. In short, savings are the intersection where what you want from life crosses what you get from life. It’s just that simple. And let me assure you: any increase in your savings that occurs without keeping track of what you make and what you spend is purely coincidental.
If that’s not enough to convince you, maybe this will. Not being organized and keeping track is directly related to any anxiety you feel when it comes to finances. Check out the following definition of anxiety. And as you read it, see if you can relate to how you feel when you think about money.
Anxiety: painful or apprehensive uneasiness of mind usually over an impending event or anticipated ill.
Does this not fit the vast majority of people when it comes to money? We feel anxiety because sooner or later something expensive is going to happen and we’re afraid we might not have sufficient funds, or we won’t be organized enough to know what to do. We’re going to get sick. Our kids are going to college. Our car’s going to break down. We’re going to retire. We’re going to die. Whatever…we know that something is going to happen that’s going to cost us. But we don’t know how much it will be or how we’re going to deal with it. And there you have it: anxiety.
Of course, setting goals, staying on top of revenue and expenses and being organized won’t result in an automatic increase of your savings balance. But these things do immediately increase your control and reduce your anxiety, because doing this stuff requires you to review where you’ve been and think about where you’re going. Which means that before you know it, you’re aware of exactly what’s covered in case of a health-care crisis, exactly what you’ll be expected to pay, exactly where that money is going to come from and exactly where to find the pertinent clauses in your insurance policy. You’ll have an idea of when you plan to retire, what that retirement will look like, how much you’ll have in savings and the factors that will influence that savings balance. See how this works? Organization and 60-minute money managing are like tattoos and bikers: you won’t see one without the other.
Once you’ve input and organized what you own, what you owe and where your money is going, you’ll probably want to fiddle with your expenses a bit so you can attempt to set savings goals. This entails creating a spending plan.
The key thing to remember when you’re talking about planning your spending is that it’s a plan. It’s not a “budget,” which implies deprivation much like “diet” implies going hungry. We talked about allocating your savings in an earlier chapter. Did that sound like deprivation to you? Well, same principle here. Your spending plan is merely a reflection of how you’re allocating the money that doesn’t find its way to a savings account. If you want to allocate seven percent of your income to your GI Joe collection, nobody’s going to beat you up or call you names. You just need to recognize that you’re spending seven percent of the money you make on GI Joes. That’s not screwing up…that’s learning something. If you get that much pleasure from GI Joes, maybe you should increase the percentage. But if retiring a bit earlier, or owning your own business or helping your kids with college seems important too, you’re now in a position to review your priorities and make sure your assets are allocated properly to achieve your desired outcome.
In other words, having a spending plan allows us to see where our money is going now, make sure that the current allocation is satisfying our goals and if it isn’t, trying to rearrange things so it is.
And by the way, I was just being polite before: if you’re spending seven percent of your income on GI Joes, you’re screwing up big time.
Ok, now you’re almost there! You’re a new, organized you. You have the fewest possible number of places to keep your money, and you have the highest interest rates on them. You have the fewest possible debts, and you have the lowest interest rates on those. You know where every penny of your money is going, you have resources to find additional ways to trim your expenses, and you are ready to do your taxes at the push of a button. Isn’t life grand? But before we stop talking organization, let’s do something else that will make you annoyingly efficient. Let’s trash some of the stuff you’ve been keeping.
It’s necessary to keep some paperwork handy, but the vast majority of us keep a lot more than we should. This causes us to spend time filing when we could be watching TV or fantasizing about the new neighbor across the street.
What do you need to keep? How long do you need to keep it? Well, the first thing to remember is that if something doesn’t relate to either taxes or a warranty, there’s probably no point in keeping it at all. For example, utility bills. Admit it…you send in the check to your power company every month, and then file the portion of the bill that says, “Keep for your records.” Good thing the bill didn’t say, “Jump off a cliff.” Your electric bill isn’t tax deductible (unless perhaps you’re working from home) so the IRS doesn’t care whether you’ve paid it or not. If your check doesn’t find its way to the electric company, the part of the bill that you’ve kept for your records isn’t proof of anything. So exactly who are you keeping it for? If you want to see if and when you’ve paid a bill, look in your check register. If you want to see if they’ve cashed the check, look at your bank statement or the cancelled check. If you want to see how much electricity you’ve been using, call the electric company and ask them. They have people there who are paid to keep track. You’re not.
What about your bank statements? Once you’ve reconciled your statement and made sure that your balance agrees with the bank’s, you really don’t need the statement any more. But that doesn’t keep most of us from keeping them all anyway. By the way, your personal finance software will help you reconcile your checking account in a few minutes a month, and thereafter can go online and tell you instantly which checks have cleared and which are outstanding as of that moment. You know as much as the bank does.
As to cancelled checks, if you need them the bank has copies. It’s justifiable to keep cancelled checks for a month or two in case someone, like the electric company, says that you didn’t pay your bill. It’s also perhaps understandable to keep those that relate to income taxes, or prove you paid for something that carries a warranty, although store receipts are better for this purpose. But what about everything else? Can you imagine the circumstances that would require you to keep a cancelled check for the groceries you bought last year? If you want to know how much you’re spending on groceries, get a report from your personal finance software or add up the amounts in your check register.
This is also true of your credit card statements. You only need your monthly statement for as long as it takes to reconcile the receipts for purchases you made that month (you’ve kept ‘em, right?) with the charges reflected on your statement. Again, your personal finance software will keep track of what you bought and put your purchases in the proper categories. It will also show that the credit card bill was paid and the check was cashed. Like cancelled checks, if you want to be conservative, keep statements for a month or two in case some payment dispute arises. But how many times have you needed last year’s credit card statements?
You may not have noticed this, but many of your investment statements are cumulative, especially in the case of mutual funds. In other words, your December statement shows all the activity in your account from the previous 11 months in addition to what happened in December. The other 11 statements have now outlived their usefulness. And if you’ve been faithfully updating your personal finance software, you’ve already got a secondary source for this information anyway, albeit not one suitable for tax purposes. Your 401(k) statements are normally quarterly, but you also get an annual statement. Once you’ve made sure that the annual accurately reflects the quarterlies, the quarterlies are kindling. In other words, keep statements that summarize your annual activity, but toss “sub-statements” after making sure everything’s kosher. Statements that show how much you paid for a security, however, including reinvested dividends in the case of mutual funds, should be kept until three years after the security is sold, thereby becoming part of a tax return.
What about receipts? If there’s a warranty involved, staple the receipt to the warranty or instruction book so you don’t lose it. Receipts are also documentation for your tax records, so you should keep those with the applicable tax return, meaning they’ll be around for three years after the return is filed. Receipts or other proof of improvements to your home should be kept until three years after your house is sold, because these expenses could affect the sale price you report, if you have to report one.
Some people like the idea of keeping receipts for big-ticket items indefinitely so they’ll have proof for the insurance company if they lose their possessions in a fire or the like. Nothing wrong with that, but I prefer to videotape my possessions while dictating the price I paid and the date I bought them. That’s normally adequate for the insurance company. In any case, if you keep receipts for insurance purposes, don’t keep them in your house, since if they burn up, they won’t do you much good. Unless you’ve videotaped the receipts, and the tape is someplace safe. But since you can’t shoot video of the video camera, you’ll need to keep the receipt for that. Isn’t this confusing?
Your pay stubs are like your mutual fund statements: cumulative. Make sure your year-to-date numbers add up, then toss prior stubs. Same drill when you get your annual W-2 statement from your employer. Agree with the last December stub you had? The December stub is now toast.
I’m not going to go over every conceivable piece of paper you’re storing right now, but see what you’re keeping and think about why you’re keeping it. If you haven’t touched a particular folder in a year or more, odds are that you don’t need it. Unless, that is, it relates to taxes.
So how long do you keep your tax returns and the cancelled checks, receipts and other fragments of dead tree that support them? For answers to this burning question, we turn to IRS Publication 552, “Recordkeeping for Individuals.” This staple of bathroom reading declares that you should keep your tax stuff (that is, the return and everything that supports it) for three years after the date the return was due. (In other words, if your return is due on April 15, 2004, the clock starts ticking on April 15th of 2004, even if you file the return early. If you file it late, the clock starts the day you actually file.) Notable exception? If you cheat on your taxes. If you don’t file a return, or file fraudulent returns, the IRS could conceivably audit you for every year since you were born, and maybe even while you were still in the womb. If you under-report your income by 25% or more, they can go back six years after the return was filed. But if you’re not an outlaw, you only need to keep your tax returns for the three years after you file. That being said, some people counter that since the IRS could conceivably audit you for any year in which you don’t file a return, it makes sense to keep a copy of your return forever. Otherwise, Uncle Sam could say you didn’t file a return and you won’t be able to prove you did. So if you’re a packrat, there’s your excuse to keep packing.
There are additional rules for people who own businesses. For example, you should keep all records related to your employees for at least four years. But I’m not going to include everything having to do with those of us who are self-employed. Instead, I’ll just tell you where you can go to download it. You want IRS Publication 583, “Starting a Business and Keeping Records,” and you can find it at irs.gov. It’s free, and perfect to add to your bathroom library, or to keep by the bed if you suffer from insomnia.
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