Tuesday, April 12, 2016

Controlling Your Finances

There are plenty of systems and ideas floating around about how to perform budgeting.  The envelope methodThe 60% solution.  There are several variants to the same idea, such as the 50-30-20 budget.  Some companies use a zero based budget.  There are plenty of ideas around that part of life.  However, I see a lot less emphasis on how to manage the money and expenses you have.  For me, it took a while to develop a scheme for handling my day to day management.  Dave Ramsey's baby steps comes closer to a suitable scheme. However, even his steps are a bit abstract.  So here is my attempt to describe how to organize your finances.

Control the Money

Off, Button, Press, Icon, Symbol, Power
Don't give your billers all the power.  Keep the off button.
There are lots of places that offer automatic withdrawal from accounts.  These sorts of automated systems are useful, however, I suggest that it is better to have a push system rather than a pull system.  By this I mean, it is better to send money to pay the bill rather than have the biller pull money from your account. I have several reasons why I prefer this system.  First of all, they might pull out the wrong amount of money and leave you in a bind.  I have seen this happen personally, and most billers will not pay your banking fees if they cause you to overdraw your account.  Secondly, if there is a mistake in your bill, you are more likely to notice if you have to enter in the amount.  Thirdly, you are more likely to have a deep understanding of your "budget" when you hand pay your bills every month.  Finally, you can ultimately turn off these payments.  I have heard of stories where people have tried to turn off services but continued to be billed for multiple months after canceling their service.  Having the ability to push the off button gives you the power, rather than the biller.

This is not to ignore the convenience of modern times.  Most banks allow you to send money to a payee via their web interface.  That way no checks or stamps are required.  For bills which have a static cost, you can even have the bank auto pay that amount.

Controlling your money is not just keeping people from billing you automatically.  Controlling your money is also making sure you understand what you are controlling.  You should also try to disentangle yourself from long term debt.  While I do cover debt in other posts, let me give a brief set of suggestions.  Find some way to get into the habit of paying off your debt early.  If that means starting with the smallest bill and work on paying it off, do that.  If that means having an automatic payment to your mortgage, do that.

Background, British, Budget, Business
Keeping some cash around for emergency is important.
Another piece to this puzzle is creating an emergency fund.  I suggest a bare minimum of 1000 dollars per 2 members of your family.  This means if you have two adults and two children, you should keep 2000 dollars.  Why the extra money?  Since you have a larger family, the chances of something going wrong increase, and the day to day expenses are higher, making an emergency that much more stressful.  Having a little extra cushion will help prevent that stress.

On the other hand, I do suggest you limit the amount of spare cash you hold.  Ultimately, it's better to invest that money into retirement accounts than have 50,000 sitting in the bank.  Even better if you can put it into a IRA or 401k account where it goes untaxed or sheltered from future tax.

Control the Data

Your money leaves a trail that you can follow to gain insight.  In general, I use my bank's export features to gain understanding of my accounts.  My bank allows exporting from multiple years back.  Some banks might limit such an export to the last 90 days.  I usually export my data once a month, but excluding the current week, because some payments are 'processing' and may end up different, which affects the data.  I also do this for my credit cards.  Using a tool, such as Money Pig,  you can get trending data, and gain understanding of what my finances look like.  I also look at the past month and try to add notes about why a particular month was 'different from average'.  I also keep an eye on trends like if my expenses are going up.

I should note that I specifically pull my credit card data so that I can track and categorize it as well.  While I may pay my credit card using a single check from my bank, that makes it hard to categorize the actual expenses.  In order to know how you are spending your money, you need to break that down.  That also means that if you have large cash you withdrawal, these will not be well documented.  This means that you will have to hand track this data or estimate it in your head.

Control the Debt

Refugees, Economic Migrants
Your accounts balances can either go up, go down or remain the same.
There are no other possibilities.
There are only three states possible in regards to income/expenses.  You can make more than you spend, you can make less than you spend or you can keep both equal.  Keeping both equal is very difficult, although possible.  So in the majority of cases you are either saving money or you are spending money.  If you are in retirement with a sizable nest egg, it is okay to spend more than you make, because hopefully on average your investments will make up for the lack of incoming cash.  If you are 20 and going to college, it maybe acceptable to spend more money than you save in order to get an education.  However, at some point you have to pay that debt off, and the sooner, the better.

In my opinion, there are only a few cases where debt makes sense.  If it is short term and can be paid off the month you are in debt, it maybe easier to track than cash.  Another good reason to do so in the short term is when ordering online.  If your credit card is stolen, most credit cards cover all losses, where as a debit card can get you into trouble.  If it is a long term investment, such as a car to get to work, a home (if it makes financial sense).  There is a debate raging on if betting on your future earnings justifies going into debt.  It certainly is a long term investment, but it is also a risk.  Like starting up a business, you need to be aware of the risks and then make a personal judgment on how comfortable you are with those risks.  Finally, in some emergency cases, such as when you are going through a divorce and may not have access to your emergency fund.

Don't forget, no matter how good a deal you are getting, you have to factor in financing costs and emotional costs in the months and years to come from the debt.

Control Yourself

Ultimately, things like budgets are only useful if you have a habit of following through.  No matter what methods are provided, you must learn to control yourself.  In some cases, the way people treat money is not unlike that of any other addiction.  In fact, in some cases, it is clinically considered to be an addiction.  Learning to live with in your means can be difficult.  Even if not an addiction, breaking habits is long and hard work.  Replacing habits is often easier.  So instead of buying expensive things, try to buy cheaper items.  Another strategy is keep a list of things you want to buy and limit yourself to only buying 1 per week or month (depending on circumstances).  Happiness research suggests that satisfaction last longer when you treat yourself with an experience rather than purchasing a thing.  So if you feel the need to treat yourself, choose experiences.  Keep in mind an experience need not be a expensive plane trip to some fancy beach.  It might be eating out at a nice restaurant with friends or family, enjoying a park or many other small, cheaper experiences.

Experiment and discover what works for you.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investing advice and/or professional financial advice. Always consult with a licensed financial professional.

Saturday, March 26, 2016

Securing Your Financial Information

Security is often a nebulous and scary concept, particularly when it related to computers.  Anyone with an internet connection or whom watches the news can appreciate how hacks can put your data in jeopardy.  Ever piece of data you put on the internet is another piece of data that can be stolen.  The more places you have that data, the more 'surface area' you leave open.  That is to say, each place you store your information is another place that information can be taken from.

While having passwords such as your blog account cracked maybe upsetting there are two places that are particularly dangerous to lose control of your data.  The first is medical records.  Medical records may allow a hacker to get prescriptions and medical equipment they should not have access to, gives them your personal data to create credit, they might even use your insurance.  The other risk set of data you can lose is your financial data.  This too can be used to extend illegal credit, use existing charge cards and even make withdrawals from your account.

Pourbus Francis Bacon.jpg
"Knowledge is Power." - Sir Francis Bacon 

The vast majority of the types of attacks that occur are those against web-connected systems.  Typically these are websites and phone apps.  The reason for this is because they provide the bad guys the best bang for the buck.  If you want to make money using credit card data, you need thousands of credit cards to make it worth your time.  The easiest way to do that is to find a large data store that contains lots of data in it.  A single person's data is not worth all that much, maybe at little as a dollar.  Instead, thieves depend on getting lots of data at once.

One common attack is known as a SQL injection.  If you pretend for a moment that you had a machine that processed bank transactions.  The system had a pre-written statement with a few fields that needed to be filled in would read that looked something like this:
Deposit X dollars to account Y and Withdrawal X dollars from account Z.
So a real transaction might appear like this:
Deposit 1000 dollars to account MyAccount and Withdrawal 1000 dollars from account MyWorkPlace.
Now imagine that someone whom wanted to steal money from the bank.  They might try to prevent the withdrawal piece from ever occur.  This would look like this:

Deposit 1000 dollars to account MyAccount and disregard this: and Withdrawal 1000 dollars from account MyAccount.
The machine would look at that and would deposit 1000 dollars then never withdrawal the money.

The power in this is that if you can figure out how to do a SQL injection for one account, you can do it for every account.  After all, it's just filling in a blank with the right account information.  So once you have defeated the security for one account, it is often possible to do the same for every account, making everyone vulnerable from one small security hole.

Now that you can see the reason your data is at greater risk the more places you store it and in particular, when storing your data online, the question is what do you do with it?  How can you protect your data?  Products like Money Pig, that exist on a individual's machine make it more difficult for a hacker to break into because they don't have a single place to break into.  It isn't like the data of 1 million people is sitting on a single database.  Instead, only your data is stored on your computer.  There is also less incentive to break in when you can only get data for one person.

Furthermore, Money Pig allows users to not only password protect their files but accepts almost any characters including special characters, spaces and international letters.  This makes the number of possible passwords much larger and more difficult to discover.  Many online websites limit the type of password you can enter.  Finally, the data is only stored locally or where you choose to store it.  If you decide that Drop Box is a secure enough location, you can store it there, but you are in control. You have the power to decide what to do with your data.  If you decide to quit using the product, unlike a website, in which you can never be sure your data was fully removed, you can delete it because you are in control of the data.  Eternal Blue Software, the maker's of Money Pig, do not collect any personal financial data.  Furthermore, no back door exists in our software to allow us to open your data, even if we wished to.

Security is important to us all.  We need to continue to adapt and find new ways to keep criminals out.  Eternal Blue Software will continue to do their part by keeping Money Pig up to date.  We welcome questions about how our security works.

Padlock, Lock, Chain, Gate, Keep Out
Find a product that keeps you in the know and the criminals out.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investing advice and/or professional financial advice. Always consult with a licensed financial professional.

Saturday, November 14, 2015

Debt: Make a Plan

Nearly everyone starts out with few resources when they first become enter adulthood. Most people don’t have enough money to go to college for four years, buy transportation, purchase a house, etc. Even if you go a non-traditional route or if your college is paid by the state, it is likely at some point in your life you willpay back with interest.

For example, a credit card might provide you with up to 1000 dollars in which to purchase things without having to use your own money. However, this credit must be paid back, often if you do so in a short enough time frame you do not need to pay any interest. The trouble is, credit card companies, like all banks, are designed around making money. So they choose to charge an interest rate and often fees for various services. Sometimes these are equitable, small fees. In my case, the last time I was used my credit card abroad, I was charged a small fee for the service of currency conversion. This seemed very reasonable. Other fees are designed around making the credit card companies money, such as late fees. The last time I looked, my credit card’s late fees were something like 35 dollars. These fees strongly encourage you to be careful with your finances and to keep close track of them.

Today I want to talk about how debt can affect your in the long and short term and what you should do about it. In many of the financial blogs I have read they describe some arbitrary numbers that look like this:

Debt: $20,000 (@ 6% Interest)
Income: $100,000
Mortgage: $300,000 (@ 4% Interest, 30 years, fixed)

From here they would talk about if you should put your money into investments, the mortgage, savings or pay off debt. They might then talk about an investment that would make 10% interest and discuss the pros and cons in investing. In my opinion, this sort of example is too simple.  It doesn't even say if the income is gross (income before expenses, like taxes) or net (income after expense)!  Instead, let’s talk about debt. Debt is not free money but rather someone else’s money you are borrowing for a fee, backed by a contract. The debt in the scenario above shows:

  1. That is nearly 40% of the gross income for a year is dedicated to debt.
    1. 20% of the income would be required to pay off the debt, to say nothing of the sizable mortgage. The scenario does not say if the debt will increase in interest, as most credit cards charge more in interest than that. Perhaps it’s student debt, but that is still a sizable sum.
    2. 17.2% of the income is going to the mortgage. 
  2. The person appears not to have any savings.
    1. Maybe they have a 401K plan not shown, but they certainly don’t seem to have a safety net.
Often even these sorts of analysis do not consider the emotional factors around debt nor do they take into consideration the risk of losing your job. Even if this is two peoples' incomes, it is not likely they both earn exactly $50,000.  More likely, one person makes the larger share of income, and if that person loses their job, both people are will be in trouble. Really, what we have here is a large pile of debt with a debate over investment strategies. I submit a more important debate is if you should pay the debt off or prepare a ‘6 month plan’.

A 6 month plan is a plan that will allow you live at your current lifestyle for 6 months. Why that? First of all, it is easy to calculate, since all you need to do is look back at the last few months of expenses. If you don’t know how to do that, I suggest using financial management software such as Money Pig to assist you in the problem. Another reason is because 6 months may not be long enough, but you can always cut expenses, but once you have lost your job, you can’t increase your income. Now if you have a emergency, you can use the money saved up without the need for even more debt.

The alternate approach is to pay off your debt. This approach in the short term will save you more money, as you will not be paying interest on your debt. If you pay off that debt load and had an emergency, you could perhaps get more loans. This is a risk however, as some lenders will not be interested in you when you lack a job. However, this approach has two more big downfalls. The first is that you are still not learning the habit of saving. This habit is valuable and worth cultivating. The second problem is it might take you a long time to complete and you will not have that safety net for the entire time.

A third approach. Why not try a combination of the two approaches? I suggest that a 20% of your income go into savings, from the 401K, if you have it, to the emergency fund to private investing, with a bare minimum of 10% going to the emergency fund. I then recommend another 10% go into the debt, which would pay the debt off in a matter of years. Once the emergency fund is paid up, then I would put that money into paying the debt off. Once you are debt free (except for a mortgage), then and only then should you be debating various investment options.

Keep in mind, every situation needs to be custom tailored as there are always more complexities than can be captured in a single post.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investing advice and/or professional financial advice. Always consult with a licensed financial professional.

Sunday, November 8, 2015

Personal Finances: Organizing your Financial Life

Personal finances are one of the more difficult things to manage in adult life.  As children, most of us may have had allowances, but we didn’t think in financial terms.  We had toys, not assets.  We saw what we had as just an allowance, spending money, not an income stream.  We put money in our piggie banks, we did not deposit funds.  We bought our toys on impulse, or if our parents did some teaching, we might have had to save up for a toy.  We did not have multiple debt obligations competing for our funds along with social obligations and yes, still, toys we want to buy, even as adults.  At best, perhaps we learned a little of this playing games like Monopoly or possibly discussing it with our relatives and close friends.  All of that is not the same as living it day to day with all of life’s other complexities going on.

My goal today is to describe how you can organize your finances so that they are trackable and traceable.  While I will talk about tools, all of this can be done by hand or using one of a multitude of tools to solve the problem.

There are multiple different ways to slice the problem, but let me give you a few suggestions:

  1. Updating the Plan:
    A plan is just a map for a possible future.  The future is often different from your plan.  You must keep an eye on changes and adapt to them.  Gas may go up in price and that 100 dollars of savings per month may no longer be feasible.  You might get a bonus which allows you to pay your car off early and now you have a car payment's worth of money you no longer have to dedicate to car payments.  No matter what happens, you need to keep your plan up to date. 
  2. Gather Data: This can be what you know off hand, but I suggest you try to gather records from the bank.  Even if all you do is write down the balance at the end of the month for several months in a row, that will at least show you a trend line.
  3. Create High Level Goals and a Plan: The goal portion of this is what you want to achieve.  Do you want to have enough money for retirement?  Do you want to pay off your home mortgage as fast as you can?  You make a plan to help you reach your goals in a sustainable way.  The plan can be a budget, saving to get your first car or this can be about retiring with a certain amount of money in the bank.  The plan needs to reflect the realities discovered in the data gathering phase.  That is to say it needs to be achievable and realistic.
    1. NOTE: If you have a significant other, it is important that you talk about your goals.   Even if you choose to keep your finances separate, talking about goals and plans will give each other a sense of how you are doing.
  4. Working Towards Achieving Your Plan: Put effort into making your plan work.  Use automation such as moving money from checking to savings.  I suggest you pay your savings account first, or else you will be tempted to withdrawal from it.  If it is a 401 K, have your employer take it out of your account for you automatically.  If it is paying off your mortgage early, then have your bank automatically send additional payments.  
    1. NOTE: In my personal experience, it is better to have your bank control the automatic payments than to have the mortgage company take the money out of your account.  Banks often are more interested in making their system's customer friendly and allowing you to modify the rules, while mortgage companies have less motivation to provide top tier service.  So I suggest you run all auto pays through your bank rather than your mortgage lender, if you are allowed to. 
In the past, when people exclusively wrote checks, they would often keep track of the balance of their account in a little page in the back of the checkbook.  This was call the checkbook register and this was a way of keeping your checkbook balanced.  In today's complex world, few people still keep with this tradition, but there is some evidence that keeping records by hand helps your memory which in turn may help you realize your goals.

A frequent tool to organizing personal finances is a budget.  I think budgets are useful tools, however, never mistake the map for the road.  Budgets provide you guidance on how your income and spending should appear in a given month, but they are just there to attempt to describe an average month.  So rather than treating a budget as something you must follow exactly, I suggest you use a budget to give you map of how you can achieve your plan.

Some people find budgets less useful and would rather look towards trend lines.  That is to say, they would rather take previous income/expenses and average them out and see what the world would look like if those held constant for a certain amount of time.  These trend lines give you a glimpse into the future. In this trend line, you can see that the person's income is going up.

A example Money Pig graph.  This trend is up and to the right, exactly what you want to see.
The line is a trend showing an estimate of what the account total might look like in half a year.

Of course they don't take into account the pay raise or job loss you may experience in the future, but they do give you a degree of confidence that if you don't experience a change in your lifestyle, what life in the near future will look like.

The last method is to play it by ear.  That is to say, some people find that having an occasional formal check is all that is needed.  For the rest of the time, they just  use some built in measures to keep track of their funds.  One method may have an automatic withdrawal to a different account to buy that new car.  Another method may have keep their balance at some 'even number', such as 1000 dollars and if it goes over 2000 dollars they might reassess their finances.  These sorts of methods can be useful, but be aware that they also leave you vulnerable to surprises.  You might forget that you have to get an expensive car repair or other unexpected expenses.  These sorts of methods, without periodic inspections of a check list, can fall prey to such events.

All of these methods have different pros and cons.  You must figure out what does and doesn't work in your life.  You might notice that I wrote these methods in order from the most formal to the least formal.  I suggest you start with the most formal methods and as you get more proficient, you can then slowly move towards the less formal methods.  If you have life changing events, I again suggest going back the formal methods since that will help you learn what a normal set of income and expenses look like.  No matter which method you like, Money Pig can help you get there.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investing advice and/or professional financial advice. Always consult with a licensed financial professional.

Saturday, October 31, 2015

Understanding Finances: A Personal Account

In my personal experience, I have found that finances are complicated. I was 18 and it started out really easy, I was making just above minimum wage and I was paying rent to my mom. Then I started college, bought a car, needed car insurance, and kept making more and more money. I started wondering if I should get health insurance, which my employer did not provide. I bought a house, got yet more insurance, had friends whom I went out with, and of course, let us not forget the various consumer goods I bought, like my Xbox and TV. I spent 6 years in college, going part time because I was afraid of debt after amassing several thousand dollars in debt in the first year. I didn’t want to create more debt, so I choose safety over a speedy education. I also happen to be a self-learner, so I worked on learning software development and software testing over the years.

Then with the financial crisis I saw an opportunity. Like the Chinese curse, may you live in interesting times, I bought my house during the middle of the Great Recession of 2008. Towards the end of the Great Recession, I saw a nice house in a better location for me and I jumped at the chance. I decided that I could manage it if I rented out my other home, and I had always wanted to start my own business. This felt like a good place to start learning about running my own business. However, the only way I could do it was if I could get all the tax advantages from the rental. By this point I was struggling to keep track of what was going on. Adding a rental on top of it was making things too messy. I started with trying to create a simple rental management application. The more I worked on it, the more I saw I could generalize it to be about all my finances. And thus Money Pig was born.

Money Pig is not like some traditional financial software packages. It’s primary purpose is not just to try to enforce changes in your behavior by yelling at you when you’ve not saved enough but rather to allow you to gather insights about your finances. In looking to manage my money, I wanted something that would allow me to categorize my data and let me see trends. Then, as I was categorizing it, I realized how dull it was to do so by hand, so I built tools in to do it for me. Next up, I wanted to track what was a write off (from my rental or from donations), so I added that in too. I realized I wanted to see what the future would look like based upon my past year and I added another report. The next thing you know, this thing was making it really easy for me to tell how I was doing. I started telling my friends about it. They suggested features and I added a few. Then I stopped working on it. I changed jobs, life happened and I was only building it for myself.

I was talking with my boss one day, and he asked if I was doing anything cool with Money Pig. I told him no, I had not worked on it for some years. He then suggested, “If it’s that useful, why not sell it?” I started thinking about it. I had been slowly sharpening my business skills. I realized that other people might want other features, so I started adding some additional important features. I made Money Pig more secure. I made it support importing of CSVs support most formats, not just my banks. I made it easier to use. I started writing documentation. In effect, I made it what it is today. It no longer is just my Money Pig. It’s a tool for others to use.  It's our Money Pig.

So how do you understand your finances? While I can’t speak about specific cases, let me give some general guidance. You obviously want your income to go up, so keep your eye on that, particularly if you do not have steady income. If you have never done so, I suggest you hand-enter your entries in for a while. In doing so, you will gain insight into your finances. Just like in school, when you write things down, you recall them better. You can then start to see patterns and notice when something seems amiss. After that, importing financial data works just fine. You can then use the reports to notice things amiss rather than having to do everything by hand. When you do notice something odd, Money Pig allows you to write down notes about why some particular time was different than normal. You can also use a budget to keep track of your finances. These will help alert you to abnormalities in your finances. This will also help keep you from overspending or under saving.

I do want to pause here and make a few comments on my competitors. While I have found my methods work well for me, and I will continue to work to improve my software, I have no problem with you using my competitor’s software. I think it is better that you use what makes sense to you and make good choices than use a tool that does not make sense to you and make poor choices. Ultimately, I want you to succeed in your finances. Money Pig works for me, and in order to give you an opportunity to try it, I have a 30 day money back guarantee.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investing advice and/or professional financial advice. Always consult with a licensed financial professional.