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.