How do you manage your budget?

[Philpug]

Pack your lunch, don't eat out. If you drink coffee, make your own, don't go to Starbucks or whatever gourmet coffee shop you go to.

 

[Monique]

There is a great psychological effect of having a cushion. Instead of "damn I have to put this on a credit card" it's "damn, I have to use the cushion."

Yes. I have a large cushion already in place. I am trying to budget so that it is my "last resort" cushion. So I suppose I will have a primary level cushion and then a "shit went very wrong" cushion. Not including retirement savings, which are inviolate.

 

[Steve]

Yes. I have a large cushion already in place. I am trying to budget so that it is my "last resort" cushion. So I suppose I will have a primary level cushion and then a "shit went very wrong" cushion. Not including retirement savings, which are inviolate.

Yeah, that's my "Safety Net" account. First is the Cushion, the Safety Net is for real bad things and has more money in it, but I never use it. It is getting about 2% interest in an online savings account. And as with you, the Retirement accounts, which I call the "Nest Egg" are inviolate.

I do put money monthly into the Safety Net, but when it hasn't been used in a long time, I may stop putting into it, as long as it remains at it's baseline amount.

By the way, having a decent amount of money in cash ($20's) hidden away is a good idea too. Never touch it. That's the terrorism, or electric grid gets hacked into money.

 

[Magi]

Personal finance is a fairly simple thing to get right at the basic level, but much like skiing - simple and easy aren't the same thing.
Disclaimer: All below advice is not the advice of someone with a fiduciary duty to you. Do research and make good decisions.


Rule 0 - Compound interest is your greatest enemy and greatest ally. Understand and respect it.

Rule 1 - You need to have more money coming in than going out over the course of a month/quarter/year.

Rule 2 - Have a cushion of "emergency" funds that allow you to cover violations of rule 1 without taking on debt. Keep this in cash/cash equivalents.

Rule 3 - Save for the long term (retirement, house, etc...) - keep this money in low cost index funds of stocks/bonds, both domestic and international. (Vanguard is great for this).

Rule 4 - Know what you're paying for advice.


Elaborations on the above:

Rule 0 - Compound Interest is POWERFUL. Make it your friend, not your enemy.

Understanding compound interest is the single most important bit of financial education you can have.
Debt is an emergency to be dealt with *first* in your planning.
If you have credit card debt - you are very probably doing it wrong.
Use low cost index investments to make compound interest work FOR you, not against you.​

Rule 1 - If you spend more than you make - you will necessarily go into debt and/or bankruptcy.

If you can't stop spending more than your budget - use cash.
Credit cards are the devil. Avoid them.
The more debt you take on now - the less money you have for the future. Make sure it's productive debt (Student loans for college *can* be productive. Use expected salary distributions and DO THE MATH! before you plunk down tens or hundreds of thousands of dollars).
​

Rule 2 - Emergency funds

The point of having cash sitting 'is because borrowing money (especially short term and unsecured) is *expensive*.
The entire idea of rule 2 is to make sure as much money as possible is working for you by making sure you never have to use 22% APR credit card debt to fix your car or buy food.
Some people will think "I can just pull emergency funds out of my investment accounts" - you don't want that to coincide with a significant (and temporary) drop in your investments. The money for rule 3 and rule 2 are separate for a reason - so that you are never pulling $$$ from long term investments under duress.
​

Rule 3 - Pay yourself first.

Figure out when you want to reach a financial goal. (House down payment, retirement, w/e) Then calculate how much you need to save each pay period to make that happen. Then put that money into savings FIRST. Then live on the rest.
Every dollar you have invested pays you ~4 cents a year forever.
Savings fall into two kinds: Retirement and long term.

Retirement - Priority for funds

401K match at work (Free money!)
IRA (Roth or traditional [Taxes now, or taxes later]
Rest of 401K
Accounts that aren't tax advantaged​

Long Term Savings

Emergency fund - 1-24 months of expenses in: Money Market / CDs (This money you are prioritizing low/no volatility in.)
Long term savings -

OPTIMIZE FOR COSTS - lower expenses are exactly the same as a bigger return. (I like Vanguard *a lot* for this reason)
Investing != gambling - If you have the ability to pick individual stocks that generate an above market return - go make 7 figures on Wall Street instead.
Use a mix of stocks and bond index funds, and a mix of domestic and foreign funds.
Weight against volatility as you get older, but not too much.
​

Rule 4 - Pay flat fees for your advice.

Fixed fee advice for taxes or planning can be a great value. Pay them some amount of fixed dollars for some amount of hours of advice.
Never pay an "investment advisor" a percentage of anything. (Many studies show that investments outperform the market average by exactly their fees, netting you nothing in the best case, and increasing your losses in the worst/average case).
Until and unless you have mid 8 figures under investment - you don't need an investment "advisor" on retainer. (That person comes after your accountant and lawyer are on retainer).​

​

​

 

[Chris Walker]

I actually used to do it by paying cash for everything, and when I got my paycheck I'd cash it and divide up the money into different physical envelopes. One for food, one for bills, one for entertainment, etc. It was easy to know if I had room left in the budget for a certain category: just look in the envelope. Well, it's not real secure and there'd be too many envelopes these days to make it practical. More of a little story about the weird way my brain works than a suggestion.

 

[Monique]

By the way, having a decent amount of money in cash ($20's) hidden away is a good idea too. Never touch it. That's the terrorism, or electric grid gets hacked into money.

For sure. Although in most emergency cases, cash is pretty useless vs, say, guns and potable water. I figure it's "get out of town without leaving a trace" money.

If you have credit card debt - you are very probably doing it wrong.

Agreed here.

Credit cards are the devil. Avoid them.
The more debt you take on now - the less money you have for the future.

Agree about debt, but disagree about using credit cards. You just have to pay them off. I haven't carried a balance on a credit card in ... 15 years? More? I got into a lot of credit card debt right out of college, and the process of digging myself out was painful.

Credit cards can be useful for tracking expenses, though, and getting the benefits (cash back, miles, whatever). You can also dispute charges. If I'm spending cash, I tend to lose track quickly. (Yes, I could start from a baseline amount and then just see what's left - but I don't tend to do that.)

But - it all hinges on controlling spending enough that you can avoid carrying a balance. If that's a challenge, then absolutely, avoid plastic.

Investing != gambling - If you have the ability to pick individual stocks that generate an above market return - go make 7 figures on Wall Street instead.

Having worked in a finance-adjacent industry for years, I 100% agree with this.

Never pay an "investment advisor" a percentage of anything. (Many studies show that investments outperform the market average by exactly their fees, netting you nothing in the best case, and increasing your losses in the worst/average case).

This makes sense. I'm not doing it ... In practice, my husband and I shoveled money into accounts, but chose funds without a consistent strategy, and then never checked up on them. We could have been doing a lot better. When my husband died, his childhood best friend was able to help me. He did not push the idea that he would manage my money, but I was overwhelmed and wanted to get it off my plate. I don't know if I could have tracked all the accounts without him - heck, there are just a few outstanding loose ends still, and I still can't keep track of them all. He reviews my assets and investments regularly, makes sure they're aligned with my goals, and helps me with questions like, "If I do X, how will that impact my retirement?" I would still be at a loss to figure out my budget numbers without him.

We paid an independent FA to suggest a strategy a few years ago. Surprise, surprise - we did maybe one out of ten of the things she suggested, because it was a pain to deal with.

I'm sure this is suboptimal compared to correctly managing my money myself, but I've proven time and again that I'll do a poor job with that. Index funds and date targeted funds would address a lot of that, but there's more to money management than maxing out my 401k. Figuring out whether I need additional vehicles to achieve my goals, figuring out how a major purchase will impact my goals - those are things I'm not good at.

Now, is it worth the amount I'm paying? Maybe not. Probably not? But it's a relief to know that it's being managed, and I just have a quick call once a month to check in. I do believe that he will do a better job managing my assets and clearly identifying consequences than I ever have.

 

[scott43]

I actually used to do it by paying cash for everything, and when I got my paycheck I'd cash it and divide up the money into different physical envelopes. One for food, one for bills, one for entertainment, etc. It was easy to know if I had room left in the budget for a certain category: just look in the envelope. Well, it's not real secure and there'd be too many envelopes these days to make it practical. More of a little story about the weird way my brain works than a suggestion.

And you miss out on all the points..

 

[wallyk]

What amazes me is how fearful and lazy most people are about managing their personal finances. If most adults allcoated 60-90 minutes a day of non-ski time, priorities please!!!, 4 or 5 times a week reading, researching and taking time to understand how mange their finances that time adds up. There are so many tools available to empower the individual when compared to 20-25 yers ago....it's unreal.

 

[scott43]

I think people just don't want to face up to it. It's like people who continue to drive their car with the Check Engine light on or when it's going *click-click-click-click* while they drive...

 

[wallyk]

I think people just don't want to face up to it. It's like people who continue to drive their car with the Check Engine light on or when it's going *click-click-click-click* while they drive...

@scott43 Great quote and analogy.

Investing is about knowledge and risk management. Most people are afraid of taking risks when it comes to money, yet more people than ever are invested in the global equity markets...lots of people are doing something right.....If one starts a risk position with a small amount, has a plan to prevent losses and does their research over the long haul there will be gains.

when it comes to personal finance and budgets, "The only thing to fear, is fear itself."

 

[scott43]

when it comes to personal finance and budgets, "The only thing to fear, is fear itself."

Yeah, I think that's it..just a...dread..or something of going through the numbers and seeing how short they are of what they want. Income tax is like that, isn't it? I mean, it's not complicated for most people, I just think they don't want to see on paper what they're not doing. And market entry isn't that easy..we do our own investing but it's somewhat intimidating for the average person to get to that stage. Once you're there, and people see you have money, suddenly everyone is friendly and happy to help you do something with that money!

 

[Uncle-A]

1. I have used an Excel Spreadsheet to keep track of my bills for years. It has worked as long as I did keep it up to date and that is half of the challenge.
2. Retirement planning is best done using payroll deduction before you see the check.
3. I have found that buying used cars and driving them as long as last, instead of a new car is a good way to keep transportation cost down.
4. Use cold hard cash and not credit cards if you can, the credit cards are for emergency use only.
5. Basic cable if any at all.
6. Take a second job if you have that much need. Maybe in a field that you have a special interest so it is less of a job and some fun..
7. Do not eat out a lot and cut back on drinking. (Cheap wine will get you buzzed as well as the high priced stuff.)

 

[jack97]

^^^ I've been buying used cars recently that has helped alot. I don't even have cable and rarely use my tv, I get by with live steaming news on ytube. I eat more salads and less expensive (red) meat.

Also, I'm thinking about hobby related activities that can generate income while in retirement.

 

[Magi]

<internet disclaimer - I am not your fiduciary, this is not financial advice>

This makes sense. I'm not doing it ... In practice, my husband and I shoveled money into accounts, but chose funds without a consistent strategy, and then never checked up on them. We could have been doing a lot better. When my husband died, his childhood best friend was able to help me. He did not push the idea that he would manage my money, but I was overwhelmed and wanted to get it off my plate. I don't know if I could have tracked all the accounts without him - heck, there are just a few outstanding loose ends still, and I still can't keep track of them all. He reviews my assets and investments regularly, makes sure they're aligned with my goals, and helps me with questions like, "If I do X, how will that impact my retirement?" I would still be at a loss to figure out my budget numbers without him.

I want to make clear that I have zero issue with paying someone for their time, and that a financial advisor, who has a fiduciary responsibility to you, can be a great use of money. My problem is with signing an agreement that indexes their fees to a % of assets under management, and also with "no fee" advisors who make commission off selling you something.

Your financial advisor should be like your Accountant or your Attorney. You have a question or a task, and you agree on a payment to get an answer to that question or perform that task. Financial advisors should also have a Fiduciary Duty (Legal term of art that requires them to act in your financial best interests under penalty of civil and possibly criminal liability) to you. Don't work with one that isn't (different classes of persons in the industry with different qualifications have different requirements under federal and state laws).

The "reviews your assets and investments regularly" for 99%+ of people should be a once every year thing, that you do yourself, probably at tax time.

Simplest version -

1. Go to vangaurd.com and set up an account.
2. Decide when you plan to "retire".
3. Place retirement money into the "Target 20XX" fund that is close to that date, LEAVE IT ALONE.
4. The fund will automatically rebalance between stocks and bonds and shift the allocation as you near retirement. It has pretty dang low fees.

Slightly more complicated version -

1. Set up account at Vanguard.com
2. Decide what you want your "target" asset allocation to be (70/30, 80/20, 90/10).
3. Place 70-90% of equity money into Vanguard S&P 500 fund, Place the rest into Vanguard Investment grade bond fund.
4. Once a year, same time every year - see if your allocation has shifted more than 5% beyond your "target". If it has, move money appropriately.

SUPER FANCY Version

Same as "complicated" version, but you go 75% domestic equity, 15% bonds, 10% Foreign equity. Still all in index funds at Vanguard.​

In all of the above scenarios - Don't follow the financial markets. Don't check your portfolio more often than quarterly (less is better). You aren't investing in anything beyond "America as a country is going to continue to exist and prosper". You'll hear about that if it changes.

Your accountant will tell you when the above isn't enough - *that* would be the moment to

I'm sure this is suboptimal compared to correctly managing my money myself, but I've proven time and again that I'll do a poor job with that. Index funds and date targeted funds would address a lot of that, but there's more to money management than maxing out my 401k. Figuring out whether I need additional vehicles to achieve my goals, figuring out how a major purchase will impact my goals - those are things I'm not good at.

Now, is it worth the amount I'm paying? Maybe not. Probably not? But it's a relief to know that it's being managed, and I just have a quick call once a month to check in. I do believe that he will do a better job managing my assets and clearly identifying consequences than I ever have.

Peace of mind is worth money. Just make sure you know how much it's costing you, and it should be a fixed $$$ amount, not a % of assets.

Let me preface the following with the fact that I don't know your (or anyone's) specific circumstances. You *might* actually have a really complex situation involving real estate and business ownership. If you do - you already have an accountant that should be able to answer all your questions.

"Managing money" *is* pretty darn simple, if you let it be. The most complex "investment vehicle" you should probably consider is municipal bonds. If you should be looking at those, your accountant that you already talk to 4 times a year when you're filing quarterly will tell you. If you have real estate holdings or a business - then talk to your accountant instead of hiring a "financial advisor".

1) Decide % of income you will save for retirement. This will determine when you can retire.
2) Put that money into, in order of importance (aka tax advantages): 401K, IRA, normal account [All of these can be at vanguard].
3) Take the rest of your money and spend/save for things you want.

Have I paid all mandatory bills for the month?
Is my emergency fund topped up / big enough?
Do I have any debt outstanding?
What's left is your discretionary income. Spend it as you see fit.​

4) "Can I afford that?"

Do I have enough to pay cash for it up front without touching my retirement or emergency funds?

Yes? - Buy it.
No? - Save money for it, then Buy it.​

In practice, my husband and I shoveled money into accounts, but chose funds without a consistent strategy, and then never checked up on them. We could have been doing a lot better.

Assume your strategy is to match the market. (If your strategy is to *beat* the market - stop investing your money and get paid to gamble with other people's money on Wall Street instead, much better return.)

Shoveling money into accounts containing index funds or a target date fund (You can set up vanguard to pull money in AUTOMATICALLY every month) and ignoring it is *exactly* what you should do.
You can get about 99% of the bang with five accounts:

Retirement accounts:

401k account
IRA account
Investment account.​

Personal accounts

Savings account
Checking account​

If you really need your emergency funds to be a seperate account - add another savings account in.

 

[graham418]

And stop buying so many skis!

 

[MarkP]

Recognizing your limitations and taking appropriate actions puts you ahead of the vast majority of people.


You've had some major life changes, you felt and probably still feel somewhat overwhelmed, but you got help from someone you trust and want to get comfortable doing more on your own. Pretty good stuff so far. Lots of good advice on here as well.

My off the top of my head list:
Don't panic (Hitchhiker's Guide).
Ask/pay (fixed $) for and listen to advice. Act as you feel comfortable, you don't have to do everything.
Spend less than you make (I like saying this way vs. make more than you spend). Put aside AT LEAST 10% is a good start. Increase that by 1% each year if possible.
Keep it simple, don't get greedy (broad-based inexpensive index funds).
Know your risk tolerance (can you stomach a 20% drop? 30, 40%?). Your FA can help there.
Don't beat yourself up (too much) if you mess up. Learn from mistakes.

Little things add up. One of my favorite penny-pinching moves getting a reusable K-cup ($3 from Walmart) and using Kirkland (Costco) coffee. I figger I save enough each year to pay for two lift tickets. Now that's rewarding!

 

[Tricia]

In a practical sense, this means I am attempting to actually stick to a budget for the first time in my life.

You've had quite the evolutionary year.
You're getting a lot of good advice and some tongue in cheek advise.
You're ahead of the game just because you're taking it seriously.

Basic economic rule, if your outgo is greater than your income, then your upkeep is your downfall. I know it is simple but it is also true. Start by putting 10% right off the top aside, then back into the rest with yoru daily bills..when in doubt, round up.

Honestly, by just asking the question puts you ahead of 75% of the people out there.

QFT

 

[jack97]

Simplest version -

1. Go to vangaurd.com and set up an account.
2. Decide when you plan to "retire".
3. Place retirement money into the "Target 20XX" fund that is close to that date, LEAVE IT ALONE.
4. The fund will automatically rebalance between stocks and bonds and shift the allocation as you near retirement. It has pretty dang low fees.

Slightly more complicated version -

1. Set up account at Vanguard.com
2. Decide what you want your "target" asset allocation to be (70/30, 80/20, 90/10).
3. Place 70-90% of equity money into Vanguard S&P 500 fund, Place the rest into Vanguard Investment grade bond fund.
4. Once a year, same time every year - see if your allocation has shifted more than 5% beyond your "target". If it has, move money appropriately.

SUPER FANCY Version

Same as "complicated" version, but you go 75% domestic equity, 15% bonds, 10% Foreign equity. Still all in index funds at Vanguard.​

Yet another fancy version, don't go foreign and prepare to allocate your bond funds near toward retirement. This conventional wisdom was based on old data where the foreign markets were independent to domestic, this is not the case any more. The latest credit bubble shows how global our economy has become. Furthermore, a recent paper shows foreign markets lag behind by ~ 6 months wrt US business cycles. As for bond allocation, even J Bogle (founder of passive investing) converted his funds to bonds at a much later time in his life. Presently, bonds are doing bad due to deleveraging (resulting in low interest rates). Placing any money in bond funds may get you 1% to 2% above inflation so it becomes a drag as far as an investment vehicle.

Assume your strategy is to match the market. (If your strategy is to *beat* the market - stop investing your money and get paid to gamble with other people's money on Wall Street instead, much better return.)

Exactly, a study shows 70% of active managers fail to beat the market, the market being the S&P 500 index. So Bogle from Vanguard came up with a passive fund to match the performance market by making the fund a scaled version of the S&P500. However, there some passive funds that can beat the S&P 500 as far as making more alpha (higher risk adjusted returns) and lower beta (correlation to down turn).

 

[newfydog]

Also, I now have a financial advisor who has actually given me a monthly budget to accomplish my retirement goals. In a practical sense, this means I am attempting to actually stick to a budget for the first time in my life.

OK, the manager has done his/her job. Now get rid of them.

That may be a bit of an overstatement, but be very very careful about any of those people. If they are charging a mere 1%, and you have a year with a 4% return, they took 25% of your income. (Edit....you are paying a flat fee....good, .....but it is unlikely you need to keep paying....get it set up and take it over yourself.)

Here's a very good book which shows mathematically and practically the fact that you can do it yourself, and while you might not be perfect, by using realistic plans, discount places like Vanguard, indexes, a bit of discipline in allocation, you will be much better off in the long run than if you pay someone to to skim... ummm... I mean manage your money. We basically retired in our 40's, and have made it to mid 60's without going broke yet, so I think it can be done. This book was instrumental in getting this far.

https://www.amazon.com/Four-Pillars.../ref=tmm_hrd_swatch_0?_encoding=UTF8&qid=&sr=

If you read nothing else, read the chapter "your broker is not your friend"

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To answer your question, I link all our accounts to Quicken. Once a year we print out all the income/spending by category and look at it. Then we move on for another year knowing we can spend more/need to spend less on whatever, and see how it it looks the next year. We don't worry week to week or month to month, and it is amazing how at the end of the year, we're right about where we thought we'd be.

 

[Chris Walker]

And you miss out on all the points..

Yes! By now I've ditched the envelopes for one of those airline cards. Paid for 3 tickets to Taiwan this year.