How do you manage your budget?

[Seldomski]

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).

Do you have a ticker symbol for an example?

 

[Uncle-A]

Someone above talked about a retirement fund based on when you plan to retire. I used this type of 401K fund from Fidelity and I retired the first time in 2001. Some people say that this type of fund is very conservative and higher returns can be made from other type of funds. You have to feel comfortable with a level of risk based on a number of things that are specific to you. If an investment advisor does not ask about your level of risk, you better find a new advisor.

 

[jack97]

Do you have a ticker symbol for an example?

pm sent

 

[jack97]

pm sent

Thought about it some, does not seem right since I made a tease so here's the links to two ETFs, the links are Morningstar's Rating and Risk page where they calculate the 3, 5,10 year alpha and betas. In general, Morningstar is a great web page to rate performance of ETF and mutual funds.

As far as the two tickers, the expense ratio is higher than VOO (Vanguard's S&P500) by 11 to 26 basis points. I rather take a larger alpha than lower basis points. In addition, the two above uses an index that will rotate to winners and discards losers while the S&P500 is based on market cap. These two funds uses other factors other than size, such as momentum and low volatility. Academic papers have shown using these factors have a way of rotating through business cycles. The ETF wrapper is tax efficient and in general offers less of a tax burden than a mutual fund that uses these factor.

http://performance.morningstar.com/funds/etf/ratings-risk.action?t=MTUM

http://performance.morningstar.com/funds/etf/ratings-risk.action?t=SPHD

 

[jmeb]

Lots of good advice here.

As others have said, saving preemptively has been a key for me. That is, as soon as a paycheck hits my direct deposit account, the vast majority of it is siphoned out into other things: the mortgage/insurance payment, the joint expenses account (SO and I have separate finances except one account for monthly expenses from bills to eating out to new joint-gear), emergency fund, Roth IRAs and a slew of various savings accounts. (Pension is already pulled out prior.) By the time all that has happened and last month's cc statement has been auto-paid, there isn't much left sitting in an account feeling spendable.

Having a bunch of savings accounts for specific things has really helped me both a) save and b) not feel guilty about spending. I use Ally since it has unlimited savings accounts that are easy to set up and I don't see them when I look at my main bank accounts. Right now I've got:
- Home Improvements
- Urner Haute Route (1.5-2week ski trip to Austria for touring)
- Gear slush
- Fence
- Engagement/Wedding

Don't tell my SO about the last one.

 

[Steve]

Don't overlook municipal bonds. They are exempt from Federal taxes and depending on your state and the state of issue may be exempt from State taxes. Getting 3 to 3.5% interest is common. Factor in the tax savings and that's a good fixed income. If you're young you can gamble on Equities and Equity funds, but as we get older much of our investments should be in fixed income.

 

[newfydog]

Don't overlook municipal bonds. They are exempt from Federal taxes and depending on your state and the state of issue may be exempt from State taxes. Getting 3 to 3.5% interest is common. Factor in the tax savings and that's a good fixed income. If you're young you can gamble on Equities and Equity funds, but as we get older much of our investments should be in fixed income.

I saw a great example of bonds vs stocks leading up to the the dot com bust. Start with a portfolio of tech stocks, industrial stock index, bonds etc. Each year you make a ton in your tech stocks, while losing money in bonds. A disciplined investor would rebalance by selling some tech every year and buying more bonds. After four years, it is tempting to conclude that tech is the road to riches, bonds some old fashion way to stay poor. After the bust, the guy who rebalanced into bonds comes out way ahead......showing the importance of believing in your planning, and not getting hung up on one year performance.

 

[jack97]

Don't overlook municipal bonds. They are exempt from Federal taxes and depending on your state and the state of issue may be exempt from State taxes. Getting 3 to 3.5% interest is common. Factor in the tax savings and that's a good fixed income. If you're young you can gamble on Equities and Equity funds, but as we get older much of our investments should be in fixed income.

Although I like the idea of a safe haven with municipal bonds, they have been hugging just below inflation and dependent on what the fed will do inflation may go higher. Pending the location of the municipals, the rates may not be favorable in areas where the state or city is wavering toward bankruptcy think California and Illinois. The other risk is muni bonds are callable meaning the municipal has the right to redeem the bond at an early date. That uncertainty may screw up a fix income budget.

 

[Guy in Shorts]

My favorite on line source for financial info is " Mr. Money Mustache" a guy out of Longmount,Colo who preaches stoicism. Great on line group of folks with a passion for money very much like the Pugski crew has for skiing..

Their tagline - Early retirement thru badassity.

http://www.mrmoneymustache.com/blog/

 

[Magi]

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).

Your given definitions of Alpha and Beta are incorrect.

Alpha is the difference in relative return between what you're measuring and your chosen benchmark. Beta is a measure of volatility of the investment. Higher volatility generally correlates with higher return on an investment (Stocks - high return/high volatility, bonds lower volatility/lower return).

Thought about it some, does not seem right since I made a tease so here's the links to two ETFs, the links are Morningstar's Rating and Risk page where they calculate the 3, 5,10 year alpha and betas. In general, Morningstar is a great web page to rate performance of ETF and mutual funds

I believe you are genuinely trying to be helpful, and I don't want to crap all over that spirit.

I'd like to offer an opinion that might be helpful to people without a finance background reading why I believe this is at best dangerous advice.

What you're describing isn't "investing" its gambling. I hear you telling people "hey look at these things that have 'good' numbers in the past - let's put money into them for the future!".

First concern is what you're using as "Good". Higher alpha with a lower beta (all else equal) seems great. The question you need to be able to answer is "Why does this have higher Returns than my benchmark with lower Volatility?". Until and unless you can answer that - and the follow on questions: "What are the conditions for that to continue?", "What will happen when those conditions stop?", "What are my transaction costs?", "What if I'm wrong?", etc...

You're not Investing - you're gambling.

Proprietary formulas created by a marketing ratings agency like Morningstar are a *terrible* way to make decisions. Morningstar is one of the agencies that said AAA rated Mortgage Backed Securities were an extraordinarily low risk investment before 2008. They have great fundamental data to make your *own* decisions with, and if you want to use them for that - great. If you aren't building your own models from scratch - you are much more likely to be gambling than investing.


PAST PERFORMANCE HAS NO BEARING ON FUTURE OUTCOMES.

It's not just a tagline people use to avoid getting sued. It's an incredibly important principle that means picking your fund based on what it did for the last 3/5/10 years is a bad idea. Lots of things look great until they don't. Tech before 2001 and Finance before 2008 are two recent examples of things that look great till they eat your face.


So the thing to remember in finance is that what's "good" is always relative to what the other options are, and that there are literally hundreds of thousands of people being paid to do *nothing* but use billions of dollars of resources to beat you. (And to be clear there are absolutely opportunities that small amounts of capital can go after that big players can't - but if you're going to pick that nit - this post isn't for you)

Bottom line - If your "investment" decisions come down to "I sorted a list!" - you're probably doing it wrong.

 

[jack97]

Your given definitions of Alpha and Beta are incorrect.

Alpha is the difference in relative return between what you're measuring and your chosen benchmark. Beta is a measure of volatility of the investment. Higher volatility generally correlates with higher return on an investment (Stocks - high return/high volatility, bonds lower volatility/lower return).



I believe you are genuinely trying to be helpful, and I don't want to crap all over that spirit.

I'd like to offer an opinion that might be helpful to people without a finance background reading why I believe this is at best dangerous advice.

What you're describing isn't "investing" its gambling. I hear you telling people "hey look at these things that have 'good' numbers in the past - let's put money into them for the future!".

First concern is what you're using as "Good". Higher alpha with a lower beta (all else equal) seems great. The question you need to be able to answer is "Why does this have higher Returns than my benchmark with lower Volatility?". Until and unless you can answer that - and the follow on questions: "What are the conditions for that to continue?", "What will happen when those conditions stop?", "What are my transaction costs?", "What if I'm wrong?", etc...

You're not Investing - you're gambling.

Proprietary formulas created by a marketing ratings agency like Morningstar are a *terrible* way to make decisions. Morningstar is one of the agencies that said AAA rated Mortgage Backed Securities were an extraordinarily low risk investment before 2008. They have great fundamental data to make your *own* decisions with, and if you want to use them for that - great. If you aren't building your own models from scratch - you are much more likely to be gambling than investing.


PAST PERFORMANCE HAS NO BEARING ON FUTURE OUTCOMES.

It's not just a tagline people use to avoid getting sued. It's an incredibly important principle that means picking your fund based on what it did for the last 3/5/10 years is a bad idea. Lots of things look great until they don't. Tech before 2001 and Finance before 2008 are two recent examples of things that look great till they eat your face.


So the thing to remember in finance is that what's "good" is always relative to what the other options are, and that there are literally hundreds of thousands of people being paid to do *nothing* but use billions of dollars of resources to beat you. (And to be clear there are absolutely opportunities that small amounts of capital can go after that big players can't - but if you're going to pick that nit - this post isn't for you)

Bottom line - If your "investment" decisions come down to "I sorted a list!" - you're probably doing it wrong.

Think portfolio performance, comparison the index and factor based investing.......

edit: added link from Sharpe's web page on the formulas used by Morningstar. And yes, I believe it's the Sharpe that has the ratio named after him.
https://web.stanford.edu/~wfsharpe/art/stars/stars2.htm

 

[KevinF]

A little late to the party here, but...

I like having different bank accounts for different expenses, or at least expenses due at "set times". That is, I have one bank account that handles bills that come monthly -- rent, loan payments, gym membership, Netflix, that sort of thing. I have automatic withdrawals setup with my bank; i.e., paycheck comes in, and half the money needed to cover monthly expenses automagically gets transferred into the "monthly" account.

Same thing with "yearly" expenses -- i.e., ski passes, insurance bills, membership dues, XMAS gifts, etc. Add up an estimate of all that, divide by the number of times you get paid a year... automatic withdrawals

Third account is for "multi-year" expenses -- you know at some point you'll have to replace the car tires, your ski boots, your washing machine, your... You don't really know when, but you know that they'll occur. You know every X years you'll be spending Y dollars on "unexpected but predictable" expenses. Saves you from having to replenish your emergency fund for foreseeable expenses. This is a total guess, but it provides a cushion.

Takes some discipline to not "rob Peter to pay Paul" -- i.e., money in a given account is only meant for the purposes of that account, so you need some sort of written list of what expenses are "allowed" from each account.

Basically when my automatic withdrawals are done, whatever is left in my primary checking account I'm free to spend on whatever I want -- dinner out, movies, etc.

I also like the philosophy of "you spend whatever you don't save", so part of my automatic withdrawals is for savings. I like to set that one my percentage of income. That way if you get a raise or a bonus or whatever, you're still saving a constant percentage. Harder for lifestyle creep to intrude on your savings rate that way.

Mine might be a little overly complex with automatic withdrawals and an overly-detailed spreadsheet indicating what expenses belong to which accounts, etc., but it works for me. Best budgeting system is whatever you can stick with.

 

[KevinF]

Don't overlook municipal bonds. They are exempt from Federal taxes and depending on your state and the state of issue may be exempt from State taxes. Getting 3 to 3.5% interest is common. Factor in the tax savings and that's a good fixed income. If you're young you can gamble on Equities and Equity funds, but as we get older much of our investments should be in fixed income.

I think that all the different investment vehicles (stocks, bonds, annuities, municipals, etc.) have their place and their own role. However, I take some issue with the word "much"... The allocation amounts towards each vehicle needs to be based on your risk tolerance; Somebody entering retirement with millions built through the stock market (or whatever..) can (probably) afford to keep substantial equities knowing that even if the market tanks, you have time before you would ever need those funds.

If you're coming into your retirement years with "less", then yeah, you have less risk tolerance and you need to keep your money in safer investments.

 

[Monique]

If an investment advisor does not ask about your level of risk, you better find a new advisor.

No kidding!

I was surprised that the basic "risk tolerance" sheet I saw only listed one year comfort level. At my age, I do not give two shits what my investments do in a given year. I would have also expected the same questions for 5, 10, and 20 year horizons.

 

[Ski&ride]

Am I the only one who’s confused? I thought a budget is a PLAN that matches expense to income. Whatever the income is.

And when I saw the thread title, I assumed it’s about how to keep to that budget plan?

Investment advice MAY help to increase the income. But it’s well known even people who have high incomes still end up outspending their income.

 

[Plai]

Am I the only one who’s confused? I thought a budget is a PLAN that matches expense to income. Whatever the income is.

And when I saw the thread title, I assumed it’s about how to keep to that budget plan?

Investment advice MAY help to increase the income. But it’s well known even people who have high incomes still end up outspending their income.

It's called epic thread drift into religious agruments.

 

[Monique]

Am I the only one who’s confused? I thought a budget is a PLAN that matches expense to income. Whatever the income is.

And when I saw the thread title, I assumed it’s about how to keep to that budget plan?

Investment advice MAY help to increase the income. But it’s well known even people who have high incomes still end up outspending their income.

Good point. An example of the kinds of things I mean: do you take a percentage off the top for rainy day stuff (as @Philpug described) ... or do you plan for certain large expenses explicitly...

 

[Nancy Hummel]

I take a percentage off the top, max 401k, IRA, then a set amount each month goes into an investment account for which I have no checks. Yes, I have access but I have never touched it and do not plan on touching it until I retire.

I have another account that I keep at a certain balance like several others have mentioned. My operating checking account has enough in it for recurring monthly expenses.

I put everything on credit cards which I pay off every month. I use the end of year detailed report to evaluate spending habits.

Oh, and any money I earn at ski school goes to ski equipment, après or other ski entertainment.

 

[KevinF]

Good point. An example of the kinds of things I mean: do you take a percentage off the top for rainy day stuff (as @Philpug described) ... or do you plan for certain large expenses explicitly...

Yes to both. Every penny that you save (except for the most dire emergency) is money you don't have to replace in retirement. If I live off of 90% of my income -- i.e., I can -- and have -- go years without even thinking about that remaining 10% -- then that's money I don't have to replace in retirement.

My feeling is that if the money is "spent" -- whether immediately (as in mortgage payments) or years down the road (i.e., roof repair, new car downpayment, whatever), then I didn't really "save" it and I still need to find a way to replace that money in my retirement years. So I have budgeted items for various "rare" large expenses, but I don't consider that to be savings or a "rainy day" fund.

As per @Ski&ride 's comment... I budget for investing purposes not to increase my current income, but so that I have income when I retire. i.e., "pay your future self first".

 

[Magi]

Think portfolio performance, comparison the index and factor based investing.......

edit: added link from Sharpe's web page on the formulas used by Morningstar. And yes, I believe it's the Sharpe that has the ratio named after him.
https://web.stanford.edu/~wfsharpe/art/stars/stars2.htm

Sharpe is a smart guy. The 1997 paper you linked to has some interesting information on how morningstar calculated things 20 years ago.


EDIT - And here's a chapter from his 2017 work (on the same site) that corroborates what I've been saying in this thread, and goes into greater detail about why it works.