David on Finance

In the article Money Myths for Young Graduates, one of the myths I wrote about was the misconception towards long, detailed budgets. However, I have found that micromanaging every little transaction literally sucks life out of my soul. As I mentioned, I use Wesabe to view my spending, instead of Quicken (as a software developer, I’d rather shoot my eyeballs out than look at Quicken more than a minute). Now, Wesabe is nice because you simply “tag” a transaction. That is, instead of putting a trip to McDonalds into a Food category, you could tag it as “food, fastfood, warning, fat”. At the end of the month, you can then view the Fat category to see how much you pay to gain weight. This really does a great job of eliminating the need to find a tiny category for every expense.

However, despite the agile way Wesabe allows you to view your expenditures, I really needed to find a way to control my spending. Strict categories are good for learning how to spend, because you can easily see “oh, I spent $39 on fast food, when I only budgeted $25″. However, when you create a category list, you can easily get to 30-40 categories without blinking.  My solution was to knock it down to 4, one of them having 2 subcategories. Then, I use Wesabe to view exactly where extra money is going, or where I have done well. Admittedly, these categories may not be appropriate for older married people, because it ignores things you might need to track such as tax-deductable home expenses or such. However, I find it a great tool for those starting out. It keeps things simple, and makes the end-of-the-month sorting process so much quicker. For those of us who are not Type A, it keeps us on our game.

1. Static Expenses. I quickly noticed that if something was going to cost the same amount every month, then why did I need to track it separately? I know my rent is $875, I know my car payment is $250, I know my insurance payment is $100. Why should I track those individually? I found about 7-8 “categories” that fell under this description: required expenses that do not adjust from month to month. Put them all in the Static category.

2. Dynamic Expenses. These are the expenditures that can change from month to month. There are two types of dynamic expenses I saw, Required and Flexible. Required includes the expenses that may differ each month, but you are stuck paying them, such as electricity, gasoline, etc. Flexible includes the expenses that may differ each month, that you can exert some self control to decrease, such as food, entertainment, bank fees, etc. The reason these two go into the same “main category” is to contain in one category the fluid part of your budget, or the part of your budget that has the most activity. For example, if you micro-budget $100/month for gasoline and wind up spending $120, you must “borrow” that money from your Flexible budget. In this way, you can set a main budget for all Dynamic expenses, and if you have to get a second haircut in a month it’s ok; just use money from another sub-category, always prioritizing the Required category. Again, I’m single, so it’s very easy for me to borrow money from my food allowance, I simply eat cheap. This may not work for a family, in which case you can always make food into a Required or Static expense. The whole point is to not follow my format but create your own.

3. Savings. Obviously, this includes any money you put towards any type of savings account. Right now, I am collecting an emergency fund, and have a relatively high Savings budget. When I begin shifting money to debt repayment this may drop to nothing. However, I also use this to track money I use for my retirement account and any money I make in interest or dividends on previous investments.

4. Debt Repayment.  This is the category that takes into account any debts you are actively engaged in paying off. You may keep your mortgage, student loans, or cars under the Static category, since they are stable monthly expenses. However, if you begin paying extra in hopes of being out of debt sooner, you may wish to shift it to this category. My endgame is to eliminate this category entirely.

As a software developer, I pay a lot of attention to design, even reading about architecture and typography. A common theme is that the key to any good design is workable simplicity; that is, the least amount of overhead that allows the same accomplishment. In software, this translates to the fewest clicks it takes to accomplish an action (even if I have to add super advanced logic into the code to “think for the user”). In architecture and photography, this may be the concept of empty space or geometric patterns to gain a desired effect.

In the same way, in order to have a well-designed budget, it should not be any bigger than necessary. You  may find that you still need 30 categories to effectively manage your spending. However, some of you maybe fine with 2-3 categories. I have found that the 4 category system works well for my expenses. However, everyone is different.

My point here is that it’s your responsibility to design a budget, rather than using someone else’s. Take a deep look at what your are spending, and what your common pitfalls were. Design a way to manage things where you will minimize setbacks. Design a budget that allows you to quickly categorize things at the end of the month. If you crack open Quicken, the first thing I recommend is to delete every category and start from scratch. Otherwise, it will always be too complex and unworkable, and the result might be that you give up again. By designing your own budget, you eliminate the chances of failure, because you know yourself better than Quicken knows you. And, like me, if you still wish to track expenses in micro-categories (if you want to know how much you spend to gain weight), try out a tool like Wesabe to help you out. In addition to a small categorized budget, a more flexible tool may work wonders toward your personal financial goals!

Now that I know where I am as far as financial matters go, I have to find out where I can trim down my budget to pay more towards my debt. As I said before, 28% of my income was wrapped in fees. Luckily, I know Excel very well from my day job, and was able to break down my fees and see when they were occurring. I normally get paid on the 15th, and have a cell phone bill that is automatically debited that day. My bank, Wachovia, tends to make the debit before they make the deposit, on a very consistent basis. This means that if I only have $40 left, I overdraft, and then the subway I get for lunch overdrafts, and now we’re at $70, unless a few more charges get through. Now, my bad experience with Wachovia is a story for another time, as this is just one example of the way I think they tend to make extra money (debits before deposits). Granted, I shouldn’t be living paycheck-to-paycheck, and a $60 charge shouldn’t hurt me, but I’m fixing that now.

To fix that particular issue, I had T-Mobile change my billing date forward to the 25th, receiving some of the best customer service I’ve had with a celular provider. While on the phone, I had them review my current plan and see if I would be better served with a smaller plan. Originally, I had 1000 minutes, with an addition of a 400 text messages package. At one time, I was using both of those to capacity. However, my recent history has seen around 400 minutes per month, and 30 text messages. I was able to cut my plan down almost in half! That’s an extra $25 per month I’ll have.

I also noticed that my entertainment budget was out of whack. It was difficult to notice, because most of it is subscription based. I subscribe to Blockbuster Online and the Rhapsody music service, as well as to 2-3 magazines,  go to the movies 1-2 times per month, and regularly buy music from iTunes. I’m going to keep Rhapsody since it keeps me sane at work, but I’m going to drop the magazines since I have no time to read them anyway. My Blockbuster subscription is awesome, but it’s for 3 movies out at a time, and it’s become hard to find things I haven’t seen but want to. I changed my plan to having 1 movie out at a time, and I think it will work much better. I save quite a bit this way, and I make better use of it. I’ll likely cut down theater-going to once per month. I don’t even enjoy most movies out these days anyway. As far as iTunes, it’s time to chill on that until my debt is gone. I can always listen through Rhapsody for now and then buy the music later, or wait for good CD sales.

Also, along the line of monthly fees, I am late on almost everything. This is because I’m both phlegmatic and love to procrastinate, and I wind up being late. Bam, a $30 charge here, a $5 charge there. It adds up, and gets compounded with interest. I put all my payments on auto-pay for this month. I would use Wachovia’s bill pay, but that’s another way they’ve messed up in the past. By eliminating late fees and overdrafts, I will save hundreds of dollars.

In addition, I can save money by making better choices with food. I need to be cooking more often, and when I do eat out, I need to make better decisions (both financially and calorie-wise). I also am a sucker for credit card activation sales pitches, because I’m non-confrontational. Thus, I have a few of those “credit protection” or “identity monitoring” services, and such. I need to get rid of those; I have no credit to monitor. When I get my debt under control, I’ll likely sign up with one not associated with my credit card. I know they are going to be a pain in my rear to quit them, but it will save me about $20 each month.

I’m also Craigslisting old junk I need to get rid of. Not only is it taking up valuable space in my apartment, but I don’t use it anyway, its value is decreasing by the day, and if I have to move, it’s going to be that much more of a pain. I’ve already made about $300 doing this, and expect to make about $1000 more, if my computer sells. (I’m on a Mac now, so I have no desire to keep a PC around)

The last thing I have left to do is change checking accounts. My current account both sucks and charges me for it, so it’s time to leave for something better, like the Schwab One account with Checking. That experience will likely be its own post, as it will be a big logistical move, and will actually earn me interest on the dollars I save.

Mostly, I can find extra money by changing the way I think; that’s what it comes down to. Instead of seeing a balance of $250 as something I can spend, I have to view it as something I can’t allow to be debited. Instead of just thinking problems will sort themselves out, I have to become proactive about every dollar I spend and owe. I can no longer say “Oh, it’s just $20, it won’t matter”. When I do that 5 times, it’s $100 extra per month I could be putting towards debt owed. This really is going to be as much a mental exercise as it is a logistical one.