Posts Tagged ‘money’

Creating financial systems

Financial systems are “set it and forget it” applied to your personal finances. They are valuable because they save you from having to worry about your money. For example, instead of making a decision to save each month, it happens automatically. It helps you focus your attention on things that do matter, like creating value for other people.

My favorite guide on creating systems for personal finance is by Ramit Sethi, called The Ultimate Guide to Personal Finance.

In it, Ramit talks about a prescriptive budget and a descriptive budget. The descriptive budget is where your money is currently going. Due to my obsessive tracking of my expenses in Gnucash, I already had this. Do you need to be like me? Probably not—there exist tools like Mint.com that can aggregate various spending accounts into one convenient place.

A prescriptive budget is a plan for spending each month. Here’s one way to create a spending plan:

  • Fixed costs: things like rent, utilities, debt
  • Investments: your 401k and Roth IRA contributions
  • Savings: Build up an emergency fund if you haven’t already. Otherwise, this is for accumulation fund for things like vacation, house down payments, etc.
  • Guilt-free spending money: Groceries, eating out, shirts from REI, movies.

Then you want to create systems that automate the categories in your prescriptive budget. That way, you spend less time worrying about money and more time enjoying the guilt-free spending money.

Does that sound like more fun than constantly worrying about financies? If so, head on over to The Ultimate Guide to Personal Finance.

Investing for retirement: some recommended books

Probably the biggest mistake you could make investing your money would be to listen to “advisers” who really are making a commission off your ignorance. Instead, you would do well to learn a little and then make your own choices. At the top I’ve put my favorite resource on this topic, a 16-page booklet by William Bernstein. There are also two suggested books.

“If You Can”

For those who don’t want to read an entire book about investing, I recommend Bernstein’s 16-page booklet entitled “If You Can: How Millennials Can Get Rich Slowly.” It is also available as a free PDF (linked from his website, halfway down on his “New Books” page).

The booklet gives a high-level overview, and also gives reading assignments for those who want to dive deeper (sorry, books are inescapable). It’s organized according to the 5 hurdles people who want to save for retirement on their own will face, paraphrased below:

  1. The temptation to spend instead of save.
  2. Lack of understanding of finance.
  3. Lack of understanding of the history of finance.
  4. Human shortcomings in long-term decision-making.
  5. The “monsters” of the financial industry who give “advice”

The Sound Mind Investing Handbook

The Sound Mind Investing Handbook: A Step-By-Step Guide To Managing Your Money From A Biblical Perspective, by Austin Pryor, is a good introduction to being a steward of money for God’s glory. The book is organized into sections according to different stages of personal financial management.

Section 1: Getting Debt-Free
Section 2: Saving for Future Needs
Section 3: Investing Your Surplus
Section 4: Diversifying for Safety
Section 5: Retirement countdown
Section 6: Investing That Glorifies God

Sections 1–5 discuss the how/why of personal finances from a practical point of view. Topics covered include asset allocation, timing the market (why not to attempt to time the market), the disciplines of investing, risk preference, and, how taxes will affect your investments.

Section 6 discusses the why of investing from a spiritual perspective. Pryor discusses his own story, how he got into the financial industry, and how he had a spiritual encounter and came to know Jesus Christ. Then he goes into what the Bible says about money, investing, and stewardship.

I think the strength of this book is its completeness. It serves as a good reference guide, due to both the variety of topics covered and the depth they are covered. There are some nice example calculations as well. On the other hand, at times the book can get a bit bogged down in its handbook style.

The Investor’s Manifesto

The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between, by William Bernstein and Jonathan Clements, focuses on how the average person can manage their retirement savings successfully.

In the old days companies would give you a pension plan, and you would be set. But now the responsibility is on us to manage our 401(k)/IRA/what have you. Unfortunately successfully managing your retirement savings is a difficult task. It requires at least 4 abilities:

  • An interest in the process
  • An understanding of the math (probability and statistics)
  • An understanding of financial history
  • Emotional discipline to execute the planned strategy “come hell or high water”

The book is broken down into the following sections:

  • Chapters 1–3 give a theoretical basis and a brief financial history
  • Chapter 4 talks about “the greatest enemy facing investors”—look in the mirror, it’s you
  • Chapters 5–6 focus on executing your investing plan in the face of hurdles, like the “piranhas” of the financial industry

I enjoyed reading Bernstein’s book. He balanced out the investment details with some fun anecdotes and a bit of humor. All of the math stuff got swept aside into “Math Detail” sidebars.

Compared to Pryor’s book, Bernstein’s book spent less time on practical concerns like the cost of personal debt or how to budget, and spent more time on investment history and theory. Bernstein also covered a few more investment types, such as real estate investment trusts (REITs), which I had not personally been exposed to yet.

Advanced money tracking with GnuCash

In my last post, I wrote a review of GnuCash. Today I’d like to explain some things I’ve learned to track using this financial software.

Reconciling

When I receive a new statement, I first save the PDF to my hard drive. (Hard drive encryption mitigates some of the risk of having all those statements sitting on your hard drive.) Then I reconcile that particular account.

Adjustment account

The adjustment account is an expense account used to keep cash assets accurate. Cash transactions are hard to track, and sometimes my amount of cash on hand does not match the amount recorded in GnuCash. I periodically record this difference as an “Adjustment” expense.

Tax withholding

In the US, taxes get withheld from paychecks throughout the year. This tax withholding can be tracked in GnuCash. Each time you receive a pay check (or pay stub), create a split transaction. The gross wage is entered as income. This income will be split between several assets: some income goes to the tax withholding asset, and some income goes to the checking account (net pay).

When it comes time to pay taxes, the money in your tax withholding asset is used to pay your taxes. The taxes actually paid are an expense. There are two scenarios, and each can be covered by a split transaction:

  1. Your taxes are less than the amount withheld.
  2. Your taxes are more than the amount withheld.

Here’s an example for situation number 1:

tax-withholding

Multiple currencies

Peter Selinger has an excellent discussion of some of the general challenges of multiple currency accounting. The crux of the matter is: Under File-> Properties, go to the Accounts tab, and check “Use Trading Accounts.” This feature doesn’t have a lot of documentation, but it gets the job done.

Reimbursements

When you spend money on a reimbursable expense, you aren’t really spending your own money. You are eventually going to receive that money back, so to you it is an asset. (Not a very liquid asset.) See GnuCash Guide: Chapter 16.

Salary advance

When you receive a salary advance, you receive money you technically haven’t earned yet. This is a liability. You enter the salary advance as a credit to the checking account and a debit to the liability account. When future paychecks come that are reduced (because the company is using them to pay down your salary advance), you can also track this. Enter the paycheck as income, but instead of crediting your checking account, credit the salary advance liability.

Reimbursement advance

A reimbursement advance is money your company gives you to spend for a specific purpose. If you don’t spend it for that purpose, they will eventually need to make you pay that money, e.g. by lowering later paychecks. When you receive a reimbursement advance, you debit that liability and credit your checking account. You continue to record reimbursements by debiting one of your liquid assets and crediting the reimbursement asset. When you submit a reimbursement to clear the advance, you debit the reimbursement asset and credit the reimbursement liability instead of your checking account.