Archive for the ‘Personal finance’ Category

Roth vs Traditional chart

In doing retirement planning, I found some charts that compared roth vs traditional for either an IRA or a 401k, but not a lot of charts that compared both types of retirement accounts simultaneously. This is my attempt to create a unified comparison.

Disclaimer: I’m early in my career and am mostly focused on contributions, so the chart doesn’t include a lot of detail on taxes/distributions/earnings. It’s also missing information about IRA “catch-up” contributions.

	IRA common features Anybody can make one More control over which funds are selected $6000 annual contribution limit. This is the total of both Traditional & Roth (2022)	401k common features Controlled by your employer $20,500 (2022 limit) May have company match
Traditional common features May be deductible “pre-tax” Becomes a taxable income source in retirement	Traditional IRA Deduction limit (example from 2022: filing status is single — no deduction for AGI $78,000 or more) Distributions are taxable (and sometimes required)	Traditional 401k
Roth common features “post-tax”	Roth IRA Income-based contribution limit, may not be able to contribute to Roth at all. Contributions vs. earnings have different tax treatment.	Roth 401k

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:

The temptation to spend instead of save.
Lack of understanding of finance.
Lack of understanding of the history of finance.
Human shortcomings in long-term decision-making.
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.

More GnuCash tips

I’m continuing to learn more about GnuCash in order to use it more effectively.

Make the display a little less cluttered by removing the horizontal and vertical lines from the register view. Edit -> Preferences dialog, then the Register tab. Note the two checkboxes, Draw horizontal lines between rows, and Draw vertical lines between columns. Before:

After:

Transaction filtering

I’ve found this to be helpful when looking at a reimbursements account. I mark a reimbursement as cleared once I’ve received the money back from the company. Sometimes the reimbursements get cleared out of order because I have submitted them out of order. Then, when I submit my next reimbursement, I use transaction filtering to narrow down the display to just the un-submitted reimbursements.

How to filter transactions: View -> Filter By… Click the Status tab.

My beef with the summary bar

The summary bar appears above the status bar and includes information pertaining to the currently opened tab. On the main accounts page, it shows the grand total of all assets as well as the profit. The profit is calculated by subtracting YTD expenses from YTD income. Therefore, it gives a rough idea of how much money I’ve saved so far this year. However, I find this idea a bit misleading.

For example, it is August 2013. Lets say I will save $100 a month this year, by spending less than I earn each month. This is a monthly profit of $100, so at the end of the year, my profit would show $1200. However, let’s say that since April of 2009, I’ve been saving up to buy a car, and it will cost $5000. At the beginning of 2013, I had $4200 in my accumulation, and now in August, my accumulation fund has reached maturity. I buy the car for $5000. Suddenly the summary bar reports a profit of $-4200, whereas before it said $800. This is a little disconcerting.

In summary (pun intended) the summary bar’s profit calculation is not helpful for personal finance since it doesn’t help you know if you’ve stayed on budget. However, for other Tabs or Pages, such as stock accounts, the summary bar provides useful information, such as the current value of the shares held. So I wish there was an option to disable the profit calculation from showing, but keep the other useful information visible.

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:

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

Here’s an example for situation number 1:

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.

GnuCash: A Review

GnuCash is a tool for tracking your money that works on Windows, Linux, and Mac OS X. GnuCash has powerful features for tracking assets, liabilities, income, and expenses. Using GnuCash has helped me learn some more advanced accounting terms and concepts, such as double-entry accounting. I’m not going to explain those concepts here, as the GnuCash guide does a good job. Be sure to read both the help and the guide.

I plan to use GnuCash for many years to come. As my finances become more complicated, and my assets grow, by God’s grace, I need a tool to help me track my money. I’ve heard of other people tracking their money on spreadsheets, and I realize that if I did that, I would spend too much time trying to tweak the formulas. GnuCash has excellent data entry and reporting, saving me from writing these myself.

I consider GnuCash a compelling alternative to online finance tools, such as Mint, because it keeps my data secure on my personal computer. Of course, this raises its own risks, since there are many ways an adversary could access your data on your own computer. Still, I am more comfortable with these risks then the unknown risks of trusting the cloud.

Advantages of GnuCash

Using it will teach accounting concepts.
Register entry has powerful autocomplete and keyboard shortcuts.
Importing account transactions in QFX format automatically determines whether the data needs to be used to add a new transaction, or to reconcile an existing transaction.
The reconciliation window allows you to keep your accounts in sync with bank statements.
Included reports give a good overview of income and expenses.

Areas to improve

I wish color coding affected the accounts in the account list view, not just the color of their tab. Since I’ve heavily customized my accounts, the account list view can get longer than one screenful. Color coding would help me quickly spot a particular account.

Things still to learn

How to use the price editor for multiple currencies in an effective way.

Features I haven’t used

Budgets.
Recurring transactions. If I enter it manually, it reminds me that I am spending that money.

bobbyratliff

Creating structures that automate things people do every day.