Keeping Track of Your Money

If you follow any of the mainstream personal finance advice about getting out of debt there seems to be one recurrent theme between all of the individual PF advisers: SPEND LESS THAN YOU EARN.

This mantra is valid and absolutely necessary to success, but it is lacking. It provides a way not the means. It is simple to say to spend less than you make, but if you are in debt up to your eyeballs you probably have built some pretty terrible money habits, the greatest of which is poor record keeping. How can you realistically expect to spend less than you earn if you do not keep track of every transaction that takes place.

Now this concept is related to but distinctly different from budgeting. Budgeting is deciding in advance where your money will be spent. IN ORDER TO BUDGET EFFECTIVELY, YOU MUST KEEP METICULOUS RECORDS.

During the last few months I have come to the conclusion that simpler is better when it comes to record keeping. Personally, if it takes too long I won't do it. This is why I have not written a single transaction into my check register for the last 5 years (and was intermittent at best before that).

The system that my wife and I have settled on is one that I built using Microsoft Excel. It is a two pronged system: a simple monthly budget and an electronic checkbook register that allows me to track every transaction that passes through our accounts.

Before deciding to build my own check register in Excel I looked around on the web to see if there was a template I could use that would be easier than building my own. There are a lot. The problem I had with every one of them was that I have more than one checking account.

In my situation I utilize two checking accounts and one savings account for most of our transactions (this does not include the online savings accounts for our "emergency fund" and the savings accounts I have set up for our children.) This means that using a generic Excel template to track my transactions I need no less than 3 files or sheets in a file to accommodate my personal situation.

I have been keeping individual check registers for all three of our main accounts. I had been keeping registers for our other accounts but stopped since it became too tedious. This is a problem. Since I stopped keeping track of our online savings account I have noticed that the balance has been shrinking over the last few months since we are no longer held accountable by tracking every transaction!

The solution? Build a better electronic check register! I call it Easy Register. It allows an individual to keep track of up to TEN accounts all within a single check register. I have plans in the future to upgrade it to include a budget feature and allow for categories of transactions so you can extract useful data from your expenditures, but for now I feel that this spreadsheet will be a useful tool to help people get on the right track (ha ha, no pun intended).

The spreadsheet is pretty self explanatory, but if you have any questions please feel free to email me. I would love to help.

As a side note, each sheet within the file is protected, but not with a password, so please feel free to play around with it if that is your bag!

DOWNLOAD EASY REGISTER

ETF?

While most people new to investing have a basic idea what "stock" is I would guess that your average Joe just starting out is not as familiar with the term "ETF". What is an ETF? ETF stands for Exchange Traded Fund and it is exactly what it sounds like. An ETF is essentially a share of a pool of assets that is bought and sold on a stock exchange.

The website Investopedia.com has this to say about ETFs:

What Does Exchange-Traded Fund - ETF Mean?
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.

I recently found a useful website that has a lot of great articles on the subject of investing, especially about investing with ETFs. I personally found the article on Lazy ETF Portfolios to be helpful and of interest.

If you enjoy investing and want some intelligent yet easy to understand information regarding the subject go check out Mike at the Oblivious Investor.

Saving for College

Do you have children? Do you want them to go to college someday? Then you need to start saving for their future college expenses right now. Beyond throwing some coins into the piggy bank or saving cash in a high yield online savings account there are some really great options available to start saving for your child's education. Here are two that I like:

1.) Savings Bonds - United States Series EE and Series I Savings Bonds are an excellent choice for saving for college if your tolerance for risk is low and your investment horizon is still a long way off. Both of these types of bonds offer preferential tax treatment when the proceeds are used to pay for qualified education expenses. The main difference between the two is how interest is calculated for each.

Series EE bonds earn a fixed rate of return for the life of the bond. The fixed rate is adjusted up or down according to the market each May 1 and November 1. So as you purchase bonds over time, some will have higher yields, while others lower, depending on market conditions at the time of purchase.

Series I bonds are a little more complicated since they have a composite rate that is the aggregate of a fixed rate and a variable rate. The fixed portion is similar to that of Series EE bonds, while the variable rate is correlated to the Consumer Price Index to give these bonds the benefit of inflation protection.

Both have limits on the dollar amount that can be purchased under a single Social Security Number each year (for any one SSN, you can buy $5000 each of paper and electronic bonds of both Series EE and Series I for a grand total of $20,000 worth of bonds each year)

Below is a comparison chart of Series EE and Series I United States Savings Bonds from www.treasurydirect.gov, the official website to find information about and purchase United States debt.



2.) 529 College Savings Plan - Named after the section of the Internal Revenue Code from whence it came, a 529 College Savings Plan is an investment account that is, typically, operated by a state or state agency.

This type of savings vehicle is appropriate for investors of all risk levels and investment horizons since the investment options within a 529 plan are usually pretty broad. The main advantages of a 529 plan are the deferral of federal income tax on earnings within the account and the tax free treatment of distributions taken from the account that are used for qualified higher education expenses. Many states also offer preferential treatment for state income tax purposes if you invest in the 529 plan within the state you reside.

As mentioned above, the choice of investments within a 529 plan are usually great. I invest with the Oregon College Savings Plan and they have options ranging from a relatively safe Money Market fund (a savings account) to more risky Bond and Stock Mutual Funds. The Oregon College Savings Plan also offers a very simple to use age based strategy (the money you invest is automatically and gradually rebalanced towards less risky investments the older your child gets).

I like both of these options for saving for my children's education. My family is very fortunate to have a grandparent of our children that purchases each of them a $100 Series EE Savings Bond each month! My wife and I are currently setting aside $25.00 every month inside a 529 College Savings Plan for each child, too. Our investment horizon is still many years away, so we have time to build up this savings and hopefully give our children a leg up on the ridiculous cost of higher education.

For more info on Series EE savings bonds, click here.

For more info on Series I savings bonds, click here.

And, for information relating to 529 plans in general and the Oregon College Savings Plan (the one I use) click here and here, respectively.

To Save or not to Save

Should a person save money while they are in debt, or should they utilize all their free cash to pay down the debt? I have seen this question addressed multiple times on the net. Here and here, specifically. It seems to be a heavily debated topic.

From a strictly economic standpoint, one would be better off to save cash if and only if the interest rate on their savings was greater than the interest rate on their debt. For people with credit card debt, I can hardly imagine a scenario where this would be the case. In my personal situation the credit card debt is raking in nearly 11% while my savings account is paying me a little over 1%.

If you find yourself in this dilemma, the only advice I can offer is to do what feels right. If you decide to save up some emergency cash instead of paying off your debt be aware that it comes with a price; you will have to pay additional interest on your debt. With this in mind, it is possible that the benefit that is derived from the security of having an emergency fund set up will outweigh the additional interest you end up paying for delaying a full frontal attack on that debt.

This is how my family and I have tackled this subject: beginning four months ago we started paying a fixed $600 per month to our credit cards (remember that we are in forbearance on my wife's student loans and mine are still within the grace period, so we aren't making payments on them at this time), while at the same time saving roughly $200 a month in an online savings account. Now that we have a pretty good cash cushion, we are going to utilize that $200 that we had been saving to pay towards our debt. Using Microsoft Excel to do a quick and dirty amortization schedule, it looks like, at this pace, we will be rid of our credit card debt in 20 months instead of 27! Also, I think we might look into one of those Zero percent balance transfer offers that are floating around the web to help expedite our goal (more on this later).

Mountains of Debt

This is pretty discouraging, but I know that we can do it.



We can pay off this debt!

Fortunately all of my student loans are still within the grace period, and my wife's loans are currently in forbearance. Once the grace period on my student loans expire in July or August I will apply for forbearance on those, too. If you are not familiar with forbearance it is a good option for people that are struggling to make the payments on their student loan obligations. Essentially you contact your loan issuer and request forbearance, if granted you have a year before you need to start making payments. The catch is that during that year any interest that would have accrued is added to your loan balance at the end of the forbearance period unless you pay the interest during the year. This means that you will owe more at the end of the year than you do right now. This situation is good for us though, since it will allow us to focus our efforts on paying off our credit card sooner, which has a MUCH higher interest rate than our student loans. All of our loans are serviced by two companies: UHEAA and Fedloan Servicing.

For more information on forbearance with UHEAA click here (scroll down to the middle of the page.)

For more information on forbearance with Fedloan Servicing click here.

Origins

I remember the first time I couldn't pay my credit card balance in full for the month. This was back in the Fall of 2000. I had charged over eight hundred dollars that month, mostly on restaurant food and various forms of entertainment. I had nothing to show for my purchases. I remember thinking, "It's ok, I will just pay it off next month."

Well, it has been nearly 120 months and I am further in debt by a few orders of magnitude! Needless to say this happened by my own stupidity and in my defense the majority of my debt is now of the so-called "good" debt-student loans.

On top of my earlier stupidity, my family and I have lived off of credit cards and student loans for the past four years while I went to school. While not working during college enabled me to focus my efforts on my academic pursuits (I earned high marks during college) it left us with a skyscraper of debt that we must now deal with.

The good news is that since the beginning of the year we have not used our credit card. We are committed to living within our means now. We have started a budget and are following it. We are slowly paying down our debt and are saving and investing.

In future posts I want to share our budget system and start to track our net worth to help motivate us in our efforts. I also want to start to discuss saving and investing. Good luck to those of you in similar situations. Through education, patience, and persistence we can all get out of debt and become financially secure.