Budgeting help

As a CERTIFIED FINANCIAL PLANNER(TM) and mortgage professional I have shared countless conversations with customers on the various challenges of setting up and maintaining a household budget/ spending plan.  I know that I personally use Quicken for my household but that program can be a little cumbersome for folks (it helps to have some level of accounting background if a person wants to use Quicken).

Savings, money, deposit.

That said, I was in a meeting today with some real estate professionals and they were raving about youneedabudget.com.   I went on the website and polked around and I love their mission and methodology.  Full disclosure: I have not used their free trial so I can’t say how easy or hard it might be to use but if you are a person looking for budgeting help this might be a tool to check out.  Good luck!

Looking for ideas on how to track spending/ build a budget?

Matt Jabbs wrote THIS PIECE on the Debt Free Adventure website in which he makes a couple suggestions for how to track your spending.  I’ve blogged many times about how getting control of your cash-flow is the primary driver of building wealth yet also the most elusive for so many households.  If you spend as much as you bring in or more (meaning you’re building debt) then it is impossible to put money away into savings & investments.  If you can live below your means then you begin to build savings which can be used to invest and grow.  Make it your summer resolution to take care of this and contact me if you need an accountability partner.

Unique Perspective on Evaluating Cash-flow

If you’re like most people then you know that your spending habits ultimately determine your ability to generate wealth.  If you spend more than you make then you will go into debt which is not a sustainable.  If you’re able to spend less than you make then you can set money aside for savings and investment.  Do this long enough and you’re almost certainly going to become wealthy.  This concept is widely understood yet very few people track their spending.  In my opinion it is one of the most important yet overwhelming processes in the financial planning field.

One of my long-term professional goals is to come up with a process for helping households evaluate their cash-flow and provide clarification on the age-old question: Where does my money go each month?

In doing some preliminary reading I came across THIS ARTICLE from the December 2008 “Journal of Financial Planning“.  In it the author takes a unique perspective in measuring cash-flow.  Most models I see use a fairly simple approach where a person categorizes their spending into different accounts such as “housing”, “groceries”, “entertainment”, etc.  With this approach the author views spending in…..

1. The static account is their 30-day
money. This is what it takes to run
their household for a month—the
mortgage, utilities, car payments,

2. The control account is their seven-day
money. These are the funds that they
will spend today or within the next
week. These are lifestyle types of
expenses—dining, recreation, hobbies,
groceries, and gas for the car.

3. The dynamic account funds all future
expenses, from trips and gifts, to cars,
education, and retirement.

This perspective is fairly simple and allows the household to see what areas they have control over.  I look forward to giving this approach a whirl soon.

Family Budget Planning Tool

Talk with any financial planner and I think they’ll agree that a households ability to build wealth starts and ends with cash-flow.  If they are able to spend less money than they earn then they will be able to set aside cash for savings and investment.  That money will then benefit from compound interest which even Albert Einstein called “the most powerful force in the universe.”  Conversely, a household that spends the same or more than they earn will be forced into a cycle of debt to acquire housing, cars, college tuition, etc.  That household will not build long-term wealth.  Do you know if you’re getting ahead or falling behind?

Despite its critical importance to the financial planning process very few households operate on a budget and/ or track their spending.  I can appreciate why.  The process is tedious and overwhelming.  I wanted to share THIS SPREADSHEET that I found on google docs for those people who want to take a pro-active step in evaluating their cash-flow.  I would recommend sitting down with your bank and credit card statements at least monthly to record your spending so that you can see for yourself how you’re doing.

What I like about this spreadsheet is that the spending categories are plentiful and customizable so you feel like you are getting an accurate depiction of your spending history.  If you have any other ideas for tracking cash-flow please leave them in the comments section below.

Planning on becomming a centurion? better save…

Marketplace money had a good story over the weekend about the financial impacts of living to be 100.  You can read/ listen to it HERE.  The story profiled Horte Guttman who is now 102 years old.  Unfortunately she ran out of money at age 98 despite good financial planning.  According to the story a new study indicates that most babies born after 2000 in developed nations will live to be 100.  As our life expectancy lengthens it becomes increasingly important for financial planners to account for that in calculating retirement needs.  The bottom line is we’ll all have to save more and possibly work longer than we previously thought.

Retirement Survey Shows Many Americans Don’t Know How Much it Will Take

Each year the Employee Benefit Research Institute conducts a survey about American’s financial preparation for retirement.  The results from this years survey were just released and show a couple troubling trends.  You can read the entire report summarizing the results HERE.  But if you prefer the executive summary like me here are a few cliff notes:

*Only 16% of workers surveyed stated that they were very confident about having enough money for a comfortable retirement.

*Only 19% of retirees said they were very confident about having a financially secure retirement.

*More than half (54%) of workers surveyed reported that the total value of their household savings and investments was less than $25,000.

*Less than half (46%) of workers reported that they have tried to calculate how much money they would need to accumulate in order to insure a comfortable retirement.

If you are like a majority of workers and haven’t taken the time to calculate your capital accumulation needs then you can contact a financial planner (I’d be happy to help) or check out this blog post which has many retirement calculators.

Does the Roth conversion make sense for you?

I am not a wealth manager or retirement planner but I do have a passion for personal finance and as I’ve mentioned before on this blog I am currently enrolled in an Executive Certificate in Financial Planning class at the University of Portland Pamplin School of Business.

I am currently in the middle of our retirement planning module learning about qualified benefit plans, IRA’s, 401(k)s, etc..  One of the big questions in the retirement planning community this year is whether or not it makes sense for a traditional IRA owner to convert their account to a Roth IRA.

In the past this option was only available to households with adjusted gross income’s <$100,000.  However, this year it’s available to anyone.

The NY times published a good summary of the decision making process here.  By coincidence, my investments module professor is quoted near the end of the story.

If you are thinking about converting I would encourage you to read the article.

‘In Cheap We Trust’

On the way into the office this morning I was listening to Morning Edition on NPR Radio and heard this story about a new book entitled ‘In Cheap We Trust‘ written by Lauren Weber.  The book is a history of frugality (AKA “cheapness”) in the United States.  If you’re looking for some historical inspiration to spend less and save more this may be your answer.

An interesting note is that Lauren in her research found that during the origins of the United States frugality was a virtue that was encouraged because it helped the US Economy distance itself from relying on Britain. After World War II however consumerism was encouraged because it helped utilize the excess capacity in our economy used to service the war effort. Furthermore, it was around this time that consumer credit was created and became mainstream. Ever since we’ve been playing catch up.

You can click this link to buy the book from Powell’s.

Steve Martin in “don’t buy stuff you can’t afford” skit

I came across this video with Steve Martin over the weekend and thought it was amusing. Here is the transcript:

Wife: I just can’t get these numbers to add up.
Husband: Like we’re never going to get out of this hole.
Wife: Credit card debt, does it ever end?
Salesman: [entering from who-knows-where] Maybe I can help.
Husband: We sure could use it.
Wife: We’ve tried debt consolidation companies.
Husband: We’ve even taken out loans to help make payments.
Salesman: Well, you’re not the only one. Did you know that millions of Americans live with debt they can not control? That’s why I developed this unique new program for managing your debt. [Holds up book] It’s called, “Don’t Buy Stuff You Cannot Afford”
Wife: Let me see that. [Reading from book] If you don’t have any money, you should not buy anything. Hmmm…sounds interesting.
Husband: Sounds confusing.
Wife: I don’t know honey, this makes a lot of sense. There’s a whole section here on how to buy expensive things using money you’ve “saved”.
Husband: Give me that. And where do you get this “saved” money?

Deleverage post #3

I blogged about the process of “deleveraging” balance sheets for US households back in September and October.  Deleveraging is the process of US households reducing their debt and hopefully increasing their assets.

For the past few years US households “leveraged” themselves by borrowing money on easy credit qualification.  Not only did US households engage in this process but US corporations did as well.  In fact, leverage is the reason Wall Street behemoths Lehman Brothers, Bear Sterns, and Merrill Lynch all collapsed.  They had borrowed money to buy assets that are now difficult to value which caused their capitalization ratio to fall below allowable levels.

Many US households face similar fates.  Borrowing money to purchase investment properties, consumer goods, or other non-liquid assets is now causing problems throughout our economy.

This artcile which was publised on www.cnnmoney.com is another sign that the downturn in the economy is forcing consumers to spend less, save more, and pay down debt.  Although this spells problems for US retailers it is great news for the long-term viability of our economy.