Personal Finance

This week on slate.com there was an interesting series of posts written by Jessica Grose about how couples managed their finances. She wrote five posts ranging from a set-up describing the different ways people managed their money to a detailed review of those three different ways (Common Potters, Sometimes Sharers, Independent Operators) to the conclusion on how she and her husband were going to be managing their money. I encourage anyone interested in personal finance to give all five posts a chance.

While others might get uncomfortable when the subject comes up, I think it is really interesting to see how people handle their money. Currently, I love talking about personal finances, but it wasn't always the case. I didn't really care how much money I had or what I did with it for the longest time in my life. However, when I began my 2nd job out of college something clicked and from that point on I have been been diligent in regards to managing my money. Since that day back in 2007, I have managed a monthly budget and taken interest in something I never really cared about for the first 24 years of my life.

It made logical sense that when M and I got married that I would continue to do a budget, but this time for two people instead of just me. It has been a pretty good system for both of us and the slate.com series got my thinking that I should share my thoughts on budgeting. Here are the basic budgeting rules that we follow:

1. Know how much we make.
2. Know how much we spend.
3. Know where our money is.

If I can answer those three questions then I am happy. Any further detail from those points is just an added bonus, but really knowing those three things means the most to me. I would like to address each point individually, without giving specific quantitative details.

Point 1 - Know how much we make.

Knowing one's salary or hourly wage is one thing, but that is just a starting point. It is important to know what contributions you are making (401K, medical, dental) that affects the difference between your salary and your take home pay.

Point 2 - Know how much we spend

For this I place any transaction from our checking accounts into 18 categories ranging from "rent" to "gifts" to "entertainment." Accounting for every penny we spend isn't something I would like to do, so something like an ATM category allows me to have some flexibility and more importantly some sanitiy. There is no point in coming up with such a detailed budget that you dread putting it together. The important thing for me is knowing generally speaking how much money we spend. I like being able to know basic amounts, so that I will know what to adjust if the current situation changes.

Point 3 - Know where our money is

This should be pretty basic, but I found some people don't even know how much money they have or how to access that money. If you (or your parents) worked, so hard for that money then it is nice to keep track of it. I like to know where the money is and what that situation means for my money in terms of risk versus reward. Do I have too much money in stocks and not enough in cash? Is my cash making 0% interest, when there is a 4% interest checking account available? Are my stocks diversified? Too Risky? Risky Enough? There are certain tools you can use to keep track of where your money is, but sometimes it is as easy as just logging into your checking, savings, stock brokerage accounts.

One note on the stock front is that I find the Morningstar Instant X-Ray to be an extremely valuable tool, when I want to review my stock holdings. All you have to do is enter your stock tickers and how much money you have in each and Morningstar will give you an overall view of what kind of stocks (ex large cap vs small cap) you are holding.

Overall

If you keep up with the answers to those three questions every, single month then you will start notice certain patterns. More importantly for me, I find comfort in having that information available. One of the financial stories that I like most comes from the banker J.P. Morgan. When a person approached him in order to get some advice on how to handle being nervous about his investments, J.P. Morgan allegedly said "Sell down to the sleeping point."

I am sure this quote has changed people's investing strategies in terms of managing risk, but I am taking the advice differently. My sleeping point isn't taking money out of the stock market and putting it all in cash. My risk isn't that the money in the stock market will go down. Knowing how much money I am making, where it is going and where it has been allows me to sleep well at night, and understanding the answers to important financial questions (ex. how expensive of a house can we afford) is the risk I am trying to manage. It might sound cliche, but when it comes to personal finance knowledge is power.