Economic Cents

For love and money

As my girlfriend, C, and I approach our 18 month anniversary, we’ve begun to trudge deeper into topics that we haven’t talked much about to this point in our relationship. As you might guess, money is at the top of the list. We are both in our early 30s and established in our careers but are pretty far apart in our present financial states.

As I’ve previously mentioned, my financial well being is due largely to my frugal upbringing. While C didn’t come from a wealthy family, they lived very comfortably. Unfortunately C was never taught (or learned) to be disciplined with money and now finds herself weighed down with credit card debt. Needless to say, our spending habits have butted heads over the last year and a half.

I know that before our relationship can progress further (i.e. popping the question), there are a few financial questions that we have to ask and honestly answer. Starting at the basics, we haven’t even discussed our income, savings, or debts. What other financial matters do we need to be talking about?

Weekly Spending Outlook: August 11, 2008

Major expenses: No major expenses are due this week.  Need to follow up with the new auto insurance company to see when I should expect to get my proof of insurance so I can cancel my existing coverage.

Entertainment: I’m guessing Friday will be a date night, probably just dinner ($40)

Household:  While the freezer is fairly full of “warm up stuff,” there’s not much in terms of fresh food in the fridge.  Need to get to the grocery store for some fruit and food to ensure I don’t break the bank eating out again this week.

Frivolous: Simply put, I’ve been eating out too much and last week was one of the worst weeks in a long time.  This week I’m going to make a concerted effort to not eat out for lunch for any meals this week. Things like going grocery shopping so I have food in the house and giving myself enough in the morning to make breakfast and coffee at home can eliminate this frivolous expense.

Update on cash spending

After using Mint to track overall spending for a few months, I was a bit shocked to see that I was averaging $270 a month in ATM withdrawls.  Since the beginning of May, I’ve made a much more concerted effort to not spend cash and use my rewards credit card when ever possible.  Only if I can’t use the credit card or debit card do I use greenbacks.

Since that time, I have only spent $107 in cash.  I haven’t figured out if I’ve spent less overall since I just shifted exchange medium from paper currency to credit/debit cards.  I am very excited that I have that much more information about where I’m spending money.

Since I know that I’m now able to track these purchases  that I used to make with cash, I am more conscientious before making a purchase if I use a credit card.

I would love to reduce my cash spending even further.  Paying for parking is nearly always a cash transaction as are tips for valets or car washes.  I know at least $40 from my cash spending over the past few weeks has been used for parking and tips!  Any ideas?

Personal Finance and the Small Business Owner Part 1: Business Expenses and Personal Budgets

When it comes to tracking expenses and budgeting, reimbursed business expenses complicates things a bit. The business reimburses me for things like broadband, health insurance, and mileage since it isn’t possible/practical for the business to pay for these directly. The biggest problem is with auto expenses. I drive a truck that I own and the business reimburses me at the federal mileage rate (which was raised from $.505/mile to $.58/mile as of July 1, 2008).

Mint gives great information on what I spend on fuel, insurance, and service but I don’t have an easy way to break down these expenses between personal and business use unless I collect more information. When comparing my spending on fuel to what I budgeted, it isn’t immediately clear if I’m sticking to my personal goals since my business mileage has varied between 600 and 1100 miles a month.

And that’s the root of the problem. As I wrote about earlier, one of the guideposts of economic thinking is that information is costly. While I track mileage that I drive for business purposes, I don’t keep track of personal use. Even if I did track personal mileage, I’d also need to track both the MPG for the month and the price per gallon when filling up to be able to accurately see what I’m spending on fuel for personal use.

In the end, this proves to be more effort than I care to expend at the expense of a less accurate personal budget.

My multiple account strategy

As part of my quest to become more assertive in the management of my money, I setup the online banking version of the “envelope” budgeting system. Envelope budgeting essentially calls for stashing cash in envelopes earmarked for planned expenses. For example someone using the envelope budgeting system might put $50 a month in their “weekday lunches” envelope and use this for their daily lunches during work days. This would be their budget for the month for this category.

Since I’m not a big cash user, I’ve adopted a similar budgeting system using ING sub-accounts after hearing several other folks talk about it. As I’ve mentioned, about 18 months ago I moved the bulk of my savings to ING with the notion that this was my savings for a down payment on a house. What ended up happening was that I co-mingled my short term savings (i.e. savings for taxes and other planned expenses) into this same account.

In April of 2008, I started to implement envelope budgeting system using ING sub-accounts. That first month, I added accounts nicknamed “Taxes” and “Slush.” One of the challenges of the small business owner is that I pay income taxes on a quarterly basis meaning that I have to set aside a portion (right now it’s about 23%) of my monthly draw for Tax savings. So, every month I move the prescribed amount into this my ING “Taxes” sub-account.

Over the past few months, I’ve added sub-accounts for three separate Irregular Expense categories: Auto, Gifts/Entertainment, and Other. Using Mint and Excel, I totaled my spending in these category over an entire year and then divided this total amount by 12 to give me a monthly average. In the irregular auto expenses budget, I included things like service, insurance, and registration. Rather than knowing that I had to set aside $800 in February and August for my insurance premium, I am now setting aside a small amount each month.

It’s the same idea with the Gifts/Entertainment account. For the past 8 years, I’ve owned season tickets for UCLA football. So every June I had a ~$600 payment (2 seats) due. I’ve added this planned expense to my Gifts/Entertainment budget along with a planned budget for Christmas gifts that I save for over the course of the year.

The extra few minutes a week that I spend over the course of a month in managing the additional accounts are well worth it for me. By spreading out the savings for my large expenses over the entire year it is less of a shock to the accounts when they come due. Another benefit of using these multiple accounts is that I know that the money in my Down Payment savings account is actually for the down payment and not mentally earmarked for something else!

A supurb NYT article on Renting vs. Buying

David Leonhardt has a great article in the NY Times today discussing his recent decision to buy a home after years of preaching the economic benefits of renting.  It’s a great example of applying economic thinking!

Renting involves one obvious, recurring cost that can never be recouped: the monthly rent check. Buying, on the other hand, involves multiple expenses, some of which aren’t so obvious. On top of closing costs, there are repairs, property taxes, mortgage principal and mortgage interest. (The mortgage-interest tax deduction reduces this last cost but doesn’t eliminate it.) When you own, you also lose the ability to invest your down payment elsewhere, like the stock market.

Of course, owning also brings benefits that have nothing to do with money. You can settle into your home, confident that no landlord will kick you out. You can repaint the walls and redo the kitchen. All else being equal, owning seems far preferable to renting.

They also have a terrific rent vs. buying calculator  which shows at what prices it makes more sense to own or rent.  As a renter, I’m continually debating home owners trying to convince me that I’d be better off buying a house but using the rent vs. buying calculator, at the current prices in my area, it isn’t beneficial to buy at this point!