Handling Finances

I’ve written previously about my goals for 2008, but in reality I have many more goals than simply saving for retirement, buying a house, and traveling to England. In the past, I would simply use a spreadsheet to allocate the money in my savings account to different goals, but I found that rather tedious and would frequently just work on one goal at a time and ignore the rest. Having grown up with the internet and computers at my fingertips I’ve come to expect things to be automated and about a month ago, I found a great way to automate my goal-oriented saving.

Once you’ve entered all your information and started an account at ING, it’s extremely simple to create additional separate accounts for various purposes. You just pick which type of account (checking or savings — I only use savings) and give the account a name. I’ve started four accounts besides my main account for some basic discretionary spending in my life: Photography, Vacation, Auto and Charitable Giving. I also set up automatic transfers to each right after my monthly paycheck is deposited — I always keep enough to cover these automatic deposits in my main checking account so I’m not in danger of emptying my account and incurring fees.

Why save for smaller goals?

There’s another way to do this — I could pull money from my checking account when I want to give to charity or buy a new camera lens, and I could use my emergency fund for car problems. But car problems are predictable — you don’t know when they’ll come up, but you know that you’ll encounter them eventually! Putting money aside every month reduces and even eliminates the financial stress of car problems, and can spread out the cost of a new car into a high-interest savings account.

Aside from the auto savings, all my accounts are totally discretionary. These accounts serve two purposes: they limit my spending on photography and vacations, and they ensure that I will have money to spend in these areas when I want it.  Also, while my wife balks (with good reason!) at spending hundreds of dollars on camera equipment, saving for months to get a new lens both helps me to avoid impulsive purchases and calms her reaction to the cost of lenses “we don’t need.”  Avoiding marital strife and impulsive expenses all at once is a huge bonus in my book!

Saving for Goals Sets Priorities

Not only does this system reduce marital strife, eliminate impulsive purchases and avoid debt, but it makes your priorities obvious every month.  With automatic or manual monthly transfers to the savings accounts, you can assign priorities based on how much money you put into each account.  If I’m saving up for an overseas vacation, I might increase my vacation savings.  At the same time, I can either reduce my contribution to another account or simply live with less spending money for the month.  if I get some extra money (like the coming stimulus check) I can put part of that toward whatever goal I want as well as throwing some into long-term savings.  By increasing my photography account, I’ll be stimulating the economy… just perhaps not until I can afford that $7000 Canon 600mm F4L lens I’ve been drooling over!  (note to the wife: just kidding!)

Smartypig — the online version of my savings plan.

Smartypig.com has a really similar way to save for small goals. If you want to save up for your next vacation or a new car, you can put your money in an account with regular deposits. The site will tell you if you’re on track — factoring in your automated deposits and the interest rate. Unfortunately, although the site has a slightly higher interest rate than ING and other high-interest savings accounts, it charges hefty fees for everything from having gifts deposited by relatives (5%!) to getting back your money by check. Of course they don’t let you direct-deposit your money back into the account it came from because they want the 2% interchange fees they get from the debit card they want you to use. Overall it’s a bit of a racket and I strongly suggest perusing The Finance Buff’s review of the site at Free Money Finance before giving them a dime!

Whether you go with ING accounts, Smartypig, or just keep track of your categories on a spreadsheet, consider prioritizing your money with goal-oriented savings.  It’ll help your finances, teach you patience, and earn interest while you wait!

This week has been very interesting with the ongoing discussion of federal bailouts for investment banks. The act certainly helped avoid a panicked run on investment banks causing numerous more bankruptcies. At the same time, when taxpayers are essentially insuring the industry, government regulation is generally in place to ensure that the taxpayers’ money isn’t being subject to extremely high risks. I certainly hope Bernake decides to clarify his bailout of Bear Sterns so we know whether it was intended as a one-time thing or as a precedent. Whatever happens, we’re likely to see some regulation of investment banks — just the extent and nature of the regulation remains to be seen. Regulation generally has two effects — it makes an industry slower and more expensive, and it makes the industry less risky or dangerous. I do think regulation is necessary to curb wild subprime lending since lending to people who can’t repay the loans is just unethical in my view. At the same time, history has shown that regulation is highly reactionary — it might prevent the exact problem we just encountered, but people will always find new ways to take advantage of others and there will always be loopholes that won’t be plugged until the next time the financial sector gets itself into trouble.

Last week, I posted a riddle about some guys who went on vacation. They were involved in a confusing transaction and it seemed as if $2 had disappeared. In fact, it all worked out and it was just the question that was faulty. Each of the three paid $9 for a total of $27. The hotel got $26 and the bellhop snagged $1 on his way to return the amount they had overpaid. Having an incredible amount of trouble finding money-related riddles that don’t require a strong grasp of math, I’ve decided to retire that project for now. I love complex math problems, but I know few people who share this interest so I suspect that simply coming up with challenging problems won’t be worth much to my readers.

The Roundup

My post Cheaper Financing is a Funny Route to the American Dream was included in Carnival of Personal Finance #145. Check out the carnival for articles from across the internet on personal finance.

PaidTwice posted about how she took way too long to raise her (husband’s) 401(k) contribution to the 6% required to receive the full 20% match.  If your employer offers a matching contribution, the immediate 20%-100% return (depending on your employer) for the first 6% is amazing, free money.  While you might prefer to contribute the majority of your retirement savings to a Roth IRA, make sure you qualify for any employer match first!

Patrick at Cash Money Life discussed job searching while employed.  This is something I need to get into as while I love my job and intend to stay there for the next five years or more, it’s much easier to stay on top of job opportunities when you’re still employed and not desperate for income.  It also helps you keep on top of potential opportunities that you might not notice if you kept your head down in your company.

Finally, Lynnae discusses some cheap homemade cleaners at beingfrugal.net.

In many commodities, prices move fast. Sometimes when a technology moves fast as with computer speeds and capacity, a new, better product is released every couple months and the prices of last month’s release will drop dramatically. Marketers take full advantage of this and push companies to release numerous small upgrades rather than simply targeting the best possible product every year or two. This way, consumers who are “early adopters” and tend to purchase the best will be repeatedly pressured to shell out top dollar for the newest and greatest. Similarly, those of us looking for a bargain will constantly see prices dropping dramatically and feel like we’re getting a great deal.

In reality, marketers are adjusting pricing to get the largest profit they can, so we’re not getting some great deal at their expense, but there’s usually a sweet-spot that offers the highest performance (or latest features) at the best price. Of course it’s not always just a marketing ploy, often making something larger or faster is challenging and it can take months for a manufacturer to learn how to make a new version for a lower price.  I like to call this sweet spot the “value elbow” because you can find it by looking for a bend in the graph of price vs. performance.

Looking for the best value (lowest price per performance/capacity/weight) is a good idea in all areas from grocery shopping to buying a car, but when technology and prices move fast, there’s generally a good reason to get the best performance possible. For example, if you’re shopping for a computer, you don’t want to buy the cheapest one you can find because it won’t run many of today’s programs. At the same time, you don’t want to buy the most expensive computer because you’re paying a huge premium for the latest, hottest components.

Graphing price vs. performance.

Again, this works for a lot of fast-moving commodities, but I’ll focus on LCD computer screens as I’m a bit of a nerd and follow LCD displays rather closely.  To get a good comparison as an example, I chose just Acer displays from BH Photo Video.  The technique can work with a variety of brands at multiple vendors, but it’s sometimes difficult to differentiate between the different features and quality of different brands.  I chose to graph simply the size of the displays, but again, the technique can be used for a variety of different features.  To the left is the graph of cost vs. screen size of the Acer displays.

Circled in red is the best value for the money.  At this point, you can get the biggest screen (or whatever metric you’ve graphed) for the same price per area as smaller screens.  At this point, you’re not paying to be an early adopter or paying the manufacturer extra while they learn how to make these larger screens at a lower cost.

Be careful not to buy into this value elbow just because it exists!  In some cases (as with computers in my opinion) buying at or near the value elbow really is the best deal since the product becomes obsolete so quickly.  In other cases (as with flash memory for my camera) you might be able to purchase a much cheaper card that will never become obsolete because your camera will never ‘need’ a larger card (as long as you don’t upgrade your digital camera anyway).  Finally, there are times when you might really need a feature or capability on the expensive side of the value elbow.  Consider carefully whether you can wait for the price to drop — if an even newer version is scheduled to be released in a couple of months, it might be worth the wait until the product you want drops back into the value elbow.

This technique will never tell you which product to buy, but it can be useful to let you know which products are being priced higher just because they’re new.  If the latest gadget is important to you, and you can afford to pay the premium, the most expensive item might be worth the extra price.  On the other end of the spectrum, if you only intend to use your computer for email and basic web surfing, buying a computer at the value elbow would be a silly waste of money — you should look for something much cheaper that will meet your needs.