Handling Finances

I was talking to a coworker of mine who has an MBA about one of the biggest lessons in business management classes that gets ignored not only in business management, but in national policy and yes, in our own personal finances.  Quite simply, it is never wise to base major decisions on ANY single event!  Terrorism is a big problem worldwide, but the additional safety to our airplanes of having our nail clippers confiscated and eye-drops visible in plastic baggies is insignificant compared to the added cost of even badly enforcing these new rules.  Some oversight of mortgage brokers would be a good thing, but it should be broad and loose rather than simply cracking down hard on a specific two or three practices that led to the recent increase in forclosures.  And yes, spending less than you earn is a great idea, but you shouldn’t decide to save just because you declared bankruptcy!

That’s right, even good decisions should never be based on rare events.  You shouldn’t decide to go with a used car because a friend had to fight with a dealer over whether their new car was a lemon.  You shouldn’t ride your bike to work because you normally drive over a bridge and you heard about the 35-W bridge collapse.  You certainly shouldn’t save for retirement because Enron went bankrupt and their pensions became worthless.

Emotions are healthy, but they can never be trusted to drive major decisions. If you’re looking to buy a car, certainly take the chances of buying a lemon into account, but only as part of your decision.  Look carefully at the price differences, warranties, reviews, safety information, fuel effiency etc…  You might end up buying a used car anyway, but you won’t be risking your hard-earned cash on a hasty decision.  Similarly, don’t save for retirement just because Enron’s collapse scared you — evaluate your expected income from social security, private pensions, annuities etc… and look carefully at how likely they’ll be there until you die.  Hopefully you do decide to save significantly for the time when you may be unable to work, but you’ll be better educated to be able to decide how much you’ll need each year and how much you need to save to meet your goals.

Unfortunately, we are wired to make snap decisions based on emotions. It’s a great survival trick from back when we had to choose to fight or run when staring into the eyes of a tiger.  It’s a great way to be manipulated though as politicians routinely use natural disasters or (in these days) terrorist attacks to get votes.  Yes, it’s best to have FEMA be prepared to respond to the next emergency, and we certainly want to avoid as many terrorist attacks as possible!  Still, it’s important to evaluate the facts — would adding a billion dollars to the INS budget really prevent determined terrorists from bombing shopping malls?  What about ten billion, a hundred billion?  How much liquid does a potential terrorist need to down a plane?  (answer: less than you could fit in a shampoo bottle).  Will suspending the national gas tax bring down the price of gas?  I haven’t yet heard a professional energy analyst say yes — we’d perceive gas prices as a “deal” and increased use would push the price far higher than the 18 cent “sale.”

Of course, emotions are a vital part of being human and they can’t be ignored either.  Any decision should certainly take into account our stress levels and how a decision will affect us emotionally! In some cases, as with tragedies that affect us and our families, emotional factors may even be the primary reason for making a particular decision.  Even when that happens, though, it’s important to step back, look at the facts, and then choose one way or another.  Because while you might feel better for a little while in a large new house to soothe your feelings about living in a tiny shack as a child, reality will eventually catch up and you might wish you’d looked at facts as you’re being evicted.

When I started this blog, my net worth was right around zero, I’d paid off my student loans and had just landed a great new job.  Even with a trip to London, a new digital camera, and the occasional car repairs, our net worth is climbing between $2,000 and $5,000 a month.  While I’m confident this is sustainable, it’s not really how we plan to live long-term.  My wife would very much like to quit her nanny job and volunteer more.  We’re also looking at buying a house and then making, buying and renting children (through pregnancy, adoption and foster care) so we’ll be paying interest instead of earning interest and our costs will increase.  At the same time, if we can continue to save just over $2,000 per month (including part of our house payments that goes toward principal) and don’t turn rabidly materialistic in the next couple of years, I think we’re in good shape to hit this goal.

My net worth is computed very simply.  I add together my retirement accounts and my savings accounts and subtract my credit card debt (which is paid off each month).  In Quicken this is automatic so the only thing I have to do is review the transactions to make sure everything is copacetic.  I purposefully don’t add in the value of our two cars as they’re both worth no more than a couple thousand dollars and we intend to drive them until they’re more trouble than they’re worth.  If I purchase a new car someday I might include it in my net worth, but even then I suspect I’d prefer to treat it as spent money rather than an asset I can buy or sell.  When I purchase a house, that will certainly be included in my net worth.

Quicken doesn’t track all my money as the $500 I’ve put into Prosper isn’t included and my wife has an account she uses for selling Avon that I choose not to track, but overall it gives a good picture of my financial situation.

It’s hard for me to think about reasonable and useful goals more than a few years in advance so I just figured I’d set my first longer-term goal at the arbitrarily significant figure of $100,000.  A little math showed me that I’d hit it by or at least in 2010 if our cash flow stays reasonably static so that’s what I’ll shoot for.  If history is any guide, that’ll be somewhere around half in retirement savings so I’ll have a good start on avoiding dog food when I’m too feeble to play with lasers.

I keep summarizing our finances to my wife. I let her know where our money is kept and how much money we have. We discuss our plans and goals regularly.

Still, when I asked my wife where she would find our emergency fund if I was incapacitated in an emergency, she had no clue. It turns out that while my wife is interested in our finances and in our financial future, she really couldn’t care less about the details. Before we got married, she was generally good with finances — spending less than she earned while occasionally paying a bill late due to disorganization. Now that I take care of money and keep her updated as to our general progress toward goals, she just doesn’t bother to pay further attention.

I don’t think that’s a problem — as long as we continue to communicate and align our goals, we won’t run into serious problems if just one of us takes care of financial details. Still, she does need to be able to access our money in an emergency, so I’ve begun working on my alien abduction package. It will include instructions and important account numbers for all our accounts including which accounts she owns and which (like retirement accounts) will need to be transfered to her if I’m abducted (we don’t like to talk about me dying).

We don’t yet have a safety deposit box, so I will likely be encrypting a copy I can keep in a reasonably secure online file-saving account.

It’s taking me a bit of time to get this together, but I’ll post a reasonably scrubbed version as Mrs. Micah did at the link above. It should make reasonably interesting reading as it will include both the location of my money as well as the reasoning for this location and special instructions on how accessing it may be complicated.