Crackerjack Greenback Prudent Advice for a Prosperous Future

November 25, 2008

Ripped Off: Can You Trust Your Financial Adviser?

Filed under: Investing,Retirement Planning,Saving Money,Spending,The Basics — Paul Williams @ Crackerjack Greenback @ 4:00 am

       The financial services industry is great at making you feel good while ripping you off. They’re also great at confusing you so much that you can’t even figure out how badly you’re getting ripped off. To make smart financial decisions, you need to realize how your “advisers” are getting paid and how their pay structure may affect the advice they give you.

       These advisers can include stock brokers, bankers, realtors, financial planners, insurance agents, lawyers, and accountants. Different compensation methods can create various conflicts of interest—situations where your best interests are not the same as your adviser’s best interests. This is a long article, but what you’ll read here can save you many problems and oceans of money.

Commission-based Advisers

       These advisers get paid a commission when you buy a product. The products they sell can include stocks, bonds, mutual funds, insurance policies, annuities, real estate, mortgages, other loans, and much more. (When you take out a loan, you’re essentially buying a product and the banker typically gets a commission or bonus.)

Chris Gardener by dbking on Flickr       The problem with this compensation structure is that the advisers are influenced to sell you products that give them a higher commission. This could mean selling you inappropriate or sub par products with high fees, telling you that you need permanent life insurance coverage, convincing you to buy the most house you can afford, or encouraging you to take out the biggest loan the bank will let you. You often don’t realize the cost of these decisions because the commissions are rarely disclosed in an honest, upfront, and easy to understand manner. It may seem like you’re getting cheap or free advice, but you end up paying much more in the end because of the commissions that are built into the products you buy.

       Commission-based advisers are also much more likely to persuade you to make many transactions (buying and selling investments many times) because this increases their pay. There are strict rules against “churning” in investment accounts, so be sure to seek help from the government or a lawyer if you believe your account is being churned.

       While there are some commission-based advisers who are trustworthy and do give their clients good advice, you’re best served by steering clear of commission-based advisers whenever possible. If you must work with someone who earns their fees by commissions, make sure you get full disclosure on their compensation and always get a second or third opinion on their advice. Do your homework, and you can avoid getting ripped off by commission-based advisers—but there are often better ways you can get help with your financial decisions.

Fee-based Percentage of Assets Advisers

       Fee-based percentage of assets advisers are paid a percentage of the assets they manage for you. This business model is also called the assets under management (AUM) model. This is generally seen in the investment world, though it can crop up in other areas. The typical fee is about 1% of your assets, but this can vary wildly between advisers. It’s important to keep in mind that this fee is almost always in addition to the fees in the products you purchase.

       The first conflict of interest with fee-based AUM advisers is the fact that they get more money when they manage more of your assets. They’ll often encourage you to transfer more of your assets to them and justify the advice with some compelling reasons. However, it isn’t always best for you to move your assets to an AUM adviser. Additionally, when you take money out of your account the adviser’s fee goes down. If you’re weighing the decision to pay off a loan with money the adviser is managing, how likely do you think it is that he will tell you to pay off the loan? If you pay off the loan, the adviser gets a pay cut.

Business Meeting by llawliet on Flickr       The next problem with fee-based AUM advisers is cost. When you pay 1% of your assets in management fees every year, the total cost can really add up. Let’s assume the adviser takes a 1% fee at the beginning of each year and your investment returns are 8%. Over 25 years, you’d pay $62,527 in fees for every $100,000 you had invested at the beginning of the 25 year period. Over a 65 year period, you’d pay $1,104,280 in fees for every $100,000 you initially invested. Most advisers will justify this cost by saying that you wouldn’t have received 8% investment returns if they hadn’t been there to advise you along the way. While this may be true, you can duplicate their results if you educate yourself enough about the long-term history of the markets and learn how to avoid stupid mistakes. You can also look into using an hourly or flat-fee adviser for a better deal without having to learn everything on your own.

       During retirement, these costs can be especially hazardous. My research has shown that a 5% withdrawal rate is probably safe for most people. If you have to pay an investment adviser a 1% fee to manage your assets, your safe withdrawal rate goes down to 4%. This means a $1,000,000 would only provide you with a $40,000/year income if you’re paying an investment adviser. Alternatively, you could have a $50,000/year income if you didn’t have to pay 1% of your assets to the adviser every year.

       The AUM model also isn’t very fair to the clients. If Bob has $100,000 and Joe has $200,000, Bob only has to pay $1,000/year but Joe has to pay $2,000/year. Why does Joe pay more? It’s only because he has more money. How is this fair for the clients? Having worked in the investment industry, I can personally tell you that not much more work goes into managing Joe’s $200,000 portfolio versus Bob’s $100,000 portfolio. Why should Joe have to pay twice as much for the exact same services? He shouldn’t, and that’s another reason why I am not too fond of the AUM model. Fee-based AUM advisers will try to justify this problem with different arguments, but there’s rarely a legitimate argument that would hold up when viewed by an unbiased party.

       Finally, fee-based AUM advisers are generally restricted to working only with wealthier clients. It’s much more profitable to spend 10 hours working with someone who has $1,000,000 than to spend 10 hours working with someone who has $100,000. This means young people and late starters with little money saved up are going to have a hard time getting a fee-based AUM adviser to work with them.

       Fee-based AUM advisers usually give much more appropriate advice to their clients than commission-based advisers, but there are still many conflicts of interest and problems with this compensation structure. Advisers using the AUM model like to advertise that their compensation structure eliminates many conflicts of interest present in the industry, but you should be aware that it does not eliminate all possible conflicts—no compensation structure can do that.

Fixed-fee Advisers

Good Advice by Gary J. Wood on Flickr       Fixed-fee advisers are paid a flat fee to provide certain services you agree upon. There are few of these advisers around, but their fee structure can eliminate many of the problems with commission-based and fee-based AUM advisers. You may also hear this fee arrangement referred to as a “retainer”.

       You’ll want to ensure that the flat fee you pay fixed-fee advisers is the sole source of their compensation. If the adviser still receives commissions for any products you may buy, then they will still have a conflict of interest in selling you the highest-paying products.

       You’ll also want to make sure you do not pay for more services than you really need with a fixed-fee adviser. Because these advisers are charging a flat fee, you can end up overpaying if you do not fully utilize the services and time included in the package. This is especially true for those who have a simple situation or for those who have the biggest areas of their financial plan implemented already. Since fixed-fee advisers often charge upwards of $1,500 or $2,000/year, it may not make sense to use them if you do not need much help.

       Since fixed-fee advisers are paid a flat fee, it is to their benefit to spend as little time as possible on any one client as this maximizes their hourly rate. While this is short-sighted, it is still a possible downfall of using fixed-fee advisers. If you feel your fixed-fee adviser is not providing the level of service you agreed upon, you should confront him or her to get an explanation. If you’re not happy with the service, you may want to change advisers.

       The major benefit of fixed-fee advisers is that they will not be tempted to advise that you purchase high-fee products or to put more money under their management. Since their compensation structure is separated from your assets, they are able to focus on your best interests when they provide advice. You’ll still want to make sure you’re not paying for more than you receive, and you should carefully consider any personal finance decision no matter where your advice comes from.

Fee-based Hourly Advisers

Good Advice by rick on Flickr       Fee-based hourly advisers get paid an hourly rate for the time they spend working on your situation. This time could include meetings with you, researching your situation, completing paperwork for you, or meetings with your other advisers. Most accountants and lawyers work under this compensation method, but you will hardly find this fee model in the investment, insurance, banking, or real estate industries. Fee-based hourly advisers eliminate many of the conflicts of interest present in commission-based and fee-based AUM models, but they are not without their issues.

       Because fee-based hourly advisers are paid for their time, they may try to give you complex advice to justify their fees and keep you dependent on meeting with them. If you feel like your fee-based hourly adviser is giving you the runaround, be upfront and let him or her know that you need a better explanation of why the advice is so complicated. If the adviser does not try to educate you, it’s probably time to seek another adviser. Any adviser should be more than willing to educate you about what is going on in your financial situation. If not, they could be hiding something or trying to keep you dependent on their advice.

       You may need to be more involved with your finances if you use a fee-based hourly adviser. Since you are paying the adviser by the hour, your costs will be lower if you can do as much as possible yourself. The fee-based hourly adviser should be willing to provide you with any instructions you need to complete simple tasks on your own. This could include setting up accounts, transferring assets between accounts, placing trades, purchasing products, or meeting with other professionals as needed. If you need help, you can always ask the adviser to assist you but your costs will be much lower if you do most of the grunt work yourself.

       With a fee-based hourly adviser, all clients are treated the same because they all pay the same amount per hour of the adviser’s work. These advisers can work with people who have few assets or people with a high net worth. As long as they only receive their compensation from you, they won’t be tempted to advise that you purchase high fee investments. On the contrary, they are likely to give you the best advice possible for your situation because they know that exceptional advice and education is the only thing that can really keep you coming back for their help.

Other Things to Keep in Mind

Good Advice by cornflakegirl on Flickr       You might find an adviser who uses some combination of these fee structures. Proceed with caution! The more complicated the adviser’s compensation the harder it is for you to understand exactly how he is getting paid. With any type of adviser, make sure you get full disclosure of their compensation in writing.

       Never be afraid to get a second opinion on your adviser’s recommendations. You can easily go to a fee-based hourly adviser for a one-time project when you’re making a major decision. For a few hundred dollars, you can get this second opinion and avoid a much more costly mistake. Even better, you could do substantial research on your own so you learn in the process and understand the situation better.

       Always remember that your advisers should be teaching and educating you throughout the process. If the adviser is reluctant to explain his recommendations, I would be very wary of trusting him. By finding an adviser who is a true teacher at heart, you can be more confident that the adviser is honest and trustworthy. The best adviser should be working to make himself completely unnecessary at some point!

       Don’t fall for slick marketing, a round of golf, free dinners, or nice gifts! Advisers who spend a lot of money in these types of “client appreciation” or advertising areas are simply using the money you pay them to give you “free” stuff just to make you feel good about getting ripped off. You should remember that the adviser is not going to give you so much “free” stuff that they don’t make a profit. While it may feel good to get that “free” round of golf or gift card to your favorite restaurant, you should never forget that you’ve already paid for it when you paid the adviser’s fee. Don’t fall for the illusion that it feels good to get ripped off! If you really want those things, pay for them yourself and stop paying through the nose to get it from your advisers.

November 21, 2008

What is Index Fund Investing?

Filed under: Investing,Retirement Planning,The Basics — Paul Williams @ Crackerjack Greenback @ 4:00 am

       Last week, we talked about a definition of Active Investing. This week, we’ll talk about Index Fund Investing and how it differs from Active Investing.

Characteristics of Index Fund Investing

       Just as I started last week’s discussion of Active Investing by describing its characteristics, we’ll being talking about Index Fund Investing by looking at its characteristics and the behaviors of Index Fund Investors.

The Slippery Slope of the Stock Market by Ergo Martini - Gone 'til December on Flickr

1.  Index Fund Investors understand that stock prices change unpredictably based on unexpected news. Index Fund Investors know that no matter how much research you put into a company random events will occur that you could never have predicted. They also understand that free financial markets (no government intervention) are mostly efficient. All known and publicly available information is already reflected in current stock prices, and these prices change almost instantly as new information becomes available. These factors make it nearly impossible to “beat the market” (appropriate benchmark) without some dumb luck.

2.  Index Fund Investors understand that Market Timing, in any form, is a loser’s game. They understand that the bulk of stock market returns are often contained in the best few days—and missing those few days means your return ends up much lower than it would have been if you had just held tight. Index Fund Investors know that no one in history has a long term (10-20+ year) track record of being able to figure out when to get in or out of the market. They also realize that Market Timers end up paying more in taxes because of their excessive trading—often negating any gains they might have had from their activities.

New York Stock Exchange by Helico on Flickr

3.  Index Fund Investors understand that it takes more than an S&P 500 Index Fund to be diversified. A true Index Fund Investor will have their portfolio split between several different asset classes: Large U.S. Stocks, Large Value U.S. Stocks, Small U.S. Stocks, Small Value U.S. Stocks, Large Int’l Stocks, Large Value Int’l Stocks, Small Int’l Stocks, Small Value Int’l Stocks, U.S. Short-term Bonds, U.S. Intermediate-Term Bonds, and Global Bonds to name a few.

4.  Index Fund Investors know that investment returns are related to the risk you take. They understand diversification is a way to lower risk, and they have a feel for their risk tolerance. They also understand the risk of not meeting their goals and are willing to take the risk necessary to achieve their goals.

5.  Index Fund Investors read and understand the academic research about free markets and investing. They know that university professors and Nobel laureates are proponents of Index Fund Investing because it has been proven and backed by academic research. Index Fund Investors know that nearly all of the academic research available points to Index Fund Investing as the superior long-term choice for investors.

My Definition of Index Fund Investing

       Index Fund Investing is an investment strategy backed by academic research and over 80 years of history. It doesn’t try to “beat the market”. Instead, it attempts to duplicate market returns by keeping costs as low as possible. Index Fund Investors don’t have to be as worried about the short-term fluctuations in the market because they match their portfolios to their goals based on their time horizon. This means they’re much more relaxed than Active Investors and have more time for the things they really enjoy in life.
189 - Family Dinner by eyeliam on Flickr
       If you want more great information on Index Fund Investing and why you should consider it, check out Trent’s post at The Simple Dollar on The Chorus of Voices for Index Funds.

November 20, 2008

The Way to Wealth – Nuggets of Wisdom from Benjamin Franklin: Wasting Time

Filed under: The Basics,The Way to Wealth,Values — Paul Williams @ Crackerjack Greenback @ 4:00 am

       Last week, we talked about The Lazy Tax (or the tax of idleness) in Benjamin Franklin’s The Way to Wealth. This week we’ll talk a little more about wasting time. Here is today’s quote:

       But dost thou love life, then do not squander time, for that’s the stuff life is made of, as Poor Richard says. … If time be of all things the most precious, wasting time must be, as Poor Richard says, the greatest prodigality, since, as he elsewhere tells us, lost time is never found again …

The Way to Wealth – Benjamin Franklin

Love Life? Then Don’t Waste It!

Old Clock by macinate on Flickr       If we truly love life, then we’ll quickly realize that when we waste time we are wasting our lives. What counts as wasted time? I can’t answer that question for all people as we’ll all value our time differently. But I think we can safely say any time that passes by when we don’t derive some value from it (however you define that value) is wasted.

       Once we waste time it’s gone. There’s no way to get it back. The average human in the world has a little over 578,500 hours in a lifetime (over 657,400 if you’re American). Waste one of those hours and you can’t really get it back. Sure, you can do things to try to make up for that wasted time. But in truth, there’s no way to recapture the value of the time you have wasted.

       Franklin’s admonishment to us is that we should never waste time—because wasted time is wasted life. If we really want to live a purposeful life and live it to its fullest, we must be on guard against wasting time.

November 14, 2008

What is Active Investing?

Filed under: Investing,Retirement Planning,The Basics — Paul Williams @ Crackerjack Greenback @ 4:00 am

New York Stock Exchange by wenzday01 on Flickr       If you’re new to investing, you’ll soon hear about the two main styles of investing – Active Investing and Index Fund Investing. Before we can really discuss either of them at length, we need to have a definition for each approach. I’m going to set out here my definition for Active Investing, and next Friday I’ll discuss my definition of Index Fund Investing and what it means.

Characteristics of Active Investing

       Rather than start out by giving a simplified definition of Active Investing, I’m going to start out by describing some of the characteristics of Active Investing and the behaviors of Active Investors.

1.  Active Investors believe they can pick specific stocks that are going to “outperform”. They also often believe that there are other people, usually Active Mutual Fund Managers, who can pick the “right” stocks as well. The idea is that with enough research and the right insights or methods, you’ll be able to find values that other people have missed and make a fortune in the process.

2.  Active Investors think they can figure out when to get in and out of the market or a specific type of investment. They believe it is possible to tell when they should sell all their stocks and put everything in cash. Or they think commodities (or any other specific asset class) are overvalued and it’s time to start buying foreign stocks (or some other specific asset class). This is often called “Tactical Asset Allocation”, but it’s essentially Market Timing any way you look at it. Active Investors often apply the same line of thinking to individual stocks or bonds.

3.  Active Investors often think a mix of U.S. Large Company stocks provides adequate diversification. The truth is there are many other types of assets in the investment world, and you need a mix of several to be truly diversified.

4.  Active Investors often invest without thinking about risk. If an investment is a good value, you should just put your money in it, right? Wrong! You first have to consider the risk of the investment and your own risk tolerance before investing. You also have to consider the risk of not meeting your goals.

5.  Active Investors often invest without first reading the academic research about free markets and investing. Academia offers us a much less biased view of investing than the materials we see in the financial media and the advertisements of financial services companies. If you really want to understand investing, you need to learn a bit about what academic research tells us.

My Definition of Active Investing

Charging Bull, Wall Street by carlossg on Flickr       Active Investing is basically any investment strategy aimed at “beating the market”. This means Active Investors are attempting to get a higher net return than a relevant benchmark or index. The net return should be adjusted for all additional commissions, loads, fees, expenses, and taxes. You should compare the results over at least 10 years, but preferably over 20 or 30 years, to get a meaningful comparison. Most Active Investors fail to take all of these factors into account when comparing their performance with an appropriate benchmark. They usually don’t even pick an appropriate benchmark!

A Better Way

       Next Friday, we’ll talk about the alternative to Active Investing – Index Fund Investing.

November 13, 2008

The Way to Wealth – Nuggets of Wisdom from Benjamin Franklin: The Lazy Tax

Filed under: Taxes,The Basics,The Way to Wealth,Values — Paul Williams @ Crackerjack Greenback @ 4:00 am

       Continuing our series on Benjamin Franklin’s The Way to Wealth, here is today’s quote:

       “It would be thought a hard government that should tax its people one tenth part of their time, to be employed in its service. But idleness taxes many of us much more, if we reckon all that is spent in absolute sloth, or doing of nothing, with that which is spent in idle employments or amusements, that amount to nothing.”

The Way to Wealth – Benjamin Franklin

Diamond-Tipped Government?

Fat Sam by Randy Son of Robert on Flickr       When I read the first part of this quote, I wanted to laugh. I personally pay 25% of my income for federal, state, and local taxes including Medicare and Social Security taxes. Franklin says a hard government would tax its people 10%. What would he think of 25%?! 🙂 I often wonder what our Founding Fathers would have to say about the current state of America.

Wasted Time

       On the other hand, how much time do I waste and how much is that time worth? I’m not talking about the necessary leisure to rest from work and spend time with family and friends – but just the shear amount of wasted time where I’m neither working nor involved in some leisure I truly enjoy. How many hours are wasted in front of the television just watching whatever happens to be on (so many better options here)? Or sitting around waiting for a doctor’s appointment (we could be reading instead)? Or time we spend just surfing around on the Internet letting time slip by while we’re so easily distracted with the millions of things you can find online?

       What if we put a dollar value to all that wasted time? How much would it be worth? Would we be able to pay our taxes easier if that money were in our pocket? Would our taxes even need to be so high since there would be more income to tax? Franklin’s point about taxes was that we probably wouldn’t need to complain about them if we actually used our time wisely. What do you think?

November 11, 2008

Compound Interest – A Lesson from Benjamin Franklin

Filed under: Investing,The Basics — Paul Williams @ Crackerjack Greenback @ 4:00 am

Benjamin Franklin by kimberlyfaye on Flickr       In 1785, French mathematician Charles-Joseph Mathon de la Cour wrote a parody of Benjamin Franklin’s Poor Richard’s Almanack. The Frenchman called his parody Fortunate Richard and, attempting to mock the American optimism so well-represented by Franklin, wrote that Fortunate Richard left a small sum of money in his will to be used only after it had collected interest for 500 years.

       Mr. Franklin thought the idea was fantastic and wrote back to Monsieur de la Cour thanking him. Franklin decided to leave a bequest of £1,000 (about $4,550 at the time of his death) each to his native hometown of Boston and adopted hometown of Philadelphia on the condition that it gather interest for 200 years. Franklin believed 200 years was the maximum length of time any person should be able to control assets from beyond the grave.

The Strings

The Puppet Master by stephen031 on Flickr       In 1789, Benjamin Franklin added a codicil, or supplemental provision, to his will providing about $4,550 each (about $108,000 in 2008 dollars) to Boston and Philadelphia. Mr. Franklin stipulated that the funds should be used to make loans at 5% interest to young craftsmen under the age of 25 to help them set up their businesses. The loans were to be given only to those craftsmen who were married, had completed their apprenticeships, and could obtain two co-signers to vouch for them.

       After 100 years, each city was to take 75% of the fund to use for public works (like bridges, pavement, public buildings, and the like). They were to then continue loaning the money for another 100 years. At the end of that 100 years, each city would get about 25% of the money and their respective states would get the rest. Had Boston and Philly followed through with Franklin’s wishes successfully, they would each have had nearly $20,000,000 in their funds at the end of the 200 years.

What Really Happened?

Boston by Paul Keleher on Flickr       In truth, Boston only had about $5,000,000 in its fund at the end of the 200 years, and Philadelphia only had about $2,000,000. That’s still a strong testament to the power of compound interest. Turning $9,100 into $7,000,000 is sure to catch most people’s attention. (And that’s after spending 75% of it halfway through the 200 year period. It could have theoretically reached well over $78,000,000 if they had never spent any and had managed it well.)

Philadelphia by George L Smyth on Flickr       Boston and Philadelphia both started out following Franklin’s wishes, but other factors came into play and thwarted his original plans. The Boston fund started investing in savings accounts and a life insurance company after the Industrial Revolution, when more people started working for big companies instead of setting up their own small businesses. Philadelphia used its fund mostly for mortgages during the last 50 years, which was probably more in line with Franklin’s intentions.

Franklin’s Message

       The point of Franklin’s experiment was partially to benefit two cities dear to his heart, but I believe he was also trying to illustrate the tremendous power of compound interest for future generations. The longer you keep your money invested, the more amazing the power of compound interest. So start saving today, and put your money to work for you!

The Power of Compound Interest
Click the graph to see the power of compound interest.

November 10, 2008

New Cars or Retirement?

Filed under: Consumerism,Contentment,Frugality,Retirement Planning,Saving Money,Spending,The Basics,Values — Paul Williams @ Crackerjack Greenback @ 4:00 am

       Bob at Christian Personal Finance has a great post about how cars affect your financial freedom. Definitely check out his post. He estimates that eliminating a $400/month car payment could mean $1,000,000 more by the time you retire. Even a $200/month payment could mean an additional $600,000 over 40 years. Granted that’s not adjusted for inflation, but it could easily mean the difference between retiring and having to work a few more years for many people. It’s just another great reason you shouldn’t buy into consumerism. There’s nothing wrong with buying a used car, and it could save you a lot of money in the long run.

New Car

OR

One Million Dollars

?

Your Choice!

       Be sure to check out this week’s Carnival of Personal Finance hosted at The Digerati Life! It’s a very interesting theme this week!

November 7, 2008

Ways to Create a Budget and Track Your Spending

Filed under: Budgeting,Spending,The Basics — Paul Williams @ Crackerjack Greenback @ 4:00 am

       There are many ways to create a budget and track your spending. The only “right” way is the way that works for you. This is a short list of some ways you can track your spending and create a budget.

Paper & Pencil or a Spreadsheet (Microsoft Excel, OpenOffice Calc, or Google Docs Spreadsheet)

Pencils and Moleskines 04 by Paul Worthington on Flickr       Creating your own method of tracking and categorizing your spending and then creating a budget can give you a much better understanding of your situation. It takes a bit of time and is not the easiest way by far, but it is free and keeps all of your information private. You simply create categories for all of your expenses, track them manually, and then create or update your budget as your situation changes. If you don’t have the discipline to track all of your expenses and continue to update the spreadsheet, then I don’t recommend you try this method.

Quicken

Quicken       Quicken has been the standard personal money management software for quite some time, but many competitors are emerging and offering better products. Quicken can import data from your financial institutions, track your spending and help you create a budget, and offers various reports so you can get a better picture of your financial situation. Quicken Online is currently free (but that could change), so if you’re comfortable storing all of your login information online in one spot you might want to check it out. If you want an alternative that keeps all your information on your computer, you can try Quicken Deluxe for $59.99. (You might be able to find a better deal elsewhere online, so shop around!) My own personal experience with Quicken Deluxe wasn’t especially great. It takes a while to set it up and you’ll have to get familiar with how the program works. However, if you need a way to automatically track your spending it may be worth the initial effort.

Mint

Mint       Mint is a free, online money management program that can pull together all of your bank, credit union, and credit card data to help you track your spending and budget for your expenses. To get all that information in one place, you’ll have to give them your user names and passwords. While Mint uses the same kind of data encryption as your bank, I’m still very wary of putting all of my financial information in one place online. If that data were ever compromised, you’d have to change the information on all your accounts to protect yourself. I just don’t feel comfortable with that possibility, so I would never use an online system like this. Also, Mint’s computer algorithms look at your spending patterns to offer you specific deals through their sponsors so you may or may not be comfortable with that. However, I have read great things about Mint, so I thought I should include it here.

Mvelopes

Mvelopes       Mvelopes is another online money management program that has received good reviews around the web. You get a free 30 day trial, but after that it will cost you anywhere from $7.90/month to $13.20/month depending on the membership period you select. Like Mint, Mvelopes gathers data from your bank, credit union, and credit card accounts to help you track your spending and create a budget. Again, I personally wouldn’t feel comfortable with having all of my account logins stored in one place regardless of the encryption and security used. But if you’re comfortable with it, Mvelopes might be another easy way to start tracking your spending and keeping a budget.

My Method

Google Docs       Personally, I just use a Google Docs Spreadsheet to create a budget so I can have an idea of what my spending should look like. Every so often, I check over different categories to make sure I’m not overspending. However, I don’t really track my spending closely because I have my spending well under control, my savings is automatic, my bills are on auto-pay, and I have a sizable emergency fund. Unless all of those apply to you, I recommend you track your spending. The Spreadsheet method also isn’t for those who don’t have the discipline to dig in and do most of the dirty work themselves (as opposed to a computer program doing the grunt work for you). Here’s a template of the Google Spreadsheet I use. You can save a copy for yourself if you have a Google account and use their “Save” feature under the “File” menu. You should be able to save a copy to your computer, too. You’ll have to edit it for your own situation, as I can’t list every possible expense category a person might have.

There’s More Than One Way to Skin a Budget

       There are many other ways you can track your spending and create a budget. I didn’t even mention You Need a Budget or PearBudget. You can also do variations on any of these methods. For example, for the paper & pencil method you could use envelopes to split up your money and make sure you don’t overspend. What are some other methods you use to track your spending or maintain a budget? Leave your tips in the comments!

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