How I manage my personal finances

March 1, 2012

(Source: 401k)

I’m really big on maintaining my personal finances as best as possible – it’s one of my hobbies. I’ve read countless books & blogs to learn as much as I can over the past 14 years (ever since I was 16!).

Anyways – I hope this helps you out – maybe you can compare how you manage your money with mine and get some tips. Or you may already doing it better than I am – then you can leave a comment below and let me know.

My inspiration comes from:

1. Rich Dad Poor Dad – basic ideas about assets & liabilities which we are never taught in school or by family. A must (and easy) read.

One of the main things is that your house is not an asset. This goes against many of the mainstream ideas out there – but the idea is that a house costs money to maintain (mortgage, taxes, repairs, lawn care, etc) and puts no cash into your pocket. An asset should be cash flow positive – thus your house is a liability.

Quick story of how I learned about this book: I was a senior in college (2003/2004) and at a friend’s party – probably a friday or saturday night. Everyone was drinking, listening to music and just having a good time.

My friend’s neighbors from the apartment next door were also there. I was just sitting there and one of the neighbors leans over and asks me if I’ve read Rich Dad Poor Dad. Weird and random topic to bring up at a loud and chaotic party.

I told him I’ve never heard of it before. He walked into his apartment, brought out his book and gave it to me to read. I remember being back home and reading the book in one sitting – I couldn’t put it down.

It was so fascinating and nothing I had ever heard or read before. Looking back – it was truly a life changing moment set up by the universe. The guy had no problem telling me all about the book and had no problem lending his book to me (a stranger to him).

So weird.

I don’t remember the guy’s name or even what he looked like but I’m thankful to him for his gift of sharing his knowledge.

2. Jim Rohn (idea of 70/10/10/10) – I’ve listened to all of Jim’s talks – so I’m not sure where I heard this idea but he gives his thoughts on what you should do with your dollar.

If you have no idea on what to do – the basic idea is for every dollar you earn – spend only 70 cents on your living expenses, 10 cents for long term rainy day savings, 10 cents for investing (stocks, mutual funds, etc), and 10 cents to charity.

The charity part circulates money back into society to people who need it the most – plus it instills the idea of abundance (there is so much money in the world that you giving out 10 cents out of every dollar won’t have an effect on you) – and lets you live on less than you earn. I’ll share about how I do my finances below.

I would listen and read everything Jim Rohn has to say as he was one of the best business philosophers.

3. Think & Grow Rich – basic law of attraction book without mentioning it. This is a classic book that instills the right thought process to have wealth and abundance. Your mind has the power to bring abundance into your life. Hence – THINK and GROW RICH. Must read (I listen to the audio version).

4. The Richest Man in Babylon – it’s always easier to learn lessons when it’s written in a story format rather than a lecture. This teaches personal finance lessons in the format of a story taking place in the olden times (when people rode camels and carried gold). Fun and easy to listen.

5. Motley Fool Personal Finance Section – has tons of articles & guides if you want to learn more. I learned about the Motley Fool back as a senior in high school from my economics teacher and have been going there ever since (13 years).

How I manage my money – super easy method:

1. Sign up for – if you’ve never heard of it – it’s a free personal finance website (also has apps for iphone). You can add all of your accounts here and it’ll show a snapshot of your finances in one place.

ie: I have my credit cards, bank accounts, mortgage, brokerage accounts etc all into mint.

There are additional options like email/text alerts if there is a large purchase or a bill that’s due, etc – but I don’t use any of it.

I log into my mint every day (because it’s fun) and I can see everything that’s happening (every purchase, every bill that I paid, every time I deposit a check, etc) and can quickly see if everything is working ok.

And it’s safe and secure. Do it. Now.

2. At least 10% of all my income goes into an ING savings account – automatically every month.

This serves three purposes:

a. It keeps my money away from my checking account so that I don’t spend it – and since ING is only online – I can’t access it right away. Transfers take a couple of days to happen – which is a bonus. If you just have a savings and checking account in chase bank – then you will be tempted to transfer money because it’s so accessible.

b. It earns more interest than my chase checking account – not that much but it’s 0.01% vs .8% or so. I don’t know the exact numbers but it’s a lot more than what chase gives me.

c. I can create different buckets within the same ing savings account so that money can be kept separate for different reasons. I have one long term savings account. I have a travel account where I put some money in there so that I can have money aside for future fun travel. I have a car maintenance account just in case I need to change my tires (like I had to last winter and cost me close to $900 – I was lucky I had some savings). When you create different buckets – it’ll help your mind know that you have money saved for different reasons rather than having all the money just sitting in your checking account which you spend right away.

And once you start saving money – don’t touch it!

Set your own rules in the beginning then follow thru. ie: If you create an ing bucket for a downpayment for a house – don’t dip into it to buy rims! If you really want rims – just create a different ing bucket and throw some cash in there until you have enough to buy rims. (Seriously though, please don’t buy rims!)

3. Invest at least 10% of my income into stocks. I used to do mutual funds but studying & researching stocks is a hobby of mine – and I like the freedom of picking my own stocks rather than just buying an index mutual fund.

I currently do about 34% of my income into stocks (I have a low maintenance lifestyle). I used to do different things over the past 10 years but as of 2012 – I’m following a simpler model of owning only 6 stocks – amazon, starbucks, yum, intel, ups & fedex. All the stocks (except amazon) – I invest in drip programs where I put in a certain amount per month and reinvest all the dividends. I will write a separate post on how I invest (where I’ll talk about my thoughts on ira etc).

I learned tons from the Motley Fool investment articles.

3b. If your company offers a 401k program with a match – you should invest as much as the match offers. This is a must. My company has 4% match – so I invest 4% of my paycheck. I don’t understand when people don’t invest in their 401k match programs because it’s a 100% return for every dollar you invest. If you can’t afford it – figure out a way to cut your living expenses so that you can invest. Just do it. Don’t be silly.

4. 10% goes to charity. I used to donate automatically from my bank to the chicago food center and a couple other charities. I did that for a year but found it was very unsatisfying since I never saw where my money actually went.

Plus it’s hard to figure out which charities are the best – which ones spend most of the money on actual charity activities and which ones spend a lot on management, etc.

So now I have an easy policy. The basic premise is to get some of my money out of my hands and into someone who could use it (less fortunate than me, preferably).

I eat out and get food delivery a lot – so now I just tip extremely well as my form of charity. I’ve found some of the hardest workers and unappreciated people are waiters, delivery drivers etc. Plus it makes me feel better to tip well – especially when the waiter or driver has worked hard.

I don’t really keep track of 10% of income to go as charity – since I eat out almost every meal, a good amount of my money goes back into the universe in the form of tips.

5. Bonus step – The above three steps will already put you ahead of the majority of the population when it comes to personal finance.

I go to the next step by having my own profit & loss spreadsheet. I keep track of my revenue (income), savings (ing), investments (drips, brokerage), living costs (rent, utilities), necessary costs (food, car, gas, etc), discretionary costs (netflix, things via amazon), & self improvement costs (books, vitamins, supplements, float tank visits, etc).

This way – I can keep track of where my money is going – what percentage of income I’m spending on things and what my cash flow is. Yours doesn’t need to be identical to mine – just keep track of your income & expenses.

With my spreadsheet – if I’m running low on cash – I can see where exactly I can cut my costs – usually starts with self improvement or discretionary costs – or I lower my ing savings. The last thing I touch are my investments & necessary costs.

Final Quick Tips:

1. Don’t spend more than 70% of what you earn
2. Try to spend 30% or less on living expenses (rent or mortgage + utilities)
3. 10% goes to savings – make it hard to access your money
4. 10% goes to investing – if you have no desire or energy to figure out stocks – just invest in a no load, low cost index mutual fund. Vanguard is a good company.
5. 10% goes to charity – do it in a way that makes you feel good. Being charitable is the right mindset to be in to allow abundance into your life.

(Disclosure: The links to amazon are my affiliate links – so if you buy something, I’ll get some passive income. I fully stand by my recommendations as they’ve changed my life and I think it can help you out as well. If you decide to buy something through my link – I thank you in advance. Just wanted to let you know and be totally upfront.)