My expense categories for Interest

Hi,
I don't know what it used to be. However, here are my categories in this area. I have been using Quicken a long time and this is an integration of what Quicken used to provide as well as integration from many financial planning resources. It has served me well and I think should cover most your investment/financial expenses:

FinChg (For Finance Charge)FinChg -> Bank ChargesFinChg -> Int (interest charges)
FinChg -> Int -> Auto (for auto loans)
FinChg -> Int -> Consumer (for credit card interest)
FinChg -> Int -> Investment Int (for investment interest charges) Tax: Form 4952
FinChg -> Int -> Mortgage (tax: Schedule A: Home Mortgate Int ...1098)
FinChg -> Int -> Points (Tax: Schedule A: Points Paid)
FinChg -> Int -> Std (Student loan interest)
FinChg -> Invest ExpenseFinChg -> Invest Expense -> Account Fees (Schedule A: Investment Mgmt Fees)
FinChg -> Invest Expense -> Advisor Fees (Schedule A: Investment Mgmt Fees)
FinChg -> Invest Expense -> Transaction Fee (Schedule A: Investment Mgmt Fees)
FinChg -> Loan FeeFinChg -> Membership Fee

Categorizing Income in Quicken: Creating and Using Spending Categorization (Part 2)

Hi,

When trying to use a budget, I strongly recommend that you use Quicken (or an equivalent tool). I use Quicken and my in-depth examples will assume you do as well.

First of all, it is much easier to work with a budget when it mirrors your real-life and the mental-model you have for your finances. For example, you should try to make the line-item for your income equal your monthly take-home page. That is, you probably thing about your monthly "income" in net terms (after all deductions for taxes, social security, 401k, etc.). Most budget programs default to have you just classify your income. Then, they capture all the taxes as a separate area. This makes it challenging as your "income" then looks massive (significantly higher than reality). Also, you need to make sure you net out and capture all your taxes. If you do it wrong, it will look like you have more (or less) than reality.

I have found it much easier to classify all the appropriate spending categories under an Salary Category Group. Quicken lets you define Category groups that "roll-up" a bunch of spending categories. Working with this higher-level category group makes it very easy.

My category groups are defined in this post:
Creating and Using Spending Categorization (Part 1)


Let me review the income categories and explain what I did.

Category Group: "I1 - Salary-Self"
This contains all the line-items on my monthly paycheck. It nets out to the amount of take-home pay I really have. For example, I mixed together income and expense categories.
I put in the following categories:

• Income:RegularSalary
• _401EmployerContrib (this is a Quicken Category)
• Insurance:AD&D
• Insurance:Dental
• Insurance:Disability
• Insurance:Medical
• Taxes:FedMe
• Taxes:Medicare
• Taxes:SocialSecurity
• Taxes:StateDI (State Disability)

This lets me do a few things:
a) I can set up my paycheck (my regular, non-variable part of my pay) and track the details.
b) I can accurately assess my tax situation later in the year (because I am tracking this)
c) I can "eyeball" by budget and tell that it is right (based on my takehome pay). This simplifies the process when you are building a budget.
d) I can "minimize" or roll-up this area. As long as I know the take-home is right, I don't need to spend time being distracted with these spending areas in my budget line-items. Putting them in here lets me ignore them later.

Category Group: "I2 - Salary Bonus-ESPP"
I put in more variable income categories here. The idea goes with the principle that I espoused in this write-up: Applying Physics to Financial Management

You want to minimize the variability in your budget. If you make money more periodically, or quarterly, REMOVE that from your budget tracking for your more steady income. The point being is that you want to make it easy to "eyeball" your budget as you work with it and ensure you don't have a mistake. It is a lot easier to see two line-items:
Regular Salary: $x,xxx
Bonus: $xxx
Some months you will have additional income. Some months you will not. By separating them, it makes it easier for you to not "forget" and have to keep clicking into the budget area to remember why this month salary was higher.
Also, it is easier to put savings plans in place as you enter the bonus. Whenever I have a higher amount coming in, I try to net it out by either increasing savings or increasing payments to a loan. This helps you do a better job meeting your goals. Otherwise, it is very easy to spend that extra money that lands in your account.

Category Group: "I2 Work Reimbursement"
I do the same thing. This might not apply to you, but periodically I have a set of things that I get reimbursed for (work travel for example). It is easier to "net" this out of your reports so that it does not look like you had a big income. Also, I use the same category both for the "expense" as well as the reimbursement "income" The idea is that this category: "Professional:Reimbursable" should net to zero through the year. If it isn't in a spending report, then that is a sign to go fix something.

Here is a clarification I want to add based on a similar discussion on the Quicken boards:
There are two tools in quicken. First, there are Categories (the "Category" field in every entry). These are the tied and true categories that everyone uses to track spending. You can see these by going to the menu item Tools->Category List (or hold down Shift+CTRL+C).There is a second classification area in Quicken called "Category Group". You can see this when you are creating or editing a category. Look in the dialog box for a field called "Category Group".What I am saying is that this allows you to "group" these smaller categories together. This is really useful in the budgeting process. In the budget tool in Quicken 2006, on the budget tab, look for a little check-box that says "Show Category Groups". This let's you see your budget at a much higher level. These are the category groups that I created. it is much easier to think of "income" in terms of you net-income than to have to create all the line-items in your budget for taxes, insurance, salary etc. With my method, you still created these, but they are bucketed together with the category group and you can roll-up and just see the category group line-item and not all the smaller categories.

Creating and Using Spending Categorization (Part 1)

"Let honesty and industry be thy constant companions, and spend one penny less than thy clear gains; then shall thy pocket begin to thrive; creditors will not insult, nor want oppress, nor hungerness bite, nor nakedness freeze thee" - Benjamin Franklin

Building a budget is instrumental to getting control of your finances and having a financial strategy.

I spent a lot of time working on the right categories so that it was actually useful and easy to have a detailed budget while not getting overwhelmed with minutia and monthly variability.

Here are the category groups (note the Categories) I have used to slice and categorize my income and spending.

Note, I created leading characters (“I1” for Income, “P” for Payments). This allows sorting in reports reports (e.g., my salary is listed first). I use these to group together multiple Quicken Categories.

Income Categories
I1 - Salary-Self
I2 - Salary Bonus-ESPP
I2 – Work Reimbursement
I3 - Salary Spouse
I2 – From Goals Saving Short Term
I3 – From Goals Savings Long Term
I3 - Other Income

Expense Categories
P1 – Credit Card Payments
P1 – Loan Payments
P1 – To Goals Savings Long Term
P1 – To Goals Savings Short Term
P2 – Non Discretionary Expenses (Monthly)
P2 – Non Discretionary Expenses (Periodic)
P3 – Discretionary Expenses (Monthly)
P3 – Discretionary Expenses (Periodic)

To see these show up in the Budgeting tool in Quicken: In the budget tool in Quicken 2006, on the budget tab, look for a little check-box that says "Show Category Groups". You can also see category groups when you are creating or editing a category.

Applying Physics to Financial Management

As an engineer by training, it is interesting thinking about household finances in physics and engineering terms. One area where this maps is in smoothing out your monthly financial cash-flow.

As I mentioned previously, it drives me crazy when I have a set spending plan and then some unplanned event comes along and whacks my carefully planned out budget allocations. Being able to manage your cash-flow is critical to starting to save money and really have control of your finances.

If you can manage your budget for the week, you can better control your spending for the month. If you can control and meet your budget target for each month, month after month, you will be able to hit your goals for the year. If you hit your goals for the year, you will be on your way to meeting your overall financial objectives. The key is to eliminate the "noise" from your daily, weekly and monthly budget.

The way I think about this is to create a smooth pattern. I know, and can plan for, all the bills that can be expected. I also know, and plan for all the unexpected bills.

Back to physics. Look at the following diagram (borrowed from http://www.csis.ul.ie/staff/currencies/CS5631_Sound_synth/Wk2_Lec2.HTM )


Here you can see that as you add multiple "waves" together, the result (the bottom-line), looks chaotic. Imagine every hump being a month on the bottom line. Some months look like you are able to save money, other months things just come "out of nowhere" and you suddenly spent much more than you were planning to spend. Now you are deeper in debt, or you had to give up your first savings nest-egg, etc. Periodic examples of this are things like the holidays, car-repairs, tuition, etc.

I have found that if you start really using a spending tracking tool such as Quicken or MS Money, you can start to have the ability to really track your expenses. This will let you tease-apart your spending. You want to find your "Fundamental" spending pattern, then build into your budget all of the additional "waves" that are going to come along and knock you out.

What I did was then create savings goals for those unexpected areas, and I simply included them into my monthly budget allocation.

For Those With Bad Credit Habits: The Benefits of Debit Cards Over Credit Cards

I have found that debit cards were really useful when I was working to eliminate debt.

A number of financial advisors direct people who are having spending problems to use the "Jar" technique. This is a bit out-dated and probably not pragmatic, but the approach is sound. Basically, the idea is to have a number of empty envelopes that you put your salary into as you get it. You would have one for the rent, one for groceries, one for gas, etc. Then, as soon as you get a paycheck, you drop your cash in the envelopes for the month. This technique was used to help protect people from overspending. I haven't seen this written about in modern financial books but a number from the 1970's and earlier espoused this approach. This probably made sense in the days prior to widespread credit cards, ATMs, electronic banking and computers. However, the principle is right on (forced budgeting).

Take a look at http://www.mvelopes.com/ I haven't used this service but it looks like the modern equivalent to what I am describing. I personally use Quicken but this service may be easier.

The issue with credit cards is that they easily let you overspend. There is no "I spent my salary for the month so I can't go to dinner out with the gang tonight". Instead, credit helps drive the immediate gratification consumer culture and people easily overspend.

You probably should initially cut up ALL your credit cards. This is a good way to go cold-turkey, but it can be kind-of a pain from a day to day basis. After all, who wants to walk into the gas station to pay when you could get in and out with a swipe of the card?

If you are trying to go cold-turkey, look at debit-cards for benefits:
- They are very similar to paying by cash or a check. You need to have the money in your account. Your money is debited immediately and you don't pay interest.
- If you are the type that doesn't do extensive financial management and check-book balancing, it makes it easier to manage your spending by watching your bank balance and avoiding getting hit with a big credit card bill at the end of the month.
- They provide all the convenience of a credit card (fast access, not having to run to an ATM).
- Many banks provide cash-back as well. I get 0.5% back for debit-card transactions.

(NOTE: Do not get caught in the trick of spending more because you get cash back. Drop this until you have paid off your debt and have proven to yourself that you can consistently pay off all your card balances every month. You are losing FAR more in interest charges if you keep a balance then you will ever make in cash-back).

So, in summary, if you are looking for a way to cut out your credit card spending, I strongly urge you to move to debit cards for the time being.

Make it a goal to live debt free

Charles Dickens so insightfully wrote: "Annual income twenty pounds, annual expenditures nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds aught and six, result misery."

One of the biggest obstacles to financial freedom is debt. If you have a lot of debt, you are basically a slave to it and to the person who owns the debt. The unfortunate thing is that many people get into this situation voluntarily. You slowly spend more than you earn and slowly (or not so slowly) build up a mountain that you can't get out from under.

I know it sounds impossible, but you should make it a goal to live debt free. Now, there are some people that can mange complicated debt and investment strategies, but for the vast majority of us, debt, and the ease of getting into debt, is an insidious poison. Here is my basic premise. If you cannot pay for something this month with cash, what is going to change next month that will enable you to pay for it? Can you really handle spending money at twice the rate with next month's salary to pay for the things you are charge this month and the things you will be charging next month?

One of the issues that hits people is something that I call, "unexpected miscellaneous big expenses". At one point, when I first was trying to figure out a financial plan and to try to eliminate my debt, I kept getting hit with what seemed to be surprises to me and that would completely destroy my budget for the month. One month it was the car DMV registration that I wasn't expecting. Then we had to renew insurance and the premium was higher than I expected. Then the washing machine broke down. Then we had a car repair that cost a lot more than planned. Then we this and that and this and that etc. etc. etc. It was really frustrating. How could I get out of debt if every month there is a "surprise" waiting for me? I started getting disheartened and started thinking that budgeting was a fantasy and would not work. Miscellaneous big expenses were completely disrupting my ability to try to set a budget.

I think a problem is that too many people put these expenses on a credit card thinking they will be able to pay them off easier over time. This is a double-whammy.

Here is one way I tackled this (I still use this strategy today).

I created a planning budget line-item called "MiscBigExpense" for all the miscellaneous big expenses that had been plaguing me. Then, I went back over the past months and I totaled up all the unexpected expenses. Then, I averaged them out for the year and created a spending plan that took into account that I would have these expenses. That meant that I had to cut back in other areas. Not as many dinners out. Maybe a few less movies and recreational activities. However, this was a key to building the right plan that would start to contain "shock" absorbers for the future. This is one of the fundamental principles that I want you to also adopt. Plan for the unexpected (actually, most of these things actually should not be unexpected, hence you should plan for them :-) ).

As I am re-reading what I have just written, there are a few things hidden between the lines.

1) Financial Automation with a computer. Quicken. I rely very heavily on Quicken. Quicken is a program that you can buy that is simply amazing. It will help you cut through and really manage your finances. I strongly urge you to use a financial tool such as Quicken or Microsoft Money. I am a serious power user of Quicken and I will detail specifics in the Blog on how I have done things with Quicken. I am sure the other financial packages can easily map to what I have done in Quicken. I think you are going to waste a lot of your time if you don't use a tool like this. I can go into more depth on this in a later post.

2) Budget: You have to build one up. Remember the 100's of books I told you that I read. Well, I can tell you that very consistently, almost every single one started off with: (1) figure out where you are (count up all your accounts and balances) and (2) build a budget.

So, back to debt. Get rid of it. It is terrible. Here are a couple of books that I recommend you read that outline both philosophical and practical steps to thinking about and reducing debt:

1) Your Money or Your Life

2) Nine Steps to Financial Freedom

Given I am new to blogging, I am not sure how much interest there is in the specific steps I took to get out of debt. I had a mountain of credit card bills and I developed some solid strategies and an approach that helped be crush the debt and move on to higher ground. Please let me know if you are interested in hearing more about the details to follow. financialfortress@yahoo.com

Here is a simple equation: (Money Earned) - (Money Spent) = (Money Saved)

I know it sounds simple, but it is an extremely important point. There simply is not a free ticket to getting out of debt and to saving money. You have two primary areas you can control. You probably have the most immediate control over (Money Spent). Next, you have control over (Money Earned) but is isn't as easy to move this one quickly.

Your goal, to eliminate debt, is to drive these numbers so that (Money Saved) is as high as possible every month so that you can apply that to bringing down your debt. Anyone who is pitching "get out of debt" fast strategies, or pushing "consolidation loans" should be kicked out of your life. These people are just trying to increase their own (Money Earned) :-) , but they want your money. Seriously, you can juggle accounts to manage interest rates, but DO NOT think things will get easier if you just get a consolidation loan. You need to go to the root of the issue and figure out how to get your income and expense in a fashion where you can start apply extra income to reducing your debt.

Look at the graph to the right. Let's say that you are starting this year off $10,000 in the hole. If you don't do anything to change, whatever practices you are following will probably dig you deeper in debt through the year. Now, look out and calculate just how much you are going to have in income through the year. Income includes everything. The only way you are going to get out of debt is to ensure that you spend much less then you make.

You should make getting rid a debt a high priority. Get passionate. Hate your debt. Think about all the ways you can get rid of it. Think of it as a terrible enemy that if you don't get eliminated it will cause years to try to catch up later. I guarantee you. If you focus your mind on a goal, you will be successful.

Increase Income:
The first thing you can do is increase income. Look around the house at all the junk you have accumulated. Think how many things in the house are not actually "yours" because you are still paying someone (the credit card company) for the privilege of borrowing these things. Unclutter your life and sell things you don't need and then use the money to pay down your debt. You will be amazed at what a liberating feeling this is. Also, remember, the more stuff you have, the more time and money you spend storing it.

More stuff means you need more space (perhaps more rent). Maybe you have a storage shed that you are renting somewhere for your important "stuff". Things cost money to maintain (a spare motorcycle, boat or other hobby equipment). Think of all the money you spent buying something, then how much time and money you might spend maintaining it. Do what you can to generate income quickly but shedding possessions that you do not really "need". You need to take a critical look at your priorities. Do you want to be working day-in and day-out to make money to pay interest so that the banker can have a nice house and a nice income? Or, do you want to start working for yourself and having your earnings be able to go to long-term goals and savings for YOU?! I think we know the answer. However, YOU have to change your habits to make this happen.

Decrease Spending: This is key. I will post more on this later.

In summary, debt management (and elimination) is part of the foundation to a financial fortress. You cannot have a financial fortress if the foundation to your castle is rotted out and hollow because you are overwhelmed with debt.

Why Financial Fortress?

The goal of this blog is to help people better manage personal finances. Whether you are just getting started in life, or if you have a pile of debt and credit cards and are looking for solutions, or if you have significant assets that you are looking to invest better, I plan to provide advice and learnings that I have picked up over the years to enable you to build your own financial fortress.

Why a fortress analogy? I have found that one needs to have multiple layers to a financial plan. Just as a good fortress provides multiple layers of defense and shelter to occupants, a good financial plan provides layers of defense and levels of security. A fortress has outer moats to guard against the unexpected; there are outer castle walls and inner castle walls. There are high towers and key points that can absorb the shock of attack. In short, there are multiple layers of defense to guard against the blows of marauding armies. Additionally, the inner castle shelters a family from rain, sleet, snow and storms. The fortress then provides protection for an area to allow investments to be made for future harvests. In the same way that there are multiple levels of defense in a fortress, there need to be multiple levels to your finances. You need protection in the case of unexpected job loss, financial hardships from surprise bills. You need a plan to provides a solid fortress to defend against the day-to-day surprises that life has in store. You need to build up a financial strategy that will provide shelter on that rainy day and that will help you have the confidence and foundation to make more investments for your future.

Why listen to me? My goal is to help others learn to build financial fortresses of their own. I successfully (and much more quickly then I could have imagined), eliminated all my debt, built a serious financial foundation, and now have significant financial assets that I manage and invest. I didn't do this over months but I did it over years. I think anybody with the right advice and the right discipline can do what I did. I hope to be able to share what I have picked up with others to help them more quickly get on the path of building their own financial fortress.