Let me start off by saying that I’m a long time Mint user (9 years) and I always rave how using Mint changed my life. This was back when I had no budgeting system in place and I was desperate to get visibility into what was going on in my finances. By simply being able to see where my money was going I was able to make significant life decisions that I am proud of.
I’ve since matured a bit more and my budgeting needs have changed. I still want to be able to see what’s going on with my finances but I also want to better plan for the medium and long term, and Mint isn’t very good for that. I am not a finance expert and the tips below are based on my own trials.
Because my family and I split time between the Caribbean and the US, our finances are split between the two. On the US side most budgeting tools keep pace, they over syncing etc but on the Caribbean side the banks are a lot less technologically advanced so syncing is not even available.
Visibility of finances also meant being able to understand what our balance and spending power was, taking into account credit card balances etc. With Mint I felt I never got a true sense of how income was spent because of what I felt was double counting of credit card payments (it should be a transfer between accounts but Mint never got that quite right).
Lastly the issue of currency conversion was lost in translation because I couldn’t import the info from the Caribbean accounts.
The solve this issue I initially planned to leverage double entry accounting principles. For the uninitiated double entry accounting is where every transaction is recorded as two parts where 1 account is debited and another corresponding account is credited. This seems tedious (especially if it’s being done manually) but it addresses a number of scenarios encountered when managing accounts including transferring between accounts, positive balances vs negative balances. After some research I saw that many developers before me come to a similar conclusion though the projects they started have stalled for the most part.
A co-worker recommended the Wallet App for budgeting and I wrote this article that describes how I set that up. This app has been a huge help in visualizing the flow of income as well as keep track of the spending targets that I’ve setup.
A lot of people have this notion that good budgeting and being financially responsible is stashing money away and spending as little as possible. I’ve always readily acknowledged those methods are not for me. I feel like assets are to be used whether it’s to create new opportunities or leveraged in some way. Having huge accumulation of savings isn’t the best thing.
When people set financial goals they set this lovely target, “I need to save $2000 to go to Europe in 6 months”. Then they begin Netflix and chilling, and cutting out expenses deemed unnecessary. The thing is for you to go to Europe in 6 months, you have to buy tickets, the value of which might go up by the time you save the entire sum. Also where are you stashing the money you saved? Are you putting it in a special account? You must put in somewhere safe how else do you not spend it?
To solve this issue I used a spreadsheet to plan my future spending in greater detail. Similar to cash flow projections I laid out all my income, recurring expenses as well as one time expenses. Each month the ending balance is carried over. You can see my template here
The advantages of this approach are :
Over the years I’ve invested mainly in stocks and the returns have been good. That said I don’t always have the time to do all the research needed to keep my portfolio in good shape. I’m also cognizant of the need to diversify my portfolio. Diversification is tricky because it’s not very straight forward to compare the return on different types of investment. Do you buy stocks? Do you pay of the mortgage?
To get a handle on what was going on with the mortgage, I created a spreadsheet that outlined the amoritization schedule. You can also use this calculator to get the same info.
The next step was to apply the additional payments. Using the calculator put in one future payment and see the net effect over the years. Use the reduction of the interest payments to calculate the savings in interest payments. You can now use savings amount to compare the return on invest of the same amount. To calculate the the potential return on an investment I used an investment calculator that accounts for inflation, and taxes. It should be noted that investment capital depreciates over time because of inflation, though home equity can improve over time if the home appreciates. You can factor this into your decision as well.
In my case my planned pre-payment yielded interest savings (7.2%) that was comparable to an investment with 9% yield over the same period. Even if I looked at an investment vehicle that yielded 7.2% that was tax free it still makes sense to pay off the mortgage because of appreciation of the home vs the depreciation of the investment capital because of inflation.
Figuring out the right mix of savings and investment is an important first step in planning for the future. The next step is getting into the specifics. My plan here is to make a wealth projection sheet similar to the one I use for setting my financial goals; this version of the sheet will be based on years instead of months. This sheet will also take into account ALL balances including the investment account, 401K, mortgage balance etc. The idea is to have a macro plan for what needs to happen leading up to retirement as well as post retirement.
Getting a handle on your finances might seem daunting at first but these practical tips can help anyone get a better understanding of what is going on and what needs to be done.