Budgeting without the Maruchan diet
December 19, 2011 11:28 AM   Subscribe

Help a capitalism n00b manage her soon-to-exist money.

Graduating university and lucky enough to have landed a sweet, well-paying job (woo!) starting in the spring!

Except, this is the first time in my life I'll have a non-negligible amount of money and I would like to learn how to (intelligently) manage it.

I come from a family of self-described capitalist n00bs, so I basically have no intuition or background for this kind of stuff. I also have a generally poor attitude towards "capitalists" and "budgeting" because of several friends who were really into this sort of thing but would do things that just irked me to no end, like:
- talk endlessly about money-making schemes
- eat pb&j for lunch every day because it was their calculated most cost-efficient meal (as a full-time engineer...making plenty of $$)
- buy donuts off their friend for 50 cents each and turn around and sell them for $1 to others (um? okay....seems petty and really stupid)
- stress and bitch about $$ for an upcoming trip and still go on it anyway but with tons of money guilt (why not just either NOT GO or go and ENJOY IT?)

Basically I want resources (books? blogs? podcasts? online classes?) to learn about:
1) relevant investment stuff for when you're young (I have no idea how stocks work nor have bought/sold one ever... seems like hocus-pocus to me), but I feel like I'll have enough money that it can start to "make money for me" as they say...if only I could figure out how...
2) how to come up with reasonable budgets for myself based on my income -- how much do I need to save vs. can blow on partying and trips to Europe?
3) how to make money stuff a little more fun instead of filling me with an overwhelming sense of BOREDOM and feeling like I'm turning into a pb&j-luncher.

In case it's relevant: single for now, childless for the next decade and/or forever.

Stuff I've done so far:
- Read Rich Dad, Poor Dad, so I think I ~get the idea of assets vs. liabilities
- Set myself up with Mint.com
- Looked over previously, previously, previously

Special snowflake detail:
I plan to leave the US permanently or semi-permanently in the next say, 5 years. I can't even begin to imagine how that affects money management...? (Not 100% on where I'll end up yet, though.)
posted by mokudekiru to Work & Money (19 answers total) 28 users marked this as a favorite
I'd start with Get Rich Slowly.
posted by craven_morhead at 11:35 AM on December 19, 2011 [3 favorites]

Ric Edelman's The Truth About Money is a good primer on practical finances.
posted by Johnny Wallflower at 11:47 AM on December 19, 2011

Okay: first a bit of good news -- if you're as young as you are, you really don't have to know how stocks "work". You are young enough that, if you start saving now, you can just start an IRA or something and have your bank pick how to invest your money on your behalf. All you need to tell them is how much "risk" you want them to assume; if you're really young, this may be a good bet because you have enough time before you retire to make your money back if when you're 28, say, the stock market goes screwy. But if that freaks you out, just tell your bank not to be too risky, and they'll do that -- you may not make as much money on your investment, but you'll still make a good amount, and you won't risk losing as much either. But you don't have to sit there deciding where your bank is going to invest your savings in -- they do that for you. All you have to do is start putting money into an IRA every year.

And that's a wise thing to do -- because that also lets you save on your taxes. So for no other reason, do that.

As for the budgeting: the rule of thumb I've heard is that no more than 1/4th of your monthly income should be put towards rent or mortgages or housing. So that's about 1 week's pay. Working out the rest of the budget is something that comes with practice -- only some hands-on experience with seeing how you personally do things, and going through a couple months where money's a little tight -- will help you figure that out. But that's okay -- we all do that.

One good tip I got to make sure I didn't get overly obsessive with money, and to make sure I spent some money on myself rather than being all self-restrictive, is to put 10% of all my paychecks into a separate savings account, which I think of as the "I'm Worth It Fund". (I got the name from the friend who told me about this.) Then any time I want to go to a movie, go out to dinner, go on a vacation, etc., the "I'm Worth It Fund" is where I get the money for it. This has been a great move -- because I've already established that that's what it's for, so I'm more likely to use it for fun stuff, but it's also a finite number, so I don't go too crazy.

As for how to make sure I automatically pay bills, save, etc. -- I set up some automatic transfers from my checking account every week; when I got my first paycheck, I calculated 10% of that and set up an automatic transfer from there into a savings account (for the "I'm Worth It" fund), and a couple other automatic transfers to some credit card bills. It happens the day after every payday, so I don't have time to do anything else with the money. I don't even have to think about it, really. But this budgets my money for me -- if it's not in my bank account, I can't blow it on something stupid.
posted by EmpressCallipygos at 11:47 AM on December 19, 2011

I Will Teach You to Be Rich. Especially the section on automating your finances.
posted by TheOtherGuy at 11:48 AM on December 19, 2011 [3 favorites]

Read Rich Dad, Poor Dad, so I think I ~get the idea of assets vs. liabilities

Oh god, stay away from Robert Kiyosaki and anyone who gives even vaguely similar advice. This was a guy who said that Casey Serin was an example of a great entrepreneur.

relevant investment stuff for when you're young (I have no idea how stocks work nor have bought/sold one ever... seems like hocus-pocus to me), but I feel like I'll have enough money that it can start to "make money for me" as they say...if only I could figure out how...

This is my boiler-plate overall personal finance advice for people in general. The "make money for you" aspect is overhyped in my opinion, the way that most people determine their overall financial future is by keeping their spending down and not making big mistakes. Picking a simple investment like a broad index fund and shoveling money into it every month will do better for you in the long run than complicated investment schemes and spending a lot of time and effort trying to be an investment genius.

how to come up with reasonable budgets for myself based on my income -- how much do I need to save vs. can blow on partying and trips to Europe?

Step one is to figure out how much you're spending normally, and Mint is great for that. Once you have that, you can figure out what are your big priorities that you need to put money aside for (vacations, buying a car, etc.) and what you are spending more than you would like to spend on. PB&J luncher might feel like lunch is not a big priority and that saving a few bucks a day is worth the monotony, whereas other people might cut down on eating out to move toward making more meals out home and eating healthier. If you just pluck a number out of thin air for your budget you're probably going to end up so far off that you'll give up on budgeting at all, it's much better to use a budget as a sort of guide, so that you can see a big red flag if you have been spending too much on clothes for the past few months or something like that. Also for most people it's easier to stick with an overall spending limit if you pay yourself first, by automatically putting money into savings or investments straight out of your paycheck before the money is available to spend.

how to make money stuff a little more fun instead of filling me with an overwhelming sense of BOREDOM and feeling like I'm turning into a pb&j-luncher.

Personal finance is not really an inherently fun topic so it's totally normal if tracking budget goals doesn't fill you with joy. Really making good financial decisions is more about not feeling horrible about your finance situation, such as looking at a $30,000 credit card balance or being 5 years away from retirement with no retirement savings. You should stay healthy financially the same way you stay healthy with your body, do the simple things to take care of yourself and have good backup plans for if things go wrong. If you do finances right, it should be something that you get a good handle on and then go on auto-pilot until something unexpected comes up.
posted by burnmp3s at 11:51 AM on December 19, 2011

Another thumbs-down on Rich Dad Poor Dad.

It's a little obvious, but if you are really as much of a beginner as you say, I'd suggest beginning with the Dummies series (there's even a Personal Finance in Your 20s for Dummies).
posted by Mr.Know-it-some at 12:00 PM on December 19, 2011

+1 for I Will Teach You to be Rich. Crucially aimed at a younger demographic, it's funny, no-nonsense and cuts through the cliches about personal finance.
posted by the foreground at 12:01 PM on December 19, 2011

Check out Mutants old posts and he even has a recommended book list.
posted by Wolfster at 12:02 PM on December 19, 2011 [1 favorite]

Oh also for resources the I Will Teach You to Be Rich and Get Rich Slowly personal finance blogs mentioned above are good, as is The Simple Dollar. For books The Bogleheads' Guide to Investing is a good introduction to straightforward investing and The Complete Idiot's Guide to Personal Finance in Your 20s and 30s is a good overall introduction to basic personal finance topics.
posted by burnmp3s at 12:13 PM on December 19, 2011

I would agree with most of what others have said above, with the exception of anything involving "hav[ing] your bank pick how to invest your money on your behalf." I think this is a really bad attitude to take. Passive investing is a great thing and I definitely recommend it, but there's a gaping chasm in attitude between investing passively, not chasing the market, using 'Target Retirement 20xx' funds, etc. (all good things), and relinquishing responsibility for your money off to some indistinct third party (very, very bad).

You need to take, and keep, control of your finances. Unless you become stupendously wealthy, it's unlikely that you'll be able to sufficiently incentivize other people to look after your money with the same degree of care and attention that you would devote to it. After all, you're the one who is going to need to retire on it; they aren't.

I've watched a number of people -- mostly older people, but not entirely -- get really burned with bad advice from shady commission-based "financial planners" or "advisors" provided by their banks or other institutions, who talked them into products that turned out to be expensive or unprofitable (for them; presumably they were profitable to the person pushing them) in various subtle ways.

So ... I'm not saying that you should be paranoid, or become some sort of obsessive stock-ticker-checking day trader, it just means that you have to keep yourself in the driver's seat. Make sure you're the one making the key decisions.

Anyway, in terms of specific advice ... the standard "must dos" are to look into the retirement match provided by your new company. If they offer any sort of "free money" in return for contributing into a 401(k), do it. Contribute whatever the maximum is, so that you don't leave any money on the table. But probably don't contribute any more than that. Once you've obtained the maximum employer match, open a Roth IRA with a reputable company (I like, and use, Vanguard -- they're non-profit) and max it out. Although it's impossible to say without making some projections about your future income, tax rates, and a lot of other stuff, that combination will probably be the most advantageous to you, as a currently-young worker, in the long run. And then if you still have money left, I'd put it into post-tax non-retirement savings for future expenses like a down payment on a house, education of your possible child-spawn, mid-life-crisis Lamborghini, whatever. (The vehicle you choose for that savings depends on the time you think you might need it; it's probably a separate question.)
posted by Kadin2048 at 12:21 PM on December 19, 2011

Mint is good, but I didn't really get seriously invested in the idea of budgeting until I picked up YouNeedABudget (or YNAB for short).

YNAB is the best tool for anyone interested in tracking cash flow as it relates to growing your net worth.

I recommend it regularly to any Members of my Credit Union who are learning to budget.

I also recommend that you enter transactions manually, rather than import them (or sync) with your bank. The reason being two fold: 1) I spent an inordinate amount of time correcting, or manually editing almost all my transactions for categories and easier-to-keep-track-of names, and 2) When you "sync" it seems to psychologically make you less interested in taking an active role in knowing where your money is going.
posted by smitt at 1:10 PM on December 19, 2011 [2 favorites]

The easiest way to healthily budget (not crazy-budget), is to set it up when you are where you are now, ie before you start the job, and have to change all sorts of automatic payments.

My general plan: Find a decent bank.
Set up 3 bank accounts.

Your Income goes into the first, your bills account, and all of your automated payments come out of that. And basically? All your payments should be automated. Phone, power, rent, all of these things can be set up with automatic payments or direct debits, and you don't have to think about it, worry about it, and you always get the early payment discount if there is one.
This account does not have an eft-pos card, or debit card, to make it harder to transfer money out except if you actually need it.

The next account is your spending account. Each week, your spending money for food & fun comes from the Income account into this. A debit card is handy, so that you can buy stuff online etc.

The third, is a savings account. Either set up an automatic payment which dumps a small amount of it in here each pay, or set up a 'sweep' which moves money from the Bills account into here if the Bills account goes over a certain amount.
This is one of those savings accounts which is separate from your other money, maybe you only get bonus interest from it if you don't make any withdrawals. Maybe it's with a completely different bank so you don't even see the balance, and it just doesn't exist, except as a safety net that provides a hell of a lot of peace of mind (seriously, even a few grand in there provides a lot of 'I can handle it' when things go bad).

The 50/30/20 budget provides a really good guideline for how much you spend on essentials, luxuries, and savings.
The trick is, if you spend less on 'essentials', you can actually have way more fun spending on luxuries.
The easiest way to do this, is to rent/buy way less house than you can afford. In fact, not more than 25% of your income is a really good rule of thumb.

Finally, on the lunch thing, make sure the money you are spending is on things you really appreciate. Lunch each day kind of blurs all together, so, what's better? The same cafe lunch each day, or a simple packed lunch most days, and then trying out a new restaurant for lunch, and getting something nice, maybe with a friend, once or twice a week?
Spend on the stuff you'll remember, and appreciate!

It's the frequent things that add up.

If you're wanting to move overseas, then basically, squirrel money like a mad thing.

One thing that often motivates me to save, is thinking about how far my money would get me on holiday in say, Vietnam. For $15, that's basically accommodation and food for the day!
posted by Elysum at 1:26 PM on December 19, 2011 [2 favorites]

You'll definitely want to familiarize yourself with a bunch of the investment advice you've gotten so far. There is some really good information in those responses (also, Rich Dad, Poor Dad is crap, sorry).

I'll make some suggestions of a more day-to-day logistical nature.

You should start out by thoroughly analyzing your spending for a few months. Use excel, Quicken, MS Money, Mint (which is probably the easier), or something to analyze each and every expenditure. It will be boring and it will suck but you'll only have to do it for three or four months to get a good handle on what you spend the most money on, what is important to you, and where you can save some extra money.

Longer term you want to have a checking account, a savings account, and a credit card. It helps if they are all at the same financial institution and make sure you're not paying monthly or annual fees if at all possible (especially for the credit card). On the first of the month, bring the balance of your checking account to one month's worth of expenses. Use your credit card for every single purchase that you can. Not the debit/check card but the credit card. You won't be able to put everything on the card (IE rent/mortgage) but you should use it to pay for as much of your spending as you can so long as you don't incur extra fees to do so. Towards the end of the month, you'll get a credit card statement, you want to pay the "statement balance". This is the balance that you need to pay so that you won't get charged any interest. Always, always, ALWAYS pay the whole thing off. Once that payment is done, transfer money into or out of your checking account to bring the balance back to one month's expenses.

Let's say, for example that you make $1,500 per bi-monthly paycheck and have $2,500/month expenses which includes $1,000/mo rent.

Day 1 balance: $2,500
Day 5 balance (rent check clears): $1,500
Day 15 balance (payday!): $3,000
Day 20 balance (random bills): $2,800
Day 30 balance (paid again!): $4,300
Day 31 balance (credit card statement balance $1,300): $3,000-$500 (transferred to savings)=$2,500

It can sound kind of complicated but here is the method to my madness. Let's say that you had some emergency to deal with on day three in my example that cost you $1,100. If you were using a check card/debit card, that money comes out of your checking account and, if you're not keeping really good track of that account, it gets overdrawn when the rent check clears. By using the credit card for all of your purchases, you're using the bank's money and keeping your cash in the bank. You worry a LOT less about what you balance it and more about what you're spending. The other handy thing is that you can add up your paychecks and subtract whatever you transferred to/from your savings to get back to your starting balance and blammo!, that is what you spent that month. In the above example Paycheck 1 $1,500 + paycheck 2 $1,500 - $500 transferred to savings = $2,500 monthly expenses.

If it is abnormally high or low, you can do some more research to figure out why. If things are weird for a few months in a row, you can go back to looking at each and every transaction and categorizing them to figure out if you need to eat more PB&J or buy fewer pants or whatever but you can mostly skip all that you just have to spend a few minutes dealing with your cash each month.

The thing I don't like about budgeting your savings (IE put $150 from each paycheck into savings) is that it can feel like permission to spend money of frivolous stuff. You start to tell yourself, "Well, I've already met my savings goal this month so I can spend the rest on booze and hookers!" When you really should be upping your savings goal. You can treat a savings goal like another expense or just have money taken out of each paycheck but you should do that in addition what I've outlined above. Your goal is to make the amount that transfer into your savings account bigger every month. The other nice thing is that, when you DO make a frivolous expenditure, it feels better because you know you're treating yourself rather than rationalizing it.

Once you've the checking/savings/credit card routine established, you can start adding layers.

You should try to keep six months worth of expenses in that savings account. You can transfer the excess out into another layer once per quarter or maybe when it hits some dollar amount, it's pretty arbitrary. That next layer could be some kind of highly liquid, low-risk investment. Something like a money market fund is my go-to example(except the returns have sucked compared to savings accounts for quite some time). The next layer should have more risk and be less liquid, some kind of investment grade bond fund. You can keep adding layers as you save but you should only need one or two more since you shouldn't need access to those funds for a good long while (10+ years).

The balances and time periods that you choose for these different layers are completely up to you and what you're comfortable with and of course YMMV but this has been working quite well for Mrs. VTX and I for a really long time. It's easy to manage and low stress and gives you a good picture of your financial situation at all times without forcing you to do more research than you want or need to.
posted by VTX at 1:30 PM on December 19, 2011

As MoonOrb says, leaving the US will have a huge effect. A lot of people in the US would recommend that you put money into long-term investments designed to minimize US tax, but your tax situation will change drastically when you become a resident of another country (I'm speaking as one).

If you're really sure you're going to become a full-time non-resident of the US in five years, I would suggest you save up a big pile of money in mostly liquid form in whatever way works for you (maybe some CDs that will mature at the right time). You'll need a cushion when you expatriate, and many visas have income or savings requirements.

For example, to get my visa, I had to show the Immigration people the last three months of my bank statements to prove that I had savings of X or a monthly income of Y. I'll have to do this every year until I've been here long enough to qualify for permanent residency.

When you live abroad, the US still wants to tax you, even if your employer is in your current country and you never set foot in the US again. However, you can exclude the first big chunk of income from US income taxes (Google "foreign earned income exclusion"). This means you won't get taxed by the US for that income. However, that income also won't be considered applicable for an IRA or for other tax-advantaged investments that are based on income. It's like you never earned the money (though, of course, you're living on it). And, of course, you might have to pay local income tax.

So take whatever matching funds your employer provides, but only if they will go into an account that you can still benefit from when you're no longer a US resident. There's a lot of information about expat taxes this site.
posted by ceiba at 1:34 PM on December 19, 2011

Oh, I forgot credit.

Yes, you need a credit card, because otherwise you don't have a credit history (I'm belabouring a point that doesn't really need to be made, merely because my Mother couldn't buy a house when I was a child, even though she had 1/2 down; because she had no credit history - yep, never been in debt, no hire-purchase).

Having a credit card, that you have had for a very long time, that you always make payments on, is a good thing.
I forgot to mention it, because my credit card is with a separate bank to my normal bank, and I don't really go into debt on it. And, I have an AP going in monthly for what the minimum payment would be if I did make a small purchase (just so I don't buy something on it, and make a late payment by mistake).
Interestingly, the bank doesn't really ever raise my credit limit, because I'm not making them any money with how I use the card, but my credit rating is great. I'm basically only cultivating my credit rating for if I ever buy a house.
And boy, do I cultivate.

If you're having to use a credit-card to tide you over between paychecks, you're still, in a sense, having to live paycheck to paycheck. Even when I was in a crap job, and being paid monthly, I had the money in the bills account to cover things, and as far as I was concerned, I was being paid weekly. Because that's when I got *my* money to spend.

And, personally, be wary of various plans to get a couple of percent more interest by having your savings account as your spending account, or even 'getting more interest on your money' by putting things on the credit card and then paying it back monthly. When you look at human psychology, people lose far, far more money through the more frivolous/less conscious spending this encourages, than they save in a measly few percent interest in a month.
posted by Elysum at 4:56 PM on December 19, 2011

Highly recommend John Bogle books and anything written by his ardent followers, The Bogleheads.

And a great forum for asking specific advice is The Bogleheads' forum. It's mainly, but not exclusively, US-centric and there are bound to be people in the same boat as you.
posted by NailsTheCat at 7:49 PM on December 19, 2011

If you are uncomfortable with "capitalism," then you should check out a credit union and ethical investing.
posted by Gor-ella at 9:01 AM on December 20, 2011

Basically I want resources (books? blogs? podcasts? online classes?) to learn about:

1) relevant investment stuff for when you're young (I have no idea how stocks work nor have bought/sold one ever... seems like hocus-pocus to me), but I feel like I'll have enough money that it can start to "make money for me" as they say...if only I could figure out how...

It's a lot to take in at once, but the Yale Financial Markets Course has a wonderful video lecture series by an economist I like. Pace yourself, and realize that the little math there is is less important than the concepts; you can always rewatch or hit up wikipedia for the details later when you need them. There are also some interesting guest lectures, from the start of the subprime collapse. If you're not a student of history I suggest you skip these because the greater historical context dramatically changes what you should learn from them-- for example, Andrew Redleaf's lecture details his fund's pursuit of guaranteed returns using things like fraud clauses on bonds, but one of his partner firms would be outed as a Ponzi scheme months later, and not long after his firm bailed on the partnership.

Bookwise, I've read I Will Teach You To Be Rich, and I generally agree with the principals it espouses, but I would caution you that "young" here is mainly about dropping product placement references and sexual allegories, in an attempt to make money management "edgy". Liz Warren's book All Your Worth gives most of the same advice with less shall we say, testosterone. IWTYTBR does however, offer far more practical, actionable advice.

Personal investing, I still haven't found a perfect book for yet. Most Keep It Simple books espouse lifecycle funds, but the more research I do the less I think they offer any value. My strategy at this moment is a binary portfolio of sp500 mutual fund (very low expense ratio) and AGG bond funds (again, low expense ratio), with a target allocation between the two. I feel lifecycle funds do basically the same thing for 10x the price.

2) how to come up with reasonable budgets for myself based on my income -- how much do I need to save vs. can blow on partying and trips to Europe?

Well, obviously the first step is to make sure your annual budget balances. Plenty of books and tools to do that, but I just use spreadsheets and GNUCash. You can budget post tax, but I like to do pre-tax so I can evaluate various options like renting vs buying a home.

As a young person you probably don't have a lot of recorded data to go by.. All Your Worth gives a big picture budget to jumpstart your planning: 50 percent needs, 30 percent wants and 20 percent savings. If you need more detail, the BLS publishes data on consumer spending, but it's averaged out over a lot of households, so individual data points may not make much sense. IIRC, it provides bigger picture data as well, so don't have to pay attention to individual line items like "grapes, dried" etc.

3) how to make money stuff a little more fun instead of filling me with an overwhelming sense of BOREDOM and feeling like I'm turning into a pb&j-luncher.

Set goals for yourself. Generally these PB&J guys are extreme early retirement people with a twinge of Asperger's, who consider the same meal every day a feature not a bug. Recognize that people value experiences more than things, and that you probably put a premium on diversity. Set large and small goals to have a lifetime of experiences, and budget to make them happen. Set goals for retirement, but not just retirement.

Automate the mundane shit. Autobill pay is a wonderful thing as is direct deposit -- never forget to deposit your paycheck or pay the water bill again!. Tracking is also boring and can be automated. Mint.com is one option, but I just don't like their business model or their security model. GNUCash has two features that significantly help me out: online transaction pull and scheduled transactions. This lets me plan my spending 30 or 90 days out and not get surprised, and saves me the trouble of data entry on those annoying 20 way paycheck expense splts (health insurance, parking permit, taxes, 401 contribution, employer match, vacation time).

I also consider time an important thing to budget, and many of these penny-pinching activities don't pass the hourly wage test. Plus keeping a calendar helps you do the stuff you can't automate, and remember things you may need to do six months or a year from now. Every month has a todo list theme, like taxes or auto insurance or open enrollment.

One other book worth reading I think is Willpower, which outlines some science on the subject. Obviously not everyone's circumstances are outlined by willpower, but it does suggest that making decisions is ego-depleting (consumes willpower) and thus up front planning really helps.

I really have no advice on money for expats. If you really think you want to live in Japan long-term, I'd probably save up some for that, and put that narrow topic into ask mefi when it's closer to reality.
posted by pwnguin at 5:59 PM on December 20, 2011

Here is one tip that works but requires discipline. Find the best rewards credit card you can find. If you are into travel, get something like a Capital One Venture card that pays double miles. Pay for everything you possibly can with said credit card. Pay off the credit card every month. NO EXCEPTIONS. Never buy something you can't afford to pay for in cash. Get free plane tickets. Build credit. Win.
posted by jasondigitized at 4:50 PM on December 21, 2011

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