Personal Finance 201

August 5, 2016 4:35 AM

(1) Are there resources you would recommend that tell you HOW to move from savings accounts and retirement accounts to a more sophisticated approach to personal finance (or can you tell me how you did it), and (2) if the answer is "pay a financial advisor," how much have you or would you pay for an advisor to build you a financial plan to execute yourself (one-time, fee-based)?

My husband and I are very fortunate to have a healthy amount of savings and retirement assets with (likely?) stable income. We are in our 30s with the first kid on the way (yikes!), we own a home (with plenty of renovation projects ahead of us, and most of the years left on the mortgage). We have a healthy emergency fund, max out our respective employer's retirement account offerings, and we toss a bit extra at the mortgage monthly. It seems that we might have outgrown my approach to managing our finances but I am not sure what the next step is.

For example, I think my husband and I keep too much in cash. I have always budgeted with separate savings accounts: one each for emergencies, travel, home renovation, charitable gifts, car expenses, etc. Hell, we have one for WINE! (The most important one?) At the moment, we have 14 savings accounts at Capital One 360. (Plus IRAs and such for retirement savings.) And this works for us. This is what I started doing when I got my first job, and what I did when my husband and I merged our finances and I started managing it myself.

However, as we always have a total cash balance of more than we need immediately, it may be that we would be better off with this cash in something other than savings accounts.

There are lovely tools on the Vanguard website and such that ask you questions about how long you intend to invest before withdrawing and what your risk tolerance is. That's fine, but I do not know how to map that to my life overall. How do you determine how much to contribute to a brokerage account (versus into savings or checking)? Do you map out scenarios for every spending category? "I expect to spend $x in travel each year for the next 5 years, with a super special $y trip in year 3, so I should invest in the following way." Do I need to build an Excel model and update it quarterly? Do I guess and hope that I am right?

There seems to be plenty readily available online on personal finance 101 (spend less than you earn, emergency fund, get the employer match) - and that was GREAT for me when I was 22 and was starting from scratch. However, we might be ready for the next level.

If you are in this position, how do you handle this? And if the answer is "pay a pro!" how much is reasonable to spend?

posted by teragram to Work & Money (13 answers total)

I don't think you necessarily need an advisor, but if you want one, you're looking for a fee only fiduciary advisor. I'd expect to pay $300-600 for a consultation.

Mostly it comes down to make a budget and stick to it. Your cash holdings should be the current month's budget plus short to medium term savings for things like vacations, and then a 3-12 month emergency fund. Most savings that has a 5+ year time frame should go into investment accounts. As you get closer to needing to spend that money, you might need to pull it out of riskier assets like stocks and put it into something safer to prevent a market crash at the wrong time from disrupting your plans.
posted by Candleman at 4:58 AM on August 5, 2016

I'm a pretty smart person with an inclination for numbers. So Mr moiraine and I have a sophisticated portfolio (we are in our thirties, with no kids yet). We have 6 months in liquid cash, a 'medium' term portfolio (for a house, children's education), a 'long' term portfolio (for early retirement), and a retirement portfolio for when we retire (can't take out before 55).

We track all our spends, as well as investment gains made to our portfolio

Doesn't need anything more complicated than an Excel spreadsheet. But you kinda have to like numbers, charts and Excel.

This book is a classic and helped me get started on investing: Intelligent Investor: Value Investing by Ben Graham

I track out personal spends into three broad categories: Needs, Wants and Savings. I read Elizabeth Warren's (yes, the Elizabeth Warren) personal finance book where she describes her Balanced Money Formula. Life is too short to have more than 3 categories. I use an app for this, but you can use an Excel sheet and it'll do. With the data I have, I can project for the next few years and come up with a good budget.

Beyond this, I read up a variety of blogs and personal finance articles. Took me about 3 years to get to where I am. I'm pretty happy with the state of our portfolios now.
posted by moiraine at 5:23 AM on August 5, 2016 [6 favorites]

And yes, I update our Excel portfolios quarterly. You don't need more than 2-3 portfolios. Each should serve a specific time horizon.
posted by moiraine at 5:29 AM on August 5, 2016

There are finance clubs, like book clubs, for this. It seems to me that you've got the saving not spending thing down pat, I'd hate to think how much you're wasting in bank fees and charges, let alone the organisational difficulty. You can be more grown up about this, put the money in one or a few buckets and just assign it to causes in your own mind. Work out what sort of investments interest you, and what sort of risk profile you want, then do your own research, then yeah, I'd you want, go pay someone $1000 to get one time no strings attached advice. Just remember TANSTAAFL , but lazy money is bad. Sitting in the bank is nice and secure, but lazy. Could be working harder for you. What the missus and I did was just buy blue chip shares in companies that we understood. Didn't ask anyone, didn't pay anyone, only put in what we could. It's working out fine.
posted by wilful at 5:31 AM on August 5, 2016

The hardest thing is deciding what you want - your priorities - and determining your risk tolerance, and an advisor can't help you with that (unless they're a psychic advisor, I suppose). Once you know what you want, the how isn't that complicated - read a couple of books on investing. When you have enough money to worry about estate taxes you might want to hire somebody.

The only secret about investing is, there really are no secrets. You can't get high yield plus liquidity plus complete safety - the reason the wealthy can make money on investments (and plenty of them lose money, too) is not that they have access to financial advisors, it's that they've got enough cushion that they can be more risk-tolerant.
posted by mr vino at 5:32 AM on August 5, 2016 [5 favorites]

This type of question gets asked all the time over on bogleheads.org, and there's always a wide range of responses. That is, there is no single best answer. It depends on your circumstances and preferences.

Generally speaking, you need to balance the drag of cash on your portfolio--it's not only not working for you, it's losing value to inflation--against your real and perceived liquidity needs (e.g. emergency or pre-paid vacation funds).

Whether or not you should invest some portion of your cash will depend on your time horizon and your risk appetite (i.e. as mr vino says above, there is no such animal as "low risk, high return"). The better the upside potential, the higher the chance that when you need the money it might not have earned you anything or may even have lost value.

Lots of people chase returns on their cash (CDs, TIPS, etc.) at very low interest rates, while others think that's too much work for too little return.

As to Finance 201, I'd recommend Jane Bryant Quinn's How to Make Your Money Last: The Indispensable Retirement Guide (2016).
posted by Short Attention Sp at 5:45 AM on August 5, 2016 [2 favorites]

Really you only need to worry about the next level once your assets reach a level where tax and estate planning starts to make sense. Also now that you have a kid you'll need to think about things like life insurance (term), disability insurance, things like that.

As far as budgeting goes, work with what works for you and don't over think it. Sure figure out what you need to save for non-essential things you want to do, but don't try to game things out too far in advance - life is uncertain, that's already why you have the liquid emergency fund right?

Do the 14 savings accounts cost you anything? If not, don't worry about it.

The only other question is how the long-term and medium-term funds are allocated between asset classes, and what the math is on paying down your mortgage given your marginal tax rate and what you expect long-term equity returns to be. If you have a low fixed rate mortgage and a high marginal tax rate, paying it off quickly may not make sense over thirty years - but that's a function of your risk tolerance as well. If your income isn't stable then maybe paying it off remains the dominant strategy? Again build a spreadsheet.

But realistically you are already doing a lot more than finance 101.

So far as investment selection goes, unless you personally have an interest in investing and the markets and will derive some pleasure from investing for yourself, the only reasonable advice for a 10 year plus money is to stay in low-cost passive equities.
posted by JPD at 6:02 AM on August 5, 2016 [1 favorite]

Hi! I'm you but 10 years down the road. When I was in your shoes 10 years ago, with a spouse, house, great jobs and baby on the way, our finances were great! [not quite as great as yours, but pretty darn good!]

Then we had a baby, and then another baby, and then my spouse left career to take care of kids, then got seriously, chronically ill, then got a masters degree to go into a field that works in the context of the physical limitations of illness and practical limitations of family life...

You see where this goes, right? 10 years on, our finances are a mess. We are paying a fee based financial planner ~$1200 to help us devise a plan. We're now back to a '2 great jobs' situation, and our house doubled in value during this interval, so things aren't disastrous, just messy.

It's really hard to anticipate how a baby will change your life. If I could talk to myself 10 years ago, I'd advise me to enlist the fee based financial planner, first to get a plan in place and second to have a professional relationship with someone who you can pay a little bit more to to think about and modify this plan when you're sleep deprived and stressesd and thinking about your colicky baby, sick spouse, crazy job, and not able to think about your money, you just need it to be there for daycare, tuition, books, and healthcare bills.
posted by u2604ab at 6:06 AM on August 5, 2016 [1 favorite]

the reason the wealthy can make money on investments (and plenty of them lose money, too) is not that they have access to financial advisors, it's that they've got enough cushion that they can be more risk-tolerant.

I just want emphasize something - pretty much everyone - small investors, wealthy investors, endowments, pension funds - they all end up earning about the same returns in a given asset class - they all end making the same mistakes (high fees, performance chasing). They are also all about as bad as one another at selecting asset classes to invest in. Managing Liquidity Needs, Time, and risk tolerance are the only things that really differentiate people.
posted by JPD at 6:07 AM on August 5, 2016

Well, the wealthy also practice sophisticated tax evasion, have access to corrupt schemes, and tend to pay less in transaction costs. But I can't recommend either of the first two. Transaction costs are a real thing, though, and as you investigate various options you should always seek extreme clarity on the fees, expenses, etc. that you will be charged.
posted by praemunire at 8:24 AM on August 5, 2016

I read an article many years ago that did an analysis suggesting that a higher cash portfolio with less bonds and more stock could have a slightly better return than a classic stock/bond split. Which is saying that it is ok to keep more in cash-like vehicles but then offset that with a higher percentage of stock. (Cash doesn't earn anything much but it has zero volatility compared to bonds so it can balance out the higher risk/higher return of stocks). What I did was use the Vanguard models but substituted some cash for bonds and then increased the % stock slightly.

By the way, don't obsess over your answers to the questions too much - it is as much about how much risk you can stomach as any magic, perfect number. Stocks give you more return in the long run but you have to be able to ignore the ups and downs along the way. (That's why you don't put money you need soon in stocks) However, mixing up your portfolio a little (US/international/bonds/cash) gives you lower risk at a minimal hit in returns. So, long term money should be mostly but not all stocks. (Mostly being 50-90% depending on your time horizon and risk preferences.

You migtht want to take a look at how much you would save if you tracked your 14 accounts on paper but consolidated them into a Vanguard money market account. It might pay just a little better and/or have lower expenses, especially if the consolidation allows you to get into an Admiral version of the fund. Be sure to multiply the saving by the actual amounts. A 50% increase in interest rates might not be worth if it is only worth $100 actual income.
posted by metahawk at 11:04 AM on August 5, 2016

Some day I will write up blog posts about this all or a amazon booklet or something. Part of the challenge is simply that there's a million ways to do things, and none of them are objectively wrong, and basically all of them represent local optimizations for personal circumstances. My own setup, for example, likely doesn't perform well for married couples. The other part is that PF201 is like 10 percent bookkeeping techniques, and 90 percent living life. Getting your financial affairs in order is a lot of work, but you eventually reach a point where the system is a well oiled engine that runs itself. You find yourself wanting to spend time improving things, but the returns are increasingly small. Finding a way to transfer $1000 out of savings and into retirement contributions is worth a meager $70 a year.

With those caveats, let me describe my own idiosyncratic setup. I have an annual budget spreadsheet. This is where I plan out whether retirement contribution levels work out or not, etc. Every year I copy the budget to a new sheet (make a new tab), and when a major event or opportunity arises, I make speculative sheet to see how it fares. This is an annual budget because the point is to separate out financing concerns of timing money in vs money out and focus on the actual dollars and cents.

I do have I use a double entry accounting system, GNUCash, to track everything I possibly can. Bank accounts, income, taxes paid, investments, asset values, debts owed, etc. Instead of splitting money into bank accounts earmarked for specific things, I use one checking and one savings acct. The place where accounting systems beat Mint is predicting the future -- this is where the finance part happens. I can put in that I will spend 300 dollars on car insurance six months from now (because paying in full every six months avoids financing charges), paid from checking, credit card, wherevever. And GNUCash lets me create a schedule of transactions x days out, so I don't have to deal with much data entry. Basically instead a dozen CapOne 360 savings accounts, I have a dozen future dated transactions in just the one checking account.

Every month I sit down and pull in transactions online and reconcile what I thought would happen with what did. If there's a major screwup, I can adjust scheduled transactions etc going forward. If I had to draw down my emergency fund for something unexpected, I can figure out how to refill it. Most transactions actually go on credit cards for the rewards, which makes the next month of bank balances pretty predictable. GNUCash calculates a future minimum balance for accounts, and I can use that to ensure I'm not going negative in checking, or below my "emergency fund" level in savings, then any surplus money into savings or Roth IRA.

Investment wise, it doesn't make sense right now to plan on investment returns for short term needs -- the inflation rate is higher than interest rates. So my portfolio is very simple and only for retirement. 70 percent SP500, 30 percent AGG (bond index). I focus on trying to reduce the expense ratio than any kind of time based risk-preferences or advanced portfolio selections you see on Bogleheads. I'm contemplating a network flow algorithm to rebalance, but for now it's a very manual process I could stand to do better at, but I'm still at total assets under management where it matters more how I contribute than what exact percentages of the portfolio goes where. I'm able to contribute to two non-coordinating retirement plans, so it's generally a stretch to run out of tax advantaged options for retirement. For modeling retirement, I have a single spreadsheet that guesstimates inflation adjusted returns, salary increases, social security PIA, etc.

The key to all this is build up slowly. It takes years to get data, and a workflow that matches your lifestyle. Maybe you're not salaried, and can't necessarily rely on a steady income. That'll take some practice to plan around. There's two of you, and that adds a layer of complications. There's a kid on the way, so you really need something simple and automated while you adjust. I wouldn't bother long term planning trips -- kids changes the calculus significantly enough that whatever plan you make is bound to be wrong, and you may discover the extra level of patience and planning it takes to travel with an infant makes travelling dramatically less appealing.
posted by pwnguin at 8:47 PM on August 5, 2016 [1 favorite]

My method:

1) Decide how much money I want to have completely liquid to feel “safe,” and keep that in savings/ checking accounts. This varies a LOT per person.

2) Decide how much money I want to have accessible in case of a serious emergency (long-term unemployment, massive medical bills, etc.)/ future college tuition and put that in a mutual fund. (I put as much of this as I can in a Roth IRA; contributions can be withdrawn without penalty if need be.) I have it in a total stock market index because the fees are low, I have that degree of risk tolerance, and I like to keep more money liquid (see 1) than is logical to most people so it’s not my sole fallback if the market crashes.

3) The extra I am using to pay off my house. This might be a lower interest rate than I’d be making in investments, but it’s risk free and gives me a different kind of security. (My tax situation is such that the mortgage interest deduction does not normally apply.)
posted by metasarah at 6:49 AM on August 10, 2016