Jun

9

Tools for Tracking Your Finances

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In my Keep Score by Tracking Your Net Worth blog post, I talked about the benefits of keeping score if you want to improve in a specific area of your life. Tracking your results, especially in numerical terms, focuses your attention on the impact that your actions are having in objective terms. In the area of finances, I recommended focusing on your net worth and its components. Your net worth represents your financial position at any point in time. Just as weighing yourself regularly will tell you if your diet or exercise program is helping you lose weight, reviewing your net worth regularly will tell you if your decisions that impact your finances are making you stronger or weaker financially.

One way to track your finances that has been used successfully for many centuries is the “old school” method of using a pen or pencil and some paper. However, although this method gets the job done, most people find that this method is far too tedious. Luckily, software comes to our rescue and makes our job much simpler.

Spreadsheets

One solution is to use spreadsheets to track finances. Spreadsheets have the benefit of being extremely flexible and incredibly powerful, not to mention that there are free spreadsheet programs available. I find that spreadsheets are useful when your needs are either very simple or very complex. If your needs are very simple, then you won’t want to bother getting specialized software. If your needs are very complex, then specialized software might not have all the functionality that you need, so spreadsheets might be helpful in providing additional functionality to better satisfy your specific needs.

I have created a spreadsheet that you can use for free if you just want to keep things simple and you have at least a rudimentary understanding of spreadsheets. It’s called the Monthly Net Worth Tracker. You simply update it each month with the current values of your assets and liabilities. The instructions are included in the spreadsheet. If you don’t have Excel, the spreadsheet appears to work fine on OpenOffice.org Calc, which is part of the free office productivity suite that can be downloaded from the OpenOffice.org website.

Personal Finance Software

If you are intimidated by spreadsheets, or if you want something that is much more automated and has built-in functionality to help you track spending and easily create reports and graphs (among other functions), then you will probably be interested in using personal finance software. You might have heard of Quicken and Microsoft Money, which are the leaders in the industry. I have been using Quicken since 1995, and I’m amazed at what it can do. They keep adding features and improving the product, and the level of automation keeps getting better and better. Here are some of the things that personal finance software can do for you:

1) Download all of your account activity over the Internet. I use the Internet to download transactions for all of my financial accounts (checking, savings, investment accounts, credit cards, etc.) except for one account that doesn’t offer it. Some of the accounts can be downloaded automatically by Quicken. For other accounts, I simply go to the website for that account and click a button to download my transactions, which are automatically loaded into Quicken.

2) Automatically reconcile your accounts. Many accounts, such as checking accounts and credit card accounts, can be automatically reconciled if you download your activity over the Internet. The software will automatically match up the cleared transactions and reconcile the account for you. This is an amazing feature and a great timesaver. The software even makes manual reconciliations so much easier.

3) Easily track your spending. After you download your transactions, you assign an expense category and “accept” the transaction to be entered into the software. For transactions that are recurring, the software will remember the category you used last time, making it even easier. For example, the software will learn the name of your electric company and automatically assign it to “Utilities Expense” if that is how you track it.

4) Automatically update your portfolio values. The software can automatically download securities prices over the Internet and adjust your daily portfolio values.

5) Generate numerous pre-programmed reports and graphs. The software includes reports and graphs that tell you your net worth, income & spending, portfolio allocation, and all sorts of information, and they are easily customizable. For me, the Net Worth and Income & Expense reports are critical to my understanding of my financial situation.

6) Much, much more. Personal finance software has so many functions these days that I don’t come close to using all of them. For me, the most valuable aspect of personal finance software is the automation that it allows. I can get an update of my financial situation in a matter of minutes.

What Software Should You Choose?

If you decided that you are interested in trying personal finance software, there are three main personal finance solutions that I’m aware of (although there are certainly other lesser known solutions out there). The first two I already mentioned: Quicken and Microsoft Money, which have been around since at least the early 90s. However, there is also a relative newcomer called Mint that has been generating a lot of attention. Mint offers free online personal finance software.

From my own research, Quicken appears to get the best reviews. Microsoft Money’s reviews seem to be slightly worse, although my guess is that it would probably still do a pretty decent job. Both Quicken and Money get horrible reviews from Amazon.com (see the links to reviews below), although reviews elsewhere seem to be relatively positive. The two main complaints seem to be a requirement to buy an upgrade every few years and poor technical support. Mint’s reviews seem to be pretty positive, although the reviews suggest that Mint’s features are more limited than those of Quicken or Money.

As I mentioned earlier, I have been using Quicken since 1995, and I have been very happy with it. I have had occasional challenges in setting up accounts to automatically update, but overall the issues have been pretty minor. My guess is that most people would be pretty happy with any of the three programs. They appear to have most of the same functions. You don’t have much to lose in trying them out. Quicken offers a 60-day 100% satisfaction guaranteed return policy, Microsoft Money offers a 60-day free trial, and Mint is completely free.

At the very least, you can try one of the programs, set up your checking account in it, and play around with it for a while. It’s worth a shot. And if you like it, you can set up the rest of your accounts.

The About.com reviews

Quicken Deluxe 2008
Money Plus Deluxe 2008
Mint

The cnet reviews

Quicken Deluxe 2008
Money Plus Deluxe 2008

AOL Shopping customer reviews

Quicken Deluxe 2008
Money Plus Deluxe 2008

Amazon customer reviews

Quicken 2008 Deluxe
Money Plus Deluxe

Webware reviews

Mint review #1
Mint review #2

Jun

3

Book Review: The Millionaire Next Door

Filed Under Book Reviews, Personal Finance | Leave a Comment


When I first read The Millionaire Next Door: The Surprising Secrets of America’s Wealth by Thomas Stanley and William Danko many years ago, it forever changed my beliefs about what it takes to be wealthy. I used to think that I was going to have to work my butt off by either starting my own company or by working my way up the corporate ladder of someone else’s company. The Millionaire Next Door taught me that this might give us a high income, but it won’t necessarily make us wealthy. Too often people equate having a high income with being wealthy, and I think that I was unconsciously making this same connection. It finally began to dawn on me that it isn’t how much you make, but rather how much you keep. In retrospect, this seems like a flash of the blindingly obvious. I think that it took me a while to really understand this point because society has a tendency to program us with the flawed “high income equals wealth” paradigm, and I bought into it without really thinking about it. As Stanley and Danko explained:

“Most people have it all wrong about wealth in America. Wealth is not the same as income. If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.”

Who is the millionaire next door?

Stanley and Danko began to study how people become wealthy, and they made an unusual discovery. Many people that appear to be wealthy are not wealthy at all, and many people who don’t appear to be wealthy are in fact very wealthy. People with big houses, nice cars, and tons of possessions often have little net worth, or worse, they have a negative net worth (to learn more about net worth, read my post Keep Score by Tracking Your Net Worth). If their incomes were interrupted for whatever reason, they wouldn’t be able to survive very long on what they had saved. On the other hand, people with modest houses, cars, and possessions often have a high net worth. They could survive without an income quite comfortably for years. These are the “millionaires next door.” Your neighbor with the average size house and a Toyota Camry in his driveway could very well be a millionaire, and you wouldn’t know it. They made one other discovery that really piqued my interest:

“Eighty percent of America’s millionaires are first-generation rich.”

This tells me that the old expression that “it takes money to make money” is just plain wrong. America is truly the land of opportunity if you are willing to do what it takes to become wealthy. Unfortunately, most people either don’t believe this is true or they are just unwilling to do what it takes.

The Seven Factors of Wealth

Stanley and Danko identified seven common denominators among those who successfully build wealth. They are:

1) They live well below their means.

2) They allocate their time, energy, and money efficiently, in ways conducive to building wealth.

3) They believe that financial independence is more important than displaying high social status.

4) Their parents did not provide economic outpatient care.

5) Their adult children are economically self-sufficient.

6) They are proficient in targeting market opportunities.

7) They chose the right occupation.

The book goes into detail on these 7 factors, so I won’t do it here.

How Wealthy Should You Be?

Your level of wealth is obviously going to depend on several factors such as your age and your income. Other things equal, you would generally expect a 50-year old person to be wealthier than a 25-year old, and you would expect a 50-year old earning $100,000 to be wealthier than a 50-year old making $25,000 per year. Stanley and Danko try to answer the question: “Whatever your age, whatever your income, how much should you be worth right now?” I don’t like this question, because it assumes that there is one right answer to how much wealth we each should have. I think the amount of wealth that we have should be dependent on our values, and these are going to vary widely from person to person.

In any case, Stanley and Danko came up with a formula to compute a person’s expected net worth:

“Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.”

I think this is an incredibly stupid formula, and it has been widely criticized by readers of the book. As an example of the formula’s shortcomings, let’s say you are 25 years old and are fortunate enough to earn $100,000 per year. Your expected net worth according to the formula would be $250,000 (25 X $100,000 / 10). Assuming you graduated when you were 21 and assuming that you didn’t start out making $100,000 per year, you would probably need to save more than 75% of your pre-tax income when you were 22, 23, and 24 to be worth $250,000 by the time you are 25. This would be pretty challenging considering that you would pretty much have to live on nothing after you paid your taxes.

The Difference between PAW’s and UAW’s

You can forget about the formula, but it is worthwhile to pay attention to the distinctions that they make between the prodigious accumulator of wealth (PAW) and the under accumulator of wealth (UAW). PAW’s build significantly more wealth relative to others in their income/age category. Stanley and Danko do an excellent job of describing the characteristics that distinguish PAW’s from UAW’s. The most critical point is that PAW’s live significantly below their means. UAW’s don’t accumulate much wealth because they overspend. This is the dominant theme throughout the book, and rightly so. Living below your means is simply much more important in accumulating wealth than having a high income.

Conclusion

For me, The Millionaire Next Door was one of the most important books on becoming wealthy that I have ever read. It doesn’t provide specific approaches on how to invest or build a business or any number of things that you will find in other books about getting rich, but it provides an essential philosophy to work from. It had a significant impact on me in terms of convincing me of the relative importance of “playing good defense” (i.e. keeping my spending low) versus the importance of “playing good offense” (having a good income). While good offense will obviously help you win the game, always make sure that a strong defense remains a priority. As Stanley and Danko wrote:

“Millionaires play both quality offense and quality defense. And quite often their great defense helps them outscore/outaccumulate those who outearn/have superior offenses. The foundation stone of wealth accumulation is defense, and this defense should be anchored by budgeting and planning.”

I found parts of the book somewhat dull, especially in the second half of the book, but I highly recommend reading this book to anyone who is serious about becoming wealthy.

Other Reviews of The Millionaire Next Door

The Profit Advisors review - “I have read every page of this book. I found The Millionaire Next Door
to be fascinating, educational reading and recommend it enthusiastically. Give it or loan it to family members. Be sure to put it on your summer reading list. Then take action on what you learn, and I’ll have a lot of wealthy clients!”

The It’s Your Money review - “The Millionaire Next Door
is an exceptional book, and I must recommend it highly. It could be particularly useful if one were just beginning a financial-improvement regimen and needs a dose of the “big picture” outlook which only large-scale surveys can provide. Overall, TMND is full of lightbulb moments and, for those of us who cannot help but shake our heads at the High-Consumption Crowd, a great many self-gratifying conclusions.”

John T. Reed’s review - “One of the best books ever on millionaires is currently at the top of a business book best seller list: The Millionaire Next Door by Ph.D.s Thomas Stanley and William Danko.”

The Simple Dollar review – “I give the book a “buy” recommendation if you are over the age of forty, if you have substantially greater assets than many people in your age group, or you are interested in long-term financial planning. The book does a great job of outlining what people should be doing in middle age if they want to build substantial wealth (and enable their families to carry on this tradition) for their later years.

On the other hand, I give the book a “not buy” recommendation if you are young and without appreciable assets. At this point in your life, the focus should be on building a solid foundation for your financial life and this book does little to address that topic. Your time and attention is almost assuredly better spent somewhere else.”

Jun

2

Money doesn’t buy happiness. Or does it?

Filed Under Personal Finance, Psychology | 2 Comments


One of the most common clichés that we hear is that money doesn’t buy happiness, but have you ever noticed that many people who say they believe that money doesn’t buy happiness live inconsistently with this belief?

There are many different reactions when people find out that I have a strong desire to be wealthy. Some people are very supportive, but others make it clear that they feel that the desire for wealth is crass, materialistic, greedy, or any number of negative adjectives. When I tell people that if they want to be wealthy they need to live well below their means and save diligently, I often get the response that “money doesn’t buy happiness. I would rather be happy than wealthy.” They use this as an excuse to spend instead of save their money.

Anonymous man: “What does it feel like to have all that money?”

Arthur: “It feels great.”

- Arthur (the movie) -

The first problem with their thinking is the implicit assumption that you need to make a choice between happiness and wealth. There seems to be a very common belief that the sacrifices that must be made to become wealthy are large enough that it would require sacrificing happiness as well. I think this is nonsense, but let’s take a look at the reasoning behind it.

The Contradiction

The logic goes like this: money doesn’t buy happiness. Therefore, I don’t need money to be happy. I would rather be happy than wealthy, which is why I spend my money now instead of accumulating wealth.

“Money is better than poverty, if only for financial reasons.”

- Woody Allen (Complete Prose of Woody Allen)

Have you picked up on the contradiction in this line of thinking yet?

My question is this: why would you spend all or nearly all of your money if money doesn’t buy happiness? If you aren’t any happier spending 95% or 100% of your income than you are when you spend 85% of your income, then why do it? Why bother even working for the money in the first place if money doesn’t buy happiness? Shouldn’t you be just as happy with zero money?

What Does Money Mean to You?

In my opinion, money is just a tool that we use to get what we value (or at least what we think we value). To the extent that the satisfaction of our values is what brings us happiness, money does buy us happiness. If you are clear about your values, then you are also clear about what makes you happy. My personal desire for wealth is motivated first and foremost by my love of freedom and independence, which are two of my strongest values. I don’t like being in the position of having to work for others (which is one reason that I believe that taxes should be very low). I also would love to have the means to satisfy some more materialistic concerns, like traveling around the world, buying a nice house and a nice car, or whatever. I personally don’t think it is immoral to have desires for material possessions.

“Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.”

- Groucho Marx -

Money is neither good, nor evil, and neither is the love of money. Rather it is what we do to get money and what we do with the money that is either good or evil. Money itself is neutral. Money can be a force for good or a force for evil. I intend to make it a force for good, and I intend to have a lot of it. Money buys you happiness in direct proportion to how much you value what you get in return. Does this mean that money is necessary to be happy? Of course not. The satisfaction of our values is often accomplished in ways that don’t require money. Like I said before, money is just a tool. If money didn’t make our lives better and happier, then we wouldn’t bother with it. The issue isn’t that money doesn’t buy happiness. The issue is that it isn’t the only thing that buys happiness. There is also no money-back guarantee that money will buy happiness. You have to be clear about your values, or money will be disappointing.

“Money will not purchase happiness for the man who has no concept of what he wants: money will not give him a code of values, if he’s evaded the knowledge of what to value, and it will not provide him with a purpose, if he’s evaded the choice of what to seek.”

- Ayn Rand (Atlas Shrugged) -

So what do you think? Do you still think that money doesn’t buy happiness? If it doesn’t, what’s the point?

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