Money Management

I. Introduction

This is an attempt to summarize the basics of money management, for people who are “newly independent”, such as new college graduates. There are many books on the topic (e.g. Broke Millenial seems promising), but I thought a short summary on the key topics might make a good starting place.

Some of these things may be obvious; apologies in advance. Suggestions for improvement, or questions, are always welcome.

II. Banks & Savings & Loans, Oh My

In Ye Olde Ancient Days, banking was simple… and tedious. You had a checking account, and most of your money went in (and out) of there. You paid for things by writing physical paper checks. Job and other income arrived as checks in the mail, which you took to the bank and deposited. You tried to stash some income away, bit by bit, into a savings account. The bank paid you some interest (typically 1 to 6% per year, aka “APR”, depending on the year and the economy).

The bank made its money by loaning out the money that you gave it… to other people… at a higher rate of interest. As in casinos, “the house always wins”. As long as everyone played the game. In Depression-era times, if everyone tried to take their money out, banks failed. FDR, the FDIC, etc. all happened as a result, and provided a huge safety-net. Even so, some banks did fail during the Great Recession of ~2008.

Today, the basic pattern is similar, but the mechanics (and the players) are very different.

Checking. It’s still a really good idea to have a “home” checking account, meaning, where most of your money lives (or more precisely, passes through). Most banks have multiple kinds of checking accounts, with a variety of services and fees. Get the simplest one possible, and with no fees and no conditions. You’ll eventually have other accounts of various kinds at other institutions (banks, credit cards, Venmo, etc.), but use the “star” formation: your home checking is at the center, and money moves from the “outer” accounts, to the center, and then back out again.
1. Writing Checks? Actual physical checks are damn near obsolete. I might write one a month, and even then, only in dealing with ancient institutions like the State of Michigan — license plate renewal, taxes, etc. where they charge a fee to use an online method. Bizarre. Still, it’s good to have a small stash of paper checks around, just in case. Even if you have to pay for them. (Many banks will give you a small number of them, free, especially if you ask in-person at a branch.)
2. Depositing checks? You may still receive some paper checks. Almost every bank has an app that lets you deposit a paper check (essentially by taking a photo of the signed check). Keep the paper check around for a month, though, in case something goes wrong (it happens!). Most banks have a limit on how much you can deposit this way, per day or per month. (Typically ~$2000.)
3. Keep a minimum balance. I.e. don’t let your checking balance go below (say) $100. Something Will Go Wrong, and then they will sock you with overdraft fees.
4. Use ATMs carefully. Banks love to charge you fees for withdrawing cash from “foreign” banks. Credit unions often have interlocking arrangements with other credit unions, for fee-less ATM transactions. But check first.
Savings. Most banks want you to have a savings account, to go along with the checking account, usually with some minimal balance (e.g. $10). It’s silly; there’s no good practical reason for it.
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But there is a good emotional/motivational reason to have (some sort of) savings account. It provides a boundary. Even if the savings account has pitiful interest, the idea is that you put money in there and you leave it there. “Out of sight, out of mind” in your daily money flow. Some money management books call it an “emergency fund”, i.e. you only draw on it for (really and truly) emergencies: car repair if you need a car to get to work, health emergencies, and the like. A good target to aim for is 3 months worth of your regular income.
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But “savings” doesn’t have to be your home bank’s savings account. Most brick-and-mortar banks pay truly sad amounts of interest, e.g. Chase pays (as of this writing) 0.2%. Some online-only banks (e.g. viobank.com) pay closer to 1%. We keep our emergency fund in a Lake Michigan Credit Union (lmcu.org) checking account… that pays 3% interest… as long as we use their credit card at least 10 times/month.
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There are a variety of other kinds of savings, such as CDs (certificates of deposit) that pay higher rates… but in those cases, your money is locked in for a certain period of time (3 months to a year) in order to get that rate. (It makes sense from the bank’s POV, but it’s also a classic capitalistic clause from as far back as the Babylonian era: those with more money are more able to make more money.)
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The whole practice of savings is intertwined with budgeting, which has its own section further down. But I argue that it’s critical to start some kind of savings practice as soon as possible, even if it’s only $20/month.
Venmo, Zelle, and other fluid “banks”. I don’t have to explain Venmo to the current generation (the reverse, if anything). Venmo (etc.) is the (mostly minus the problematic aspects) Facebook of money apps: everyone uses it, because everyone else is using it. There are no fees, but also no interest.
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Well, sort of. If you use Venmo to pay a business, the business pays a fee (currently 2.9%). And it’s silly to leave any significant balance in your Venmo account for very long, since you could be earning interest on it, in a “real” bank.
Security. (Probably also obvious to the current generation). Most banks will insist on (at least intermittent) MFA (multi-factor authentication). I.e. If they don’t recognize you, they’ll send a text to your phone, or require some other “thing that you have” along with the “thing that you know” (username/pw).
Loans (kinds of). This, of course, is where most banks make most of their money. There’s a huge (and sometimes bewildering) variety of kinds of loans:
1. Subsidized “Stafford” student loans. The Feds “secure” the loan, meaning they pay it if you go bankrupt. (Don’t. It’s extremely difficult to ever get another loan thereafter.) Interest is not charged while you are a student. The interest rate is set by Congress — it was ~5% before the pandemic, 0% during, and will most likely return at the same level in May 2022.
2. Unsubsidized “Stafford” student loans. Like the subsidized loans, except interest is charged throughout. (Although it was also paused, i.e. set at 0%, during the pandemic.)
3. Private student loans. Everything is between you and the bank (or you and your parents and the bank).
4. Auto loans. Typically very low interest, because the bank can take back the car if you default.
5. Mortgages (home loans). Similar to auto loans, but higher interest (because it’s harder to “take” a house.)
6. Home Equity line-of-credit (“HELOC”). A different kind of mortgage — when you have paid off a significant chunk of a mortgage, banks will loan you money based on the “equity” in your home, i.e. what “part” of your home that you really and truly own. We have successfully used HELOCs as (mostly) temporary “bridge” loans to pay some college tuition as it came due.
Loans (getting them, interest). The ability to get loans, and the interest you’re charged, depend on several factors, all of which are really about the risk the bank is taking. Banks’ interest rates are partly about profit, partly about paying their day-to-day costs, and partly about making enough ‘extra’ money to pay for the loans that don’t get paid back.
1. Is it secured? If the bank can “take something back”, their risk is lower, and your interest will be lower. Cars and homes can be taken back. Education can’t. But even a student loan is considered less risky than an “unsecured” personal loan, because presumably students with degrees will earn more money (someday) than those without. Federally guaranteed student loans are even better.
2. Length of loan. A shorter-term loan is, all things being equal, less risky than a longer-term loan.
3. Your income and credit score. Obviously, if you make more money, you have a better chance of paying off a loan. If your previous history of paying off loans (even credit card bills) is good, you’re also less risky.
4. Is it co-sponsored? You can often get a better loan if someone else (with more money) promises to pay it if you default. Don’t co-sponsor a loan unless you (literally) trust them with your life.
5. Fixed or variable rate? Banks typically offer lower interest rates on “variable rate” loans — because they can jack them up whenever they need to. They take a higher risk on fixed rate loans, since they have to guess the future.
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  Turning that around, you should always get a fixed-rate loan. (Unless you want to “play the market” and watch interest rates as they change, oh, every week!). The particular beauty of fixed-rate loans is that you can shop around, oh, maybe twice a year — and jump from one fixed-rate loan to a lower fixed-rate loan when you choose. Variable-rate loans are a racket; fixed-rate loans are a ratchet — you get to lock-in the lower rates when you find them.
Loans (paying them off). The hardest part, of course. But there are guidelines.
1. Pay at least the minimum. Always, always, always, pay at least the minimum — which usually means paying at least twice what the interest charge was for the month.
2. Shop, shop, shop. As above, check interest rates at least twice a year.
3. Federal Lottery. Despite the wimping-out by two “Democratic” senators, I still think there’s a chance of some national student-loan forgiveness within the next ~8 years. Even if you can find private loans at a lower interest rate than the Stafford loans, keep a good chunk of your debt in the Stafford loans.
4. Don’t obsess. Student loans are, for now, in our insane economy, part of the cost of living the ‘professional’ life. Build the payments into your budget, re-evaluate once a year, and then forget about it.
5. Balance loans and liquidity. Paying off loans is good. But having some “liquidity” (such as an emergency fund) is better. Even if you get less interest on an emergency fund (than you are paying on a loan), having the emergency fund “liquid” — immediately available — can be crucial.
Choosing Banks. It used to be that we chose banks based on the features they offered. These days, most banks are comparable, with a few special cases. These days I choose a bank based on the ethics of its business model. E.g. Chase = bad (financing fossil fuel extraction), credit unions = usually good, and most of their money is invested (loaned out) locally. Often different credit unions will band together and share ATMs, or (as in our case) create a shared company to offer mortgages in their region.

III. Credit Cards

Credit cards are the perfect capitalistic seducer. They are incredibly convenient, and they are the gateway drug to rampant consumerism.

Credit cards are a huge source of income, especially for large banks. They get money from the businesses you shop at (typically 2-5%), they get lots of interest from you (5-10% or more if you don’t pay off your total every month), and they get astoundingly obscene amounts of money from you if you ever forget to pay a monthly bill. (A big one-time fee plus hugely increased interest rates, up to 29%!)

(BTW, the fee that credit card companies charge businesses is the source of all the “rewards” and “rebates” that they turn around and offer to you. If a card company charges a business 4%, it can easily afford to give you 2% back as a ‘reward’. That’s how they compete with each other. It’s also why retailers like Target have their own branded credit card that offers a discount — they don’t have to pay other companies when you shop at Target.)

Having said all that, they’re still (largely) a neccessity. But unlike the earlier casino metaphor, you can actually make money off of them — but you have to be willing to “count cards” and play their rules carefully. Depending on which style of personal discipline fits you best, here are some guidelines:

Use cash. Once we’re post-pandemic, a simple approach is to budget cash for your personal expenses — i.e. anything outside of normal groceries, rent, utilities, etc. So, coffee, restaurants, movies, and so on. When we were originally getting our budget under control, I had 5 different sections in my wallet, with cash for 5 different purposes. If I ran out, I didn’t buy anything more in that section until next month.
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There’s probably a Venmo equivalent, but I don’t know what it is. Invent one.
Pay the full balance every month. This is hard. Do it anyway. If you absolutely can’t, then pay the minimum, and put the card away until it is paid off (and go back to cash in the interim). If you pay off the full balance every month, they cannot charge you interest.
Have two different cards. Keep one at home. It’s easy to cancel a card if it gets lost, stolen, or compromised — but it can take 2 weeks to get a new one. Hence the need for a backup card.
Scam protection. Most credit cards provide automatic theft-protection services. If they see something that doesn’t look right, they can text or call you. Sign up for those features if they’re not already the default! Keep a photocopy (both sides) of your credit cards somewhere safe — so you can call them if you lose your card. Look over every purchase on your bill — if you see something that’s not right, call them immediately. Most credit cards will insure you against purchases you didn’t make, as long as you contact them. This will happen to you. I get a fraudulent purchase against a credit card about once every 2 years.
Shop shop shop (redux). Find the credit card with the best terms. Mostly, that means the best “rewards” or “rebates”. Most credit card offers that lead with low interest rates are BS, because you shouldn’t ever pay any interest (because you pay off the total balance every month). So that means they’ve got nothing better to offer.
Use rewards to (help) pay your balance. The best possible rewards go straight to your existing balance. If they don’t offer that (rare), then take them as a deposit to checking, and then turn around and pay that amount immediately to the credit card account (don’t wait for the monthly bill).
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What they want you to do is to use your “rewards” to buy more stuff. If the credit card is the gateway drug, this is the heroin. They will tempt you by offering a discount on buying something else with your rewards — don’t give in, even when it seems “logical” to do so.
Making money. (Not for the faint-of-discipline.) Because the credit card business is so lucrative, there’s a lot of competition: companies will try and poach each others’ customers. If you like finicky-rule-playing-games, you can make money of off this. (I make about $1000/year this way.)
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The simplest method is the “sign up for our credit card, and spend $500 in the first 90 days, and we’ll give you $200” or similar offer. These are real, but you have to read the fine print. It might require a certain amount each month, or that you pay off each month in total, or you have to keep the card active for 6 months before you get the $200. The company is banking on (heh) you being stupid, and not following the rules; or being lazy, and continuing to use that credit card afterwards.

IV. Record Keeping

One might thinking that financial recording keeping in the ‘modern’ age would be easier than ever. While it’s true that the tools continue to improve, and the speed of access and the availability of financial records are increasing… so, too, are the number of paths the money can follow.

E.g. in 1978, I wrote a check to pay the utilities, and put it in the mail.

In 2021, I might venmo A to repay B for the credit card bill to pay for the utilities for C, who no longer lives there but is subletting to D, but the credit card is in the name of the parents of E… well, you know.

The more complicated the path, the greater the importance of good record-keeping. And while each individual component (bank, venmo, credit card) will have all of the records available, none of them will, by themselves, make sense of the complete transaction.

There are two schools of thought here: (a) track only those things that might get confusing, or (b) track everything in a money-management tool.

Track Everything
I’m a big fan of the “track everything” school. Then again, I’m a numbers geek: I like fiddling with numbers. In practice, this means using a money manager app (on a laptop), like Quicken or GnuCash. Quicken comes in a variety of flavors and costs $$, but the simplest version is basically centered around a checking account, and everything else fans out from that. (There’s that “star” model again.) There’s probably a cloud-only version. GnuCash is free (“open-source”) and is a full double-entry bookkeeping application.

Digression
Double-entry bookkeeping just means that each transaction gets entered in two accounts. (But you only enter it once, the software takes care of the rest.) For example, when I get paid, I add a “transaction” that moves $$ from an account I call (say) Income-MyJob, into an account Checking-MyBank. I can look at Checking-MyBank to see what’s in my bank account; I can look at Inc-MyJob to see the full history of when I got paid, and how much. That’s it. When I pay a bill, I create a transaction from Checking-MyBank to Expenses-Utilities. Rinse & repeat.

Pros:
Lots to love about money managers. Almost every bank and credit card company provides the ability to download all of your transactions straight into your money manager. All of your data is at your fingertips. It forces some discipline: garbage-in, garbage-out, so the motivation to keep up-to-date is high. (Although sometimes even I will dedicate one credit card to miscellaneous expenses, and just track that as a single account — rather than track all the details.)
Cons:
It can be tedious.

Just Track the Confusing Stuff, part 1
If your financial life is (relatively) simple, it can be enough to just track the stuff that (otherwise) will get confusing. The first part is easy: track what you’ve done (what you’ve paid), and what you’re going to do. A simple spreadsheet will suffice. Here’s an example:

Pick some interval: twice a month is good. On the selected days, pay everything that is due within (say) the next half-month. Enter the date paid. A question-mark means it isn’t paid yet.

(I’ve been managing my own money for 45+ years, and this is the single best way I’ve encountered to make sure I don’t miss a freaking credit card payment. I check it every Saturday morning. If I can’t “eat the rich”, I can at least make sure not to give them my food.)

Just Track the Confusing Stuff, part 2
The second part is recording the truly confusing stuff, i.e. the things you know (if you’re being realistic) that you’re going to lose track of (or already have lost track off). Especially the A pays B pays C pays D… stuff. Or (for the kind-hearted) the stuff you might not feel comfortable confronting other people about (who may owe you money but forgot). Of course, each one of these tends to be different, but even so, usually a spreadsheet will handle it.

Here’s a possible example and exercise. Track (at least) the last 12 months’ worth of your rent payments. Include any damage or other deposits you paid; there’s a chance that someone owes you money. Use one row for each month and location; put the month in the 1st column, and add one column for each person or entity paid along the way. (So A pays B pays C… is at least date + 3 columns.) Have someone else check it, and ask you questions. It may take a couple of iterations to figure out a pattern that works for you; this is just a starting point. But I suggest that this is a useful exercise, especially if it is uncomfortable.

Pros:
Less tedious. More likely to be self-motivating (unless you’re a numbers geek like me). Works well for simple finances.
Cons:
Doesn’t handle complex situations. Harder to get answers after the fact.

V. Budgeting

Budgeting is hard; everything else (above) is just mechanics. Everyone struggles with this. Some argue that we evolved to respond to short-term threats, and are fundamentally challenged when it comes to looking at longer-term needs. A wise woman I know reminds me that kindness is important here, too: be realistic, and be kind to yourself, at the same time.

Practically speaking, the starting point is just another spreadsheet: monthly income, and your best estimate of monthly expenses. Over time, use as much data from your record-keeping (above) to refine those estimates with real data.

There are really two ways to budget yourself; everything else is a blend of these two tactics:

Spend only what you have. Essentially, this is the cash approach. Pay the biggest chunks (e.g. rent, utilities) up-front, and allocate cash to the remaining categories. Then spend the cash, and when it’s gone, stop (until next month).
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There are many ways to handle the mechanics of this. E.g. pre-paid cards instead of cash — which can make it easier to break things down into different categories. Many people have a “funny money” category, which is a small amount allocated for pure fun or whimsy — which can make keeping to the budget in the other categories easier.
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In essence, this externalizes your budgetary limits. It’s a once-a-month discipline, the rest is automatic.
Track what you spend. Track everything that you spend. Know on a daily (or at least weekly) basis what you’ve spent, and what’s left — and use that to inform your next expenditures.
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This internalizes your budget, every day (or week). It’s harder in many ways, but also gives you more control. Some people (me) find it comforting; many find it nerve-wracking.

In reality, the people who are most successful at budgeting, work out some blend of the above. E.g. they might track the biggest expenditures (rent/mortgage, utilities, groceries), but spend-as-cash (or equivalent) the smaller stuff.

The rest of this section covers more general thoughts that relate to budgeting, even if they do not impact the immediate week-to-week mechanics.

Jubilee
Many employers pay on an every-two-weeks schedule. This means that 10 months out of the year, you’ll see two paychecks; and for 2 months, you’ll see three. Budget based on the 2 paychecks/month income. When a 3rd paycheck arrives, declare a personal Jubilee. First, pay back any immediate debts to self or others (e.g. if you went over budget on something and haven’t yet paid it all back). Then throw some of the extra money at student loans. Or put some into your emergency fund. Or make a charitable donation (if you haven’t already budgeted that in.) Or buy yourself or others something nice. Or best, do all of the above, even if each allocation is small.

Know your debt
Track your long-term debt (student loans, etc.) Keep a simple spreadsheet-and-graph, and update it once a month. Since the name of this blog is Lookfar, I think it’s in keeping to remember Ged’s big lesson: lean into that which you fear. (Always and ever a reminder to myself.) Don’t obsess over the total, but take pride and comfort in its slow, steady, decrease. I promise it will accelerate over time.

Ease Transitions
Changing from the student life to the independent working life is a huge shock. Work out a transition plan. If your parents have previously been paying for everything, you might be able to start by just paying your rent for the first few months… and use that transition time to start your budgeting. There are dozens of different approaches here. Whether it’s parents or an actual bank that are involved, they all want you to succeed.

Examine your lifestyle
What do you really need at this stage of your life? This includes (especially!) emotional needs. You might find a cheaper apartment somewhere else, but risk being lonely if you move away from the people you care about or are most comfortable with. Or you might be happier knowing that you’ll feel less stress if your expenses are lower. Coffee at Starbucks? Coffee from home? A million choices to make. They have to work financially, but they also have to work emotionally: which disciplines will you really be able to stick to? Make your own choices, and don’t let others choose them for you.

Healthcare
Don’t skimp on healthcare. Thanks to Obama et al, health insurance plans (for a family) must cover children up thru the age of 26. Regardless, it’s always cheaper to take care of yourself now, compared to later.

VI. Conclusion

Questions? Comments? Other things this article should cover? Other resources (books etc.) that would be good to point to?

It’s an insane world. I hope that these thoughts and clues are useful, in living in this world. Always remember that you are loved, by someone, somewhere.