Getting Organized for Financial Independence

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You can get to financial independence well enough even if you’re disorganized. As long as you’re also smart and creative. But, you’ll reach financial freedom much faster by being organized about your intentions. Sloppiness with your money is no advantage on the journey to wealth.

In my last post I discussed the basic financial tools I use. Here in this post I’m going to follow up on that thread by discussing the components of my financial system.

Organizing is a specialty of mine, bordering on obsession. It’s such an overriding viewpoint that my initial approach to solving any problem or challenge is to “get organized.” And usually that’s a good instinct. But I have to be careful that it doesn’t become an end in itself. And I try not to foist my single-mindedness on family, friends, or readers….

Even if you agree that being organized about your money is an advantage, you still don’t have to use my system. What’s most important is simply to have some system that matches your personality, schedule, and style — a set of financial tools and procedures that you follow day in and day out.

Tracking Expenses

“Watch the costs and the profits will take care of themselves.” –Andrew Carnegie

Over the long haul, monitoring your spending is one of the most important actions you can take to build wealth and retire comfortably.

Tracking your money helps to create awareness, which leads you to the essential reasons you spend, and finally to control over your actions. Once you become aware of your spending, you can begin to make intelligent choices about whether your expenditures fit in with your personal ideals, financial priorities, and long term goals – or whether you are letting emotions override your own best interests.

The most accurate approach to monitoring expenses, and the best investment of your time for the long haul is “real-time tracking”. This means you put in place a system to record and categorize all your expenditures, as they occur, or shortly thereafter. This is the “best” approach by most standards because the information is most accurate and will always be up to date for making personal finance decisions.

I still use Quicken, manually inputting transactions, which takes me only a few hours each month, and gives me the most control. But there are many alternatives these days for automatically downloading and/or categorizing your transactions instead. Go automated if you don’t need perfect accuracy, and don’t want the dog work. You can even start by seeing what capabilities are already built into the web interface for your checking and credit card accounts.

Just because you implement a system for tracking expenses doesn’t mean you can’t enjoy life. You don’t need to micromanage every small sum of money, to meet your major financial goals. You need some flexibility, and some modest splurges. You don’t need puritanical control over every cent.

The best policy I ever made to encourage tracking our own expenses was to set a “relevance threshold.” Not every expense matters: If you’re a college student or a compulsive spender that threshold might need to be fairly low. If you’re relatively wealthy or inherently frugal it can be higher. For me, in the early days it was a few dollars. Nowadays it’s more like $10-20. When something costs less than that threshold, I simply pay cash and don’t bother getting a receipt or keeping track.

If we ever find large sums of money unaccounted for in our spending, I can revisit this threshold, and lower it. But that hasn’t happened yet. There is a “Miscellaneous” category in my budget spreadsheet where I record the total cash withdrawn and spent each month. That category remains at just a few percent of our spending. Meanwhile, by not tracking small cash purchases, I’ve cut out dozens of trivial transactions each year that I didn’t need to monitor, or feel guilty about.

Finally, in retirement, if tracking individual expenses just won’t work for you, you could generate a round-number retirement “paycheck” for yourself, and limit your spending to just that amount. I discuss some of the details of such a system in my new book.

But it is difficult to make that retirement decision until you understand your expenses precisely.

Managing Accounts

Despite the obvious value in tracking expenses, the key to maintaining a simple, streamlined financial life that is on target to reach your goals is to actively limit just how much you have to track when it comes to your saving and investing!

This begins with having relatively few financial accounts. In our case, my wife and I have a single joint checking account and a single credit card each for daily transactions. Then we have a single joint savings account for our short- and mid-term FDIC-insured savings.

We do however keep our investments at three different companies: USAA, Schwab, and Vanguard. (Just two of those would probably be adequate.) Having more than one company does provide peace of mind: One serves as a backup if another one has a temporary system failure.

The successful investing strategy that led to my financial independence at age 50 was built on a simple, passive index-oriented investment portfolio. When it comes to our individual investments, we are currently holding just 7 positions — all mutual funds or ETFs, mostly passive indexes. I have pruned several of those positions in the last few years and I expect to keep pruning more so that we enter our mid-60’s with no more than 2-3 investments, and perhaps a fixed annuity.

Our transition to paperless financial records is essentially complete now. There is very little financial paperwork in my life. That said, a number of credit card receipts, and the occasional paper statement, still accumulate in my office each month. I keep them in a “Pending” folder until they are reconciled against Quicken. Then I file them in their respective account folders, or a generic “Annual” folder for one-off items. At the end of each calendar year, those folders are gathered together and stored in a banker’s box in the garage.

Those banker’s boxes are purged, and the contents shredded, after 3-4 years. That’s because, in general, the statute of limitations for tax-related matters is three years, unless it relates to illegal activity or gross under-reporting of income. I try to play by the rules and run a clean, simple financial ship. I don’t expect to have to justify my financial life beyond three years.

Scheduling Activities

In practice, my financial routines break down into a regular schedule of simple recurring activities:

Weekly — Twice each week I enter all accumulated transactions in Quicken and reconcile any statements that have arrived. I also spot-check our accounts online for any fraudulent transactions. (This happens, sadly, every year or two.) On Fridays I usually enter closing market prices for my investment holdings and review my portfolio, though I’m happy enough to skip that task for a few weeks if I’m busy. I never take any action in my portfolio based on weekly market prices, but I like being able to reference the historical data.

Monthly — Once a month I compile our actual spending for the previous month against our budget categories and review how we are doing for the current month. I’ll share the results with my wife, so she can help us stay on track. If we are running short on cash, I’ll transfer some from our longer-term savings to our checking account. My philosophy for a budget is that most of the value lies in the data and awareness of your spending goals, not in meeting the goals perfectly. And it’s a long-term tool: monthly and even quarterly results are inconsistent. You need a year or two of data to truly understand your spending.

Quarterly — Once a quarter I update all our investment holdings in my AssetAllocation spreadsheet and review our asset allocations. If they have drifted significantly off target — say more than 5% — I might consider rebalancing. But, usually, I just make a mental note to keep an eye on the situation. I rarely rebalance, and when I do it’s usually at the end of the year in the context of other investing moves. I also pay estimated tax as needed quarterly, though I usually schedule this in April for the entire coming year, using the Federal electronic payment system, based on what I paid in taxes for the past year.

Annually — At the end of each calendar year I update my Annual spreadsheet with our expenses, income, and investment returns for the preceding year. (See my article on how to compute annual investment returns.) In late March or early April of each year, I compute and pay remaining taxes for the previous year, and update my Tax spreadsheet.

Maintaining Motivation

Having an organized system is a great asset in staying on track for and eventually reaching your financial goals. But, before you can have any system, you must have motivation. The best-designed, most optimal tracking and investing system in the world can’t achieve a single goal without your personal commitment and consistency.

So getting and staying organized starts with a motivation that can only come from within. You must have a clarity of focus and purpose, or your planning won’t survive the long haul. So, make sure your goals are suitable for your life and your personality, then remind yourself of them daily.

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