Personal Finance is not complex, in fact, the simpler it is kept – the better it is.
One of the reasons why finances become complex for most people is because they don’t have a plan or are not organized enough to execute a plan.
There are good reasons why the plan or organization does not work out as required.
- The person is busy in his own professional and family life and managing finances is often the last priority.
- Inability to control one’s emotional spending and running into thousands of dollars of debt.
- Bad advice from most financial professionals who are working to fulfill their own agenda than the clients’.
- Greed and over-smartness to navigate complex financial products and hence having a delusion that complex means better, and something superior to what ordinary people can achieve.
The effect of the above is that a person remains on either extreme of personal financial planning. Either they don’t have a plan at all and run into huge debt, or they have too complicated a plan that is difficult to execute.
I have suffered from the former in my initial days of career. I did not run into huge debt but then blew up money in a way as if there is no tomorrow.
- Bar hopping – spending hundreds of dollars per weekend/outing.
- Friends who were there just for the good times.
- Buying useless gadgets and products – Clothes, watches, electronics.
- Investing in my agent’s future – Financial products with huge front-loaded commissions and fees.
And then I discovered the fundamentals of investing but went overboard with complicated ones.
- Market linked Insurance Policies (sold as investment products).
- Thematic Mutual Funds – Infrastructure Fund for India Economic Growth.
- Overpriced Real Estate – thinking real estate prices can only go up.
- Commercial Real Estate – not doing due diligence before investing and losing it all.
So one can be damned if he/she invests, damned if he/she doesn’t.
The way to keep the balance (and do the right thing without getting carried away) is to have a plan. As we all know, a good plan is time bound and well defined. And to execute it, you need to plan it in your calendar.
Hence I decided to write a post about designing and following a Personal Finance Calendar (PFC), that is unique to one’s own financial situation.
The PFC has to be very personal taking into account following situations.
- It can incorporate a debt-payoff plan.
- It can incorporate a systematic investment plan.
- It can incorporate a tax management plan.
- It can align with critical life events like college admission, getting married etc.
- It can reduce stress and unplanned expenditure.
- It is a higher level budget which plans/tracks finances more than just a daily log.
Let us see how we can design a calendar which takes into account all of the above aspects. One may have other situations and this post will provide a template to fit those as well.
Paying off debt using the calendar
Debt is like the dirt or debris that one can accumulate at home due to procrastination or lack of hygiene. If it is neglected, it just grows and stinks more and more.
However like any cleaning activity, one needs to start and persevere till it is done. A lot of it, when cannot be cleaned up in one shot, should be put on a cleaning schedule.
A schedule breaks down the insurmountable task into smaller parts and regular clean-up ultimately brings back the spic-and-span state.
The finances and debt are same. When one does not have consumer debt and only manageable amount of mortgage, the finances are so simple and clean.
There are two methods for cleaning up debt – the debt snowball method and the debt avalanche method.
No matter which one is followed, it will help to schedule payments automatically on the Personal Finance Calendar (PFC) and to remain diligent about sticking to the plan.
Systematic Investment Plan
This is one of the most popular forms of investing, also known as dollar cost averaging. It helps to avoid market timing, but mainly it is another form of ensuring a well defined plan of investment.
Since the systematic investment plan is committed to once setup and fully automatic, it falls into one of the essential components of the PFC.
The more investments are automated in this way, the lesser it leaves for ad-hoc investments or spending the money away. It also prevents one from reacting to new investment products and changes in the market, which should be ignored as mere noise.
My investments are all automatic like monthly subscriptions, thus subscribing to the calendar implicitly.
Tax Management Plan
Taxes are slow death for any investment plan. Unless planned, it can give such a jolt that years of hard work (and savings) come crashing in one year or month.
Ask anyone who got a nasty surprise while liquidating (or even wrongly rolling over a 401k), how taxes can bite the apple you painstakingly grew.
The only way out is proper tax planning and is now a commonplace advise from financial experts. However it is up to the investor to plan his taxes and investments throughout the year.
The following are examples of using the Personal Finance Calendar for tax planning.
- Make sure monthly tax withholding is done in a correct manner and for the right amount. This can be planned in the beginning of the year through W-4 submitted to your employer.
- If self-employed or have other variable income, you need to plan quarterly estimated tax payments to the tune of expected yearly income.
- Use of retirement and other tax advantaged accounts (Roth, HSA) to the fullest while planning for your investments. All of these accounts have a yearly cap and defined periods by which investments can be made for that tax year.
- For someone withdrawing from the tax advantaged accounts, it is also another calendar event and need to be planned meticulously to the calendar.
Critical Life Events
Life has many planned and unplanned events, planned ones being children’s education or marriage and unplanned ones like different forms of emergency.
Both these types of expenses need planning in advance and use of the calendar to cushion the shock or enjoy the situation as the case may be.
- For an event few years down the line, break the total expected cost into months and add it to your calendar’s savings goals.
- Allocate your investments according to short term, medium term and long term goals. These goals should be clearly visible in your calendar.
- Emergency Fund – build up this fund slowly month by month and set a target by when it will be complete as a 6-12 month corpus set aside.
- Life Insurance and other insurance premiums – Even though insurance premiums are due once a year, I set aside the little amounts under each head (Car, Life, Home) every month.
- Financial calendar is the foundation of life planning as it takes care of the most important thing – funding life’s goals and emergencies thrown at us.
Reduce stress, fund or reduce unplanned expenses
A Personal Finance Calendar is an excellent way to say goodbye to your worries.
When you have everything (well almost) planned on your calendar, you just need to keep track weekly or monthly and take care of the upcoming events.
An easier way to manage this is to setup your Google Calendar with events like:
- Due date for estimated taxes
- Pay credit card bill (if not already automated in your bank account)
- Become debt free
- Look for opportunity to refinance mortgage
- Kid’s college prep starts – move funds to safer investments
- and so on…
The best thing about Google Calendar is you can set reminders and some events can be made multi-day events so that it keeps sending you reminders throughout the duration.
Another feature of Gmail I use is the “snooze until” for emails. The email (which asks to pay something in about a month) can be snoozed till end of the month, when it will again appear at the top of your Inbox to take action.
The “Snooze until” feature can be cleverly used to try out subscriptions and not fall for the automatic renew by forgetting the renewal date. For example, if I sign up for a trial subscription for 14 days, I will snooze the sign-up email to return back in about 12 days. By then either I have not used the service or did not like it, hence I can promptly cancel it before automatic billing date. If I liked the subscription, well it is also a chance for me to make an informed decision to continue with it. This is particularly useful for yearly subscriptions, when I cannot be expected to remember the exact date of renewal.
Budget and Calendar go hand in hand
If you are planning your finances, in all likelihood you budget. It may not be a day to day log of expenses, as some people do budget at the macro level.
I use YNAB (You Need a Budget, its that simple) and find it’s planning and goal scheduling feature very useful. It is another form of my Personal Finance Calendar, apart from Google Calendar and my own notebook plan.
Here is one of their articles on the feature:
Plan your calendar to start in February, not January
A company I worked for, once changed their yearly closing from Dec 31 to Jan 31.
Guess why? A lot of things change at the turn of the year and things (read sales) get a lot slower due to vacations etc.
Same happens for planning personal finance. However good intentions and plans you have around the new year, it takes about a month to settle or change a plan for the new year.
Sometimes its even better to completely skip the new year, and plan April-March instead. That way you get a quarter to check out the flow of the new year and wrap up last year’s tax filing etc.
Whatever period you choose, work on a Personal Finance Calendar and you will never be impulsive with investments, taxation and purchases.