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What should our personal finance system “buy” us?

by The Happy Rock on May 25, 2007

moneyflow.jpgBefore I post on how we are going to change our current system, I wanted to discuss what I am looking for in a good finance system. Note, I am using personal finance system to mean the accounts and tools that your money flow through from paycheck through payment and/or savings. As always, the purpose of analyzing this and the overall theme of The Happy Rock is to continually simplify our lives in order to create more freedom for the goals and people we truly value in life.

Here are five areas that should be analyzed when creating, tweaking, or assessing a personal finance system. A personal finance system should be :

  • Simple – First and foremost, I am convinced that a good system needs to be simple. If it is not simple, it can rob us of the motivation to use the system to our best advantage, or waste time that could be spent on other areas. Simplicity is a broad term, but here I am mostly talking about number of accounts. With each extra credit card, bank account, and savings account in the system, comes add complexity(even if the accounts themselves are ‘simple’). Complexity breeds more rules to juggle, more points of failure, more time investment, and ultimately more stress. Complex schemes seem easy when everything is running smooth, but throw in a lost job, unfortunate death or injury, or even a mistake and the system can collapse. One late fee or bounced check can quickly wipe out all the benefits we thought we were receiving from our schemes.
    Freedom is usually sacrificed as complexity increases. If you really feel that you ‘need’ added complexity, make sure that you get a premium for the extra time, stress, and complexity. For me, 40$ or even 100$ dollars a year in interest isn’t worth the negative side effects of too much complexity.
    Finally, simplicity is crucial for facilitating good financial patterns in marriage. If one spouse creates a system that is inaccessible to the other, it creates an imbalance of power and destroys communication. The system should foster sharing of stress/responsibility, ideas, workload, and accountability. Without the ability for each spouse to ‘do their part’, the system loses the bulk of its effectiveness.
  • Working for you – The ability for the system to provide returns on the money you earn is a key component. It boils to down to more freedom. The more your system earns for you, the less you need to focus on earning. When drawn out over the years(retirement), the importance of this factor becomes even more apparent. Here the main components to look for: interest rates in your savings account and checking accounts, credit card rewards, and performance on retirement vehicles. Performance needs to always be balanced against risk. The higher the risk, the better return you need to earn. As a guideline line, savings should earn above 4%, checking above 2%, credit cards rewards from 1%-5%, and retirement performance would hopefully be 10% or more over for those with a long time before retirement.
    • Fees/Rates – I also want to lump in fees, because they will detract from you earning power. Late payment fees, service charges, overdraft fees, mortgage rate, credit card rate, and ATM fees will effect your bottom line. For example, $20 a month on ATM withdrawal fees would probably warrant a close look at new options.
  • Easy to Use – Ease of use speaks to the complexity and convenience of the tools that the system offers you. Instead of breaking this into categories, I will throw out some questions that I think about are relevant: Is the website straightforward and easy to use? How hard is it to transfer money? Check card options? What does it take to deposit? Is customer service easy to contact, friendly, and efficient? Do I have access to branch services? Easy payment options? Do I have to wait in long lines? What happens when the internet is down? Good training materials? Remember, each person may have different requirements here, so balance the questions I posed with the particular questions you need to ask.
  • Provide Protection from Mistakes – The idea here is that when we inevitably make a mistake(and we will), how badly with the system penalize use? A large part of this requires doing business with companies with solid reputations that aren’t out to ‘get you’. Other than fee structure, this is based mostly on the experience of others. Research really helps, and the internet and blogosphere provide a plethora of relevant material. Most people bounce their first check, and don’t realize that they can call the bank and be given fee reductions. For example, the other day I emailed Wachovia to see if they could do anything about the Microsoft Money service fee. Although they couldn’t help long term, they did remove May’s $5.95 monthly fee.
  • Supports your Goals – Your whole financial system should be setup up to support your values and goals, but what does that really mean outside of helping me earn the most money. For me, I noticed that a college fund is noticeable absent from my system. Since my family is of the utmost important, I decided to pursue an ESA as part of our system. This support could even be more personal. If one of your values is earth friendliness, then maybe you would choose companies that are more environmentally aware. When a system aligns with your goals, using it will provide a sense of fulfillment that will help propel you forward. I know this may seem like overkill, but a little forethought and planning can go along way to creating success and achieving freedom from in your personal finances. So what does your financial system look like, and how does it stack up? Next post I will tie these criteria into the changes that we are making to our finance system.Does any one have any other criteria they use? Feel free to drop a note in the comments.

{ 4 comments… read them below or add one }

Glory September 9, 2008 at 4:07 am

but how one can provide protection from mistakes. Everyone does mistakes, we learn on them ;)

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Lening Afsluiten October 28, 2008 at 3:06 pm

I’ve nothing to add, but I do like your list. And I’m glad I found your website. I’ve been in dept for a five years, and it was like hell. You can’t buy anything and you live really sober.

I subscribed!

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Burt February 20, 2009 at 8:18 pm

If you want to be in control,create a budget and try to follow it. It can be easily done in Excel.The only downside of any system is that you need to fill figures in on a regular basis. However if create a detailed plan, broken down into months, weeks or even days it is not difficult to follow. I use My Outlook to set dates for payments and receipts, it is dead easy to use.

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Emprestimo Pessoal March 11, 2009 at 11:43 am

Having control and a good overview on our personal finance has always been important. It is just now, that we are in less prosperous times that everyone thinks about it!

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