Even billionaires hate budgeting

Oracle titan Larry Ellison is famous for his conspicuous wealth enjoyment. At an Oracle conference I covered last fall, a reporter asked Ellison during the press Q&A about his recent purchase of some Malibu land, the cost of which I believe the reporter put at $180 million. (The always reliable Wikipedia calls the beachfront stretch "the largest single residential acquisition in United States history".) Ellison shrugged and said it's nice to have a bit of land on the water, and that he wasn't really sure how much it all cost. I mean, seriously. What busy mogul has time to keep track of pocket change like a few hundred million?

Seems Larry's accountant would like him to start balancing his checkbook more often. From a story in today's San Francisco Chronicle:

Like a concerned parent, [accountant Philip] Simon chides Ellison for overextending himself on a new yacht, on his America's Cup team and on his new houses in Woodside and Malibu.

"I'm worried, Larry ..." Simon wrote to Ellison in a 2002 e-mail. "I think it's imperative that we start to budget and plan."

Oh, Larry. I share your aversion to planned spending. First you're writing a cheese budget, and the next thing you know your financial advisors are telling you to knock off the impulse shopping for yachts. That's no way for civilized people to live!

Consolidate student loans NOW

There have been lots of headlines lately about major changes in student-loan legislation that will reduce the amount the federal government spends on education subsidies. One practical offshoot of this is that rates are about to jump this summer, to 6.8% on Stafford loans, up from the current 4.7% (for students currently in school. For those out of school, it's 5.3%). Those with loans still lingering can take advantage of consolidation to lock their rates down before the hike hits.

I've been nervous about consolidation. I've heard the horror stories: Consolidate once, and you can never go back. If rates go down, you're still locked in -- unlike a mortgage, you can't refinance your consolidation.

But I'm also hearing the horror stories about waiting to consolidate and getting glued into this summer's higher rates. I decided to take my 4.7% rate and run with it. (Consolidating can also lower your monthly loan payments, by extending the repayment term. Of course, stretching the loan over a longer period increases the interest you ultimately pay. Fortunately, there are no prepayment penalties -- I'm planning to keep paying at a higher rate than my minimum. If you're crunched for cash, though, consolidation can be very helpful.)

I also held off on consolidating because I didn't think I should do it while I'm still incurring new loans. Turns out, thought, that that's actually a really good time to do it. While you're in school (or in the just-left grace period), rates are slightly lower. Also, while you only get one shot at consolidating, having a new, unconsolidated loan is a reset button. You can't redo already consolidated loans, but you can redo the process if you have a new loan to add to the mix.

Consolidation has never been easier. Instead of mucking around with long and intimidating paper forms, you can do it all online, either through the government's website or through your lender's. (I did all this through Citibank's site.) Filling out all the paperwork for mine took less than an hour, and all the info I needed was available online -- I just cut and pasted balances into the consolidation form.

Student loans are daunting, but being an ostrich about them is costly. I'm kicking myself for not consolidating a year ago, when rates were even lower. Grr.

Reasons to stay single (on your W-4, at least)

I married my husband David right after I left college, when I was still figuring out how things worked with paychecks and taxes. Within months of getting married, we each started new jobs (for David, an Australian, his job was the first he had in the U.S.). With the new jobs came new W-4s. Because I was now married, I checked that box on my forms. So did he.

That, we later learned, was a very expensive mistake, thanks to the IRS's antiquated assumptions about family finances.

By checking married, I lowered the amount of withholding my employer pulled out of my paychecks. So did David. Because we were both new to our jobs and pay levels, neither of us realized our take-home pay was suspiciously large.

It turns out that if you check married, the withholding calculations assume you are married and the only income earner in your household. But David and I not only work, we each earn nearly identical salaries. If one of our salaries were supporting both of us, we'd be in a much lower tax bracket than we are with both salaries -- and the married withholding was done with that assumption, that the household had only one wage earner. Oops. At the end of the year, in place of our customary refund, we had a $3,000 tax bill. Much panic ensued. Crawling out of that financial hole (which we only did thanks to David's willingness to survive on ramen noodles for six months to pay off the IRS) was deeply stressful and unhappy.

I haven't filled out a W-4 in years. I just looked at the newer ones, and see there's a box for "married, but withhold at single rate." Immediately after our oops, David and I refiled our W-4s to switch to single-rate withholding. Now we're back to getting refunds. It makes tax time much happier.

(I realize there's a school of financial thought that says you should try to minimize tax refunds, since you're essentially loaning money to the government for free that could instead be invested and earning you interest. However, David and I have little fiscal discipline, and with higher take-home pay, we'd be investing in more sushi dinners and books. We're better off foregoing that interest and using the IRS to force us to save a bit more from each paycheck to get back as a tax-time lump sum.)

Maintenance updates

Because I wanted TrackBack functionality and a more open commenting system, I've swapped out the Blogger defaults and installed Haloscan. In the process, I wiped out existing comments. Whoops! Sorry about that; I'd intended to have this sort of infrastructure stuff sorted before I took the blog 'live,' but alas. Comments should be set from here on out. Thanks for reading along :)

Notes from the health care trenches

Two months ago, all I knew or cared about with my health care coverage was that I had some. But right after we clocked over to 2006, my spouse ended up in the hospital and I took a new job -- which means trolling the fine print of health-care policies is my new leisure-time activity. Here are a few quick things I've learned, answering questions I'd had about how these mysteries work:

- My health care premium is somewhere around $100 a month. I suspected COBRA premiums would be higher, if I elected to continue my coverage for the gap month I'll have before my new coverage kicks is. I did not expect them to be $400 higher. The helpful sheet HR sent me today puts my monthly COBRA rate at $457.42. Covering my teeth as well as the rest of my body would be an extra $41.94 per month.

-The good news: When you leave a job, you have 60 days to decide whether you want to pay for COBRA continuation coverage. And it's retroactive. So, I don't have to commit now to paying for health care coverage I probably won’t need. If I break my leg in two weeks, I can then retroactively opt in on COBRA. The grace period is even a little longer, in practice: After you elect COBRA coverage, you have 45 days to make your first premium payment, and not making one effectively cancels the coverage, with no penalty.

-My other concern about health care and job changes was the nasty "pre-existing condition" exclusions I hear about. If carriers can deny coverage on existing medical issues, I wondered, how the hell would anyone ever be safe to change carriers? If I developed a chronic condition requiring regular care, would that forever lock me to my current job?

Not exactly. First, the maximum length of time insurers can block coverage of existing conditions is 12 months. Not great, but also not indefinite, at least. More importantly, the preexisting condition exclusion is only allowed against those who have a gap in their health care coverage. If you are currently covered under a health-care plan, and you move directly to another, you can take with you $10,000 monthly bills for an entire diagnostic manual's worth of ills and the carrier can't exclude it. (COBRA counts as a qualifying plan. So, if you leave a job and elect COBRA, you avoid the gap.)

You even get a bit of leeway with the "directly" part. You're allowed a 62-day stretch without losing your prior-coverage qualification, and if your employer imposes a waiting period before health benefits kick in, that also doesn't count as a gap: your clock on insurance qualification starts on your start date.

Which means that those with typical company health-care plans, like me, can leave one job and not have any pre-existing condition worries so long as they start a new job (assuming it carries similar benefits) within two months. Whew.

Can we please just socialize the damn system?

Playing chicken with airline miles

The Washington Post's intriguing new consumer-issues blog, The Checkout, writes today about changes to Capital One's rewards-points policy that radically deflated the value of members' airline mileage points. The coverage underlines a point I'd already taken to heart: start spending those airline frequent-flyer points, stat.

Any financial instrument is only as valuable as the institution backing it. At the most basic level, paper money only has worth because we trust governments to honor the currency power imbued in coins and bills. But, as too many people are learning as they watch promised pensions evaporate, the system of guarantees becomes meaningless when one party backs out or alters the contact's terms -- and in many cases, there's nothing the other party can do about the change.

Anyone who has picked up a newspaper in the last year is aware that the airline industry situation is dire. Four of the seven major U.S. carriers have gone bankrupt (Northwestern, Delta, United and U.S. Airways; United is scheduled to emerge any day now, and U.S. Air's escape clause is its merger with America West), and all the remaining players are struggling to stay afloat amid the problems posed by soaring fuel costs, labor challenges, and business models predicated on scarily thin margins. Anyone want to place a long-term bet on an airline's solvency? I sure don't.

Traditionally, rivals have viewed frequent flyer programs as jewels available for plucking when a competitor goes under. Someone buys the list and honors the miles members have accrued. But with all the airlines struggling, the calculations are different. It's tempting to hoard miles and dream about the exotic vacations you'll use them for one day. But with the currency of mileage at great risk of hyperinflation, I say it's better to burn them up now and get some value from them, while they still have any.

The virtues of PocketMoney

Quicken seems to be the popular favourite for personal-finance management software. I've never been tempted to use it because, as noted, I don't have any desire to keep a strict budget. But several years back, I decided I did need a program to replace my oft-neglected paper checking account balance register. I wanted software for my Palm, the device I can't live without. (I feel about my Palm the way iPod devotees feel about their iPods.)

This was quite a while back, so there may be interesting new options I'm unaware of, but I tried out three or four programs and settled on this one: PocketMoney. I like the interface. I don't use fancy features, but I gather it has some. Were I so inclined, I could download my financial info and data-mine my spending. It's fairly cheap, and you pay the fee only once -- no annual-subscription nonsense. For Palm owners looking for a finances program, I highly recommend it.

How to avoid budgeting

Almost all of my financial organization is predicated around one core principal: I never want to draft a budget.

How you handle money is intensely personal -- and I, personally, have always chafed against the idea of drawing up strict categories like "books," "food," "clothes," etc. and trying to first anticipate, and then stick with, planned expenditures. My expenses swing wildly around. One month I'll go through $300 buying new pants and blouses, and then I'll go six months spending nothing on clothes. One week I'll eat out a lot and spend less than $20 on groceries; the next I'll drop $100 at the store and cook for four days straight.

These decisions are generally impulsive. I could be more disciplined about deciding in advance what my near-term priorities will be. I could sit down at the beginning of the month, decide that I need new clothes, and write up a nice, detailed budget allocating money for that. Or I can do as I've always done and shuffle financial priories on the fly.

What makes my system workable for me is my ability to mentally subdivide and track my expenses in two categories: fixed expenses and 'slush fund money.' A few weeks back, a friend pointed out Stackbacks, a budgeting system that works on this principal. The Stackbacks wrinkle is that its creator hit on the idea of physically separating these two categories. He suggests setting up two checking accounts. Calculate your monthly fixed expenses (like rent, cell phone bill, utilities, car payments, planned savings, etc), and from each paycheck, immediately transfer the money needed to cover them into your fixed-expenses account. Set up automatic payments for those bills so that the money reliably withdraws on schedule. Then, your other checking account becomes your slush account. Use the money on the fly for whatever you need, but when it's gone, it's gone. The advantage of the Stackbacks system is that it protects fixed money for the essentials: you won’t accidentally spend the rent money because your landlord was slow clearing the check.

I can see the appeal for people who don't keep detailed checking-account records and have trouble tracking what money in their account is 'available' and what isn't. My mental categorization essentially works the Stackbacks way, and has ever since I got my first paychecks, except that I don't physically maintain two separate accounts. I use PocketMoney to track expenses on my Palm (that'll be its own post ...) , and I'm religious about noting down every single debit or ATM withdrawal. When I get paychecks, I immediately deduct rent, monthly bills, etc from my PocketMoney register --- and once the money is gone there, my brain treats it as truly gone, even if it takes days or weeks longer to actually move out of my checking account. This works fine for me because I don't mind paying close attention to my checking-account debits. It would stress me more not to. For those who hate such meticulous record-keeping, the Stackbacks system seems an interesting idea.

With one big caveat: On-the-fly spending is likely to lead to impulsive spending. I know that it does with me. If a new cheese catches my eye at the grocery and I have a reasonable amount of slush to tide me over to my next paycheck, I'll drop $10 on the cheese. Same with clothes, books, whatnot. If I planned my expenditures in advance and, say, set a cheese budget, I'm pretty sure I would spend less.

But the caveat to the caveat is that money is only useful for what it buys -- and for me, I've made the decision that indulging in such impulsive budgeting is more valuable than the $100 a month or whatnot I could save through better planning. It's the personal-finance writer's chestnut to point out how much little things add up. With that $2 a day you spend on coffee, they cluck, you could instead bring coffee from home and put an extra $400 a year to work in your 401k, or save for that big vacation ...

But, dammit, I like my coffees, deli lunchs, throwaway magazines and other fripperies. I like them enough to forego a few hundred (or even a few thousand) extra each year toward bigger, grander goals. My long-term savings isn't terribly impressive, but it's not awful, either, and I comfortably meet all my basic obligations each month. Part of why I go to work each day is so that I can earn enough money to not have to watch every penny. It's a luxury I'm willing to pay a high price to enjoy.

Slash your magazine budget to nothing

I'm not a count-every-penny type, and I don’t expect to turn this blog into a compendium of frugal moneyscrimping tips like 'save $10 a month by reusing your coffee grounds for two or three days straight!' But some savings chances are too good to pass up -- like this tip pinched from PFblog: eBay your magazine subscriptions. The economics of why this works are completely beyond me (the circ side of magazine publishing is a very deep, very black information vortex), but you can reliably find dirt cheap subscriptions on eBay to almost any magazine listed with major distributors.

I've long used airline miles, media connections and discount mailers to avoid paying full price for my list of subscriptions, but eBay is putting even my methods to shame. The Time subscription I wrangle annually with Time Inc.'s customer service to get for $30 (the price they charge new subscribers -- charmingly, they try to hit existing customers for twice that to renew) is available on eBay for $14. New York magazine, perennially trying to jump its rate from around $18/annually to $40, goes for $6 on eBay. Even Wine Spectator, which digs its heels in hard on its steep $49.95 subscription rate, eBays cheap. You can grab it there for $10/year.

The caveat on this is that I haven't yet tried renewing any eBay-procured subscriptions. I imagine that renewals will only be offered at rack rates, which means that profiting from the cheap deals will require letting subscriptions lapse each year and restarting them afresh off eBay. That's somewhat painful. Still, for a $40 a year savings on Wine Spectator? Bring the pain.

Tracking frequent flyer miles

This isn't precisely a finance topic, but it plays into my general information-organization strategy. I fly often, but I tend to go for the cheapest ticket -- which means I have memberships in more than a dozen frequent flyer and hotel rewards programs. I badly needed a centralized way of viewing my points in various programs.

It seems like a simple task: a quick-and-dirty programming job should be able to code up an application to pull data from assorted airline sites. Unfortunately, most of what I found when I started searching were programs that charge for their tracking services, like MileageManager and MaxMiles. I wasn't interested in fancy premium services -- I just wanted a centralized tally of my miles. But free sites did a lousy job of it. Yahoo's Awards Tracker could only hold a small number of programs (it's since been closed down -- I think the limit when I tried it was six programs), and sites like Points, which includes a balance tracker, cover only a handful of programs from their partners.

I grudgingly signed up with MileageManager and used that for a few months, until I happened across my current solution: a desktop app. USA Today's MileTracker is completely free, supports more than a hundred frequent flyer programs (including all of the ones I use), and works quite well. It's not a Web program, so you'll only be able to access the information from the PC on which the application is installed, but for me that's an acceptable trade-off.

Having my miles centralized does end up saving me money, since I've finally started cashing them in, now that it's easier to see how many I have with each program. I've snagged two free roundtrip Denver -> NYC tickets so far this year. Yay.

Seeking those 401k index funds ...

One wrinkle with implementing an index-fund strategy in your 401k is that every financial company has its own list of funds available for selection -- Burns' column focused on Vanguard (with them, the funds he cited for the Margarita Mix are the Total Stock Market Index fund [ticker: VTSMX], Total International Stock index fund [VGTSX] and Inflation Protected Securities fund [VIPSX]), but my 401k is with ING. Picking index funds isn't always straightfoward , or even possible, I found.

Finding an S&P 500 fund analog isn't hard -- the "500" in the fund names tends to be a tip-off. At ING, I'm using the Scudder Equity 500 Index Fund (operating expenses fee: 0.25%). With bonds and international indices, it gets trickier. My plan at ING doesn't have any international index available, so I dug through all my international options and took a stab at the one that seemed to offer the best returns/fee stats. I'm using the Oppenheimer Developing Markets Fund, with a relatively hefty 1.52% fee. After digging through my bond choices, I went with PIMCO VIT Real Return Portfolio, which focuses on inflation-indexed bonds (annual expenses: 0.65%).

Of course, having finally worked all that out, I'm now changing jobs and will need to roll my 401k into my new employer's plan. Watch for a new distribution strategy next month ...

Fixing my 401k

I started my 401k around 1999, but I only started paying attention to it in 2001, when I changed jobs and began funding it in a more serious way.

I had gotten the 401k mantra that everyone repeats through my head -- "max your employer match" -- but no one had ever offered me any advice about the next step (and I hadn't sought any out): picking from among the large assortment of mutual-fund options. My employer sent along a thick folder of prospectuses and a power-point deck about "401k strategies." I flipped helplessly through these papers a few times and came away only with a vague impression that as someone with more than 30 years to go till this mythical "retirement" phase, I could afford to try out a few of those investment options labeled "aggressive." I picked out 10 funds in various categories, spread my money somewhat randomly across them (20% or so to a bond fund for safety; 4% to a "technology" fund because hey, I'm a tech reporter, and I should support the home team), and forgot about my 401k.

Every year or so I would notice the pile of statements ING mailed me and open one to see how my 401k was doing. Each time, I'd be astonished by two things: 1) it had actual money in it, in sums that felt rather sizable to me. Yay automatic paycheck deductions and investments!, and 2) the "investment earnings" section was usually negative. Now, this was all post-bubble, and the stock market was doing nasty things to most people. I was never tempted to stop funding my 401k because my employer match kept me coming out ahead, and I knew that if money wasn't being automatically deducted, I'd waste it anyway. But it gnawed away at me, and I finally hit the point last Spring where I decided to do some research and try to staunch the red ink.

After only a few hours of research, I'd reached a startling conclusion (well, startling to one who earns a living as a business journalist): I hate money. I hate finance. Stocks and Wall Street strategy bore the hell out of me. Not just interminable, predictable-bad-movie boredom; this was 'I would rather jab my eyes out with flaming Q-tips than keep reading this stuff' antipathy.

So I gave up on research and went for Plan B. I asked older, presumably fiscally wiser friends for advice on 401k distribution. One suggested that I check out the "Couch Potato" strategy.

Some Googling explained the method to me. It's a formula cooked up in the early '90s by Dallas Morning News personal-finance columnist Scott Burns. Its core tenant: Most mutual funds charge management fees. However, most mutual funds don't outperform indices like the S&P 500 over the long haul. Therefore, you can do reasonably well passively investing in just a few basic index funds and otherwise taking a hands-off approach with your 401k.

The fees issue is something I hadn't thought about at all, but which turns out to make a huge difference for long-term investing. Mutual funds charge management fees (.25% to 2% seems to be roughly the range) which come not off your profit, but off your total invested assets. So, say your $1,000 investment is in a fund returning 10 percent growth for the year. Now you have $1,100. If you lose half a percent of that to the management fee, you deduct $5.50, and your total gain for the year is $94.50. With a 2% fee, the management cut jumps to $22, and your gains are down to $78. Pretty big difference -- especially when you start calculating it for hundreds of thousands of dollars.

Because there are no high-priced judgement calls involved in running index funds (which simply buy the stocks included in the indices), they have low management fees. The Couch Potato ethos is to put half your 401k assets in an S&P 500 Index fund and half in a bond market index fund. I opted for one of Burns's more recent passive-investing concoctions: the Margarita Mix. It's slightly more aggressive, and calls for a three-way mix of a domestic stock index, an international stock index and an inflation-protected Treasury securities fund.

So how'd I do? Consistently positive returns since I made the switch in April, and a 12% return for the trailing twelve months, according to my December statement. OK, what really matters is how this performs over decades, not six months, but still -- it's comforting to finally see my 401k investment returns go up, not down.

Liftoff

My personal finance kick began late last year when I discovered that I'm almost out of credit card debt. With that moment of bliss came a startling realization: I know how to manage debt. I have no idea how to manage savings.

All the screaming about The One Cardinal Rule of Finances for Young Adults -- "Start Your 401k NOW" -- had gotten that tiny bit through. I've had a 401k since I was 20, and when I started a job five years ago that actually offered a match, I began putting in the maximum amount my employer matches (4%). That is the only fiscally savvy thing I have ever done: I have a 401k balance hovering in the lowish-five-figures. I have no other assets or savings. I don't know how to organize savings: investments? CDs? Buy a really nice mattress to stuff cash under?

I hit the bookstore, and found tons of self-help books on finance. Most made me want to flee in panic. I'm in my twenties. I don't have a mortgage, kids, estate issues, tangled investments or any of the complications that financial advice writers focus on so they can pad their books out to decent lengths. The information I'm after is much more basic -- for instance, should cash-for-savings go into a retirement account like my 401k, or into something shorter term? What are the best short-term options?

So, welcome to my personal finance blog, where I'll write about helpful info and tips I pick up while attempting to turn my financial house of cards into some kind of foundation.