Monday, June 1, 2020

Start Managing Your Money! (An Example of a Personal Financial System)

A few years ago, when I started receiving my first few paychecks, I remember casually asking my elder sisters: “How much should I save?” And their resounding answer was: “As much as you can!” I’ve often kept that moment in mind whenever making financial decisions. I hope you noticed that since I had to ask this when I was already earning, money wasn’t a usual topic of discussion when I was growing up. My parents almost never talked about it except to remind us to save. I still try not to think about it, but even then I knew that it was something that I had to keep myself on top of. So, I decided to create a system that would allow me to control my inflows and outflows without too much complication.

Again, I must emphasize that I’m no financial expert, so this post won’t tell you what to do with your money. Instead I’ll try to share with you my system as an example, and a simple one at that. I’ve been using it for the past three years, but I’ve been planning on redesigning it soon. Nonetheless, it has served me well and has done what I’ve needed it to do.

Hopefully, this leads to some adulting geoscientists to take their money matters more seriously and at least give them some idea of how to start. And if I’m doing something wrong (that I’m unaware of) hopefully someone more experienced can kindly point it out.

My system

First, my system requires tracking all my expenses. Because of this, I prefer to use an app on my phone, which I bring with me wherever I go. In my app, I have four “virtual wallets” or accounts which I use to separate my short-, medium-, and long-term savings. I call them Kilo, Mega, Giga, and Tera – referring to how much money I plan to keep in them in the long-term, and how often I plan to take money from them. Bear with me here, but I will start with the 4th one, Tera, and work my way down to the 1st and smallest one, Kilo.

Just for some context, I receive my salary four times a month; take note that this doesn’t always correspond to once a week. Each time, the amount is slightly different, but the monthly total is always the same.

Tera

This wallet contains money which I’ve allotted for long-term savings such as insurance and investments. One end-goal for this wallet is to save enough for retirement. As I receive my salary each week, I immediately record a fraction of it as an income for this wallet. This fraction is a nice number rounded up to the hundredths place, approximately equivalent to 20% of my salary. It used to be around 15%, but since my salary increased I felt like I could afford to put more into my savings.

Currently, I only spend a small percentage of this for my existing 10-years-to-pay insurance plan. I would like to invest more, but I am uncertain about my financial requirements when I start my PhD in the next year or so. I wouldn’t like to be in a tight spot in a foreign country and not be able to liquidate my money.

Giga

This wallet contains my medium-term savings. I’ve allotted this money for major life expenses that I may need in the next five years. Perhaps a car, a new home, my wedding(???). These are big expenses, so I record about 40% of my weekly salary as income for this wallet. It used to be around 30-35%, but I increased it due to the same reason that I increased the inflow to my Tera wallet.

This wallet also includes my emergency fund. If you aren’t familiar with that, it’s a sum of money equivalent to around two to three months’ worth of your salary. The idea being that if you lose your job, you have two to three months to look for a new one.

Mega

This wallet contains my short-term savings and has the most varied uses among the four. I use it to pay for almost everything that I don’t spend for daily. Some things I still pay for regularly, just not daily, such as utility bills, subscriptions, health and maintenance expenses, and school and office supplies. I also use it for things that I don’t buy regularly. So that would include gifts, new office clothes when the old ones get ratty, medicine when I get sick (which is often), field work expenses, conference expenses, etc. And the rest I get to keep for things that I want, such as new tech, field equipment (e.g. my compass, loupe, field clothes, field hat, field shoes, field notebooks), books, sporting activities, vacation expenses, etc.

I put everything that’s left from my salary into this wallet. So that would be around 40%. The balance of this wallet fluctuates wildly because of those irregular expenses. My largest purchase was my work laptop and that put this wallet into the negative side. This also sometimes happens when I have to pay for various field expenses or airfare for international conferences (some get reimbursed while some do not).

Kilo

This wallet is for my daily expenses. These are mostly just food and transportation, and I added a category called “others” just for various small expenses. I further sub-categorized my food into main meals and snacks (I have a bad habit of snacking too much, especially under stress). Remember those regular expenses I mentioned in the Mega wallet? One of those is my weekly allowance, which is an amount that I calculated as a reasonable average daily expense multiplied by seven. This amount, accounting for around 15% of my salary, is about a thousand units of my country’s currency, hence the name Kilo. This weekly allowance is transferred from Mega to Kilo. I don’t record this weekly allowance directly from my salary because my salary doesn’t come every week, as I mentioned earlier as context.

This wallet is mainly used to keep myself from overeating or overspending on the convenient and comfortable modes of transport. Taxis and ride-sharing services are more expensive compared to the cheaper but inconvenient public transport options. So, if I’m negative for one week due to overspending, I’ll tend to be more frugal during the following week, by eating less and waiting in line more.

Other details

These are “virtual” wallets because they don’t really exist. They’re just imaginary partitions of my money in my mind. My actual money is stored either as cash on hand, or in one of my two bank accounts.

The values I record as income for Tera and Giga are nice values, usually rounded up to the hundredths or thousandths place. The same goes for Kilo, but it usually changes by a few hundred when I anticipate an increase in food cost for a certain period (say, if I’m on a field work). So, I calculate my Mega income by subtracting my Tera and Giga incomes from the salary that I record. Then I subtract my weekly allowance from Mega, obviously each week.

I don’t expect you to follow the percentages I used. I think this depends greatly on individual circumstances. I urge you to do more research into the recommended savings percentages, to help you decide what’s best for yourself. One way to do this is to come up with a target value you want to have saved by, let’s say, the next 5 years. Then calculate how much you need to save each month to reach that goal. I also don’t recommend you to save too much to the point that you find yourself unhappy all the time. It’s good to hold back from purchases and be unhappy sometimes, as this can build character and prepare you for rough times (ahem ahem pandemic). But being unhappy all the time, in exchange for saving a lot, in my opinion isn’t worth it.

Benefits

1. I’m sure that I’m saving money the moment I receive my salary. I only spend on things I want when I have the extra money for it. Not the other way around, where I spend all that I want, and only save whatever’s left.

2. When a wallet, usually Kilo or Mega, is negative, I have a lingering feeling that I have to save. Like an itch that won’t go away. This continues until the balance goes back to zero and beyond.

3. When I want to make a purchase that isn’t necessary, such as a new device or accessory, the first question that matters is “Do I have enough in Mega to pay for it?” If not, then I don’t buy it. If Mega does have the money for it, the next question is “Am I willing to deduct that much from Mega and bring it back to a low value?” Being on the negative side gives me a bad feeling, and whenever I make a purchase, I want to make sure I have enough left in Mega to cover any sudden emergency expense (e.g. if my phone breaks and I urgently need a new one) without going back to the negative side. This way, my system prevents me from making rash, unneeded purchases (ahem ahem online shopping).

Drawbacks

1. My uncertainty about my financial future during my PhD studies is costing me a lot. Ideally I’d already be spending all my Tera money on a multitude of investments to let them grow. Instead, they’re mostly depreciating in a low-interest savings account.

2. Because my bank accounts overlap with my virtual wallets, I need to keep a separate list of my debit card and online transactions to make sure no one has hacked into my bank accounts. Ideally, I’d have a separate bank account for each wallet, but a) I don’t want to open a 3rd and 4th bank account yet, and b) then I’d have to transfer money from my payroll account to my other accounts every week, and to me that’s a bit of a hassle.

Takeaways

Before ending, I’d like to repeat that this is just an example. There are others out there that may be more convenient for you. The main takeaway that I want you to have is that you must start tracking your inflows and outflows, and hopefully this post made you realize that it isn’t that complicated.

Lastly, if you can afford to save a larger percentage than I do, then that’s truly great! But if you can’t afford to save as much as I do, I hope you don’t compare and despair. We all come from different financial backgrounds, and we all live different lifestyles (whether voluntarily or not). While in an ideal world we’d all start on equal footing, the current reality is that, to paraphrase Gandalf, “all we have to decide is what to do with the money that is given to us.” Hopefully, your financial system will help you decide what to do with the precious money that you so tirelessly worked for. Best of luck!


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