Create and Maintain a Budget Using Wesabe

For the past several months my wife and I have been using the free, easy-to-use, web-based software called Wesabe. Many of you have been asking me about it lately so I decided to give a brief overview of what it is and why I like it.

First, I'm a firm believer in the importance of spending your money intentionally, rather than being surprised by your purchases at the end of each month. In order to do this a detailed budget must not only be created, it must be constantly maintained. There are many different programs out there to help you in this endeavor like Quicken and MS Money, but Wesabe is free and it adds the community element which I'll explain later. Before I forget, here's the link to a quick 3-minute video tour of Wesabe if you're more of a visual learner: VIDEO TOUR

Some of the highlights of Wesabe:

All Your Accounts in One Place - Wesabe is nice because it allows you to view all of your bank and credit card accounts in one place making it easy to budget, categorize and view all of your spending rather than having to skip from site to site.

Creating Spending Categories - When you first upload an account (checking, savings,
credit card, etc.) with Wesabe it displays the transaction exactly like it reads on your financial statement, often meaning pointless numbers and codes with no relevance to you. Wesabe then allows you to edit the transactions individually changing the bank code into something you can use like, "McDonald's" or "Apple Store". What makes Wesabe great is that from that point on it will recognize if a similar transaction comes though and will assign it the name you chose automatically; meaning, if you receive a paycheck on the 1st and 15th of each month from the same place Wesabe will recognize this and call the transaction "Paycheck" (or whatever you assign).

Also, as part of the editing process Wesabe enables you to "tag" each transaction, putting it in a specific category like "Restaurant" or "Entertainment." This ability to create spending categories is obviously key in creating and maintaining a detailed budget. The tag process also "learns" as you use Wesabe more, automatically assigning repeat transactions the right tag. For example, if you go to Chili's every week you will only have to assign the first transaction a name and tag, after that it will do this for you as it recognizes the same purchase item or place.

Creating Spending Limits - Another handy tool Wesabe offers its users is the ability to create spending limits. Users can assign each "tag" or spending category a certain spending limit for the month and Wesabe automatically keeps track of where you are as you make your purchases. If you set a "Restaurant" limit of $150 for the month, Wesabe will let you know that you only have $50 left for the month if you go out one night and spend $100 on a meal. This is probably my favorite feature as it eliminates the guessing of where you are at any given point in time in regards to your budget...helping you spend intentionally

The Community Element: Tips and Goals - Wesabe is unique from traditional budgeting software in that it relies on its community of users to provide guidance and tips on how to successfully manage your money. The "Tips" section of Wesabe looks at common themes in your spending and automatically provides user-generated tips specific to you. So, if you're a single-person with no kids you won't be receiving advice on saving money on diapers or budgeting for your kids' college tuition.

The community also comes into play in the "Goals" section of Wesabe, a place where you can create and monitor your personal financial goals. The wife and I currently have goals including buying our first house and maximizing our yearly Roth IRA contributions. Wesabe allows you to connect with other users with the same goals giving you an opportunity to discuss, share and learn.

Overall, we've been very pleased with Wesabe. Every once and a while it mis-tags a purchase, but that is rare and easy to fix. The only other problem we ran into was having one transaction come up twice in "Bills" and "Payments"...we fixed this using the filter feature, filtering out the "Payments" from our spending and earning summaries. Finally, many have questioned the security aspect of uploading financial accounts onto the web...understandable, but Wesabe takes security just as seriously as any of your financial institutions that you bank with daily. Check out there security policies here: https://www.wesabe.com/page/security.html

3 Investment Principles Every Young Person Should Know: #3 Dollar-Cost Averaging

Continuing on in the 3 Investment Principles series (If you haven't caught the first two here they are: Time Value of Money and Pay Yourself First) we come to the final principle: Dollar-Cost Averaging (DCA). The aim of DCA is to reduce the risk associated with a single, large investment by spreading out the investing (and risk) over time. Everyone has heard the token financial advice, "buy low, sell high." Seems simple enough, but in reality no one can predict exactly when a stock will bottom out. By investing a fixed dollar amount at regular intervals (weekly, monthly, etc.) regardless of share price, you will end up buying more shares when the price is low and less when the price is high, thereby maximizing your total return.

An example of this from youngmoney.com:

"Dollar cost averaging works like this: systematic investments are made to an investment account. For this example we will say on a monthly basis. To keep things simple we will also say that the investment account is allocated 100% into one growth fund. We will use $100 as the monthly investment amount. Now, depending on how the market is doing that fund's price is going to fluctuate from day to day. So let's look at a six-month example in the table below.

Month	Price	Shares Purchased
1	20	5
2	16	6.25
3	10	10
4	5	20
5	10	10
6	25	4

In the example above, you have invested $600 and your account is now worth $791.73. Over the six-month period, you paid an average of $14.33 per share. If you would have taken all $600 and purchased the shares at the beginning of the six months, you would have purchased 30 shares and your account would now be worth only $750. For this example, using dollar cost averaging has increased your account by over 5%! Of course the above scenario is just one example of using dollar cost averaging. There are many."

This isn't to say that this method of investing doesn't have its critics. DCA operates on two assumptions: 1) the investment (stock, mutual fund, etc.) follows an overall positive trend over the investment time frame, meaning, dollar-cost averaging isn't going to help if the investment you're putting money into ends up losing value in the long run. 2) If you happen to get extremely lucky and start investing at the bottom of a long-term price trend you would be better off buying a lump sum...good luck timing the market!! John Wagonner explains in USA Today, "Dollar-cost averaging typically does best when an investment goes sideways or down for years and then, at the end of the period, suddenly breaks to the upside."

As is the case with nearly everything in finance, time frame matters. "Regardless of the amount of money that you have to invest, dollar-cost averaging is a long-term strategy," explains Jim McWhinney for Investopedia.com, "While financial markets are in a constant state of flux, they tend to movie in the same general direction over fairly long periods of time. Bear markets and bull markets can last for months, if not year. Because of these trends, dollar-cost averaging is generally not a particularly valuable short-term strategy."

In the end I like DCA for one simple reason, it builds a habit pattern of investing in season and out of season. Its very easy to form the wrong habits in an affluent culture like our own. It seems everyone, but you, always has the latest gadget, toy, car, etc. Spending, saving, investing are all habits. The purpose of this 3-part series on investment principles is to help make good habit patterns, ones that create wealth and enable you to live the High Life.

2008: The Year to Buy a House?

Anyone who has caught a glimpse of the news over the past year has heard of the black cloud hanging over the American housing market in regard to the sub prime mortgage mess. Record numbers of home buyers defaulting on their loans has had a tremendous ripple effect on everyone from lending companies to major banks, and the U.S. real estate market has shown the strain. Prices have retreated and supply has grown as lenders have tightened down their lending policies and mass foreclosures have become common place. As the saga continues the question is whether 2008 will be the year to buy a house? This question has become personally relevant as my wife and I prepare to purchase our first home sometime next Spring depending on where the Air Force decides to send us after Pilot Training.

After a little research the answer is mixed at best. For one, as real estate agents are often fond of saying, "real estate is local." Some markets are expected to continue their decline in 2008 at double digit rates while others, mainly those catering to vacation home buyers, may already be close to bottoming out. A recent CNNMoney.com article provided the following table listing those areas predicted to be hit worst by continuing declines in housing prices.

Secondly, the answer to whether or not to buy in '08 hinges on how long you plan on keeping your house after the purchase. While opinions on the time frame for a market turnaround are incredibly diverse, almost everyone agrees that in a few years the crisis should be over. Meaning, if you buy a house tomorrow, as long as you're not trying to flip it in the next year or two, you should be fine.

Keeping these things in mind the best thing for a potential buyer to do is scout the area and put their "House-Flipping for Dummies" book at the back of the shelf for the time being.

Barbara Corcoran, the real estate contributor to CNBC, MSNBC and NBC's TODAY show explains, "Give yourself a crash course on home prices in your area by visiting the open houses of homes similar to the one you've got your eye on. Then, get three competitive brokers to give you a cost estimate of what the home is worth. Once you're armed with information, you can put in an educated offer. A nice place to start is 15 percent below the asking price, if it's properly priced, or 15 percent below what you believe the value is if it's not.”

Here are some good sites that can also help you research the local markets by providing tons of great information on the prices of recently sold homes, for sale listing, neighborhood information, trends, etc.:

1) Zillow.com

2) Trulia.com

3) Redfin.com

As Marelize and I go on our own little journey through the world of the first-time home purchase next Spring I will be sure to keep you updated on the process.

3 Investment Principles Every Young Person Should Know: #2 Pay Yourself First

If you want to create wealth you must either save more or spend less...that's it. Why is it so hard then? Most people have the best intentions when it comes to doing these things, but at the end of the month, when the bills and statements arrive, the letdown begins. You realize that your money has yet again pulled a Houdini and is no where to be found...where did it go...you stand there puzzled, your empty Starbucks cups and Hollywood Video receipts mock your weakness. And so the cycle goes...unless you make a change. Thus, the second of the three investment principles every young person should know:

#2: Pay Yourself First

Most people pay everyone else before they pay themselves. They hope at the end of the month they will have some money left over to put towards savings or investments, but it rarely happens, its too easy to spend money. Paying yourself first means exactly that: when you get your paycheck, before you start paying bills, going grocery shopping, filling your gas tank, etc....take a percentage and put it in savings or investments. If you do this you will never go a month without saving money. At the end of the month you will still probably spend all your money...its what we are all great at, but the savings will already be in the bank, safe and sound.

The easiest way to pay yourself first is to set up automatic fund transfers on the days you receive your paychecks. This way you won't even realize the money is gone, you'll budget and spend according to the new amount. Spending is largely psychological, if you start out with a smaller amount your mind will tell you that you have to spend less, be more frugal.

Finally, an example of the power of paying yourself first from financial educator David Bach, author of "The Automatic Millionaire":

"Let's assume you make $50,000 a year. That's about $2,000 every two weeks, which is how most people are paid. So to save 10 percent of your income, which is less than an hour a day of savings, you'd have to save $200 every two weeks -- or $14 a day.

If you invested $200 every two weeks for 35 years in a retirement account that earned an annual return of 10 percent what would you have? Quite a pot of gold: $1,678,293.78."

**Author's Note: I actually pay myself second, I give the first 10% of my income to my local church, also known as tithing...but the principle remains the same.

3 Investment Principles Every Young Person Should Know: #1 The Time Value of Money

Since my last post I have had time to read more of Ramit Sethi's, I Will Teach You To Be Rich blog. As I have read the articles and seen the demand for simple financial education...and after many discussions with friends it has become obvious to me that many college and twenty somethings have not been introduced to basic money and investment principles that most close to finance would consider fundamental. For the next few days I'll be laying out the three investment principles every young person should know.

#1 - The Time Value of Money




The basic premise of the time value of money is that all else being equal an investor is better off receiving a certain amount of money today than he is receiving that same amount of money in the future. Basically, money now is better than money tomorrow. To most people this is instinctive, of course you would want money NOW! But why? One would assume that the value of $1 today is equal to the value of $1 a year from now, but this assumption is wrong. The dollar received today is more valuable because of all the ways you can make it grow. Just by putting it in a savings account you'll at least earn interest on it, thereby increasing its future value Here is an example:

You are given the choice between
Option A: $100,000 today
Option B: $100,000 in 3 years.

Lets say you decide to take Option A and invest your $100,000 in a savings account with a simple annual rate of 5%.

Future value of investment at end of first year:
= ($100,000 x 0.05) + $100,000
= $105,000

Next you leave this money untouched and let interest continue to accumulate

Future value of investment at end of second year:
= $100,500 x (1+0.05)
= $110,250

These equations rolled together would be equivalent to:

Future Value = $100,000 x (1+0.05) x (1+0.05) OR
$100,000 x (1+0.05)^2

Using this logic after three years the value of the $100,000 would be:
= $100,000 x (1+0.05)^3
= $115,762.50

This equation allows us to calculate multiple years or periods of interest without having to add each period up individually and is the basis for one of the most basic finance equations out there:

Future Value = Present Value x (1+interest rate)^number of periods



NOW, before you zone out from too many numbers. Here is the bottom line. Option A, in this case, is $15,762.50 more valuable than Option B, who's future value is equal to its present value. And remember, this is just assuming you put the money into a savings account making 5% interest. Option A could in fact be much more valuable if you instead invested the money in the stock market which has averaged approximately %10 percent return per year over the past several decades.

Compounding interest (another discussion in itself) allows our youth to work for us in mighty ways so that the money we have today is in fact much more valuable than money we will have in the future. Albert Einstein was quoted as saying, “The most powerful force in the universe is compound interest.” Understanding the time value of money principle allows us to harness this force and create wealth.

You're Young So You Should Get Rich

It amazes me the amount of financial advice availabe today. Books, seminars, blogs, dvds, etc. with the sole purpose of showing you how to make money. I'm all for it to be honest, the more information available the better....although there are a lot of crooks and idiots out there as well. So, you have to be careful who's advice you take. I found a blog yesterday entitled I Will Teach You To Be Rich by Ramit Sethi, a young Silicon Valley entrepreneur. While I admit I haven't had the time yet to read through all of his articles, I was in agreement with his general views on creating wealth. The principles below are from his blog with some extra info added in by yours truly. I post these because they are, in large part, the same principles that I have come up with as I've attempted to hack my way through the jungle of financial plans, solutions and gimmicks in my own life. Nothing cosmic...THERE ARE NO SECRETS...but sound advice to any college/twentysomething wanting to create a stable financial base:


-- Create and Maintain a detailed budget. Wesabe is an excellent site I use that helps you do this...best part, completely free! Upload your accounts, label transactions, set spending limits and you're on your way.

-- Get your credit report. A recent amendment to the federal Fair Credit Reporting Act requires each of the nationwide consumer reporting companies – Equifax, Experian, and TransUnion – to provide you with a free copy of your credit report, at your request, once every 12 months. To get these reports go to www.annualcreditreport.com

-- Make sure you're not paying fees on your bank accounts or credit cards.

-- Open a high-interest bank account. www.bankrate.com will give you a comparison of all the different banks and their interest rates.

-- Establish a savings goal of 20 to 30 percent of your income, if possible.

-- Open an investment account at a discount brokerage. Most of my friends that I talk to about this look at me with horror saying they just don't know what to do...believe me, brokerage houses don't get rich by making it hard for you to open an account with them. Call, ask questions, don't make any quick decisions. If you already use USAA they do a good job, I'm also a fan of American Funds...if you go the mutual fund route.

-- Fully fund 401(k)s and Roth IRAs. If you are over the age of 22 and do not have a Roth IRA set up, even if you don't contribute much yet, you are flushing money down the toilet. It takes literally a few minutes to set up an account that will allow you to grow money throughout your life TAX-FREE.

First Costs vs. Life-Cycle Costs aka How to Buy Stuff

One finds himself organizing and reorganizing his life many times as his first child's birth approaches. There is a constant assessment of the "known-knowns, known-unknowns and unknown-unknowns," as Donald Rumsfeld would explain it. One of the fields in constant flux over the past few months has been finances, specifically how much a new baby will cost, how much we should buy beforehand and finally how much should be spent on certain items. My wife and I have had many great debates on these issues and found at the end of it all a philosophy of money and spending that both of us have come to agree on (for the most part). The philosophy hinges on the difference between "first costs" and "life-cycle costs."

A good example of this difference is found in Thomas Stanley's book, "The Millionaire Mind." He gives the example of deciding whether to pay a professional plumber $150 to come install a new water heater or buy the supplies and install it yourself. Ask this question to a group of people and chances are you would get a good spilt between the DIY crowd and the "pay the professional" crowd.

Stanley writes, "Milliionaires and those who are likely to become wealthy someday are not 'first-cost' sensitive; they are life-cycle-cost sensitive. 'First cost' refers to the dollar cost savings if you install the water heater instead of using a skilled plumber. You may have saved $150 in the process, but the figure is very deceptive. You see, the plumber's quote included a high-efficiency water heater. You shopped and found a low-priced (first cost) water heater with the same gallon capacity as the high-efficiency one, but over the projected life of the heaters, the plumber's will save you more than the $150 in terms of operating costs. Also, the plumber's is estimated to last longer and heat water faster. Over the life of the heater you would install, there is no warranty on the installation. You could easily install it incorrectly and burn out the system..."

He goes on, "The other issue relates to trade-offs. You cannot install a water heater and at the same time carry out assignments that are part of your work. Of course the plumber still charges more per hour than you charge for an hour of your time, so you could save by doing it yourself. But you are not thinking of life-cycle differences...If you decide to install the water heater yourself, you have to shop for a unit, which takes time and energy. You could be using this time and energy to enhance your professional skills or study investments....Then you have to study water-heater installation techniques and acquire the proper tools. Whether you rent tools or buy them, it still takes time and money. Finally, how many other hot-water heaters will you be installing during the remainder of your working life? I bet you'll never want to install another one once you've stuffered through the first campain to save $150....After all this, ask yourself about the actual dollars you really saved. In terms of a life-cyle cost-benefit analysis, select option number two: Call the plumber!"

How does this relate to a baby you might ask? When deciding on what to spend money on and what to skimp on I have this philosophy of life-cycle costs in the back of my mind. Unless, this first baby scars us severely, Marelize and I plan on having a few children. So, when we look at the various cribs, car seats, or strollers (the must haves) we think more in terms of life-cyle costs (buying quality products that have good warranties and will last through several years and children) rather than being sensitive to "first cost" and trying to save through buying only the cheapest products. The baby industry is tricky though because the standards of safety and quality for products are high, owing to society's generally positive view of babies and the incredibly strict expectations and requirements of zealous parents. So, it's hard to find large variance in the quality of the industry's products. The practice of the life-cycle cost philosophy in this arena then becomes much more complex leading to choice anxiety for many parents. It seems the best a parent can do is pick off the outliers (aka Bugaboo strollers for $800...ridiculous) and find something in the middle.

Now, this entire philosophy hangs on two big assumptions: 1) you have the money to pay the up-front costs associated with "quality" 2) the extra money spent on an item or service actually equates to better quality or a longer service life. There is a large risk of looking and feeling like a fool when you spend top dollar for an item only to find that the quality is equal or even less superior to an item of lesser cost. As I go through this baby process I'm sure I will experience this feeling once or twice and will be sure to share it with all of you.