The Ritchie Financial Map

Table of Contents

• 1 Introduction
• 2 My Savings Philosophy
• 3 Accounts and Tools
  • 3.1 Mint.com
  • 3.2 Checking
  • 3.3 Credit Cards
  • 3.4 Savings
  • 3.5 Investment
    • 3.5.1 Non-Retirement
    • 3.5.2 Retirement
• 4 List of all of my recurring transactions
  • 4.1 Automated Transactions
  • 4.2 Manual Transactions
  • 4.3 Reminders in my Task List
• 5 My Financial Workflow

1 Introduction

The summer after my Freshman year, while living up in Burlington, Vermont, I took my first stab at getting my (very junior) finance situation under control. I had decided to pursue my pilot’s license, bulling ahead even after discovering that not even the Burlington Starbucks was willing to hire me for the month or so of my residency. Without any income to speak of, I was forced to dig in to the decent chunk of money that my paternal grandfather had left to each of his grandkids. He wanted us to pursue passion projects with the cash, and I felt that this qualified. Still, the withdrawal left me feeling guilty. I became obsessed, as I tend to do, and started reading up on better ways to invest the remaining money.

What follows is a rough layout of the system I’ve created for myself in the years since that first awkward start. I’m living in New York City now, managing multiple income streams, and funneling cash in small amounts off into a number of different savings goals. I put in a great deal of effort at the very beginning to create a system that I trusted implicitly, and then let the system move forward on autopilot. The results have been fantastic. With a bit of self-control on spending, one can fairly well ignore everything here after the initial setup.

2 My Savings Philosophy

As you can see from the figure, I’ve wrapped my Savings and Investment accounts up into two black boxes. This allows me to have as many of each as I’d like. The core of the whole system is the Bucket checking account. Whether I maintain one or twenty savings accounts, all the bucket account sees is that one trunk line pulling money out.

Each savings or investment account is a cash envelope that I can effectively forget about after initial setup. If I decided to buy a bike, for example, I’d calculate my biweekly contribution by dividing the total cost of the bike by the number of two-week periods between now and the date that I wanted to make my purchase. (I’ve been using SmartyPig for this, and find it very helpful, though I don’t mention it below.) Then, I’d set up an automatic biweekly transaction from that bucket account to a new savings account, calculated to get me to the right balance on the right date. Voila, a payment plan with myself! And one that earns interest, as my transfers accumulate in a high-yield online savings account.

My theory behind all of this complication is that by deciding on which expenses are worthwhile, automating those expenses, and focusing my energy on MAKING money, rather than not losing money, I can compensate for the fact that the human mind is extremely risk averse. I tend to spend far more time figuring out how to save 50 bucks on something than I might spend on earning that same 50 bucks back. This is irrational, and counterproductive.

3 Accounts and Tools

3.1 Mint.com

Sign up for a Mint.com account immediately. This is your Finance Command center. I just use it to get a picture of everything in all of these other accounts, but you can easily set up budgets, low balance alerts, etc, and look at how you’re spending all of your cash. Mint makes it very easy, at tax time, to do a pull of all of the things you’re going to try and expense to Whizbang. Taxicabs, airline tickets, all that stuff gets categorized automatically for perusing at the end of the tax year.

3.2 Checking

For checking (and insurance if you’re military), USAA is simply the best. You can deposit checks with your iPhone. ‘Nuff said.

1. USAA Checking Account (Bucket Account)

The bucket account is the switching center for all transactions. Income flows in, and savings and expenses flow out. I set up all the details of these savings transactions ahead of time, and forget about them, trusting that my former self didn’t screw up too badly. All I look at, when doubt creeps in, is this account’s total balance. I’ve set an arbitrary goal myself of maintaining $10,000 in this account. If the level falls below, I go out and work harder at coding! If the level rises above, I take the excess and dump it into some long-term savings goal. Currently, that goal is a large CD ladder, as described in this great blog post from The Simple Dollar.

1. USAA Checking Account (Cash Account)

I keep this second checking account for the times I have to take cash out at the seedy ATMs on Saint Marks in New York City. I pick a far lower balance for this one–say, $500 bucks–and look on this as my cash reserve for the two week period between paychecks. I spend less than that, but this separates the whole ATM thing from the nerve-wracking fluctuations of the Bucket account. This balance is a very HONEST balance, one might say. The bucket account balance isn’t to be trusted except as a general indicator.

3.3 Credit Cards

I have two listed, but there’s no need to have both. You just need one to activate USAA’s Deposit@Home feature, which is fantastic. I switched to the AmEx since the points value is higher, but it really doesn’t matter.

1. USAA World Mastercard

Just a good credit card. I like that it’s at USAA, so I can easily pay it off on the USAA website when doing my other business. I do this automatically, of course. Mastercard works all around the world.

1. USAA American Express

Again, I just switched to this for the points. It does NOT work all around the world. This is probably excess, and I’ll cancel one of these soon.

3.4 Savings

My big breakthrough was realizing that a savings account is like a file folder. It should carry no psychic weight; indeed, I find that keeping fewer savings accounts forces me to do mental arithmetic to split each of my savings goals out of the mess. It’s okay to have 10 saving accounts, if you actually have ten savings goals.

I decided to go with a high-yield online savings account over the perhaps simpler USAA savings solution, as annual interest rates are far higher. (Even in this economy, we’re talking 2% vs 0.1% for a standard checking account.)

1. ING Direct Orange Savings Acct

The easiest bank to deal with, for the multiple account thing, was ING Direct. I have savings accounts for

• Rent
• Taxes
• Travel (one for each trip I’ve budgeted and am putting money away for), and
• Funding for the CD ladder.

The bike example above would be implemented using yet another savings account.

1. USAA Certificates of Deposit, for the CD ladder.

This is how I implement the CD ladder itself. As a quick summary of what this is–I’m in the process of buying a single 18-month certificate of deposit every month for 18 months. These certificates renew automatically. At the end of this process, I’ll have a “ladder” of funds, rather than a large pool of money. In the event that my income completely dried up, I could start cashing these out, rather than letting them automatically renew. A paycheck for a year and a half! This makes it very easy to, say, leave a shitty job. Further, these CDs are earning more than the high-yield savings account can.

If I were to come into an $18,000 windfall, I would put that money into my ING direct savings account, and out of THAT pull a thousand dollars each month for a Certificate of Deposit. That way, that money is ear-marked, and I never even consider using it for anything else. I’ve “spent” it already, and, again in line with our goal, it carries no further psychic weight.

3.5 Investment

So we’re back to where it all began. The investment accounts. For money you’re planning on saving for a LONG time, the stock market is the best way to go. Unless you happen to be a full-time investor, the only smart way to invest is through a low-cost index fund, such as Vanguard’s total stock market index.

These funds invest in absolutely everything in the market, which guarantees that their performance will mirror the big indexes almost exactly. I have 80% in the total stock market index, 10% in real estate, and 10% in emerging markets. I don’t really have any justification for this, beyond the fact that both of the 10% values are riskier than the total stock market index, and might mean more return down the road. I recommend going 100% VTSMX.

3.5.1 Non-Retirement

I can withdraw from these funds whenever I want, though I pay capital gains taxes if I do. I don’t really know what I’m going to do with the money in here. I plan on leaving it alone for decades, only taking it out if I suffer some big loss and need the money.

1. Vanguard Prime Money Market Fund (VMMXX)

I use the Prime Money Market Fund as a parking place for cash that I want to invest. Dollar Cost Averaging guarantees the highest returns for index fund investing, so I put lots of money into the money market fund, and trust my automatic exchanges to do the dollar cost averaging. All I have to do is make sure the balance on the money market fund doesn’t fall to zero. I do this through an automatic exchange from my Bucket Account. (Can you tell that I love these exchanges?)

1. Vanguard Total Stock Market Index Fund (VTSMX)
2. Vanguard REIT Index Fund (VGSIX)
3. Vanguard Emerging Markets Index Fund (VEIEX)

3.5.2 Retirement

• Personal Roth IRA
  

  I initially had an annual transfer that split between both of these… now, I just transfer the maximum IRA contribution from my Personal VTSMX to my Retirement VTSMX at the very beginning of the year. No need to dollar cost average, since it’s already in the fund. These sit in a Roth IRA (versus a traditional IRA… money goes into a Roth after tax, but you never pay tax on it again. For a traditional IRA, you put money in BEFORE tax, but have to pay taxes on the distributions. You can contribute to a roth of you make under 100k a year after-tax. Definitely take advantage of this while it applies).

  1. Vanguard Total Stock Market Index Fund (VTSMX)
  2. Vanguard International Growth Index Fund (VWIGX)
• Business
  
  1. Vanguard Solo 401(k) for Threadlock Design

  This is an awesome tool for those of us who own LLCs! (If you freelance at all, I recommend setting up an LLC. It’s very simple, and you gain access to investment vehicles like the Solo 401(k). Very worthwhile.)

  Since the LLC is a partnership, you can set this up very easily, and for free. The contribution limit is 16.5k plus 20% of your income from the LLC, up to a total maximum (for ALL 401(k)s in your life) of, as of 2010, $49,500. The money goes in before taxes and grows without them. This is the best retirement vehicle around, as far as I’m concerned.

4 List of all of my recurring transactions

4.1 Automated Transactions

These account for all of the lines you see in my Financial Map image, plus a few more. Each of these guys is automated, so it’s important to keep the Bucket Account balance high enough that it can act as a reservoir to handle all of these automatic withdrawals. Imagine a trampoline. You need that thing high enough above the ground that the kids can bounce without hitting zero. I chose $10k, as I mentioned above, even though the perfect number, where the minimum balance would graze zero, would be far less.

(I do some weird spacing on the “twice-a-month” transfers… that’s mostly just to keep the bucket account balance falling at a fairly constant rate.)

| Item          | Amount          | From Account | To Account/Person               | Frequency             | End Conditions |
|———————-+————————-+———————+————————————————-+———————————-+————————|
| Savings       | 750.00          | Bucket       | VMMXX                           | 1st and 15th of Month | Never          |
| Savings       | 1500.00         | VMMXX        | 80% VTSMX, 10% VGSIX, 10% VEIEX | Monthly               | Never          |
| Ret. Savings  | Max (5k Today)  | VTSMX        | VTMSX (Ret)                     | Annual                | Never          |
| Trip Planning | 180.00          | Bucket       | Smartypig Savings               | 4th and 18th of Month | April 1st      |
| Monthly Rent  | (Monthly Rent)  | Bucket       | Landlord                        | Monthly               | end of lease   |
| Utilities     | (Utilities Amt) | Credit Card  | Cable Internet + any others     | When bill comes in    | Never          |
| CC Bill       | Full Balance    | Bucket       | Credit Card Account             | Monthly               | Never          |

4.2 Manual Transactions

The key here is that I only have to complete FOUR THINGS manually. (Actually six, but if I had a regular paycheck I could automate the last two. I’ve paid off all of the rent, so it’s really just three (or five.), accounting for probably five minutes every two weeks. I can do all of these items in a single sitting.

My rule for the “judgement call” transactions below–in this case, transactions into my rent and CD bucket accounts–was to take any money above and beyond the limit I’d set for my bucket account and transfer it ALL into one of these two. So, if my limit was $2000, and I had $3000 in the Bucket, I’d quickly dump $1000 into the Rent Savings Account and forget about it.

| Item              | Amount                                 | From Account | To Account              | Frequency               | End Conditions      |
|—————————-+————————————————————+———————+————————————-+————————————-+——————————-|
| Paycheck Deposit  | Paycheck Amt                           | Checks!      | Bucket                  | When a reminder pops up | Death               |
| Rent Savings      | (Ideal bucket balance) - (current amt) | Bucket       | Rent Bucket Account-ING | ASAP                    | Year’s Rent in acct |
| CD Savings        | (Ideal bucket balance) - (current amt) | Bucket       | CD Bucket Account-ING   | ASAP                    | 18m of CDs paid for |
| Spend Transfer    | (Ideal cash balance) - (current amt)   | Bucket       | Cash Acct               | Roughly biweekly        | Death               |
| Ret. Savings      | 20% Threadlock                         | Bucket       | Solo 401(k)             | @Threadlock Deposit     | Never               |
| Tax Planning      | 25% Income                             | Bucket       | Tax Savings Bucket-ING  | @Paycheck Deposit       | Never               |

4.3 Reminders in my Task List

I have a few of these as scheduled items with reminders in advance–quarterly taxes and timesheets, for example, have strong deadlines, while paycheck deposits don’t.

I should note here that I use Harvest for timesheet management, which simplifies freelancer billing immensely. I’ve heard FreshBooks is good too. I track time inside this system all week, and submit my invoices with a single click. Harvest prepares everything I need at tax time, too.

| Reminder Text                                 | Next Reminder        | Frequency |
|———————————————————————-+———————————+—————-|
| Buy USAA 18-Month CD                          | June 24th            | Monthly   |
| Pay Quarterly Taxes                           | June 15th (deadline) | Quarterly |
| Buy new Turbotax Version                      | Feb 1st              | Annual    |
| Federal Taxes Due!                            | April 15th           | Annual    |
| Submit Threadlock Timesheet                   | June 4th (deadline)  | Biweekly  |
| Deposit Threadlock Paycheck                   | June 11th            | Biweekly  |
| Add 20% Threadlock to 401(k)                  | June 11th            | Biweekly  |
| Add 25% of Remaining Threadlock to Tax Bucket | June 11th            | Biweekly  |

Julien, our new intern at TED, just informed me that in China, one can only stand in the middle of an elevator if one has blood type B. That’s completely fascinating. I did a quick Google search and couldn’t find the reason, so I passed this up. Does anyone have any ideas? It must be a fairly recent superstition. Looking to hear what you have to say!