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I’m Desperate For A Financial Makeover

By Frugaling 11 Comments

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Looking at a map

A year ago I read Burton Malkiel’s seminal text on investing, A Random Walk Down Wall Street, and concluded that it made sense to invest in exchange-traded funds (ETFs). He imparted a challenging message: people are inherently poor stock pickers, but we can be better through diversification and buy-and-hold strategies. ETFs would be a quick, affordable, engaging way to diversify, too.

Despite the logic, my brain wouldn’t relent — I wanted to invest in an individual stock. Like a horse being kicked and yanked to the right but continuing left, I decided, against my better judgment, to place an investment in a risky, small cap stock. I’d been following it for quite some time, and made a small prior investment. I wanted to put more in, though.

Only two weeks after doing so, I lost $400. How could this happen? Why did I fall for this logical fallacy and bias? I was berating my brain for the errors. The company looked poised for a rapid expansion. I had drunk the Kool-Aid.

I knew better than to make this recent individual investment, and did it anyways. Humbled, I was the definition of many of the investing problems and fallacies individuals have a habit of engaging in.

Like my flawed investment, I realized much of my financial strategies had become stale. Having money to invest was a new feeling, and the do-it-yourself route wasn’t working. I needed to refresh my checking, savings, and investment streams. And I wanted to feel secure in my financial future. Here’s how I analyzed and reviewed it all.

1. Analyze current accounts

Almost all banking goes through Ally Bank. With 1% and 0.10% on savings and checking accounts, respectively, Ally is an industry leader. I’ve been with them for years, and appreciate the domestic ATM-fee reimbursements and free checks.

After paychecks are deposited into the account, about 40-50% of the money goes to regular, immediate bills. Then, another large portion gets spent on food and regular expenses throughout the month. This variable amount is something I continue to work on and struggle with. Reducing food budgets is something I’ve written about before, and will likely talk about again. It’s vital for a frugal life. But after all is said and done, there’s only about $300-400 in leftover funds.

Right now, I’ve been putting the surplus into a savings account. Additionally, I’ve been investing in individual stocks, but with mixed results. At this point, and with such little money at the end of every month, I need to be smart about what I do with any extra funds. These funds will be used to travel for job interviews, licensure, work clothes, moving expenses, and other emergencies. It’s important to have a fair amount on hand for all these moments.

After looking at the accounts, I can see that I have two piles: a checking and savings. There aren’t specific accounts for individual goals. Money is one big slush fund of fun.

Another major unaddressed part is regular investing. As mentioned it’s a weakness within my current financial management.

International travel has been also concern financially; not necessarily the cost, as I use bonus miles for most travel, but the currency exchanges. When I traveled to Colombia about a year ago, I needed local currency and had no method to get cash without fees. It cost me quite a bit to talk to a money exchange business and have them take my USD for Colombian Pesos.

2. Consider other accounts, options

Based on this analysis, I will stick with Ally Bank as my primary checking and savings method. Direct deposits will continue to flow to this checking account first. The goal will be to use this to manage all regular bills and upcoming expenses. Ally has really earned my respect over the years, and I’m happy to stay with them.

Staying with Ally doesn’t mean I’ll be staying with the same strategy, though. I’ll be opening up a new savings account and calling it, “Vocational Expenses.” This will be specific for interview, moving, and other work-related expenses incurred over the next three years. Now, how much should go in here and how fast? I will likely need $4000-5000 over the next few years, but this is a rough estimate. To meet this target, I’ll deposit $250 per month automatically out of every paycheck (Ally checking account) for the next 16 months on the first of the month.

International travel currency fees have been abysmal. To remedy this problem, I’ll be opening up a Charles Schwab Investor Checking account and solely using my Capital One Quicksilver credit card. The interest-earning checking account provides most of the features that an Ally Bank affords, but includes ATM-fee reimbursements for international ATMs and no foreign transaction fees for purchases out of country. The account is widely regarded as the best travel debit card in existence. And unlike Ally’s checking debit card, Schwab’s debit card has a chip and pin. In preparation for any travel, I will place a budgeted travel amount into the Investor Checking account, but leave it at low levels, as there’s no minimum balance necessary. Moreover, I’ll use the Capital One Visa for all international transactions, as it has no foreign transaction fees.

The last revised strategy will be a regular, monthly deposit into a taxable Wealthfront account of $100 on the first of the month. Wealthfront provides low-cost (and free for those under $15,000 invested) asset management, and automates the entire process. They choose real estate, emerging markets, and domestic stocks. They reinvest dividends and provide timely updates.

Now, I don’t need to worry about rebalancing my portfolio or looking for low-load or low-fee funds. I’m exceptionally happy with their service and professionalism. Because I might need the funds sooner than retirement, I’ll be placing them in a taxable, brokerage account for now. Eventually, when I have more cash flow and income, I will place more in my Roth IRA to invest without incurring additional taxes.

3. Review decisions and new strategy

With any financial management plan, there are going to be hiccups. When you make as little as me, automating savings and investing helps, but can also hinder my plans. Sometimes, I don’t have enough money one month and can’t make the savings necessary. At the same point, the plan motivates me to earn and save more. Maybe it’ll even encourage me to save on food!

As I analyzed and reviewed my current actions and future plans, I reflected on interest rates and banking business. Today, banks are not in the business of encouraging you to save. They nickel and dime customers — especially brick and mortar banks — for every little thing. Checks? That’ll cost you. Overdraft fees? You bet. Minimum balance not met? Say hello to my lil’ fee.

Banks earn more when you spend. They profit when you’re in peril; a tragic irony that places their interests (pun intended) above yours. From car loans to mortgages to credit debt, banks increase their margins by marketing these products to their customers.

To save requires great care, forethought, and hours of hard work. To spend takes the swipe of your card.

Reviewing and updating your financial plan is one of the most important actions you can do. If anything, it helps you understand your financial fitness and maximize interest earnings. And maybe still, it challenges you to look for new ways to save and scrimp.

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Filed Under: Save Money Tagged With: Accounts, automated, automation, Banking, Banks, Budget, Checking, Financial, investing, savings, Wealthfront

Comments

  1. Gary @ Super Saving Tips says

    June 7, 2016 at 2:59 pm

    Thanks for sharing your financial accounts makeover. While there are other financial updates I make regularly, like revisions to my budget and checking my credit score, I’ve only changed my accounts when an issue has occurred or something has prompted me to do so. I’m going to add my bank accounts to my list so that even if I decide to keep the same setup, at least I check whether it makes sense periodically.

    Reply
    • Sam Lustgarten says

      June 8, 2016 at 9:50 am

      Gary, that’s exactly right! For us financial mavens, it’s a humbling reminder and experience to check our financial moves. Sometimes, surprisingly, we need to switch things up as well. Would love to hear what you find out!

      Reply
  2. Debbi says

    June 7, 2016 at 3:04 pm

    You might want to consider reading one of Dave Ramsey’s books (you should be able to get them from the library). While I do not agree with all of his advice, it is generally solid. Suze Orman also has a newish book out for the young and broke – the library should have this as well and her advice is also generally solid. Hers may actually be better as it is specifically for people in your age group but I have not read it as I am too old! Her other books were great, however. Congratulations on reaching a place where you have enough income to consider saving and kudos on actually using it to save! BTW, I loved your idea of social finance and thought you were so good at articulating what many of us feel.

    Reply
    • Sam Lustgarten says

      June 8, 2016 at 9:49 am

      Debbi, I’ve actually enjoyed Ramsey’s books quite a lot! He’s got some solid advice about budgeting and structuring. The problem is that my income can be quite variable from month to month. It’s related to earnings through Frugaling, the book, Ubering, and various other side jobs. Money made varies greatly between these activities. What I focus on for saving and investing is primarily my main income stream (work).

      And I’m ever so grateful you appreciate that part of my writing! Social finance influences and informs everything I do at Frugaling. Thanks for following along.

      Reply
  3. Mike @ Tip Yourself says

    June 8, 2016 at 7:21 am

    Ah! The individual stock temptation is so real! Especially if you spend anytime reading and consuming finance content. Great post on stepping back and taking a new look at your finances in general.

    Quick question: what’s your plan for the wealthfront account? Is it just a general long term investment fund?

    Reply
    • Sam Lustgarten says

      June 8, 2016 at 9:46 am

      Mike, thanks for understanding the desire! That’s exactly right, too. CNBC and other financial news networks seem to encourage this hypervigilance and individual stock selection. Unfortunately for the lil’ guys like me, it’s not possible to beat the pros in their game. Best to get a highly diversified portfolio that’s managed for me. At least, for now. 🙂

      Right now the plan is to deposit into the brokerage/taxable account. The reason is that I might need these funds sooner than retirement. I just cannot plan for 65+ yet, and have some sizable expenses ahead. I’m going to do my best to increase my salary, but if I can’t, I’ll need access to the funds.

      Reply
  4. Millennial Moola says

    June 15, 2016 at 11:16 pm

    It’s amazing how much the retail bankers hit you up with pitches for variable annuities and other high commission products. I had a roommate who made more money than I did at a mutual fund company by pushing his bank’s affiliated insurance products and getting commission.

    Reply
  5. Chandra says

    July 4, 2016 at 12:10 pm

    Just curious if you are happy with your Ally bank account? I was tempted to open up an account myself, but a quick Google search left my confidence in that company shaken. They seem to have a steadily falling stock value, and the reviews listed were very split between people either loving or hating them… I’m a big fan of Capital One so I am considering opening an account there to get anything better than the 0.01% return my current checking account offers.

    Any thoughts would be appreciated!

    Reply
    • Sam Lustgarten says

      July 4, 2016 at 3:05 pm

      Hi Chandra,

      Thanks for your comment! I have nothing but positive things to say about my Ally Bank account. It’s been an incredibly great account, good customer service, and best rates possible.

      Let me know if you have specific questions!

      Sam

      Reply
  6. Erica Schaefer says

    July 6, 2016 at 2:14 am

    I’m assuming since you’re something akin to a financial blogger you know of the Early Retirement bloggers as well. I’m curious why you don’t just invest in Vanguard? Picking your own stocks or even having them managed in any way almost always results in worse results (especially with management fees). I know it’s a psychological thing which is why so many people lose money in the stock market when if you just invest in Vanguard and let it sit it’s near impossible to lose money over the long term.

    If you haven’t checked out Jim Collins yet he has a new book that’s really great (imo) about how to and why to invest with Vanguard. Called…. The Simple Path To Wealth.

    I found your book recently after I found out about the “early retirement” people and from being into minimalism. I’ve just started it and I’ve just found your blog from it so if you’ve already addressed what I’ve mentioned just ignore it. 🙂

    I will say the only thing that unsettles me about going the Vanguard route is that I would end up investing in companies I’m morally opposed to. It’s a thought I’ve been struggling with for a bit now, but I honestly don’t know enough about investing to get around it as of yet. (another reason I love Collins book is it’s made to be as simple as possible for people like me who don’t have the interest in stocks/investing/money to take the time to understand it… luckily it seems the simple path is still the best one anyways. 🙂 )

    Reply
    • Erica Schaefer says

      July 6, 2016 at 2:17 am

      Ignore this comment. I just saw you do use vanguard. Sorry. 🙂

      Reply

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