Auto vs. Manual: Personal Finance Showdown

finance

When it comes to handling personal finances, there are two kinds of people: those who take care of it manually, and those who automate everything. Manual people tend to be more controlling, constantly checking balances and physically transferring money from account to account. Automated people are a bit more laid back; once they set it up, they forget about it. One requires constant attention, the other only sparing check-ins. Me? I’m a mix of the two.

On Lifehacker today, I came across this article asking whether you should automate your finances or not. The article does a good job of explaining the pros and cons of automating your finances: less effort, no need to remember to pay a bill, and instilling better financial habits are just a few of them. For example, if you set up an automated transfer between your checking account and savings account, you can pay yourself right when you get your paycheck and not need to worry about saving it at the end of the month. It’s automatically taken out of your account, so you don’t even see it.

But should you automate ALL of your finances? I’d say not necessarily. One thing to consider is your free cash flow each month. Do you have enough cash in your checking account to pay for all your monthly expenditures? If not, then you shouldn’t automate. Think about it like this…let’s assume your paycheck is for $2k net, paid out twice a month. You get paycheck #1, and have to pay out your rent, utilities, credit card bill and car note. If these things total $2500, then automating your finances could lead to overdrafts and fees. You want to make sure you have enough cash in your account to cover everything.

I would argue that certain things can be automated, while others shouldn’t be. Monthly expenses that don’t change can be automated, provided you are comfortable with your cash flow. Rent is a good example; I have my rent set to be paid out of my account on the 1st of every month. The amount doesn’t change, so I can be confident. Savings is another one; the concept of paying yourself first works very well with automation. As I said above, set up an automatic transfer between your checking and savings, and you’ll never even see the money. If you can’t see it, you can’t spend it. I have my payments to my emergency fund taken out via automatic transfer.

I am a firm believer that credit card payments should NOT be automated. Nor should cell phone or cable bills. The reason is that these things can change from month-to-month, and they also tend to have a great deal of issues. Cell phone bills are notorious for having random charges, usually from a thing called cramming. And cable bills seem to ALWAYS have random charges on them, requiring a call to take care of. If you automate these payments, you may not see them until after you have paid them (if at all). I think credit card payments are the best example. I charge everything to my Chase Sapphire Preferred card, and I pay it off twice a month (it’s a psychological thing, I hate seeing high balances so I pay it off more frequently). If you automate your payment, you won’t see any errors on your bill. But more importantly, I think you miss out on looking at your balance and seeing where your money is going. Automation removes you from that gut check. You may not realize that you spent $800 at the bars, or $500 on clothes last month.

One particular area that I think automation is a good thing is retirement savings. Obviously 401k plans and other employer-sponsored plans are good examples of this. So is the emergency fund. If you set up an automatic transfer to a Roth IRA or a brokerage account, it makes saving for the long term much easier. If you wait until you need to do it manually, you may not do it at all. Or worse, you end up spending it all before you get a chance to save it!

So that’s my automation plan. Constant expenses and savings get automated, while fluctuating bills are paid manually (albeit online). What about you? How much are your finances automated?

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Road to NYC: Marathon Training Week 4 Recap

Holy crap, we’re already past week 4? The official countdown to the NYC Marathon stands at 96 days and change. That’s getting incredibly close. Up until the taper, I no longer have a sub-10 mile long run; it’s all double digits from here. Kind of scary. You can tell things are getting interesting. People keep asking about how my training is going, how I’m handling the heat, where do I run, etc.

Tuesday was a normal run, though I felt a bit heavy and slow. My time was 45 seconds or so off what I should have been doing for that pace. It was a hot and humid week, so maybe that’s it. Wednesday, again, was slower than it should have been. The distance got bumped up to six miles, but I should be more than capable of knocking out 9s at that distance. Thursday is speed day, so I headed down to the park and ran 4x800m. I felt good during them, keeping my pace as close to 7:30/mile as possible. I could have pushed it harder, but in training right now I really don’t want to injure myself. By the time Friday rolled around, I was more than ready for my rest day. I did walk around a bit that night, partaking in Trolley Night in South Main, but I called it an early night. It was supposed to be extremely hot on Saturday: mid 90s, humid, and a heat index of 105. We woke up at 5:30AM to eat and fuel up and get started. We finally made it out the door at 6:40 and knocked out 11 miles. I was out of water, and feeling the heat, so I was glad when I finished. Afterwards, plenty of water, gatorade and a bit of an ice bath for my feet.

NYCM Week 4

Sunday, I again took off. My legs needed the rest…and so did my head, which was screaming from Saturday night’s festivities. Time to slow that down as we get further into training, I imagine.

Marathon Training Totals
Weekly Runs: 4
Weekly Miles: 25
Total Runs: 13
Total Miles: 70

On Dealing With Professional Disappointment

If you’ve been alive for more than a few years, you’ve likely dealt with disappointment. Losing a game, not getting a job, getting rejected from the girl you finally had the courage to ask out. You feel like you’ve been punched in the stomach and cannot image ever wanting something more, or ever having something so good. Life is full of disappointments, they are unavoidable. What truly matters is the way you handle them.

I have been working towards a promotion at work for many months. I had crossed off all the checkboxes required of the new title, and had indeed been performing that function for almost a year. My performance was solid, I had taken on new tasks and worked hard day in and day out. My manager said repeatedly I had done everything I needed to do, that it was just a matter of time. Imagine my surprise when I hear that a coworker on another team is getting promoted before me. I was angry, frustrated, and I wanted to quit right then and there. Screw the job if they couldn’t recognize that I was ready for a promotion!

I could have marched right into my manager’s office and told him how I felt, and where he could stick his promises and assurances to me. None of that mattered anymore, I hadn’t gotten what I wanted. But would that have helped anything? Or would it have hurt my professional reputation? Luckily I walked outside, took a few deep breathes and called home to get some perspective. Just relax, my mom said, and don’t do anything stupid or rash. Take your time, and gather your thoughts and feelings before doing something you may regret later. I went back inside and searched for professional disappointment and what to do when you are passed over for a promotion. Another article I found was this one. I followed what I read pretty closely.

First, I allowed myself a moment or two to feel my emotions. I was angry, upset, frustrated and sad. I would jump around between emotions frequently that day, and just when I thought I could think with a clear head, another emotion would come back. You have to let these emotions out. Don’t bottle them up, but don’t let them control you either. If you feel angry, be angry…just don’t start yelling at anyone or throwing a vocal pity party for yourself.

Next, I sought some perspective on what happened. I met with my manager at the end of the day, and he knew exactly why I wanted to speak with him. I had used the day to gather my thoughts and form some questions; I’m usually not good with conflict or difficult conversations, so it helps me to prepare. I asked what more I needed to do, why I wasn’t moving forward, questions that related to me, not the person who got what I wanted. Comparing yourself to someone else in this situation, or demeaning their accomplishments, only ends up hurting you. Focus on what YOU need to do to get what you want. No one takes a promotion from you, so don’t blame them. He gave a little bit of insight into the situation, which in this case didn’t really help me. The reason I hadn’t gotten promoted had more to do with my manager not fighting for it, rather than anything I hadn’t done.

After gaining some perspective, I decided to take stock of where I am professionally, and how best to move forward. I set up meetings with my director, my vice president, and another director who works closely with my organization. The feedback ranged from difficult (lack of a personal network at work) to helpful (use your introversion to your advantage) to a bit of psychological boosting (I’m doing excellent, it was just a matter of timing). I realized that I could either wallow in my disappointment, or move forward from it. Working with those people, I came up with a plan of attack to continue pushing forward, while also setting up for new opportunities within the company. After the meetings, I had a renewed sense of purpose and motivation.

While my particular situation was about a professional disappointment, it works just as well in other cases too. Didn’t get the girl? Take some time to be sad about it, but then ask people you trust for some honest feedback, and build a plan to address any shortcomings. And don’t discount timing or luck; they are certainly important factors that are completely out of your control. And if you can’t control something, it’s not worth getting upset over.

Road to NYC: Marathon Training Week 3 Recap

Alright, this week ended up much, much better on the training front. For the first time this since training began, I managed to get in all four runs, plus some cross-training. It was a step-back week (as every third or fourth week should be, regardless of whether you are training or not), which gives the body some rest. My long run dropped back to six miles, so I took that opportunity to add back in the fourth day of running without adding too many miles too soon. That’s a recipe for injury.

Tuesday’s run was at my 10k pace, while Wednesday’s run was at half marathon pace. While I’m focusing on the NYC Marathon, I’m also training for a half marathon four weeks after. I’ve had a long-standing goal to break 2:00 in the half, coming up just short at the Germantown Half Marathon back in March. I’d really like to cross that one off the list, so I’m hoping this extra pacing and practice will pay off. Thursday is my hills/intervals day, because Friday is a rest day from running. Living in Memphis, actual hills are few and far between. The longest I’ve managed to find is about 2/10 of a mile, so I did that five times at a bit over 5k pace, totaling four miles with warm-up and cool-down. I need to remember to switch off auto-lap and auto-pause when doing these, my splits were all jacked up because of that. Saturday’s long run was a quick jaunt to Mud Island and back. Going to the Island is good because the AW Willis bridge is basically straight up and straight down, which helps to add some variety to the otherwise flat Mississippi River pathways.

NYCM Week 3

This morning I managed to wake up early and go for a bike ride. I normally drive out to Shelby Farms and ride those paths, but with the park under some serious construction, I decided to finally brave the city streets. I went out early, when I knew most of Memphis would still be asleep. I weaved my way around the downtown streets, over to Tom Lee Park and finally got to ride on the new bike lanes. The first thing that hit me: Memphis has some serious road quality issues. They really need to spend some money fixing them up, they are horrible! Going over the AW Willis bridge was interesting, my heart rate was skyrocketing by the time I got to the top. Once there, the road was much better. I rode to the end of the Island and kept on going, finally stopping at the DeWitt Airport and turning around. All in all, it was just under 13 miles at an extremely leisurely pace.

bike ride

All in all, a fairly solid week of training. Next week will be another step up, as my long run gets to 11 miles.

Marathon Training Totals
Weekly Runs: 4
Weekly Miles: 19
Total Runs: 9
Total Miles: 35

How Much Should I Spend On A Car?

clunker

In 2005, I finally got my first job out of undergrad, making $30k a year for a regional bank. At the time, I thought I was rich, having worked hourly, part-time positions before. I was driving the family hand-me-down car, a 1995 Ford Probe with 120k miles. First one brother drove it, then another, then me, then my sister, and finally back to me. The CD player didn’t work, the driver side door wouldn’t open so you had to crawl through the passenger side, and I had shorted out a speaker system in the back. After about two months working at the bank, I decided I wanted to buy a new car. I wanted a Jeep Liberty, and nothing could stop me from getting one, not even my lack of down payment or growing student loan payments. I walked into the dealership, test drove my Jeep and paid the employee rate. Financed at 8.55% over 72 months, it was mine.

Fast forward over 9 years, and I still drive that car. Sure, every year or so I have to do a large repair (brakes, fans, suspension work, etc.), the A/C doesn’t work very well, my antenna snapped off so I rarely get any radio reception, and I can’t turn the wheel to the far end of its normal range. Last weekend, R and I were on our way to meet some friends at a lake house to enjoy a relaxing weekend. Unfortunately, 2/3rds of the way there my car started overheating. We ended up having to spend the night at a motel, and carefully drive the car back in the morning with the A/C totally off and the windows down. I quickly had a decision to make: when is it time to get a new car? How would I pay for it? How much can I afford, or how much should I spend?

In doing some research, I decided to see what the personal finance people feel is appropriate. Dave Ramsey says 10%; so does this post from Financial Samurai. 10% seemed low to me. The article didn’t make sense, either. I started to question the “don’t spend more than 10% on the purchase price of the car” mentality. Let’s take it step by step.

First, I take issue with the notion that you should ONLY spend 10%, no matter what. FS talks about if you make $40k, you can only spend $4k on your car. If you make $400k, you should only spend $40k on a car. But does that make sense? If you’re making that much money, you’re likely already in a strong financial position, not living paycheck to paycheck or swamped with debt. You’re probably already maxing out your retirement accounts. If you’re in a strong position, and you enjoy nice cars, who’s to say you can’t spend more than that on a car?

Secondly, how feasible is this? According to the Bureau of Labor Statistics, the average annual salary in the U.S. is $46,440. Using the 10% rule, that means you shouldn’t go over $4,644 on a vehicle purchase. But what about everything else? Let’s look at some other factors. For my age group, the average monthly car insurance rate is $82 (assuming you have liability, comprehensive and collision on your policy) according to this article. Annually, that comes out to $992. The Energy Information Association estimates that gas accounts for 4% of pretax income. That’s a large chunk. Finally, the BLS also estimates that the average household spends 1.5% of its annual income on auto repairs. If we add this all up, it comes to $3,546.20. Assuming Dave Ramsey’s budget includes these categories within his Transportation heading, that leaves $1,097.8 to spend on the ACTUAL car. Good luck finding a car for that price.

Lastly, I take exception to some of Financial Samurai’s points about why you shouldn’t spend more than 10% on a car. Let’s go through these one by one:

1) Maintenance costs: We’ve got auto insurance, maintenance, parking tickets, and traffic tickets. Furthermore, the thrill of owning a new or new used car lasts for only several months, but the pain of paying the same car payment lasts for years.

This is true….for all vehicles. Whether you spend $3k on a 15 year old beater or buy a brand new BMW, you’ll pay auto insurance, maintenance, and possibly parking and traffic tickets. Insurance MAY be cheaper on a used vehicle, but you can guarantee that maintenance costs would be more expensive on that used car. And whether you buy a new car, or a new-to-you car, the thrill will wear off after a few months. If the same point applies to both sides of the decision, then those points are no longer valid.

2) Opportunity cost. When you buy a car you lose the opportunity of investing your money in assets that will likely grow and pay you dividends in the future. Everybody knows to save early and often to allow for the effects of compounding. Buying too much car is like negative compounding! Imagine how much money you would have accumulated if you invested $300-$500 a month in the stock market over the past three years instead of paying for a car? Probably around $15,000-$30,000!

Again, this would apply to both. If I buy a used car in cash, I am forgoing the opportunity cost to invest that money. If you have good enough credit to score 0% financing, or close to it, then even a simple savings account would yield a positive return. Whether you spend $4k upfront or spread out money over several years, you’re still losing out on the opportunity to do something else with that money.

3) Stress. When you pay more than 1/10th your income for a car, you will become more stressed. The stress you feel from not wanting to park your car in a crowded lot is completely because you cannot afford your car! If you are within 1/10th of your income, you drive and park stress free. You stop caring about door dings, bumper scrapes, even break ins. Stress kills folks.

This one is just silly. My Jeep is over 9 years old, has 136k miles and is full of dents and dings, and I STILL get stressed in a crowded parking lot. If I spent only a little bit of cash on a car, I would also feel stress from wondering if it would break down, if I got a raw deal on the beater or if it got stolen. Stress exists in life for a variety of reasons. Whether you spend 1/10th of your salary on a car, or finance a car, you’ll still experience stress. The simple act of driving is stressful!

4) Makes you want more. The nicer your car, the nicer your other things. You start thinking stupid thoughts like: I’ve got to buy a matching chronometer watch, driving shoes, and outfit. You start paying $20 for valet because you want people to see you come out of your car instead of park for free. Having nice things makes you want to have nice everything!

Another point I completely disagree with. So if you finance a car, you are helpless to not spend money elsewhere to live up to the image? If I “splurge” and finance a new Honda Civic, must I spend money on clothes and accessories to live up to that image of someone who can afford to buy a Civic in cash? Will I want people to see me coming out of The Olive Garden? No. This is just ridiculous. I can assure you that whether someone finances a car or follows this rule, their impulse spending control will determine this, not their car. Plenty of people are capable of buying a car, spending more than 10% of their salary and NOT racking up credit card bills because they bought that car.

5) Makes you feel stupid. Deep down, you know that if you can’t pay cash for your car and have money left over, you can’t afford the car. Each payment you make is a reminder how foolish you are with your money. Why would you want to be reminded every single month of being dumb?

Sigh. Buying a car that’s above 10% of your salary = you are dumb, no matter what.

Here’s my problem with his views on this: it ignores the utility a person can derive from their car, the enjoyment they could get, the peace of mind from having reliable transportation. Know what these things equal? Value. Value is not just a dollar figure; it’s why people enjoy vacations. The rest, relaxation, seeing things you never thought you would see. Spending more than 10% does not make you dumb, or force you to spend uncontrollably in other areas. Spending less than 10% does not remove maintenance/insurance/parking tickets/traffic tickets, does not remove stress.

Want to know the secret? Be smart about it. Think about what your financial priorities are and follow that plan. You know you should be socking away money for retirement, for an emergency fund and for other things. If you make $40k a year, have no savings and aren’t putting money into a retirement account, you likely cannot afford a new car. If you make $40k, have a handle on your monthly expenses, have a sizable down payment to avoid being underwater, and are putting away a decent amount towards savings, you may be able to afford something that’s more than $4k. For me, I make a decent salary, have no consumer debt and am paying down my student loans while saving a great deal every month. I’ll find a sensible car that meets my needs and does not put me anywhere close to financial ruin.