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Rich outside, paycheck-to-paycheck in reality

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From a very young age, I knew that money was necessary. When I was making wishes as a kid, I wished for money (or a magic wand which is the same in this age). I was also lucky to be born into a family of professional engineers who believe that a good education and hard work will pay you.

My initial view of money was: get much of it, and everything will fall into place. So, I followed the classical career path: working hard during my studies, working hard after I graduated, sacrificing a lot, and finally starting to get results. My first real job was in the 60th percentile of the market (not a bad start!), and then I basically doubled my income every three years, which brought me to the infamous 1% of the population in a reasonable amount of time.

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Cost of ownership

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What is your favorite store? Mine is Home Goods. They have such cute things to make your cozy, neat nook. All these pretty boxes, labels, pillows… I can immediately imagine them in my house. I also imagine that my place starts to look like a design magazine; I already mentally turn the pages…

But then I come back to reality. I have only one medium-sized apartment, and it has just a limited number of walls and “nooks”. I cannot have all these fantastic design ideas implemented.

This thought helps. But what I found more appealing is the concept of Cost of Ownership. Think about it: as soon as you buy a thing, you take responsibility for taking care of it. The responsibility can be small (wipe out dust from a figure) or extensive (purchase insurance for your car), but still, you have it.

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Lean household

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The Lean and Just-in-time (JIT) production concept was initially introduced in the industry by Toyota. A big factory needs raw materials to operate. Usually, factories order wholesale amounts of supply to enjoy wholesale discounts, and then they store the raw materials before they are uses, and the next batch is required. It was status quo in all industrial facilities until Toyota decided to look closely at the situation and asked some inconvenient questions.

The raw material storage is not for free. First, you need space to store, and it means you will need more significant facilities than you potentially need for production. Second, raw materials can expire or go wrong, so you need a particular tracking system, and you also need to adjust output to use materials before they expire. Doing this, you might not produce what your customers need right away. So, you will need storage space for the final products as well. Third, moving the materials is also labor, so you need to pay more for the workers who will do it. Forth, the supplier could provide you the wholesale batch size, which does not fit your needs (imagine that the factory produces 3-legged chairs, and the supplier offers only 4-leg packages). Finally, when buying excess, you freeze your money, while the business can use it for something else meanwhile.

So, Toyota decided to calculate if its suppliers’ wholesale discount is worth the additional cost. Unsurprisingly, it turned out that it does not worth it. And Toyota started its long journey to rebuild the supply chain. It came to its suppliers, and said, instead of 2000 suppliers, we will work only with 20, but you will supply under our conditions. The conditions are you will provide the raw materials with the quality we’ll set, the quantity we order and just in time (not before, not after), in return, you can set up the fair price and get life-long contracts… These negotiations made industrial history, and the arrangements are still in place for Toyota.

Though this might be an exciting story for outlook, what does it have in common with household and personal finances?

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I’m bad with my money

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I am bad at personal finances.

It was two years ago in February, I was finalizing my divorce and trying to rebuild my life with my kid. Brick by brick, I was constructing new existence: find a new rental apartment, figure out school questions, buy furniture, focus on my career (how many times the diving into my career saved me!). Still, it was a time of uncertainty, and my sanity depended on how much order I was able to bring to my life.

With time things started to fall together: my new apartment started to look like a livable place, my kid got used to a new school routine and met new friends, my investment in work brought higher title and respective routine. And then it came: one day I woke up with a sick feeling, that I am bad at personal finances.

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Budgeting is intimidating

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I tried to start budgeting three times and failed. Three times! Luckily, I am very stubborn, and if I fail in something, I persist if not to the mastery, to at least of the “feel confident” point. So now I budget, and it is part of my everyday life.

I must confess it is extremely rewarding. It brings a sense of ownership and control over my money. It also dramatically lowers anxiety associated with “what if […], and I don’t have enough money”. It also helps you to live beyond your means, save money… The rewards are countless.

But… Before I came to the point where I am now, I struggled. And now participating in the budgeting communities, I still see people are intimidated by budgeting. It feels so overwhelming in the beginning! In this post, I try to express tips that I would have given to me in the past, during my initial 3 unsuccessful attempts.

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Budget in plain English (…and in pictures)

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For some the budgeting looks intimidating. It looked so for me before I started. To tell the truth, it was so intimidating, that I postponed my decision to start a budget for almost 20 years.

Now I face a new challenge: I am trying to bring my knowledge to my 12-years old daughter. I literally have a 5-10 minutes span of attention to bring all the wisdom I acquired. That is how I created the explanation. Hopefully, it will be useful for others, too.

All things are difficult before they are easy.

Thomas Fuller
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I’m tracking expenses… now what? Step by step plan to optimize spending

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Tracking expenses is the first stepstone to budgeting, building wealth, and all other fancy financial applications. But for some reason, it is not an easy transition.

I clearly remember my frustration about 3 months after I started to track my expenses. I was staring at the computer monitor on the neat rows of numbers. The number themselves don’t tell me what to do, where to move. Do I save enough? How can I see the progress? What do I need to work on in terms of money behavior?

In this post, I provide the strategy I eventually follow. It was not a straight path, and I had a lot of tries and fails, but looking back, here is what I would have suggested myself in the very beginning.

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Tracking Expenses

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Trying to be smart with my credit cards I discovered, that I don’t have a credit card that covers “gas” nicely: all my cards don’t provide good cashback for the gas. A quick search revealed, that all the cards with substantial gas cashback have annual payment. To understand if it’s worth paid for the card, I needed to know how much I payed for the gas last year.

What is the problem?

Sounds easy? Well, it’s not.

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My long way to investing

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Finally, I’m an official investor: having a brokerage account, choose stocks, bonds, and mutual funds for the purchase, tracking market situation, making investment decisions…

It took me more than 20 years to come to the point. The 20 years passed from the time when I first read about investment and wanted to do it to the time when I actually started to invest. Now, looking back I’m sure I could start much earlier…

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I love to pay my bills

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I really do love to pay my bills. I like to seat, go through my routine: fill the amount and push the “Pay” button on my computer or sign a check, seal an envelope, and drop it to the postbox. I love the feeling of the done deal, feeling that I don’t owe anything and freedom coming from it. Easy-breezy

I must confess, only a year ago it was a mess. I was anxious, I was sweating and try to postpone the moment of payment as long as possible. When I finally force myself to seat and start to sort out the bills, I was already confused: what should I pay, what if I don’t have enough money, what if I forget something. Moreover, after this torching process, my seemingly significant checking account was heading to zero, and this fact set me into stress again. I always lived from paycheck to paycheck.

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