Advanced Budgeting / Personal Accounting

[Scott 2]

How do you handle your personal budget and accounting, once your income is from a diversified set of asset classes?

My simple excel model of income and expenses is not scaling well to assets. When I was simply throwing excess money into a mutual fund or mortgage, it was OK. However, now my assets are multiples of my annual salary, and I need to be more accountable around their performance. Especially to have confidence that my salary is optional.

I've started down a path of creating cashflow buckets - home, employment, and investments. However, this is not scaling well with respect to tax optimization, buy/sell decisions, dividends, variance in valuations, actions in tax advantages accounts, etc.

My goal is to accurately model cash flow and net worth over time, so I can have confidence in my redundant income streams supporting my needs. I need help.

[tylerrr]

I know FinancialSamurai.com advocated for a specific software....I forgot the name of it.

[The Old Man]

I use MS Excel.

[wood]

Each source of income stream should have its own system in my opinion. There's no sensible way to have the same kind of system/spreadsheet for stocks as you have for real estate or your home brewing business or your personal expenses. Each require a unique type of budget, accounting and/or reporting. The sum of all these (the output if you will) will then make up the basis for your weekly/monthly cash flow/networth summary. Or that's how I do it.

Cash flow doesn't have to correspond with the current performance of your investments. So track each type of investments with regards to what data you want. I'm not sure you know exactly what data you want? What do you consider to be the income from your stocks investments? Their positive change in value day to day? Or the profit you made at the point of selling? Or just their dividends? Maybe you need to decide whether you want a value-based accounting system, or a transaction-based one. And whether you want your actual cash flow to exactly match your investment performance, or just have an actual cash flow that is based on estimates and then adjust your estimates and actual cash flow as you track your investment performance. When I say "actual cash flow", I mean the cash that is being transferred from your brokerage account and into whatever account you use daily. This will be whatever amount you choose. Implications on cash from dividends, tax optimizations, buy/sell decisions etc should be kept separate from your personal daily accounting system in my opinion. It just creates unnecessary mess. Maybe what you really need is an investment performance system?

I'm interested to hear how others do this.

[Scott 2]

I checked out the financial samurai blog, the author appears to have a marketing relationship with a company called Personal Capital, which is a wealth management firm targeting high net worth individuals. While they are offering software, I don't think it is something I want to touch.

Wood - you are right, I don't know exactly what data I want. I suspect this is a solved problem, and I just need to know the right software (or principles to roll my own spreadsheet). Your post points at some concepts which I need more familiarity with. My goal is to understand the amount of capital in each asset, expected return, actual return, risk, and tax implications. I want to use the numbers to have confidence in my cash flow over time, compare performance of assets, and make decisions about how to manage my capital over time.

Breaking the spreadsheet into individual assets and income streams is definitely a good step forward, and I am continuing down that path. I just can see this taking dozens of hours to setup and requiring ongoing maintenance of a couple hours a month, as I learn and grow. Not terrible, but it seems inefficient. Especially when I start thinking about problems like assessing aggregate risk and tax optimization across the portfolio.

Maybe I am just looking for Quicken? I have no objection to spending a little money to save time - https://www.quicken.com/personal-financ ... iness-2016

[Dragline]

My goal is to accurately model cash flow and net worth over time, so I can have confidence in my redundant income streams supporting my needs. I need help.

It's a difficult practical problem, because the management of the passive investments really has nothing to do with what is happening on the expense side, and projecting net worth over time can be perilous, especially if your investments are volatile. Just looking a a monte carlo simulation of the potential future based on the past (see Firecalc or Portfolio charts) shows you that variance only increases over time.

The simplest solution is to maintain a large pool of cash or "guaranteed income" like a pension or annuity that will cover say, the next year of expenses. This give you enough of a buffer and time to "re-fill" the cash bucket over the course of a year.

The "bigger picture" solution is to think of yourself like an insurance company that has to pay out so much per year in claims. Ideally, you match the tenor (duration) of your investments to match your expected expense flows.

And yes, your overall performance may suffer -- probably no more 100% stock portfolios unless you can live off the dividends only. But you are trading some potential performance for more stability.

[Scott 2]

Yes, volatility is a problem. The need to smooth discrete events is also something that's been in the back of my mind. Annual bonus, semi-annual property tax bill, quarterly estimated taxes, quarterly dividend, monthly interest, etc. Up until now, I've just assumed these all accrue continuously, which worked for a simple model.

I like the idea of using this year to fill the cash pool for next year. That's a good solution for the smoothing.

I don't even have a guess as to my portfolio performance to date. I've been blindly throwing money into low cost target retirement funds for the past 10 years...

[vexed87]

I too log all income and expenses in MS excel but more recently, google drive, then categorise each transaction using pre-validated fields so that I can easily allocate them and sort them in pivot tables. This way I can summarise spending and income by category, break them down day by day, monthly or weekly or simply total everything for whatever period I require for the analysis task at hand.

I also track net worth figures and update charts at the end of each month, and also have a live view of my portfolio values by importing data from google finance and various HTML tables, which is cool. Fancy software and UIs are really not necessary, I used to advocate YNAB in my early days, but got sick of its limitations. I replicated my favourite features in excel and then some. I think YNAB recently went subscription based which is another reason to avoid it!

I +1 Dragline's suggestion of anticipating expense flows and holding that cash in a buffer. One of the best ways to do this is to track your expenses over time to see what you can expect to spend on typical expenses in a year, my excel categorisation helps to weed out any atypical expense and give me the confidence that I can retire on about £7-8k/year if I really had to.

As for the cash allocation, I quite like the permanent portfolio as it allows me to keep way more than a years worth of living expenses in 'cash', and when following ERE, that shouldn't be too much. I can just dip into that if I need to, I only need to rebalance the allocations if cash drops below 15% or an other assets creeps over 35%. The dividends top up the cash allocation as the year progresses, so in theory, regular rebalancing wouldn't be a major issue once the accumulation phase is over.

[vezkor]

I don't like financial samurai, but I love personal capital.

I have been using personalcapital to track my income, expenses, debt, assets and investment performance for over a year and I am very happy with their software. My favorite part is watching the net-worth graph move up and to the right every month

For your specific situation of multiple income streams, I think personal capital would be unusually effective due to the way they read the transactions. Every month/quarter/half/ytd etc. there is a cash flow section that shows you income compared directly against expenses. This will help you visualize how much income you actually NEED to cover expenses.

Two criticisms, though:
1. They cannot currently auto-link to one of my brokerage accounts (loyal3) or one of my loan accounts (earnest). This means I have to manually update the balance, but it still keeps a historical record of the balance at past dates for me.
2. Cash transactions are hard to track (duh, that seems to be the point) so by using cash you create a lot of manual work for yourself clarifying, on the personal capital website, what the "withdrawal from ATM" actually went to pay for (if you care about expense categories like I do). So, if most (or all!) of your transactions are electronic then this isn't an issue. It's still POSSIBLE with cash, just a pain/time consuming.

Your mileage may vary!

edit: clarifications

[FBeyer]

...I've been blindly throwing money into low cost target retirement funds for the past 10 years...

Blindly?

As in: cheap fund? If yes, then throw money at it?

[Scott 2]

This input is great. I'm finding a lot of the data I might want to think about is already available via my investment account websites. I even found rates of return for my investments.

I'm moving forward with the excel approach in the immediate term. There's some learning I need to do here, before I can really evaluate a software product long term.

FBeyer - it seems to have worked out OK, with returns of 5-8%, depending on the fund. Target retirement funds are typically used this way, I think. Unless a 401k didn't offer it, these have typically been collections of vanguard stock and bond indexes, at various ratios, depending how tax advantaged the account is.

[daylen]

GNU Cash?

[Scott 2]

I've broken my budget spreadsheet down into around a dozen entities, with cashflow (from the perspective of my checking account) from each aggregated in an overview sheet. Now I at least know what I own. Some stuff I found:

1. I had 2/3 of my remaining mortgage balance sitting in cash in a savings account with a 0.75% rate. Lazy. Paid off half the mortgage balance.

2. My HSA, which I am maxing out contributions to, is still 100% cash, with a 0.25% interest rate. Back when I opened it, there wasn't enough money to care. I forgot. Getting an investment account setup in there is on my todo list.

3. My IRA is "diversified" with 2025 and 2035 target retirement funds, comprised of the exact same mutual funds at different percentages. A 2030 fund is available that matches the aggregate.

4. It turns out that I am not a pure index investor. Apparently my current 401k (roughly half my investment dollars) is actively managed to a volatility target. I checked the "Growth" fund box when I started my job, never really thought about it again.

5. I was dramatically undervaluing the benefits provided by my employment


On the plus side, what I have done well is to establish and fund tax advantaged accounts. They've performed well enough, and really minimized the risk of me making dumb tax related mistakes.

My next step is to get a better model for growth and the flow of money between the various pools of value. With my mortgage just about gone, I need to figure out where new money goes today. I also need to understand where the money comes from if employment goes away.

[Scott 2]

I've made progress in visualizing the cash flow. A financial mistake I was making is using my checking account as the hub, with extra flowing from it into investments. My savings needs to be the hub, with a fixed amount flowing into checking, per my planned expenses. This keeps me in honest and sets the framework for a transition to investment based income.

The current diagram is below. Feedback welcome.

http://i.imgur.com/EBQN03H.png

Everything in a circle is a portfolio. They are all generic place holders so far. Clearly my IRA should be more volatile and have a longer time horizon than my post tax brokerage account, for instance. I still need to figure out how the different tax rules drive allocations and the plan for when money moves between accounts. I am getting there.

[daylen]

@Scott Interesting chart! I like the "starts/stops on retirement" distinctions.

[Scott 2]

I've gotten to my working model, below. Using firecalc, I get a 95% success rate with current assets and assumptions. This leaves a couple big safety valves, including the value of my home, untouched.



Some interesting things I found:

When income is in the 15% tax bracket, a lot of the tax problems from a normal brokerage account go away. Jacob has alluded to this, but the low income investor is heavily favored. I could make an argument for draining all non earnings from the Roth IRA day 1, so my future earnings aren't locked up.

The 72t rule limits withdrawal rates against an IRA. 3% was the highest calc I could find. Without cash in other accounts, I'd be stuck. It takes five years before Roth conversion money can be accessed penalty free.

As much as the idea of portfolio optimization sounded cool, it bores the hell out of me. I'd rather work more and invest dumb.

At this point, another year of work increases my asset base by nine years living expenses. That's a 25% bump in the income my portfolio can produce. So much easier than investing 25% more clever for the next sixty years.

A rational choice to motivate working longer, could be quadrupling my living expenses doing crazy once in a lifetime stuff, at the same time adding to the retirement buffer. No one really talks about it here, but a year or two of that could be fun.

[Scott 2]

I've since learned foregoing the 72t and relying on a Roth conversion ladder to get at the IRA money is preferable

It also looks like flat assumption of 15% tax against that money is too high.

By stretching the conversion ladder out, I can likely access most of it at 10 and 0 percent tax bands. Even changing to an assumption of a flat 10% tax rate in that money gives me an extra 500 on 10000 expected annual spending.

The tax benefits of low cash flow needs make me feel much better about the decision to pay off the mortgage.

[sodatrain]

Woof! Gonna bump a thread after 8-ish years.

@Scott2 - thanks for posting your flow diagrams. I think that is a helpful way to think about assets and expenses and how they all relate and flow.

Questions!

1) Do you still have this more or less as you shared it here?

2) Can you explain some of the notation a little bit? For example, under Cash > Checking > 2 +- 1 - No Reimburse and then what must be 3 numbers blocked out. Does that mean you have 1-3 months of the expenses that are connected to the right in your checking account? Then the arrow has something blacked out that ends in m and then what must be the amount under each category per year. eg. Food.

[Scott 2]

Hah, this is a fun blast from the past. Gonna answer the questions in reverse:

2. Yes, I'm using m as an abbreviation for month. The arrow is the estimated monthly flow. So in checking, I summed the arrows going in or out. That gave my total monthly cash flow from checking. Lets call it $X. So the blacked out squares would have been 2$X plus or minus $X. The final blacked out $ was what I currently had in there.

1. I roughly followed the plan until stopping work in early 2021. Looking back, I see many mistakes:

- Keeping separate finances from my spouse didn't survive retirement. I wish we'd learned how to collaborate on money before I stopped working.

- I was holding way too much cash and reserves, especially for someone with a salary. The most I'll have on hand now is a year of withdrawals. Going down to a few months at times.

- My attempt to model cash flow at the monthly level was far too granular. I use an annual cycle now, with a ranged budget target for the year. I was caught up in the fact that I got paid twice a month.

- My planning no longer has any diagrams. Just a budget spreadsheet in excel. I download all transactions monthly, reconcile them to the plan, and forecast how the year is heading. I did end up using personal capital to aggregate transactions.

- We use far more granularity in the list of Annual Expenses, as our budget. This is where the conversation with my spouse about money happens.

- The target retirement funds sucked for tax optimization. I now hold the underlying mutual funds as appropriate. IE bonds in tax deferred, VTSAX (low dividends) in my brokerage.

- Note I did not say ETFs - trading in real time as the prices change stresses me out. I prefer to exchange the mutual funds, even though it's slightly less efficient. We simply re-balance to our portfolio target annually.

- Not working, my actual income tax rate has been 0%.

- In practice, our withdrawals have been from the brokerage accounts. We're doing roth conversions to fill up the ACA subsidy, but haven't touched any of the money. Income grew and our brokerage along with it. It's a good thing, because medical expenses were higher than I thought. And the end of ZIRP was not kind to our bond position.

- I now think it's likely social security will pay out 80% or more.

- We don't touch the HSA money. It's tax protected earnings. The ACA cost sharing also favors plans that do not allow HSA contributions.

- The complexity was an attempt to robustly and permanently achieve freedom from. But the effect of a couple years without work is impossible to predict. I now advocate for exploring freedom to early, with much less money saved.