Friday, February 12, 2016

Lesson From Automatic Budgeting with Simple Goals

In the last couple of posts, I have written about how I am using to manage my self-banking experiment. It turns out that one flaw in the process is me. It has become habitual to check balances, transfer money, schedule payments, and figure out strategies to ensure what needs to be paid gets paid. I maintained the habit knowing that Simple can mostly manage things.

Since switching my payroll direct deposit over to Simple, finally, much of my fussing over money is automated. It has been difficult for me to let go of the reins. At first, I was putting lump sums into Simple Goals in order to pay off self loans, as I have done since beginning the self banking experiment.

The problem with manually doing this is that Simple automatically allocates a daily amount into your goals. Therefore, your Safe-to-Spend quantity goes down every day as Simple allocates your daily rate.

For example, let's say that to meet my Goals, Simple needs to set aside $45.67 per day among the various Goals. This means that I would need to have enough money in Safe-to-Spend to set aside until next pay day. So, if I were paid every week, I would need $319.69 available to put towards my daily budgeting.

What I was doing instead was allocate money manually and make payments to my self loans without leaving that 7 day buffer. Therefore, my Safe-to-Spend balance would zero out and cause my Goals to pause their daily budgeting. Then, by the next paycheck, my Goals would grab a big chunk of my paycheck to catch up, in addition to the daily allocations from my already diminished paycheck.

The result is that I kept "running out of money", which is preposterous because I earn sufficiently to cover all my expenses.

Whereas I manually budgeted in lump sums per paycheck on my own, Simple budgets smaller daily quantities automatically.

I have to learn to let go and allow Simple to do its magic so that I can go about enjoying some extra free time.

To remedy my problem, I've had to borrow from myself to ensure that there is enough cash in the account to smooth out the roller coaster budgeting that my interference has caused.

My take-home lesson is that once I automate a process, I should step back and let it run. My interference caused something meant to uncomplicate my life do the total opposite.

Wednesday, February 10, 2016

Self banking is easier with Simple

In my last blog post, I wrote about my self banking experiment and a transition to +Simple as my main bank account. Previously, I had my paycheck deposited into a local bank. The money would then pay bills and pay down my loans to myself. This method required a lot of time in tracking accounts, bills, and loan balances. Transitioning to Simple has freed up so much time.

Self Banking Recap

Let me recap the self-banking idea. I have a savings account where I accumulate a percentage of my income. Whenever I need to purchase something other than a living expense, a WiFi router for example, I use money from savings. That instantly becomes a loan with tacked on interest that is paid back over one year or less. In this way, the savings account has a means to grow other than the meager interest rate the bank offers. In this way I avoid using outside credit and recapture the interest I would have paid out.

Self-banking is a fun mental game to play with my finances. Whenever I purchase something in this way, the loan has a name, it has a payment schedule, and it has an interest rate. There is a greater mental urgency to budget my paycheck to pay off these loans than there is to only save a fixed percent of my income.

Imagine borrowing $120 from savings and then still making payments on it after six months. It is a bit ridiculous to take twelve months to pay down $132 (loan + interest). Yes, I could make $11 payments every month, or I could pay off the entire loan in a lump sum. The point is that having a "Router Loan" hanging over my head ensures that I will pay down the loan in addition to my regular savings contribution. Thus, by financing purchases in this way, I am effectively increasing my savings rate every paycheck. The game ensures that I budget loan payments like I would a utility bill. This could get exciting if I ever got to the level of loaning myself money for a car.

Simple Makes Administration . . . uh, simple

One drawback to this mental finance game is that there is some administration necessary to make it work. The old way required creating a note, creating an amortization schedule, keeping track of payments, calculating balances, and budgeting my paycheck to figure out how much of the loan to pay back. By switching to Simple and using their Goals feature, all of that goes away.

I originally started the administration with note cards for each loan. Then I moved to tracking via Evernote. I would also do the budgeting on paper every paycheck.

Now when I borrow from Savings, I tack on the interest and make it a Goal in Simple. Simple automatically siphons money into the Goal every day. If I want to pay down the loan faster, I can move lump sums into a Goal until it is paid off.

By using Simple, my Self Banking game is easy to do from my phone. The only "work" is that I need to add 10% to the loan, which might require a calculator. Beyond that, Simple handles tracking payments, tracking balances, and a large part of the budgeting.

Why It Works

I have given some thought to why Simple is so effective for making my Self Banking game work. It comes down to Accounting. Prior to considering Simple to track my self loans, I was seriously trying to design an accounting system to help me manage the loan accounts. I was about to shell out money for ledger paper so that I could create a general journal, a ledger, and loan accounts. It would basically do what my note cards were doing, except more formalized. I was even considering Quicken or Quickbooks.

Simple works because it breaks your main account into sub accounts when you create Goals. Simple also works because it does not separate your bank account from your accounting. It's all in one. No reconciling required.

A Goal in your Simple account can be used as a sinking fund, for tracking loans, for budgeting monthly bills, to create as many "savings accounts" as needed, and probably some other uses I have not imagined. In short, rather than have a checking account and a separate accounting system, Simple combines both into one product, which is a time-saver.

With Simple, I can track expenses, allocate money, transfer from one account to another, and many of the things that we can do with a formal accounting system. The only thing missing is that transactions between your cash and Goals, or between Goals, are not recorded. You lose those details. However, since this is my personal financial game, not a business, there is no need to leave breadcrumbs for auditing.

Now the question is, what can I do with all the time I have freed?