May 15th, 2021 paycheck
From about 2006 until 2020 I had been using the same time-oriented approach. While I appreciated that approach for getting out of debt, I found it didn't serve me in where I was going after getting back to broke.
I'm a proponent of zero-based budgeting even before I knew what it was called or that it was formally labeled something. I'm also a proponent of the envelope budgeting system, which I didn't know had a name beyond what my high school personal finance teacher told us. I tend to equate the envelope system to Fund Accounting, which is used by not-for-profit organizations (including the US Federal Government). Each fund is essentially an envelope and every dollar that comes in is shifted or earmarked for one of those envelopes, leaving a zero-balance for the Income account.
Once I found the formal implementations of these concepts I abandoned the version I was coming to by bumping into walls and iterating slowly and grabbed on like Captain America holding onto a helicopter.
I wanted to stop using the spreadsheet altogether. And, after two or three paychecks, I think I might be there.
I recently started using Wave as my accounting software for both 8fold and my personal finances. I'm appreciating the interface and experience; however, it's an account aggregator and falls victim to the pitfalls of most financial software that syncs with various accounts. Specifically:
- The list of transactions may be out of date.
- You need to sign back in to re-sync the transactions.
- You will either want to use it as an after-the-fact tool, or a pre-emptive tool (more on that in a moment).
- There's also some accessibility concerns I have from a development perspective.
Let's focus on the after-the-fact or pre-emptive tool.
Using accounting software as an after-the-fact tool means you aren't using that software to plan for the future, you're aggregating historical data, verifying that data, and generating reports. Which, for me, meant I needed a tool to handle the present and future — that's the spreadsheet I'm trying to get away from.
Using accounting software as a pre-emptive tool on the other hand means using it to input transactions almost as soon as they happen. This means the tool has a more accurate representation of reality than your financial institution; the old-school check register. Of course, this means you probably don't want to sync your accounts because if you're entering transactions regularly you'll end up with duplicates when the transaction hits your financial institution and, eventually, the accounting software after it syncs again.
Let's get away from my description and to a case study.
I went to the grocery store the other day.
I paid for the groceries using Apple Pay with my card that gives me 3 percent cash back on supermarket purchases. The receipt printed. I launched the Wave Receipts app and snapped a picture of the receipt. It did the automatic processing to figure out merchant and amount. I updated the information with which account I used to pay and which category the transaction should use. Then I told Wave to add the transaction to my ledger and it did; thereby, updating my balances inside Wave.
It would take one or two days for the credit card to convert the pending charge to an actual charge instead of a pending transaction. It would then take Wave another day or two to sync and show the transaction on the ledger for that card. And, when Wave did sync the transaction to catch up with what I already did, there's a possibility there would be a duplicate entry I would need to deal with...meaning I'm no longer able to trust the accuracy of the system.
Luckily, or unluckily, depending on how you want to look at it, Wave doesn't have the ability to automatically sync with all my accounts.
They use Plaid to access the other financial institutions. Near as I can tell, they use the basic plan that doesn't allow for syncing with investment accounts — the language of support folks tends to feel like throwing Plaid under the bus, which bothers me — they are your partner.
In other words, they don't say, "Wave is testing Plaid out at the moment. In an effort to reduce costs and continue passing those savings to our users, we have opted for the Plaid plan that doesn't include investments. That may change in the future." Something like that would be better than, "Our third-party account aggregator doesn't allow us to do that" — like Plaid is incapable of it. This bus throwing language gets users complaining about Wave's choice to partner with Plaid, at which point Wave does come to defend Plaid in comparison to their previous aggregator. Anyway, Plaid apparently does have the ability to sync with investment accounts, just not on the plan most likely used by Wave.
My turn to throw Plaid under that bus a bit, because they don't seem to be able to show the line of credit I use for overdraft protection. Messaging from Wave throws Plaid under that bus as well: Our data provider is unable to supply transaction data for most types of loan accounts. (With a link to this page for details.)
I have a lot of accounts I want to track inside of Wave for personal use. Most of them can't be synced automatically and I'm not sure I would want to even if they could; specifically:
- Apple Cash and Card (which is new) can only be viewed in the Wallet app on my device.
- I have three different brokerage providers at the moment each with one to three sub-accounts; can't sync any of them (not a shot at Plaid, a soft shot at Wave).
- I'm tracking those investment accounts at the fund-level, which means each sub-account may have two or more funds.
In short, there are around 33 accounts inside the Wave chart of accounts I'm tracking for personal finances. 14 of those can be synced automatically, if I'm okay with them being up to 5 days behind real-time; that's one benefit to being cash-based.
What I decided to do instead is have Wave sync 4 of my credit cards and the Income Fund; at least for now. I'll do the other 29 accounts manually.
That might seem like a lot of work; however, the credit cards are the most active accounts and I only use 3 of the 5 for most things. When I use them directly, I can use Wave Receipts in the moment. Otherwise, they'll be charged online and I may not do a manual entry at that point...that's why they still sync automatically.
By the time the first and fifteenth roll around there shouldn't be that much work to do — I hope — and if it seems like too much we'll just iterate again. I'm hoping that by using Wave Receipts I can avoid the duplicate entry problem as well.
Wow. That got long.
All that to say, I'm going to try and use Wave as a pre-emptive tool.
Instead of going to the spreadsheet to plan how I'm going to move money from the Income fund to the others, I will go to Wave. I'll review transactions and whatnot to make sure I'm caught up and the books seem correct compared to reality. Then I'll create new transactions for transfers to various accounts and bill payments.
That becomes the plan. Until the transactions are actually processed and settled, I will leave the transactions unreviewed.
Once I have the plan in place, I'll make the money moves. When the transactions become processed and settled I'll mark them as reviewed; most likely the next time I go through the process.
This replaces the bulk of what the spreadsheet did for me and does it in more detail while being able to generate reports and whatnot.
I still have a spreadsheet. The spreadsheet is basically to generate the asset allocation graphic.
For the 401(k) I have 11 percent of my pre-tax income going there at present, which I'm going to increase throughout the year as I dial in what I need to land in the Income fund to support my total lifestyle cost. I updated my payroll allocation to have a specified amount go toward replacing my equipment (computers and phones), this is taken out before distributing from the Income fund. From the Income fund:
- 10 percent to the Profit fund.
- 2 percent to the Tax-hold fund.
- 15 percent to the Operating Expense fund.
- 10 percent to the Runway fund. And
- 60 percent to the Investing Pass-through fund.
That leaves 3 percent inside the Income fund. Because this is a drastically new way of doing things for me I am being a little conservative at the tail-end of reducing my liquid cash reserves. Basically, that 3 percent is the last of it. Going forward, I'll be taking the Income fund to a zero-balance every time.
The next paycheck will be on June first, which means I'll be shifting the money from the Profit fund and potentially changing these flow percentages.
As more money flows into the small- and mid-cap US equities, the ratio of the large-cap and municipal bonds should drop in comparison, which is what I'm going for. Also, as the allocation percentages shift, my cash reserves will continue to build back up.
With that said, I want to be running pretty lean while I'm earning an income from a day-job. That means trying to reduce the percentage required for the Operating Expense fund from each paycheck to increase the amount going to the Investing Pass-through fund. I'm considering, or hoping, to reduce the percentage put into the Profit and Tax-hold funds, which will allow me to increase the amount held back for the 401(k) and put toward the Investing Pass-through fund.
I'm thinking of switching from buying frozen, steam-in-the-bag vegetables and go with fresh. I started using frozen vegetables because sometimes I wouldn't cook at home and the fresh vegetables would go to waste. Now that COVID has calmed down and I feel comfortable shopping along with reducing operating expenses by not eating out as much, I think buying fresh will have multiple benefits:
- should be less expensive,
- should more nutritionally rich (I won't be cooking or microwaving them),
- should be in stock more consistently (sometimes the frozen vegetables I eat are out or too low to cover the week — everybody seems to always have broccoli and carrots), and
- the desire to avoid waste tied to a minimal prep-time should inspire me to eat from what I have more.
The timing of my paychecks, these posts, and the snapshot are throwing off my flow. Here's what I'm thinking:
- I'll do the snapshot on the first or fifteenth.
- I'll make the moves a day or two prior; I get paid biweekly and not on the literal first and fifteenth — though I do like the idea of getting back to moving money on or near when I get paid — not waiting.
This way the snapshot will be somewhat settled based on the current balances of the accounts.
The doubt settled in a bit with this paycheck. It was interesting.
Personal Capital generates this thing they call the You Index®. It measures daily changes in percent of your synced portfolio. You can compare it against the blended approach recommended by Personal Capital, the S&P 500, and others. Up until this paycheck, I would compare and the difference never seemed like a lot; usually marginally behind against the S&P 500 and Total Stock and ahead on the foreign and the blended. This time, there have been multiple times where it's been behind all of them.
It’s an interesting feeling.
I’m watching my portfolio get out performed by almost every alternative except bonds. And there’s that feeling of doubt. That needle prick of “I should change something.”
Then a voice in my head said, “Stop comparing it to other things, judge it on its own merit” — my inner voice is either a punk or a philosophy professor.
One interesting part is that based on backtesting the portfolio, I know when it drops, it will typically drop lower than the total stock market; it's a byproduct of the even market-cap distribution. Yet, here I am, doubting the design.
Another interesting part is I didn't create the portfolio based solely or primarily on performance — a fool's errand, right? If the principle is that the average person (me included) won't out perform the market on a regular basis, why is performance suddenly feeling like a painful thing? (Told you checking daily was a meditative exercise.) But, no, I based the portfolio and my investment policy on values and principles I hold.
I checked balances to see how that would go. The almost 700 USD gain from April is back down to 100 USD. So, technically, checking balances didn’t go well. Of course, I’m not looking to withdraw and have no idea why it seems to be bothering me.
Then I looked at the investment chart from Personal Capital. The downward slope is almost unnoticeable, especially compared to what happened around this time in April.
Having just purchased more VEXAX to finish off the 2020 Roth IRA contributions, I decided to check prices; what had I paid for it. 134 USD. Put in context, the cheapest I‘ve bought in at is 131 USD and the most expensive was 141 USD. The median price is 137 USD and the average deviation as of this writing is around 3.50 USD. This means I got in at a discount, which made me feel a bit less troubled.
That’s another thing. Intellectually I know that fluctuations in the value of VEXAX will be amplified because I have more of it. Further, I’m not losing shares in the fund, it’s that their perceived value is less. Like losing buying power with cash, which is roughly 3 percent per year.
Then there’s the time scale. This is a 10 year plan. I’ve been operating the plan for less than six months. The strategy isn’t even based on numbers, again, it’s based on my values and principles. On a 10 year time scale, most of the money will be from direct contributions, not returns.
And yet, here I am battling with doubt. Asking myself the question, should I do something different? Put more money into a different index fund. Even stranger is the slight underpinning of asking whether I should have done something different; like regret.
A popular refrain with me is: You can’t change the past, only determine how to progress into the future.
Then there are the principles I hold, specifically “past performance doesn’t guarantee future performance.” My approach isn’t grounded in performance, it’s grounded in my values and principles; I keep coming back to this. And, if I do change something it should be grounded in the same manner, which means changing my values and principles or at least reframing them.
Odd emotions seeping into the brain. Walking up a mountain playing with a yo-yo is a metaphor used by The Money Guy Show and I think it's an apt metaphor. And, for me right now, it feels more like walking up a mountain while riding the yo-yo.