Personal Finance 101 the MMM way? (a confession)

[pbdupatree]

Hi Mustachians

New here, and frankly, new to the mysterious world of money.

I'm a 34 year old freelance female artist with income and, recently, an unexpected inheritance after my mother's unexpected death a few hollow months ago.

While I may seem like a well-adjusted, self-possessed successful artist with a Master's degree, I confess that I have no idea what I'm doing with money.

I have no debt and have avoided any financial catastrophes to date, but I somehow just noticed upon receiving this inheritance that I never learned about personal finance. Not a thing about it. Ever.

I've never had a budget.
I've never looked at my bank statements.
I've never put money away, or thought about investment.
I don't have a financial plan whatsoever.

There, I said it.
My face is red.

I miraculously stumbled across MMM after a wide eyed google search and have been blown away by the blog and forum.
I may not know the first thing about money but when I found MMM I knew I'd found my tribe.
While there's clearly a wealth of valuable information here, I need a serious primer.
I would love to present a "case study" for the forum, but I don't even know how to parse my financial picture well enough to fill out the form!

So here's my question/white flag-
how/where do I learn the basics of the basics of personal finance as a foundation for the MMM trajectory? Would a fee based financial counselor/advisor be a good person to help me wrap my head around these embarrassingly rudimentary skills? Or simply an accountant? What's an accountant? If so, how do I connect with one who subscribes to the MMM principles to enlighten me?

[boarder42]

It's better and cheaper to learn here. Read everything start tracking your expenses. The most important thing you can teach yourself in life is finance and luckily the internet exists now so you can learn it all for free in relatively short order

[Ms.BecomingFI]

Hello Pbduatree and welcome to the tribe!  I am also sorry to hear about your mother. 
I found the tribe about a year ago and so happy I did.  If you are interested in learning about the investing from a MMM point of view, I would highly recommend: http://jlcollinsnh.com/stock-series/ 
If you are interested in learning about finance tracking, I would recommend signing up at mint.com and also reading the book "Your Money or Your Life", which there is probably a copy at your library.  Of course reading through the MMM site from the beginning is pretty awesome.
There is a wealth of information out there.  I would say not to make any big decisions right away until you have a good understanding from reading.  Take it one thing at a time... don't rush into anything.  Best of luck!

[GoConfidently]

Hey there. We have a lot in common, so your story really resonated with me. Like you, until recently I had no clue about finances except that debt is bad and investments (whatever that meant) were the key to retirement. I've learned a lot here, and you can too. In fact, whether or not you eventually use a financial counselor, you need to get some basics under your belt first.

1. Assess your income and spending - a simple spreadsheet will suffice. What are your recurring monthly bills? What do you spend your money on? What is your income? Do you have any retirement accounts or investments? Where is the inheritance money? Put it all down in writing.
2. Make a budget - Did any of the numbers from #1 surprise you? Can you lower any recurring expenses? Make a target for spending in each category from #1 and make sure you're hitting it regularly by tracking your spending (in writing). Sometimes it's shocking where our money actually goes vs. where we think it's going.
3. Do you have a safety net? Emergency fund of any kind? How much and where is that money being held?
4. Credit - You have no debt; that's great! But what about your credit? Do you know your credit score? Have you applied for a line of credit recently, and were there any red flags? It's a good idea to check these things out periodically just in case.

Once you've done that, it's time to do some future planning. What are you working toward? What is your goal? Do you want to FIRE? Just travel more? Buy a house? Move across the country? Your money should work for you, so you need to know the plan before you can get advice about the best way to get it to do that thing. Once you have a plan in place, then you can get some feedback. Until then, all the advice you get about future planning (from here) will be based on the preferences of the person giving the advice. Your plan can change! Nothing is set in stone, but you need a general direction to get started.

With a general direction and some monthly tracking, you'll be ready for a case study. Until then, keep reading and start envisioning what your future self will need or want.

Good luck, and welcome!

[harvestbook]

I would second the research/learning aspect. Even if you decide to get a fee-based adviser (hourly flat fee instead of for a percentage of your money), you still need a basic background and platform to understand and not be taken advantage of or inadvertently led astray. My favorite book is Your Money and Your Brain because a lot of our mistakes are behavioral in nature. I was also greatly influenced in frugality and low-cost investing by John Bogle and Paul Merriman as well as the MMM lifestyle (bogleheads.com is another excellent forum in which to learn from the real experiences of others.)

I'm also a freelance creative and managing money is just as important for your career as creating desirable things. It's the best way to maintain your artistic freedom. Good luck.

[MDM]

I would love to present a "case study" for the forum, but I don't even know how to parse my financial picture well enough to fill out the form!

So here's my question/white flag-
how/where do I learn the basics of the basics of personal finance as a foundation for the MMM trajectory?

I'm guessing someone else has prepared your tax returns?  If you have been doing your own, then you know more than you are crediting yourself.

If you have had them prepared for you, no problem - you can learn!  If you expect 2017 to be similar to 2016, your 2016 federal return should help you fill in the income portion of the case study spreadsheet.  You at least have a paper copy of the 2016 return, correct?

For the expenses, nothing beats keeping track.  Quicken, YNAB, spreadsheet, pencil and paper, etc. - take your pick of how you would like to keep track.  No need to track every penny, but putting 50% into "miscellaneous" isn't worthwhile either.  Say, 5% or less of your non-housing spending is a reasonable target for "miscellaneous".

But, for starters, you might be able to estimate total spending if, for example, all your income goes into one checking account and all your spending comes from that account.  In that case, your 2016 spending was (2016 income) minus (1-Jan-2016 checking balance minus 31-Dec-2106 checking balance).

In any case, it may be worthwhile for you to post what you can, and go from there.  Good luck!

[Kansas Terri]

A budget gives me freedom. A budget means I do not have to be figuring costs all the time or worry: I let the budget worry. Once a week I deal with bills and think about money: the rest of the time I do not. My money day is Friday.

A lot of people feel deprived when they stay on a budget but I find it makes life easy. When I buy groceries, for instance, I stay below $70 and I *KNOW* that there will be enough money in the bank for the bills for the rest of the month. No worries, and no doing hasty math before I write out the check. I just shop, pay, and go.

Etc.

On Friday I pay bills, balance the checkbook, and see that I am on track. If I am not on track (which is rare) I adjust the figures to change the amount of grocery/pocket/clothing or whatever I decide to reduce for the rest of the month, and then life goes on.

It spares me some worry!

If I were you I would start with a budget, and to do this you must first keep track of your expenses, so you know what your cost of living is. Then do your budget, and then your inheritance will not be nibbled away by day to day expenses

[marty998]

So here's my question/white flag-
how/where do I learn the basics of the basics of personal finance as a foundation for the MMM trajectory? Would a fee based financial counselor/advisor be a good person to help me wrap my head around these embarrassingly rudimentary skills? Or simply an accountant? What's an accountant? If so, how do I connect with one who subscribes to the MMM principles to enlighten me?

Talk to us! Talk to us!

Ahem. An accountant is... oh shit, I've been one for 13 years and I can't even define it. There's too many types of accountants lol.

Accountants are just like everyone else. Some will be frugal/FIRE focussed, others will be the worst kind of spenders imaginable.

My advice is to start making lists:

Write a list of all your bills - rent, utilities, things you need for work. Add them up. This is your "I must pay these" list.
Write a list of all your essential expenditure - food/groceries, personal care/products. This is your "there might be some room to optimise this, but I'll still need to cover these".

Write a list of all other spending - shopping, eating out, entertainment. Divide it into things that bring value to your life and things that don't. Start slashing and burning as appropriate.

And then we can go from there...

[asiljoy]

If you have made it this far as a freelancer without debt, you're doing alright. Give yourself a little more credit.

Budgeting isn't rocket science and everyone's is going to be different because we all value different things. If you don't really know what you spend, hook your accounts up to Mint for a few months. That'll layout where your money is going for you,  where the 'money leaks' are, and then you can optimize.

As far as strategy? I'd just start at the beginning of MMM and read on through and don't skip the comments. Not that it's all sage advice, but there are a lot of smart people debating topics that will get your brain working. Have a specific question? Ask. Chances are someone will know what's what.

[pbdupatree]

What lovely, kind, salient words of wisdom every one of these comments offered.
Thank you!

I'll work on getting my case study together.
This exercise made it clear your insights to my big picture would be invaluable.

Inspired XXX

[FLBiker]

I don't think there's any one way, really.

Personally, I don't budget.  I live well within my means (always have) and don't worry about it.  I do use Mint, but mostly just to keep track of investments.

For investing, it's just a matter of picking an asset allocation.  Here are a bunch of good samples -- https://www.bogleheads.org/wiki/Lazy_portfolios.  I do a four fund that's 50% US stock, 35% INT stock, 5% REIT and 10% Bond.  Once you've got your asset allocation, you just want to do it in the most tax advantaged way you can, in index funds that have the lowest expense ratios available.  Vanguard is a good option.  I don't have experience with inheritence (my mom died suddenly last year, but my dad is still alive) so I defer to others on how best to navigate taxes with that.

I learned some good stuff from The Only Investment Guide You'll Ever Need by Andrew Tobias.

[boarder42]

dont feel bad being budgetless as others have mentioned i was raised frugally and have never had a budget. 

[Bicycle_B]

Hi, Pbd.  Fan/emotional supporter of artists here, and sometime accountant.  Here are starting points and some completion criteria - in hopes of finishing the process so you can return to your art!

1. I don't really budget either, and that's fine.  Detailed budgets can be helpful but are a fine point. You can get a basic handle on your situation - what the engineers might call "a first-order approximation" - just by analyzing your previous spending. Think of it as the pencil drawing that da Vinci sketched out before painting - it shows the outline and hints of detail, enough to get an idea.  You just need some spending data in order to evaluate your situation.

2a. If you've been using a bank account, Mint will let you download info from it into Mint.  Mint is free, you can download it from mint.com.  Mint will help you by offering a tentative classification of the expenses that can be used a basis for budgeting in case you want to go the budget route.  Same for any spending that you did via credit cards - you can download it into Mint.
2b. If you don't want to learn Mint, but you have a bank account, get a copy of a spreadsheet program such as Excel or one of its free sisters, such as LibreOffice. If you're using a laptop or desktop, you probably have one of these already.
https://www.scoro.com/blog/11-user-friendly-excel-alternatives/
2c.  You can download data from your bank account into the spreadsheet.  There's an option for that in your bank's website.  Call their customer service if you need help.  Same for your credit cards, if you have any.  Downloading this data will cover your past 12 months of expenses, except for any cash transactions.  12 months is a length of time that most companies retain, and is long enough to make most month-to-month variations in your spending average out.
2d.  Depending on how many cash transactions you have, either some or all of your spending can be captured in this way. But you need to add in the cash too.  Do your best to guess how much cash you spent, and add that in.  Remember that if you got cash from bank withdrawals or by depositing checks, the bank data includes withdrawal and deposit records that you can use to approximate the cash amounts.

3. Once you have the above financial data, analyze it as follows.
3a.  Separate all the incoming money (deposits) and all of the expenses.  Add them up separately.  Mint or the spreadsheet has ways of doing this very quickly.  Let us or your office-y friends know if you have any difficulty with this.
3b. Your expenses for the year are the basis for the rest of the planning.
3c.  You can reasonably expect to live off your investments forever if you have at least 25 times as much money in investments as you have in your annual spending.  It's a rule of thumb, but it means you're in the right ballpark.  Just remember that if you spent any cash, you need to somehow include it in the expense amount before you do the "times 25" part.  Mr. Money Mustache has a good article on this 25x rule, also known as the 4% rule.  (Saying "spending is 4% of investments" is mathematically the same as "investments are 25 times as much as spending").
http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/

4. If you have enough to maintain your current spending from the inheritance based on the 4% rule, you are now free to create art the rest of your life without selling your art.  Of course you can keep selling if you like, you're just free.

5a. If the inheritance doesn't cover your spending, but you'd like to be completely free as an artist, you still need to save more, or else to cut expenses to the point where your expenses are covered by your investments.  MMM's article below covers how to calculate how long this will take.  Use the inheritance to cover some of the years - ask for details if this isn't self explanatory after reading.
http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
5b.  In the meantime, you can improve your stability by maintaining at least a few months' spending as an emergency reserve, aka "prudent reserve."
5c. Above that, use the power of additional savings as...F-U money! 
http://jlcollinsnh.com/2011/06/06/why-you-need-f-you-money/

6. If you want savings tips, the case study will probably get you detailed ones.

[pbdupatree]

THIS IS SO HELPFUL

THANK YOUUUUU

[Aminul]

I'll throw my support behind the no-budget crowd, with the caveat that all people are different.  Tracking expenses and having a high-level view of what's happening in my money world -- to me that's more important than a budget/plan.  I pay myself first and understand where I'm at between pay periods (another big fan of Mint here).  This allows me the flexibility to spend to an arbitrary floor in my bank account.  Obviously, this approach requires some self control and living below one's means. 

The book that most influenced me in moving down a path to a better financial future was The Wealthy Barber.  It's written more as a story so I found it easy to digest as a newbie in this scary world of finance. 

[boarder42]

if you use credit cards mint or personal capital will help with those as well.  as bank statements dont itemize credit card bills well. I'm a personal capital fan but you'll find both here.

[wenchsenior]

I was in kind of a similar situation to you in my late 20s.  I knew enough to stay out of consumer debt, but I didn't pay much attention to anything else because DH and I'd been in school so long. I figured I would worry about all that stuff when we were graduated.  DH was older than you by that time and also didn't know much.

Right around the time I graduated I worked for about a year for a fee based financial planner, and it kind of kicked me into awareness that I really needed to learn.  So, I just picked up some basic 'dummies' guides to personal finance and read those and followed the advice.  In the years since I've run into tons of my husband's grad students that are similarly clueless.  This is the book that I usually give or recommend to people starting from knowledge = zero. It's super short, easy, basic advice about getting your financial life in order (not only for women).

https://www.amazon.com/My-Own-Two-Feet-Personal/dp/1440570841

After you have absorbed that, you can tackle more of the fine points as pertains to forums like this or your own personal situation.  It's really not complicated, so don't worry...you'll pick it up in no time!