Financial Independence Progress (FIP) Graph

Here's the second installment of my new favorite way to evaluate my financial situation - the Financial Independence Progress Graph. This is a simple but elegant graph that actually provides quite a bit of information, but directly and indirectly. The blue line tracks my income month-to-month, the red line tracks my monthly living expenses (all spending minus savings and investments), and the green line tracks my investment income. The key is to try to maximize blue, minimize red, and increase green until it crosses or surpasses red - this is the point at which financial independence (FI) is achieved.



As you can see things are at least trending in the right direction after a horrid June, expense-wise. I picked up a little bit of extra income in referral bonuses and brought spending back down, although not nearly as low as I'd like. Although it's barely noticeable here, that green line is beginning to rise as well coming off a tiny gain in my IRA.

The real key to increasing the green is to maximize my monthly savings and investments. The key to doing that is to maximize the area between the blue and red lines. It's a simple formula: income - expenses = cash flow. That cash has to be used as investment capital in order to have any hope of accelerating my journey toward FI. As you can see from the graph I had a couple great months in this regard, which helped me get my assets to where they are now, and a few so-so and bad months that have brought my efforts to a crawl. I need to work much harder than I have been on this.

It's a long road to be sure, and a tough one, but by starting early and focusing now it will make it easier as the power of compounding works for me.

iPhone Owner or Millionaire?

Which would you rather be?

A great post from J.D. over at Get Rich Slowly about this comic. Here's the math behind the point of the strip. It's amusing, but also illuminating.

Of course this isn't just about the iPhone per se but about a certain mentality. Personally I'm going to skip the iPhone. How about you?

Spending Habits

The New York Times has a very cool infographic showing the spending of the average American based on data compiled by the U.S. Bureau of Labor Statistics. It shows the current percentage and the change from last year's data. Notably, petroleum products and food have all increased significantly.

Miscellaneous Money Musings

• I have a lot going on with my personal finances right now, in addition to the craziness that is our current economy. The Fed cut their rate again, and ING is down to 3.00% APY for savings and a paltry 1.75% for checking. I'm sure I'd feel much worse if I had a large amount of cash saved up, but it's still a bit of a blow coming over the last couple months as I'm getting my financial house in order. The good thing is that I'm saving money and it's earning me something - both of which are big improvements over what I was like before.
• I haven't paid a single bank fee since December!*
• I have an opportunity to go to Ireland this June. This was completely out of left field (relatives are going) and I could go with airfare, housing, and food expenses paid. This is all but definite now. I'm planning on taking the opportunity to extend my trip for a week and visit a friend in England. That leg will come out of my pocket. So I need to do some serious saving for this. Costs are high over there.
  
• Still annoyed about this whole thing. Sigh.
  
• Trying to figure out the best way to balance retirement savings with travel, general and emergency savings (I will likely tap my emergency fund to boost my IRA).
• Need to buckle down a bit to finish off the month strong. A couple birthdays and some lax discipline made me go over budget on a few unnecessary expenses so far. I should be able to sock away a good chunk though and stay on target.

*With the exception of a wire transfer fee that was reimbursed by NSTAR.

Want to cut down on that monthly bill? Just ask!

I've read about people being able to get promotional rates on their cable and internet service by quoting competitor pricing or saying that they would be switching providers. I decided to try this out for myself yesterday. I live with two roommates, so despite the fact that we have internet and cable with HBO, the expense isn't that high. Still, it comes out to about $47 per person per month. It would be nice to reduce that if possible, if only temporarily. Once The Wire ends I think I will make the case to my roommates to drop the HBO.

At any rate, I spoke with a couple people at Comcast and was able to get $10/mo. off for the next 3 mos. as a courtesy for being a good customer. Not the $19.99 internet promotional rate I was hoping for, but less is less.

Next time around I think I will play hardball a bit more, maybe quote another provider or something. But it does work!

2,633 Reasons Why Fees Are Bad

Over the first couple weeks of this year I took a look at some of my spending over the course of 2007. I was always struggling, living paycheck to paycheck. A big reason for this was overdraft fees on my checking account at Citizens Bank. My checking account would be down to $5.37 and I would inevitably take out $60 before the end of the month rolled around so that I could go out, buy food, booze, or whatever, and I would go into the negative. $38 overdraft fee. For a while I just thought "Eh, whatever. If they'll float me some money for a while that works out fine for me." It got to the point where I would routinely be $200 or more in the hole by the time my new paycheck was deposited. I was playing catch-up every two weeks, and it was a vicious circle. I would get my new paycheck, pay off $200+ in negative balance, have that much less to work with for the next two weeks, and then overdraw my account again. I knew what I was doing, and I knew it was crippling me financially, yet I kept doing it. The fees were ridiculous: $38 every time the account was overdrawn (whether it was by $1 or $100), then additional service fees if a negative balance was carried for more than five business days (which it was, quite often). I think the worst it got for me was when I was $400-500 in the hole, probably half of which were in fees.

So I went back through my bank statements over the last 12 months and tallied them up, every single charge:

$2,633.

Two thousand, six hundred and thirty-three dollars!

Typing this makes me physically ill. Do you realize how much money that is? I do not even want to tell you how much money that represents as a percentage of my annual income. What else could I have spent that money on? Let's see:

If I had opened an IRA in January 2007 I would have socked away 65.83% of my annual contribution limit.

$2,633 works out to about $219/mo. If I had put that in a savings account at 4% interest every month since 1/07 I would have had that plus an extra $53 right now.

It could have been about 87 dinners at my favorite restaurant.

It could have been about 19 1/2 months of student loan payments.

It could have paid off about 81% of my current credit card debt.

It could have paid for my airfare to Hawaii to attend my good friend's wedding last September, which I had to miss because I did not have the money. This kills me.

It could have been about 27.7% of the debt I currently owe to friends and family.

It could have been new clothes, shoes, movies, music, wine, fine liquor, cigars, dates, treating my friends, a new hard drive, travel expenses, bigger and better Xmas presents - in short, it could have been anything, whether a frivolous spend, debt reduction, or wise investment - and it would have been infinitely better than wasting that money on Citizens Bank.

Never again.

Money mistakes have emotional as well as financial costs. These can have a lasting impact. It was essential for me to take stock of my situation, realize what I had done, take responsibility for it, and plan how to avoid it in the future. I think this is necessary for anyone trying to improve his financial situation no matter what the particulars are.

(NB - While I do think that the overdraft fee system at Citizens Bank and other "brick and mortar" banks (Use online banks! No fees!) are obscene, predatory, and unethical (banks raked in over $19 billion in overdraft fees in 2007), I take full responsibility for my incurring all those fees. The irresponsibility was mine and mine alone.)

Switch Set to Save

I recently read an article on one of many personal finance blogs that I've been perusing about how saving and investing is more a particular mindset than having a complicated investment strategy per se. The same writer also mentioned that for most people, there is a certain definable point in their lives when a switch flips and they transition from spenders to savers. And I think there's something to this idea.

For whatever reason, this January I had that switch flip in my head. I quite literally see everything differently now - my income, debts, spending habits, my financial future, a growing understanding of financial terms, an appreciation of how the global and domestic economies can impact me (and vice-versa). I'm not sure exactly what changed in me - part of it was setting personal goals for 2008. I did this in 2007 and it was a mixed bag of success and failure. But I didn't outline financial goals for myself. Part of it was that, for a few reasons, I had a small amount of cash on hand, and I can't remember the last time this was the case. Part of it was that I was sick of living paycheck to paycheck; I was sick of paying Citizens Bank overdraft fees every month; I was sick of not being able to participate in things because I was broke again; I was just sick of being broke all the time.

I've never thought of myself as a "spender." Mainly this is because I've rarely had the money to buy big-ticket items. But once I sat down and took stock of my spending over the past year and itemized my spending in January, I saw exactly how much and on what I was spending my money. I was a spender, but I just spent here and there in small amounts. I would inevitably overdraw my checking account balance, have to eat into my next paycheck to pay off the negative balance, and start in the hole for the next two weeks. It was a vicious cycle and I never had the discipline to just stop spending and play catch-up.

For the last few years I've always thought, "Oh, I don't make enough money to save," "I don't have a retirement plan at work," "This is something I can figure out when I get a better job." These were all excuses. After taking a look at my expenses, I not only see how I can save more, but I'm able to ensure that I'm saving a certain amount of money automatically monthly. I think this saving mentality is a self-fulfilling prophecy of sorts; in addition to the fact that I have real savings now for the first time since I graduated college, I'm already feeling reluctant to spend what money I do have on frivolous or transient things. For the first time in my life I feel like I am in complete control of my financial future. I have money in the bank, I have a plan for my short-term savings and retirement, and I've never felt better.

The switch is set to save. And I'm not switching back.