My life as a hamster

Back in 2007, a post by Trent at The Simple Dollar introduced me to the concept of the financial treadmill. The idea is that, if you're living paycheque to paycheque, and spending every dollar you make (or, worse, dollars you haven't made yet), you're basically running in place (or even falling behind).

I've written about this a couple of times, looking at my financial progress to see whether I can "get off the treadmill". So far, I still feel the treadmill spinning away, even though I've brought my cash flow out of the red, and built up a small savings cushion.

A post today at Generation X Finance put the treadmill dilemma in a slightly different light. The focus here is to "stop running in place and start making progress."

That "start making progress" piece is a subtle but important difference in the approach to the problem. It really suggests that, instead of looking to get off the treadmill (which really only happens at retirement), you should look to keep ahead of the treadmill. When you look at it this way, it takes "no, I'm not off the treadmill yet, but I'm getting closer," and turns it into "yes, I've come so far, and I'm getting better every day."

Forward motion is success, and helps to motivate future success. My debts (consumer, student and mortgage) are getting smaller every month, and my savings are growing consistently over time. If I have an off week, I may lose ground, but I still end up ahead of where I could be.

I'm still on the treadmill, but I'm running at my own pace.

A look at my accounts

Putting together my January recap, it occurred to me that it might be a good idea to post a summary of how my financial accounts are set up. I've already discussed my cash flow setup in some detail, but I haven't looked at the individual accounts that comprise the gears of my money machine.

Don't take this as a recommendation of how you should set up your own finances; in fact, I may very well see this exercise as an excuse to simplify my own financial life. At any rate, here's the rundown:

Chequing Accounts

• Joint chequing account at a brick and mortar bank - This is the account into which my pay is deposited every two weeks, and our mortgage and loan payments all come out of this account automatically. You could call this the "hub" of my finances, as this is where money enters my life, and then moves out to the appropriate accounts and expenses.


• Individual chequing account at a brick and mortar bank - I keep this account as my own personal spending money. After all of my savings and fixed expenses come out of the joint account, what's left of my paycheque is transferred into this account to be used for groceries, gas, etc.

Savings Accounts

• Individual savings account at a brick and mortar bank - This account is currently empty, as it pays virtually no interest. I haven't used this in several months, and should probably just close it down.


• Emergency Fund at ING Direct - This used to be my primary Emergency Fund account, until I moved the majority of my emergency savings to HSBC. I still keep a few hundred dollars in this account, and I have a bi-weekly automated transfer of $15 into this account from my payroll account.


• Emergency Fund at HSBC Direct - Thanks to the myriad ways of using HSBC's savings account (you can essentially do anything short of writing a paper cheque), I decided to keep $1,000 of my Emergency Fund with them. I have an access card that gives me access to this account, and I can even pay bills from it if necessary. The balance has been slowly growing thanks to the $2-3 in interest that it earns each month, to the point that I now have nearly $1,040 in this account.


• Emergency Fund at Canadian Tire Financial Services - I opened this account when I was reviewing high-interest savings accounts, and I basically hold $20 in the account just to keep it open. The rate is comparable to ING and HSBC, but it doesn't really serve much purpose in my financial life.


• Emergency Fund at ICICI Bank - As with Canadian Tire, I opened this account just to see how it stacked up against the others. I have no complaints, but it's really a redundant account, with $20 earning pennies in interest each month.


• Emergency Fund at Citizens Bank of Canada - What is wrong with me? Yet another duplicate account. I opened this to take advantage of a $50 promotion in the fall, and now I'm just keeping a balance of $150 in this account until they remove the hold in March.


• Freedom Account at ING Direct - This is my most actively used savings account. This is where I stash money that I know I'll need in the near future, but not before my next paycheque. Condo fees, car insurance, cable and hydro bills are all paid from these savings, as well as clothing, subscriptions and car repairs. I use a spreadsheet to keep track of how much I have saved up in each category. $300 goes into this account every payday, and I transfer funds back out as needed.


• Giving Account at ING Direct - Really just an extension of the Freedom Account, this is where I save up for birthdays and Christmas, as well as charitable donations. $100 gets socked away in this account every payday, and I also keep track of the categories in a spreadsheet.


• "Fun" savings at ING Direct - Actually the first online savings account I ever opened, this is where I save up for "treats." I set aside $25 each payday in this account, and periodically wipe it out on something fun.


• Wedding Fund at ING Direct - This is a regular ING savings account, and I have an automated transfer every payday into this account, as well as any ad hoc savings I manage to set aside for our big day.


• Wedding Fund TFSA at ING Direct - Saving for a wedding represents a fair chunk of change, so I opened this account to take advantage of the tax-free interest earnings and flexible withdrawal rules.

Investment Accounts

• Self-Directed RSP at discount brokerage
- This is where I hold my index funds. I'm due for a rebalancing in this account, and I'm just waiting for my year-end bonus to transfer over before I make the jump.

• Group RRSP through my employer - This is where I purchase my employer's stock by payroll deduction. I set aside 6% of my paycheque in company stock, and they match 50% of my contribution.


• Group DPSP through my employer - This is where my employer's matching contributions go, again purchasing company shares.


• Group RRSP through my employer - This is a separate savings plan from the group RRSP listed above, with more flexible investment options and contribution methods. I defer a portion of my year-end bonus into this account to reduce my taxes owing (and save for retirement, of course!). I can hold company stock, index funds and cash in this account.


• Non-registered trading account at discount brokerage - I'm still deep in the hole thanks to my consumer debt, so this account has been empty since I opened it. One day, however, I hope to enter the world of non-retirement investing.

Credit Cards

• BMO Mosaik MasterCard with Air Miles - I've mentioned before that Air Miles are my reward program of choice. This card gives me one point for every $15 I spend, and it is my primary card, and the one with the highest limit.


• VISA from a brick and mortar bank - I subscribe to the "have one of each" philosophy when it comes to credit cards, so I have this card for the rare situation where MasterCard isn't accepted.


• American Express with Air Miles - AmEx is the only credit card accepted at Costco, so Costco ends up being pretty much the only place that I use this card. However, since these transactions usually come in at $150-300, being able to rack up rewards under the same reward program as my primary card is a nice benefit.


• MBNA MasterCard with 0% prmotional APR - This is where most of my revolving debt currently sits. I'll have to pay this off within the next month when the 15-month promotion ends, at which point I'll either look for another 0% deal, or simply close down the account.

Line of Credit

• Unsecured line of credit at a brick and mortar bank - Once the promotion on the 0% MBNA card ends, I'll pay it off with this account. I use this account to hold my revolving debt at a low interest rate. As I mentioned in past discussions of my cash flow, every time I use my credit card to buy something, I transfer that amount from my chequing account to this line of credit, and then pay the card from the line of credit at the end of the month. This saves me a fair amount in interest charges each month, since my line of credit balance is artificially lowered (essentially small-scale credit card arbitrage).

Term Loans

• Mortgage at a brick and mortar bank - This is the original mortgage on our condo, which we're slowly chipping away at. It's up for renewal this summer, so we should be able to lock in a better rate than what we currently have.


• Mr. Loonie's consolidated OSAP loans at a brick and mortar bank - I consolidated my student loans into a low-rate, 5-year loan back in 2006, and I'll be saying a fond farewell to this debt in February of 2011.


• Ms. Loonie's consolidated OSAP loans at a brick and mortar bank - In the summer of 2007, we also consolidated Ms. Loonie's student loans, which will be paid off about a year after my own loans. By that point, we should be chugging along with nothing but a mortgage, and that is just fine by me!

Summary

Wow. I have a lot of accounts. Two chequing accounts, eleven (!) savings accounts, five investment accounts, four credit cards, a line of credit, a mortgage and two loans. That's 26 accounts in total. However, most of these accounts serve a very specific purpose. The only place I could really simplify is by closing down some savings accounts. Even here, I don't trust my money management quite enough to throw all my savings in a single pot, so I would want to maintain my Freedom Account separate from my Emergency Fund, and so forth.

The good news here is that I can account for every penny of my savings and my debt, and I have current login information for each account. I've even put together a "road map" that provides the relevant information for every account on this list. Still, I can't shake the feeling that I'm doing some significant juggling here, so I may need to look for ways to trim this system down over the next couple of years. I've put myself on the path to financial recovery by swinging pretty far to the OCD end of the spectrum, and now it may be time to start loosening my grip.

Taking the road less optimized

I'm a numbers guy.

I love numbers. I actually enjoy working with spreadsheets, and I love the challenge of working out the mathematically optimal way of doing things. Flexo at Consumerism Commentary has a great post today on the power of a "mathematically correct" solution, and I have to say I agree with his logic.

That doesn't mean, however, that I always use the optimal solution.

Take my bi-weekly cash flow, for example:

1. Money comes into our joint chequing account on payday


2. Fixed expenses, including mortgage payment, student loan payment and line of credit payment, come out of chequing


3. Emergency Fund and Freedom Account contributions are transferred from chequing to online savings


4. Leftover cash gets transferred into my secondary chequing account, as my spending money for the next two weeks


5. As I spend money on groceries, entertainment, etc., I either pay cash, or use my credit card and immediately transfer the corresponding amount from chequing to my line of credit


6. When my credit card payment is due, I pay the bill with my line of credit

Steps 5 and 6 are my attempt to perform small-scale credit card arbitrage with my monthly spending. Because the credit card is paid in full every month, each purchase essentially represents an interest-free loan until the next payment due date. By making a corresponding interim payment to my line of credit, I'm actually using my credit card to defer interest accrual on the LOC, and saving myself some money.

I'm pretty proud of having devised this system, but I can't ignore the fact that, if I skipped steps 4 and 5, and instead just transferred all my leftover cash onto my LOC on payday, I would save even more interest. Even though this might be the "right" way to structure my cash flow, I've learned from experience that it's much easier to lose track this way than it is with the method described above. I find that transferring funds every time I make a purchase gives me a much more concrete feel for how much I've spent, and how much I have left before the next payday. The extra interest that I accrue by leaving that money sitting in the chequing account ends up being the "fee" that I pay for having a system that works for me.

True, I could be paying less interest, but I could also be paying a lot more, and I'm happy to find some middle ground.

This is partly about having training wheels on our financial bicycle, but it's also about priorities. I keep $200 of my Emergency Fund in physical $20 bills, earning no interest, so that we have cash immediately available in an emergency. Both Ms. Loonie and I have income tax withheld by our employer so that we don't have to worry about making up a shortfall at the end of the year, and also to keep us thinking of our income in net, rather than gross terms.

As the size of our Emergency Fund grows, it will become more important to optimize the vehicles we use for these savings. Similarly, as the gap between income and expenses grows, the impact of where I keep my "in-flight" cash will become more significant. However, for now, I think the small dollar amount we give up in order to have a convenient, manageable system is worth it.

Feeling some property tax relief

Both Paid Twice and Make Your Nut posted recently about changes to their property tax payments. Like many new homeowners, they make escrow payments to their mortgage lender in order to cover their periodic property tax expenses, and like many new homeowners, they started off with an escrow shortage, and subsequently saw their payments jump to cover the shortfall.

Ms. Loonie and I have been in a very similar situation. We make a property tax payment to our bank every two weeks along with our mortgage payment, and this is meant to cover our property tax bill when it arrives. Because we had a tax bill to pay shortly after closing on our condo, we initially found ourselves behind on our tax payments, and the bank hiked our bi-weekly contribution as a result. Now that we've got two years of payments under our belt, however, we're finally getting caught up on our initial shortfall, and I've been thinking of talking to the bank to get the payments adjusted back down.

Well, it turns out the adjustment letter we received last summer was just part of an automatic review the bank does on the account every year, as we received an almost identical letter from them this year. The only difference is, this time around the payments are being reduced rather than increased.

It's nice to see that the bank is actually proactive with managing the property tax account. I'd still prefer to pay the taxes ourselves (and I think we'll look into this when we renegotiate next summer), but it was a nice surprise to see the lender adjust our payments down without having to ask.

Like Paid Twice and Make Your Nut, we'll have a bit of extra cash injected into the budget once the payments readjust (effective August 21). It amounts to about $100 per month for us, which is certainly welcome. This was a nice instance of seeing something I read on a couple of American blogs relate directly to my own situation here in Canada. Another illustration that, although the terminology may differ, our financial systems operate in very similar ways on either side of the border.

Payday update: Decisions to make

Today was payday in the Loonie household, and I've updated my progress bars and NCN Network chart to reflect my current debt reduction and savings progress. No big changes this month, as I'm largely treading water on my ongoing goals. However, there is a significance to today's paycheque that I need to consider.

Today marks the last time (at least for the foreseeable future) that Ms. Loonie and I will be on the same pay schedule.

When she starts her new job next month, Ms. Loonie will switch from our current routine getting of paid every two weeks, to a two-paydays-per-month system. There will be times in the future when our respective calendars will line up and we'll both be paid on the same day, but these will be few and far between.

It's easy to dismiss this as a negligible change, as this really only means that she will be paid slightly more on a less frequent basis. However, our mortgage and student loan payments are currently synchronised with our pay schedule, so that the payments come out of our accounts on the same day we get paid. This means that, two weeks from today, our payments will be due a few days before Ms. Loonie's paycheque goes into her account.

This serves as a huge reminder of the importance of having some liquid savings on hand. Between Ms. Loonie's student loan and her contribution to our housing/utilities expenses, she shells out about $850 every two weeks. That translates directly to a $850 shortfall in our income that we need to cover on July 10.

When I started this blog, we would have had little choice but to use my ULOC to cover this interruption of cash flow. Today, however, we have a few more options:

• Ms. Loonie can "borrow" from her tax savings account to cover the shortfall. When she gets paid mid-July, she can then move the money back into savings.


• I can "borrow" from the Emergency Fund, for the same short-term period.


• I can postpone some of my Freedom Account contributions for a few days to cover the shortfall.

Ideally, we'll use the first option, and leave all of her pre-authorized transfers in place. However, any of the three options simply represent a temporary re-allocation of cash savings to fill a gap in our income.

Once she has a couple of paycheques under her belt, Ms. Loonie will have more than enough savings cushion accumulated to cover future mismatched pay periods, and this will cease to be an issue. In the interim, however, it feels good to know that we have a choice in how we'll address this issue.

Just goes to show the difference that even $1,000 in liquid savings can make: borrowing from yourself feels a lot better than borrowing from the bank.

That was a close one.

As many of you know, I've had some issues in the past few months with overengineering my finances. At times feel like a financial Icarus, flying too close to the sun on wings of automated transfers. I've been burned twice by my financial fiddling, once when I forgot how many free withdrawals I was allowed in a month, and once when my auto insurer charged me $0.01 more than they said they would.

Well, yesterday I had a close call with ING. Due to Friday being a holiday, last Thursday's Freedom Amount contribution didn't clear until this morning (there's a five-business-day hold on deposits). When I checked my ING balances yesterday afternoon, I saw that my monthly donation to Jazz.FM91 had just come out of my "Giving" account, leaving me with a balance of $81.75, $80 of which was still on hold.

I have to admit I don't know the NSF rules at ING, but I can only assume that the outcome would not have made me happy. I'm a little unnerved that I only avoided the sordid details by $1.75.

Paid Twice has a post today on the pros and cons of automated finances, which really hit home for me after yesterday's close encounter.

Managing your finances: pretend you're a corporation

I work in the marketing department of a large Canadian corporation. In my day-to-day job, I'm constantly dealing with different departments and business units and their individual business objectives and budgetary constraints. However, the scale of it all makes the actual dollars and cents seem very abstract; it's often hard to look at a multi-million dollar advertising budget and see it in terms of real money.

A couple of weeks ago, Ms. Loonie and I attended our condominium corporation's annual general meeting. We live in a building with about 100 units, and approximately 30 units were represented at the meeting. This was my first time attending such an event, and it was very interesting. Somehow, the smaller scale of this corporation's financial picture made it much more tangible, and I was really geeked out to go over the financial report. There are a lot of things from the way a small corporation like a condominium operates, that you can apply to your own finances:

• Reserve Fund - A big part of our common element assessment every month goes toward building the condominium reserve fund. This is the fund that is used to cover any "out-of-budget" expenses. Need to replace your boiler? Use the reserve fund. Need to fix leaks in the parking structure? Use the reserve fund. It's essentially the corporation's Emergency Fund, just on a much larger scale. I was interested to learn that the Condominium Act requires that a reserve fund be held in an interest-bearing savings account, just like your personal Emergency Fund should be.


• Operating Budget - Much of the rest of the common element fees help to cover things like keeping the lights on, paying the maintenance staff, and heating the building. These are all planned expenses, and the corporation takes pains to stick to this budget in order to maintain a positive cash flow. It sounds simple, but corporations need to do this just as much as individuals need to stick to their own budgets.


• Reserve Fund Study - This was the item I found most fascinating. The condominium commissions a study on a periodic basis to determine the general status of its assets and infrastructure. A team of engineers conducts a very thorough review of the building, and determines the amount that the corporation should set aside to pay to fix or replace elements when they eventually fail. This really makes the reserve fund a combination of the Emergency Fund and Freedom Account concepts; it's where we keep our "rainy day" emergency cushion, but it's also where we save up for periodic major expenses, like re-paving the driveway every 10 years, or replacing the heating system every 20 years.

It's not exactly a new idea to think of yourself as a corporation; lots of bloggers have written about how we're all essentially self-employed (even if you work "for the man", you're essentially a service provider, and your employer is your only client). It helps, however, to shake up your way of thinking about your finances. I know this meeting was an eye-opener for me, and I think I learned a lot.

Paying the stupidity tax

My father used to work as an accountant at a car dealership, and would joke about the various fees that get worked into the bill of sale on a car purchase. He would rattle off "fuel delivery charge, administration fee, not-paying-attention tax..." and this has always stuck with me. I try to avoid these sneaky fees wherever possible.

Of course, I'm also human. In December, I accidentally made more than my share of free withdrawals, and incurred a transaction fee on my otherwise free savings account. Fortunately, I was later able to get the fee waived, so I breathed a sigh of relief, having learned my lesson to be more vigilant with my accounts.

Or so I thought.

Yesterday I went $0.01 into the red on my primary chequing account. My car insurance policy just renewed, and there was a $5.76 increase in my monthly premium. I left the "exact" amount of the premium in chequing, so that my insurer could debit it directly from the account. Unfortunately, the amount actually drawn from the account was $0.01 more than what I had left in there.

I don't have my insurance documents with me, so I can't double-check the monthly premium. I honestly thought I had left the correct amount in chequing, and if this turns out to be the case, then I'll dispute the overdraft. However, there's a very good chance that I simply mis-read the premium, and that this is entirely my fault. If that's the case, then I'll pay my NSF fee and finally learn my lesson.

This is a strong argument for keeping at at least some degree of cushion in my chequing account.

Building a chequing cushion

I really have a feeling that 2008 could be the Year of the Loonie. I've set my formal goals for the year, but I'm also developing some informal projects as I go along. One of these is to pull myself further out of my paycheque-to-paycheque rut by developing a chequing cushion. I stated last week that I would be building up this cushion, so I thought I'd go into some detail as to exactly what this means, and how I plan to go about it.

What is a chequing cushion?

A chequing cushion is a sum of "extra" cash that I will leave in my chequing account(s). This money is separate from my Emergency Fund, but serves much the same purpose: it is meant not to be touched unless absolutely necessary. This will be useful under the following circumstances:

• I incur a "temporary" expense, i.e. one for which I will be reimbursed. The cushion funds provide immediate access to the cash I need. For example, if I need to cover a medical expense, I can borrow the funds from my cushion until I file the claim with our insurance company.


• I incur an unexpected expense. For anything that falls outside the scope of my regular bi-weekly budget or Freedom Account savings, the chequing cushion would be the first place I would look to cover the expense. If the cushion proves too small, then I would look to the Emergency Fund to close the gap.


• Greater liquidity will give me more flexibility around my cash flow. Having cash on-hand, outside of my Emergency Fund, will allow me to "borrow from myself" to take advantage of opportunities (such as a sale on an already-planned purchase), or survive small crises (such as a delay in receiving my paycheque).

Essentially, this cushion will be looked at either as a temporary Emergency Fund, or as an extension of my formal Emergency Fund. The key to using this cushion effectively will be in training myself to know when my account is "empty", since there will always be funds in the account, even though the cushion is off-limits.

What is my ideal chequing cushion?

Ideally, I would like to have two weeks' expenses as a cushion, in addition to my formal Emergency Fund. This would mean that, without touching the Emergency Fund, I have two weeks to respond to any disruption of my cash flow. When I reach this point, I will know that, if my pay is delayed, or an expense comes early, I can cover it without depleting my Emergency Fund.

How will I get there?

Two weeks' expenses is not a neglibible sum, and it will take a while to get to that amount. I've divided the target into some different "segments", in order of their priority:

1. Ms. Loonie's expenses - I've already discussed the fact that Ms. Loonie and I approach our credit card payments differently, and I really want to get her ahead of the payment cycle. Therefore, the first priority is to save up one month worth of Ms. Loonie's expenses, in order to get her in sync with my own pay-as-I-go approach. We'll work together to determine exactly what this number should be.


2. My discretionary expenses - Once Ms. Loonie's expenses are covered off, I'll focus on building up enough to cover my discretionary spending, which includes wardrobe, gifts and "fun". This may seem counter-intuitive, but I'm taking a page from Dave Ramsey's book here, by tackling the less important, but more achievable goal of discretionary spending first, and then moving on to my committed expenses. Obviously, in the event that we hit a major bump in the road, the committed expenses will be given first payment priority, but while I'm building up our cushion, I want to be able to check steps off the list, to mark my progress.


3. My committed expenses - Once I've got my discretionary spending covered, I'll build the cushion up to the final stage of being able to cover all of our committed expenses, including mortgage and other debt payments, groceries, etc.

As to how long this will take, that will depend on the exact amount that we decide on. The saving approach is basically a savings snowball, where my progress will accelerate as I get closer to the goal. It will be a long undertaking, but it will provide significant peace of mind. This is all about forward progress, and knowing that I'm in a slightly better position with every bi-weekly contribution will be a huge motivation.

Do you keep a chequing cushion? How have you gone about setting it up?

The joys of merging finances

I'm currently on a kick of improving the level of communication between myself and Ms. Loonie regarding personal finance. As part of this, we're looking at combining our finances. Currently, we hold a joint chequing account, our mortgage is a joint account, and Ms. Loonie is an authorized user on one of my credit cards. Aside from that, however, we have separate accounts.

I don't believe that a couple should only hold joint accounts. It's nice, for example, to be able to use our respective credit cards to shop for gifts for each other, without giving away the surprise. However, I absolutely believe that a couple needs to have transparency around their finances. To have one partner hiding debt from the other is a recipe for disaster.

Ms. Loonie and I have decent communication in this area, but it tends to be mostly in the form of short "did you pay the bill?" conversations, just to make sure we're keeping on top of things. Beyond these basic checkpoints, we don't often discuss our respective budgets.

One thing has come up in our renewed discussions around finances: the two of us have different approaches to paying our credit card bills. Although neither of us carries a revolving balance on our cards*, she uses each month's income to pay off the previous month's bill. I, on the other hand, set aside cash every time I make a credit card purchase, and use this accumulated cash to pay the bill when I receive it.

From what I've read, the ideal approach to budgeting is to use last month's income to cover this month's spending. Neither of us is at this point yet; I'm using this month's income, and she's using next month's income. This poses a problem for developing a consolidated budget, and I'm not sure exactly how to tackle this.

One solution, building on yesterday's post, is to build up a cushion of one month's worth of Ms. Loonie's discretionary income, and use this to get "ahead" on her credit card. It won't get us to the one-month-ahead ideal, but it will at least get us in sync with each other. I think we'll try to go this route. Until we get there, I'm not sure how we can put together an effective household budget.

Do any of you have experience with this?

* I currently have most of my revolving debt on a 0% credit card, and the rest is on my line of credit. Our regular-use credit cards are paid in full at the end of the month.

Another look at the treadmill

Back in August, I wrote about my frustration with the paycheque-to-paycheque treadmill, and the feeling that, despite my efforts, I still seemed to be struggling. My question at the time was whether you ever actually step off the treadmill, or simply get used to the effort it takes to stay on.

Since that post, my situation has improved quite a bit. My Freedom Account is doing its job by covering irregular (non-emergency) expenses as they come up. My Emergency Fund can comfortably handle any emergency under $1,000, my debts are shrinking, and I'm generally sticking to my budget.

And guess what: it is starting to feel easier.

Oh, I still worry about coming in under budget, and sometimes the last few days before payday can feel like an eternity, but I definitely feel less pressure now than I did last summer. A few things have contributed to this:

• I've converted my budget from monthly to bi-weekly, to be in sync with my paycheques. This means that, every time I get paid, the same amount gets paid toward bills, shunted to savings, and left in chequing as spending money. The days of "OK, this is the first pay of the month, so I have to send $400 to my Freedom Account" are over, and the volatility is gone.


• I've "promoted" more of my regular expenses into my Freedom Account. This means I don't need to remember not to spend that $45 that's sitting in chequing, because it's earmarked for widgets.


• I've improved the tracking of my Freedom Account balances (inspired by Trent and Michael). This has stopped me from over-using these savings, and gives me a clearer picture of what I can actually afford. Without knowing what your budget is, you can't possibly stick to it. If I want something for which I haven't yet saved enough, I wait. If I need something for which I haven't yet saved enough, I look to the Emergency Fund.


• Speaking of the Emergency Fund, I've surpassed the magical $1,000 threshold, so my "bare minimum" cushion is in place. That helps a lot with the mindset.

Personal finance is an interesting topic, because it really requires you to walk a fine line. Automation is always encouraged, in order to take emotion and discipline out of the equation, but it's also important to stay engaged enough that you don't become complacent. You should always know what's going on, and look for areas for improvement, but you also want to put things on auto-pilot. That can be a tricky balance to strike.

In the interest of stretching myself out of complacency, I have a few tweaks that I want to make to my finances:

• Create a chequing "cushion". This will complement my Emergency Fund, and essentially give me a buffer to cover any temporary expenses that may come up. An example is a health expense where I am expecting a reimbursement. Basically, this would be my first line of defense for "out-of-budget" expenses. I have to work out how big this cushion needs to be, and train myself to know I'm effectively "broke" when the cushion is all that's left in the account.


• Start snowflaking. One idea I've been toying with is to round up my purchases to the next dollar, and snowflake this extra to debt. I'd like to try this for a month, and see what the result looks like.


• Work with Ms. Loonie to develop a household budget. I currently track only my own spending. Although Ms. Loonie is very responsible with her money, I think I need to stop thinking of our budgets separately. I've already talked about improving our financial communication, so let's put my money where my mouth is.

Let's see if we can get this treadmill to slow down even more.

Holding pattern

I get paid every second Thursday, and my employer posts our pay advices online two days before our actual payday. This means that, on the Tuesday of every payweek, I can login to our HR site and check the amount of that week's pay. This is usually constant from one pay to the next, but as I mentioned in this morning's post, the first pay of the year is a bit of a question mark, because I don't know exactly what the CRA deductions will be.

I've already checked this week's pay advice online, so I have a pretty good idea of what to expect for the first half of the year. It's great to be able to check this in advance, because it helps to plan my cash flow over the next two weeks. I've set up my ING transfers, and worked out how much to allocate to debt payments, etc. I know how much is coming in, and I know how much is going out.

I just don't have the cash yet.

It's funny how knowing exactly what to expect can actually erode your patience. I really want to make the year's first update to my goal bars, and it's driving me nuts that I have to wait until tomorrow morning.

Apparently I'm a five year-old on Christmas morning.

Coping with the January pay-cut

For Ms. Loonie and me, tomorrow is the first payday of the new year. In Canada, the year's first paycheque is often substantially smaller than the last pay of the previous year, since it marks the return of our good friends CPP and EI. For those who haven't had the pleasure, these payroll deductions are used to fund government-provided pension and unemployment insurance, respectively. For 2008, the deductions are as follows:

• CPP - 4.95% of annual earnings in excess of $3,500, to an annual maximum of $2,049.30


• EI - 1.73% of annual earnings, to an annual maximum of $711.03

Once you've reached the annual maximum, the deductions stop, so you effectively get a pay raise around half-way through the year. The problem is that, if you get used to this increased income, it's a bit of a shock to the system when the deductions start again in January. Even if you have a year-end raise, unless it's an increase of 15% or more, your January paycheque will be smaller than its December predecessor.

How to deal with this "pay cut"? Ideally, you would base your spending around this diminished income, and have the discipline to save the extra that you earn after maxing out the deductions. Then, when January rolls around again, you're already spending less than you earn, and have built up a substantial cushion of savings. This takes a lot of discipline, but it puts you in great financial shape.

As for us, we have some room for reductions in several budget categories, so I'm making small cuts here and there to make up the difference. Since the Emergency Fund is already above $1,000, I'm reducing the bi-weekly contributions to $10. Our (modest) budget for eating out is also being cut. The good news is that, after having a cash-only Christmas, we don't need to spend January playing catch-up. I am also receiving my year-end bonus tomorrow, so that helps to ease the pain of a diminished paycheque.

UPDATE - The January "pay cut" only applies to Canadians who earn more than $41,100 per year. I completely overlooked this point when I originally wrote this post, and I should apologize for that. File this "pay cut" under "problems I'm fortunate to have".

A nice start to the new year

I posted last month about a $1.25 mistake in managing my cash flow. Well, as expected, when I checked my bank balances online yesterday, I had been charged a $1.25 fee for going over my allowed debits for the month.

As I was tallying up my balances for my net worth update, I decided that I might as well try to get this fee reversed. So, I called up the call centre, and after a few minutes on hold (it is the first business day of the year, after all), I told my tale to a customer service rep, who was more than happy to refund the fee for me.

Net result: I finished 2007 $1.25 richer than expected.

It just goes to show that, if you want something, you might as well ask.

'Tis the season for cash flow slip-ups

I'm trying very hard to keep this a "cash-only" Christmas. I've written about this before, but basically I'm trying not to create any new debt with this year's Christmas purchases. So far, I've been managing this well. I've been using my Freedom Account, and diligently tracking my holiday spending. I think I'll pretty much break even.

As a result of this "spotlight" that I've placed on my holiday finances, I've been moving cash between my accounts pretty much constantly. I've mentioned before that I use my line of credit as a sort of money merge account; every time I make a purchase with my credit card, I make a payment in the same amount to my line of credit, reducing the interest-bearing balance on that account, and then I pay my credit card in full using my line of credit at the end of the month. I've been making very good use of this system for the past few weeks.

In addition to my two chequing accounts, online savings accounts, line of credit, and credit cards, I have a savings account with my primary bank. In order to avoid the wait times involved with moving funds between my chequing and online savings accounts, I decided last week that I would use this "extra" savings account as a holding area for my holiday funds in between purchases. This account earns next to no interest, but it's convenient because it's at the same institution as my chequing and line of credit, so transfers are instantaneous.

Yesterday afternoon, as I made my third transfer in as many days from this savings account to my line of credit, I suddenly remembered the fee structure for this account. The account comes with two free debit transactions per month (including transfers to other accounts at the same institution), with additional debits costing $1.25 per transaction. My cash flow shenanigans had just cost me $1.25.

On the one hand, it's only $1.25, and I did catch on before I made more than one non-free transaction. However, it really rankles me that, when I thought I was being so clever and attentive to my finances, I could make a dumb mistake like this. It's entirely my fault, as I have known about this $1.25 cost since I opened the account; it just slipped my mind (mainly because it's been so long since I used the account).

Let's hope that I've learned my lesson, and this will be the last "stupidity tax" I see this season.

The balancing act

Meg at The World of Wealth posted this week about why she uses two chequing accounts. Basically, she uses one to cover her committed expenses (including savings, donations and bills) through automatic payments, and the other for her discretionary spending. The idea is that she can spend as much of the discretionary money as she wants, because all of her savings and monthly bills have already come out of her primary account.

I manage my cash flow in a way similar to Meg's system. Ms. Loonie and I have a joint chequing account, and my paycheque goes into this account every two weeks. All our monthly bills come out of this account, and I transfer my leftover funds into my secondary account. Having my discretionary income sequestered in its own account like this means that I know at a glance how much cash I have left before my next pay, and it was a nice affirmation to read that someone else uses a setup so similar to my own.

In another post, Meg goes into how her budget actually works, including the details on what percentage of her income she allocates to each category (savings, donations, bills, and fun). This was where I started to see just how much room for improvement I still have. Meg targets a split of her gross income into 20% savings, 10% donations, 60% bills (including taxes), and 10% fun. When I look at my own allocation, I'm currently sitting at 9.4% savings, 1.4% donations, 78.4% bills, and 10.8% fun. A few things stand out here:

• Debt reduction (revolving debt and student loans) accounts for 12.9% of my gross income. Once I've paid off my debts, a big chunk of my "bills" allocation will be moved into other categories.


• My charitable giving is anemic at best. This is where I'm the most off the mark, giving less than one fifth of the generally recommended 10% tithe. When my debts are gone, this is the first area I'll look to increase.


• The definition of the categories is somewhat subjective. For example, I think housing and groceries should go into the "bills" category, since they're really basic living expenses. Vehicle maintenance/insurance/licensing costs probably belong here as well, although they're not strictly essential. I include cable/internet/phone in this category, because they are committed expenses, even if they are really luxuries. The way I look at it is that they're living expenses, but if need be, they can be pruned.


• Although I like Meg's target allocation, it's not gospel. I need to determine an allocation that matches with our own values and goals.

The message here is really that there are two requirements for a truly balanced budget:

1. The budgeted total across all spending categories is less than or equal to your total income


2. The budget allocates spending to categories in a way that matches your values and goals

My budget meets the first requirement, but I have a way to go before I really line up my budget with my goals.

Adjusting my Freedom Account goal

Look in the "Goals for 2007" section of the sidebar and you'll see that I'm shooting for a balance of $3,000 in my Freedom Account by December 31. In my earlier post, I explained the Freedom Account concept. Essentially, I tally up all my predictable periodic (i.e. less frequent than monthly) expenses, and determine how much I need to save per month in each category. For example:

• $500 for vehicle service every 4 months = $125/month
• $74 for vehicle registration every 12 months = $6.17/month
• $75 for license renewal every 60 months = $1.25/month
• $89 for passport renewal every 60 months = $1.48/month
• ... etc.

I then divide each category's monthly amount by two, and deposit that amount every two weeks into an ING Direct account. Then, when the expense comes up, I've already saved the required amount, and I have the cash on hand.

The $3,000 goal is essentially just the sum of all the individual "fully funded" amounts. That is, $500 for service plus $74 for registration, and so on. However, since stating this goal, I've realised that the true purpose of this account is not to reach a certain balance, but rather to ensure that these expenses do not interrupt my cash flow when they occur. The balance in this account is actually meant to fluctuate widely, as I contribute to some categories while simultaneously withdrawing from others. Therefore, the true goal for this account is simply for me to use it for these expenses. It's unlikely that I will ever actually reach $3,000 in this account, but by keeping me "ahead of the curve", the account will be doing its job perfectly.

I'm going to keep the $3,000 goal in the sidebar, but don't expect it to hit 100%.

How will I know when I'm off the treadmill?

When I looked at my finances at the end of April, I realised that my savings would not be able to cover the loss of a single paycheque. I've often heard numbers thrown around about how many North Americans are "less than a paycheque away from living on the street", but it was shocking to say the least to find myself in that position.

Trent at The Simple Dollar has a great post on getting off the paycheque-to-paycheque treadmill. The gist is that, when you have at least one paycheque saved in the bank, and are spending less than you make, you are "off the treadmill", and no longer living paycheque-to-paycheque. I really like this post, because although the goal he describes would not exactly make one financially independent, it represents a huge step in the right direction. I've found that that first step, from doing nothing to doing something, makes all the difference.

I'm not yet at the point that Trent describes, but I am spending less than I make, and I have several hundred saved in my Emergency Fund. I'm on the right track. However, I still find myself "riding out" the last few days before my next paycheque, and counting the pennies until that next influx. Although I have a positive savings rate, I still feel like I'm living paycheque-to-paycheque, and I'm wondering whether this feeling will ever actually go away.

I think the problem is as follows: with every paycheque, I first transfer my savings to ING, and then earmark the money that needs to go to bills and debt repayment. Good so far. Then, with what's left over, I cover my expenses for the next two weeks. In this "other expenses" category, however, I always spend every dollar, so there's never anything left over, and I'm always counting down the days until my next paycheque. I'm technically following the rules, but I still feel as if I'm spinning away on that treadmill.

I believe that, as I get more and more practice with frugality, and as my savings grow and my debts shrink, I'll feel this pressure lift, as the habits become more ingrained. I just hope I'll recognise the feeling when I get there.

What's been your experience? Have you lost that paycheque-to-paycheque feeling, or have you just learned to manage it better?

Playing the waiting game

I posted recently about my plan to use ING to hold "unused" cash from each paycheque, and as I implement this plan for the first time, I've noted some tweaks that need to be made:

• Planning ahead - I made my first "unused funds" transfer to ING after receiving my pay last Thursday. However, since I requested the transfer on Thursday morning, ING didn't actually process the transaction until Friday, meaning that the funds are on hold until this coming Friday. If I had scheduled the transaction in advance, then ING would have processed it on Thursday, clearing the funds a day earlier.


• Having a buffer - Since this is my first time implementing this approach, the available balance in the ING sub-account is currently $0 (the rest is on hold). This means that this money is effectively trapped at ING until Friday morning. Transfers are only delayed when ING is receiving funds; when I transfer funds from ING, my brick-and-mortar bank makes the funds available the day after ING processes the transaction. Therefore, I am planning to build up a $600 cushion in this ING account, so that there will always be adequate funds available to cover regular expenses.

By making these minor changes to my cash flow management, the system will move much more smoothly.

Small-scale arbitrage

Dedicated to Financial Freedom has a new post today with a technique for maximizing the rewards of regular spending. Essentially, the method is

1. Get paid


2. Send "unused" cash to an online savings account


3. Make your usual purchases on your credit card


4. When your credit card payment is due, transfer money from online savings to pay the bill in full

If the card used is a no-fee rewards card, then this approach pays off in two ways:

1. You earn interest on the "unused" money you set aside on payday


2. You earn rewards on dollars that you would have spent anyway

This technique reminded me of my own cash flow setup, but it adds another layer, in that the "unused" cash earns high interest until the purchase is made on the credit card. I think this is a great enhancement to my own technique, so I'm going to try the following "hybrid" cash flow:

1. Get paid


2. Send "unused" cash to online savings (ING Direct in my case)


3. Make the usual purchases on my credit card


4. With each purchase, transfer money from ING to pay down my line of credit balance


5. When my credit card payment is due, pay the bill in full using my line of credit

This milks my spending habits for about as much free money as I can think of. Of course, an even more lucrative method would be to send the "unused" money directly to the line of credit (which has a higher interest rate than my savings account) on payday, but my fear with this is that it makes tracking spending slightly more difficult. I like the fact that, with the approach above, I have a declining balance in my ING account that tells me at a glance exactly how much more I have available to spend.