So you’ve started tracking your budget, congratulations!  But now, you may be second-guessing a few of your category choices, or find yourself going over-budget each month. We’ve complied a few tips to help you get back on track.

Here are a few of our favorite “I’ve started budgeting, but now what?” budgeting tips:

• Budgeting software often has trouble correctly categorizing a few expenses, specifically towards the beginning of use.  Take a quick look at your transactions and identify and correct those that are mislabeled. If you are using Mint.com or an online version of Quicken, be sure to take advantage of their easy to read ‘trend’ or reporting sections.  You can see where you’ve spent money over specific categories in charts that allow you to drill down to the transaction level, helping to spot inaccuracies. If you are not using budgeting software, compiling data from your receipts and statements will be a good way to get started.  Remember, you are trying to identify where your spending money and look for ways to reduce spending, if necessary.
• Revisit the items you have budgeted.  Now that you have been tracking for a few months or longer, are your budgeted items realistic? Maybe some adjustments need to be made to common expenses like household utilities, food and dining, transportation costs (including gas and regular maintenance), and discretionary (misc. spending).
• It is common for your expenses to fluctuate over time and for some expenses to occur only during parts of the year.  Some items, like car insurance, homeowner association dues, and professional fees may be paid quarterly or semi-annually, so be sure to include those expenses in your budget now.
• If you are spending more than your budgeted amount on a regular basis, take some time to plan out ways to reduce your spending.  Little things like taking your lunch to work once or twice a week, making coffee at home, or planning errands around one trip can all add up over time.
• Have you had any lifestyle changes that should be reflected in your budget?  A home purchase, renovation or new child can increase (or decrease) spending and should be accounted for.  Adding new expenses to your budget while taking time to review your overall spending picture can help set you back on track.

For our current clients, we are available to help answer questions that you may have about Mint and Quicken.  We may also be able to assist you in starting the expense tracking process from the very start.  Please contact Heather Gudac at hgudac@financialsymmetry.com if you are interested.

Cameron Hendricks

Financial Symmetry recently expanded our Operations Department by adding Cameron Hendricks to our team as our new Data Specialist .

Cameron joins the firm after participating in FSI’s financial planning internship program in the spring of 2010. He recently graduated from NC State University with a B.S. in Business Administration, Finance, with a minor in Accounting.  As Financial Symmetry has continued to grow, so has Cameron’s role within the company.

Cameron’s responsibilities include supervising data collection and processing for our clients’ accounts, developing new processes to manage incoming data, and assisting our advisors with wealth management reporting. Cameron also supports our team’s cost basis reporting and tax preparation services.

He is looking forward to improving and establishing new data processing procedures that will benefit FSI’s clientele in each of their fee-only services- financial planning, investment management and wealth management.

In operation, the higher your capacity for risk, the more of your portfolio can be allocated to stocks which offer higher long term return potential but have greater short term volatility than cash and bonds.

The chart to the left demonstrates the historic ranges of returns for US Stocks going back to 1928.

As you can see the average one year return is 11.3%, but has been as high as 52.5% and as low as -43.8%.

Then as you look at longer time periods, losses become less likely, and over periods of at least fifteen years there has been only one loss of 0.2%.

Notice that while the difference between the best and worst returns gets narrower as you look at longer time periods, the average returns are close over all time periods.

Bond and Cash returns follow a similar pattern, with the difference between high, low and average returns being lower for bonds, and lowest for cash.

So a sound investment strategy should take into account when you are likely to need money from your portfolio, and allocate the money you won’t need for many years to stocks, while money you will need in the next few years should be in bonds and cash.

Below are some examples of how our Risk Capacity formula puts this into practice.

The more money you will need each year, the more you should allocate to bonds and cash and this results in a lower stock allocation.

If you are saving money for the next several years, you can allocate more to stocks and less to bonds and cash.

Risk capacity is also dependent on the amount of savings or withdrawals relative to the size of your portfolio as can be seen by the difference in stock allocation for examples C and F.

Example F shows that a maximum of $200,000 of the portfolio would be in stocks, thus allocating $300,000 to bonds and cash which would allow for six years of withdrawals at a $50,000 annual pace.

Example C would allocate $650,000 to stocks and $350,000 to bonds and cash, which would be seven years of withdrawals in bonds and cash.

Don't push the panic button

Probably not, even though it may feel like it.

What’s Going On

The financial markets have been hit with a steady barrage of negatives.

Europe is still struggling to address the problems inherent in the Euro — namely that they have a currency union but not a political union.

Here in the US the short term budget deficit caused by the Great Recession is being confused with the long term budget problems.

These long term problems are primarily about rising healthcare costs, tax revenues that are too low by historical standards, and to a lesser extent Social Security.

This confusion, combined with a toxic mix of politicians in this year’s Congress, caused a dysfunctional budget process. And this dysfunctional process caused Standard & Poors (S&P) to downgrade US Treasury debt (though that company’s past performance on debt ratings leaves substantial doubt about whether they should be listened to).

On top of all of this, we were already in a slowing industrial cycle directly related to China tightening their monetary policy to bring their inflation rate down.

Reactions

Fear that these issues could push the US and the world into another recession is causing falling stock prices.

Most tellingly, these issues have actually reaffirmed investors’ faith in US Treasury debt as Treasury prices have steadily risen as the negatives have piled up.

Clearly investors do not believe that S&P was correct with their downgrade, or US Treasury prices would be falling, which causes rates to rise.

In fact, since the beginning of the year, the yield on the ten year Treasury bond has fallen from 3.4% to 2.4% as fearful investors sought a safe haven. And most of this decline in rates occurred in the last two months as the debt crisis manufactured in Congress ramped up.

This Day in History

Our research tells us that it is not uncommon at this point in a recovery to have a slowdown, so the current economic slowing may not lead to a recession.

Furthermore, the current recovery is only a little over two years old, and in the last 80 years there have only been two recoveries that lasted less than 3 years. In both of those previous cases, the stock market did correct, but the decline was less than 20%.

Double Dip?

There are good reasons that this current crisis is not likely to be a repeat of 2008.

Households and corporations alike have spent the past few years rebuilding their balance sheets. Corporations have become leaner and added significantly to their cash positions.

This should enable them to weather an economic downturn without needing to make layoffs on a scale like we saw 2-3 years ago.

More Good News

We are also encouraged by attractive stock market valuations.

The current stock market’s earnings yield is around 7%, which provides a much higher return potential than high quality bonds which are only yielding about 2% to 4%.

We also believe that companies will see rising earnings over the next 5 to 10 years. Even though the decade of the 2000s was a poor one for the US economy, earnings of our big corporations still rose by about 60%.

For the decade of the 1990s, earnings rose by over 100%. So it is plausible to believe earnings will rise over the coming decade at least as much as in the 2000s.

What We’re Doing

As has been our experience with large market drops like this one (and large market rises as well), we have learned not to make investment strategy decisions based solely on short term market gyrations, though they can present opportunity.

Our research lead us to reduce stock allocations at higher stock prices in late 2007 and earlier this year. Conversely we will be increasing stock allocations at these now lower prices.

We are paying close attention to valuations as some sectors are not as reasonably priced as others.

We are continuing to emphasize large-cap, high-quality companies as they are more attractive than smaller stocks at current prices and better equipped to endure difficult conditions.

Our focus on international equities is in developed economies as they too, have better valuations when compared to emerging markets, though we are maintaining a position in emerging markets as we anticipate those countries to be the drivers of growth during economic expansions.

Many high-quality US companies are also uniquely positioned to take advantage of the emergence of a middle class in China and developing economies as they expand their operations into these markets.

Given that emerging market stocks have also declined, we may be bringing up emerging market allocations for the first time in several years.

The Bottom Line

When fear is high and confidence is low, people have a difficult time seeing how things will get better.

But they always do.

* Photo credit: jma.work

Does the value equal the cost?

As a new mom I am always trying to do what is best for my child.  Whatever the decision-whether to swaddle, use a pacifier, or let him cry-I frequently second-guess myself and wonder if I should be doing things differently.  At the end of the day I know that we have to do what works best for our family.  One decision that I thought I was sure of was funding a college education.  My husband and I are both college graduates and value not only the opportunities that a degree provides, but also the experiences and maturity gained in those college years.

However, I have been reading a lot about the “Return on Investment” of a college education and that self-doubt is starting to creep up again.  In Bill Gross’ recent Investment Outlook , he questions, “A mind is a precious thing to waste, so why are millions of America’s students wasting theirs by going to college?”  He is not the only well respected name questioning the value of a college education.  You may have also seen Peter Thiel on the news.  Theiel, head of Clarium Capital, established a foundation to give $100k grants to students to drop out of school and pursue entrepreneurial ventures.  What are well-meaning parents to do?

Luckily the latest Journal of Financial Planning has some food for thought:

• “Three-quarters of Americans believe college is too expensive and more than half (57%) say there is not an adequate value return for what students and families pay.”
• The U.S. Census Bureau reports that the median annual income gap between a college graduate and a non-graduate is $19,550
• “The strong majority of college graduates (86%), feel their higher-education experience was worth the investment.  Three-quarters believe that experience was very useful in helping them grow intellectually.  About 70% believe it helped them grow and mature as a person and 55% mention its use in preparing them for a job or career.”
• “Many Americans say a young person’s success depends largely on a good work ethic (61%) and knowing how to get along with people (57%).  Fewer than half (42%) point to a college education.”

This is all a lot to digest, but just another instance where I know I need to follow my instincts.  The financial planner in me is also telling me to practice what I preach-contribute to a 529 plan after fully funding retirement accounts and Roth IRAs and avoid over-funding those plans.   For more about this strategy read “Thinking Outside the 529 Box.”

Photo credit: ajajendorf25

The first priority for what gets paid starts with the interest on our national debt which would take $207 billion.  The next priority would be military operations, which is budgeted at $965 billion.  The amount left over to fund all other U.S. government spending would be just shy of $1 trillion.  It would require a 60% cut across the board to all of the other federal programs in order to balance the budget.  This would affect every person who receives benefits from Social Security, Medicare and Medicaid, education, transportation and infrastructure, unemployment, low income housing, environmental services, national parks services, public safety, prison security and on and on.

Trying to predict what would happen if the politicians in Washington failed to reach an agreement is difficult.  However, because of the untenable nature of the spending cuts it doesn’t seem likely that a government shutdown would last long.  The last two times it occurred, it lasted a total of six days in 1995 and around three weeks in late 1995 to early 1996.

We believe that a deal will get done before a shutdown happens.  Our assessment of where things currently stand is that a deficit reduction package that both sides can come to an agreement on may not be possible by August 2^nd.  What can happen, however, is an agreement to punt the issue of making structural changes not only to spending but also our tax code (revenue) to the 2012 election.  The leadership in the Senate is working on a backup plan that would give the President the authority to raise the debt limit without a specific approval by Congress.  This would accomplish a short-term solution allowing more time for discussion of the two longer-term potential problems, health care costs and the appropriate level of tax revenues, to be addressed.

Photo Credit: iandavid via flickr

Money Savvy Pig

If you think back to your childhood, what were the biggest influences on how your view of money developed?  If you’re anything like me, this question triggers memories of the struggle between saving my hard-earned allowance and spending it on the newest pack of baseball cards in hopes of obtaining the rare 1989 Ken Griffey Jr. Upper Deck rookie card.

Since my wife and I just welcomed our first child into the world, I thought I would share some of the conversations that have been taking place at our house regarding how we plan to teach our daughter about money.  We’ve both heard and read over the years that teaching kids about how to handle money is one of the bigger challenges parents face.  Whether it is rewards for good grades or allowances for mowing the grass, the ability to spend that income develops quite naturally with young children.  So what are the key points to teach our children about the importance of saving vs. spending more than they earn?  Here’s a few we plan to employ…

Somebody’s Watching Me

This was not just a creepy 1980’s song by Rockwell, it’s really a phrase that describes how your kids are likely that somebody.  They are learning from our actions whether we like it or not. One of the best ways to teach sound money management is by actually using a budget to manage the family finances.  In addition to keeping the numbers updated, making a point to openly discuss where we are spending our money demonstrates how to be accountable for our decisions.  Using a budget also teaches how to delay gratification if money is not yet earned.   By communicating openly and explaining the why behind our money decisions, children can pick up lessons along the way.  Several examples include pointing out the unit cost of items in the grocery store, explaining your net pay vs. your gross pay and discussing the percentages you are giving and saving. Volunteer work can be a great way to demonstrate the benefits of giving your time while also validating that rewards that aren’t monetary can be just as fulfilling.

Value vs. Quantity

Other lessons that get lost in the money conversations is teaching our children the true value of an item.  By taking care of the things they already have, children can prolong the life of a toy decreasing the extra purchase to replace due to wear and tear.  Kids also can learn by making things instead of purchasing them.  Going through this exercise teaches young children how to use their imaginations and also how to be resourceful with the things they already have.

Experiences = Life Lessons

One of the best ways for anyone to learn a truth is by making a mistake.  Kids need to have the freedom to make mistakes because of their own decisions so that it creates teachable moments for parents.  One tool, that does a nice job of creating these situations is the Money Savvy Pig.  By putting this tool to use, kids learn about the opportunity cost of a dollar.  They can place money in the save, spend, donate or invest section of the bank.  Therefore, if they choose to save a dollar, that dollar can no longer be spent, given or invested.

We’d love to hear your input.  What are some of the successful methods you’ve used to teach your children about how to handle money?

Financial Symmetry, Inc. has recently promoted Heather Gudac to Operations Manager.

Upon graduation from NC State University with a B.S. in Business Management – Finance, Heather joined Financial Symmetry, Inc. (FSI) as their Operations Specialist and Office Manager in 2008. She began her career with the firm as a financial planning intern in late 2006.

As Financial Symmetry has continued to grow, so has Heather’s role within the company. In addition to her responsibilities of assisting with portfolio administration and growth management, and overseeing the company’s internship program, Heather’s new position includes managing a growing operations team. Working closely with FSI’s advisors, Heather coordinates new account transitions, supervises account maintenance and guides our clients though qualified account rollovers and distributions processes.  Heather also assists FSI’s primary advisors with financial planning projects by gathering and organizing data through client communications.

Heather maintains her position as FSI’s office manager, handling the day-to-day operations within the company. Going forward, she is looking forward to improving and establishing new operational processing that will benefit FSI’s clientele in each of their fee-only services- financial planning, investment management and wealth management.

For more information about Heather and what she does for Financial Symmetry, see her bio on our main site: http://financialsymmetry.com/our-team/heather_gudac/ or contact her by email, hgudac@financialsymmetry.com, or by phone, (919) 851-8200 ext. 205.