For over 2 years now, I’ve been using spreadsheets to track our month-to-month household cash flow. In general, it’s been a huge success. It helps immensely with short- and intermediate-term financial planning. It lets us know when we’re running short on cash and need to be budget-conscious, and it allows us to earmark money ahead of time for future expenses. Through a combination of living beneath our means and planning expenses with these spreadsheets, we’ve managed to come out ahead every single month since I began doing this.

Tracking expenses like this does involve some extra accounting overhead. I have to spend a couple hours each month maintaining the spreadsheets, and there’s a fair bit of double-entry between the spreadsheets and our financial software. It’s well worth the effort, but I still like to refine the spreadsheets periodically to try to make the process easier.

Each spreadsheet tracks the cash flow in our “main” checking account over the course of a month. There’s a column for income and expenses, and a separate section to track money that is “reserved” for future expenses. I project expenses for the current month and a couple months in the future, so in June, for example, I might have active spreadsheets for June, July, and August. At the end of each month, the balance is carried forward to the following month’s spreadsheet as either income or an expense. I also use a separate sheet to track a second (money market) account, which is used for longer-term expense planning as it earns a higher interest rate. Rounding the whole thing out are sheets to track our two active credit cards. To keep things simple, most credit card expenses are glopped into a single “household expense” budget. I don’t account for individual charges against this budget, just the grand total. However, I do account for individual charges that are outside the household budget.

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Up till now, I also tracked an account we hold with the local credit union. The credit union pays really crappy interest, so I don’t keep much money there. However, they have an ATM that’s convenient to me, so I use the account for cash withdrawals and check deposits. I transfer any balance over a certain amount into our “main” checking account, where it earns much better interest. This month, I decided that it wasn’t really worth the effort to track the credit union account, so I took it out of my spreadsheets. If I really miss it, I’ll put it back… but I don’t think I will.

I follow a similar strategy with the money market and the “main” checking account. Between the two, I like to keep as much money as possible in the money market. However, the money market doesn’t have the convenience of checkwriting or immediate liquidity of funds. If I need funds from it, I need to sell shares, which has a 1-business-day turnaround. So, I use the spreadsheet to plan when I’ll need to sell money market shares, and how much I’ll need to sell. Today, I hacked the spreadsheet template to “recommend” an appropriate amount of money market shares to sell, based on this strategy.

I’m hoping that these two tweaks will simplify the spreadsheets a bit, as they had been getting a little unwieldy. That aside, I highly recommend this method of cash flow management, as it’s worked really well for our family.

I signed up for a bill payment service yesterday. While I was reading through all the legalese in the “bill payment agreement,” it occurred to me that although the service is advertised as being free, it’s really not. There’s a very sneaky cost to it built in, which must be weighed when determining whether using the service is actually cheaper than sending stamped envelopes.

Allow me to elaborate. When a financial institution offers bill payment service, there are several ways in which they can pay the payee. One of these is to actually mail a physical check. And here’s the clincher: most of these services will debit your account at the time they issue the check. The funds are transferred to a “holding” account owned by the financial institution, and the check itself is drawn against the holding account.

Now, when you write and mail a paper check, it never clears right away, because it has to go through the mail, then the payee’s accounts receivable department, etc., before it actually posts and the funds are withdrawn from your account. During that time, the money sits in your account accumulating interest for you. But with a bill payment service, it sits in the financial institution’s holding account, earning interest for them. And that’s the hidden cost: the interest you lose when making these types of transactions. The actual cost varies with the amount of the transaction, the account’s current interest rate, and the length of time it takes the lender to cash the check.

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Of course, the best way to illustrate this is to use a concrete example. Imagine a hypothetical payment of $100 from an account that pays 4% interest compounded monthly, and assume the check-cashing delay is 7 days. Also assume that a stamp costs $0.39 and a paper check costs $0.10. Using the compound interest formula with the above numbers, we come up with $.08 in earned interest on the $100 over the 7 day period. That’s less than the $.49 it would cost to mail the check, so in this case, the bill payment service is the less expensive of the two methods. However, if the payment is $1000, the earned interest over 7 days comes to $0.77. In this case, mailing the check is cheaper. Similarly.. if the payment is $100 but the payee takes 60 days to cash the check instead of 7, the accrued interest comes to $0.66, making the mailed check a better deal in this case too.

It seems that for most average transactions, the bill payment service comes out ahead. The ones to look out for are: large payments, and/or payees who take a long time to cash checks. For most people, the difference in cost is not going to be enough to be significant (I’m also not accounting for non-monetary factors, such as the convenience of the bill-pay service vs. physically writing and mailing a check). But, it’s still worthwhile to keep these things in mind as you’re trying to pinch pennies. A few pennies here and there will add up over time.

8/24/2006: I paid my first bill through Schwab Bill Pay this week, and it appears that my initial assumption was wrong. They paid the bill via a mailed check, but the check went directly against my account, rather than going to a holding account. So, the funds weren’t withdrawn until the payee cashed the check several days later. That basically kills the entire premise of this entry, and makes the bill pay service the clear cost winner in all cases (assuming there’s no monthly fee, of course). Bill pay services have apparently come a long way in the 8 or 9 years since I first tried one out.

Background: My home county bills my property tax in two semiannual installments. The first installment is always larger than the second installment. But I’ve never been able to ascertain the formula they use for figuring the amount of the first installment vs. the second installment. The other day I spent a half hour or so playing with the amounts, and couldn’t figure out how they were arriving at the numbers.

Today, I finally found the magic formula on Howard County’s web site. It’s not particularly easy to find stuff on their site: I dunno if it’s because it’s badly laid out, or if it’s just that I tend to look for obscure info that the webmasters don’t see fit to post prominently. But regardless, it seems like when I need to find something there, I have about a 50% success rate, and the info is never where I expect to find it. But I digress.

From the Howard County Property Tax FAQ:

Under the semi-annual payment schedule, the first installment consisting of one-half of County, State, Fire, Ad Valorem, Mid-Patuxent levies and the full amount of Front Foot and Trash Fees is due by September 30th. The second installment consisting of the other half of the levies is due December 31st.

So there you have it.

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So why do I care about this? Being a self-professed financial geek, I like to project future bills as far in advance as possible. I’ve already figured out how to compute my total property tax bill for a given year. And since I’m stuck with an escrow account on my current mortgage, I’ve also figured out the formula my mortgage company uses to do escrow analysis. If I can project my property tax installment schedule, I can do a full projected escrow analysis for the current year, and figure out what my monthly mortgage payment will be next year (and whether I’ll be getting a refund check).

Sometimes I wonder if I’m in the wrong field..

6/16: Well, I found out my tax bill for 2006 (haven’t gotten the mailing yet, but it’s online at Howard County’s Property Tax Lookup page), and, it’s within a penny of the amount I predicted. OK OK, you can stop applauding now. Our ever-escalating assessments are keeping the bill on a steady rise, but this year’s increase was the smallest in the past 4 years, thanks to token cuts in the tax rates by both the county and the state. That, combined with the homestead exemptions, is keeping the bill from bankrupting us, but it’s still going up faster than the rate of inflation (and is pretty much guaranteed to keep doing so for the next several years). We need to pressure our elected officials to keep nudging the tax rates down to compensate. That’s the way it’s supposed to work.

Between my wife’s broken foot and my son’s infection, I’ve spent quite a bit of time in doctors’ offices this past week. This week, we have doctor’s appointments every day except Friday. Next week, we have appointments Monday and Tuesday. Every visit means another co-pay. We’ve got a pre-tax health care spending account (HCSA), but we depleted it ages ago. Every year I sign up for the account, I worry that I might be putting too much into it. Every year, I end up wishing I had put more in. Which brings me to my gripe of the day. Now, don’t get me wrong. I love HCSAs. My employer calls them “Flexible Spending Accounts”. The problem is, they’re really not that flexible at all.

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Here’s the way our plan works: During annual open enrollment, if I choose to enroll in a HCSA, I have to choose a dollar amount to contribute to the plan every pay period. Then, for the next year, that amount is deducted from each paycheck before taxes, to fund the HCSA. Then each time I have a medical expense not covered by insurance (like a co-pay), I can request to be reimbursed for that expense from funds in the HCSA. Thus, I can pay for these expenses with tax-free dollars. One of the great features of these accounts, is that I can request funds from the account before I’ve actually made the contributions — which in effect is an interest-free loan.

So why am I griping? Well, the problem lies with the amount I choose to contribute, and the fact that I can’t change that amount during the course of the year. At the beginning of the plan year, I have to estimate the year’s medical expenses, and choose the amount based on that. But, I can’t predict the future. So, I estimate conservatively, to avoid losing the funds in the account.

I’d really like to see the rules for HCSAs relaxed a bit, to allow participants to make changes to the contribution amount over the course of the year. I think it would encourage more people to take advantage of them. I’m sure there’s some reason they don’t work like this (administrative overhead comes to mind), but if they did, it would certainly almost always work out to my advantage, at the expense of Uncle Sam. And suddenly it all becomes very clear..

I’m getting ready to open a new college savings account for our new son, Andrew. This time around, I’ve decided to go with a 529, the Maryland College Savings Plan. For our older son, I have a Coverdell Education Savings Account. I’ve always been partial to the Coverdell accounts, mainly because I like freedom — I can open a Coverdell with my favorite brokerage, and invest in pretty much anything I can invest in via a regular brokerage account. On the other hand, most 529 accounts tend to be more like annuities or 401(k) type plans: you are limited to a fixed set of mutual funds or mutual-fund type investments, depending on the plan. Of course, you’re free to choose any 529 plan out there, but if you want to take advantage of the tax benefits 529s offer, you typically have to pick the plan from your home state.

I like Coverdells because of their flexibility, but they’re not perfect. For one thing, the annual contribution limit is a relatively low $2000. 529s typically have a much higher limit, and with Maryland’s plan in particular, I can deduct contributions up to $2500 from my Maryland state income taxes. It was this little perk that sold me on the plan. The plan does charge a one-time $75 enrollment fee, but with the tax savings, I easily make that up in the first year.

As far as the investment choices go, they’re limited, which is a drawback. But, the plan is administered by T. Rowe Price, a very reputable mutual fund company. I’m even going to break with my control-freak tradition, and try out one of the “life cycle” type funds.

Until recently, there’s been something I’ve always wondered about the paycheck I get from UMBC. We’re paid biweekly, which translates to 26 paychecks per year. Now, the University gives me a certain dollar amount as my annual salary. But if I add up the gross pay from each of those 26 paychecks, it always comes out to slightly less than what the University claims is my annual salary. Being the paranoid type, I always assumed the University was short-changing me. Happily, I was wrong. The figure the University gives me is for 365 days (or 366 days in a leap year). My paychecks cover 26 14-day pay periods, or 364 days. So, in most years, I’m receiving paychecks that cover only 364 days. To get my actual annual salary, I need to take the sum total of all my paychecks, divide by 364 to get the per-day pay rate, and multiply the result by 365 (or 366 in a leap year) to get my salary for a full 365 (or 366) day year. When I do this, the result always matches the annual salary reported by the University.

So what happens to the remaining 1 or 2 days worth of pay? It gets rolled into the following year’s pay, and every so often, we end up with a year where we get an extra paycheck (for a total of 27 paychecks). To an unwashed employee like me, this seems like a confusing way to do accounting, but it does all add up in the end.

While I’m on the topic, I should plug what is probably the most useful site on the State of Maryland’s website (at least for state employees): The Central Payroll Buerau Net Pay Calculator. You basically enter your gross biweekly pay, all pre-tax deductions, and number of exemptions from your W-4, and it tells you what your net pay will be. Very, very handy when you get a raise, or your pre-tax deductions are changing, and you want to see what effect it will have on your net pay.