We recently returned from our all-inclusive trip to Cancun that only cost us a couple hundred dollars thanks to credit card rewards. I was going to write up a review of the Hyatt Zilara we stayed at, but PDX Deals Guy recently did just that and I don’t have much to add. It was an amazing trip and a place we can definitely see ourselves returning to in the future, read his full review here and let me know if you have any questions about our own experience.
Anyway, back to the real world of managing our ever-growing financial picture on the path to financial independence. I recently decided to map out our household cash flow in flowchart fashion in order to look for worthwhile ways to improve it. Mapping out the full picture was no easy task given the large number of financial accounts we maintain spread across checking and savings accounts, investment accounts, credit cards, and more. I started out with a basic picture and kept “breaking down” various parts further to get a better idea of the overall picture. Join me as I take a look at our financial picture and walk the line between keeping things simple and increasing complexity in order to maximize returns.
The Most Basic Household Cash-Flow
This is probably the simplest possible picture of the average household’s cash flow. No investment accounts to worry about, all the money is in one place, and everything is paid out of the same account.
In this basic cash flow, we’ve achieved the ultimate level of simplicity that makes keeping track of money as easy as possible. Unfortunately, if your household cash flow really is this simple, a lot of opportunity is being left on the table! For starters, most people should be taking advantage of tax-advantaged investment accounts such as 401k’s and IRA’s! If your employer happens to offer a match, there’s almost no reason not to take the free extra money.
Adding in the investment accounts as a single-block would look like this:
An employer provides any matches or profit sharing while you can also contribute your own money directly out of your paycheck. If you take advantage of an IRA as well, that will most likely be coming from one of your bank accounts. The best part is once you get money into the investment accounts, they start growing on their own. You can think of this as an additional green arrow circling back on the investment accounts in the form of gains and dividends that are then reinvested.
Our goal of financial independence is to make that investment account arrow big enough that we no longer need the employer arrow at all to maintain our lifestyle!
After taking advantage of tax-advantaged investment accounts and any employer matches, there’s several other ways to add complexity to your finances in order to increase returns and reduce expenses. See below for how we’ve done that with several different avenues.
Our Own Cash Flow Picture
One of the first things that make our cash flow diagram different from the basic one above is that we’re a two-income household which means we each have our own employers, paychecks, and investment accounts to track. And while we also opened a joint checking account to pay the mortgage and utilities, we both maintain our own personal bank accounts as well for discretionary spending. We also have a separate high-yield savings account for our emergency fund which would cover 3+ months of expenses in a worst-case scenario.
In addition to the extra bank accounts, we also choose to filter as much of our spending as possible through credit cards in order to take advantage of the rewards they offer. We make sure to pay them off in full every month to avoid any interest charges and fees, but by doing this we are able to get a significant amount of our money back in the form of miles, points, and cash back. By signing up for new credit cards periodically, we can take advantage of signup bonuses that can sometimes offer 10%, 50%, or even more value back on our regular spending! We then use these rewards to heavily subsidize our travel expenses which allows us to take awesome vacations for very little money, such as the Cancun trip I mentioned above.
Even if we weren’t chasing sign-up bonuses, simply putting all of our expenses on a simple 2% cash back card would give us over $800 per year!
Another thing we do to reduce our expenses is buy discount gift cards for places we shop regularly which often saves us 20% or more at our favorite restaurants as well as reduce our grocery expenses.
Breaking out our different investment accounts and adding all of those little optimizations in makes our financial picture look a little more like this:
But Wait, There’s More
While that chart does a good job of capturing most of our financial picture, it does leave out a few different things. First, I didn’t take into account my business accounts which adds a couple bank accounts as well as income and expense streams. Second, I chose to leave out the many different “temporary” bank accounts we have opened in order to get bank account signup bonuses. The standard flow for these new accounts is:
- Open account by funding with credit card (if possible) or from an existing account
- Meet bonus requirement (direct deposit and/or bill pay and/or transactions)
- Wait for bonus to post
- Close account after the early termination fee cutoff (usually 3-6 months)
- Rinse and Repeat
This process earned us over $1,000 of extra money in 2015.
One bank account that I opened for the bonus is actually ongoing, so I suppose I should add that one in. The Santander extra20 account gives me $20 each month for having a direct deposit and 2 bill pays which I’ve fully automated at this point. Unfortunately, this specific account can no longer be opened, but I intend to keep it open as long as they keep the deal going for existing members.
I guess you could say the picture above is our “ideal” cash flow for the amount of complexity we’ve decided yields worthwhile returns. That doesn’t mean there isn’t room for improvement though!
Ways to Improve Our Financial Flow
After mapping out our cash flow and looking at all of our different accounts, there are several things that jump out that we could improve on.
- Remove unnecessary bank accounts
- While we regularly close out bank accounts that we no longer need, there are several sitting around that are either redundant or we’ve just been to lazy to actually close. This is an easy way to increase simplicity without any drawbacks.
- Improve the return on our Emergency Fund
- Our 0.95% interest rate through our Discover savings account is far better than the national average, but certainly not the best available right now. Doctor of Credit just did a great post summarizing the many different high-yield options available, but I haven’t decided for sure which one (or more) I’ll open. The best options seem to come with catches or a little extra effort, but it can mostly be automated away. I’ll probably do another post once I pull the trigger on moving our E-fund to a higher yield account.
- Open a Taxable Brokerage Account
- Our extra money up until this point has all been channeled into tax-advantaged accounts such as 401k’s and IRA’s or towards mortgage principal to remove PMI, but we’ve since removed PMI and maxed out our tax-advantaged space. Right now, our extra cash is just sitting in a checking account waiting for our refinance to close out (apparently the state of WA has been really slow to report property tax history lately…), but I plan to shove it all into the market once we sign the final paperwork.
Beyond that, the only real goal is to wait until those blue investment account bubbles get big enough that we can get rid of our employers and start living financially free.
Despite the many different bubbles and arrows in our financial flow chart, managing our day to day finances is really simply thanks to a few great tools. Mint.com is probably the most important as it tracks all of our income and expenses across ALL of our different accounts in a single place. Mint Bills (formerly Check) helps me make sure I don’t miss any bill payments for credit cards or utilities (I choose not to automate most of them for various reasons). AwardWallet tracks all of the miles and points we earn from credit cards to make figuring out how we’re paying for our next trip easy.
Except for a once per year addition to our IRA’s, the investments are automated right out of our paychecks and I check whether or not we need to re-balance every 6 months or so (we use a simple Three-fund approach to investing). Other things such as important dates and requirements for new credit cards and bank accounts are all tracked in Excel which I check in on at least once a week to make sure I’m not missing anything.
Over time, we’ve added a bunch of little optimizations one at a time that add up to the picture I’ve described above. I don’t recommend trying all of them at once, but slowly building out an efficient financial system can yield huge returns in the form of increasing income and reducing expenses across the board.
Does your financial system have any cool optimizations I didn’t mention above?
Additional Bloggers That Have Mapped Their Money
A few bloggers started a chain of posts to encourage others to map out their money, be sure to check them out below:
Anchors: Apathy Ends, Budget on a Stick
Link 1: The Luxe Strategist
Link 2: Adventure Rich
Link 3: Minafi
Link 4: OthalaFehu
Link 5: The Frugal Gene
Link 6: Working Optional
Link 7: Our Financial Path
Link 8: Atypical Life
Link 9: Eccentric Rich Uncle
Link 10: Cantankerous Life
Link 11:The Retirement Manifesto
Link 12: Debts to Riches
Link 13: Need2Save
Link 14: Money Metagame
Link 15: CYinnovations
Link 16: I Dream of FIRE
Link 17: Stupid Debt
Link 18: Spills Spot
Link 19: Making Your Money Matter
Link 20: Life Zemplified
Link 21: Trail to FI
Link 22: The Lady in the Black
Link 23: Smile & Conquer
Link 24: Her Money Moves
Link 25: Full Time Finance
Link 26: Abandoned Cubicle
Link 27: Freedom is Groovy
42 thoughts to “Mapping Out Our Financial Rube Goldberg Machine”
Good stuff. Any thoughts on the state of the market these days? Good time to invest or just sit tight?
I don’t know what the market will do tomorrow and neither does pretty much every one else in the world. I plan to continue investing early and often in broad market index funds regardless of what the market looks like at the time. Attempting to time it beyond that is a bit of a gamble, so I choose to avoid trying.
Look into moving your checking and emergency fund into “rewards checking” accounts. They pay 3% and you have to do some basic things such as 10 debit purchases, e-statements, 1 ach or billpay, log online. One of the best ones that are available nationwide is lmcu.org. It pays 3% upto 15K with no min balance requirements and $10 in ATM fee refunds each month. If you need something liquid that pays interest, it doesn’t get better than this.
You must have missed this section:
“Improve the return on our Emergency Fund
Our 0.95% interest rate through our Discover savings account is far better than the national average, but certainly not the best available right now. Doctor of Credit just did a great post summarizing the many different high-yield options available, but I haven’t decided for sure which one (or more) I’ll open. The best options seem to come with catches or a little extra effort, but it can mostly be automated away. I’ll probably do another post once I pull the trigger on moving our E-fund to a higher yield account.”
Plenty of 5% prepaid checking accounts as well that Noah was referring to, also with their own complications. I’ll have to look at these reward ones though, I thought they all had monthly fees
Lots of great 3-5% options available right now, check out this post by DoC for more info on the various options: http://www.doctorofcredit.com/high-interest-savings-to-get/
I noticed in your personal cash-flow diagram that you and your significant other have your paycheck flowing to individual Roth IRAs. I would have assumed you guys would opt for traditional IRAs and then utilize the Roth conversion ladder. Is there any reason to opt for the Roth IRA at this point over the traditional if early retirement is your goal? Great site by the way.
Thanks! I’m utilizing the backdoor Roth because I’m over the income limit to be able to deduct Traditional contributions or contribute directly. We could utilize a Traditional IRA for Becky because it does tend to work out better for early retiree’s (which we plan to be), but for now I’m continuing with the Roth for tax-advantaged diversification.
An additional reason is that utilizing a Traditional now may make backdoor contributions in the future much more complicated because of the pro-rata rule. This could come into play once we’re filing jointly as a couple and could potentially exceed the Roth contribution cutoff (as well as the Traditional deduction cutoff) as a couple.
We have the Netspend regular and WU Netspend accounts each. So, $5000 x 4 at 5%.
I think I’m going to look into getting a couple accounts for ourselves pretty soon, I haven’t heard any real reasons not to. 5% is tough to beat
Really spiffy map! It kind of looks like a star destroyer.
I used to use Mint but got frustrated as hell trying to keep all the accounts synched. I know just rely on my little old .xls ?
Haha, now that you point it out, it kind of does!
I use Mint for tracking, but also export into my own excel sheet for the fun part 🙂
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