Minimum Viable Money Management

I've been learning quiet a bit about agile development and lean management in the past two years of the MBA program and now I am using this same methodology at my job in relation to business processes. MVPs are the new hot topic in business, discussed in more detail in Eric Reis' The Lean Startup.

"A Minimum Viable Product (MVP) is: "[the] version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort" — Eric Ries." Google

In simpler terms, an MVP is a product, for example, a mobile app, that is developed quickly and released to the customers before there is time to put on the finishing touches. Releasing the product to the customer quickly lets you learn from feedback and fail fast if you are going in the wrong direction. This process allows you to spend minimal funds on a progressively better product. You can know the biggest needs of the customer (or if the product is needed at all) before you spend money on the final logo of the application, for example. 

Viable is a key term in this phrase. Viable means that the product might not have all the features, but it is useable by the intended audience. 

The idea is that this process is efficient. No money or time is wasted, no resources are misused or idle. I love lean management and believe that efficiency is key to running a smooth machine that is a business. 

I look at myself and my money management as a small business. I have a resource (my own potential), a revenue source (my income), and expenses (rent, food, etc.). Thus, I translated the lean management techniques into personal finance and am piloting and learning from my experience. 

What does that mean? Firstly, I have decided that my job is stable enough and my paychecks are large enough that I do not need an emergency fund at the moment. I don't own a home or a car and I planned to keep $5K in my saving account for emergencies. I might not have that money at any one moment, but I can gather it within a 2 week period. Thus, now while I am trying to attack my student loans with everything I have, why keep $5K in the account idle? Remember that viable for a product means useable and for a process: doable, which means you have to be careful not to be so lean as to miss payments on credit cards due to a low cash balance. 

Secondly, I've always cleared my credit card with regularity. I would sometimes pay the card off once or twice a week just so I know the true amount of cash I had left and for simplicity purposes. Now, for simplicity in calculations, I might pay a small amount on my cards to round the amount down at any one time, but I no longer pay the full amount until the actual due date. The reasoning for this method is that if there are two paychecks between today and when a credit card payment is due, then instead of paying my credit card today (which accumilates no interest) and my student loan in a week (which does accumulate interest), I can prioritize whom I pay first from each paycheck based on the interest %. It sounds complicated and will require you to calculate how much you will have to dedicate from your paycheck that is paid out on the closest to the credit card due date towards that credit card payment, but it will save you in interest costs. If you have automatic payments set up on your student loans (or a mortgage), you can pay the amount due earlier and, usually, a second payment will not be automatically deducted on the due date. Do check with your loan provider. Why wait for the due date when you have the money today and when the money will be idle in your bank account until the payment date?

Thirdly, I'm delaying putting anything in my Roth IRA until right before April 15th. I'm generally risk averse, thus, I want to put the money in my Roth IRA because it is a smart move. Yet, instead of putting a little away every month, I'm going to stash a lump sum before the deadline from my March and April paychecks. This method allows me to put funds where they are needed today - student loans. This choice might be contentious for some. Yes, I loose out on the benefit of dollar cost averaging and of possibly making a good return in the market. Yet, the greatest value for me right now comes from decreasing my debt. That piece of mind is worth this move. 

I am also in need of a credit card that is not an AMEX, so I'm looking at options with the best rewards, but I am also seeking a 0% APR introductory offer so I can put one of my student loans that is $6K on a credit card. The reason for this move is that I would pay a small fee to pay that student loan off with a card, yet, I can focus on paying higher interest loans off with those funds instead of paying the $6K one down monthly. Overall, calculating the return of being able to snowball money intended for this loan into a higher interest loan and returning to this $6K one on the credit card before any credit card interest is due will save me close to $300, even after I pay the service fee for paying the loan off with a credit card. 

I have also raised my deductions for my paycheck. I am used to receiving a refund and because the refund is never significant, I never played around with my withholdings. Well, now I have and now I am plowing more money towards - you guessed it - student loans. I can calculate the refund or the amount due by the end of January and save up if needed through April 15th.

Overall, I've become more conscious of giving away "free money." In the past, I've paid for rent months in advance or pre-paid on other services I know I would be using like insurance. However, now, unless the service will benefit me via a discount that is greater than the interest I am paying on my student loans for not directing those funds to loans, then I do not pre pay anything. I also withdraw my Venmo and PayPal money from eBay after each transaction instead of transferring when I remember. Why give my landlord or eBay an interest free loan?

There are many more strategies where you can make the dollar work for you. It might be tedious, but if you are looking to save money on interest - these strategies could be useful and will become routine after doing it for some time. Something that has kept me motivated and swung my decisions has been an Excel I have been keeping that keeps track of the interest savings from paying down my loans first then my credit card on its actual due date. Overall, I've saved several hundred dollars in interest from a combination of these strategies. 

Comment to share any of your strategies for Minimum Viable Money Management. 

Tax Brackets Explained

There are several tax brackets in the US tax system. If you earn more money, you pay a higher percentage on some of your earnings. Here is how the tax brackets break down:

To see how this would break down for other statuses, visit the Money Chimp Website.

The key to understanding the tax bracket system is that if you currently earn $34,000 and you are filing as a single tax payer, you are in the 15% tax bracket. If tomorrow, you will receive a tiny raise and your salary will be $35,000, only $500 of that will be taxed at 25% and the remaining $34,500 will keep being taxed at the 15% rate.

Financial Clean-Up

If you haven't done so already, now is a great time to get your finances in order. Taxes are done; it's a fresh financial year. Now is a good time to start making folders for 2011 taxes: one for receipts, one for paycheck stubs, one for interest payments you make on your mortgage or student loans, etc.

If you start organizing now, taxes will be a breeze in April, or maybe you will be so organized that you can do your taxes in January and get it over with.

Now is also a good time to make some long and short term financial goals.

Here are mine:

1. Continue to contribute 15% towards retirement through 401(k) and IRA
2. Pay extra on my student loans, but just enough extra that I only pay $2,500 in interest in 2011
3. Have an emergency fund of 6 months that I don't have to touch because I have enough in checking as well (recently I pulled some money out because I had a family medical emergency, a car accident, and I want to prepay some rent to negotiate the rent down)
4. Start saving money on the side to pay off my private student loan in 2013 (as discussed in a previous post, my whole payment is currently interest because I am only paying capitalized interest and after doing some math, it works out better if I only pay $2,500/per year in interest for the tax deduction and then pay off my loan in full in 2013, when I won't be able to rack up the $2,500 in student interest payments for the tax deduction) - I would like to see $3,000 in this account by Dec 31st, 2011
5. Get a raise of around 13% from my current salary by April 2012 - currently supposed to get a raise at the end of May and then again in April
6. And of course, be able to take all my vacation days by going somewhere, buy Christmas presents for the family, and spoil my nephew-to-be

Your Tax Payer Receipt

So, taxes are over, unless you filed an extension of course. If you want to see where your tax dollars went, you can check it out at the White House Tax Receipt Website. It's crazy to think that $48 out of every $1,000 went to education, student financial aid, employment services, and training for people with disabilities, while $74 of that same $1,000 went to paying interest. No wonder, the students today have the most student debt ever and no wonder the US public educational system lags behind other countries.

2011 Withholding Calculator

Now that taxes for 2010 are done, it is time to look into what is being withheld from your paycheck. If you received a large refund for your 2010 taxes, or had to pay a lot to the IRS, this is for you. However, everyone should have a go and make sure that their W4 form is correct with the HR.

Fill out the IRS 2011 Withholding Calculator and see the amount of allowances you should claim. Once you know the number, check with your HR office or your online pay system to see how many are currently listed on your W4.

E-File Your Taxes

Monday is the last day to file your 2010 taxes. The quickest way to file is to e-file. You can do it for free is your AGI is lower than $58,000. Many people automatically assume that they cannot e-file even if their AGI is below $58K because they have a Schedule C, royalties, or some irregular circumstance. However, this is not true. Each company has it's own restrictions and limitation and many companies allow all sorts of forms to be filed and they are just as easy as Turbo Tax.

Go to the IRS website to see a list of companies that you can use to e-file.

If you are receiving a return, elect to have it deposited directly into your bank account and receive your refund in around 14 days. And, next year remember to file early to eliminate the stress of filing at the last minute and get your refund earlier. Of course, if you owe to the IRS, it would be beneficial to you to file on the last day possible.

Student Loan Capitalized Interest

I recently noticed that for tax purposes, the student loan interest that is deductible is anything above the principle. Therefore, since my loan right now is higher than the original amount due to capitalized interest, the entire monthly payment is deductible for tax purposes. Something to keep in mind as you start to prepare for the 2011 taxes.

Estimate Your Tax Refund

If you haven't done your taxes yet and are expecting a return, then maybe an estimate of your return would be a motivator. TurboTax is great for doing your taxes or at least filling everything out and seeing what the refund will be and then trying to do get the same number yourself on paper copies.

Another great feature of TurboTax is their TaxCaster  - Free Tax Calculator. In less than a minute, you can receive a rough estimate of your return. I think mine is roughly $100 off.

Save the link for next year and play with your numbers in December so you know what to expect before 2012 rolls around and while you are still able to make some changes in 2011.