Free Money Finance

Successful People Share Smartest Thing They've Done with Money

Business Insider posts on nine successful people. They list the smartest things they're ever done with their money.

The list:

• Build an emergency fund.
• Pay yourself first.
• Invest in real estate.
• Bought a computer (which led to a career).
• Invested in ideas.
• Made my money work for me.
• Started a business.
• Lived below my means.
• Invested in myself.

It's a pretty good list. Hard to argue with any of these.

But for most people, there's a different list of the best money moves you can make.

I've had several good moves. Most notably:

• I worked on growing my career.
• I controlled my spending.
• I invested in index funds and then real estate.

Those three things alone helped me reach financial independence.

How about you? What are the smartest money moves you've ever made?

A Money Expert Who Knows What She's Talking About

In contrast to many financial "experts" in the media who know very little about money management (I noted this in Money 101: How to Measure and Track Wealth and Another Financial Media Mistake), Business Week magazine interviewed Ann Kaplan, a woman after my own heart.

Here's what started off the interview:

What’s the biggest financial mistake people make?

The biggest mistake isn’t bad investment choices, it’s overspending. Most people are very surprised when they analyze their spending to discover that a lot of it doesn’t reflect their priorities. Maybe they’re eating out a lot when their priority is travel. Most can cut one-third of their budget by eliminating things they don’t really need, whether that’s buying jewelry or theater tickets. The goal of thinking about this isn’t to encourage you to necessarily cut back but to understand that you can. That helps eliminate fear.

Couldn't agree more. Several years someone asked and I wrote My Best Financial Advice: Spend Less than You Earn. I followed that up years later with The Ten Worst Money Mistakes Anyone Can Make. FYI, the worst mistake was "over-spending."

I'm also on the same page as her here:

If you have a financial planner you trust, shouldn’t you leave the decisions to him or her?

You can hire wonderful advisers and use magnificent products, but at the end of the day no one cares about your money as much as you do. You always need to be the chief financial officer of your life.

Again, couldn't agree more. That's one reason I write this blog -- so all of us (me included) can learn more about managing our money and thus not be at the complete mercy of a financial planner who may or may not have our best interests at heart.

Any extra thoughts on either of these subjects?

Giving Love Through Money

The following book excerpt is reprinted with permission from Emotional Currency: A Woman's Guide to Building a Healthy Relationship with Money. Copyright © 2011 by Kate Levinson, PhD, Celestial Arts, an imprint of Ten Speed Press, a division of the Crown Publishing Group, Berkeley, CA.

Giving and receiving money can bring intense pleasure as well as strengthen the love between family members. It is an expression of an elemental wish to be of help, a desire that arises from caring. As women, we are often concerned for the happiness and needs of others, and we give whenever we are able. Most of us know the feeling of gratification that comes from giving, either to celebrate an occasion, to help someone in need, or to share what we have.

Giving money can be beneficial, benefiting both the recipient and the giver—though sometimes, it may not feel 100 percent good. Linda described how challenging it was after her husband lost his job and she was the sole provider:

Those two years took a toll on me. Money worries are one of the most stressful things. We still lived better than most people in the world do, but you compare yourself to how you used to live. I’ve always worked full time and when we both were working, we didn’t live extravagantly. But I had a horse—horses are money pits—and we traveled. It was very hard to sell my horse and to not take any time off. I had to pick up extra work. We’d always kept our money separate, and now I had to make my income and savings work for both of us. I grew up spoiled, and so it wasn’t a pretty side of me when I couldn’t be my spoiled self anymore.

In order to support my husband, whom I loved very dearly, I needed to look at my dream of how I thought my life should be and question my expectations. We learned that having money worries didn’t make us different people or love each other any less at the end of the day. We discovered that we can get through bad times, including my anger and my husband’s depression. And we’re stronger now as a couple. Some of our new strength came out of my being able to support us financially for those two years, and his being able to receive the support.

Giving money can also be detrimental, even when we give out of love. We can give in ways that are hurtful, financially as well as emotionally, to ourselves and others. Sometimes the sacrifices we make are too large. We can be overly possessive—using money to control and keep our children and others tied to us. We can be overprotective—using money to keep our children and others from struggling with hardships and decisions that could bring them experiences and learning.

Rose gave money to her son every time he asked for almost forty years. After she developed dementia, though she might not recognize her grandchildren or friends, the minute she saw her son she went to look for her checkbook. Even through the fog of her dementia, she remembered his need for money and her need to give it to him. Rose actually ended up having enough money to live out her life, but it cost her in other ways. Before her dementia, though she never stopped giving to him, she was angry that her son contacted her only when he needed money. Additionally, Rose’s giving so much attention to her son, always worrying about him and giving him money, made her daughter feel less loved in comparison. This was hurtful to her daughter, and though she remained devoted to Rose, over the years it took its toll on her love for her mother. And when Rose died, there was little money left for the family. The son, who had become dependent on the handouts, was left high and dry.

Many mothers, my own included, cannot stop giving reflexively—sometimes even when they want to. Roberta had raised her daughter as a single mother, and when her own daughter had children, Roberta wanted to help so her grandkids wouldn’t go without. A pattern was established of giving her daughter money—not only cash but also car insurance, cell phone coverage, and so on. This went on for sixteen years. Roberta told the Emotional Currency group, “I thought it was just a phenomenon in the black community, but I spoke to a white lawyer who’s supporting her daughter. And it’s not just women; there’s a Bank of Daddy as well.”

Many mothers have difficulty saying no. But Roberta was eventually able to:

I closed the Bank of Mama. It wasn’t easy, but it was necessary. Money was wreaking havoc on our relationship; it was so unhealthy. I realized that I wasn’t going to have enough to take care of myself when I got older. I’d been harping on her to get her own insurance and phone, but she never did it. When I closed the Bank of Mama, she took care of business.

The first several months afterward things were very testy. But my daughter is not only taking care of business, she’s checking in with me more, and there’s a new freedom between us. With money involved, there were certain things I had to know, things I didn’t want to know.

Roberta had to separate money from love in order to do what was best for both her and her daughter, and, therefore, the most loving thing she could do. Luckily it brought them closer, but there was no guarantee it would turn out that way.

Increasingly, adult children are being called on to help their parents financially. This can feel like an opportunity to lovingly return the care they received from the parents growing up. Sammie sends her elderly mother a monthly check, which gives her mother enough extra income to turn the heat on when she gets cold without worry about the fuel bill or to go out to eat occasionally when she might otherwise skip a meal. These checks give Sammie a chance to directly express her love for her mother and give her mother an opportunity to feel well-loved. Sammie feels fortunate to have the means to express her love in this way.

Ask yourself:

How do you use money to express your love through taking care of others?

Save 97% of Any Windfall

The following is a guest post from Marotta Wealth Management.

Surprisingly, studies show that onetime windfalls can actually impoverish you. They make you feel rich, which inevitably leads to overspending. But wealth is what you save, not what you spend.

With large windfalls, people tend to spend about 40% of the money. So if you get $20,000, you might spend $8,000. But if the amount is small, you will squander a greater percentage, often more than you received. Thus if you win $75, you may actually spend an additional $125 before you stop celebrating.

Either of these scenarios will make you poorer. One goal of wealth management is to increase the amount you can spend each year rather than adopting a lavish lifestyle followed by thrift and austerity. A lifestyle is defined here as everything you can do with money, including generous donations to the charities of your choice. The goal of an ever-increasing lifestyle is not to consume more each year but rather not to allow your choices to outpace what you can continue to maintain. A year of living extravagantly is foolish if it isn't sustainable.

Consider this extreme example to see why spending even 40% of a onetime windfall breaks this principle. Imagine that instead of an annual salary you receive all your lifetime earnings in one $2 million lump sum at age 20. Spending 40% the first year is neither maintainable nor advisable. After blowing $800,000 the first year, you have reduced your potential standard of living by 40% for the rest of your life. Getting $1.2 million at age 21 is barely half as good as the original deal. Not only is your future spending severely diminished, but your expectations after a year of an $800,000 lifestyle are extremely inflated. You will struggle not to spend at least $400,000 the next year and may still feel slighted.

It is easy to expand your lifestyle and spending but very difficult to contract. Even if you give most of the $800,000 to charity, the organizations will want those funds again the following year. Prudent spending, even charitable giving, often involves continuous annual spending over a long period of time.

If your windfall is a once-in-a-lifetime event, only spend a very small percentage of it. If you are young, 3% would be reasonable and sustainable indefinitely. Saved and invested in a diversified portfolio, you should be able to earn at least 3% more than inflation.

Imagine inflation is running at about 5% and your investments are making 8%. So after a $2 million windfall, you can spend 3%, or about $60,000. Your $2 million portfolio will grow 8%, appreciating to $2,160,000. After spending $60,000, you will have $2,100,000 left. You may think you have more money, but you don't. Because this is only 5% more than you had originally, the increased amount will have the same buying power after adjusting for inflation.

The second year you can again spend 3% of the increased $2,100,000 amount, or $63,000. This will offer you the same lifestyle because prices are now 5% higher. As your portfolio increases 8% each year, you spend 3%. The other 5% simply keeps up with inflation.

Most people believe they are doing well when they save 60% of a windfall and contain their celebration to only 40%. Don't be fooled. It's like saying because it is OK to have a glass of wine every night why not just have 150 in one night and then not drink for the rest of the year. Moderation matters. You can't restrain your lifestyle and still spend 40% of a large windfall.

If you don't adjust your lifestyle spending, you will jeopardize your retirement plan. Progress toward retirement is measured by how many multiples of your standard of living you have saved. At age 40 you should have about 10 times your annual spending saved. If you spend about $60,000, you should have $600,000 saved.

You might think a windfall of $400,000 could only help your retirement plan. Now you have $1 million! Surely you should be able to spend more now that you are a millionaire.

You are better off, that's true, but only if you don't spend any of the windfall. If you do, you will have increased your lifestyle. That translates to increasing the amount you should have saved by age 40 as well as the amount you need to save each year to stay on track toward retirement.

Spend just $40,000 of your $400,000 lifestyle and your lifestyle balloons from $60,000 a year to $100,000. So by age 40 you should have ten times your standard of living or a full $1 million in savings. But because you spent $40,000, you are now $40,000 short.

Increasing your retirement goal also means increasing your annual saving toward that goal. You should be saving an additional 15% of your lifestyle each year. At $60,000, saving 15% meant saving $9,000 a year. But with your lifestyle now at $100,000, you ought to save $15,000 a year. Sustaining that increased level of savings will mean a lower standard of living in future years.

Escalating your lifestyle anything more than slightly can ruin your retirement plan. You can increase your spending each year by just 3% of any windfall. There are really few exceptions to that rule. Only a small number of families are sufficiently disciplined to rein in their celebration and save 97% of a windfall. Be one of those few. Build real wealth by saving and investing. In the end, your investments will be a dynamic engine of wealth creation and you'll enjoy financial peace of mind.

5 Steps to Help Anyone Negotiate for Things Money Can't Buy

The following is a guest post by James Clear from Passive Panda.

I have developed a simple system to successfully negotiate for things that money can't buy.

With a little creativity, you can use this 5-step process to gain access to all sorts of amazing experiences and events without paying a dime. Even better, you don't need to utilize complex negotiation tactics to get the desired results.

You will find the 5 steps below. To better describe the strategy, I offer a personal story as an example of the ideas in practice.

The set up: I had previously heard about a zoo in our area offering behind-the-scenes tours to schools for educational purposes. I wasn't sure if they would go for it, but I really wanted to schedule a personal tour for my girlfriend and I.

1. Smile. The way you enter a room can dictate how you will be treated for the rest of the time. Keep your head high and show some teeth when you enter. Moreover, smiling actually increases the flow of positive chemicals to your brain, which will help you exude a positive and trustworthy demeanor.

The idea in practice: I had to call the zookeeper over the phone, so I didn't have the luxury of a smile. However, a warm, "Good Morning. How are you?" will do just fine. It's always a good idea to start on a positive note, no matter how small.

2. Turn it into a cooperative discussion. Hollywood likes to portray negotiations as hard-fisted, never-say-die arguments. In reality, the most successful negotiators simply hold conversations. A perfect negotiation would end with the other party being happy to give you what you want.

The idea in practice: Our conversation started with the following exchange.

"Hi, I'm calling for two reasons. I just want some general information about what it is you do and the types of animals that you have on site. Also, if it's a good fit, I would like to talk about setting up a tour."

"We aren't offering any tours until April."

[April was 5 months away.]

"That's totally fine. Can you help me get a better idea of your zoo and the types of animals you have?"

Right from the start, I was told that what I wanted was not available. However, instead of attacking that issue head on or pressuring them about their policies, I transitioned to something we could talk about together. This allowed me to speak with the zookeeper for 10 minutes about the zoo, their animals, and his background. It was a great way to build rapport and develop a positive relationship with him.

3. Inquire about alternative options. The world is a good place and people want to help you. But just like you, they are busy. Their focus is on doing their job, so it's rare that someone will go out of their way to find solutions for you because they have their own problems that need solving.

This is why asking about other options often works well. There is almost always more than one way to solve a problem. However, most people simply default to the standard option so that they can get their work done.

The idea in practice: After we had talked for awhile, I asked about their tours again. Turns out, there is only one option: educational tours for schools. Not the answer I was hoping for, but at least I knew what they were offering.

4. Just ask for what you want. If you have set things up well with a pleasant conversation, then stop talking so much and just ask for what you want. Don’t bother with backing your way into a suggestion. The other party will rarely give the answer you are looking for unless you ask the question first.

The idea in practice:

"Well, thank you for the information. This talk has really been informative. I want to be respectful of your policies, but I do have one question. My girlfriend loves animals and I was hoping we could stop by and you could take the two of us on a tour. It could be short, maybe an hour or so."

[pause]

"I tell you what. If you stop in here sometime next week, I could do that for you."

"Wow. That would be great. And if it's possible for us to feed the White Tiger, I'm sure she would love that."

"We can do that. I'll take you around through the Big Cat house and you can toss him some chicken."

Essentially, my request fit none of their typical criteria, but I was still able to get what I wanted because I developed a positive conversation and I asked for what I wanted. Originally, it didn't seem like there were any alternative options, but we still found a way to make it work.

5. Get it in writing. If you are negotiating for something at a later date, then make it easy on yourself and get proof of your victory. There is no reason to negotiate everything all over again.

The idea in practice: I asked the zookeeper to add us to his calendar for the next week. As he was recording my contact information, I wrote down his.

Give it a try. As you can see from my example, you don't need each step to work out perfectly to end up with the desired result.

Spend some time trying these tactics out and I'm sure you will find all sorts of ways to save money and enjoy amazing experiences you otherwise couldn’t buy.

Money Ethics: What Would You Do with Found Money?

The Bucks Blog asks what would you do if you found a $100 bill? This got me thinking about the ethics of what to do with found money.

At first it seems like it's a fairly straight-forward question -- would you keep found money or wouldn't you? But the answer could be different based on a variety of factors:

• Does the location make a difference? What if it was found in an elevator? Or perhaps a store? Or outside a children's daycare?
• And what about the amount -- would that change things for you? Would you do one thing for a small amount (like $1, $5, or so) but another for a larger amount ($100 or more)?
• And would it make a difference if anyone was with you or not? If you were alone would you do one thing but if you were with someone would you do another?

Lots to consider. And I've probably left out several variables, but you get the idea.

Here's what I would do:

• If there was a reasonable chance of finding the rightful owner, I would take it to someone in "authority." For instance, if I found $20 in a doctor's waiting room, I'd give it to the receptionist in hopes the rightful owner would come claim it. But if it was out in the middle of nowhere (like walking on a sidewalk downtown), I'd probably keep it.
• The amount wouldn't matter to me, though I'd be much more inclined to go out of my way if the amount was larger. No one's going to lose sleep over losing $1, so I probably wouldn't bother trying to find the owner. But if I found $1,000, I'd be more apt to try and determine who the rightful owner was since that's likely a meaningful amount to someone. (FYI, here are sisters who found $18k and turned it in.)
• I don't think it would matter whether or not I was alone, but having someone with me could help find the owner. After all, two heads are often better than one and we could work together to decide what to do.

How about you? What would you do with found money?

What Financial Advice Would You Give a Younger You?

I recently received an email from Education.com. The note highlighted a list of posts they had collected on how to teach kids about money and talked about the importance of teaching children how to handle money. But the part that made the biggest impression on me was a question near the end of the email. It asked:

What financial advice would you give a younger you?

I thought that was a very interesting question to consider -- one I'd like to answer and thought you would as well.

Here's what I'd tell a younger me if I could go back in time:

Start saving and investing earlier.

My first investment other than a savings account at a bank was when I was 27 and I enrolled in a 401k with my new employer (and at that point I had to be convinced that it was a good deal -- I wanted to spend the money instead -- what a dufus I was.) Anyway, I put in a minimal amount and that was it. A couple years later, I was married and started to study personal finances and really began getting my financial foundation set (paid off debt, started saving more, cut back on spending, etc.)

That said, I probably missed out on five good years of saving/investing -- and given the power of compounding, those extra five years are worth a HUGE amount of money when I retire. That's why my advice to myself would be to start saving and investing earlier -- so I could take full advantage of the benefits of compounding.

So, what financial advice would you give a younger you?

Get Advice from People Who Are Where You Want to Be

I was recently listening to a podcast by Andy Stanley and he suggested this bit of advice for people looking to make good decisions:

Get advice from people who are where you want to be.

This really made an impact on me. I've been trying to say this here in many different ways, but just didn't have the words. Then Andy simply gave me the words. I'm not trying to brag here, but I do want to say what I mean, so please take the comments below as someone who is simply trying to be honest to get a point across. With that said, here are some thoughts I had on the saying above:

1. This is exactly why I wouldn't go to a financial planner who had lots of head knowledge but was not doing well financially himself.

2. I've done fairly well financially up to this point and the reason is that I have followed my own advice (like growing my income). It's this advice that I share with you daily in order to help you all grow your net worths. Most of you are younger than I am (many by a decade or two) and with a good start now, you have excellent chances at being ahead of me financially when you reach my age. This is my wish for all of you.

3. Not everything I say will be right for you (of course), but hopefully enough of it will resonate with you and you'll apply it. If so, I think you'll certainly grow your net worth to a decent level. That said, be careful what you pick and choose to follow. If you miss even a few of the basics, all the other suggestions won't get you back on track.

4. The principle of "getting advice from people who are where you want to be" works in any area of your life, not just personal finance. It works in marriages, business, raising kids, and so on. Find someone successful in an area where you want to be successful, ask them for advice, and follow what seems to be right for you.

5. I'm not saying to totally ignore people who are "wise" and yet are not "successful" in the area where they are giving advice. But I would say that if the unsuccessful person says one thing and the successful person says another, it seems to me that it's clear who you should follow.

Ok, now I'll get off my high horse and return us all to lighter topics. ;-)

Help a Reader: What to Do Next

Here's a recent email I received from a reader:

I am single and 44 years old and have fully paid off my newly renovated house.  (worth about $125k) What should I do now?  I feel I paid off my house too quickly.  My mutual funds have earned about 12% a year for the last 5 years.  Is there a good way to pull money out of the house and invest it?   Or are there other ideas on what I should do?

So, what would you tell him to do?

Five Ways to Stay Safe at the ATM This Holiday Season

Here's a piece I was sent from CO-OP Financial Services. They suggest five ways to stay safe at the ATM this holiday season. Their thoughts:

ATM convenience is essential for hectic shoppers to get quick cash this holiday season. While Americans make more than 11 billion ATM transactions annually, December is always the busiest month for ATM usage, according to CO-OP Financial Services, which operates CO-OP Network, the nation’s largest credit union ATM network. In fact, in 2006, CO-OP Network set a record for the largest one-day volume in Network history, with over 3.5 million transactions just on Christmas Eve.

When ATM transactions increase, so do fraud, ID theft and crime at the ATM.  With 400,000 ATMs across the United States, these convenient cash machines can be an easy target for thieves looking for a quick buck. While most of these machines are secure, consumers should always take certain precautions, especially during the busy month of December. 

Here are some suggestions that help make trips to the ATM merry and safe this holiday season.

1. Come Prepared -- Before arriving at the ATM, prepare all documents and have your ATM card ready. Maintain a small supply of deposit slips at home, the office or in your car and fill them out before going to the ATM. “Criminals generally select victims who are unaware and unprepared,” says Stan Hollen, CEO, CO-OP Financial Services, which operates 25,000 ATMs across the United States and Canada.  “Attitude and demeanor are important, so walk purposefully to the ATM and stay cognizant of your environment – especially at night.”

2. Stay Aware of Your Surroundings -- Keep a constant watch of the nearby area while standing at the ATM. If you are using an indoor ATM where a card is needed for entry, don’t let anybody else in who you don’t know. Walk away if you see anything suspicious and if your transaction is in progress, be sure to cancel before leaving.

3. Select an ATM with an Unobstructed View -- Make sure you select a well-lit ATM that is visible to a passerby and not blocked by any barriers, including shrubs, signs or buildings.  Do not select an ATM at the corner of a building because it creates a blind spot while you conduct your transaction. If possible, select an ATM that is patrolled by a security guard or is equipped with a transaction surveillance camera. “If you must use an ATM at night, consider taking someone with you,” says Hollen.

4. Protect Your PIN -- Keep your PIN a secret -- do not share it with anyone. When entering your PIN at the ATM, stand between the machine and people waiting in line and shield the keypad with your hand or body.

5. Complete Your Transaction and Leave -- After your transaction is finished, make sure you have your card and transaction record. “Avoid counting or displaying large amounts of cash,” says Hollen. “If you get cash, put it immediately in your wallet, purse or pocket.” When leaving the ATM, make sure you’re not being followed. If you think you’re being followed, go to an area with a lot of people and call the police.

Great Financial Advice from Vanguard

I didn't know Vanguard was publishing articles on its site until I logged into my account the other day and noticed a few of them. In particular, I liked this one titled "Advice for Graduates", that really offers great financial advice for anyone -- not just graduates . The piece centers the four financial principles that follow:

1. Live below your means. You have to spend less than you earn. The investment benefits are self-evident. If you don't save, you can't invest. But living below your means also provides protection from volatility in your personal financial situation. If you suffer financial setbacks—job loss, unexpected health-care costs—you'll be better positioned to weather those challenges than people who habitually spend every penny they earn.

2. Participate in the markets. More important than picking the optimal investments is simply getting started. Once you start investing, you face another challenge: volatility. The financial markets have recently provided a very good illustration of volatility. From its May high to its June low, the U.S. stock market lost almost 10% of its value in a few short weeks this year. If you can resist the urge to react to the emotional potholes created by short-term fluctuations in the value of your investments, riding along with (and continuing to invest in) the markets will be a productive experience over many years.

3. Invest regularly. A regular saving and investing habit is key to financial success and security. Payroll deductions, a feature of most employer-based savings plans, and other automatic investment programs make the mechanics of regular investing simple.

4. Get knowledgeable. Your goal should be to become familiar with the way the markets behave. Over time, this familiarity will help you establish—and stick with—a well-constructed long-term investment plan.

You KNOW I LOVE this advice! Much of it is contained in my piece titled The 10 Best Money Moves You Can Make.

Good, solid, beneficial financial advice like this is not glamorous or exciting, but it certainly works. And because they promote these sorts of principles, I whole-heartedly recommend Vanguard to anyone interested in saving, investing, and growing their net worth.

Four Tips for Avoiding a Gift-Card Fiasco

Here are four tips from David Bach, author of the Automatic Millionaire, on how to properly handle any gift cards you may have received as presents this year (or anytime in the future, really):

1. When You Get the Card, Photocopy It.

2. Check the Expiration Date.

3. Don't Lose the Change.

4. Read the Fine Print.

My thoughts:

1. Overall, these are good tips.

2. I NEVER photocopy the card. Then again, I treat it like cash, so I handle the card itself with extra care. This goes for whether the card is new or if it's only what's left on the card.

3. In the past two months, we've received several gift cards/gift certificates including ones to Burger King, KFC (yum!!!!!), Carrabba's, our church bookstore, the Gap, and Target. It's s bit hard to keep track of all of them and you really need to be diligent about it to make sure you don't forget about any. I have a system I use on my Palm to make sure I use them all.

4. In the past few months, we've given a few gift cards. They seem to work best for us when you know the type of item a person would like, but don't know exactly which one to get. For example, my son went to a birthday party and we knew the birthday boy liked video games. But we didn't know which ones. So we gave him a gift card to Best Buy. Problem solved.

Hate Financial Planning? You’re Not Alone!

For most people, the thought of financial planning ranks right up there with having a root canal.  They find the process intimidating, costly, boring, and painful.  The (now closed) website I Hate Financial Planning noted these as reasons why more than 95% of Americans don’t have a financial plan.  So what are the alternatives?  Must you suffer through formal financial planning or be destined to financial ruin? Not at all.  Here are some simple steps you can follow which will help you achieve many of the benefits of financial planning without all the hassles:

• Set financial goals – Start planning by describing your vision of your financial life in one year (short-term), five years (medium) and ten years (long-range). List your priorities and don’t be afraid to dream a bit.  Review these goals regularly to make sure you’re on track to meeting them.
• Determine where you are – Calculate your net worth by taking the total of all your assets (house, car, investments) minus your debts (house and car payments, loans, credit card balances).  This is the amount you own.  Once a year, compute your net worth and compare with the previous year to record your progress.
• Create a spending plan – Find your monthly net income by subtracting your taxes and automatic deductions (retirement, medical insurance) from your total earnings. Next, determine your monthly expenses.  Create columns for expense categories like housing, utilities, food, transportation, clothing, medical, insurance, debts, entertainment, savings, charitable giving, and miscellaneous.  Record your average spending in each category by reviewing your checkbook, bank statements, and receipts over the past three months. Remember to include items requiring annual payments, like insurance, taxes, or subscriptions.  Also, track your cash spending for 30 days, adding expenditures to the proper category.  When finished, add these categories to determine your total monthly expenses.  Subtract this total from your net income.  A positive number reveals that you are adding to your net worth each month while a negative number reveals a monthly drain.
• Reduce spending – Review your spending plan for opportunities to save money.  Review magazines and websites for money-saving ideas and get tips from friends and family.  Get the whole family involved and make a game of how you can work together to get more for less in every area of spending.  Even “fixed” expenses, like housing, transportation, and food can be reduced if they’re out of proportion.  Every expenditure has the potential to be reduced – don’t let any stone go unturned.

“The biggest financial mistake I see is a consumptive lifestyle – simply spending more than you can afford,” notes Ron Blue, author of Master Your Money. Controlling your spending is a simple way to grow your net worth.  “Spending less is easier than saving more,” note Bill and Mary Toohey in The Average Family’s Guide to Financial Freedom.  And they should know – they accumulated a whopping $467,000 in eight years on an income of $65,000.

• Eliminate debt – The average American owes $8,000 on her credit cards, paying $1,200 a year in interest!  Car loans, school loans, and mortgages add to these totals.  Paying off debt and determining not to borrow is a guaranteed investment as high as 18% -- obviously, a wise financial move.  To become debt-free, financial expert Dave Ramsey recommends a “debt snowball” in Financial Peace.  List your debts, smallest to large and put any extra money on the smallest.  Then, reallocate payments from the retired debts to those existing, until all the debts are consumed.  Retiring all your debt can “earn” you thousands of dollars over your lifetime.
• Create an emergency fund – Emergencies arise.  Cars break down, ankles get sprained, and jobs get terminated. Ramsey recommends that you prepare yourself from getting into debt by creating an emergency fund of three to six months living expenses.  This fund will cover those inevitable, unexpected costs and keep you from borrowing money when they occur.
• Carry adequate insurance – Car, medical, disability, homeowner’s, and life insurance can prevent a financial crisis.  Agent Jeff Flowers comments, “You want to do business with a company that will be around for years to come – one that will be there if you ever need it.”  Insurance is complicated, so consult with a trusted professional to secure the right coverage.  (Ask your parents, friends, or co-workers for recommendations on insurance agents.) Review your coverage annually for rates and to adjust for lifestyle changes.
• Save for life’s major expenses through stock investing – Saving early for long-term expenses like retirement or college will allow you to capitalize on the most important investing force: time. Time helps your money multiply itself.  In Retire Rich, Bambi Holzer notes, “Regular saving is the key to a successful retirement.  Do it early and often, and it can be relatively painless.  Wait till the last minute, and you could be in trouble.” 

But starting early is only part of the formula.  To beat inflation, it’s also important to invest aggressively.  Stocks are the best option as they have historically exceeded other investments over long periods.  “Stock mutual funds are great for investing,” comments Chartered Financial Consultant Scott Pruski.  “You can utilize the diversification and professional money management of a mutual fund with systematic investments of as little as $25 per month.” 

Look for no-load (no fee to purchase or sell) mutual funds with low expenses.  Review the investment’s performance at least annually, making adjustments as necessary for under-performing funds.  Make this process even easier by having money automatically transferred from your paycheck to an investment account.  Multiply your efforts by using employer and government sponsored vehicles like 401k’s, IRAs, and education IRAs to their fullest extent.

• Get a will – A will can ensure your assets will be divided according to your wishes and save thousands in taxes for your heirs.  Also, a will allows parents to designate their children’s caregivers.  A simple will usually costs less than $200 and “can be changed as people’s lives change, either by writing a new will or only changing provisions of the old one,” adds attorney Jay Nardini. Don’t try to do this yourself, though.  A “simple will” can be complicated for the average person and a do-it-yourself kit is not a bargain if something’s missing.  Use a lawyer instead. 
• Give – It might seem hard to give when you’re trying to get your finances straightened out, but try to contribute some money from each paycheck to your local church or charity.  Remember, you’re rich compared to most of the world.  Besides, giving helps us focus on others and keeps finances in perspective – not letting them becoming an all-consuming part of our lives.

Congratulations!  You have broken from the pack and entered the realm of financial planning!  All these steps don’t have to be done at once – in fact, some will take years to accomplish.  But if you focus on one area at a time, and stick with it, your effort will pay off.  You’ll not only find financial freedom, but you’ll also be on your way to making your dreams a reality.

Make Time for Finances

One of the lamest excuses for not actively managing your money is "I don't have the time to plan".  As Terri Cullen asks, "Some cheese with that whine?"

Seriously, she has written a great piece for the Wall Street Journal Online on Finding Time for Personal Finances.  A key point I'd especially like to highlight:

"Sure, managing money is time-consuming, but technology has increasingly made mundane tasks easier, leaving more time to focus on big-picture planning."

This goes along well with Flexo's advice yesterday.

And it really doesn't take much time to manage your finances properly.  Terri says:

"For my finances, that means scheduling a few hours once or twice month to tackle big decisions (researching where to invest for college, comparison shopping for insurance, updating my will), grabbing a half hour each week to take care of at least one routine duty (ordering a free credit report, dealing with paperwork for flex-spending account reimbursements), and grabbing a few minutes every day to fix problems and keep an eye on the books (monitoring accounts online, disputing a credit-account charge). And, thanks things like automatic bill payment, occasionally someone else shoulders the drudgery for me."

Check out the rest of the article at the Wall Street Journal Online, then get to work.  All it takes is a little bit of time to set yourself on the road to financial freedom.

Graduate’s Guide to Finances

You’re now on your own!  But with the joy of freedom, comes the pain of responsibility.  This is the time to assess your financial goals and take action to accomplish them.  While every financial plan is different, here are some general guidelines you’ll want to consider to get started on the right foot:

• Organize your financial records – The best time to organize your financial records is now – when you’re just starting out.  Set up a system for filing checks, tax returns, financial statements, debts, and other financial documents.
• Develop a budget and stick to it – If you can do this one thing, you’ll avoid many financial troubles.  Take your net income (what you earn, less taxes) and subtract your expenses (from food, shelter, clothing, to entertainment, saving and giving).  As a guide, housing, food, and auto expenses need to be 65% or less of your net income to balance your budget.
• Keep spending low – Watch your spending!  “The biggest financial mistake I see is a consumptive lifestyle – simply spending more than you can afford,” notes financial expert Ron Blue, author of Master Your Money.
• Avoid debt (or get out immediately) – If you have debts, plan to pay them off as soon as possible – and remain debt-free.  Financial expert Dave Ramsey recommends a “debt snowball”.  This method reallocates payments for retired debts to existing loans until the payments become large enough to consume all debts.
• Put off buying a car – The cheapest car you’ll ever own is the one you’re driving now.  Yes, it might cost more to maintain, but it beats high car payments. If you must buy, choose a good used car.  Check your selection with a good mechanic before you purchase.
• Save – Set aside a percentage from each paycheck to save for future needs or desires like a new (used) car, further education, vacations, etc.  And it’s never too early to begin saving for retirement.  Check first with your employer’s 401k plan.  If they match funds, you’ll get a tax break this year, and the earnings grow tax-deferred.  In addition, experts suggest you set aside 3-6 months living expenses as a regular reserve in case of a loss of income.
• Prepare for misfortunes – Car, medical, and homeowner’s (or renter’s) insurance are musts.  Check with friends or relatives for references on reliable companies and review your policies annually to get the best rates and coverage.
• Give – Allocate some money from each paycheck to your local church or charity.  Giving not only benefits others, but it also helps keep financial things in perspective. 

Congratulations!  With these tips you’ll get a great start on managing your money for life.

Update: Time to link to the Beltway Traffic Jam.