31 Days to Fix Your Finances - Day 3

Yesterday, we made up a list of ten goals that derive directly from our values. Now (and for some of you, finally), we start talking a little bit about numbers.

Let’s get right down to business. Take ten sheets of paper and at the top of each sheet, write each goal you defined yesterday. On each of these sheets, you’re going to define some specific milestones for each of your goals.

For each of the short term goals, I want you to define five specific actions:
> I will do this in the next three days.
> I will do this in the next week.
> I will do this every week.
> I will do this in the next month.
> I will do this in the next six months.

Some of these will be information gathering and have no cost. Others will actually require some investment, usually the one that happens every week.

For example, yesterday I mentioned that one of my short term goals is doubling the value of my son’s 529 college savings plan in the next year. Here’s what my five specific actions look like:
> In the next three days, I will get the balance of my son’s 529 account, along with the data on the annual returns of each of the investment options in the plan.
> In the next week, I will determine how much I need to invest in the coming year to double the account balance and also estimate what the return for the coming year might be.
> Every week, I will invest 2% of what I calculate is needed to double the balance in the coming year.
> In the next month, I will evaluate all of the different funds available for my son’s 529 and choose a fund that I feel is the best match for him.
> In six months, I will check in on the account and see how he’s doing for the year, see how the various funds are doing for the year, and reconsider my investment choices.

Generally, the model outlined above works well: gather information in the next three days, plan a baseline amount you’ll need in the next week, save an appropriate amount every week, investigate the details in the next month, and review things in six months. If you do this, you’ll almost always meet your annual goal.

Now, for each of the long term goals, I want you to define five specific actions:
> I will do this in the next week.
> I will do this in the next month.
> I will do this every month.
> I will do this in the next year.
> I will do this in three years.

Some of these will be information gathering and have no cost. Others will actually require some investment, usually the one that happens every month.

For example, yesterday I mentioned that one of my long term goals is completely owning a wonderful house in twenty five years. Here’s what my five specific actions look like:
> In the next week, I will gather information a selection of potential houses that reflect what I plan to buy immediately and what I plan to buy in fifteen years.
> In the next month, I will calculate how much I will have to spend per month on mortgage, insurance, and taxes on the lower-end house, and also calculate how much the nice house will cost in fifteen years.
> Each month, I will save 25% of a mortgage payment for helping me get ahead on payments when I purchase the first home. This will enable me to “trade up” more effectively when the time comes.
> In the next year, I will buy a home that is in the lower house bracket and switch the extra 25% from a savings account to a direct payment on the mortgage.
> In three years, I will sit down and re-evaluate what my “dream home” is like and refactor my plan accordingly.

By doing this, I break down something that seems far-off (a beautiful big house to retire in and for my children and grandchildren to enjoy) into smaller pieces that I can do right now. I also find it useful to find an image that captures a long-term goal and place it in a place that I’ll see regularly. This way, the end goal is always in sight; it’s a constant visual reminder of where I need to go.

Now that you’ve defined these plans, you have specific things that you’re saving for and spending your money on that are in line with your values and goals. Whenever you go to spend money, pause for a second and think about your values, goals, and plans, and ask yourself if that money expenditure is really helping you reach your goals or is really reflecting your values.

You should strongly consider making up a schedule that combines all of your plans together. What will you do in the next week? What will you do every week? What will you do in the next month? What will you do every month? A schedule that keeps you following your plans will help with this.

One week from now, you should have some numbers that will show you what you need to be doing to reach your goals. The amounts might trouble you, but don’t worry. In one week, we’ll take these numbers and use some techniques to carefully evaluate what they really mean - and how you can make them count for more than you think.

Before I did this exercise, I often found that, even though I often realized it wasn’t a good idea to spend, I would still spend money anyway. Why? I didn’t have any sort of concrete plan for what to do with my money, especially not one that was larger than saving for a new gadget or toy. Now, whenever I’m tempted to spend money in a frivolous way, I think about what’s important to me, and it directly connects to a plan for spending my money.

Tomorrow, we’ll start looking at your money.

31 Days to Fix Your Finances - Day 2

Yesterday, we defined five main values that define our life. These values are what we live for; they drive us to work and generally guide us in how we spend our lives.

Yet so often we find ourselves betraying these values (everyone does this at some point), and it is when we choose to betray these values that we find ourselves in financial trouble instead of in financial stability. We either spend money on things that don’t match or even oppose our values, or we spend money on our values but in a misguided fashion.

Why do we do this? The biggest reason that we spend money out of accord with our values is that we don’t sit down and define our goals. Goals are merely the specific embodiment of our values - tangible milestones that are clear indications of lives lived in tune with our values.

You’re probably thinking to yourself, “I have values and goals already - this is a waste of my time.” Before you log off, I want to ask you one simple question: first, do your goals actually match the values in your life? Let me give you an example. One of my major short term goals is buying a house, something many of you can identify with. This is a goal related to one of my primary values, my family. Thus, I’m buying a house for my family. Understanding this connection lets me clearly define what type of house I’m looking for (it doesn’t need to be shiny and new, but it does need to have space for my son and my future children - a large kitchen, a family room, and four bedrooms are what I seek). Thus, every time I think about the home purchase, I realize that I’m working for my family.

If you can honestly match ever single goal in your life with one of your central values, you’re more well-adjusted than almost everyone in the world. The truth is that we all have central values without any associated goals, goals without any associated values, and goal-value pairings that are really unclear and muddled. People that are financially successful find ways to minimize all of these.

How do they do this? They define all of their goals based directly on their personal values, and they live their lives to meet these goals above everything else. If they go to spend money, they ask themselves whether that money directly leads them to one of their goals. If the answer is no, they don’t spend the money. Thus, when they actually spend money, it doesn’t fill them with guilt. They can immediately see how that money is going to realize their goals, which are fundamentally connected to the values that define their life.

How do we get there? Let’s take an hour, sit down, and define ten goals in our life. If you went through yesterday’s exercise, you will already have a list of the five values that are central to your life. Now, we take these values and use them to define ten concrete goals.First, forget what you believe your goals are right now. You might end up coming back to these goals during this process or you might not. The intent is to define your goals in direct harmony with your core values.

For each value on your list, ask yourself where you want to be in terms of that value in twenty five years. I mentioned that one of my main values is my family (specifically my children), so in twenty five years, I would like to have two college-educated children starting stable lives on their own, and perhaps a third in college.

Now, turn that dream into a goal. For my children to be able to start out their own lives on their own, I want to minimize their college debts and set a good example for their lives. So, my goal is to be able to pay for at least part of their education.

You might be tempted to start writing a plan for that goal right now, but don’t. We’ll get to that later. Right now, we just want to make a list of long-term goals that match your values.For those curious, here are my goals for twenty five years down the road:

• I want to be able to pay for a significant part of my child’s college education
• I want to have a fully paid for house big enough for my grandchildren to visit and feel comfortable
• I want to be able to travel the world with my wife
• I want to have three books in print
• I want to be able to live off the interest of my non-retirement investments

Once you’ve made the long term goals, go through your values again and ask yourself where you want to be in terms of that value in one year. Just like before, figure out where you would like to be in relation to that value in one year and don’t worry about defining a plan for that goal.

Again, here are my one year goals:

• I want to double the value of my son’s 529 college savings plan
• I want to buy and move into a house
• I want to select and begin learning a foreign language
• I want to quadruple the readership of The Simple Dollar
• I want to reach $10K in my non-retirement mutual fund account

Now that you have these goals, we’re ready to begin defining some plans … but let’s sleep on it first.