Today is something of a culmination of the first part of the “31 Days” program: it basically ties up all of the goal-setting and evaluation to date into a single document. This document isn’t a set of rules to live by, but a financial picture of who you are and where you can go. Sound exciting? Let’s get started.
Take out a blank sheet of paper, the “time budget” you prepared yesterday, and the approximate hourly wage you calculated earlier. We’re going to use these two pieces to assemble a true budget.
What do I mean by “true” budget? Most of the time when people prepare a budget, it has no connection to their life experiences and their goals. The truth of the matter is that every person is unique, thus every budget should be unique. People fail at following “traditional” budgets because they aren’t aligned to an individual’s lifestyle, goals, and dreams.
The budget you’re about to complete is a “true” budget: you’ve built it yourself, composing it out of your daily life, your hopes for the future, and your dreams for the rest of your life. Most “traditional” budgets expect you to change your life for it; a “true” budget asks only that you don’t forget to plan for your dreams while living your own life.
On the blank sheet of paper, make three columns: one for each budgeted item, one for hours, and one for a dollar amount. We’re going to prepare a monthly budget here, so take each item from the “time budget” prepared yesterday, then multiply that weekly hour number, multiply it by 52 (for the number of weeks in a year) and then divide that by 12 (for the number of months in a year). This is the number of hours of work time in an average month that you’ll devote to each element on your budget.
Now, for the final piece: multiply each hourly amount by your true hourly wage and enter it. This is exactly how much money you’re alloting to spend on each category during the month. For regular bills, this number should be very close to what your monthly bill is; for your extra debt payment and your goals, this is how much you’re going to be setting aside each month for these. The total should add up to a number that is less than your monthly take home salary (remember, you have some extra that you bring home that you use for job-related expenses).
When I first did this, I read through the items and actually shivered. Why? It was the most accurate picture of my financial life that I’d ever seen - and it made it clear to me where I was doing things right and doing things wrong. I had never felt such a connection between a sheet of paper and my life as a whole.
What will it mean for you? Spend some time reading over the sheet carefully and thinking about it. There are countless different conclusions you may draw: maybe you feel that this whole thing is spot-on and is putting you in a position to live your dreams. Maybe you realize how much of your life is spent in the “now” and how little you’re actually spending for the big things tomorrow. Maybe you believed you were planning well for the future, but you see some huge areas for improvement. It’s up to you to figure this out.
Tomorrow, we’ll discuss how to keep track of this budget each month, starting by ensuring that you’re meeting your goals.
Monday, November 24, 2008
Sunday, November 23, 2008
31 Days to Fix Your Finances - Day 11
Yesterday, we figured out exactly how much of your money - and your time - you spend with basic living expenses. From this, we determined what was left - the amount that we can use to pay off our debts and build our dreams.
A great rule of thumb applies here: you can reach your short term goals with debts, but you can’t reach your long term goals with debts. In other words, focus on your short term goals and for your long term ones, pay off your debts first.
Why do it this way? I call it the “dream” factor. Paying off debts isn’t romantic at all, but dreaming about the great things you can do in the future is romantic. Since you’ve defined five short term goals (and plans to execute them) that match your core values and also line up with your long term values, every step towards these short term goals is a step toward success - and living your dreams.
Sit down with a piece of paper and make a list of your five short term goals along with a list of all of your debts; you should already have these ready to go. Every step you take towards your short term goals should be matched with a step towards your long term goals, so you’re going to divide up your money and time investment equally between your goals and your debts.
Now, take the amount of hours you have “left over” after yesterday’s calculations and divide that in half. You’re going to spend half of them on debts and half of them on your short term goals.
It’s important to remember here that these debt payments are extra debt payments; in other words, you’re going to pay an extra amount each month to get the burden of debt off of your shoulders so you can walk freely and confidently into your future.
Why am I dealing with “hours” instead of dollars? For many people, dollars are an abstraction: they have a hard time directly associating money with the work that they do. Money comes in, money goes out, and that’s life. The truth of the matter is that every dollar we make is the result of some amount of time spent doing something for someone else. Time is something we all understand from our earliest days, and these hours are merely something much more tangible to hold onto.
How do I decide which debts to pay first? There is a lot of merit in the “debt snowball” concept, which advocates paying off the smallest debt first. For now, put the entire amount you have allocated for debts next to the smallest debt balance. We’ll worry about dollar amounts tomorrow.
What if I have no debts? If you’re lucky enough to be debt free, you can invest all of your extra money towards your goals. Take that half that you would have been using to pay off debts and apply them to your long-term goals as you see fit.
What about my short term goals? You can probably determine for yourself how to split things up among your short term goals. Look at your plans and decide which ones need more of your working time to make them come true, and which ones need less. Write them down.
Once you’ve figured this out, assemble a new “big picture“ using the one you created three days ago, along with the individual expenses (and the hours you spend on each of them) yesterday. Add in the hour expenditures you created today (including the ones with 0 hours assigned to them), and do a final check to make sure the hours add up to what you figured that you actually work each week.
Sit back and look at this sheet. In some ways, it’s a budget, but it’s something more than that: it’s actually a picture of you. This is what you work for each week, hour by hour. Maybe you work three hours a week so that you can keep your cable turned on, but you only work an hour a week towards a college education for your children. Do you feel comfortable or happy with this? Whether you do or don’t, there are so many things here to think about in terms of how you choose to spend your time.
Tomorrow, we’ll take this “time” budget and convert it all into real dollars - and begin the process of converting all this planning into some real action.
A great rule of thumb applies here: you can reach your short term goals with debts, but you can’t reach your long term goals with debts. In other words, focus on your short term goals and for your long term ones, pay off your debts first.
Why do it this way? I call it the “dream” factor. Paying off debts isn’t romantic at all, but dreaming about the great things you can do in the future is romantic. Since you’ve defined five short term goals (and plans to execute them) that match your core values and also line up with your long term values, every step towards these short term goals is a step toward success - and living your dreams.
Sit down with a piece of paper and make a list of your five short term goals along with a list of all of your debts; you should already have these ready to go. Every step you take towards your short term goals should be matched with a step towards your long term goals, so you’re going to divide up your money and time investment equally between your goals and your debts.
Now, take the amount of hours you have “left over” after yesterday’s calculations and divide that in half. You’re going to spend half of them on debts and half of them on your short term goals.
It’s important to remember here that these debt payments are extra debt payments; in other words, you’re going to pay an extra amount each month to get the burden of debt off of your shoulders so you can walk freely and confidently into your future.
Why am I dealing with “hours” instead of dollars? For many people, dollars are an abstraction: they have a hard time directly associating money with the work that they do. Money comes in, money goes out, and that’s life. The truth of the matter is that every dollar we make is the result of some amount of time spent doing something for someone else. Time is something we all understand from our earliest days, and these hours are merely something much more tangible to hold onto.
How do I decide which debts to pay first? There is a lot of merit in the “debt snowball” concept, which advocates paying off the smallest debt first. For now, put the entire amount you have allocated for debts next to the smallest debt balance. We’ll worry about dollar amounts tomorrow.
What if I have no debts? If you’re lucky enough to be debt free, you can invest all of your extra money towards your goals. Take that half that you would have been using to pay off debts and apply them to your long-term goals as you see fit.
What about my short term goals? You can probably determine for yourself how to split things up among your short term goals. Look at your plans and decide which ones need more of your working time to make them come true, and which ones need less. Write them down.
Once you’ve figured this out, assemble a new “big picture“ using the one you created three days ago, along with the individual expenses (and the hours you spend on each of them) yesterday. Add in the hour expenditures you created today (including the ones with 0 hours assigned to them), and do a final check to make sure the hours add up to what you figured that you actually work each week.
Sit back and look at this sheet. In some ways, it’s a budget, but it’s something more than that: it’s actually a picture of you. This is what you work for each week, hour by hour. Maybe you work three hours a week so that you can keep your cable turned on, but you only work an hour a week towards a college education for your children. Do you feel comfortable or happy with this? Whether you do or don’t, there are so many things here to think about in terms of how you choose to spend your time.
Tomorrow, we’ll take this “time” budget and convert it all into real dollars - and begin the process of converting all this planning into some real action.
31 Days to Fix Your Finances - Day 10
Yesterday, we took a look at our living expenses and tried to find places where we could easily make some reductions. The goal was not to make hard cuts, but to find ways to reduce spending that fit within our lifestyles.
Today, we want to see how this revised personal expense balance fits within our overall life plan. Pull out the overall plan you built a few days ago along with the estimates you calculated yesterday. You’ll notice that your older plan is calculated in terms of hours, which is a great way to see what your expenses are really costing you, so let’s do the same conversion for your expenses.
Take out a fresh sheet of paper and make three columns on it, with the left one taking up about half of the page and the two on the right taking up about a quarter of the page each. In the first column, write each expense down from your sheet from yesterday, then in the second column, write the amount per week that you calculated yesterday. If you skipped that part, just take your annual estimate for each item and divide it by 52.
Got that? Now, in the third column, divide each second column number by the true hourly wage that you calculated earlier. This is the number of hours that you spend working each week to pay for that expense.
For me, this exercise really opened my eyes. I found lots of places where I felt almost guilty for what I was doing - things such as working eleven hours a week just for my entertainment expenses. I was working a lot every week just for silly little things, when that time could be spent working for something bigger, something that reaffirms my life.
Once you’ve converted all of these dollar amounts to hours, total them up. Unless you have some major spending problems, this total should be less than your total hours you spend working in a given week (which you figured up earlier in the week). Ideally, it’s around 60% of the total hours in a week (mine is about 55% right now, but when I first did this, it was at about 92%), but you don’t really need to worry unless it’s pushing 95% or so. If it’s over 100%, you need to make some cuts in your spending or you will never get ahead, as your spending will grow as your income grows.
At this point, it might be useful to start a “real” balance sheet. Take the overall plan and recopy it with the same items as before, but don’t move the numbers over. Instead, just put in the total number of hours in a week and the total number of hours you spend on living expenses. The difference between the two is what you will use to begin building your future.
What if I’m left with only a 10% sliver? How can I “build my dreams” with that? First of all, even a small amount of money can get you started and, with the power of compound interest, can build up quite well over time. Second, this process of evaluation is not a one-time process. It’s useful to go through this on an annual basis, just to re-evaluate where you’re at and where you’re headed. Once you get started and watch things begin to build to fulfill your dreams, the feeling is often so powerful that you find new places to trim your spending - you pay off debts, cut down on your nonessential purchases, and so on.
Tomorrow, we’ll look at what to do with that remaining fraction.
Today, we want to see how this revised personal expense balance fits within our overall life plan. Pull out the overall plan you built a few days ago along with the estimates you calculated yesterday. You’ll notice that your older plan is calculated in terms of hours, which is a great way to see what your expenses are really costing you, so let’s do the same conversion for your expenses.
Take out a fresh sheet of paper and make three columns on it, with the left one taking up about half of the page and the two on the right taking up about a quarter of the page each. In the first column, write each expense down from your sheet from yesterday, then in the second column, write the amount per week that you calculated yesterday. If you skipped that part, just take your annual estimate for each item and divide it by 52.
Got that? Now, in the third column, divide each second column number by the true hourly wage that you calculated earlier. This is the number of hours that you spend working each week to pay for that expense.
For me, this exercise really opened my eyes. I found lots of places where I felt almost guilty for what I was doing - things such as working eleven hours a week just for my entertainment expenses. I was working a lot every week just for silly little things, when that time could be spent working for something bigger, something that reaffirms my life.
Once you’ve converted all of these dollar amounts to hours, total them up. Unless you have some major spending problems, this total should be less than your total hours you spend working in a given week (which you figured up earlier in the week). Ideally, it’s around 60% of the total hours in a week (mine is about 55% right now, but when I first did this, it was at about 92%), but you don’t really need to worry unless it’s pushing 95% or so. If it’s over 100%, you need to make some cuts in your spending or you will never get ahead, as your spending will grow as your income grows.
At this point, it might be useful to start a “real” balance sheet. Take the overall plan and recopy it with the same items as before, but don’t move the numbers over. Instead, just put in the total number of hours in a week and the total number of hours you spend on living expenses. The difference between the two is what you will use to begin building your future.
What if I’m left with only a 10% sliver? How can I “build my dreams” with that? First of all, even a small amount of money can get you started and, with the power of compound interest, can build up quite well over time. Second, this process of evaluation is not a one-time process. It’s useful to go through this on an annual basis, just to re-evaluate where you’re at and where you’re headed. Once you get started and watch things begin to build to fulfill your dreams, the feeling is often so powerful that you find new places to trim your spending - you pay off debts, cut down on your nonessential purchases, and so on.
Tomorrow, we’ll look at what to do with that remaining fraction.
31 Days to Fix Your Finances - Day 9
Now that you’ve built a list of your non-work expenses, you’ve probably realized that you do spend a lot of money on frivolous things. Don’t worry, I’m not going to say “STOP BUYING FRIVOLOUS THINGS!” Everyone knows that frivolous expenses are the things that eat away at your long-term plans - and everyone keeps buying them anyway.
Instead, you should evaluate the areas where you feel comfortable cutting down. In some ways, it is like a diet: if you diet too strongly, it won’t be long before you’re laying prostrate on the couch, Sara Lee poundcake in one hand and a 20 ounce bottle of Mountain Dew in the other. Instead, dieting works when you make little choices throughout the day, like not super sizing a meal or choosing to take the stairs.
Let’s get started. Take out that list of expenses that you made yesterday along with a blank sheet of paper. What you’re going to do is go through the entire list and think about each item a little bit, then note how much you think you can save per week on that item.
Here’s what you do. Copy the first item to the new piece of paper, then close your eyes for one minute and think about that item. Do you spend too much on it? Is there a way you could easily cut down on that expense without really feeling the crunch? Could you eliminate or drastically reduce that expense without feeling too bad about it? Keep in mind why you’re doing this - you’re trying to find money with which you can chase your dreams.
Here are ten quick suggestions about how to cut various kinds of expenses with minimal impact; if you want more, spend some time hanging around The Simple Dollar and you’ll find plenty.
> Conserve energy by installing energy efficient items like CFLs, programmable thermostats, and intelligent power strips.
> Buy fewer books by spending more time at your local library. Whenever I have a bad desire to go to the bookstore, I just consciously go to the library instead almost all of the time.
> Buy less music by listening to music in your collection that you’ve never spent the time to appreciate. Instead of buying a new CD, find an older one that you only listened to once or twice and put away.
> Buy fewer clothes by selecting items that go well with much of the rest of your wardrobe. A modular wardrobe creates the appearance of a lot of clothes without the need for a large clothing bill.
> Eat out less by buying a good cookbook that starts out at a beginner’s level and stocking your kitchen well.
> Reduce insurance by calling your insurance carrier and looking at raising your deductible.
> Reduce your credit card payments by calling your credit card company and requesting a reduction in your interest rate.
> Reduce your bank fees by looking into no-fee or low-fee options at your bank - or at other banks.
> Reduce your cable bill by eliminating unwatched premium channels or looking at other basic package options - or even consider eliminating it altogether.
> Reduce your car payments by ending the leasing cycle and buying late model used cars instead.
For each item that you decide you can effectively reduce the cost of, estimate realistically how much you might save in a year doing this. Estimate your savings low; you’re always better off with flexibility.
Once you’ve done these estimates, rewrite your overall cost list with the spending reductions calculated in, then divide each element by 52 to see how much that is per week. You should see a decent reduction in your living expenses. What will that translate into? More money that you can spend on your dreams - and fewer years until you get there.
Tomorrow, we’ll see how much time we’ve saved - and what that means for the bigger picture.
Instead, you should evaluate the areas where you feel comfortable cutting down. In some ways, it is like a diet: if you diet too strongly, it won’t be long before you’re laying prostrate on the couch, Sara Lee poundcake in one hand and a 20 ounce bottle of Mountain Dew in the other. Instead, dieting works when you make little choices throughout the day, like not super sizing a meal or choosing to take the stairs.
Let’s get started. Take out that list of expenses that you made yesterday along with a blank sheet of paper. What you’re going to do is go through the entire list and think about each item a little bit, then note how much you think you can save per week on that item.
Here’s what you do. Copy the first item to the new piece of paper, then close your eyes for one minute and think about that item. Do you spend too much on it? Is there a way you could easily cut down on that expense without really feeling the crunch? Could you eliminate or drastically reduce that expense without feeling too bad about it? Keep in mind why you’re doing this - you’re trying to find money with which you can chase your dreams.
Here are ten quick suggestions about how to cut various kinds of expenses with minimal impact; if you want more, spend some time hanging around The Simple Dollar and you’ll find plenty.
> Conserve energy by installing energy efficient items like CFLs, programmable thermostats, and intelligent power strips.
> Buy fewer books by spending more time at your local library. Whenever I have a bad desire to go to the bookstore, I just consciously go to the library instead almost all of the time.
> Buy less music by listening to music in your collection that you’ve never spent the time to appreciate. Instead of buying a new CD, find an older one that you only listened to once or twice and put away.
> Buy fewer clothes by selecting items that go well with much of the rest of your wardrobe. A modular wardrobe creates the appearance of a lot of clothes without the need for a large clothing bill.
> Eat out less by buying a good cookbook that starts out at a beginner’s level and stocking your kitchen well.
> Reduce insurance by calling your insurance carrier and looking at raising your deductible.
> Reduce your credit card payments by calling your credit card company and requesting a reduction in your interest rate.
> Reduce your bank fees by looking into no-fee or low-fee options at your bank - or at other banks.
> Reduce your cable bill by eliminating unwatched premium channels or looking at other basic package options - or even consider eliminating it altogether.
> Reduce your car payments by ending the leasing cycle and buying late model used cars instead.
For each item that you decide you can effectively reduce the cost of, estimate realistically how much you might save in a year doing this. Estimate your savings low; you’re always better off with flexibility.
Once you’ve done these estimates, rewrite your overall cost list with the spending reductions calculated in, then divide each element by 52 to see how much that is per week. You should see a decent reduction in your living expenses. What will that translate into? More money that you can spend on your dreams - and fewer years until you get there.
Tomorrow, we’ll see how much time we’ve saved - and what that means for the bigger picture.
Thursday, November 20, 2008
31 Days to Fix Your Finances - Day 8
Yesterday, we worked out exactly how the hours you spend at work break down into three areas: your living expenses, your debts, and your dreams. Since this was only a thumbnail sketch, today we’re going to look more carefully at the breakdown in living expenses.
Let’s get started. Take out a sheet of paper and start another list. This time, we’re listing every expense you have in a given year that do not directly relate to your employment. We’re not going to worry about amounts yet, just a list of all of the things that we spend money on in a given month. Here’s a sampling of the expenses that I listed when I did this exercise:
> Rent
> Electricity
> Telephone
> Cable
> Student loans - minimum payment
> Health Insurance
> Car Insurance
> Clothing
> Food
> Entertainment - Books
> Entertainment - Music
Spend some time thinking about this. What do you spend money on each year? House insurance? Christmas gifts? Household items? Car repair? Home decor? Toiletries? Just keep listing things as you think of them. It might be useful to leave this list out somewhere you can see it and add things as you think of them. Don’t worry about amounts yet; we’ll worry about those in a bit.
Now, let’s figure how much you spend on each item in a given year. For the amounts you know on a shorter timeframe, multiply them out. For amounts you don’t know, use some estimation over a shorter timeframe (and estimate on the high side) and multiply it out. The point is to get a rough thumbnail sketch of what you spend in a year on various things. Note that we’re not making any value judgements yet; we’re merely trying to see what’s there.
This will take some time, and during that time, think about each of these expenses a little. Do they bring you joy when you look at them now? Do they really feel essential to your life, or when you think about them, do you feel like you’d be better off if you spent money on the list of goals you created earlier this month?
When you’re done with this list, total up everything. Then calculate 10% of that and add it to the bottom, labeled “incidentals.” Add that into the total. That number is roughly what you spend on your living expenses in a given year. You can divide it by 12 to see how much it is a month, then divide it by 52 to see how much it is in a week.
Now, let’s see how many hours you work in a week just to meet these expenses. Take the weekly amount you just calculated and divide it by your true hourly wage. A typical American usually winds up with a rather large number here.
Spend some time meditating on this - you spend that many hours a week at work just for the expenses you listed. What does that mean? What could you do with your life - with your future - if you trimmed away some of the extra fat? Your debt could be gone - and you could be working towards a better and brighter future for yourself.
Let’s get started. Take out a sheet of paper and start another list. This time, we’re listing every expense you have in a given year that do not directly relate to your employment. We’re not going to worry about amounts yet, just a list of all of the things that we spend money on in a given month. Here’s a sampling of the expenses that I listed when I did this exercise:
> Rent
> Electricity
> Telephone
> Cable
> Student loans - minimum payment
> Health Insurance
> Car Insurance
> Clothing
> Food
> Entertainment - Books
> Entertainment - Music
Spend some time thinking about this. What do you spend money on each year? House insurance? Christmas gifts? Household items? Car repair? Home decor? Toiletries? Just keep listing things as you think of them. It might be useful to leave this list out somewhere you can see it and add things as you think of them. Don’t worry about amounts yet; we’ll worry about those in a bit.
Now, let’s figure how much you spend on each item in a given year. For the amounts you know on a shorter timeframe, multiply them out. For amounts you don’t know, use some estimation over a shorter timeframe (and estimate on the high side) and multiply it out. The point is to get a rough thumbnail sketch of what you spend in a year on various things. Note that we’re not making any value judgements yet; we’re merely trying to see what’s there.
This will take some time, and during that time, think about each of these expenses a little. Do they bring you joy when you look at them now? Do they really feel essential to your life, or when you think about them, do you feel like you’d be better off if you spent money on the list of goals you created earlier this month?
When you’re done with this list, total up everything. Then calculate 10% of that and add it to the bottom, labeled “incidentals.” Add that into the total. That number is roughly what you spend on your living expenses in a given year. You can divide it by 12 to see how much it is a month, then divide it by 52 to see how much it is in a week.
Now, let’s see how many hours you work in a week just to meet these expenses. Take the weekly amount you just calculated and divide it by your true hourly wage. A typical American usually winds up with a rather large number here.
Spend some time meditating on this - you spend that many hours a week at work just for the expenses you listed. What does that mean? What could you do with your life - with your future - if you trimmed away some of the extra fat? Your debt could be gone - and you could be working towards a better and brighter future for yourself.
Wednesday, November 19, 2008
31 Days to Fix Your Finances - Day 7
During this past week, we identified our primary values and used these to create clear goals and plans that derive from these values. Then, we spent some time discovering what our work time is actually worth. Today, we’re going to combine these two together.
If you’ve been following the plan, you’re probably working on the numbers for your plans right now. We won’t evaluate them yet (after all, you’ve got a few days to go before you have some real numbers), but you should realize that you’re going to have to save some money to meet these goals.
The big secret, though, is the realization that you can in fact work for your dreams instead of working just to get by. Yesterday, we calculated our true hourly wage, so you know how much you’re making for each hour you’re involved with work-related tasks. Let’s transform this hourly wage into something that has more meaning.
Take out a new sheet of paper and list your ten goals on it. Today, we’re going to make a framework that will enable you to go to work with renewed vigor, because you’ll see the connection directly between your time at work and your dreams.
Under these goals, make a list of each of your debts as well. Part of the journey to your dreams is paying off these debts, so we want to put them each on the list, too.
Under that, add one last item: living expenses. Obviously, even as you work towards your dreams, you’ll still need to cover your daily expenses, such as electricity, food, water, and whatever else is fundamentally important to you.
At the very bottom, write TOTAL and then over on the far right, write the total amount of hours you work in a week that you calculated the day before yesterday.
What we’re going to do is see how many hours we can spend at work each week on each of these items. Once we have this first draft written, you can use it as a life baseline until we refine it later on in the month.
So let’s get started! First thing, until you’re sure how your life will be rebalanced, include 60% of the total hours under the item “living expenses.” For example, let’s say your total hours for a week is 80. You should then include 48 hours next to the living expenses. This may need to be more; we’ll evaluate it more carefully in the next few days.
Now, let’s handle the debts. If you have debts, you should spend 25% of your hours on paying off the debts. For example, if you have 80 hours, you should figure that 20 of them should be used on paying off debts. Note that this is extra debt payments; your basic minimum debt payments are included in the living expenses. When (or if) you have no debts, all of the time going into your debts can go straight to your dreams.
The remaining 15% should be assigned in equal pieces to your dreams. I had 12 hours left, so I gave 1.2 hours to each of my dreams.
So, what’s the point? There are two points. First, if you multiply your hourly rate by the amount assigned to each element, that’s how much you can spend each week on that element. If you’re thinking that this is something like a budget, you’re right in a way, but rather than a list of month-to-month expenses that demand things of you, this is a “dream budget” - a device that lets you follow your goals to achieve your dreams.
Second, it lets you find real goals in your work. This is the truly powerful part of this. So often, we wake up in the morning and trudge into work wishing we were doing anything else. If you realize that some portion of your day is spent working specifically for your dream, it becomes easier. For me, the hardest part of a day is getting ready in the morning; I’d much rather sit down with a cup of joe and check my email than take a shower, get dressed, and take my son to daycare. So for me, the first hour of a given day is an hour I’m working towards one of my goals. While I’m showering or out in the truck on the way to daycare, I remind myself over and over that I’m working solely for the purpose of one of my dreams. I imagine that dream and somehow I feel better about it.
There are two vital lessons that this exercise teaches. First, the various aspects of your life are all connected: your work, your pay, your dreams, and your goals. They’re all tied together in one big picture. Many people often compartmentalize these things and fail to see how they all relate to one another.
Second, it reveals that you can directly connect the work you do every day to your dreams. This is the real power of the exercise, I think. Every single day you go into work, you can tie some of your least favorite tasks directly towards achieving a life goal. It can be the parts that you like the least, or it can be the commute. Just pick a portion of it and, while you’re doing it, remind yourself that you’re doing this action so that you can live in that beautiful house or so that you can travel to Italy with your wife.
Tomorrow, we’ll start breaking this picture down piece by piece, starting with the living expenses. The goal is to create a picture of your life, with the living expenses as merely the frame around a beautiful picture of your dreams.
If you’ve been following the plan, you’re probably working on the numbers for your plans right now. We won’t evaluate them yet (after all, you’ve got a few days to go before you have some real numbers), but you should realize that you’re going to have to save some money to meet these goals.
The big secret, though, is the realization that you can in fact work for your dreams instead of working just to get by. Yesterday, we calculated our true hourly wage, so you know how much you’re making for each hour you’re involved with work-related tasks. Let’s transform this hourly wage into something that has more meaning.
Take out a new sheet of paper and list your ten goals on it. Today, we’re going to make a framework that will enable you to go to work with renewed vigor, because you’ll see the connection directly between your time at work and your dreams.
Under these goals, make a list of each of your debts as well. Part of the journey to your dreams is paying off these debts, so we want to put them each on the list, too.
Under that, add one last item: living expenses. Obviously, even as you work towards your dreams, you’ll still need to cover your daily expenses, such as electricity, food, water, and whatever else is fundamentally important to you.
At the very bottom, write TOTAL and then over on the far right, write the total amount of hours you work in a week that you calculated the day before yesterday.
What we’re going to do is see how many hours we can spend at work each week on each of these items. Once we have this first draft written, you can use it as a life baseline until we refine it later on in the month.
So let’s get started! First thing, until you’re sure how your life will be rebalanced, include 60% of the total hours under the item “living expenses.” For example, let’s say your total hours for a week is 80. You should then include 48 hours next to the living expenses. This may need to be more; we’ll evaluate it more carefully in the next few days.
Now, let’s handle the debts. If you have debts, you should spend 25% of your hours on paying off the debts. For example, if you have 80 hours, you should figure that 20 of them should be used on paying off debts. Note that this is extra debt payments; your basic minimum debt payments are included in the living expenses. When (or if) you have no debts, all of the time going into your debts can go straight to your dreams.
The remaining 15% should be assigned in equal pieces to your dreams. I had 12 hours left, so I gave 1.2 hours to each of my dreams.
So, what’s the point? There are two points. First, if you multiply your hourly rate by the amount assigned to each element, that’s how much you can spend each week on that element. If you’re thinking that this is something like a budget, you’re right in a way, but rather than a list of month-to-month expenses that demand things of you, this is a “dream budget” - a device that lets you follow your goals to achieve your dreams.
Second, it lets you find real goals in your work. This is the truly powerful part of this. So often, we wake up in the morning and trudge into work wishing we were doing anything else. If you realize that some portion of your day is spent working specifically for your dream, it becomes easier. For me, the hardest part of a day is getting ready in the morning; I’d much rather sit down with a cup of joe and check my email than take a shower, get dressed, and take my son to daycare. So for me, the first hour of a given day is an hour I’m working towards one of my goals. While I’m showering or out in the truck on the way to daycare, I remind myself over and over that I’m working solely for the purpose of one of my dreams. I imagine that dream and somehow I feel better about it.
There are two vital lessons that this exercise teaches. First, the various aspects of your life are all connected: your work, your pay, your dreams, and your goals. They’re all tied together in one big picture. Many people often compartmentalize these things and fail to see how they all relate to one another.
Second, it reveals that you can directly connect the work you do every day to your dreams. This is the real power of the exercise, I think. Every single day you go into work, you can tie some of your least favorite tasks directly towards achieving a life goal. It can be the parts that you like the least, or it can be the commute. Just pick a portion of it and, while you’re doing it, remind yourself that you’re doing this action so that you can live in that beautiful house or so that you can travel to Italy with your wife.
Tomorrow, we’ll start breaking this picture down piece by piece, starting with the living expenses. The goal is to create a picture of your life, with the living expenses as merely the frame around a beautiful picture of your dreams.
Tuesday, November 18, 2008
31 Days to Fix Your Finances - Day 6
Two days ago, we determined your true annual salary. Yesterday, we determined the number of hours you truly work in a year. Today, we combine the two numbers - and consider what exactly that means about you, your employment, and your time usage.
Are you ready for the big calculation? Take the total salary you calculated two days ago and divide it by the total hours you calculated yesterday. You’re going to be left with a number that you’re going to have to ponder quite a bit.
This number is how much you actually bring home each hour you do something for your employment. For some of you, this number is going to be shockingly low. There are many seemingly decent-paying jobs that wind up with an hourly wage below minimum wage when looked at in this fashion. For example, if you come up with an hourly wage below minimum wage and you spend 60 hours a week involved in work activities, you might actually be better off working at Home Depot with a much lower responsibility and stress threshold.
Many of you might balk at the Home Depot idea, but hear me out. A relative (and friend) of mine walked away from a situation where she was making between $40,000 and $50,000 a year to take a job working the floor at a local Home Depot for $9 an hour. She worked forty hours a week, rode public transportation to and from work, and came home from her job without the baggage of additional stress. What happened? She was reinvigorated to follow her passions. What about her finances? Without all of the extra costs of her job, she was only slightly worse off than before, plus with the extra energy to follow her interests, she actually wound up doing better than before within six months.
Spend some time considering what this number actually means. There are a lot of truths about our lives that are revealed by this number.
If you buy a frivolous item for $X, consider how many hours you had to work to have the money to buy it. Let’s say you calculated that you are actually earning $5 for each hour of your time invested in work. When you go to buy a new pair of shoes that cost $80, look at them and ask yourself whether or not they’re worth 16 hours of your time spent working. When you go to buy a new electronic gadget for $300, look at it and ask yourself whether or not it’s worth 60 hours of your time spent doing things you don’t want to do.
When you pay a loan bill, figure out how many hours you have to work just to pay for the finance charges or interest. I find this one to be a real eye-opener. Whenever you pay a bill, look at the amount you’re paying in finance charges or interest that month, then convert it to hours of your life spent at work. With the example above, a $100 finance charge amounts to twenty hours of work just so you could have some frivolous item before you could actually pay for it.
Some people consider this exercise frightening; others find it incredibly uplifting. The maxim that time is money is painfully true; by translating the things you spend money on directly into hours of your life spent toiling in labor, you often discover that maybe you don’t need a lot of things after all. When you start doing that… well, that’s tomorrow’s exercise.
Are you ready for the big calculation? Take the total salary you calculated two days ago and divide it by the total hours you calculated yesterday. You’re going to be left with a number that you’re going to have to ponder quite a bit.
This number is how much you actually bring home each hour you do something for your employment. For some of you, this number is going to be shockingly low. There are many seemingly decent-paying jobs that wind up with an hourly wage below minimum wage when looked at in this fashion. For example, if you come up with an hourly wage below minimum wage and you spend 60 hours a week involved in work activities, you might actually be better off working at Home Depot with a much lower responsibility and stress threshold.
Many of you might balk at the Home Depot idea, but hear me out. A relative (and friend) of mine walked away from a situation where she was making between $40,000 and $50,000 a year to take a job working the floor at a local Home Depot for $9 an hour. She worked forty hours a week, rode public transportation to and from work, and came home from her job without the baggage of additional stress. What happened? She was reinvigorated to follow her passions. What about her finances? Without all of the extra costs of her job, she was only slightly worse off than before, plus with the extra energy to follow her interests, she actually wound up doing better than before within six months.
Spend some time considering what this number actually means. There are a lot of truths about our lives that are revealed by this number.
If you buy a frivolous item for $X, consider how many hours you had to work to have the money to buy it. Let’s say you calculated that you are actually earning $5 for each hour of your time invested in work. When you go to buy a new pair of shoes that cost $80, look at them and ask yourself whether or not they’re worth 16 hours of your time spent working. When you go to buy a new electronic gadget for $300, look at it and ask yourself whether or not it’s worth 60 hours of your time spent doing things you don’t want to do.
When you pay a loan bill, figure out how many hours you have to work just to pay for the finance charges or interest. I find this one to be a real eye-opener. Whenever you pay a bill, look at the amount you’re paying in finance charges or interest that month, then convert it to hours of your life spent at work. With the example above, a $100 finance charge amounts to twenty hours of work just so you could have some frivolous item before you could actually pay for it.
Some people consider this exercise frightening; others find it incredibly uplifting. The maxim that time is money is painfully true; by translating the things you spend money on directly into hours of your life spent toiling in labor, you often discover that maybe you don’t need a lot of things after all. When you start doing that… well, that’s tomorrow’s exercise.
Sunday, November 16, 2008
31 Days to Fix Your Finances - Day 5
Yesterday, we calculated the actual cost of our employment over a given year - and were surprised to discover how little it actually is. Once you remove all of the work-related expenses, such as the commute, the wardrobe, the extra meals, and the child care, the actual income you get from your job is ominously low.
Today, we’re going to look at our work from a different angle: time. We need to get an accurate picture of how much time you spend in a year chasing the money you make. At first glance, this seems almost automatic, but let’s look at it a bit more closely.
As usual, take out a sheet of paper. Along the top, make a list of each of your employments and, along the far right, write how many hours you actually spend at work (include your lunch break) in a given year. Don’t include vacation time. If you work overtime some of the time, just estimate what an average day looks like, then calculate how many days you work in a year (total days minus holidays and vacation), then multiply the two numbers together.
Now, underneath your time spent at work, list every other activity you do in relation to your work. The list you made yesterday might help, but give the question some thought. List everything that you do that you wouldn’t otherwise do if it wasn’t for your job. For example, if you travel, you can list almost all of your nonworking waking hours. You can list the time it takes to travel to and from work. You can list the time you have to deal with child care. You can list the time you spend shopping for work clothes, or time you spend going out for business dinners, or time you spend doing "optional" training.
For example, here’s my list:
> Child care
> Commute
> Working outside the office
> Business travel
> Business dinners / parties
If you haven’t already, for each of these activities, list the number of hours you spend on them in a year. Put these in next to each item, but over on the right hand side of the page under the time you spend at work in a year. I find that for many of these items, it’s easier to figure out how much you invest in these things each day (like the commute or the child care connection), then multiply it out by the number of days you work in a year.
Now, total all of the numbers on the right. That’s how many hours you actually spend working in a year. Divide it by 52 to get your weekly total, or by 365 to get your daily total (realize that this daily total does include weekends; if you want to exclude them, divide it by 260 to get only weekdays, or by 250 to exclude ten holidays - you may also want to subtract your vacation days from that total, too). For me, this number was a real eye-opener, as I began to realize how much of my time really is taken up by my chase for more money.
Spend some time thinking about this exercise and what it means. You spend all of this time working your tail off and yet you still find yourself in financial trouble. I spend an average of 70 hours a week working just to keep my job. What things could I do if I didn’t have this time investment? What sort of things could I do if I did a low-wage job just down the block? I leave it up to you to draw your own conclusions, but it is a question worth thinking about.
Tomorrow, we’re going to see how much your time is worth - and what that really means.
Today, we’re going to look at our work from a different angle: time. We need to get an accurate picture of how much time you spend in a year chasing the money you make. At first glance, this seems almost automatic, but let’s look at it a bit more closely.
As usual, take out a sheet of paper. Along the top, make a list of each of your employments and, along the far right, write how many hours you actually spend at work (include your lunch break) in a given year. Don’t include vacation time. If you work overtime some of the time, just estimate what an average day looks like, then calculate how many days you work in a year (total days minus holidays and vacation), then multiply the two numbers together.
Now, underneath your time spent at work, list every other activity you do in relation to your work. The list you made yesterday might help, but give the question some thought. List everything that you do that you wouldn’t otherwise do if it wasn’t for your job. For example, if you travel, you can list almost all of your nonworking waking hours. You can list the time it takes to travel to and from work. You can list the time you have to deal with child care. You can list the time you spend shopping for work clothes, or time you spend going out for business dinners, or time you spend doing "optional" training.
For example, here’s my list:
> Child care
> Commute
> Working outside the office
> Business travel
> Business dinners / parties
If you haven’t already, for each of these activities, list the number of hours you spend on them in a year. Put these in next to each item, but over on the right hand side of the page under the time you spend at work in a year. I find that for many of these items, it’s easier to figure out how much you invest in these things each day (like the commute or the child care connection), then multiply it out by the number of days you work in a year.
Now, total all of the numbers on the right. That’s how many hours you actually spend working in a year. Divide it by 52 to get your weekly total, or by 365 to get your daily total (realize that this daily total does include weekends; if you want to exclude them, divide it by 260 to get only weekdays, or by 250 to exclude ten holidays - you may also want to subtract your vacation days from that total, too). For me, this number was a real eye-opener, as I began to realize how much of my time really is taken up by my chase for more money.
Spend some time thinking about this exercise and what it means. You spend all of this time working your tail off and yet you still find yourself in financial trouble. I spend an average of 70 hours a week working just to keep my job. What things could I do if I didn’t have this time investment? What sort of things could I do if I did a low-wage job just down the block? I leave it up to you to draw your own conclusions, but it is a question worth thinking about.
Tomorrow, we’re going to see how much your time is worth - and what that really means.
Saturday, November 15, 2008
31 Days to Fix Your Finances - Day 4
Yesterday, we developed some very specific plans to achieve aspirations that fit within the context of our personal values. These plans provide the basis for what we should be doing with our money; not only do they guide us towards a goal, but they also serve as a reminder that we’re off track if we do things that oppose the plan.
Now that we have these plans in place, we need to dig into our finances a bit. The first step is to see what income you actually have with which to chase your dreams. This will provide a baseline with which to figure out how we can rebuild our finances.
As before, take out a sheet of paper. Along the top, make a list of each of your employments. For me, I just listed one job (right now, The Simple Dollar is a very involved hobby, not what I would call a "job"). On the right hand side of the paper, write how much you make per year at your job (minus only income taxes - include all benefits, including any employer matching for retirement).
Now, underneath that, make a list of every single extra cost you have specifically because of your job. What does the commute cost? How much does lunch cost if you don’t bring your own lunch from home? What does your work wardrobe cost? What do you spend on going out with coworkers? On small professional gifts for others? On a nicer car or jewelry or other items for "work image"? What about child care? Each of these are expenses related to your job. Just make a list of them; don’t worry about amounts yet.
Here’s my list, if you’d like something to compare it to:
> Child care
> Driving to work - gas
> Driving to work - extra maintenance
> Wardrobe
> Meals
> Gifts
> Office supplies
Now, for each item on your list, figure out how much it costs you per year. First, figure out how many days a year you work (this is useful for the automotive calculations), then figure out how long your daily commute is. Multiply the two together and you get an estimate of the mileage you put on the car. I drive about 5,500 miles a year for work, so that amounts to roughly 400 gallons of gasoline, at $2.50 a pop (on average), which comes out to $1,000. I also figure that I’ll have to spend about half that much on other maintenance (oil changes, filter changes, and increased risk of major problems): $500. Then I look at child care: $5,800. I usually buy about $300-$350 a year worth of extra clothes for work, and I eat out probably once a week with coworkers, so tack on another $780 ($15 a meal, estimated). I also buy gifts for our gift exchanges at work and some of my office supplies, adding up to nearly $100 a year. Obviously, your calculations will be far different.
When you’ve determined annual amounts for each entry, subtract them from your salary. This will be sort of painful, particularly if you work in an office at the $12-$15 an hour range. The amount you’re left with is your true take-home salary for your job for a year. We used the post-tax number because you’re paying for this extra stuff after taxes.
I know some people who claim to be making $35,000 a year, but when they take their post-tax number and subtract out their job expenses, the number left makes them feel rather worried. It should. Some people even realize that this number takes them down to near the poverty line, and they get quite sick when looking at this number in comparison to other things.
Over the next few days, we’ll take a deeper look at this number and figure out what it really means in terms of your life values.
Now that we have these plans in place, we need to dig into our finances a bit. The first step is to see what income you actually have with which to chase your dreams. This will provide a baseline with which to figure out how we can rebuild our finances.
As before, take out a sheet of paper. Along the top, make a list of each of your employments. For me, I just listed one job (right now, The Simple Dollar is a very involved hobby, not what I would call a "job"). On the right hand side of the paper, write how much you make per year at your job (minus only income taxes - include all benefits, including any employer matching for retirement).
Now, underneath that, make a list of every single extra cost you have specifically because of your job. What does the commute cost? How much does lunch cost if you don’t bring your own lunch from home? What does your work wardrobe cost? What do you spend on going out with coworkers? On small professional gifts for others? On a nicer car or jewelry or other items for "work image"? What about child care? Each of these are expenses related to your job. Just make a list of them; don’t worry about amounts yet.
Here’s my list, if you’d like something to compare it to:
> Child care
> Driving to work - gas
> Driving to work - extra maintenance
> Wardrobe
> Meals
> Gifts
> Office supplies
Now, for each item on your list, figure out how much it costs you per year. First, figure out how many days a year you work (this is useful for the automotive calculations), then figure out how long your daily commute is. Multiply the two together and you get an estimate of the mileage you put on the car. I drive about 5,500 miles a year for work, so that amounts to roughly 400 gallons of gasoline, at $2.50 a pop (on average), which comes out to $1,000. I also figure that I’ll have to spend about half that much on other maintenance (oil changes, filter changes, and increased risk of major problems): $500. Then I look at child care: $5,800. I usually buy about $300-$350 a year worth of extra clothes for work, and I eat out probably once a week with coworkers, so tack on another $780 ($15 a meal, estimated). I also buy gifts for our gift exchanges at work and some of my office supplies, adding up to nearly $100 a year. Obviously, your calculations will be far different.
When you’ve determined annual amounts for each entry, subtract them from your salary. This will be sort of painful, particularly if you work in an office at the $12-$15 an hour range. The amount you’re left with is your true take-home salary for your job for a year. We used the post-tax number because you’re paying for this extra stuff after taxes.
I know some people who claim to be making $35,000 a year, but when they take their post-tax number and subtract out their job expenses, the number left makes them feel rather worried. It should. Some people even realize that this number takes them down to near the poverty line, and they get quite sick when looking at this number in comparison to other things.
Over the next few days, we’ll take a deeper look at this number and figure out what it really means in terms of your life values.
Friday, November 14, 2008
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.
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.
Thursday, November 13, 2008
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:
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.
Wednesday, November 12, 2008
31 Days to Fix Your Finances - Day 1
Some of you might have expected that we would start out fixing your finances with a pencil and a calculator. In fact, it will be a few days before we have any need for either of these. Why? Before we can define a plan that works for you, we need to sit down and figure out what really matters in your life.
All of us work hard for a reason. We go into work and come out of work because we want money, right? Money buys us things and allows us to live in this modern world. But what do we mean by “live”? What exactly is this “living” that we are focused on?
The real truth is that we live according to a set of values. We continually perform actions based on values: our values mixed with the values of others. For example, my top value is my family. I want a good, fulfilling life for my wife and my son so that they can easily define and follow their own values.
Every person has a set of between four and six primary values that underline their life (we may have other values, but those values are secondary to the primary ones). Financial problems occur through distortions of those values: we come to believe that some things are vital to these values when they really don’t matter. Generally, this is what advertising seeks to do: it tries to express a core value that some people have and make their product seem essential to achieving that value.
So, our first step is to define exactly what our values are. We are not defining goals here! Goals are specific actions, like “retiring at age fifty five” or “paying for my son’s graduate school.” What we are looking for are values.
At first, this seems pretty difficult, so here’s a procedure that will help you get in the right mindset.First, get calm and relaxed. For me, this usually comes after a nice meal with a glass of wine or a great craft beer. I can clear my mind and think about my life. Do whatever gets you relaxed: have a massage, lay down in bed, or anything that increases your calmness.
Second, be honest. No one has to see this list, so write down what really comes from inside of you. You might write down things like “power” or “excitement” that you might not want to show other people, or you might be tempted to write down “family” because your significant other would expect it - but it’s not really important to you.
Third, close your eyes and ask yourself what is really important in your life. If nothing comes immediately, don’t worry about it. Think about the moments where you feel most whole and fulfilled and that feeling stays with you, not a temporary, passing feeling.As you discover values, write them down. Just make a list on a sheet of paper. It doesn’t have to be ranked in any way. Once you’ve discovered a value that’s important to you, just add it at the bottom of the list. You’ll know when you are done; don’t worry too much about how many you’ve written down.
If you have more than six values, ask yourself if any of them are the same value. Quite often, if we get above six values on our list, we’ll realize that two of the values are actually the same thing. If they are, just combine them, or cross off one of them.
If you have fewer than four values, think about them some more. Most people have at least four central values in their lives, so spend some more time to make sure you’re not missing anything.Once you have this list, save it. We’ll not only refer to it in later steps, but it will probably be valuable to you. See you tomorrow!
If you need some help getting started, here is a list of thirty values that you might have in your life. Note that this isn’t a list of all possible values, just a selection of some values to help you get started.
All of us work hard for a reason. We go into work and come out of work because we want money, right? Money buys us things and allows us to live in this modern world. But what do we mean by “live”? What exactly is this “living” that we are focused on?
The real truth is that we live according to a set of values. We continually perform actions based on values: our values mixed with the values of others. For example, my top value is my family. I want a good, fulfilling life for my wife and my son so that they can easily define and follow their own values.
Every person has a set of between four and six primary values that underline their life (we may have other values, but those values are secondary to the primary ones). Financial problems occur through distortions of those values: we come to believe that some things are vital to these values when they really don’t matter. Generally, this is what advertising seeks to do: it tries to express a core value that some people have and make their product seem essential to achieving that value.
So, our first step is to define exactly what our values are. We are not defining goals here! Goals are specific actions, like “retiring at age fifty five” or “paying for my son’s graduate school.” What we are looking for are values.
- Friends
- Love
- Freedom
- Truth
At first, this seems pretty difficult, so here’s a procedure that will help you get in the right mindset.First, get calm and relaxed. For me, this usually comes after a nice meal with a glass of wine or a great craft beer. I can clear my mind and think about my life. Do whatever gets you relaxed: have a massage, lay down in bed, or anything that increases your calmness.
Second, be honest. No one has to see this list, so write down what really comes from inside of you. You might write down things like “power” or “excitement” that you might not want to show other people, or you might be tempted to write down “family” because your significant other would expect it - but it’s not really important to you.
Third, close your eyes and ask yourself what is really important in your life. If nothing comes immediately, don’t worry about it. Think about the moments where you feel most whole and fulfilled and that feeling stays with you, not a temporary, passing feeling.As you discover values, write them down. Just make a list on a sheet of paper. It doesn’t have to be ranked in any way. Once you’ve discovered a value that’s important to you, just add it at the bottom of the list. You’ll know when you are done; don’t worry too much about how many you’ve written down.
If you have more than six values, ask yourself if any of them are the same value. Quite often, if we get above six values on our list, we’ll realize that two of the values are actually the same thing. If they are, just combine them, or cross off one of them.
If you have fewer than four values, think about them some more. Most people have at least four central values in their lives, so spend some more time to make sure you’re not missing anything.Once you have this list, save it. We’ll not only refer to it in later steps, but it will probably be valuable to you. See you tomorrow!
If you need some help getting started, here is a list of thirty values that you might have in your life. Note that this isn’t a list of all possible values, just a selection of some values to help you get started.
Adventure - Balance - Beauty - Cleanliness - Confidence
Control - Creativity (music, film, food, etc.) - Education - Excitement - Family
Friends - Freedom - Fulfillment - Fun - Growth
Happiness - Health - Independence - Leadership - Love
Making a difference - Marriage - Peace of mind - Power - Security
Service - Sharing - Spirituality - The environment - Truth
Tuesday, November 11, 2008
31 Days to Fix Your Finances - Welcome
(Editor's Note: Groups of days info are also broken up into Stages as outlined below.)
Stage 1: Figuring Out Your Goals And Values
Day 1: Your Five Main Values
Day 2: Defining Your Goals From Your Values
Day 3: Create A Plan For Each Goal
The underlying challenge that most people have with their finances is that they see money as distinctly separate from the rest of their life. Money is an antagonist, an enemy that keeps you from doing what you want to be doing. The truth is that money is merely a tool, and when you find yourself feeling as though money is an antagonist, it is no different than a person attempting to learn how to use a heavy sword; it’s unwieldy and dangerous.The first step for learning how to integrate money into your life and use it successfully as a tool is to figure out what exactly you wish to build with that tool. Without underlying values, goals, and plans, money is no different than swinging a hammer around without building something. Thus, this first stage is crucial: what exactly is most important to you, and what will it take to adequately support those values?
Stage 2: Evaluating Your Situation
Day 4: How Much Did You Earn Last Year?
Day 5: How Much Did You Work Last Year?
Day 6: Your True Hourly Wage
Once you’ve figured out what is central in your life, it’s time to take a serious look at what you have to work with. How much do you make, and how much time do you spend making it? This seems like an easy question, but it’s not. How much of your income do you spend maintaining your job, via transportation, career development, clothing, and so forth? And how much time do you spend doing things devoted to your job, such as going to work, coming home from work, attending work-related functions, and so on?When you calculate these new numbers, you might be shocked both at how much time you actually spend working in an average week, as well as how little you actually earn. You can drive this point home especially clearly by calculating a number that we’ll use throughout the month, your true hourly wage. How much do you really make for each hour that you spend devoted to your job? It’s not nearly what you might think, and that alone might shock you into considering some different avenues.
Stage 3: Building Your Own Life Budget, Not Following Someone Else’s Prescription
Day 7: Work For Your Dreams, Not Your Money
Day 8: Breaking Down Your Expenses
Day 9: Cleaning Up Your Expenses
Day 10: Fitting Your Expenses Into The Bigger Picture
Day 11: Dividing Up The Rest and Finishing Our Time Budget
Day 12: A Flexible “Budget” That Reflects Your Reality
Once you’ve taken a hard look at what you actually earn, you can begin to set up the basic framework of how to spend that money that is in line with your personal goals. This isn’t about printing out worksheets and trying to jam your life into the pigeonholes that someone else has created for you; instead, this is about defining how you spend money and working from there.It’s almost unfair to refer to this as “budgeting,” because budgeting carries with it some very bad connotations, much like putting on an uncomfortable suit. This process is much more like going to a tailor, who uses you as the basis to construct a custom suit that fits you. This process will create a custom budget that fits your life with your values and goals as a basis. We’re not talking about restricting you to spending $20 a month on “dining expenses,” but instead creating a structure where you can decide what’s appropriate because you can see how it relates directly to your dreams.
Stage 4: Looking At Your Life, Piece By Piece
Day 13: Pay For Your Dreams First
Day 14: Get Rid Of Debts (Slowly But Surely)
Day 15: Coming In Under Budget and An Emergency Fund
Day 16: Evaluating Your Expenses - Home and Auto Insurance
Day 17: Evaluating Your Expenses - Life Insurance
Day 18: Evaluating Your Expenses - Energy
Day 19: Evaluating Your Expenses - Automobiles
Day 20: Evaluating Your Expenses - Food
Day 21: Evaluating Your Expenses - Housing
Day 22: Evaluating Your Expenses - Monthly Services
Day 23: Evaluating Your Expenses - Bank Fees
Day 24: Evaluating Your Expenses - Entertainment and Hobbies
Day 25: Evaluating Your Expenses - Credit Cards
Once you’ve got a basic budget in place, it’s well worth spending some time carefully evaluating those numbers that represent you and see if there are any places where there is excess fat - and simply trimming it away. Is your electricity bill pretty high? Maybe there are a few simple ways to reduce it. Getting tired of paying that life insurance bill? Maybe you don’t need it at all - or can utilize something less expensive. Getting dinged over and over again with bank charges? Look at what they’re charging and do something about it. Credit card finance charges eating you alive? There are some easy ways to reduce them.We’re looking for ways to trim away fat (things that make you uncomfortable when you look at them) so that the meat (your goals, dreams, and values) have room to thrive. You don’t have to eliminate that daily latte if it brings you joy - just look for the many things you can do without or that you can reduce without significant pain and you’ll have the money to chase your dreams.
Stage 5: Setting The Stage For Lifelong Success
Day 26: Refining Your Budget
Day 27: Keeping Good Records
Day 28: Preparing For The Inevitable
Day 29: Paying Cash
Day 30: Live What You Love
Day 31: Keeping It Up
Now that the complete package is coming together, there are some basic methods for keeping the momentum going. What do you do with the fat you’ve trimmed away? How do you keep track of all of your financial information so that it’s not chaotic and incomprehensible? How do you ensure that you’re not ensnared in loan debt over and over again? How do you keep this good thing going?If you follow this plan and keep these principles in mind, you can easily live your dream. It’s all up to you, and it takes just an hour a day for a month to get things going.
Stage 1: Figuring Out Your Goals And Values
Day 1: Your Five Main Values
Day 2: Defining Your Goals From Your Values
Day 3: Create A Plan For Each Goal
The underlying challenge that most people have with their finances is that they see money as distinctly separate from the rest of their life. Money is an antagonist, an enemy that keeps you from doing what you want to be doing. The truth is that money is merely a tool, and when you find yourself feeling as though money is an antagonist, it is no different than a person attempting to learn how to use a heavy sword; it’s unwieldy and dangerous.The first step for learning how to integrate money into your life and use it successfully as a tool is to figure out what exactly you wish to build with that tool. Without underlying values, goals, and plans, money is no different than swinging a hammer around without building something. Thus, this first stage is crucial: what exactly is most important to you, and what will it take to adequately support those values?
Stage 2: Evaluating Your Situation
Day 4: How Much Did You Earn Last Year?
Day 5: How Much Did You Work Last Year?
Day 6: Your True Hourly Wage
Once you’ve figured out what is central in your life, it’s time to take a serious look at what you have to work with. How much do you make, and how much time do you spend making it? This seems like an easy question, but it’s not. How much of your income do you spend maintaining your job, via transportation, career development, clothing, and so forth? And how much time do you spend doing things devoted to your job, such as going to work, coming home from work, attending work-related functions, and so on?When you calculate these new numbers, you might be shocked both at how much time you actually spend working in an average week, as well as how little you actually earn. You can drive this point home especially clearly by calculating a number that we’ll use throughout the month, your true hourly wage. How much do you really make for each hour that you spend devoted to your job? It’s not nearly what you might think, and that alone might shock you into considering some different avenues.
Stage 3: Building Your Own Life Budget, Not Following Someone Else’s Prescription
Day 7: Work For Your Dreams, Not Your Money
Day 8: Breaking Down Your Expenses
Day 9: Cleaning Up Your Expenses
Day 10: Fitting Your Expenses Into The Bigger Picture
Day 11: Dividing Up The Rest and Finishing Our Time Budget
Day 12: A Flexible “Budget” That Reflects Your Reality
Once you’ve taken a hard look at what you actually earn, you can begin to set up the basic framework of how to spend that money that is in line with your personal goals. This isn’t about printing out worksheets and trying to jam your life into the pigeonholes that someone else has created for you; instead, this is about defining how you spend money and working from there.It’s almost unfair to refer to this as “budgeting,” because budgeting carries with it some very bad connotations, much like putting on an uncomfortable suit. This process is much more like going to a tailor, who uses you as the basis to construct a custom suit that fits you. This process will create a custom budget that fits your life with your values and goals as a basis. We’re not talking about restricting you to spending $20 a month on “dining expenses,” but instead creating a structure where you can decide what’s appropriate because you can see how it relates directly to your dreams.
Stage 4: Looking At Your Life, Piece By Piece
Day 13: Pay For Your Dreams First
Day 14: Get Rid Of Debts (Slowly But Surely)
Day 15: Coming In Under Budget and An Emergency Fund
Day 16: Evaluating Your Expenses - Home and Auto Insurance
Day 17: Evaluating Your Expenses - Life Insurance
Day 18: Evaluating Your Expenses - Energy
Day 19: Evaluating Your Expenses - Automobiles
Day 20: Evaluating Your Expenses - Food
Day 21: Evaluating Your Expenses - Housing
Day 22: Evaluating Your Expenses - Monthly Services
Day 23: Evaluating Your Expenses - Bank Fees
Day 24: Evaluating Your Expenses - Entertainment and Hobbies
Day 25: Evaluating Your Expenses - Credit Cards
Once you’ve got a basic budget in place, it’s well worth spending some time carefully evaluating those numbers that represent you and see if there are any places where there is excess fat - and simply trimming it away. Is your electricity bill pretty high? Maybe there are a few simple ways to reduce it. Getting tired of paying that life insurance bill? Maybe you don’t need it at all - or can utilize something less expensive. Getting dinged over and over again with bank charges? Look at what they’re charging and do something about it. Credit card finance charges eating you alive? There are some easy ways to reduce them.We’re looking for ways to trim away fat (things that make you uncomfortable when you look at them) so that the meat (your goals, dreams, and values) have room to thrive. You don’t have to eliminate that daily latte if it brings you joy - just look for the many things you can do without or that you can reduce without significant pain and you’ll have the money to chase your dreams.
Stage 5: Setting The Stage For Lifelong Success
Day 26: Refining Your Budget
Day 27: Keeping Good Records
Day 28: Preparing For The Inevitable
Day 29: Paying Cash
Day 30: Live What You Love
Day 31: Keeping It Up
Now that the complete package is coming together, there are some basic methods for keeping the momentum going. What do you do with the fat you’ve trimmed away? How do you keep track of all of your financial information so that it’s not chaotic and incomprehensible? How do you ensure that you’re not ensnared in loan debt over and over again? How do you keep this good thing going?If you follow this plan and keep these principles in mind, you can easily live your dream. It’s all up to you, and it takes just an hour a day for a month to get things going.
31 Days to Fix Your Finances - Introduction
I recently came across an interesting article entitled, "31 Days to Fix Your Finances". It was written by Trent Hamm and posted on his website "The Simple Dollar" back in 2007. I enjoyed the article immensely, and found it full of straightforward, no nonsense ideas on how to get a handle on your finances. I plan to repost this series on this blog.
Stay tuned for Day 1.
Blogmaster G
(sorry for the bad nickname ... I just felt compelled)
Stay tuned for Day 1.
Blogmaster G
(sorry for the bad nickname ... I just felt compelled)
Saturday, November 8, 2008
Debt Help
Debt
Many of us have too much debt, and we want to reduce or eliminate it. Others use debt responsibly, for example for a mortgage on a house. However, if you are feeling financially stressed, then you likely have too much debt.
Why is debt difficult to deal with? It is due to interest, which is the cost of borrowing money. Banks and other financial institutions lend money, and in return the individual that borrows the money pays interest. The rate that individuals pay varies depending upon their credit worthiness and the type of debt. For example, credit cards charge some of the highest interest rates, 8%, 10%, 18% or more.
Many of us have too much debt, and we want to reduce or eliminate it. Others use debt responsibly, for example for a mortgage on a house. However, if you are feeling financially stressed, then you likely have too much debt.
Why is debt difficult to deal with? It is due to interest, which is the cost of borrowing money. Banks and other financial institutions lend money, and in return the individual that borrows the money pays interest. The rate that individuals pay varies depending upon their credit worthiness and the type of debt. For example, credit cards charge some of the highest interest rates, 8%, 10%, 18% or more.
Subscribe to:
Posts (Atom)