Personal Finance 101 Posts of the Day 6/7/07

• My Money and My Life has a break even goal for the summer. Good luck!
• The Credit and Credit Card Blog talks about the pitfalls of revolving debt.
• Consumerism Commentary talks about saving for your kids instead of yourself.
• Personal Investing Advice has some tips on saving for the future.
• All Financial Matters created a directory of past posts. Very useful!
• The Dough Roller teaches his kids to use Quicken.
  

Personal Finance 101 Posts of the Day 6/4/07

• Broke Ass Student reminds you not to sacrifice tomorrow for today.
• Grad Money Matters lists 5 budgeting blunders to avoid.
• My Two Dollars asks if your family could live on one income.
• Frugal Law Student rehashes some pratical advice for young people.
• $1 Million to my name - Part V in the retirement saving pitfalls series - Buying too much house.
  

How to effectively set and track goals

A thread on the recently established Get Rich Slowly forums got me thinking about goal setting so I thought I'd post my goal setting instructions and worksheet for those who might be interested. The worksheet is in excel and is hosted on the Personal Finance 101 website and you can dowload it from there for free. Let me know if you have any questions/comments.

Get the goal setting worksheet

Why set goals?

Setting goals is one of the most important things you can do to ensure financial success, but it is usually the last thing people think about. If you don't set goals, how do you know if you are actually being successful? If you are going to get to where you want to be in life, you have to know the path to take. Goals are your roadmap and if you set them up right, they will take you from point A to point Z with as few detours and as little pain as possible.

How to set goals

The key to goal setting is to make your goals concrete and measurable and to make meeting them automatic. By this I mean, your goal should have a date and amount associated with it. You don't just say “I want to pay down my debt.” You say "I want to reduce my debt by $5,000 over the next 12 months." By giving yourself a set $ amount and date to meet, you will be able to judge whether you are actually meeting your goals or not and make adjustments accordingly.

By making it automatic, I mean using technology to your advantage. Set up automatic payments for all of your bills so that you are never late. Set up an automatic deduction from your pay check that goes directly to your savings account so that you are paying yourself first and will be less likely to spend the money instead of saving it.

Just doing those two things 1) Making your goals concrete and 2) Making them automatic, will drastically increase your chances of success.

The timeline

Goals can be divided into 3 categories: Short-term, Mid-term and Long-term. Short-term goals are goals that will be completed within the next 12 months. Mid-term goals are ones that will be completed within the next 1-7 years. Long-term goals are goals that will be completed 7+ years from now. Some examples could be:

Short term – establish emergency fund of $1000

Mid-term – pay off consumer debt within 3 years

Long-term – have enough for retirement

One of the biggest challenges is being realistic! If you only make $40k/year, it won’t really do you much good to set goals that will cost you $20k/year to meet. Be honest with yourself about what you can do. If you find that you are ahead of your timeline for meeting your goal, you can always add another one or meet your goal early but if you find that you are behind, it can be disheartening and cause you to give up all together.

The process

As I mentioned above, to set your goals you have to set specific criteria as well as an action plan. If you open the accompanying excel workbook and click on the Goal Summary tab you'll see that I have taken the liberty of filling in some goals for you that should be on everyone’s list. Remember, that your goals don’t all have to be responsible. Your goal can be to buy a new TV or to go on a vacation. As long as you are meeting the core responsible goals, there is nothing wrong with enjoying your life and money. Setting a goal plan just means that you will be more likely to meet all of your goals without having to scramble and sacrifice something else that is important.

For your goals, fill out the following information for each goal:

1. Goal Name
2. Start Date
3. End Date
4. $ Needed
5. First Step
   

If you are married or in a similar relationship, you should do this with your partner.

Once you have set at a few goals in each category, print out that page and put it somewhere you will see it every day. It will remind you of what you are working towards and keep you on the right path. I would also suggest writing your most important goal on a sticky and attaching it to your credit card so you have to see it any time you want to use your card. That way you will know that every penny you spend on that card is a penny that is not taking you closer to your goal.

Make a plan

Now that you know what your goals are you need to plan how to meet them. In the same workbook is a tab called Detailed Goal. You should make as many copies of this as necessary – one for each goal. I would recommend re-naming the tab for each worksheet to reflect the name of your goal.

To develop your goal plan, you need to figure out what the steps are to meet your goals. The first step should be to implement whatever your automatic transaction will be. For example: if you want to buy a car in 5 years and you plan to spend $10,000 on that car, you can figure out that you will need to save $2,000/year or $167/month. So, your first step should be to set up an automatic transfer to your savings account for that amount per month. Since this is a longer-term goal, you should set up milestones so you can check back in to make sure that this goal is still a priority and you are still on track to meet it. I suggesting setting a milestone at least every year and preferably every 6 months. This allows you to take a minute to review your goals to make sure you're going the direction you want to go. Put your milestones on your calendar with reminders so you don't forget to check back in.

Implement your plan

So, you’ve gone through all the planning, now you just have to execute. The key to achieving your goals is to make them as easy to do as possible. This means making everything automatic. Set up all of your goals so that you don’t even have to think about them. Use auto bill pay and auto deductions to your savings/investment accounts. It takes a bit of time at first but it will be worth it in the long run.

Monitor/Add to your goals

Your goals are always going to be changing. You should keep adding goals as they come up. When you add a new goal, you have to look at your existing ones and figure out which is more important. It may be that your new goal is more important than one of the old ones so your old one gets pushed down the list. Look at your goal list as a fluid thing and don’t try to be too rigid with it. There is nothing wrong with reprioritizing as thing change.

How to manage your goal money

Everyone has a different method. It all depends on how much time/effort you want to put into it. Personally, I'm a fan of lazy accounting so I use ING for my goal savings accounts. I like the fact that with ING I can set up multiple sub-accounts and name them whatever I want. So I can have a car account and a vacation account and a furniture account, all separate, so I can tell at a glance how much money I've put towards each goal. It' makes things very easy for me and if you dislike book keeping as much as I do, this method may work for you as well.

Good luck with your goals. Just the fact that you're thinking about them puts you one step closer to success.

Personal Finance 101 Posts of the Day 5/22/07

• Ask Uncle Bill talks about how to save a million dollars.
• Blogging Away Debt has some tips for living within your means.
• Mad Money Analyst talks about why you should start saving for retirement now.
• Queercents talks about setting goals and getting organized.
  

Personal Finance 101 Posts of the Day 5/13/07

• FILAM Personal Finance talks about some of their short and mid-term goals.
  

Personal Finance 101 Posts of the Day 5/3/07

• The Simple Dollar talks about how to deal with not meeting your goals.
• All Financial Matters asks his readers to give their best advice to new grads.
• Kiplinger’s talks about how to save money during wedding season.
• Credit Card Lowdown tells us 10 common sneaky fees credit cards charge.
• English Major gives some reasons why younger people don’t save.
• My Two Dollars talks about how he and his partner manage their finances.
• The Simple Dollar talks about what he did after hitting rock bottom financially.
• Get Rich Slowly gives some great tips on how to track your money.

Personal Finance 101 Posts of the Day 4/25/07

• Ask Mr. Credit Card talks about the impact of credit on insurance rates.
• Free Money Finance talks about how much you should be saving.
• Zen Habits gives suggestions on brown bag lunches.
• Queercents talks about the pitfalls of renting your fist apartment.
• Make Your Nut talks about how expensive it is to NOT brown bag your lunch.
• The Simple Dollar takes a look at couples and money.
• Laws of Finance talks about the benefits of paying your credit cards online.
• How I Save Money lists 25 ways they save money.
• Prime Time Money talks about why paying off debt brings you success.
• Personal Finance Advice talks about the different debt payment strategies.
• Finance is Personal gives some advice to those just starting out.

Personal Finance 101 Posts of the Day 4/21/07

• Blunt Money talks about how to set goals.

Personal Finance 101 posts of the day 4/10/07

• Young and Broke lets us know that Minnesota is going to require financial education in school. And can I just say: About freaking time!!! Hopefully more states get with the program!
• Care One lists 101 ways to save one dollar a week.
• Ask Mr. Credit Card talks about what he’s learned from 10 years of marriage.
• Web Financial Planner wonders how rich is rich enough.
• Queercents talks about the US savings rate.
• Investments and Loans tells how to build your emergency fund.
• Debt Consolidation News talks about why home ownership may not be for everyone.
• Free Money Finance talks about the disconnect between what teens know and what they think they know (shocker!) about money.
• Free Money Finance talks about taking responsibility for your financial decisions.

10 Reasons You Aren’t Rich

From The Street, 10 Reasons You Aren't Rich covers some of the traps that people fall into that hold them back. (My comments in italics)

1. You Care What Your Neighbors Think This is huge! One of the reasons I'm leaving Washington, DC is that so many people around this area care about things like what you drive, where you work, etc. It gets old and really, the people worth knowing aren't the ones who care about what kind of car you drive or what kind of shoes you wear. Live your life in a way that makes you happy and comfortable and who cares what others think!
2. You Aren't Patient In today's world of easy credit and instant gratification it can be hard to wait to buy something until you have the cash. But, the advantages of waiting are: 1 - you save money in interest, 2 - you tend to appreciate things you have to work hard to get instead of those that come easily, 3 - waiting gives you time to decide if you *really* want something rather than just following your impulse, 4 - saving up gives you time to do your homework and find the best deal on whatever it is that you want.
3. You Have Bad Habits This includes your "Latte Factor." The three hardest things to give up are: coffee, alcohol and cigarettes. It's not a coincidence that they're also the most expensive and the worst for your health. Cutting back on those vices not only saves you money today but also in the future on health care costs.
4. You Have No Goals My Goal Setting 101 class is my least popular class but it's the one that I think people get the most from. The first question I ask is: "If you don't know where you're going, how will you know when you get there?" The answer to that question is: You don't. Without goals you're just floating along rather than moving forward with a purpose. IMO, goal setting is the most important part of financial planning but is also the most overlooked.
5. You Haven't Prepared This is why you need an emergency fund. It's a fact of life: Stuff happens. No matter how prepared you are, you aren't prepared for everything. But, you can do your best. The easiest thing you can do is establish an emergency fund. This fund should be in a cash account (or equivalent) that can be accessed quickly and without penalty. You should aim to have at least 3 months worth of expenses in your account though some people like to keep much more. When you figure out how much you need, take an honest look at your life. Is your job steady? Do you have dependents? Do you own a house? Do you have adequate insurance? The answers to those questions will help you figure out how much (or how little) you need to have in your account to be secure.
   
6. You Try to Make a Quick Buck When people approach me about the best way to turn $1,000 into $10,000 in a week I have 2 standard responses: 1 - go to Vegas. At least there you get free drinks while you gamble with your money. 2 - Re-read The Tortise and the Hare but this time, learn the lesson. When it comes to investing, the vast majority of the time slow and steady will win over the long run. Set your investment up, make it automatic and then forget about it except for when you re-balance twice a year.
7. You Rely on Others to Take Care of Your Money I'm a huge proponent of DIY. It's why I started Personal Finance 101. I saw the aftereffects of too many people who had gotten screwed by investment advisors who sold them bad products. There is no reason why someone can't manage their own money, particularly now that Target Retirement Funds exist. If you're just starting out, there are 2 books I recommend that every newbie read. The biggest thing to keep in mind: You are the only person who cares about your money!
8. You Invest in Things You Don't Understand I did this when I first started investing. I started buying stocks without knowing what I was doing. I just listened to what others were buying and followed the herd. Not only did I lose a *ton* of money to transaction fees, I lost a ton in the investment itself. Since then, I've sold off the losers, held on to the winners (I did get a couple right) and have stuck to funds. I have realized that not only do I not have the knowledge to pick stocks, I don't have the desire to learn the skill so funds are the way to go.
9. You're Financially Afraid I see this all the time, especially in those who lost a lot of money in the dot bomb. So many people who lost money during that time are too scared to invest in stocks again. Every time I ask them about their experience, they were always almost 100% in tech stocks and freaked and sold when stocks went down. When I explain to them what would have happened had they A - been diversified and B - stuck to an investment plan instead of freaking out they start to calm down. For those who are worried about investing in anything risky I usually suggest starting with a balanced fund like the Vanguard STAR fund. That fund is 60/40 stocks/bonds so, while it earns more than bonds it's not as volatile as stocks. I then suggest they start adding small amounts into more agressive funds once they're used to being a bit more agressive. I also forbid them from checking their accounts more than once every 6 months. Frequent account reviews are the worst thing people who are risk averse can do. Any little dip will freak them out and trigger a panic reaction.
10. You Ignore Your Finances I'm a big supporter of a hands-off money management style. But, that's very different from ignoring your money. To have a hands-off style, you first have to have a plan. Then, you can implement that plan, make it automatic and just check back a few times a year to make sure you're on track. Find the balance that works for you - somewhere between checking every day and checking once a year is good.
    

Personal Finance 101 Posts of the Day 3/27/07

• Debt Consolidation News has a good post about 50 common sense spending tips. I agree with most of them. Except # 20. I've taken long distance bus trips and no thanks, never again. I'll pay $250 for the flight to save 14 hours of my time. It's worth it not only for the comfort but also for the time savings.
• Save Money gives 4 Ways to Keep Your Credit Score High.
• The Simple Dollar talks about how to Follow Your Dreams. I love this post. Not enough people focus on goal setting. My Goal Setting class is the least popular of the Personal Finance Classes I teach but I really think it's the most important. You need direction if you're going to succeed and the key to that is to make your goals/dreams measurable and give yourself a timeline.
• The Consumerist tells us about 8 Free Personal Finance Management Programs (and a few paid ones)
• Anxiety Ended talks about how to save money and reduce anxiety.
• No Credit Needed talks about how to keep grocery costs under control.
• Personal Finance Advice talks about how to eat out without spending a lot of money.
• Kirby on Finance wonders if your ego is your own worst enemy.
• Financial Hack tells us 10 ways to simplify your finances.
• Free Money Finance doesn’t seem surprised that financial planners give bad advice.

Personal Finance 101 Posts of the Day 3/26/07

• All Financial Matters has a great summary of why renting furniture is a bad idea. I agree 1000%. I've said it over and over that financing a depreciating asset (car, computer, furniture, jewelry, etc.) is always a bad idea. The value of the product drops so quickly that it's guaranteed that you'll be upside-down on the loan almost immediately. It's a much better idea to save up your money and buy with cash. This is why you set financial goals, to plan for these purchases.
• Credit Card Lowdown lists 20 moronic things people do with credit cards.
• Money for the Rest of Us talks about how to find cheap flights.
• Broke-ass Student talks about things to watch out for with credit cards.

Do you know your money?

Below are 10 questions everyone should be able to answer about their money.

1. Does your employer match any of your retirement contributions and are you getting the full match?

Many employers offer to match all or a portion of the money you contribute to your employer retirement plan. This is free money and you should make sure you are getting as much of it as possible. If you aren’t sure whether your employer matches or if you’re getting the full match as your Human Resources or Benefits office for details about your plan.

2. What are your short-, mid- and long-term goals and are you on track to meet them?

If you don’t know where you’re going, how will you know when you get there? Just like you wouldn’t set off on a cross-country trip without directions, you shouldn’t be saving for your future without a plan. That plan should include your short- (within 12 months), mid- (within 5 years) and long-term (more than 5 years) goals and how you plan to get there. It’s important to come up with a plan that’s reasonable and to review it periodically to see if you’re still on track.

3. What’s on your credit report?

Credit reports are so important. They can impact all areas of your life, not just your ability to get a loan. Did you know that a bad credit report can result in higher auto expenses and that it could even make you lose a great job opportunity? It’s important to check all three of the major credit bureaus at least once a year. You can do this for free at www.annualcreditreport.com. I recommend getting one report (from each of the three) every 4 months. Each credit agency will report different information but with this method you’ll be on top of your credit and see each report at least once. If you want to know what your credit score is, you should visit www.myfico.com to get your true FICO score. Scores gotten from other sources are typically not FICO scores. Before you spend your money on a score, just know that scores are only important if you’re applying for a loan. As long as you are paying your bills on time and there are no negatives on your report, your score should be fine so it isn’t necessary to buy your score very often.

4. How much will you need for retirement and are you on track to get there?

This is a pretty personal question and depends a lot on the lifestyle you want to live in retirement. There are dozens of financial calculators on the web that can help you figure out how much you’ll probably need and how much you should be saving to get there.

5. What kind of expenses are you paying for your investments?

Sometimes we are paying for expenses with our investments and we don’t even know about it. Does your fund have a sales load or a high expense ratio (anything over 1% is high)? Does your brokerage charge monthly or annual account maintenance fees? Review your accounts and make sure you’re getting the most bang for your buck. There is no reason to pay high expenses and fees when there are many well respected low or no-fee brokerage houses.

6. Are you in the right investments for your age, risk tolerance and timeline?

What was a good investment for you at 22 may not be so good when you are 42. Make sure that you periodically check your asset allocation to make sure that you’re investing correctly for your goals. There are many online calculators that will ask you a few questions and then give you a suggested allocation based on your responses. Take a couple of these and see where you stand. Make sure that you’re looking at ALL of your investments, not just one account.

7. Where does your money go each month?

You don’t have to know to the penny, but you should have a pretty good idea of what you’re spending your money on. If you don’t know, you should find out. You’ll probably be shocked to see how much you spend on certain expenses like coffee or eating out. To develop a budget, get a notebook and track all of your spending for 30 days. Write down every penny you spend and then put it into excel and categorize it into expense categories (entertainment, food, gas, etc.). The numbers will probably be eye opening and you might be surprised that by making a couple small changes you can free up a nice chunk of money each year to put towards your goals.

8. Which is better for you – a Roth or Traditional IRA?

This is a frequently asked question and the answer is: It depends. Much of the decision about whether to contribute to a Roth or to a Traditional IRA (TIRA) has to do with taxes. Generally a Roth is better for most people. See our article What's so great about a Roth IRA?

9. Are you getting the most out of your savings?

Many people are still using the savings account that their regular bank offers, and which only pays .5% a year. With the advent of online banks like ING Direct, Emigrant and HSBC, traditional savings accounts are going the way of the Dodo. With rates over 5% at these online institutions and transfers only taking a couple of days to complete, there’s really no reason to keep your savings in a low-rate account. For the latest list on the highest returns, check out these banking sites.

10. When will you be debt free?

Everyone wants to know the answer to this question. It’ll take some math and usually a budget, but you can find out if you put in the effort. Start by listing all of your debts in order of highest interest rate to lowest. Then list what the minimum payment is for each account. Finally, figure out how much money you have available to put towards debt each month. From there it’s simple math. You want to pay the minimum payment on all debts except for the one with the highest interest rate. You want to throw all of your extra money at that one with the highest rate. Once that one is paid off, you’ll add that entire payment to the minimum payment you were making on the next highest interest rate debt. This method will save you the most money and will get you out of debt as quickly as possible.

Are you ready for the new financial year?

2006 is ending and it’s time to start preparing for 2007 so you can start off on the right financial foot. Here are some things you can do now to make 2007 a financially fit year:

At work:

• Increase your retirement contributions. The 2007 annual retirement contribution limit for 401(k) and 403(b) plans was increased to $15,500, so make sure you adjust your contribution levels accordingly. If you can’t max out the annual retirement contribution, at least try to increase your contribution 1% this year.
  
• Review your FSA contributions. If your employer offers a Flexible Spending Account (also called a Cafeteria or Section 125 plan) it’s a great thing to take advantage of. Try to sit down and use your budget to figure out how much you’ll need for the next year. Remember, you can now use it for over-the-counter medicine like aspirin or cold medicine and things like contact lens solution. Just don’t over estimate since if you don’t use it by the end of the year you lose that money.
  
• Double check your taxes. If you’re getting a big refund for this year, you probably need to take a look at what you’re having withheld each pay check. Your goal should be to break even at tax time and take that money you would have gotten in a lump sum at tax time and invest it monthly. If you aren’t sure how much you should have withheld, www.paycheckcity.com has a great paycheck calculator. Similarly, if you’ve had a major life change (house, marriage, divorce, etc.) that impacts your taxes you should double check that your withholdings are still correct.

On your own:

• Review your asset allocation. As investments rise and fall throughout the year they can impact your asset allocation plan. Make sure that at least twice a year you are rebalancing your investment portfolio to make sure you stay on track.
• Max out your Roth IRA . If you contribute $333/month to a Roth IRA you will have maxed it out for the year. The easiest way to do this is to set up an automatic contribution plan that will deduct money automatically from your checking account and invest it in an appropriate mutual fund. If $333/month is a bit too rich for your blood, look at the program that T. Rowe Price has that will allow you to start a Roth IRAwith as little as $50 to start and $50/contribution. If you haven’t yet maxed out your 2006 contribution you have until April 15, 2007 to do so, just make sure that you indicate that the money is for your 2006 contribution or they will credit it to 2007.
• Do a budget check. Look over your budget for the last 12 months and see if there were any unexpected expenses that you need to plan for this year and adjust accordingly. Better to save up for that license plate renewal than to get caught by surprise!
  
• Review your financial goals. Are you on track for your financial goals? Have you added/removed/changed any of them? Take a look and see where you are. Increase or decrease your savings based on any changes to your financial goals.