2007 Financial Report

I finally sat down and compiled our 2007 financial report and put together a presentation. Unfortunately the 2008 projections will have to wait, but here are some highlights.

Spending on food and utilities are unchanged from last year - though our dining out spending was slightly up, our grocery spending was slightly down.

We spent 10% more on gas this year than last year. Not bad considering gas prices are much higher. Our carpooling efforts, I think, are having a positive effect.

We have paid 59% of our total debt from the beginning of the year. Rough projections still put us at paying it all off in 4 months.

Our emergency fund (not including the bill pay/readjustment account or unscheduled maintenance account) has averaged $2,045 throughout the year, with a range of $1,940 to $2,150. We really didn't need to use it this year.

For the most part, we met or exceeded all of our goals for 2007 (with the exception of me finding a better paying job).

That's about it! I'm looking forward to sitting down and figuring out some goals and estimations for the upcoming year. Of course, overall goals will have to wait until my wife and I go over the year-end report and discuss what they should be.

Anyway, what's the point? I handle most of the finances, so I like to print monthly reports of our spending/balances for my wife to read. At the end of the year, it is nice to have a presentation to show her so she can get a clear picture of where we are financially. For both of us, I think it helps us get on the same page and focuses us on similar goals.

Unscheduled maintenance account nuked

Today our microwave died. It was a good old microwave and had given its various owners many years of faithful service. Lately however it had begun to act strangely. Last month it inexplicably stopped running. A quick unplug fixed it. Then randomly it would activate its exhaust fan - often in the middle of the night. Then the little lightbulb inside burned out, as well as the little light underneath.

Finally, today at 12:15pm as I attempted to make a bag of popcorn to watch the pilot of season 1 of Heroes (I'd never seen it before) on Netflix, I discovered it was no longer heating anything.

The fan, the light, the random shorts...that I can handle, but a microwave that doesn't heat just isn't acceptable.

Fortunately, I recently started an unscheduled maintenance account. Thus, the $160 microwave was fully covered. However, having just started the fund, the account is now empty...but my wife was certainly happy that we had it! Maybe I'll ask her to use our new microwave to make me some cookies (can it do that?).

Added a new fund to our finances

After recently purchasing an automotive part for a minor car repair, it dawned on me that I am missing a very important fund in my personal finance system. The part was only $70, but it could have easily been $100-200, or in the case of a dealer-only part, in the $200+ range. A $200 unexpected expense could not be easily absorbed by our already tight paycheck disbursements. In other words, we don't have $200 of discretionary spending each paycheck (since all discretionary dollars are thus spent during week following the paycheck) to go buy car parts with.

I already have a scheduled maintenance calculator and savings fund for the cars. This includes things that are easily timed and their costs more or less fixed. I know how many times the vehicles will need oil changes, and how much it costs (the price of oil and filter vary very little), so I know how much to save. And it is, of course, expected that something in the car will break down eventually, so this is something that I should be planning for - not something that comes out of our emergency fund. It's not an emergency if I know it's going to happen eventually!

So I created an "Unscheduled Maintenance Fund". It will cover the cost of minor repairs to our vehicles and our home. To determine how much I should contribute to this new fund, I gathered the receipts for all our repairs in the last year and divided by our number of paychecks in the year. This amount will be added to the readjustment account payment and isolated in a separate account (in fact, an ING savings account that I've been toying with ideas about what to do with).

Viola, problem solved. When something breaks in the house or with the cars, we'll have a little stash of money to cover it without wiping out our discretionary dollars or dipping into our emergency fund.

How I spend my paycheck

Above is a table that I use to divide each paycheck (though I usually do it on a sticky note so it never looks so neat!). This helps me keep track of where I need to send the money coming into my checking account so I don't accidentally spend something I shouldn't. The numbers are just made up.

First I deposit my check and subtract 15% for savings (another 15% is already taken out for my 401k). I subtract my readjustment/spread account payment, any bill payments that were made from my bill pay account (a separate high-yield interest checking account - ING), and any budgeted items coming up that week. In the right side I figure out how much I need to transfer to ING, which is the readjustment/spread amount, the bill pay balances, and the savings (my savings is presently being used for maximum debt repayment).

At the bottom I take the current balance of my checking account, add the deposit amount and subtract the ING transfer amount. That gives me my actual account balance. Next to it I subtract the budget amounts, which stay in the checking account until I spend them that week, and I get the "Available" amount, which is what I have for spending on whatever that week.

Of course, this particular table doesn't include nearly as many bills as I usually have - for simplicity, so my available spending balance is rarely so high!

Balance out your utility costs

Gas and electric costs vary wildly throughout the year. According to government sources, these costs will be even higher as natural gas and electric prices increase. This can turn an already tight budget into a catastrophe, or at least a very lean winter. Who needs bigger utility bills near Christmas time? I sure don't.

The easy solution is to adjust your bills and save the difference. You can call your electric/gas company and just ask over the phone if you don't have your statements for a full year, how much it cost you each month. Add them together, divide by 12, and you get an average cost of these utilities throughout the year. This becomes your monthly payment. During the months where your bill is lower than your average, the excess goes into a savings account. During the months that it is higher, the shortage comes out of that account.

This stabilizes your budget and any increases in cost (or accidental overuse) can be more easily managed.

Also do whatever you can to lower your consumption of course.

Can you become too obsessed with your debt?

Probably.

So my wife and I were sitting down last night discussing a few of our current money problems. Namely, a couple a medical bill forced us to dip into our emergency fund and we have a follow-up that is going to cost us again. We still haven't replenished our emergency fund, mainly because I haven't taken our debt repayments to reimburse it. Instead, I've been nickel and diming the fund to slowly bring it back up - using any spare income we have.

Needless to say, our fund is not back up to $2,500 yet. Actually, it is $1,900 now because of that bill. This new bill will set us back another $600. Ouch. Not a good month for the emergency fund.

Of course this discussion lead to how we are going to repay our emergency fund and pay our upcoming medical bill. We have very different approaches.

1) Her plan. She wants to take our debt repayment amount (about $1,200) for this month and pay these medical bills with it. That will of course cover the whole thing and bring our emergency fund back to where it should be, but it leaves us with little extra to put into the debt (not including the regular payments - our debt is a closed term loan and a student loan) for the month of September.

2) My plan. I want to pay the bill out of the emergency fund and slowly build it back up out of our discretionary income without reducing our debt repayment amount.

This lead her to the following conclusions about me:

1) I am too obsessed about repaying our debt.
2) I am wrong.

I don't like the idea of using our debt repayment to pay these medical bills because I feel that's what our emergency fund is for. I don't see the debt repayment as optional. In reality, this would only set our goal of being debt free back a month. Not the end of the world.

This also lead me to once again showing her a simulation of our debt payoff plan, how much we are sinking into this debt, and how wonderful it will be without debt. None of this affected her conclusion that I am wrong.

So, we compromised. We will wait it out until the end of the month and put as much as we can into the emergency fund to bring it back to snuff and save extra for the upcoming bill. If we're short, we'll use a portion of the debt repayment.

Things my home office can't do without

Everyone needs a home office. Even if you don't work at home, you need some place where you can quietly go over your budget, bills, and finance management. Even if it is just a desk in a room. We have a library/office in my home that we use to do the budget, pay bills, research, and talk about finances. The most important thing, in my opinion, is good organization. Here are some elements of my home office that I couldn't live without.

• A computer: Just any desktop computer with some good software programs. These include spreadsheet (either MS Excel or the free open source OpenOffice), a desktop calendar (I use Active Desktop Calendar), an address/contact book (Outlook for me).
  
• Online access: I would be lost without the Internet. Via email we can quickly contact companies, through the net we can find corporate phone numbers instantly, conduct research, and manage our bank accounts.
  
• A filing cabinet: We use a large 5 drawer steel filing cabinet to store our documents, all well organized into categories and labeled folders. Such documents include our bills, statements, declaration pages, copies of outgoing letters - essentially everything up to 2 years old. A couple of drawers are dedicated to older documents like tax papers, contracts, and other "archived" statements/bills/etc. Filing cabinets are expensive, but you needn't buy them new. I purchased mine from an old supply warehouse for $20. For about $5 you can buy a can of "Appliance Paint" to make it look brand new.
  
• A safe: We keep our credit cards, personal identification, and titles in a fireproof safe.
  
• A desk with plenty of space: I can't stand a cluttered desk or one that doesn't let me lay out my paperwork.
  
• Sticky notes: I'm a big fan of sticky notes. I use them to jot down paycheck disbursements and leave notes on my monitor about pending transfers or balances.
  
• A phone: I like having the phone right on my desk when I need it, next to the computer and my filing cabinet so I can quickly get to information I need.
  
• Office supplies: The essentials, like scrap paper, pens/pencils, a calculator, stapler/scotch tape, scissors, etc.
  
• A shredder: A good one that will take whole envelopes. I use mine mostly for shredding unwanted solicitations, but also for those courtesy checks, expired credit cards, old documents, and incriminating photographs.
  

Not living paycheck to paycheck

When my wife and I married 2 years ago, we were literally living paycheck to paycheck. A paycheck would come in and we would pay the bills we had received, the minimums on the cards and loans, buy the essentials like food, splurge a little, and then try to save whatever was left over.

After we were married we decided to tackle our finances. We wanted to manage our personal finances, not just sit along for the ride.

One of the best feelings I got was when I realized we no longer lived paycheck to paycheck. We started saving off the front end of our paychecks instead of the back end, saving money for bills that did not arrive regularly (like insurance), saving for retirement, delegating a huge chunk of our savings rate to paying off debt after having established an emergency fund, stopped carrying balances on the credit cards, and only splurging after all those things (and food and bills) had been paid.

Now that we have money sitting in a bank in emergency fund and our bill savings, we have funds sitting there that we use to pay the bills. This is our "bill pay account", formerly what I called our "readjustment account" - still trying to come up with a good name for it. Now when we get a bill, we just pay it. When a big bill like insurance comes it, we just pay it. No sweat.

It's a great feeling, because we really feel like we're making progress.

Setting up a readjustment account

I am a firm believer in what I call a readjustment account (maybe I need a catchier name?). It's really a simple concept; you have a separate account (preferably an interest-bearing checking or savings) that you fund each week. Say you have a $500 car insurance payment every 6 months. You have lawn service for $60 every 3 months. This is a total yearly expense of $1240. You divide this by the number of paychecks, in my case 4 per month...$25.83. That's my readjusted bill that comes directly out of my paycheck every week.

Add all the other irregular bills to the system and you end up with a nice chunk of your pay (I personally have $83 a week going into my readjustment) set aside for upcoming bills. When the bill comes, I pay it out of the account. The beauty of adding many different bills to it is that even if I don't have a full 6 months saved up for that insurance bill, there is a pool of money from all those other bills, so it levels out and the money is there.

The more bills I can set up to pay on a non-monthly basis the better, because that big pool of money is earning interest for me while it waits to get zipped off to some company. Instead of stressing over my insurance bill, I can happily pay it knowing not only does it not affect my regular monthly budget but I've actually earned money on the payment I just made.

Account Flowchart

Above is an example of a flowchart of my various accounts, not including retirement and investments. Basically, this shows where our paychecks go. Since we have stopped our Roth IRAs until we are out of debt, do not fund any other investments, and our 401ks are taken out pre-tax, this is a distribution chart of our net take-home pay.

We have a brick and mortar bank that we use for our everyday spending, for cash withdrawals and debit purchases. A percentage of our income goes into our long term savings (the whole 6 months of income thing), or it goes into short term savings (but that account is already sufficiently funded so it gets nothing at the moment). Why have 2 savings accounts? The FNBO has a great high interest rate, but transferring money can take a few days. With the Wells Fargo savings, which earns barely any interest, I can transfer the money instantly. A credit card is fine for emergencies only assuming the emergency will take plastic! I like having cash available, and the Wells Fargo account beats keeping it under my mattress.

Our bills, weekly readjusted costs (readjustment pool money) and debt repayments goes to ING. From there it sits until needed and a bill is paid and earns 4% interest in the meantime. A savings account wouldn't do for this obviously because it restricts the number of withdrawals per month. Why even have an ING savings? Good question. I opened it with them intending to move my money there until I discovered FNBO, and I just left it open. Maybe ING will come out with a promotional rate, so there's no harm in keeping it.

Seeing it as a chart, it's not as complicated as it sounds when I try to explain it!

Newlywed Budgeting

Most of the financial problems I hear or read about in marriages have to do with miscommunication or just lack of cooperation between a couple. Typically one spouse handles all the finances and/or wants to relieve themselves of debt, build a budget, etc and the other just isn't interested. I heard a Dave Ramsey caller the other night who complained that despite being neck deep in debt, her husband refused to even talk about it. He just sat on the couch and watched TV because he had been working all day. Ouch.

In that spirit, here's a nice little article from MSNBC "How newlyweds can find financial bliss". Between my wife and I, our families certainly had different ways of handling finances. For one, my parents were fairly open to me about their finances, while my wife was kept in the dark on just about everything. Sadly I have learned more from their mistakes than their successes!

But one thing that was important to me was that we communicated regularly about our money. Isn't money the #1 cause of divorce?

Develop A Payment System That Works For You...Instead some couples find letting the more ‘enthusiastic’ partner handle the routine financial chores while keeping the other informed, is more efficient.

I think appointing one person in charge of just about all the finances is the way to go. Splitting it up can get confusing real fast. At the same time, I try to keep my wife informed about everything, even the little details. We've come up with some pretty good strategies for keeping each other in the loop, and many times I've had to draw out flow charts to show her where our money is going. Printing a monthly report that she and I can read together has also proved invaluable.

Epperson is a proponent of diverting a household’s cash flow into streams of yours, mine and ours. She suggests designating roughly 90 percent of the total household income as ‘ours,’ allocating 60 percent of that to household expenses and 10 percent each to retirement plans...“But there are times when you want your own money,” she adds. By allocating the remaining portion of the household budget — five percent each — to fund ‘yours’ and ‘mine’ accounts

We fall short on this one. We have a joint spending account, but nothing separate. With some debt repayments going, relatively low savings, and our income still in its infancy, we haven't had much to spend beyond the regular bills/savings/etc.

Epperson suggests...exchanges of credit information

Before my wife and I got married we didn't check each others reports. We did right after we married, and now we check them every single year from annualcreditreport.com, but I agree completely with doing it pre-wedding. I read on another blog about one man's wife finding out about his heaping piles of debt the night of their wedding! What a way to start a marriage!

Once married, it pays to review each partner’s employer benefits plan. Sometimes switching to family coverage under one plan can yield better coverage despite the added premium cost.

So far we haven't run into this situation because my job offers insurance and hers does not. But if it did, we would certainly look at them both. It gets pretty complicated though, with not only premiums to consider but also which offers better benefits. That isn't always as clear.

the "money talk" is not a one-time thing, but a continuing dialogue for couples committed to living happily ever after.

Absolutely! Communication, communication, and of course...compromise.

What is an emergency fund anyway?

A post about "How much emergency fund is too much" over at The Simple Dollar blog got me to thinking about my own emergency fund. How much should you have in an emergency fund? No Credit Needed says 12 months. Smart Money recommends 3-6 months. I personally feel a good 6 months is ideal.

But when I say I need 6 months of expenses, I'm thinking of what would happen if we had a sudden loss in income. A layoff, or illness, or anything that puts us out of work. 6 months of income would keep us afloat while we tried to rebuild.

Is this really an emergency fund? When I look at its primary purpose, I think its much more important than a simple emergency fund. For me, an emergency fund is for unexpected bills that suddenly come up, or small disasters that happen around the house. If my transmission fails and I have a $2k repair bill in my hand, that's an emergency. I need to have money that I can access pretty quickly. That convenience means that it needs to be somewhere like a high yield savings account, something with zero risk that is not going to offer very good returns.

The job-loss situation though is quite different. That's not really an emergency, its a temporary income replacement. It also has to have a principle quite a bit higher than an every-day emergency fund. 6 months of expenses. Is an "emergency fund" a one size fits all fund? I tend to think not. I feel you need to have 6 months of income replacement stashed away, but certainly you don't need to have access to it like you would a fund for smaller disasters. You can put it into an index fund or other safe but healthy return investment, and more than likely it will just sit there. Though layoffs are more common now, the chance of being suddenly fired is somewhat small.

The odds of my water heater dying, a tire blowing out, or something in the house breaking and needing replacement [insert any appliance here] is far more likely. I need to have that money pretty quickly. Even if I "floated" the balance for a month with a credit card, do I really want to dig into my income replacement fund for every day emergencies?

I say defining our emergency funds and splitting them into short term and long term safety nets is a better plan than lumping it all together into one.

How do you manage your emergency fund?

Two big mistakes, related?

I was going through my finances this morning and came across 2 pretty big mistakes. The first was with my credit card. I pay my balance every month, and it has been quite a while since I have ever been hit with a finance charge. However this month I was double-checking my bills and noticed that I paid a total of $390 towards my card...but the balance due was $397! Of course now the billing cycle for the previous period is closed and I can't pay any more money into it, so because I paid $7 under what I should have, I'm going to be hit with a finance charge.

Ugh!

Worse, I quickly calculated my average daily balance to be around $250. $250 hit with a finance charge for my stupid $7 mistake.

I also found a pretty bad leak in my budget. I discovered that I have been paying an average of $57 a month on liquor. My evening pre-dinner drink is really creating a huge leak in our spending. Do I really need to spend $57 a month on alcohol? I don't think so! Starting immediately I am going to switch to a nonalcoholic beverage after work. We'll save the alcohol for wine over nice dinners.

I think that these two may be related. To have paid $390 on a $397 bill, maybe I was drunk!

Signs of bankruptcy

Are you in danger of filing for bankruptcy? Would you be able to recognize the warning signs if you were?

The AICCCA released its top 5 warning signs that may indicate a path towards hitting rock bottom.

1) Living paycheck to paycheck

If all of your paychecks are wrapped up in bills, especially if those bills include minimum monthly payments on credit cards or other loans, you may be headed for trouble. A loan adjustment, card rate increase, or emergency could quickly send you into the red with little hope of recovery. My solution? Start slashing your spending and immediately begin saving money, at least 10% of your check. Then double up on debt payments to pay them off early, or put together a debt repayment plan (there are many out there). This will eat up a good chunk of your income so that if something does happen, you can either slow your savings or take a break from early debt repayment until you can recover.

However to avoid living on each paycheck doesn't mean you always have money in a checking account. It's silly to keep any money in a no-interest account, which brings us to...

2) No savings cushion

Put aside money for an emergency fund, that should be a #1 priority. At least a thousand or two, even if you have debt. If you're debt free, continue saving. Save for future purchases that people often finance, like automobiles and furniture. There's nothing wrong with spending money as long as you are putting plenty into retirement, have a sufficient emergency fund, have no debt, and are paying cash for those purchases (unless you decide to be savvy and play the "greater return" interest game).

3) More than 20% non-mortgage debt to income ratio


Um, how about zero non mortgage debt. You can't get ahead while you're borrowing money at 10-20% interest. Dump it ALL. The only debt you may need to have is a mortgage (and unless you are subprime - which means you shouldn't have bought a house in the first place - its a pretty cheap debt at that). Anything else is holding you back from financial freedom, because whether or not you can "earn more in investments" you are still letting debt eat into your earnings. You're paying someone else, a bank, to make up for your lack of fiscal management. Your money should work for you!

4) Making only minimum payments on credit cards

If anyone is in this position, cut up those cards immediately. Not only are you borrowing money at a high rate, but you are extending your repayment so long that you will double the due balance by the time it is paid off.

5) Not adequately insured

You don't need perfect health insurance, but one hospital visit can send you into a debt black hole. The basic minimum anyone must have is catastrophic. Your emergency fund can take care of the small stuff if you really can't afford medical insurance.

Seek credit counseling before you think you may need to file for bankruptcy, but be careful. Many of those counseling agencies will try to get you to consolidate bills and you may end up paying more for it in the end (to the agency of course).

What are your priorities?

When allocating your income to paying various funds, what are your priorities? Obviously savings and retirement should be up there, but with the ridiculous amount of consumer debt on the table (the average American family has $9k in credit card debt now?), paying off credit cards needs to be taken seriously.

Are there any low priority debts? Student loans, mortgages, car loans? Many people describe these as "normal" debt. Am I unusual in believing that all debt can and should be avoided? And if unavoidable, at least attacked aggressively until it is gone as quickly as possible?

Here are my priorities:

1) Pay down high interest debt (credit cards with obscene 15-30% rates need to be eliminated before all else).
2) Begin saving emergency funds.
3) Saving for retirement.
4) Paying short term low interest debt (student loans, car loans, etc).
5) Paying long term low interest debt (mortgage).
6) Saving for spending and high dollar purchases.
7) Additional investments.

I also believe in doing all of these on the front end of your income. Rather than paying bills, setting aside some spending money, and then throwing whatever is left at a debt, I calculate my budget and spending habits, figure out how much I need for bills and casual spending and then figure out a percentage plan for my saving/repayment goals. 10% goes here, 5% goes there, 5% over here, etc as soon as the income checks are deposited. Then I pay bills, and then whatever is left over can be used for spending. Any miscalculation then ends up cutting into my personal spending, instead of my savings or debt repayments.

FREE Practical Money Skills educational materials

Want to teach your kids about money but don't know where to begin? Go to http://www.practicalmoneyskills.com/english/resources/about/classroom.php and click "Classroom Resources" and "Download 2 CD-Rom set (75 mb.zip)" to download and burn to a CD (cd burning software required - usually comes with a home computer), or just load right on your computer.

Some of it is repeated material. For example, the "Practical Money Skills for Life CD-ROM" is the same as Disc 2 of the classroom resources. There is also a pamphlet series, but it has only general info and I consider it more of an introduction to the more detailed lesson plans.

Disc 1 is where the good stuff is. It contains lesson plans for kids in 5 groups, preschool-2nd grade, grade 3-6, 7-12, graduates and college students, and a special needs section (the addition of this last section scored big points with me). The Macromedia Flash interface they give you is a bit clunky. Basically all the material is in html, pdf, and powerpoint files. You might find it easier to just browse the files in the directories themselves, print the pdfs and htmls, and load the powerpoints manually (I couldn't get the Flash interface to launch the powerpoint presentations). Disc 2 has some practical but basic info for financial situations you might encounter at home, all in html format. There are also some games that kids might enjoy, but the only one I tried at length was the Quiz.

It wasn't very good, and some of the information wasn't quite correct. The credit card section also didn't quiz on the most important aspects of credit cards - reading and understanding the terms. It was also very flashy and loud, and not in a good way. I would stick with disc 1.

Also, its very disorganized and difficult to find the referenced materials. Although you can download the lesson plans to a CDROM, it doesn't contain just about all of the actual materials needed to learn anything. For that you apparently need to download them individually from here . There also did not appear to be any way to take the quizzes without being online.

Even so, the lesson plans are a useful guide, but expect to do most of the actually learning materials on your own. If anyone has had any experience with this program, please share it. For the conspiratorial among us, this program was created by VISA.

Also available is the Jump$tart Coalition, an education program for children who recently issued tests of financial literacy. It is sponsored by Citibank. If there are any consumer financial awareness/education programs out there that are not created by credit card companies, please let me know.

Getting nowhere at $250,000 a year

MSN Money has a report about the savings trends in different income brackets. The article focuses on those making up to $250,000, and how they do not save as much (or at least as consistently) as those making $50 to $100 thousand.

Do the rich (and I would classify them as rich) feel less concerned with having an emergency fund as the middle class? I would think they'd be more concerned. Owning a million dollar home (read: owing a million dollar mortgage) and a couple of leased Mercedes might be fine when you're bringing in top dollar, but what happens if you suddenly lose your job? Not only do you have to weather the period of unemployment, but finding a $250,000 job is going to be a lot harder than finding a $50,000 one. 6 months expenses? Try a couple of years of expenses.

These quotes stood out in my mind:

when HSBC asked what prevents them from saving more, the top answer was the need to pay everyday bills

Not surprisingly:

The savings rate in the United States dipped to zero in 2005 and has even fallen into negative territory

Of course, excuses are abound.

HSBC found that 49% of respondents with at least $250,000 in income aren't saving more because they simply "want some spending money."

Spending money can't be found in a quarter million a year budget?

respondents say they do not save more because "something unforeseen always comes up."

At least we know being in debt and not saving is not a class issue. Our excuses are the same, from the poor families on welfare to the high rolling elite.

I'll end with this gem of a quote, because it left me laughing.

people who earn $250,000 or more say they aren't even earning "enough to make ends meet as it is."

Right.

Tips for building wealth

• Eliminate your debt. A bit obvious, but the most important. Creating wealth is about maximizing the value of your money. Any debt you take on is a negative investment, and takes from one hand to feed the other. It will either reduce or, more likely, eliminate your returns on your positive investments.
  
  
• Track your finances. I myself do not use a budget in the traditional 30% housing, 5% entertainment sense. I track all my spending, all my income, and keep it in a spreadsheet so I know exactly where my money is going. It helps me make financial decisions, because the worst thing that you can do with your money is not know what's happening to it.
  
• Save 10% of your income. Right away, just start hacking 10% from your paycheck. That's how I started saving, and you will be surprised how quickly you adjust. If you aren't saving anything right now...just start with 10%, with your next paycheck. Like ripping off a band aid.
  
• Start your retirement. Start saving now. The key to saving for retirement is time, not necessarily money. Even a little bit of regular contributions over 30-40 years adds up to a lot. A company 401k? They almost always have a match, and if you are not contributing at least up to the match you are just throwing money away. It's like walking into your bosses office and asking him to pay you less.
  
• Think long term. Buying something like a car needs to be a long term decision. What mileage does it get? What maintenance will it require? Why am I buying this on credit instead of saving for it?
  
• Watch less TV. Studies show that regular exposure to advertisements causes people to spend 15% more. Cut out commercials from your life, and you subconsciously increase your income.
  
• Pay in cash. Before you have a firm understanding of where your money is going and how to maximize its potential, paying in cash will give you a real grasp of what you are spending. Cash just feels more real, and studies show that people will buy more if they are buying it with 'virtual' money, like a credit card.
  
• Communicate your finances. Talk to your spouse about your finances. Even if one or the other is the primary financial planner, getting the other on board will give you a stronger outlook overall. Two heads are better than one.
  
• Combine errands, shopping trips. Designate one day of the week to do all your errands and shopping (food, misc goods, etc). By restricting your outings, you not only save money on the transportation necessary to make those trips, you also decrease the time you have to spend money. Shopping should be as efficient as your financial plan.
  
• Repeat to yourself: Money doesn't create wealth. It doesn't matter how much money you have, what matters is how you manage it. Money is as volatile as the gas you put in your tank. Its value changes with your behavior. A family making $100,000 is no better off than one making $30,000 if they are spending more than they earn and/or not saving for retirement.
  
  
  

How I save.

Before I have posted about my 6 essential savings goals. Now I'd like to mention how I personally am going about meeting them. I started my savings vehicles a few years ago and have added about one every year to make my goals, and its a system that has worked out so far. I now have a short term emergency fund, a readjustment account, and a statistical readjustment account. I've started my retirement portfolio, but so far it only consists of a small Roth IRA (which I do not contribute regularly to yet because of some debt) and a 403b with a 5% pre-tax contribution, a 5% base and a 4% match - ie, 14% of my pre-tax income.

So far I have a 10% after-tax disbursement into my short term emergency fund. We've fully funded that ($2,000 in a low-yield easily accessible savings account) and are funneling that 10% now into the 6 month emergency savings, but that savings is still pretty low. Another 5% - what should be going towards Roth IRA contributions, is being put into some debt repayments. We have a personal loan and a car loan that need to be eliminated before we can really free up come money for saving. Those two debts cost us around $500 a month in payments and although the interest is low, I don't like having debt.

When those are paid, we can start funding our Roths at 5% and take that $500/mo payment and split it up between a car purchase savings (to save for our next car so we don't have to finance it) and mortgage prepayment. My goals are to have the car/loan paid off by January of 2009 - which it will be at our current rate and shave at least 10 years off our mortgage. To do that I need to pay only $100 a month extra, which won't be hard at all once the other debt is gone.

The vehicle I want to fund this year, my goal, is our freedom funds to let my wife and I freely spend money without always worrying about whether its going to impact our budget (and without having to always consult each other), and can be funded with a modest 2.5% of our income. Not much at our income level but it's better than nothing. It will be a while (maybe 5 years) before our 6 month savings fund - which needs to be around $25,000 - is done, but once it is we can take that 10% and add to our retirement portfolio and skim the interest off the 6 month fund as spending cash for the freedom funds.

I also hope to increase my income by this time in 2008, which will make all these funds balloon nicely.

So my outlook right now is 2 years to eliminate all my debt, 5 years to fully fund my savings vehicles, and 20 years to pay the mortgage (assuming a job doesn't force us to move). The short answer is that the way I meet all of my goals is by having one or two to meet per year and slowly build them so they don't heavily impact my budget.

Essential savings goals

I believe in 6 essential savings goals.

1) A diversified retirement portfolio.
2) A readjustment account.
3) A short term emergency fund.
4) A statistical readjustment account.
5) A freedom fund.
6) A 6 month expense emergency fund.

In that order.

1) A retirement portfolio should be made up of diversified funds and packages. A 401k is not the end-all of retirement planning. In fact, I would advocate fully funding a private package like a Roth IRA. It can be a balanced portfolio in of itself, but with the tax benefits and low maintenance fees it is superior, in my opinion, to a 401k. A 401k (or 403b) should only be contributed to before the Roth if there is an employer match - which there quite often is. Contribute up to the match, then contribute to the Roth IRA. It has limits also, and they change every tax year so you need to start planning your Roth contributions at the beginning of each year, contribute each month (to maximize your purchasing power, called dollar-cost-averaging) and then when you are capped, funnel the rest into the 401/403.

2) I previously wrote a post about my readjustment account. This is an essential savings vehicle that normalizes your budget and allows you to weather months that come with large bills. It also helps you evaluate your real yearly spending. Rather than your monthly bills jumping around, you see each month what your lifestyle is costing you. It is rather difficult to have a solid savings plan if you have a $300 bill one month that you are not properly prepared for. This should be a checking account, as it needs to be accessed often. Another advantage? If you are short on money before your paycheck comes you've got a nice pool of cash to borrow from without touching your savings.

3) A short term emergency fund is not an emergency fund that financial advisers insist you have. That's important too, but this fund is for little things that crop up in the course of the year. Things like the car breaking down, although that is eventually covered by the statistical readjustment account (goal 4). The last thing you need to do is dip into your 6 month emergency fund, which is there to cover you if you are temporarily ill or unemployed. This fund needn't be large, a couple thousand at the most. I recommend a savings account associated with your bank, so you can instantly move money to your checking via online if needed. Also why we don't want this fund very large; we lose the benefit of the high-interest savings our 6 month emergency fund enjoys.

4) Read the post on the Readjustment Account for information on how this works. This is similar, but it really is an emergency fund. It need not be entirely liquid, so a high-interest online savings account will do nicely. It takes some calculating, and some diligence in paperwork, but I think it's worth it. The car repair example is perfect. How much do you spend on maintenance for your car? Oil changes, radiators cracking...it all adds up. Get as much data as you can, add it up, divide it by the number of months you collected it and there is your average monthly spending. Do this for several other categories and you have your monthly expense for this account. This can be included "virtually" in your regular Readjustment Account checking account, and it provides a nice cushion in that account.

5) The freedom fund is to give us that high that credit card lenders prey on. We love to spend, we love to buy. Our freedom fund should be a set amount that we allow ourselves to spend every year on...well, anything! Frivolous spending on fancy pillows can be purchased from this account. The only catch is you need to be disciplined, if you empty your account for the year on one purchase...tough beans. There's always next year. I feel this is essential as someone who is married, because we don't always want to feel tied to our spouse for every purchase because our budget is so tight.

6) Here's the one that experts all recommend, and I couldn't agree more. A 6 month emergency fund saves you from an unexpected illness or job loss. This is something whose principle shouldn't be touched (and needn't grow unless your regular expenses do). It's not an investment, its not a spending account, its there to shield you from financial disaster should disaster strike. This should be in very safe CDs or high-interest savings. And I wouldn't feel bad about skimming the interest off to fund, say, the freedom account.

The best part about it? By the time you have fully funded all of these savings vehicles, you're essentially saving 20-30% of your income. If a long-term disaster does strike, you can minimize the damage by temporarily halting your paycheck distributions to one or more of these funds. You slowly reduce your dependency on 100% of your paycheck, thereby living well within your means, and assuring your financial security overall.

So where to begin? Financing all these savings vehicles can be overwhelming, to say the least. Later I'll explain how I started (and, in fact, I'm still working towards some of these goals).