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Financial Goals for 2010

Wednesday, January 6th, 2010

I thought it may be helpful to share my financial goals for this year:

  • In order to have financial freedom in retirement:
    • Contribute at least 15% of my income to the company 401K plan via payroll deduction from each check.
    • Contribute $2,500 every three months to Roth IRAs for my wife and myself totaling $10,000 for the year.
  • To open the possibility of early retirement
    • Invest at least $1200 this year in a taxable account by contributing $100/month.
  • To have money available for my future goals:
    • Invest 15% of my income in my company’s employee stock purchase plan via payroll deduction from each check.
  • To aid our children with college expenses
    • Save least $160 per month into 529 plans via automatic deposits.
  • To pay my son’s tuition
    • Save at least $160 per month.

Goals Instead of Resolutions

Wednesday, December 30th, 2009

Are you tired of making resolutions every year and never making progress on them?  Well this year try something different make some goals instead of resolutions.  With goals you are much more likely to follow through and really accomplish something.

Goals that are SMART

To maximize your chances of achieving your goals, make them SMART:

  • Specific- Every financial goal should have a specific dollar amount.  Instead of a vague resolution like “I will save for retirement” be specific “I will save $5000 for retirement”.
  • Measurable – You need to have a way to gauge your progress, since your financial goals should have a number it is easy to measure the progress.  The progress percentage is the amount you have divided by your goal number multiplied by 100.
  • Attainable – A goal must be something you have control over- like investing a certain amount.  There is no point in setting goals on things beyond your control like getting a particular return on your investments.
  • Realistic – Your goals should be realistic so that you can stick with them- if you make them unrealistic you will most likely become discouraged and give up on them.
  • Timely – The difference between a dream and a goal is that goals have deadlines!   It’s also helpful to break down goals into manageable pieces.  For example “I will save $5000 for retirement this year by investing $417 each month.”

I like to add two features to my goals- a reason for them and an at least clause.   The reason is there to remind me why I chose this goal, and to remind me why I should sacrifice to achieve it.  The at least clause opens up the possibility to accomplish more if circumstances allow.  An example financial goal is “I will save at least $5000 for retirement this year so that I have freedom to live as I want by investing a minimum of $417 each month.”

Merry Christmas

Friday, December 25th, 2009

Have a wonderful holiday!

Frugality Should be About Creativity

Monday, December 14th, 2009

When reading an article on get rich slowly about frugality it struck me that most of the comments assume that the only option for frugality is deprivation.   You can stick to your budget by denying your desires but aren’t there any better options?

Creativity

In stead of closing the door with a statement like “I can’t afford it.” What if you ask a question like: “How can I afford it?” that opens up a whole new world of possibilities.  I heard a wonderful example from a podcast: A caller into the show told the story of how he loved sailing and was able to sail for free!   What he did was to provide his labor as a crewman for sailboat races.  This is a great example of a win-win situation- the captains have the boats and need sailors, the sailors want to sail but need boats to sail.  This is a very specific example, but there is a general principle.  Ask how could my desires also serve others?  Could this service fund my desires?

Finding the Core

The other key is to understand exactly what you love to do.  Say you love going out to dinner with friends.   Is it eating out or the interaction with friends that you really love?  If it is interacting with friends – you could substitute having friends over for a pot luck dinner.  The critical part, interacting with friends, is the same, but the bill is LOT less!  

Your Thoughts

Do you have any stories where you used creativity to make frugality work for you? Leave a comment to share them!

Wish Lists to Prevent Impulse Buying

Tuesday, December 1st, 2009

If you don’t see an item then you won’t be tempted to buy it.  Instead of browsing through all the deals at online retailers like Amazon.com ONLY browse your wish lists.  This strategy insures you can see deals on items you want and will ignore the rest.  It will also save you a lot of browsing time too.  Just be sure to limit your wish lists to things you really want.

Happy Thanksgiving!

Thursday, November 26th, 2009

Happy Thanksgiving, I hope you have a lot to be thankful for today!  I’m going to take some time to try to appreciate all of the the people and things I have.-Rick

Retailers Are Trying to Brainwash You!

Monday, November 23rd, 2009

Save Money.  Live Better.   Good advice, right? Normally I would agree, but I bet the last time you read that was on a Walmart advertisement that all about you SPENDING not SAVING!   I’m sure you have seen dozens of adds proclaiming SAVE! in anticipation of Black Friday.  The truth is that making purchases at lower prices will only become savings when:

  • You can sell the item for more then you paid for it.
  • You were ready to buy at a higher price with cash.

The first case is extremely rare because most used items lose 50% of their value, still there are sometimes opportunities- just don’t forget to factor in the cost of your time to buy and sell the item!  If you fall into the second case- you decided on your own to make a  purchase, saved the cash needed for it, and just happened to find a better price.  Then you have real savings go for it!   Just be wary of the lure of the bigger/better version that will eat up all your savings!  In any other case don’t fool yourself you are really just spending more.   Before you part with your hard earned cash, ask yourself: Couldn’t I live better by keeping my old TV/DVD player/iPod and REALLY saving that money?

Should I Wait or Act Now?

Monday, November 16th, 2009

Are you interest in investing, but feel overwhelmed with information? You might want to delay starting until you figure it all out, however that would be a mistake! Let’s consider two investors Motivated Moe and Cautious Carl that want to start investing. Both will invest $1000 a year once they start. Moe does not know what to do but wants to start right now. Cautious Carl decides he will wait and figure out the best investment path before starting. Carl studies and after a year decides to invest in a portfolio of bond and stock index funds which returns 8% each years of investing. Moe starts out with a very conservative fixed investment and decides he will find better alternatives later. Moe has two years where he only earns 2% then he adds some bonds and has two years of 4% returns. Next Moe adds some stocks and ups his returns to 6%/year for another two years. Finally Moe discovers Carl’s portfolio and sticks with it. Who does better?waitoractnow.png

  • Moe (blue) is always ahead for starting earlier!

Remember that time is money so even though it took Moe 6 years to find the right solution, starting one year earlier still puts him ahead of the game.  So, how much did Moe miss out from his 6 years of experimenting?  Only 4.5%, Carl’s caution cost him about 8%.   Time is your most precious ingredient for investing, so it’s better to start conservatively today than it is to wait until you have the perfect plan.

Simple Strategies to Improve Your Money Management

Friday, November 13th, 2009

Tired of increasing credit card debt, or overdraw your checking account?  Would you like to be the one to fix your family’s finances?  Here is a simple system that can help you do it!

Eliminate the Invisi-bill

It’s easy to overspend if you don’t have any idea that you are doing it!   Do you know how much money you can spend today without getting into trouble this month?  I’m going to share the system I used in college to really know exactly how much I could spend:

  • I always carried my checkbook.
  • I immediately recorded any expenses.
    • Not just checks or ATM transactions but also credit card charges.
  • If I ever wanted to spend I could check the balance to see if I could afford it!

Yes, I realize some of these expenses won’t clear immediately, but if you assume that they do then you never risk overdraft fees!  Also, when that credit card bill comes in the mail you will have the money available to pay it off.

But My Finances are too Complex!

I bet you are thinking that this could work for a college kid but your finances are too complex you have lots monthly bills, and some of them you don’t know the amount ahead of time.  Well there is good news; it isn’t hard to extend my simple system to work by:

  • Recording any fixed monthly expenses at the start of the month
  • Building up a reserve for variable monthly expenses

If you always enter the fixed monthly expenses at the start of the month they will never be a nasty surprise at the end of the month.   As for variable expenses- you probably already have a good guess of the range a bill could be.  For example your electric bill may be 2-3 times more in the summer when running the AC, but you know it isn’t 20-30 times more.  If you put aside some amount of cash reserve you can cover the variable part of your variable expenses.  Also, once you know how much you really have to spend you will want to have some reserve cash anyway…  Otherwise you can’t take advantage of life’s opportunities because you are broke!

But I Hate All that Math

Do you like trying to manage credit card interest payments and overdraft fees better then tracking your expenses?  I certainly don’t!  However, there is some good new because once you increase your reserves enough and have the  habit of not overspending then you don’t have to watch your balance as closely.  I haven’t kept an exact total for years and haven’t overspent in years either!  These days I just keep a large enough reserve that I know I’m not going to over draw it in a month.  Then if I see my reserves dropping I spend less the next month(s), until my reserves increase enough so that I feel free to spend a bit more.

Start Investing… and Pray for a Crash!?!?

Friday, November 6th, 2009

My title sounds like very strange- who wants to see their investments crash?   However, if a crash is going to happen it is much better for you for it to happen sooner and for the recovery to happen later! Let’s explore a few graphs to see when and how much it could matter.

Lump Sum

Let’s first consider a lump sum starting with $10,000 what happens in three cases:

  • Blue – Uniform 8% Returns
  • Red –  Boom (133.3% gain) then Crash (-50%)
  • Green – Crash (-50%) then Boom (133.3% gain)

lumpsum.png

  • All 3 cases end with exactly the same amount

This isn’t an accident because multiplication is commutative, the order you multiply doesn’t matter: 3*5 = 5*3 = 15.   However, most of us don’t do all of our investing in one giant sum.

Periodic Investments

Most of us put away some amount every year over a long period of time; let’s look at an example where we invest $1000 each year for 10 years with the same returns as above:periodic.png

  • Totals Very Different:
    • $26,812
    • $7,317
    • $13,486

Multiplication with addition (or subtraction) is NOT commutative, for example (5+1)*2+1 = 13 while (2+1)*5+1= 16.  The order matters!  It matters a lot in investing- if the crash happens first then the boom the total is over three times more than the boom first and then the crash.   So when you start investing you should pray that the biggest crash happens immediately!