Your Money_ The Missing Manual Part 2

Old-School Tools.

Not everyone is comfortable with web-based tools, especially when it comes to tracking their financial lives. If you're one of these people, there are plenty of other ways to stay focused.

For example, I, your humble author, use a spiral notebook. Every day, I make a list of my short- and long-term goals; paying the bills and paying off the mortgage both go on the list. As I accomplish a goal, I cross it off the list. At the end of the day, I copy all of my unfinished goals to a new page. In this way, the stuff I haven't finished floats to the top of the list and I add new goals at the bottom. You can use this same technique to track goals in your favorite text editor or spreadsheet program (including Google Docs; see the previous section).

Other people like visual reminders of their progress. You can draw a debt thermometer and stick it to the fridge, or write your annual savings goal on an index card and tape it to the bathroom mirror. Or create a chart with 360 checkboxes-one for every mortgage payment-and check off the boxes one by one as you make payments.

There are many ways to track the progress toward your financial goals, and no one method is right for everyone. Go with whatever works for you.

Your Money And Your Life: Advertising to YourselfThere's no shortage of TV and magazine ads telling you how and why to spend your money. But you don't see ads about why you should save; n.o.body's there telling you about the joys of Roth IRAs (see Learning to Love Roth IRAs Learning to Love Roth IRAs).Lynn Brem writes Take Back Your Brain (www.takebackyourbrain.com), a blog that aims to teach you how to fight the influence of commercial marketing and use professional advertising techniques to help you pursue your goals."Advertisers have spent billions of dollars developing and testing ways to influence us," Brem writes. "We cannot stop the torrent of advertising streaming toward us every day. What we can do is make sure at least some of it is advocating for objectives we have chosen for ourselves." Take Back Your Brain is filled with tips and techniques to help you use personal marketing-advertising to yourself-to stay focused on your goals.Brem says that repeated exposure to images is a great way to get motivated to save money. Say you're saving for a specific item-a fancy new computer, perhaps. Here's how you'd use personal marketing to save: 1. Find out exactly how much the item costs.

2. Designate an envelope for saving the money, and write your target sum on the outside.

3. Find a picture of the item in a magazine or online, or take the photo yourself.

4. Fasten the picture to the envelope.

5. Commit to a definite schedule for adding money to the envelope-$10 a week, say, or $50 every paycheck. Write that commitment on the envelope, too.

6. Feed the envelope according to your schedule.

Each time you add money to the envelope, you'll see the picture of the item you want, setting up a positive feedback loop that feeds your desire. To supercharge this technique, Brem suggests Photoshoping a picture of yourself with with the thing you're saving for so that it reinforces the positive buzz. (You can also use this method with targeted savings accounts, which are described on the thing you're saving for so that it reinforces the positive buzz. (You can also use this method with targeted savings accounts, which are described on Targeted Savings Accounts Targeted Savings Accounts.)

Coping with Mistakes and Setbacks.

It's unlikely you'll achieve all your goals without encountering setbacks or making mistakes. When you get sidetracked from your goals, it's easy to get discouraged. You can waste a lot of time reacting to problems-bounced checks, emergency car repairs, and so on. The best way to deal with financial setbacks is to prepare for them.

There are two main ways to lessen the impact of setbacks. You can do both of these before disaster strikes: - Educate yourself. The more you know, the better you can antic.i.p.ate problems. Read personal-finance books, magazines, and blogs. Most importantly, talk to the people you know who have control of their finances; they'll probably be happy to offer advice.TipFor more recommended sources of financial info, head to this book's Missing CD page at www.missingmanuals.com.

- Be prepared. Start an emergency fund (Establish an Emergency Fund). Setting aside $500$1,000 in savings is cheap insurance. If you have a cash cus.h.i.+on, your financial plans can't be derailed by a single mistake or crisis (unless it's big big). Your emergency fund can grow as you become more financially stable.

Even if you're prepared and educated, you're still going to make mistakes now and then, so you need to know how to pick up the pieces after things fall apart. Here are some strategies for minimizing the damage: - Don't panic. When you suffer a setback or realize you've made a mistake, try to relax and do not freak out. Take an hour or two to distract yourself. Better yet, sleep on the problem-it's amazing how a little time can provide some perspective.

- Believe in yourself. Though you may not know exactly how to solve the problem at hand, trust that you'll find a solution. Stay positive, solve the problem, and learn from the experience.

- If possible, undo it. You can reverse some mistakes. Say you just blew a bunch of money on new clothes or are feeling buyer's remorse over your new Nintendo Wii. Return the items, if you can. If that's not an option, sell them to recoup some of your loss.

- Evaluate your options. Some mistakes and setbacks aren't reversible: If a little old lady runs a red light and totals your car, there's no undoing the damage. So make the best of the situation: Create a list of your options, keeping your long-term goals in mind. This will help you avoid making rash decisions.

- Don't let it get you down. When things go wrong, it can be tempting to ease the pain by spending more money. But compulsive spending (Curbing Compulsive Spending) just makes it harder to reach your goals, which will make you feel worse, not better. So fight the urge to practice "retail therapy." Don't let one problem s...o...b..ll into two or three.

- Learn from your mistakes. Figure out where you went wrong. How did that traveling salesman sell you those overpriced steak knives? What can you do in the future to avoid doing the same thing again? This is a fine line to walk: You don't want to beat yourself up, but you don't want to keep making the same mistakes, either.

- Don't dig a deeper hole. Money spent is money spent. Just because you've already sunk $200 into a gym members.h.i.+p you never use doesn't mean you need to keep spending money on it. Cut your losses by getting out as soon as possible.

- Keep your goals in mind. A setback is just that: a temporary roadblock on your journey to something more important. Make peace with the past and keep your mind on the future.

Setbacks are disheartening, but remember: Failure is okay. Mistakes are lessons in disguise. There's a j.a.panese proverb about perseverance that translates as "Fall down seven times, get up eight." Successful people fail just as often as the unsuccessful; the only difference is that successful people learn from their mistakes, get back on their feet, and resolutely march toward their goals.

If you've made some poor choices or had some bad stuff happen to you-or both-don't give up. Use the mistakes to launch yourself on a new path. It's never too late to change direction and start making smart choices. Build your future on the ashes of the past.

TipFor more on transforming failure to success, read John C. Maxwell's Failing Forward (Thomas Nelson, 2007).Your Money And Your Life: Fighting Financial TrollsAs you travel the path to wealth, you'll inevitably run into financial trolls, which Steve Pavlina describes on his website (http://tinyurl.com/wealthlessons) this way:Financial trolls strive to sabotage your financial pursuits. These trolls can be internal or external. They're the people who make comments like, "Wealthy people are so greedy. They only care about themselves and will take advantage of anyone to make money." Financial trolls are also the internal voices that say, "If you make too much money, people will judge you harshly for it. They'll a.s.sume that's all you care about."External trolls are people with chips on their shoulders who cling to preconceived notions or just want to argue. They're not worth your time, so dealing with them is easy: Ignore them. Redirect the conversation, leave the room, or hang up the phone. Above all, don't argue-any time you argue with a troll, the troll wins.Internal trolls are more insidious than their external cousins because they're part of you, so eradicating them requires self-discipline. Internal trolls include: - Self-defeating thoughts and behaviors: "I can't do this-it's too difficult", "I'm not smart enough", "It's too much work", "I don't deserve to have money."

- Procrastination: "I'll start next week", "I'll worry about this later", "I can start saving next month." For more on how to beat the procrastination habit, see http://tinyurl.com/GRS-putoff.

- Rationalization: "Buying just one pair of shoes won't blow my budget", "I'm out with my friends-I should have fun", "I deserve to reward myself for how well I've been doing lately."

- Barriers: "I don't know how to open a Roth IRA", "It's too much bother to set up automatic deposits", "Sure I could shop around for lower rates, but I don't like talking on the phone." (There's more on how to knock down the barriers that hold you back at http://tinyurl.com/GRS-barriers.) Most internal trolls are a product of self-doubt and can be best combated through exercise, discipline, positive social interaction, and a healthy diet. (Yes, exercise and a healthy diet can help you with your finances!)Some trolls are difficult to defeat: What do you do about a partner who insists on sabotaging your family's financial security? How do you cope with your own compulsive spending? Problems like these may require the a.s.sistance of a trained professional like an accountant, lawyer, psychologist, or financial planner. The important thing is to deal with them; otherwise, they'll hold you back and keep you from achieving your goals. For more on defeating both kinds of trolls, read T. Harv Eker's Secrets of the Millionaire Mind (Collins, 2005).

Final Thoughts on Pursuing Goals Setting meaningful goals that are closely aligned with your pa.s.sions can help you make better decisions about money. When you're tempted to spend on something that doesn't match your priorities, you can resist because you know that your money is better used somewhere else. (The next chapter has detailed info about using goals to direct your spending.) One thing more than any other can help you achieve your financial goals: action. If you want to pay off your debt, own your home, or retire early, the best thing you can possibly do is start today. Commit to your goal and take the first step. The sooner you start, the sooner you'll be living the life of your dreams.

Chapter3."Budget" Is Not a Four-Letter Word.

"A budget is telling your money where to go instead of wondering where it went."-John C. Maxwell.

As you learned in the last chapter, your financial goals are your destinations. But to get from here to there, you need a map to show the way. In other words, you need a budget.

To most people, budgeting sounds about as much fun as a trip to the dentist. But creating and sticking to a budget doesn't have to be a giant ch.o.r.e, and it can have huge benefits. You probably think of a budget as a restrictive, tedious accounting of every penny you earn or spend. Turns out budgets don't need to be super detailed to be helpful.

For a lot of people, a broad, general budget gives them the guidance they need to reach their financial goals without making them feel like they're in a straightjacket. But some people prefer a detailed budget with lots of categories. If you pick a budget that fits the way you live, it can help you meet your goals more quickly than you ever imagined.

This chapter will give you some basic budget frameworks that lots of people have road-tested and found helpful. You can use them as is, or build on them to create a more detailed budget. You'll also learn why many budgets fail, and find out how to avoid common pitfalls. Finally, you'll get a rundown of some of the best computer programs for tracking your budget.

Mapping Your Financial Future.

You may have the wrong idea about budgets-lots of folks do. Budgets aren't meant to control you, and they shouldn't prevent you from enjoying life. In fact, when done properly, budgeting doesn't make you spend less on the stuff you want; it helps you spend more on the stuff that matters.

In their cla.s.sic The Millionaire Next Door, Thomas Stanley and William Danko write, "Operating a household without a budget is akin to operating a business without a plan, without goals, without direction." In Chapter2 Chapter2, you learned how to set meaningful goals. A budget is simply a plan that helps you reach those goals; it's a way to specify how and where you want to spend your money.

Your budget can show you where you've already spent your money (expense tracking), what you have available to spend now, and where you want to spend your money in the future (expense planning).

If you don't look at what you've spent in the past, you have no way of knowing how your current spending relates to your habits; in other words, you can't know what your "typical" spending looks like. And if you don't look at the future, you're not taking an active role in directing your money, which makes it hard to reach your goals. A good budget helps you look at the past, present, and future so you can evaluate your spending decisions in relation to your past choices and future plans.

Many budget skeptics turn into budget evangelists once they discover that budgeting can take them from deficit spending (spending more than they earn) to actually having a cash surplus (earning more than they spend); see the box on Simple Budget Frameworks Simple Budget Frameworks for a real-life example. In this way, rather than making you feel confined, a budget can actually be liberating. Keep reading to learn more about the joys of budgeting. for a real-life example. In this way, rather than making you feel confined, a budget can actually be liberating. Keep reading to learn more about the joys of budgeting.

Building a Budget That Works.

As mentioned earlier, your budget is your roadmap to success. It should help you take charge of your financial situation and steer you toward your goals. The key is choosing the right map. Maps are designed to make your journey easier, and the same is true of budgets. Yet when most people budget, they create elaborate, detailed lists of categories and impose so many rules on themselves that their budgets hinder their progress instead of helping, and they eventually give up. But it doesn't have to be that way.

This section will show you some simple yet effective budget frameworks you can adapt to suit your life. Some of them have as few as three categories. You can't get much simpler than that, now can you?

Your Money And Your Life: Budgeting Your Way to SuccessIn 2005, Jason was living paycheck to paycheck when his wife gave birth to their second child. Jason realized that unless he started saving, he wouldn't be able to afford clothes for his kids, let alone send them to college. So he decided to do something about it.Jason had tried budgeting before, but without success. The systems he used were too complex and they felt restrictive. "I tried to account for every nickel, every dime," he says. "That didn't work for me. I always gave up after a day or two."Then he had his aha! moment. "One day I sat down and made a spreadsheet," he says. "My wife and I earned a certain amount of money, and we decided that was all we were going to spend. I took my bank statement and put the numbers into the computer. I just made the simplest budget I could: income, fixed expenses, and whatever was left over. Nothing fancy. The first few months of budgeting were hit-and-miss, but that was okay. I made adjustments and Iearned to set priorities. I learned from my mistakes. After a few months, the budget was liberating."Jason started with a basic budget and added complexity with time. Eventually he was able to pay off over $11,000 in debt and break the cycle of paycheck-to-paycheck living. Today he still uses a budget-but now he only has to fuss with it once a year.Jason now runs a blog called No Credit Needed (www.ncnblog.com), where he helps others tackle their debt and spending issues. He tells his readers that keeping a budget was central to overcoming his financial problems."If you had told me 5 years ago that today I'd be debt free, my retirement accounts would be fully funded, and I'd have plenty of money to live on, I would have thought you were crazy," he says. "But all of these things are true. And it's because my budget helped me paint a picture of my spending."

Simple Budget Frameworks.

Many budgets fail because they're too complex. When something is difficult, it can become a ch.o.r.e, and if it's a ch.o.r.e, you're not going to stick with it. Your first budget should guide your spending in broad ways rather than determining how you spend every single penny.

The key is to start simple. Don't begin by tracking 50 spending categories-you'll get overwhelmed. Instead, try starting with 10 categories, or five, or even just two. Simple budgets provide a general framework for spending. This may sound a little sloppy, but loose budgeting is actually surprisingly powerful.

In The Only Investment Guide You'll Ever Need The Only Investment Guide You'll Ever Need (Harvest Books, 2005), Andrew Tobias offers the following simple yet effective budget: Destroy all your credit cards; invest 20% of all that you earn and never touch it; live on the remaining 80%, no matter what. Although Tobias is being glib, budgeting really can be that easy if you're disciplined. If you follow his three steps-and you start early enough-you can become rich. (Harvest Books, 2005), Andrew Tobias offers the following simple yet effective budget: Destroy all your credit cards; invest 20% of all that you earn and never touch it; live on the remaining 80%, no matter what. Although Tobias is being glib, budgeting really can be that easy if you're disciplined. If you follow his three steps-and you start early enough-you can become rich.

In All Your Worth All Your Worth (Free Press, 2005), Elizabeth Warren and Amelia Tyagi propose a budgeting method similar to Tobias's, though they're less tongue-in-cheek than he is. The authors argue that, in order to succeed financially, you need to balance three broad areas of your finances. They say to divide your monthly net income (that's after-tax income-what you actually take home each paycheck) as follows: (Free Press, 2005), Elizabeth Warren and Amelia Tyagi propose a budgeting method similar to Tobias's, though they're less tongue-in-cheek than he is. The authors argue that, in order to succeed financially, you need to balance three broad areas of your finances. They say to divide your monthly net income (that's after-tax income-what you actually take home each paycheck) as follows: [image]Figure3-1.The Balanced Money Formula.

- Allocate no more than 50% to needs, including housing, transportation, groceries, insurance, and a basic wardrobe.

- Spend up to 30% on wants like cable TV, clothing beyond the basics, dining out, concert tickets, comic books, knitting supplies, and so on.

- Set aside at least 20% for savings, including paying off debt.

TipWhen creating a budget, think of savings and debt reduction as interchangeable. While you have debt, your main focus is to get rid of it-saving money is secondary. Conquering debt takes time, but it can be done. See Chapter4 Chapter4 for debt-defeating pointers. for debt-defeating pointers.

This budget framework lets you save for the future and have fun today. The authors insist that to maintain financial balance and be happy, you can't spend more than 50% on needs (spending less than that is even better). For example, if you take out an enormous mortgage and overload yourself with a bunch of monthly bills, you'll feel swamped and unhappy.

TipYou can think of financial happiness as inversely related to how much you spend on needs: The lower your needs, the higher your happiness. (See Living a Rich Life Living a Rich Life for more about how expectations affect happiness.) for more about how expectations affect happiness.) Warren and Tyagi say most budgets fail because they don't leave room for fun. Their formula lets you spend 30% of your money on the things you want, with no restrictions. So spend it all on baseball cards or a trip to Europe if that makes you happy. The final 20% of your income should go to savings-or debt reduction.

Finally, let's look at a budget framework shared by Richard Jenkins in an article for MSN Money (http://tinyurl.com/60pct-solution). After 20 years of budgeting, Jenkins decided that a detailed budget was too much work for too little information, so he developed a simpler framework.

Jenkins's goal is to keep committed expenses manageable. (Committed expenses are the wants and needs you can't or won't compromise on; you're committed to them.) He suggests allocating your monthly gross (that's pre-tax) income like this: - 60% to committed expenses like taxes, clothing, basic living expenses, insurance, charity (including t.i.thing), and regular bills (like cable).

- 10% to short-term savings for things like vacations, home repairs, new appliances, and so on.

- 10% to long-term savings including car purchases, home renovations, emergency savings, and paying down debt.

- 10% to retirement savings through Roth IRAs, 401(k)s, and the like.

- 10% for fun money you can spend on anything you want: hobbies, dining out, whatever.

[image]Figure3-2.The 60% Solution.

When your committed expenses rise, so does your stress level. So Jenkins says that the best way to relieve money pressure is to reduce committed expenses: cut the cable TV, spend less on clothing, reduce your rent, and so on. If you can keep these costs under 60% of your income, you'll have more money to spend on other things-like having fun.

The budget frameworks listed in this section are starting points, and if you follow them, you'll be in good shape. But there's no reason you can't do more by going beyond the percentages they suggest. If you choose the Balanced Money Formula, say, and you can reduce your needs to below 50% of your income, great. If you can get them down to 40% or 30% of your income, that's even better.

Next, let's take a look at how you can use these frameworks to build an actual budget.

Budgeting in Practice.

Budget frameworks can help you wrap your head around the big picture, but most people need at least a little more detail to create a budget that'll actually help them change their spending habits. Whereas budget frameworks have broad, general categories like savings, wants, and needs, actual budgets usually have specific categories like groceries, car payment, mortgage, and so on.

How can you decide what categories to use? One way is to get ideas from budget templates, which you can find online at places like http://tinyurl.com/ramseybudget and and http://tinyurl.com/googlebudgets, or in books like Mary Hunt's Debt-Proof Living Debt-Proof Living (DPL Press, 2005) or Dave Ramsey's (DPL Press, 2005) or Dave Ramsey's The Total Money Makeover The Total Money Makeover (Thomas Nelson, 2003). But it's important to not just blindly use a budget that belongs to somebody else; your budget should fit your life. You may want to use your budget to: (Thomas Nelson, 2003). But it's important to not just blindly use a budget that belongs to somebody else; your budget should fit your life. You may want to use your budget to: - Track problem areas. Do you buy a lot of music or spend too much on dining out? If these habits make it hard for you to achieve your goals, incorporate them into your budget. By adding a budget category to track your music expenses, for example, you can continue to indulge your hobby-within reason.

- Save for specific goals. Maybe you plan to visit your aunt in Cleveland next year, and want to save $1,200 for the trip. Add a category to your budget so you'll save $100 per month toward this goal.

TipAs you'll learn in Chapter7 Chapter7, targeted savings accounts (Targeted Savings Accounts) are a great way to manage your saving priorities. Whatever you're saving for, open a different account for each goal.

It's up to you how detailed to make your budget. To get started, take one of the budget frameworks from earlier in this chapter, like the Balanced Money Formula, and break each of the broad categories into three to five more specific categories.

Let's say, for example, that your family's take-home pay totals $4,000 per month. You'd use this number to construct your budget. (Always budget with only your actual income; don't include bonuses or raises you've been promised.) Based on this hypothetical income, you might split the Balanced Money Formula into the following categories: Table3-1.Sample Balanced Money Formula Budget

Needs: 50%, or $2,000 .

Wants: 30%, or $1,200 .

Savings: 20%, or $800 .

Rent: $800 .

Entertainment: $400 .

Credit card payments: $300 .

Utilities: $150 .

Dining out: $300 .

Your retirement savings: $200 .

Transportation: $300 .

Clothes and grooming: $200 .

Your spouse's retirement savings: $200 .

Insurance: $150 .

Miscellaneous: $150 .

Your kid's college fund: $100 .

Groceries: $500 .

Charitable giving: $150 .