I have long contended that, at its most fundamental level, keeping a household’s finances in the black has much in common with operating a profitable business. In both cases, you have to try to generate the greatest revenues, while at the same time keeping expenses in check. It’s not rocket science or brain surgery. In both worlds, success boils down to making – and keeping – more money than you spend.

These thoughts were percolating in my mind last fall, when I covered one of the printing industry’s largest conventions, the Graph Expo Show at Chicago’s McCormick Place. The show is both a showcase for printer manufacturers and suppliers, and an opportunity for printing companies large and small to learn about the latest technology.

On day one, I sat down to take notes at a presentation billed as “Heidelberg Presents the State of the Industry with Andy Paparozzi.” As vice-president and chief economist for the National Association for Printing Leadership, Paparozzi had been called on by printer maker Heidelberg to offer attendees an hour of well-chosen economic illumination.

If you ever get a chance to witness a talk by Andy, don’t miss it. Knute Rockne could have taken lessons from Paparozzi in exhorting listeners to greater glory. As impressed as I was by Andy’s gifts at a microphone, however, I was even more taken by the universal nature of his insights.

While Andy’s talk was geared to an audience of printing company honchos, it could just as well have fit virtually any other industry. Beyond that, almost every lesson he imparted to business held some parallel for those trying to hold household budgets together.

Let’s take a look at a few of Andy’s key points, and see how effectively they translate to the American household of Joe and Jane Sixpack and their 2-1/2 precocious youngsters.

Managing uncertainty

Paparozzi started by noting that as he talked to printing industry professionals, he sensed an aura of uncertainty from each. They didn’t know what to expect next.

“I’ve never seen that in my 28 years in this great industry,” he said. “Recovery has been maddeningly slow, irritatingly sporadic and uneven. But recovery is nonetheless occurring. This recovery is not what we want it to be, but what we make it. That requires making smart investments, managing uncertainty, and learning from the last recession.”

Translation: We’re not happy with the bounce-back from the economic abyss of 2008, but why waste time and effort complaining about it? We can still exert some control over how we recover, and that in itself is energizing. We’re not helpless pawns in the recovery, but masters of our own ship. We can put extra time and consideration into what we spend, and manage uncertainty by husbanding our household savings and avoiding risky purchases. We can also avoid mistakes made last time, which for many centered on assuming good times would last.

“Nothing is more important to the future than getting capital investments correct,” Andy went on. “We can’t pass inefficiencies on to our clients. The industry’s too competitive.”

Translation: One of the “capital investments” any family can make is in education and training. Being good is no longer good enough in the workforce of 2011. A struggling economy may be the best time to invest in training, because as the economy improves, it stands to make us more marketable in an ever more competitive employment landscape.

“We must stay lean,” was Andy’s next message. “Recovery no longer provides a margin for error. And you can’t let being busy be an opportunity for not getting better. We’re getting better or falling behind. Retain multi-taskers and release those who can’t or won’t multi-task. And set up a cost-watch task force on the production floor.”

Translation: Let’s excise the fat from our household budgets, while also seeking an opportunity in our spare time to improve our financial circumstances. Let’s look at landing a second, part-time job, selling some unneeded camping equipment, clipping coupons or taking in a boarder. Let’s find a way to convert some of our relaxation time into productive use, and while we’re at it, set up a reward program for the kids when they identify places to cut costs.

“If we learn, we win,” Andy next exhorted his listeners. “If we don’t, the Recession wins. If you aren’t doing things differently, you’re not in business. You can lose it all quite easily if you aren’t prepared to change your business model. We can do more with less. We have to keep our costs light, even in the good times.”

Translation: There’s nothing like tough times to force agonizing appraisals on any household. This is probably one of those times for re-examining. Can we find a lower-cost place to buy groceries? A more cost-effective phone plan? Can we trade in our car on a more fuel-efficient model? Can we scan the Internet for Deal-of-the-Day offers? We can do more with less. We have to keep our costs light, even in the good times.

“Create a ‘Recovery Manifesto,’” Andy urged in conclusion. “Improve continuously. Challenge your own success. Never use being busy as an excuse for not improving. Be adaptable and flexible, because those who are get stronger.”

Translation: You may be tired of the slow recovery, but that’s no reason not to embrace principles that make businesses successful, in printing or any industry.

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Despite high unemployment and lingering financial turmoil from the recent recession, American workers continue to earn pay raises each year. According to the Bureau of Labor Statistics, the typical worker earned an average pay raise of 1.9% last year, and they are on tap to earn a similar raise in 2012.

These annual pay raises will help wages keep up with inflation. While a 2% to 3% raise may not seem like a lot of money at first glance, it can equal $1,000 or more per year for a family earning $50,000. But the real question remains, what should you do with your new pay raise after you earn it?

If you do not take an active role in putting the money to good use, then you are more inclined to simply find it disappearing into your monthly budget before you can even realize the money is gone. Below are five ways to help you put your new pay raise to good use.

Pay off high interest debt

Using a new pay praise to pay off high interest debt is typically a wise move. Having credit cards that charge you 18% or more in annual interest can quickly start to add up. Paying off credit cards with a high interest rate with a pay raise is like earning the same amount from an investment.

If you were paying 18% each year in interest on a credit card and paid off that card with your new pay raise, it is just like having earned 18% annual rate of return on your money. While the stock market zigzags like a roller coaster, paying off your high interest debt can be as sure a return as possible.

Build up your emergency fund

One thing that I personally struggle with is having a fully funded emergency fund in place. Most financial experts recommend that you have three to six months of living expenses set aside in an emergency fund. What many people do not often realize is that six months of expenses is actually quite a large amount of money in many cases. It can quickly equal $10k-$20k for some families. Living on your previous income and saving your new pay raise is a great way to help boost your emergency fund if have not quite reached your goal of six months of living expenses.

Boost your retirement savings

Using your pay raise to build up your retirement savings can be a great plan. You have until April 15^th of each year to finish contributing to an IRA. If you receive a year-end bonus or a pay raise at the beginning of the year, you can put that money to good use by finishing up maximizing your retirement account contributions.

A pay raise is also a great way to build up to maximizing your 401(k) retirement plan contributions. In 2012, you can contribute up to $17,000 to your 401(k). That is a lot of money, especially if you are just starting out in your career. But, you can incrementally increase your 401(k) contributions each year until you reach your maximum contribution level. If your small increase is timed with your new pay raise you won’t even notice the difference.

Double check your insurance coverages

Do you have enough insurance coverage? Far too many people find themselves underinsured in many aspects of their lives. Do you have umbrella insurance to protect yourself from being sued? Do you have flood insurance on your house? According to FEMA, over 30% of all home damage from flooding occurred on homes that are not in a federally designated flood zone. Purchasing flood insurance if you live outside of a flood plain is very inexpensive. Spending money now on the proper insurance coverages can help you save on insurance in the long run.

Splurge on yourself a little

I am not talking about spending your entire pay raise by purchasing things for yourself. But, you did earn the money, and you should enjoy it. Many financial experts recommend taking a small portion, such as 10%, of your raise or any year-end bonus you earn and spending it on something for yourself. Doing so will help you stick to your other plans for the rest of the money. This is similar to having a cheat day on a diet. If you are too strict with yourself and how you spend your money, you will be more inclined to fall off the wagon and be resentful to your new financial goals.

Are you one of the lucky ones that will receive a pay raise this year? What will you do with your new pay raise? Will you just absorb it into your monthly budget, or will you use it to increase your financial wellbeing? Living on your previous year’s income and using your new pay raise to accomplish your financial goals is a great use of the new money. What do you like to do with a pay raise?

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New Years resolutions usually involve losing weight, quitting smoking, etc. Instead, this year use your resolutions to help put your financial house in order. Doing that won’t help you fit into that pair of skinny jeans or improve your breath, but it will fatten up your wallet and improve your financial outlook. Here are five potential resolutions you can make for your family:

Go Without One Thing

Have each person in your family resolve to give up one indulgence in the coming year. These don’t have to be big things, but they need to be things that cost money. Examples might include chewing gum, an expensive brand of hair conditioner, the second daily cup of Starbucks coffee, driving to a destination that is easily walked to, playing the lottery, etc.

The sky is the limit here. The idea behind giving up one thing is that psychologically it is more effective when you can focus on your sole sacrifice rather than generally resolving to spend less money. And it’s easier to keep track — if you pack a lunch for work rather than going to McDonald’s one day each week and it saves you $3 to do that, it’s easy to calculate that you’re saving $150 a year.

Shop Slowly

Shopping slowly involves several concepts. First, it means that you plan your shopping trips, which helps prevent expensive impulse purchases. Second, shopping slowly means that you comparison shop, clip coupons, and otherwise get the best deal possible. Finally, shopping slowly means you resist using credit for purchases that can wait. Sure, you want to buy all new accessories for your bathroom this minute, but if you wait a month, you may be able to pay cash.

Inventory Your Financial Life

Resolve to sit down once or twice in the new year to seriously consider your financial life. Start your financial inventory by writing down all your sources of revenue and all of your major expenses. Then examine each one in turn. Here are some questions you might ask:

• Are you getting the best price on the various types of insurance you carry?
• Is your phone/internet/cable plan exactly what you need and can afford?
• Do you really need three cars?
• Are there some tasks you are paying others for, such as lawn care, that you could do yourself?
• Is it time to ask for a raise or promotion, or to seek a new job?
• Is your 401K allocated properly?

Find savings or new money in just a couple of these and you could end the new year with a healthier bank account.

Teach the Kids About Money

This year, focus some of your parental effort into teaching your kids about money. If your children are young, you might give them their first allowance and show them the importance of saving 20% each week. If they’re preteens, help them become entrepreneurs by suggesting jobs they could do in the neighborhood or items they could create and sell. If they’re teens, get them involved in your family finances by explaining how you budget, make major purchase decisions, save for college and retirement, etc. These three suggestions are only the tip of the iceberg — there are tons of other ways to teach kids about money.

Set Some Specific Financial Goals

Being vague about financial improvement is lazy and ineffective, so instead set some clear goals. For example, consider ending each month with $250 more in savings than you had the previous month. You can accomplish this by either saving that much, earning that much more, or some combination. Exclude things you can’t control, such as the stock market (that is, if your stock portfolio drops by $100 in a month, you’re not really $100 further behind).

Some other possible goals: Find one specific area in your budget each quarter that you can trim by at least 10 percent; set aside exactly 10 percent of each paycheck for savings; end the year with zero balances on your credit cards. The key is to be specific, because specificity breeds discipline.

So when the New Year’s noise makers are put away and the streamers are cleaned up, take an hour to consider these potential resolutions. Even if you choose just one or two, the new year will end more financially stable than this year did.

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This is a guest post from Jessica Ward.

It happens to many of us: we design a lean, mean budget, but over time, like a worn-out rubber band, it begins to lose its pull. Sure, it’s still there and still performing its duty, but it isn’t the well-tuned machine it used to be. You might have experienced some “lifestyle creep” — little things, which add up over time.

Is your budget doing its job? When was the last time it got a tune-up? Here are a few quick checkups to make sure your budget is running at peak efficiency.

1. Pull out your budget from last year, and, if you can, 2-3 years ago. If you don’t keep your budgets, check your bank statements. How is your spending compared to last year? One of my favorite books is Jim Collins’ “Good to Great” which explains that “success is a direct result of disciplined people, doing disciplined things, in disciplined ways.” How disciplined is your spending, especially in comparison to past results?
2. Review your most recent grocery receipts. Highlight the four or five most expensive things. Would you have purchased those items a year ago? What can you do to reduce or eliminate those? I discovered that a consistently large expense in my budget was laundry detergent, so I started making my own. It costs about $2.70 per year, versus my earlier $17 per month. Saving money on groceries can go a long way towards taming your budget.
3. Conduct a regular budget “performance review.” Managers review their employees. If your budget is not working for you, you need to know early on so you can spot and correct problem areas. At least twice a month, if not weekly, revisit your goals versus actual spending and see where you’re at. A monthly post-mortem on the budget is virtually useless, because you can’t fix the prior month — you can only budget smarter for the following month. Attacking your budget from both sides will be far more effective.
4. Have you added cable TV or other extraneous services back into your budget? Do you really need it? I cut my cable one summer in a fit of budgetary ambition. A few months later, ice hockey season started, and I really missed the games, so I succumbed and added the cable back in. After a couple of these cycles, I learned that some cable companies offer 3 or 6 month promotions without a penalty for canceling. Now, I add cable just for the winter at a short-term promotional rate. If you’ve elected to keep cable year-round, try calling and asking them to adjust your rates. Our cable/phone/internet services are “bundled” so we periodically call and ask to be “rebundled” (same services, new price structure). They can almost always drop our price — if they can’t, they can usually tell us when the next promotional rates begin, so we can call back at that time.
5. This is the season for outrageous energy bills. Call your energy company and find out the best ways to reduce your energy bills. Perhaps you could run the laundry and dishwasher at night during off-peak hours. The utility company may even provide free energy consultations. My water company noticed my high water usage and offered a consultation — they gave us free replacement showerheads which cut down on our water and electricity use (for hot water).
6. Check for “zombie” charges. Recurring charges on your bank account and credit cards can slip by us unnoticed. Double check for magazine subscriptions, newspapers, gym memberships, and other items that might be under the radar.
7. Ditch the storage unit. If you’re paying for offsite storage, you may think you’re saving money “just in case” you need that stuff again. But in reality, you’re buying it all again every month. Remember, the keystone to frugality is efficiency. Hold a garage sale, and stash that money in your emergency fund, just in case you do need some of that stuff again.
8. Call your home and auto insurance company and ask for a lower rate. If you can’t get one, call a qualified insurance broker and have them shop your policy around.
9. Eliminate “miscellaneous” from your budget. Be ruthless with unallocated spending. If it isn’t important enough to budget for, should you really be spending it?
10. Think before you renew! Many magazines and newspapers automatically send their renewal notices at year end. Let’s face it, we’re just trained to renew things at the end of the year. But the fact of the matter is, your renewal may not be up for many more months. I once canceled a magazine subscription and continued to get the magazine for a year. I called and asked why, and they explained that I was renewed for another two years — I’d just paid each time they billed me. Thankfully, they gave me a refund for the overpayment.

So those are my ten tips for giving your budget a tune-up. What tips and tricks do you use to keep your budget in line?

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As I write this, I’m sitting in the living room of my childhood home. My dad has been experiencing some fairly serious age-related health issues, so I took some time off to come home and help out for a few days. Unfortunately, he’s at a point where my mom can’t care for him entirely on her own, so they’ll be needing some help.

The good news is that they’ve been carrying a long-term care insurance policy for quite some time now, so they’ll be able to fall back on that for some financial assistance. But even with that policy in place, I’m learning that elder care ain’t cheap.

The policy that they’re carrying will pay somewhere between $150-$200/day for in-home care — let’s call it $175 for simplicity — and they’ll probably need 8-10 hours per day of help. The rates that we’ve been quoted thus far are around $30/hour, that works out to $240-$300/day. Subtracting off the LTC benefit leaves a difference of $65-$125/day that they’ll have to pay out-of-pocket.

But… The LTC coverage doesn’t kick in for 90 days, which means they’ll have to foot the bill for three months on their own — to the tune of somewhere between $7k-9k/month. Yikes! That’s a huge amount. And even after the LTC policy kicks in, they’ll be facing $2k-$3.8k in monthly expenses related to his care.

Over the course of a year, that works out to $25k-$45k in additional expenses. Ouch. I always new these things were expensive, but I’ve never done the math. And before you ask… Medicare only covers skilled “medically necessary” care, not the so-called “custodial care” that my dad will need.

In retrospect, I shouldn’t be too surprised by all of this. What we’re talking about is essentially a full-time (and then some) position, so it only stands to reason that they’ll have to pay for the privilege.

The good news is that they’ve scrimped and saved for retirement, they have a good pension, and they’ve long since paid off their mortgage, so they should be able to get through this. And if/when he needs to go in for full-time care in a nursing home, the LTC coverage will increase. But this was certainly an eye-opener for me.

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The other day, I ran across an interesting article by Rick Ferri about how to go about investing a lump sum of cash. Should you dump it all in the market at once, or should you dollar cost average? Based on historical data, your highest expected return comes from investing it all at once.

Of course, with higher expected returns comes more risk — and they’re just that, expected. While dollar cost averaging might reduce your expected returns, it also prevents you from investing it all at just the wrong moment. As such, many people would be more comfortable deploying their cash a little at a time.

For his part, Ferri suggests that you ask yourself four questions.

How big is your windfall?

For starters, if your windfall is relatively small relative to your existing portfolio, Ferri suggests that you invest it all at once in your target allocation and be done with it. Ferri’s rule of thumb is 20%. If it exceeds that 20% of your current investments, then go to the next question.

Was this money from a pension plan payout?

If the money comes from a lump sum retirement payout, then the cash was presumably invested in the stock or bond market prior to the distribution, and it should go straight back in at your target allocation.

Was the money from the sale of a business or property?

If yes, then the money was previously exposed to market risk, and Ferri suggests investing half the money today and then dollar cost averaging the the balance over the next two years. In his view, this spreads out the “entry-point risk.”

Was the money inherited or won?

Finally, if the money comes from a source where you had no previous ownership — such as an inheritance or lottery winnings — Ferri suggests investing 40% now and then dollar cost averaging the remaining 60% over the next three years.

Beyond the above, he also suggests the possibility of revisiting your target allocation depending on how big the windfall is. If it’s less than 20% of your current savings, then you probably shouldn’t bother changing your allocation. But if it’s more than that, you might want to revise your overall investment strategy.

The thinking here is that with a much larger nest egg, you probably don’t need to take as much risk to meet your goals. In other words, your risk capacity has been reduced, and you might want to shift to a more conservative portfolio.

While the specific rules he lays out strike me as a bit odd — e.g., why DCA half over two years in one case vs. 60% over three years in the other case? — he also makes some points that are worth considering.

For starters, if it’s not a huge amount relative to your current nest egg, don’t sweat it. Just dump it in the market and move on. At the same time, if it is a significant amount, then consider the source, and also consider its implications for your investment strategy going forward.

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If you’re among the fortunate few, you not only have a job you love, but one that will earn you at least a decent living over a sustained period of time.

For all too many Americans, however, that’s a pipedream. Many of them toil away at jobs they detest, but that pay the bills. After a lifetime of drudgery, they’ve funded their lives, but never experienced the joy of a labor of love.

Others follow their passions, and savor pursuits they adore, but that don’t afford a living wage. Their jobs are more hobby than vocation. And it’s not long before they realize that while they’re enjoying living, they can’t make a living.

Two guys who avoided those extremes and found the sweet spot are Randy Garn and Ethan Willis, co-founders of a Salt Lake City company called Prosper, which coaches students to make key financial changes in their lives.

Their book, Prosper: Create the Life You Really Want, which just hit the New York Times Bestseller List, may help you align happiness with the income you need over a sustained period. That equation, they argue, equals prosperity.

All about balance

“There are a lot of books just written about money, and a lot of books just written about happiness,” Willis told me. “But from our research, there are very few written about prosperity, which is the balance between money and happiness and sustainability, and deciding what role money will play in your life.”

Garn and Willis launched Prosper a dozen years ago with four employees, and grew the company to more than 400 employees, based on the idea of helping people not just think about greater prosperity in their lives, but go out and get it. Prosper has 75,000 students in more than 80 countries, its offices conducting more than 1,500 one-on-one coaching sessions every week.

Prosperity, Garn and Willis argue, isn’t about making a ton of money, it’s about making enough money, and making it consistently over time. Too many people get obsessed with making tons of money, and wind up on what’s known as the hedonic treadmill. They just keep on going, but never gain a sense of satisfaction or a sense of fulfillment. “People focus all their financial hopes on tomorrow, and wind up with a lot of broke yesterdays,” Willis says.

The Polaris Point

When those seeking to prosper find what Garn and Willis call their “Polaris Point,” named for the North Star that has guided explorers for eons, they have a clear vision of what they want to accomplish by the end of their lives.

“When you’re climbing that mountain, you’ll know you’re in the prosperity zone when you’re making the money you need, when you’re completely fulfilled and passionate about what you’re doing, and there’s a sense of sustainability in doing what you love,” Garn says. “You’ll know you’re not when you feel frustrated, anxious, depressed and distracted, or you can’t make ends meet.”

If that sounds like a bunch of nice words, rest assured there are specific strategies, a concrete plan and tactical action steps to create the life you want.

“The book has great case studies of some of our students,” Willis says. “There’s also a prosperity assessment that allows you to find out where you are personally in that prosperity equation. Where are your prosperity gaps? Where do you need to go? And how can you define the Polaris Point? Everyone has their own Polaris Point, which is what you want to achieve in your life. After all the scores have been tallied, and you’re looking back on your life, what do you want to be known for? And then how much money will that take to support you? The irony is sometimes it takes less than what you’re currently making.”

Receptive audience

Another irony is that the economic train wreck we’ve all dealt with the last few years may be making people less willing to spend their entire lives in jobs that do nothing for them but deliver a long string of paychecks.

Garn and Willis used to hear people ask, “How do I find the job that can pay me the most money?” After the financial markets meltdown, though, folks seemed to change. “They said, ‘What can I do that will be satisfying in the end?’” Willis relates. “What can I do to not just make a living, but make a life?”

Making a life, the authors emphasize, involves understanding joy is truly found in the journey, not just the destination. “From the happiness standpoint, there’s a lot of power in the pursuit,” Willis says. “It’s not just about the trophy, it’s about giving yourself a few blue ribbons along the way.”

After I hung up with Garn and Willis, I recalled the story about legendary author Joseph Heller, recounted in a book by John C. Bogle. Told a hedge fund manager had made more in a day than Heller had made in his entire career, the latter famously said, “Yes, but I have something he will never have. Enough.”

I’d bet he was one guy who knew his Polaris Point.

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I am ashamed to say that my wife told me the other day that she doesn’t know what a mutual fund is. This stemmed from a brief discussion about where to invest $1,000 that we had collected from our 8-year-old son’s birthday and Christmas money. My wife is a big fan of certificates of deposit. They are her safety blanket, and all she knows about investing.

Of course, I was appalled. I was not only mortified at her investment choices but also at my own inability to educate her over the past ten years of marriage in the topics of my chosen profession.

I realized that part of my problem has been my poor communication skills. Like many couples in America, my wife and I are very different in the way that we think about, handle, and approach our personal finances. It starts to get even murkier when we discuss our combined efforts. My wife has very little experience with, love for, or interest in personal finance, investing, or money management.

Don’t get me wrong, she does care about our retirement and our overall financial wellbeing, but she is not as passionate about the subject as I am, and doesn’t want to be bothered with the details. So, it is very hard to include her in our family’s financial planning. Below are four ways that you can try to include your spouse in the financial planning for your family.

Have a monthly finance meeting

Having a family meeting about your personal finances is one of the most important tools that you can use to include both spouses in the financial planning and decision-making process. This should not be a one-sided meeting, but rather a family money talk and discussion.

Your monthly meeting should cover items such as where your family currently stands financially, what your net worth is, which investments have grown or shrunk, etc. You should also review your financial goals, discuss any financial challenges, and refine or reconfirm your short and long-term financial plan.

Set goals as a family

Your family should have both long-term and short-term financial goals, and you should set those goals together with your spouse. Take some time separately to write down both short and long-term goals, and then come back together to share and discuss each other’s goals. You may find out things about your spouse that you never knew were important to him or her.

For example, you may learn that your spouse finds it very important to leave your family home to your children after you both die. If you do not know your joint financial goals as a family, it will be hard to ensure that your family’s financial plan is heading in the right direction.

Develop systems for saving and investing

Do you have a monthly written budget that your family sticks to when spending? How do you handle large purchases? Do you have a certain amount of money that you can spend without having to discuss the purchase with each other? Many families set a spending limit of (say) $100 or $250 without having to check with each other. For others, the limit is much lower. The key is to find a number that works for you.

You should also find a budgeting system that works for your family. Should you use the envelope budgeting system to control your spending every month? My wife and I actually use credit cards to manage our monthly budget, and pay off the balance every month.

See a financial planner together

Another great way to involve a spouse that has no interest in financial planning is to solicit the help of a professional. Not only will a certified financial planner be able to develop a comprehensive financial plan for your family based on both spouses’ financial goals, but the financial advisor will also be able to properly educate both of you on your investment options.

A financial planner can be a teammate that helps you explain things to a spouse who may need extra help with certain financial concepts. There is also a neutrality that the financial planner brings to the table. You could tell your spouse something a hundred times, but it may not click until it is heard coming from a neutral party who is an expert in that field.

Do you, or your spouse, care more about the day-to-day finances in your family? Do you have trouble including your spouse in your family’s financial planning? How do you approach your finances as a couple?

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What would happen to your finances if you were to die? Would your family be able to easily pick up where you left off? Or would they be left scrambling to piece things back together?

Just think about all those disparate bank accounts… Investment and retirement accounts… The insurance policies… The deed to your home… Your car title… And on and on and on…

According to the National Association of Unclaimed Property Administrators, states are currently holding well over $30B in unclaimed bank accounts and other assets. In other words, the stakes are very high.

So what should you do to protect your family? Simple. Create a “death dossier” — i.e., a collection of documents related to every aspect of your financial life. Given the sensitive nature of these documents, you’ll need to be sure to secure them.

But where should you put them? That depends, in part, on your state laws. In some states, it takes a court order to open your safe deposit box, so it would be better in those cases to keep an original copy of your will — and any other documents that might require immediate access — with your attorney, at home in a fireproof safe, etc.

Next question… What all should you assemble? Here’s a list of items that experts recommend you keep on hand and accessible in the event of your untimely demise:

• Marriage license/divorce papers
• Personal and family medical history
• Durable healthcare power-of-attorney
• Authorization to release healthcare information
• Living will
• Do-not-resuscitate order (if desired)
• Housing, land, and cemetery deeds
• Escrow mortgage accounts
• Proof of loans made and debts owed
• Vehicle titles
• Stock certificates, savings bonds, brokerage info
• Partnership and corporate operating agreements
• Tax returns
• Life insurance policies
• IRA information
• 401(k) information
• Pension documents
• Annuity contracts
• List of all bank accounts
• List of usernames and passwords
• List of safe deposit boxes
• Last will and testament
• Letter of instruction
• Trust documents

To this list, I would add an investment policy statement (IPS) where you (or your spouse, or whoever is in charge of the finances) lays out your investment philosophy, goals, and strategy.

You should also be sure to keep a list of one-off items, such as life insurance coverage through your workplace. In most cases, you won’t have an actual paper policy, but your family still needs to know about this os they can make a claim.

For those passwords and usernames, I would personally recommend storing them in an encrypted password keeper such as 1Password, LastPass or KeePass. Just be sure that your spouse, executor, etc. know how to access them in a time of need.

If you’re nervous about relying on a technological solution such as this, print them out and stick a copy in your safe deposit box just in case. Just be aware that it will be a pain to keep these updated, so you’ll have to make a special effort to do so.

Confession time

Unfortunately, I’ve been pretty lame about all of this myself. Yes, we have an estate plan in place, and much of our financial life could be reconstructed from our tax returns. However…

Things aren’t nearly as streamlined as they should be. This has been a long-term goal of mine, and I’ve been piecing away at it. However, at the rate I’m going, I’ll probably die of old age before I’m done.

Most recently, I’ve been working on writing an IPS, and I’ve loaded tons of info into 1Password. This goes well beyond usernames and passwords, and includes things like account and policy numbers, credit card numbers, etc. But I still haven’t shown my wife how to use it…

What about you? Do you have all your ducks in a row?

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I am getting some extra money — about $10k — and I have no idea what to do with it.

I am 57 years old and have no debt. I have about $9k in my company’s 401(k), and that is my only savings right now. I also purchased a house about three months ago.

The problem is that I have no knowledge on how to invest, but I do have a couple of people in my life with some understanding of investing.

Do you have any suggestions, or could you give me some resources that could help me make this decision?

This is an excellent question, and there are actually several issues here.

For starters, I’m not sure if that “no debt” statement means that she has no debt period, or that she has no consumer debt, but perhaps has a mortgage associated with the recent home purchase. The lack of high interest consumer debt is great. If there is a mortgage, I’m hoping that it’s at least at a low rate. Given the recent interest rate landscape, that should be the case.

Regardless, the thing that really stuck out to me was that she’s approaching 60 and has very little in the way of retirement (or other) savings. While it’s certainly nice to have an extra $10k to invest (and talk about this further in a minute), that money won’t make much of a difference if she doesn’t find a way to free up some extra cash flow and make saving/investing a priority.

The reason I say this is that, even if she can earn 8% returns on that money, it will only grow to $18.5k by the time she turns 65. And honestly, 8% returns aren’t particularly likely unless she takes on a good bit of risk between now and then. Obviously, this isn’t the sort of money that will free Diane up to retire in comfort, but it’s a start.

Spending and saving

So my first suggestion — even though she didn’t really ask about this — would be to take a very careful look at her spending patterns and figure out what she can do to free up extra cash that can be directed into an investment portfolio each and every month. Cut the cable, downsize the cell phone plan, reduce utility costs, quit dining out, etc.

Of course, spending is only one part of the equation, so Diane should also look closely at her income and try to figure out ways of earning extra money. Given that she’s been able to stay out of debt based on what she’s already earning, this extra money could be used to supercharge her savings – an absolute necessity given that she’s starting so late.

Now… Returning to that $10k windfall… If it were me, the first thing I would do would be to establish an emergency fund. Depending on Diane’s circumstances, this could be as little as $1k (at least to start), though it might need to be considerably more.

Learning and planning

At the same time, I would recommend that she start learning about investing. Yes, she said that there are some people in her life with “some understanding of investing,” but it’s hard to know exactly what this means. What I can say for certain is that nobody cares about your own financial well being as much as you do. Thus, you need to put yourself in a position to make informed decisions.

For this, I would start by reading my two go-to books about investing: The Bogleheads’ Guide to Investing and The Four Pillars of Investing. Hopefully these books will be available from the library. If not, I consider buying both of them to be money well spent.

From there, the goal should be to develop (and implement!) a plan. What are her goals? What’s her timeframe? How risk tolerant is she? Etc. By answering these questions honestly, it should be possible for Diane to develop an appropriate asset allocation — both for the $10k windfall and for the ongoing investment of her newfound savings.

If she’s still uncomfortable with her finances after doing a bit of self-education, it might be worth spending a few hundred dollars to talk to buy some time with a reputable fee-only financial planner who can help her get her ducks in a row – though I would only recommend doing this after reading the books. Once again, this will likely be money well spent.

Putting the plan into action

As for where to stash this money, the 401(k) may be a great option — or maybe not. It depends on her investment choices (and the associated fees) as well as whether or not her employer offers a matching contribution. While she can’t just contribute the $10k directly to her 401(k), she can crank up her contributions to a ridiculous level for the rest of the year and use the $10k to make up the shortfall, effectively transferring the money from her savings account into the 401(k)*. Money is fungible.

Or, for maximal flexibility (but without the employer match), she could open a traditional or Roth IRA at a low-cost provider like Vanguard. The current contribution limit is the smaller of your taxable compensation for 2011 or $5k for people under 50. This max rises to a max of $6k if you, like Diane, are over 50 years of age. She could opt for a single fund, like one of the Target Retirement options, or a simple mix of broad market index stock and bond funds.

While much of what I’ve written above might sound like Greek to the uninitiated, it’s really not that complex, and the two books that I’ve linked above should explain everything in sufficient detail to at least get started.

As always, if you have any suggestions of your own, please don’t hesitate to leave a comment.

*Note: Depending on how the employer match is structured — for example, if it’s capped each month — a more gradual approach might be advisable. The devil is in the details.

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You’ve heard time and again that expenses matter when it comes to investing. In fact, when it comes to mutual funds, Morningstar has gone so far as to argue that “investors should make expense ratios a primary test in fund selection… In every single time period and data point tested, low-cost funds beat high-cost funds.”

This begs the question…

If expenses are so important, then why are so many people so quick to fork over a ton of money to an investment advisor? The “assets under management” model, where an advisor collects a percentage of the funds that they’re managing, has become increasingly popular. Typically, this fee is around 1%.

The high cost of 1%

While that might not sound like a lot, 1% can have a huge impact on your investment returns. Consider, for example, a hypothetical investment portfolio with an initial value of $250k. In this case, the investor doesn’t have a huge tolerance for risk, so he dials in a nice 60/40 split between stocks and bonds.

If we assume that, over the next 30 years, this portfolio averages 6% annual returns, our investor friend would be sitting on over $1.4M. If, on the other hand, they had turned over their portfolio to an advisor charging 1%, and if that advisor (in accordance with the investor’s risk tolerance) had assembled a similar 60/40 portfolio, it would be worth less than $1.1M after 30 years.

This is a difference of more than $350k – all because of that pesky 1% annual fee.

Of course, you could argue that the advisor would do a better job of managing that money, thereby offsetting the higher cost. And while I do agree that good financial advisors can add value, it’s rarely enough to come close to offsetting a 1% fee.

Sure, there might be a rare advisor who can significantly outmaneuver the market, but what are the odds that you just happened to connect with one of them?

Effects on retirement income

Still not convinced? Let’s fast forward to retirement… If we assume that a particular investment allocation is sufficient to provide you with a (say) 4% safe withdrawal rate, then an additional 1% advisory fee means that your advisor is getting a quarter of your retirement income.

Read that again. For every four dollars of spendable income that your portfolio generates, your advisor will get one of them. That’s huge. So do yourself a favor and get educated. Read some books about investing. Take a course (or two) at a local community college. Then read some more books about investing.

From there, it’s just a matter of putting your newfound knowledge to work.

An alternative approach

If you’re still not comfortable with an entirely DIY approach, keep in mind that there are financial advisors out there who will assemble a plan for an hourly rate. From there, you just need to implement it. Open an account with a trustworthy outfit like Vanguard or Fidelity, spread your existing funds into your target allocation, set up auto-investments for ongoing contributions, and rebalance as necessary.

Yes, it really is that simple. And if you ever feel like you need a checkup, you can pay for another hour or two of your advisor’s time on an as-needed basis.

If you’re still overwhelmed, you can always invest in a target-date mutual fund like the Vanguard Target Retirement series. While I’ve criticized these sorts of funds in the past, they’re generally a solid option for new investors who are just getting their feet wet – and you don’t have to fork over an extra 1%.

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Do you have a will? If not, why not? Sure, you might not have any kids, and you might not have much in the way of assets, but if you die without a will, the courts decide who gets what – and their decisions might not jive with your desires.

But lawyers are expensive, and there are now a variety of options for generating a do-it-yourself will on the cheap, so why not save a few bucks and use one of those?

Back in the day, my wife and I actually did just this… We used a copy of Nolo’s Willmaker (which has since been acquired by Intuit) to put together some very simple wills. To my untrained eye, they looked pretty solid, but lucky us, we never had to test them out.

Do it yourself estate planning?

So… Is writing your own will a good idea? Consumer Reports Money Advisor recently addressed this question by evaluating three of the most popular options for putting together a DIY will – LegalZoom, Rocket Lawyer, and Quicken Willmaker Plus. In short, they found that all three had some shortcomings.

To do this, they created wills for three different hypothetical profiles using each of these tools. They then sent the resulting wills to a law school professor for evaluation. The shortcomings that were identified included:

• Outdated estate tax information
• Insufficient detail when it comes to state-specific estate laws
• Arbitrary age limits for trusts and the inability to set up conditional bequests
• The ability to edit your will after it’s complete, or to create a special directives section, both of which could introduce inconsistencies and contradictions
• The inability to create things like a special needs trust, or to address digital assets, pets, or compensation of your executor
• An inability to handle certain tax issues

In short, while having a DIY will is better than nothing, none of these budget-minded solutions are perfect. The best option? Quicken Willmaker Plus, which was described as “competent – though far from ideal – for drawing up a simple will.”

Ultimately, you’ll probably be okay if your needs are along the lines of: If I die, my spouse gets everything, if he/she dies, I get it all, and if we both die, then Individual X (or Charity Y) gets everything. But if your needs are more complex, you’d be well advised to spend some time (and money) getting professional advice.

A few years ago, we broke down and had an attorney put together a proper estate plan, including our wills, a testamentary trust (for our kids), durable general powers of attorney, healthcare powers of attorney, and living wills.

While hiring an attorney cost a good bit more than Willmaker, it wasn’t terribly expensive, and we certainly sleep better at night knowing that we have a solid – and legally defensible – plan in place.

Source: CRMA via The Consumerist

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When I began my career as a financial advisor, I worked in a bank. On my third day on the job, I met one of the wealthiest men I would ever meet. Phil was worth over $10 million dollars – and this was back in 1986.

As if that weren’t enough, Phil never inherited a dime from anyone. And to make his accomplishments even more astounding, he was a garbage man. Even though he was worth millions when I met him, he had no intention of leaving his job.

I was amazed by what Phil had accomplished so I asked how he did it. He was kind and agreed to share his story. We sat together for over an hour.

Here’s what I learned:

1. Real estate

Phil told me that he amassed his wealth by purchasing a piece of real estate every year. He thought of it as his own small business. He bought a single family home every year and rented it out to nice, stable families. He didn’t try to make a killing. He believed in growing his wealth slowly. It was a smart investment strategy.

You might think it would be tough to buy a piece of real estate every year on a garbageman’s salary, and you’re right. Phil grew his wealth during a period of steady real estate appreciation. He refinanced his properties often. He took out equity and purchased another home each year. Of course, because Phil’s income was limited, he couldn’t afford to get into a negative cash flow situation, and he never did. Also, keep in mind, Phil had a large family of 6 and his wife didn’t work outside the home.

While I believe that this could be a fantastic time to follow in Phil’s footsteps, it would probably be a mistake to count on quick appreciation right now. That being the case, it will take more time to build your wealth using real estate.

What would Phil Do Today?

I’m no longer in contact with Phil, but my guess is he’s still buying real estate now. But he wouldn’t pull out equity and take the risk of running a negative cash flow. He’d take it slowly. My thinking is that if it’s good enough for Phil, it’s probably a good idea for you and me.

The lesson is to take advantage of opportunity, but be willing to adapt to current circumstances. I meet lots of people who want to build wealth quickly. They want to make up for lost time or past mistakes. That’s a huge mistake because the risks pile up when you take that approach.

If you want to buy real estate right now, it might be a great move. But don’t get in over your head, and don’t get into a negative cash flow situation. If you do, and then find that you lose your job, you could end up on the very wrong end of the stick.

2. Methodology

Phil told me that he always invested before doing anything else. His number one priority was investing. If he didn’t have the money to go on vacation, he and his family stayed home. If he didn’t have the money to buy a new car, he stuck with his old jalopy. But he never failed to invest every year.

You’ve probably heard the expression “pay yourself first.” It’s really smart advice. In fact, if you do this, I can see how you might not even need to track your spending. But above all else, make investing your priority.

If Phil were just starting today, he might not be able to buy a rental home every year. But he’d put something aside no matter what and build on it. You may not be able to put down a huge stash of cash each year right now. But start with some amount and make sure that you put that money aside no matter what.

3. Use time

As I said above, Phil wasn’t in any rush. And he understood that he had no real reason to rush. He liked working. He thought of real estate as his retirement plan.

The lesson here is to make sure you’re not taking on too much unnecessary risk. If your time frame is 20 years (for example) make investments consistent with that period of time. Don’t worry about short-term valuations because they just don’t matter.

4. Family man

Family was really important to Phil. He stayed married to the same woman for 35 years. Much has been written about the financial devastation of divorce, and Phil seemed to intuitively understand that.

But he also involved his family in his financial plan. Even in the 80s, he made sure his family understood and supported the need to invest. They were all aligned. Phil’s children knew better than to expect their father to support a lavish lifestyle. They also understood they would have to carry their own weight.

I’ve seen more than my share of couples who worked hard, did everything right, and still ended up broke in their retirement. The reason? The gave or lent money to their kids without understanding the economic fallout for themselves. They gave up that cash out of love, but they sacrificed their own futures. I realize that it’s tough to say no to people you love when they need want your financial support but, before writing those checks, make sure you weigh the pros and cons for everyone involved.

The bottom line to Phil’s story is that he didn’t have or need a “silver bullet,” and neither do you. You’ll read many financial success stories like Phil’s. Why? Because the principals work.

You may not need $10 million but, if you’re like me, you do need to make a plan and execute it if you want a secure future. The steps Phil took are steps that anyone can take. We may not end up with the same result, and the times are different to be sure. But still, Phil’s example is a good one.

Over the years, I’ve seen people succeed in all kinds of economic conditions and situations. In fact, the situations rarely had anything to do with the success these people enjoyed. I really believe that success is available to all of us but we’re going to have to get out of our comfort zone in order to make it happen.

We have make investing a priority.

We have to say “no” to people we love sometimes.

And we have to invest in the future and stick with our strategy during uncomfortable periods.

What are you willing to do to secure your future? What are you willing to change?

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If you are like most people I know, you go through financial ups and downs. When this happens, do you talk about it with the kids or pretend nothing is wrong? If you decide to share it with your children, how? And how much do you share? I faced this dilemma a few years ago.

I’ve been pretty diligent about my finances for years. I save, invest, and (most important) track my spending. But, like a lot of people, I took a huge hit in 2008. My income plummeted at the perfect time – just when my middle daughter was about to start college. We had saved for college since the time she was born, but the investments were crushed at the same time that my income withered. The perfect storm. We weren’t in danger of losing our home or our good credit, but we were facing some difficult decisions.

We could either borrow money to pay for an expensive school my daughter got accepted into and live as if nothing had changed, or we could adjust our lives to the new reality.

My children were money savvy. They knew what was going on in the financial world by just seeing my face. And they knew my business was hit. They just didn’t know how bad things were and what it all meant.

I understood the anxiety my kids were feeling. I personally lived through very tough financial times growing up. My parents didn’t plan well at all and we paid the price for it big time. I wasn’t about to repeat their mistakes.

As a family, we talked it through and decided (I convinced them…) that borrowing money was the worst alternative, and that going to a lower-priced college was the way to go. In order to get their support, I had to be very frank about our financial situation without being needlessly gloomy. Here’s the way I approached it.

1. Honesty

As I said, everyone knew what was going on and they could see I was very concerned in a way I hadn’t been before. It never occurred to me to try to hide what was going on. But I knew that it was important for the family to have the facts.

I shared the numbers. What they were before the hit and what they were likely to be in the foreseeable future. My wife and I didn’t hold back anything from our oldest two children, but we didn’t share the numbers with our youngest, who was nine at the time. She couldn’t possibly understand what the numbers meant so we just skipped this step with her.

2. Meaning

Numbers without context have no value. We explained what was going to stay the same and what would change. I told them we were not moving and that we were secure. That’s all they cared about. I did explain that we’d be cutting back on lots of discretionary items and they seemed more than OK with that.

Without explaining what was going to change and what was going to stay the same, they would probably have assumed the worst. In retrospect, by talking about this in detail, we actually relieved their anxiety.

3. Options for school

We spoke openly about all the options for college – including borrowing. While I was dead set against taking on debt for college, it was important to discuss it. I wanted my kids to understand the pros and cons of borrowing. I wanted them to see that we could survive just fine by tightening our belts and didn’t have to solve all our problems by borrowing. Sure we’d give up some experiences – but we’d gain others.

4. Unintended payoffs

I believe that involving our children in this difficult financial process was by far the best financial lesson my wife and I could possibly provide. They learned how much it costs to live and they don’t take their lifestyle for granted. I don’t think they live in financial fear but they are financially sober. They don’t think money grows on trees anymore. They understand that they are expected to support themselves when they get out of college so they study in areas that will help them achieve that objective.

My middle daughter went to a state college and thanks us for sending her there. She is super-involved on campus and is doing great. She actually has more opportunities to shine at the state school than she probably would have had at the expensive school that she first wanted to attend.

I believe the kids got another really important message. They saw that being self-employed provides (at least in our case) more security than having a job. Many of their friends families were faced with much greater problems. If I was an employee, I could have lost my job and thereby lost everything. Unfortunately, that happened to many people.

By having my own shop, I didn’t have to worry about being fired. My kids saw the value of being self-employed (which I am a huge fan of) and the absolute necessity of running the business well.

Why is this an important issue to you?

It’s been almost three years since the financial melt-down. Many people are struggling now more than ever. Even if you are fortunate enough to have escaped that catastrophe, it’s really important to involve your entire family in your finances.

Remember, nobody taught you about money. You had to learn the hard way. Do you really want your kids to go through the same wringer that you did? If you do want to educate your children about money, what better way than to involve them in your daily financial life?

Let them see how you make decisions. Let them participate in the process. Have them experience making financial trade-offs – saying YES to one thing and having to say NO to something else. Teach them that decisions have immediate and long-term consequences. You can talk about these things and that’s fine. But there is no better way to have them integrate that education than by inviting them into your process.

What’s your experience? Do you think that sharing your finances with your children is too much of a burden? Or do you think it’s a good idea? How much do you share, and how?

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When it comes to planning for your financial future, inflation is a huge issue. In fact, given the historic annual inflation rate of 3.75% a million dollars today will be worth just over $190k in 50 years. Moreover, using that historic rate along with the rule of 72, we can further conclude that prices will double every 19.2 years.

CPI vs. the true cost of living

Of course, it’s also been argued that the true cost of living is increasing faster than the official inflation rate. One problem is that gas and groceries are omitted from the so-called “core inflation rate,” meaning that when food and fuel prices spike, this particular inflation indicator might not budge. For this and other reasons, it has been argued that official inflation estimates understate the true situation.

The motivations for underestimating inflation are obvious. Because numerous governmental programs, as well as estimates of “real” economic growth are indexed to inflation, the federal government can (at least in theory) save money and paint a rosier economic picture by understating inflation. I’m not going to wander of into the weeds and debate whether or not this is happening. Rather, I’m just pointing out the potential benefits of inflation manipulation.

Note: Just to clear up any confusion, inflation-indexed government programs typically use the CPI-U, which does include food and fuel prices. The point here was just that, for a variety of reasons, the various inflation estimated have been criticized as inaccurate, with a tendency to understate the real situation.

If inflation were to be understated, however, this would be a huge deal from an investor’s perspective. After all, if you think that inflation is running at X% and it’s really running at Y% (where Y > X), then you’re likely to fall well short of your goals – at least in real terms. The reason for this is that, even though your portfolio may be growing, the value of each dollar is shrinking faster than you expected.

Estimating inflation in the real world

With that as a backdrop, I wanted to point out an interesting website that I ran across this past weekend. It’s called The Billion Prices Project (BPP). The BPP is an academic project based at MIT which seeks to use prices collected at hundreds of online retailers to estimate a daily price index.

As of now, they are still well short of covering all of the goods and services that go into the CPI. If you click through and look at the graph, you’ll see that there is a rough correlation between the BPP index and the CPI. Since late 2009, however, it appears that the BPP index has been running ahead of the CPI.

Given the differences in what the two indices cover, it’s difficult to say if this difference is real, but this is (to me at least) a fascinating project with a lot of potential. It would be great if they can tweak the BPP to the point that it converges on the CPI. It would be especially nice to see a real-world calculation that includes the cost of fuel.

While fuel prices aren’t easy to come by online, and thus aren’t part of the BPP index, it seems like they could partner with a crowd-sourced database such as Fuelly (which I’ve written about before) to get real-time estimates of fuel prices from throughout the country.

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Earlier this week I proposed the idea of building a personal endowment. In short, this involves building an investment portfolio that is 25x-33x your annual living expenses. If you can achieve this goal, then you can fund your ongoing expenses from your investment income, without ever having to touch the principal.

Given the large numbers involved (e.g., $50k annual expenses = $1.25M-$1.7M, depending on the multiplier), I also talked about breaking this down into sub-goals. That way you can buy your financial freedom one piece at a time. Your $1k rent expense? That’s yours for a $300k-$400k. You groceries – at $250/month? You can eat for “free” (for the rest of your life) for $75k-$100k.

Today, I want to talk about two related items…

First, a reader (and fellow finance blogger) named Evan pointed out that it’s also useful to look at this concept in reverse. That is, if your ongoing grocery expenses is $250/month, then a “passive” income stream* such as a blog that earns $250/month is roughly equivalent to an investment portfolio worth $75k-$100k.

*Note: As any serious blogger will tell you, this is hardly as a passive endeavor. Nonetheless, it’s an enjoyable hobby, so it doesn’t necessarily count as “work.”

Obviously, this logic scales up with the amount of additional income, and highlights the value of earning extra money. That being said, you have to be careful about the stability of this income stream if you are counting on it being there in the long run.

Second, I also wanted to point out the importance of keeping your expenses in check if you want to achieve financial independence. Look at it this way: for every $10k you reduce your living expenses, you reduce your necessary target portfolio by $250k-$330k. That’s huge.

If you sit down and calculate your number (which I encourage you to do – right now!) and you find that it’s dauntingly high, you have several options:

1. Give up
2. Increase your earnings to reach your goal faster
3. Cut your expenses to reduce the size of you goal

For obvious reasons, I don’t recommend option #1. In reality, the best strategy is a combination of #2 and #3. Minimize your expenses to reduce your target by as much as possible, and then maximize your earnings to get there as soon as possible.

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If you feel like your retirement plan is DOA, you are in good company. The financial crisis of 2008 whacked most people’s faith in the future. In fact, this is one big reason why more and more people aren’t ready for retirement.

Government debt is astronomical, and many people aren’t sure Social Security is going to be there as promised. Long-term interest rates are low, which reduces your potential income from fixed income investments. We’re living longer and high-paying jobs are more difficult to land. People are worried about potential inflation and what it might do to their savings. Taken together, it might be reasonable to conclude that you’ll be working for a living as long as you can breathe.

According to Allianz Life Insurance Company, the statistics for retirement are sobering. The average person:

1. Retires at 62
2. Will be retired for 18 years
3. Spends $50,000 a year
4. Gets a little over 40% of their income from Social Security
5. Spends about $5,000 a year on health insurance and medical care
6. Owes $50,000

If this describes you, there should be a number of questions that are raised in your mind:

1. How much am I going to spend in retirement?
2. How am I going to generate the income that I need in retirement?
3. How can I get out of debt before I retire?

And the Grandmother of all retirement questions:

Will I ever be able to retire? And what happens if I physically can’t work?

Each of these questions deserve real consideration. Let’s go through each and see if we can answer them:

1. How much am I going to spend in retirement?

There is no sure-fire way to answer this question. You have to approximate. But there is no way you’ll be able to approximate the answer to this unless and until you know how much you spend now. As you probably know, I’m a huge fan of tracking your spending against your budgets. You should implement a budget tracking system today no matter if you are retired now or plan on retiring in the distant future. This information is central to your retirement plan.

2. How are you going to generate income during retirement?

The first question approximates how much you’ll need. The next question tries to answer how you’re going to get it. The only way I know how to address this is to make a list of all the possible ways you can generate income during retirement.

How much in social security benefits are you going to receive? Are there any pensions that will be coming in? When will you stop working? Will you work part-time after you retire? If so, how much will you earn? How much money will you have saved for retirement> How will it be invested? How much money can your retirement investments produce?

All these questions can be answered by creating a mini-financial plan. Don’t ignore this step.

3. How can I get out of debt before I retire?

If you’re in debt, you have to first identify what caused the debt problem. Some people find themselves in debt because of some calamitous situation. Others accumulate debt slowly over the years and find they can’t get out. Believe it or not, it’s the latter situation that troubles me. People in this situation face chronic debt issues. If you are in this camp, then you owe it to yourself to do whatever it takes to get out of debt now.

The last question – when will I be able to retire? – can only be answered by your own retirement plan. I strongly recommend that you create a plan and then update it every year. I recently updated my own plan and, when I did, I realized that I needed more term life insurance. Even though I’m a professional, I would never have realized that I needed to do this had I not created a plan.

Doctors need checkups sometimes. So do you. Financial planners need financial plans. You do too.

If you run your financial plan, track your budget, get out of debt, and set up your retirement income, you’ll have done everything possible to make your retirement dream become reality. You may realize that you missed the mark and have to make adjustments. No problem. It’s far better to realize this sooner rather than later.

Have you run retirement projections? How often do you update them? Were you surprised by what you learned?

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Many academic institutions, charities, and foundations fund their operations with a financial endowment. In other words, they use a pool of assets to generate an ongoing income stream without touching the principal. If this approach works for them, why can’t it work for you?

How much do you need?

Assuming a safe withdrawal rate (SWR) somewhere in the 3-4% range, you’ll need to amass an endowment of 25-33x the amount of income you’re hoping to generate. Note that the old 4% SWR is based on an academic study that has come to be known as “the Trinity study.”

According to the Trinity study, which relied on backtesting using historical investment performance data, a portfolio with a 75/25 stock/bond allocation has a 98% chance of surviving 30 years at an inflation adjusted 4% SWR. In this case, however, portfolio survival was defined as not running out of money.

If you want to avoid touching the principal, you may need to dial back that withdrawal rate to 3%. If, on the other hand, you have a relatively short time horizon and/or are okay with running down your investments, then you might opt to go higher. This part is entirely up to you.

As for that 25-33x range listed above, that calculated by simply diving your withdrawal rate (expressed as a fraction) into one. So for a SWR of 4%, you’ll need 1/0.04 = 25x your expenses, and for a 3% SWR, you’ll need 1/0.03 = 33.3x your expenses. Got it? Good.

Breaking your goal into pieces

Wherever you settle with respect to withdrawal rates, you now have a target. And, in all likelihood, it’s a massive, imposing, and seemingly insurmountable target. Let’s assume, for example, that you have annual living expenses of $50k, and that you’re young so you want to be conservative when it comes to withdrawal rates.

If you target a 3% SWR to produce that $50k in living expenses, you’ll need to accumulate just shy of $1.7M. Perhaps you could bump that SWR up a bit – after all, you can’t take it with you – but even then, you’re looking at a huge chunk of change.

So why not break the problem into pieces? Instead of trying to amass a fortune capable of covering your entire cost of living, why not shoot for incremental amounts that will cover specific aspects of your lifestyle?

Are you a self-avowed, lifelong renter? Assuming that’s the case, and that your rent is currently $1k/month, you’ll need a portfolio of somewhere between $300k-$400k if you want to live “rent free” for the rest of your life. Still overwhelmed? Let’s break things down further.

Is your grocery bill in the neighborhood of $250/month? You can “eat for free” with a food endowment of $75k-$100k. Do you love taking an annual vacation at the cost of $1500/year? Then you’ll need a “vacation endowment” of somewhere between $38k-$50k to support that habit for the rest of your life.

Note that I’m not really suggesting that you create a separate investment portfolio for each and every expense. Rather, this is more of a thought exercise designed to help you achieve financial freedom one step at a time.

Enforcing frugality

This is also a very powerful concept when it comes to valuing the things that you’re paying for on an ongoing basis. Do you pay $200/month for lawn service? By choosing not to do it yourself, your required endowment goes up $60k-$80k. Your $100/month cable bill? That “little” luxury raises the target another $30-$40k. The same goes for your daily $3 cup of coffee.

Are these things worth it? That’s for you to decide. But your spending really looks different when you view it in these terms. Try it. You’ll like it. Or maybe you won’t. But hopefully this worldview will help you make better financial decisions.

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Today I want to talk about budgeting strategies for those of you who, like me, hate budgeting. For starters, I want to remind you of a strategy that I’ve dubbed “reverse budgeting.” This is the strategy that we’ve used for years, and it’s been great. It’s both easy to set up and easy to maintain. Here’s what I’m talking about:

Instead of setting up a detailed budget, complete with projections of how much we’re going to spend in particular categories, we have predetermined (and rather aggressive) savings goals. Beyond that, we mostly let the chips fall where they may. Of course, we also have a few other targets (like giving a prescribed percentage to charity). But, for the most part, as long as we’re hitting our savings targets, we don’t really worry about the details of where the rest of our money is going.

If you do decide to go this route, I encourage you to start by sitting down to define some goals and run the numbers. What are you trying to achieve? How much money will it take to get there? And how much money can you commit to setting aside?

If you’re not sure how much you need to be saving, then you might consider following (or aspiring to) something like “The Balanced Money Formula,” which is outlined in the excellent book “All Your Worth: The Ultimate Lifetime Money Plan” by Elizabeth Warren and Amelia Warren Tyagi.

The Balanced Money Formula is based on your net (i.e., after-tax) income. According to the formula, you shouldn’t be spending more than 50% of your net income on “needs” (such as food, housing, utilities, basic transportation, and so forth). Obviously, the less you can spend the better, but let’s just stick with that 50% for now.

Next up, “wants”… You can spend up to 30% of your net income on this category. This includes all sorts of discretionary items, including things like entertainment, vacation travel, dining out, clothing beyond the essentials, etc. And yes, even things like cable TV and internet service should be included here. These things may seem essential, but they’re not truly “needs.”

And finally, savings… You should be saving/investing at least 20% of your net income for future needs. Note that I would recommend inverting the order here, and ranking these as follows: (1) needs, (2) savings, (3) wants. By re-ordering things, you protect against overspending on wants and leaving too little for savings.

Okay, now that you have goals, here are some tips for making them a reality:

Automate your savings

From here, I recommend automating your finances at least to the point where your savings and investment contributions are automatically deducted up front. That way you won’t slip up and forget. And by taking out the money up front, you won’t be tempted to spend it. Out of sight, out of mind.

Save (part of) every raise

In the future, as your income rises, simply commit to setting aside a a fixed proportion of every raise to increase your investment contributions. For example, when my wife and I were first getting started, it was a stretch to save 5% of my income – but we did it. And from there forward, we added at least half of every raise to that amount.

A year into my job, when I got a 3% raise, we bumped our savings up to 6.5% of my (now higher) income. A year after that, I got a 4% raise, and suddenly were were saving 8.5% of my (now even higher!) income. And so on. The beauty of this approach is that you won’t miss that extra money since you didn’t it in the first place.

Consider using separate buckets

Depending on the nature of your goals, you might benefit from splitting your savings up into multiple “buckets.” For example, you can stash you emergency fund in a local savings account, save for multiple near-term goals in dedicated sub-accounts at ING Direct, save for longer-term (but pre-retirement) goals in a taxable brokerage account, and so forth.

But don’t overdo it. The whole point of this exercise is to get you away from the tedium that will drive you to abandon your budget. If you streamline the front end but make the back end too complex, you’ll throw in the towel when the novelty wears off. In other words, make your system as complex as it needs to be, but no more so.

Don’t spend money that you don’t have

Finally, for this “save first” approach to work, you cannot spend money that you don’t have. Yes, it’s fine to use credit cards – we do so all the time. But you cannot allow yourself to carry a balance. If you do, then you’re not truly saving as much as you think you are, and the whole system will crumble.

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Many people ask me if they should change their investments in light of what’s happening on the world scene today. In my opinion, you can perhaps best learn how to react to major political happenings by reviewing what happened the last time the world had a financial/world crisis – don’t miss this opportunity.

Two years ago, the economy was dying. Stock prices were about 50% of what they are today. Companies announced layoffs almost every day. Banks and insurance companies were folding. Our national deficit was (and unfortunately still is) boldly going where no deficit has gone before. If you had a job, you were holding on for dear life. And being self-employed was a frightening proposition, too.

How could this story look anything but bleak? It was understandable for people to overreact and run for cover. Despite all the financial darkness at the time, however, there were still reasons to be optimistic. In fact, here’s a portion of what I wrote to my clients two years ago:

Employment

Lots of people are out of work. That’s true and it’s terrible. But 93% of the people who want to work are working.

Banking

While banks have huge obstacles to overcome, the difference between what they pay us in interest and what they charge us to borrow makes this one of the best times ever to be in the lending business. The banks are going to thrive. And while it’s tough to get a loan, it’s very inexpensive if you are borrowing money now.

Real Estate Value

Lower prices hit those who need to relocate or downsize, but when averaged over the last 10 years, you still made money in real estate. 90% of us meet our mortgage obligations. For most of us, the loss in home values is frightening, but it’s not relevant.

And working young couples have a chance to buy a home now that they couldn’t even imagine buying only 2 years ago.

Why do I bring this up? Because as frightening as times might be, you just never know how things will work out. The last two years have demonstrated that. If you had followed your gut two years ago and bailed out of your long-term investment plan, you’d be very sorry today.

While it might be a bit shaky at the moment, especially with the recent political unrest overseas, the market has recovered very nicely from the dark days of 2008/2009. Had you bailed out at the low-point, you would have locked in your losses and found it very hard to find a time to re-enter the market.

This is a very important point, and hopefully helps you in making smart decisions about what to do with your investments right now. It’s important to understand that, despite all the turmoil in the oil-producing regions, nobody knows how things are going to unfold. You also need to acknowledge that you are an emotional being, and will have strong urges to react to uncertainty.

Perspective

If you are currently drawing on your retirement accounts, you might need to make some changes – but those changes aren’t all that drastic. For example, if the market drops, you may have to withdraw less money. Granted, it’s easier to adjust to an increase in income than to a reduction, but you can do it.

And if you aren’t pulling money out of your retirement accounts yet, you are in a fortunate position. If you currently make monthly contributions to your retirement plan, you end up buying shares at bargain prices every time the market dips. In the long run, these dips can help you to maximize your retirement accounts.

Times are very tough for people who are out of work and for those who just bought homes in the last four years. If you are in one of those situations, there are a number of things you can do to improve your situation. In fact, the site that you are currently reading has a number of great resources to help you do just that.

Look at it this way… I did not live through the Great Depression, but I can tell you that the people who did go through it would have thought they died and went to heaven if they woke up and found themselves in the “depression” we’re supposedly going through now. And if you’re buying a home now, you should be ecstatic over the low prices as compared to just a couple of year ago.

I do think the upheaval in Middle East is a watershed event, just like the financial crisis in 2008 was. The world is re-defining itself. For the last two decades, we spent and borrowed like there was no tomorrow. Now we’re in “tomorrow” and we’re cutting back and learning how to make ends meet. As the situation changes in the Middle East, we’ll adapt and thrive.

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We recently received some good news from my husband’s employer. Starting this month, he’ll be getting a raise of a few hundred dollars per month. Of course, whenever we experience a change in income or expenses, we sit down and create plan for the change. We have clear financial goals that we both want to reach, but we don’t always have the same ideas on how best to accomplish them.

I’d be willing to bet that many other couples out there are dealing with similar issues. Thus, I wanted to share some tips that we’ve found useful in hopes that they’ll help your family thrive.

Examine your short-term and long-term goals

Earlier in the year, my husband and I discussed some goals that we had in mind for 2011. Here they are:

• Build our car replacement fund. Our goal is to save another $5,000 in a dedicated savings account.
• Bump up our emergency savings to a full six months. With a baby on the way, we decided we would feel more comfortable with getting more money into our savings account.
• Pay down our student loan debt. This is our last non-mortgage debt, and it’s decent amount of money. What I dislike the most about this debt is how slowly it’s going down. For every $150 or so we pay each month, the principal only declines by $45-$60.

We also have some smaller financial goals, but these are the big ones.

Allocate new money to what’s most important

If you’re lucky enough to get a raise, or otherwise come into money, it can be hard to decide which of your goals is most important. This is especially true if your partner has other ideas.

This is exactly the situation we faced, as we both had our own ideas as to we could best allocate my husband’s raise. I’d love to pay down that student loan, whereas my husband was more concerned about getting our savings built up before the baby arrives in July.

So how do you decide what to do when you don’t see eye to eye? For us, we’ve found the following tips helpful:

• Sit down and talk. Listen to each other’s motives on what to do with the money. It’s extremely easy to find fault with a goal, but hearing and understanding why your partner wants to do something can be very productive.
• Run the numbers. When we’ve discussed financial issues in the past, we’ve often found ourselves getting into the emotional and psychological side of things. When this happens, it helps to put some objective numbers down on paper (or in a spreadsheet) to keep your thoughts on course.
• Be willing to compromise. If we can’t agree to do one thing or another, then we try to find some sort of mix that addresses both of our concerns.

In this specific case, I realized that wanting to pay down the student loans faster was more of an emotional decision than a financially sound one. If we’re able to go ahead and reach our savings goals earlier, it’ll give us a cushion and allow us to start aggressively tackling our other goals.

We’re expecting a tax refund, and a good portion of that will go towards paying down the student loan. In the end, we’re hoping to meet all of our goals by the end of the year (if not sooner).

Consider having some fun money

I know many people who are so intense about their finances that they simply won’t deviate from their plan. While that works for some people, my husband and I just aren’t like that. While he’s definitely more disciplined than I am, even he wants to have some fun money.

Given the above, it wasn’t hard for me to understand his desire to also increase his “splurge account” account a bit. With everything that he’s put into building our family’s finances, I completely understand where he’s coming from. So while the majority of his raise will go towards fulfilling our joint financial goals, he’s setting aside a bit to have some fun.

I think it’s healthy for couples to allow themselves to enjoy their hard work. When I have a good month, I review it with him and put a little on the side for myself. It’s about being honest and open with each other, so one doesn’t feel like they have to hide a little stash from the other spouse.

Your thoughts on handling raises

Every family handles their finances differently, so I’d love to hear your take on this topic. How have you dealt with increases in your family’s income in the past? Did you modify your budget and direct the additional money toward your goals? If so, what specific things did you target? Your emergency fund? Retirement savings? College savings? Or did you do something fun, like start a vacation fund?

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I have a question about marrying someone who will go through bankruptcy BEFORE marriage. Other than having difficulty with getting a loan, what other effects should I expect in the future?

The bankruptcy had to do with a prior divorce, and ownership of more properties than one should own at any one time, so I’m not worried about his spending habits. What do you think?

This is a great question, and needs to be addressed from two different angles.

Everyday impacts

First, you each have your own credit history so his poor credit rating won’t impact your good credit score. Of course, if you apply for a loan together, his dark credit past is going to hurt you.

My suggestion here is for you to apply for big-ticket credit items like mortgages by yourself. You will get a better interest rate than if you apply with your fianc̩. But this leads to the second issue Рassets.

You may try to keep your assets separate and, as long as you do so, you might be okay. But you have to be careful. For example, if your sweetheart doesn’t discharge all of his debt, you wind up marrying into a financial mess. Let me explain…

Let’s say he ends up with a tax lien and the two of you file a joint tax return. In that case, the IRS is going to want it’s money before it gives you any tax refund. And debt relief from the IRS doesn’t come easy. Are you ready for that?

And the problem doesn’t end with tax liens. The same goes for things like student loans or government loans. You’ll also have to pay close attention to the laws of the State in which you live. This is especially important if you live in a “community property” state like Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin.

Let’s say that you own your own home, but you commingle funds to pay expenses associated with the property. Your new husband helps pay the mortgage and utilities from your joint savings account, where he also deposits money.

The above fits the definition of commingling and, depending on the state in which you live, the property might then be considered partially his. If he hasn’t discharged all of his debts, his creditors could come after the property in that case. Not a good outcome for you.

This is why you might want to wait to tie the knot until his bankruptcy judgment is final. That way, you’ll know exactly what you’re stepping into. If your soon-to-be groom goes Chapter 13, he won’t discharge his debts. And even if he files Chapter 7 bankruptcy (which discharges most debt), not all debts are discharged.

After he’s been through the bankruptcy process, you’ll know which debts will be staying on the books. If you live in a community property state and he still has a lot of debt, you should definitely consult an attorney to determine if it’s possible to commingle while steering clear of risks associated his debts.

The bottom line is that it’s going to take this gentleman time to get out from under. That means the money he earns that should go toward building a future with you is going to his past creditors. Thus, even if everything else works out, you’ll be directly impacted by his debt problems for years to come.

Don’t forget the big picture

I would also recommend putting strict boundaries between your new husband and your own finances. With all due respect, this man has made some pretty serious errors in the past. Sure, divorces are devastating, and anyone who goes through one could end up in financial trouble. But the fact of the matter is that he wound up owning too many properties and he failed to plan for the future.

It’s fine to build a life with a wonderful person despite past indiscretions, but be very careful about letting him get to involved with your finances until he’s really proven himself. For example, he may be convinced that he’s got an unbeatable investment strategy but give it some time before you hand over any money.

One last thing… In case he doesn’t already know, you might want to ask him how his bankruptcy is going to impact his credit score. If he doesn’t already “get it,” encourage him to check it out himself.

What advice would you give this person?

If you were in her shoes, what would you do? Would you consider marrying someone who is going through extreme financial difficulties, up to and including bankruptcy?

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I will be 55 yrs old in another month (ugh!) and have made very poor financial choices in my life. Because of that, I have very little retirement savings (about $8,000), nothing in my savings account, have a job where I live paycheck-to-paycheck.

I do have great computer skills, but no college degree. I have tried to figure out how to make some more money with my computer skills.

Right now, I am trying to figure out how to change my financial life.

I have a history of health and longevity on both sides of my family, so I am expecting I will live well into my 90s.

Any suggestions???

First off, I really appreciate the e-mail. There is a great deal going on here this and I want to break it down. As I see it, “R” has a number options – all is not lost! As always, I like to look at things in a linear fashion:

1. Stop beating yourself up

I’m not sure if I am reading too much into the e-mail, but I just want to make sure that “R” remains focused on the good things rather than on her mistakes. She has great computer skills, and it sounds like she isn’t in debt. That’s not a bad starting point if you ask me.

She has also realized that it’s time to make a change, and that’s really important. Lots of people come to see me when they are heavy in debt – and much older. “R” is being proactive here, and that’s great. I love it.

I know this sounds corny but the first thing I’d ask “R” to do would be to create a gratitude list, and write down all the wonderful things she loves about herself. This is going to instill a very positive attitude, which will translate into greater financial opportunities.

(Don’t worry… I’m not going “OPRAH” on you… I also have some very practical ideas to start putting some cash in her pockets.)

2. Break it down

If “R” focuses on the need to accumulate a massive retirement fund, she might get discouraged. A bad attitude is the kiss of death for financial success, so it’s dangerous to think about that right now.

For starters, “R” should consider launching a side business or getting a weekend job with her computer skills. Even though she doesn’t have a degree, she should be able to leverage her skills.

For the time being, I just want “R” to take action and get some side income flowing. With computer skills, it shouldn’t be hard to do. Once that money starts streaming into her hands, it’ll be time to consider if the job she has is appropriate, or if she can upgrade. I don’t know enough about her situation to say anything in detail here, but she needs to be sure that the job she has is the best value proposition.

3. Plan

Once “R” starts working that side business, she should set up a retirement plan. She’s going to have to be willing to compromise. Given her currently small retirement savings, she’ll have to work more years, and possibly live more modestly – but for now she needs to formulate a plan and work towards it.

Of course, any financial plan has at it’s core a spending plan. My experience tells me that your spending is the foundation of your financial future. I know plenty of people who earn more than a $1M/year but can’t afford to retire because they spend all of it – and then some!

On the other hand, there are plenty of people who have built a wonderful financial future on a relatively limited income. The difference? These people track their spending and understand just how important that is.

“R” should create a financial plan for herself, but she shouldn’t dwell on how far she has to go. Her plan is going to change and look better as she bumps up her income and starts tracking her spending. Her plan needs to be dynamic so she can refer back to it and update it often.

In summary, “R” needs to approach her situation one issue at a time. If she tries to process it all at once, she’ll be immobilized by fear and panic.

In summary, here’s what “R” should do:

1. Build a rock-solid positive attitude by writing all the lovely, wonderful, and talented things she loves about herself.
2. Get a side business/job.
3. Implement a tracking system for her budget and spending.
4. Create a mini-financial plan and update it as things improve.

Obviously, there are no magic bullets here. But without a firm plan, she’ll go nowhere fast. What other tips would you give to “R”?

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As I noted in a recent review of our 2011 financial goals, we’re going to have some big upcoming expenses that we need to prepare for. It’s happy news – we’re expecting our first child!

Of course, aside from the emotional, mental, and physical preparations, we’re also looking at our finances so we can be ready as possible for the baby’s arrival. We know you can never get completely ready, but it’s important to us to do our best.

For all the new parents to be out there, I wanted to get a baby list ready.

Little baby – big expenses

Who knew babies required so much? I was reviewing baby costs on Baby Center to get an idea of what to expect. It’s based on a survey of 1,000 real mothers, whose expenses as you’ll see below can vary greatly.

Baby furniture

While we’re planning to transform the guest room into a nursery, I was amazed at how much stuff is suggested for the baby’s room. I’d like to investigate and see the quality difference between some low, medium, and high end models since the price difference appears to be huge.

• Crib & mattress: $200-$910
• Changing table: $80-$250
• Bouncer: $30-$70
• Playpen: $25-$80

Baby showers are, of course, a great way to check of some of the items on your list, save you money, and give your friends and family a chance to help you out with some practical gifts.

Baby clothes

Many blogs and sites emphasize that you don’t want to go overboard and shop for a bunch of baby clothes. Children grow rapidly, and small baby clothes won’t be worn long.

The site suggests that $59/month is normal for mothers to spend. We’re going to play this one by ear. While having new clothes can be nice, we have no problem using good hand me downs. I don’t think the baby will notice, do you?

Diapers

Looking to go broke? From what I’ve been reading, diapers can be a big expense, though you can make it more manageable with a bit of elbow grease. It depends on whether you choose disposable or cloth diapers. If you’re going with cloth diapers, you have to decide if you’re going to launder them yourself or sign up for a service.

• Disposable diapers: $72/month ($864/year)
• Cloth diapers: $19/month ($228/year)
• Cloth diapers & service – $76/month ($912/year)

We haven’t made a decision yet on what we’re going to do. I’d love to get your feedback on what you’ve decided and how it worked out.

Baby gear

Traveling and living with the baby takes effort and some gear.

• Car seat: $60-$150
• Diaper bag: $25 -$200
• Sling: $29-$60
• Stroller: $70-$900
• Infant Bathtub: $20-$40

Food and feeding gear

This is another huge expense if you’re going the formula route. Breastfeeding does have some upfront costs, but month-to-month you can save a significant amount of money.

• Bottles: $60
• Formula: $105/month
• Manual breast pump: $30
• Electric breast pump: $150-$350
• Nursing bras: $75
• Highchair: $60-$250
• Plates, utensils, and bibs: $45

Besides the nutritional benefits of breastfeeding, many people and books have pointed out the economic benefits.

Money for hospital bills?

A big bill that we’re looking at is the delivery. While it’s few months away, it’s going to be a significant chunk of money. Early estimates for our insurance coverage would put it around $800-$1,000.

Since things can vary a lot based on where you are, you should consider asking friends who have recently have had babies to get an idea of their out-of-pocket expenses at your local hospital, a birthing center, or at home.

Common mistakes parents can make

We’ve had a lot of conversations with family and friends to get their much-needed advice. They’ve been kind enough to reflect and share their thoughts, and their feedback has been invaluable to us.

• Don’t get obsessed with new stuff. It’s very tempting to assume that your baby needs the latest and greatest gear that you see on TV and the web.
• Babies don’t need big rooms. We’re in a 3 bedroom townhouse and for the nursery, we allocated the current guest room. It’s the smallest of the three bedrooms, but we’re confident it’ll be more than sufficient for the baby.
• Babies don’t need a ton of toys. Well meaning friends and family have a tendency to flood your new baby with toys, so don’t stress yourself by getting more toys.

I have a feeling we’ll be asking many more questions in the future.

Your thoughts on baby expenses

I know I haven’t even come close to covering all of the possible expenses – childcare for example – but I wanted to hit some of the early expenses that we’ve considered.

Do you have kids? If so, what did you do to prepare (financially) for their arrival? Do you have any tips and tricks to share?

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The best approach to financial security is to have a beginner’s mentality. By that, I mean that you should approach your finances as if you don’t have any answers.

You might be saying to yourself, “What is Neal talking about? Surely he’s talking about someone else, not me. I never behave like a know-it-all. Especially when it comes to money.”

Perhaps that’s true. I know plenty of people that don’t behave this way… Or at least they don’t behave like this most of the time. But everyone has an intuition about a stock once in awhile… Right? They “just know” this one is going to explode, so they put a big chunk of their savings into it.

And if you ask most people what they spend, they’ll tell you they know exactly what that amount is. They don’t need to keep track of their budget. Or if you ask them, they’ll tell you they don’t need life insurance because “they have longevity and health in their genes.”

Almost everyone I’ve ever spoken with thinks they know something that they really don’t. The consequences of this mentality can be catastrophic. In fact, more people have been wiped out by this kind of thinking than by the financial tsunamis that plague investors every so often.

Here are a few real examples.

Roger’s heart attack

Roger was my good friend and CPA. He was 39 years old when he dropped dead of a heart attack on the basketball court several years ago. He was an otherwise healthy person with no history of medical problems.

According to the statistics, he should still be alive, but he isn’t. I don’t know if Roger had insurance or not – that’s not the point. The point is that most people who are 39 and healthy don’t expect to die… But they might.

Because there is a chance, even a slight chance of that happening, these people need life insurance, and they also need to do some estate planning. This is especially true if others rely on them financially.

Deborah’s stock market flyer

I spoke with Deborah yesterday who bought stock in Sirius (SIRI) when it first came out. The company had $500 million in cash and a contract with Howard Stern at the time. What could possibly go wrong? Deborah invested $10k into the stock because she felt it was a sure winner. That $10k is worth less than half that today.

These are just two examples that I can name off the top of my head. Think of all your examples. I’m sure you have plenty of them.

If you want to secure your financial future, it’s vitally important that you pay attention to this trap. Am I saying that you shouldn’t ever take a flyer on an investment? Well… Not really. What I’m saying is that it’s critical to understand what you’re doing. And if you’re taking a flyer and a risk, acknowledge it and be prepared for the consequences.

Let’s look at a few examples.

Gambling on life insurance

Are you making uneducated decisions about your life insurance? Let’s take a look. Take a few minutes and add up all the life insurance coverage you have. Let’s say a person has $250k in coverage. At first blush, that seems like a lot of money.

Whenever I meet someone and they tell me about their life insurance, I ask them why they have the amount of coverage in place. Usually people look at me like I just asked them a question in Russian. That tells me that they’re just assuming that they have plenty of coverage – but they’re not sure why. They just figure that things will work out.

Now, I ask them what their heirs would do if they were to die. Let’s assume the insured person earns $50k/year, and that life insurance is supposed to replace her income. If the family expects to use the $250k to earn $50k each year, they’re crazy. That’s a 20% annual return.

What’s really going to happen to this family is that they’re going to exhaust this $250k in 5-6 years and then they’ll be broke. This will happen for one reason and one reason alone. The person who bought the insurance didn’t think it through because they “knew” the family would be fine.

Taking your job for granted

Let’s not restrict this to insurance and investments. Think about your job. I met a man last night who worked for, and invested in, Bear Sterns and lost everything. I mean everything. He “knew” the company was strong and he “knew” his job was secure. In reality, he didn’t know anything of the kind.

Am I asking you to live in a world of constant anxiety? No. But I am suggesting that you always have a plan B and always consider the worst-case scenarios. Have a beginner’s mindset. Assume you know nothing.

In the case of your job, your plan B should be developing a weekend job that could turn into a side business, having adequate cash reserves, or a combination of the two. If you have your own business, get a small business disability insurance policy. If not, you should still explore long-term disability insurance.

When it comes to investments, hope for the best, but be prepared for the worst. If you can’t accept a worst-case scenario, don’t make the investment. And when it comes to life insurance, accept the fact that you have no idea how long you’re going to live and purchase adequate life insurance accordingly.

Do you operate with a beginner’s mind?

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While you don’t have to wait for January to start working on your finances, this is often a great time to try a new approach. If you’re thinking of making some changes, you may be wondering where to start. Here are some ideas for optimizing your finances.

Clean up your bank accounts

If you have multiple bank accounts, make sure they’re all necessary and doing their job. If you have extra accounts that you no longer need, consider consolidating them. There’s no need to have checking and savings accounts at multiple banks unless you’re actually using them.

Get free checking

Some banks are cutting back on their free checking accounts by nickel and diming their customers. If your bank is charging any of the following unnecessary fees it’s time to shop around.

• Minimum balance fees: Many banks will charge you if you have less than a certain amount in your account. Requirements vary from one bank to another, so make sure you know it for yours.
• Overdraft fees: While charging for overdrafting is fair, the amount that many banks charge can be insane. Did you know that you can avoid overdraft fees entirely with ING Direct? Instead, they offer an overdraft line of credit and charge a small amount of interest when you use it.
• ATM fees: ATM fees have risen to $2-3 for out of network use, and you’ll often get charged by both the ATM owner and your own bank. These fees can quickly add up, so shop around for a bank with low or no fees and/or ATMs where you need them.
• Fees for online billpay: These fees are less common than they used to be, but some banks still charge a fee for using their online billpay service.

Double check your recent bank statements to find see if you’ve been incurring any of these fees. If you can’t get your bank to waive these fees, then switching banks might be your best option.

Are you saving enough?

Automating your savings is one of the keys to financial success. But have you really though about much money you’ll need for various expenses? To figure things out, you need to sit down and list your needs and goals. Here are some ideas:

• Emergency fund
• Vacation fund
• House down payment
• Medical expenses for the year
• Car replacement fund
• Baby fund
• College savings fund
• Retirement fund

Every family will be different, as everyone has different goals. You may not want to be homeowners, or maybe travel isn’t a priority. Whatever your list looks like, it’s important to sit down and hash things out.

Spruce up your paycheck

Another good thing to do at the start of each year is to take a close look at your paycheck. Is your tax withholding right? Are you being paid what you’re worth? Can you think of other ways to earn extra money?

Look at your W-4

If you receive a tax refund, you should consider adjusting your withholding for 2011. While you’ll reduce your tax refund for next year, you’ll get more money in your pocket each pay period.

At the same time, you should set up (or adjust) an automatic savings transfer to make sure you don’t squander this “extra” money.

Ask for a raise

It may seem counterintuitive to ask for a raise when economy is still stumbling, but you should still take a close look at your circumstances. If you’re underpaid relative to others in a similar position, you should consider asking for a raise – especially if your employer has successfully weathered the economic storm.

Before talking to your boss, you should get your ducks in a row. Make a list of successes you’ve played a role in, and progress that you’ve made over the past year or so. You need to make a compelling case for why you’re due for a raise. You might not get as much as you want, but you’re unlikely to get anything if you don’t ask.

Make money on the side

If you’re having trouble making ends meet, you should consider moonlighting. It doesn’t matter if you wind up freelancing some of your professional skills, tutoring, or even delivering pizzas. What matters is that you earn some extra income to fill the gap.

Whether you plan on paying down your debt or building up your savings account, having an alternative income stream can help make your goals a reality.

Your thoughts

Now… I’d love to hear about your goals for 2011. Have you started working on your finances for this year? What’s your biggest financial goal for 2011? What steps are you taking to reach it?

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Doing anything fast usually has limited and temporary success.

Think about it… Lose 10 pounds in a week! Get out of credit card debt in 90 Days! Turn your investments into millions in a year!

All of these promises are pie in the sky. They might get results for some people, but it’s usually the people who sell the programs, not the people who buy them. You know this, of course, but here’s why you get taken advantage of anyway:

You want the easy way out. Unfortunately, things like getting out of debt are hard, and the debt itself is downright unpleasant. Creditors call you asking about their money. Your phone keeps ringing. The letters are even worse. You don’t even open the mail anymore. The pain builds and builds.

Then, just when you think you can’t take it anymore, you hear about a program that promises to get you out of debt in 90 days or your money back. Before you can say, “Suze Orman” you whip out your credit card and order the program.

As soon as the package arrives you rip into it and diligently put the principles to work.

Then, after just two weeks, you get tired of all the hard work. You don’t see the promised “instant results,” so you put the books aside for a few days. Before you know it, it’s been a month since you last visited the program, and now you’re deeper in debt than ever. You tell yourself that nothing works, so you give up completely. That is of course until the pain builds up again and you repeat the cycle.

Are you seeing a pattern here? Do understand now why you should not try to get out of debt fast, raise your credit score overnight, or lose 10 pounds in 10 days? It’s because you’re impatience sets you up for failure.

You and I are procrastinators at first. We wait until the problem becomes unbearable and then we become impatient, demanding instant solutions. These “solutions” never work and, once we realize that, we become disillusioned and our motivation goes out the window.

Vendors understand our character defects and take advantage of it to the hilt.

They sell us on the “instant results” we want and give us a “money back guarantee.” These companies know we’re motivated by immediacy. They also know that most people never even open the box after they buy something. It just sits on the shelf. The manufacturer has nothing to lose no matter how poorly their products perform for you and me.

I don’t blame people who sell this stuff. Nothing I do or say is going to change them. But we can change ourselves. We want solutions, but are we willing to do the work to get the results? Are you?

A better approach is to break down your ultimate objective down into achievable daily goals. Let me explain.

Let’s say you want to re-make your financial plan. This is a pretty big exercise, and one that I’m in the middle of as we speak.

The first task I had was to create an action list.

I needed to look at my spending, savings, life insurance, investments, liability, disability, car, and homeowner’s insurance, continuation plan, and legal documents.

Was my spending in line? What did do we spend? Is our spending going in the right direction?

How much do we need to save? Are we doing it? What is the expectation for those savings going forward (given that I have 2 kids in college). Am I going to be able to save more or less over the next several years?

How have our investments performed? Am I over-weighted in any particular area?

Is my trust up to date? Are all the legal documents in order to protect myself and my family?

Do I have enough life insurance? Am I paying too much for it? How about disability? Since I’m self-employed, disability insurance is an especially big deal.

This is just a partial list of questions of course. Also, my experience tells me that once I do a bit of research and answer one question, it’s entirely possible that 4 other questions might pop up. This is not a process you embark upon with the idea of finishing in one sitting.

With so much to do, it was easy to procrastinate. It just seemed like I never had the kind of time I needed to take a big stab at this.

What I did was schedule an hour at a time to work on it. I didn’t give myself a deadline to complete the project. I just cleared my desk at home on a Sunday afternoon and went at it. After I complied the “to do” list, I chipped away at it, one item at a time. And I told myself from the get-go that this was going to take some time.

I needed to get input from lawyers, accountants, and insurance agents. I also had to go over everything with my wife. On top of this, I understood that the process was dynamic, and that I’d probably have to do it again in the near future.

To be completely frank, I’m not done with updating everything but I’m a lot further than I was before I started. Once I let go of the manufactured need to complete this immediately, I actually started making progress – and once I started working on with very focused time. I made headway much faster than I expected.

What have you been putting off? Are you willing to forge ahead despite the fact the you’re not going to get instant results? Can you break your ultimate objective down to daily tasks? Are you willing to let go of quick results?

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Today I’m going to talk about how to organize your financial documents and records… Just in case something bad happens to you.

You and your family deserve to not worry about your finances. One important way to have peace of mind when it comes to money is to know where all of it is. If others depend on you, then you have an added responsibility: to make sure your loved ones are able to carry on in your absence. Again, simply organizing your documents is an important part of that.

I must take a moment and explain why this is a such a hot button with me. My parents died while I was in high-school. My father, the main bread winner, had all our important financial records and documents on the backs of envelopes, in misplaced folders, and in huge stacks and piles scattered throughout his office. In short, at the worst possible time, we were left clueless.

Needless to say, that left my siblings and me in an even worse situation than we otherwise would have been. In other words, I know what it’s like when people who are supposed to take responsibility fail to do so. Don’t let this happen to your family.

And even if you don’t have any dependents or a spouse, you’ll be far better off simply by organizing your financial documents effectively. True, if you get hit by a bus, it won’t matter… But what if you get hit by a Smart Car? If that happens, you’ll just be incapacitated – though the automobile may be totaled.

When something like this happens, someone else may have to handle your financial affairs for you – and you’ll have no control over this possibility. Here’s how to keep your finances organized in case of your death or disability:

Contacts, accounts, passwords, etc.

At the very least, create a spreadsheet. List out all of your important account names and numbers, websites, passwords, etc. Of course, if you just use a regular spreadsheet, you’ll need to take steps to be sure that you data is secure – just make sure it’s doesn’t wind up being inaccessible to your heirs.

In addition to critical financial information, create a second tab and include contact information for any important professional in your life – e.g., legal, tax, insurance, and investment advisors.

Once you’ve compiled all of this information, make absolutely sure that you update it as your information changes. If you use a piece of paper, it will wind up being a mess and you’ll have to redo it all the time.

Budgeting

I highly recommend that you and your spouse become proficient at tracking your spending. Use a budget tracking program and make sure to take turns updating the data. Then, meet each month to discuss if your spending is in line or if you need to make changes.

This exercise has tremendous benefits that I’ve discussed before (like helping your spouse spend less money) but for our purposes, this insures that your spouse will be able to take over the budgeting in case you can’t do it. You should also make sure that they understand the value of a high credit score and how to keep theirs intact.

If you’ve been the only one managing the budget, you’re spouse won’t be able to make intelligent decisions about investments or spending when he has too. Don’t they deserve better? Well, even if they don’t… Do it anyway. You’ll feel better about yourself.

Income sources

Remember, you’re creating this document to empower your spouse to take over in case you are take out of the picture. How is your spouse and family going to survive from an income standpoint? What will the sources of income be? Social Security? Pensions? Life insurance? Investments? Spell it out.

This is neither the time nor the place to encourage your spouse to be creative. If you’re the one who is in charge of the financial management, you’re spouse will need all the help you can provide. This is the place to supply it, so be as specific and complete as possible

Documents

I suggest you keep a physical folder that has your trust or will, any health care directives or other powers of attorney, and your last five year worth of tax returns. These include all sorts of clues about your finances, including 1099 forms from your various savings accounts and investments. Also include copies of passports, birth certificates, real estate documents, vehicle registration, etc. If you own a small business, keep the documents for your business in that same folder.

If you want bonus points (and you should), scan all these documents and put them on a flash drive for your spouse as well as keeping them on your computer password protected of course. Here again, if you’re concerned about security, you can encrypt them – just be sure you spouse (and anyone else important) knows how to access this information.

As an extra level of precaution, tell your CPA, attorney, or financial advisor the location of all these documents on the computer and the password to access them. If and when an emergency comes up, your spouse may be so distracted that they’ll forget everything despite your best efforts.

Of course, the most important tip I can provide is to talk to your spouse. Tell him or her what to do just in case. Answer all of their questions. Be sure they’re aware of everything, including the details of your life insurance policies. Talk to them about investing too. Make sure they know what your small business is worth, how your investments are structures, and so forth.

I’ve done this with my wife. I’ve gone through all these steps. At first, I thought she’d be reluctant to discuss these morbid issues, but I found she really appreciated my efforts. This holiday season, can you think of a better gift to give your family than this kind of peace of mind?

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Last week, I mentioned that now would be a good time to take care of any financial task you needed to do before the end of the year. One of these tasks was creating reasonable financial goals for next year. We’ve done that for the last few years, and it’s helped us have a general road map when it came to our family’s money.

One way we’ve been able to create and reach these financial goals is by first examining what went on during the previous year. This process involves looking at our monthly expenses, looking at our retirement accounts, and discussing some of our long term goals. We look at what went well, what didn’t go as planned, and how we could improve.

Reviewing monthly cash flow

Examining monthly income

I’m surprised at how many people view monthly income as a fixed number. If you’re willing to work hard and be creative with your time and effort it doesn’t have to be that way. Remember, you can only cut costs so much, you have much more room and control with increasing your income.

Here are some ideas:

• Argue your case for a raise – Don’t just go to your boss and demand a raise, even if you’ve done the work to deserve one. Instead, create a compelling case of why it’s a good investment for the company money to an extremely productive employee (you) with proper compensation. Be prepared to back up your case with hard numbers and facts. Have you’ve gone above and beyond to help your department exceed goals? Have you demonstrated your leadership skills?
• Start another income stream – Do you have a talent or skill that can earn you some extra money on the side? While many people are afraid of becoming full-blown entrepreneurs, they can still help themselves financially by thinking like one and diversifying their income.
• Clean the clutter and earn cash – If you have junk at home that’s in good condition, you really should look into selling some of it off and getting at least some of your money back. You could use that money for some of your family’s financial goals and you’ll clear some space in your house.

We also look at trends with windfalls, bonuses, and raises. While our policy is not to include them when planning our monthly budget, it gives us an opportunity to review if we spent them wisely or not.

Optimizing monthly expenses

Here’s where we spend time analyzing and brainstorming. As we were doing our monthly reviews, we keep a record of our spending habits to see if there is something we could improve upon for the next year. For 2010, here are some of our biggest expenses that we could optimize better.

• Food and dining – For 2010, 14% of our spending went under this category. The bulk of it (70%) was for groceries. The remainder was for eating out at a restaurant. Cutting back on some of our eating out expenses is a goal, but we’re also looking at improving our culinary skills. If there is a dish we really enjoy, we’ll use sites like CopyKat to see if they have the recipe on there. If so, we’ll try to learn it. We’re also hoping to have more potlucks at our home next year,which provides the social benefits of a night on the town without the added cost.
• Travel – We love traveling, and we also know that planning ahead a bit more will help us stretch our travel budget. We’ll be a bit more aggressive with our Priceline bidding and we’ll spend some time in travel discussion forums to get more tips on how to maximize our rewards.
• Electronics – We got a new video game console this year and have picked up several games to play on it. Looking forward, we’ll try to wait out new releases and grab more pre-owned games for it to save some cash.

I also find that looking at our expenses helps us sort out what’s important to us and what isn’t. Simplifying our lives removes some unnecessary expenses and frees up money for us to spend what we love.

Adjusting retirement accounts

If you haven’t done so already, checking your retirement balances and contributions is an important end-of-the-year financial task. If you received a year-end bonus, you may want to go ahead put some of it into your retirement to max out your contributions for the year. Likewise, if you’ve received a raise, can you increase your regular contributions?

We also like to review our portfolios’ performances to see if we need to adjust the funds we invest in. Over the course of the year, certain funds in your portfolio may outperform others. Over time, this can cause your asset allocation to shift a bit from the your targeted mix.

Asset allocation is vital because it helps you to control your expected risk/return levels. If things get out of whack, you could be taking on far more risk than you think. Don’t know your own portfolio’s asset allocation? Try out MorningStar’s X-Ray tool – you can sign up for free.

Long-term goal progress review

Last, but certainly not least, we look at some of the progress (or lack of) for our financial goals. What are some of our long term goals that we’re looking at right now?

• Car replacement fund – We want to avoid having car payments again while having a reliable car. This past year we bought another car when my husband’s car was wrecked. It was great to grab something that we could use and that was within our budget. We’re now saving up to replace my current vehicle.
• Freedom fund – We would like to have some money set aside in this account so both of us have the freedom to work scale back and/or work from home if necessary.

While we have some other goals that we want to reach, these are two areas where we could do better in terms of contributions. What are some of your future goals that you’ve trying to reach? How hard or easy was it to get started? What has been your progress this year on it?

Your thoughts on year-end financial reviews

Do you do a year-end financial review? If you’re part of a couple, is this a joint exercise? What have been the hardest parts? Any tips for making it easier? Has doing a year-end review helped you reach your financial goals?

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This is a guest post from James Griffiths, who is a freelance writer for Mint.com. Mint has created a number of tools to help you save, manage, and grow your money. On their website they offer a budget worksheet for users to stick to their budgets.

Anyone who has ever tried to make a budget has encountered similar types of mistakes. It’s not an easy process – for most of us, the transition from spontaneous spending to disciplined money management means a whole new way of life. That’s why it helps to be aware of the most common problems at the beginning, before stress and headaches set in. Being familiar with these obstacles will help you remain focused on overcoming them.

No specific budgeting goals

A major reason so many budgets fail to last, or deliver the results we hope for is a lack of specific financial goals. As noble as budgeting may be, very few people can stick with a budget for its own sake.

The only way you will voluntarily endure the sacrifices and inconveniences of a budget is if you know it adds up to a bigger payoff later on. For instance: having the down payment on your dream house in five years instead of ten, or sending your children to a better school without using loans.

Goals like these stick in your mind and motivate you to stay the course when tempted to overspend. Without them, “the budget” will come to be seen as little more than an annoying thorn in the side of your social life.

Across The Board Cuts

Others assume that budgeting has to include “across the board” cuts in every single spending category. In fact, this is not always the best way to budget. Instead of seeking to spend less on everything, start with the spending categories that you objectively don’t care about.

List each category on a piece of paper (things like entertainment, food, gas, clothing.) Then, decide which ones you can comfortably spend less on. Maybe you can buy store brand food, but keep buying designer clothes, for example.

The idea is to begin budgeting in areas that wont immediately depress you, and only cut spending on cherished categories if truly necessary.

Unrealistic expectations

How many of us have sworn at the beginning of a new year to “start going to the gym seven days a week?” Chances are, you stuck with it for a week or two and then never went back. The problem wasn’t the goal of getting in shape – it was how unrealistically huge your expectations were.

In her book Debt-Proof Living, Mary Hunt says budgeting is similar. Vowing to cut spending by 75% is certainly admirable, but unless you have iron-clad willpower, you’re more likely to abandon budgeting entirely than stick to such a lofty standard.

If you’re serious about budgeting, start with a more modest and attainable goal – say, a 15% overall spending reduction. It might not sound like much now, but repeated a few times, it soon adds up to an impressive amount.

Lack of structure

A budget, if it is going to work, requires structure and accountability. Too many people keep their budgets mentally, never writing it down or recording progress as time goes by. This is a huge mistake.

In order to be successful, your budget needs to exist in the physical world, outside of your mind. One way to achieve this is by using envelopes to hold the amount of money you can spend in each category. Once an envelope is empty, no more spending in that category can happen until next month.

You can also use online budgeting tools like Mint to track spending. Simply connect your credit card or debit card to Mint and watch as your spending in each category is automatically and painlessly graphed for you every single day.

Tolerating exceptions

Of course, there is still no substitute for having a real mental commitment to your budget. Never forget that a budget reflects your own self-chosen financial priorities. It was created by and exists to benefit you. This means that no one is going to hold your feet to the fire or prod you to stick with it. Therefore, it is your responsibility to develop a zero-tolerance attitude toward exceptions.

Once your goals are established, never allow yourself to get away with overspending “just this once.” Exceptions will only eat away at your resolve, create weakness and demoralize you from sticking with the budget you created. Instead, solemnly accept that you will be uncomfortable in the beginning – and stay on track anyway.

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As you’ve likely heard by now, President Obama has agreed to extend the Bush era tax cuts for all taxpayers for the next two years. What you may not have heard is that this sweeping agreement also includes a fix for the looming estate tax situation.

What situation? Well… In case you weren’t aware, the estate tax disappeared for 2010, and was set to come back with a vengeance next month with the estate tax exemption dropping from $3.5M in 2009 to $1M in 2011, and the top estate tax rates jumping from 45% to 55%.

Well, that was then… Now it’s looking like the estate tax exemption will be increased to $5M and the top rate will be reduced to 35%. While the timing of this change isn’t clear, I’m assuming that they’re hoping to have it in place by January 1st.

What do you think? Does this agreement go far enough? Too far? Personally, I’ve never really been a fan of the estate tax even though it doesn’t impact the vast majority of people. I am, however, a bit surprised at how far the proposal goes. This goes well beyond restoring the status quo.

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The year is quickly winding down, and soon we’ll be starting 2011. It’s gone by incredibly fast, and so many things have happened. Fortunately, we’ve been doing well so far and are hoping to end the year on a good note. We’re thus working through our end-of-year checklist to make sure we have everything taken care of.

I’m pretty sure we’re not the only ones who could use it, so I decided to publish our list of tasks here. Do yourself a favor and spend a bit of time polishing up your finances so you’re ready for success next year. If you’re willing to take 15-30 minute breaks every couple of days, you’ll be able to save yourself some serious money and possibly get earn some more.

Check your Flexible Spending Account (FSA)

For starters, make sure you don’t leave any money behind in your FSA. If you’ve contributed to a flexible spending plan you won’t be able to carry your money over from one year to the next, so be sure to use it before you lose it.

Here are some items that typically qualify for reimbursement:

• Annual check-up with your PCP: It’s good to be on top of your health, even if you think you’re doing just fine. Prevention is much more cheaper than waiting until you notice a big symptom.
• Vision check-up: If you wear contacts or glasses and need new ones, you should go ahead and place your order before the end of the year if you have funds left to spend.
• Dental check-up: We love our dentist, but we’re grateful for coverage because it would get expensive quick. If you have the money set aside, go ahead and get your dental work done now.
• OTC medications: For the time being, you can still buy over-the-counter drugs and get reimbursed. That option goes away in 2011, but it’s a good option now if you have money that needs to be spent.

Vacation time and sick days

Do you want to cash in and get some money now? If so, you can try to cash in your vacation days. Double check with your Human Resources to see if this is possible and/or what sorts of limits might apply. If you can’t cash in your vacation time, check to see if (and how much of) the time will carry over to next year. If not, then you may want to use some up before you lose it.

My husband will have a few days left this year (unless he gets sick) that he plans on cashing in. While it’s not a huge amount of money, we can either use it to boost our savings, pay off debt, or have some fun. It’s nice to have some options, and we’ll treat it like a bonus.

You could also use the cash to fund a debt free vacation next year. If you have some financial goals (see below) that you’d like to get a jump-start on, you can use money for them as well.

Get your paperwork together for tax time

Even though you don’t have file right away, save yourself from some stress by starting to organize your tax paperwork now. As additional paperwork comes in January, simply add it to your tax folder. What papers should you wrangle up now?

• Pay stubs (make sure they match what’s on your W-2)
• Quarterly statements for your retirement accounts
• Bank/brokerage statements
• Charitable donation receipts

A little work now will make filing your taxes easier and quicker later.

Reveiw your insurance policies

For some employees, now is the time to switch health insurance and dental plans at work. If you weren’t satisfied with the coverage you had this past year, have you looked into other plans offered at your company? Shop around and ask co-workers if the like the health plan they signed up for. Talk with someone in Human Resources to weigh your options.

You also might want to look at your life insurance policy to make sure it accurately reflects your family’s current situation. Have you had kids? Or maybe you bought a house?

Run the numbers again and talk with your insurance agent to see what your options are. I’d also look around with other companies to make sure I’m still getting the best deal around.

Create your 2011 financial goals

Now that you’ve tidied up your financial house, it’s time to plan for next year. After reviewing your progress in 2010, have you discovered areas where you can improve? What goals do you have for 2011?

• Can you finally pay off that last credit card?
• Can you contribute more towards retirement?
• Can you start or fill up your kids’ college fund(s)?
• Have you prepared a will or living trust?

Instead of creating very vague goals, try sitting down and breaking each goal done into specific steps. If you plan on paying down credit card debt, how much money will you put into it each month? What will you temporarily cut down on to get that money? When do you plan on paying it off?

The more specific you get with your goals, the more likely you’ll keep them. If you’re in a family, then you need to sit down together and work out the goals for the family and what everyone’s part is for reaching it.

What’s on your financial task list?

So now that you have some ideas on what we’re doing, I’d love to hear about your plans. What financial tasks do you need to finish up before the year is over? What are you looking forward to knocking out this month? And what are your plans for next year?

Note from Nickel: The end of the year is also an excellent time to make charitable contributions. My wife have a tradition of making the bulk of our annual contributions between Christmas and New Years.

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If you’re the one managing the finances, tracking the expenses and mapping out your family’s financial plan, you deserve a lot of credit. But I’m sure there are times when you wish your spouse was more involved. First, because it takes time to steer the money ship and it’s only fair to share that burden. And second, because it’s nice to know your spouse could take over in case you get run over, or suffer any similar fate.

You’ve worked hard to build a strong financial foundation and credit rating. You want to make sure your spouse doesn’t ruin your finances or trash your credit score regardless of what happens to you. That being said, you might be asking yourself how to handle money talks with your honey.

This is a situation that I’m very familiar with. My wife “allowed” me to do the financial management for years. She didn’t know how to pay the bills online, update the budget, or invest our savings to create retirement income.

This bugged me. I wanted her to be a co-pilot rather than a passenger. This was really important to me, because I know what it’s like to be in a home where the financial decision maker gets taken out of the picture prematurely. Even though my wife was very hesitant at first, we’ve made a ton of progress. We’re not there yet, but well on the way. Here’s what happened:

1. I cried like a schoolboy

I got this idea from George Costanza (Seinfield). He wanted to get his fiancé to do something she didn’t want to do (delay the wedding) so he started crying – and it worked. I figured that if George can do it so can I.

I didn’t really cry, but I did tell her how important it was to me that she be able to run the family’s financial affairs. I really opened up and told her my feelings. By doing so, she recognized that I wasn’t trying to control her. I was genuinely interested in making sure the family would be taken care of in case of unforeseen emergencies. When she understood that, she become more willing to take an active part.

2. We started slow

I was on my own financially when I was 17. I have a degree in accounting, and I have been a professional financial advisor for more than 25 years. In other words, I have a lot of knowledge and experience. I couldn’t expect her to step into the role of financial manager overnight. I introduced one hurdle at a time. I didn’t move on until she was comfortable with a given step.

3. We developed a plan

I created a detailed financial plan that really has two parts. The first part of the plan is a retirement projection. What we’ll have 10 and 15 years from now based on certain assumptions.

The assumptions include a savings goal. I’ve explained that we must hit our annual savings number in order to reach our ultimate retirement dream. Seeing this plan really helped my wife view spending money completely differently. She has never been a spend thrift but none-the-less, seeing the big picture really put spending in perspective.

The second part of the plan is really an emergency continuity plan. What to do if…

That includes a detailed discussion of life insurance, spending, savings, social security spousal benefits, college funding, trusts, wills, etc. I created a list of what to do and when to do it. I included who to contact, who to ask to step in as financial planner, and a general discussion of what assets we have and how to use those assets to replace my income.

As you can imagine, these two sections cover a lot of material. It’s a reference that we’ll have to revisit many times. Each time we do, she’ll get a better understanding of the entire picture and how each of the moving parts works.

4. I handed the budgeting over

I went over how to use the software to track our spending. Then, I asked my wife to be in charge of updating the budget each month. She’s been doing a fantastic job at it. An unforeseen benefit is that by her being so involved with the budget, it’s impacted how she views spending.

5. Entering uncharted territory

There are areas we have yet to work on, and that’s okay. As time goes on, we’ll get there. As new issues come up, we discuss them. The main point is that finances are no longer a mystery to my wife. That empowers both of us.

Is your spouse up to speed? Could he or she take over managing the finances at home? Are you anxious about turning over the reigns?

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I’ve been gathering information over the last couple months, but hadn’t really sat down and done anything. This week, I decided to go ahead and figure out what we need to get done. Needless to say, I was a bit overwhelmed at first.

What I discovered is that we need to do a lot more than just create a will. Here’s a peek at our to-do list:

• Will
• Revocable living trust
• Executor
• Beneficiaries

Most of this stuff was at least vaguely familiar, but I wasn’t sure of all the details. Thus, I decided to look a few things up and answer some questions that had been bothering me.

We don’t have any children, but since that’s a possibility, I looked into that angle a bit. Of course, if you do have children, these things are even more important as you’ll want to protect them in the event of your death.

It’s never a pleasant thought, but having the appropriate documents in place can give you some peace of mind knowing that you’ve done all you could to take care of your family.

Having a will vs. a revocable living trust

I was surprised to discover that creating a revocable living trust was recommended along with a will. I hadn’t really heard the term, so I decided to investigate. A last will and testament is a legal document that basically designates how your money and estate will be distributed after you die. You can also include your burial wishes and if necessary, you can name the guardian for your children.

When creating wills for couples, you can opt for mirror-image wills, where each spouse creates a nearly identical will in favor of the other. This is different from a joint will, where both spouses share one will. I found that joint wills can be more difficult after one spouse dies, which is the opposite of what we want. We would like to make the difficult process as easy as we can for each other.

A revocable living trust is a document that allows you to accomplish many of the same things as a will. A big advantage of a revocable living trust is that there’s no need to have a probate court weigh in on things. I also discovered that you can include in your trust a plan for who would handle your assets should you become incapacitated.

Why have both? If you have any assets that aren’t included in your trust, then your will serves as a backup to ensure that your last wishes are carried out.

Things to consider when preparing your documents

After deciding to create a will and/or living trust, there are still some issues that need to be addressed.

• Who are your beneficiaries?
• What property and other assets will you include?
• Who will serve as your executor?
• If both of you die, who will serve as guardian of your child(ren)?

My husband and I need to sit down and really talk about this. For example, we have to decide if our assets will be split between our siblings and parents, or if we should just include our siblings.

Other considerations: life insurance

My husband and I got term life insurance policies to cover expenses if one of us dies in the coming years. Deciding on how much life insurance you should have for the well-being of your family involves a lot of thought. That being said, there are some general rules of thumbs that you may want to consider.

• What is the life insurance for? Do you intend on supporting your family off the proceeds? Do you want them to pay off the mortgage? What about leaving behind a cushion of some sort?
• Do you have a life insurance plan with your employer? Some jobs offer a small life insurance policy at no cost to employees. Check with your Human Resources department to see if you already have at least a bit of coverage.
• What’s your annual income? Insurance companies often give ranges of 8-12x your annual income. If you know your family’s needs, simply choose a multiple that makes sense for you.

One final thing… Make sure you keep the documents in a safe location. Be sure that your executor and spouse know where they are so they can easily find them if something bad happens.

Thoughts on preparing for the worst

Preparing for your demise takes time, but doing so will ease the pain and stress for your loved ones as they go through a very difficult time.

If you’re looking for more info, here are some resources that I found useful:

• The Road to Wealth by Suze Orman
• AARP Crash Course in Estate Planning by Michael T. Palermo

I’m curious to hear your thoughts. What have you done to prepare your loved ones?

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I’m a financial advisor so I make my living when people ask this question and decide that they do. But even so, I can tell you that not everyone needs an advisor.

Here are some ideas to help you decide if you really need one if you’re thinking about it:

1. Do you expect a “religious experience”?

I’m talking about miracles of course.

Sure your investments have been hammered. So has everyone else’s.

Don’t expect an (honest) advisor to make a killing in this market. There aren’t many people who are knocking the ball out of the park these days – professional or otherwise.

But when it comes to investment performance, it’s tricky.

If you consistently do much worse than the market, that’s a sure sign that you need help.

If you are unhappy with your performance but it is inline with the market, don’t expect miracles. You might benefit by working with an advisor if you are amenable to changing your asset allocation. That change could result in you getting returns that are more in line with your risk appetite.

But if you aren’t willing to accept lower returns in exchange for less risk, don’t waste your time or money. Financial advisors are only human, they’re not miracle workers.

2. Buying life insurance

You don’t need a financial advisor if you know you need life insurance. Just figure out how much you need and buy the best term life insurance cheap. Done.

Now, if you have people who depend on you and you think you don’t need life insurance, or you refuse to find out how much life insurance you really need, then you need to see an advisor. What you need in this case is an overall plan and to see how life insurance fits in with that plan.

3. Creating a living trust

If you need a living trust, don’t go to an advisor. Go see an attorney to set up your living trust.

Like life insurance, if you don’t know if you need a living trust, you should see an advisor you trust rather than attorney. This way, you’ll get objective advice. Of course, the end result will be the same in most cases (you need a living trust) but you’ll feel better if you are told this by someone who has nothing to gain by telling you so.

4. Creating budget

An advisor can help you set up a budget. They can help you get the proper software and help you start using it. If your budget is your main concern, you should probably meet with a qualified advisor for a few hours, but that’s all you’ll need.

But you have to be honest with yourself. If you aren’t willing to do the work, don’t waste your time with an advisor. A budget isn’t a hard thing to implement. Once you set it up properly, it will take you a few hours a week to keep up-to-date.

People who fail to keep their budgets up to date do so mainly because they don’t want to see the truth. They prefer to stick their heads in the sand. Limited time isn’t a good excuse because it doesn’t take all that much time.

So see an advisor if you need help setting up your budget and are committed to doing the work.

5. Formulating a retirement plan

Having a retirement plan can make all the difference in achieving your goals and having financial peace of mind.

You don’t need a financial advisor to create a plan. There are plenty of programs online that allow you to do this for yourself.

However, a seasoned professional can add a ton of value in this regard. He or she can point out areas, issues and concerns you may not have anticipated. He or she may have helped hundreds of people create and implement a retirement plan. You may have never done it before. Once you have a plan, you’ll be better able to make the best investments for your retirement.

If you do want an advisor to create a plan for you, it should take her no more than 3 or 4 hours unless your situation is very complicated.

But if you’re not going to implement the tactics suggested by the plan, again, don’t bother.

6. Dealing with credit and debt problems

I get asked to help people solve their credit and debt problems all the time. So do lots of other financial planners. But that’s not our specialty. Financial advisors can help generally but if you are looking for ways to improve your credit score or solve your debt problems, there are better resources. You can do plenty of this by yourself but if you do decide to hire someone, make sure you avoid debt relief scams.

Are you seeing the pattern?

If you are truly open to doing things differently, you can really benefit by using a financial advisor. If you are unwilling to take advice, don’t kid yourself and don’t waste your money.

Do you use an advisor? Why or why not?

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My goals were:

• Consolidate my student loan
• Start a car replacement fund
• Contribute more to my Roth IRA for retirement

I don’t think these goals are unique; many people are looking to get their finances in order. I’ve been doing pretty well, but there’s definitely room for improvement.

Like others, I’ve been distracted and I’m behind on one of my goals. That being said, I’m determined to get back into the swing of things and complete my list. What about you?

Whatever it is that you hope to achieve, I hope I can help you get back on track (or stay on track) and meet your goals. What follows are three common financial goals, and steps you can take to meet them.

Building up your emergency fund

Your circumstances (single, married, with kids or not) and risk tolerance will dictate how much money you need to have in your emergency fund.

We’ve found that treating our savings goals as bills is the best way to keep us on course. When you develop your monthly budget or spending plan, include your ‘emergency fund’ and other savings goals in it.

Next, set up an auto-payment (transfer) to cover that bill each and every month. If you wait until all the bills get paid before save, you’ll rarely have anything left to set aside.

Getting out of debt

Right now, our only debts are my student loans and our mortgage. We had a car loan when we got married and decided to accelerate the payments and get rid of it. We were planning to buy a house and figured it would look better if reduced our debt-to-income ratio.

Getting out of debt is a great goal to have, but it’s not easy to implement and maintain. I think the biggest issue for most people is making debt reduction a priority.

If you’re sick and tired of being in debt, then debt reduction is likely a priority. Your intensity level may vary, but when once you make it a part of your routine, you have a much better chance of eliminating your debt.

One big thing to do is to ask yourself tough questions when you’re about to spend money.

• Is my money better spent paying off my credit card or buying new clothes?
• Do I want to pay off my credit card sooner, or do I want to eat out more often?
• Is having a new car that important, or can I keep my used (but good) car for an extra year or so?

What helped me was to: (1) keep reminding myself that these sacrifices were temporary, and (2) avoid cutting out the extras entirely. I know, I know, we weren’t “gazelle intense,” but it was sustainable. I’ve done the extreme frugal routine in the past, and wound up burning myself out within a couple of months.

Contributing more for retirement

This is an area where I could definitely use some improvement. I’ve made contributions, but I know I could do better.

The good news I have until I file my 2010 taxes to make my IRA contributions. I plan on using that extra time to deposit more than I otherwise would have. My problem has been that I’ll tell myself that I’ll transfer the funds at the end of the month, but then I often don’t.

How did I overcome my procrastination? I took the plunge and automated my Roth IRA contributions. I think this is the best option for me personally. I set aside a monthly amount I know I can make. If I earn more or spend less than expected, I’ll take a portion of that extra money and deposit it into my Roth IRA.

If you’re behind on your IRA contributions for the year, try to make an automatic contribution each month or pay period. While you might not make the $5,000 limit, you’ll wind up saving more than if you didn’t take action.

Your goals and progress

How are you been doing this year when it comes to meeting your financial goals? What’s gone well? And what obstacles have you come across?

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The thought popped into my head while my wife and I were on vacation in New York. (Side note – the vacation was debt free!)

While there, we visited two of our best friends – Lori and Nathan. This couple (and their two amazing kids) are a family we love dearly.

My buddy Nate is uber-successful. He is second in command at one of the largest financial institutions in the world – and he’s only 46 years old!

I want to be like Nathan, but I’m not.

I’m delighted for Nathan and honestly not jealous.

But while I was visiting him, I noticed I was beating myself up pretty good.

I asked myself why I wasn’t as successful as my buddy.

I came up with many reasons – some of which I have no control over. I’m not stupid, but I’m not a genius like Nate. Not much I can do about that.

But I did come up with one reason for which I found no excuse – impatience.

Don’t get me wrong. I’m really grateful for where I am in life. But had I been more patient at any number of turning points in my life, things would have been easier and (possibly) better.

Once I came to this realization, I asked myself how to use that understanding to do better rather than as an excuse to put myself through the ringer. Could I use this to improve my small business? Could I harness the power of that realization to improve my investing results?

I came up with a great idea.

I decided to go against myself.

Attack your weaknesses

By nature, I want to get it done and move on to the next issue as quickly as possible. Sometimes I move on too soon.

I decided to be ultra patient in any business or interaction that was on my plate even though it was the last thing I wanted to do.

I committed to slow down and hold myself accountable to others.

The result has been very positive so far. If nothing else, I feel more relaxed.

I’ve also realized that success in certain areas that I’m working on are going to take time. I’m going to force myself to be OK with that.

And once I feel comfortable with my ability to be more patient, I’m not stopping. I’m going to keep listing my character flaws (news flash: I have many). Then, I’m going to go against myself again. My character flaws cost me too much. I’m going to put everything I have into going against the grain.

How can this help you?

Simple.

Find your flaws

Ask yourself what is the one thing that has kept you from where you want to be in life.

Are you impatient like me?

Are you selfish?

Do you fail to think things through?

What is it?

This is super important. It’s painful, but you have to be completely honest with yourself if you want the payoff – and believe me, it’s worth it.

If you’re having trouble coming up with the answer, ask five people you trust and respect. Tell them you are trying to overcome your main character flaws and you need their help to identify them.

Ask your boss and spouse. Ask your co-workers. Your workout partner. Five people.

Once you have identified your main character flaw, write down how it’s impacted you in the past. What has that flaw cost you?

Has your impatience created credit card debt?

Has your laziness resulted in not having the right life insurance?

Has your selfishness kept you from getting your budget under control?

Has your anger made it difficult for your small business to thrive?

Write it down

If you want this exercise to have its full impact, you must actually write this down with a pen and paper. There is something magical about actually writing (as opposed to typing) that I can’t explain. Do it, then tell me if you don’t agree.

Once you’ve done your writing, don’t put your pen and paper away. You’ve got more work to do.

Let the past go. Don’t beat yourself up.

Instead, think about what your dealing with right now.

Are you putting together your estate plan?

Are you trying to launch a new business?

Looking for a new career?

Trying to help your kids get on track?

Think about how your character flaw, if left unattended, is going to make your job harder.

Now write it down. See yourself shooting yourself in the foot. Describe how that character flaw is going to make it harder to accomplish your goal.

Look to the future

Now, map out a different course.

See yourself NOT giving in.

See yourself NOT being lazy, but doing your homework before you buy that life insurance.

See yourself NOT being selfish but thinking of others before you create your estate plan.

Can you see how taking contrary action is going to get you closer to your goals?

How does that feel? Can you write that down too?

Lather, rinse, repeat

The great news is that you don’t have to stop there.

You can use this exercise to master other character flaws in your business and personal life.

Are you willing to do it?

Have you ever undertaken an exercise like this in the past?

What was the result?

Do you have any other ideas that can help others overcome character deficiencies?

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He’s one of the infamous Teletubbies – those colorful little TV creatures who live in Teletubby Land, of course. You remember his friends Po, Dipsy and Laa-laa, don’t you?

I knew it would all come back to you.

Anyways… Tinky taught me a great deal about money – and I only just recently realized it.

First, a little background.

My youngest grew up loving Tinky Winky, and was constantly fascinated by his (her?) antics.

Being a good dad, I spent time with my little one watching the Teletubbies, and I’ll admit it wasn’t easy.

You see, I have 2 older children. They grew up with Sesame Street and Power Rangers.

They knew about quality.

(I mean, come on… How could Tinky Winky compete with the likes of Big Bird and Elmo?)

It’s laughable, I know…

Poor Tink never had a chance, at least not in my mind.

But as convinced as I was, my kid wasn’t having any of it.

As hard as I tried to get my little one interested in high-quality characters like Elmo and Big Bird, it was of no use. My little girl was hooked on Tinky Winky, and I couldn’t do anything about it.

What made things worse was that, as I grew more intolerant of the little purple dweeb, my little pumpkin enjoyed the show more and more.

How could she have been so misguided?

Eventually, I gave up. When I couldn’t tolerate Tink anymore, I just started reading “Atlas Shrugged” instead. That kept me busy until she was well out of the Teletubby stage and into Miley Cyrus.

So how does this have anything to do with money you ask?

It has everything to do with money. Everything.

Opinion vs. fact

In fact, it’s probably the most important lesson you could master when it comes to finance.

You see, what Tink taught me is that I don’t know everything. I shouldn’t be so sure of myself.

I was so convinced that the Teletubbies were the by-product of a bad acid trip and just worthless. But I was wrong.

I was absolutely sure that Tinky Winky was a lightweight, and not worth anyone’s time.

At the same time, my daughter (and millions of other Teletubby fanatics) came to a different conclusion.

You see, my opinion is just my opinion. The problem starts when I mistake my opinion for fact.

Avoiding financial ruin

I didn’t (and don’t) know everything. I have to check my conclusions from time to time — especially when I’m “sure” that I’m right.

This may seem like an obvious axiom of life but, if you’re like me, you forget. And when you forget, you run the risk of financial ruin.

People who are convinced they are doing the right thing often fail to re-examine their financial decisions. Instead, they plod ahead – even though the results of their actions may scream “STOP!”

It’s like an explorer who is convinced they’re trekking in the right direction. They might eventually realize that they were holding the map upside down, but it’s often too late.

A real life example

I recently had this experience with my budget at home.

I was absolutely sure that I was the best person at home to handle our budget. I’ve been doing it for decades. I own a successful small business, I’m a CFP, and I have a degree in accounting.

I know about budgeting. More than that, I’m proud to say I don’t owe anyone in this world one red cent.

Not bad, huh?

You’d think that I’m a Budgeting Behemoth, right?

Wrong.

My wife recently started handling the books, and we are far better off as a result.

Why?

Because she is the person who is in charge of most of our spending.

Duh.

For 20 years, I handled the money and the books. At the same time, we often disagreed over the best use of our funds.

Why couldn’t she just see things my way?

This has all changed now.

She comes up with ideas to save money I never thought of. And since she does the books, she sees first hand how spending impacts our ability to save and invest.

And yes, she makes very strong arguments for spending money sometimes that I never would have spent in the past. And I often end up agreeing.

We both “get it” now, and it’s a direct result of her taking charge of our bookkeeping. I never would have guessed this change would occur, but it did.

Imagine that… Something happening that I didn’t foresee.

There are plenty of other examples.

I talked to a couple only 2 weeks ago. They’ve owned life insurance on each other for the last 30 years. When they first bought it, they needed it. But now they don’t.

In fact, they haven’t needed life insurance for over seven years. But they never stopped to re-examine their financial decisions. They were “sure” they were doing the right thing. Unfortunately, “being sure” cost them more than $40,000 in wasted life insurance premiums over the last seven years.

Re-evaluate everything

Of course, checking your financial behavior doesn’t stop with budgeting or insurance.

You should examine everything. Your investments, budget, and insurance policies (especially if you are retired), how you are dealing with your debt, and both estate planning and retirement planning.

You don’t have to do this with a financial professional, and you don’t have to spend a red cent. You can find someone who is knowledgeable, and whom you trust, and just have an hour-long conversation.

The most important element is your ability to listen. Whoever you speak with, ask questions. Don’t go into that meeting sure that what you are doing is right. That defeats the entire purpose.

You don’t know how many times I get calls from couples “desperate” for help. Sometimes, rather than being open to doing things differently, at least one of them simply wants to convince me how smart they are. They want me to sign off on their financial life.

In other words, they don’t want to change their behavior, they simply want to change the results of their behavior. Even Tinky Winky can’t work that magic.

Think about your financial behavior. Which aspects are you most sure of?

Now… Go out and get a second opinion.

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Like 10,000+ other people, I subscribe to FiveCentNickel, so everyday I get the newest post in my Google reader. When I saw the title “Why You Should Fire Your Financial Advisor” come up on my screen the other day, it immediately piqued my interest. The post was written by the guy who runs Financial Uproar, a self-proclaimed DIY investor. The main reason that this post grabbed my attention is because I work in the financial industry every day.

That post contained four main arguments as to why you should fire your financial advisor:

1. Nobody cares about your money as much as you do
2. Compensation is way out of whack
3. He drives a fancy car
4. Most mutual funds are a bad idea

I think the main problem with these arguments really comes down to the author’s competence, both in daily finances and investing. Unfortunately, I don’t believe everyone is as focused as him on investment and money management.

While it’s true no one cares about my money as much as I do (except maybe The Wife), that doesn’t mean that everyone is good at it. You don’t have to look very hard to find one person after another who can’t manage their day-to-day finances, much less an investment portfolio.

I’m pretty sure that no one cares about my car as much as I do either, but I don’t pop the hood and play with the flux capacitor. That’s just not something that I’m good at.

I’ll come back to the compensation issue, later, but I wanted to note that I actually want my financial advisor to drive a nice car. Maybe “fancy” isn’t the best word for it, but if any professional in my life showed up in a POS, I would get worried.

Moreover, while the author of the original piece presents actively-managed mutual funds as the primary tool of a financial advisor, that is an extremely narrow view of the industry. And even if you agree with him that most investors are best served by holding a portfolio composed entirely of index funds, many investors need some help when it comes to identifying the right mix of holdings.

Compensation of financial advisors

And now for the big one…

Before we can even discuss whether their compensation is fair or not, you have to decide whether or not it’s true that not everyone is cut out to handle their own investments. If you think that everyone can (and should) handle their own portfolio, then any level of compensation is egregious.

As a tongue-in-cheek example of what I mean, I believe that pretty much everyone can tie their shoes, so charging a fee for that (no matter how it is structured) would be unfair compensation. Am I right?

If you’ve spent much time reading about finance, then you know that the financial industry gets hammered by bloggers, authors, pundits… Just about everyone. But let’s take a closer look at the numerous ways that advisors can get paid:

• Commissions
• Hourly fee
• Flat fee
• Fee for assets under management

I really don’t believe that any option is better or worse than another. Yes, strong arguments can be made for fee-only advisors but, in general, the bigger problem is that the various options aren’t typically fully explained to the client.

Consider, for example, a typical 22 year old with a relatively small investment portfolio. Should that person choose an hourly rate of $100 to $300, perhaps with a large retainer up front, akin to an attorney… Or would they possibly be best-served by choosing an advisor who’s paid on some sort of a commission?

Advantages of a financial advisor

Just to be clear, I don’t think everyone needs to meet with a financial advisor, just like I don’t think everyone needs a personal trainer to oversee their exercise program. At the same time, however, it’s sometimes nice to meet with a professional.

Off the top of my head, here are a few advantages of working with a financial advisor:

• Advice on asset allocation
• Cash-flow analyses
• Retirement income analyses
• Estate tax planning
• Tax loss harvesting
• Providing a buffer against emotional decisions

Yes, while most of these things can be achieved on your own, even some of the most money-savvy people sometimes drop the ball. If you think that an advisor would suit your needs, then you shouldn’t let anyone scare you into dropping them.

Moreover, if you’re currently a DIY’er but you think you might need some additional help, you should definitely consider asking around for recommendations. Once you have a few names, go ahead and set up an initial consultation with two or three of them to see what they have to offer.

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If you’re the one who manages the finances – and possibly earns most of the money – you’ll do your spouse a solid by simply going through this exercise.

Ask your spouse how they’d pay the bills if you were gone.

How would they pay the mortgage?

Where would the money come from?

How would they save for retirement?

Pay for the kids’ education?

Track expenses?

I recently asked a group of men in their 70s and 80s to think about how their spouses would carry on in their absence. They didn’t even understand my question. They looked at me as if I were from Mars.

They never took the time to think about what might happen to their spouses once they die. Rather selfish… Don’t you agree?

What? They’re going to live forever?

Are you?

You might love to run this “fire drill” at home but your spouse doesn’t want to take the time to do it. I feel your pain but want to encourage you not to acquiesce.

Ask your spouse to think about getting on an airplane. Isn’t it better knowing there is a trained co-pilot even if he or she never gets the stick? Of course it is.

Doesn’t your family deserve a co-pilot too?

You’ve worked hard to create a solid financial base, but it’s going to turn into “poo” if your spouse doesn’t have the skill to take control. How does that make you feel? How does it make your spouse feel?

I take this stuff really personally. I know what it’s like to try to pick up the pieces after the people who were supposed to be financially responsible weren’t. It’s not pretty. It’s not fun. Don’t let this happen to you.

So… What are the three most important steps in getting your spouse ready to take control?

1. Maintaining a budget

You simply have got to get your partner conversant in the language of “budget-speak.” Put them in charge of tracking your budget. This way, they’ll get a sense of where the money is coming from and where it’s going.

It doesn’t matter if you use an envelope system or a software package to track your expenses. Just implement a system and make sure your spouse takes charge of it.

I’ve done this at home even though I’m the CFP with 25 years experience and a degree in accounting. My wife keeps the books. She is in charge of the budget tracking, and we spend an hour every week going over the numbers to make sure we’re on track.

It’s been a game changer for me as I know it will be for you.

How do you introduce this system?

At first, spend that time learning together. Don’t get angry if your spouse is resistant or finds it difficult. Be patient. Give them time. But stick to it and don’t allow them to give up.

Get a commitment from your spouse that he/she will update the books each week at a set time. If they need your help, make yourself available during that time.

In addition, meet every month at a pre-arranged time. Go over what’s working and what needs to be addressed. Are you on budget? Are you saving as much as you planned? How are the investments performing?

2. Life insurance

If you have people who depend on you, buying life insurance is a must. Term is my insurance of choice because it’s cheap, and it gets the job done. Talk about this with your spouse. Tell your spouse how much insurance you have, why you have it, and what should be done with it in case you get taken out.

3. Books and records

Create instructions on how things should be handled in case you die prematurely. The instructions should cover:

• What to do about living trusts and wills
• Who should be contacted
• How to generate income
• Where the investments are and how to manage them
• Where the insurance policies are and how to cash them in

In my experience, these are the three crucial steps to take to get your partner involved with your finances.

I understand that it may not be easy for you to ask your spouse to take these steps with you. I understand that even bringing up the subject could be very uncomfortable. But I also know (first hand) that failure to do so exposes your spouse and your entire family to tremendous risk.

Take these three steps. Start with step one. Start today.

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As a DIY investor, I have a strong dislike of financial advisors – perhaps too strong. As far as I’m concerned, there’s nothing that an advisor can do for a client that a reasonably educated person can’t figure out by using a search engine and a few minutes of their time.

Ditch your advisor

In my view, one of the first steps to maximizing your investment returns should thus be to fire your financial advisor. Here are several reasons why – and yes, I realize that I’m painting with broad brushstrokes here.

1. Nobody cares about your money as much as you do

The reality about your financial advisor is that he views you as nothing more than a number. Sure, they want you to be satisfied, what business doesn’t want happy customers? Yet the secret to their success is having a large number of accounts to manage. If you’re one of 500 clients to an advisor, do you think that advisor really cares if you take your meager retirement savings elsewhere?

2. Compensation is way out of whack

My problem isn’t so much with the amount of compensation per se, but rather with the way many advisors are compensated. For example, if you buy a mutual fund with a front end sales charge, your advisor may be getting most (if not all) of that charge. In other cases, advisors get paid a percentage of assets under management.

If somebody has a portfolio consisting entirely of mutual funds, why should an advisor get paid ten times more for a $500,000 portfolio than a $50,000 one? Does it take 10 times the amount of work? If it doesn’t, then why is someone getting paid like it is?

The other problem I have with the compensation is the lack of disclosure that the investor gets. If you ask 100 people with limited investment knowledge how much their advisor gets paid to manage their account, how many would even be close to being right?

3. He drives a fancy car

Let me say right away, I have nothing against people driving fancy cars. If that’s something that’s important to you, then knock yourself out.

Your advisor is probably facing some sort of pressure to look the part of being successful, whether it’s from his superiors or just from inside his own head. Yet we all know that, financially speaking, driving a fancy car is just a waste of money.

So let’s summarize the hypocrisy of the whole situation. Your advisor advocates making better choices and saving more, yet wears expensive suits to work and drives home in a BMW. Sounds like a classic case of do what I say, not what I do.

4. Most mutual funds are a bad idea anyway

While I’m an active investor, I would recommend most people just buy index funds. A basket of well diversified exchange traded funds will get you a market return, which is pretty much guaranteed to beat most actively managed mutual funds in the long run. The reason for this is simple. Fund managers can’t consistently beat the market long term because they have to beat the market plus their management fee.

Just do it

I want to encourage everyone reading this post to explore investing on their own. There are tons of books, websites, etc. out there that can guide anyone through the process. It’s just a matter of getting started.

Oh, and if you do end up sticking with an advisor, make sure you’re on the same page when it comes to investing philosophy, and also make sure you know exactly how they are being compensated.

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Reflecting on our net worth has been a helpful tool and a great complement to managing our monthly cash flow. I really do find it to be empowering, and it gives us a great “big picture” measure of the progress that we’ve made.

What to include in your net worth calculation

It’s important to identify which assets and liabilities you’ll be including in your net worth review. Some people pick and choose about what they include, whereas others want a more comprehensive view. It’s your prerogative, but understand that the things that you track are often those you wind up focusing on and improving.

Assets

In the “plus” column, we have assets. There are a number of different things that can be included here, and you can be as thorough as you want, even breaking down categories down to individual accounts.

They typically include:

• Bank Accounts (including checking, savings, money market accounts)
• Appraised value of your house
• Retirement account balances
• Estimated value of your car(s)
• Personal belongings (e.g., jewelery)

Some people feel that including the value of your car(s) and home is a flawed approach, as you can’t (and often won’t) liquidate them in a pinch. Others feel that your home’s value is every bit as valid as your 401(k) balance. To me, this is a personal choice. However, if you choose to leave out big ticket, but illiquid items, then you’re really tracking net investable assets as opposed to net worth.

Personally, we include our home’s value as as an asset, and we subtract our our current mortgage balance (more below). We figure that our estimated home equity should be counted. To keep it realistic, we use the lowest amount between tax appraisal, Zillow’s assessment, and recent neighborhood sales.

Liabilities

People are sometimes tempted to minimize, or in extreme cases, ignore their liabilities estimating their net worth. It really is to your detriment not include them in your calculations.

Liabilities that you should track can include:

• Mortgage
• Car loans
• Credit card debt
• Student loans
• Home equity loans

Listing and tracking your liability is the hardest part for many people, but it’s also the most informative. It can hurt to see how large your debts are, but there’s nothing more motivating them staring them in the face.

As a general rule, you should include all of your consumer and educational debts, and then include (or not) your home and auto loans depending on whether or not you included your home and car(s) as assets. Here again, it depends if you’re truly interested in net worth, or your investable assets.

Once you have everything organized, figuring your net worth is very easy. Simply total up your assets and subtract off your liabilities. The most productive part of your net worth review, however, is the game plan you will (or should) develop once you start tracking your progress.

Tracking your net worth over time

Recording your net worth once has limited benefits. This exercise is most instructive — and fun — when you track your progress over time. Two tools that I use for tracking our net worth over time are Mint and Quicken. Both do a great job of helping you break things down and see more details.

Reviewing and reflecting on your net worth

The simple act of tallying up your numbers has limited value unless you set aside some time to analyze the results. Your net worth is simply a snapshot of your financial status. When viewing it, ask yourself:

• What’s been working since my last review?
• In what areas have I been struggling?
• What’s have changed since my last review?

As you periodically review your net worth, you can start setting financial goals. People often set a vague goal of increasing their net worth by growing their assets and/or paying off debt. Instead, try setting a specific goal based on the data that you gather, and maybe even try to stretch things a bit.

For example, if you’ve averaged $250/month on debt reduction, try stretching that to $300-$350/month. As you gather more and more data, you’ll be able to fine tune your financial system. Which months are the hardest when it comes to debt reduction? Why were you able to beat your savings goal by so much last month? And so on.

Your thoughts

Do you include the value of your house (and mortgage) in your net worth calculations? What about your car(s) and associated loans? To me, the key is to be consistent. Ultimately, you’re doing this for yourself, so do what works for you.

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You see, the thing about unexpected expenses is – if we’re being totally honest with ourselves – they’re not really unexpected. We know they’ll comes sooner or later, right? So why not just expect the unexpected and formulate a plan? Let’s get started!

Plan for the unplanned

As we’ve already acknowledged, we know most “unexpected” expenses will rear their ugly head at some point, so let’s focus on how to defeat the beast before it strikes. Okay? Here we go.

1. Compile a list of irregular expenses. Sit down with your significant other and write down every irregular expense you can think of. Anything that is not a monthly bill is an irregular expense. Write them down and estimate how much they will cost.
2. Save for your irregular expenses. Adding up all the expenses you came up with in Step One and dividing by 12 will give you an amount that you will need to save each month.
3. Don’t forget miscellaneous expenses. After you come up with your total amount, add a safety cushion for each month. Either a flat dollar amount or a percentage, depending on your circumstances. This will help you save for those miscellaneous expenses you forgot about, as well as any truly unexpected expenses.
4. Fund a dedicated savings account automatically each month. Create an automatic transfer of the final amount from step three into your new irregular expenses savings fund each month.

Now let’s break a few of these points down and talk about them in a little more detail.

Compile your list of irregular expenses

Trying to come up with all your expenses can be a little intimidating, and this is actually the hardest part of the process, but don’t worry… You won’t even break a sweat, and once you’re done you’ll feel great knowing that your plan will save you a lot of headaches, time, and money over the long haul.

Be sure to include infrequent payments such as car repairs, life insurance premiums, auto registrations, and so on.

If you don’t think of everything, don’t worry, at least you’re saving — and don’t forget about the extra amount you included for miscellaneous stuff. My wife and I have been doing this for the last year or so and it has saved us so much trouble, stress, and cash. Being prepared is so damn nice!

Save for and fund your irregular expenses

You have your list of expenses and have accounted for additional miscellaneous expenses that are bound to happen, now you just have to start saving money. Let’s say your expense amount comes to $200/month… Just start funneling that money into your new savings account.

Don’t have room in your budget for an extra $200 each month? I don’t buy it. Do you even have a budget? A WRITTEN budget that you actually maintain and adhere to? If not, there’s your first problem.

Cancel your cable TV. Cancel your cell phone and get an unlimited Vonage line for your home for $25/month. Save money on groceries by planning meals, shopping in bulk, and growing and processing some of your own food.

If you don’t have the extra $200 at the end of the month, then you need to start trimming down your standard of living. Don’t like the thought of that? The alternative is to continually have unexpected expenses popping up and taking all your dough. You make the choice, but I’ve done both and my advice for you is to cut back, plan, and save.

Exercising your self-discipline is a good thing… It’s one of the keys to financial success.

In closing…

It’s really this simple:

1. Plan
2. Save
3. Enjoy

Now that you’ve written things down and are saving, there is almost no reason why you should ever let anything bust your budget ever again! You do have a budget don’t you?

What About You?

Do you have a plan to stop budget busters dead in their track? Let us know how you do it.

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I’m at the “now what” stage. We have paid the car off, and a fat savings account. We do not plan to pay off the house because we want to move soon. Not sure that the house will sell for the amount we paid. 401(k) is funded.

This is a great question. We spend a ton of time and energy focusing on getting out of debt, building an emergency fund, funding our retirement accounts, saving for college, paying off our mortgage, etc. But once we get a handle on these things, what’s next?

It’s not uncommon for people to be so focused on their daily lives that they don’t give any serious thought to what the future holds. In fact, if you ask around, you’ll find that a lot of people will flatly state that they’re pursuing “financial independence” without really knowing what they mean.

This is actually an issue that fellow blogger JD Roth tackled about a year ago when he wrote the following about the so-called “third stage” of personal finance:

I’ve reached a place of financial security. My income is good. I save and invest. I don’t spend frivolously. Now I find myself in the enviable position of having to decide: Should I decrease my workload, or should I use some of my income to invest in the things that make me happy?

Unfortunately, JD didn’t have the answer, and neither do I. In fact, I’ve struggled mightily with this issue. Should we charge ahead toward the finish line (retirement) trying to get there as quickly as possible? Or should we slow down and enjoy the ride?

There are no easy answers. Moreover, just as Matt pointed out when he wrote about financial priorities, the “right” answer will vary from person to person. With that in mind, I’d like to hear your thoughts…

Stepping back and taking a look at the big picture, what are your long-term goals?

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Perhaps you’ve been asking yourself this question but have been unable to settle on an answer that you’re comfortable with. If so, you’re not alone… Many people push investing to the back burner because they’re unsure where, when, or how to begin building their nestegg.

In fact, it seems that many people want to start investing, but simply aren’t ready to take the plunge. And even if they are ready, they have no idea where to start. In this article, I’ll be focusing on the issue of readiness.

The obvious answers

Many people aren’t comfortable tying up their money in long term investments until they’ve met a couple of key milestones.

1. Consumer debt is paid off. Getting rid of your high interest consumer debt should be high priority. It’s probably best for you to forget about investing until your most burdensome debt obligations are met.
2. Liquid savings buffer built. Having ready access to money when you need it is always important. Make sure you have a comfortable amount of money set aside in a high interest savings account before you begin investing.

While debt reduction and emergency savings are certainly important considerations, there are other important factors to consider.

Other factors to consider

• Age. While there is no ‘one size fits all’ age to begin investing, the sooner you start, the sooner compound interest can begin working for you. Optimal investment vehicles and portfolio allocations will differ depending on age, so be mindful to choose age appropriate solutions.
• Matching funds. Does your employer match your 401(k) contributions? Are you fully vested in their contributions right away, or on a graduated scaled based on years of service? If they do offer a match, this should only speed your decision to contribute.
• Children. If you have kids, you might be tempted to begin saving for their education, but you shouldn’t put this ahead of retirement savings. Instead, you should consider consistently putting 15% of your income toward retirement investments prior to saving for education.
• Job status. How stable is your current source of income? If you have a stable job and solid savings, you might feel more comfortable locking up a portion of your income in retirement accounts. If your situation is more tenuous and you may be let go tomorrow, you should build a larger emergency fund.
• Marital status. If you’re considering a move into investing and have a significant other, be sure to include them in the decision making process! When married, these long-term decisions affect both spouses equally, so be sure to communicate and decide accordingly. The best decisions are usually made together.
• Insurance policies. It is important to carry the proper types of insurance at each point in our lives. A decision to invest should not be made without balancing our investment strategy with situation appropriate insurance coverage. Health insurance, disability insurance, long-term care coverage, and life insurance coverage are all important and need to be considered alongside any decision to invest.

In closing

While there are certainly other factors to consider before making the decision to invest, this list should provide a good foundation and get you started in the right direction.

When making important financial decisions, always move slowly, ask question, and consider as many contributing factors as possible. You might even consider consulting with a professional advisor for feedback.

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So why is this so hard for us to grasp, adopt, and live by? It’s not complicated, it’s not unreasonable, and it makes perfect sense. So what’s the deal? Why do most Americans spend money that they don’t have?

Well, I don’t have the answer for that, so… Rather than opening that can of worms, I will present sound information that will help us grasp the Save Then Buy concept, adopt this commonsense philosophy, and live by the wisdom of it’s simplicity.

Save money, then buy – grasp the concept

If people would simply take a step back and rationally analyze the Save Then Buy mindset, there’s little chance that they could come up with a valid argument against it. Moreover, if one were to make an equitable comparison between the Save Then Buy mindset and the modern American cultural norm of Buy Now Pay Later, there’s little doubt that they would deem the former as the best financial choice.

If we can see the wisdom of the concept, but have not yet adopted it… What is holding us back?

An example

Let’s take a look at a simple example of Save Then Buy versus Buy Now Pay Later in the context of a college education…

Save Then Buy: A prospective college student might seek a low level job in an industry of interest, then either attend classes while earning enough to fund them, or save for a few years and begin schooling once they have enough saved, gathering no debt along the way.

Buy Now Pay Later: With this mindset, a prospective student would first seek financial aid (most often in the form of loans), amass a mountain of debt throughout their college years, and graduate with tens of thousands of dollars of student loan debt.

While some might argue about the value of getting that college education as quickly as possible, my view is that the Save Then Buy student will come out on top across the board. They will have gained work experience prior to and during their education which will help them refine their field of study, and will provide them with necessary experience for launching their new career.

In fact, they will often already have a job with a company in their field of expertise, and can start climbing up the ladder with their new degree. They’ll also start their professional life with no student loan debt, and can begin saving and investing out of the gate.

The Buy Now Pay Later student will graduate with no relevant job experience, no job, and a mountain of debt. They will have to go into the world and compete against better equipped Save Then Buy candidates.

Save money, then buy – adopt the philosophy

I’m guessing that many people reading this article currently have a Buy Now Pay Later mindset. That’s okay… I used to be hold that view myself.

The good news is that you can change your behavior today. You no longer have to be a slave to a poor economic mindset just because “everybody else is doing it.” Break free from a culture of temptation and start living by a new personal economic mindset that is based on wisdom and sound financial principles.

Will it be hard?

Sure… It might be. Was it hard for me? Not really. All I had to do was calculate how much our debt was costing us. Once I had the numbers in front of me, the reality of $1,300+ of my hard earned money going toward interest on my debt was all the motivation I needed.

Get mad at your debt

You should sit down and take a long hard look at how much your debt costs. I can virtually guarantee that you will wind up with some good healthy anger toward your debt, which should help motivate you to adopt the Save Then Buy philosophy.

Save money, then buy – live by simple wisdom

Now that we’ve fully explored the concept, analyzed the numbers, and gotten mad about our current situation, all that remains to be done is to adopt the concept. Don’t buy stuff you can’t afford. Instead, save your money money until you can comfortably afford the expenditure.

From laborer to capitalist

In making this transition, you should also stop thinking like someone who trades their time for money, and instead start thinking like someone whose goal is to live off the proceeds of their money. If we want to win with money, we have to start considering our future every time we open our wallets. With each decision we make, we should be moving ourselves closer to the wise goal of living off the proceeds of our assets.

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Cash flow

I start with cash flow because you need to make sure that you’re not spending more than you earn. finances are not sinking you more and more into debt. Grab a budget spreadsheet and input all your income and expense numbers. If your expenses are higher than expected, looks for areas where you can cut back.

For example, instead of going out to see a movie every weekend, try visiting museums and art galleries on free nights, visiting local and national parks, or seeing if there are any free concerts and festivals. If you’re still intent on seeing movies, consider signing up for Netflix or Blockbuster.

If you’re looking for ways to increase your income, consider starting a second job or building an alternative income stream based on a hobby or other passion. It doesn’t have to make you full time money in order to improve your bottom line.

Emergency savings

I’ve learned from personal experience that the only way to lessen the pain of an emergency is to prepare for it. Cars break down, jobs get lost, and appliances stop working at the absolute most inconvenient time.

Make sure you’re comfortable with amount of emergency savings that you have. If not, then start building it up. By putting it in a high yield savings account, you’ll have easy access to it and earn a bit of interest at the same time.

Outstanding debts

It might help to separate this category into high interest consumer debt such as credit cards and low interest and/or tax advantaged debt like student loans or your home mortgage. Attack the high interest debts first, as they can get out of control if put them off too long.

The easiest way for me to pay off my credit cards has been automating my credit card payments. Try to pay the minimum on all but one of your debts. Put the rest of your debt reduction money into either your debt with the highest interest rate. If you’re not comfortable with that approach, try attacking the lowest balance first.

Retirement accounts

If you have retirement accounts, make sure that your asset allocation isn’t out of whack. If they are, then you should rebalance them. You may also want to review your fees and expenses to see if you can save some money.

If your job offers a 401(k) retirement plan and you haven’t already joined, you should enroll. Many companies offer a match on a percentage of your contribution, and failing to take advantage of this free money can be a costly mistake.

You can also get started by opening a Traditional or Roth IRA through your favorite brokerage or mutual fund family.

Your thoughts

How does your financial snapshot look? Is it better or worse than a year ago? What are you planning on doing in 2010 to improve things?

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Reduce your debt

Debt reduction should, in my opinion, always be numero uno. This is especially true if you’re dealing with high interest consumer debt. But even if your debt has a low interest rate, you might still want to make debt reduction a high priority. Whether or not you should pay off your mortgage early is a hotly debated topic, but even that is worth considering.

Build your savings

Your first line of defense when it comes to your finances is your emergency fund. Open a high yield savings account and work to build it up as a hedge against job loss or other unexpected curveballs that you might come your way.

A lot of people say to maintain a minimal emergency fund until you are out of debt, but I disagree. I think you should always pay yourself at least a small amount. That’s why I stick to a 75/25 savings plan.

There are, of course, other savings priorities that you might need to consider. For example, if you have a high-deductible health plan, you should be funding a Health Savings Account (HSA) so you can pay for health expenses with pre-tax dollars. Unlike a Flexible Spending Account (FSA), you can modify your HSA contribution levels throughout the year.

Fund your retirement

When it comes to funding your retirement, you have several options.

Individual Retirements Accounts – These come in two main flavors: Roth and Traditional. I personally prefer Roth IRAs over Traditional IRAs, but your needs may be different. Regardless of the type you choose, funding your retirement is an important priority. If you are under 50 years old, the 2010 IRA contribution limits are $5,000 or 100% of your taxable compensation, whichever is less.

If you are 50 or older and have sufficient taxable compensation, you can contribute $6,000 in 2010. The extra $1000 is referred to as a “catchup” contribution. Either way, getting started in January is your best bet for fully funding your IRAs. In fact, you still have time to make your 2009 contributions if you haven’t done so yet — the deadline is April 15, 2010.

Employer plans – Depending on where you work, you might have access to a 401(k), 403(b), and/or 457(b) retirement plan. We’ve previously outlined the contribution limits for these plans. In short, you can make elective deferrals of $16,500 to these plans in 2010 with an additional $5500 in “catchup” contributions if you’re 50 or older. If your employer matches your contributions, you should at least take advantage of the match so you’re not leaving money on the table.

Taxable investments – If you’re doing all of the above and still have money to spare, you should consider investing in a taxable account. You can do this either through a major mutual fund family, or through a discount broker. Either way, you’ll want to pay attention to tax efficiency when deciding what to hold where.

Save for college

Once you have everything else under control, you might be interested in funding your child’s education. Here are some of the best ways to do so…

529 Plans – When it comes to 529 plans, you have your choice between prepaid tuition plans and college savings plans. The former is a hedge against tuition inflation, while the latter depends on the performance of the underlying funds.

Regardless of which route you choose, make sure you do your homework. The good news is that qualified distributions are state an federal tax free (at least for now), and you might also get a state income tax deduction on your contributions.

Education Savings Accounts – The “Education Savings Account” (ESA) is a less-utilized college savings vehicle that has undergone some attractive changes since its inception as the “Education IRA.” Like a 529 plan, qualified distributions from an ESA are tax free.

ESAs can be used not only for qualified college expenses, but for certain K-12 expenses, as well. The contribution limits were raised from $500 to $2,000 in 2002 and remain there today. If you’re in a position to fund your child’s education accounts, make sure you look into this as an option.

What are your financial goals for 2010?

As I noted above, everyone’s financial priorities are likely to differ at least a little bit. While the above outline is a good place to start, you’ll want to tailor things for your own needs. You might even have things on your radar that I haven’t touched on.

What are your financial goals for the coming year?

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In life, we’re routinely faced with situations that require an immediate reaction. Consider the need to pay monthly bills and keep your head above water. Beyond these short-term reactions lie proactive decisions that provide longer-term benefits.

For example, paying yourself first with just $50 extra per month to go directly into an IRA, 401(k), or other account is a proactive step that will lead to a better retirement. While such thinking results in obvious benefits, however, it typically requires delayed gratification.

With budgets becoming increasingly tight for Americans, being proactive in just a few facets of your financial decision-making can provide you with enormous benefits and set yourself up for long-term financial success.

I’ve highlighted below a few situations in which it pays to be proactive rather than reactive. If you find yourself constantly reacting to financial situations, you may want to ask yourself why, and whether it’s time to get a little more proactive.

Emergency savings

Having an emergency fund prevents painful emergency fees, payday loans, credit card interest payments, and other non-essential payments that you wouldn’t otherwise incur. Nobody sets out in life saying, “I’m looking to pay exorbitant fees on debt for the rest of my life,” but that’s the situation many people find themselves in without proper planning.

Life happens, and the repercussions of living without a safety net can last for years. You risk bankruptcy or foreclosure, or at least being forced to sell off personal assets at a loss to make ends meet.

If nothing else, having cash to fall back on will help you sleep better at night and should outweigh the perceived benefits of owning a high-end car or the latest HDTV technology. If you don’t have an emergency fund, think about what it would take to build one. The near-term sacrifices will be worth it in the long-term.

Budgeting

Living paycheck-to-paycheck carries thousands of dollars per year in hidden costs. Without sufficient cash on hand, you lose out on things like early payment discounts on taxes, insurance, etc. You’ll also wind up facing unnecessary overdraft fees when your accounting is off by as little as $1. Beyond this, you’ll be unable to take advantage of one-time opportunities where having cash on hand can save you money (see below). If you can’t stand budgeting, at least consider implementing a reverse budget to avoid these problems.

One-time events

Americans have been presented with numerous one-time opportunities to exploit situations created by the financial crisis, but only those with liquid cash and/or good credit have been able to take advantage of them. Examples abound, including the homebuyer tax credit, cash for clunkers, and the opportunity to buy into the stock market when investor capitulation sent shares down by as much as 50% (70% for Emerging Markets).

An upcoming opportunity is the cash for appliances program, which is being rolled out state-by-state. This program will allow you to replace your aging appliances with a more energy efficient model at a substantial discount. You will also realized the long-term benefit of decreased energy costs.

Perhaps your existing appliance are already reaching the end of their useful life. If you combine the government’s incentive program with adequate cash on hand and a bit of research, you can realize a very strong return on your investment in 2010.

Paying for convenience

People sometimes take the easy route instead of the smart route at the expense of a few dollars here, a few dollars there. This translates into hundreds, if not thousands of dollars per year in leakage from your after-tax budget. A simple example involves buying food and drinks at the movie theater instead of taking them with you.

Here’s another example: I went to a Borders and browsed the store for books for my wife last week. I found several that I knew she’d love, but instead of just buying the books on the spot, I whipped out my iPhone and checked out the prices at Amazon. Even with the in-store “discounts” and club card, the savings at Amazon were over 30%. By planning ahead and allowing time for shipping, I saved a quick $30 on Christmas and personal book purchases.

Finally, we shop at Costco several times per year and buy in bulk instead of paying significantly more per unit at a grocery store. While shopping at Costco takes a bit more planning, and the up-front costs are higher, we save a ton of money. Surely, you encounter these sorts of situations daily. Each time you’re making a purchase, think about whether you could’ve done better with a bit of advance planning.

High ROI expenditures

Seeking out a high return-on-investment (ROI) is a smart way to improve your bottom line. There are some very simple and inexpensive ways to reduce utility expenses at home that many people don’t consider. For example, while buying conventional light bulbs is cheaper than CFL bulbs, there’s no question that you save money with CFL bulbs over the long term. Other examples include reducing your utility costs by switching to a low-flow shower head, planting shade trees around your house, and investing in an energy audit for your home.

Investment strategies

Reacting to market news by altering your investment strategies has wreaked havoc on retirement funds of millions of Americans. While Western society has hundreds of years of historical market data indicating that over long periods of time, equities outperform bonds and cash, millions of investors sold out of stocks last winter/spring, effectively locking in their losses.

They just couldn’t take the continued declines and bad news. Unfortunately, those individuals that reacted to recent market performance and deviated from a long-term investment strategy missed out on a huge rally. In contrast, investors that stayed the course are now seeing their 401(k) balances at or above the pre-crash levels (Vanguard notes that 60% of 401(k) accounts now have more money in their accounts than prior to the start of the crash).

While cynics will point out that monthly investments and company matches continued along the way, the point is that by sticking to the same long term strategy, these 60% are in pretty good shape compared to those who panicked and reacted to poor market performance by jumping ship.

No responsible investment adviser would advocate 0% equities in a retirement account with a 20+ year time horizon, but I have colleagues and friends in their 30s who completely sold out of stocks earlier this year and said they’re never coming back. Their investment portfolios will almost certainly lag behind inflation, meaning their money will be shrinking.

Closing thoughts

As you can see, there are many situations in which we’ll be forced to react if we haven’t gone to the trouble of planning for the future. Yes, being proactive and planning ahead requires short-term sacrifices, but the long-term benefits make it all worthwhile.

Do you have additional examples of being proactive vs. reactive in your financial life? If so, please share them in the comments.

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It should come as no surprise that planning for the future and saving for retirement can bring a great deal of peace to those who do it. Unfortunately, many Americans are so mired in debt that they can’t make any progress toward their long term goals.

You don’t have to have $500k in the bank to achieve financial peace. All you need is a solid financial plan. This will serve as a springboard for eliminating debt, building your savings, and getting you back on the road to a comfortable retirement.

“A clear vision, backed by definite plans, gives you a tremendous feeling of confidence and personal power.”

-Brian Tracy

Financial peace may be closer than you think…

When I say “financial peace,” what comes to mind?

You may have answered with one or more of the following:

• No more creditors calling
• No credit card debt
• A paid off mortgage
• Freedom from overdue bills
• A bunch of money in the bank
• Maxed out retirement contributions
• A diversified investment portfolio, etc., etc., etc…

While all of these are necessary pieces of the financial peace puzzle, most of them will probably take awhile to achieve. Wouldn’t it be cool if you could gain a great measure of financial peace in just a week or two?

Actually… If you follow the simple outline below, you will very quickly find yourself on solid footing and on your way to increased financial peace and prosperity.

The uneasiness of financial uncertainty

Only a fool thinks he can properly plan for everything. Much the same, it is foolish for us to walk through life with no financial plan at all.

“Life is full of uncertainties. Future investment earnings and interest and inflation rates are not known to anybody. However, I can guarantee you one thing… Those who put an investment program in place will have a lot more money when they come to retire than those who never get around to it.”

-Noel Whittaker

Consider the runner. Though he can never prepare for all the “what ifs” a race may bring, there are a few things that he can be certain of. For example, he cannot control the weather, but he can be prepared for different types of weather. He cannot control the length of the race, but he can know how long the race is and prepare accordingly. He can pace himself based on his knowledge and preparation and, at the very least, save enough of his energy to reach the finish line.

It’s much the same with our finances. We can never plan for every situation that may befall us, and only a fool would try to do this. What we can do is start with a few basics, take inventory of what we have, decide where we want to go, and develop a plan to get us there.

Once you finish planning, you still have to execute your plan to reach your goal, but… Once you have that plan, you can rest easy knowing that now it’s just a matter of follow through. There is peace in planning!

A simple plan for achieving financial peace

Does planning overwhelm you? Then start simple and refine things over time. Remember that “a journey of a thousand miles begins with a single step!”

Use the following outline to start forming your plan to gain control and peace over your financial situation:

• Get to know your debt and get angry. You’re never going to formulate a plan until your establish a proper relationship with your debt. One of the best things I ever did was to figure out how much interest I was paying on my debt. Simply take an inventory of your loans, and calculate how much interest you pay toward your debts each and every month. Once you figure out how much money you’re paying in interest, you’ll be motivated to move on to step two.
• Focus on needs and stop spending foolishly. Sure, you’ve made bad decisions in the past, but that’s behind you now. Start differentiating between needs and wants, stop buying things you don’t need, and focus your available funds on true necessities. Take it one step further by applying wisdom to your necessities. Food is a great example. Instead of simply buying everything you want, employ these grocery hacks to help cut corners.
• Start an emergency fund. Sell unneeded items, stop going out to eat, use your grocery savings from step two and save at least $1,000 as quickly as possible. This step can be accomplished much faster than you think, and will bring you a great deal of security and peace all by itself… And it only gets better from here!
• Keep a spending journal. Do this. Don’t skip it. I’m serious. If you’re like me, then even now you’re probably making excuses as to why you don’t need to do this. Knock it off. Keeping a spending journal is the cornerstone of living on a spending plan (a.k.a., a budget.) The cool thing about a spending journal is that it’s way easier to start than a budget. A budget is a living document that will take months to get into working order, but you can successfully implement a spending journal right now! Stop making excuses, get a small notebook, and keep it on you at all times. I carry mine in my man purse. Yeah you read that right… I carry a man purse – get over it.
• Start budgeting. As I mentioned above, this is something that will take time, so don’t feel like you need to master it in your first go-round. Now that you’ll be keeping a spending journal, this will be much easier than you think. Begin with a very simple budget and tweak it both in accuracy and completeness as the days go by.
• Repay high interest debt with your new found excess. Trust me. If you’ve followed the steps from above you will have quite a bit of extra money each month to help repay your debt much faster than expected. Whatever you do, don’t be tempted to spend it! Instead, use it to repay your debt ASAP. If you’re like me and you find it necessary to save while focusing on debt repayment then you can follow the 75/25 debt repayment and savings plan. Die hard Dave Ramsey fans will disagree, but this has proven to be a wise choice for my wife and I several times over.
• Build your emergency fund to 3-9 months worth of expenses. Now that your high interest debt is gone, you’ll want to build up your emergency fund. My wife and I plan to save enough to cover 6 months worth of expenses. You’ll want to keep this money in a place where you can easily access it, like a high yield savings account. This money is not an investment. Rather, it should be viewed as personal emergency insurance against unexpected events.
• Begin saving for retirement. Once consumer debt is gone and you’ve built up your emergency fund, use your newly developed financial discipline to begin saving for retirement.

There… Doesn’t that feel good?

“A clear vision, backed by definite plans, gives you a tremendous feeling of confidence and personal power.”

-Brian Tracy

Even though you haven’t saved a dime more than you had before creating your plan, you can walk away from this article with confidence, optimism, and a new found measure of financial peace concerning your future.

One last piece of advice – make sure you follow through!

Now that you have proper direction, all you need is determination, patience, and a little hard work. It’s amazing how a simple plan can have such a huge impact!

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