Free Money Finance

Thoughts and Advice from FMF Readers

2012-05-25T04:29:00-04:00

Much of the quality content here at FMF comes from the comments. There's a lot of wisdom, experience, and good advice on almost every post as readers with some great perspectives leave their thoughts. If you don't read the comments here at FMF, you're missing out!

Every once in a while I select a few that I want to be sure everyone sees for one reason or another -- they offer a helpful tip, raise an interesting point, or so forth. So today I'd like to share three recent comments with you. One is a GREAT tip (and something I'll apply) while two others hit upon things I've been thinking about/seeing in my life or the lives of others.

So let's get started. Here's a comment on my post titled Get Rid of Your Stuff: Make Money, Declutter Your Life, and Help Others. I had noted that every season we go through our closets and pick out the clothes we didn't wear. We then give those away or sell them at a church used clothing sale. Here's how one FMF reader takes this idea to another level:

One thing I learned years ago is that after you purge your closet of clothes you don't wear anymore, to then turn all your hangers around backward on the rod for the clothes you're keeping. After you wear an item, turn the hanger back around the right way. You'll be shocked how many hangers are still backwards at the end of a season - even after you did what you thought was a thorough purge of your clothes at the beginning of a season.

I LOVE this idea -- and we'll be implementing it for sure at our house.

The next comment came when I announced my March Money Madness winner, a post about how a blogger "broke the rules" and bought a new car. One reader responded:

Rules are made to be broken.

Personally I have been looking for a car for my teenage son and I am surprised at the cost of used cars. People and dealers want exorbitant prices which tilt in favor of buying [new]. Until the economy turns around and the demand for used drops I don't see this changing soon.

I am not willing to pay $12k for a 4 year old car with 80k mile on it when I can buy a brand new comparable car for $17k and zero miles on it. (I am talking Saturn Astra to the Chevy Sonic)

The $1250 in depreciation per year is worth the peace of mind over the 4 years, under warranty and you know how the car was driven.

This is exactly the same situation a friend of mine encountered. He wanted to buy his son a used Subaru Forester. But the best ones he could find were vehicles with over 50,000 miles and were only $3,000 less than a brand new one. So, he bought new. I would have too. (Then again, I buy new anyway.) :)

I think the car-buying "rules" are changing. While buying used may still be the better option in the majority of cases, it's no longer a "no brainer" in all of the cases -- and especially with particular models.

Is anyone else experiencing the same thing as you look to buy a new/used car?

Finally, here's a comment on my post The Key to Great Investment Returns that I've been grappling with myself:

I am an advocate of saving and shunning debt but I can't agree that the 401-k millionaires are the winners! Here's why, I recently worked with a friend of mine who retired early at 48; with a million in his 401-k. He had other savings outside his 401-k but not nearly enough to cover day to day expenses etc. So, he ended up dipping into his 401-k-taxed at normal rates with a penalty.

Upon reflection he wishes he had spent more efforts building a million dollar cash portfolio which threw off a lot of income. For those really serious about retiring in their 40's and 50's start thinking about what my friend came up against and maybe structure your portfolios differently.

Exactly. If you plan to retire early and yet have the majority (or even a decent portion) of your retirement savings in 401ks and IRAs, then you better have a GREAT plan on how to live off the non-tax-advantaged savings you do have. Otherwise, you're looking at some big penalties for early withdrawal. Yes, there are ways you can get at the money, but they constrain you at least a bit. Here's what CBS says about what I'd consider to be the best option for doing this (it's one that the majority of people are likely able to at least consider):

Substantially equal payments. If you want to turn your retirement money into an income stream before you're too old, you can do it with the help of what the IRS calls rule 72t. This allows you to dodge the penalty as long you take the money out in "substantially equal" payments over your remaining lifespan or that of you and a beneficiary.

There's even a loophole within this loophole. The payments don't' really have to stretch over your remaining lifespan. You've satisfied the IRS if the payments last five years or until age 59 ½, whichever comes later. After that you can take out as much or as little as you want.

There are a handful of ways your withdrawals can qualify as "substantially equal" in the eyes of the IRS, and they can get complicated. The web abounds with 72t calculators to help you sort things out, but you might want to double check the formula you settle on with a tax adviser.

So there are ways to get at your tax-advantaged money early, but they aren't really great.

I have roughly 60% of my retirement savings in either my current 401k or IRAs that were funded from 401ks at past jobs. So if I ever wanted to retire early, how would I manage doing it without some complicated (and likely expensive) moves (not to mention the lack of flexibility issues.) As a result, my retirement plan schedule by year lists what funds I have access to and what funds I don't in any given year. These numbers give me a really good feel for when I might be able to retire early.

Anyone else grappling with this issue (or have you worked around it)?

“Do What You Love” Is Bad Advice

2012-05-24T12:45:00-04:00

The following excerpt is reprinted with permission from Rise: 3 Practical Steps for Advancing Your Career, Standing Out as a Leader, and Liking Your Life by Patty Azzarello, copyright © 2012. Published by Ten Speed Press, an imprint of the Crown Publishing Group. I have to agree with this advice. That's why I recommend that people do what they LIKE.

Other FMF article topics touched on by this piece are What I'd Do with a High-Paying, Unrewarding Job and And Yet Another Reason Not to Quit Your Job Early.

We all get told at some point (if not over and over again), “Do what you love and the money will follow,” and it’s just plain bad advice. The number of people who make a lot of money doing what they love is so insignificantly small that it’s an unrealistic and useless thing to model. The most unfortunate thing about this is that it makes people feel like they are failing when they don’t achieve it.

This plays out in two destructive ways:

1. Because they don’t have the same feeling of love for their work that they do for their family or leisure activities, they feel like they are selling out or living life wrong. They waste a lot of time feeling unfulfilled, unhappy, or plagued by the feeling that they should be doing something different.

2. Others, who try to do the things they love full time, find that the effort to make a business of it and a living at it takes away all the enjoyment of it. They end up turning their love into a job they don’t like, one that generally doesn’t pay very well. They end up not loving life after all. And they waste time that they could have spent earning money.

Don’t put this pressure on yourself!

KEY INSIGHT: Consider thinking about your work/life strategy like this:

Do what you love for free.
Work for money.
Change how you do your job to feel less tortured about it—and maybe even feel pretty good about it.
Spend the money you make on doing the things you love when you’re not at work.

End of insight: Please read it again.

Oops, I Hate My Job—Now What?

I am not proposing that you sell your soul to a job you hate just to make a lot of money. I do believe, however, that you can make good money at a job that you don’t love as much as you love your leisure activities, and that you are better off doing so.

During the middle of my career, when I was not enjoying my work, I was still wondering “What should I really be doing?” All the stories about people who gave up high-paying jobs they didn’t like, took big financial cuts or risks to pursue their dreams, and were now so happy with their smaller, simpler, less expensive lives didn’t help me. I wanted to stay in my comfortable home, buy nice shoes, drink good wine, and feel successful, happier, and more satisfied.

I felt stuck.

The problem was that I was in a technology career and I pretty much hated technology. My non–love affair with my work started in my first job out of college as an engineer in the Robotics Research Lab at Bell Labs, supporting the PhD researchers who were working to make robots respond intelligently to their environments. It would have been a dream job for some people, but I hated it. As I navigated my way from engineering into management roles, I still never got excited about the technology itself.

So how was I effective as a technology business leader when I hated technology? I learned to use the very fact that I honestly hated technology as a core strength. And I focused on using that strength to add real business value. Here’s what I mean.

I always felt that technology was too hard to use. It made people feel stupid when it didn’t work right, and most of the time it didn’t work right. It annoyed me.

As I climbed the ranks from sales engineer, to product marketing manager, to VP, GM, and CEO, I always focused on where the technology met the humans—and how to make that part work better and be less annoying.

I dealt directly with the technology as little as possible. I didn’t spend time and energy trying to be more technical, because it was not a strength of mine (even though this is what my technology-oriented managers said they expected from me). Instead, I focused on what was a strength and source of energy for me—my understanding and caring about how to help humans work more effectively with technology.

So I focused my teams on making the product install better and the demo easier. I watched how people used our products. I learned where they got stuck and understood how they were thinking about the task at hand.

We made sure the products did what they were supposed to do in the way that the user expected. I also made sure that the business processes surrounding the technology were good for humans. We cleaned up things like sales presentations, partner contracts, distributor packaging, and license agreements. I sold my management on the fact that my leading this effort was more important to our business than my becoming more technical.

As it turns out, there was real value in making technology less annoying for humans! So I was succeeding, by using (1) my authentic dislike of technology and (2) my strengths in understanding what motivates and drives people to act in particular ways.

These people-oriented strengths also gave me the ability to build great teams and get them aligned and focused to achieve a common purpose. I had both the guts to make organizational changes and the intuition to get the right people into the right roles. I had strong skills to clarify strategies and turn them into realistic, effective action plans.

Thrive More at Work

By focusing on what I was really good at and what energized me, and by building strong teams to reinforce my weaker points, I was leading in a way that was true to myself. So it wasn’t painful, and it created great success over and over again.

I figured out how to be really successful as a business leader and get a lot more enjoyment and a stronger sense of personal satisfaction and purpose in my well-paying, corporate, technology job. Life got better. Even my family noticed; they would say things like, “It seems like you are actually enjoying your work; what happened?”

Your Money or Your Life, Calculating Your Lifetime Savings Percentage

2012-05-24T04:29:00-04:00

I have read several sites and posts where people have said that Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence: Revised and Updated for the 21st Century was the one personal finance book that had changed their lives the most. For one reason or another, I had never read the book. I had my own "best money book" in The Millionaire Next Door: The Surprising Secrets of America's Wealthy -- a book I had learned from, applied to my life, and amassed a decent net worth as a result. So I never thought I needed to read Your Money or Your Life.

Then I was in the library a few weeks ago looking at the personal finance books and somehow it jumped out at me. I thought "I should read that -- if for no other reason than to let FMF readers know what I think of it." So I checked it out and started reading.

As you might imagine from the title, the book lists nine steps people should take to get a handle on their money. I'm going to give you all nine steps over a series of posts and let you know my thoughts on them.

Step #1 actually has two parts as follows:

Find out how much money you have earned in your lifetime.

Create a balance sheet of your assets and liabilities. What do you have to show for the money you've earned?

I think this is probably the most depressing money-related exercise most people could ever imagine undertaking. This is what it would look like for many Americans:

Age: 44

Years working: 20

Average annual salary for 20 years: $40,000

How much money you've earned in your life: $800,000

Net worth: $40,000 (I used the mid-point between the age and income numbers on CNN Money's net worth calculator)

Look at it this way. You've slaved for 20 years, are halfway to retirement, and what do you have to show for it? $40k. That means, even with growth/appreciation of your savings, you've only been able to squirrel away 5% of what you've earned in your life. And not only that, but it's so small that it's a pittance of what you'll need for retirement, not to mention college and other major expenses. See why it probably seems so depressing for so many?

So why do they ask us to do it? Because it's part of "coming to terms with your past relationship to money." It then sets the stage for "looking at [your] present [relationship with money]." Translation: this shows you how messed up you are because of bad choices in your past. Now we're going to work on setting you straight.

Ok, I can give them a partial break. After all, my first step to great finances is to calculate your net worth. But it's the lifetime earnings that just seems to be over the top for me. It will hit people pretty hard that they have worked so long and so hard for so little. Then again, maybe that's what it's designed to do. :)

So far, I'm not really feeling the inspirational vibe that so many people have noted comes from this book. Then again, I'm only done with step 1. Stay tuned to see if things change for me or not.

The Best of Money Carnival

2012-05-24T04:00:00-04:00

The Best of Money Carnival is now up!

Enjoy!

The Eight Tax Rules

2012-05-23T12:45:00-04:00

The following is an excerpt from Securing Your Financial Future: Complete Personal Finance for Beginners courtesy of Rowman & Littlefield Publishers. All Rights Reserved.

Taxes! Strong opinions abound on virtually every aspect of the subject—at least among taxpayers. Are taxes already too high, or are even higher taxes necessary to balance the budget? Is the burden fairly distributed, or are adjustments in order? Is the tax code complicated in order to ensure fairness across a wide variety of situations, or is the complication simply the result of privileged interests getting what they want? If you think of those as contemporary questions, they’re really not—they have been brought up and debated for as long as there have been taxes.

If you are interested in pursuing those kinds of discussions, you’ll have no trouble finding forums to do so. But we’re not going to engage in any of that here. Instead we want to take a realistic look at the effect that taxes have on your financial life and offer some practical advice about how to deal with them successfully. In our discussion, we’ll focus solely on the U.S. federal income tax. Even though that’s not the only type of tax that you’ll pay, it is likely to be the biggest, and many of the points that we’ll discuss are adaptable across the tax landscape.

Since taxes are all about rules, that’s the format we’ll take. Below are eight rules that I recommend you follow in dealing with taxes. The first four are principles that you should adopt, and the next four are specific areas of competency that I recommend you develop.

1. Pay your taxes in full, on time, every time. Taxes are serious business, and they deserve your complete attention. A rule like this might seem obvious, but I’m including it to emphasize that taking a casual, haphazard, or last-minute approach toward complying with tax laws is an extraordinarily bad idea. The consequences of ever getting on the wrong side of the IRS, or any other tax enforcement body, are significant.

2. Pay the minimum legal amount of taxes that you owe and not a penny more. Understanding rule #2 requires that you understand the difference between two similar-sounding, but vastly different, words: evading taxes and avoiding taxes. Tax evasion is a criminal offense. It refers to dishonestly or fraudulently misrepresenting your financial status to reduce tax payments. On the other hand, tax avoidance is perfectly legal. This refers to taxpayers making decisions explicitly to take advantage of specific rules in the tax code, to reduce their tax liability. The tax code is complex. Two taxpayers with identical financial situations can end up paying wildly different amounts, both perfectly legally. The taxpayer who pays less has done so by being more familiar with which specific elements of the tax code could be legally used to his or her advantage and then doing so. Legally and financially speaking, there is no virtue at all in paying more taxes than you are required to. Do not evade taxes, but avoid them to the greatest extent that you legally can.

3. Commit to understanding the basics of the income tax and to keeping your understanding current. This rule is a natural extension of rule #2. If you don’t have a good working knowledge of the basics, or at least the basics that are most applicable to your own situation, you are very likely to end up paying more tax than you need to. To state it a little more forcefully—ignorance of the tax code is likely to be an expensive habit. You don’t need to become an expert, and you don’t need to build your knowledge overnight. But you can commit to improving your knowledge of the important basics, year after year.

4. Have an effective record-keeping process. There’s no way around it—a fundamental part of financial responsibility is keeping good financial records. If you’re already following the recommendations made in recent chapters—doing all your spending using either a debit or credit card featuring summarized, downloadable transaction details—then you’ve already got the most challenging part of this under control. Keep this, and all your other financial records, secure (and remotely backed up, if applicable), and your tax preparation process will be significantly simplified.

5. Know your marginal tax rate (your tax bracket) and your average tax rate. You probably know that tax rates are structured in a graduated, or progressive, way. This means that higher and higher levels of income are taxed at higher and higher rates. At the time of this writing, there are six brackets of income, with six progressively higher tax percentages levied on each one. The lowest bracket is 10%, ranging up to the highest rate of 35%. (I’m emphasizing “at the time of this writing” because the number of brackets, and the rates charged, can and do change from year to year. For example, the number of brackets has been as few as three and as many as fifteen. The U.S. Congress has proven very willing to adjust the structure in response to all kinds of economic and political forces and is likely to continue this practice.)

How do these progressive brackets work? Let’s say that you earn just barely enough to put you into the highest tax bracket: 35%. (Congratulations!) That doesn’t mean that your total tax bill is 35% of your income. Instead, you pay 10% on your first “chunk” of income, a higher rate on the next chunk, and so on; you only pay 35% on the very last chunk. In this example, by the time you add all that up, your total tax bill would average out to about 29% of your total income. In tax language, we say that your marginal tax rate is 35%, but your average tax rate is 29%. Both rates are important. The average tax rate is important because it determines your total tax bill. The marginal rate is also important because that’s the rate you’ll pay on any additional income you earn this year. For example, if you are considering earning some supplemental income, understand that you’ll pay 35% on that extra income, not 29%.

6. Have a deduction strategy. Deductions are expenses that the tax code allows you to subtract from your income before your tax is figured. Examples of deductible expenses are mortgage interest paid on an owner-occupied house, charitable donations, a certain portion of your medical expenses, and a long list of others. The more deductions you have (in dollars), the lower your total tax bill is. The tax code gives you a choice: you can list all your deductions one by one and add them up (this is called itemizing) or you can take a single flat amount that the government offers everyone called the standard deduction—one or the other, but not both. Which do you take? Whichever is higher, because that’s how you legally pay the least tax.

It is in your interest to know whether your deductible expenses in any given year are likely to be higher or lower than the standard deduction. Early in your financial life, before you own a house, it isn’t unusual simply to take the standard deduction. But eventually your deductible expenses will probably begin to approach the standard deduction amount, and sooner or later it will make more sense to itemize. You don’t want to miss that crossover point because each year you take the standard deduction when you could have itemized could cost you in unnecessary taxes.

7. Have a withholding strategy. Like most U.S. employees past and present, I am a veteran of many coffee-break debates about what the ideal tax-withholding strategy is. What is a withholding strategy? As Bobby Budget explained to Billy Bigshot, employees fill out a form with their employer called a W-4. Based on how it is filled out, the employer knows how much to withhold from your earnings toward your income tax. When you eventually file your return, if the amount withheld is greater than your actual tax bill, you get a refund check from the U.S. government. If your tax bill is higher than what has been withheld, you pay the government the difference.

Contrary to what a lot of the coffee-break debaters believe, getting a big refund check year after year is not an indication of financial genius—just the opposite! When you get a big refund check, it just means that the IRS has been holding your money on your behalf; and while they are holding it, they are earning interest on that refund money—and you’re not! In other words, you’ve just generously provided the IRS with an interest-free loan. On the other hand, if your employer doesn’t withhold enough, you get to earn interest on that difference, until you have to pay. In both cases, the amount of tax paid is identical—the only difference is who is earning interest.

So what is the ideal withholding strategy? It depends on your skill level at budgeting and tax bill estimation. If you are a rookie at both, then you should be conservative and aim for a zero difference between your tax bill and the amount withheld (zero refund, zero additional tax owed). Once your skill level is high, though, you can get more aggressive at reducing your withholding and earning interest on the money that you will eventually have to pay in taxes. The extra skill is required because you will have to be completely certain that when your tax bill is due, you will have the funds available to pay your taxes. How do you adjust your withholding? Work with your employer’s payroll department, or any tax professional, who can advise you on perfectly legal ways to adjust your W-4 to your advantage.

8. Know when to seek outside expertise, and what kind. Here is a simple model, listed in the order of increasing expense to you:

Level 1: Do all taxes and tax research yourself, using readily available resources. You can buy or check out one or more books, search online, and so on.

Level 2: Use tax software, carefully researching which product best meets your needs and ensuring you only use the most up-to-date version. Often it is possible to use software that can also be used in automating your budgeting process.

Level 3: Engage a certified tax professional. Services can range from simply filing your return based on information that you provide to extensive consultation on tax planning for the current and future years.

When you are just starting out in your financial life, level 1 may be perfectly sufficient. Or you may be someone who is so comfortable with computing tools that you couldn’t imagine filling out a tax form when you know there are simple applications available that can do the job better than you can; if that’s the case, you might skip directly to level 2. Eventually, though, your financial life may get complicated enough that you’ll want to go to level 3. Each level costs more than the preceding one; but each level also offers a greater chance of spotting potential tax savings. The more complex your situation becomes, the more likely it is that it makes sense to move to the next higher level.

Five Expenses You Won't Have in Retirement

2012-05-23T04:29:00-04:00

You've probably heard it said that during retirement you'll need roughly 80% of your pre-retirement income. This line of thinking has two inherent assumptions:

1. What you make while you work is fairly close to what you need/spend.

2. There will be certain expenses you have now that will go away during retirement. (Yes, some expenses -- like healthcare -- will go up, but overall you'll see a 20% drop in costs.)

For most people, assumption #1 is likely correct. But if you've built a big gap between what you make and what you spend, then this rule-of-thumb is going to estimate your retirement needs too high. For example, consider the following scenario:

Pre-retirement income: $100,000

Pre-retirement spending: $50,000

Estimated retirement income needed based on "80% rule": $80,000

Actual retirement income needed based on spending habits: Something below $50,000 (we'll get to this in a minute)

Difference between actual and estimated needs: At least $30,000

If you think you need $30k more per year than what you actually need, you're going to make incorrect decisions based on this perception (the biggest of which are that you'll likely save too much for retirement and delay retiring for much longer than needed.) This is why I prefer that you actually run the numbers and estimate your actual retirement costs. Then you'll have a much better feeling for the costs you will actually incur while retired and you can plan accordingly. This is what I've done. And I update my spending calculations every other year just to make sure they are still on target.

As for the second assumption, US News offers their thoughts on why you will actually spend less during retirement. They list five expenses you won't have in retirement as follows:

You no longer have to contribute to your retirement accounts.

Most people will pay less tax in retirement.

You no longer need to support your kids.

You can cut down on consumption related to having a job.

No more excuses to pay for conveniences.

My biggest expenses currently (if you include saving for retirement and other large expenditures as "expenses" are):

Savings

Taxes

Giving

Family costs -- food, clothing, shelter, etc.

ALL of these should go down significantly (or be eliminated completely) in retirement. Of course I've already taken that into account when I estimated my retirement expenses. However, most people probably don't think about these "savings", and you can see how costs for many will dramatically drop in retirement.

One thing they don't mention is housing costs. I know we've discussed this several times here on FMF, but IMO by the time you retire you shouldn't have a mortgage either. And that simple fact will decrease costs in retirement by 25% or so by itself. Of course if you're reading and following along with my tips, you will be out of debt completely well before you retire. :)

How about you? If you're retired, did you see your costs drop once you quit working? By what percentage? And for those of you planning for retirement, how do you account for potential costs?

Enhance Your Career by Writing Articles

2012-05-22T12:45:00-04:00

Dr. Thomas Stanley says you can enhance your career by writing articles. He talks about an investment advisor who was published (of all things) in Medical Economics. His thoughts:

Once you are published in a prestige journal you are no longer just one of the more than 200,000 registered representatives in America. No longer are you just Roger or Bill or Barbara. You are now Roger, the writer. One of the great advantages of being a writer is that more and more prospective clients will take the initiative of calling you instead of the other way around. Writers tend to be viewed as experts, and by definition experts have high credibility.

Mr. Balser's article is indeed an implied endorsement from Medical Economics. Endorsements from highly credible, prestigious third parties can make one's career. In my career, I have conducted research for more than half of the top 50 financial institutions in America. Yet I never initially made contact with them. As a professor, to get promoted and obtain tenure, one had to write a lot, and I did. Prospective clients called me and asked me to do research. Eventually I turned much of this research into more articles and a series of books.

Is it difficult to get published? As discussed in my first book, Marketing to the Affluent, it depends upon which of the more than 10,000 trade and professional journals, including newsletters, you target.

I love this idea! It's a way an employee can show expertise, credibility, and influence -- three things that employers LOVE. And when employers love something about an employee it tends to help out that employee's bottom line significantly. ;-)

I've previously shared how I turned my hobby of writing into an income. It started with a chance request where I was asked to write my thoughts on our industry for a top trade magazine. When I found out they actually paid for it, I wrote business pieces for two different trade publications (I actually had a monthly column in one) for several years as well as expanded my writing to personal finances in other periodicals. I made a very nice side income those years doing something I enjoyed.

But what I haven't shared is the impact writing those pieces had on my career. Because I was writing for trusted industry publications and did a decent job with my pieces, I was viewed as an industry expert. As a result, I was invited to speak at industry events. I was asked to visit many of our customers and they sought my advice. I was invited to sit on several industry committees where I networked with even more of our customers. And the more I wrote, the more these opportunities presented themselves.

The climax of these events was when I was given an award (at the annual convention) for the person who most impacted the industry in a given year (note: this was not an award I applied for, like I suggested we all do in trying to get a career award, but one I was selected for.) In addition, my company was named the industry's "Supplier of the Year" two years in a row -- the first time our company had received this award ONCE, not to mention twice. Getting the company award was not only because of my efforts (there were other factors, of course), but it was certainly part of the equation.

The writing benefited my career and compensation as well. A couple years into this process, I actually had part of my bonus tied to writing a certain number of industry trade articles. So I not only got paid from the publications for writing the pieces, but also received a nice bonus once I reached the required number of articles. In addition, I was ultimately hired for a higher-level (and better paying) position by our top customer and ended up working for them for five years. Overall, writing articles for trade publications was a win all the way around.

But it wasn't easy. I had to network to get them to take the initial articles. I had to write most of the pieces on my own time -- at nights or on the weekends. And I had to continually have interesting ideas/topics that the readers would enjoy/use -- otherwise they would stop reading. And I was ALWAYS on a deadline. So don't get me wrong, it was a lot of hard work. But was it worth the effort? It sure was!

I know that this idea is not for everyone. Not everyone is a writer. Not everyone has trade publications they can write for. Not everyone works in a field where others are seeking advice (I wrote on marketing, which was highly sought after advice, but "accounting" might not have had the same appeal.)

But for those who do like to write, have an area of expertise where people want ideas, have trade journals that cover those ideas, and are willing to do the extra work required, writing articles is a GREAT way to both earn and extra income as well as grow your career as an industry expert.

Small Choices Can Lead to Big Gains

2012-05-22T04:29:00-04:00

When we look at what's needed to become wealthy, the big-picture view can be absolutely daunting. How can anyone hope to accumulate millions for retirement while also saving for college, raising a family, and attempting to get a bit of enjoyment out of life? It seems like an impossible task.

But the truth is it's not impossible. In fact, it's not only possible, but probable that you can become wealthy over the course of a lifetime. With just a few simple steps, you can go from financial zero to financial hero.

The key is in understanding the concept of making small choices, on a regular basis, in order to achieve big gains over time. If you take simple, practical, small steps day after day for years (and eventually decades), you WILL become wealthy.

I LOVE the concept of small changes making a big impact over time. I always appreciate and short story/illustration/saying that shows the impact small changes can have. A few that come to mind:

You have possibly heard the scenario about whether you would rather have a million dollars or a penny that is doubled every day for 30 days. The one-off million dollars sounds great but, in fact, the penny a day would yield you five times that amount. This simple scenario shows that small things can build to significant gains. Unfortunately, few people understand the concept of small amounts, saved regularly and invested wisely, will eventually build into a nice nest-egg.

Water eventually wears down rock if given enough time.

And, of course, the old standard: "A journey of a thousand miles begins with a single step."

And yet, even if most Americans did understand these principles, most people have little stomach for implementing them. Because while these steps are simple to understand, they are not easy to implement. They require discipline, patience, and persistence -- three characteristics that are lacking in most Americans when it comes to managing money.

But being the eternal optimist, I always think people can rise to the occasion if presented with the right ideas. And while I know many won't, some will. And helping just a few people -- even one person -- become financially sound is worth all the effort I put into this blog. It's for this reason that I offer the following list of small choices anyone can make that will translate into big financial gains in the future:

Track spending. It is often said that people don’t plan to fail, they just fail to plan. When you are not working within a household budget, this is exactly what you are doing. If the word ‘budget’ brings up nasty connotations for you, give it a different name. Call it something that will inspire you to stick to it (I like "cash flow plan".) Take your time working out your plan, include all income and expenditures and make sure it is accurate. Be honest with yourself and take your time getting the budget right. Add up your expenses. If they exceed your total income, look for ways to cut expenditures to make it balance.

Identify Problem Areas. Look for areas in your budget where you already know you over-spend. Reduce the allocation in these areas and put the amounts saved into a saving section. Small choices here and there can add up to big results over time. Now look for other areas where you can cut expenditures.

Identify ‘wants’ versus ‘needs’. Understanding this difference is vital to allow you to save and build a secure financial future. Restrict ‘wants’ spending so there is enough for the ‘needs’ and some left over for saving.

Spend Less than you Earn. Now, this may seem obvious, but so many people ignore this simple concept. You cannot live on credit forever; at some stage you are going to have to pay the piper and it is going to cost you! Also, you need to have some back-up savings in case of an emergency.

Manage Debt (with a goal of getting out of it completely). If you have multiple debts, particularly several credit cards, choose to consolidate and manage these debts and save money. There are several useful strategies that will help you reduce debt and interest. Choose to pay cash instead of using credit; if you don’t have the cash, do you really need the item?

Make your money work for you. Allow for a savings amount in your budget but don’t just leave it sitting in your checking account. Put your money to work for you in an interest-bearing account. Get advice from a financial planner for the best options for you. Choose to have this savings amount automatically transferred each month and watch how it grows.

Make a commitment to stick to the small choices and changes you have identified. Then keep looking for more ways to free up some extra cash and increase your gap. Decide to put up with some short-term pain for the big gains you will enjoy in the long-run. Twenty years from now, you'll be thankful you did!

30 Steps to Great Finances: Steps 7 and 8

2012-05-21T12:45:00-04:00

Today we are going to continue talking about how to improve your finances in 30 steps. We are going to talk about the final piece of growing your career as well as how to make more money outside your day job.

If you want to see where we've been so far, start with step #1 and work your way through the series. But for now, let's proceed with today's tips.

Step 7: Grow Your Career – Other Opportunities

In addition to the career-related tips we've already suggested (over-delivering, networking, being likeable), there are several other ways to advance your career (and thus increase your income.) Here are three of the best ones IMO:

Apply for awards. Don’t sit around waiting for recognition, awards and praise to come to you—look for the opportunities yourself. You may be surprised how few people do this, and if you are the best of those who applied, you get recognition by winning the award. Awards look great on a resume and also reinforce to your current employer what a great asset you are. For specifics, see my post on how to get a career award.

Get educated. Take classes to learn more about your field or to become a better manager (or potential manager). Showing the initiative to learn more says a lot to your supervisors about your dedication to the job.

Get certified in a skill important to your field. This may set you up to be a specialist in your department, which makes you more valuable.

The more you can gain recognition and experience in your field, the faster your career can grow, and, often the more money you can make.

Step 8: Develop a Side Business Using the Skills You Already Have

Once you take steps to make the most of your day job, it is time to focus on additional income streams. And one of the easiest ways to do this is to use the skills you've developed over your career and freelance at night and on weekends. A few examples of how you might be able to do this:

If you are a teacher, you can tutor students on the side. As a homeschool parent, I hire teachers all the time to teach my kids subjects my wife and I can't (Spanish, chemistry, etc.)

If you are a computer engineer, you might offer consulting. Know anyone who needs their computer fixed? Me too.

If you are a business executive, you could advise small businesses on how to grow their sales, market their services, save money in operations, etc.

Any way, you get the idea. Take what you already do/know and turn it into an extra money-maker.

And who knows? You might find that you enjoy your side gig so much that you can eventually quit your day job and run your side gig full-time.

Stay tuned for the next two steps coming up soon. If you have been following along in this series so far, what success have you had following the steps I’ve given? Share them in the comments. I’d love to hear them!

The Most Important Part of the Budgeting Process

2012-05-21T04:29:00-04:00

The following is an excerpt from Securing Your Financial Future: Complete Personal Finance for Beginners courtesy of Rowman & Littlefield Publishers. All Rights Reserved.

Get ready: here comes one of the most important recommendations in the whole book. It is a trick that makes your left brain happy by getting the power of compounding working in your favor but slips right by your right brain’s bag of tricks. This recommendation guarantees that you will follow the First Rule, month after month and year after year.

It is called Pay Yourself First.

Here’s how it works: the First Rule requires that you save 10%—minimum—of everything that you ever earn. So first you decide what percentage you are going to save and then convert that into a dollar amount. Next, make that amount the very first line item in your monthly budget. Think of this savings as a bill that comes to you every month—a completely nonoptional bill that you can’t ignore or delay. Then as soon as the month begins, pay that “bill” first, before you spend any other money whatsoever. The way that you pay the bill is by transferring that amount from your checking account into your savings account. It’s like saying “I know I have to pay my landlord, the electric bill, my phone bill, etc., every month, and of course I will. But I am going to pay myself first.”

This changes your mentality about spending and saving in a subtle but extremely powerful way: you no longer save what is left after spending. Instead you spend what is left after saving. The difference may sound subtle, but its power is profound.

It works even better if you can make it automatic, which I highly recommend. Do this by preauthorizing an automatic monthly transfer, from checking to savings, in the amount that satisfies the First Rule (at least), on the same day that your paycheck is deposited. Your right brain’s preference for the path of least resistance usually hurts you financially, but paying yourself first turns the tables and allows you to use this tendency to powerfully help you instead. The money is out of your account (and your mind!) before you even realize that it was ever there. You’ll never miss it, so it won’t feel like a sacrifice. You’ll be consistently doing the right thing financially, in such a way that it doesn’t hurt a bit. In fact, after you set it up, you won’t even notice that it’s happening. The only time that you’ll notice it at all is when you happen to notice your savings account balance and are surprised by how big it is getting.

By the way, paying yourself first isn’t a secret, and it isn’t new—it’s been around for generations. It’s so well known for its rock-solid effectiveness that it’s the primary technique used by the U.S. government for its own revenue collection. When you get a paycheck from your employer, you’ll notice that an estimated amount for U.S. income tax has already been taken out before you get your hands on your pay. If the IRS doesn’t want to take the chance that it won’t get paid, why should you? Paying yourself first takes the chance out of increasing your net worth and makes it a sure thing. It’s like money in the bank. Wait . . . it is money in the bank!

Getting the Most for Your Money

So far, all of our emphasis in this chapter has been on keeping your total amount of monthly spending under control by using the budgeting process. As long as you do that, you’ll be following the First Rule and your net worth will grow. In addition, the learn step in the budget process will increase your spending skills, and this is important. Two people can spend the same amount of money in a month, but the one with the superior spending skills will be able to afford more (or better) goods and services for the same amount spent. Alternatively, two people can buy an identical set of goods and services in a month, but the one with superior spending skills will buy them for less, and therefore will be able to save faster.

People who have mastered the art of spending waste less money and get more for the money that they do spend. You’ll learn how to do this yourself as you continue to repeat the learn step in the budget process, but I’d like to give you a head start by outlining some of the key elements of spending skills. Here are seven of them.

1. Don’t make individual yes/no decisions—prioritize. The most basic level of prioritization is separating needs from wants. There is no debate that you need a basic level of food, clothing, shelter, and health care. But everything beyond that is a want. What prioritization is all about is ensuring that your needs are paid for before any wants and deciding which of your wants you want the most. Because you are committed to staying within a fixed amount of spending each month, every time you say yes to a want, you’re saying no to other ones. Your goal at the end of the month is to look back and be satisfied that you got the most for your money—that you spent it only on your needs and your very highest-priority wants.

The worst possible way to get that result is to make your spending decisions one at a time, as they come up or as they occur to you, as if every spending decision were completely independent of every other one. Decisions will come at you at disjointed, random times—so you’ll get disjointed, random results. Without prioritization you just spend your way through the month, saying yes when it seems like a good idea, and you run the risk of spending your monthly total before the month is over. (The technical phrase for this is “running out of money before you run out of month.”) The only possible way to end up close to a good prioritization is to look at all of your possible spending alternatives together, at the same time, so that you can compare them against one another. The wrong question to ask is “Should I buy X, yes or no?” The right question to ask is “I can afford to buy X, Y, or Z, but only one of the three. Which one of them makes the most sense for me right now?”

The budget process forces you to prioritize your spending in just this way, in advance. This kind of “advance comparative thinking” will become a habit and will give you a much higher level of satisfaction with your spending decisions than the “serial yes/no” approach. You’ll become much less tempted to make spontaneous exceptions to your budget, because you’ll know from your own experience that you’ll have to pay for them by doing without something else that you wanted even more.

2. Be a smart, well-informed consumer. We’re all bombarded by advertising around the clock. This virtually guarantees that we get a constant, unrelenting view of exactly one side of the story. Everybody knows what this side of the story looks like: the benefits of buying are mind-bogglingly wonderful, the price is unbelievably low, you’ll be admired by everyone you know, and unless you act now, you’ll really be missing out. Is that all you need to know, or is there another side to the story?

Of course there is—but you’ll have to do some of your own homework in order to get it. If you put some effort into this kind of homework, I’ll promise this: you’ll be amazed by how much you can save, easily. Become familiar with consumer-oriented publications and forums. Check out user reviews on the Internet. Get educated about the real trade-offs between new vs. used, and about branded vs. not. Ask friends or colleagues who have made similar purchases what they learned in the process. Spend a few minutes looking at coupons in the mail before throwing them out as junk. Learn which things you should never pay the full asking price for. Understand why Homer Simpson says, “Extended warranty? How can I lose?” If you’ve never done this kind of research before, it might sound like a lot of work. But like many other areas that we’ve been talking about, the key is to establish a habit. There is no real shortcut to becoming a smart, well- informed consumer. It takes a commitment to doing the homework, but the payoff for doing so begins early and is well worth it.

3. Smooth out nonrecurring expenses. Most of the expenses in your budget come to you in relatively predictable monthly amounts. But some of your expenses won’t follow this kind of monthly pattern. You might have some that are once a year, like membership fees, holiday gifts, or annual vacations. Others might be one-time expenses, like purchasing a major appliance, a new computer, or a training course.

This is where your emerging habit of long-term thinking can come into play to improve your financial life. The idea is to begin planning for these expenses early, well before you need the money to pay for them. How do you do that? By including them in your budget, in small, regular monthly amounts. Similar to paying yourself first, you simply transfer these amounts to savings each month, where they’ll earn interest in the meantime.

Financially speaking, not every month is the same. But the trick is to use your budget to make every month seem roughly the same. When it’s time to pay the nonrecurring expense, since you’ve saved for it in advance, your monthly process won’t skip a beat. For those without budgets—or who don’t use their budgets to anticipate these kinds of expenses—financial life can be a chaotic series of up- and-down months. Smoothing out your nonrecurring but perfectly predictable expenses frees you up from all of this unnecessary stress. This feeling of being in control of your monthly expenses is one of the more immediate benefits of budgeting; you’ll be surprised by how easy it is once you’ve gotten the hang of it.

4. Plan for unplanned expenses. Your car needs new brakes much sooner than expected, your doctor prescribes some new and expensive medication, or your microwave blows up and needs to be replaced. All kinds of things like this invariably pop up, and the one thing that they have in common is that they weren’t in the budget. We’re not talking about huge financial emergencies here—we’ll cover those in a later chapter. Instead we’re talking about those bothersome, unplanned expenses just big enough to put a painful dent in this month’s budget. That means that you’ll have to scramble to find the money by doing without some other things that you’d been planning on. Unless, that is, you’ve taken some precautions.

Look at it this way. Even though events like these are rarely planned, what is the probability that your car will never need an unexpected repair, that you’ll never get sick, or that a household appliance will never need replacing? What to do? Build a contingency fund into your budget, that’s what.

Let’s say that your goal is to do a little better than the First Rule minimum, and you intend to save 15% of everything you ever earn. The way that you plan for unplanned expenses is to put a line item in your budget called “contingency fund.” If you budget for 3% of your earnings on that line, all of your other—planned—spending will be set as if you were planning on saving 18%. The difference between the 15% and the 18% is a pool of excess savings that you can draw on when these unplanned expenses occur. At the end of the year, if it turned out that you needed the 3%, you’ve got it—and you still achieved your goal of saving 15%. If it turned out that you didn’t need the 3%, then you’ve saved more than you planned and your net worth is increasing faster than you’d planned—oh, darn!

5. Avoid using currency. There are many forms of what economists call cash and cash equivalents—we’ll learn more about them in upcoming chapters. But probably the most familiar of all the forms of cash is currency—coins and bills—whether in your pocket, purse, wallet, piggy bank, or between the cushions on your couch. Do you understand now what I mean by currency? Good. Now, stop using it.

When you spend coins and bills, they leave no trail. Unless you want to collect paper receipts all month, or keep some kind of transaction-by-transaction record, using currency short-circuits the compare and learn steps in the budget process. It’s like mystery spending—who knows where, when, or how it was used? All you know is that it’s gone.

When you spend with a debit card, a credit card, or by check, you leave a specific record of what the purchase was for, which greatly facilitates the budgeting process. The best approach of all is to select just one of those three (debit card, credit card, or check), and use that for every transaction. (We’ll cover which one of the three is best a few chapters from now.) That way, the results for the entire month are available online, all in one convenient place, in downloadable form. This makes the compare step a snap, and you can spend more time in the learn step.

Yes, there are exceptions. It may not work particularly well to pass your debit card down the aisle at a baseball game to a hot dog vendor or to write a check at an automated turnpike toll booth. But the more you can avoid using currency, the smoother your budget cycle will be.

6. Small transactions repeated a large number of times add up. Sounds obvious, doesn’t it? But this is one of the most common spending traps that those who don’t budget fall into. Why go to the trouble of bringing your lunch to work? It’s always easier to go out; bringing your lunch might only save $5 or $10. The key is to understand that it is not a $5 or $10 decision—multiplied by 200 lunches a year, it is a $1,000 or $2,000 annual habit. Maybe those lunches are worth that much to you, or maybe they’re not, but the point is to make the decision consciously, prioritizing the lunches against other things that you could spend that same amount of money on.

Budgeting forces you to look at the small-dollar, high-volume transactions and see them realistically. Operating without a budget, or letting these kinds of expenses escape scrutiny by using currency to pay for them, will allow you to be lulled into thinking they’re much smaller than they really are.

7. Beware of the subscription effect. Many service providers charge for their services on a regular monthly basis. Often it is convenient for both you and the service provider to set up an automated payment scheme, which calls for you to preauthorize payment from either your bank account or a credit card. Examples include services like cell phones, cable or satellite television, club memberships, and insurance coverage. If you are completely certain that the monthly amounts will never change and that the duration of the agreement cannot be extended without your explicit permission, then you are on safe ground. But if the monthly charges are subject to variation, or if the agreement can be automatically extended or renewed automatically, then watch out! This situation leaves you vulnerable to what is sometimes called the subscription effect, and it is financially dangerous; you might end up paying much more, and/or for a longer period of time, than what you had originally preauthorized. Here’s how it works.

It starts with highly visible advertising for a very low monthly rate for a certain set of services. (The rates are often especially low if you are switching over from a competitor.) These low rates are only temporary, but you will only find that out in the fine print. These temporary low rates are called teaser rates. Before long, the teaser rates go up—sometimes very substantially. The seller heavily encourages you to preauthorize an automatic monthly payment, allegedly for your convenience. But the seller’s real motivation is to encourage an “out of sight, out of mind” situation so that you (hopefully) won’t notice when the teaser rates expire and the higher rate takes effect. After several more months, the seller may implement yet another price increase. If you’re notified at all, the communication is usually in the tiniest print available and specifically designed to encourage you to ignore it. A similar tactic may be used when it’s time to renew your agreement; it isn’t uncommon for service providers to automatically assume that you want to renew unless you specifically notify them to the contrary.

Here’s another twist. Let’s say that the seller has three levels of service: red, white, or blue. You sign up for blue. A year or so later, the seller redesigns all their service packages and now has four levels: bronze, silver, gold, and platinum. The seller notifies you of this exciting new development and advises you that “gold” is the closest to what your current “blue” service level is. So, supposedly for your convenience, they offer to make the assumption that your choice is to switch to gold, and if you agree, you don’t have to do anything—they’ll take care of everything automatically! Well, gold may be the closest to blue, but it is a safe bet that gold has a higher price than blue. Unless you are the type to read every line of fine print in what looks like a routine piece of mail, you’ve just “agreed” to pay a higher price—by doing nothing. Suffice it to say that these sellers know all about the paths of least resistance. The idea is that they’ve got a little hidden drain in your financial bathtub, and they want to steadily open that drain up as wide as possible without your noticing a thing.

Your budget process stops this tactic cold. They’re hoping you won’t notice the steady increases, but your budget forces you to notice every increase. Each increase is a trigger for you to reprioritize the spending against all of your other spending and make conscious decisions about whether to accept the increase, downgrade your service level, or cancel it altogether. If it sounds like I’m making a big deal out of one small part of your spending, wait until you set up your first budget. If you’re like most people, you will be surprised by the large percentage of your total spending in the automatic monthly billing category. It is a big deal!

Decision Time

Earlier in this chapter, I noted that many people choose not to adopt a budget process at all because it doesn’t seem like much fun. And even though I’ve done my best to convince you, point by point, of the many advantages of a basic budget process, I’m sure that some of you still aren’t ready to commit to it. I won’t sugarcoat it; even though the budget process eventually becomes a breeze, the first few cycles are likely to be time consuming and maybe a little bit frustrating. That’s because you’re learning lots of very valuable lessons in a concentrated period of time, and I highly recommend that you begin right away.

But for those of you who just can’t stand the idea, let me offer this alternative. Strictly speaking, you don’t have to use a monthly budget process, but if—and only if—you faithfully follow the First Rule (which, as you’ll remember, precludes any form of borrowing whatsoever) and pay yourself first every month without exception. If you follow these two rules, you can just spend each month until you run out of money—and then stop.

If you choose this alternative, there is good news and bad news. The good news is that your net worth will continuously grow—maybe even as fast as it would if you were doing monthly budgeting. You’ll also be able to use every other tool and recommendation in the book; none of them are dependent on your doing a monthly budget. Now here is the bad news: your financial life will be quite chaotic. Especially when you are in any kind of transition (a move, adding a spouse or partner, new dependents, new job, etc.), you’ll find yourself running out of money before you run out of month and having to scramble. And you definitely won’t get as much for your money as if you’d budgeted. Once you’ve had enough of this bad news, you can always change your mind—when it comes to budgeting, better late than never!

The choice is yours: implement the monthly budget process as was just described, or skip it and instead rely only on the First Rule (which precludes any form of borrowing) and Pay Yourself First shortcut.

Before you decide, consider this: would you invest in a company that doesn’t budget, when there is overwhelming evidence that most successful companies do? Isn’t investing in your own financial future at least as important?