Personal Finance Goals

• Increase my net worth by $60,000 - This is a pretty aggressive goal based on my savings rate. I say “based on my savings rate” because I don’t think setting a goal based on earning a positive return on my investments is all that useful. I can’t control what the market does, but I can control how much money I save. If my business does well over the next year and I hit at least 100% of my bonus at work, I just might be able to hit this target. Of course, if the market crashes it probably won’t matter how much I save. On the other hand, if the market shoots up 20% next year, I will hit this goal easily. But I’m not going to worry about that either way. I won’t feel bad if I miss my goal solely because of an uncooperative stock market.
• Fully fund both my 401k and SEP IRA next year - I’ve been fortunate enough to be able to max out my company’s 401k plan both of the last two years and expect to be able to do so in 2012 as well. I will only be able to defer 20% of my self-employment income into my recently-opened SEP IRA, which will put me absolutely nowhere near the maximum contribution for that type of account. So when I say “fully fund my SEP IRA” I mean defer 20% of my self-employment income. This should be a gimme barring any unforeseen disaster I would need to funnel my secondary income towards.
• Fix up the ol’ homestead to prepare it for sale or rental - I want to move. I don’t necessarily see myself being able to sell my condo for a reasonable amount in this market, but I’d like it at least to be in saleable (or rentable) shape by the end of the year. Best case scenario would be to lease it sometime in 2013 while I move to my favorite part of town.

Personal Goals

• Spend at a very minimum 2 weeks this year on another continent – Preferably Asia or South America, but I’m not going to be picky. In reality, I’d rather spend more like an entire month abroad. We’ll see how this goes.
• Do some sort of exercise at least 5 days per week – I’m already doing pretty well on the personal fitness front. I work out at least 2-3 days per week and sometimes hit 4 or even 5. But I’d like to get to the point where I’m working out 5 days per week consistently. This isn’t really a particularly aggressive goal, because even something as quick as an intense 10 minute interval session would count. The point is to do something every day. Walking doesn’t count, but things like playing soccer or basketball after work do.
• Eat better – I already eat a ton of fruits and vegetables, so overall macro nutrition isn’t a problem for me. But I also eat far more junk food than I should, and often after a long day at work I’ll just order a pizza for dinner. I have to cut back on that significantly.

Business Goals

• Break 1,000 RSS subscribers – I’ve been hovering around the 600 RSS subscriber count for almost 6 months now. Most of this is due to the fact that I didn’t aggressively pursue RSS readers in 2011 coupled with not doing any guest posts on larger blogs, which in my experience is one of the best way to build loyal readership. Wanna help me out? Subscribe to my RSS feed!
• Consistently post about 3 times per week – My posting slowed down considerably in the second half of 2011 due to some personal things I won’t get into. But that’s really no excuse. I’m going to post more regularly in 2012. You guys deserve it.
• Write at least 1 quality guest post per month for a popular blog in my niche – Guest posts can be a time sink, but they are still the most effective way I know of to build domain authority, search traffic, and most importantly readership.
• Start a mailing list – Everybody else does this. Why don’t I? Because I’ve been lazy.
• Increase business income by 50% – There’s absolutely no way this is going to happen without creating my own product. I’ve had a few ideas for an ebook I’ve been kicking around in my head for a while now. Speaking of which…
• Write an ebook – I’m just going to do it this year. I may even decide to give it away for free to loyal readers instead of selling it. But I can worry about that after I’ve actually written the damn thing.

But many (if not most) people just don’t want to go it alone for whatever reason. Maybe you don’t trust your judgement or know you’ll probably do something stupid when the market tanks. Or maybe you just don’t care about investing and doing the necessary research sounds worse than a trip to the dentist for you. Fair enough.

I Recommend Fee Only Financial Planners

There are a few different kinds of financial advisors. For reasons I could write a whole series of articles about (and probably will), I mostly just recommend using a fee only financial planner. Fee only financial advisors aren’t compensated with commissions so they have less of an incentive to put you into inappropriate investments just to make a quick buck. There are still conflicts of interests, of course, but they tend to be less several with a fee only financial planner than commission-based planners.

5 Questions To Ask A Prospect Fee Only Financial Planner

So how does one choose between all the fee only financial planners out there? A lot of it comes down to finding somebody you can trust and are personally comfortable with. At a minimum, that means you should do a background check on any advisor you’re thinking of hiring. But besides the basics, here are a few questions I think everybody should ask when interview financial planners in order to get a feel for how well the planner’s approach jives with common-sense investing best practices.

1.) How long have you been in the business?

You want a financial advisor with experience across a wide range of market conditions. Somebody who started their financial planning practice during the last great market crash may be overly-conservative with their asset allocation strategies while somebody who has been around mostly during bull markets might be overly optimistic about future returns. At a minimum, I would want to work with somebody with at least 10 years experience. That’s not to say a less-experienced advisor wouldn’t do just as well, but you have to draw the line somewhere.

2.) What certifications do you have?

There are a ton of different certifications in the financial planning business, some of them more useful than others. One of the most rigorous certifications out there is the Certified Financial Planner (cfp.net) designation. Planners with a CFP designation had to demonstrate their knowledge by years of dedicated study and by passing some pretty difficult tests. Other worthwhile designations are Certified Financial Consultant (ChFC), Chartered Investment Counselor (CIC), and Chartered Financial Analyst (CFA). This is not a complete list, so you should always research the designations earned by every fee only financial planner you interview and then verify with the appropriate designating authority they actually earned the designation they claim to have earned.

3.) How important is controlling investment costs to your investing approach?

If their response is anything other than “very important” run away as fast as you can. All else being equal, a lower-cost mutual fund will beat a comparable higher-cost mutual fund and low-cost diversification is as close to the optimal investment approach as you can get. Any sales pitch along the lines of “costs shouldn’t matter because I can choose superior mutual fund managers and beat the market” is a huge red flag.

4.) What’s your track record?

I prefer index funds, but plenty of individuals and many financial planners prefer active funds. And there’s nothing inherently wrong with that. But if your financial advisor insists on recommending actively managed funds, don’t you want to compare how their picks have panned out in the past? If your financial planner hasn’t been able to at least approximately match the performance of a basket of broad market indices in the past, what makes you think they will be able to do so going forward? And if they can’t do so going forward, you’d be better off in index funds.

5.) How does your investment approach account for taxes?

This isn’t a big deal if all your money is locked away in a 401k, IRA, or other tax-deferred account. But if you’ve got a lot of money in taxable accounts, you’re going to want to make sure your financial planner is investing in the most tax-efficient way possible. Furthermore, you want to make sure your planner is looking at your portfolio as a whole and not just a collection of different budgets. Proper asset location can make a big difference come April 15th.

Obviously, this isn’t an exhaustive list of questions you should ask. For more general info, check out the National Association Of Personal Finance Advisors (NAPFA) and their list of tough questions to ask.

The Definition Of “Afford”

This post was inspired by a post I read on Well Heeled Blog entitled, fittingly enough, “The Definition Of Afford.” In it, WellHeeled outlines what the word “afford” means to her. This post is an attempt to spell out, to myself as much as to anybody else, exactly what the word means to me and how I integrate it into my daily life.

Will This Purchase Improve My Quality Of Life?

This is the most important consideration for me, and it’s all about value. I don’t mind buying something expensive if I’ll get a lot of value out of it. For example, I don’t really watch much TV so I don’t own a big plasma TV. Would it be nice to have a $2000 television? Of course it would. But there’s no way I would get good value out of a purchase like that taking into account how little television I actually watch, so I don’t own one. On the other hand, I do enjoy a nice meal out and don’t hesitate to drop $80 on a good meal every once in a while. I consider a good meal with good company a good bargain at twice the price. And that $5 latte? Screw it, I love coffee! And I’m going to continue wasting money on good coffee, than you very much.

Will This Purchase Enable Me To Meet Long-Term Financial Goals?

Will I have to go into debt to make this purchase? For some things, such as a house, that’s probably unavoidable for most people. But going into debt into debt on its own isn’t enough to disqualify a purchase as “unaffordable.” For example, if the home I buy appreciates in value over the years while my mortgage payment stays the same, I will almost certainly come out ahead versus long-term renting. Similarly, where I live in Atlanta you pretty much have to own a car. Public transportation sucks unless you live and work in very specific areas of town. Thus, most Atlantans simply have to have a car to get to work every day. I think “getting to work” would fall under the “enable me to meet long-term financial goals” category, so the purchase is reasonable. I’m not going to go out and buy a Porsche or anything, but my Toyota was certainly a reasonable and affordable purchase.

Will This Purchase Negatively Affect My Ability To Meet Long-Term Financial Goals?

The flip-side of the above, any purchase that will negatively affect my ability to meet my long-term goals is unaffordable, no matter how small that purchase may be. If that $5 latte was really truly causing me to have to cut my 401k contributions I might have to reconsider. But even in that case, I think the most reasonable solution to that problem is to find a way to earn more money, not cut small expenses from the budget. It’s true cutting recurring expenses can have a positive impact on your bottom line in the short term, but at the cost of a lowered standard of living. Remember, it’s okay to spend money on things that truly make you happy. The trick is knowing which is which.

Put in my concrete terms, my target is to save 30% of my pre-tax earnings every single month. If a purchase makes it so that I won’t be able to save 30% of my pre-tax income, I probably can’t afford it. If not, I usually feel comfortable buying pretty much whatever I want so long as I meet that minimum standard of savings. Even frivolous purchases are fair game at that point.

Am I Buying This For Me Or For Social Status?

I get it: iPhones are cool. They are useful. They make pretty pictures and fun noises. But do I need one? No. Would it improve my quality of life even slightly? Probably not. The only reason I can think of that I would buy an iPhone, realistically, is to be able to say I have an iPhone. Is there anything wrong with that? Not really. And if I’ve already met my 30% savings target, there’s really no harm in buying an expensive gadget. But it’s important to at least see the purchase for what it is, and that’s to buy social acceptance. And yes, despite this example I am going to be buying a smart phone in the near future. It probably won’t be an iPhone, though.

What Is Your Definition of “Afford?”

You are bound to agree with some of what I’ve said and disagree with others, and that’s fine. Everybody has a different idea of what it is to be able to afford a purchase. The exact definition doesn’t matter so much, I don’t think, as the fact that you’ve actually sat down and thought about what’s important to you personally. So what about you? What criteria do you use to judge whether or not a purchase you’re considering is affordable?

Don’t Reach For Yield

The act of downgrading the overall quality of your savings (or portfolio) in order to get a higher yield on your savings is called “reaching for yield,” and it’s often a bad thing. Why? Because in any remotely efficient capital market such as the ones we have in this country, you can’t have more return without risk. When you reach for yield, you increase the probability that your money won’t be there when you need it due to inopportune market losses. While that kind of risk is acceptable for long-term goals, it is absolutely not for short-term goals, much less your emergency fund. Does that mean you should never take on more risk? Of course not. But there’s a time and a place for that. Hint: it’s not with your short-term savings

In general, you should divide your savings into three pots:

Ultra Short-Term Emergency Savings

This is your emergency fund. If your car needed $2000 in repairs tomorrow, this is how you would pay for it. Consequently, it should be money you can get to almost instantly, or at least soon enough so that you can afford to pay off your credit card at the end of the month should you use credit to cover the unexpected expense. For emergency funds, most experts recommend a regular old savings account at your bank or a high-yield savings account online. Personally, I prefer online banking because a.) it’s more convenient and b.) the rates are usually much higher. For example, I use ING Direct for my emergency fund (click here to find out why I chose ING Direct over other higher-yielding online savings accounts). In my opinion, bond funds (even short-term bond funds) are totally inappropriate for emergency savings. There is a school of thought that states this is dead money and entails too high an opportunity cost, but I strongly disagree: better safe than sorry. Unless you have a high net worth and can afford to sell assets at a loss, the negative consequences of risking your emergency fund are too high to bear  for most investors.

You can use a site like Bankrate to find the best bank interest rates on different types of savings accounts.

Intermediate-Term Savings

Do you plan on buying a new car in 5 or 6 years? Saving up for a down-payment on a home in 3 years? Since you more or less know when you’ll need the money and how much you’ll need, you can afford to reach for yield a bit here. Let’s define “intermediate-term” in this case to be any goal over 1 year and less than 8 years away. For these goals, you’re generally best off investing in either high yield FDIC-insured CD’s or bond mutual funds with an average effective duration less than your time horizon. For instance, if you are saving for an expense 6 years down the road you should feel free to invest in a bond fund with an effective duration of less than 6 years, which includes most short- and intermediate-term bond funds. Alternately, you could buy an individual treasury bond directly from the U.S. Treasury at TreasuryDirect.gov and bypass the management expense. You should still stick with high-quality issues here, though, meaning no junk bonds and no stocks (unless you have so much money that it doesn’t matter if you miss your target, in which case all bets are off).

Long-Term Savings

This is your retirement portfolio and other long-term savings for goals 10+ years out. Your long-term savings should probably be equity-oriented within your risk tolerances and anchored by an allocation of high-quality short- or intermediate-term bonds. If you’re going to take risks in an effort to strike it risk, this is the only appropriate portion of your portfolio in which to do it. Go ahead and over-weight small-cap stocks, or emerging market stocks, and maybe even own an individual stock or two and some junk bonds. Don’t go crazy, but you’ve got plenty of time to recover from a few setbacks.

Benefits of Bankruptcy

The obvious benefit of filing bankruptcy is the fact that once a debtor has filed, creditors must immediately cease all collection actions that are pending. If you hire an attorney the moment you inform your creditor you are in the process of filing bankruptcy they must contact your attorney. Stopping the threats and harassment may seem like a huge benefit. While this is definitely on the top of the pros list, you should consider the long-term effects of bankruptcy.

Bankruptcy gives you a chance to start over from scratch. When you do not have debt weighing you down you can make attempts to rebuild your credit in a responsible manner. Studies show that individuals who file bankruptcy minimize their risk of burying themselves in debt again.

The Negative Effects of Bankruptcy

With the good always comes bad. Bankruptcy is not the magical answer to all. It is important to exhaust all of your available options before you choose to file. If you are concerned about the impact bankruptcy has on your credit you definitely have a legitimate concern. Bankruptcy will have a negative impact of your credit record for 7 years from the date your bankruptcy is discharged. It can make it more difficult for you to obtain loans for homes, schooling, cars, a personal loan, or any other revolving credit. Obviously, you will be considered a higher risk and you will have to pay higher interest rates when you are approved for loans.

In some cases, bankruptcy can have an impact on your employment. State and Federal jobs consider your credit history when determining whether you are eligible for employment or advancement. The effects of bankruptcy on employment can be significant. You will need to explain why you filed if the employer asks and in some cases you could be denied the opportunity to advance.

Bankruptcy laws have changed in the last few years. It is no longer a legal filing that erases your debt for good. Consider the advantages and the consequences of filing bankruptcy and make the responsible decision.

• Understand how it works- If you don’t know how your credit score is calculated you are at a distinct disadvantage. Before you can increase your score you have to know what actions help or hurt your score.
• Get your finances in order- We all know the importance of having great credit, however it is impossible to attain this goal if your personal finances are in disarray. If you are dealing with high interest debt, past due accounts or another financial crisis- you need to get a handle on those issues before trying to boost your credit. Once you get your finances in order you can turn your attention to increasing your credit score.
• Use a major credit card (sparingly)- In a world where credit card use has suddenly become taboo, there is still one benefit from using credit. Your credit score tells lenders how you have managed credit in the past, which indicates how you will manage future credit. Without this history on your credit report there may come a time when a credit score will not even be generated. The key is using your credit card responsibly (such as using your card to earn travel rewards points). Do not charge more than you can pay off in full each month. You need to show responsible credit card use, not indebtedness.
• Automate your payments- Paying your bills late will not only hurt your credit but also put you in a position where you have to pay late fees, penalties or higher interest rates. If you have your finances in order there should be no reason for paying your bills late. Take advantage of automated payments and put your bill paying on autopilot. This will ensure your bills get paid on time every month. Late payments have a damaging effect on credit scores. Note: It is imperative you remember what bills are automated to ensure you have the money available when the payments are due, otherwise you may end up paying overdraft fees if payments are returned. Remember also to monitor automated payments to ensure the right amount is being deducted.
• Manage your debt- You don’t have to be debt free to increase your credit score but you will have to pay down debt to decrease your credit utilization. In addition to paying down debt you can also spread your debt around to increase the debt to credit ratio. The amount of debt may be the same, however it is better to have a little debt on several cards, than a lot of debt on one.

Increasing your credit score is a worthwhile endeavor, one that will take some time. Credit scores plummet quickly when you manage your finances poorly however the recovery time is sometimes a bit slower. Be patient and eventually you will be rewarded for managing your credit well.

Home Equity Loans

“Equity” is the difference between your home’s current value and any outstanding debt. If you currently owe $50,000 on an existing mortgage and your house is worth $100,000, you have $50,000 in equity. You may borrow against that amount to consolidate high-interest consumer debt into a single larger balance. Convenience and lower tax-deductible interest are the advantages of home equity loans that are highly touted by hungry lenders.

The obvious drawback, of course, is that default results in the loss of your home. Should you find yourself in dire financial straits before the loan is completely repaid, you cannot completely discharge home equity loans in bankruptcy. As these are secured debts, a court-ordered debt restructuring known as a “Chapter 13” Bankruptcy would be the only way to hold on to your house. A Chapter 13 Bankruptcy is not easy to get, however.

Credit Card Balance Transfers

“Zero percent” interest on amounts transferred from other cards look good at first glance. The catch is that the nonexistent interest is fragile and short-lived. One late payment instantly takes it into double-digit territory. In 6-12 months, it dies a natural death and decomposes into a much nastier number. Use these unsecured debt consolidation loans only if you plan to: 1) accelerate payments to retire your entire debt before the no-interest period expires; or, 2) switch it all to another interest-free card at that time. Still, used wisely these 0% balance transfer credit card offers can save you money.

Unsecured Debt Consolidation Loans

An unsecured debt consolidation loan is the only option for most financially strapped folks. Those burdened by excessive debt are probably so credit-impaired not to qualify for other low-interest options. Unsecured debt consolidation loans have no underlying collateral to secure them. Thus, they feature relatively high interest.

Much longer repayment is the main consumer motivation for these loans. Is it really worth it? Analyze your current situation carefully. Compare existing interest rates against those of a proposed unsecured debt consolidation loan. The longer time required for repayment may be more costly than your current credit contracts. Moreover, any debt reduction obtained via reduced credit balances may be treated as taxable income.

Exhaust all alternatives before assuming the hidden costs of cheap debt consolidation loans. You might be able to accomplish debt relief without excessive interest or encumbering your home. Consumer Credit Counseling Services offers free credit counseling and debt restructuring. Visit cccs.org, or consult your local Yellow Pages. New federal legislation also permits up to 50 percent forgiveness of credit card debt in excess of $10,000. For further details, visit ftc.org.

Note that, of course, it’s often possible to achieve both of the values that are sometimes traded off for each other. They’re listed below only because they’re often pitted against each other — not because they always are done so.

• Debt vs. Freedom. Sometimes debt is necessary for us to achieve things that are good in the long run, but we can’t currently afford out of pocket. For example, a home, an advanced degree, or often even a car. The problem with debt is that it often chains us to certain possessions and assets.

• Security vs. Comfort. Money spent on security is money that could be spent on more immediate desires and luxuries. For example, spending a thousand dollars for a diesel generator is probably not going to be as comfortable as spending the money on a new TV. The same goes with insurance, an emergency fund, and monthly savings. Planning for the future requires sacrificing a little of the present.

• Education vs. “Coasting”. Out of all the trade-offs made in personal finance, this one is probably the most damaging and consistently poor trade off. Many consumers — if not most — choose to coast through their finances without trying to get a systematic financial education. It’s hard work learning how interest rates work, how mortgages work, what the right IRA might be, what live silver prices are, how to diversify a portfolio — but in the long run, learning these and similar topics is absolutely crucial to predictable financial success.

• Short-Term vs. Long-Term. Of all the trade offs made in personal finance, this is the big one — short term versus long term. Should you pay off your car quicker or save for retirement? Buy term or whole life insurance? Get a grad degree, or make do with your current income and education? These questions honestly have no single universal answer, and really depend on the financial values of the person in question.

In the end, understanding economics is essential to learning to master personal finance. The more you master, the more prepared you’ll be for whatever financial situation comes your way.

• Understand money management - Before you can jump into the world of investments you must first have a firm grasp on how to manage your money from day-to-day. Investments should not be looked at as a get-rich-quick plan, rather a long term strategy to grow your money. For this reason you have to be able to spend, save and survive each day of your life. Before you invest establish emergency savings and practice good money management skills.
• Establish financial goals - When you are just starting out on your own there are many things you probably wish to accomplish. You may want to start a family, travel or buy a home. It is important to establish and consider both short and long term goals in order to allocate your money appropriately.
• Retirement is not that far away - Very often when we are younger we think we have a lifetime to begin growing our money. Unfortunately if you let life guide your money decisions there will always be something that requires your attention. If you begin saving your money and investing it wisely in your youth you do not become accustomed to spending that cash. If you put the money to work for you in your youth, you may be able to retire much earlier than you would if you delay saving to invest.
• Learn about investing - This is not a venture you should jump into without first learning as much as possible from reliable sources. Just as your money can work for you, you could also make unwise decisions which could cost you big time in the long run. While it may be tempting (especially in our youth) to make risky investments it is important to understand exactly how much risk you are willing to take. Find a mentor or ask your parents or other trustworthy adults for advice before you step out on your own.
• Invest what you can afford - Avoid early withdrawal penalties or losing growth opportunities by investing only what you can afford. Investments should be considered for the long haul, not a place to put your cash for a few months until you need it- that is why you keep cash in short term savings vehicles. If you are putting too much money in investments and don’t have enough to survive each day, consider re-examining your budget to get the most for your money.

Hindsight is always 20/20 and many people wish they could turn back the hands of time and begin managing their money better in their youth. If you are in your twenties or even late teens, heed this advice and begin saving and investing as soon as possible.

Take Stock of the Situation

How much debt do you really have? Go through your credit card statements, loan statements, check register and bank statements and make yourself an accurate and complete list of expenses and debts you pay. On your list, include the creditor or account name, how much you owe total, what the minimum monthly payment is, and how much you pay in interest or finance fees. Also include your monthly living expenses, like mortgage or rent, utilities and car maintenance.

Is your income enough to pay for everything you have to pay each month? If your income is large enough to pay at least the minimum payments on everything you owe each month, the situation may not be as bad as you expected. If your income is less than what you owe each month, you may need to take drastic measures to reduce your living expenses to free up more of your income for debt repayment.

A debt reduction plan will help you dig yourself out of debt. You’ll need 100% commitment to the schedule you create.

Negotiate with Creditors

One of the benefits of working with a debt management company is that they will try to negotiate on your behalf with each of your creditors to get either a lower interest rate or a lower monthly payment. What you may not realize is that you have the same bargaining power as the debt management companies do, and you just need to call each of the creditors you have, explain the situation, and ask for a different payment arrangement.

You could end up with a lower interest rate for a temporary period of six to twelve months just for making the phone calls. A lower interest rate means more of your monthly payment will go toward your balance and you’ll pay it off faster. You could also get a lower minimum payment amount, which doesn’t help you pay it off faster, but can help you stretch your income and make it possible to keep up with all your financial obligations that you weren’t able to at the higher minimum monthly payment amounts. In some cases, the creditors can even temporarily stop charging you late fees while on the new payment arrangement.

Create Your Debt Reduction Plan

Once you have negotiated new payment arrangements with each of your creditors that will work with you, update your list to reflect the new amounts you are required to pay each month. Sit down and make yourself a plan to reduce and pay off as much debt as possible.

Where is your money going now? Eliminate any unnecessary expenses (don’t buy coffee on the way to work, keep to a grocery budget, don’t eat at restaurants, don’t buy new books or music when you can borrow from the library, etc).

Subtract your necessary expenses from your income (these include your rent, utilities, car insurance, gas, etc) and look at how much you have left. This is what you have available to pay off debts. Make a plan that allows you to pay off the debts with this money as quickly as possible, and then stick to it. Before you know it, you could be debt free.