Get Financially Fit!

If you’re new here, please subscribe to my RSS feed or sign up for email delivery.

According to government statistics, the Core Price Index (a measure of broad inflation) is up only 4.0% over the last year (see March 2008 report from the Bureau of labor statistics).   In my life I am finding a disconnect between this low reported rate of inflation and a wide variety of good and services such as gas, groceries, and restaurants.      

I have written several articles with ideas on how to Live within your means, How to Balance your Checkbook, and how to Eliminate Debt.  In this article I would like to share some ideas on how I am working to reduce expenses.

1.  Eliminate left hand turns on busy roads.  Both UPS and FedEx announced early this year that they remapped their routes to minimize left turns.  I have been trying this strategy.  I’m not sure if I’m saving money, but I can say that I have reduced the stress associated with crossing difficult roads.  The next time you are completing your errands, see if you can eliminate those difficult left turns that keep you stranded in the middle of the road.

2.  Split a meal when eating out.  American portion sizes are much to big.  My wife and I typically share meals at our favorite Mexican, Thai, and Chinese restaurants.  For example, at the Mexican restaurant we share Fajitas and order extra tortillas. 

3.  On date night, eat at home but then go out for dessert  Another trick that my wife and I do sometimes is to eat a simple meal at home (such as leftovers) and then go out for either a fun appetizer and drinks or dessert.  This is a fun way to get out and enjoy the experience of a restaurant at one-third the price.  I’ll never forget one time when we met a large group of friends at a high end bistro.  My wife and I split an appetizer and each enjoyed a glass a wine for $25 for both of us, while our friends bloated on multi course meals at over $100 per couple.  When the bill arrived, the credit cards began flying into the center of the table like playing cards in Vegas.  The looks were priceless when we simply paid with cash, bid everyone good night, and escaped into the clear night air. 

As you can tell, it’s easy to for me to think of food ideas.  What are your suggestions?

Never spend your money before you have it.
-Thomas Jefferson

To my surprise only a quarter of people who I informally survey, balance their checkbook. For most people, going to the dentist is more fun than balancing their checkbook. Properly maintaining your checkbook is as important to personal finance as a healthy heart is to good health. Keeping your checkbook balanced is foundational for spending less than you make.

Here are five checkbook essentials:
1. Verify all bank statement charges
2. Put every charge in your checkbook
3. Reconcile your checkbook on a regular basis
4. DO NOT rely on the balance from the bank to avoid overdraft charges.
5. Maintain some ‘cushion’ in your account to prevent overdrafts.
Let’s review these points one at a time.

Continue reading ‘How to Balance your Checkbook’ »

How do you feel overall about your personal finances?  Are you in shape to hike up Mt Retirement? Could you survive in the financial wilderness if you had a setback such as a job loss?  I have created a financial fitness survey to help you assess different areas of your personal finance.  Please take a minute and complete the financial fitness survey on the next page.  The purpose of this survey helps you identify areas both where you are doing well and areas of improvement for your personal finance life. This survey should take less than 5 minutes to complete.

A complimentary PDF version of this test post at book resources 

How did you do on the survey? The purpose of the survey is to show you areas where you’re doing well and areas where you can improve. If you got good scores (4 or 5) on most of the questions then you are in good shape - congratulations!  If you got low scores (1, 2 or 3) on the majority of the questions, don’t feel despair. Through focus and continuous improvement you will become financially fit. As you become more financially fit, you will experience less stress and be able to pursue your passions and live your purpose.

Follow your dreams, Achieve your goals!

I once travelled to Singapore for business.  I went during the rainy season and the hotel told me to carry the umbrella that was provided in the room.  After a few days in Singapore I lost the umbrella and didn’t think much of it since I grew up in Oregon.  Even though it can rain a lot in Oregon, you can almost always still dart from one location to another without getting wet.  In Singapore I got caught in a torrential downpour where the it was raining so hard the droplets were literally bouncing off of the ground.  Luckily I was able to take shelter under a bus stop cover.   I had to wait a half an hour the rain stopped.  Once I got back to the hotel I requested another umbrella so that I wouldn’t get stuck.  I learned that having an umbrella is like having a rainy day fund in our financial life.          

A rainy day fund is your safety net when life’s challenges arise.  I recommend that you save up and be prepared for the unexpected loss of a job or a significant medical event.  Hopefully you will never need your rainy day fund, but in the event that you do you can focus on the challenge at hand.  I recommend that you target a rainy day fund size that is appropriate for you age and your career.  

In general I recommend that if you’re under 30 years old, save 3 months of living expense.  If you are between 30 and 40 save 6 months of living expense.  Above 40 years of age, accumulate 12 months of living expense.  You should increase these amounts if you are in a career in which a lot of time is needed to get hired.  Conversely you can reduce your rainy day target balance if you are confident that you can quickly land a job quickly.

In summary get your umbrella prepared for the possible rainstorm. 

If you don’t know where you are going, you’ll end up somewhere else.
-Yogi Berra

Once when hiking in a wilderness area, a tired and weary hiker approached me and asked directions to the trailhead. I pulled out my hike book and showed him the trail map. Quickly he identified the route back to his car. He thanked me, and with new energy he hiked off. I felt a great sense of satisfaction helping the hiker get back on course. I then thought, “How could he have gotten lost, there are only two turns that he had to make?” Later that day as I headed back toward the trailhead it became evident how the hiker missed a key turn. The path to the trailhead was so faint and the main trail was so dominant, you would have guessed it was a game trail. My thought at that point was, “Who would walk in the wilderness without a map?”

Do you have a financial plan? A clear map to help navigate you to retirement security and financial independance? I have created the following financial steps to to guide you through the finanical wilderness.

A complimentary PDF version of this test is posted at book resources 

1. Define your goals
Write down your dreams. Identify, clarify, and prioritize your goals. For each goal track the next actoin step that you can complete. Keep your goals visible and review your goals weekly.

2. Live within your means
Pay as you go! Spend less than you make every month. Maintain a balanced checkbook, put your credit cards on sabbatical, eliminate impulse purchases, save up for large purchases, detail your monthly cash flow, and reduce fixed and variable expenses. Achieving your goals is the motivation to reduce your spending.

3. Create and emergency fund
Create an emergency fund that is one-quarter of your montly living expenses, then gradually increase to a full month of living expenses. Only use the money for true emergencies such as medical expenses and car repairs.

4. Eliminate high interest debt
Eliminate all credit card and consumer (i.e. auto loans, student loans, etc) with greater than or equal to 6% interest. Attack outstanding loans with the highest interest rates and lowest remaining balances first.

5. Contribute 10% to retirement savings
Save 10% of your salary for retirement. Use automatic deductions and payments to contribute to your 401k/403b or a Roth IRA. If you can’t immediately save 10% of your income then take advantage of any matching available from your employer in your retirement plan. Increase your contributions both when you achieve pay increases and when you eliminate debt. Commit to save for the long haul. When changing jobs, roll your retirement plan to an IRA - avoid the temptation to cash out the money.

6. Pay off credit card and consumer debt
Attack and prepay all debt greater than 4% interest. Debts lower than 4% interest rates can be paid on the regular schedule. Do not incur any new consumber debt (i.e. auto loans, home equity lines of credit, etc). If you use credit cards then pay off the balance every month.

7. Fully fund your rainy day fund
Be prepared for the loss of a job or a serious medical event. Rainy day reserves help make lifes difficult transitions manageable. If you’re under 30 years old, save 3 months worth of living expenses. If you are between 30 to 40 then save 6 months of living expense. Above 40, accumulate 12 months of living expense.

8. Maximize retirement savings contributions
Fully contribute to your 401k/403B plans and Roth/traditional IRAs. Continue increasing your contributions until you reach 15% of your income. Either invest in index funds to keep expenses low and achieve market performance or invest in no-load mutual funds that outperform index funds.

9. Continuously build equity and then pay off your mortgage
Purchase a home with 30% down and fixed 15 or 30 year morgage. Do not take out home equity line loans. Pay off your mortgage to reduce your living expenses and achieve peace of mind.

10. Achieve retirement security / financial independence
Financial independence is the point at which your assets provide the necessary income to cover your expenses. You are now in the position to pursue your passions full time. You also can increase your giving.

Follow your dreams, Achieve your goals

How is your journey going?  What step number are you on?