I just got back yesterday from New Brunswick, Canada. I live in Seattle, so the travel time was almost 12 hrs each way! One thing I enjoy about long flights is that I can read a book mostly uninterrupted. My latest read was “Good to Great” by Jim Collins. It looks at the things that great companies did when they made the leap from good to great.

One idea that stuck out that was a “Stop Doing List”. It’s basically the opposite of a “To Do List”.

Our time and finances are limited. They both need to be budgeted. We can’t do everything we want. That’s why it’s important to focus on things that really matter to us. We get into trouble went we try to juggle more than we can handle.

I’ve talked about having specific written goals in life. These include areas of career, finance, family, social life, intellectual, spiritual, and physical. These goals should be regularly revised. Any activity that doesn’t benefit our goals should be stop or reduced.

Too much car, too much house, too much student loan, can all take too much resources and time from other life goals that are equally important to us.

Soccer games, music lessons, kung fu lessons, can all be great. But when they are over done, areas like finances, career, intellectual and spiritual life can take a dive.

Removing some activities and items from our life can free up not only an hour or two a day, but can also free up some extra cash to do some that really matters to us.

Seth Godin had a great post yesterday in his blog  titled Enormity (meaning incredibly horrible).

The concept is that no matter how great a problem is empashized, you’re not going to get more people, or contribution money, to solve it unless the problem is solveable.

Seth conludes that people like to be on the winning side. They want to get involved when something works. So if some problem is so big that it would take generations to solve, people will move on to smaller issues at hand instead. No one wants to fight a loosing battle.

The same concept can be applied to finances. We need to break up our goals into small achievable bit sizes. Or else we’ll loose focus and go back to our bad habits.

That’s the reason Dave Ramsey’s debt snowball works so well for paying off debt. People focus on their smallest debt first. The goal becomes achievable, it’s a problem they can solve. One by one and the debt is all gone.

I think getting to that first million is the same way. One small attainable goal at a time. Like getting to the first $1k, then $10k, $50k, $100k, etc. I use NetworthIQ to track that progress. It’s nice looking at a graphical chart. It gives me a moral boast to tackle the next step.

Whenever I get close to acheiving a goal, I go into sprint mode. I’ll sell something, or pick up some quick side jobs and knock off that goal. The wins are what keep us going.

This week I’m going on vacation. I’m flying to eastern Canada to visit some friends. Unfortunely, I need to be at the airport in the evening during peak rush hour! I live alone and so I have to find a ride. I could be mean and try to get one of my friends to take me there but that would be torture to waste an hour or two sitting in traffic. So I decided to find an alternative ride.

The most obvious way of getting to the airport is driving there and pay for parking. But parking around here is so expensive it would cost about $10/day to park even remotly close to the airport. And I’ll be gone for about a week.

A more popular way of getting to the airport is to catch the airport shuttle that will pick you up at home and drop you off at the airport. But even that service was $30 each way!

I looked into a couple other methods and all turned out to be at least $35 or more. Untill I decided checkout the public bus system. The cost was  only $2.50! Granted, I have to transfer buses and feel a little awkward carry lungage on board.

You see, the airport shuttle is advertised so heavily around here, they make you think there is no other option to getting to the airport, unless you pay $30 bucks each way. And because the airport is outside the city, most poeple dont’t realize that the public bus system will take you there.

I’m not a big fan of saving dimes and nickels, but when I could save $60-$70 round trip, for an extra 15 minutes, I’ll take it.

“It’s my money, I can do whatever I want with it,” is the typically line I hear from people after they’ve just splurged on some selfish item. I know, I’ve been guilty of it. But whose money is it really?

I’m a Christian. So it’s hard to ignore what the Bible (God’s word) says about money. Here are a few verses:

“The earth is the LORD’s, and the fulness thereof; the world, and they that dwell therein.” Ps. 24:1 (KJV)

 ”The silver is mine, and the gold is mine, saith the LORD of hosts.” Haggai 2: 8

“And thou say in thine heart, My power and the might of mine hand hath gotten me this wealth.  But thou shalt remember the LORD thy God: for it is he that giveth thee power to get wealth, that he may establish his covenant which he sware unto thy fathers, as it is this day.” Deut. 8:17-18 (KJV)

Stewardship

These verses and many more make it clear that everything we own and every dollar we make belongs to God. So if he has entrusted us with our income and abilities, wouldn’t it make sense to wonder what He want’s us to do with it? This is where the concept of Stewardship comes in.

Webster defines steward as “one employed in a large household or estate to manage domestic concerns (as the supervision of servants, collection of rents, and keeping of accounts)”. A steward can basically be described as one that takes care of another’s property.

That’s what we get in Matthew 25:14-30 in the story of the three stewards. Each was given talents (money) to manage. One was give five, another two, and the other one, each to his ability. Both men who received five and two talents put their money to work and both doubled what they have been given. But the servant that got just one talent just buried it. When their master returned, he required what they  had done with the talents he entrusted them. To the servants that doubled his money he said “Well done, thou good and faithful servant: thou hast been faithful over a few things, I will make thee ruler over many things: enter thou into the joy of thy lord.” But to the servant that did nothing with his talent he said “Take therefore the talent from him, and give it unto him which hath ten talents. For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath.”

Obviously this parable can be applied to all aspects of our lives. This includes not just money and possessions but our time and abilities as well. But for the purpose of this blog we will focus on the money part.

If I had a large business and I hire a financial accountant, that accountant is my steward. It’s not his own money he manages but mine. So if he doesn’t do a good job, I’ll replace him. If he does, I’ll make sure he is well rewarded.

Giving

God wants each Christian to be diligent and not slothful. God is also a great giver. And he want’s us to represent Him; to be Christian is to be Christ-like. God gave us his greatest gift, his son Christ Jesus to bare the penalty of sin for us.

“Thanks be unto God for his unspeakable gift.” 2 Corinthians 9:15 (KJV)

The Christian’s goal in life is not to hoard and build wealth for himself, but for the use of his Master and to think of others. After all it’s His money. God loves a cheerful giver. Give and it shall be given to you. Don’t give as to receive something in return. It’s really not our money that we are giving from, it all comes from God. True prosperity and blessings are not about the bank account and the big house.

“Every man according as he purposeth in his heart, so let him give; not grudgingly, or of necessity: for God loveth a cheerful giver.” 2 Corinthians 9:7 (KJV)

^“Give, and it will be given to you. A good measure, pressed down, shaken together and running over, will be poured into your lap. For with the measure you use, it will be measured to you.” Luke 6:38 (KJV)

“Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal: But lay up for yourselves treasures in heaven, where neither moth nor rust doth corrupt, and where thieves do not break through nor steal: For where your treasure is, there will your heart be also.”  Matthew 6:19-21 

Let’s test God, with His money, and see if Blessings won’t come out.

“Bring ye all the tithes into the storehouse, that there may be meat in mine house, and prove me now herewith, saith the LORD of hosts, if I will not open you the windows of heaven, and pour you out a blessing, that there shall not be room enough to receive it.” Malachi 3:10 (KJV)

Net worth is measured by taking the value of total assets minus total liabilities (debt). It is the standard measurement of wealth. Your assets include homes, cars, stocks, 401k’s, cash, personal property, etc. The liabilities include mortgage, car loans, credit card debt, student loans, etc. The goal is to have more value in assets than liabilities. Is maximizing net worth really the same thing as financial success? Is it a good overall measure of a person’s financial health?  

The answer depends what your goals are. For most people financial success has nothing to do with being paper rich. Yet most of us measure how well we’ve done by our net worth. Let’s look at two individuals who both, by most people, would be considered successful, and see who really has financial success and who doesn’t.  

Fred is 45 years old. He owns a small software company with 9 employees. Fred estimates he has about $1.6 million! Fred had a taxable income of $260,000 last year, and hopes to make about the same this year.  

Tim is a 42 year old software engineering. He works for Fred 4 days a week. He gave up his corporate job last year to enjoy 3 day weekends. His income went from $81,000 to $68,000 per year. Due to his conservative nature Tim has a net worth of $800,000.  

By doing a quick glace at the two lives, we can assume Fred enjoys more financial Success than Tim. What we don’t realize from the numbers above is the liability aspect of each individual. Fred has a net worth of $1.6 million, however, his liabilities (mortgages, student loans, car loans and credit cards) are over $2 million dollars and his assets around $3.6 million. His rental properties were bought during the peak of the housing boom and are now loosing money, one of the homes have been empty for 4 months. He doesn’t want to sell anything now because of the bad market. So he is working 50-60 hrs a week to be able to maintain his $260,000 income. After he pays all the bills for his liabilities, he is left over with a disposable income of $58,000.  

Tim on the other hand just paid his home off. He has zero liabilities. Tim lives in the same neighbor as Fred. His disposable income after taxes is about $58,000 too. Both have similar $250,000 homes. But unlike Fred, Tim works only 32 hrs a week, and enjoys 3 day weekends with his family at his paid off vacation house on the lake.  

Even though Fred can eventually sell everything off and have more wealth than Tim, his drive for more net worth and higher income keeps him in a constant state of stress and discontentment, as well as less time with his family. Fred is more paper rich than Tim, but Tim lives a more prosperous life and enjoys financial peace. He has no bills or Saturday office days to worry about either.  

So is net worth pointless when it comes to true financial success? Not necessary. It’s just that we can’t stop there. Debt represents more responsibilities and added stress. So although our net worth can be great our lifestyle might not be. Life is stressful enough, we don’t need to add additional financial stress. Financial peace also depends on your personal level of contentment. There are individuals that are just as happy living in a 1400 sqft house as a 5000 sqft house, so for them a smaller income might be all they need. Financial peace brings more happiness than financial wealth. Without a personal standard of contentment it’s hard to ever reach financial success that comes with peace of mind.

I couldn’t understand the concept of an emergency fund a few years ago. I use to think, why stick money in a savings account producing very little to no interest, when you can keep that money invested, and use the credit card as an emergency fund. I mean, what if I don’t have an emergency, I’m giving up a higher rate or return by keeping cash in the bank. However, I’ve learned that life is unexpected. There are job losses, transmission problems, leaky roofs and spetic tank issues. Don’t be caught without a life preserver when the waves start rolling in.

Here are 7 reasons why an emergency fund is essential:

1. What if you lose your job? Can I live for 6 months without any income? Will the unemployment check be enough? It typical takes a month for every $10k you make to replace a job. So if you make $90k per year, it would typically take 9 months to replace that job on average. In a rescission it takes longer.
2. Protects long term investments. No one wants to be forced to sell a property or long term investment when the market is down. Job losses and bear markets go hand in hand. Your 401k is not an emergency account. 
3. Avoid high credit card interest and fees. Thinking about using a credit card for an emergency? Consider this; if you charge 80% of your card you’ll be marked as a high risk. High risk credit card holders can see their interest rates climb to 28%.
4. More job and life options. Stuck in a dead end job? Afraid to pursue other options because you live paycheck to paycheck? An emergency fund helps you get out of the rut and seek more life fulfilling options.
5. Stress reliever. The worse part from living paycheck to paycheck is the stress. Do your health a favor. Relieve stress by building an emergency fund.
6. Avoid late payments. Our expenses are not always evenly distributed in a month. An emergency fund can smooth out the dips between paychecks. This will help us avoid late payments.
7. Break bad habits. Most people that struggle with debt have bad habits. The credit card is not an emergency fund. Relying on credit cards can develop bad habits that result in revolving debt, interest and fees. Stop relying on the credit card by building an emergency fund.

Here are some temporary steps to building an emergency fund:

• Build the first $1000 as fast as possible. Go crazy for a few days. Sell a bunch of stuff! Especially stuff you haven’t you used that often in the past year. Most people can save the first $1000 within a couple of weeks.
• Cancel the entertainment monthly subscriptions. This includes Cable TV, magazines, and even internet (if you can get by). Get some exercise or read a book instead.
• Visit the Library. You’ll not only get free books, movies, and magazines, but you can get free internet too.
• Stop the drinks! No daily latte, wine or beer till the emergency is funded.
• Sell the car. Downgrade or get by with just one. Dave Ramsey recommends that all your vehicles should not exceed 50% of your annual income.
• Brown bag it. Pack your lunch to work. Not only is it cheaper, but you can eat healthier too.
• Drop the premium auto insurance.  If comprehensive insurance is required make sure you’re not paying for a higher deductible than you need. Some banks typical require a $1000 deductible. If comprehensive is not required, get just liability insurance.
• Get a side gig. I create websites for small businesses on the side. It brings in an additional $6-8k per year to my corporate job. The nice thing about side jobs is that you can typically bank everything you make. It’s a very effective way to save extra money.
• Sell the House! Sounds extreme, but If your total monthly house expenses is over 50% of your take home income than you’re house poor. Rent a cheap temporary place till you straighten your finances.
• No Vacations. Stay local, go camping instead, or visit friends or relatives.

How big should the emergency fund be? Typically 6 months of expenses, not income, but expenses. Couples with dual incomes and no kids can get a way with just 3 months of expenses. Those with high liabilities or chronic health issues should save more.

Remember, these steps are just temporary. Once the emergency fund is fully fund you can slowly start introducing the luxuries back into your budget. A good place to keep your funds is in a money market savings account like ING Direct. It pays a similar interest as CDs do but you can access the money anytime, without forfeit the interest.

Total Money Makeover

There’s no such thing as a one-size-fits-all financial plan. Everyone has a different life goal. We are all at different stages of life. However, it is important that we all know where we are going and how we plan on getting there.

I’m a big fan of Dave Ramsey. His book the “Total Money Makeover” has helped me turn my life around. If you need a financial plan his 7 Baby Steps are perfect to start out with. If there is such a thing as a  one-size-fits all financial plan, this would be the best. Here’s a summary of the steps:

1. $1,000 to start an Emergency Fund – Stop your investing temporary. Get current with your creditors and quickly save $1000 dollars for unexpected events. You can do this by selling some stuff around the house or picking a side gig. Get on a budget.
2. Pay off all debt using the Debt Snowball – Start with the lowest balance, pay that off, and then work on the next lowest. Ignore the interest rate.
3. Three to six months of expenses in savings – Remember, this is three to six months of EXPENSES not income. Keep this amount or most of it in a separate savings account. I keep 80% of it in an ING account, and 20% of it in my credit union’s savings account.
4. Invest 15 percent of household income into Roth IRAs and pre-tax retirement – Dave doesn’t want us to invest more than 15% because there are still two more important steps, the kid’s college and your home. However, retirement should not be ignored either. 15% seems to be the balance for most people.
5. College funding for children – Dave recommends ESA and 529 plans.
6. Pay off home early – Two things to keep in mind here; one, don’t get a loan for more than 15 years, and two, keep the payment under 25% of your take home income. A home should be a blessing not a curse.
7. Build wealth and give! – Hooray! With no debt in place, a nice retirement fund and a paid off home, the only thing left is helping others!

The controversy: Baby step two is where a lot of people disagree with. Mathematically speaking it would be faster to pay off your highest interest cards first than the lowest balance. But for most people with debt problems, paying off the lowest debt gives them better traction. These people didn’t get in debt because they couldn’t do math, but because of bad behavior and habits. Dave says that personal finance is 20% head knowledge and 80% behavior. So quick wins over debt is more important than saving a little bit in interest, even if it does take a few weeks longer. Don’t over exhaust yourself. Finishing the race is what’s important here.

Step two was extremely draining for me. It’s by far the hardest. People that struggle with debt have to fight years of bad habits. Completing this step is very rewarding, though. I felt so light when I was done.

 ”The rich ruleth over the poor, and the borrower is servant to the lender.” Prov. 22:7

The next four steps are fun, because every dollar you save brings in interest. Rich people collect interest, poor people pay interest.

Download Budget Template

Since I get a lot of people asking me for a budget template, I decided to post a static page in the menu bar that’s all about Budgets.You can find a free budget download there along with other tips and resources on budgeting. I hope it can be a help to those new to budgeting.

My budget template was inspired by Dave Ramsey’s electronic budget I used when I went through his Financial Peace University’s 13-week course.  I have uploaded my excel budget to Google Docs so I can update it from any computer with internet access. It literally takes me less than a minute a day to update it.

A budget is a great tool to accomplish your financial goals and spend money purposeful.

Here are some reasons why the typical new car purchase is a really bad idea, especially when you don’t have the cash:

1. You pay interest. According the Bankrate the average car loan intrest is 7.27%! That’s equivalent to giving up on a bank CD that pays roughly 9.7% if you’re in a 25% tax bracket… pretty much unheard of nowadays!
2. Cars depreciate! “The average car loses about 65 percent of its value over five years,” according to KBB.com.
3. A bunch miscellaneous money is wasted. According to the National Automobile Dealers Association, the average price of a new car sold in the United States is $28400. In most states, sales tax and registration will be about 10% of the cost. That equals to another $2,840 out the window the moment you sign the papers!

More interesting facts: According to Edmunds.com the average down payment on a car is $2400. Based on that figure, the average monthly payments should be around $582.67.

What this adds up to: Instead of having a car payment from age 25-65, if an individual takes that $582 and invests it in an index fund like the S&P 500, that’s been averaging around 11%, they’ll have $4,515,647.75! This officially makes car payments stupid!

What you should do instead: Ride your bike. Ok, I’m kidding (although I know several people that don’t own cars). Instead, buy a used car. It’s pretty amazing what you can find if you don’t have car fever. Be open-minded about the car model. I found a 4 year old Ford Taurus with 36k miles on it for around $6500.  I’ve had the car for 3 years now and put another 40k miles on it without a single problem! What’s amazing is that the car has only depreciated by $2k in 3 years! I hope to drive the car at least another 5 years!

Cars last a long time these days. Most cars can be driven to 200k miles with just regular maintenance. Checkout this article on MSN Article, “Cars that Last A Million Miles”.

I got an email today from my friend Andrew. He was complaining about not being able to stick to his budget. There always seems to be an event or “emergency” forcing him to overspend. It reminded me of when I first tired to live on a budget in my early twenties.

When I got out of college I blew a lot of money. I just didn’t know where and how much. I tired several expense tracking methods. I first did an excel budget. That worked for about a month or two, and I lost interest in it, too tedious; and I still overspent. My friend recommended I try Quicken; he used it for his business. So I figured it could work for me too. I stuck to that for about 2 months. I would have quitted earlier, but I spent $40 on it.

Over the years I tried other applications and websites too. But none seem to work. I could not stick to a budget. I would always overspend. I thought I try a different approach altogether. The 60% Solution. Who was I fooling, that was the biggest bust.

Today I live on a budget without much effort. I finally realized why it’s so easy to live on a budget now vs. back then. The difference is that I now have specific goals for my budget while back then I would pointlessly just track expenses. Without an end goal in mind, a budget is completely pointless. It will never work.

When I got on a budget a year ago, I had a very important goal in mind. It was to pay off $43k in debt. The budget was the written plan to reaching that goal. I knew if I follow the budget down to a tee I would be out of debt in just 14 months. I didn’t create that budget based on past expenses; I created that budget based on my goal and its due date. So if my rent was too high, I had to find a cheaper place. If my food was too much, I had to find cheaper food (while still healthy). I had to ask myself, is this purchase more important than my goal, if the answer was no, then I would not purchase that item. I was so intense and pumped up about my goal, that it made it easy to follow my budget.

After paying off my debt, my goal for the budget changed. It became to save a 6 month emergency fund. Now since that’s fully funded, my goal changed to saving for a house, while taking four big vacation trips a year, and do more charitable giving in addition to my regular tithing. A budget is really just a tool. Give your budget a purpose.

In order for a budget to work, your financial goal has to be very important to you! You have to be intense about it.

I’ve heard it said, “If you aim at nothing, you will hit it every time!”