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What do you want from your money? Think about that for a minute. It's a loaded question, a difficult question, a question with an infinite number of answers. But it's a question you need to address. You've already taken the first step: You picked up this book. That alone tells me you know that figuring out what you want from your money is something you're ready to do.
Some of it won't be easy. It's important that you understand that up front. Setting financial goals means making at least some temporary decisions (and I say "temporary" because you'll certainly revise them along the way) about not just your money but your life. It means thinking about how big a family you want to raise, how you wish to retire, and whether your aging mother should live with you or in a nursing home. It means dealing with the queasy subjects of who should be the guardians for your minor children and how and when you need to write a will.
But the payoff will be enormous. Just think about how good it would feel to have a plan in place to deal with all the "what-if " scenarios in your life (what if I lose my job, what if I get divorced, what if I become disabled...). And the rewards won't just be emotional. Once you leap in and get hold of your finances, there are a number of small moves you can make that'll pay off big in the wallet.
The key here is to relax. I'll talk you through all the issues, page by page, one by one. And we'll start back at the question I asked a moment ago: What do you want from your money? What do you want your money to do for you? Let's take a look at the answers some other folks gave to get us going.
My friend Susan, who recently married, can sum up the answer in one five-letter word: h-o-u-s-e. She and her new husband want to move out of his bachelor pad/apartment in New York City and into a house of their own, preferably somewhere in the suburbs of Westchester County, where she grew up. She doesn't know exactly what the place will look like, but she's got a specific enough list of prerequisites that she'll know it when she sees it. "It has to be old," she told me, "with lots of charm. But it doesn't have to be huge. I don't want bedrooms that are big enough to land a plane in. And I don't want so many rooms that I can't afford to furnish the place nicely all at once. And I don't need a ton of land either, just enough for a substantial garden."
Ken and Nancy, a couple nearing forty with two young kids, are crystal clear on the subject, too. They want an early retirement with plenty of free cash to travel the globe. When Ken was around thirty, he passed up a chance to spend six months in Asia roughing it with three friends. All three of these other guys were at career roadblocks. Not one of them really liked what he was doing. So they quit their jobs and went on an adventure to clear their heads.
Not Ken. He had been working at the same bank since college and was quickly rising up the ranks. Every time I spoke to him, it seemed, he had been given more people to manage. Taking time off to travel would have deadened his momentum. In hindsight, it was a good thing that he stayed. Shortly after his friends left on their trip, he met Nancy. A year later, they married. And nearly a decade later, he's still at the bank and he and Nancy have two kids and a house they designed themselves on a quiet cul-de-sac. They live well, but not lavishly. Instead, they sock every extra dollar into savings, so that once the kids are through with college, they'll be free to go on an adventure of their own when they retire-at age fifty. And this time they won't have to rough it.
As for me...in the short term, my husband, Peter, and I already have a house that we love. We've tackled the big-time structural fixes: new heating system, new roof, new air-conditioning. (It's seventy years old, and we knew it was a fixer-upper!) I'd like to see it fully furnished sometime soon, but we're taking it one room at a time. Long-term, our goals are fairly straightforward. We'd like our kids to go to the colleges of their choice with no financial worries. We'd love to-someday-add a beach house to our real estate portfolio. And though I, in particular, can't get a clear picture of my "retirement" yet (probably because I'm one of those people who doesn't believe I'll ever really retire), I know that as I get into my fifties or sixties, I'd like to be able to work a little less, play a little more, and have enough free time to exercise just about every day.
But that's me. What do you want? Clearly, if you're reading this book, then one of your goals is to gain a clearer understanding of your money in general. But what about the specifics?
€ Do you feel you're not investing enough for retirement?
€ Are you fighting about money with your spouse?
€ Are you afraid you'll die leaving your family in a bind because you don't have the right insurance?
€ Do you feel like everyone's making money in the stock market except you?
€ Are you mired in credit card debt?
€ Or do you feel like you simply need a good-that is, an understandable-introduction to money?
I could sit here and type questions like this page after page after page. And perhaps I'd never hit on what drove you to the business section of your favorite bookseller. But it's important to get a grip on what you want from this book-and what you want from your money in general-in order to be truly successful as you work to-ward your financial goals.
Most people, you should know, have absolutely no idea what their financial goals are. According to one survey from the Certified Financial Planner Board of Standards, not setting measurable goals is the number one mistake Americans make with their money. Fewer than one third of financial planning clients actually have an idea of what they'd like their money to do. (And remember, those are people who've sought out professional financial help. The percentage of the population at large that's setting financial goals must be slimmer still.)
Why is goal setting a big deal? Because research shows it works. Establishing benchmarks for your money is like setting goals on the job, or on your diet or exercise plan. Unless you have them-unless you know that you want to make manager in under a year, lose five pounds in four weeks, or run a 10K this fall-your accomplishments will be meaningless. You may achieve all of those things, but be-cause you never set benchmarks, you won't have any means to measure your success. You'll never know when you've crossed the finish line. As a result, it'll be harder to keep going.
You also never get the emotional payoff that comes with having knocked an item off your list. I remember when my husband and I got our first wills. We already had an infant (yes, we should have done it before he was born, but we waited-like many people- until we were getting on our first airplane). And I was definitely nervous about sitting down in a lawyer's office and discussing all the issues that come up when you're making a will. But when the document finally arrived in the mail, all I can remember feeling was relief. We ran over to a friend's that day so we could sign in front of them as witnesses.
So that's the first thing we're going to talk about in this chapter: how to figure out what you want, and why you also need to revisit those desires every so often simply to make sure they haven't changed, and alter your plans if, as is likely, they have.
You may have noticed that earlier I didn't refer to just plain goals, but to measurable ones. Setting your benchmarks is one thing. But once you've set them-whether they include a new station wagon, retirement at sixty, or eliminating credit card debt-you have to figure out what they're going to cost you. Only then can you develop a schedule for stockpiling the assets you'll need in order to make those things happen.
Can you accomplish all of this yourself? Absolutely. You can do it with instruments as basic as a No. 2 pencil and a legal pad. Or you can install the latest version of Quicken or Money from Microsoft in your computer and let it walk you through the decisions. And if you're comfortable online, the Internet has more financial planning tools than I could ever describe in a book twice this size. (You can also hire a financial planner to help.)
Finally, none of this works unless you can make it happen- consistently-for weeks, months, or even years on end. Those of you who have seen me on television probably know I like to com-pare managing your money to exercising. The first day you hit the gym for Cardio Kickboxing (or whatever) it's brutal. Your thighs hate you. You can't breathe. Your muscles weren't made to work this way. Five minutes into the class, you're fantasizing about vegging out in front of Rosie. But if you can get yourself to stick it out, three times a week for a month, then all of a sudden you realize you can do it. You're kicking higher and punching harder. You have form. Now if you don't make class, you feel as if you're missing some-thing. That dose of endorphins has become as indispensable as your morning coffee. It's a habit. It's part of your life.
Managing your money works the same way. The first day you save every receipt so that you can track your spending, it's a pain. The bulge in your wallet is annoying. You don't quite understand how knowing that you spent $6.95 on a cobb salad roll-up and a Diet Coke and $4.69 on film is going to make a difference in your retirement account. But if you stick with it for a few days, then a week, then a month, all of a sudden you experience the same sort of confidence-boosting flash of results. You've got $200 more in your bank account at the end of the pay period this month than you did last month. Your brokerage account is gaining weight. Over time, saving those receipts, following your money, taking pride in Talking Goals your growing account balances becomes a part of you. You don't understand how you could have ever done it any other way.
So here we are again, back to the question I asked at the top of the chapter: What do you want from your money? The difference between what you have today and what you'll have months or years from now can be nothing-or it can be very substantial. If you'd like to see your assets grow, it helps immeasurably to have a road map, to set you on course. You can use it to become clear on your priorities, so that soon you'll know which investment accounts to fund, which credit cards to pay down, what you're saving for. Think of this planning exercise as making a financial to-do list-only this time, instead of a to-do list for the day, you'll be making one for the next couple of years (or if you're really clear, maybe the next couple of decades)
The Wish List
How do you start? Diving in is the only way. Pick up a pencil and a piece of paper, pull out your Palm (or other PDA) or take a seat at your computer, and let's make a list, a financial wish list. This is a time for thinking really big. In a few minutes, we'll attach numbers to the items on your list and decide what you can accomplish in the short term and what's a fantasy. But if you restrict yourself from the outset, chances are you're missing something that's important to you. So go ahead and dream a little.
I have no idea what's in your head (sorry) but here are some possibilities to get you started:
€ I want to buy a home.
€ I want to go back to school.
€ I want to start saving for college for my kids.
€ I want to get rid of my credit card debt.
€ I want to buy a car.
€ I want to retire in Phoenix.
€ I want a time-share in Orlando.
Throughout this book, you'll find lists of questions: Five Questions to Ask a Financial Planner, Five Questions to Ask Your Life Insurance Company, Five Questions to Ask Before Buying a Stock. They're designed to help you figure out whether you're buying the right products, getting the best deal, working with an up-to-date (and on-the-level) professional. Perhaps no list of Five Questions, though, is more important than this one:
Five Questions to Ask Yourself (and/or Your Partner) About Your Goals:
1. What do I want to accomplish financially this year? Don't censor your answers. They can be anything from I want to spend winter break in Boca to I want to have $1,000 in my savings account to I want to pick better stocks. All are acceptable. Just be sure to list accomplishments that are possible to achieve in the next twelve months. Red Flag! Don't allow yourself to be wishy-washy. Specificity is key. Otherwise, a year from now you'll still be starting from scratch.
2. What do I want to accomplish with my money in the next ten years? Again, be very detailed. Perhaps you envision having $30,000 in your IRA or 401(k) by that time. Perhaps you can see yourself having zero in credit card debt. Or maybe you'd like to be working for a company that grants stock options. Knowing what you're striving for makes the path toward those goals easier to find-and therefore easier to follow.
3. What do I want to accomplish with my money far off in the future? These are your stretch goals. They may include retirement at age fifty-five, a second career in the Peace Corps, or the ability to leave your kids a sizable inheritance. One of my colleagues at Talking Goals Money magazine, Jason Zweig, says his long-term investment time horizon is 100 years. No, he's not expecting to break the Guinness Book records for longevity, but he has children and he's planning to leave certain investments to them.
4. Am I willing to begin? There is only one thing standing in the way of achieving your goals-at the very least your short-term ones-and that's you. Are you willing to do it? Perhaps you decided you wanted to save an extra $1,000 this year. Are you willing to cut your spending by the $20 a week it'll take to accomplish that? Or to take on a freelance project or some overtime? Are you ready to do it today? When it comes to your money, procrastination can be a killer.
5. Do I know how to get started? Don't worry, that's what this book is here to teach you. But the key to beginning is to break that goal down into smaller chunks that you can wrap your hands around. Take that $1,000 example again. As one sum, it sounds like a lot of money. But when you realize saving it on a weekly basis only means socking away a $20 bill, it's manageable. If you want to buy a house five years from now and need to come up with a down payment, you're working with larger sums of money-but still they can be broken down into manageable parts. Put away $50 a month into Treasury securities at a 6 percent return, and you'll have $3,342 in five years after taxes (assuming a 28 percent tax bracket). If that's not enough, run the numbers for a $100 contribution (you'll have $6,684) and a $150 contribution ($10,026) and a $200 contribution ($13,368). That $200 may sound like a lot in one chunk but if you think of it as $50 a week it's much more reasonable.
As you go through this exercise, remember that it's okay if your answers are all over the map. Your first time through these questions should truly be a brain dump. Then go back over the items and organize them in terms of priorities. Which is more important to you, the home or the car? If you get rid of your credit card debt today, do you think you can stay out of debt tomorrow? If so, you should probably tackle your credit cards first and start stashing as much as possible into the retirement fund second. Putting all your money muscle behind a single financial task will often provide the biggest payoff (in the credit card case, for example, it's often impossible to beat the return you get by paying off an 18 percent card by investing your money another way). But there will be times when you can work on multiple goals at once. If your company has a tuition reimbursement program, for example, you can go back to school while you're paying off your Visa.
Note: It's fine to focus much of your energy on the expenses of tomorrow such as retirement and college, but you also need to have a life today. Ross Levin, a Minneapolis financial planner, had a client in his office who wanted to move his family to a neighborhood with better schools. But he was hesitant to do it now. Instead he wanted to wait three years, thinking he could use the time to rack up a re-ally substantial balance in his retirement accounts before he started pouring money into a new residence. Levin talked him into reconsidering: "The reality is you want your kids growing up in this neighborhood, in these schools, with these playmates," he argued. "The impact of moving now on your family will be much more dramatic than the additional money you're putting away for later."
His point is an important one. There is such a thing as too much delayed gratification. Saving so much today that you're living unhappily isn't worth a few rounds of golf or even a few expensive vacations down the road. You have to find the middle ground. The key is to be as intentional about your spending as you are about your saving. When you plan for a kitchen renovation or a trip to Europe for your twentieth anniversary-just as you would plan to make your 401(k) contributions-then they don't play havoc with your future. You decide how much you'll need to make them hap-pen, put the money aside, spend it, and move on to the next item on your list. Which brings us to...
Challenge Your Goals
Once you've set your goals and listed them, it's time to make sure you believe in them. Write a first draft. Put it away for a week or two and then revisit it. Have any of your goals changed? Have some Talking Goals begun to seem more or less important than they did when you first put pen to paper? The items that stick after two weeks are the ones you should work toward. If you're a couple, you'll each want to make separate wish lists, edit them, and only then merge them.
Things to avoid as you go through this process: "Brussels sprouts goals," items that end up on your list because you believe you should want them, whether or not you really do.
Take college saving, for example. It's likely to show up on many lists. But do you really want to put enough money aside to pay 100 percent of your child's expenses? Is that the best thing for you considering how many years you have until retirement? Is paying for college in full the best way to encourage your eighteen-year-old to stand on her own financial feet? Maybe. Maybe not.
Or take your retirement projections. Does your life revolve around your work? Is your work the impetus for your social life or the source of most of your friends as well as your financial support? Are you the sort of person who says (and truly means): "I love what I do"? If so, then quitting work cold turkey the day you turn sixty-five is highly unlikely. The numbers you plug into whatever retirement calculator you're using should reflect that.
Frame Your Goals
Now that you have a working list, you need two other pieces of in-formation to make your goals real. The first is some idea of timing. When do you want to make these things happen? You also need to figure out what they'll cost. You'll be guessing a bit (particularly on things like how much it'll cost to rent that villa in Tuscany in the year 2007 for your twentieth anniversary). But that's okay. Getting close means you'll only have to put a small amount on your credit card or that you'll have a slight surplus. Either way, you'll be better off than if you hadn't saved at all. What you'll have sitting in front of you at that point is a big number: $3,000 for the vacation, $22,000 for one year at private college, $25,000 for the down payment on your first house. Now you have to figure out how much you'll have to put away each month-or each pay period-in order to get there. There are plenty of calculators on the Internet to help you. But you can also get extremely close with pencil, paper, and a handheld calculator.
Let's work out the math for the biggest example above: the $25,000 down payment on a house. We'll assume you're already al-most halfway there and say that you have $12,000 earning 5 percent in a money market fund. In two years, assuming you're in a combined 33 percent state and federal tax bracket, that $12,000 will be worth just over $12,800, so you'll still need another $12,200. How do you pull it together?
Start with a rough guess. Looking at your take-home pay, you think you can put away $400 a month. Again, that'll go into a money market account earning 5 percent. If you put away $400 a month for two years, you'll have saved $9,600. A simple interest calculation on that earns you $480, so even before you take taxes into account, you know that $9,600 in savings won't be enough. What if you increase your monthly contribution to $500 instead of $400? In savings alone, that'll get you to $12,000. You know that taxes zap a little more than one third off the top of the 5 percent interest rate your money will earn, bringing it down to 3.35 percent. Now multiply $12,000 times 1.0335 and you'll find that your total return is about $12,400. That's close enough for me.
Siphoning $500 or however many dollars you've determined it's going to take to reach your goal out of your spending money each month isn't always going to be easy. There will always be a ski trip or a Christmas list or a new suit that looks more immediately attainable-and therefore more attractive. That's why it's crucial to make saving as automatic as possible. Arrange with your bank to have the proper amount deducted every month from your checking account and moved directly into your money market (or other short-term investment) so that you don't have a chance to spend it.
It also helps to keep those long-term goals in sight. Post little re-minders around the house where you're sure to see them to help you remember why you're not spending $98 on that skirt in the window of Banana Republic. For years now, my friend Jonathan has had a picture of a waterfront home in Rye, New York, taped to the Talking Goals refrigerator of his apartment in New York City. He cut it out of the real estate section of the New York Times Magazine when the home was up for sale. Never mind that it sold years ago. It's like the home he knows he wants. It's something to keep in mind as he heads off to work each weekday (and often on Sundays), putting in many more hours than a salaried employee would to get his start-up business off the ground.
Revisit Your Goals
In the fall of 1999, my family got together on a Friday night and heard some great news: My brother Eric and his wife, Gabrielle, were expecting a baby. Then the phone rang on Monday with some even greater news. It was twins!
Even though they were ecstatic, the good news threw their financial plan out of whack. They had figured on staying in their one-bedroom apartment in Manhattan for at least a year, maybe two. It had a small dining alcove that could easily fit a crib for the babies. Now it seemed they'd have to buy a two-bedroom place or house soon after the kids even arrived. And-not knowing how Gabrielle would feel about going back to work-they were only going to look at places they could carry on Eric's salary alone.
My point is this: Life is a moving target. You plan on spending $2,000 to repair the kitchen in your new home, when all of a sudden the roof goes, too. Or your aging parent needs to move in. Or your cat needs dialysis. Or you visit Santa Fe and decide, "The heck with the East Coast," and start packing your bags. Or, like my brother and sister-in-law, you have twins. It happens. On my husband's side of the family, it happened to the same sister twice!)
The best way to rid your stomach of the butterflies this sort of a financial roller coaster brings is to sit down, once again, to talk about what these changes mean to your life and to run the numbers. Some people find numbers frightening. I find them very reassuring. It's nice to know that having a second baby doesn't double the charge for labor and delivery, it only raises it by a third, that buying a new dishwasher only costs double what it would cost to fix your old one (not five or six times the cost of the repair as you might have been imagining) or that even though you went insane with your gift buying at holiday time you can pay it off by April if you cut back on a few small nonessentials. Then you can sit back and live-even enjoy-your life.
You Can Do This! (Will You?)
A revelation: From a purely numerical point of view, there isn't any-thing that complicated about financial planning. You figure out how much money you need, what sort of savings and investment return it'll take to get there, and you make a plan that will get you to your goal. A handheld calculator is the only tool you may need. Especially when there are only a few items on your list, it's pretty easy to do the math.
But as your goals get a little more complicated-as you're trying to save for a car, invest for college, put money away for retirement, and pay down your mortgage simultaneously-you'll want help. The cheapest form of sophisticated help available is an off-the-shelf software package. I'm a big fan of Quicken; my husband and I have been relying on it to track our spending and our portfolios for years. But you'll find many of the same tools in Microsoft Money, or on the Web sites of just about any large financial institution. Using these tools, you can run through many of the same calculations that a financial planner would run either with you or for you. (Little-known fact: Many financial planners rely on similar computer aids-just like many tax preparers rely on souped-up versions of Turbo Tax, a soft-ware product you can buy yourself.)
The downside of doing it yourself? You really have to do it your-self. I'm not kidding. Gary Schatsky, a New York-based financial adviser, goes as far as to say that he "bets" most of his clients could do their planning on their own. The question is: Would they? "Most of them are so focused on their families or their own businesses that they don't have the time to do it," he says. "I have clients who Talking Goals manage portfolios for a living. They know small cap stocks like the backs of their hands-but their personal finances specifically, they don't have a lot of time to spend on."
Doing your own financial planning means taking the time to make sure your plan makes sense. Doing well by your money means revisiting that plan every six months to a year to make sure it still makes sense. And you'll have to commit to putting your plan in action, too: opening the accounts, buying the mutual funds, purchasing the insurance, working toward your goals. By far, more people do this themselves than hire someone to help them. It's completely possible-it doesn't even take that much time, just a day or so to get organized, then a couple of hours each month to stay that way. You just have to commit to it, like you'd commit to a job search or earning a degree. It's a matter of habit-and of making it stick:
The Big Three: Things To Take Away From Talking Goals
1. If you don't know where you want to go, you're never going to get there. So sit down with pencil and paper and rough out your long-and short-term goals. A legal pad is your best friend.
2. The next step is to understand financially what it'll take to achieve those goals on your list. That means doing enough research to attach actual numbers to your goals.
3. Accept the fact that none of this will happen overnight. But small habitual changes in the way you handle your money can have an enormous impact on your overall financial picture.
SEVEN WAYS TO MAKE A GOOD HABIT STICK
The way to make managing your money seem like a natural ex-tension of the rest of your life is to make it habitual, a regular part of your routine. That's true whether we're talking about paying all your bills on time (which we'll do in Chapter 2), keeping track of your expenses (Chapter 3), or having regular money discussions with your spouse (Chapter 11). But how do you do that? If you've ever tried to adopt a new habit (and who hasn't?) then you know: Some stick but some vanish as soon as the next sun rises.
Study after study shows that you have to have patience. It takes twenty-one days for a daily behavior to become a habit. A weekly or monthly behavior takes even longer. The difference between successful attempts and failures is that people who are successful do the following:
1. Keep a record. For new habits, a daily journal is the best medicine, suggests Kelly D. Brownell, a professor of psychology at Yale University. If you like numbers better than words, a daily graph noting even the tiniest improvements often works as well.
2. Organize your environment to help-not hinder. You want to keep things that'll help you reach your goals nearby-and keep temptations as far away as possible. That may mean leaving your credit cards in a drawer at home if you can't think of a reason you'd need them that day. It also means setting up mechanisms to make your accomplishments come easier. For example, when Michelle and Adam, a Seattle couple, were trying to get themselves to stick with a budget, they kept a spending log on their pillow so they'd re-member at the end of the day to write down every expense.
3. Don't set yourself up for a fall. If you've hated research since the time you were in junior high school, you're probably not going to love spending hours in the library (or even online) re-searching stocks. Don't fight this reluctance: Go with it. Instead of forcing yourself to pick a new stock or fund every time you have a few dollars to invest, schedule automatic monthly withdrawals from your checking account and have the money deposited into a mutual fund that you can stick with for the long term. Likewise if balancing your checkbook is what you dread, buy a software program that'll do all the actual figuring for you. You can thus make these tedious tasks nearly effortless.
4. Reward yourself for good behavior. Just make sure that your rewards don't work against your ultimate goals-for example, if you're trying to save money, your reward shouldn't be spending an extra $30 at the Gap, it should be something free like an extra-long soak in the tub. Likewise, don't punish yourself when you experience a setback. Let's just acknowledge right now that you will. A friend will come into town for a few days and you'll go on a little Visa bender. Give yourself a break and get back on the plan as soon as you can.
5. Seek out support. Sometimes working with another per-son- or group of people-can provide just the boost you need to get with the plan. It can be a group with similar goals, like an in-vestment club filled with beginners who all want to learn the basics of research, or a single individual-perhaps a money therapist- who can help keep you on the right path through a series of well-tested suggestions. Some people find that quarterly trips to a financial adviser who can provide structure and encouragement are enough to keep them on the straight and narrow
6. Keep going-even when you feel down (especially when you feel down). By actually doing something over and over again, you'll gain a feeling of accomplishment-even power. That's why it's so important that when you find yourself feeling frustrated and overwhelmed by something, you do just what will help you conquer what's getting you down. When you're feeling fat, you should hit the StairMaster instead of the refrigerator. And when you're feeling poor, you should sit down with a pad and paper and figure out just how much money your new habits are saving you. Two dollars a day saved by walking to work rather than taking the bus may not sound like much, but it adds up to more than $500 a year. Once you write it down, focus on how the accomplishment makes you feel. Concentrating on the change will make you feel energized. Think of it as insurance for how you'll behave tomorrow.
7. Trust yourself. Don't let your feelings of self-doubt get in the way. Whether you realize it or not, it took time and practice to develop your current habits. It'll take the same time and practice to develop the ones you want to adopt for the future.
Copyright (c) 2001 by Jean Sherman Chatzky
All rights reserved.