Millionaire Mommy Next Door » Resources

New Year’s Task List

Millionaire Mommy Next Door — Thu, 07 Jan 2010 18:06:41 +0000

Yesterday I encouraged you to use the New Year to reflect and proactively plan ahead. Today I’m presenting a list of specific tasks that I refer to this time of year. I keep track of these tasks (and all others throughout the year as well) with a neat online application called Remember The Milk. This application is flexible, customizable, easy to use, and it’s free! Make sure you take advantage of the repeating event feature and the reminders.

Below, I’ve included the items I find relevant for the New Year:

Finances:

Schedule reoccurring family finance meetings and put them on the calendar
Reconcile year-end account statements (bank, credit cards, investments)
List debt liabilities with current balances, interest rates, minimum repayments, terms, credit limits
Check your credit profile and report. Important! AnnualCreditReport.com is the ONLY website you want to use to order your free annual report! Dispute any errors online through each credit bureau.
Ask for an interest rate reduction on your credit cards. Be sure to mention if you received a credit card offer in the mail with a lower rate, and threaten to transfer if they won’t negotiate.
Compare 2009 actual expenditures with 2009 spending plan
Reevaluate your priorities and modify your spending plan accordingly for 2010
Update net worth statement: list all assets and all liabilities, subtract liabilities from assets = net worth
Fund retirement accounts and HSA (health savings) accounts
Rebalance investment allocations
Set up automatic bank transfers and automatic bill payments
Pursue outstanding credits promised
Purge file cabinet: set aside 2009 tax papers, box up 2009 files (label box)
Prepare for annual tax return and schedule an appointment with accountant
Evaluate and price-compare insurance policies: auto, home, medical, personal liability, disability, term life. (If you have a suitable emergency fund, raise deductibles to save money on premiums.)
Evaluate and price-compare services (phone, cable/satellite, banks, credit cards, etc.)
Update Will and Medical Directives
Take computer data back-ups to off-site safety deposit box
Change all passwords (online and off)

Maintenance:

Install fresh batteries in smoke and CO2 detectors
Change furnace filter
Clean carpets and furniture coverings
Touch up wall paint

Organization:

Purge each room of things you didn’t use in 2009. Sell (I use Craigslist), consign, or donate these items.
Sort and label 2009 photos
Recycle magazines, newspapers, catalogs and other paper clutter

Calendar:

Update 2010 calendar: add birthdays, anniversaries, due dates and reminders. (I use google.com/calendar and set up the reminder feature for each event.)
Schedule routine annual exams: wellness, dentist, optometrist

Relationships:

Update contact list
If you didn’t send a holiday letter, connect with your family and friends by phone, or send an email newsletter and a few photos.
Schedule reoccurring date nights with your sweetie and/or kids

Readers. if you notice something I’ve missed — or have an additional suggestion — please include it in the comments section below. I will update this list accordingly. Thanks!

How To Track Your Expenses

Millionaire Mommy Next Door — Tue, 05 Jan 2010 23:02:25 +0000

Money flows like water. It can gush like a raging river or drip like an annoying leaky faucet at midnight. If we use this precious resource mindlessly, we face drought. However, if we first observe the ebbs and flows, effective management becomes a simple matter of design. In other words, you NEED to know where your money goes in order to manage the flow. Once you know where your money flows, you can design a realistic budget plan and start making conscious spending choices for your hard-earned dollars.

Create an expense tracking system and establish a routine. January is the perfect month to start. I’ve tracked my expenses for over 15 years. It really doesn’t require a lot of time (~5 to 15 minutes a week). I pay my bookkeeper to do this task for me now and at about $1.25 to $3.75 a week, it’s worth it. If you have kids, this can be an educational task to delegate to them.

Expense tracking options include:

save all receipts and file them into large envelopes labeled by expense category
write each expenditure under a category column in a ledger book
write each expenditure in a pocket-sized spiral-bound notebook (carry it with you when you leave home)
use a software spreadsheet like Microsoft Excel or Open Office Calc
use a personal finance software program such as Microsoft Money Plus Premium or Quicken.
sign up for an online application such as Mint.

While all of the above methods work, I use personal finance software (specifically Microsoft Money Plus Premium because I like their Lifetime Planner tool). Both Microsoft Money and Quicken include a wide range of helpful tools to make personal money management tasks easy. Specific to this particular task of tracking expenses, Microsoft Money Plus Premium and Quicken personal finance software:

connect to thousands of banks and update your expense transactions automatically
automatically categorize your transactions and compare them to your budget
show you exactly where your money is flowing using charts, graphs and reports
let you see the big picture or drill down to the details

Four Tips:

Make the most of on-line banking. To make tracking your expenses easy and accurate, pay for everything with a check, debit, or credit card. Check your account often and set up as many automated transactions as possible. (Important Note: If you pay routine expenses by credit card, pay off your account balance in full each month!)
If you must use cash, keep your receipts and enter each transaction into your expense tracking system.
Make it a habit to track your expense transactions regularly. Designate a time weekly for this task and at the end of each month, total the amounts spent by category. In my case, it only takes about 10-20 minutes per week to confirm my automatically downloaded expense transactions and to reconcile my downloaded bank account statements.
Here is a comprehensive list of expense category suggestions. Modify my list to fit your own needs and lifestyle:

Auto -repairs, gas, insurance, registration, tolls…
Auto Payments
Bank Account Fees
Beauty -hair cuts, manicures, makeup…
Child Care
Clothes
Debt/Loan Payments -create a different account/category for each loan
Dining Out
Finance Fees
Gifts
Groceries
Home Improvements/Maintenance/Repairs
Household Furnishings
Insurance (Disability)
Insurance (Health)
Insurance (Homeowner/Renter)
Insurance (Life)
Insurance (Medical)
Insurance (Personal Liability)
Liquor/Tobacco -if applicable
Mass Transportation -bus, train, light rail…
Medical -everything except health insurance premiums
Misc -avoid this category as much as possible!
Mortgage Payments/Rent
Pets
Recreation/Entertainment
Savings (Education)
Savings (Emergency Fund)
Savings (Retirement)
Savings (Specify Purpose)
Storage Unit
Subscriptions, Books, Software
Taxes (Federal, State, Local)
Tax Preparation Fees
Toys (purchase, repair, insure) -includes boats, electronics, bikes, jewelry…
Travel
Utilities (Electric)
Utilities (Gas)
Utilities (Internet)
Utilities (Misc)
Utilities (Telephone)
Utilities (Trash)
Utilities (TV Programing)
Utilities (Water)

Questions for readers: Where does most of your money go? If you currently track your expenditures, what method do you use?

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Are You Saving Enough For Retirement? Use These 4 Simple Rules Of Thumb And Find Out Now.

Millionaire Mommy Next Door — Fri, 18 Sep 2009 18:00:16 +0000

This is a guest post written by Todd Tresidder.

How do you know if you are saving enough so you can afford to retire? And more importantly, are you saving enough to retire with confidence so that you can support your present lifestyle without running out of money early?

To answer these questions, you might consider using one of the many online retirement calculators available. Unfortunately, these “simple” retirement calculators are often complicated and require you to assume many things about your future retirement that may or may not work out to be true. It’s the old “garbage in equals garbage out” rule, and nowhere is that rule more true than with retirement calculations.

One alternative to sophisticated retirement calculators is to apply simple rules-of-thumb that allow you to quickly and easily estimate the sufficiency of your nest egg and savings plans. While these simple formulas lack the “rocket science” sophistication of Monte Carlo theory and other financial planning innovations, they do provide a reasonable ballpark approximation that is easy enough to do yourself – without a computer, software, calculator or financial planner. Usually, a pencil and the back of a cocktail napkin are sufficient.

The advantage of this simplicity is you will actually complete the exercise – which is essential to successful retirement planning. You must know the retirement savings goal you are aiming for in order to plan constructive actions to reach the goal. You are far better served by knowing a rough approximation of your retirement planning needs than to have no estimate at all.

The truth is perfection in retirement planning is impossible anyway because accuracy depends on assumptions about your future which can never be made with certainty. Therefore, it’s better to at least work with ballpark estimates than to risk being thwarted by complication that might keep you from playing the game altogether.

Below are four simple rules-of-thumb for retirement planning that will at least get you in the ballpark until you have the time and inclination to sharpen your pencil…

The Ten Percent Rule

Some old-wives-tales are true, and the importance of saving 10% of your income happens to be one of these truths. This retirement savings strategy was popularized in the bestselling book The Richest Man in Babylon. In general terms, the way the math works is if you save 10% and invest it with long term returns around 10%, your investment portfolio will grow to the point that it can support your lifestyle from earnings in roughly 35-40 years. That means you could retire and live on the investment earnings alone, never touching the principal. Your life expectancy doesn’t even matter in this situation because you would never run out of money since it doesn’t require you to spend principal. The biggest risk to this simple formula is inflation, although even with that limitation it still provides a good working approximation for how much you should be saving.

What’s fun about this formula is how easy it is to understand, easy to implement, and easily adapted to your situation. For example, if you have less than 40 years until retirement then you should obviously be saving significantly more than 10%. The sooner you start saving, the longer you have for your interest to compound to build your retirement fund. If your average investment return exceeds 10%, you won’t need to save as much. If it is less than 10%, you need to save more.

One big benefit to using this simple rule-of-thumb is you don’t need to pay for a fancy financial plan that sits in the binder on your shelf collecting dust to get started. It is a rough approximation that points a clear direction so you can get started immediately – and starting immediately is a critical factor to your retirement savings success.

The “Millionaire Next Door”

Now that we have a reasonable approximation for how much you should be saving each month, lets examine a different approach that provides an approximation for how successful your savings efforts have been to date.

According to The Millionaire Next Door, authors Stanley and Danko provide a simple yet reasonably accurate formula for assessing your wealth accumulation skills:

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

For example, if you are 35 years old and earn $100,000 per year with no inheritances, then your net worth should be $350,000: 35 times 100,000 divided by 10 equals 350,000. If you meet this standard, consider yourself to be “on track” for moderate wealth accumulation and a successful retirement fund. You aren’t a super achiever, but you aren’t behind either.

Go ahead and do the math for yourself. How do you measure up? This formula is really just another twist on the 10% savings rule cited earlier. It is based on sound mathematics and seems to provide a conservative but realistic figure for a broad range of scenarios.

Although it does not consider inflation, taxes and varying interest rates, this simple formula does yield a useful estimate of your retirement savings goal. It gives you a fast and easy way to see how well you are progressing toward financial freedom.

Stanley and Danko go one step further, creating two additional benchmarks based on their basic formula. “Prodigious accumulators of wealth,” or PAWs, have accumulated twice the savings indicated by the formula. “Under-accumulators of wealth,” or UAWs, have accumulated half the expected total. If you are a PAW then you are reasonably on track to knowing if you can afford to retire. If you are a UAW, now is the time to step up your financial management skills and start saving more.

12 Times Income

Jonathan Clements, former columnist for theWall Street Journal and author of The Little Book of Main Street Money: 21 Simple Truths that Help Real People Make Real Money, offered another alternative to the “How Much Money Do I Need To Retire?” question by claiming a reasonable retirement nest egg should be 12 times your income. To reach this goal, the amount you need to set aside each month depends on how much time you have before your target retirement age and your current savings-to-income ratio. This premise makes a few assumptions:

your income increases to match inflation,
you draw 5% of your savings as income the first few years of retirement, and
you achieve an investment return of 5% after inflation.

The numbers purport to yield 60% of your pre-retirement income. Combined with Social Security and other income, you might end up with 80%, a figure that most retirement calculators assume is enough. Alternatively, if your own calculations show that you need a higher percentage, then you need to amass more than 12 times your income.

Rule of 25

One of my favorite rules for simplifying how much is enough to retire is to multiply your expected annual spending for your first year of retirement by 25 to determine your total savings required. This is just a mathematical simplification of the famous 4% rule where you are allowed to spend 4% of your savings each year during retirement.

This rule is on firm empirical grounds because the sophisticated retirement planning models including Monte Carlo optimizations will generally result in spending rules ranging from 3-5% depending on assumptions and confidence interval required. Now you can get roughly the same result without a computer, software or arcane mathematics. Just take your first year of retirement spending, multiple it by 25, and presto – you are right in the same ballpark.

Summary

These quick and dirty rules of thumb are far from perfect. But the ugly truth about retirement planning is there is no such thing as perfect. In the end it is all a rough approximation anyway. For those readers wanting more explanation and detail, the ebook “How Much Is Enough To Retire” will help you understand exactly when you can afford to retire.

The future is unpredictable and conventional retirement planning requires you to predict the future in order to apply their models – this is a serious flaw. The truth is many unknowable factors will determine your financial needs during retirement, and those will only be known in the fullness of time. There are alternative models to retirement planning that don’t require you to see into the future and for those readers who don’t have the time or inclination to learn those models, this article provides some simple rules that will get you close enough for basic planning.

The important thing is to develop a concrete retirement savings goal to work toward – regardless of the model used. An inaccurate goal is better than no goal at all. You can use these simple rules of thumb to get started today and sharpen your pencil later when accuracy becomes more important.

About the Author

Todd R. Tresidder is a financial coach who retired comfortably when he was just 35 years young. His ebook, How Much is Enough to Retire? is based on his own experiences and explains how you, too, can afford to retire. Check out his web site for more retirement planning books, educational articles, and try his free retirement income calculators.

photo credit: ted.sali