The 1-2-3 Money Plan Part 3

Net worth = your age times your income, divided by 10.

A 40-year-old with a household income of $60,000 should have a net worth of $240,000. And that's just to be what the authors called an "average acc.u.mulator of wealth," AAW. To be what the authors called a PAW, prodigious acc.u.mulator of wealth, you'll need twice that much net worth.

A basic philosophy is one often attributed to American philosopher Bill Earle: "If your outgo exceeds your income, then your upkeep will be your downfall."

2. Look Back.

Now that you've explored your earnings compared with your wealth, let's turn to spending. Minding your spending isn't a subst.i.tute for trying to raise your income. You still need to do that. But, as I highlighted previously, spending is where you have the most control right away.

The best way to get a handle on spending is to track it. I'm not talking about doing a full-fledged budget. Instead, just track your expenses and categorize them.

Start by tracking expenses for two months. It doesn't matter how you do it. You can use pencil and paper, a spreadsheet, or software programs such as Quicken or Microsoft Money. You can keep a notepad with you at all times to jot down spending, or compile store receipts with monthly bills less often. If you mostly use debit and credit cards instead of cash, a convenient list of transactions will be on your statements.

Then categorize the expenses. Use categories that fit your spending. Attempt to get a little detail on big expenditures, such as food. Split it into two subcategories, groceries and dining out.

QUICK TIP.

Several Web sites now offer to help you track spending. Among the most popular is Mint.com, which is free and worth considering. It can automatically import transactions from many bank accounts, credit card, and investment accounts. It also suggests vendors that could save you money. Similar sites are Wesabe.com, Yodlee.com, Buxfer.com, and Geezeo.com.

With these categorized totals in hand, this is where you face the ugly reality that you spend $534 a month on dining out or that, on average, you spend $156 a month on shoes. You're probably already familiar with your once-a-month expenses, such as your electric bill and car payment. The more shocking figures will be the little money leaks that add up. "Do I really spend $50 a month on bottled water, $40 a month in bank fees, and $60 a month on DVD movies?"

The point is to identify where your money has been misspent in the past so you can redirect it toward your priorities in the future. How do you know if it's been misspent? That's the beauty. You decide.

3. Look Ahead.

"Speaking of priorities, how do I get myself a set of those?"

You set spending goals.

As the saying goes, "If you aim at nothing, you will hit it every time." Abraham Lincoln said, "A goal properly set is halfway reached." And Benjamin E. Mays, a mentor to Martin Luther King Jr., said, "It must be borne in mind that the tragedy of life does not lie in not reaching your goal. The tragedy of life lies in having no goal to reach."

"Yeah, yeah, yeah," you might be thinking. "Set goals. Next chapter, please!"

Before you dismiss the importance of setting goals about money, read on.

Goals give you direction and can provide peace of mind. They even have application in daily life. With all the marketing bombarding us every day and fueling our wants, a set of goals help us to say no. They remind us there's something we want more than the tempting purchase right in front of us.

So, the antidote for leaky, undisciplined spending is having goals.

Developing spending goals is not difficult. Brainstorm the big, expensive stuff you want to buy and do. Write them down, both long-term goals and short-term ones. The only rules are that each objective must have two components, a dollar figure and a date for completion. We'll talk about some of these in-depth during future chapters, but the following are some typical goals: * Eliminate consumer debt. Everybody knows you want to get rid of debt so you can stop paying interest. But some of the most valuable benefits are nonfinancial-less money stress, a sense of freedom, and possibly more relationship harmony with your significant other. High-interest credit card debt should be an urgent priority. Mortgage debt and low-interest student loans are a lower priority to pay off quickly.

* Build an emergency fund. Creating a rainy-day fund can be a two-step process. The long-term goal is a fund equal to three to six months worth of bare-bones living expenses, such as food, shelter, and utilities. A shorter-term goal might be to stash away $1,000 or $2,500. Then, it's not a crisis or a time to incur debt when the car needs new tires at the same time the roof needs repairs.

* Buy a house. Be clear about what price you will pay for a house, which lets you estimate an amount for a down payment. If you're already a homeowner, perhaps you desire a vacation home. If so, it is unlikely to become a reality unless you begin planning for it.

* Take a vacation. Vacations are optional, but don't totally dismiss the value of shared experiences with family and friends. Paid-for vacations are better. I recall a Parade magazine cartoon that showed a couple sitting on lounge chairs aboard a cruise ship. Suntan lotion and an umbrella drink rested beside them. The guy turns to his wife and says, "This would be a lot more relaxing if we could afford it."

* Complete home fix-ups. For homeowners, list your major home-improvement projects and home-furnishing purchases in priority order.

* Buy a vehicle. You will replace your car or truck. It's just a matter of when. Start talking about the type of vehicle you might get next and when. That should give you ample time to start saving a substantial down payment, or better yet, to pay in cash. A slightly used car is a better value than buying new.

* Retire. Past generations often had defined pensions, the kind where they guarantee you a check every month regardless of what the financial markets are doing. But, today, it's your job to figure out how to squirrel away hundreds of thousands, and maybe millions, of dollars, before you quit work. What type of retirement do you foresee? And when do you expect to gear down your working life? Where will you be living in retirement? Do you antic.i.p.ate knocking off work at age 70 and being a homebody or quitting at age 55 and traveling the world? Those plans require vastly different amounts of retirement savings. Run through scenarios with easy-to-use calculators online at such sites as d.i.n.kytown.com or ChooseToSave.org. Estimate the nest egg you'll need. From that, you can back into a single dollar figure: the amount you should be saving each month for the type of retirement you want.

* Kids' college. Although important, saving for kids' college expenses is a lower priority than most. You can often get a low-interest loan for college expenses, but n.o.body lends money for retirement, for example. Open a 529 savings plan and start contributing regularly, even if it's only $50 a month. As you free up money in your life, revisit this goal and raise your contributions. Few families will be able to fund all their other savings goals and save 100 percent of college tuition. Do what you can. Learn more about college savings plans online at Savingforcollege.com.

Establishing goals is only the start. The rest is follow-through. Allocate regular and automatic savings amounts toward each goal that needs to be started now. We'll talk more about that in the chapters ahead.

If the goal amounts seem intimidating, break it down further. For example, don't think of saving $2,500 for an emergency fund. Instead, you're saving $6.85 per day for a year. Opening separate fee-free savings accounts for some top goals, such as a car fund, can help improve your focus on the goal. Set up an automatic draft from your checking account to fund each goal. Your money is finite, so you might have to delay funding lower-priority goals until ones that are more important-or more immediate-are either under way or completed.

You should also keep close track of your progress toward achieving the goals, regularly revising both the dollar figures-upward, we hope-and time frames-sooner, we hope.

Then, next time you're tempted with an impulse purchase, you'll have a reason to say no. That's fundamental to spending smart.

Estate Planning.

n.o.body wants to consider their own demise, but death planning is part of being an adult.

Estate Planning, 1-2-3.

Make an appointment with an estate-planning attorney to draw up or update the following doc.u.ments: 1. Will.

2. Durable power of attorney for finances and for health care.

3. Living will (pull-the-plug papers).

"Isn't this a book about saving money?" you might be thinking. "Why is he telling me to pay an attorney to draw up these doc.u.ments?"

You could use lower-cost alternatives, certainly. You can try to write a will yourself with the help of books. You can write it with the help of a computer software program. In fact, a program called Quicken WillMaker Plus by Nolo generally gets rave reviews. You could buy the Will & Trust Kit sold by personal finance guru Suze Orman or use such Web sites as itsmylife.com and LegalZoom.com.

But sometimes it just makes sense to cough up the money and make sure it's done right. This is one of those times. Consider the issues: Who gets your money if you die, who gets your kids if you die, who's going to pay the bills if you're physically unable, and should doctors keep you on artificial life support?

Rules vary by state on this stuff. For example, do you know how many witnesses to the signing of a will your state requires? If your life is the least bit complicated-for example, estranged family members, blended families, a special-needs child-these doc.u.ments become all the more important. A good attorney will walk you through all the scenarios, including many you might not have thought about.

In short, spending a few hundred dollars for an estate-planning attorney to create these doc.u.ments is spending smart. There's no magic way of choosing an attorney. Your state bar a.s.sociation will certainly have a list. But you might ask for recommendations from friends, relatives, and other professionals you use, such as an accountant.

1. Will.

A will is often the centerpiece of estate planning. Wills aren't only for rich people. A will dictates who gets your money and property if you die. It dictates who will care for your minor children. If you die without a will, the state decides.

If you're married, you might think it's simple: Everything-the house, money, and kids-goes to your spouse. But what if you both die at the same time? Think car crash. It's not so clear-cut.

If you're paying by the hour with an attorney, you can save money by talking through some scenarios and making decisions before you enter the law firm's offices. If you have children, you need to pick a guardian. You'll need to decide on an executor of the estate, which is the person who manages the a.s.sets right after you die. List your a.s.sets and liabilities and decide which beneficiary gets which a.s.set.

If you already have a will created years ago, whether by an attorney, software program, or some other way, it might be worth having an attorney review it again, especially if your life circ.u.mstances have changed significantly since the will was drafted.

QUICK TIP.

This estate-planning move is absolutely free. Make sure all your financial accounts have up-to-date primary and secondary beneficiaries. These accounts include retirement plans, bank accounts, and life insurance policies.

2. Durable Power of Attorney for Finances and for Health Care.

If you're incapacitated, you'll need someone to make decisions about your money and your medical treatment. These are really different issues and can be different people, but you should proactively decide who it should be in both cases. These doc.u.ments are generally part of a package of estate-planning doc.u.ments an attorney will draw up for you.

3. Living Will.

A living will addresses the scenario that, for some, might be worse than death. You're being kept alive artificially, being fed through tubes and your quality of life has diminished to near nothing. What type of end-of-life care do you want if you're terminally ill or incapacitated?

Do You Need a Living Trust?

There's nothing wrong with a revocable living trust, which is often touted as an alternative or supplement to a will. This legal doc.u.ment allows you to transfer a.s.sets into a trust while you're living, which can help bypa.s.s the court process called probate after you die. It might save money on legal and court fees during probate-which is expensive in some states, such as California-and make the process quicker and more private.

But living trusts are oversold and cost much more to prepare than a will. A lawyer-prepared will might cost $300, whereas a living trust might cost $3,000, although you can prepare a trust yourself. Trusts also require more maintenance than a will. For example, you have to transfer everything you own-personal property you have now and will buy in the future-into the trust. That can be a lot of paperwork, both when setting up the trust and going forward.

If you're considering a trust, have a good reason to get one. What is the cost now, and what are your heirs likely to save later, when you die? And again, if you want a trust, consider having it drawn up by an attorney, instead of a salesperson selling boilerplate trusts.

Ident.i.ty Theft.

Ident.i.ty theft is when someone illegally uses your personal information, such as a Social Security number or credit card number, usually for financial gain.

Most important about the advice here is what not to do. For example, unless you've been a victim of ident.i.ty theft, you don't need to pay for credit monitoring. Monitor your credit yourself by accessing your credit reports for free, as we'll talk about in Chapter 6, "Credit When Credit's Due."

n.o.body needs to pay for ident.i.ty theft insurance, which just reimburses you for incidental costs of cleaning up ident.i.ty theft. It might reimburse you for the costs of mailings and phone calls, and perhaps lost wages and attorney fees. But few victims of ident.i.ty theft actually incur any out-of-pocket expenses.

Instead, focus on these three, simple steps to help prevent ident.i.ty theft.

Ident.i.ty Theft, 1-2-3.