Nickeled and Dimed

New Year’s Resolutions have been around for over 4,000 years, ever since the Babylonians came up with the idea that whatever a person did on the first day of the year determined how the rest of their year would go.  The most common “resolution” back then was to return borrowed farm equipment.

Today, the first day of the new year is used for countless numbers of people to make (and usually break) promises to themselves involving things like losing weight, quiting smoking, working out, etc.  While I’m not a big fan of the typical New Year’s Resolution, I do think reflecting on past performances and setting specific goals for future performances is absolutely vital to your journey to financial success.

So what I’m going to do today is look back on my financial performance for 2008, list my financial goals and plans to achieve them for 2009, and list four tips for setting and keeping New Year’s goals or Resolutions.

Reflection of 2008

Unfortunately, I did not set a list of specific goals last New Year’s, so I do not have anything to judge my progress against.  Instead, I will simply list what I feel were good financial decisions I made this year and bad financial decisions I made this year.

The Good:

- Made a commitment to paying down debt, and paid off over half my credit card balance as a result.

- Increased my number of roommates from one to three, which cut my rent in half, despite moving to a more expensive area.  This gave me more money to put towards debt and savings.

- Graduated college and got my first “real” job.  This doubled my income and gave me more free time.

- Sold my motorcycle.  This eliminated 3,500 dollars of debt and my 80 dollar minimum monthly payment. 

- Opened and started making healthy contributions to a 401k.

- Started an emergency fund, which came in handy when I had over 1,000 dollars of unexpected expenses in December.

The Bad:

- Took a student loan out for my entire final semester of college when I could have easily worked extra hours and paid at least half of it with cash.

- Used credit cards at times for items I could not pay back in full the same month.

- Went out to eat too much, especially for lunch at work.

- Traded in my fully paid off car and took out a 13,000 dollar loan to get a new car (not actually new, it was used).  I have a little trouble putting this one here, because my old car wasn’t in great shape and I got a very good deal on my new one.  But if I’m being perfectly honest adding 13,000 dollars of debt and 250 dollars a month payments to my finances was not a necessary thing.

Goals for 2009 and Plans for Achieving Them

- Pay off remainder of credit card balance by February: Current amount owed is about 1,800 dollars

        - Plan for achieving this goal: Use extra paycheck in January to pay remaining balance.

- Pay off 5,000 dollar personal loan by April: Currently owe entire amount

        - Plan for achieving this goal: Pay back 600 dollars a month starting in February and use most of tax return

- Build a 3,000 dollar emergency fund by August: Currently have about 900 dollars in fund

        - Plan for achieving this goal: Starting in April begin contributing 400 dollars a month

- Save 2,000 dollars for 2010 wedding: Currently have nothing saved

        - Plan for achieving this goal: Begin contributing 100 dollars a month in April and 500 a month in August

- Earn enough passive income from this site to cover at least one of my fixed expenses every month by June

        - Plan for achieving this goal: Work to constantly improve content on this site and market it to the best of my abilities

Those are my financial goals for 2009.  I also have other smaller goals within those main ones, but those are the targets that will dictate my finances for the rest of this year.

How successful were you in following through with your 2008 goals?  What are your financial goals for 2009? 

Welcome to Nickeled and Dimed, a blog about personal finance and economics.  For more information on me and this site, read the about page.

For my first post, I’m going to outline my plan for becoming “financially independent”.  My plan is based on the strategies I have taken from several different personal finance books.  While this is the plan I feel is best for me, it may not necessarily be what is best for you.  It is important to remember that your journey to financial stability is unique to anyone else’s and a plan is only good if it works for you and is something you will follow through with.

Every example I’ve ever seen uses the building a house analysis, so I’m going to try something a little different and go with a boat metaphor.

So, without further ado, here are the steps I plan to take, listed in order of highest priority:

Pay Off Debt-Plugging the holes

Debt is the enemy of financial independence.  It is the holes in your boat.  If you assume a conservative seven percent long-term return in the stock market, and an equally conservative 14 percent interest rate on a credit card, the credit card balance you carry has a 21 percent opportunity cost to you.  Over the course of two, five, ten or more years, that can add up to a whole lot of money.

Now I’m not going to sit here and preach to you that all debt is evil.  Mortgages and student loans can be very good uses of debt.  A car can be a necessary use of debt.  A credit card, however, is almost never an acceptable use of debt to a financial fit person.

Not that credit cards are bad.  When used responsibly they can be very good tools to build credit or even earn travel rewards and other perks.  But that is not what we are talking about here.  We are talking about using credit cards, or other short-term loans, to buy things you can’t afford right now.  If the balance of your purchase will not be paid by the next billing cycle, you can’t afford what you are about to buy.

We will discuss the different strategies to paying off debt in a later article, but my personal preference is Dave Ramsey’s “snowball plan”, which is to pay them off from lowest balance to highest balance.  I have found this is the most effective way for me, but most experts recommend you pay them off starting with the highest interest rate.  Again, whichever method works best for you is the one you should follow.

By paying off, and keeping off, all credit card debt, you begin to plug the holes in your financial boat.  So my first step is to pay off all my credit cards and short-term loans.

Build an Emergency Fund- The life jackets

Unexpected expenses happen.  A well stocked emergency fund is your life jacket that can save you from disaster.

An emergency fund is a savings account you keep separate from all your other accounts and only use for unexpected expenses.  Whether it’s a new roof on your house, a new transmission in your car or helping a friend or family member in need, all of us have plenty of expenses we didn’t plan for.  Without a certain amount of money set aside for these unexpected events, we run the risk of starting our financial journey over by using debt to fund them (putting the holes back in the boat).

How much you should keep in an emergency fund varies from expert to expert.  Most I have read tend to go with the three to six months of living expenses, but others are as low as simply 3,000 dollars and as high as a years worth of living expenses.  But like everything else, it depends on your own situation.  If your income is not stable or consistent, you probably want a larger emergency fund.  If you have a consistent income and stable job, you can cut it down a little.

My second step is to build a 5,000 dollar emergency fund as my life jacket for unexpected expenses.

Invest in Retirement Accounts- The oars

A well diversified retirement account, whether it is a Roth, 401k or just a normal IRA, can be the oars that take your financial boat out to sea.  With the magic of compounding interest, every dollar invested can be worth much more when you retire.  Almost every study ever done shows that up to this point you were pretty much guaranteed to earn between 7 and 11 percent on a diversified portfolio in the long-run.  And while past performance does not guarantee future results, and the recent outlook isn’t pretty, I’m still going to bet my money on over 100 years of history.

And on top of the returns on your investment, investing in IRA’s has several tax advantages.  401k’s allow you to use pre-tax dollars to invest with, while all gains in a Roth IRA can be taken out tax free.  The differences between these plans will be covered in great detail in future articles, but whichever one you choose, you can secure a great financial future by investing early and often in a retirement fund.

My third step is to max out my retirement plans as my oars to row my financial boat.

Create Passive Income- Putting up the sails

Passive income is revenue created with little or no effort from you.  It can be rent from property you own, dividends from your investments, money you make from your blog when you aren’t writing, or any other form of income you receive without working.  Passive income is the sails that will allow your boat to move while you sit back and relax.

Creating passive income is the ultimate achievement in personal finance.  The standard definition of “financial freedom” is having your passive income exceed your expenses.  It is the ability to put your finances on cruise control and enjoy the ride.

So my fourth and final step in this journey is to create enough passive income to cover my expenses.

Summing Up- Setting sail

That’s it.  That’s my plan to get my financial boat out to sea.  I’m going to plug the holes by paying off my debt, put on a life jacket by building an adequate emergency fund, use my investment accounts as oars to row, and then put up the sails with passive income so I can sit back and enjoy the ride.

In reality it is much more complex than just following these four steps, and that’s why I made this site.  You can expect all future articles to revolve around small pieces of these steps.  Whether it’s ways to cut expenses, increase income, pay off debt, or save money on necessary purchases, everything here will revolve around the principles of this site.  And to mix things up from time to time you can expect interviews, guest posts from other relevant people, questions from readers and other outside voices on ways to improve your personal finances.

Thanks for stopping by and please come back daily for new articles.  I encourage you to discuss everything posted in the comments section below and feel free to send any comments, questions or story tips to centsabilitytowealth@gmail.com.

 

 

Centsability to Wealth is scheduled to launch on 1/1/2009.