financial zen

The Rule of 72 has been mentioned on Personal Finance blogs before - and by no means should we forget it!

This simple rule is how long it would take your money to double at a given interest rate by dividing the interest rate into 72. The link above is to a handy calculator if you don’t think you can handle the math (and when you are dealing with 5.06% interest, it’s understandable you may need some help!). Initially, it seems like a pointless calculation - unless you start hearing people discussing doubling your money (or you’re wondering how much interest you’ll be needing in order to double your money by a certain time - maybe you’re saving up for a vacation, a car, or something similar?)

I’ll be revisiting this rule in the near future!

The real measure of your wealth is how much you’d be worth if you lost all your money. ~Author Unknown

As I wrote about the fundamentals of personal finance success - and the fundamental truth of saving more than you spend to reach wealth, it’s important to recognize what that exactly means.

You can save all your money, live in your car until your debts are paid off, live at home and mooch - basically you can spend as little as possible now so you can have a lot of money in ten to twenty years, sleeping on a couch, eating ramen, and walking everywhere.

Or you can buy a car, live in an apartment, make your own lunch, buy used, and spend less than you earn. You can still have an occasional night out, party on occasion, go to Europe - it just means being mindful with your money. But how can you do this on a limited income?

Very easily. Cut out the unnecessary expenses. No cable, no memberships, no magazines. Okay, you want cable? Get basic. Skip the DVR package and the “VOD - only $10/month!” ‘deals.’ Go to the library. Read more. Go to the park to jog. Pick up some used weights on ebay or craigslist. The point is - be frugal not cheap. You don’t need a huge house that you can’t afford - I don’t care if you think you can afford it in a few more years, that’s moronic. If you knew tomorrow you were winning the jackpot billionaire lottery - but only made $26,000 a year now, and you were thinking of getting a new car/house/xbox/whatever - treat it as if you only had the $26,000. Oddly enough, I heard someone talking to a friend at an old apartment (back when I made $11/hour as a trainer):

You do not go out and buy a Bentley because you think you deserve one. You do not buy one because you think you can afford it in a year. The car does not make the player! When you are set, you will know you can buy the Bentley outright because you can get it if you want it, not because you need it.

There be wisdom in these walls! The guy who said it made a decent living in a factory, drove a convertible, and lived in off-campus housing. Cheap housing that allowed him to buy the material possessions he wanted. Not necessarily the best move financially, but wiser than buying a bentley, a mansion, and maxing out credit cards to give the illusion of wealth. You earn your lifestyle, you don’t choose it.

No doubt everyone’s heard of the guy who tried to flip houses by lying on his credit applications saying he made more money (which they made no effort to check or clarify, either). Here’s a stripper in 24 million debt because she wanted to quit her life and find a new way - and instead of researching she signed her life away, ruining her credit while the brokerage got to inflate housing prices. Do not be duped by easy money. There is no such thing.

Let’s look at it this way - you want to retire rich? Then set aside some money now.CNNMoney has a useful retirement calculator to help figure out how much money you want to live on and when you want to retire. There are a lot of factors involved, and it’s something you should always be working towards - so don’t think your plan is set from day one - it’ll need constant nurturing, but as you watch your retirement fund grow, you’ll realize it’s worth it. Just don’t put off your life until then - I’ve met many an old couple that says they wished they spent more money when they were younger to travel and do the things they can’t do because of their age - and seldom have I met an old couple that regrets traveling or managing their money for trips.

Just remember - manage your debt, spend less than you make, and focus on your long-term goals while keeping yourself satisfied and happy in the present. A delicate balance, but one that you (your loved ones) will enjoy!

(Read more stories of how other people paid off debt at Chris Pirillo’s blog)

It seems so simple, but I know a few people that don’t, so perhaps it’s time to iterate:

You NEED a budget. You NEED to track your spending.

I don’t just mean read over your bank statement, or check your credit card bill.

Follow these simple steps:
Use this calculator and figure out your monthly income after taxes.(I got it from Miss Mini-Ducky)
Plug it into this calculator and get a rough budget.
Make an excel spreadsheet (or use quicken) and enter in ALL your receipts. I really mean all. Your coffee, your McDonald’s, your gasoline, your cell phone. Plug it all in. Categorize it (Food, Auto, Rent, Utilities, Pets, Kids - you can be as specific or as vague as you want -it’s *your* tool).

I suggest using the budget from the calculator as a guideline - use it to give you some rough numbers to guide yourself along and perfect your budget.

We did this for April, and it’s quite an eye-opener. It was on my “ToDo” for 2007 and I saw how horribly we were aware of our expenses - we ate out WAY too much, we put way too much on our credit card.

I ran through our statement, and I see why - luckily, the majority of the credit card was on computer parts (I built a system for Dad - he reimbursed me, the check was sent straight to the card).

One thing we did do this month - I have a UPromise Citicard. A *fraction* of every purchase (especially groceries and local establishments, including bars!) go towards my student loan. We’ve devised a system where we use the card to pay for groceries/food and when we get home, we enter the amount into our budget spreadsheet and I write a check through my online credit union to AUTOMATICALLY be sent that night to pay it off - the money is gone that night, the card is paid in full! So it’s win-win, I get a % to my student loans, my card gets used, and we pay it off!

Problems with our budget:

• I don’t account for external incomes. Side-jobs, ebay, my wife’s job, etc. aren’t included in our budget, which makes it much more conservative then it needs be (so if we’re over budget by $50 - it’s BAD but not HORRIBLE).
• We also discovered our eating out habits is responsible for a huge decline in income. We saw the effect one and a half weeks in and cut out dining out the rest of the month - much to our benefit! We also are starting to research local prices to see where we can get the best deals (who has the cheapest bread, eggs, milk, etc.)

Improvements to the Spreadsheet:
I’m looking for other’s spreadsheets before I post mine to incorporate others improvements. Ours is pretty simple - written in Excel Office 2k7 - with mostly simple layout and design. It’s my goal to have it be our one stop shop for budgeting, I still use Quicken as a “whole picture” view, but I’m finding it to be bulky and annoying - I haven’t given up, I just need to learn it more thoroughly.

Anyone else find a useful method for budgeting? Any “must-haves” or “good to knows” you’ve come across?

Related (via The Simple Dollar):
Tips on making a budget
Why you should make a budget

I hate guessing taxes on my wife’s paycheck.

I do. I hate estimating, guesstimating, et al. with taxes (I’m still learning to master them!)

Luckily, Ms. Ducky has posted a calculator that will do the work for you!

I’m plugging through my wife’s numbers to get a rough idea, it’s a cool tool to utilize!

I came across this Spending Plan Online Calculator from Crown Financial Ministries which assists in setting up a budget - you enter your yearly salary, tithe, and taxes, and it spits out a budget. I came across this on either Google or another blog, sorry I can’t remember which!

An *excellent* tool in starting up a budget. I’m using it as a basis for a spreadsheet to help share the state of our finances with my wife (she’s the pen-and-paper budgeter, I’m all about Excel/Quicken - and possibly Mint, once the Beta opens up!)

It’s a very good *start* of a budget - it breaks it down by percentages. What I did was plug it into Excel and start comparing my expenses to it’s assumptions - I’ll update it the beginning of March to see how we did!

EDIT: Actually, there are quite a few good tools on the site! Visit and click around!

I read once on Lifehacker about using the snowball calculator to pay off debts. (Or was it at Get Rich Slowly? I don’t know - they both reviewed the same method)

Yup, the Dave Ramsey method.

This works by gathering all your information, and I suggest using this calculator.

Select your number of debts (mine was 5, currently)
Setup a minimum amount per month you are willing to devote to this (I chose $1000 - a conservative estimate, really)
And which way would you prefer to snowball? Interest or balance? - the great thing about this calculator is you can compare them both and see which way you would benefit the most.

Instead of doing it by the “emotional” method of paying the lowest off, I’m doing it by interest rate - I stand to save more money that way (~$200 in the long run). Of course, this is assuming I’m not going to have any purchases made, any increase of debt, or any changes in income - no doubt with a baby on the way the changes will be coming - and when my wife and I get a house purchase in order - the mortgage actually shouldn’t affect this plan - I’m establishing this as if we are all ready paying on the mortgage.

Has anyone else used this method? What are your experiences with it?