Setting achievable financial goals, part 1


I’ve heard many times that the secret to getting things accomplished is to set goals and achieve those goals. Well, just setting goals is far too simplistic, because as humans, we all have the tendency to oversimplify the thinking required to achieve something difficult and meaningful. For example, when my kids want to buy something, they generally look at the price, say $100, and think “I’ll be able to save up $100 by the end of the month because I’ll just really work hard and save the money”, then they announce to their family and friends that “I’m saving up to buy this $100 thing”, when in reality they’ve taken virtually no steps toward saving except deciding that it would be great to have one. Nearly every single time, the kid gives up after a few days and forgets about the whole thing because they didn’t take the steps necessary to achieve an ambitious goal.

roadAs an adult, I’ve learned that setting an ambitious goal takes thought and deep planning. For example, I’ve done some fairly extensive road trips in my lifetime, crossing the country on motorcycle and numerous car and van trips. A novice traveler may decide to go to Atlanta, lets say, then pull up their GPS, punch the destination in and announce that it’ll only take 9 hours to get there. If they leave by 8 in the morning, they’ll be there by 5pm! No need to figure in hotel costs, dinner costs, time spent at rest areas, and numerous Starbucks breaks! Yeah… It doesn’t work out like that. Taking a trip to Atlanta takes far longer than the 9 hours the GPS says, and from my years on the road, I know that it’ll take 2 days to get there, so you might as well pack a well-stocked cooler with food and drinks, comfy blankets, clothes for the next day, and plenty of music and money for the trip.

Same thing with financial goals. An person with little financial experience will tend to oversimplify a complicated goal. Saving up to buy a $5,000 car, for example, isn’t as easy as putting $300 back each month until the goal is achieved for most people. To begin with, they have to come up with an extra $300 each month to put toward their new car fund, and odds are, that wont necessarily be as easy as they assume it’ll be. They they have to be able to use a budget to make sure they don’t spend that extra $300 they’ve worked for on something trivial and mundane. Thirdly, they need to move the $300 into the savings account and not let it sit in checking (where it’ll be more inclined to be used on other purchases). Lastly, and this is what tends to hurt people the most, they have to be able to resist the urge to spend the car savings account on other things. When it starts getting up there, like $2,000 and higher, the urge  to treat yourself to a nice sushi dinner or to get that upgraded sports cable package. Sitting on that much money tends to burn a hole in people’s pockets and that thwarts many a well-begun plan.

lp400s35Another sure-fire way to cripple your goal setting prowess it by reaching too far. When I was a teenager, buying a Lamborghini Countach was my life’s goal. It didn’t matter that the price for one was close to $250,000. I decided I wanted to own one and I’d figure out a way to get one. Well, life happens, and with 10 children and mortgage to worry about, that hot red Lamborghini just doesn’t look like its gonna happen anytime soon.1985 Chevrolet Camaro Z28 IROC-Z My goal was too far ahead of my ability and isn’t realistic. Now, I could set my goals on something else, say that blue 1986 IROC-Z that I’ve always wanted, and figure out a way to get one by the time I’m 50 (perfect age for a guy to own a car like that, I might add). That’s a goal I can achieve within my financial constraints and retirement goals, and would be within my ability to realistically plan on purchasing with proper planning.

In part two, I’ll go over ways we can stop the cycle of killing our own goals, and actually go about achieving our money goals.

Adventures in Budgeting

One of the core tenants of good personal finance is operating with a budget every month. Back in the day, before I aspired to be a personal finance nerd, I had heard of a budget, had heard that it was a good idea, and supposed that it was something I should look in to, but just hadn’t gotten around to yet. My parents never had a budget, I didn’t know anybody that had ever used one, and saw the people that I knew getting along with life well enough, so I kept putting the research off, with no idea what I was missing out on.

Few people operate with a budget in place, and we only have to look at our own United States Government to see a prime example of not bothering to respect a budget. It seems that the US government sees a budget as more of an idea, or a rough draft of what a project will cost, or how much a policy will affect the US bankroll, rather than a set of monetary rules that were jointly agreed to and need to be respected. The term “over budget” is so often used that it seems like its normal and natural to run over a budget, and to see it’s limits on spending more as a “nice idea”, rather than a hard stop.

After deciding to get in the game with my personal finances, a budget was the first thing that I learned about. It is the first line of defence in the war against financial ruin. I looked at lots of budget templates, and my financial hero, Dave Ramsey, offered paper-based budget templates in his books that are able to be printed and replicated as much as needed. I also looked at lots of spreadsheet-based budget templates, and they all have pros and cons to them.

My wife and I decided to give Ramsey’s paper budgeting sheets a good solid go, and had mixed results with it. We sat down at the end of the month to plan out next month’s budget, but were really bogged down with how much detail that Ramsey’s budgeting templates had. For example, it took us too much time to try and put a figure to next month’s clothes for the kids, then for my wife, then for me. After that, we had to decide how much to save for future clothing purchases. Then we had to plan, in detail, our car repairs, and future car repair savings, and future car purchase savings, and on and on. It was so detailed that we wound up being confused with how much to budget for each item, and it became very hard to reconcile the budget at our weekly budget meetings, and was abandoned after about 3 months. Strike one for budgeting.

Not wanting to give up on budgeting, but being thoroughly finished with a paper-based budget, we gave a go. Its an Internet-based budgeting tool that allows as much or as little detail as one needs, and does the arithmetic for you, as any good computer application should. I immediately purchased the “Plus” package which links your checking account to the budget, allowing you to drag and drop each transaction into its respective budget category, but this proved to be a bad move. Because I have my business checking, short-term savings, and long-term savings linked to my bank login, showed every transaction that I did, not only my personal account, but my business as well. Because every transaction, including business ones showed up. it became very confusing to try and remember if a transaction was a business income or expense, and should not be reconciled with my personal budget. This lead to frustration because I had to weed out transaction types, and I made some mistakes, which meant that I was messing my budget up. After about 3 months, I stopped using it because EveryDollar was unable to pull 3 weeks of transactions and I was frustrated with it. Strike two for budgeting.

Two months ago, it was killing me not to be using a budget, and my wife and I were in constant money fights. We both knew that a budget would really go a long way toward stopping our money fights, and we were feeling out of control with our finances, so I decided to give it a 3rd go. Again, I looked at all the budgeting options, and settled again on, but skipped the paid version, so I would have to input each transaction manually. We had a budget meeting, put every projected income into the system, every projected expense into it, and our debt elimination goals for the month. I use a spreadsheet that I developed to balance my checking account, and was able to come up with a system to track which transactions I reconciled with the budget, and which ones needed to be reconciled and categorized using colored cells.

We also decided to simplify our categories, lumping groceries, toiletries, household goods (soap, etc.), and home repair items into one category, rather than each of them on their own (and subdivided). This was done because it was impossible to remember how much, for example, a Walmart transaction was groceries, how much was toilet paper, how much was shampoo, how much was replacement cabinet hinges, and so forth. We generalized much of the budget in that way, which made it far easier to reconcile the budget, and greatly reduced the frustration level of our weekly meetings.

So, how has the first month gone you ask? Well, we underestimated the income, which is always a good thing. However we underestimated things such as groceries (we ran $250 over), school fees (a field trip came up for the kids that we didn’t know about and cost $100 not in the budget), and find that we need a “general costs” fund that covers things we can’t think of, mostly things for the kids that always seem to come up like birthday parties and the like. We have had some money fights, with me being the finance nerd, and she being the free spirit. We both agree, however, that we have fought less about money that in the months proceeding Budget v.3.0, and are both committed to keeping it up. As long as we both agree on the spending and both reconcile the budget, money fights become obsolete. Keeping ourselves within the budget will require more work and effort, and we did a pretty sloppy job of it, but will no doubt improve.

Budget newbs, I’d love to hear how your early budget experiments have gone for you, and how more seasoned budgeteers have been able to make it a success. I’m looking forward to posting our success (or failure) of month #2’s budget.

The financial wasteland that was my finances 5 years ago. 

I grew up with a father who ran (and still runs) a very successful and profitable business. He has always had his personal finances and fortunes tied very tightly to his business’s well-being, and because he’s a good businessman, that has worked out well for him. He has 100% of his retirement tied into his business, and is quite secure in it. 

Because I saw that being modeled, I naturally grew up thinking that was the way things needed to be for me too. Start a successful business, grow it, keep investing in the business, and it will be my retirement plan and savings, growing all along. I’ve started many businesses, and am self-employed today, but none with the success I see in my father’s companies and none of my businesses have the remotest chance of being a source of retirement savings and income for me. When I’m not working, my businesses stop making money, and they would fail if I tried to draw a retirement income from them. 
When I realized that I’m not getting any younger and my ideas of retirement were very different from the ones my dad was enjoying, I got very discouraged and started thinking that I would never be able to retire, no matter how hard I worked. Because I never educated myself and was never taught the ideas of retirement savings and compound interest over time, I became convinced that I had missed the boat on retirement back in my 20’s and I was too late to be able to save or invest any meaningful amount into savings for retirement. I also carried a large amount of debt and was facing a divorce and child support payments that were already forcing me to work two jobs just to keep afloat. Lots of reasons to be discouraged about my retirement ideas that I was starting to see on the distant horizon. 
In my mid-30’s, I had:

Tax debt of more than $30,000

Credit card debt of more than $4,500

Child support payments of $950/month

House payment of more than $1,100/month

And a mess of other smaller debts and costs per month that were keeping my finances in a real bind. 
Things were looking bleak for my future and I was feeling overwhelmed and hopeless. I know I’ve referenced Dave Ramsey many times in my blog, but he really is the one who opened my eyes to personal finance and how, using a series of intentional small steps over time, I could climb my way out of my financial nightmare and begin dreaming again. His book, The Total Money Makeover, changed my life, and my family’s future. I’ll go in to details later on. 
Personal finance was a mysterious thing that I didn’t understand and didn’t think would be much use to me because I thought I could never have the finances to use strategy and planning. I was 100% wrong. When assets are low, is when personal finance strategies are their most useful and important. Not to mention how interesting and heartening it is to see how using one’s money wisely, you can lift yourself out of debt and poverty, and have a plan to build wealth. 

Harvard agrees that the Debt Snowball works best. 

I have personal experience showing that the Debt Snowball works. It provides the necessary simplicity and motivation to help people see their ability to pay off their debts in a much shorter span of time than they ever thought was possible, and Harvard now agrees. 

Although the article was kind of tough to read because of all the rediculous sharing options that kept clogging up the page, only about 2/3 of the screen could be used for reading the article, the rest was clutter encouraging me to share the article, it was still worth the read. The article gives ideas to help clean up your inbox from subscriptions that are probably clogging it up and causing you to shop, and thus waste your money. It also lays out the Debt Snowball plan with some basic spreadsheet undead. Nothing groundbreaking there. 

Still, if you have a few minutes to do an easy read that is well written and informative, take a look.