Eight Ways to Budget for Eight Budgeting Personalities

The First of the Eight Ways to Budget — The No-Budget Budget

Most people who believe that they entirely lack the budgeting gene stick to an informal sort of spending plan all the same. Say that you save nothing and always owe money on credit cards. Would it be fair to say that you keep to a budget? If you try to limit the amount of your credit card debt to $5,000 (or any other number), it would be fair to say that. It’s not a terribly effective budget, to be sure. But any rule that you follow that places a limit on your spending is a form of budgeting.

Creating a Personal Budget

We all are capable of budgeting. I hope that that comes as encouraging news to those who find money management a struggle. You don’t need to learn new skills. All that you need to do is to learn how to execute the skills you already possess more effectively. The road to effective money management is not as steep as it looks.

The Second of the Eight Ways to Budget — The No-Numbers Budget

If you like the idea of saving but you can’t stand the idea of keeping track of what you spend, this is the budget approach for you. Many effective savers never write a formal budget. They just keep in mind the benefits of saving, and thereby keep their spending under control.

I see great benefits to writing a formal budget. If you happen to be one of those people with a natural love of saving, though, this easy budgeting approach can work well indeed.

The Third of the Eight Ways to Budget — The Looking-Back Budget

With this approach, you do not write down spending categories and allocate spending amounts to each of them. You look at your credit card statements at the end of the month, take note of how much spending you directed to different types of products and services, and ask yourself “was it worth it?” When you feel remorse, you try to learn a lesson from it.

Budgeting does not have to be difficult. This approach probably does not take more than 20 minutes worth of time per month. But it does the job for a good number of Financial Freedom Community members.

The Fourth of the Eight Ways to Budget — The Pay-Yourself-First Budget.

With this approach, the only decision you make is how much you want to save. You set that amount aside before making any spending decisions, and then leave yourself free to spend the remainder of your income in any manner you please.

Family Budget

What I don’t like about this budgeting approach is its suggestion that saving must be forced. I prefer to compare value propositions, compare value propositions, to spend when spending offers the most life enhancement and to save when saving offers the most life enhancement.

That said, this is the most popular approach to budgeting. Many swear by it.

The Fifth of the Eight Ways to Budget — The Monthly-Allowance Budget.

This is a variation of the “Pay Yourself First” budgeting approach. With this approach, you first cover your basic costs of living and finance your saving plan and then allocate to yourself a specified amount that you may spend, without making any attempt to say in advance how you will allocate it to the various spending categories.

The only distinction from “Pay Yourself First” budgeting is that you identify the amount that is available to you to spend as you please. Knowing the dollar amount of your “spending money” might cause you to allocate more to saving and less to “spending money” if a number of raises cause this amount to increase to a point at which you come to feel that your spending has become profligate.

The Sixth of the Eight Ways to Budget — The Flexible Budget

You maintain a list of spending categories and allocate dollar amounts to each of them. You do not, however, check to see that you are “following” the budget on a regular basis. The assigned amounts are viewed as goals rather than requirements.

Make a Budget

I believe that assigning dollar amounts to the various budget categories is an insight-generating process. But many people are not willing to take on both the task of writing a budget and the one of keeping track of spending regularly. This is a good choice for those who see benefits to keeping a formal budget but who are not willing to spend too much time and effort doing so.

The Seventh of the Eight Ways to Budget — The Detailed Budget

With this approach, you record every dollar you spend to one of the budget categories. When you spend too much, you either move the money from another category to cover the shortfall or maintain a deficit that needs to be covered in subsequent months.

Those who follow this approach are maintaining their personal finances in the way that a business keeps its books. There are great long-term financial planning benefits that follow from adopting this approach.

The Eighth of the Eight Ways to Budget — The Life Plan

This approach goes a step beyond just keeping books in a businesslike way. This is a holistic approach, in which you see your money choices as decisions determining what sort of success you are going to have in attaining your life goals. You make an effort to see that your decisions about money reflect your personal priorities. You change your budget to change the direction in which you want to see your life headed in days to come.

How to Budget
This is my favorite budgeting approach. It takes the most time. It is also the most fun approach to budgeting. You learn so much about yourself following this approach that, after some time, budgeting no longer is viewed as a chore. When you reach that stage, you are well on your way to achieving financial freedom early in life.

Spending on Vacations

Point #1 to consider when deciding on how much to include in your personal budget for spending on vacations is that this is an optional spending category.

You must spend money on shelter. You must spend money on food. You must spend money on health care. You don’t need to spend money on vacations. You could cut this spending category to zero and continue to live a perfectly pleasant middle-class life.

Spending on Vacations

It’s something to think about if you are in a hurry to achieve a higher level of financial freedom. There are many middle-class workers who save less than $3,000 per year but who spend more than $3,000 per year on vacations. Workers in those circumstances who elected this year to save the entire amount that last year they directed to spending on vacations would gain an entire year’s worth of saving in their quest for financial freedom.

There are not too many budget categories that offer that sort of potential payoff.

Point #2 to consider when deciding on how much to include in your personal budget for spending on vacations is that a lot of people don’t have all that much fun on their vacations.

Vacations upset your routine. People get sunburned on vacations. People get lost on vacations. People often find themselves bored on vacations. Spouses often experience frictions in trying to decide what to do and where to go on vacations. Children often get fussy on vacations. They cry. They whine.

Vacations are not always fun.

Sometimes they are.

But sometimes they aren’t.

Point #3 to consider when deciding on how much to include in your personal budget for spending on vacations is that vacations almost always cost more than you expected they would cost.

If you don’t keep a budget, you are almost certainly spending more on your vacations than you think you are. I do keep a budget, and I like to take vacations. Most years, when my wife and I reconcile our budget numbers, we discover that some aspect of our vacation experience ended up causing the total amount of our spending on vacations to go higher than we anticipated it would go.

How Much Do People Spend on Vacations?

The reasons are numerous. One factor is that you cannot check out all the things you will be spending money on if the vacation spot is one you have not been to before. Another is that your guard is down when you are on vacation, so your mind goes into overdrive justifying additional spending on vacations. Yet another is that, if you are at a vacation destination that you do not expect to visit again soon, you feel strong pressure to experience everything there is to experience at that site regardless of price. You’ll never get another chance, right?

Point #4 to consider when deciding on how much to include in your personal budget for spending on vacations is that planning vacations can be a lot of fun.

I don’t think it is fair to assess whether a vacation is worth the money by looking only at the fun you have for the seven days or so that you are actually on the vacation. I very much enjoy the process of planning a vacation, especially if it is to a place where I have never been before. The fun that I have planning what I will do and see on my next vacation is part of the value proposition obtained in return for the money I direct to spending on vacations.

Point #5 to consider when deciding on how much to include in your personal budget for spending on vacations is that vacations generate memories.

I don’t like it when I spend on things that provide little life enhancement. I don’t mind spending on things that enhance my life in significant ways. There are few things that I spend money on that leave as long-lasting an impression as a good number of the vacations I have taken. I remember things I did on vacations that I took ten years ago. That’s a sign to me that I received my money’s worth from my spending on vacations in those cases.

You spend a lot on food when on vacation. And you spend a lot on hotels. And you spend a lot on tourist-type activities. But it may be that that stuff is not what you are really buying when spending on vacations. Maybe what you are really buying when spending on vacations is memories.

Point #6 to consider when deciding on how much to include in your personal budget for spending on vacations is that going to new places and taking a break from your regular routine can open your mind to life-transformational ideas.

Have you ever had a friend who came back from a vacation with a firm resolve to look for a new job? I have. Vacations can change your life.

In theory, you could achieve the same effect by taking a week off to take walks in the park and think things through. But would you?

Budeting for Vacations

If it takes a vacation to cause you to engage in the going-down-deep thinking you need to engage in to turn your life around, you might be getting a bargain from your vacation spending no matter how much you find yourself spending on vacations.

Point #7 to consider when deciding on how much to include in your personal budget for spending on vacations is that vacations can save marriages.

You know you love your wife (or your husband). You just cannot for the life of you remember why. For heaven’s sake, get about the business of planning a vacation!

Vacations are cheaper than marital counseling.

Vacations are cheaper than divorces.

A lot cheaper.

Point #8 to consider when deciding on how much to include in your personal budget for spending on vacations is that a fine vacation need not cost a lot of money.

One year my wife and I took a week off to visit tourist attractions in the town in which we lived (it was the Washington, D.C. area) that we never found time to visit during weeks when we were working.

No hotel expenses.

No restaurant expenses.

No travel expenses.

Having Fun on Vacation

A good time in which we had a few laughs and a good number of long conversations we might not have had even if we had gone on a regular vacation at which we were fussing and fretting about which destination we had to get to next, and at what time, and by what route.

Spending on vacations is worth it if you really do have a lot of fun. It’s entirely possible to have a lot of fun without spending a lot on your vacation.




Spending on Transportation

Point #1 re spending on transportation — Used cars are a steal.

In May 2000, my wife and I purchased a 1991 Volvo with 100,000 miles on it. Only in the past month did we incur our first major repair expense for this car. The car now has close to 200,000 miles on it. We paid $7,000 for it.

Spending on Transportation

Point #2 re spending on transportation — You should always have your eye out for your next used car.

My father died last year and my mother had been wondering what to do with his car. I didn’t need another car as the Volvo had been running fine (until problems came up last month). But I believe that the most important thing to know about a used car is its history. Since I know that my dad took good care of his cars, I thought it was worth buying his car as a back-up.

It turned out that the Volvo had its problems about two weeks after we purchased my dad’s car. Now we plan to use my dad’s car as our primary vehicle and use the Volvo (after repairs) as our back-up.

Point #3 re spending on transportation — Long drives can be fun.

Rush-hour driving is an obvious pain. Long highway drives are still fun, though. There were a few vacations that my wife and I went on that included long drives that facilitated deep conversations that we wouldn’t have enjoyed otherwise.

Conversations in cars can go on and on, moving from one topic to another. They’re like long walks in that way. You can find out a lot you didn’t know about both yourself and your spouse on a long drive.

Point #4 re spending on transportation — Cabs are cheap.

People think of cabs as a luxury. That causes them to resist paying for them. I think that’s frequently a mistake.

I used to have a carpool arrangement at work that sometimes fell through and left me without a ride. On those days, I would pay for a cab to get home. On an overall basis, spending on cabs produced a big savings because the few times I had to use cabs made the carpooling arrangement workable.

Point #5 re spending on transportation — Car rentals are cheap.

Like cabs, car rentals are a seeming luxury that can save you lots of money. It’s a lot cheaper to get by with one car, and occasionally rent a car for a few days, than it is to have two cars.

Point #6 re spending on transportation — Car upkeep is cheap.

Budget Cateogry for Transportation Spending

The biggest transportation “cost” is the risk you take on of getting hurt or stranded.

Point #7 re spending on transportation — Walking is cheap.

I resist getting into the car. I walk everywhere it is possible to walk. I’ll even walk in the rain before I’ll get in the car to go to a destination within walking distance.

Walking is slower, of course. The payoff is that it puts you in a frame of mind that encourages thought. Modern society is not set up to encourage thought. There is a payoff for it, though. You need to make time for it. An easy way to do that is to elect to walk when you can.

Point #8 re spending on transportation — Buses are okay in small doses.

Many people will avoid taking buses if they can. When I needed to travel to work each day, I didn’t want to incur the expense of parking in town. So I took a bus to the office.

I didn’t like the idea of taking the bus two times a day. So I set up a carpool arrangement to get me home (the two other people participating drove to the office and I contributed money for their parking costs). The bus ride would have annoyed me if I had to take the bus two times a day. I enjoyed taking it once a day.

Point #9 re spending on transportation — Car pools can be okay if you work it and if you are lucky.

Most people see the sense of carpool arrangements. The problem is that different people leave the office at different times, and it is hard to make things work. I was able to pull it off in a way that worked well. There was some luck involved in being able to do so, though.

How Much to Spend on a Car

When they work, carpool arrangements are great because they permit you to form friendships with the other participants.

Point #10 re spending on transportation — A new car could serve as an effective incentive for achieving an important Life Goal.

I’ve never purchased a new car. I’m thinking of making plans to buy one when I meet a specified level of progress in building up my writing business. I think that would be a nice way to celebrate the achievement.

One of the pluses of not buying yourself things each time you feel a desire is that, when you do make a significant purchase, it has that “special” feeling to it that we enjoy when we are young and sometimes lose when we fall into the habit of buying ourselves everything we fancy.


Spending on Food

Suggestion #1 re Spending on Food — Keep a Price Book

A Price Book is a self-prepared listing of the foods you buy that notes the highest price you are willing to pay for each of them. The idea is not to be taken in by a grocery store’s claim that an item is “on sale” when the discount is from an unacceptably high “regular” price. Maintaining a Price Book puts you in charge.

Spending on Food

Suggestion #2 re Spending on Food — Check the Day-Old Section

Most grocery stores have a day-old section. They often are in hard-to-spot places. Most shoppers walk around them. Buying stuff from the day-old section not only saves you some money. It changes your attitude about spending in the opposite direction from the way in which advertising changes it.

Advertising flatters you into thinking that you deserve the best and that nothing is too good for special you. Buying from the day-old section is humbling. The statement being made is: I can’t afford the best. That’s so. It may be that you can afford the best in some areas. You can’t afford the best in everything you buy, not if you also want to enjoy best results in terms of attaining early financial freedom. Buying luxuries can be a healthy choice. So can buying day-old bread. Let that in.

Suggestion #3 re Spending on Food — Calculate Your Cost Per Meal

We rationalize all sorts of things. I remember my mother telling me once that eating at McDonalds is cheaper than preparing a meal at home. It can be. But, if you are going about things the right way, it usually isn’t.

McDonalds prices can sound awfully low when your frame of reference is what you spend in sit-down restaurants. You should calculate how much you spend per person per meal on home-cooked meals. It is possible to get this number down to $2 or less, including drinks. It’s hard (but not impossible) to beat that at McDonalds.

Suggestion #4 re Spending on Food — Don’t Play at Appreciating Fine Wine

If you enjoy fine wine, you should buy it, at least on occasion. If you appreciate it, it’s worth the cost.

Budget Category for Food or Groceries

If you don’t, don’t play at being a wine expert. It’s an expensive game. It makes sense to buy a bottle of wine when you go out for a nice dinner. The conversation held when drinking a house win is every bit as good as the conversation held when drinking something up in price a few notches. Even moving up to the mid-level on a wine menu sets you back more than it’s worth if you can’t tell the difference.

Suggestion #5 re Spending on Food — Treat Eating Out as a Separate Category

Food is an essential. Eating out is not. So you should have a separate category covering eating-out expenses. You want to direct more scrutiny to that category.

Suggestion #6 re Spending on Food — Get to Where You Enjoy Preparing Meals

Most people don’t eat at home because they are out of the habit of making their own meals and it is just easier to pick something up. But putting meals together can be a lot of fun. Think of what you need to do to make it fun again preparing meals, and you will be on your way to saving a lot of money over the course of a lifetime.

It might mean taking a cooking course. It might mean making changes in your schedule so that you have time to prepare meals the way you like to go about doing so. It might mean learning about meals than can be prepared quickly. It might mean making it a team project with your spouse or partner.

Suggestion #7 re Spending on Food — Bring Lunch to Work

This needn’t be something you do every day. You should be sure to do it at least once a week. Again, it is a humbling thing. Once you get over your resistance to the humbling experience, you will at least see bringing a lunch to work as a viable option. Then you will likely end up doing it more than once per week.

Suggestion #8 re Spending on Food — Don’t Even Sample Convenience Foods

Budget Category for Eating Out

Convenience foods are often sold at greatly reduced prices to get you hooked. If the regular price is too high (and this is usually the case with convenience foods), you don’t want to get hooked. So don’t buy even at the sample price.

Yes, you could resist paying the higher price after enjoying the sample price. But the research shows that there’s a good chance that you won’t; otherwise, you wouldn’t be offered the sample price.

Suggestion #9 re Spending on Food — Make Drinking Special

I drink when I am at a restaurant or when I have friends over. Not otherwise. That makes drinking special. It makes it a treat.

Suggestion #10 re Spending on Food — Work This Category Hard in the Early Days

There’s a lot of money to be saved by cutting back the food category because these are expenses you incur month after month after month after month. Work this category hard until you are sure you have it right.

After you’ve worked it hard, you can pretty much forget about it. The category stays stable once you have got the numbers right for you.


Spending on Education

Consideration #1 re spending on education — The long-term payoff can be huge

Educational accomplishments open doors. Well-considered education spending provides a greater long-term return than just about any other kind of spending.

Spending on Education

It’s not just that those with a college degree are considered for jobs not available to those lacking a degree. It’s that the job you obtain by gaining a college degree puts you in the company of people going places that people without a college degree ordinarily cannot go. The degree that gets you the relatively high-level job right out of school also permits you to form contacts that down the road take you to even higher-level jobs. In the right circumstances, education pays for itself many times over.

Consideration #2 re spending on education — Much education spending provides a negative return

Please don’t fall into the trap of thinking that all spending on education is wise spending. Many young people today are uncertain as to what they should do with their lives. Because pursuing an education is a highly respected way to spend some time, many are tempted to pursue a college degree or a graduate degree for the wrong reasons. Many who do not know what work they want to do elect to go to school for a few additional years as a means of putting off the need to make a decision.

This can be a huge mistake. Education is terribly expensive today; so the direct financial cost alone can be huge. The direct financial cost is not the worst of it, however. It’s worse to waste years of your life. That’s what you’re doing if you spend years in schooling for a vocation you do not really want to pursue.

Consideration #3 re spending on education — Education is not obtained only in school

It’s often impossible to know whether you want to pursue a line of work without doing work in the field. Working in a field, even in an entry-level position, often provides more of an education about what it involves than does reading books and attending lectures.

Entry-level employment is often mocked. It shouldn’t be. Entry-level employment often offers an outstanding long-term value proposition. You learn by doing and by watching others do, and you get paid for the privilege! That’s a deal that’s hard to beat.

If you are able to obtain entry-level employment in the field in which you want to work, taking it can be a savvy way of learning about the field. If you end up going back to school at a later date, you will probably do better in your coursework because of what you learned “on the street.” And you might discover that additional schooling is not necessary. You can learn what a job entails a lot faster by doing it than you can by examining theories about it written in a book.

Consideration #4 re spending on education — Going back to school can be a strategic move

How Much to Spend on Education

What I say above is so only if you are not stuck in a dead-end job. A dead-end job is financial death. You won’t learn much. You won’t get paid much. You will be bored, and that will make you increasingly disgruntled over time. As you become less and less excited about your work, your work product will become increasingly slapdash. You may in time become all but unemployable.

If you find yourself in a dead-end job, you need to make an escape. It’s not easy to do so. Employers can smell failure and those stuck in dead-end jobs give off this smell. It’s not fair. But it’s so.

Going back to school can be a smooth move in these circumstances. You can break the chain of defeating circumstances and start feeling more confident about your abilities again. And few will care much about the dead-end job you were in for a time once you rewrite your Life Story by excelling in school.

Consideration #5 re spending on education — It often pays to do the opposite of what you feel like doing

There are some people who just love going to school. There are some who just hate the idea. It’s not infrequently the case that those who love the idea most need to obtain practical work experience and that those who hate the idea most need to get a degree.

You should not spend money on education in the way in which you spend money on vacations. When spending on a vacation, it is natural to elect to do the things you most enjoy doing. When spending on education, you want your money to add value to you as an employee to employers bidding for your services. The idea is not to take the path that is the most fun. It is to take the path that adds the most value.

Consideration #6 re spending on education — There’s a place for the liberal arts

The liberal arts are not popular today. The question that students often ask about the liberal arts is — How will that get me a job?

It’s a good question. But it’s also a question that reveals a shortsighted mindset.

The most technical skills are the easiest to replace with a computer program or an overseas worker. The skills developed learning the liberal arts are not technical skills. These are the hardest skills to replace with cheap code or cheap labor. What you learn in liberal arts courses might someday down the road become your safety net.

A liberal arts degree does not add to your immediate marketability in the way that a degree in accounting does. In the long term, however, the knowledge gained from studying the liberal arts can add more value. The most exciting and the most important and the best paying jobs are jobs that require skills obtained from a deep and sophisticated understanding of the liberal arts. The biggest money often goes to those who early in life developed skills that at the time added little dollar value.

Is College Worth the Cost?

If you are going to study liberal arts, you need to take into account the short-term marketability problems you are likely to face. You need to be strategic in your thinking. Come up with ways to get some money coming in while you develop your other skills to the point at which you are positioned to make money from what you learned by studying the liberal arts.

Make sure that you are really learning something important in every liberal arts course you take. It is easier to b.s. your way through a liberal arts course than it is to b.s. your way through most other types of courses. Many schools today seem happy to take the money of students who are not doing much more than taking up space and sending in checks. If you pay for a course and learn little, you have hurt yourself big time.

Consideration #7 re spending on education — Debt is a crushing burden

It’s so easy to justify debt incurred to finance an education. If the education leads to higher pay and the debt is quickly paid off, all is well. If the debt remains, it becomes an anchor keeping the student who incurred it from making much progress on his or her financial freedom dreams for many years to come.

It’s generally not possible to obtain an education without incurring debt. You don’t have to like the idea, however. Try to adopt an attitude of contempt for debt, an attitude that will push you to get it paid off as soon as possible. Don’t let debt become acceptable. Don’t let your acceptance of education debt cause you to become open to other forms of debt too.

Consideration #8 re spending on education — The building doesn’t come free

Budget Category for Education Spending

Going to assigned courses in a school building to learn something is the most expensive way to do so. If you need the degree to achieve your goals, you need the degree to achieve your goals. But always remember that an education obtained at little cost can pay off just as big as an education obtained at great cost. You can learn a lot about investing at the cost of taking out a library card.

So do that.

Consideration #9 re spending on education — It’s not purely a financial transaction

Learning is a challenge. Learning is exciting. Learning expands you. Learning is fun.

There are lots of Fun Units to be had obtaining an education. Education is too expensive for most of us to be able to afford to put our focus on the Fun Units that yield no financial payoff. They shouldn’t be ignored when it’s a close call as to whether it makes sense to spend on education, though. The good life is a fun life and obtaining the right education at the right time can be an awful lot of fun.


Five New Ideas for Controlling Holiday Spending

The first new idea for controlling holiday spending is to enter an agreement with your spouse not to exchange presents but instead to spend a smaller amount of money doing something fun together. You’ll spend less and strengthen the marriage more by spending the time with each other rather than by shopping.

Controlling Holiday Spending

The second new idea for controlling holiday spending is to reserve the Saturday of the busiest party weekend for yourself or for your marriage. Let friends know early on that this will be a day of reflection when you will sit before a fire with a glass of wine in your hand and think about where you are going in your life (and talk over goals with your spouse, if you are married).

You still will end up attending plenty of parties, so there will still be a social component to your holidays. But this quiet and reflective time will add an important dimension to the holiday experience that otherwise would likely be missing from it. Reflecting on what you most want to do with your life is the best way to acquire the motivation needed to save.

The third new idea for controlling holiday spending is to identify a specific non-holiday purpose to which you would like to direct your money so that you will be better prepared to resist urges to spend.

Rather than saying “I can’t spend $20 more for the most beautiful tree (which makes you sound cheap),” say “I can’t buy that tree this year because I am trying to put together $1,000 to pay for a family reunion that my spouse and I will be attending out of town in about two months.”

The reason why it is hard to say “no” to urges to spend money is that the urges are specific while the alternative to spending is a general desire to save money. Specific claims always appear more pressing than general ones. This is why journalists often open newspaper or magazine articles with anecdotes illustrating the point made in the article. Specifics have an emotional pull that abstractions lack.

The fourth new idea for controlling holiday spending is to regularly review where you stand in regard to your holiday spending plan.

Don’t wait until you have bought all the gifts you intend to buy for the year before going through receipts and adding up how much you have spent. If you learn then that you have exceeded your holiday spending targets, it’s already too late to do anything about it.

Consumerism at Christmas The key to controlling holiday spending (and other types of spending too) is regularly reviewing where you stand. My wife and I used to take a two-hour walk each Saturday afternoon to talk over all sorts of things, including where we stood with our financial plan. That helped a lot.

The fifth new idea for controlling holiday spending (for the following year) is to make New Year’s Day a day to write a budget, or to revise the one you already have, rather than simply to make a resolution to try to get spending under control. Single-issue resolutions don’t stick because they are not integrated with your other life, work and money goals. A budget will stick if you think of it as a plan for achieving your most important life goals rather than as a way to reduce spending.

Make budget-writing a celebration of the positive changes that one brings to one’s life through effective saving. My wife and I rewrite our budget each New Year’s day. We go to a bed and breakfast, spend most of one day rewriting our budget and the Life Plan that it finances, and then have dinner together at a nice restaurant and talk over our new goals and the progress we made on bringing our goals from the previous New Year’s Day to realization over the course of the year now ended.




Financial Life Planning

Financial life planning is a hot idea. For good reason. The key to success with a money management plan is achieving an integration of life, work, and money goals. No one cares about the money itself. What we all care about is the exciting things we can do with our lives if we win higher levels of financial freedom early in life. So the key to becoming motivated enough for your financial plan to succeed is focusing on how the success of that plan will enhance your enjoyment of life.

Financial Life Planning The hard part of making the pitch for financial life planning is that there are no cookie-cutter solutions with this new approach to money management. The rule-of-thumb that advises you to aim to save 10 percent of your paycheck is not financial life planning. That rule is the product of the conventional approach to money management, an approach in which all aspiring savers are presumed to be saving for roughly the same purposes. In reality, some savers should be saving 10 percent, some less than 10 percent, and some more than 10 percent. It depends on where the saver is in regard to realization of his most important life goals and how important realization of those goals is to him. With financial life planning, rules of thumb generally do not work. And that makes it a lot harder to communicate what this approach to money management is all about.

Set forth below is a description of my personal financial life plan. This plan is not one that you can apply to your own particular circumstances. That just will not work. But it may be that by viewing my plan you will be able to gain a good sense of the sorts of considerations that come into play in crafting a financial life plan for you.

This is a description of my Passion Saving plan that I wrote back in early 2002. A good number of aspects of the plan have changed since then. Why? Because my financial circumstances have changed since then. And my life goals have changed since then. It makes sense that my financial life planning ideas would have changed since then too, doesn’t it?

On the spending side, our family spending has increased to $38,000 because we now have two growing boys, have moved into a single-family home, and have experienced big increases in spending on health insurance. On the earning side, I have completed my first book and am about halfway toward completing a second, and have recently taken this web site live. On the investing side, I possess a far more solid understanding of what the historical stock-return data says about how to invest in a data-informed way as a result of all that we learned from The Great SWR Debate. Still, I believe that the words below provide a good sense of the basics of my plan and how the various elements work together. Please note how the changes that have been made in the plan in just three years demonstrate the flexibility of the financial life planning approach.

Amount of annual spending: $30,000. The $30,000 figure was made possible by our having paid off the mortage on our old home some years ago. Also, our tax liability is a tiny fraction of what we were paying in our two-income days, as most of our earnings are “protected” from tax by the standard deduction, four personal exemptions, and two child credits.

Planning Your Life

This is a number that changes for me at least once, and generally twice, a year. My wife and I schedule a re-do of the budget (which is also a redo of our financial life plan, of course) for January 1. Often, special circumstances require a touch up at least one other time during the course of the year.

There have been lots of changes since my “retirement” date in August 2000. We had less than one year of spending experience on the first child at the date I turned in my resignation, so we are still getting a handle on what all the added costs will be. The second child just came along in March. My wife had some extra hospital time in connection with the second pregnancy, so there were added costs there. I’ve had some added costs with the start of my writing business, such as paying for internet access, getting lots of books on writing and publishing, attending conferences, and such. There also were some new costs associated with a move to a new home (the new home itself was a little less expensive than the old one).

All of these costs are integrated into the budget/financial life plan as they occur. The integration does not always happen in the same way. If there is a new recurring cost, such as the need to pay for food for growing children, that needs to be added to the monthly budget figure for groceries. If there are one-time costs that are not addressed in the monthly numbers (the cost of a moving van), they need to be covered in some other way.

There are several ways of covering the unexpected costs. One is that the new home was less expensive than the old. Since my wife and I owned the old home without a mortgage, the move left us with free cash. Some of that money went to cover unexpected one-time costs incurred over the past six months or anticipated for the next six months (but not anticipated at the time the budget for the year was prepared). Again, please take note of the flexibility of the financial life planning approach.

Retirement Stash: $400,000

Annual Earnings Assumption: 4 percent. I spent a lot of time researching the question of what number to use as the annual earnings percentage on my investments. My conclusion was that a 3 percent rate was clearly attainable and that a 5 percent rate was within the realm of the possible in some circumstances (not without stocks, however).

For my personal financial life plan, I went with 4 percent. My view is that this number should vary with your personal circumstances. If I had left the work world altogether, I would have used 3 percent. If stocks had been at better price levels, I might have gone with 5 percent.

Taking Charge of Your Life

I had three retirement dates in my plan: the one I would use if I really got to a point where I couldn’t stand the job another day; the farthest-out one if I felt at the time that I would rather continue putting assets away and thereby allow for a greater measure of freedom from financial worry in my retirement; and the middle one. I ended up electing the middle one.

The reason for the three dates was that, it undermined my daily motivation to see my date for realization of my goal as being too far out in the future. I needed one date that could be achieved in just a few years to keep me focused on doing everything possible to make progress. However, I didn’t want to lock myself in to the quick date. Once I got to the first date, I felt that if now I could bear the thought of collecting a regular paycheck for a few more years, it would make more financial sense to do that.

At the time I hit the second date, we had just had our first child and my wife had given up her own paycheck. So, while she had been supportive of the plan throughout the process, she was not at all opposed to me staying at the job until the third target date. What decided things was the Motley Fool’s creation of the Soapbox site. That offered a means of making a small amount of money outside the corporate context, so I wanted to devote my full energies to that.

This is another example of the flexibility of my approach. Just as there is no fixed annual spending amount, there is also no fixed retirement target date. There is planning. I see it as essential to have specific targets because the process of picking those numbers or dates forces you to come to terms with all the issues you should be dealing with. But the benefits come from the process, not any particular dollar or date target. Once you engage in the right process to put realistic goals in place, I see it as okay to modify them regularly, always being sure to maintain the realism of the initial choice, of course.

Spouse Earnings: $4,000

My Earnings: $10,000

My wife earns $4,000 a year doing occasional work for her former employer. I have no regular income, but need to earn $10,000 a year from freelance writing (my goal was to make this career shift, not to “retire” in the traditional sense) to make the financial life plan work.

This earnings component of my particular financial life plan has its flexible side too. In the first six months of retirement, I didn’t earn $5,000 (half of the annual $10,000 target), but $15,000 (from sales of my Soapbox.com report). That “paid” for 18 months of writing freedom. When Soapbox went under in February 2001, I began writing a book and set a target completion date of January 2002, so that I could use the income from a publisher’s advance to “finance” the next year of writing freedom.

The book has taken longer than expected to complete. My new target completion date is January 2003. By then, I will be one year “behind” on my freelance writing income just as I had at an earlier time been one year “ahead.” None of this concerns me greatly. The money will come in. If there is no publishing company in the world willing to pay me a penny, I will flip hamburgers or deliver newspapers. I highly doubt that it will ever come to that. I set the $10,000 figure low enough so that I could be certain to meet that target on an annual basis without too much trouble (so long as I was willing to work at least 40 hours a week, as I expect to continue doing even past age 65). These circumstances are of course unique to me, and, thus, I would not expect to see similar numbers apply in the financial life plans of too many other Passion Savers.

I considered working at the old corporate job longer so that I could eliminate this need to produce an annual income from freelance writing. There’s some appeal to that, but I rejected the idea for several reasons. First, it delays your retirement a lot to come up with the added retirement stash ($250,000) to replace the easy annual earnings of $10,000. Second, I knew I would be doing this work whether I needed the income or not, so I viewed it as virtually “free money.” Third, knowing that I have to generate income from my writing forces me to approach the writing career in a more professional manner (while still having the freedom to turn down any unappealing assignments). It’s work I do primarily for love, but also partly for money. That’s the mix I like best.

Please note that the financial life plan does not address only saving issues, as a conventional budget might. Work issues are given important play. Investing issues are given consideration. My hopes for where I want to take my life, and when, are drivers as to what sorts of assumptions and goals go into the plan.

1) TIPS at 3.5 percent real in tax-protected accounts
2) ibonds at 3.4 percent real in non-protected accounts (not taxed until cashed in)
3) Certificates of Deposit still held from pre-retirement days (and, thus, held at higher rates than those available today–some are at 7 percent). The CDs are being phased out as they come due into other investment classes. I expect to move a portion of the CD money into stocks. If stock prices came down, I would move it all into stocks.

Stock Allocation Goal: My goal is to get to a 50 percent stock allocation. I initially made the zero percent allocation to stocks for two reasons:

Taking Control of Your Life

(1) I accumulated all of my retirement stash in a short amount of time. It was nine years from having zero in the bank to retirement date. So any stock purchases made in anticipation of retirement would not have been “for the long term.” My worst nightmare was that, one year short of my retirement date, stocks would go into a downturn. I was not counting the months until retirement, I was counting the weeks. There was no way I wanted to take the risk of losses that could put off the retirement date for years. This serves as yet another illustration of the flexibility of the financial life planning concept. Do you see how different this approach is from the conventional money management approach?

(2) Stocks were at extreme levels of overvaluation at the time I began accumulating large sums for investment. I preferred to put money ultimately to be allocated for stocks into safe investment classes until stocks could be purchased at prices closer to average valuations. That way, I can purchase many more shares for the same portion of my retirement stash. Once I find reasonable purchase points, I intend to hold the stocks for the long term (no “timing” in and out of the market).

I have maintained a binder of stock ideas. The purpose is to learn during the time that I do not participate in the market, and to not lose the sense of “being part” of the market. Participting without a financial stake is not the same, but I think it is healthier to do this than to adopt an “out of the market” mentality.

Returns: While I use a 4 percent annual return assumption, you’ll note that most of my investments do not earn a full 4 percent. The CDs do because they were purchsed at high yields (many between 6 and 7 percent) that result in a real return over 4 percent in today’s low-inflation environment.) But the ibonds are at 3.4 percent and the TIPS at 3.5 percent. I make up this difference with a technique I think of as “the personal inflation rate.” The inflation adjustment for the TIPS and ibonds are done according to government estimates of inflation. For purposes of my own records, I use a personal inflation measure instead.

My personal inflation rate is the amount that my spending goes up from one year to the next. If government estimates say that inflation is 2 percent, and my spending goes up 1.5 percent, I count inflation as 1.5 percent. Using this approach allows me to get by with earnings on TIPS or ibonds of only 3.5 percent.

I am considering a similar adjustment for when I begin purchasing stocks. I don’t want to count the gains that come from bull market extremes as permanent gains or the losses that come from bear market extremes as permanent losses. Thus, I may set up a separate set of books where I add to the stock’s purchase price some reasonable estimate of the corporate earnings for the year (but not “unreal” moves up or down). The goal is to have a better fix on the real value of my portfolio than what is provided through use of newspaper-listing prices (which are valid only if you intend to sell that day).

Bottom Line: My stash has to increase by at least the rate of my personal increase in spending for me to maintain the same level of financial independence i possessed on retirement day. If my spending were to be exactly the same after 10 years, and my stash were to be exactly the same size, that would show that I was generating enough income each year to cover all expenses and to lose nothing in the way of stash. If my spending goes up 3 percent per year, my stash must go up 3 percent a year.

Meaning of Money If I see things I would like to add to my life that would require increases in spending, I need to increase my stash at a faster pace. The personal inflation rate is not necessarily a number that goes up slower than the government number. I can push it up faster than the government number if i care to. I just can’t push it up any faster than the pace at which the stash is increasing.

Where do I get money to push the stash up faster than inflation? From earnings beyond the $10,000 minimum figure I’ve set from freelance writing. I view the book that I am writing as a capital asset. I cannot predict what income it will produce, but I believe it will produce something. If it does not, the second one will.

From a financial perspective, I view the writing career aspect of my financial life plan as a sort of oil drilling expedition. I know that every drilling venture is not going to pay off, but feel confident that one down the line will.

This is another reason why I did not want to wait too long to get started with the second career. The earlier in life I got started with it, the greater long-term gains I can expect from my “personal capital.” A freelance writing career begun at age 43 is more likely to produce profits than one started at age 63. Any year in which I earn one dollar above $10,000, that’s “free money” that can be used for a variety of purposes:

1) Luxury Spending: There were certain luxuries that I cut from my budget to get to financial independence sooner, but which I did not want to cut on a permanent basis. An example is vacations. Cutting this category allowed me to retire much sooner, but I would have viewed it as a bit of a deprivation to give up vacations altogether. So I arranged things so that, any year in which I earn more than $10,000 (most of them, I hope), there will be money for vacations. Any $15,000 year (not at all an outlandish scenario) allows for very nice vacations indeed.

2) Increases to Stash: My level of financial independence will continue to grow gradually post-retirement just as it did in the pre-retirement years. In any year in which I earn more than $10,000, I have the option of directing all of those dollars to stash. Since my living expenses have been covered from prior savings amounts, I can save at a 50 percent rate if I earn $20,000. If I earn $50,000, I can save 80 percent. Savings grows quickly at those sorts of saving rates.

3) Taxes: My tax rate will go up dramatically in years in which I earn amounts far above $10,000 (because it is so small in the years in which I do not). I sort of like this arrangement. In years in which I don’t do that well, the pain is eased with the joy of a small tax burden. In years in which I do, there is a tax burden, but I’m adding enough to my savings that it doesn’t seem like such a bad thing.

4) High-Return Investments: Since my basic living costs are covered by assets invested in super-safe investment classes, I can invest additions to stash in high-return, high-risk investment classes without incurring any significant personal risk at all. I want to see gains in the assets making up this portion of the stash, because it provides me with slack and with the funding for luxury spending, but I don’t need any set level of gains on this part of stash (or even return of the stash itself, for that matter) to pay the bills. In theory, I could put all of this on one hot stock. I won’t, but I could.

5) Charitable Contributions: At certain levels of income, I could afford to make generous charitable contributions. This is where the money will go if the stash gets high enough to cover not only all basic living costs, but all compelling luxuries as well.

New Finnacial Planning Ideas

Goals: Over time, I hope to acquire a 50 percent stock allocation at levels of overvaluation (not undervaluation) lower than those prevailing today. I do not expect to go above 50 percent unless my stash increases a lot, because I don’t want more than 50 percent of the “basic stash” amount at risk. My theory is that I can take a 20 percent loss of my assets without too much personal anxiety. If you purchase stocks at reasonable prices, the risk of a loss greater than 40 percent is minimized. A 40 percent loss in an investment class comprising 50 percent of your portfolio leaves you with a personal loss of only 20 percent.

As the years go on, I expect more of the “action” in my plan to be at the “stash plus” level. The original stash amount was intended only to finance the transition from dependence on a corporate paycheck to a self-directed career. If you are careful at that stage, you increase the prospects of having the real fun in Stage Two.

Risk: I don’t measure risk in the way that some others do. For me, the risk is not in having my investments not earn a certain return. It is that I will not get to enjoy some of the opportuntiies that life would otherwise have to offer. To this way of thinking, there was more “risk” in staying in the corporate workforce another year than in making the break when I did.

There’s also more risk in a Basic Stash portfolio heavy in stocks because that approach might force me back into paycheck dependence. All aspects of the plan (including those calling for career growth and the income that produces down the line) are lost if I give up the assets I worked for to accumulate financial independence.

I did not assign a certainty-of-success percentage to my financial life plan. I don’t say that it has a 100 percent chance of working, or 80 percent, or 50 percent or any other percent. For me, the goal was to make the shift to a different form of employment without causing my family any negative financial consequences. I don’t want my wife to have to live in a house she doesn’t like, or my kids to not be able to afford college. To meet that test, I needed to be sure that the odds of doing two things were better than they were when I had a corporate paycheck: (1) pay all the basic costs of living; and (2) allow for luxuries and spending to open up life opportuities (such as college spending).

On the first goal, I am clearly better off than most peers, since most have not saved the amount of stash that I have at this age. None of this would have been done but for the motivation supplied by the desire for the career change. So I think of my entire stash as essentially “found” money. I had zero savings before I started saving for early “retirement.” So there is no doubt for me that the adoption of the financial life plan did not increase financial risk for my family, but greatly diminished it.

On the second goal, I also believe that my financial life plan reduces risk. The risk of staying with the old job was that I would not fully develop my human capital over time. Only by becoming free to challenge myself in use of my talents can I hope to acquire real long-term wealth. The steady paycheck seems safe, but carries hidden risks if holding onto it requires you to allow yourself to stagnate.

So I am living a life of less financial risk after retirement than I lived before. That’s the key question for me. If Plan A carries less risk than Plan B, and also provides a more exciting life than Plan B, you choose Plan A. There’s no real need to assess risk beyond that.

Holistic Financial Planning The only really big risk for me is the possibility of allowing the plan to unravel. Without the basic stash in place, everything falls apart. In my mind, growth is an important, but secondary, concern. I focus on growth only after the fundamental stuff is assured.

Variations: I would not expect anyone else to follow the same financial life plan. I believe that each money management plan needs to be custom-tailored. So:

1) Someone who enjoyed the corporate job they were in when accumulating assets would probably want to remain longer and accumulate more assets before making the break;

2) Someone who began working toward early retirement at an earlier age would be able to go about achieving it at a slower pace. I had to act quickly because the chances of making my second career a successful one dropped with each passing year that I remained in corporate employment.

3) Someone not married or without kids could go with higher risk assets because, in a pinch, they could make do with less income. Thus, the ultimate risk of having to return to the workforce is less of a concern to someone in these circumstances.

4) Someone seeking to leave the world of work behind altogether would probably want to have a financial life plan calling for a 3 percent or 3.5 percent return rather than the 4 percent return assumption that I use. I haven’t yet had a problem producing the 4 percent annual return needed. But if I ever do, I have the means available to make income needed to cover any gaps (after all, there are a lot of people doing freelance writing for a living that have no stash at all). My plan cuts things close. I wouldn’t want to do that with a plan that called for the early retiree to leave the workforce altogether.

5) In times of average stock valuation, I would have at least a portion (up to 50 percent) of my basic stash in this asset class. I get that number by using 20 percent as an estimate of the highest loss with which I would feel comfortable. In today’s market, it’s hard to have significant stock participation without putting 20 percent of your portfolio at risk. In other circumstances it would be possible to hold up to a 50 percent stock allocation without much risk of a loss to the overall portfolio of more than 20 percent.

Holistic Financial Planners

6) Stock allocations would go up if there were more assets in the Super Stash category (desired but not really needed). At $10 million of stash, even an 80 percent allocation provides a great level of safety. Volatility is less of a concern as you reach total stash levels where the basic stash is not at real risk.

Those are some of the basic considerations. I’m sure there’s stuff I’m leaving out. But perhaps that gives an idea of the things I worked through in engaging in the financial life planning that helped me achieve my financial freedom dreams early in life. I help that this outlining of my personal plan will help you gain a better sense of what will be involved in putting together a plan that will work for you.

Paying Off the Mortgage Early

“Paying off the Mortgage Early”–it’s an idea with obvious appeal, but not one that many middle-class workers pursue. The reality is that it’s often a better idea than much conventional money management advice suggests.

Many money advisers are less than enthusiastic about the idea of paying off the mortgage early. I think they are wrong. It is certainly true that there are circumstances in which it makes sense not to do so. If your interest rate is so good that the bank just made a bad bet in giving you that low rate, you might want to continue enjoying the benefits as long as possible. In many other circumstances, paying off the mortgage can be a fine money management move indeed.

Reason #1 — It Provides Peace of Mind.

Even conventional money advisers acknowledge that there is a peace of mind that comes from paying off the mortgage early. Unfortunately, they often speak of the peace of mind gained as if it is something that shouldn’t count for much in the minds of those who are smart enough to run the numbers before making their financial decisions.

Paying Off Mortgage Early

I disagree. We all spend money all the time to gain access to good feelings–the excitement that comes from riding a rolling coaster, the connected feeling we get from making a donation to our favorite charity, the ego boost we obtain from sitting in a car that shines after its trip through the car wash. The peace of mind obtained from paying off the mortgage comes at a higher price than most feel-good purchases. But the good feeling we obtain from making this choice lasts a long time. I say that peace of mind is worth a lot, and those who know that they would feel a lot better about their futures if they didn’t have a monthly mortgage payment to make should give serious consideration to the idea of paying off the mortgage. Feeling good about your future is worth a lot.

Actually, peace of mind is not the only good feeling that can be obtained from paying off the mortgage. Another good feeling that comes from taking this step is the feeling of being in charge of your finances. Many of us often think of doing something to improve our financial picture, but fail to act on those thoughts. Pay off the mortgage and you have done something concrete and tangible. You will have made a difference and you will know it. That may give you confidence to take a good number of other money actions that also need to be taken.

It’s not the norm to pay off the mortgage early. So you will also feel liberated from conventional thinking if you take this step. That also can be a big plus. Pay off the mortgage, enjoy that benefits that flow from doing so, and you will begin thinking of yourself as the money expert that knows the most about what is best for You, Inc. You are! Effective money management requires a certain willingness to engage in independent thinking, and even the fact that you are considering the idea shows that you have what it takes. Going ahead and taking the plunge will confirm for you in your own mind that you are one of those willing to go your own way when necessary to make financial dreams come true.

Reason #2 — It Reduces Costs of Living.

What is the core thing you must do to obtain financial freedom early in life? You must reduce your costs of living. Paying off the mortgage early reduces costs in a number of ways.

Most importantly, it does away with interest costs. If you are like most middle-class workers, interest costs are a big item in your monthly budget. You have to live somewhere. So it is not realistic to think that you can do away with housing expenses altogether. But you do not have to pay interest costs. Those are an add-on imposed on those who elect to borrow. Elect instead to pay off the mortgage, and those costs disappear into thin air. Nice!

If you are not in a position yet to pay off the mortgage altogether, you might try paying off just enough to eliminate mortgage payment insurance costs (PMI). Doing that will allow you to enjoy in a smaller way the magic trick of making costs of living disappear and may encourage you to take bigger steps somewhere down the road.

Reason #3 — It Diminishes the Fear of Job Loss.

One of the biggest fears that trouble middle-class workers today is the fear of job loss. Money advisers tell us to put six months of living expenses away to cover emergencies. But don’t you worry at times that in the event you really do experience job loss that that will just not be enough? What if you paid off the mortgage, and no longer had to make those monthly payments? In those circumstances, the prospect of a job loss would not cause nearly as much worry.

Should I Pay Off the Mortgage Early?

There are lots of spending categories that you will be able to cut back on if you lose your job. You don’t need to go out to eat as often as you now do. You don’t need to take expensive vacations. So there are places where you can cut back if so required. But you have to make the mortgage payment, don’t you? So that one is the real source of the worry over job loss. Do away with that one, and you have to a large extent addressed your concern over what will happen to you financially if you lose your job.

The other side of the story is that paying off the mortgage early is a celebratory event. You have heard stories from the old days about people burning their mortgages, right? There was a time when the dislike of debt was such that people made a fuss over eliminating it, as they do when they make a fuss over wrapping presents for the birthdays of their friends. We need more of these sorts of celebrations to mark the progress we make in the money management area of our lives. Don’t look at paying off the mortgage just as something you do to escape worry. Look at it as something you do because you like the freedom that comes from no longer needing to make payments to the company store. Celebrate the financial freedom win you experience when you reach the point where that monthly mortgage payment is no longer one of the items on your list of Bills That Must Be Paid.

Reason #4 — It’s a Saving Goal That Provides Strong Motivation.

The conventional saving goal–financing an old-age retirement–is not a goal that generally provides the motivation we require to actually take steps to move money from the spending column into the saving column. It is short-term saving goals that work. Paying off the mortgage early is a short-term saving goal (at least compared to financing an old-age retirement). Make a decision to pay off the mortgage, and you will begin to think about how much you will enjoy reaching the goal. Your anticipation of the good feeling to come will cause you to save more than most middle-class workers think is possible. Motivation matters.

Reason #5 — It’s a Marriage Strengthener.

What cements a marriage is the things you do together, the things you accomplish over time by combining the power of the different skill sets possessed by the two marriage partners. Don’t you feel good about your spouse when you work together to make a good purchase of a new piece of furniture, first doing some research, then talking over pros and cons of different options, and finally making a decision that you know is the right one? Going through that sort of process helps one spouse appreciate the good things that the other spouse brings to the partnership.

Paying off the mortgage early is a long-term project that requires the use of a variety of different skills. You are going to need to make numerical calculations to determine where you stand. You are going to need to make decisions to cut spending in other areas to come up with the money needed to double up on mortgage payments, and so on. At the end of all this, you will feel like you climbed a mountain together. On the day the final mortgage payment is made, it will feel like you are at the top of the mountain looking out at an awe-inspiring view. You will reach to your spouse and want to hold her (or him). You will love her (or him) a little more than you did before you embarked on this adventure together.

Reason #6 — It Highlights the Benefits of Financial Freedom.

It was our joint decision to pay off the mortgage early that convinced my wife Boo of the merits and feasibility of our plan to seek financial freedom early in life. In my case, it was a job loss that got me thinking about this stuff. But I would not have made the progress I did in the time I did without an awful lot of help from her. It was the mortgage pay-off that got her on board.

Why? Because she needed to see something tangible to understand that financial freedom really is attainable to middle-class workers early in life. I had talked to her about financial freedom many times and the words were just words. When she reached the point when she no longer had to make out a check to the company holding our mortgage, that was not talk. That was real. From that day forward, she was a believer. That made a big difference.

Reason #7 — It’s a Safe Investment.

Money directed to paying off the mortgage early pays a highly predictable return–the reduction in interest expense achieved by doing so. At this time of overvalued asset classes,  that’s something not to be overlooked. You know you are getting a nice return on your investment when you use it to pay off the mortgage.

Reason #8 — The Tax Deduction Is Often Oversold.

Pros and Cons of Paying Off the Mortgage Many do not pay off the mortgage early because they do not want to give up the tax deduction available to those who make mortgage interest payments. That’s an important concern. The reality, however, is that many do not obtain as much benefit from the tax deduction as much conventional money advice might lead them to think. If you do not itemize your deductions, you don’t get the benefit. If you are subject to minimum tax rules, you might not obtain the full benefit. You need to check your circumstances to see if the availability of the tax break really justifies a decision not to pay off the mortgage.

Reason #9 — It Fosters a Low-Spending Mindset.

We all rationalize spending in this Consumer Wonderland of ours. One way we rationalize is to compare the costs we incur with a new expense with the other expenses we are incurring for other things. Did you ever find yourself saying “Yes” to a $3 charge for a bottle of water because it is being offered at a baseball game at which you have already incurred a big expense for tickets and for parking and for food?

It’s harder to get serious about cutting back in other spending categories when the amount you spend on housing is so high. Pay off the mortgage and all of those other “small” (compared to the mortgage) expenses begin to look not so small afterall.

Reason #10 — It Simplifies Money Management.

There are all sorts of complexities involved in hanging on to a mortgage. The most important one is that the big number in your budget category for housing expenses makes it hard to keep a firm grasp in your mind on how much you need to earn to keep body and soul joined another month. Get the total monthly number down, and the entire money management project becomes a lot more, well, manageable.

Is the peace of mind (and all the rest that goes with it!) that comes from paying off the mortgage early one of the New Luxuries made avaiable to middle-class workers of today as a result of the Productivity Bonus we have all enjoyed in recent decades? I say yes.

David Bach and the Realities of Writing a Budget

David Bach argues in his book The Automatic Millionaire that budgets are not generally such a hot idea. I don’t agree. But I do very much like the argument that Bach puts forward to support his case.

David Bach and the Realities of Writing a Budget

Personal finance advisors have been telling people for a long time that they need to set up budgets so that they know where the money is going and so that they can plan effectively. It’s advice that makes perfect sense, of course. Have you ever heard of a business that failed to set up a budget? If the budget concept is so critical for businesses, it follows that it could do a lot of good for individuals and families too, does it not?

Yes and no. The problem with the conventional advice is that it ignores the reality that individuals and families are in a fundamental way differentfrom businesses. In a business, there is an accountant who is paid to set up and maintain the budget. There is no such person in the individual or family household.

The Job Does Not Get Done

This is a difference of great consequence. Since no one gets paid to set up and maintain the familty budget, the job does not get done unless there is someone in the family who finds the task pleasurable in some way. The motivation for the accountant keeping the business budget is the paycheck he or she receives for doing so. The motivation for the person keeping the individual or family budget is–What exactly?

The motivation is to be able to retire at age 65, or to be “responsible,” or just to know that one is getting ahead financially over time. Those are all good strong reasons for keeping a budget. Still, they don’t cut the mustard for most. David Bach is right to point that out in The Automatic Millionaire. Most of us have lots of things going on in our lives and, as good as these motivators sound in theory, in the real world they don’t often pull us away from the other things that need our attention and get our backsides down at our kitchen tables filling in the rows and columns of spending categories and spending allocations that comprise a personal budget.

Budgeting is a good idea. But it’s a good idea that doesn’t work for most. David Bach is on the right track in acknowledging that reality.

David Bach Is Upfront About Budget Realities

What I like about The Automatic Millionaire is that it is upfront about this reality. Bach says that it makes sense to acknowledge that you are probably not going to maintain a budget and thus argues that it is best to find some other means of making the saving happen. I like it that Bach’s book puts the practical reality above the theoretical appeal of the budget concept.
Creating a Spending Plan

That said, I think personal budgets are too powerful a money management tool for middle-class workers seeking financial freedom early in life to give up on them. You need a personal budget. You need to take account of the practical realities noted by David Bach. But you don’t want to accept those realities as applicable to You, Inc. You need to overcomethose realities.

The trick to budgeting in the real world is directing the personal budget to some savings goal that matters a lot to you and that you expect to realize within five years time or less. Write a personal budget for your age-65 retirement when you are 30, and David Bach is right–it ain’t likely to produce much in the way of results. But writing a personal budget so that you can make that career change you have been dreaming about for several years now, that just might work!

It worked for me. And it has worked for lots of other middle-class workers saving for more immediate saving goals than the financing of an old-age retirement. Businesses don’t write budgets to achieve goals 10 or 20 or 30 years in the future. They write budgets to guide them toward realization of goals that will make them more successful in the near-term future. That’s what you should be doing too.

We Need a New Kind of Personal Budget

David Bach is right to be skeptical of the merits of the conventional budget. Too many have failed for personal finance advisors seeking to provide genuine help to middle-class workers not to take note of the reality. I think he is wrong to give up on the budget concept altogether, however. What we need are personal budgets crafted to achieve saving goals of intense personal significance. We need turned-on budgets helping us achieve our most important life goals, our life’s passions.

Spending on Charity

I’ve made a decision. I need to give more to charity.

My concern about how much I give is voiced in an indirect way on Page 221 of my book, “Passion Saving: The Path to Plentiful Free Time and Soul-Satisfying Work.” Following a table showing what my family spends on all of our various spending categories (the amount shown to be allocated to the Charity category is $75 per month), the following words appear: “For the past few years, we have been able to make an additional  amount specified above.”

Spending on Charity

$75 times 12 is $900. Add $500 to that, and you have a $1,400 annual amount for contributions to charity for the Bennett household. Is that enough?

Focus on the fact that I had zero income in 2004 (I was finishing work on “Passion Saving” and researching my second book, which will be on what we learned from The Great Safe Withdrawal Rate Debate) and that I bear financial responsibilility not only for myself but also for a stay-at-home mom and two small boys who I would like to see go to college, and it sounds like maybe that is all that my wife and I can afford to give at this particular time in our lives. Focus on the fact that we enjoy a net worth large enough to permit me to spend a year polishing and researching books while there are no wages coming in, and I think a good argument can be made that it is not.


Should the Needy Pay the Price?

The charity question is a paradoxical one. When you are pursuing a saving goal that you care about intensely, the natural tendency is to cut spending on goods and services to the bone. You incur no real sacrifice doing that because it is the person giving up the goods and services who gets to enjoy the financial freedom benefits tapped into as a result. If I cut back on the amounts that I give to the needy, however, I am havingthem pay the price of me seeking quicker realization of my Passion Saving goal. Is that right?

To some extent, I think it is. If I am able to make a success of my writing business, I will be able to make contributions to charity in the future far larger than those I was able to make in my free-spending days, when I was giving a good bit more than I give today. Anything I earn above $10,000 is essentially “free money,” so I can give a lot without it hurting much at all. So I think it makes sense for a Passion Saver to cut back on contributions to charity for a time as a means of speeding up the transition to a time when he or she has greatly reduced his or her dependence on a corporate or government paycheck.

It’s dangerous to take this sort of reasoning too far, however. Passion Saving works because it is not a miserly approach to money management. Following the conventional Sacrifice Saving approach to money management makes most of us feel small and cheap and tight. That’s why our vows to follow the conventional rules don’t usually take. Passion Saving is different because it is a money management approach in tune with the generous spirits that most middle-class workers either actually do possess or at least aspire to possess. Our goal is to live richer lives, not cheaper ones!


The Miser Trap

Budget Category for Charity Spending

Get too carried away with the “I’ll give to charity later, when I can afford to do so” line of thinking, and you risk falling into the trap of thinking like a miser and not too long after thatfeeling like a miser. That’s not the way to go.

What is it you “buy” when you make a contribution to charity? There’s no material good you enjoy. There’s no service provided to you. What you “buy” is a feeling, a feeling of being connected to others in the world less fortunate than yourself, a feeling of doing your part to keep the human project going forward not just for yourself but for your fellow travelers through this valley of tears. You can get along just fine without a lot of the goods and services that a lot of us enjoy in this consumer wonderland of ours. I question, though, how well you can get along without that feeling of connection that comes from reaching into your pocket for the benefit of those who haven’t had quite so many of God’s blessings handed to them in this life.

The Charity category is not like most of the other budget categories we rework when putting together an effective saving plan. With most of the others, we can make serious cuts without feeling any real sense of self-denial. With the Charity category, however, because it is not spending directed at the upkeep and pleasure of the self, even temporary cuts that go too deep can lead to losses (spiritual for sure, and perhaps even financial if the spiritual losses grow too large) of a serious nature.

A Rich Life

I believe that I have created a pretty darn rich life for myself. To make sure it stays as rich as I want it to be, I need to do some work getting that Charity number up a bit. Otherwise, I run the risk of over time becoming a true miser and coming to feel not rich at all.

I’m not taking the chance!