2010 Financial Focus: Prioritization

Over the past couple years I’ve become very conscious and deliberate with how I manage my money. Even when I don’t make very much (tutoring 6 hours a week during the school year doesn’t equate to a very big paycheck), my financial habits help me get a lot out of what I do make.

At times though, my frugality threatened to become a little bit too much, past the point of sound money management and closer to self-deprivation. I would basically try to save money on everything I did, which is good for your savings but not so much for one’s morale. For 2010, I’m trying to move more towards prioritized spending and away from universal penny-pinching. In other words, I want to pour more money into the things I really care about and ruthlessly cut back even more on the things I don’t (Ramit’s idea of conscious spending has been a big influence on my changing mindset).

Most of us don’t make enough money to save, pay off or avoid debt, and spend randomly on every whim that tickles our fancy. Many Americans default to option three while completely ignoring the first two. Then they stand around scratching their heads when they get a foreclosure notice. The other extreme, where we have huge bank accounts but no life, isn’t much better. If you’re on financially stable grounds yet refuse to turn on the air conditioner in July, you have a problem.

The best solution, then, is to save for the future while prioritizing effectively in the present. Most rational people should do this to an extent, but we can do it a lot better if we explicitly give it our attention. For 2010, there is one key area where I want to consciously spend more without feeling guilty about it:

For as long as I can remember, I’ve had strong feelings of wanderlust (very typical among many people , especially those in a state of endless cornfields). As a kid though, you’re at the mercy of your family when it comes to traveling, so it doesn’t require much personal decision-making. Not anymore. I realized this as my roommate and I were planning our road trip for last spring break, and my desire to go out and explore the world greatly intensified.

This year I have one semi-big trip planned, a camping and backpacking journey to Sedona, Arizona over spring break with one of my best friends. The backpacking part will be my first such endeavor, so there’s a lot of planning involved. I’m a planner by nature though, so this is one of those instances where planning and anticipation is a huge part of the fun.

I find it somewhat ironic however, that backpacking, as an outlet to temporarily get away from society, reconnect with nature, and survive with basically only the essentials, is quite an expensive hobby to pick up. Thankfully my friend’s dad is willing to lend us a lot of the gear we need, but what I have had to buy so far (backpacking boots and a 90 liter bag) hasn’t come cheap. I can already tell that it’ll be well worth it though. I joked with my friend that we’ll probably spend the majority of the 20+ hour drive back to Iowa deep in discussion on where we want to go next.

In order to invest more resources in traveling, and more specifically this one trip, something has to give. It should be obvious that I don’t plan to compromise my long-term financial objectives, so I need to eliminate spending elsewhere (given that my income will likely be fixed until summer).

My expenses are already low in most areas, but I think I can be even more meticulous with my spending in my day-to-day entertainment (eating out, drinks, movies, etc). Like I said, I don’t spend all that much in these areas as it is, but I could still cut more for the sake of saving for my trip. I don’t want to be a scrooge who refuses to ever spend a dime out on the town, but I’m certainly not going to eat out multiple times per week and buy a 24 case of Bud Light every weekend, as some of my peers do. Spending liberally on these things isn’t a prerequisite for having a good time, and in the end I’m going to get a lot more satisfaction out of camping under the Arizona sky than I would by consuming a copious amount of beer every weekend.

In addition, I’ll continue driving my Civic like a grandma to save gas and using my far outdated LG flip-phone. It feels like I’m one of the few who still relies on a real computer to check emails and update my Facebook status, but for now I can survive with my cheaper phone and basic contract. After all, even though my grandparents have trendier phones than I do, it still makes and receives calls perfectly fine.

You can’t have it all, but we can do a lot better with the resources that we have simply by giving a little thought to how we utilize them. I plan to update my progress throughout the year.

Emergency Fund Goal: Almost There…

Early this year, I recorded a simple financial goal: by December 31st, I wanted to have $1,000 in my ING emergency fund. At the time, I had about $500 and change in the account. Now, with a little over two months left in the year (and, if you can believe it, the decade), I’m less than $75 away from my goal.

Some things I’ve learned along the way:

1.) Having an emergency fund (even a small one), really does give you some peace of mind. We all worry about our transmission conking out, a huge medical bill, or losing our income,  but we need not worry as much if we have money set aside specifically for these possibilities. Unless you are an exceptionally lucky person, these sorts of things will happen at some point in your life. We won’t know when, but we can be ready.

Many people have enough assets to cover a minor crisis or two, but for many this entails raiding a retirement account. Since this is essentially stealing from your future, and you get slammed with taxes and penalties to boot, this only adds insult to injury in an emergency-type situation.

2.) It’s also a good idea to have a miscellaneous savings account for unexpected expenses. This account can cover untimely cash outflows that aren’t exactly a full-blown disaster; speeding tickets, broken windows, or a towing bill after leaving your car in the street during a snow ordinance (guilty here). These things all suck, but they aren’t emergencies in the way that being laid off is. If a legitimate crisis is present, you will know it. Otherwise, don’t even think about touching that emergency fund.

3.) A 1.3% interest rate blows. It’s disheartening. It makes me disgusted with our drunken-sailor monetary and fiscal policies that are killing the dollar. Not too much we can do about this though; an EF needs to be extremely low-risk and liquid.

After I reach my goal, I’ll likely cut back on EF contributions, maybe putting in 1-3% of my income (vs. 5%+ now). This will allow me to focus a bit more on scaling the mountain of student-loan debt that looms before me.

Why Defined Savings?

Saving for retirement is pretty straightforward. We try to max out 401k’s and IRA’s, hope the markets do their thing over the long haul, and then retire a millionaire. Simple enough.

Hopefully that’s not the full extent of ours savings though. We also need to consider things like…

-Vehicles
-A house down-payment
-Education (self or child)
-Wedding (again, self or child)
-Vacations
-Emergency expenses

I can think of three ways to pay for such big-ticket expenses:
1.) Rake in a monstrous income and pay for them as they come.
2.) Charge them to a credit card or dash to the bank for a loan.
3.) Steal from your future by raiding your retirement funds (and paying enormous amounts in taxes and fees to boot).
4.) Plan well in advance and save.

Unfortunately, option 1 isn’t realistic for most of us, and numbers 2 and 3 are definitely undesirable. It’s clear that we need to become proactive with our savings.

Now the issue at hand is how to save. For the most part, there is no right or wrong way to save. The only blatantly wrong decision is simply not saving at all. However, I’d like to make a case for having multiple savings accounts, each with a specifically designed purpose.

Even though you may not know exactly how much you’ll need (or when), there are still advantages to saving this way. I’ll use an example:

Let’s say that, outside of retirement savings, you have $17,000 in a single money market account. In addition, your old rust-bucket of a vehicle is on its last legs and will need replaced soon. How much of the $17k should you spend on a new ride? How much (if any) should you finance? It’s a tough call when your other big objectives of your savings are considered- a proposed trip to New Zealand, a MacBook, and a healthy cushion for emergencies.

Now with the same $17,000 split up among different accounts- one each for a car, a MacBook, New Zealand, and an emergency fund, the decision is easier. If the vehicle account balance is $9,267.45, you know exactly what you have to work with.

Even though the total sum of your savings is the same, it’s easier to prioritize as you go when you save this way. You can contribute more to accounts of higher importance while depositing smaller amounts to other goals.

A criticism I’ve heard of this method is that, if unavoidable expenses are bigger than the amount you’ve allocated to it, you’re going to have to pull money out of other areas anyway, so why bother to keep funds separate? This is true, but this system ensures that only on genuine emergencies would this be the case. In instances such as the car example, you can raid other accounts only by clearly acknowledging that you’re stealing from one of your other goals. As a result you’ll be much less likely to do so. Besides, by being more proactive, you reduce the likelihood that these situations will create such a dilemma.

To account for some of the uncertainties of life, I’ve opened a miscellaneous savings account in addition my defined ones. It will take some discipline not to tap into it for certain whims, but I think the added flexibility will be beneficial.

With their great subaccount feature, ING* is the perfect banking institution for this setup. I don’t know of any other bank that allows depositors to open and maintain multiple accounts so easily. It literally takes less than 30 seconds to open a new account when you’re an Orange Saver, and the ability to name them is beyond awesome.

Once again, there is no necessarily right or wrong way to save. I just wanted to share this method because it seems to work fairly well. As always, I’d love to hear your opinion on this.

*Note: If you’re interested in ING and decide to open an account(s) with them, let me know. New customers that deposit at least $250 and use a referral code get a free $25 and I get $10, so it’s a win-win for all.

Make Progress with MITs (Most Important Tasks):

Big ambitions often fail to get the attention they deserve in the day-to-day grind- it’s commonplace to become swamped with routine responsibilities. I realize that for people who feel stretched thin enough as it is, the notions of lifestyle design and long-term goal-setting may seem impossible.

There are some techniques though that nearly anyone can employ to make time for these pursuits. One that I recently read about and implemented for myself is Leo Babauta’s Most Important Tasks (Oops, I guess it was mentioned here earlier)..

It’s really simple. Before you go to bed, identify one or several MITs for the next day. As the name implies, these are your personally identified most important actions that you need to take.

I’ve been designating goal-related actions to be MITs. They are steps that should directly enable me to move closer to achieving my goals.

Things like work, errands, and appointments are all important as well; you definitely don’t want to blow these things off to write your future best-selling novel. However, they will get done whether or not you label them as MITs. Things like writing 1,000 words, getting in an intense workout, or working on your project motorcycle are more MIT material.

We often know what steps we have to take to move closer to our goals, but it’s far too easy to let day-to-day obligations zap us of the energy and motivation to work on them. By precisely labeling what steps we need to take and when, and making ourselves accountable to take those steps, we can ensure that we give our goals a fighting chance.

The morning is often a perfect time to get MITs accomplished, especially if you wake up a bit earlier than the rest of the world. If you’ve spent 5 minutes in the online personal development world, you’ve probably read about the benefits of becoming an early riser. While I don’t think it would universally benefit everyone to the same extent, waking up likely will provide plenty of benefits.

By the time I’ve spent the greater portion of the day on other matters (work, homework, errands, etc), it’s tough to buckle down and work on my goals. This is especially true when they are long-term in nature and no immediate benefits are likely to be realized. For this reason, I like to wake up earlier than my first scheduled obligation and get something accomplished. I’m not the type that can roll out of bed and immediately began doing creative or otherwise mind intensive work, but I do enjoy working out first thing in the morning. I consider a strong morning workout to be an MIT, so it feels good to get this accomplished before anything else.

I used to be a fan of morning classes, that way I could get them out of the way early and have the rest of the day to do whatever. But it was often hard to get much quality work done in the afternoon- I’d often be sluggish and less motivated to sit down and do work than I was in the morning. Because of this, I now prefer later classes. I can spend the mornings working on the things I deem to be most important, school-related or otherwise. I’ve found that how I spend my time before noon is an extremely good indicator of how the rest of the day will unfold.

Some people may not be like this, either because of personal preferences or other circumstances. That’s perfectly fine. It doesn’t really matter when MITs get done- what matters is that they do get done. Just make sure that you’re doing all you can to carve out the necessary time to work on what’s most important to you, whether that be at 5:00 A.M, over the lunch hour, or while you’re burning the midnight oil. Your future self will thank you.

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