Welcome back to my continuing break down of Dave Ramsey’s Baby Steps.  These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.

I personally find these steps simple and easy to follow but also elegant and effective.

In previous installments I covered:

Baby Step 1 – $1000 Emergency Fund

Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball

Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses

Baby Step 4 – 15% Earnings Invested for Retirement

Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)

Baby Step 6 – Pay-Off the House

Today, we’ll examine Baby Step Seven.

Baby Step 7 – Save, Invest, and Get Rich

It’s still early.  The sun is barely denting the dark sky.  My wife is sound asleep and so too are the kids.  There is a stillness in the early morning that calls out to me.  Quietly I steal out of bed so as to not disturb and I make my way to the kitchen to brew a pot of coffee.  Caressing the warm mug, I step out onto the deck and have a seat.  In this calm moment I bask in my accomplishment.  Humble steps in my past have strung together to form a perfect now.  I own this home outright, a growing balance is set aside for my children’s education and what was previously a 6 month emergency fund swelled to well over 12 when the mortgage payment went away.  Sure, I still have wants… that new Harley would look fine in my garage and that trip to Italy may have been put off for long enough.  But those are just checks I can write when the mood strikes strong enough.  For now though, I’m content enough to sip my coffee, reveling in the notion that I am winning.  I have done something good for my family and damn it just feels good.

Ok, so I’m no master fiction writer, but the scene is one for which I long.  And even better, I believe that it exists within my future.

Once the house is paid for and you’ve already been contributing to retirement and college educations, you have the opportunity to amass great wealth simply by continuing to make wise decisions with what now amounts to a significant flow of fully discretional cash.

Your current income CAN make you wealthy!

What’s interesting is that when you start the Baby Steps your mind almost will not allow you to consider this kind of future.  It’s so foreign to our normal that is seems impossible.  But with each new step you’re carried closer and closer to an abundant life.

A life once well outside your reach, exists only Seven Baby Steps away.

Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well.  While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.

Read, Enjoy, Comment, Subscribe!

Bible Money Matters – step 7 

Plonkee Money – step 7

Dave Ramsey – step 7

Photo By: Leo Rynolds

Welcome back to my continuing break down of Dave Ramsey’s Baby Steps.  These are the steps he teaches in his books, and radio and TV shows to millions willing to listen and follow his advice.

I personally find these steps simple and easy to follow but also elegant and effective.

In previous installments I covered:

Baby Step 1 – $1000 Emergency Fund

Baby Step 2 – Pay-Off Debt Smallest Balance to Largest Using the Debt Snowball

Baby Step 3 – Boost the Emergency Fund to 3-6 Months of Household Expenses

Baby Step 4 – 15% Earnings Invested for Retirement

Today, we’ll examine Baby Step Five.

Baby Step 5 – Start Savings for Your Child’s College Education (as applicable)

This may be my favorite single step.  Not because I don’t want to experience the benefits accrued to the other steps – they are all winners – but rather because of what it represents.

I’ll explore this step by elaborating on what this step represents to me.

• Assumed Affluence – face it, if you’re writing checks to send your child to college then you’re doing something right.  You may not be swimming in money, but you’re surely not bouncing checks and worrying about the mortgage each month.  Something may be keeping you up at night, but if you’re taken care of business on this front then it likely is not your cash flow position.  Bear in mind, I’m not saying affluence to suggest flash.  Rather, this is an attained position of financial comfort.
• Love, Sweet Love – who wouldn’t want a couple extra hundred dollars in their budget each month?  That may represent a couple nice nights out with the spouse or access to the latest high tech gadget or (for many) an enhanced car payment.  Or, it could be quietly tucked away in an act of sustained selfless discipline and devotion aimed at your child.
• Shoulders of Others – there’s a certain truth in the idea that each generation wants their children to achieve more than they did.  I know that my father loves me in the way he is so genuinely proud of the success and opportunity I’ve had in my life and career.  Through the years he has made sacrifices to help me along my way.  As a living tribute to his example, and with the hope that my child will one day see my love echoed back onto them, I want to shoulder as much of their educational costs as possible.

The tools for executing against this objective or step are varied and I’ll supply a handful of links to help inform your (and my) research.  However, the mechanics are less the point for this Step – at least in my mind.

Resource Links:

What is a 529?

Comparison of College Savings Plans

What is an Educational Savings Account (ESA)?

Whereas the previous steps have progressively influenced the relative comfort of your situation, In Step 5 you can begin to redirect the future path of your children.  Imagine them embarking on adulthood with no debt.  For so many of us, that’s the starting point we’re still struggling to achieve oh these many years later.  That’s why I want to advance my child’s starting point as far as possible.

That simply is worthwhile.

Stay tuned for upcoming installments in this series:

Baby Step 6 – Pay-Off the House

Baby Step 7 – Save, Invest, and Get Rich

Many other skilled and talented writers have dedicated time to dissecting Dave Ramsey’s Baby Steps and I want to share their work for your review as well.  While I certainly hope you’ve enjoyed my treatment of the material, I’m confident you’ll expand your understanding and insights by spending time with the interpretations of others.

Read, Enjoy, Comment, Subscribe!

Bible Money Matters – step 5

My Two Dollars – step 5

 Dave Ramsey – step 5

Photo By: fabio funkyb

Welcome back to our study on the Views of Money.  After resetting the contextual baseline, we’ll jump into Part 2 Net Worth, Balanced Perspectives and Opportunity Cost

Money is important.  It is the lifeblood of our society.  It is our economy.  In the context of our modern culture it is a requirement for our day to day living.  If you doubt this notion, imagine yourself penniless for the next 30 days.

Money also is dynamic.  It is huge in the context of government spending programs or corporate initiatives.  Equally so, it is small measured against our next meal or gas tank top-off.  Money is even tiny as it collects nightly in our change cup.

A former teacher oft shared a story of 3 blind men describing an elephant.  The man at the trunk reported an animal significantly different from those reporting from the side and tail of the animal.  All reported a piece of the truth but not a whole truth. 

Money operates in our lives in a very similar manner.  Many of our views on money are technically correct, but lacking a grasp of the greater whole.

Across this two part series I want to reconcile several views to ensure that we keep each in proper balance.  If we skew too hard in one direction we’re likely to end up with a distorted picture of reality. 

The key to our money, as with many things in our lives, is proper balance.

Today we will examine:

View 4 – The Long View – Net Worth Planning

View 5 – Mosaic View – Balanced Perspectives

View 6 – The Lost View – Opportunity Costs

Please visit Part 1: Objective Setting and Simple and Advanced Cash Flow if you missed that entry.

View 4 – The Long View – Net Worth Planning

Once the art of the Mid View (Annual Planning) is mastered, it is not difficult to begin expanding the annual view into 5, 10, or even 20 year horizons – think new(er) car, new house, college savings, and retirement.

With your mind now wrapped around larger and life altering objectives, you are less likely to direct your unallocated cash flow towards acquiring a new monthly payment, first because your mind resists such shortsighted thinking and second because there are no unallocated dollars.  The planning and aspirations are too focused to allow otherwise.

As with previous views, you may still feel constrained by your income.  But the constraints are positive rather than negative.  Instead of feeling constrained against being able to lavish yourself with new gadgets and trinkets, you are much more likely to feel constrained against making large debt payments or maximizing your IRA and 401k contributions.  The beauty is that as you are able to overpower those constraints you are propelling yourself forward rather than further tethering yourself to fixed station.

Net worth is the scoreboard for your long term financial success.

View 5 – Mosaic View – Balanced Perspectives

There is a certain evolution of thought as you progress from view to view but there are important lessons to carry and retain as you progress.  In many ways it is like using the addition, subtraction, multiplication, and division fundamentals you learn in grade school to master the principles of geometry, algebra, and even chemistry and finance you engage later in your education.

Another example may be a highly successful business that monitors its stock price (think net worth) by reporting and managing its cash flow statements, balance sheets, individual store sales amongst a bevy of additional reports and performance matrices.

The key message here is that we need to be nimble and versatile across these views.  At times, we may need to gauge a purchase or investment across multiple perspectives. 

Borrowing from a personal example, I am currently in the process of refinancing our home.  While I am lowering my interest rate I am also shortening the term on my loan from 30 to 15 years.  This move has implications across all views.  My monthly payment will actually go up a bit which impacts Views 1-3, but the condensed time horizon will play a significant role in advancing view 4.

View 6 – The Lost View – Opportunity Costs

If View 1 is our starting point and most immature (in terms of thought development) view, then the mastery of Views 5 and 6 are our most evolved judgment criteria for driving our financial activities towards a successful outcome.

Opportunity Cost is a compelling and engaging concept but sometimes hard to fully grasp.  The idea is that, unless you are a member of Congress, you can only spend a dollar once.  However, when you hold that dollar, you have many potential opportunities for its deployment.  Opportunity Costs suggest that the cost of an item is the sum of its actual dollar cost AND the cost of the lost opportunity had that dollar been spent elsewhere.

For illustrative purposes, here’s an extreme example.  Let’s say that in the early 80’s a spent a couple dollars to buy a hotdog rather than an aggressive option for Microsoft stock.  You could argue that I had consumed a million dollar hot dog. 

That may be a fun example, but it is not realistic because the ballooning value of Microsoft was unknowable at the time.

To really work the concept, you have to consider your actual and viable options.

Consider a more realistic example whereby you decide to spend a $1000 bonus check on some cool new electronics gadgetry. 

Instead, you may have directed those dollars against a high interest credit card, placed it in a mutual fund, or applied it against your outstanding mortgage balance.  Each of these options has an interest component that makes the comparison math easy.  For example, a 10% interest rate on the card suggests that you’ll accrue $100 interest waiting until next year’s bonus.  Similarly, the investment and mortgage prepays could be calculated but it is easy enough to grasp that the $1000 bonus has an exaggerated value when considered against three likely alternative deployment opportunities.

Putting it all together

Consider now another example.  You positioned yourself in a job or career better aligned with your values and income targets and are now receiving your first annual raise and bonus.  What do you do?

• View 1 is addressed with the job selection and income
• View 2 understands our cash flow has increased and immediately looks for deployment options
• View 3 recognizes our annual budget has increased and provides a ‘capture’ point for the new inflow
• View 4 envisions how these new dollars can best drive the future you envision for your family
• View 5 finds harmony amongst the varying perspectives
• View 6 makes the best and most informed decision

 Without the full view we’re much more likely to make an impulse decision which often is a suboptimal decision.  Meanwhile, chasing an input through the full range of perspectives does not ensure absolutely that we’ll each make the same or even the best decision.  We each have our own visions and dreams, and our own personal contexts.

And that in the end is part of the beauty and mystery of that dynamic lifeblood we call Money.

Photo By: shadphotos

Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

This article was featured on the Fiscal Geek’s roundup.

About this time a year ago my wife and I talked about how good 2008 had been to our household.  It was a fun moment of connection, and reflection, and celebration, and optimism.  In a demonstration of faith we agreed that 2009 would be an even better year for us.  And so it has been.

Of course 2009, for our house, began with tremendous questions in the air.  Walking away from a long term employer in January amidst the prevailing economic climate and with no known landing spot will do that.

But the time between jobs was refreshing and motivating.  Within a month I launched this site and have been faithfully exploring and chronicling my thoughts and reactions for all of those patient enough to read along.  I believe this exercise is more for my benefit than yours and it has certainly opened doors of opportunity in my mind – more to come as we track my goals in 2010.

The time between jobs also helped me identify what I had enjoyed most about my previous employer.  I honestly thought I wanted my next job to take me in directions far from my previous experience.  That was the case until I really started walking through my resume and in preparing responses to mock interview questions.  It was then that I realized how I wanted to perfect my previous experience in my next career chapter.

Then – as if suddenly – the perfect opportunity presented itself.  The fit was instant and obvious like hand in glove with much less travel and in aggregate a more handsome benefit package.  I asked, God answered.  That’s not to say there are no challenges, that’s every day, but solution to challenge and growth through exposure is part of what I enjoyed and enjoy most.

And, that’s not to say one day my dreams and harnessed abilities won’t lead me to new pastures, but 2009 introduced me to a perfect career home for this season.

2009 brought us incrementally closer to financial security – debt repayment, Roth IRA Investments, and a dream realizing Real Estate Investment.  Perhaps not all were executed in absolute accordance to Ramsey’s plan but none were whimsical or ill-considered either.

2009 brought us upgrades to our previous car situations – his and hers.  New used cars that will serve us for years to come and with no monthly payments in tow.

2009 afforded another ride weekend with my father – moments in time, for me, that at once race forward and stand still as snap shots in my mind.

2009 marked the passage of time with my 20^th high school reunion. It was everything and nothing I would have expected and it was invaluable in the way it dusted off long ignored friendships.

2009 is a banner year for my college alma mater as our football program marched through a spectacular season and now stands on the threshold of greatness.

2009 yielded reconnections with family members and time well spent with dear friends crafting memories that will endure.

Yeah, 2009 certainly delivered on its promise and our household is better for it.

…A couple nights ago my wife and I talked about how good 2009 had been to our household.  It was a fun moment of connection, and reflection, and celebration, and optimism.  In a demonstration of faith we agreed that 2010 would be an even better year for us.  And so it shall be…

Photo By: Heidi & Matt

Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

This article was featured in the Personal Finance Carnival

Our society is given more and more to laziness and victim mentality, or so it seems.  I’ve conducted no scientific research but the prevailing winds of conversation, and print stories, and news ‘events’ seem to prevent as much.  Perhaps this is just the vocal minority – I so hope – or perhaps we’re on a horrible downward trend.

A pair of illustrations resonated, or more accurately collided, with me.  These are recent events but they mimic a theme that has does resonate with me.  In fact, it’s a theme I’ve written on before.  I hope today I add to the discussion rather than simply echo the same rant.

The first item was a recent caller on a Dave Ramsey program.  I disagreed with both the caller and the advice he received.  The caller was about 6 months behind on a $11k credit card bill and was trying to settle the account for about 25% of the balance due ~ or about $2750.  Ramsey agreed that the creditors would not settle for such a low amount so quickly and advised the caller to continue to save up his settlement funds while continuing to negotiate a settlement.

The advice was directionally sound, however, that it reeked of a failure in personal accountability caused me to bristle.  Rather, I believe a more genuine approach would be to negotiate down some of the usurious fees, make a huge payment against the remaining balance (say 20%), negotiate a moratorium on interest and pay the freaking bill each month as you previously committed to doing.

I don’t necessarily fault Ramsey here because many of his callers have circumstances that limit their ability to pay, and the advice offered fits that bill perfectly.  However, this caller had no such circumstances other than wanting a smaller bill.  HEY TOO LATE DUDE… should have thought of that when you were running up the tab at the bar, literally or metaphorically.

The second event was the one that really sent me into orbit and solidified my need to string together these words.  Several months ago I enjoyed and commented on an article posted on another site.  As part of the commenting process I was able to subscribe to subsequent comments so I could continue to engage the conversation.  The original article was about preparing a mortgage and frankly I can’t recall my comment though the general idea is one to which I aspire.  The other morning I received just such a subsequent comment from some deep thinker who has it all figured out.

The genius – sarcastic speak for moron – did not feel constrained by his mortgage payment obligations simply because the value of his home had declined.  It was not a function of his inability to pay but rather that his commitment to pay for an asset that is now – and likely temporarily – underwater was simply inconvenient.

I could, and should do a full treatment on the topic, but ladies and gentlemen, this is a loser mentality.

Consider 3 questions as a measure of this dude’s brain lock:

     1. Do folks expect to lower their car payment when they find its value upside down?

      2. Do investors expect a refund when stock prices/values contract?

      3. Do people expect their mortgage payments to increase when their home values rise?

The answers… NO, NO, and HELL NO!

In fact, the first item is so common that it’s a sad and well repeated punch line – the worst accidents DO happen on the showroom floor.

That this level of infantile thinking exists in a civilized society chaps me to no end and I can’t help but wish ill upon them.  It is as if I want to personally witness as their sins catch up with them.  But that takes me to a negative place.  I place I’d do well to avoid.  Instead I’ll do my best to take care of my business while both congregating with like minded responsible adults and sharing my beliefs with those willing to listen.

And so I want to thank you for listening to my rant and ask that you help to grow the like minded community this fledgling site represents.  I don’t often ask so overtly, but if you agree with the prevailing thoughts represented here, then take a moment to forward a link or email.  I’d love, welcome, and appreciate your help in turning up our volume.

Photo By: Olivander

Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

This article was featured in the Carnival of Money Stories hosted by Funny About Money.

A couple weeks ago I read an interesting article in Smart Money entitled Lessons from the Crash.  While the specifics of the story were geared towards those given to single stock investing, it was more the premise that caught my imagination.

The set up was the top 5 lessons investors have learned over the past 12 months, the spiritual if not literal anniversary of the downturn.

So that got me to thinking. What are 5 financial lessons I’ve learned or revalidated over the last year?

Debt is Risk

It is the easiest and most straightforward principle in the toolkit, yet the hardest to execute on.  The idea of debt reduction is so impossibly intriguing that simply talking about it has made some folks quite wealthy, yet it remains a struggle for most and others have seemingly given up and claim the shackles of their creatively contrived debt are signs of their own financial enlightenment.

But the harsh reality is that every claim on your ‘as yet to be earned’ income represents risk.  If you’re still not sure, try imagining the next six months without an income.  How would that impact your current reality?

I’ve written before about the idea of our financial footprints.  I use this term to define the monthly cash flow required to fund our current existence.  In my experience, debt is the most manageable variable in this equation.  At its peak, my footprint was over $4100 per month and it was ripe with student loans, and furniture payments, and credit cards.  Had I embraced the average American’s car payments (one flavor of debt I had already managed to shed) for new ‘his and her’ sleds, I would have been bumping $5k a month in pre-obligated expenses.

Fortunately, I woke to the realization that debt is risk before the economic down turn and waged an attack such that last year when things started to turn, and a then unknown stint on the rolls of the unemployed loomed, my footprint was down to a more manageable $2400.  And while there is still room to whittle, the shift from debt yielded obvious results in our household.

Green is Good

Paper or plastic is mostly commonly asked as it is related to how you prefer to transport your groceries not how you wish to acquire them.  If, as we previously covered, debt is a risk then fat stacks of cash are sweet comfort.  Consider the footprints we stepped through above and imagine how cozy you’d sleep at night if you had 6 times that amount in cash tucked away in a savings account to help insulate you from life’s unexpected moments.

No one would argue against the security afforded by accrued cash, but few have the resolve to save.  However, if the last 12 months have taught us anything, it is the significance of setting something back.

Panic is a Killer

In doses, fear is healthy.  It causes us to lock our doors, follow traffic laws, and flee burning buildings.  However, fear traded at wholesale quantities is lethal.  Consider those that dumped their stock as the market started to spiral and those who continued to sell even as the bottom settled.  In many cases these are the same folks who are now missing out on records returns.

This is not to say that folks didn’t take a beating when the market tumbled, I know I sure did, but the vast majority of folks would have done well to unplug the panic button rather than the invested dollars.  Unbridled fear clouds our judgment and prevents us from seeing events as part of a larger whole.  Sure, a 40% drop in value is cause for concern, but selling out only locks in losses, losses from which many may never recover.

You’re Your Bailout

The most annoying aspects of the economic downturn were all the governmental bailouts.  Each party hosted a spending free-for-all so this is not a political statement, but rather an indictment on the concept of big government stepping in to save us.  The reality is that we are our own bailouts.  Our time and energy and efforts have an immediate and direct impact on our reality.  Consider the relative size of our economy and limited impact the nearly $2 trillion – that’s $2,000,000,000,000, a ‘2’ with 12 zeros! – in bailout dollars has had. Folks are still losing homes and national unemployment remains in the crapper.  The macro economy it too big to be bailed out, however, consider your individual economy and the impact a quick $1000 influx from a second job might have.  A second job sustained for several months may boost your bottom line by $10,000.  Sure, it’s a lot less zeros, but they’re all yours and powerful when applied directly to your point of need.

Opportunities Abound

Historically speaking, downturns on our economy have planted the seeds for fantastic growth and the explosion of personal wealth for those poised to take advantage.  Now, I’m not claiming to have the corner on wealth building ideas, but I agree with the principle and am motivated by its promise.

Perhaps the reduced staff in your office is providing you an opportunity to demonstrate additional value – value which may enable you to grow your income with your current or future employer.  Perhaps low stock prices are preparing your 401K for explosive growth.  Or perhaps reduced mortgage rates are allowing you to realize significant monthly savings.

Whatever the case, the events of the last 12 months should inspire – or force – you to look at your situation in a new way.  And with a keen eye and open mind… who knows what you might see.

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The title is a quote from Super Bowl winning coach Bill Parcells. The idea is that a team is as good or as bad as its record indicate.  Fans, commentators, and even players like to interpret – or rationalize – circumstances and game events so as to suggest that a team is better, or sometimes worse, than its record might suggest.  A lucky bounce here or a bad call there and those close losses are wins, see, ‘we’re better than our record suggests’.

Parcells on the other hand will have nothing of it.  His take is that a team’s record is its bottom line.  Explanations and rationalizations will not lead you to a championship season, only your results on the field of play.  So rather than tell me that you’re a good team, show me.

Life often parallels sports, or is it vice versa.

We have a bottom line metric that tells us without question or explanation how we are performing in the arena of our personal finances.  Too many assume this metric is our level of income.  But income alone is like the team who scores points in bunches only to watch their opponent do the same.  It (high income) can contribute to a win, but it is not the only ingredient in the winning process.

Rather, the key metric – the record indicating the relative success for our financial play – is our Net Worth.

For purposes of example, consider the wealthy business man living in the McMansion, funding newly leased German luxury sedans and Caribbean vacations rather than retirement or junior’s college education while sporting an array of $1000 suits.  The dude is loaded!  And doubly so when compared to the unassuming school teacher living in a quiet townhome and driving the 10 year Corolla raking perhaps a third the income.

But a funny thing happened on the way to a cozy retirement.  The schoolmarm contributes to her 401k (or equivalent) has steadily paid down her mortgager, and traded a monthly car payment for a positive monthly cash flow.  Meanwhile, the business man’s killer income has washed through his hands like so much water.  His kids are in private schools and travel soccer teams, his perpetually renewed leases provide a relentless and growing outflow, the leveraged dream home is upside down and retirement planning begins with the next raise or perhaps the one after that.

Hey, it sounds like fiction, but I’ve read enough Money mag “Real Life” segments and observed the bevy of Lexus’ in my office parking garage to know that too many folks are working away for the now rather than the future.  Sure they may be paying attention, but to net income and cash flow rather than to the bottom line – Net Worth.

So what is this Net Worth number?  Trent over at The Simple Dollar offers a great illustration of the mechanics, so I’ll send you here rather than recreate his efforts.  But suffice it to say that Net Worth sums the net value of your assets against the net value of your liabilities.

Simply stated:  Net Assets – Net Liabilities = Net Worth

In the example I provided, the business man with his leveraged home, car debts (a contracted lease obligation is the same as a debt… try breaking a lease if you doubt it), and limited savings may actually have a negative net worth.  For all his outward appearance he has nothing but debt to show for his efforts.  Whereas the teacher has learned the lesson taught by others – she has bulked up savings and equity in her home offset only by her mortgage balance.  According to her financial record, she is putting together a winning performance.

Now fast forward to the very end of our individual games.  Our net worth will represent our final estates.  It is the legacy we will or will not be able to leave behind to the ones about whom we care.  Dave Ramsey uses a line when talking to callers trying to settle an estate.  He is not meaning to be harsh, but reality is sometimes cold.  Depending upon the structure of the dialogue he’ll ask or comment (paraphrasing) “there is nothing left to show for the estate”.

When I hear this comment, I personally rephrase the question in my mind – rather harshly I might add – as motivation for myself:  “financially speaking, there is nothing to show for this person’s life work but debt”.

Now, the key is “financially speaking” because we’re all worth more than the money in our accounts, but this is how I repeat the question to myself and it forces me to consider how I’d want it answered upon my coda.

At a minimum, I don’t want my final possessions liquidated to pay my accrued debt.  Nor do I want creditors hounding my loved ones for payment when I’m gone.  So I find it important to keep score.

And, because one day I want to enjoy more of life’s finer things – including a dignified retirement – I actively keep score.  I monitor my net worth on a monthly basis and track my percentage change month over month.  I’ve written before about my net worth goals, and it is a winning score most anyone would be pleased to accomplish.  However, I’m now tracking my progress in a way that allows me to be intentional in my actions relative to those goals.  While that does not by itself ensure success, it sure crystallizes my game plan and directs the path for my execution.  One day I’ll look at my record and feel a touch of pride, because I’ll know both what it says and represents.

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I recently attended a benefits presentation hosted by my employer.  It seems that we are changing HR/payroll outsourcers and as part of the transition we were engaging the annual selections process earlier than is typical.  We are also using this transition as a convenient time to alter our overall benefits package.

In fairness, I still consider myself new, and I’m pleased with the package but I do notice changes having enrolled in June as a newbie and again in September as part of the transition.

One interesting change had to do with our 401k offering.  Our employer is auto-enrolling everyone into the program at a modest 2 or 3% contribution level.  Employees may alter their contribution levels or self select out of the program altogether, but starting in October, the default setting is participation.

I’ve heard of this idea before.  And my first reaction at that time may mimic yours – “you’re forcing someone’s behavior” and “personal choice is being removed from the process”.  But I quickly recognized this as lame, half baked thinking.  Personal choice remains.  One can elect to not participate in this model just as one had to elect to participate before.

The reality of choice remained, but the impact of not acting is really all that changed.

Give that a moment to settle.  The concept becomes more profound as your ponder it.

Under the old “opt-in” model, I must take action.  I must elect to participate in the 401k, decide my contribution level, and select my investment options.  That’s a lot of effort for someone who may intimated by the investment process.  And given the vastness of the options I have before me, and the countless other pulls on my time, I am likely to delay the actions that I may eventually take.  Assuming investing for one’s future is a good thing, my inaction leaves me with a negative outcome.

In the new “opt-out” model, I don’t have to take action.  My contributions, albeit smaller (or larger) than I might self select, are automatically pulled and deposited into an age defined portfolio that rebalances itself as I trend towards retirement.  For those intimidated by the investment process and subject to inaction; and still assuming investing is positive, inaction positions me well relative to my future.

The default setting is “Investment ON” which for the vast majority is clearly better than “Investment OFF”.

So about the time I come around to realizing the power of this approach, I can’t help but try to think of other ways I can leverage this principle in other aspects of my life.  How can I build a system or process that is designed to pull me in the way of growth and success?

Well, I can’t say that I have this one figure out just yet but it is something I think about and try to incorporate into my daily process.  Here are a couple examples:

Habits and routines are like default settings. 

• I wake up at a certain time
• I leave my keys and wallet on the same spot on the counter every day
• I follow and chart a particular exercise routine
• I adhere to a monthly budget
• I auto pay my monthly bills

Of course many of these require a degree of discipline to stay on track.  For example, schedule disruptions such as travel for work has knocked me off more than one good workout streak and once off, I need to reset my mind and expectations – restore the default setting of working out – to get back on track.

Goal setting and taking incremental steps towards larger objectives are other ways of baking success building into your daily process.

Some ideas are more obvious than others and some yield results more quickly but all deposits of success are significant because collectively they both chart and propel our course.

What patterns or practices have you automated into your daily live that helps you achieve success?  Enter a comment below or log onto the site and share your best practices.  I’d love to learn how others define their blueprints for success.

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Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

If you’ve been reading here long, you might guess that I am no fan of social programs.  However, I am a fan of taking advantage of opportunities as they are provided… provided your use of such  offerings is moving you in a positive direction.  A personal example I’ll share related to Obama’s spending plan or stimulus attempt back in the first of the year. 

Part of this program allowed for the government sudsidy of COBRA payments and as I was between jobs at the time, a 60+% reduction in our monthly insurance payments was a nice benefit.  To have refused would have been foolish… it was offered, it was legal, it was helpful.

Similarly, the tax credit offered to first time home buyers is a unique opportunity for those who both qualify for the program and who can actually afford to purchase a new home.  Prices are low and rates are low and a home is a fantastic investment over the long haul.  It is not the right time for everyone, but for some it is a great time.

For this reason, I want to pass along some information about this program.  Enjoy!

If you have been waiting to take advantage of the low mortgage rates currently available, now may be the time. The economic stimulus package currently being pushed by the Obama administration includes an $8,000 first-time homebuyer refundable tax credit for qualifying buyers who purchase a home between Jan. 1, 2009 and Nov. 30, 2009.

Homebuyers cannot have owned a primary home within the past three years in order to qualify as a first-time buyer and you must make less than $75,000 if single, $150,000 if married. The house that you purchase must also serve as your primary residence for at least 36 months or you will be obligated to pay back the credit. Applying for the credit is very easy- all you have to do is claim it on your tax return and no additional papers or forms are necessary. You don’t have to wait until the 2009 tax season comes around in order to get your $8,000 credit. Once you complete the purchase of your home you can get it sooner by filing an amended 2008 return.

Time is beginning to run out (the deadline is November 30th) and whether congress will extend the credit is still very much up in the air. The program so far has had a tremendous impact on new home sales and housing prices throughout the country as evident in the latest Case-Shiller index. The index showed the first increase in national home prices in three years with the National Home Price Index rising 1.4%. It will be interesting to see what direction housing prices will take in the months ahead, especially if congress decides to extend the program.

Thanks for readng along.  I hope you’re take  minute to leave me a comment below or click over to the site (if you’re reading from email) and let me know what you think of this content as compared to my typical materials.

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A few weeks ago a friend wrote an article about his experience with his CD Ladder.  That article led to a comment, a follow-up article, and a promise from me to craft an article sharing my opinion and perspective on the topic.  Today, I (finally) make good on that commitment.

So you ask, what the heck is a CD Ladder?  Great question.  It was not that long ago that I asked the very same question.  To be fair, I have seen multiple interpretations and applications.  But this being my muse, I’ll start by dispensing my interpretation.

I generally define a CD Ladder as follows:

A series of CDs with tiered or layered or graduated maturity dates often established to safeguard emergency funds or savings while distributing interest rate risk across the portfolio.

Nice… but what does that mean?

Ok, you know that CDs come in different maturities and each maturity will offer a different rate of return.  For example, the return on a 5 year CD purchased today will differ from that of a 6 month CD purchased today.  If you wait 3 months to make those same purchases you will likely find that both of these available rates have changed.  Therefore, if I purchase a single year CD using my entire bankroll I’ll earn a single rate of return for the duration – good or bad – and the same goes when it renews.  However, if I use 25% of my bankroll each quarter to purchase a series of 1 year CDs, I’m likely to experience 4 unique rates of return – again, good or bad – and again, the same goes as they renew.

The second example starts to resemble a ladder with each maturing CD a rung on the ladder.  In this example, the rungs are 3 months apart, which helps provide increased liquidity over a single 12 month CD, in addition to the greater interest rate diversification.

Why Have One?

When I first started reading about CD Ladders I was convinced it was a much ado about nothing situation.  I believe that the value of an Emergency Fund is in the inherent preparedness for an Emergency.  Those funds are intended for defense rather than offense so be they in a money market account or your sock drawer their utility is sustained.

I’ve since come to appreciate that the maximized reality may be more nuanced.  Sure, the stated objective of an Emergency Fund is as simple as that – cash at a time of need, and any gyrations perpendicular to that end should be avoided.

However, that does still leave room to operate and I’ll share 2 such movements that have swayed my response to CD Ladders.

1.     Emergency Funds are only for emergencies and said funds should not be accessed for anything shy of a certified emergency.

We’ve all seen the fire extinguishers behind the glass with the placard “break glass in the event of an emergency”.  Human nature being what it is, a fire extinguisher sitting on a table invites horseplay.  The simple plate of glass requires vandalism to achieve the same horseplay.  Clearly not worth the effort. 

A stack of Benjamins functions in much the same way.  Sitting in the bottom of my sock drawer I can hear them beckoning for my attentions even now.  In my moment of weakness no one will know but me.  However, preserved in the confines of a CD, I have to take public action… and human nature being what it is, those actions start to sound like work… and so my money remains safe from my own hand.

2.     Have an “every little bit matters” mentality.

Imagine if I eat one less Oreo everyday but keep my activity level the same.  I’ve just made a difference.  Small, yes, but still a difference.  Add in other small changes and my waistline starts to register an impact.  The same principle applies to our finances as well.  By actively seeking a solution that adds 1 or 2 or 3 percentage points to my bottom line, I can train myself to look for similar opportunities elsewhere and collectively my balance sheet starts to register an impact.

What’s the Downside?

Is there a downside to building a CD ladder?  Our world is round and it spins so things move and little is truly perfect.  But the downsides of the Ladder are minimal given appropriate efforts.

1. The first of 2 downsides is the time required to build a proper system. Borrowing from our previous example, the quarterly ladder would require 9 months to properly affect – January 1, April 1, June 1, and October 1 – assuming it is stocked with 12 month maturities.

My thoughtful counter to this complaint is… “whaaa”.  Look folks, neither Rome nor your financial security are built in a day, so invest some effort if you aspire to such a fiscal security system.

2. The second downside is a function of the perfected creation. Once built, I don’t want to break it, so I’m actually encouraged to use credit when an emergency strikes.

My reaction here is not dissimilar.  If you are willing to overlook available cash to satisfy an emergency with credit, then perhaps you need to reevaluate your definition of an emergency.

Perhaps these are aggressive stances – relative to these downsides – but they are authentically mine and hopefully they will inspire thoughtful consideration if your first response was not one of agreement.

How do I perfect My CD Ladder?

So clearly I am a fan of building a CD Ladder, but how have I designed my own Ladder?

To be clear, I have not yet built my CD Ladder but I have certainly designed it.  Using fictitious numbers, here is my design plan from the ground up:

• Desired Emergency duration/coverage – 12 months
• Monthly budget obligation – $1,000
• Total Emergency Fund requirement – $12,000
• Rung Size, or time between maturities – 1 month

To execute the build, I’ll need to purchase a $1k CD early each month for a full year – 12 such purchases.  However, the beauty is that each maturing CD will fuel that month’s household expenses – during a time of need.  (Specifically the early month maturity is designed to help cover mortgage payments).

To address immediate issues – think a sudden illness rather than next month’s layoff – I’ll park another $1k in a savings account (or sock drawer) for “1 minute access”.

Granted, such an elaborate concoction will take time and some precision to construct, but imagine the nights of peaceful sleep it will engender once in place.

So there you have it.  My take and blueprints related to CD Ladders.  Material probably a year in the making when you consider the evolution of my perspective, and I trust you will find it worth the effort.

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Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

Related Articles I enjoyed:

Creating a CD Ladder for your Emergency Fund or Other Savings to Earn a Better, Safe Return

How to Build a CD Ladder

CD Ladder Explained