The New Money Book of Personal Finance by Editors of Money Magazine
How Are You Doing?
Taking control of your finances. The very sound of it delivers a
jolt of self-confidence. Once you're in control of your finances, after all, you
can do what it takes to reach your most important money goals. But don't be in a
hurry. Many people mistakenly think that the way to become financially
independent is to plunge into stocks or mutual funds and hope for some winners.
Actually, the secret to financial success is educating yourself about all the
key areas of personal finance—from taxes to investing to debt management to
estate planning—and then taking the right steps in each. Before you make any
moves to improve your financial lot in life, you need to know how you're doing
currently. By putting down on paper the true numbers representing your
finances—your assets, your liabilities, and your net worth—you'll see where you
need to get started improving your situation.
Determining Your Assets, Liabilities, and Net Worth
So, do you know how you're doing, really? Chances are, you have a vague
notion. For instance, you may be pretty certain that your debts are higher than
they ought to be. Or that you could be investing a bit more. Perhaps you've been
squirreling away money for years and have amassed a substantial amount. By
filling in the following worksheets, you'll know for sure.
Sizing yourself up means looking at three important financial indicators:
your assets, your liabilities, and your net worth. Your assets are all the
things you own: the money you have in the bank, your furniture, your home, your
investments. Your liabilities are the debts you owe. Your net worth is what you
get when you subtract your liabilities from your assets. In some cases,
particularly if you are young and haven't accumulated much yet, your net worth
is a negative figure.
Budgeting and Cash Flow
Now that you know how you're doing you can begin looking for ways to do
better. Start by getting a handle on where your money goes every month. This way
you can begin plugging your money leaks and find ways to spend less, save more,
and boost your net worth.
Nobody likes to keep a running budget of expenses. The process is a pain and
generally winds up as an annoyance. That said, jotting down how and where you
spend your money can be an eye-opening experience. How often have you said to
yourself: "I just don't know where the money goes. I make a decent living, but
there's nothing left at the end of the month." By keeping tabs on your expenses,
you'll be able to solve America's greatest unsolved mystery: the case of the
So, try this mini-budgeting program and think of it as cash-flow management.
For two months, starting the first day of next month, keep a written record of
every time you spend money. (Yes, one month would be easier, but some expenses
such as clothes don't show up monthly; by giving yourself two months, you're
more likely to end up including the full range of your spending.) Jot down
exactly how much you spent and what you spent it on. In addition, make note of
every time you take cash from the bank or your automated teller machine and
write down the amount.
If the old paper and pen approach seems way too Stone Age for you, go digital
with computer software such as Quicken or Microsoft Money or tap into the great
tools and calculators at their Web sites
respectively. Both programs (which sell for $30 to $90) or other, free Web sites
have a computerized ledger for entering purchases and worksheets to help you
create a budget.
Chances are, you'll be astounded to see where your money actually went. You
might find that you spent an exorbitant amount on food, particularly for
restaurants or workday lunches. You could also be surprised to see how much it
cost to clothe your family or drive them around. The cost of upkeep for your
home and your utility bills may also be sky-high.
Similarly, you may be shocked to see how little you saved or invested.
Continue on such a path and you'll have a devil of a time meeting your long-term
financial goals, such as paying for your child's college education or retiring
with a lifestyle that matches your dreams.
Reining in your spending isn't easy, but it's not impossible, either. Some
fixed expenses are hard to reduce, such as your health, disability, and life
insurance premiums, but not impossible. Most of your other expenses, however,
are what economists call discretionary. That means you could spend more or less
on them if you choose. Ask yourself the following 20 questions and odds are
you'll find at least one expense that you can snip without feeling much pain:
20 QUESTIONS TO TURN SPENDERS INTO SAVERS
1. How can I eat out less often?
2. How can I spend less money when I eat out?
3. How can I cut back on my vacation spending this year?
4. How can I reduce my entertainment expenses and still have some fun in my
5. How can I get my boss to pick up more of my business expenses?
6. Can I lower the cost of child care and education without harming my kid in
7. What can I do to cut my household's medical expenses without endangering
my family's health?
8. How can I spend less shopping? (Hint:T ry less expensive stores, more
sales, fewer trips to the mall, and hand-me-downs for your kids.)
9. How can I lower the cost of commuting to work?
10. What can I do to reduce my car expenses? (One idea: Do more work on your
car instead of taking it in. Another: Wash it yourself and save the car wash
11. What can I do to reduce the cost of upkeep for my home?
12. How can I pay less in debt? (Consider charging less on your credit cards
or trading in a loan or a card for one with a lower interest rate.)
13. How can I lower my home heating and cooling, telephone, and cable TV
14. What can I do to pay less to the IRS and the state tax man and keep more
15. Could I fight my property tax bill and get it lowered?
16. How can I reduce my dry-cleaning bill? (How about laundering and ironing
more clothes yourself?)
17. Can I cut the fees I pay to my bank, mutual fund, or stockbroker? (Try
consolidating accounts so you're not hit with so many different fees.)
18. Could I lower my mortgage payments by refinancing?
19. Are there discounts I could receive to cut my homeowners and car
20. Can I buy less expensive gifts without looking stingy?
Throughout this book you'll find budget-cutting ideas that will answer many
of those questions. Chapter 18, for instance, is devoted to making you a wiser
consumer. But only you know for sure what you can give up or scale back. Only
you know the alternatives in your area to your favorite restaurants and stores.
If you're truly serious about spending less and having more cash to save and
invest, set monthly or annual limits for certain expenses. For instance, you
might force yourself not to spend more than, say, $100 a month on telephone
bills (including your cell phone) or $200 a month on clothes. Or you could limit
your annual vacation spending to, say, $2,000.That might require you to give up
a vacation altogether. Alternatively, you could just find a less expensive way
to relax. Make sure you let yourself have some pleasures, though. Otherwise
you'll eventually get so fed up with your budget constraints that you'll bust
loose and spend wildly to compensate.
You may find it easier to put yourself on a budget by deciding in advance
what you will do with the savings. This means converting your budgeting into a
specific financial goal. It might be using the savings to pay down your debt or
to invest for your child's looming college bills. Whatever the goal, give
yourself something to shoot for. That way you won't feel as though you're simply
After you have a spending plan you can live with, stick with it for three
months. Then, repeat your initial exercise and see how you're doing. Find out
exactly how much you are spending in every category again. You may even be able
to kick in for a luxury or two that you've done without. After 12 months you
ought to be so used to this spending regimen that you'll no longer mind the
cutbacks you have made.
A final budgeting tip: Don't carry around too much cash, since you may be
tempted to spend the money. If you normally take out $150 from the bank each
week for spending money, try withdrawing $125 for a few weeks and see how you
manage. If you're in the habit of constantly yanking cash out of your bank's
automated teller machines, cut your visits in half. If you must, change your
routine so you're not anywhere near your bank's ATMs. If you can't see the
machine, you can't take money out of it.
Your Finances by Your Age
A useful way both to see how you're doing financially and to figure out what
you ought to be doing with your money is to understand what you should be
focusing on financially today, depending on your age.
PEOPLE UNDER AGE 30: THE STARTING OUTS
1. Stop living paycheck to paycheck and start saving regularly. Ideally,
you'll want to salt away 10% of your income. Then you can start investing in the
stock market, through mutual funds.
2. Start investing as early as you can. For instance, if you put aside only
$2,000 a year in an Individual Retirement Account earning 8% for just the 10
years from ages 25 to 34, you'll have nearly $315,000 by the time you're 65. If
you wait to age 35, however, and then start investing $2,000 a year in the IRA
for a full 30 years, you'll have only about $245,000. Similarly, try to
contribute the maximum allowable amount to your employer-sponsored retirement
savings plan, such as a 401(k) plan. (For more on great tax-deferred retirement
savings vehicles, see Chapter 11.)
PEOPLE 30 TO 44: THE CLIMBERS
1. Get serious about cutting your spending and debt. This is the time of your
life to break bad spending and debt habits. Otherwise you'll likely be stuck
with them for life and you'll find yourself struggling to reach your financial
2. Don't forget about insurance. It's easy to put off buying life and
disability insurance. Don't. You want to be certain that if something happens to
you, the people you care most about won't be hurt financially.
3. Pump up your savings for your retirement and your children's college
PEOPLE 45 TO 54: THE PEAK EARNERS
1. Don't let looming college bills prevent you from saving for retirement.
When tuition payments approach, it's easy to decide to forgo contributions to
employer-sponsored retirement savings plans-such as your 401(k) or 403(b)— IRAs,
and Keoghs. That would be a mistake, however. Borrow more for college, if you
must. But you need to look out for yourself as well as your kids.
2. Meet with your aging parents to discuss their finances. Your parents may
need some help with the likes of investing wisely, dealing with Medicare or
Social Security, holding down medical bills, or simply making ends meet. You may
even want to try to save a bit for their potential nursing home bills.
PEOPLE 55 TO 64: THE PRE-RETIREES
1. Meet with a financial adviser to discuss how to handle a pension and
401(k) or 403(b) payout. You might want to take all the money at once. Or, you
might prefer to get the pension in monthly installments for the rest of your
life. Whichever way you go, there will be tax and investment implications.
2. Make sure you're clear about IRA withdrawal rules. Although recent laws
have made this process a lot less complicated, you'll still want a pro to help
you work out the details.
3.Wise up about Social Security, particularly as you approach 60. You'll need
to decide when to start getting your first checks. Plus, you should determine
how much of your benefits will be taxable and whether income you earn in
retirement might reduce the size of your Social Security checks.
PEOPLE 65 AND UP: THE RETIREDS
1. Focus on preserving your assets and preventing them from losing value to
inflation. That means keeping about half of your investments in stocks or mutual
funds that buy stocks. You can put the rest in safe bonds, mutual funds that buy
bonds, or the bank.
2. Don't buy a home for retirement in another part of the country until
you've fully checked out the area. It's smart to rent for a year or so before
you buy. That way you'll have time to see whether you like the climate, the
setting, the people, and the attractions.
Setting Your Financial Goals
No matter how old you are or how much you make, you'll want to zero in on the
key financial goals you hope to achieve. Too often, people have just vague
notions about what they want financially. Their goals are things like "I want to
have a lot of money." Or "I don't want to die poor." Or "I want to be
comfortable." Or "I want mutual funds that will go up." Trouble is, these goals
are too squishy to help you much.
Instead, you ought to get more precise and decide exactly what it is you want
to have and when you want to have it. For instance, your goal might be "I want
to be able to retire at 65 and live as well as I did before retirement." Or "I
want to buy a house in my city within three years." Or "I want to have enough
saved to pay for 75% of my son's college education when he is a freshman."
The best way to make the right goals is to figure out what's important, what
isn't, and when you want to achieve your goals. Once you've placed priorities on
your financial goals, you can start adopting appropriate strategies to hit your
marks. For example, if reducing debt is much more important to you now than
goals requiring you to save and invest—such as buying a house or financing
education—you'll want to focus on your credit cards and loan payments. If you've
been negligent in properly insuring yourself and your family, you'll want to
make that a top priority and concentrate on building up protection.
Similarly, it's crucial to divide your goals into short-term, medium-term,
and long-term commitments. That will help you see how quickly you need to work.
For instance, if you have teenagers, paying for college is a short-term goal. So
you'll need to find ways to increase your savings, borrow wisely, find
scholarship or grant money, or some combination of all of these.
Complete the following two worksheets by checking off the appropriate money
goals and you'll get a clear idea of both your true financial goals and your
timetable for reaching them.
After you've created these master goal lists, remember to return to them from
time to time. After all, your goals may change, or—with any luck—you'll be able
to cross some off your list over time. At the very least, draw up new goals
worksheets once a year. Be certain to make revisions when you have dramatic life
changes, such as the birth of a child, a marriage, a divorce, a new job, a
layoff, a move, or the purchase of a home.
YOUR FINANCIAL-PLANNING CHECKLIST
One last way to get a read on how you're doing financially: a
financial-planning checklist. This one was prepared by the Consumer Financial
Education Foundation. Circle the YES or NO answer for each and see how you score
when you finish:
1. Are you saving money? YES NO
2. Do you know how much you spend each month? YES NO
3. Do you pay all of your bills each month on time? YES NO
4. Is your net worth improving over time? YES NO
5. Do you have a satisfactory credit rating? YES NO
6. Do you have enough life insurance? YES NO
7. Do you have adequate medical coverage? YES NO
8. Do you carry disability income insurance? YES NO
9. Are your investments diversified? YES NO
10. Do you invest according to your own tolerance for risk? YES NO
11. Do you have a growth component (such as stocks or stock mutual funds) in
your investment portfolio? YES NO
12. Do you rely on financial information from an objective source? YES NO
13. Do you learn as much as you can before you invest? YES NO
14. Do you review your investments regularly? YES NO
15. Do you take taxes into account when you spend and invest? YES NO
16. Do you file tax returns on time? YES NO
17. Do you know how much money you'll need to live on when you retire? YES NO
18. Do you know how much you'll receive in Social Security benefits when you
retire? YES NO
19. Do you contribute the maximum amount you are allowed to your employer's
401(k) or other pension plan? YES NO
20. Do you know how much you'll need in personal savings to fund a
comfortable retirement? YES NO
21. Do you have a will? YES NO
22. Have you considered ways to minimize estate taxes that may be due on your
death? YES NO
23. Do you have a secure (hopefully fireproof) file for your important
documents? YES NO
24. Have you recorded the location of all your assets? YES NO
25. Have you prepared advance directives such as a durable power of attorney,
living will, and health care proxy? YES NO
Score (one point for each YES):
20-25 points: You have taken solid steps toward establishing financial
15-19 points: You have begun the journey to financial stability—continue and
focus. Less than 15 points: You need to take control of your financial life.
No matter what you scored the New Money Book of Personal Finance will help
you improve in all of the areas covered in this checklist.