I Have More Money Than I've Ever Had in My Life!

How often can you say that? My goal is to be able to say it every month, and the last few months, I haven't been able to do so. But although I haven't yet pulled together a full monthly wrap-up, my net worth at the end of April was around $373,000, which is higher than it's ever been. It's a nice feeling!

Goals for 2008

Ok, how am I going to figure out some goals for this year? As I've mentioned, a net worth goal alone now seems a bit too simplistic. But it's still a handy way of tracking my progress.

From 04 to 05, my net worth increased 24%
From 05 to 06, it increased 22%
From 06 to 07, it increased 15%

Should I set a goal for another increase of a similar percentage? A 10% increase this year would put me at about $396,000. A 15% increase would put me at about $415,000. 20% would put me at $432,000. Should I play it safe at set myself a modest goal of $400,000?

Or should I delve into this a bit more, by looking at each piece of what makes up my net worth and projecting where it could go this year? Here's how I thought it through:

A couple of assumptions:

• I think my level of spending will be somewhat consistent with last year, with a couple of exceptions. All this will be factored into my 2008 budget.
• I'll get a small raise and a moderate bonus

Unknowable factors:

• Market performance
• Home value: I'm going to assume it will stay flat, and just account for paying off the principal on my mortgage.

I can project how much my cash will increase due to savings and interest earned. Let's say I average 4% on what I have, at a minimum. Then as an upside, let's add about $2,000 in cash savings (not counting retirement)-- that effectively increases my cash by about 10%.
I can project the increase in the value of the bonds as those have a pretty steady interest rate. I think it's a little over 4%.
I can assume my credit card liability at year end will be in the usual range of whatever happens to be outstanding between paying it off in full each month, so basically 0% difference there.
For home equity, I'll put in an increase of about 4% again, as that is about how the principal payments worked out this year.

Then I can put in a range of how much I think my investment accounts might increase. So far this year they are down. Yuck! I can be optimistic and assume that they will at least recover enough to stay flat for the year, and as a maximum, I'll assume that they could increase as much as they did in 2007, so let's say 0-7%, for both my E*Trade account and my retirement accounts. Then I have to add the $15,500 I'll put into my 401k to the projected amount for the retirement account, and I'll round it up to $20,000 to include Roth IRA contributions. This may be missing the impact of dividends, etc. as my actual retirement increases from year to year have been much higher. What if I just use a percentage in that range instead?

Here's a picture of the spreadsheet I used to work all this out:


In the end, I'm actually going to stick with a number based just on slightly less than a 14% net worth gain: $410,000. It's about mid-way between my high and low estimates. And to achieve that goal, I'll have sub-goals of:

• Fully funding my 401k with contributions of $15,500
• Saving enough money to fully fund a Roth IRA at $5,000 (we'll see if I'm still eligible)
• Saving an additional $2,000, at least. That doesn't seem like much, but it's in line with the kind of expense budget I'm working on.

That leaves the rest of the goal to be reached via investment performance. I worked it out that if my E*Trade account grew by 4.3% and my 401k had returns of somewhere around 9-10%, I could get there. (It's a little weird trying to properly do this math and factor in compound interest, etc., so I'm probably off a bit!) Based on what I've already said about not expecting great things from the market this year, that might not be all that realistic. But maybe it will work out once all the dividends, etc. are factored in, as the overall gain is less than I had this year.
So that is the plan! I like breaking it out this way, as it will let me see if I met my goals on things I can control, and give me some idea on whether I am estimating reasonably on things I can't control. Wish me luck!

Miscellaneous Updates

Happy New Year, everyone! I've taken a longer than usual holiday from posting this year, due to visiting family and friends. Here's a little report on what I've been up to, as it relates to personal finance:

I had a short conversation with my Dad about whether or not he has a will. He doesn't, which is probably not a good thing for a man in his mid-70s, with serious health problems and a financially irresponsible wife. He does have the name of a lawyer and I offered to visit again and go with him if he wants. I think I've at least goaded him into taking some action and he seemed glad I'd brought it up, even if he doesn't end up involving me in the whole process.

I deposited checks totaling $220, which were Xmas gifts from my parents and great-aunt.

I gasped in horror on New Year's Eve when I saw a TV news report about how much the stock market had dropped yesterday. As I write this, I have not yet updated Quicken to see what the damage was and whether I'll make my year end net worth goal.

I listened to my mother's worries about my sister. My mother, whose own shopaholic tendencies put her in quite a bit of debt, says that my sister is "even worse." She said she advised my sister not to overspend, which I'm sure Sis took as the pot calling the kettle black. Of course my mom always has her own spin on things-- she's worried that my sister's husband, who she adores, will get stressed out by having his earnings eaten up by my sister's spending. Though my sister is a stay at home mom right now, she and her husband discuss and share all the financial decisions. That may not mean he approves every item she brings home from Costco, but my mom is obviously putting their relationship into the context of her own marriage, in which the husband earned the money and controlled all the purse strings. I'm not sure I'm explaining this very well, but I guess to me, it just showed that my mother couldn't see controlling one's expenses as something worth doing for its own sake, but just as a way of making sure your husband doesn't think you're some kind of shrew!

And speaking of Costco, I went there for the first time over the weekend. The friend I went with is a member but doesn't go too often. She said it herself: "the prices are great on lots of basic things it makes sense to stock up on, but every time I go, I always end up buying some high-priced special item and when I check out, I can't believe I've spent hundreds of dollars." And sure enough, between the two of us, we did some damage. My purchases: two pairs of much-needed pajamas ($17), half of a two-pack of those racks that hold brooms ($2.50) and the new Mary J. Blige CD ($10). Her purchases: a mini-stereo system ($150), a book ($15), the other half of the broom holder two-pack ($2.50), some stick-up lights for inside closets, ($10, I think) and jumbo packs of toilet paper, paper towels, AA batteries, Power Bars, and a number of other food items including a $10 shrimp cocktail package that we ate as a post-shopping snack. The total was somewhere over $300. I was glad to have an opportunity to pick up a couple of things I needed/wanted at very good prices, but it's probably just as well I'm not able to shop at Costco more often!

I also did some other shopping, buying a couple of new pillows to replace the flattened out ones currently on my bed, and a new answering machine to replace the 20-year old one that just recently broke. I also picked up a cute little pizza-making kit for kids that was on sale for $2.50 at Bed, Bath and Beyond-- it will be perfect for my niece's birthday.

That's it for the moment-- I'll be returning to my regular posting schedule soon. Now it's time to do some work in Quicken so I can have a net worth update ready for later this week... will I be able to hold to my $350,000 net worth goal? Oh, the suspense!!!

Ugliness.

I'm not sure I can face doing my next net worth recap. As of today, my net worth is about $20,000 lower than it was at the end of last month.

Ouch. (This is the polite translation.)

At this rate, I may not hit my original year-end goal, let alone my higher revised one. This is the downside to vigilantly tracking one's finances. It's also what goes with trying to invest aggressively: most of the time, you can feel like your money is growing, but it hurts like hell when the market goes down and you see your gains evaporate. In some ways it's almost worse than the feeling I get about over-spending. If I had SPENT that $20,000, I'd have something to show for it, even if it was only in my own memory of having had a really good time.
But of course, I do still have something to show for it: I still have the same number of shares in all those investments, plus a few more from the last of my 401k contributions and reinvested dividends. Those shares have lost some value, but they can regain value too. I just need to grit my teeth and wait it out. And I need to keep saving as much money as I can in the meantime.

Lessons Learned from Diet Books: How to Think Like a Rich Person

For a long time now, I've been wanting to write about the similarities between managing one's money and managing one's waistline. The kind of self-discipline involved in saving money and reducing debt is very much paralleled by what it takes to lose weight and eat healthily. I'm certainly not the first blogger to notice this (see Sitting Pretty, Frugal for Life, Kate Spills the Beans, and this great chart showing how American house sizes correlate to obesity rates!)

With that in mind, I started to wonder about how weight loss and finance compare in the book publishing world. At any given time, there always seem to be at least a couple of diet and personal finance books on the bestseller list. So do they offer similar advice? Or can the lessons in one type of book be applied to the other?

A couple of weeks ago, I attended the BookExpo convention in New York. I didn't have a chance to take photos of all the upcoming finance books as I did last year, but one day I noticed that signed copies were being given away of a recent diet book that has gotten a lot of attention, so I snagged one.
The Beck Diet Solution claims to "train your brain to think like a thin person," using techniques based on cognitive therapy. Might there be some analogy to training one's brain to think like a rich person, or at least a debt-free person? Of course there is no universal way that rich or debt-free people think, and many debt-free people wouldn't be considered rich by the usual definition. For the purposes of this post, I'm defining rich people as people who are financially secure, i.e. free of credit card debt, living within their means, on track to be able to retire comfortably-- these aren't insignificant things, and should at least make you feel rich if you've accomplished them!

In The Beck Diet Solution, Chapter 3 is titled "How Thin People Think." The author lists 8 characteristics that make it difficult for many people to diet, and claims that thin people don't have these characteristics. They make a lot of sense, I think, and can easily be translated into traits that might be common among people who find it hard to save money:

#1: You Confuse Hunger with the Desire to Eat
Translates to: You confuse need with want.
You need to learn to differentiate between what is really a necessity, and what is not, and practice depriving yourself a bit so you can experience what true need is really like.

#2: You Have a Low Tolerance for Hunger and Cravings
Translates to: You have a hard time not acting on your desire to buy things.
You need to learn that desires don't have to be acted on right away, and that if you don't buy something you want at that moment, you won't necessarily be haunted by it for the rest of your life.

#3: You Like the Feeling of Being Full
Translates to: You like being surrounded by possessions that make you feel prosperous, or spending money makes you feel prosperous.
Just as there is a difference between eating until you are full, and over-eating to the point where you feel stuffed, you need to recognize the difference between enjoying some of the rewards your money can buy, and over-doing it. You have to train yourself to appreciate what you can reasonably spend, and not feel deprived because you can't spend more.

#4: You Fool Yourself About How Much You Eat
Translates to: You fool yourself about how much you spend.
If you know how much you spend, it's easier to control. You might overspend a little one day, and then know you should compensate by cutting back on another day.

#5: You Comfort Yourself With Food
Translates to: You comfort yourself by spending money.
If emotional distress makes you want to run out and go shopping, you need to learn other ways of comforting and distracting yourself, and try to solve the problems that are upsetting you.

#6: You Feel Helpless and Hopeless When You Gain Weight
Translates to: You feel helpless and hopeless when you get into debt.
You need to learn to have faith in your own decisions and ability to act on them. If you overspend and get into debt, make a plan about how to solve your problem, and stick to it, rather than feeling like you're a failure and demoralizing yourself.

#7: You Focus on Issues of Unfairness
Translation: none needed.
Yes, some people are genetically thin, and some people are born rich. That said, just as many people look effortlessly thin but actually work quite hard to stay that way, many rich people did not have their wealth handed to them on a silver platter, and worked very hard to get it. In any case, how other people got their money isn't really something you should be worrying about when you're trying to get your own financial house in order.
Of course, unlike your weight, your finances may be affected by government policies you feel are unfair-- if you want to change them, get involved and take action to do so, but in the meantime, you're stuck in the world you live in and ultimately, you and only you are responsible for how you spend your money. You have to accept the fact that getting rich isn't going to be easy for you.

#8: You Stop Dieting Once You Lose Weight
Translation: You stop watching your spending once you get out of debt, or reach a certain savings goal.
If you've really buckled down and reached a financial goal, that's great, but you should look at your financial habits in terms of long term goals, not just immediate ones. You have to change your attitude towards money for life, or you'll find yourself in trouble again in the future.

So, a thin person knows why they are eating, knows how much they are eating, is willing to feel hungry, doesn't use food as a distraction, doesn't think gaining a few pounds is an irreversible catastrophe, accepts that staying thin takes some work, and sticks with this attitude for life. A rich person knows how much they are spending, whether it's truly important, knows they will sometimes have to say "I can't afford it," feels satisfied with moderate possessions, doesn't shop as a distraction, doesn't stress out if they go a little over budget now and then, doesn't resent other people's money, and sticks with this attitude for life. That all sounds pretty good to me! Maybe author Dr. Judith Beck should write "The Beck Budget Solution!"

I'm looking forward to trying this with some other diet books, though I'm not sure all of them will prove as useful: French Women Don't Get Poor? The South Beach Savings Plan? YOU: On a Budget? We shall see!

Rethinking My Savings Plans

This month's expense recap pointed out one of the confusing things about how I track my savings. I kind of look at it two ways:
One is the overall bottom line. Total income minus total expenses, equaling a net of $36 saved for May. "Expenses" are defined as money I spent that no longer belongs to me in the form of cash or investments. Since my 401k contribution still belongs to me, it's not an expense.

But my second way of looking at it is more useful to me in some ways. I have a spreadsheet where I take my gross spending and expenses and then break out things that sort of "don't count"-- I subtract taxes and business expenses that will be reimbursed, and back out the 401k. What I really want to look at is how much cash I deposited in my savings account, and how much my controllable expenses are. To me, this is a good reality check. I can't spend my retirement savings or home equity or unrealized stock market gains, so I like to pretend they're not there. I see my 401k contributions as a baseline of necessary savings-- but on top of that, I set myself a goal of saving additional money from what is left of my net paycheck.
I set up a spreadsheet that allows me to enter a few numbers from a monthly Quicken summary and look at the results. Here's this year's spreadsheet so far (click image to enlarge):


This allows me to see what I "really" spent each month. I also break out major items like housing, food, and fixed costs like my base monthly cost for cell phone, newspaper subscription, and internet access, so I can see what I spent on "other," which is what I really need to be vigilant about. I note any unusual large expenses that might skew a particular month, and calculate running totals and averages at the bottom. It's kind of a quirky way of doing it, I guess, and I could probably simplify the spreadsheet, but it tells me what I need to know. I highly recommend the exercise!

As you can see, when looking at my cash flow in this way, I'm not exactly behaving like Miss Thrifty! In my grid for 2006, my average monthly total savings in column N was about $1,700 when I backed out extraordinary items like my bonus and condo downpayment. This year the average is $1,229, which is entirely due to 401k savings. Also, I didn't back out my bonus this year, so it skews higher than it should. When you look at the "paycheck cash saved" column, I'm at -$477, vs. $476 in 2006. (Kind of weird how the numbers are almost a mirror image!)

As I always try to remember, it's expensive to move into a new home. For me, it's been particularly so because of the way I had lived for most of my adult life. After living either with someone else who already owned a lot of furniture, or in tiny studios of my own, I made it to my late 30s having bought very little furniture, so now I am catching up! And in general, I am in super-nesting mode in my new place. I just love it, and of course I want it to look nice and be comfortable and well-organized. Which is all very well and good, but at a certain point, I have to acknowledge that I can no longer afford it.
Trying to have a perfect home all at once was what got my mother into over $50,000 worth of credit card debt within a single year. I am definitely her daughter in many respects! Luckily, I have a more stable income than she did, and I am more financially secure and independent in other ways. So is it ok for me to spend this money, or not? What is the right balance point for me? Since I've covered most of the major items on my wish list, I think it's time to put the brakes on for a while. I can't let myself get into the habit of buying everything I want and throwing frugality to the wind. I have to remember that I have much larger fixed housing costs now, so I have to be more careful about what I spend on other things.
In the near future, I'll be looking more at how I'm doing vs. my overall budget and where I'm at in relation to long term retirement savings goals. Now that the dust is starting to settle after moving into my new home, it's time to refocus and make sure I am on track!