Archive for the ‘Personal Finance’ Category
A while back I attended a FranklinCovery “4 Disciplines of Execution” workshop for my work. It’s a brand new training course and our company, being located in Utah close to FranklinCovey, was chosen as a test group. They brought up some very interesting points about the most important measures for determining success in reaching your goals. As I went through the training I could help think how these concepts apply to personal finances.
Lead vs. Lag indicators
One of the major distinctions they made in the training was between lead and lag indicators. These are measurements you can track that help you achieve your goals. A lead indicator is something that can be tracked and acted upon in the moment and that predicts the outcome. A lag indicator is something that can only be tracked after a result has been achieved. Lag indicators don’t predict an outcome, but rather show the results of an outcome that has already occurred.
The main point here is that a lead indicator is also something you can control in the moment whereas a lag measure is something you can’t control because it’s already happened.
Lead vs. Lag example
Confusing? Here’s an example. Let’s say your son has a goal to save $5 for a toy at the end of the month. In this situation a lag indicator would be how much he saved last month. It already happened and can’t be changed. It also won’t predict how much he’s going to save this month. In other words, it can’t be acted upon. On the other hand a lead indicator could be how much he puts in his piggy bank every day. This is a measurable indicator that your son can influence and act upon and will predict how much he has saved at the end of the month.
As you can see from this example, it’s important for us to identify the lead indicators for reaching a goal because they help us act and to achieve the goal.
Applying lead and lag indicators to personal finance
So how does this apply to personal finance? I often see people using lag indicators to try and predict future performance within their finances. For example, how many of you have wanted to figure out what you are going to spend next month on groceries by looking at expenses from last month? We’ve all done it and yet that is a lag measure. How much you spent last month may have nothing to do with the expenses you’ll incur next month. Further, you can’t act to change what you spent last month. Looking at your finances this way is almost useless in helping you curb future behavior.
Instead, what are some lead measures that could help you predict next month’s grocery spending? What measures will help you achieve a goal of spending a certain amount and no more? There actually could be many different lead measures, but let me suggest a few possibilities.
Lead measure examples
One lead measure could be how many times you go to the store every week. By going to the grocery store less you may spend less which would help predict how much you’ll spend by the end of the month. This probably wouldn’t be the most effective lead indicator, but it’s a start.
Another, slightly better lead measure could be creating a spending plan for your groceries. By outlining how much you’re going to spend on what, you can predict what the total expense will be and such a plan will influence your behavior. While this is a much more effective lead measure and will be more highly predictive of the final outcome, it would require a lot of time and work.
Probably my favorite lead indicator for how much you’ll spend on groceries next month is how much cash you take out to spend on groceries. Of course, this assumes you are exclusively on a cash basis for groceries and that you wouldn’t purchase groceries on a credit card. If you take out $400 for groceries and only spend that cash, you have a perfect lead measure that predicts you will spend $400. Cash serves as the perfect feedback loop. Once the cash is gone, it’s gone. Cash is also a great lead indicator because it can influence your behavior in the moment. If the cash is running low, you may reconsider purchases or decide to purchase some items next month if you don’t really need them yet.
Don’t be deceived by “quick lags”
In contrast, let’s look at using credit cards to measure spending. Many people would consider using credit cards to be a lead indicator because they can look up their account at any time and see what they’ve spent. However, using a credit card in this manner is NOT a lead indicator. Instead it’s what they call a “quick lag.” A quick lag is something that can seem like a lead indicator, but has already occurred and can’t be influenced.
The best comparison is someone trying to lose weight. It may seem like weighing yourself daily is a lead indicator, but it’s actually a “quick lag.” Why? When you weigh yourself, you can’t immediately change the results. There is nothing actionable about weighing yourself. Your weight is the result of decisions you’ve already made and can no longer control.
Looking at your credit card spending at the end of every day is the same way. You can’t go back and change what you spent. Your spending is a lag indicator showing what has already happened and it can no longer be acted upon.
Now I will agree that if someone were to look up their account before every purchase to see how much they’d spent in a certain budget category, it could be a lead measure and could influence behavior in the moment. But that is not a common behavior nor is someone likely to go through the hassle of doing so.
How to create your own lead indicators
So how do you create your own lead indicators to help you reach your financial goals? There’s no one clear answer to this question. Identifying lead indicators can take some creativity and can be a fun process. Here are some guidelines that will help.
Characteristics of lead indicators include the following:
- they are forward-looking and predict future performance
- they predict or contribute directly to achieving a goal
- they can be influenced or changed in the given moment
Characteristics of lag indicators include the following:
- they are backword-looking and measure something that has already occurred
- they can not be changed or influenced
Try looking at the measures you use to control your finances and see if they are lag or lead indicators. Can you change or improve them to be more effective? What behaviors or actions are predictive of how much you spend? How much you save? By re-evaluating your system within the framework of lead and lag indicators, you may have some useful insights that will help you achieve your goals more quickly and easily.
What measurements do you use? Leave a comment and share what measures have worked best for you.
Posted in Finances, Personal Finance | 1 Comment »
Several months ago I was contacted by Organize Magazine to write an article for their new magazine. I’m happy to announce that it’s been published and included in the most recent edition. The article is titled “Financial Files-Your Money Minder” and describes how to set up a binder containing critical financial information. It’s a great way to establish and maintain an overall 50,000-foot level view of your finances.
Due to the nature of the magazine publishing industry and space constraints it was necessary to shorten the original article so the published version is only a fraction of what I originally wrote. I’m planning on posting the whole original article which has a lot more detail and explanation concerning how to set up your financial binder. In the meantime check out the published version.
Organize Magazine is a new publication that, you guessed it, tackles the issue of organization in great depth. Even though it’s a new magazine they’ve already interviewed some major personalities including best-selling author and host of the TLC show Clean Sweep Peter Walsh as well as Sherri Shepherd host of The View. I’ve been very impressed with the magazine and had a great time working with them.
Posted in Personal Finance | 24 Comments »
As I mentioned a couple of posts ago, I credit much of our getting on a solid financial road to participating in Dave Ramsey’s Financial Peace University or FPU. Committing to attending the 13 weeks of classes was one of the best financial decisions we’ve made. The course covers a broad range of topics regarding personal finances and really gives you a good 10,000 foot view of your financial situation. In this post I’ll describe how FPU works and then give a detailed summary of the content and principles in Financial Peace University. I’ll cover the first 6 weeks of the program in this post and the remaining weeks in my next post.
How Financial Peace University is structured
Financial Peace University is broken into 13 classes each about two hours long. In each class you watch a DVD recording of Dave Ramsey presenting a different principle or concept on stage in front of a live audience. At the conclusion of the DVD the moderator then guides the group through a small discussion on the topic of the week. I’m sure the discussion portion of the classes can vary widely based on the charisma and promptings of the moderator. Our discussions were rather brief and not overly soul-bearing which was nice. There were about 15 attendees at our classes and we didn’t really get to know the other attendees. In retrospect it would have been better if the discussion was just a little bit more open so we could hear about others’ experiences.
The best thing about Financial Peace University: Consistency
One of the best things about FPU is not necessarily what is taught, but rather that it forces you to consistently engage with your spouse about personal finance issues week after week for three months. Anyone who chooses to simply listen to the CDs or read the book without attending the classes misses out on the primary benefit. You will miss the recurring opportunity to discuss finances with your spouse every week. You will be less likely to implement what you’ve learned because you’re acting alone. You won’t be able to take your finances in small chunks a week at a time. You won’t strengthen your wealth-building muscles. You won’t be able to create a solid foundation from which to build your financial relationship.
It’s amazing what you can accomplish over 13 weeks when you take it one small step each week. We were able to discuss otherwise sensitive issues without any conflict because we weren’t having one huge meeting every couple of months where we try to hash out everything at once. I believe it truly was a key to our success. If you want to go through Financial Peace University and can’t attend the classes, please make a commitment to meet weekly with your spouse and discuss the principles. The value of the lessons will be quadruple what they would be alone.
The Dave Ramsey Show and FPU
I’m actually not an active listener of the Dave Ramsey show. I came across FPU from another radio news snippet about Dave Ramsey. I went to his site and saw the program. He must have effectively marketed his program because my wife and I decided to sign up. The materials that came with FPU seemed a little homemade to me which is surprising since the program was made by a a nationally-syndicated radio show host. But in the end the quality of the content was much more important than the physical presentation.
Here is a week-by-week summary of the topics discussed in FPU. I’ll cover weeks 1-6 in this post and 7-13 in the next post.
Super Savers (week 1)
Dave Ramsey provides an overview of the program. He covers the value his “baby step #1,” a short-term emergency fund which he defines as “$1,000 in the bank.” Do not touch the emergency fund, except for in emergencies. Savings is about emotion and you’ll only save if you make it a priority. Social Security will not provide enough for a secure retirement. Money is amoral – it’s not good or bad but can be used for good or bad purposes. Don’t spend more than you earn.
You need to save for three things: emergency fund, purchases, wealth building (retirement, college, etc.). By saving for purchases and paying in cash you can negotiate better deals. Start saving NOW – the sooner you start the more of an impact compound interest can have. He goes through some examples of how compound interest works. He emphasizes the importance of a high interest rate. Make your long-term savings automatic. Cut up your credit cards and never use them again. Budget ahead for things like clothes, Christmas, and other expenses that you know are coming.
Cash Flow Planning (week 2)
Dave Ramsey explains the basics of budgeting (spending plans, or cash flow plans). I found that this is one of the areas that lacked the most detail. He explains enough to get going but didn’t cover how you reconcile budgets. He defines a budget as simply telling money what to do rather than wondering where it went. Creating and refining your budget takes time – don’t expect it to be perfect the first month. Persistence is key. Do not go into any more consumer debt.
Dave addresses some relationship issues. A budget is not a tool to control your spouse. Instead, you need to have a civil agreement concerning your budget. Many people avoid creating a budget because they don’t want to face their messed-up financial situation. A budget must be comprehensive and include ALL expenses. Don’t make your budget too complicated. You need to live your budget. Don’t just write it down and ignore it the rest of the month. When you start budgeting, you may have to meet daily or weekly to keep on track.
Make sure you fund your necessity categories – food, shelter, clothing, and transportation. He addresses what to do if you can’t pay for everything. He enumerates the benefits of peace and stress reduction that come from following a budget.
Dave explains the concept of a zero-based budget and promotes the use of cash in your budget (monthly cash flow plan). He briefly discusses recommended percentages that each category should take in your budget.
Relating With Money (week 3)
Dave Ramsey describes the difference in how men and women relate to money. Money is one of the top (if not the top) causes of divorce because money accentuates value differences. Both partners should be involved in budgeting and make money decisions. There are two types of people when dealing with money: nerds and free spirits. Nerds like analyzing and creating complex spreadsheets. Free spirits don’t want to be controlled. If you’re not married, it’s good to get an accountability partner.
Dave then outlines the rules for a budget committee meeting.
- The meeting can’t go longer than 17 minutes
- Nerds make a proposed plan and bring it to the meeting. They give it to the free spirit and then shut up and let them look at it.
- The free spirit has to show up, act like an adult and give positive feedback.
Dave talks about teaching kids how to relate to money and the value of paying “commissions” for chores. You can teach your kids to be responsible with money by making them save for some of their own purchases. Whenever they get money, help them separate the funds into three envelopes: giving, spending, and saving.
Buying Big Bargains(week 4)
In this lesson Dave talks about how to get big bargains and never pay full price. In other countries, bargaining is the standard. But here in the U.S. we’re uncomfortable bargaining.
The first principle in getting good deals is to ask for them. When bargaining you’re not out to hurt the other person. Some helpful “rules of engagement” are:
- Tell the truth
- Have good intentions
- Seek a win-win deal
Here are some other tips for buying big bargains.
- Utilize the power of cash – by paying in cash, there is an immediacy that makes people more willing to bargain with you.
- Utilize the power of silence in negotiating. Most people say too much. One good line to use when bargaining is to say “that’s not good enough” and then stay silent and let the seller make an offer.
- When bargaining, make sure you’re talking to the decision maker.
- Use the phrase “If I…then.” In other words, if I take the item at this price, then I want you to throw in x.
- Try bartering products or services – maybe you have something the seller wants.
- If you’re trying to save money and get out of debt, give homemade gift certificates as gifts.
- Great places to find bargains include estate sales, auctions, consignment stores, garage sales, government auctions, repo auctions, and buying from individuals (classifieds, etc).
- You can often get free products by staying at a convention as it’s closing. Many vendors want to get rid of products so they don’t have to ship them home and are willing to give them away for free.
- One negotiating tactic is to tell the seller “you may be able to sell it for more, but I’ll give you this much right now in cash.”
Dumping Debt (week 5)
Dave addresses many myths about debt and gives a step-by-step plan to get out of debt.
- Myth – Lending to a friend or relative helps them. Truth – Instead it really changes the dynamic of the relationship and damages it.
- Myth – Co-signing on a loan is ok. Truth – Statistically the person you’re co-signing with won’t repay the loan. That’s why the bank requires someone to co-sign.
- Myth – Cash advances help poor people get ahead. Truth – Cash advances are a way for poor people to have things they can’t afford.
- Myth – Lottery and power ball will make me rich. Truth – Lottery and power ball are a tax on poor people.
- Myth – Car payments are a way of life. Truth – Most millionaires drive paid-off used cars.
- Myth – Leasing is a good deal and a sophisticated way to drive a car. Truth – Any expert or analysis will tell you it’s one of the most expensive ways to drive a car.
- Myth – I can get a great deal on a new car. Truth – The value of the car goes down 60% in the first four years.
- Myth – Home equity lines are good for tax deductions and are a good replacement for an emergency fund. Truth – The math doesn’t work. You shouldn’t take out more debt just to avoid paying some taxes.
- Myth - I’ll get a 30 year mortgage and pay extra. Truth - Nobody pays extra. You should get a 15 year fixed-rate mortgage.
- Myth – It’s ok to take out an adjustable rate or balloon mortgage because I know I’ll be moving. Truth – You will be moving when they foreclose on your house.
- Myth – You need to have credit cards and take out a car loan to build your credit. Truth - Open credit card accounts with zero balances and car loans count against you when qualifying on a home.
- Myth – You need a credit card to rent a car. Truth - All major car rental operations accept debit cards.
- Myth – It’s good to use a credit card for the rewards points. Truth - 78% of credit card owners don’t pay off the balance every month.
- Myth – I’ll make sure my teenager gets a credit card to teach them to be responsible with money. Truth - Credit card companies target teens because they become life-long customers and can go deeply into debt.
- Myth - Debt consolidation is good. Truth - Personal finance is 80% behavior. If you don’t change your behavior, you’ll just end up taking on more debt.
- Myth – Debt is a tool to be used to build wealth. Truth - 75% of Forbes 400 wealthiest people said getting and staying out of debt is the #1 key to building wealth.
Steps to getting out of debt
- Quit borrowing more money. Don’t take on any more debt.
- Cut up credit cards. Go cold turkey. Credit cards can mess up your budget on many levels.
- Sell stuff. Go crazy. You have way more than you need or use anyway.
- Get an extra job. Take side jobs to accelerate paying off your debts. This can be temporary.
- Debt snowball. Pay off the lowest debt first, then use the amount you were paying for that debt and roll it over to the next debt.
Understanding Investments (week 6)
Dave explains the basics of investing and recommends what you should invest in. Don’t invest in anything you couldn’t explain to a 7th grader.
Diversification means that you spread your investments around. The more you diversify, the lower your risk.
He explains the relationship between risk and return. Typically, the higher the risk, the higher the return. For example, saving money in a cookie jar is very low risk but provides no return. On the other hand, investing in a high-growth stock is very risky (you could lose all your money) but the potential return is also very high if the stock does well.
Dave explains what liquidity means. Typically low risk investments are very liquid meaning you can access your money quickly and easily. Again using the cookie jar analogy, you can access money in a cookie jar at any time – it’s very liquid – but it doesn’t provide any return. On the other end of the spectrum if you invest in real estate the potential return is very high but the investment in the house is not very liquid – it can take months to actually get the cash in hand from the sale of the house.
Dave explains the difference between saving for something and investing. If you’re saving for something with a horizon of 5 years or less you should put it in a highly liquid, low risk investment like a money market account. If your investing horizon is over 5 years you can afford to take more risk and should buy a mutual fund. On a 5+ year investment you need to make 6% to break even with taxes and inflation (inflation has averaged 4.5% according to CPI).
Dave explains how all main-stream investments work including: money market accounts, bonds, CDs, mutual funds, stocks, Rental Real Estate, Annuities, Commodities and Futures.
Dave’s strategy for allocating investments (he prefers mutual funds) is as follows:
- Standard Diversification
- 25% Growth and Income (large cap, big companies)
- 25% Growth (mid-cap, mid-sized companies)
- 25% International
- 25% Aggressive growth (tech, web, health care, bio-tech, small companies, emerging markets)
- Conservative Diversification
- 25% Balanced
- 25% Growth & Income
- 25% Growth
- 25% International
That concludes the first part of the Financial Peace University summary. I’ll be posting the second half next week.
Posted in Personal Finance, Resources | 14 Comments »
I’m a big fan of Dave Ramsey and give much of the credit for our financial turn-around to his Financial Peace University program. In fact, friends that we’ve referred to Dave Ramsey’s program have also reported that for the first time they’re on the same page as a couple concerning their finances. I must admit though that the book Financial Peace University wasn’t that great — rather the 3 month program was useful.
In addition to FPU, Dave Ramsey is mostly known for his daily (week day) radio show and his book “Total Money Makeover.” Over time I’ve come across a lot of information about Dave Ramsey both on his official websites (of which he has many) as well as in forums and blogs. As a benefit to GFD readers, I’ve consolidated the most prominant Dave Ramsey links and resources for easy reference. Some of the Dave Ramsey resources require a subscription (like his “My Total Money Makeover” online subscription) but there is a lot of good information available for free. If you’re new to Dave Ramsey, I would check out the summary on his “Baby Steps” in particular. It is one of the best, most focused approaches to financial goals I’ve come across.
Read more »
Posted in Lists, Personal Finance, Resources | 35 Comments »
In my previous post about GTD for personal finances (part 1), I covered some basic ways to apply GTD principles in managing your personal finances. Here are 5 more ways you can apply GTD principles to your finances.
Posted in GTD, Personal Finance | 10 Comments »