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.

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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.

Organize Magazine: Financial Files-Your Money Minder

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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.

FPU summary

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.

Debt Myths

• 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

1. Quit borrowing more money. Don’t take on any more debt.
2. Cut up credit cards. Go cold turkey. Credit cards can mess up your budget on many levels.
3. Sell stuff. Go crazy. You have way more than you need or use anyway.
4. Get an extra job. Take side jobs to accelerate paying off your debts. This can be temporary.
5. 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.

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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.

Official Dave Ramsey Sites and content

Dave Ramsey Official Website
Dave Ramsey Radio Show
Dave Ramsey Podcast – You can only download one hour of each show unless you subscribe to My Total Money Makeover.
Total Money Makeover
Financial Peace for the Next Generation – A financial management curriculum for high-school students.
Junior’s Clubhouse (Dave Ramsey for kids) – Products and advice for teaching kids about money.
Dave Says Newspaper Column – Includes archives.
Drive Free. Retire Rich – A multi-media presentation about how to drive a nice car without going into debt.
Questions and Answers on WorldNetDaily

Find list of radio shows

Other radio stations/listen

Overview/summary information about Dave Ramsey

Wikipedia Entry
Overview of baby steps [It's Your Money Blog]
Deconstructing Dave Ramsey – A short overview and analysis of Dave Ramsey’s teachings via thesimpledollar.com.

Books and other Dave Ramsey products (roll over for more info)

I was surprised at how many books Dave Ramsey has published. I am only really familiar with the Total Money Makeover and Financial Peace University books.

Books

The Total Money Makeover: A Proven Plan for Financial Fitness
The Total Money Makeover Workbook
Financial Peace: Restoring Financial Hope to You and Your Family
Financial Peace Revisited
The Financial Peace Planner: A step-by step guide to restoring your family’s financial health
Financial Peace Personal Finance Software
The Money Answer Book: Quick Answers to Everyday Financial Questions
More than Enough: The Ten Keys to Changing Your Financial Destiny
How to Have More than Enough: A Step-by-Step Guide to Creating Abundance
Priceless: Straight-Shooting, No-Frills Financial Wisdom
The Ten Keys to Changing Your Financial Destiny

Spanish-language Books

La transformacion total de su dinero
Tranquilidad Financiera: Traduccion de la Nueva Edicion

Kid’s Books

Financial Peace Jr.: Teaching Kids About Money! : “Cool Tools” for Training Tomorrow’s Millionaires!
Battle of the Chores: Junior Discovers Debt (Life Lessons with Junior)
The Big Birthday Surprise: Junior Discovers Giving (Life Lessons With Junior)
The Super Red Racer: Junior Discover Work (Life Lessons With Junior)
Careless At The Carnival: Junior Discovers Spending (Life Lessons With Junior)
My Fantastic Fieldtrip: Junior Discovers Saving (Life Lessons with Junior)
A Special Thank You: Junior Discovers Integrity (Life Lessons with Junior)
Adventures in Space: Junior Discovers Contentment (Life Lessons with Junior)

Audio Books and Programs

The Total Money Makeover: A Proven Plan for Financial Fitness (Audio Book)
Dave Ramsey’s Financial Peace University Audio CD Library: 13 Life-Changing Lessons! – This looks like the full CD recordings of the FPU seminars. These are included if you enroll in FPU.

Other Products

Deluxe Executive Envelope System: Dave Ramsey’s Financial Peace University With Envelope And Other And Pens/pencils – Includes the FPU book as well as budget envelopes.

Articles/Blogs

Murphey Be GONE [sixredheads.com]
ConquerYourDebt.com
Snowball Calculator
Give up a 401(k) match in order to pay off debt [allfinancialmatters.com]
Dave Ramsey’s Snowball method vs. Suze Orman’s method for getting out of debt [allfinancialmatters.com]
About.com
About.com Nashville
Debt Snowball [mdmproofing.com/iym]
Dave Ramsey vs. Suze Orman: Which Plan For Dealing with Debts is Best? [thesimpledollar.com]

Forums

LivingLikeNoOneElse.com
Gazelle Intense Forums
No More Debt [delphiforums.com]
Frugal Villiage Dave Ramsey Threads

Dave Ramsey Critics

Dave Ramsey is bad at math [fivecentnickel.com]
Dave Ramsey is good at psychology [fivecentnickel.com]
Questioning the “Drive Free” theory [thetaoofmakingmoney.com]

I’m sure I’m missing some links. Please leave other resources I may have missed in the comments.

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GTD principle: Don’t burn unnecessary cycles.

GTD is about efficiency. You ideally should only have a thought once before it’s stored in your trusted system. Otherwise you’ll burn unnecessary psychic energy thinking, worrying, stewing, or remaking decisions about the item. Make a decision once and then take action at the appropriate time and place.

Personal finance principle: Make decisions once and keep a record of them

One mistake couples make is that they burn unnecessary cycles talking about the same topics and making the same decisions over and over again. Not only is it unproductive, it’s emotionally draining and taxing on the relationship.

To remedy this situation I recommend setting up a financial binder (a standard three-ring binder will do) and keeping a record at each financial meeting about what you discussed and what decisions you made. Whenever you have a “didn’t we already talk about this” moment, you can refer to your notes. Your notes don’t need to be long and can often take the form of a simple list of decisions.

Here are some of the decisions (and lists) my wife and I record.

• The situations that we have agreed count as emergencies and would justify using our emergency fund.
• A list of large purchases we’d like to make. This makes it much easier to negotiate when we receive a windfall.
• Our previous months’ budgets for reference
• Net worth statements (updated quarterly)
• Outlines of major discussions and decisions made
• Travel plans and budgets
• Gift giving plans and budgets
• Record of how we used bonuses, tax returns, or other windfalls
• Prioritization of high-level goals (save emergency fund first, pay off debt next, etc.)

Paper vs.digital records

I am a big advocate of keeping a paper binder in addition to a digital copy of these records. Once you’ve printed out a spreadsheet or document, it doesn’t change and acts as a stake in the ground. At that particular point in time, that’s that decision you made. By keeping a digital record, you’re never quite sure if anything was modified since you last looked at it. Did your spouse make any modifications? Did you to into the file to play around with different scenarios? This is particularly a problem with keeping budget records which tend to always be in flux.

Of course if you have a good way of keeping digital records and tracking changes, go ahead and do so.

GTD principle: The power of the “next action”

Many people get stuck on projects because they simply don’t take time to determine the very next step. Instead, they get overwhelmed by the enormity of the task. Or worse, they simply don’t take the 30 seconds it requires to get enough clarity about what to do next, even if the task and project are relatively simple. By determining the very next step, you gain enormous clarity and momentum. You can clear the log jam and get a project moving again.

Personal finance principle: Focus on one financial goal at a time; your “next goal”

There is tremendous power in determining a list of your financial goals and attacking one at a time. It’s so easy to get overwhelmed with your finances trying to decide which of the many goals to go after. Instead of attacking them all at once, choose one at a time and focus only on that until it is accomplished. This applies more to short-term goals but can also apply to long-term goals.

Many people have heard about the debt snowball which happens to apply this very principle. Rather than trying to pay all of your debts down a little every month, choose one debt to pay down (the one with the lowest amount left to pay off) and focus all the money you can on just that debt while paying the minimum payment on the rest. Once the first debt is paid of, apply all the funds that were going toward that debt and add them to the next largest debt. As you pay off each debt, the total amount going towards the next debt continues to increase or “snowball” until all debts are paid. By following this principle you can pay off all of your debts much faster than if you simply paid a little extra to all your debts every month.

But don’t let it stop there. Once you pay off all your debts, take the total that was going toward paying them off (which could be quite a large chunk) and start putting the entire amount towards your next goal be it saving for a large purchase, a vacation, or your kids college education (notice how I put that third). Chances are with such a large focused amount you could achieve these secondary goals in a few months or less.

Of course, this principle doesn’t apply so much to retirement savings where the whole idea there is “slow and steady wins the race.” But for finite goals this focused approach works great. Speaking of which, you should already have a list of your goals, along with priorities, printed out and sitting in your financial binder, right?

GTD principle: Viewing all your projects in one place makes it easier to make priority decisions

One of the benefits of keeping a project list and reviewing it regularly is that it’s so much easier to make priority decisions when you can sit back and take a high-level view of all your projects. That way you can compare one against another. Some projects may seem incredibly vital when seen individually but, when compared to other projects, should take a back seat.

Personal finance principle: Keep a list of your financial goals and major purchases and make decisions based on the big picture

Having a trusted, complete financial system allows you to take a high-level view of all your goals and priorities and make the best trade-off decisions about where to spend your money. Sometimes I get fixated on buying a particular item and it seems like that’s the only thing I want. But when I take a step back and review my list of goals, I realize that there may be 2 or 3 things that I want even more but had forgotten about. I’m able to readjust and refocus my spending to maximum effect.

Even on a monthly level, this principle works. By switching to a cash-based budget, we saved a significant amount of money but perceived absolutely no decrease in our standard of living. That’s because we had been spending a lot of money (small amounts here and there that added up) on things that seemed alluring or attractive at the store but, once bought, went virtually unused. Sometimes these were small grocery items, and sometimes larger household items. Because we didn’t put a cap on our spending with clear cues when we reached the cap, we just relied on our impulses.

GTD principle: Operate from a zero base

David Allen mentions in his audio series “Getting Things Done FAST” (not currently in publication) that he operates from a zero base. Every day he completely empties and processes his in-boxes to “zero.” Doing so helps him maintain a squeaky clean system and make sure all open loops are dealt with.

He goes on to share a story of one executive he worked with that had a psychological resistance to getting his email to zero. He had processed everything up to that last email and then stopped. David had to coax and convince him until he finally succumbed and processed the last email, taking his email inbox to zero. Suddenly a light turned on in the executives mind as he experienced the freedom of a zero inbox.

I’ve personally experienced this release of a zero inbox. All of a sudden, you are no longer subject to constantly checking your email and being controlled by what others are sending you. When I get to zero I have the feeling of “wow, now I can do what I think is most important rather than what others think is most important.” It allows you to operate by your priorities rather than urgency. It inspires tremendous creative energy and freedom.

Personal finance principle: Use a zero-based budget and zero-based accounting

Zero-based budget

The obvious application in your finances is to operate on a zero-based budget. In other words, assign every dollar of income (your inbox) before you spend it. Ensure that there is no dollar without a “name.”

By operating on a zero base, something magical happens. Suddenly your finances become a finite thing. It’s surprising how many people never have this experience. They never are able to pin down their finances but rather feel out of control. Using a zero-based budget you have a sense of control and empowerment. The first time you operate on a zero base can be shocking. Sometimes you don’t see a pretty picture. But the good news is, by using a zero-based budget, least have control to fix your financial problems.

Operating on a zero base means operating within the bounds of the hard facts of your financial situation. You’re no longer dealing with rough or theoretical amounts but in hard income and expense figures. But even more important, it empowers you to take control of your finances and reach your financial goals. It allows you to make trade-off decisions based on your higher-level values.

Zero-based accounting

A second application to the concept of operating on a zero base is zero-based accounting. This concept may be a little confusing so stay with me. Zero-based accounting means that every dollar of income recorded in your financial management tool of choice (Quicken, MS Money, or a spreadsheet), must be allocated to a category bringing your “virtual balance” to zero. Conversely, every expense must be allocated or “come out” of one of your categories.

It’s like using virtual cash envelopes. With a completely cash-based budget, you would receive income (in cash) and divide the income up, putting the cash into envelopes with each envelope representing a category. When you spend funds, you must decide which envelope or category the funds come out of. Zero-based accounting is doing this exact thing, only instead of being cash, you’re tracking things virtually or electronically.

Another way to look at this is that the total sum of dollars in all your financial accounts minus the total funds that are allocated to categories (in a spreadsheet or other tracking tool) must equal zero.

Using zero-based accounting can be done fairly easily using spreadsheets or even in Quicken using the “savings goals” feature (I will go into much more details on this in a coming post). It’s a little more work as you go since every incoming and outgoing flow must be decided upon and allocated accordingly, but doing so allows you to see instantly your whole financial situation. It’s much easier to spot trouble areas (do you have enough saved for your next yearly insurance payment?) and track your progress towards your goals. If you’re not sure where to allocate funds, you can temporarily put it into a “decide” category and then address those funds at your next budgeting meeting.

GTD principle: Organize from the bottom up. You have to first know where you are to get to where you want to go.

The GTD system is a bottom-up approach. By getting control over the runway-level actions and projects you can then more easily and effectively achieve your higher-level goals and objectives. David Allen doesn’t say you can’t think about higher-level goals before you get your day-to-day operations under control. But it’s harder to achieve your high-level objectives if you can’t get a grip on your actual next steps.

Personal finance principle: Manage finances from the bottom up. Getting control over the details accelerates reaching your high-level goals

Managing your finances from the bottom up means getting total control of your month-to-month, “runway-level” spending and directing your money powerfully and effectively toward achieving your high-level goals.

I used to think that saving 10% for retirement was the ultimate in financial responsibility. I could spend how I wanted as long as I was saving for the high-level goal of retirement. Over time I’ve come to realize that by taking that approach I wasted thousands of dollars on frivolous spending that I really didn’t value as much as the other financial goals I neglected. By approaching finances from the bottom up I was able to still set aside some “fun” money while optimally directing other funds towards the goals I really care about.

Most people never get a clear picture of where they are financially on a nuts and bolts level. There’s always some element of mystery. By creating net worth statements and using a zero-based budget, you can get a solid grip on income and expenses to help you make solid decisions to meet your higher-level goals. Once you really see where you are, it makes it easier to get to where you want to be. Oftentimes it’s painful to see where you are but if you never do, you’ll end up arriving at an unwanted destination years down the road.

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• Applying GTD principles to your personal finances – Part 1 | Getting Finances Done

By applying David Allen’s personal productivity principles to personal finances I’ve been able to make some vital distinctions that have helped me manage my money more effectively. Some principles have a very general application like “use a trusted system” while others have a very direct application like “operate from a zero base.” Here is my take on how you can apply GTD principles to your personal finances. It’s ok if you don’t know anything about GTD. These principles will still make sense and are sound principles to follow.

GTD principle: You must have a trusted system to achieve a “mind like water”

To achieve stress-free productivity, you need to have a system you can trust 100%. If you have any unresolved items not in your system, you will never be able to trust it completely and always have some degree of worry, anxiety, or concern that you’re “missing something.” When you have a trusted system, you can achieve a “mind like water” in your personal productivity. You will respond in perfect proportion to the inputs in your life.

Personal finance application: You need a financial system you can trust

In order to achieve a “mind like water” in your personal finances, you must be able to totally trust your system. Every time you spend money, you need to know that you have it and won’t need it for something else. You need to know that you’re saving according to your priorities and values in relation to other possible goals.

People make false starts in managing their personal finances all the time. You start budgeting and tracking your spending in Quicken or MS Money. But if you don’t have a pre-defined plan, things can start getting complex and out of control. Before you know it, you’re not sure if you can trust the data in Quicken because you don’t have an accurate way of reconciling accounts. The data in Quicken just doesn’t seem to match what’s in your bank account. You’re not sure if your spreadsheets are accurate. You’re not sure if your budget reflects reality. As a result, you lose confidence and throw all your efforts out the window. You end up discouraged and pessimistic, feeling that you’ll never be able to get your finances figured out. You return to negative spending patterns and go deeper into debt.

Those who trust their financial management system, have a completely different outlook. They spend confidently knowing they have the money and that it’s set aside for that purchase or category. There are no holes in their budget. They are moving forward and are on track to reach their financial goals. They know from month to month that all their money is accounted for and being used exactly the way they want. There is no anxiety or nagging feeling in the back of their mind, fearing they might miss a bill payment or that they “missed something” in their finances.

This principle has implications throughout the other principles below. While this article won’t go into great detail about how to create a trusted system, some of the keys to trusting your system include creating an emergency fund, having an accurate way of reconciling your budget, using a zero based budget, keeping track of all your money in all your accounts, and reviewing your finances regularly (at least monthly).

GTD principle: Collect everything in your system

This principle ties directly into the first. In order to have a trusted system it must contain everything. In regard to personal productivity, all your open loops — anything that is an incomplete action or project — must be collected and organized into your system.

Personal finance application: Account for every dollar

To apply this principle to personal finances, we must determine what our “open loops” are. In this case, every dollar you own is considered an “open loop.” If there is any dollar unaccounted for, ignored, or forgotten, you will never have peace about your finances. There will always be questions in your mind as to whether you’ll meet your financial goals, or even if you’ll have enough to pay next month’s bills. I like the way Dave Ramsey puts it–you have to “give each dollar a name.”

There are two ways to track open loops and assign each dollar a purpose. First, use a zero-based budget. By definition, a zero-based budget requires you to allocate every single dollar of income so that income minus expenses equals zero. Doing so forces you to make conscious decisions about all your money, even if you have discretionary funds left after allocating your living expenses.

The second way to collect your open loops is what I call zero-based accounting. Zero-based accounting means that you assign every dollar in all of your financial accounts. If your checking account has $1,200 in it, write down what these funds are allocated for ($600 are for this months budget, $500 to pay the next credit card bill, $100 is part of my emergency fund, etc.). You can do this in a spreadsheet or even within Quicken (I’ll write about this in more detail in a later post). This is easy for IRA, Roth IRA, and 401K accounts since the purpose of those funds is clear. However, most people don’t clearly assign the funds in their checking or savings accounts and just whittle them away on unplanned purchases. By assigning those funds, you take a critical step that will allow you to consciously obtain your goals rather than just optimistically hope to achieve them.

Look at the funds in your checking account right now. Do you know exactly how they will be used? Are they there to pay your next credit card bill? Are they to be used as an emergency fund or cushion? Are you planning on spending them on a big-ticket purchase? By making and tracking decisions about how the funds will be used, you’ll ensure that they won’t be unintentionally wasted or spent in some other way.

GTD principle: If you’re feeling out of control, do a “mind sweep”

The “mind sweep” is a process David Allen suggests to ensure that everything is in your system. You essentially go through every possible aspect of your life (aided by a list of triggers) to see if there’s anything lurking in your subconscious mind. You gather any missed items and get them in your system. This ensures that your system is as complete as possible and helps give you peace of mind that you’re not missing anything.

Personal finance application: Conduct a “reality review”

Sometimes even the most refined systems have hiccups. Human error or complex software can cause situations in which you’re not sure your system is accurate or comprehensive. The personal finance equivalent to the “mind sweep” is what I call the “reality review.” Every personal finance system needs to have a way to quickly do a reality check to ensure the mass of spreadsheets and financial software actually match reality.

There have been many times when I simply haven’t trusted Quicken. Despite the slick syncing functionality, I just don’t always trust that what I see in Quicken will equal what is actually in my bank account. In minor instances, a simple trip to my bank’s website is all I need to confirm or deny my suspicions. The problem is that an updated Quicken account will show all transactions up to today, whereas my online account may lag a few days. In such instances, you can simply look at the date of the last transaction online and refer in Quicken to the entries for that date. The running balance in Quicken for that date should match your online balance.

Some cases require a more in-depth review. You may need to compare your savings account balance with a spreadsheet of how the funds are allocated. It’s hard to give a specific process for a “reality review” since situations and ways of managing finances vary so widely. But everyone should have a documented procedure they can go through to compare what’s really in your accounts to what your accounting systems say. You should be able to go through your “reality procedure” quickly, so keep it as simple as possible. You’re looking for the shortest most efficient way to achieve the desired result.

Perform a mind sweep on your finances

There’s actually an obvious second application of this principle and that is to do a mind sweep for finances. Brainstorm all of the possible financial issues you need to address and make sure you have plans to deal with them. Make sure you’ve allocated all your funds (did you miss that old savings account you never closed?). Do you need to review your investments or insurance? What are your long-term savings goals? What are your short-term savings goals (purchases, vacations). Do you have all your goals properly documented for regular review and adjustments?

You might want to have David Allen’s system in place before doing this so you can deal with all the open loops it creates.

GTD principle: Don’t keep open loops in mental RAM. Keep them in your system.

Mental RAM is like the memory in your computer. Just as the RAM in your computer can only hold a limited amount of information for short-term retrieval, so your mind can only hold so much in its sub-conscious before it overloads. Rather than keeping everything in mental RAM and being constantly distracted and overwhelmed, keep everything in your system. That way you can trust that you’re not missing anything. You can “load” only the project you’re working on into your conscious awareness.

Personal finance application: Don’t keep track of your spending in your mind. Use cash or a spending notebook

Don’t keep track of your spending in your mind. Not only is it next to impossible to keep track of all your purchases throughout the month, but if you have a spouse, you won’t have an accurate accounting anyway since he or she may have spent funds in that category as well. Instead, use cash or carry a spending notebook (or some other way to track your spending on paper).

The most common financial anxiety I hear about is that people are not sure if they have the money they are about to spend. Or they’re not sure if they have spent over their budget for that category. This uncertainty results in that pit-in-the-stomach feeling and is one of the leading disruptors of financial peace.

Credit cards don’t help you track real-time spending

Many people mistakenly think that spending with credit cards alone solves this problem because they can download their transactions at the end of the month. But having data after the fact does not help you control your spending in the moment. You need real-time data. In fact, credit cards can exacerbate the problem because you’re spending money that won’t actually be paid until next month. This time-shifting effect can muddy the question “do I really have the money to buy this?”

Use cash in your budget to track spending where needed

My preferred method for tracking day-to-day spending in problem categories is cash. It has an advanced instant feedback mechanism that is always accurate, requires no batteries, and I don’t even have to carry a pen. I never think twice about if I have the money or not because I always know. I never worry about spending outside my budget.

Use a spending notebook for debit card, credit card, or check spending

A spending notebook is slightly less convenient since you have to take the time to record your transactions but is equally effective. Just make sure that you and your spouse decide how much you each can spend in the same category so you don’t go over. If you insist on using a credit card, you can also track those expenses with a spending notebook.

GTD principle: The weekly review

One of the most important parts of David Allen’s system is the weekly review in which you review your whole system. Empty your inbox, review your lists, review your open loops, update your projects. This process is critical in keeping your system up to date and in helping you trust its accuracy.

Personal finance principle: Regular budget meetings

Reviewing your finances on a regular basis is crucial to maintaining your system. The typical review period is monthly, but if you’re just starting to budget or are in a tight financial situation, you may want to review your finances daily or weekly. Your periodic review should include:

• entering receipts into financial software
• reconciling your financial software with your paper statements
• reconciling last month’s budget
• creating next month’s budget
• determining how much cash to withdraw for the period (if you use cash)
• ensuring all automatic payments were made as planned
• ensuring all automatic payments for the next period are set up properly
• reviewing your short-term savings goals

About once a quarter you should also:

• review your long-term savings goals
• update your net worth statement to see your overall financial progress
• plan for upcoming vacations or major purchases

Becuase finances are so in flux, it’s impossible to maintain a working, accurate financial system without a regular review. Schedule a time every month to sit down and review your finances.

GTD principles for personal finances part 2

Ready for more? Check out GTD principles for personal finances part 2.

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• 3 reasons most budgets don’t work and how to fix them (a.k.a. How to create a budget that works)
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Fixed/Variable Model

In my post about how to create a personal budget I addressed how to create your first budget. In that article I advocated using the fixed/variable model; first allocate your fixed and semi-fixed expenses, and next allocate your variable expenses. For first-time budgeters, this makes a lot of sense and helps you first determine your hard landscape (fixed expenses) before you fill in the rest (variable expenses). This is still one of the best ways to create your first few budgets, but isn’t the most efficient way to group categories once your budget is established.

Necessity Model

The next model is the necessity model. Using this model you budget your necessities first (food, housing, clothing) and proceed from most essential to least essential. This ensures you can pay for shelter, food and clothing before you pay for your new HDTV. This can also be a useful model for novice budgeters. But it is particularly relevant if you’re in an emergency financial situation or if you’re facing bankruptcy. Give priority to the necessities and let the other expenses take a back seat. However, this model is not very useful for normal month-to-month budgeting.

Usage Situation Model

There are really only a few ways to “use” or manage money. By grouping budget categories by how the money is used you can accelerate the budgeting process.

I’ve found it most helpful to group the categories as follows:

• Automated categories – Expenses paid automatically (electronically)
• Cash (Debit) categories – Expenses that will be paid for in cash or with a debit card
• Accumulated categories – Periodic or irregular expenses that need to be saved for (these may be automated or paid for using cash or a debit card)

Grouping categories by usage situation also makes it easier to manage and keep track of your money. For example, by grouping automated categories, it’s easier to identify how much money you need in your bank account to cover those expenses and the timing of those withdraws. If you want to review your automated expenses to ensure they’re behaving as expected, you have them all at your fingertips. By grouping cash categories you can quickly calculate how much money to withdraw every month for cash expenses. By grouping accumulated categories, it’s easier to track and manage the balance of each category and where those funds reside.

Let’s look at each group individually and how to address them in your budget.

Automated Categories

When reviewing your budget, first address the automated categories. This group is pretty self-explanatory. These are all the categories that are paid automatically on a monthly basis. They are typically fixed (with a few exceptions) and the amount rarely changes. The great news is, this is the category that should take almost no time to address. You just copy the amounts from one month to the next and you’re done. You typically won’t need to have big discussions with your spouse about these categories unless the rest of your budget is very tight.

Here are some examples of Automated categories:

• Utilities
• Mortgage
• Some charitable donations
• Retirement or other long-term savings
• Subscription Services (satellite)
• Some insurance expenses
• Some medical expenses

Automated categories tend to be difficult to change without a lot of effort. For example, your mortgage payment cannot be easily or quickly changed. If you decide to switch satellite or cable providers, it’s typically a multi-week process. That’s not to say these expenses can’t change, but often it takes more time and effort to do so than other expenses.

Dealing with variable automated expenses

Some automatic expenses are variable such as utilities (gas, electric). In these cases, find out if there’s a fixed payment option. Many utility companies offer a fixed payment option that calculates a fixed average payment for 6 months or a year. If you end up paying too much, the fixed payment is adjusted down at the end of the period. Pay to little and it’s adjusted up. These programs can provide a lot of stability and predictability to a budget and should be used if possible.

If a fixed payment program is not available, you’re still ok. Simply look at how much you pay on average for that expense and budget a high average for that category. For example, our telephone provider doesn’t provide a fixed payment program so we looked at our bills and found that, on average, the bill is $80 (including internet service). It tends to regularly fluctuate up to $85 and down to $75, and very rarely goes up above $90 (my wife didn’t realize calling Canada was so expensive). We decided to budget on the high end of the typical range at $85.

By budgeting on the high side, you give your budget more stability and provide a little cushion. If we go over $80 a little, we’re covered. If we go under, we let the extra funds accumulate to cover months that go over. Don’t worry too much about the exact budget amount. Over time, it will become apparent if you’re budgeting too much or too little. If you budget too much, feel free to re-all ocate the overage and treat yourself to dinner. That will act as a cue that you can reduce the monthly allocation. On the other hand, if you find you’re always short on that category, that’s a cue to increase the allocation. I should also mention that I’m assuming you already have an emergency fund establish so that if you happen to unexpectedly go over a large amount, you’ll have the money to cover it. You can check out my article about ways to save a little cash for an emergency.

Cash (Debit) Categories

Next, address your cash (or debit) categories. These expenses are usually depleted every month; you budget $100, you spend $100. Uncontrolled, cash categories tend to be highly volatile. This is where much of your overspending can occur which is why it’s good to use cash. Fortunately, as your budget matures this group is fairly easy to address because your needs won’t change much from month to month. When you first start budgeting as a couple, there is typically a lot of discussion about how much to allocate to categories like “grocery,” but over a few months, you should settle into a sweet spot. After that, you typically won’t make major adjustments unless there’s a significant change in your financial situation.

Example cash (debit) categories are:

• Grocery (food or non-food)
• Eating out
• Clothing
• Some Medical
• Prescriptions
• Over-the-counter medications
• Babysitting
• Personal Money
• Entertainment

A good rule to follow is that any category where you tend to overspend should be cash. One benefit of grouping your cash categories is that it’s easier to calculate how much cash you need to withdraw every month because they’re all in the same place.

Accumulated Categories

Finally, look at your “accumulated” categories. “Accumulated” budget categories are expenses that may occur less frequently than monthly or that may be unpredictable. In other words, these are categories where you “accumulate” funds over time until they are needed. Accumulated categories are the least homogeneous of the three groups. Some are semi-fixed like Insurance and car registration payments. Others can be wildly variable like vacations and gifts. Some accumulated categories are easy to change while others may be difficult. For example, changing your clothing budget is not difficult to do (even though your wife might have issues with it). On the other hand, quarterly or yearly life insurance payments may take considerable effort to change, particularly if you need to research insurance companies, get a new quote, get a blood test, etc.

Unfortunately this is where a lot of the arguing, negotiating, compromising, and pleading takes place. In a more established, mature budget, this group won’t take long. But if your just starting out, or if you’ve had some changes in your financial situation, expected or unexpected, you’ll want to plan on spending some time here.

Here are some examples of Accumulated categories:

• Insurance
• Car maintenance/registration
• Savings for large purchases
• Household maintenance
• Medical
• Gifts
• Travel
• Subscriptions
• Memberships
• Car replacement (we still aren’t funding this one)
• Clothing (if not taken out in cash)

There are 2 ways to deal with accumulated expenses

1. Make equal payments

If your $100 car registration is due in 6 months, allocate $17 a month to this category (100 divided by 6). By the time the registration is due, you’ll have the money. If you use this method, be careful not to simply divide all yearly expenses by 12 months unless you really have 12 months before the payment is due. When we first started budgeting, our next life insurance payment was only 4 months away so we had to allocate more money up front so we’d have enough. Once we made the payment, however, we then had 12 full months until the next payment and reduced the monthly allocation accordingly.

You can track how much money has accumulated in a number of ways ranging from a sheet of paper to a spreadsheet to financial management software. In future posts I will address different ways of tracking these categories. In the mean time I would recommend either a basic sheet of paper, or keep track of the accumulated amount right in your budget spreadsheet next to the category name. If funds from different categories reside in more than one bank account, also note next to the category name what bank account the funds reside in.

2. Use windfall money to fill in the gaps

Most people don’t have enough money to fund all their accumulated categories in full every month because this is where many of the “wish list” categories reside. If you can’t fund every category you can rely on (or hope for) financial windfalls to fill in the gaps. When we first started budgeting, we were so tight that we simply didn’t have enough to allocate every month for gifts and vacations. But because the rest of our budget was under control, when we received a bonus or financial gift we could allocate it to these categories accordingly. As we’ve refined our budget and as our income has increased, we’ve been able to fully fund many of these categories on a monthly basis.

Speeding up the budgeting process — An example

Using these groups, here’s how our budgeting meeting usually goes.

1. We look at automated categories. No surprises there. All the expenses are the same as always. Gas and electric are on an equal-payment system. The phone bill is $5 more than usual but we’ve been under a few months and have a little extra allocated to cover it. Time spent – 1 minute.
2. We look at cash categories. Over time we’ve settled into a comfortable amount for each of these. For categories like “personal money” we’ve had many heated discussions in the past about how much should be allocated, but now that we’ve reached an agreement that we both feel comfortable with it doesn’t change from month to month. Emily calculates how much total cash she needs to withdraw this month. Time spent – 3 minutes.
3. We look at accumulated categories. We’re on track to have our next life insurance and car registration payments saved by the time they’re due. We haven’t had any major medical expenses so we’ve built up a nice little balance in that category. We discuss if we need to reduce the amount we’re allocating every month to medical but decide that we’d rather have the funds ready just in case of a medical emergency. Time spent – 5 minutes.
4. If there is any money not yet allocated, we first look to see if there are any known expenses coming up that aren’t on track to be fully funded. Typically this ends up being “gifts,” “vacation,” or a similar category. We determine which category to fund.

   If we allocated more than we have in income, we discuss which categories to take money out of. Time spent – 10 to 30 minutes

   This last step is where the bulk of our conversation takes place. By grouping the categories, we were able to get through the bulk of the budget in a matter of minutes. Sometimes you can’t avoid lengthy budget conversations when you have an unusual month or your financial situation changes. But on an average month we can literally get through our budget as a couple in 15 minutes.

Note: the times indicated don’t include the time spent to reconcile last month’s budget.

Little distinctions like this can really streamline the budgeting process over time. What tricks do you have for streamlining your budget?

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Financial management principles are the same for millionaires and low-income-earners alike. Certainly the numbers your dealing with will change, but the basic principles and processes are still the same. In fact, by following sound financial management principles and optimizing your frame of mind, you can accelerate the process of building wealth and know how to keep it when you arrive. Here are 7 ideas that will help you think about and manage money like a millionaire, regardless of your income.

1. Be who you want to be. Earning more money amplifies who you are.

I’m going to borrow my first idea directly from my lunch partner who said “earning more money really just amplifies who you are.” While that might seem initially like a good thing, it really is a double-edged sword. For some, becoming a millionaire leads to a life of over-indulgence and decay. We catch glimpses of this in the popular media and entertainment world; drug addiction, abuse, and infidelity. Blemishes in your character will still be there if you become wealthy. Don’t fool yourself into thinking that having more money will solve your problems. It could make them worse.

On the other hand, if you have a mindset of serving and making a postitive contribution to your family and community now, you will be able to manifest those contributions with even greater power and effectiveness when you’re rich. By focusing on the positive contribution you want to make in your life, you will be prepared to expand and amplify your contribution as you earn more money.

2. Build your relationships. Earning more money amplifies your relationship dynamics.

Let me tell you a secret: earning more money does not solve your relationship problems. Even though my income has increased significantly over our 10 years of marriage, we still tend to argue about the exact same financial issues. If you have bad arguments over $100, just think of the how intense they will get arguing over $10,000 or $100,000. Working out your finances as a couple isn’t about the dollars, it’s about your values. By making all your spending and budgeting explicit, and by working as a team, you can address those values differences before they get out of control. As you become more wealthy, you’ll have a trusted, agreed-upon system in place to manage your increase.

3. Spend money consciously, but on a macro level.

Even as a millionaire you should know where every dollar is spent, but you don’t necessarily need to know line-item detail. Rather, you need to know how much is spent within broad, macro-level categories. Millionaire’s still need to decide how many thousands of dollars they’re going to spend on the “blow” category every month in relation to other expenses. Their blow category may be able to fund a new truck while mine funds a new book, but the decision is the same.

I recently read an article at StevePavlina.com where he talked about his goal of becoming a millionaire. He mentioned that to get in the mindset of a millionaire he would carry hundreds of dollars in cash in his wallet and not fret over $100 purchases. At first glance, it seemed that he was spending his money irresponsibly. But the fact is you can spend some of your money frivolously and still have total control over your finances. The trick is to simply decide how much you’re willing to blow in relation to the rest of your finances.

If I were a millionaire I may very well give myself and my wife $1,000 in personal money every month. That leaves a lot of room for spending money any way I want, anytime I want. But looking at my finances as a whole, there will be some limit as to how much I’m really willing to spend this way.

4. Be generous regardless of your income.

If you want to become a millionaire, be generous now. Charitable giving seems to be a universal law that attracts abundance into your life. Scriptures have taught this principle for ages and even T.V. shows like My Name is Earl jokingly acknowledge the effect of good karma and the golden rule.

Many people deceive themselves thinking “once I have a lot of money, I will give generously to charities,” but don’t make even small charitable contributions today. If you have a hard time giving away $10 now, what makes you think you’ll be able to easily give away $10,000 when you’re wealthy?

Upon recieving some windfall money recently, my wife and I decided to allocate a few hundred dollars to “random charitable acts.” We already donate to our church regularly but felt that we’d like to be able to give to specific people as we felt inspired to do so. We hope this will put us in a mindset of giving. We can actively be aware of the needs around us and feel empowered to help others financially as needed.

How cool would it be to do this on a large scale? I’ve been inspired by Billion-dollar donations from Bill Gates and Warren Buffet to charitable causes and think it’s a great example of a person’s character amplified. I recently read about someone who just decided one day to go out in public and start handing out $20 bills to random people. It seems counter-intuitive, but the stronger you grasp money, the harder it is to attract it into your life. In contrast, the more generous you are, the more it will flow into your life.

5. Provide enourmous value at work (self-employed or not)

One characteristic most wealthy people I know have in common is that they are totally invested in their business. Whether they earned their wealth by starting their own business or by working for another business, they all are focused on adding enormous value.

Sometimes it’s easy to kick back and waste time when working for an employer. It’s easy to not feel personally invested. But by doing so you’re only hurting yourself. In every job there are possibilities to contribute above and beyond what’s expected. Those who do tend to expand their influence and are promoted faster. Treat your job like it’s your own business and you’ll find a level of enthusiasm you didn’t know existed. Looking at work through the lens of business ownership, you also may just find yourself aching to start your own business. Either way, you’ll be a happier person and will find that opportunities for advancement and wealth come to you more effortlessly.

6. Plan a “millionaire lifestyle” day.

Imagine what your day-to-day life would be like as a millionaire. Would you get up and go play tennis? Or would you sleep in as late as your want? How would you interact with family and friends? Would you still work but only on projects you love? Once you have a clear picture in mind, find a day you can take off work and do those activities. Of course, there may be restrictions on how much you can spend, but do as much as you can afford.

By actually doing what you think you’d do as a millionaire, you can take one small step towards turning your thoughts into reality. Some people may find that they don’t really enjoy the activities as much as they thought. If the reality doesn’t live up to your expectations, re-think things and try again. If you think you’d spend your time running a business, you could use your millionaire day as a way to take massive action towards starting that business. Don’t just do this once. Schedule a “millionaire lifestyle” day 2 or 3 times a year. Have fun and get a taste of the millionaire life.

7. Build a strong foundation and get ready for your finances to explode.

It’s easy for people to get overwhelmed by the enormity of the task of getting out of debt, paying off your house, and saving for retirement. But what most people don’t think about is that with a focused budget and a debt-reduction plan, there comes a point at which your debt and house are paid off and you’re already saving enough for a comfortable retirement. All of a sudden you’re in a position with no debt, no payments, and possibly thousands of dollars a month of disposable income. Overnight, your famine turns into a feast. That’s when life gets really fun.

While we’re still working on paying off our house, we have already started experiencing this shift. It used to be that we struggled to fund luxury categories like gifts and vacation. Bonuses and cash gifts were used to fund categories that we knew we wanted to budget for but didn’t have enough month-to-month income to fund. Over the past couple years, we’ve been able to fully fund these categories and windfall money now goes mostly straight to debt reduction. Soon our second mortgage will be paid off and we’ll be putting that several hundred dollars a month (our payment plus snowball) into our first mortgage. Once the first mortgage is paid off, we should have over $2,000 a month to play with. And that isn’t even taking into consideration any income increases I may have over time. $1,000 a month in personal money doesn’t sound all that far off after all. And I won’t even need to be a millionaire to get it.

8. Recognize your wealth now to attract more into your life.

If you’re reading this blog, chances are you’re more wealthy than the vast majority of the world. Sometimes it’s easy to forget that simple fact. You are wealthy. I recently listened to an audio program by Dr. Wayne Dyer where he mentioned that if you were to compare the population of the earth to a village of 100 people and apply the same statistics you would see that 6 of the people (all from the United States) have 59% of all the wealth of the world and that only 1 person would own a computer. If you have food in the refrigerator, clothes on your back, a roof over your head, and a place to sleep, you are better off than 75% of the world’s population.

By focusing on the wealth you already have in your life, you will attract more of it. If you only think about scarcity and what you don’t have, that’s exactly what you’ll attract. To create wealth, you have to think creatively.

Be a millionaire is a frame of mind. If you’re only after money, you’ll always want more and will never have enough. If you’re after happiness, you can find it at any moment by changing your focus. By following these guidelines you’ll be able to experience just as much joy and satisfaction as any millionaire. “Money can’t buy me love” nor can it buy happiness.

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My wife graciously volunteered to write this post and it’s her first post on GFD so be sure to give her extra praise and adoration!

It’s that time of year again. Rushing around, making last-minute decisions. I’m not talking about Christmas shopping. It’s the annual employee benefits festival—you come home with all sorts of insurance papers, medical, dental, life, and (my favorite) accidental death and dismemberment. It’s not enough that you still have Christmas shopping to do before you get ready for holiday traveling—you are supposed to find the time to make important financial decisions as well.

To help you on your way with minimal loss of holiday cheer, my husband has asked me to write a helpful guide to cafeteria savings plans. Even with the risk of making my debut on his site as “the cafeteria lady,” I have agreed.

How Cafeteria Plans (FSA) work

Cafeteria plans are a great thing. By using them you avoid paying taxes on medical expenses. At the beginning of the year, you determine how much you expect to pay in medical expenses for that year. Your employer deducts pre-tax money from each paycheck, and puts it into a cafeteria plan savings account. You pay for medical expenses up front, and then submit a reimbursement claim, which is paid out of your savings account.

For example, last year we put $750 into our cafeteria plan. His company deducted $31.25 from each paycheck, before taking out taxes. As we spent money on medical expenses, I collected the receipts and submitted them to the cafeteria plan company. Within a few days the reimbursement was direct deposited to our bank account.

How much can you save by participating in a Cafeteria Plan

The first question you may have—is it worth it? Well, I figure we saved at least 30% by using our cafeteria plan*, so this year it saved us $225. Perhaps it is not worth hounding your spouse for the Walgreen’s receipts for a couple hundred dollars. However, several years ago we knew I would be having major dental work that would not be covered by insurance. That year we set aside $5000 (the maximum amount allowed), and saved over $1500. Definitely worth it!

Other benefits of a Cafeteria Plan

Another benefit (depending on how your plan is set up) is that you can get reimbursed for expenses even if you have not yet paid that much into the savings account. For example, say in January we have made two payments into our plan, totaling $62, when I break my foot and rack up a $300 emergency room bill. I can be reimbursed for the full $300 immediately.

I have also found that for professional services, I never have to pay the bill out of pocket. My cafeteria plan will reimburse me with an EOB (explanation of benefits, that lovely, confusing non-bill that your insurance company sends you). So, when I had expensive dental work done, my dentist billed my insurance company. I took the EOB (which said they would not pay a red cent), submitted it to the cafeteria plan, and received my “reimbursement” within a few days. I used that money to pay the dentist.

How to estimate your medical expenses

Great! So you’ve decided that you want to use a cafeteria plan. The next question is how, in the midst of holiday madness, do you determine how much to save. This is important because any money you do not get reimbursed for is lost. So, if you plan on $750 in medical expenses, but only have $500 in real expenses throughout the year, you lose that $250—basically you lose your savings.

If you keep meticulous records, this step is easy. Look through your previous years’ medical expenses and see how much you spent—plan on saving that amount. Perhaps add any large expenses you know are coming your way (having a baby, that long-awaited hip-replacement).

For those who didn’t track every expense for the last several years, here are some guidelines:

1. Know what expenses qualify and identify which of those expenses you typically incur

I have been surprised to find that alternative healer fees, including acupuncture and hypnosis, are reimbursable. So are chiropractor visits, some over-the-counter medications, and weight-loss program fees (with a doctor’s note). Most plans will have a handy list of what expenses qualify. If not, you can refer to the IRS website or see the links at the end of the post.

2. Determine what you spent last year

Look at your last medical and dental EOB’s—many will show the total you have spent on medical visits/services throughout the year. This won’t include all your medical expenses, but it’s a start.

3. Calculate routine expenses

Eye exams, contacts, birth control pills, and any other prescriptions qualify for reimbursement. Also, those expecting a baby can plan on many well-baby visits in the first year (at 2 days, 2 weeks, 2 months, etc.), so multiply the number of visits by your co-pay.

4. Plan for non-routine expenses such as surgeries, babies, major dental work

It’s definitely worth calling your doctor’s or dentist’s office for a cost estimate. Ask to speak with the person who does the billing. I did this, and she told me how much my insurance company will allow for certain procedures. Then I looked at my plan benefits, and figured out that we will pay our deductible plus 20%. Now I have a really good ballpark figure for what we can expect to pay.

Add these figures up, and you’ve got an idea of how much you will probably spend in the next year. Now, start saving receipts, and start saving money!

Additional Resources

• WageWorks.com – Flexible Savings Account Savings calculator (I thought this was the most useful of the bunch)
• WageWorks.com – Qualifying Expenses Summary (an incredibly useful and thorough summary of expenses that qualify and don’t qualify)
• MyUHC.com – FSA expense calculator (click on “Calculate FSA Spending”)
• MyFlexResource.com – A very useful FSA FAQ (that’s a lot of TLAs, three-letter acronyms)
• Financial Planning Toolkit – Comparison tool (participating vs. not participating)
• Sentinel Benefits – Another comparison tool

*Savings of 7.65% FICA (Social Security), 7% State, and at least 15% in Federal taxes

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Greg over at StackBacks.com has a unique and GTD friendly way of managing cash involving envelopes, index cards, and paper clips. His method is a great way of divvying out your cash so you don’t spend it all at the beginning of the month, leaving you living like a pauper at the end of the month. It’s essentially a sort of cash tickler file (look under “Tools and techniques”).

Please let us know how you manage your cash!

Cash Allowance File

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