Stumped? You might stand to learn how to organize your finances better. I know I could. Still, I don’t want to waste countless hours scrutinizing every receipt. I want to “set it and forget it”. I want a system that eliminates work and creates powerful peace-of-mind. So I created a plan to organize my finances in the simplest way I could devise; hopefully it helps you organize your finances, too. It comes down to three simple steps: Consolidate, Automate and Document.

Consolidate

Like the unused stuff in our closets, we tend to accumulate financial accounts over time. Sometimes there are good reasons: We can get a credit card with better terms or we move and open a new bank account. Before we know it, we have five credit cards and three checking accounts.

There’s nothing wrong with multiple accounts, in fact there are times multiple bank accounts are helpful. But extra accounts you don’t use create financial clutter. To help you de-clutter,I suggest you have no more than:

• Two Bank Accounts – Keep one local checking account and an online high-rate savings account. (If you run a business or you’re married and want both joint and separate accounts, you may need one or two more accounts).
• Two Credit Cards – I would only carry and use one credit card (if you want to use a credit card at all), but I advocate keeping two credit cards open both as protection in case your primary card cancels your account and for the health of your credit score. (If you’re self-employed or run a business, designate one card for tax-deductible expenses and try to put every business expense on that card).

A final note: Credit unions often make it easy to combine checking, savings and low-rate credit cards and loans under one roof. You may sacrifice some benefits like the highest savings rates and nationwide ATMs, but you’ll make up for it with simplicity, low loan rates and service.

Automate

With today’s technology, there are no excuses for not automating your finances. Every month, your checking account should automatically pay reoccurring bills (making forgotten payments and late fees a think of the past) and automatically contribute to your retirement savings and emergency fund. When you automate, remember two points:

• Create a Buffer – The biggest excuse for not automating is “flying too close to the ground”—that is, not having enough money in your checking account to cover monthly bills. That’s dangerous, because banks charge overdraft fees that can be more than late fees. Here’s the solution: Save $500 to $1,000 in your checking account or a savings account your bank will draw from in the event of an overdraft. It’s overdraft protection, peace-of-mind and a mini emergency fund all in one.
• Use Bill Pay When Possible – There are two ways to set up automatic payments: Instruct your bank to pay your bills at certain times using bill pay or authorize your billers to tap your bank account for funds. The end result is the same, but it’s the difference between you deciding to hand out money and you letting other people come in and take money from you in the night. Honestly, I use a combination of both, but I opt for bill-pay when I can because I can easily control all of my payments 24/7 in one place.

Document

If you have eliminated your unused financial accounts and automated your bills and savings, I guarantee you won’t worry as much about your money. But there’s one last step to organizing your finances—document—and there are two reasons to do it:

• Keeping Track – Studies show that high net-worth individuals are more likely to track the money they spend. Besides, it just makes good financial sense: Know what’s coming in, know what’s going out. Ideally, to the penny.
• Taxes – We all have to keep records of our income for tax reasons and, if you itemize deductions or are self-employed, you’re going to need documentation for your deductions.

Again, thanks to technology, documenting your finances has never been easier. It doesn’t matter how you track your spending: You can use a program like Quicken, a free service like Mint or a simple free budget spreadsheet.

Finally, you can opt for paperless statements from your bank and credit cards and save your monthly statements to a designated folder. In addition, most credit cards offer a year-end summary of your charges. You may still need to save that odd paper receipt for tax purposes, but a simple well-laced folder should work for that!

What about you? What steps have you taken to simplify or organize your finances? Please share your strategies in a comment!

Related posts:

1. How to Stop Worrying About Money
2. Organize Receipts with Shoeboxed: A Closer Look at Shoeboxed.com
3. How I Organize My Financial Records (And Why You Should)

Banks are never short of come-ons for winning new customers; some banks offer new depositors free checks, cash bonuses or iPods (just to name a few).

That’s because banks can’t make money until they have your money.

A Penny Saved Is a Penny Lent

Remember those days when ING Direct and other high yield savings accounts offered interest rates of five percent or more? I used to stash cash into those accounts like crazy and think: “How could banks be handing out money like that?”

It all ties back to the fundamental way banks make money: Banks use depositors’ money to make loans. The amount of interest the banks collect on the loans is greater than the amount of interest they pay to customers with savings accounts—and the difference is the banks’ profit.

For example: You currently have an emergency fund of $10,000 in a high yield savings account that may pay 1.50 percent APY. The bank uses that money to fund someone’s:

• Mortgage at 5.50% APR
• Student loan at 6.65% APR
• Credit card at 16.99% APR

Your bank may have paid you $150 in a year’s time but they earned hundreds or thousands more from the interest on loans (made possible with your money). Now, think about this process repeated with millions of banking customers and billions of dollars.

Fees, Fees, Fees

Yes, banks make a lot of money banks from charging borrowers interest, but the fees banks change are just as lucrative.

• Account fees. Some typical financial products that charge fees are checking accounts, investment accounts, and credit cards. These fees are said to be for “maintenances purposes” even though maintaining these accounts costs banks relatively little.
• ATM fees. There will be times when you can’t find your bank’s ATM and you must settle for another ATM just to get some cash. Well, that’s probably going to cost you $3. Such situations happen all the time and just mean more money for banks.
• Penalty charges. Banks love to slap on a penalty fee for something a customer’s mishaps. It could a credit card payment that you sent in at 5:05PM. It could be a check written for an amount that was one penny over what you had in your checking account. Whatever it may be, expect to pay a late fee or a notorious overdraft fee or between $25 and $40. It sucks for customers, but the banks are having a blast.
• Commissions. Most banks will have investment divisions that often function as full-service brokerages. Of course, their commission fees for making trades are higher than most discount brokers.
• Application fees. Whenever a prospective borrower applies for a loan (especially a home loan) many banks charge a loan origination or application fee. And, they can take the liberty of including this fee amount into the principal of your loan—which means you’ll pay interest on it too! (So if your loan application fee is $100 and your bank rolls it into a 30-year mortgage at five percent APR, you’ll pay $94.40 in interest just on the $100 fee).

Recently, banks are taking a lot of heat for interest rate hikes and fees going out of control. Giving banks business may seem like putting yourself in harm’s way, but of course, it still beats hiding your money under a mattress. Understand how banks work, however, and you’ll know where to lookout for fees and how to avoid lining banks’ pockets by paying more interest than you’re earning.

About the Author: Simon is a recent college grad living in Brooklyn. He writes for an interest rate-tracking Website and maintains his own personal finance blog, the Realm of Prosperity.

Related posts:

1. WaMu Failure: What To Do If You Have Deposits with Washington Mutual
2. A Case for Local Banks and Credit Unions
3. Fraud Hits Small Banks Too

• On priorities: I’m 25. What should my financial priority be?
• On saving: How much should I be saving if I earn $45k?
• On spending: Can I afford that vacation next summer?

In three years I’ve written roughly a half million words (about two or three average-length books) about money. I am proud of those words; I like to believe they help readers take control of their finances every day.

Sometimes, however, I flip flop.

I don’t intentionally provide contradictory advice. I simply believe that in spite of all the numbers involved, personal finance is more art than science. I like to point out to readers there are many roads leading from A to B. Some are fast and difficult, others longer but scenic.

But many readers aren’t looking for whimsical debates on the best way to budget; readers want answers. They want somebody to tell them: “If you’re in this situation, this is what you should do, and this is why.”

I get it.

If a reader doesn’t think the advice in an article is sound, they won’t follow it. But readers certainly don’t want to be confused by myriad possible solutions to their problem.

That is why I give you the Seven Precepts to Prosper By:

1. Avoid debt unless it can provide, with certainty, a return on the money borrowed.
2. Save and invest 25 percent of your income.
3. Account for your spending.
4. Know what you value.
5. Improve yourself.
6. Keep it simple.
7. Give back.

I wanted to bring all of my own financial beliefs that I write about in various articles together in one place. Not only to showcase my own beliefs about money, but also to provide a starting point for future readers to learn what this site is all about.

I hope these precepts inspire you on your own road to financial peace whether that means being free of debt and having “enough” or climbing higher mountains of wealth.

1. Avoid debt unless it can provide, with certainty, a return on the money borrowed.

Like many personal finance writers and speakers, I’m a recovering debtor. Often, we fell before we run. But not long before I started this blog, I realized that debt not only makes us slaves to the banks we owe, but also slaves to our jobs, to the proverbial Grind. Become free from debt and we become truly free.

“A man in debt is so far a slave.” —Ralph Waldo Emerson

If you want to prosper, above all else, rid yourself of debt. After you have saved $1,000 for true emergencies, debt repayment should be your only priority.

And of course, avoid future debt. No credit cards unless you pay them off every month. No auto loans. No store payment plans. No personal loans.

Student loans, some mortgages and business loans can be an investment in your future, but they are still debt, and I recommend people accumulate these liabilities only after careful and informed consideration.

2. Save and invest 25 percent of your income.

Once you are out of debt (or at least all of your debt except a mortgage and student loans), it’s time to start saving 10 percent of your net income in an emergency fund (and for future expenses) and 15 percent for retirement.

It may seem like a lot at first, but after a while, two things will happen:

• You’ll get used to living on less, and you won’t miss the money you save.
• You’ll save enough for emergencies and can begin using additional savings for long-term goals like a vacation or a new car.

Believe it or not, saving can be fun.

3. Account for your spending.

In a perfect world, everybody would write and follow a budget. People would obsess over Mint.com or Quicken. Or maybe use an envelope system in which you put the cash you’re going to spend on groceries in an envelope in the beginning of the month and only spend that cash on groceries (and only spend the cash in the gas envelope on gas).

The reality, however, is that most people simply never do this. They may try for a month or two, but following these systems is like following a restrictive fad diet. It may work wonders, but it’s unsustainable. Everybody should make a spending plan (i.e., a budget), but how specific you get is up to you.

Maybe you use a budget spreadsheet or jot down a really simple budget on paper. The important part, however, is to tally up your spending each month and recognize where your money is going. To ensure you are spending less than you earn. Balance your checkbook. There is no excuse for not knowing how much money you have. And there is no excuse for consistently spending more than you have.

4. Know what you value.

Money is nothing more than a way to assign a value to things. Those things might include a loaf of bread, a home, a pair of designer jeans, or an hour of your time. And ultimately, true wealth doesn’t come from the number of digits in your bank account balance but from the value you assign to the things in your life. For many, wealth is working as little as possible to buy the must-haves like bread and shelter. For others, wealth is working like a dog to drive hot cars and live at a “desirable” address.

What you don’t want, however, is to work and spend according to somebody else’s value system. If you value going out to dinner—and you can afford it—then go out to dinner. If you value your time and happiness more than a six-figure salary, then quit your job as an overworked law associate.
I would argue that this is the most important precept of all seven, and the sooner you embrace it, the happier you’ll become.

5. Improve yourself.

We can’t all be entrepreneurs and there’s nothing wrong with being an employee and earning a paycheck. But there is trouble the moment we simply rely on that paycheck to be there year after year and we stop thinking about controlling our own income.

Imagine you just lost your job. What are you going to do? If the mere thought of job loss sends you into a cold sweat, then perhaps it’s time to take some steps to take control of your income. Although there’s no way to guarantee your job, you can take steps to make yourself invaluable to your employer. In addition, you can continue your education and network to improve your chances of finding new work quickly if you do get let go. Or, you can start a side business to make additional money. And, if you live in a two-income household, you could learn to live on just one salary and save the rest, so if one person loses his or her job, it’s almost no sweat. Ideally, you could do all of these things. In which case, losing your job wouldn’t be so much of a tragedy as an opportunity.

Never stop getting better.

6. Keep it simple.

You don’t have to obsess about your money to become financially secure any more than you have to train for the Olympics to get in shape.

A smart money plan can be simple.

Millions of savvy Americans grow quite comfortable with just a checking account, a savings account, and a 401(k) or IRA. They don’t use Quicken, Mint.com, online banking, fancy financial advisors, or even credit cards (they spend cash). They just spend less than they earn and religiously set aside a portion of their income.

The same holds true with investing. Buy low-cost index funds and blue chip stocks for the long term and adjust your allocation every few years. You may need some help to do that, but you don’t need to make it any more complicated.

Simple works.

7. Give back.

To some, this means tithing to a church or giving a sizable portion of income away to charity. For others it means volunteering or sitting on non-profit boards.

Always give something back. You can’t truly prosper until you do.

Check back over the next two months for articles that fully explain how I arrived at each of the Seven Precepts to Prosper By and how you can put them to work for you.

Related posts:

1. Budgeting In Your Twenties
2. A Really Simple Budget Worksheet
3. Free Monthly Budget Spreadsheet

So I am excited to review a book that does just that: Your Money Ratios: 8 Simple Tools for Financial Security by Charles Farrell, JD, LLM.

(Farrell is a Denver, CO-investment adviser who writes the “Retirement Roadmap” column for CBS Moneywatch.)

Let me be clear: There are a lot of personal finance books out there. Probably too many. And not every book is for everybody. There are investing books, get-out-of-debt books, get-rich-in-real-estate books and “total money manual” books. Your Money Ratios is none of the above. I would call this book a “road map to retirement”. Essentially, Your Money Ratios helps you figure out how much you should save for retirement and how to manage your savings, debt, investments and insurance products at every age using simple “ratios”.

But at that, it does a great job.

Note: I also have a copy of this book to give away! Anybody who leaves a comment before Jan. 31st will be entered in a random drawing and notified by e-mail.

The Eight Tools

This is a book of eight “ratios” or “tools”. They are:

1. The Capital to Income Ratio: The multiple of your annual income that you should have saved at every age if you want to retire at 65.
2. The Savings Ratio: The percentage of income you should be saving every year to achieve your Capital to Income Ratio.
3. The Mortgage to Income Ratio: The limit on how much of a mortgage payments you can comfortably make with your income.
4. The Education Debt to Average Earnings Ratio: The amount of student loans you could take on, considering your expected post-grad earnings.
5. The Investment Ratio: A basic asset allocation strategy between stocks and bonds for different ages.
6. The Disability Insurance Ratio: An argument for disability insurance coverage and how much you need.
7. The Life Insurance Ratio: How much life insurance you should have at different ages (if you have a spouse and/or children).
8. The Long-Term Care Insurance Ratio: How to understand this often-overlooked kind of insurance, and how much you need.

As you can see, the book is about building financial security for the long-term. If you’re a typical Money Under 30 reader (in your twenties and just starting out on your own, perhaps repaying student debt and trying to save for a home), you may not think this kind of book is for you. And you wouldn’t be alone. Most Americans don’t start thinking about retirement issues until, at the earliest, they are well into their thirties. But as I’ve written before (e.g., in 23 Things Beginners Must Know About Saving for Retirement), the sooner you start the better. Whatever your age, giving Your Money Ratios a quick read paints a clear picture of how retirement works, and what you need to get there.

From Laborer to Capitalist

Your Money Ratios builds upon one simple concept: How do you go from being a laborer to being a capitalist? In other words, how can you stop working for your money and start making your money work for you? The answer, of course, is to save enough money to live on in retirement.

For better or worse (although I would argue mostly for the better), the “ratios” in this book makes it a book of simplifications. For example, take the book’s first tool: the Capital to Income Ratio.

Farrell suggests that average workers can retire at 65 on 80 percent of their pre-retirement income by saving 12 times their annual income. He goes onto provide benchmarks for one’s capital-to-income ratios at different ages. For example, Farrell suggests a 25-year old should have capital in retirement plans, savings accounts and real estate equity equal to at least 10 percent of his or her annual income and that a 30-year old should have 60 percent of his or her annual income in capital. (The recommended ratios climb more dramatically at 35, 40, 45, etc., as Farell assumes most twentysomethings are not earning much, paying down education debt, getting married, and buying homes).

Real-world retirements (and lives, in general) don’t always run so smoothly, but the 12/80/5 benchmark provides a helpful way to visualize how retirement works. (Save 12 times your annual paycheck to retire on 80 percent of your pre-retirement income by withdrawing five percent a year).

Dealing with Debt

As I mentioned before, Your Money Ratios is not a debt book. If you’re looking for down-and-dirty debt help, pick up Dave Ramsey’s The Total Money Makeover: A Proven Plan for Financial Fitness or Jean Chatzky’s Pay It Down!: Debt-Free on $10 a Day.

Your Money Ratios discusses debt in one chapter, but cursorily.The book breaks debt into two categories:

• Income-producing debt is debt that has the potential to make you money. This includes a mortgage, education debts and, in some cases, he argues, an auto loan (if the transportation helps in your business or commute to a higher-paying job).
• Income-reducing debt is everything else. I.e., credit card debt. This is the bad debt that does nothing but drain your budget and inhibit your ability to save. Farrell’s take on credit card debt is that it’s bad and if you’re in it, get out. A fair point, because saving usually doesn’t make sense if you’re paying 15, 18, or 20-plus percent on credit card debt.

Farrell looks at mortgage debt the closes and lays out what percentage of your income is “safe” to spend on your mortgage. He’s careful to point out that you should not use your home as your retirement fund and even that home ownership isn’t for everybody (usually those with modest income living in high-cost areas). Sound advice for a nation that has been bred to buy the biggest house we can as soon as we can and, recently, got into a lot of trouble for doing just that!

Who This Book Is Not For

Despite praises for Your Money Ratios thus far, I feel compelled to point out that this book is about how to retire by running the rat race. It’s about working nine-to-five until you’re 65.

That worked for many in our parents’ generation and it will inevitably work for some in our generation. I get the impression, however, that an increasing number of young people reject that notion of working for somebody else nonstop for forty years just for the chance to be old and comfortable. Many of us are interested in having multiple careers, finding ways to make a living part-time doing something we love so we never have to retire, or using savings to take several “mini-retirements” (like my friends who worked and saved for a few years out of school so they could spend a year of “mini-retirement” in Italy).

If that sounds like you, this book may not be all that helpful. If, however, you want a simple, straightforward guide to saving for retirement, Your Money Ratios is it.

• On Amazon: Your Money Ratios: 8 Simple Tools for Financial Security

Disclosures: The book publisher provided a complimentary copy to Money Under 30 editors for review and is also furnishing one copy to be given away to a commenter chosen at random. Money Under 30 may receive advertising revenue from Amazon.com links contained within this post.

Related posts:

1. How Much House Can You Afford?
2. Are You Ready to Buy a Home? An Easy Way to Check
3. What Percentage of Income Can You Afford for Mortgage Payments?

But can you blame me for dreaming about it? After all, I assumed that anyone would just lend me money (even $1 million) without peeking at my credit history. Was it my fault I didn’t know what “credit” was?

At 18 or 19, I was, like the majority of my generation, completely naïve about even the most basic financial concepts: credit, saving and investing. I’ve become more cash-savvy since. I can’t say the same for all of my peers although, fortunately, the recession may mark the beginning of an era when frugality, financial literacy and saving savoir-faire become as hot as Facebook and iPhones.

Gen. Y’s Financial Literacy Track Record

How many high school and college graduates have ever taken a class covering personal banking, credit management, basic investing, and retirement planning? Not many. Stroll the corridors of any teaching hospital and you’ll find medical students who know the majority of biochemical processes in the human body but do not understand what factors determine their credit scores. You’ll find brain surgeons-in-training paralyzed by the thought of repaying $150,000 of student loans. They don’t know where to start.

Sometimes I imagine what I would have done if, at age 17, I knew what I now know about personal finance. That year, I earned about $3,000, but had little to show for it except a closet full of popular sneakers.
Back then, I think I was about five years behind in financial literacy. Fortunately, I think I’m now about five years ahead of where I’m supposed to be.

If I had been ahead of the curve back then, my dedication to saving and investing just may have led me to hoard paychecks and buy a few shares of a breakthrough company (maybe even Google). Even keeping the money in a savings account with a modest interest rate would have done wonders.

Financial Knowledge May Save Lives

Like it or not, we will deal with money for our entire lives. That makes money management an essential survival skill. We don’t all need to learn how to use a scalpel, but we do need to know how to pay bills on time and keep food on the table.

As humans, our instincts would tell us to run away from a lion. We do not, however, know how to run away from debt. (Even though, as young adults living in America in the 21st century, debt is probably more hazardous to our health).

The point is: Financial literacy could be a key to creating a better overall standard of living for the general population…especially for young Americans who are currently in college or have recently joined the workforce.

Higher education costs are soaring, meaning students who take out loans will graduate with more and more student debt. Dealing with increasing student loan debts may be inevitable, but we can at least help young adults avoid compounding the problem by taking on credit card debt and failing to save for emergencies and retirement.

The Recession as Wake-Up Call

The recent economic turmoil is a lesson to Generation Y that we need to become more financially literate. The New York Times reported that teenagers have been cutting back on spending. Even middle school students can probably grasp the basic concept of what a recession is by now. Hopefully, today’s young people won’t forget the recession’s lessons too soon. If not, these lessons are one more case for the argument that the recession is good for the economy.

Even the Credit CARD Act of 2009 by the Obama administration has a section that requires federal agencies to examine and report on available federal financial and economic literacy programs. They must also provide recommendations and develop strategies for funding and promoting financial literacy.

It is reassuring to see that the government is taking action, but parents can play an even larger role in teaching sound financial principles to their children. Little activities such as taking the child to save money at a bank, playing Monopoly, or creating a virtual stock portfolio can be great for family fun while, at the same time, providing valuable money lessons.

In the meantime, those of us who are already grown up are on our own. If you’re reading this, chances are your already on track to take control of your financial future. But what about your friends, classmates, coworkers, and siblings? Have they experienced a financial awakening, too? Do you think the recession is having a positive effect on young people’s money habits? Think we still have a long way to go? Share your thoughts in a comment.

About the Author: Simon is a recent college grad living in Brooklyn. He writes for an interest rate-tracking Website and maintains his own personal finance blog, the Realm of Prosperity.

Related posts:

1. Money Mistakes We Make Growing Up
2. Young People Are In Financial Trouble
3. Back to School Financial Survival Guide

Be Reasonable

If your annual income is $40,000, it’s not realistic to declare that you’re going to pay off $35,000 in student loans in 2010 unless you’re going to live in your parents’ basement and eat Ramen noodles at every meal. Unattainable goals will only set you up for failure. It’s important to be ambitious, but it’s practical to be rational. If your goal is debt payoff, sit down and hash out the numbers until you come up with a monthly amount that you can pay towards your debt after you’ve set money aside for necessities and bills.

Be Specific

Being specific is the first rule in the S.M.A.R.T. criteria for goal-setting, a technique used by project management professionals.

• Learn more: S.M.A.R.T. goal-setting

There is a reason why being specific or detailed with your resolutions is so important: you’ll know exactly when you’ve met your goal. Meeting a goal is empowering and builds the path for further personal growth and financial advancement. Instead of saying “I want to save more this year,” try saying “I want to save $5,000 this year”.

Make a Plan

Resolving to improve your finances is an important first step, but how will you get there if you don’t have a plan? Start with the realistic and specific numbers that you’ve already decided on and map out the steps it will take to meet those goals. If you want to save more for retirement, choosing to contribute an extra $500 per month might be the first step. Next, you could investigate setting up an automatic withdrawal through your paycheck so you won’t have to worry about it again. Taking the time to make a simple plan to meet your goal could save you time and frustration down the road.

Baby Steps

If year-long resolutions seem overwhelming, perhaps short-term goals will work better for you. Set up quarterly or monthly mini-goals to help keep you on track. Each time you meet a short-term goal, it will encourage you to keep moving forward. If you need even more motivation, think about setting up small rewards for each achieving each mini-goal. As I study for the CPA exam, it helps me quite a bit to make a goal to complete each chapter of my book instead of taking on the daunting task of reading the entire book front to back. It’s like a small victory every time I reach the end of a chapter.

Don’t Give Up If You Stumble

The definition of a resolution is “a course of action determined or decided on”. A resolution is a journey; it’s a change to our current life. Anytime we work to change, we are bound to stumble a bit along the way. It’s only natural to fall off the wagon occasionally, so don’t beat yourself up if you go over budget one month. Take the experience, accept the fact that it’s normal, and do your best to stick to your budget next month.

Keep a Reminder

A daily or weekly reminder will help you to stay focused on achieving your goals. Consider posting your budget or debt pay-off schedule on your refrigerator or in your phone. You could also set up a recurring announcement in your e-mail calendar. If you don’t mind being “hassled” about your goals, check out Hassle Me—a free website that will irritate you into conquering those resolutions.

Meet Your Goals

Don’t let 2010 be another year where your resolutions fall through the cracks. Obtaining financial independence is the gift that keeps on giving – when you’re debt-free or have a solid emergency fund, you can enjoy your twenties without worry. Good luck, and here’s to prosperous 2010!

About the Author: Carrie is in her mid-twenties and currently studying for the CPA exam, so she’ll be soon be qualified to give us some desperately-needed tax advice. She blogs about her journey to financial independence at Carrie…On the Cheap from her home in Kansas City, Missouri. You can also find her on Twitter: @CarrieCheap.

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3. Five Easy Financial Resolutions for 2009

In Britain, banks are expected to vote today to eliminate paper checks by 2018. Ireland and some Scandinavian countries have already begun phasing out check payments.

Let’s face it: In today’s digital world, checks are slow, cumbersome, and a liability. (Where else can a thief get all of the information he needs to drain your bank account than from the front of any standard check?)

As the UK vote proves, Banks don’t like checks, either. It costs banks an average of $2 to process every single paper check. Even if that check is for $0.97.

The cost of check clearing is why banks can offer perks like free checking or ATM fee reimbursements if you agree to use direct deposit and bill pay; the bank knows it will save money in check clearing fees. And it’s why free online checking accounts like ING Electric Orange (which don’t offer paper checks) can pay interest.

I can’t predict when banks in the United States may start pushing to get rid of checks entirely, but I would bet that the idea is already on their radar. Until then, banks will continue to incentivize electronic payments so that we grow accustomed to saying goodbye to paper checks.

What do you think? Do you still use checks regularly? What for? Do you think we should get rid of them altogether?

Related posts:

1. How to Change Your Primary Financial Institution
2. Online Checking Accounts Compared: Smart Banks for Savvy Spenders
3. High Yield Checking: The Future of Checking Accounts

1. Ignoring Your Finances

Have you ever been driving when your car suddenly starts to make an awful noise? Are you the kind of person to pull-over and pop the hood or call your mechanic? Or would you just turn the radio up to drown out the sound?

If you answered turn up the radio, ask yourself honestly: Do you also try to forget about your finances?

It’s a common problem, especially when things aren’t in good shape. Hey, not everybody loves budgets and mutual funds, but ignoring things like debt and overdraft fees won’t make them go away. Plus, you take the time to get a handle on your money, eventually you can set things up so that your finances run more-or-less automatically and you can forget about your money—this time, however, knowing that everything’s running smoothly under the hood.

2. Putting Off Until Tomorrow…

…what you can get done today. Yes, I mean procrastinating. If you often waited until the night before the due date to start writing school papers, chances are you will be prone to putting off money decisions, too. The sooner you do the following, the better:

• Start an emergency fund (so you don’t get caught by a big surprise expense)
• Set up a budget (so you can learn where your money is going)
• Start saving for retirement (and take advantage of compounding interest)
• Get rid of your debt (so you can stop losing money on interest!)
• Pay your bills on time (so you don’t ruin your credit)

3. “Doing Debt”

So, you want to get your own place, drive a new car, and take a “well-deserved” trip abroad. Don’t we all. But can you afford it?

For many twentysomethings, the answer is a simple “no”. It’s not your fault you’re not made of money yet; you just graduated, you’re starting out on the bottom of the salary ladder, and you’ve only had a few working years to save!

Car loans and credit cards make it easy for anybody—even a 22-year old intern—to live a lavish lifestyle…for a while. Sooner or later the bills will come due. You’ll be losing hundreds or thousands of dollars in interest every year and scrambling just to make ends meet each month.

The simple advice? Going into debt is like smoking; it’s best to never start, because quitting debt is very, very hard. Use cash for everything or pay your credit cards off in full every month. If you’re already in some debt, stop the cancer before it spreads and make a plan to get out of debt now.

Following sound personal finance principles is not rocket science, but each step is harder than it looks and it’s easy to procrastinate.

4. Forgetting About Retirement

On the day you get your first “real job”, you should open an individual retirement account. Thinking about retirement on the day you start working sounds silly, I know. But did you know that if you invested a few thousand dollars a year from the time you are 22 until you turn 32, it’s possible you could never save another penny and still have enough to retire on when you turn 65?

That’s the power of compounding interest. The sooner you start—no matter what the amount—the better. And yet, most of us don’t start contributing to an IRA or 401(k) until our late twenties or even early thirties.

Without a doubt, saving for retirement can be intimidating. To learn more, read 23 things beginners absolutely must know about saving for retirement.

Related posts:

1. How Much Should Be in Your 401(k) at 30?
2. Five “Forgotten” Financial Habits to Develop In Your Twenties
3. High School Money Mistakes

In my opinion, a few personal finance books stand out from the rest. Whether you need some broad financial motivation or a specific action plan on how to get out of debt, automate your finances, or start ingesting, there’s a book here for you. And, by the way, these books also make great gifts!

Your Money or Your Life Among my personal favorites, this book truly puts money into perspective. Other books show you how to manage your money, this book gives you compelling reasons why to be smart with money (and the reasons are more than just amassing a life savings for your heirs). Learn more at Amazon.com

Total Money Makeover Dave Ramsey is the king of anti-debt, tough love financial advice, and his bestselling book offers a detailed road-map to escape financial dire straights, make a plan, and learn new money habits. Learn more at Amazon.com

Stop Acting Rich…and Start Living Like a Real Millionaire I have mixed feelings about this book’s message; I push back on those that live so frugally they forget that sometimes it is okay to spend money on yourself. I do, however, think that Dr. Stanely’s books provide a powerful wake-up call to anybody who needs to master living below your means. Learn More at Amazon.com

The Richest Man in Babylon This thin stocking-stuffer is a classic parable of how to build wealth slowly; it proves that the fundamentals of personal finance haven’t changed since biblical times. Learn More at Amazon.com

A Random Walk Down Wall Street Perhaps the only investing book you’ll ever need, and certainly the first one you should read. This is the “best-selling, authoritative, and gimmick-free guide to investing”. Learn More at Amazon.com

Think and Grow Rich Another classic, this book makes the compelling case for how positive thinking can lead to success and wealth. Save yourself time and money and skip all the fluffy “law of attraction” and positive thinking spin-off products and just read this book instead. Learn More at Amazon.com

Smart Couples Finish Rich Serious couples need to take co-mingling funds seriously, and Bach’s primer on smart money management for couples can help. I’m a big fan of Bach’s “set it and forget it” strategies. Learn More at Amazon.com

I Will Teach You To Be Rich A list of money books for twenty-somethings would be incomplete without fellow blogger Ramit’s recent publication full of tried and true tricks to help you get richer in just weeks. Learn More at Amazon.com

What Are Your Favorites? I could go on and on listing more great personal finance, business, career, and organization books, but I’ll stop with these essentials. What are your favorite personal finance books, or books on other subjects that have helped you manage your money better? Please let us know in a comment!

Related posts:

1. Five Second Summaries of Five Top Personal Finance Books
2. Book Review: The 4-Hour Workweek
3. Personal Finance Isn’t Just for Rich People

Many of us, however, do not really care if we join some club delineated by an arbitrary number with lots of zeros. Instead, we focus on building true wealth in every moment of our lives.

And true wealth, dare I say, is not number; it’s a state of mind. True wealth is the feeling of having enough—whether that’s money, fulfillment, family, or love—and being grateful for all you have.

There is a myth about millionaires that blogs, books, and the mainstream media perpetuate. The myth is that millionaires have it better.

Mo’ Money, Mo’ Problems

Although few would dispute that having enough money makes certain aspects of life more comfortable and makes certain problems easier to solve; there is a limit to how much money can improve you life. According to Harvard University psychologist Daniel Gilbert in his best-selling book Stumbling on Happiness:

“…wealth increases human happiness when it lifts people out of abject poverty and into the middle class but…it does little to increase happiness thereafter.”

So if you earn a degree and get a decent-paying job; chances are you’ll be happier than when you earned minimum wage. But, believe it or not, you may not be that much happier earning $200k a year than earning $40k a year.

And then there are the sad cases of absolutely miserable lottery winners, like this winner whose $16.2 million jackpot brought only “debt, despair, and heartache”. (And there are plenty more; just search for “unhappy lottery winners“).

Overnight millionaires undoubtedly face unique problems that individuals who accumulate riches over a lifetime of hard work do not. But these stories remind us that more money may actually create more problems than it solves.

Get Rich or Die Trying

This begs the question, then: Why are we always trying to get rich?

Even those of us earning $40,000 a year give or take are angling to “build wealth” faster with second jobs, savvy investments, or really frugal lifestyles.

Last week Free Money Finance published What Real Millionaires Do featuring a set of observations from the book Stop Acting Rich: …And Start Living Like A Real Millionaire by Dr. Thomas J. Stanley. For example:

• The most popular make of car among millionaires is Toyota—not BMW or Mercedes
• There are currently more than 350,000 millionaire educators (working or retired teachers or professors)—a profession that is far better at transforming income into true wealth than doctors or lawyers
• In the U.S., there are nearly three times more millionaires living in homes that have a market value of under $300,000 than there are living in homes valued at $1 million or more
• The number one preferred brand of shoes worn by millionaire women is Nine West and their favorite clothing store is Ann Taylor—with the Gap and Costco not far behind

I find these observations interesting; but they don’t surprise me, and after chewing on them a while, I have to ask: Who cares?

Of course, the point of these observations is to prove that most millionaires are not high-rolling celebs but ordinary people who save a lot more than they spend. It illustrates the importance of living within your means and that these everyday millionaires actually live far, far below their means.

These people follow the common precepts of getting rich slowly:

• Live well below your means
• Avoid debt
• Invest early and invest often, for the long run

These are good rules; the problem is many people follow them to such an extreme that they literally end up with no disposable income and no joy in their lives. If you’re trying to get out of debt, skipping dinners out and a vacation is probably a good idea. But to people who never eat out and never take a vacation because they’re trying to save every single extra penny, I have to ask: What are you living for?

Live for Today, Too

Any of us could be hit by a truck tomorrow. Assuming you don’t get hit by a truck and live to a ripe old age, that IRA will be important, so by all means save for retirement. Just don’t scrimp to the exclusion of having a little fun today.

Take that Toyota example. I drive a Toyota and, until recently, so did my wife. At first, reading that statement, I want to yell: “Yeah, we’re smart! We drive Toyotas just like all those millionaires.”

But, really, how crazy is that thinking? Choosing a Toyota over a BMW is not, by itself, going to make you any closer to millionaire; other than the difference in price between the two cars (though not insignificant).

If you can afford a BMW—even if you’re not a millionaire—and buying an “ultimate driving machine” is desirable, then perhaps you should just do it.

I’m not disregarding the fundamental personal finance rules—live within your means and avoid debt. But if you can pay cash for a BMW and that’s how you choose to spend your money, more power to you; you’re going to enjoy driving around more than most of us, and you’ll probably enjoy a Bimmer more at 35 than at 75 when, just maybe, you might be a millionaire.

It’s Your Money

I publish this Website to encourage financial literacy because I’ve realized that getting out of debt, learning to live within my means, and appreciating the importance of saving for the future has made my life better. But the attitudes I see from some readers, financial gurus, and even some other bloggers is that: “We’re better than you because we have less debt, save more, and spend less.”

For anybody just trying to manage your money in a way that balances enjoying today and providing tomorrow, that attitude probably turns you off. Your money is your money. And nobody’s better than you because they never splurge and put a bit more into their IRAs.

Maybe you’ll grow your money into millions; maybe not. Having a positive net worth yields benefits, sure. And although focusing too much on your net worth and too little on enjoying life may be the ticket to becoming a millionaire; it may not be the ticket to true wealth and the happiness such wealth provides.

Related posts:

1. The 10 Habits of Self-Made Millionaires
2. You Can’t Get Rich on a Salary!
3. How Building Wealth Can Help Reduce Climate Change