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Great blog post on 9 steps to effective long-term financial management:

http://www.wesabe.com/blog/index.php/2006/10/17/what-hold-you-back/

Of those, my wife and I have accomplished three. We're hard at work on the rest. I would actually add a few more to the list for us, since we're relatively aggressive about pursuing long-term wealth:

10. Start a business
11. Buy and hold income real estate and other cash-producing assets
12. Give back to churches, charities, and communities with your money and your time. Don't wait on this one until you accomplish 1-11. Start today.

10 and 11 may not be for you; they're not for everyone. I would recommend 12 to everyone, though. Don't give people less fortunate an excuse to hate you because of what you've been blessed with. Share the wealth.

Early last month, I started using a service called mvelopes.com. This is a personal finance and budgeting program that you would use instead of MS Money or Quicken. I had tried both Money and Quicken with very mixed results. I found them to be bloated, buggy, and trying to do too much and failing to do it well. So I decided to take the plunge and give mvelopes a try.

Mvelopes is basically an online representation of the envelope budgeting method, where you put cash into envelopes for groceries, spending, medical, gas, etc and then take the cash out when you need to spend it. When it's gone, it's gone. This can be a very effective method of budgeting, but it's 2006, and I don't want thousands of dollars in cash sitting in my house, not to mention the fact that I only use cash for a tiny percentage of my monthly transaction volume.

Enter Mvelopes.

Basically, Mvelopes works using the exact same concept as cash in envelopes, but online. So you setup a budget and then when your paycheck comes, you divvy it up into the envelopes, which represent budget categories. Mvelopes doesn't move any money, it just keeps track of how the money in your checking account is allocated. Then, as your transactions come in (automatically downloaded from the 12000 financial institutions they have relationships with), you assign them to the envelopes that they correspond to and they reduce the envelope by that amount.

Perhaps an example will help. Let's say you get paid $100 and you put that cash in the "Clothing" envelope. The balance of the envelope (assuming it was $0 before) is now $100. You buy a sweater for $25. When that transaction is downloaded from your bank, you just drag it into the clothing envelope and it reduces your balance by $25, to $75.

The service has a ton of other benefits and it takes a little bit to get the hang of everything, but it's awesome. I highly recommend it.

http://www.mvelopes.com

I've noticed that I'm addicted to multitasking. I have a very hard time sitting down and watching something without doing anything else. I can't have just one window open or one tab open in firefox. I feel this compulsive need to carry on 18 things at once, even though it stresses me out sometimes and I probably do each thing less well than I would if I just focused on one thing.

Why is this?

Maybe it's because of the incredible rate that information is flooding our world. There are billions of blogs to read, videos to watch, discussions to join, friends to talk to, etc, etc. When I'm not doing those things, I feel like I'm missing out. I was missing out before the Internet, but it was such a pain to NOT miss out. Now, it's only a click away, and if I'm signed on to AIM, these things often come to me!

I need to work harder to be more focused and more respectful of my own need for mental peace and occasional unproductivity.

From an article in Men's Health on things you should do but probably haven't:

"Be debt-free. Compounding interest is like a sorority girl on Ecstasy. She'll go both ways, but you get a hell of a lot more out of it when she's going your way."

I've been reading "The Richest Man in Babylon", a series of financial parables set in the Babylonian era. They've been around since the mid-1920's and convey (very simply) some basic principles of finances and money management. They're the kind of things we all know, but few of us seem to do. The highlights are the following:

1. A portion of all you earn is yours to keep. Save at least 10% of everything you make, no matter what
2. Do the above by controlling your expenses carefully with the use of a budget
3. Put those savings to work for you by investing
4. Don't be risky in your investments
5. Buy a house
6. Plan for retirement and future generations
7. Increase your earning potential

Again, very basic stuff, but apparently the majority of people just don't get it. For example, the average savings rate in America is now NEGATIVE. People who make $50k per year spend just over $50k per year and people who make $100k per year spend just over $100k per year. Average household debt goes up every year and the average American only has something like 15k set aside for retirement.

So lately, I've been listening to a lot of personal finance podcasts. Many of these podcasts revolve around people digging themselves out of the debt-hole they've sunk into.

Side not: It's amazing to me how ill-prepared most people are to deal with money, and how cavalier our society is towards excessive spending and debt. But that's another story for another day.

Anyway, one of the people I've been listening to is Dave Ramsey, and while I don't always agree with his advice from a purely financial standpoint, I do think that it often makes sense from a behavioral standpoint. For example, his method of paying down debts, called the Debt-Snowball method, has people arrange their debts from lowest to highest balance and pay them off that way. Mathematically, this is not optimal, and you end up ahead if you arrange them from highest interest rate to lowest interest rate. Over the long term, you'll pay your debts off faster and pay less in interest than you will using the debt snowball method. However, Dave recognizes this and advocates his method instead because of the psychological effect of paying off a larger number of small debts and maintaining a feeling of progress. This is just one example of how he tends to take behavioral issues into effect as well.

One of the things that has always annoyed me with most financial advisers is that they all tend to make statements like "First, you'll need to make sure you have 3 to 6 months worth of savings as an emergency fund. Next, you'll arrange your debts from highest to lowest interest rates and pay them off in that order." Bam! Apparently, these people do not live in the real world and think that sound financial advice means telling people who are barely scraping by as it is to somehow save 6 months worth of expenses before they begin attacking their debts. Let's take a look at how this strategy plays out in the real world.

I'm a huge proponent of real estate investment. I've come to realize that it's not the panacea and get-rich-quick strategy that infomercial gurus would have you believe, and it's definitely not easy money, but real estate investment can be a very lucrative long-term investment that can significantly enhance your wealth.

My latest realization is that around 45% of the gross rents of a residential property go to cover operating expenses, such as utilities, management, maintenance, taxes, insurance, uncollected rents, and legal and administrative fees. This leaves just 55% of the gross rents to cover mortgage payments. The most significant mistake that most new investors make is underestimating these expenses. Many investors simply compare the rents collected (or that they think they'll collect) with the PITI (principal, interest, taxes, and insurance) and consider the rest profit. This is naive. I did this when I bought my first property, a 4plex, and I can tell you that it has been much more expensive than that.

I can also tell you that, in most areas, it is almost impossible to find a property for nothing down that will truly provide a net cashflow in the first year. However, that doesn't make a nothing-down investment a bad one. On the contrary, buying an investment property without putting any cash down can be a great long-term investment, provided that you do it for the right reasons.

Other than buying for less than the fair market value (always a good idea), there are four ways to make (or lose) money through real estate investment:

1. Cashflow

Everyone always says that money can't buy happiness. I've always liked to say that money can't buy happiness, but it can buy relief from certain types of misery. Perhaps an example will be helpful.

Every time I fly commercially, about the time I'm shuffling through security with my shoes in one hand and my recently-torn-apart bag in my other, I think about the indescribable joy that private air travel would be. My feeling escalates as I'm herded onto a plane that is probably older than I am, and sit down between two enormous women who both have toddlers that are vying for the title of the World's Most Annoying Child. By the time the beverage cart creaks by at the express speed of .00756 mph and the Flight Attendant informs me that the last of the orange juice was just given to the grubby little urchin screaming his head off next to me, I'm ready to kidnap the little bugger and sell him on the black market to finance the purchase of my jet.

Relax, I'm not in the business of peddling children. Yet.

Anyway, the point is that flying commercially is miserable. Absolutely terrible. Could money buy relief from that? Certainly.

However, even I'm willing to admit that this is a rather unproductive example. Most people will never set foot on a private jet, so it's not really a viable alternative to commercial travel.

A more representative type of misery that most people go through is financial slavery. In fact, to say that most people go through this is misleading, because the majority of us will spend most of our lives mired in financial slavery, "working jobs we hate so we can buy shit we don't need." (Fight Club)

Let me give you a few examples of more common types of misery that characterize financial slavery:

• Not being able to spend time with your family because you have to work two jobs
• Not being able to provide adequate food, shelter, clothing, medical care, etc for your family

Rich Dad, Poor Dad by Robert T. Kiyosaki

When I was about 19, this book changed my entire outlook on money and finances. Looking back, and reading through the book now, I see a lot that I disagree with, but it sparked my thinking about how to manage money, and what financial freedom truly means. Not a practical book, but definitely a good start if you have no "financial motivation."
The Millionaire Next Door by Thomas J. Stanley

This book, which I read recently, is the result of years of research of America's millionaires: how they live, what they wear, what cars they drive, how they made their money, etc. It was definitely inspiring to me, and also got me thinking about the impact of wealth on future generations, both good and bad.

Cashflow Quadrant by Robert T. Kiyosaki

This book builds on Rich Dad, Poor Dad and goes into detail about how to build multiple streams of income and gradually reduce your reliance on earned income. It contains overviews of the impact on personal finances and income of things like real estate investment, entrepreneurship, and investing in businesses.
The Richest Man in Babylon by George S. Clason

This is a deceptively simple book that contains a series of financial parables that teach the importance of always saving, the power of compound interest, investment, insurance, and other time-tested financial truths. Easy read and a good reminder of some very basic lessons. Again, good to read if you find yourself lacking that "financial motivation."

Interesting article about the subject of wealth in the Bible. The author discusses how some commands and admonitions regarding wealth in Scripture no longer strictly apply under our modern economic and monetary systems, though the underlying principles still apply. Written by a professor from my wife's alma matter.

Views of Wealth in the Bible and the Ancient World

Yesterday was not quite what it could've been
As were most of all the days before
But I swear today with every breath I'm breathing in
I'll be trying to make it so much more

Cause it seems I get so hung up on
The history of what's gone wrong
That the hope of a new day is sometimes hard to see...

"Up and Up" by Relient K

I went for a long run tonight and I was listening to this song and thinking about the baggage of failure and how it weighs us down. There are things I've struggled with over and over, and sometimes it's very difficult to try again without having the idea in the back of my head that I'm going to fail. I thought I would write up a few strategies and tips that have helped me move past some of my previous failures.

Reevaluate your goals
First of all, you need do some soul-searching and ask yourself: is this goal still something you want to achieve? Don't waste your time trying to meet goals that you have little interest or passion for. Not only does it waste your time and energy, your likelihood of success is very low in this situation. Spend some time determining where you are, where you want to go, and what some of the steps in between are. Put it on paper and review it periodically to help keep that source of motivation fresh in your mind.

Be Accountable

I'm finishing up Winning by Jack Welch, and I wanted to highlight an excerpt from the very last page.  When asked at a conference about his legacy, Jack responds:

First off, I hate the word legacy.  It just sounds so arrogant.  Presidents and prime ministers have legacies.  I ran a company and wrote a book or two.

But here we are at the end of this book, and the question did get asked, so I'll attempt an answer.

If there is anything I'd like to be remembered for it is that I helped people understand that leadership is helping other people grow and succeed.  To repeat myself, leadership is not just about you.  It's about them.

I would also like to be remembered as a huge advocate of candor and meritocracy, and believing that everyone deserves a chance.  And I'd like to be remembered for trying to make the case that you can never let yourself be a victim.

He goes on to talk about his family and how much he loves and admires them.  I very highly recommend this book.  If I had a company, it would be required reading for everyone from the janitor to the top executives.

I think that's probably the best definition of leadership that I've ever heard: Leadership is about helping people grow and succeed. 

If there are three kinds of people in the world, people who tear down, people who build up, and people who just scrape by, the choice is clear.  Become the type of person who builds others up.  Learn to manage your own life, and then pour yourself into finding ways to help others find their passion, overcome challenges, and reach their dreams.  You won't regret it.

These are some things to do that won't cost you anything (or hardly anything) other than time, but will help keep your finances organized and under control. It's a good idea to do these things at least on an annual basis. They may not directly improve your finances immediately, but if you stick with them over the long-term, you'll see a dramatic change in your financial situation.

Create a written financial plan
If you don't have written financial goals, drop everything and get it done. If you've never done it, it might be difficult to get into the groove, but it will be well worth the effort. Almost nothing will improve your financial well-being more than having a written financial plan for your future.

Assuming you already have a written financial plan, it's a good idea to review it on at least an annual basis, and probably more often. I try to have a formal review of my goals about once per quarter, but I'm constantly looking at my plan in the interim, even as often as weekly. For your formal review, check to see if your assumptions and future plans are still the same, and adjust your goals and milestones as needed.

Setup a written budget
The number one rule of building wealth over the long-term is living below your means. Even if you make $500k / year, if you spend $501k / year, you're going backwards. It's very difficult to live below your means without a budget. You can budget on a piece of notebook paper, in Excel, Quicken, Money, or Mvelopes. I very highly recommend Mvelopes, and you can read my post on it here. It's not perfect, but it's the closest thing to perfect for this that I've discovered. Your mileage may vary.

Joshua Dorkin over at BiggerPockets.com was kind enough to interview me for his Meet the Investor series. Just wanted to say thanks and I hope the BiggerPockets.com audience enjoys!

I haven't posted as much as I'd like about real estate, but I thought I'd link to a few of my favorite posts about personal finance, investing, and real estate. I'll be adding a lot more of these types of posts in the near future, so check back soon or subscribe to my RSS feed. Thanks!

Can Money Buy Happiness?

My realization on real estate

My thoughts on financial bondage

8 free things to get (and keep) your finances in order

Emergency fund vs. debt paydown

My long-term financial plan

I've recently discovered one of the coolest things in personal finance that I've ever seen. It's called the Fidelity Charitable Gift Fund, and it has a lot of implications for maximizing the efficiency of both your charitable giving and your tax strategy.

Private charitable foundations have traditionally been the playground of the mega-wealthy. The cost to establish, maintain, and manage a private foundation is not trivial, making it difficult for all but those with the largest of fortunes. However, in 1991, Fidelity launched their Charitable Gift Fund (CGF), making it possible for millions of people to create a mini-foundation. Here's how it works:

1. Make a contribution to the Gift Fund and set up a Giving Account that you name — such as, The Smith Family Fund — then be eligible to take an immediate tax deduction.
2. Advise how to invest your contributions, giving the assets the potential to grow.
3. Recommend grants from the Giving Account to the charities you support, with the option of being recognized or remaining anonymous.

Essentially, the CGF is one of the largest private foundations in the US. Individuals can open a Giving Account, which is run like a mini-foundation within the CGF. You can provide guidance on how you would like your contributions to be invested and "recommend" charities for them to donate your contributions to. Fidelity reports that the recommendations are followed in 99% of cases, unless the charity doesn't qualify (no political donations, for example).

Some of the advantages of using the CGF are:

1. Contributions can be deducted from your taxes as soon as you add them to your Giving Account, even before you distribute them to the charities and non-profits of your choice.
2. Once you setup a charity or non-profit in your account, giving to that organization is a simple 1-click affair.

Interesting post yesterday on Free Money Finance about a couple of articles that discuss saving money on groceries. Some of the tips include the classics like cutting coupons, but also things like keeping a price notebook to record the prices of the stuff you normally buy?

My mom has always been a coupon person and a bargain hunter. She'll drive all over town looking for the best deals on organic produce. I've never fully understood that philosophy. It seems like your time is worth more than trying to save $.50 on a cucumber. At what point does the gas you're using and the time you're spending outweigh any small savings? I know that small numbers add up, and especially when you have a lot of mouths to feed, it may make more sense.

For my wife and I, who both work, it's just not usually worth it to try and do all this bargain shopping and coupon clipping. We order our groceries online and have them delivered for $10. Most of the things we buy are staple items and I do a quick check to see if there's another brand or something that's on sale. There are several "luxury" items that we simply do without if they're not on sale.

Building wealth over the course of a lifetime is a pursuit that requires focus, dedication, and self-discipline. Living on less than you make and investing the difference is 90% of the battle, and we often think of this path as one of constant restraint, eating ramen noodles and spaghetti and shopping at thrift stores. Pinching every penny is one way to build wealth, but the good news is that once you get some momentum and see your wealth pass a certain point, a class of investments starts to open up that allows you to have fun and increase your wealth at the same time. CNN Money ran an article a few days ago with some ideas about how to live rich and then retire richer. Here's a sample of my favorite suggestions:

• Going global: Buy real estate in exotic locales. Imagine buying a small villa in an up-and-coming tropical paradise (they mention Uruguay) and holding on to it for the next 30 or 40 years. Not only will you have the enjoyment of the property, but you can rent it out to vacationers for some extra income. When you're ready to retire, you can always keep it as a vacation home or sell it, likely for a tidy profit. What could be better?

• Collecting profits: Invest in unknown artists. If you're an art lover, buying works you love from artists who are poised to make it big is a win-win. You'll get the enjoyment of the artwork and possibly make a handsome profit along the way. Granted, it may not be as lucrative as some stocks, but as the article points out, it'll look a lot better on your wall than a stock certificate from Wal-Mart.

My Two Dollars yesterday had an interesting post about Detroit and how property values have fallen hard there, and probably have more room to fall. A few samples:

At least 16 Detroit houses up for sale on Sunday sold for $30,000 or less.

A boarded-up bungalow on the city’s west side brought $1,300. A four-bedroom house near the original Motown recording studio sold for $7,000.

Now, let me say that I would never live in Detroit. But I've seen that when everyone seems to be saying that it's crazy to own or buy property in an area, it's time to take a hard look at that area because some good values can often be found. Detroit isn't going to disappear tomorrow. It might be a little shaky there, but they'll recover, and when they do, some of those dirt-cheap houses will sell for 10x or 20x what they were bought for. Those investors will invariably be viewed by many as "lucky" but as someone once said:

"Luck is what happens when preparation meets opportunity."
-Seneca

My parents didn't do a great job at demonstrating good financial habits for me, and as a result, I've been thinking about how I'd like to teach my kids to be more fiscally responsible.  I ran across a great post today over at Get Rich Slowly with some good tips and links to helpful articles about allowances, teaching kids about the value of hard work, and more.  I don't have kids yet, so I don't have a lot of commentary here, except to say that it's definitely the job of parents to teach their kids about this.  The schools sure aren't going to do it, and judging by the pile of debt that the average American has, people don't usually fall into a pattern of good financial habits on their own.

MSN Money had an interesting post awhile ago about an annual survey of millionaires. They classified the millionaires into six categories, according to how they made their money, their risk tolerance, attitudes about wealth, etc.

Satisfied Savers (24% of Total)

• Average age: 60
• Built wealth through hard work, by living below their means and taking moderate risks
• Financially savvy
• Lost relatively little in the bear market
• Know how to make their money work for them
• Enjoy making a difference through charitable efforts

Status Chasers (18% of Total)

• Average age: 55
• Achieved wealth through work and some inheritance
• Want it all but haven't been able to achieve their major goals yet
• Define wealth as a level three times their current net worth
• Pessimistic about their own financial future
• Less financially knowledgeable than their counterparts
• Think of financial situation daily as a source of concern

Altruistic Achievers (17% of Total)

• Average age: 54
• Achieved wealth through work, some inheritance, good investments, owning a business, and living below their means
• Self-made, driven to succeed, work hard, take risks
• Use their wealth to help the less fortunate
• Lack the time, interest and know-how to manage finances; rely on professional management
• Lost the most in the bear market
• Only one-quarter plan to retire completely

Secret Succeeders (17% of Total)

• Average age: 55