Earlier today, I wrote about techniques for defining personal finance goals that you can reach by making them as specific and as realistic as possible. So, how do these techniques really apply to some real world personal finance goals? I took five of my own goals and spent some time working them out to make them more detailed and more accessible.

Buying A Chest Freezer

This is one of the first purchases we’re going to make when we get into our new home. Where I grew up, a chest freezer was a fundamental part of day-to-day life. We would store massive amounts of food in it - vegetables grown in the summer for the winter, and game caught in the winter for the summer. The cost of food acquisition for us was made much, much smaller because of this freezer.

So, let’s clarify this goal:

When? I would like to own the freezer by the end of September, so I have five months to get there.

What does it cost? The unit we are looking at costs about $600.

So, “I wish to buy a $600 chest freezer in September 2007″ is the clear goal. From this goal, instead of the much more general “I want a chest freezer,” it is very easy to develop a plan with immediate milestones, something tangible that I can start accomplishing now.

Establishing An Eighteen Month Emergency Fund

I’m a big fan of emergency funds and I wish mine were much larger than it is. Currently, I have a fund that can supply four months worth of living expenses (note that this is not salary).

So, let’s clarify!

When? I don’t have a specific date for this to be completed, just that there is steady progress toward the goal.

How much? This amount must equal eighteen months’ of living expenses. I am currently estimating what I believe expenses will be at the end of this year, after the home purchase and the birth of a second child.

How much each week/month/year? Since I don’t have a firm finish date, I must establish how much I will contribute over a set period of time to give myself a workable metric. I plan on putting in $100 a week as a minimum for the time being.

With these factors, “I want an eighteen month emergency fund” becomes “I want to build an emergency fund with $100 a week until it contains eighteen months worth of living expenses.” Stating the goal this way gives clear short-term milestones right within the goal statement, making it easy to see whether I’m working appropriately toward the larger goal.

Taking A Family Vacation To Europe

My wife and I are planning a European vacation when our daughter is twelve. Although this goal is very far off, it is still in our minds. How can we really clarify this goal?

When? Right now, this would mean that our vacation would occur in the late 2010s.

How much? This is something that we plan to define with our children as they grow older, as we want their input throughout the process.

So, what can we do here? “I want to take a family vacation to Europe” becomes “I want to take a family vacation to Europe when my daughter is twelve and begin planning it as early as my son begins taking any interest in the idea.” Thus, we have a milestone to begin formally tackling the goal.

Buying A Dream Home

This is a big one, as we’re already envisioning our dream home even before our upcoming first home purchase. This goal has us already saving, and thus transforming the goal from “I want a dream home” into something more tangible and concrete was important.

When? No later than my 45th birthday, so 2023 at the very latest.

What? My wife and I have gone to extensive lengths to model exactly what we want, and we know that this will change over time.

How much? We’ve also done a careful cost estimation of the house and have a pretty good estimate of what it would cost today. Right now, we’re targeting a number of $300,000 to have at the time of the groundbreaking on this house. This, plus the value of our home, should be somewhat close to building what we want unless the housing market continues to grow astronomically.

So, instead of “I want a dream home,” I say “I want $300,000 toward a dream home by 2023.” This transforms a nebulous idea into something that I can develop an investing plan around.

Giving My Two Children Each A House Down Payment As A Wedding Gift

This will come roughly ten years after the purchase of our dream home, and thus we can clearly define the start date for working towards this goal as being when our dream home is finished. Since the “when” period does not start until then, this isn’t really a goal, but more of a dream at this point.

How do we separate goals and dreams? We’ll talk about that tomorrow.

My wife and I have been talking a lot about making significant lifestyle changes related to frugality, and so we’ve decided to take a one month test run at it to see how it goes. We decided to make a list of twelve frugal initiatives to try for the month and then at the end of the month we’ll take a look at our finances and see how we’re doing, as well as decide which ones are worth adopting on a more permanent basis. Here are our twelve initiatives to make May an ultra-frugal month:

We will only drink water and milk at home. Water is the best beverage you can drink, and we’re retaining milk because of the nutritional value both for us (skim milk) and for our child (whole milk). We get our milk from a local dairy farmer (seriously, at Picket Fence Creamery) and it doesn’t have all of the hormonal additives of high-throughput milk.

We will only go grocery shopping twice the whole month. This challenges us to get into a routine where it becomes clear what we actually need and what gets put into the back of the cupboard only to be forgotten about. Plus, fewer grocery store trips means fewer incidental buys.

We will do all of our produce shopping at the local farmer’s market Farmer’s markets in the area have started up again and they’re already surprisingly well-stocked, as some people grow things year-round in indoor situations.

We will only do free activities (with a couple necessary exceptions) We won’t pay a dime for any activity during the month, with the exception of costs related to attending a graduation.

We will read at least one hour per day as a family How will we do this? This will happen in two half-hour stretches, one where I read to our son and my wife reads to herself, and then we switch. It’s a free activity that sets our son on a lifelong path to learning.

We will not use the clothes dryer Our apartment complex has a clothesline, so for the month we will use that in lieu of the clothes dryer. It takes more time, but it’s far cheaper, as a dryer load costs $0.75.

We will not eat out at any point (excepting meals related to the graduation and freewill meals) The only meals we will eat out this month revolve directly around travel and graduation celebration, which shouldn’t number more than three.

We will not prepare a meal that costs more than $3 per person Since there are three of us, no full meal for all of us should have a bill higher than $9 unless it produces leftovers, period. Since we are already committed to healthy eating, this makes for an interesting challenge - can we dodge the high fructose corn syrup on the cheap?

We will buy no entertainment or hobby items We can, however, trade for them or get them for free using services like the library or PaperBackSwap.

We will not run the air conditioner unless the temperature exceeds 90 degrees Fahrenheit If it’s cooler than that, then we’ll either go outside or keep the windows open to catch a breeze through the apartment.

We will not watch anything but broadcast television This means ABC, NBC, CBS, Fox, and PBS here. Since the majority of our television programming comes from these, we’ll see if we can live with just watching them. If we can, then we’ll eliminate our cable at the end of the month.

We will attend fifteen community meals There are at least fifteen available meals in our area in which you can eat for free or for a small donation to a good cause. We’re going to try out a lot of these this month to see what’s available and what’s worthwhile.

How much will this save us? It will be hard to get a precise accounting at the end of the month, but we are anticipating hundreds of dollars in savings.

This week on The Simple Dollar is Goals Week. Many of the posts you’ll read are about defining personal finance goals (and other goals) that are clear and reachable, defining goals with different timeframes, and handling achieving a goal - or not achieving one. So let’s get started.

First of all, what exactly is a goal? A goal is the result toward which effort is directed; in other words, a goal is the outcome of a period of directed activity. Goals can be over any timeframe: for example, I often set very short term goals, such as finishing my grocery shopping in thirty minutes with no extra items in the cart beyond what’s on my list. I also have very long term goals, such as writing a check for my dream home at age 45 and retiring several years after that.

Goals are great because they put a carrot at the end of the stick, guiding you down a path that leads to something you truly want to accomplish. However, the truth is that we often set goals we cannot meet - and the result of that is not only the lack of reaching a goal, but the sense of failure that comes along with it. We beat ourselves up over the fact that we can’t lose that extra twenty pounds and keep it off and our sense of self-worth goes down.

Why does this failure happen? Obviously, there are as many causes for failure as there are grains of sand in the desert, but the root causes generally boil down to several groups, three of which I’d like to focus on:

A goal that isn’t clear Setting a goal of “saving money” or “losing weight” merely sets you up for failure because it isn’t clear what success actually is.

A goal that’s overly optimistic Optimistic goals are great, but setting goals like paying off your home in a year when you owe more than your annual income is probably not going to happen unless you’ve got some sort of trick up your sleeve.

A goal that’s too distant Again, distant goals are wonderful, but they require diligence. Merely setting a goal isn’t enough.

In each of these cases, you can head off potential challenges to reaching the goal by putting in extra effort when you define the goal right off the bat. Let’s work through an example to see how you can do this in your own life.

Let’s say your goal is to save money for a house; a fine goal, indeed. However, it has some problems that make it difficult for anyone to achieve.

It’s not clear and specific Whenever you define a goal, you should make sure it answers a few basic questions with as much specificity as possible: What? When? How?

What is the goal? Obviously, to save money for a house. But what kind of house? What will it cost? Where will the house be? Will it be pre-owned, or will you build your own? How much of the down payment do you plan to cover?

When is the goal? When do you want to be moving into that house? One year? Five years? Ten years?

How will you get there? Where will this money for savings come from? Right now, you’re not saving, so you have to define what exactly will change in order for you to begin saving at the rate needed to meet the specifics you’ve already set.

Using this process will transform the goal into something specific, ideally with specific savings goals each step along the way (weekly or monthly). These sub-goals are typically called milestones and can often be thought of as goals themselves: my goal for this month is to save $X, for example.

It’s too optimistic Is it within the realm of reality for you to meet the goal you set? This is more of a balancing act than anything - you want to make it so that you’re accomplishing something, but you also don’t want to make it impossible. For example, going from barely breaking even each month to saving 40% of your paycheck will be extremely difficult for much people, so set the goal lower.

It’s too distant Obviously, the best way to handle this is by setting milestones, particularly ones that at first give you a little bit of room to figure out how it’s going to go. For savings goals, I generally find that a gently graduated approach works well: saving $X the first year, then saving more the second year and so on. This way, you find success at each point along the way.

So, using these tips, you can change your goal to something much more specific and tangible: “I am saving money for a $200,000 house in Iowa. I want to move in in five years and I want to have a 10% down payment in hand, so I will need to save $20,000 in five years. That breaks down to $4,000 a year, or $333 a month. For the first year, I’ll save $300 a month, then add $20 a month each year after that. I will put this in a savings account that earns 5.05% APY interest.”

This time around, you have a goal that’s clearly defined, with specific action points for you to follow. You can now start working towards this goal immediately, instead of it being nebulous and easy to postpone and forget about.

Remember the lady who complained at me because I gave my toddler V8 to drink? Well, I saw her again yesterday afternoon… and guess what she was doing? Taking a six (or so) year old kid into McDonalds! Welcome to the hypocrisy club! Anyway, here are some personal finance posts.

5 Different Ways To Build An Emergency Fund No, a credit card is not a good emergency fund, but there are some interesting and good alternatives here. (@ the digerati life)

Preparing Financially To Go Solo This is a nice guide to some of the preparations you need to quit your job and become self-employed. (@ queercents)

Are Car Manufacturers Compromising On Safety In Favor Of Style? - The Story Of Poor Bumper Design This popped up on one of my favorite personal finance blogs. Look, I can walk up to most new cars, give the bumper a firm push, and note that it has a lot of give to it - that makes me uncomfortable. I drive a truck with a massive bumper on it and I’ve bumped into things with nary a scratch. Yes, again, in my eyes, plastic cars are awful. (@ money, matter, and more musings)

The Simple Dollar Retro: Explaining Simple Interest, Compound Interest, APR, and APY This post was one of the first I wrote that was directly requested by a reader - she wanted me to explain the difference between APR and APY, so I went all the way back to the basics and built it up from scratch.

Today, I initiated a weekly series of personal productivity / personal development book reviews here on The Simple Dollar. The reasons for doing this are many:

One, readers have requested it. In the past, there has been pretty strong positive demand that I review some personal productivity and personal development books and philosophies. This drumbeat has gotten louder and louder and louder over the last few weeks to the point that I was getting several emails a day asking for personal development and productivity book and philosophy recommendations.

Two, while it’s not strictly a personal finance topic, it overlaps heavily. Personal productivity and personal development can increase your earning potential and also improve your way of life.

Three, it lets me practice writing about personal finance and personal development. Again, in the recent past my readers suggested trying a “spin off” blog on this topic, but to be honest I’m not sure if I can write about such things with the same quality and passion as personal finance. This book review series gives me the opportunity to find out for myself - and if it goes well, it should also whet your appetite for a spinoff blog.

So, what can we expect? These reviews are going to heavily focus on extracting specific points (reiterated in my own words) that you can utilize in your own life, as well as giving a flavor of the additional material in the book. Most of the books in this series will be positive reviews because, unlike the personal finance books, personal productivity books almost always have some value that can be extracted and applied to your life.

Also, for the readers who are worried that this will take away from the regular postings here, they won’t. These will each be an “extra” posting on Sunday in addition to the usual two posts.

I have a pretty big queue of these books built up to review, but if you have any ones you’d like for me to read and review, please mention them in the comments. I will try to get to them in the future.

Also, I will be keeping a list of all of the reviews in this post for future reference:

The 4 Hour Workweek by Timothy Ferriss
Getting Things Done by David Allen
Never Eat Alone by Keith Ferrazzi and Tahl Raz
The Now Habit by Neil Fiore
The 7 Habits of Highly Effective People by Stephen Covey
Ready For Anything by David Allen
How to Win Friends and Influence People by Dale Carnegie
Brazen Careerist by Penelope Trunk
Time Management From The Inside Out by Julie Morgenstern
The 12 Bad Habits That Hold Good People Back by James Waldroop and Timothy Butler
Go Put Your Strengths To Work by Marcus Buckingham
Made to Stick by Chip and Dan Heath
First Things First by Stephen Covey
The Well-Educated Mind by Susan Wise-Bauer
How to Stop Worrying and Start Living by Dale Carnegie
Thinkertoys by Michael Michalko

Each Sunday, The Simple Dollar reviews a personal productivity or personal development book.

Almost always, when I see a book with a title like The 4-Hour Workweek, I cringe, pick it up, leaf through it to a random page, see something with very little basis in the reality of most middle class people, close the cover, and promptly forget about it forever. When I saw this book in the bookstore about a week ago, I fully expected to do the same: I cringed at the title, picked it up, and began to leaf through it. But instead of cringing, I actually found myself seeing how some pieces of it could be applied to my life, and so I decided to give it a whirl.

What The 4-Hour Workweek Is About

First of all, I think the title of this book is a bit of a misnomer and is useful for grabbing attention. What this book actually is is the complete embodiment of the 80/20 principle into an individual’s professional life. The 80/20 principle is the idea that 80% of your productivity comes from 20% of your time, and the other 20% of your productivity eats up 80% of your time.

Ferriss argues that by eliminating that 20% of productivity that eats up most of your time, you can live in a much more efficient fashion, and the entire book revolves around that concept in various ways, hence the title The 4-Hour Workweek. In some ways, the book itself reads like a blog, as it’s broken down into lots of little pieces: some of them step-by-step advice, some of them anecdotal, and some of them philosophical.

At the bottom, I’ll give my nutshell thoughts on whether this book is worthwhile, but let’s walk through it piece by piece and see what’s worthwhile.

Walking Through The 4-Hour Workweek

First and Foremost
Right off the bat, the book makes it clear that you should pick and choose from the material presented within, and that’s a vital caveat for any personal productivity book - but especially this one. A personal productivity philosophy created by someone else is designed around their own lives and the lives of the people they associate with, but not necessarily your own. Thus, when you read a book like this one, you need to be able to pull out the pieces that work for you.

Why is that idea more true for this book than for others? Here, the different pieces of the book apply differently to different people. This is not like Getting Things Done, where the pieces can be applied in any life; many of these tips assume that you’re already wholly into the information age and that your methods of earning money are, too (or at least are comfortable enough with technology to easily move to that sort of approach).

As we keep going, you’ll see why this is really important.

Step I: D is for Definition
Most of this section is devoted to divorcing yourself from the idea of working yourself to death for a gold watch and a pat on the back. Instead, you should abandon a few concepts such as retirement as a holy grail and that absolute income is the most important thing (relative income - i.e., the amount you earn per hour of work - is the most important thing in this book). These are assumptions that actually have a lot in common with books like Your Money or Your Life and the voluntary simplicity movement.

Here’s one key exercise from this section that really shows what he’s talking about. Spend about five minutes and define your dream. If it wasn’t for the things you had to do, what would you be doing with your life right now? For me, at least, I would be a stay at home dad, writing during my spare time (like the evenings and so forth).

Now, spend another five minutes and define your nightmare in as much detail as possible. What is the absolute worst thing that could happen if you followed that dream? For me, it’s mostly a fear of not being able to support our children due to inadequate income.

If you take the dream and compare it to the nightmare, is that possible nightmare really bad enough to abandon your dream? For me, it’s not, and that’s why I continually inch closer to becoming a full time writer - in fact, I would probably make that leap if a significant portion of our home was paid for right now.

From there, the book goes into a very detailed process of breaking down that dream into tangibles and seeing how close you really are to that dream - and sets up the remainder of the book, which identifies things you can do to reach that dream.

Step II: E is for Elimination
In terms of techniques that you can really use to improve your day to day life, this section has the best advice. It focuses on some very straightforward techniques for eliminating most of the regular mundane activities that fill our professional lives. Here are seven examples that I particularly liked:

Make your to-do list for tomorrow before you finish today. When you add an item to this list, ask yourself if you would view a day as productive if that’s the only thing on the list that you got done. Then, when you start in the morning, just attack that list with vigor knowing that all of the stuff is worthwhile.

Stop all multitasking immediately. This means when you’re trying to write, close your email program and your instant messenger program and your web browser and just focus on writing, nothing else. This allows you to churn out the task way faster. For me, this was a huge step forward in my life.

Force yourself to end your day at 4 PM or end your week on Thursday. Even if you have to come in on Friday, do nothing (or, even better, focus on something to develop yourself). The goal here is to learn to compress your productive time.

Go on a one week media fast. Basically, avoid television (other than one hour a day for enjoyment/relaxation) and nonfiction reading of any kind (including news, newspapers, magazines, the web, etc.). By the end of it, you’ll discover that the media and information overload was giving you a mild attention deficit.

Check email only twice a day. I actually do this with The Simple Dollar, especially as the email volume has ramped up, and I’ve found it to be incredibly effective at reducing the time sucked down by dealing with mundane emails. Combining this with the “no multitasking” principle enables email to only eat up a sliver of my time when it used to seemingly bog down everything.

Never, ever have a meeting without a clear agenda. If someone suggests a meeting, request the specific agenda of the meeting. If there isn’t one, ask why you’re meeting at all. Often, meetings will become more productive or, if they were really time wasters to begin with, they’ll vanish into thin air.

Don’t be afraid to hang up a “do not disturb” sign. This was something that seemed very natural to me, but for many people it’s not. If you’re being interrupted regularly by people popping in, you’re effectively multitasking and multitasking is a time waster, so if you have a task that requires your focus, literally hang up a “do not disturb” sign. People will get the message.

The section has a lot more tips along these lines, but the idea here is to compress, compress, compress so that the unnecessary is squeezed out and you’re left with much more dense and effective use of your time.

Step III: A is for Automation
This section is, to me, the least valuable part of the book, because it is in essence a lengthy description of how to become a little or no-value-added entrepreneur - in other words, a middleman. The idea is that if you set up being a middleman appropriately, you can create a stream of passive income that permits you to make money with very little effort.

While this is interesting to some people, the truth is that it’s not quite as easy as the author makes it out to be. It relies heavily on salesmanship (the ability to convince people you have a product that they want) and luck (stumbling into a market). If you have both (and the examples he uses have both), you can do quite well, but such things are never a guarantee.

My approach is instead to figure out what I was good at (writing) and what I was passionate about (personal finance) and what I had knowledge of (the web) and combine the three. To me, that’s what makes a great entrepreneur, not the program defined in this section as it is far too specific for many people to succeed at. I have no doubt it worked well for Tim and for others, it’s just not something that everyone can do and be successful at.

Step IV: L is for Liberation
The final section ties the pieces of the puzzle together into an overall picture. In essence, it takes the dreams defined in the first part, the enhanced productivity of the second part, and the passive income of the third part and creates that titular four hour workweek.

The first step is to change your job so that you can work remotely. You can do this by getting efficient (as described in the second step), then demonstrating your efficiency during sick or vacation leave, then requesting some time away from the office as part of your routine, then gradually shifting to an all-remote life. This way, you can tackle the work from anywhere on your own terms. Of course, this may also lead you to quit your job if you are able to build up new opportunities (like those from the third section).

What do you do with the free time? That’s the entire point of this book, that time is the really valuable asset we have in our lives, not money. Time allows you to follow your dreams, and this entire book’s purpose (at least steps two and three) has been about moving more and more time into your own personal life so you can do these things.

I found the entire discussion to be inspirational, but also risky. I worked with an individual that did this over time, and after about two months of working at home, even though she was productive, she was basically deemed to no longer be part of the team and was removed from her job. I basically think this is a great way to make a healthy life transition, but unless you’re the head of the business, it won’t work over the long run unless you provide something remotely that no one else could possibly provide in-house.

Buy or Don’t Buy?

Giving a straightforward buy or don’t buy recommendation for The 4-Hour Workweek is difficult, because it has a lot of good core ideas surrounded by a whole truckload of marketing hype. We get the memo, Tim: you’re a big fan of marketing and salesmanship.

If you are capable of taking a book and pulling individual ideas out of it while leaving other ideas completely alone, this book is worth reading. However, if you pick up a book and expect it to be your bible, you’re going to be in deep trouble with this one, because while there are a lot of interesting pieces in the box, it takes a very specific kind of person with a lot of individual skills already in place to put them together.

That being said, I enjoyed The 4-Hour Workweek a lot. It was a fun read and there were some very good personal productivity ideas sprinkled throughout the book. If the title seems appealing to you, give it a shot - just be sure to look past all of the self-marketing that Tim does throughout the book.

About a month ago, I switched my primary checking account from my local brick and mortar bank to ING Direct’s Electric Orange online checking.

What is Electric Orange?

Electric Orange is an online-only checking account offered by ING Direct. In short, that means you do all of your checking account business either online or with a debit card. For some people, this sounds like complete craziness, but bear me out.

What’s Good?

A 4.0% APY interest rate This checking account earns an interest rate higher than inflation. My average checking account balance over 2006 was just north of $4,000. In this account, that’s an earnings of $160, just for having Electric Orange.

A strong fee-free ATM network My ATM card has no fees if I use an ATM in the AllPoint network, which has several locations nearby and apparently has one in all Target stores. My previous bank had an extremely limited fee-free ATM card network.

An overdraft line of credit Instead of incurring a big fee if you overdraft, the account instead offers a line of credit and they just begin charging you interest on that credit line. The credit line seems to be set differently for different people depending on their initial deposit and any balances they might have in other ING Direct accounts, but the interest rate on the line is 12.25%. Thus, if you accidentally overdraft your checking, instead of charging you a big fee (my old bank charged $40), you just start owing interest on the amount that you overdrafted. If you deal with it quickly, it’s just a few pennies.

Extremely user friendly online banking ING Direct has very good customer service and the best overall online banking interface I’ve used. Online bill pay with them was incredibly easy - I was paying my bills online very quickly and it all worked smooth as silk, even to rather local institutions like the local telecommunications cooperative.

What’s Bad?

No paper checks This is probably the worst drawback, but so far it hasn’t been as bad as I feared. I left my old account open with about $100 in it for small incidental checks (the nearest grocery store to my residence only accepts cash and checks from local banks as payment). For other checks, the online interface allows you to fill out a form that looks like a check and then they will mail you a check first class the following day. For me, I receive the check about four postal days after filling out the form online. This works for some larger check situations, but it’s not the most flexible system in the world. So far, it has worked fine for me, but I can envision a situation or two that might cause me trouble.

No branches The biggest reason for this for me was that my local bank allowed me to deposit pocket change directly into the account using their counting machine. Thus, I would save up pocket change in a jar for several months, then deposit it all at once. By keeping the old account, I retain this service. Other than this service, I never used a branch, so for me, this issue with Electric Orange is basically nonexistent.

Am I Going To Stick With It?

I have been very happy with ING Direct’s online savings in the past in terms of customer service and their nice interest rate, so it was a no-brainer for me to give this a try. So far, I love the account. I haven’t been hit with a single fee of any kind as of yet (and they used to come in all the time with my old bank) and I’ve earned a pretty nice little piece of interest. If you figure the losses on the fees at my old bank (and the lack of interest) versus the lack of fees at this bank and the solid interest rate, it is a very good deal.

What about a recommendation? If you’re comfortable with online bill pay, then this is the type of checking account you should be moving to. If you prefer to write checks for your bills, then this account will cause you much frustration and isn’t worth it. The online bill pay factor is really the deciding factor here.

Yesterday, I spent several hours setting up an electronic system to maintain most of my records instead of using a filing cabinet system as I described a while back.

What is an electronic financial document system?

Basically, it just means that instead of saving paper copies of your financial records, you save them all electronically, saving only paper copies of the most vital documents. This can save a tremendous amount of space, plus make it much easier than before to find and search through your documents.

Here’s an example: let’s say you wanted to find all of your credit card charges for gas in the last year. With paper records, you’d be going through the filing cabinet for an hour: with an electronic financial document system, you just click a few times and search through a handful of PDF files, retrieving the info you want in just a few minutes.

The benefits of such a system include:

It saves space Having all of your financial documents in electronic form is a lot more space-efficient than having a filing cabinet.

It’s easier to search Finding the specific information you need in an electronic system is much quicker than in a system of file folders, especially if your question is rather esoteric. This is especially true come tax time. To me, this is the true benefit of electronic financial documents.

It’s easier to back up Backing up an electronic system basically involves a blank DVD and a DVD burner (or even a CD and a CD burner for a small archive). That’s a lot easier than a filing cabinet full of photocopies.

On the other hand, the drawbacks of such a system include:

It takes longer to file things away When you get a new document, you have to scan it and add it to the system. This can take substantially longer than merely putting it in the appropriate folder in a filing cabinet. This can be mediated, though, by having an efficient system as described below.

It’s slightly less reliable. Filing cabinets typically don’t have disk errors. The best thing you can do is to make sure you have a paper copy of everything truly vital and also be sure to have plenty of backups.

It’s slightly less secure. You will probably want to have some security on the drive, such as having it attached to your desk with a steel cable or something to that effect, as well as data security software like TrueCrypt. A hard drive is much easier for someone to take than a locked filing cabinet.

What do I need?

Here are the components of the system I’ve set up.

A home computer Yep, that’s the basic piece. A few free USB ports and a CD or DVD burner are also needed peripherals.

An external hard drive Over time, this data will really add up. Plus, you’ll want the ability to easily move this archive to another computer. Thus, I recommend an external USB hard drive for storing this data.

A scanner / printer These may or may not be two separate devices. You’ll obviously also need the software for both.

Adobe Acrobat Standard (not Reader) This is my preferred format for storing the documents. Acrobat does a great job of handling character recognition from your scans, making it possible to do text searches of all of the stuff you scan in. Plus, Acrobat files are quite portable.

Blank DVDs These will be used for backups. I highly recommend monthly backups for all of your data, but especially for this type of data.

How do I do it?

This is a step-by-step example of how I set up my filing system. Your filing system may differ - the important part is that it makes sense to you.

First, I devoted an entire external hard drive to financial storage. This meant that everything on this external hard drive was nothing but financial documents. It connects via USB and is hidden in a locked desk drawer. I get it out when I need it.

On that drive, I created a series of top level folders for each entity I conduct financial business with. I have an IRS folder for my taxes, a Vanguard folder for my investments, an Alliant Energy folder for my electric bill, and so on.

Within each folder, I have a folder for each month. “December 2006″ and so on. Within each of those folders, I store the actual scanned documents with a filename that includes the date I received it as well as a brief explanation of what it is. So, in Alliant Energy / March 2007, I have a scanned copy of the bill I received during that month as well as a copy of my receipt for the online bill pay.

I also have a series of “shortcut” folders based on year. At the top level of the drive, I have a 2007 folder, and under that folders for each month. Inside of each of those folders is a direct alias to all of the folders on the drive for that month. This saves time in searching for documents.

Actually getting the documents in there is simple. I just scan them directly into Adobe Acrobat, save them appropriately, then shred the document. Once it’s shredded, I save the shreddings for campfire kindling (seriously, shredded documents makes for great kindling). I only save documents of vital importance.

Once you are used to the routine of scanning and shredding, it becomes very simple to archive all pieces of financial information that come your way. I am now actually archiving grocery receipts and so forth to make it easy to analyze my shopping habits.

In short, even though it takes a bit of work, it’s well worth the extra effort because of the constant convenience of having your financial information at your fingertips.