Throughout the month of December, The Simple Dollar is posting a daily series focusing on specific activities you can do right now to set the stage for a great 2011. Out with the old, in with the new.

3. Figure out your biggest mistake.

What one element of your life is the one element you would give anything to fix?

I’m not talking about the things you can’t fix, like incurable diseases or the like. I’m talking about things that, with some amount of luck or effort or intervention of others, could see significant positive change.

For the past few years, my biggest “mistake” has been my weight. Frankly, it oscillates. I’ll do quite well for a while, “chaining” good days together a la Jerry Seinfeld, but then something will break that chain for a few days and I’ll find my weight spiraling back quite quickly, undoing all of my progress.

It’s my biggest personal mistake, in my opinion, and it’s one that bothers me on a daily basis.

Of course, this is just one among many mistakes in my life that I regret. I can point to several other things that cross my mind at various times, from broken relationships to poor use of my own time.

When I reflect on them as a whole, though, my weight stands out, not so much as a personal appearance thing, but in terms of my ability to be a healthy father for my children.

If you’re like me, you’ll find that the one key mistake or problem in your life underpins many other smaller issues. Perhaps your debt load is keeping you from quitting a job you hate. Maybe your weight concerns are keeping you from joining a basketball league with many of your friends. Maybe your relationship with your parents is keeping you from enjoying time with your extended family.

That’s why it’s important to ask yourself if the big mistake you’re identifying at the moment isn’t really caused by something else. Maybe your inability to advance in your career is tied to poor public speaking skills, and those poor public speaking skills are also tied to your deep discomfort at being asked to be someone’s best man at their wedding.

It’s also important to remember that the purpose of this thought process isn’t to make yourself feel bad. The purpose is to dig down to that one thing in your life that you have control over that is causing the most negative elements in your life.

Spend some time thinking this through. Make a list of the things that bother you in your life, and see if you can figure out which ones are causing others. You may find that one or two things are at the root of everything if you stick with it enough.

Tomorrow, of course, we’ll talk about what to do once you figure out that one biggest mistake in your life.

This is the eighteenth entry in a twenty part series discussing the wonderful time and priority management book Making It All Work by David Allen. New entries in this series will appear on Tuesday mornings and Friday mornings through December 10.

In an earlier section of the book, Allen tells the tale of a guy named Ron and his experiences dealing with an inherited business called Gracie’s Gardens. In that earlier chapter, Allen walks through how Ron applies the basic GTD workflow to the business.

Here, in contrast, Allen looks at how Ron applies the different levels of perspective to the business, going from purpose and vision all the way down to next actions.

While I could easily quote from this story, I thought instead I’d give you an example of connecting purpose and principles down to next actions in my own life.

Purpose and Principles
As I’ve mentioned last time, one major purpose I see in my own life is creating thoughtful entertainment for others. The Simple Dollar clearly falls into that category – I try every single day to make The Simple Dollar into thoughtful entertainment for you, something that will interest you and also perhaps help you grow in some way. Of course, I’m interested in exploring other areas within this realm, too.

Vision
One dream I have along these lines is to publish a tabletop game I developed in college. It’s set in a future where the United States has fallen into a civil war among various regions. You’re essentially in control of one of the regions and you take on one of the other regions in battle. The game is entirely card-driven and can be played in about thirty minutes.

I’ve been working on it in some fashion for about eight years. About five years ago, I really got into it for a while and made up a mock version of the game, playing it a bit with several friends who were really enthusiastic about it, but I didn’t really know what to do with it at that point.

Goals
My goal is to take that game idea of mine and finish it, taking it to the point that it could actually be published. It’s not worth taking it to a publisher unless it’s in a fairly complete state, at which point they help you finish it off and handle the production of the game. It’s not too much different than handing a completed manuscript of a book to a book publisher.

Projects
Getting the game to that state means making sure the rules are clear, playing it with a lot of people to ensure that it plays well and is easy to teach, and so on – in other words, a big bundle of projects that need to, in some ways, be done in a particular order.

First among them is making up a revised playable version of the game, along with writing up clear rules for the game. Once those are prepared, I can start testing the game with friends, revising and remaking the game over time. Eventually, I need to find a remote group of people I trust to see whether the game is learnable on its own.

Next Actions
So, what’s next? The first task is a rough draft of the rules. The next task is to walk through the game components, a small batch at a time, and make sure they make sense within the rules and are reasonably fun to play.

What this all means is that there’s a clear thread connecting the mundane things I do day-to-day and the large purposes and principles I have in life. Establishing those ties (usually during my weekly reviews) helps me to figure out whether the things I’m doing have a deep connection to the big things in my life – or whether there’s a disconnect and things need to change.

I don’t expect that my purpose and principles match yours or that my goals and projects for expressing those purposes and principles would be what you would do. At the same time, though, I do believe that you should always be figuring out what your purpose and principles are and figuring out how to connect the things you do each day, from your job choices to your money choices, to those big things in life. It’ll fill every moment of your life with a much deeper sense of purpose.

Throughout the month of December, The Simple Dollar is posting a daily series focusing on specific activities you can do right now to set the stage for a great 2011. Out with the old, in with the new.

2. Create a five year sketch.

What, exactly, is a five year sketch? It simply means a detailed picture of what you would like your life to be like in five years. It can be literally drawn. It can be written in paragraphs, or as a list. It can be a collage. It just needs to be some sort of physical representation of what exactly you want your life to look like five years down the road.

Here are some elements to think about when making this sketch:
What will your job be like?
What will your family be like?
What will your physical appearance be like?
What will your home be like?
What will a typical day be like?
What will you be looking forward to?
What will your social circle look like?

I encourage you to try to write down at least ten traits for each of these questions that describe the way you’d like your life to be in five years.

Realistic or not? Don’t paint a picture of a future that’s completely unattainable. Instead, seek out a life that is somewhat better in the areas that matter to you. If you’re happy with your current physical shape, maintain it. If you’d like improvement, improve it a little, but don’t go from being highly out of shape to being a supermodel or else you’re just sketching something that you’ll never be able to obtain.

The sketch should depict an improvement in your life that you’re happy with, whatever that may be.

See, in the end, this sketch is the accumulation of the projects and goals for the next five years that you hold most dear to you. It sets a clear picture of what your life will be like if you achieve some things between now and then.

Don’t create this sketch all at once. My suggestion is to create a new document in Google Docs, paste in the questions above, and then just throw down some thoughts under each one. Save the document, then return to it every few days for a week or two. Let the ideas grow in your mind, then revise what you’ve already written down.

You’ll know when you’re finished. When you look at your sketch of your future life, it’ll ring true. You’ll feel that it’s a life that you deeply want in every way.

The next step is the empowering part: start pulling goals and projects out of that sketch. Make a list of them. What exactly do you need to do to make this happen? What can you accomplish in the next year to move you towards this picture?

From those one year goals, you can make a list of actions that you can do today. For each of those things you can accomplish this year, what can you do today to get it started?

I find this process incredibly empowering. It ties the big picture of my life down to the specific actions of today, making them feel much more worthwhile. If I know that this mundane thing I’m doing today directly connects to some bigger thing in my life, it gives that mundane thing much more life.

Return to this material regularly. As mentioned above, I keep mine online at Google Docs so I can easily check it from any web browser without really having to worry about where I’m at when I’m thinking about this. I’ve reviewed such things in the car, at my parents’ home, and so on.

Returning to this material is key because it makes you think about and reflect upon the goals you’ve set and look for new ways to move forward with them.

It’s all incredibly empowering. I strongly encourage you to give it a shot.

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Pension benefit options
2. Unapplied mortgage funds
3. Moving and investing simultaneously
4. Underwater home and credit cards
5. Setting priorities
6. Toilet paper value
7. First time credit worries
8. Car cost versus salary increase
9. Helping family with finances
10. Insurance priorities

My Christmas shopping is almost finished for the year. Aside from some children’s gifts, every present that I’ve picked up so far is either homemade or is something specifically utilitarian. None of those “Thanks for this…. thing” gifts – no one likes those, neither the sender or the recipient.

The one exception to that: our extended family is doing an interesting “Yankee swap” Christmas gift exchange in which everyone is putting a DVD into the mix, then we’re opening them “Yankee swap” style, which means you can swap your newly-opened gift for a gift that someone else has already opened. This will make a normally ho-hum gift exchange decidedly more interesting – and entertaining.

Q1: Pension benefit options
I got a job with a large insurance company directly out of high school. After ten years of working my way up the ranks, I took a position with a different institution. my company notified me that since I have ten years of service, I have a pension available. I can take a monthly benefit of $202/mo or a lump sum payment of approximately $4,800. The monthly annuity would begin at age 65. If I took the lump sum, they would withhold 20% for taxes. My current tax bracket is right on the cusp of the 15/25% border, so I would likely have to pay an additional 5% in taxes.

So which option do I take? On one hand, the annuity is a nice backup to my 401k savings (10% of gross income). However, factoring in inflation over the next 35 years brings the value down considerably. Also, this is a company with a choppy history – what guarantee do I have that the pension will be available in 35 years? Is that a serious risk? The lump sum is enough to pay off all my remaining existing debt (which is scheduled to be paid by March of next year) and cushion my emergency fund. My husband and I want to start and family in the next year and purchase a house in the next five, so debt reduction and aggressive savings are our top priorities right now. The lump sum could make this happen much faster, but I don’t want to cheat my future self out of the benefit of a lifetime annuity.
- Heather

The first thing you need to find out is whether this annuity is actually a product of your company or whether it’s held by someone else. If you doubt the long term viability of the company you work for and the pension isn’t insured in any way, then I would be suspicious of the long term value of that pension.

In other words, if you believe there’s any sort of significant chance that the company providing your pension won’t exist when you’re 65, I would take that lump sum now. Just put half of it in the bank for taxes – you probably won’t need that much, but you’re better off being safe than sorry.

I’d probably use the first half of the money to finish off your debt repayment just a little faster, then turn your focus to savings.

Q2: Unapplied mortgage funds
My wife and I have a 30 year mortgage, held by a bank which I will call Fells Wargo, at 5% on a $230,000 home which we are a year and a half into. From day one, we decided to enroll in bi-weekly payments knowing that by doing this we would trim some time off of the 30 years. I’ve come to realize that the first “half” payment sits as, what is called by Fells Wargo, Unapplied Funds. The definition of Unapplied Funds on their website is as follows:

The very last sentence turned on a lightbulb in my head. If I tell them where to apply my funds, then this will cut the amount I pay in interest. Am I right by saying so? If so, how would I tell them to apply my funds? Here are some numbers to play with… Bi-weekly payment = $847.72. Last full payment: Principal = $294.25, Interest = $920.71, and Escrow = $480.48. Remaining balance = $220,677.29
- Justin

You’re absolutely correct. If you request that your oddly-named bank apply your extra payments towards your principal, you’ll reduce the amount of interest owed on future payments.

Note that this does not mean your monthly payment will become lower. Instead, it means that a larger part of each subsequent payment will go towards the principal of your debt because the interest portion of your monthly payment is now smaller. What will actually happen is that your house will just get paid off quicker.

Also, some states don’t allow prepayment of home mortgages, so you may find that the money may just be refunded to you or deposited in an account of your choosing.

Q3: Moving and investing simultaneously
We’re tired of Manhattan and ready for a change. For several years we have been thinking about going into the Peace Corps. We’ve both done a lot of volunteering in the past and I spent some time living in an un-industrialized / less-developed country when I was in high-school so we do have some sense of what we are getting into. We also want to spend some time traveling. My husband is more adventurous in nature, he is very focuses on not squandering his time, youth and health ( its not unlikely that, if I were less pragmatic, we might be camping on a beach in South American right now rather than living in the East Village).

My question is – are doing BOTH of these things risky? I like the IDEA of buying a property that will hopefully increase in value or at least have renters to help pay off the mortgage while we spend a few years overseas. This will also make me a little more comfortable with the idea of not actively contributing to a 401K or IRA for a few years because I would be investing towards my future in another way.
- Kate

I don’t have a full picture of your financial state, but I will say that you shouldn’t even consider doing this if you don’t have enough cash in the bank to cover all of the mortgage payments while you’re out of the country doing the Peace Corps gig.

If you don’t do this, you set yourself up for a very sticky situation in which you likely won’t have the resources to cover the mortgage while overseas and you’re relying on a reliable renter, something I would never bet everything on.

If I were you, I’d either choose one or the other or wait until I had a pretty fat bankroll.

Q4: Underwater home and credit cards
I recently got married and my husband and I are in a unique situation. We both own houses that we rent out and we are currently living in a house my mom owns and paying her rent of $1250 per month. My husband owns a home with his sister and until recently she was living there with a roommate and he paid a third of the mortgage. Now she has moved in with her boyfriend and their house is rented for most of the mortgage. We pay $500 a month towards that mortgage and they have no intent to make any changes to that situation.

I came into this marriage with about $20,000 worth of credit card debt and we’ve managed to pay down about $5000 of that in the past 6 months. Our original plan was to have it all paid off within two years (which is on track) and then start putting money away for a larger house than the one I own. The trouble, is my house. I rented it out when I had to move south because it was worth just about exactly what I could sell it for, and it seemed to make more sense. It’s an interest only loan at 7.4% and I pay just under $1500 a month for the mortgage. The rental income is $1,000 so it’s only $500 out of pocket for me currently. When my tenant’s lease is up in April, we plan to move back into that house for 3-5 years before buying a larger home to accommodate the kids we’ll start trying for in the spring. The problem is the house is scheduled to reset in July. We’d like to refinance – and with my husband and my incomes, ordinarily it wouldn’t be a problem – especially since by the time we’re living there again, we’ll have paid off at least another $5000 of the credit card debt. But sales in that area have declined and I’m about $30,000 underwater. I have no idea what to do now. Paying more for the mortgage when it resets won’t break us (I hope) but I’d like to get better terms. We’re not behind, we’re not in dire straights, but is it even possible to refinance when prices are so low? I don’t see how we could qualify for assistance; we make around $7,000 a month. Oh, and we can’t refinance until we’re living there, because if I’m renting it out, it’s considered an investment property and when we asked our credit union, it was going to cost $10,000 just in fees & closing costs.
- Jenny

If I were you, I’d move into the house at the first possible instance in April and then refinance as quickly as you can before the rate resets.

I’m going to assume that you’ve been keeping up with your bills recently and thus have improved your credit rating. If this is the case, then you should be able to easily qualify for refinancing once you’ve moved into the home.

Of course, the big question is whether you can find a financial institution that would be willing to refinance an underwater home. The first business you should approach is the mortgage holder, who will likely be willing to work with you to refinance.

Q5: Setting priorities
I’m at a point where I’m unsure of where to go with my extra money every month. Here is a quick backstory on me: 29 years old, single, no children, stable job making over $100K/year. I currently have about 5 months of expenses in an emergency fund. My only debt is the $165K balance on my mortgage at 4%, and $20K in student loans at 2.13%. I am currently putting 13% of my pay to 401K (some of that is Roth so it is post-tax), and my company is putting in an additional 3%.

7) Other potential options I didn’t list that you recommend
- Nick

These are all worthwhile options, but before you commit to any of them, you need to figure out why you’re saving. What are you saving for?

If you can’t think of a specific reason that you’re saving, I would focus on eliminating all of your debts, starting with the higher interest ones. I know that they’re relatively low interest, but doing it anyway has two benefits.

First, a debt prepayment is basically a guaranteed investment that returns the interest rate of the debt. So, if you’re prepaying a 5% loan, that’s basically a 5% return that you don’t have to pay taxes on, which is pretty good.

Second, eliminating debts early gives you personal and career flexibility that you’ll never have with a debt hanging around your neck requiring you to make a payment each month.

Q6: Toilet paper value
Up until about 3 years ago or so, I used to be able to tell if a sale on toilet paper was really a good deal or not. Now that companies are doing the double & triple-roll thing, I can’t tell if a sale on toilet paper is truly a good deal or not. Do you have any rule of thumb on this?
- Nancy

I use sheet count. Of course, this will require you to have a calculator with you unless you’re really good at mental math.

Take the cost of the package. Divide it by the number of rolls in the package. Divide that by the number of sheets per roll, and you’ve got the cost per sheet. The lowest cost per sheet is the best bargain, but you can obviously restrict that by brand or type as you wish.

Obviously, companies do this to make comparison shopping a bit tougher. I don’t like it, but we all need toilet paper (or a bidet, I suppose).

Q7: First time credit worries
My grandson wants me to teach him to build credit so he can buy a boat next summer.

I would like to show him the good, the bad and the ugly about credit.
- Joan

Responsibility with one’s money isn’t something you can teach very well without a willing student. If he has no interest in getting his finances straight, then you can talk all you want but it will just go in one ear and out the other.

If you want to interest him in good personal finance, I would start with goals. Wait until he’s able to articulate things about his future that he actually wants, then start looking about how to get there.

I find that connecting goals to the mundane nature of personal finance is the best way to get people interested in and excited about it.

Q8: Car cost versus salary increase
I’m currently on the hunt for a new job. I live in Australia where the job market and economy isn’t anywhere near as unstable as the USA. My boyfriend and I are a one-car family and I bike or public transit to work. Some of the new jobs I would like to apply for include a 20-25K jump in salary range. So I’d be making significantly more. However, some of these jobs would also necessitate the purchase of a second car. Unfortunately we can’t switch positions as my boyfriend can’t take public transit to his job. This second car would most likely be a 4wd pickup truck (used) as it would benefit his career (furniture builder which requires moving significantly large pieces of furniture obviously) and our lifestyle (we enjoy a lot of camping and 4wd trips with friends and family). Unfortunately I don’t have the cash to buy a car outright. At what point does a car payment, insurance, petrol, etc. negate a 20K+ salary increase? Am I better off only applying for jobs I can public transit to?
- Carolyn

A $20,000 salary increase is well worth buying a used car for, without a doubt. (Yes, I checked the exchange rate – US dollars and Australian dollars are fairly close.)

From what I can tell, you can get a reliable used car for $8,000 in Australia. I don’t have good numbers on petrol and insurance prices there, but unless they’re enormous and far beyond the scale of prices in the United States, it’s worth it.

The deal gets even better when your car is paid off and you’re just pocketing that money.

Q9: Helping family with finances
I have begun reading your blog this year and think you have some great advice so I wonder if you could help us out.

In addition, do you have any advice on how to broach a subject like financial advice to family members without offending anyone?
- Penny

Much as I responded to Joan above, it’s extremely difficult to get people interested in personal finance if they don’t care about it.

Also, as I stated above, the best method for getting people interested is to focus on goals. Is this a lifestyle they want to sustain over the long haul? Where do they want to be in the future?

I’ll freely admit that I find it uncomfortable to talk to my siblings about personal finance. It’s just not a subject that goes well between us, so I just let it lie.

If I were you, the closest I’d get to the subject is goals. Talk about where you want to be in five years with them and then clearly state how you’re going to get to where you want to go. Don’t tell them how to do anything.

Q10: Insurance priorities
How would you rank the following with 1 being the most important and 5 being the least important: accident, disability income, health, life, and major illness? Also, what percentage of one’s pre-tax income should be allocated to each of these items? You could put in 0% if you think I shouldn’t get this type of insurance.
- Ronald

It depends heavily on the situation in your life. Do you have children? Are they young or are they near adulthood? Are you married? Is your spouse in a financially independent position, meaning would your spouse be able to survive without you?

Is there a history of disabling illness in your family? Do you work in a career where you’re at risk for disability?

Those questions will help lead you to what the most important insurance types are for you. There is no ready-made solution that works for everyone.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

Throughout the month of December, The Simple Dollar is posting a daily series focusing on specific activities you can do right now to set the stage for a great 2011. Out with the old, in with the new.

A long December and there’s reason to believe
Maybe this year will be better than the last
- Counting Crows, A Long December

I’ve always seen the five weeks between Thanksgiving and the new year as a time for reflection and for setting the stage for a successful year to come. It’s usually full of time spent with family and time spent preparing for those family events, too.

This year, I thought I would fill the month of December with a collection of the kinds of activities and preparations that I undergo during this period, both to put some closure on the year that passed as well as set the stage for an even better year to come.

Some of these will work for you. Some won’t. Nevertheless, give as many of them as you can a try. You might find that it’ll put you in a better place than you ever expected.

1. Calculate your net worth.

In my experience, there is no better snapshot of your financial health than your net worth. With one single number, you can get a glimpse of your financial state, good or bad. More importantly, by calculating your net worth on a consistent basis and comparing the numbers, you can get a sense of whether you’re making positive financial progress or whether you’re regressing.

There’s no better time than right now to get started. Here’s what you need to do.

Make a list of all of your assets and their values. How much do you have in all of your savings accounts? Your checking accounts? Your investment accounts? College savings? Retirement savings?

Some people also choose to include assets such as their automobiles and their homes. I generally think automobiles are a poor idea to include because they’re difficult to value properly and they’re not easily liquidated for most people, as they need some form of transportation. It’s up to you whether or not to list your primary residence’s value – I don’t list it on my own calculations.

The important thing is that you use a standard, so that when you calculate your net worth again, you’ll be able to make a fair comparison.

Make a list of all of your debts and their balances. How much credit card debt do you have? What’s your mortgage balance? What about auto loans? Personal debts?

Again, make a list of all of these things with their current balances. As with the asset list, this may take some time as you locate all of these balances. Net worth calculations are a task that’s greatly aided by personal finance software like Quicken.

Add up the assets and the debts separately. You’ll want a total value of all of your assets as well as a total value of all of your debts. Time to break out the spreadsheet or the calculator!

Take the total of your assets and subtract the total of your debts from it. The resulting number is your net worth, and it’s a great snapshot of your financial health.

Ack! My net worth is negative? Many people, particularly young professionals with a big pile of student loans, will find themselves with a negative net worth, something that seems really ominous.

I wouldn’t worry too much about it, particularly if you’re gainfully employed. Instead, I would focus on the month-to-month or quarter-to-quarter change in your net worth. If your net worth is going up on a consistent basis (meaning that negative number is getting smaller and smaller as it heads toward zero), then you know you’re headed in the right direction.

How do I use this information? In my experience, the best use for one’s net worth is to provide a yardstick and a motivator for better personal finance behavior.

First, you can raise your asset level – and thus your overall net worth – by living more frugally and by finding new ways to earn income. If you resist spending, then the money stays in your account. If you earn more money, that money goes into your account. The better you are at either side of the coin, the higher your asset total will be and thus the higher your net worth will be.

Second, you can reduce your debt level – and thus increase your overall net worth – by living within your means and sticking to a debt repayment plan. These methods will reduce your debt load, thus increasing your net worth.

In other words, your net worth is directly related to your financial moves. If you make good moves, your net worth goes up. If you make bad moves, it goes down or stays stagnant.

This is particularly true when you start keeping track of your net worth over time, calculating it (say) on the first of each month and comparing it to earlier net worths. It’s almost like keeping a financial “score” for yourself, one that, if you’re competitive, will make you want to beat your earlier scores through good financial behavior.

I have calculated my net worth each month since 2006. For a while, I calculated it weekly and, for another period, I calculated it every two weeks. All of this data tells me a few things: frugality really does pay huge dividends, getting rid of debts accelerates your net worth growth (because you’re not dumping money into interest), and my financial progress has been a very good thing. I keep the numbers in a spreadsheet – you can use whatever documentation system works best for you.

Get started on your own net worth track record today.

Over the past few days, my family has started the early December tradition of pulling boxes out of the crawlspace and decorating our home. The tree should be up by the time you read this, full of (mostly) homemade ornaments. The living room has been rearranged to make room for the tree, and we hope to take a family photo in front of the tree for our Christmas cards.

The Christmas season is indeed upon us.

Buying and Trading Locally: Where Does Your Dollar Go? Here, I’m making the argument that for small businesses, there is some significant benefit from getting supplies that they need from a local source. (@ open forum)

Becoming Your Real Self to Help the World Everywhere I look, I seem to see stories of people who came to the realization that, if you cut all of the unimportant nonsense out of your life, you can do great things. (@ no impact man)

Wine on a Budget: How to Get Good Deals on Wine My “wine on a budget” usually involves a trip to a warehouse club or to Trader Joe’s. (@ get rich slowly)

How to Save Hundreds of Dollars By Taking a Day Off Work When you leave unused vacation time on the table, not only are you giving the company money, you’re also costing yourself money. (@ )

Our Savings System – Lots of Goals! This couple is simply setting lots of goals for themselves and pushing each other to reach them as a very high priority. Together, they’re beating the financial game. (@ couple money)