A reader asked me if I could break down my ideas into a handful of principles. After some careful thought, I came up with a list of fourteen basic “rules” that summarize my money and life philosophy. I’ll be presenting these as a weekly series.

The book Your Money or Your Life by Joe Dominguez and Vicki Robin (read my detailed notes on the book) had a profound impact on me when I was figuring out my personal finances. One major theme of the book was the idea that you need to sit down and figure out the small handful of key values that are central in your life. Once you have figured out what those are, the rest is secondary – and that means you should seriously trim back your spending in those areas.

Not surprisingly, a major chunk of the book is devoted to ways to cut your spending. Right at the start of the list – the single most important tactic they suggest for cutting your spending – is summed up in six easy words.

Stop trying to impress other people.

If you buy a car that’s flashy rather than focusing on one that gets the job done as efficiently as you can find, you’re spending money to impress other people. If you go clothes shopping by the store sack full, you’re spending money to impress other people. If you always have the latest gadget, you’re spending money to impress other people. If you always must be seen at the coolest new place, you’re spending money to impress other people.

Stop worrying about it.

I found it was really powerful for me to take people and split them into two groups: people whose opinions I cared about, and people whose opinions I didn’t care about one way or another.

It was easy to stop caring about impressing people whose opinions I didn’t care about. Who cares what they think? As long as I’m not doing something truly offensive or heinous – something that might potentially create a negative reputation for me – it doesn’t matter what they think.

The trickier part was worrying about impressing other people whose opinions I do care about. People I want to meet. Customers. Friends. Family. Shouldn’t I want to impress them?

Again, I go back to the basics. As long as I’m not offensive – meaning I’m clean, I’m presentable, and I behave myself – I don’t need to impress these people with expensive, shiny things. The relationship I’ve built with them – or I’m going to build with them – is based on me, not on the material items. They’ll either like me for me or they won’t – no amount of shiny will change that.

So, to put it simply, take care of the basics. Have good hygiene. Keep yourself clean. Keep your weight under control. Wear reasonable clothing. Work on your communication skills. If you have them covered, you don’t need to invest time and money into impressing other people. You will naturally connect with the people you will connect with, and you won’t connect with those you wouldn’t connect with anyway.

Coming to this realization is incredibly valuable. It drops your clothing budget. It drops your automobile budget. It drops your electronics budget. It drops your housing budget. You don’t need a McMansion, a shiny car, an iPhone, or a $50 haircut.

(Yes, you may actually still want one or two of these things, but the impetus comes from what your personal core values are, not what other people around you seem to value or what marketing messages you receive.)

For some people, it seems impossible. Their social cues come from advertising-laden media and from friends who also get their cues from advertising-laden media. They believe they need a slick cell phone and $100 casual clothes. Their self-worth revolves around that little burst they get from impressing others.

Here are six ways to break through that situation.

1. Take the lead. Be a trendsetter within your group. Back away from the expenses and activities that revolve mostly around impressing other people. Make suggestions for activities that don’t revolve around showing off.

2. Try new activities. You can do this either with your circle of friends or on your own, but try out new things that you might never have considered before. Think of things that seemed fun to you but you never got involved with because others around you decried them – and you were trying hard to impress them by agreeing.

3. Guide the conversation. If the conversation turns to bland compliments of each other and insults of people outside your group, steer the conversation away from it. Focus on being positive towards everyone, particularly in non-material areas. Pick areas you’re passionate about (don’t be a one trick pony – figure out several) and guide the conversation there instead.

4. Use your compliments wisely. Offer compliments on jobs well done, but don’t bother with big compliments on new gadgets or new clothing or a shiny new car. It’ll become clear that what you value are people who take charge of their life, not people who fritter away their money trying to impress others.

5. Share personal growth oriented thoughts. Instead of talking about popular culture and “stuff” all the time, instead mix in some thoughts on personal growth. Talk about ways you’re trimming your spending in positive ways. Talk about your big aspirations and dreams. Encourage others to share theirs as well. It also helps to read good materials in these areas so that you have more food for your own thought and more ideas to share.

6. Explore new relationships. If your circle of friends is still focused too heavily on impressing others and on material gains, spend some time exploring new relationships. Call up people you’ve thought of as interesting but simply wouldn’t fit in your old group and see what they’re up to. Connect with people at the new activities you’re trying. (I’ll touch on this a little bit more with a later rule.)

In short, don’t play socially by the tired old rules that revolve around needing to impress people. Instead, spend your time on things that bring real value to you – and give real value to others.

A reader asked me if I could break down my ideas into a handful of principles. After some careful thought, I came up with a list of fourteen basic “rules” that summarize my money and life philosophy. I’ll be presenting these as a weekly series.

It’s late April 2006. I’ve finally realized how bad our financial situation really is. Finally, after weeks of stewing, I’ve decided to talk to my wife about it. I’m sitting at the kitchen table with some papers, about to tell her about the situation and that we need to make some changes. I’m scared to death.

She calls. She’s on her way home from work and has just picked up our son. I’m thinking of ways to avoid this talk. So I do. I stack up the papers and work on supper, deciding to talk about it after our son is down for the night.

We have a strangely tense dinner. I’m tense. My wife is wondering what’s going on (for good reason). She puts our son to bed and I sweat it again, not wanting to talk to her.

But I finally bite the bullet.

And it’s easy. Much easier than I thought. It was calm and rational and we came to a lot of agreements by the end of the evening. Sure, we were up until after midnight that night and up pretty late a few other nights shortly thereafter, but we started to put some pieces in place to turn our lives around.

I was afraid to talk about money – and it cost me. I avoided talking about money for years and instead watched our financial situation spiral downwards. When I realized I had to talk about it, I still kept putting it off.

And for what?

Another example: my parents are getting older. I keep seeing little signs of it, time and time again. There’s a half step that’s missing. There’s a parent getting tired surprisingly quickly. There’s a wrinkle or a gray hair I hadn’t noticed before.

I don’t want to talk to them about their finances and their estate planning. It scares me to ever think that they might pass away. So I put it off – it’s easier, right?

But one day that event will come. Maybe that event will take both of them at once, or it’ll leave one of them behind, unable to handle what comes in the aftermath. The thought of that moment, as it comes quietly closer, is beginning to worry me more and more.

So I finally did it. I called up my parents and suggested that sometime soon, I spend a weekend with them figuring out everything in their estate and walking through it.

Breaking through that social and personal barrier of talking about money is incredibly difficult, but it’s vital. Without doing it, you open yourself up to paying the penalty of countless mistakes and facing some deeply painful situations that could have easily been avoided had you just spent a bit of time talking about it.

Here are six important things to think about.

What’s Unresolved?
Look around your life, particularly your closest family and friends. In each of those relationships, there are likely things that are left unresolved, things that, in your perfect world, they would be resolved. Here are some examples.

Your partner. Are you sharing the same dreams for the future? Do you have any debts that you’re hiding? Are you in better – or worse – financial shape than your partner might believe? Are you in agreement about how to handle your respective property in the event of the other’s passing? Is your relationship fulfilling you, making you happy?

Your parents. Do they have an estate plan in place? A will, at least? Are they prepared for the financial costs of retirement? What are they expecting from you when they retire?

Your children. Are they expecting you to pay for college? Are you expecting to? Are they expecting you to help with a wedding? Are you expecting to? Do they understand your estate planning?

Other relatives. Do they owe you money? Do you owe them money? Are there other problems, such as caring for older family members? Who’s responsible for what?

Your close friends. Are they constantly engaging you in activities that cost more than you are comfortable spending? Do they owe you money? Do you owe them money?

This is just a start. Even in my own life, after lots of talking about money with the people around me, I still don’t feel as though the door is shut on all of these issues.

I will say this, though: every time I made an effort to actually talk through these issues with someone important to me, I found that I had put it off for too long and worried about it too much, because it went easier than I expected and there was much relief afterwards.

Is Everyone Involved That Should Be?
Whenever you address a complex issue, the ramifications often affect all sorts of people, and it’s usually a very poor idea to start making big changes without seeking their input.

So, before you even start discussing these things, get everyone involved that should be. If you’re talking about a person’s estate, make sure anyone who has a significant stake is involved in the discussion – or is at least carefully considered to be a part of the discussion.

Quite often, this seems painful. I immediately think of some of the estate planning situations I’ve witnessed and been involved with. It was obvious at times that things – and people – were being cut out in order to preserve the comfort of now while postponing the painful part until later.

Each time, it ended in disaster. Siblings not speaking to each other for the rest of their lives. Friendships ended because of “backstabbing.” Lawsuits.

You’re better off swallowing your pride and getting everyone relevant to sit down and talk about things. If someone won’t participate, that’s their decision, but the door needs to be very open to them – and it needs to be clear that the door is open to them.

Getting the Necessary Information
Data is the enemy of lies, lies are the enemies of trusting relationships, and the maintenance of trusting relationships is why you’re doing this in the first place.

Yes, people are defensive. Yes, it hurts to tell the whole truth sometimes. So make it easier on everyone – bring as much real data to the table as possible. Get out those statements. Figure out how much is there.

People are going to be uncomfortable with this. The best thing you can do to quell that is to step up to the plate yourself. Bring your information and offer to show it if they will. Your openness and honesty creates a standard that others will feel some strong desire to live up to, lest they look as though they are being dishonest or are hiding something.

What about feelings? Again, honesty is the best policy and, again, your best bet is to lead by example. Behave in exactly the way you’d like others involved to behave. Share every drop of your relevant information. State your opinions and feelings openly, honestly, and calmly.

Real information and real honesty are powerful tools for cutting through the layers of personal feelings and getting directly to the heart of the matter.

Getting It Done
You know what you want to talk about. You’re prepared to bring honesty to the table. You know who needs to be involved. Now, you just need to do it.

Plan to talk about it in a place that’s as safe as possible for all of the participants – a comfortable place. A person’s home is usually the best choice unless it inherently causes some discomfort.

It should also be a place where, if numbers are going to have to be analyzed, all of that data is easily available. Thus, if you’re going to walk through some estate planning, you may want to do it at the home of the person whose estate is being planned.

You should schedule a very clear time when this is going to be discussed and make that time and date known to everyone who might be involved. Give plenty of time for this, so that you can schedule around any conflicts. Don’t just decide one Saturday morning that everyone is going to meet that afternoon.

Another key factor: if it’s really involved, plan things around another activity. Make dinner during the discussion so you can dine together afterwards – or dine as a break.

A final key factor: make sure that the meeting ends with some very clear actions for some or all of the people to take. What needs to be done to make these plans a reality? Without specific actions, nothing will actually happen as a result of the talk.

Dealing with Anger or Hurt Feelings
Because money has such a huge emotional factor, you can pretty much expect that if a discussion is intense enough, people are going to get angry or upset or have some sort of emotional response. So, plan ahead for it.

First, make a very clear rule that raising your voice or being obviously angry isn’t allowed. If someone gets angry, just call a time out and let everyone chill out. Nothing good comes from allowing a discussion to continue if participants are angry or upset because the emotion will just rapidly escalate. Then follow that rule. If someone gets upset, just take a break until everyone is calm again.

Second, make it clear to everyone what the end goal here is. Make sure you all agree on this. If it’s about estate planning, for example, make it clear that the goal is to help your parents develop a plan that reflects their wishes – and that their wishes are final because it’s their estate.

Finally, don’t let hard feelings run after the event. If you’re sure that emotions are going to run high, plan a family dinner or other special event immediately afterwards to work on healing those stressed bonds. Feelings like these should not be allowed to fester.

Following Up
After the conversation, you’ll likely find yourself with a list of actions and probably some bruised feelings. Both elements deserve some follow-up.

Talk to the people involved afterwards and see what you can do to alleviate any hurt feelings. Pull back to the general purpose of the meeting and remind them that the big goal actually happened, even if it hurt. Listen to their concerns and don’t talk them down – agree with them, at least to the extent to let them know that their feelings are at least understood, even if you don’t agree.

You should also follow up on any decided actions. Make sure that the people who agreed to do things actually do them. This might even involve some follow-up meetings to ensure that these actions happened or that further input is received.

This sounds like a lot of work but the benefits are tremendous: stronger relationships, an assurance that the important things are taken care of, and potential crises averted. Talking about money honestly is a huge positive once you get past one’s fear of it.

A reader asked me if I could break down my ideas into a handful of principles. After some careful thought, I came up with a list of fourteen basic “rules” that summarize my money and life philosophy. I’ll be presenting these as a weekly series.

This rule is about as subtle as a sledgehammer, of course. Many of you started visiting The Simple Dollar because you came to this realization on your own – high interest debt is a terrible idea, and even low interest debts are a terrible idea. Let’s count the ways.

The higher the interest rate, the more money you lose with nothing in return. Leave a $1,000 debt on a credit card with an 5.5% APR for a year and you lose $55 – not good. But if you bump that amount up to a level that’s typical for credit cards – say, 19.9% – and you’re up to $199 a year. Gone. Poof. Vanished.

The higher the debt level, the more money you lose with nothing in return. So, you have $1,000 debt on a credit card with a 19.9% APR and you lose $199 a year. Bump that up to $5,000 and you’re losing $998 a year. Gone. Nothing in return.

You’re open to late payment fees, over-limit fees, annual fees, ATM fees, cash advance fees, and countless other drains on your money. If there’s a way to ding you, credit card companies will figure out how to do it. A fee here, a fee there, and you’re suddenly watching even more money evaporate for nothing in return.

A required debt payment each month reduces your freedom. With that $5,000 debt above, you’re paying about $100 every single month as a minimum payment. That’s $100 you could be saving for a down payment. That’s $100 you could be saving to start a business. That’s $100 you could be saving for a car. That’s $100 you could be saving towards retiring early. That’s $100 you could be saving towards a great vacation. Your freedom is gone, eaten by the debt monster.

The mere presence of high interest debt often brings other debt into your life. You make a big commitment to getting rid of all of this debt, then start really bearing down on it. You get half of the debt gone, then all of a sudden disaster strikes. You lose your job. Your car breaks down. Your hot water heater leaks water all over the basement. Suddenly, you’re busting out the plastic again to take care of the problem – and you’re right back deep into debt. It’s like escaping from quicksand – if all of your strokes are perfect, you can pull yourself out slowly, but if even one little thing goes wrong, you’re slurped right back in.

In other words, it costs you money, costs you freedom, and puts you into a vicious cycle of even more debt.

There are really two prongs to getting out of this trap. Whether you’re avoiding it entirely or you’re trying to escape from the pit of despair, there’s one big first step you must take.

Build a Small Emergency Fund
The first step is not paying off debt. Paying off debt first is like kicking to get out of quicksand without getting your arms around something safe first – you might be able to kick out, but if anything goes wrong, you’ll just be sucked in deeper.

So, no matter what state you’re in, give yourself that rock – a cash emergency fund, sitting in a savings account. It doesn’t need to be too big – $1,000 should be your big target, but just start by putting $20 a week into savings – or more if you can swing it. Instruct your bank to do this automatically. Do it right now – call up your bank and ask them to do it.

You won’t miss that $20 a week. Your life will quickly find little ways to save – you’ll eat a few less expensive meals, start carpooling with a friend, or skip a few coffee shop visits and you’re there. What happens is that over the course of three months, your savings account reaches $250. After just shy of a year, your savings account will have $1,000 in it.

If you’re already making extra payments on your debts and you don’t have an emergency fund, stop those overpayments for a while and deposit that extra amount into your savings each month until you reach that $1,000.

Leave this money alone except for an emergency. You might be tempted to spend it on something fun or to pay off a big slug of debt with it. Don’t. That money is your rock – it’ll be there for you if your car breaks down or you lose your job. You won’t be sucked back into debt by these unfortunate events – your savings will save you.

What do you do when you reach that $1,000 level? Many people keep saving. Then, once a month, they sweep anything over $1,000 back into their checking and use it to make an extra debt payment, knocking down their debt without touching their $1,000 emergency fund.

Here’s the big key: if you do face that emergency, like having your car break down or losing your job, and you tap that emergency fund, replenish the fund after the emergency. Go back to minimum payments on your debts and rebuild that fund. It’s your rock.

I’ve written a detailed guide to building your first emergency fund if you want to know more.

Make a Debt Repayment Plan
When you have that emergency fund in place, it’s time to start tackling your debts in an intelligent fashion. Make a big list of all of your debts; then, attempt to get the rate on each of those debts reduced. Give your credit card companies a call and negotiate your rate down. Contact your local credit union and see if there are any opportunities to consolidate your debt at a lower rate.

Once you’ve done these things, list all of your remaining debts in order of interest rate, with the highest rate first. Then throw everything you can at the highest interest rate debt. Your only extra payment should be towards this top debt, and it should be the biggest overpayment you can muster without tapping your emergency fund. Live lean. Sell off stuff you don’t use. Find ways to earn a few extra bucks to throw at it.

Once that first debt is gone, throw everything at the next one, then the next one, then the next one. Your extra payments will grow larger because you’ve got fewer minimum payments to make, and soon you’ll find yourself free.

I’ve written a detailed guide to building a debt repayment plan, too.

Avoiding High Interest Debt
I’m not a “no debt” absolutist. I think that home mortgages are often worthwhile for most people, and I think credit cards can be a useful tool if used carefully.

Having said that, many people do not use credit cards carefully. Instead of carefully using them as a tool during very regular purchases (like gas) and then setting the cash aside to pay the bill in full each month, they use credit cards mindlessly to buy whatever they throw in their shopping cart, not worrying too much about prices because, hey, the credit card will cover it!

Bad idea. If you have any inclination in that direction, cut up your credit cards, seriously. It’s the equivalent of swinging a chainsaw around with your eyes closed after knocking back three shots – you might luck out and wind up safe, but it’s more likely to wind up bloody and painful.

Instead, adopt a different approach. Leave your card at home most of the time. When you do use it, use it for specific purposes, like using a BP credit card and use it only at BP gas stations so you can get a nice kick back, or use the Target Visa only at Target to get 10% off your entire purchase regularly, and pay off the balance in full every time. Otherwise, leave it at home and use a debit card (one that features a Visa or MasterCard logo) for your purchases because then you’re actually accountable for every dime you spend while still enjoying the convenience of card use.

There are two big reasons for using this approach instead of going entirely down the cash road. First, it builds a positive credit rating, and a good credit rating improves your insurance rates and helps your employment opportunities. Second, using cards only in a very targeted fashion – as shown above – and paying off the bills in full each time results in some sweet cash kickbacks – 3% at least.

You’ve just got to respect the tool – and not start swinging it around like a toddler with an axe.

A reader asked me if I could break down my ideas into a handful of principles. After some careful thought, I came up with a list of fourteen basic “rules” that summarize my money and life philosophy. I’ll be presenting these as a weekly series.

I cover time management quite a lot on The Simple Dollar. I write about Getting Things Done and other time management books. I talk about how I manage my own time and some of the techniques I use in my own life.

Almost always, I’ll receive an email or a comment or two about how this has nothing to do with money. On the surface, that might be true – I’m not mentioning the almighty dollar anywhere. If you dig even a little, though, it becomes clear: time management is the same thing as money management, because time is money.

Step back for a minute and think about it.

Each person is blessed with the same allotment of time – 168 hours per week. Bill Gates has 168 hours per week. I have 168 hours per week. You have 168 hours per week. Each of us sleep during some of those hours, leaving us with perhaps 120 waking hours during a given week.

Out of those 120 waking hours, many of us sell the majority of those hours to someone else in exchange for money. We go to work, we work for a while, we go home, and often, some work comes home with us. Add in the hours we burn thinking about work and our time for ourselves grows ever smaller.

Household chores eat up more of that time, as does personal hygiene. Soon, we find that we’re left with just a small pile of hours in a given week to do with what we please.

Those hours are precious. They’re the ones in which we relax. They’re the ones where we interact with friends and family. They’re the ones where we catch up on personally fulfilling hobbies.

But we pay a hefty price for those hours. We invest so much time in work, hygiene, and household chores so that those remaining hours bring us some semblance of joy. Most of our financial choices are intended to either make those free hours more enjoyable or to make them safer.

Whenever we find ourselves wasting time, we take directly away from those precious hours. We get behind at work, reducing our ability to earn more and thus taking away from the enjoyment of that time or the safety of it. We waste idle time at home and then when something truly worthwhile comes along, we can’t participate – we have too many other things we’re behind on.

To put it simply, wasting time takes away from those valuable hours that we work so hard for. It strips away their quality and it strips away their safety. Time management simply seeks to give us more of those hours – or to make the other hours produce more money.

Here’s an example. Some days, when I sit down to work, I make the decision to dive right in. I’ve got some big idea on my mind and I can’t wait to research it or plan out how I might use it. So I’ll rip through most of an article in thirty minutes or so – and then find myself at a dead end. Where am I going with this? I idle for a bit, then eventually delete the article. I’ve wasted forty minutes.

On another day, I’ll start off by making a list of all of the things I need to accomplish for the day. I’ll decide what posts I’m going to write and list the main idea of each one. Then I’ll take each of those ideas and spend a bit of time fleshing them out – is this even worth a post? Is it perhaps more than one post? What research do I need to do to make it work?

That process might take twenty minutes, but I’ve usually discarded three or four ideas along the way and fleshed out three or four more to the point that I know what I’m going to write. From there, I never find myself “lost” at work – I know what tasks I need to do, I execute them, and I keep on rolling to the next one.

I might have spent the first twenty minutes of my day not moving forward at all on any projects, which seems bad. But the time invested in time management pays off – I don’t have to worry about such details as the day goes on, allowing myself to focus on just getting things done. Thus, by the six hour mark, I’m usually far ahead in terms of my work if I’ve done that planning. The big part? I’ve drastically reduced my wasted time.

The end result? If I’m a couple hours ahead, I now have hours I can add to my personal life. Or, perhaps I can use them to work ahead, giving those personal hours more of a cushion in case something happens. Maybe I can spend an hour getting in touch with others, building relationships that will really pay off over time. Maybe I can work on another project that might lead to more earnings or more readers, both of which shore up the valuable parts of my life.

Time is money, and when you manage your time well, you manage your money well, too.

How do you do that? Here are the four most valuable little techniques I’ve found for managing my time.

1. Start your day off with some planning. Make a list of what you need to get done today – usually four or so things. Don’t just make a 1, 2, 3, 4 list, though – investigate each one for a few minutes and make sure you have the information, ideas, and materials you need to actually execute each item. That might mean spending five or ten minutes on the basic framework of a task, but doing that now means you won’t burn an hour chasing snipe later on. Also, that list of things to do will keep you from burning time in the middle of the day wondering what’s best to do next.

2. Alternate between multi-tasking and single-tasking sessions. Multi-tasking works well for some tasks – phone calls, emails, filing, and so forth. Those are tasks that usually aren’t mentally taxing at all, and thus can be done two or more at a time. However, the meat and potatoes of your work usually does require your focus – and doing that with interruptions makes it take longer and reduces the quality of your work. Take a few periods during your day, turn off your communication routes (turn off your phone, close your email program, etc.) for an hour or so and bear down on a task that needs to be done. When it’s finished, go back into multitasking mode and get caught up on your messages and information.

3. Meditate. This sounds counterintuitive, but it really works. It’s easy, later in the day, to “zone out” – you’re mentally (and perhaps physically) worn out. Many people keep pushing, but they find themselves losing three minutes here and three minutes there because they space off – and this will often spread into the evening’s personal time. Instead, try meditating for fifteen or twenty minutes near the end of your work day. Just sit in a chair and relax – here are several great basic techniques to try. I almost always find myself refreshed and alert after doing this.

4. Write down the things on your mind. Keep a notebook and pen near you at all times. Whenever something pops into your head that you need to do later or think about later, jot it down immediately. Then, a few times a day, leaf through the notebook and take care of the things jotted down there. Throw down anything and everything – a word you want to look up, a personal task you need to take care of, a person you want to get in touch with. Getting these things out of your head and onto paper means you can spend far less mental energy trying to remember it – and use that energy instead focusing on your current task and getting that done as well as you can.

Another important tactic is to find ways to spend your free time that simultaneously help you grow as a person and bring you enjoyment. Reading literature that really pushes your mind is one example. Going for a jog is another example. Almost any social activity falls into this group, too – learning how to interact with more people is invaluable. Such activities bleed back into the rest of your day – they increase your energy at work, improve your mental acuity, and raise the bar on your ability to interact with others and network. Putting forth a little effort to find enjoyable ways to spend your spare time that also help you to grow pays off over and over again.

Remember, time is money – so stop wasting it.

A reader asked me if I could break down my ideas into a handful of principles. After some careful thought, I came up with a list of fourteen basic “rules” that summarize my money and life philosophy. I’ll be presenting these as a weekly series.

I picked up a copy of Money recently and counted the number of mutual fund ads in the issue. My count? 18.

Each one claimed to offer some sort of security for you. Each one claimed to offer superior service and/or superior results.

Then I turned to the content. I saw a huge list of mutual funds, all of which seemed to be described as spectacular. I saw multiple articles discussing how to make saving for retirement or saving for college as complicated and scary as possible.

By the time I sat the issue down, I was almost overwhelmed. With that many investment options and choices out there, how can I possibly ever pick the right one?

The truth? Don’t worry about it.

You’re twenty five. You want to retire at age sixty, so you’ve got thirty five years to go. You decide that $750,000 is a good target. So you start looking into investments.

You do a week’s worth of research, pick an investment that seems pretty good and stable over the long haul, and you decide to dive in and start saving right then and there.

You start socking away $5,000 a year, and that investment only has to earn 7% a year to get you to your goal. You don’t have to have sleepless nights worrying about your investment – 7% is a pretty reasonable goal.

Now, let’s say you look at them – and you’re overwhelmed. You decide to wait a year – and that year becomes five.

You start socking away $5,000 a year now, but the outlook is decidedly worse. You now have to earn 9% a year in order to make that $750,000 goal. Instead of being able to sock that money away and not worry about it, you’ll now have to micromanage it – and even then, you likely still won’t make it.

What’s the moral of the story? You’re better off starting your savings now rather than waiting until you find the “perfect” investment. The perfect is always the enemy of the good. Sure, you can keep your eye out for a better investment, but you don’t have to have world-beating Peter Lynch-like returns in order to make your goals.

So what’s a “good” investment? For starters, an index fund: they’re easy and don’t require much time investment, they’re very cost efficient, and they outperform virtually all managed mutual funds. Burton J. Malkiel, in his seminal The Random Walk Guide to Investing, makes a brilliant case for them:

[Index fund investing] has outperformed all but a tiny handful of the thousands of equity mutual funds that are sold to the public. Let’s list all the advantages of an index fund strategy:
– Index funds simplify investing. You don’t have to choose among the thousands of individual stocks and mutual funds available to the public.
– Index funds are cost-efficient. [Many] have no sales charges and have miniscule expense charges. Moreover, index funds do a minimal amount of trading. Thus, they avoid the very heavy transactions costs of actively managed funds, which tend to turn over their entire portfolio about once a year.
– Index funds regularly produce higher returns for investors than do actively managed funds.
– Index funds are predictable. You know beyond doubt that you will earn the rate of return provided by the stock market. Yes, you will lose money when the market declines, but you will never own the fund that performs several times worse than the market.
– Index funds are tax-efficient. If you do own stocks in taxable accounts (that is, outside your IRA or retirement plan), then you need to invest in index funds that don’t trade from security to security and therefor don’t tend to generate taxable gains.

Another great summary can be found in the excellent article The Best Investment Advice You’ll Never Get at San Francisco Online.

But what about stock market downturns? Obviously, putting all your money into a stock index fund puts you completely at the whim of the stock market – and as many people discovered in 2008, that’s not a good thing at all.

Whenever I think of the downturn of 2008, I think of my mother- and father-in-law. Their retirement plans hit such a serious roadblock that they went from hinting vaguely at retirement (and the requisite travel and spending time with grandchildren that would come with it) to joking about working until they fall down dead on the job.

How do you protect yourself against that, huh? The trick is diversification, especially as you get closer to retirement. When you’re a long way out – thirty years or more from retirement – it doesn’t hurt to bet quite a bit on the big return – but with that big bet comes big risk. If you have everything in stocks and the stocks drop, then everything you have saved drops.

So, as retirement gets closer, you’re well-served to gradually move things out of stocks and into bonds, real estate, cash, or other investments. You’re no longer trying to hit home runs – you’re happy just to not strike out when your retirement comes close. So diversify.

Again, many investments make that easy. Most plans offer some version of a “target retirement” plan that will do just that for you. As you approach your retirement age, the plan will gradually – automatically – shift money from a heavy stock investment (great when you’re young and can afford to swing for the fences and risk a strikeout or two) to a very diverse investment (best when you’re older and you can’t afford to strike out).

That’s all there is to it. Start saving now, preferably in a target retirement plan made up of index funds. You can watch for better investments if you want to, but the sheer advantage of saving now in a low-cost plan that automatically diversifies for you as you get older will be hard to beat.

Roth IRA? 401(k)? I don’t know what to do! Here’s the truth: they’re both pretty good. In either one, you’re not hit with tax penalties for diversifying your retirement savings. Given that we don’t know what the tax rates will be in thirty years, it’s impossible to say which one is better, and people will argue until they’re blue in the face without being able to come up with a real answer.

A general good rule of thumb is to contribute to your 401(k) up to the maximum amount that your employee matches (because employee matching is basically free money). If you want to save more, start a Roth IRA (because you have more investing choices).

However, the importance of actually saving blows away the differences between the two. You’re light years better off simply throwing everything you can into savings than sweating about which investment option is the best. Again, the perfect is the enemy of the good.

What about college savings? Virtually the same exact principles apply to college savings as apply to retirement savings. Saving now is the most important thing, and diversifying as you get close to the big day is vital, too. Just pick a good 529 savings account – preferably one like Iowa’s that has a “target graduation” investment option – and start socking away the money now.

That’s really all you need to know about investing, for all practical purposes. The earlier you invest, the better. If you can, use a plan that enables you to invest with tax protections (Roth IRAs, 401(k)s, 529s). The farther away you are from the event you’re saving for, the more heavily you should invest in stocks (high risk, high reward). The closer you get to your big event, the more you should diversify (lower risk, lower reward).

I use Vanguard for pretty much all of my investments – they make all of this so easy that once you’ve set it up, you barely have to think about it again. I know that if the stock market dips again, I don’t have to panic – my short-term stuff is safely out of stocks and my long-term stuff has plenty of time to recover. I know I’m investing now rather than later, giving compound interest plenty of time to work in my favor.

It all just works – and for all of the complexity that publications like Money try to throw into the mix, that simplicity is what we all strive for.

Remember: don’t overthink things. The perfect is the enemy of the good, and if you get obsessed with the perfect, you’ll lose the good along the way.

A reader asked me if I could break down my ideas into a handful of principles. After some careful thought, I came up with a list of fourteen basic “rules” that summarize my money and life philosophy. I’ll be presenting these as a weekly series.

If there is a single rule that underlies everything I’ve written about on The Simple Dollar, it’s this simple sentence:

Spend less than you earn.

It sounds so simple, doesn’t it? Yet there are many people out there burying themselves in debt (spending more than they earn) or living purely paycheck to paycheck (spending exactly what they earn).

Simply spending less than you earn has a cascade of positive effects.

First, you begin eliminating your debts. Spending less than you earn frees up the money you need to make larger payments on your debts. Over time, they begin to disappear, reducing your monthly bills and giving you even more breathing room.

Second, you begin to save. First, you build up some cash savings in your savings account, enabling you to roll through emergencies (like a car breakdown or a job loss). You’ll also have the breathing room to start saving for retirement, paving yourself a great future for your golden years.

Third, your stress level falls. Knowing that you have fewer debts, your emergencies are covered, and your retirement is being planned for reduces your stress level. You sleep better, your overall health improves, and you feel happier about life.

Finally, you are now able to explore possibilities closed to you before. When your debts are gone and you are spending far less than you’re bringing in, you suddenly have many more career possibilities. You don’t have to stick with your high-stress job – you have the financial freedom to move on and chase your dreams. You can live where – and how – you want to live.

All of that comes back to one basic principle – spend less than you earn.

That statement actually has two parts, though.

Spend less refers to the fact that you do need to cut your spending. The first step doesn’t need to be anything drastic – nor should it be. Many of the more extreme money-saving tips come from people who have already tried out the basic tips and love them, so they seek out more intense strategies to further cut their spending. I do this myself – I’m always trying out new money-saving strategies, discarding the ones that don’t work for me and keeping the ones that do.

Here are five big ways to get started.

First, go through every monthly required bill. Ask yourself if you really need that service at all. Do you really use Netflix enough, or could you just rent a movie once in a while from Redbox? Do you really use your cell phone much at all, or could you just replace it with a pay-as-you-go phone? Then, go through each bill and see if there are any optional services you can eliminate. Do you really need premium cable? Do you really need unlimited text messages?

Second, keep diligent track of your spending. Keep a notebook in your pocket and write down every expense you have. The simple process of doing this will make you think twice about unnecessary expenses. When you do have a month’s worth of expenses written down, take a careful look at them. Ask yourself whether or not each of these expenses actually contributed to the value and joy of your life. That process will offer a lot of insight for you as to where your spending is going to waste.

Third, look carefully at your routines. Watch what you do every day (or most days). Are there things you do each day that cost money? Those things are the most powerful ones to adjust, as trimming just $1 from your daily spending saves you $365 a year. Do you stop at a coffee shop each day? Why not cut down your daily order a bit, or switch to a different shop, or start making your coffee at home? Do you eat out every day? Perhaps you can start brown bagging it a few days a week. Look at every regular expense you have.

Fourth, get a better bank. The vast majority of Americans are with banks that don’t treat them very well. No interest at all on their checking accounts. Tons of fees for ATM use. Draconian overdraft policies. A tiny interest rate on savings accounts. Monthly usage fees of all kinds. All of these things are a waste of money. Switch your accounts to a bank that respects you. From my own personal experience, I use ING Direct for both savings and checking. I get great customer service, interest on my checking account, a solid interest rate on my savings account, and I’ve never had a fee of any sort.

Finally, do some one-time energy improvements around your home. Replace some of your light bulbs with CFLs and LEDs. Install a programmable thermostat. Air seal your home. Blanket your water heater. Install some SmartStrips to cut down on electricity use. These tactics will cut down your energy bill significantly, directly reducing your bills.

Want some more tips? Dig into my list of 100 great money saving tips for people just getting started, as well as 100 free things to do during a money-free weekend.

The rest of the phrase, than you earn, though, points to the other part of the equation: increasing your earnings. Increasing your earnings gives you more money with which to get rid of your debts, save for your big dreams, and build a foundation for whatever future moves you may want to make.

There are countless ways to earn more money, but there are several tactics almost anyone can apply in their life. Here are five key ways to get started increasing your income.

First, don’t waste time at work. The time you spend sitting idle, browsing the web, or chatting on IM or Twitter with your buddies is time you’ve effectively lost. Instead, invest that time in something devoted to your career, even if it’s not directly on a work project. There are lots of things you can always be working on – see the other things below, for example.

Second, work on your transferable skills. I’m a big believer in transferable skills – skills that one can utilize in almost any career path. Work on mastering such skills. Jump on any and all opportunities to speak in public. Hammer out an effective time management scheme for you. Get into a routine of organizing and filing your paperwork. Brainstorm ideas for things going on in your office. Write clear documentation for the standard procedures of your work. Step up to the plate, take charge of a work project, and get the ball moving forward. All of these things push you towards developing skills that are genuinely useful no matter where you’re heading in life.

Third, build strong relationships with as many people as you can in your field. Join services like Twitter or LinkedIn and start conversations with people in your career. Send emails to people you’ve interacted with a lot in your career and keep up with what they’re doing. If you have an opportunity to connect people that can help each other, do it immediately, without hesitation. Share what you know and be valuable to others.

Fourth, start a side business. I don’t mean filling out surveys or other things you can use to burn a few minutes during the commercial breaks on Lost and earn a few pennies. I mean actually devote serious time and effort to turning a passion you have into a money-making enterprise. Don’t know what that could possibly be? Here are fifty ideas to get you started.

Finally, step up to the plate at work in little ways. There are lots of simple ways to stand out. Speak up at meetings. Show empathy for the problems that others have. Take on only projects you can handle, but do them well. Get to know the support staff – and treat them well. Don’t burn bridges when you move on – make an extra effort to maintain good relationships when you leave. These little things add up to a huge difference.

Keep that rule in mind: spend less than you earn. Each move you make to maximize the gap between what you earn and what you spend will put you in a better place in your life.