Alan wrote in with an interesting situation:

My problem is that I can’t say no to people. I am a sucker for girl scouts selling cookies. I am a sucker for salesman at stores. I am a sucker for my church when they need money for something. I am a sucker for friends and family who need to borrow money. I am a sucker for the Green Party or Green Peace when they call and ask for money all the time. I have heard it called “The Disease to Please” before and I just wanted you to know how much it affects me not only with a lot of stress and anxiety, but also financially. I don’t think I am alone either. […] I am trying to empower myself by saying “No”
to at least one person a day. It is not easy though. I always fear hurting people’s feelings or making them angry. Your article today about the left and right brain was fascinating. It got me thinking about other parts of a person’s psychological make up that could potentially affect their spending habits. For me, if I could grow a back bone and say no to people, I would probably save one or two hundred dollars a month. Sometimes more.

I have some of these weaknesses, too. The biggest one is Thin Mints. Thin Mints are one of my true weaknesses in life - curse the person who invented them. I also have a weakness for school-related fundraisers, especially those “discount card” fundraisers that seem to be popular around here. Kids will stop by and sell a discount card that will get you some bargains at local businesses and the proceeds for the card go to help out a youth group - I’m a sucker for these, too.

What I’ve found that works well for me is deciding about my giving up front and then sticking to it. Here’s the game plan I use to avoid the guilt that I’m not giving enough to others.

Budgeting your giving Each year, my wife and I decide right off the bat that we’re going to give a certain percentage of my money to charity - it’s usually 10% of our pre-tax income (yes, I’m a Christian, and I do view that as my tithe, but I don’t feel that my tithing necessarily needs to go to the church, though I do admire some their charitable works) but sometimes it’s been higher than that. All of our giving comes out of that amount. We allocate pieces to various things, including a set amount for Girl Scout cookies, for community fundraisers, for school fundraisers, for my church (we actually break this down, too, and give amounts to various projects at my church that we agree with), for a few other specific charities (Iowa Public Radio, Iowa Public Television, etc.), political campaigns, and so on.

We basically set this budget in stone. Once we decide how much I’m giving for the year and what I’m giving to, it’s done. We freeze it. If a good cause comes along, we’ll consider it for the next year, but this year is locked.

When new causes come along, such as telemarketers who call for donations, I tell them the truth. “I’ve already decided my charitable giving for the year. I’ll keep you in mind for next year.” Then I hang up. In fact, I usually knock that charity down a notch because they’re harassing me at home with their demands.

This same logic applies for all charity mailings we get in the mail. I just chuck ‘em unless they’re a charity on our list for the year.

What about salesmen? I completely ignore them unless they’re helping me find what I specifically want. I don’t go into a store without knowing what I’m intending to buy, and I view it as a deep personal failure to leave with anything else. Salespeople are there to cajole you into buying something not on your list, so just ignore them. If they bug you, just say, “I’m fine,” and walk away - that’s what I do. If a salesperson is particularly persistent, I leave the store and shop elsewhere - I know that if I listen to them, I might get seduced into buying something, plus they’re eating up my time and distracting me from the purpose I had when I came to the store.

I use a similar approach if someone comes to my door. If they’re on my “list” - like the girl down the block that I’ve bought Girl Scout cookies from or the boy who lives three doors down trying to fund his trip to Mexico with his youth group - I’ll listen. Otherwise, I just quickly say “No thanks” and end the conversation immediately.

That leads into another great tactic: end it quickly. As soon as the sales pitch begins and you recognize it as something not on your list (either shopping or charity), end it immediately. Say “no thanks” right then and hang up or walk away. The longer you stay, the more likely they’ll break down your guard. Do it fast and firmly and don’t give it a second thought.

It takes practice, especially for tenderhearted people who aim to please, but by not saying no, you’re actually taking money out of the hands of the things you really care about. Saying yes to the salesman in the store means that you now have less money to spend on stuff you actually need - or on charities you actually care about. Saying yes to the person knocking on your door means you have less money to give to the people you actually care about who need it.

Every time you say “yes” outside of your plan, you let down something you care about even more. Once you really learn that, “no” becomes a much easier thing to say.

Let’s start off with an interesting statement.

I believe that many of the personal finance problems that people face are due to a confusion between wants and needs.

Not long ago, I used to think it was more a matter of a blurry area between wants and needs. I’d use that blurry area to justify some of my purchases - cell phone usage, expensive pens, and so on. These things were “needed” in some way, so I would just define them as needs and not think about them critically.

But what happens when I step back from that for a moment and think about these things with a seriously critical eye?

What do I actually need in life?
I need a roof over my head. Does that mean I need a house as nice as the one we live in? Not really - we could make do with something much smaller and older. Thus, quite honestly, probably half of our mortgage payment is a “need” and half of it is a “want.” The same goes for house insurance.

I need food and water. A majority of my food bill is a “need” - most of my purchases are simply covering staples and buying the basics of food for my family. I’ll also identify my water bill as a “need.”

I need clothing. I’m extremely tight with my clothing - what I do buy is used to directly replace something that’s falling apart, and as we’ve established, I wear clothes until they’re in very bad shape. Even then, when I do buy clothes, I’ll still spend a little above the need.

I need a means to earn a living to pay for the needs. That means at least part of our electric bill is a need, as is our internet bill, as both of these are required for me to write and earn income.

My wife needs a means to earn a living. Thus, our fuel expenses are largely a need, as is car insurance.

I need basic hygiene and health, as does my family. Those areas of spending are largely need-based.

I need to protect my family against my demise. Thus, for me, life insurance and disability insurance are needs.

Everything else is a want.
Part of my mortgage is a “want” because I want a big house. Some of my food bill is a “want” because I like delicious food. Cable? Want. Telephone? Want. Cell phone? Want. Wii? Definitely a want. Other entertainment expenses? Want. A higher-end computer? Want.

When you start looking at the small number of things in your life that are actually needs, you really begin to see how many things you buy simply because you want them, and then you start to realize just how much fat you can really cut.

For example, do I really need both a home telephone and a cell phone, especially if I’m already paying for high speed internet and my computer has a microphone and speakers? Of course not. I could just set up Skype and immediately eliminate the landline, then just get a prepaid cell phone and take care of the mobile bill, too. (My wife and I are actually migrating to this - we’re trying Skype on a trial basis as our primary telephony right now).

What fun is life without wants?
The point isn’t to abandon all of the stuff you want, but to realize how much of your monthly spending is tied to wants. It’s fine and healthy to want things, but when you’re sinking financially just to maintain things that you want, then there’s a real problem.

Try this experiment. Divide all of your spending into needs and wants. Before tallying things up, make a deal with yourself - for every dollar you spend on a want, put a dollar into savings for the future. Then tally things up.

When I did this, I realized that the majority of our spending was on things that were merely things I wanted. Looking at those wants with a more critical eye - eliminating some and putting a bit more focus on the things most important to me - led me to making some cuts in my spending that I might have otherwise just assumed as a given. That’s made a big change in my spending choices - and has put some cash right back in my pocket.

About a year ago, I wrote a lengthy article about how to start a filing system, including information on what kind of filing cabinet to buy and what sorts of things you should file. Near the end, though, I wrote one little paragraph that deserves to be looked at again in more detail:

A master document explaining what all of this stuff is This is mostly a guide to the executor of your estate, containing all important information not contained in the other documents and also explaining online account access and other such information, like where a safety deposit box key should be and such. This may also include personal letters to people for them to read in the event of your passing and so forth.

Think about this scenario: if you dropped dead right after reading this article, would your survivors - your kids, your spouse, your family - have any idea how to access your money? Would they even know where all of your accounts were?

For most people, the answer is a big fat no - and that’s an answer that can be very dangerous. It’s worth spending a few hours to put together a master information document - and updating it every year or so - just so your loved ones will have a much easier time with things in the event of your untimely demise.

How to Prepare a Master Information Document
Preparing such a document is pretty simple, actually. You just need to create a single document that includes all of the information your loved ones might need to settle all of your outstanding accounts and get all of the benefits they should be getting. Here’s a checklist of what you should include.

Account information for every account you have open. Everything from your retirement account all the way down to your library card should be included here. This will allow the person using the document to systematically go from account to account and, at the very least, have access to them.

A complete list of every benefit anyone is entitled to upon your passing. This means life insurance benefits, Social Security information, retirement accounts that may disburse, and anything else that might benefit people once you’re gone. This is the stuff that you’re paying for now so that they can have it later - make sure they get it.

A complete list of all debts and all assets. This will provide a complete financial picture for you. For each of these, provide plenty of information - the current balance as of your writing, how to contact that entity, and any account information that’s relevant.

A detailed description of how to handle any business assets you may have. This is only true for some folks, but it’s vital. If I were to have an untimely passing, I have a plan in place and it’s well-documented - all of the steps that someone needs to take to ensure that The Simple Dollar’s archives remain up and running and my other business interests are handled well.

A copy of your will, your living trust, and any other documents pertaining to your estate. You should have several copies of these documents, but be sure to include an extra one here just in case.

What Now?
Once you have the document prepared, what’s next? Here are a few steps worth taking.

Make sure everyone has access to a copy. For us, my parents, my wife’s parents, my wife, and our safe deposit box will all have copies of this document very soon. It’s currently saved on my computer’s hard drive and on my backup drive, too, so the information could be found if need be, but I intend to print it out and give it to each of these people so they’re sure to have one if it’s needed. You can distribute these electronically, but be very careful, as the document is larded with personal data that an identity thief would love to have.

Talk it over with them. Make sure they know what the document is and what they should do with it. It’s not useful if it’s not in people’s hands or if they don’t know what it’s for.

Update it regularly - at least annually. Just pull out your electronic copy, read through it, and update anything that needs updating. If it’s significant, print out new copies for everyone and distribute them.

Take a few hours and put this document together, especially if you have a family. You’ll feel much better knowing that one of your bases is covered.

Recently, Hyundai has begun airing car ads for their “Dollars and Sense” campaign, in which they’re offering a “cash back” promotion on new purchased Hyundais. To get across the idea that buying a brand new Hyundai is a financially sound decision, the commercials feature various personal finance and investment writers offering suggestions on how to use that “cash back” in a financially sound way. Here’s my favorite of the series, featuring an almost-creepy appearance by Larry Winget, the author of You’re Broke Because You Want To Be (which I reviewed and reasonably liked a while back):

Other ads in the series feature Ray Lucia (author of Buckets of Money) and Adam Smith (author of The Money Game).

Let’s look at the ads a bit more carefully.

Is this a good deal?
First of all, never, ever make your car buying decisions based on an ad for a new car. If you’re going to invest your money in buying a car, focus on late model used ones and use Consumer Reports and other car journals to research and find the most reliable and fuel-efficient car for your needs - and do the same if you must buy new for some reason. A late model used car with high reliability numbers and good gas mileage is the single best deal out there for car buyers.

Car commercials, for the most part, try to sell you on things that largely don’t matter - small sales up front (like 5% off), exterior appearance, and so on. Don’t base your automotive purchases on them - instead, go do some real research.

Is their advice any good?
Winget, Smith, and Lucia do provide good advice in the commercials. It does make sense to put your money in a highly diversified index fund or to pay off high-interest credit card debt - both are indeed good moves.

The problem with the commercial isn’t the use of the money - it’s the source of the money. They’re talking about using money that’s coming to you in the form of a rebate on an item that’s overpriced to begin with. You’ll lose more in depreciation of the value of the car the minute you drive it off the lot than you’ll gain back in the rebate from the sale.

In other words, their advice is great if we’re talking about $3,000 free and clear, but that cash is tied up in the value of the car you just bought - and you’ll lose more than that the second you drive it off the lot. A better option is to buy a cheaper car and then use the $3,000 you actually did save to pay off credit card debts and such.

Are these writers “selling out”?
The advice actually coming out of their mouths is good advice - the problem is in the context of all of it. By appearing in the ad, they do appear to be implicitly approving of the purchase (which isn’t a good financial choice for most people).

Given my condemnation of the ads, you’d likely expect me to say that these writers are “selling out,” or betraying the trust that their readers have placed in them. For the most part, I don’t feel that way, because if one of those writers had said no to the advertisement, Hyundai would have simply found another writer. By saying yes, they at least get their paycheck and a bit more attention to their books and public persona.

So, obviously, in the context of a car commercial, these guys are more interested in selling themselves to you than in providing an overall positive financial image. But by doing this ad, Larry Winget might just have been able to get a few more people to read You’re Broke Because You Want To Be, which does contain some excellent “tough love” style advice. If that book helps one of those new readers turn their life around, that’s overall a good thing, is it not?

Would I appear in such an ad if the opportunity presented itself? Honestly, I think it would depend on the car. For instance, if I were asked to appear in an ad for a car I would ordinarily recommend - one with good gas mileage, high safety ratings, and high reliability, I’d probably be fine with it because the people interested in such a car likely have some financial sense anyway. Alternately, I wouldn’t appear in an ad for a Hummer - but then the average Hummer buyer isn’t exactly going to be swayed by a guy writing a site called The Simple Dollar.

As a final note, since this post mentions Hyundai, I have to include one of my favorite comedy clips of all time - Stephen Colbert’s “I’m Singin’ in Korean” music video.

One of my most loyal readers, a person named Brad who first emailed me about The Simple Dollar about a week after it launched, sent me an email this week that really struck a chord with me. Here’s the key part.

Ever since I was a little kid, all I’ve wanted to do was play professional golf. I can’t dream of a better life than playing golf for a living, or even working in some way professionally in a way connected to golf.

Right now I work in an office and the closest I get to this is playing a couple of rounds each weekend. During the week, I’m too busy to hit the greens.

This makes me depressed. I hear you talking about reaching your dreams and I’m happy for you, but then I look around my office and I see mine slipping away and I get sad.

All right, a confession.

I fail at writing. A lot.

I’ve been writing in my personal journal every single day since 1991. When I started digging into my writing passion (writing in a little leatherbound journal my grandmother got me for Christmas 1990 when I was only twelve years old), I read that one should write at least 1,000 words each day. So I have. Since January 1991. Every. Single. Day. At this point, I’ve been writing 1,000 or more words a day for the majority of my life - and it’s usually more words. Way more.

In high school, I entered essay competitions and other contests and did middling at best. I probably would have given up then, feeling much the same way our friend here feels like giving up, if it hadn’t been for the constant and often subtle encouragement by my high school English teacher. Randy, if you’re out there reading this, I wouldn’t be writing for a living right now if it wasn’t for you.

I kept it up in college and in my early professional life. I wrote two full novels and a pile of short stories. I had a few glimmers of success with it, even going so far as to get what I considered to be a very strong bite from a publisher in 2003, but most of it was a pile of rejection letters. Failure, over and over again.

I kept writing. Why? I loved it. I still love it with every ounce of my being. I love writing short stories. I love writing essays. I love making words flow together. I love how they transfer meaning to someone else, to people I’ve never met and will likely never meet.

Finally, after seventeen years of this, I’m finally seeing a little bit of success with writing. Why is this happening? There are a lot of reasons: I intentionally write very conversationally, which works well on the internet; I’m writing about a topic that’s near to people’s hearts; and I have a lot of great readers who help me out and inspire me over and over again.

There’s another piece, too. I practice. I’ve written and edited so many things over the years that now the actual art of taking an idea and turning it into a written piece fits on me like a familiar glove. It’s only because of that familiarity that I’m able to write so much for The Simple Dollar - two original columns a day - plus freelance stuff elsewhere. Because of that practice, I am now pretty fast at brainstorming, separating the bad ideas from the good, organizing a good idea into a series of logical points, and fleshing out those points into a written piece.

Great. But that doesn’t help me with my dream.
But it does! There are a ton of lessons in that story that can help anyone with any dream that they want to achieve. Let’s walk through them and see how they fit into my story, into Brad’s story … and into your story as well.

Passion.
Every single morning, when I wake up and lift my feet out of bed, two things cross my mind. The first one usually is a thought related to my wife and my kids - my immediate focus is on getting everyone up, getting them dressed, making sure they’ve eaten something nutritious, and getting them started on their day.

The second thought, though, always revolves around writing. I think about crafting sentences and pulling together ideas. I think about the written word in all of its varieties.

I yearn to write. There are times when I am almost magnetically pulled to a keyboard or to a pad of paper - there’s an idea floating in my head and I have to start recording it.

That’s what passion is. It’s the things in your life that you’re drawn to over and over again. It’s the things that you can scarcely go a day without doing - or at least wanting to.

Brad’s golfing is a perfect example. Every day when he goes home, he yearns to golf and it tears him up not to be able to act on that passion. He has that first piece in hand - he knows dead-on what he’s passionate about.

I have another friend who is incredibly passionate about chess. His home is littered with chess boards, magazines, and books. I finally saw how deep his passion went when I discovered a chess set in his bathroom so he could work through problems while doing his business.

What if you don’t know what you’re passionate about. Not long ago, I listed in great detail seven steps to finding what you’re truly passionate about. Here they are in a nutshell (but that whole article is well worth reading):

1. Maximize your health
2. Ask questions
3. Ignore what’s “cool”
4. Dabble in everything
5. When something piques your interest, try it again - and again
6. Associate with people who share this burgeoning interest of yours
7. Don’t keep pushing it if the passion dries up quickly

Keep doing those steps and you’ll find your passion - or it will find you.

Practice.
I like watching basketball players practice. I’ve watched bad coaches lead practices, mediocre coaches lead practices, and good coaches lead practice.

At first, I thought that basketball practice was about intense scrimmages. I thought that the best way to coach would be to have your team run complete plays over and over again with the coach pointing out flaws and correcting them. In essence, I thought practice would be much like a game with the coach shouting instructions.

Wrong.

The best basketball team I’ve ever seen would have two and a half hour practices - and only scrimmage for ten minutes or so at the very end. Most of the practice was filled with very repetitive drills. They’d sprint from one end of the court to the other to do a layup. They’d run the same exact screen a hundred times. They’d all shoot fifty free throws. They’d do endurance sprints. In other words, the intense part of their practices were nothing like playing a game of basketball - they were instead a bunch of focused little pieces on specific attributes of playing basketball.

I got the opportunity to ask the coach why this was and he made it very simple: these kids would play basketball for fun all the time anyway, so scrimmages were kind of a waste of time. Instead, it was much more important to work on very specific fundamentals.

In other words, practice isn’t just about doing something over and over again. It’s about focusing in on very specific elements and techniques, hammering them in over and over again, and then seeking out feedback on that technique.

Not long ago on the New York Times Freakonomics blog, Stephen Dubner wrote about the value of using deliberate practice to make oneself very good at a particular skill. He broke such practice down into three pieces:

1. Focus on technique as opposed to outcome.
2. Set specific goals.
3. Get good, prompt feedback, and use it.

When writing, I do this by writing on a bunch of different topics. I write articles and guest postings on all sorts of topics. I write short stories. I try mixing up what I do and taking on new things. In order to get feedback on this stuff, I post it online in various places - sometimes as guest posts on blogs, sometimes on community sites where I’ll get comments. This lets me know pretty quickly whether I’m writing well - or I need to work on something.

Alternately, I’ll just take one little piece of a post for The Simple Dollar and polish it, honing a truly great paragraph. This moves me from working on just content creation into working on editing, another piece of the writer’s toolkit.

With my golfing friend, instead of going home each night and lamenting that he doesn’t have the time or cash to go golfing, he should go to a park or a field somewhere where there is a lot of open grass and practice specific shots. Lay a hula hoop on the ground, then back away fifty yards and practice hitting chip shots into that hula hoop for an hour nonstop. Do that every night and your chip shots will get better and better.

The key here is to not “practice” the whole of what you’re doing. The key is to practice specific elements. Focus wholly on the areas where you’re weakest and drill in on them. Do some intense work on just one specific element of what you’re trying to accomplish.

After that, have fun and notice how that practice helped you become more complete in the area you’re passionate about.

Persistence.
Many people know what their passion is and how to practice to get better, but they are content with merely doing so every once in a while. They sit back and get complacent with what they know, only practicing every once in a while for a specific purpose.

For some, that’s enough. My mother-in-law is a very good piano player who can play stunningly well by ear; she also knows quite well how to practice to go from being very good to great. But the persistence isn’t there - she doesn’t sit down at the piano and practice chords over and over again or try banging through highly complex pieces or try mastering some of the more common techniques through repetition.

Persistence is the repetition of practice, and if anything, it’s the most important P. The gap that separates the very good from the great is the repetition of deliberate practice and the ability to keep at it no matter what.

It’s easy to echo countless stories and anecdotes about this. I like the story about Abraham Lincoln - during his adult life he was fired from his job, failed as an independent businessman, had a nervous breakdown, lost elections to the state legislature, state Speaker of the House, the House of Representatives, the Senate, the Senate again, and the Vice Presidency before finally becoming President. There were countless times he should have or could have quit, but he didn’t, and by persisting, he made an indelible mark on history.

I write thirteen articles for The Simple Dollar every single week. I’ve written at least 1,000 words every day for seventeen years. Sometimes, I won’t write anything at all that sets anyone on fire. At other times, I’ll write so much good stuff that it’s running out of my ears. But I don’t give up on those bad weeks - I keep at it because I know that when I stop being persistent about it, that’s when things will start to fall apart.

In Brad’s situation, he needs to stop by the park and practice some aspect of his game every single night. By making it an essential part of his day, something he must do without fail, he will put in the huge number of hours he needs to get better.

You know what your passion is. You know what you need to do to get better. Set aside some time right now to get better, every single day. It’s a tough choice, but it’s the one you need to make to pull your dreams closer one baby step at a time.

Patience.
About once a week, I’ll get an email from a disheartened writer. They read The Simple Dollar, thought that they could do the same, then sat down to crank out their own blog. The desire to write burned inside of them, they knew exactly what needed to be done to develop and produce good articles, and they understood the need to write every single day.

What they found out is that after two or three months, their site still only received a handful of visitors. They’d write to me wondering what was wrong, expressing some serious disillusionment. Usually, it didn’t matter what I wrote back to them - they’d usually abandon blogging, often with the sense that it was a scam or something or that the system was rigged against them.

There is no scam. They lacked patience.

Take Brad’s golfing passion, for example. Let’s imagine Brad gets the memo and starts practicing every day at the park for an hour. He practices his chip shots, his putts, and even his iron play from the rough. He hits the same shots over and over again and begins to get a real feel for his game.

Then he goes out on the course and hits an 88. He’s devastated. That was the same score he shot before he even started practicing! He tosses this stupid practice thing in the dumpster and gives up.

Patience, Brad. Look at Tiger Woods. He’s the best golfer in the world and can hit below 70 with stunning regularity, but even he hits a 74 every once in a while. The last time you shot an 88, it was on a day where you were naturally playing a bit above average. Now, when you shoot an 88, it’s an average day. All of that practice managed to shave a consistent stroke or two off of your score, but you’re judging that progress based on one round - and that’s not nearly enough.

In my own life, I went through periods where I was ready to give up the writing dream. I’d write every day, but I’d feel like I was, if anything, getting worse as a writer. I’d see no success in getting anything published - all I’d see were rejections. It often took everything I had to keep going, but I knew that if I stopped, the dream I had of being a writer would never happen. So I kept plugging away.

A while back, I noted nine techniques for developing patience:

Figure out what your actual destination is.
Make a “Plan B,” too.
Take the other side’s perspective.
Break down big goals into tiny ones.
Wait. Just a little.
Recognize that there are some things that you simply can’t control.
Think about the things that make you react on impulse.
Recognize when you do act on impulse.
Forget the results, enjoy the process.

Whenever you feel like you’re about to give up on your dreams even after investing a lot of passion and effort into them, look at these techniques. After all, all you need is just a little patience.

Participation.
Passion, practice, persistence, and patience will make you very, very good at something, but true greatness requires even more. It requires learning from others and also sharing what you know.

Every truly great person got there by participating in a wider community. They either brought something to the table that hadn’t existed before or helped someone else stand on the shoulders of giants. They changed the game, not just for themselves, but for others as well.

For me, this means interacting with other writers. It means participating in interviews. It means mentoring new bloggers. It means sharing what I know freely and also learning what others can teach me along the way.

For Brad, the possibilities of participation are nearly endless. He can teach others how to play golf. He can participate in community events, like organizing charity tournaments at the local public golf course. He can get kids interested in the game he cares so much about. He can use his passion and practice and persistence and patience as tools to not only make himself better, but bring something of value into the lives of others as well.

Don’t know where to start? You can begin by participating in general community events and meeting as many people as you can. You’d be shocked how many opportunities there are to share your passions with others, and from there the word can only spread outward.

It is only through that kind of participation that doors will open and you’ll be able to truly live your dream. Your passion, your improved skills, and your desire to share what you have with the world will make you stand out, and when things fall into place and the right opportunity comes around, you’ll be ready and waiting.

Starting on a Big Dream Right Now
Those five elements are all you need to start in on your dream right now.

Passion. Find it and know it.
Practice. Break your passion down into pieces and deliberately work on the elements.
Persistence. Practice as much as you can on an extremely regular basis, like clockwork.
Patience. Don’t expect to be great in a day, a month, or even a year.
Participation. Find new ways to get involved and share what you know.

Today, my friend, is a great day to get started.

Many thanks to Images of American Political History for helping me find public domain images for this post. For those curious, Passion was represented by Thomas Paine, Practice was represented by Benjamin Franklin, Persistence was represented by Douglas MacArthur, Patience was represented by Lyndon Johnson and Martin Luther King, Jr., and Participation was represented by Susan B. Anthony and Elizabeth Cady Stanton. The life stories of all of these people taught me valuable lessons about achieving my dreams.

After posting my budgeting 101 article yesterday, I almost immediately got a response from a reader who had a very good follow-up question:

You talk all the time about setting goals and measuring progress. Without a budget, how do you set personal finance goals for yourself and measure progress?

My wife and I use only one metric to measure our financial progress - net worth. No other single metric says so much about our financial state.

Defining Net Worth
To put it as simply as possible, net worth is the value of your assets minus the value of your debts. In other words, if you sold everything you owned, emptied out every account, and paid every debt, how much cash would you have on hand (or, possibly, how much debt would you still have)?

Over time, a household with their financial hat on straight will see an increase in their net worth. They’ll spend less than they earn and invest the difference in some fashion. On the other hand, if there are financial difficulties, a family’s net worth might decrease over time, meaning their debt is increasing at a rate faster than their earnings - a very bad sign.

If you’re interested in trying it out yourself, here’s how to build your own net worth calculator.

Using Net Worth to Track Positive Financial Progress
Using your net worth to keep track of your financial progress is easy. Just calculate your net worth each and every month and track it over time. You might not necessarily see a jump every single month, but over the long haul, if the general trend is upwards, you’re in fine shape.

This long-term approach is much better, actually, than a monthly budget in terms of seeing the benefits of lifestyle changes and smart financial moves over the long haul - it constantly forces you to see the big picture, not just the picture of that specific month. You might not think a change that saves you $10 a month is a big deal from just the view of a monthly budget, but that $10 saved every month over ten years creates quite a different picture - used properly with an 8% annual return compounded monthly, that $10 a month becomes $1,802.12.

Because of that, things like buying in bulk and investing in quality stuff with a long lifetime show up as beneficial on a net worth progress chart, but don’t look nearly as good on a monthly budget sheet.

Using Net Worth to Set Short-Term Goals
My net worth calculator is a constant supplier of short term goals. Each month, I look at the sum total of assets and of debts and use that data to set small goals for the coming month - an asset increase of 1%, for example, or a debt reduction of 1%. These short term goals force me to keep my eye on the ball - talking myself out of buying VMWare Fusion, for a recent example - and keep myself constantly motivated.

These little goals are achievable, but by themselves they don’t seem like a whole lot. But look at it this way - if I target a debt reduction of 1% each and every month for a year, 11.3% of my total debt goes away. If I then keep pushing myself - moving that goal up to a 1.25% reduction every month, for instance, and then to a 1.5% reduction and then to a 2% reduction - I can push all of that debt out the door in just a few years.

Not only that, achieving those little goals over and over again enable big goals.

Using Net Worth to Define Long-Term Goals
Let’s say I want to achieve debt freedom in five years without reducing my current assets - that’s a big, audacious goal for most people. If my total debt is $100,000, that means that my true goal is to increase my net worth by $100,000 in five years.

How can I do that? $100,000 divided by 60 is $1,333 - that’s how much my net worth has to increase on average each month over the next sixty to achieve debt freedom.

I then set that as my small goal each month - my net worth needs to go up $1,333 that month. How can I do that? I can pay down extra debt. I can invest smartly. I can buy in bulk, effectively investing now for the future. I can work hard for extra income.

All of these little goals spring from a big goal, and that big goal is all about the net worth.

The Net Worth Mentality
The idea of net worth as a primary method of figuring financial success is a concept explained very well in the wonderful book The Bogleheads’ Guide to Investing by Taylor Larimore, Mel Lindauer, and Michael LeBoeuf - I reviewed this one a while back and loved it.

Here’s what they had to say about the net worth mentality on page 7 of the paperback edition of the book:

From the time we are old enough to understand, society conditions us to confuse income with wealth. We believe that doctors, CEOs, professional athletes, and movie actors are rich because they earn high incomes. We judge the economic success of our friends, relatives, and colleagues at work by how much money they earn. Six- and seven-figure salaries are regarded as status symbols of wealth. Although there is a definite relationship between the income and wealth, they are very separate and distinct economic measures.

Income is how much money you earn in a given period of time. If you earn a million in a year and spend it all, you ad nothing to your wealth. You’re just living lavishly. Those who focus only on net income as a measure of economic success are ignoring the most important measuring stick of financial independence. It’s not how much you make, it’s how much you keep.

It’s not how much you make, it’s how much you keep. That’s a very strong assertion, and one that a lot of big spenders would argue vehemently with. But it’s true. The money you keep is the money that will allow you to be truly financially free. The one true path to a future where you can do whatever you want is to have a high net worth - without it, you’re guaranteeing yourself a lifetime of work and limited choices. With it, though, you can walk away from your old career anytime you want and chase your dreams - that’s what I did.

Earlier this week in the reader mailbag, I mentioned offhand that I built a strict budget for the first several months of my financial turnaround, but now I am much looser about my budgeting. At the same time, I stated that this strict budget was vital in my financial turnaround.

This spurred several readers to write in and ask how exactly I built this budget - starting from scratch and having no real idea how to do it - and how I eventually loosened the reins on it as well.

So, here’s my guide on how to build a budget. This isn’t just a rehash of the budgeting guides that appear in countless personal finance books - this instead is exactly what I did. It’s the plan that I personally found very effective in helping me right my ship.

Let’s get started.

Save Your Receipts and Statements
Sitting down and immediately writing out a budget in the way most personal finance books describe is a giant waste of time. They often instruct you to write down how much you should spend in a bunch of categories that may or may not apply to your life and then stick to those amounts. That’s completely useless for the average person.

If you want to budget, the only way to start is to get a very firm grip on exactly how you’re spending your money right now.

Step 1: Starting today, save every single bill statement, receipt, or check that crosses your desk for at least one month, preferably three months.

You should be building two piles: money coming in (paychecks, etc.) and money going out (bills, receipts, checks, etc.). If you spend money in any way, record it in some fashion by saving the bill statement, a copy of the check, a receipt from the shopping trip, or even by simply writing it down on a sheet of paper. Every single penny should be accounted for.

The longer you do this, the better, but you need to do it for at least one month at the absolute minimum so you can scoop in all of your monthly bills. For most families, you’re better off scooping in three months’ worth of receipts so you can get a good “average” of what you’re spending.

I found it convenient to keep a “spending notebook” in my pocket. Whenever I spent a dime, I’d either make a note of it directly in the notebook or stuff the receipt in there. If I made an ATM withdrawal, I’d write on the back of that receipt what I did with all of the cash.

Sort Your Receipts and Statements
Once you’ve saved all of your receipts and statements up over a few months, it’s time to sort them into some sensible groups.

Most personal finance books provide a big list of groups for you to sort your stuff into, but the problem is that these lists try to be all things for all people. Very few people have financial lives so complicated that they actually cover all of those categories.

Instead, try this.

Step 2: Take all of the receipts/statements/notes/etc. you saved up and start making piles on the floor in a way that makes sense to you.

Just define your own categories. When I first did this, I basically had the following categories, which really didn’t match up very well with any personal finance book:

Required utilities (electric, gas, water, sewer, etc.); non-required utilities (cable, internet, etc.); gas; other car expenses; good food; junk food and eating out; household supplies; books; magazines; golf; video games; Magic: the Gathering; other entertainment; insurance; bank fees; finance charges; student loans; baby supplies; and miscellaneous

I still have that ancient budget, actually, and those were the categories listed on it, and they all started by piling papers and receipts and statements on the floor in various groupings.

Some receipts I came across actually fell into multiple groups, like receipts from Super Target. What I did then is go through the receipt, figure out which items went into which group, and then wrote a note for each pile with that total (including sales tax, which I divided up proportionately).

You’ll probably find yourself shifting piles around and making new piles throughout this process, as you should. The goal is to find ways to group your spending that’s natural to you. Don’t try to force it to match someone else’s groupings - if a group of receipts or statements feel like a natural group to you, that’s how they should be sorted.

Tally Them Up
Once you have all of your piles figured out, it’s time to tally up each pile.

Step 3: Add up the totals on all of the receipts and statements in each pile, then divide these totals by the number of months you’ve been accumulating data.

So, if you saved all data for three months, you’ll want to divide each total by three (remember, the more months’ worth of data you have, the better).

As you calculate the tally for each of your piles, start writing these totals down, making a list of the category names and how much you spent in that category for an average month. When you’re finished, you’ll have a picture of what you are really spending each month in each category.

When that’s done, total ‘em up and you’ll see how much you’re spending. Do the same for your income over an average month - see how much you’re earning. Those two numbers really make up the reality of your financial situation - are you spending less than you earn?

Find the Fat
If you’re like many people, the total amount you earn in a month and the total amount you spend in a month are going to be pretty close to each other - and that’s what you’re trying to correct. Spend less than you earn is the mantra, and it’s a good one - the bigger the gap between the two, the better off you are.

Step 4: Go through each category and find ways you could reduce your spending in each one.

Some categories won’t have much room to breathe, while others will be loaded with fat.

The key here is to be realistic. Look for ways to trim spending that you can easily maintain. For example, you can often trim your electric bill a bit by installing a programmable thermostat, or you might be able to cut some entertainment expenses by finding a different route home from work that doesn’t take you near your most tempting places. Maybe you could challenge yourself to cook one more meal at home each week, cutting down on food expenses a bit. If you’re a book or a movie lover, you can probably cut some fat there by digging into what’s available at the library. The next time you go grocery shopping, maybe you can make a list first or, even better, make a meal plan using the flyer before you even walk in the door.

Going overboard, though, is a bad thing. Just focus in on the baby steps - the easy things you can do to reduce some spending. If you go hardcore, it’ll fail just like most diets do. You’re developing a basis for the long term here, and by trying to force yourself into a bunch of activities that don’t come naturally, you’re asking for failure. Focus on things that are wholly automatic, like a programmable thermostat or a CFL (or a more fuel-efficient car in the future), and on just a small handful of changes you need to make to your behavior.

In a nutshell, go through all the categories and identify automatic ways to save money as well as five other ways you could trim the fat a bit. Estimate how much these will save, then subtract them from the total in that category. You now have your target numbers for next month (don’t worry about extras, we’ll deal with that later).

One more thing: add one additional category called “Flexible” and put in a dollar amount next to it equal to about 5% of your monthly take-home. This will help you during the month if a crisis comes up - just take the money from this piece to help with those unexpected. If there’s anything left over at the end of the month from this category, put it into savings.

Try It Out
Over the next month, just do things as normal except with the changes you thought up based on how you spend money - and one other little change.

Step 5: Work hard to stay within your target numbers in each category for the next month.

Remember, these numbers are completely realistic and based on how you’re really spending money minus just a few little lifestyle changes, so these are goals you should be able to meet. Even better, at the end of the month, you’ll find that you’ve spent a little less money overall.

You’ll likely stay under those numbers in most categories and go a little over in others - that’s fine, just as long as you know the reasons you went over and your total across all categories doesn’t exceed the total of all of your targets.

Even better, you’ll have a little left over, so do something productive with it. Use it to make an extra debt payment or sock it away in a savings account for a big emergency.

But even more important than that…

Rinse and Repeat
Budgeting doesn’t work unless it’s repeated, so just get in the habit of doing it at the end of each month.

Step 6: At the end of each month, refresh your budget.

This simply means go through all of your receipts and statements for the month and verify that you did indeed hit your targets overall. If you did, that’s a good thing - it means you’ve added real change to your life.

So, if you did make your targets, take that total amount that you have left over and add another line to your budget - debt repayment (or savings, if you have no debt) - and write that dollar amount in next to it. Each month, you’ll use that money to follow a basic financial security plan - first, build up a small emergency fund with it in a savings account, then start making extra payments on your debts.

Then repeat the whole process of making target numbers. If you feel confident, try adding in some additional cost-cutting tactics. If last month didn’t go so well, don’t be afraid to revise some numbers upward (and thus reduce the amount going into debt repayment or savings).

Training Wheels
The goal of budgeting is to keep in tune with your spending and don’t overdo it. Instead, treat it like an exercise plan or a diet - you gradually become more and more fit as time goes on and the budget begins to feel more normal in your life. Eventually, the little changes will become natural and you can take the training wheels off.

It took me almost a year to reach that point. I became so confident with my budget that I simply set up most of my bills to be paid automatically with online bill pay at my bank and I set up a bunch of automatic savings, too.

All of those little cost-saving tactics that I developed had become so natural that I was simply no longer spending money at an outrageous pace. Going to the library had become natural. Cooking meals at home had become natural. We were buying groceries in bulk as a matter of course now, saving money over time. We stopped shopping just for social reasons, as well.

Combining the automatic nature of my savings and bill paying with the natural reduced costs of my life was the very goal of budgeting, and thus the next natural step was to take those training wheels off and ride that bicycle of financial stability.

I often write about how a person can save a few dollars here and a few dollars there by making a few little changes in their life. For some of my readers, this seems pointless, and they’re quite happy to tell me so. “Why bother saving $3?” they’ll ask.

Over the last month or two, I’ve really begun to understand the reasons for frugality: those little choices snowball into something big over time. Let me show you exactly how it works.

Make your own laundry detergent
Let’s say I decide to try out being frugal by doing something that’s quite fun (at least for me): making a big bucket of homemade laundry detergent. Each load done with the homemade detergent described in that recipe versus the cost of Tide with Bleach Alternative saves me seventeen and a half cents. We do a load of laundry each day, so that adds up to $5.25 a month in savings.

Use that savings to buy a big pile of CFLs
You save that $5.25 every month and after three months, you have $15.75 saved up. You take that $15.75 and use it to buy a set of four 100 watt equivalent CFL bulbs and replace the 75 watt bulbs in the light fixtures in the room you spend a lot of time in - say, four hours a day. Since the bulbs are then free, you can rack up the savings. Each bulb is now savings 52 watts, or a total of 208 watts every hour they’re on - plus, they have the lifetime of five incandescent bulbs. So, over the course of the next year, you’ll save 208 watts over four hours each day for 365 days, plus the cost of three incandescent bulbs (roughly the number that will burn out over that year). If your electric company charges a dime per kilowatt hour, that means you’ll save $30.36 on your electric bill over the next year, plus you save on the cost of three incandescent bulbs, which cost about eighty cents each, you save $32.76 over the course of the year, or $2.73 per month.

Use that savings to buy a big pile of cloth diapers
Now, from the CFLs and the detergent, you’re saving $7.98 per month. Now you find out you’re pregnant, so you save up that $7.98 per month for seven months, giving you $55.86. You use that money to buy a three-pack of bumGenius cloth diapers from Cotton Babies (bumGenius are what we’re using). These diapers save you $0.26 per diaper change over disposable diapers and you’re able to run a load each day. That’s $23.40 for the first month, and then after two months, you’re able to order another batch of three, and after the third month, another batch - all paid for by frugal savings. After that, you’re saving $0.26 per change on an average of five changes per day - a savings of $39 per month. When the child grows out of diapers, you just keep saving that money anyway.

Use that savings to buy all of your nonperishables in bulk
Now that your savings all around is $46.98 per month, you are able to start buying things in bulk at the store. Instead of having to cut corners, you can buy things like rice, beans, dishwashing soap, garbage bags, bar soap, shampoo, conditioner, toothpaste, fabric softener, deodorant, and so on in bulk. You use one month’s worth of savings to get a membership at Costco and thereafter cut about $25 per month off of your spending because you’re buying many items in large quantities, storing them, and using them as you need them.

Use that savings to buy a deep freezer and start buying food in bulk to freeze
Your savings is now $70 per month with basically no lifestyle change at all. At this point, you set up an automatic deposit into an online savings account - $70 each month goes into that account, which earns 3% interest. After five months, you have $352 in the account, so you use it to buy a deep freezer for the frugal benefits. You then start buying items like bread and milk in bulk and freezing them, saving you another $5 a month. After two months, you’re able to afford buying a portion of a cow in bulk from a local farmer, already cut up and processed for you, substantially cheaper than at the store. You store this in the freezer, too, and all told, you wind up saving about $20 more a month on food costs.

Use that savings to buy a used, fuel-efficient economy car
You’re now socking away $90 a month into that savings account. Nine years later, the kid is old enough to be involved in a pile of youth activities, so you start looking for a more fuel-efficient and reliable car. You look in that account and magically there’s $10,971 in there ($90 a month, compounded at 3% annually). You trade in your current vehicle and pay for the rest of that late model fuel efficient car in cash. Your monthly gas bill drops by $60 and on average you’re saving $20 on repairs, too, with this new, efficient car, and that doesn’t even include the savings from not having to make a “normal” car purchase with payments and such.

Use that savings to pay for college
Now you’re socking $170 a month into the account. Nine years after that, your child is ready to go to college. You peek into that account. $20,724.57

And it all started twenty years before by making a batch of homemade laundry detergent.

That, my friends, is what frugality gets you. One little change, conserved over time, can snowball into something amazing. Why not get started today by finding a little change you can make in your life and putting away that difference?