One of the most common topics in personal finance writing is estate planning. Life insurance? A will? A living trust? These are always bandied about and readers are always encouraged to get on board with all of these things.

What’s often not asked is whether or not estate planning really even applies to you at all. Does it? Let’s take a look.

The first question you need to ask yourself is if you passed away tomorrow, would you leave anyone else behind in a financial pinch? Do you have dependents on your income tax? Are you helping out your parents as they get older? Look through your life and ask yourself if anyone would be in a significant bind if you suddenly vanished (and the people you work with professionally don’t count here).

If you can identify people who would need help (or may need your help in the near future, like a future spouse), then you should have some sort of life insurance. There are many tools online for estimating how much you’ll need – this MSN Money tool is particularly good.

If you can’t identify anyone, you probably don’t need life insurance at all. A tiny policy – just to cover your funeral expenses so you don’t burden your parents with the cost – might be appropriate, but if no one is left hanging by your passing, life insurance isn’t really a necessary expense for you.

Another worthwhile question to ask is do you have any specific sentimental property or small assets you want given to specific people when you pass? If you do, then a proper will is in order, so you can specify your wishes. If you don’t care what happens to your stuff for the most part, then you can either not have a will at all (and allow the court system to distribute your assets) or have a very will that assigns everything to one person.

What if you have a lot of assets you want to pass on to people? In that case, you’ll probably want to set up a living trust of some sort – consult a lawyer. You’ll probably also want to prepare a financial preparedness document for your survivors, so they know where everything is and can easily access it.

To put it simply, if you’re a young and unmarried professional without any kids or other challenges, you likely don’t need to worry about estate planning at all. Instead, focus your energy and your money on building a strong career and preparing yourself for the other challenges and goals in life, and revisit this question if you decide later to get married and/or have children.

If you’re young and are married (and/or have young children), but haven’t accumulated significant assets yet, you should have life insurance and a basic will. Life insurance will ensure that your surviving spouse and children are taken care of, and a will may specify any other specifics you may want to label, particularly in the event of the death of both you and your spouse with surviving children.

If you’re later on in life and have accumulated significant assets, that’s when a living will comes into play. Consult a lawyer and get one set up properly so that your wishes are clearly carried out after your passing.

Estate planning is a perfect example of how the same old financial advice doesn’t apply to everyone. People at different stages in life have different needs.

Recently, I mentioned that my wife and I have developed a financial plan to cover our entire life until retirement, and several readers wrote to me asking for more details about this plan. So, let’s take a look and see what I was talking about – and perhaps it will inspire you to do the same.

Defining the Biggest Goals
The first step for my wife and I was to sit down and identify our biggest goals in life. What do we really want to do with the rest of our lives? What do we dream about? It really came down to three big dreams.

Raise our two (and likely more) children with every opportunity in the world and lots of growth experiences. This means a lot of things: saving for college, providing them a top-notch education, giving them everything they need to discover and explore their passions, traveling extensively (and off the beaten path, too, to observe how a diversity of people live), reading a lot, and so on. If there’s an educational opportunity that works for our children, we don’t want our finances to stand in the way of it.

Buy a significant patch of land, mostly forested, out in the country, and build a reasonable house on it. This is something we’ve always dreamed of – a nice, large house out in the country for our kids to finish growing up in and to come home to, with plenty of space for them to sleep when they come back and bring their own children. My wife’s grandfather has this, and it’s so pleasant that it’s even come to feel like home to me – I look forward to visiting there, playing cards with my in-laws, and just enjoying pleasant and relaxing company. We both really want to have such a place for our own children and grandchildren to come back to. We want to be able to purchase the land and commence construction before our children are out of eighth grade, intending to stay in our current school district.

Retire as young as possible and commit the rest of our lives to community volunteerism. Our third major goal in life – likely the one taking center stage when the first two are complete – is to retire young and focus on community and political volunteering for the rest of our adult lives. Running for local political offices, serving on boards, doing volunteer work, and campaigning for other candidates sounds like a wonderful retirement for us.

Our Plan
We actually sketched out a year-by-year plan with specific goals reaching through our youngest child’s high school graduation, setting targeted goals for each year. We attempted to define flexible goals that could still be met even with significant life changes. Here are our goals for the next three years.

By the end of 2008, we intend to have fully eliminated my wife’s student loans, contributed $1,200 each for the year to our children’s 529 plans, and increased our retirement savings to 1.3 times our combined annual living expenses.

By the end of 2009, we intend to have fully eliminated all of our student loans, contributed $1,200 each for the year to our children’s 529 plans, and increased our retirement savings to 1.45 times our combined annual living expenses.

By the end of 2010, we intend to have $20,000 in our portfolio saving for our country house, contributed $1,200 each for the year to our children’s 529 plans, and increased our retirement savings to 1.6 times our combined annual living expenses.

Some Additional Notes
Obviously, this raises a lot of questions, so I thought I’d address some of the more obvious ones right away.

Acceleration We are intending to accelerate this as much as we can. For instance, I’m hoping that my wife’s student loan will be gone this July, so we can focus in on eliminating my own student loan, which might be done in early 2009. This lets us go ahead and start with our investing plan in early 2009 instead of in 2010.

Our current mortgage Our mortgage has a low enough interest rate that we’ll just continue to pay it off, a payment at a time, until we’re ready to move on, at which point we’ll use the proceeds from the house sale to pay off the remainder of the current mortgage.

Retirement planning Not only are we doing much better than many metrics suggest that we should be doing at our age, we’re also trying to set up sources of passive income to help guide us through.

Educational opportunity savings Right now, with our children so young, the educational opportunities are somewhat limited. In the future, we plan on budgeting a notable portion of our annual budget to such expenses, particularly travel and educational costs.

Comments? Questions? Fire away in the comments.

A few days ago, I made an offhand mention of my will, which drew a lot of questions from readers about their own wills and other things they need to be taking care of in terms of being sure that their estate planning is in order. After reading those questions, I thought it would be worthwhile to prepare a short tutorial on estate planning: what you need to do to be sure that you are covered in the case of a disaster.

First: Life Insurance
Ask yourself three questions: are you married? Do you have children or other dependents? Are you planning on marriage or children in the near future? If any of those have a “yes” answer, you should have a life insurance policy of some sort.

Life insurance really isn’t a complicated game. Most of the options out there are beneficial only in certain situations – whole-life plans, for example, aren’t a bad choice if you’re buying for a young child. For most young and middle aged adults, however, the best option is term life insurance. Just shop around a little bit for a good policy and get one with a 20 or 30 year term (covering the period where you might have children under your roof).

How much should you get? An actuary friend of mine made a good suggestion. Take the number of people in your household, multiply that by five, then multiply that by your annual salary. From that, subtract your net worth.

So, let’s say you have a total of four people in your household, you make $40,000 a year, and you have a net worth of $100,000. Multiply the number of people in your house by five, giving you twenty, and multiply that by your annual salary, giving you $800,000, and subtract your net worth, giving you $700,000. That’s how much your term life insurance benefit should be.

That’s a good way to estimate and will give you a very strong number to ensure the security of your family over the long term.

Second: A Will
A will is basically a simple document stating what you want to happen to your property in the event of your passing. After you pass away, the will is used in public court in a process known as probate to make sure your wishes are handled fairly. For most people, a will is an essential document – if you have an executor you trust and a well-written will, your stuff will go where you want it to go.

Wills are quite simple to set up, but you still should consult an attorney to make sure you’re following all of the procedures that apply in your state.

Key things to think about:
Who should be the executor? It should be someone you trust deeply.
Who should have my assets? Also, how should they be divided up?
Who should have my personal heirlooms?
Who would gain custody of my children? Talk this over with the people you have in mind and make sure they’re okay with it.

Third: A Durable Power of Attorney
A durable power of attorney is a document that you sign giving someone else the power to handle your finances and legal affairs should you become incapacitated, but it expires upon your death. Basically, you’re saying to everyone in the world that you’ve designated a particular person to represent you if you’re incapacitated for some reason. The person you designate, called an “agent,” is legally bound to act in your best interests, and you can revoke this person at any time, so you can’t just get ripped off by someone.

If you’re married, by default your spouse has power of attorney if you’re incapacitated. The only benefit of such a document is if you’re unmarried or if you want to be covered in the event of an accident that incapacitates both you and your spouse.

In truth, this is most useful simply to designate one person that’s in charge of things should you become sick. Without it, lots of people can potentially try to claim power of attorney and a legal mess can ensue while you’re incapacitated. If things are basic and straightforward, this document is perhaps not vital, but if you have a lot of assets and a lot of interested parties, it’s probably worthwhile to designate someone. As with other documents, contact a lawyer and get it done right.

Fourth: A Living Will
A living will states the health care directives you want to be followed should you be unable to tell the doctors yourself. Do you want to be on life support for a long time at the desire of your family, or do you want to spare them the anguish of a long and drawn-out scenario? What about methods to save your life? Some people have strong feelings on these issues and should have a living will – others can simply trust their spouse or whoever they’ve designated to have power of attorney over them. If you want to be certain your specific wishes are fulfilled, make sure you’ve prepared a living will.

Fifth: A Master Document for Your Survivors
A few days ago, I wrote about creating and maintaining a master financial document for your survivors. Basically, this is a document explaining all of your assets and debts and everything that needs to be done to close them out and get the assets in your accounts to the people that should have them.

It’s a great thing to have – I know from experience that such documents can be an enormous help to a family burdened with grief. Take the time to prepare such a document and make sure the important people in your life have a copy.

What About a Trust?
Many financial advisors speak lovingly about setting up a living trust in order to help with the process of transferring an estate after you pass on. These can be very effective because they allow you to avoid the court system and have your estate directly transferred to your beneficiaries upon your passing without the costs and waiting required with probate, but there are some costs – mostly legal fees – in setting one up.

Basically, if you don’t have children or you don’t have any significant assets (a net worth of less than several hundred thousand or so), a living trust probably isn’t worth the effort. However, if you do have children, particularly adult children that you wish to transfer your assets to when you pass on, you should definitely think about a living trust. As I have two young children, I have been researching the pros and cons of doing this and am considering setting one up simply so that if something happened to my wife and I, they would be very well protected.

My advice if you’re considering this? Get a few quotes from various lawyers on what they would charge to set one up for you. Don’t do this with a “create your own living trust” package – this is important enough to make sure it’s done correctly by a legal professional.

One Last Thing…
Write a few letters. Write one to your wife telling her how much you love her. Write one to your husband telling him that you loved him every day of your life. Write one to your kids telling them how much they mean to you every day. These things will mean so much when you pass away and they can no longer hear your voice – they all likely love you more than you think they do.

Doing all of these things feels rather grim, but remember you’re doing them to help your loved ones in the future. Think about how much you love the important people in your life and consider how much help your small effort now will be for them later. Then take the time and get these things done.

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.

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.

Lots of people have written me in the recent past asking me how I am preparing for an economic downturn. Take, for example, this email from Arnold:

A lot of major publications (The Economist being the biggest) have been predicting that the US will have a recession this coming year. My question has to do with preparing and surviving during a time of recession. Also, another idea would be how to work with the dropping in value in the dollar.

First of all, I think most mainstream articles on economic downturns are sensationalist. For most people leading normal, everyday lives, an economic recession doesn’t mean too much. Unemployment might rise some, but mostly it’s companies trimming fat – stable companies don’t fire good employees because of downturns.

If you’re worried about the economic downturn affecting your financial status in a significant fashion, there are one of several possibilities going on, most of which have more to do with your own choices than the market:

1. You’re concerned about your job performance and that you might be considered part of the “fat” at work. This concern usually comes from people who are underperforming at their job

Solution: Work harder, and keep track of what you do. Do what you can at all times to maximize your career and have a very good performance review. Here are fifteen things you can do right now to help, along with fifteen more.

2. You’re concerned about the long term health of your organization and you think a recession could kill it. Think about people working for Sears and K-Mart, for example. Those companies are sinking fast and could possibly go belly up in the next few years, triggered by even worse revenues from a recession.

Solution: Polish your resume and move on with your career sooner rather than later. It’s never a bad time to get out of a sinking ship. Figure out what you want to do with the rest of your life and move forward with that plan.

3. Your money is heavily in the stock market and another slide like the one from 2000 to 2002 would be devastating. You know from the past that recession means downturn in the market and you’re very worried about losing your investments you’ve built up.

Solution: Go conservative if this is keeping you up at night. Move heavily into bonds, for example, or into real estate by having your future buying go into these areas. Sell your stocks only if your ultimate sell date is coming in the next five or so years – otherwise, hold on for a roller coaster ride. During an economic downturn, a stock-heavy portfolio will not do well, but over the long run it will.

4. Your financial situation is so loaded with debt that if anything bad happens at all it collapses like a house of cards. People who are in debt up to their throats are kind of panicked right now, and deservedly so: if easy credit dries up and the economy goes down, their lives could be in deep trouble. If a job loss means you lose everything, you’re in deep, deep trouble.

Solution: Start living within your means. Build up an emergency fund, then start seriously tackling high interest debts. You need to buckle down now so everything doesn’t collapse later, so stop spending money and instead start eliminating debt and saving.

Here’s the real message: you control your economic future, not some Wall Street banker. If the economy goes sour for a while, you can make choices so that you sail right through it without a worry in the world.

Don’t let the fearmongering keep you awake at night – if you’re making sound financial and life choices, you’ll be just fine over the long run.

Quite often, I admire my cousin and his wife for some of the frugal things they choose to do in their lives. They buy late model used cars and drive them until they need replaced, eat out only on extremely rare occasions, and know cold which generic products are basically the same as the name brands. They’ve replaced almost all their light bulbs with CFLs and have actually disconnected their cable because they don’t use it much.

That’s why I was shocked recently to find out that they’re actually in a frightening debt situation. Why? They take that money that they save from frugal choices (and more) and then spend it on incredibly expensive toys. They have several ATVs, a huge array of hunting equipment, a taste for nice clothes, and their children have virtually everything they ask for.

The end result? Frugality isn’t helping them with their financial situation. They’re already doing it in some avenues of their life, but in other ones, the spending is so overblown that it undoes the buckling down. Often, the argument offered by people in this situation – including my cousin – is that the nice stuff they have is what they work so hard for, but if you ask them what happens if they were to lose their job, a deep look of fear pops up in their eye.

What can you do if you’re in this situation, where your basic needs are actually well below what you’re making, but you find yourself spending everything you bring in – and more? Here are some suggestions for putting yourself in a safer financial situation.

First, don’t give up your expensive hobbies. This might seem like shocking advice, but I’ve found that if you give up something you’re really passionate about, it works about as well as an “all-salad” diet – you do it great for a while, then relapse with crazy splurging.

Look at my cousin’s situation. He spends almost all of his free time with his family doing outdoor activities: riding around on their ATVs, hunting, fishing, and so on. It makes natural sense that he wants to spend his entertainment money on these things – and he should. Life is boring if you don’t have an outlet for your passions.

For me, my hobbies are reading and writing and some video game playing (and a little bit of music). My biggest expense is games for my Wii and DS and occasionally a computer upgrade. While I’m tempted to buy every interesting Wii or DS game I see, I’m pretty careful to not do this.

Instead of spending extra money on hobbies and entertainment, though, set up an automatic savings plan that takes some of the money out of your reach. That way, there’s no money sitting there to tempt you to spend. Take, say, $100 a month out of your checking and into your savings, and don’t touch it until you desperately need it.

You’ll find that your spending adapts to this new available amount. Maybe you’ll move from two new outfits a month to three every two months, or maybe you’ll hold off a few months on your next ATV upgrade. You still get to enjoy your hobbies and have those things that really drive you, but you also get to start putting away money for the future.

What I’ve found for me is that buying one video game, making a very earnest effort to master that game, and then move on to another one is a great way to keep my video game hobby alive with a lot of enjoyment but without much spending. Similarly, I hit the library and PaperBackSwap when I have a desire to read a new book (right now, for instance, I’m reading through most of John Steinbeck’s novels, all of which I could get through PBS or the library).

Over time, slowly increase the amount you’re withdrawing into savings. This works very well in conjunction with discovering new avenues of frugality or increases in salary, or if your interests begin to change.

You may also want to start making extra payments on outstanding debts. Now that our emergency fund is built up well, we have started making extra payments on our student loan debts, and it feels very good to watch them melting away. Once that’s done, we’re going to tackle our home loan with extra payments. This is a good move to make once you have plenty of money socked away to cover any emergency.

Soon, you’ll find yourself in a safer financial situation, and that’s exactly where you want to be.

As I slowly save for a new vehicle (we’re planning on a Honda Odyssey or a Toyota Sienna), I’ve come to realize that saving for a specific goal like this often seems slow and a bit unrewarding. Sure, the bank account goes up over time, but it still seems as though the goal is a long way off.

Luckily, I’ve found a way that really inspires me to keep going towards that goal: a visual savings goal reminder. Essentially, you create a visual reminder of the progress you’ve made towards the goal (to feel good) that also reminds you how far you need to go (to motivate you) in terms of small steps that you can take quite often (making it seem possible).

Here’s how it works.

First, define your goal explicitly. Are you saving for a new car? What kind of car is it and how much will it cost? Are you saving for a home improvement? What’s the estimated cost on it? No matter what you’re saving for, try to define it specifically enough so that you have a rough idea of what it will cost.

Next, take that dollar amount and round it up to a nice, even number. Try to make the goal have at least three zeros on the end, if nothing else, and preferably just a single number followed by zeros. So, if you’re saving for a 20% down payment on a $280,000 house, your goal might be $56,000 or, even easier, just $60,000.

Then, figure out a dollar amount that you can easily save a couple times a week. Can you put away $10 a couple times a week? How about $25? What you’re doing here is figuring out the size of the pieces you’re going to use to build up to your goal. You want the pieces to be small enough so that you can do them regularly, but not so small that they individually don’t mean much.

This next step requires some math. First, divide the total amount of the goal and divide it by the amount you can regularly save. This will tell you how many times you need to save that amount to reach your goal. Then, take that number of payments and factor it using this tool. You’re going to want to find the factor pair where the numbers are pretty close to each other. So, if you’re going to need to make 2,500 payments for your goal, the pair you’ll want is the 50 by 50 pair. Got it?

Now, take a single sheet of graph paper and make a rectangle on it. Using that linked tool is really helpful – you can specify exactly the grid that you want. How big? Those two factor numbers you obtained above will do it for you – if your factor numbers are 50 by 30, for example, then one side should be 50 squares and one should be 30 squares. Cut that rectangle out, and then find a picture of what you’re saving for and tape the rectangle to it. Hang it on your fridge or somewhere else where you’ll see it over and over again.

At this point, start saving. Each time you can save that small dollar amount in a savings account, put it in the account and then color in a square on the rectangle grid. You don’t even need to look at the savings account balance, just make those contributions and then color in a square each time you do it.

What happens? The constant reminder of the goal encourages you to keep saving money, and eventually you’ll find yourself putting “found money” into that account because it’s a lot of fun to fill in the squares and see yourself approaching the goal. Then, when you finally fill in that last square, it’s time to buy!

Some tips:

Get an online savings account, if you don’t have one already. An online savings account allows you to pull those savings bits right out of your checking account at your convenience, or even set up a plan to do it automatically (don’t forget to fill in the blocks, though). I’m a big fan of ING Direct (and use them for virtually all of my checking and savings needs) because of their ease of use, reliability, and association with a large international bank (ING).

Make an “extra” payment every once in a while. Make some frugal choices that free up the money to make an additional payment into that account that you didn’t expect, then go fill in that extra square. It feels really good when you start to realize that by not eating out and making a healthy meal for your family at home and also installing some CFLs, you bought and paid for a piece of your new vehicle/down payment/whatever your goal is.

Focus on one goal at a time. I find it’s much better motivation to focus heavily on one specific goal rather than a bunch of goals at once. Focus on saving for a car, then when you reach that goal, start another one. Spreading oneself out really hurts with focus – at least, that’s been true in my experience.