Not too long ago, a friend of mine lost one of his parents very suddenly. It just came out of nowhere and it felt like a punch in the gut to him. He spent a few weeks almost in a daze, lamenting the loss of his father, who he was very close to, and when he finally came out of that daze, he discovered a few things. He’d racked up quite a bit of credit card debt. He was deeply behind on his work. He had let some important personal things slide. In short, he now had some serious catching up to do in his day to day life.

The closest experience I had to this was during the first week of January 1996, when over a three day period the son of a family friend killed himself, an uncle I was very close to passed away from cancer, and a cousin of mine that I had practically grown up with hung himself. I don’t remember much of that period – it was kind of a haze – but I do remember going back to school and just withdrawing from things for a week or two.

Thankfully, my life was easy in those days. I went to school. I participated in some extracurricular activities. I went home. That was pretty much the cycle of my life, so there wasn’t anything too bad going on if I didn’t quite live up to my responsibilities.

Now, as an adult, things are much different. If something devastating hit my life, I’d have to rebound quickly for the sake of my family – and for the sake of my career. Plus, when those extra expenses that happen during a personal crisis hit, I’d be much happier in the long run if they didn’t have to go onto plastic.

Here are some basic steps you can follow to keep yourself always ready for the unexpected but inevitable bad hands that life deals to us.

Keep an emergency fund.
More than anything else, an emergency fund can help you through tough times in the future. Keep a savings or a checking account somewhere stocked with a few months’ worth of living expenses, and keep a little bit of cash at hand for more specific emergencies.

Having easy access to cash without putting yourself in debt means that you don’t have to worry about the bills later on from the actions you need to take right now. You’ve got the cash to handle most issues, like sudden travel, meal expenses, and other short-term costs that are often related to sudden emergencies.

I usually recommend keeping some cash nearby, too, in an intelligent hiding place in your home. I have $300 in $20 bills hidden in my home, waiting for the right opportunity to be used. When I need it, I can just grab it and go.

Keep a “work buffer.”
Keeping a “work buffer” can be vitally important for enabling you to deal with day to day life. It allows you to walk away from your work for a short while with minimal stress, and the less stress you have during an already-stressful situation, the less likely you are to spend money needlessly and make rash decisions. Here are some great methods of giving yourself a work buffer.

Get ahead – and stay ahead – on basic work tasks. For me, this takes the form of having several days’ worth of articles written in advance, so if the vagaries of day to day life catch me off guard, I can just walk away and know that the basics of my job are taken care of.

Have a well-trained backup. Make sure that there’s a person who can handle the mission-critical aspects of your job, or at least knows how to assemble the pieces so that these tasks get done.

Prepare solid documentation of your daily routine. This way, a person can fill your shoes with minimal training in a pinch, making it possible for you to back away with minimal stress at important moments.

Have a list of key contacts ready to go.
If you’re suddenly pulled away because of a personal emergency, there are likely several people you’ll need to contact to make them aware of the situation. Have these people already entered in your cell phone and listed somewhere where you can easily find them.

Contacting all the right people when an emergency happens can be the difference between an easy exit from your responsibilities and a disastrous one. Make sure you’ve covered your job responsibilities thoroughly, as well as the most challenging of your personal responsibilities.

Don’t run yourself out of leave at work.
Many people have a tendency to use their work leave as soon as they get it and fail to accumulate a buffer of leave for later on in the year, then when an emergency strikes, they’ve got to juggle a lot of things in their life and likely alienate their boss in order to be able to handle life’s emergencies.

A better tactic is to hold on to at least a week of your leave and use it only when you have to use it. This way, if a personal crisis strikes, you can quickly tap into that leave and utilize it for something truly important. Coupled with a strong work buffer, adequate spare leave can often make a quick job sabbatical go by with nary a worry.

Develop a strong social and professional network.
If you invest time and energy into consistently helping out others without anything in return, most of those people will be there for you when you really need it. Don’t hesitate to help out people when they ask and never ask for a thing in return unless you truly have a need.

Then, when you’re in a situation where you need help, these people will almost always step forward and give you the help you need, stepping up to the plate for you in pinches and taking some of the workload off your backs. They may also be a personal help, lending you emotional support or other specific things that you may need.

The time spent building up relationships with others pays dividends when you’re in a pinch, so spend some time now building up those relationships before you ever have to call things in.

Keep your master information document (and related documents) up to date – and help others prepare theirs.
There may even be some situations where you have to delve into your own personal finances or into the personal finances of others. For example, if you’re facing a major liability situation, you’ve been critically injured yourself, or a close family member is critically injured or has passed on, it may be important to know what wishes are in place and how people want their assets to be handled.

You can make this easier right now by preparing your own master information document which contains all of this information about you, so if someone needs to access it to help you out in a major emergency, you’re ready to go. Similarly, you should encourage the people you’re closest to to prepare similar documents – your parents, your spouse, your children, and perhaps your siblings or closest friends – so that you can step up to the plate for them in a pinch without having to waste a lot of time or use an attorney and incur a bunch of unnecessary fees.

A little preparation now can make a huge difference when you need it later on. Take some time to get a few things in order and when something disastrous happens, you can focus on the things that are really important and not worry so much about your personal, professional, and financial obligations.

This is an extremely challenging article for me to write because it hits very close to home. Guardianship. Who will take care of my children were my wife and I to both pass away suddenly? It’s a question that’s so painful to think about that many parents simply don’t think about it – and that can prove to be a huge mistake.

Why worry about it? In the most generic sense, you don’t have to. Each state has intestacy laws (intestacy refers to laws that determine what happens to your property in the absence of a will) that will determine, based on a simple set of rules, who would have the opportunity to claim custody of your children. Often, grandparents, aunts, and uncles are options, and in most loving families, the people will come together and find a solid and workable solution for your children.

The only problem with this is that you have no voice in the matter. Your extended family and the state will be making this decision, not you and your spouse. Given the deeply personal nature of the decision, you’ll likely want some input on that decision.

How to Pick a (Possible) Guardian for Your Children

There are many different guides available on this topic, with drastically different advice. What I’ll offer is the criteria we used in coming to this decision.

Does the potential guardian share your values? In other words, does the potential guardian believe in the same things that you believe in and have many of the same philosophies about raising children that you do? To borrow from Les Miserables, you don’t want your little Cosette put in the hands of the Thenardiers, even if you believe they have the means necessary to raise your child.

Do you believe the guardian will raise your child in accordance with those values? Is that potential guardian a good person? If you’re not confident of their character, then you might not want to have your child raised by that person. For example, the guardians we selected for our own child have vastly different interests than we do, but I know their character – our children will be in good hands with them.

Does that potential guardian have a strong family network around them to help with the burden of having unexpected (and likely traumatized) children? Likely, if you die suddenly, the lives of the guardians you selected will be turned upside down. Does your guardian have the appropriate network of support around them to ensure that your child’s life doesn’t quickly descend into chaos? It’s often a good idea that the potential guardian lives near your child’s grandparents (or perhaps are their grandparents).

Will that potential guardian teach your children the basics of success in life? In other words, you wouldn’t want to turn your children over to someone who would be incapable of teaching your child basic life skills. Can the guardian manage their own life effectively?

Does that guardian have the financial security to ensure that your child’s needs are met? In other words, if they’re struggling to make ends meet right now, dumping two children into the situation might not be good unless you’re adding your own financial support (in the form of large life insurance benefits, for example).

Will that guardian have an expected natural lifespan that will allow them to remain as guardian until your child enters adulthood? Your children have already gone through the trauma of losing both parents. Why would you want them to go through the trauma of losing a guardian as well?

The relative values of each of these questions will likely vary a lot depending on your personal values, but they’re all worth considering. These are the exact questions we used when determining who we wanted as a guardian.

When making our decision, we actually made a giant list of everyone who we would even consider as a guardian, then gradually eliminated people one at a time, eventually winding up with three strong candidates. After a lot of discussion, we decided to choose guardians that had the best access (by far) to grandparents for support in raising our kids – that was our “tiebreaker.”

Planning for the Situation

Likely, if there’s a scenario where you and your spouse have both passed on and your guardian gains custody of your children, you’ll want your estate to be used to ensure that your child has every success in life.

First of all, your will needs to specify your guardianship plan. You may even want to specify multiple guardians, so that if your first choice is somehow unable to take on the responsibility, your second choice is clearly stated. Consult a lawyer and ensure that your will is set up properly and legally so that your wishes will be carried out.

The most effective method of ensuring your children get their assets may be to set up a living trust right now, so that if you do pass away, your property is considered part of that trust and can be distributed by the trustee. Within that trust, you could specify rules for disbursement to your children at certain periods in your life. You’ll need to identify a trustee to handle this – someone you deeply trust that you are confident could handle this task with good faith.

If you don’t have significant assets and your primary gift to your children is your life insurance, you can specify in your will that these cash assets are placed into a trust for them. Again, you’ll need a trustee that you really trust, and again, you really should contact a lawyer to get the specifics worked out.

Your children are some of the most valuable things you’ll ever give to the world. Take the time right now to ensure they’re well taken care of if something happens to you.

As regular readers know, I’m a very happy user of ING Direct. They provide my checking services, my savings services, and all of my online bill pay services. They even allow me to set up sub-accounts so that I can save for specific goals. In my opinion, ING Direct is the best of the full-service online banks, and I’m a happy customer of theirs.

Because they offer all of these useful tools, over time, I’ve begun to use ING Direct as my primary budgeting tool. I can set aside money in specific small pools, automatically transfer money back and forth, set up automatic bill payments, and so on. These tools allow me to effectively manage my money.

Here’s a walkthrough of how I do it.

Step Zero: Get An Account
You don’t necessarily have to have ING Direct as your bank to do the following. You merely have to have a bank that has online checking and savings access and online bill pay. Many banks offer this – Washington Mutual and E*Trade Financial are two well-known national banks that offer similar services, and your local bank may offer it as well.

Switching to a new checking account is easier than it might sound. I’ll quote the steps you need to take from an earlier post:

1. Open the new checking account. The first step is the most obvious one. Open the account and get the information you need: account number and routing number. Order checks if you need them. In other words, be prepared. Your new bank may also need the information for your old checking account so you can transfer money from the old account into the new.

2. Make a list and check it twice. Make a detailed list of all automated withdrawals and deposits from your current primary checking account. The best way to do this is to simply watch the account for a period of two to three months so that you pick up as many of these as possible.

3. Balance your checkbook. Make sure you’ve accounted for everything outstanding so there are no nasty surprises during the transition. Figure out what you have in the old account down to the cent so that you can avoid overdraft dangers.

4. Switch over all deposits and withdrawals at once. I find this is easiest to do by switching over the deposits a bit earlier than the withdrawals, so that there is money already in the new account when deposits begin to be set up. I’m also incredibly careful about such things.

5. Leave the old account open for a while with a balance in it to catch any missing deposits or withdrawals. Even though it might feel like the balance in the old account is just sitting there wasting time, it’s actually there to protect you against your own poor memory. Just be patient and give it several months; you might surprise yourself.

6. Close the old account. Be sure to leave a correct address behind. You might also want to end other services at that bank, such as a safety deposit box.

If you’re switching to ING’s Electric Orange checking, it may be useful to skip step #6 and leave the old account open, especially if there are no fees on it. I’ve kept my old checking account open for two conveniences – cashing checks with a teller and the ability to write paper checks (on the rare occasions when I do this any more, maybe once every three months).

Step One: Set Up Automatic Bill Payments For Monthly Bills
For every regular monthly bill you have, you can set up an automatic bill payment for that bill so you don’t have to worry about paying it on time. It’s quite simple.

First, click on the “Electric Orange” tab on the top, then click on “Free Bill Pay.”

Add a new business (with the name, address, and account number) by clicking on the appropriate link, then add that bill in below. You can specify the amount, the date to pay it, or the regular date to pay it.

Once you’ve done this, the next scheduled payment shows up in your basic checking account screen, so you can easily see what’s coming up and when.

Step Two: Set Up A Sub-Account For Each Irregular Bill and Savings Goal
What about the other bills, the ones that only come around every several months and seem to always crunch the budget, like homeowners’ insurance or car insurance? For those, it’s useful to set up a sub-account to slowly set aside money so that when the big bill comes, you’re ready. Here’s how.

Once you’re logged in, in the upper left, click on the “Open Account” option. You can see it clearly in the picture above.

Choose to open a new savings account on the next screen The “Open Now” link in the image above is where you should go.

From there, the process is really straightforward – you can call each account you create whatever nickname you like to identify it as a distinct fund: an emergency fund, a “house maintenance fund,” a “vehicle replacement” fund, a “house insurance” fund – whatever works for you.

After that, you should set up an automatic transfer into that account. You can do that by clicking on the Transfer Money tab along the top.

Then, fill out the information below. As with the automatic bill payments, these will appear on your default checking account view so you can quickly see the money that’s going to be automatically withdrawn from your checking account.

My recommendations? I leave the amounts for the regular but varying monthly bills in my main checking account – things like the cell phone bill and the electric bill just come straight out of the checking. Other bills, especially large ones with longer periods like car insurance and homeowners’ insurance, are handled by having a tiny weekly deduction from my checking account into a special fund just for that purpose. For example, our car insurance is about $400 every six months, so I transfer $15 a week into an account just for that. This way, I don’t really notice that $15 going away, but when the big bill comes, it’s not a panic time – the money’s just sitting there. So I transfer it back into my checking and pay the bill, all online.

Step Three: Pay Your Bills As They Come In
After this is all set up, your only real responsibility is to pay the bills as they come in. I usually pay all outstanding bills once a week, on Sunday afternoon. Keep on top of these bills, so that you’re not dinged with a late fee. With many of the bills handled now by automatic transfer, you won’t have that much to deal with – I usually just have one or two bills a week to pay attention to.

Step Four: Use Your Debit Card as a Mastercard and Use It For Regular Purchases Like Groceries
If you wish to completely centralize all of your spending until you get things under control, ING’s Electric Orange checking service will issue you a debit card that also functions as a Mastercard. If you’re just getting your budgeting under control, it may be useful to spend a few months just running all expenses through that card, so you can keep a careful eye on what you’re really spending. Once you have a strong grip on your spending, you can move on to using other mechanisms for your expenses, but sticking with a check card for a while is a great way to make sure your spending is under control.

These steps, all together, create a centralized view of your day-to-day finances and also form the basics of a budget. This is exactly how I do things right now in terms of day-to-day money management. I use ING Direct to do all of those things, and it’s done wonders for keeping my money in line.

This plan requires you to do some basic math with a calculator. Since you’re already at the computer, using the simple calculator tool on your computer for addition and subtraction should do the trick quite nicely. I tend to use Excel because I usually already have it open in order to update my net worth calculations.

Good luck!

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.