This is the first of many outwardly signs of cracks in a system that far too many people will rely on as their sole source of income during their retirement years.  As more baby boomers retire and stop paying into the program, the program payouts will not exceed revenues, no matter how well the economy performs.

The Social Security system was designed to be a safety net of protection for the most vulnerable members of our society.  However, one of the unintended consequences of the program is most people stopped adequately planning for their retirements because they had the misguided belief that the system would take care of their needs.

Whether you are a recent graduate just entering the workforce or a seasoned employee in the prime of your career, this should serve as a wake up call reinforcing the importance of preparing for your retirement.  Take the time now to understand the retirement options available to you and make it a priority to put aside enough to fund your retirement years. You are ultimately responsible for your quality of life during your retired years.

Creating A Plan.

Plans are the specific actions you take to accomplish your goals.

When I was younger, I loved to complete maze puzzles.  When completing a complicated maze, I found it was usually easier to start at the end and work my way back to the beginning of the puzzle.  The same thing is true for creating plans.  Start at the end with your timeframe or end date and work backwards to the beginning.

For example if your goal is to eliminate all of your credit card debt in 11 months, start 11 months from now.  Figure out what you need to do between now and then.  Your answer may be paying an extra $100 dollars each month towards the bill.

Next ask yourself, how will you generate an extra $100 dollars each month.  Your answer may be to temporarily disconnect your cable television subscription or getting a spare-time job.  The important thing is to keep asking ‘How’ until you have identified things you can do now.

Write down the answer for each ‘How’ and assign a completion date.  Congratulations, you have just created your plan.

The most important thing to remember about plans is they are worthless if you don’t take action.  Most people have little difficulty creating plans.  We all like to dream big.  The problem is we don’t like to take action.

Start with the simplest action and do it immediately.  Don’t give yourself a chance to procrastinate or second guess your decision.  Like a snowball creating an avalanche, let a little action be the catalyst for your financial transformation.

In my personal experience, most of my financial difficulties were caused because I did not set and follow financial goals.

Goal setting is the foundation of all financial success.  Let me repeat that, GOAL SETTING IS THE FOUNDATION OF ALL FINANCIAL SUCCESS!  Why is that you ask?  Goals are your road map, they are the mental pictures of what you are trying to accomplish.  When you set a goal, become absolutely clear about accomplishing it and don’t deviate from it, you will eventually achieve it.

There are many goal setting techniques, but I’ve found using the SMART technique  the simplest and most practical.  SMART goals are:

SPECIFIC – what you want to accomplish

MEASURABLE – ability to measure and monitor progress

ATTAINABLE – can be achieved based on your abilities, skills and financial capacity

REALISTIC -  attainable with reasonable effort

TIMELY – a deadline for accomplishing the goal

In an interview in Success Magazine, motivational speaker, Denis Waitley said, “Goals and purpose are the engines that drive our lives.”  Goals answer the ‘What’ questions while purpose answers the ‘Why’.  The two go hand in hand.

It is not enough to know what you want to accomplish.  You also have to know why accomplishing the goal is important.  What will it mean to you if you succeed or fail?  The why often reflects what you are really trying to accomplish.

For example if  your goal is to cut your credit card debt.  Your ‘Why’ for this goal could be so you can afford to take a vacation, save more money, buy a new car, open your own business or any number of other things.

Focus your attention and energy on the Why, not the goal.  Let the goal simply be a tool used to accomplish what you really want.  Achieving the goal accomplishes the Why.

In our next post, we will discuss the third step of Laying a Financial Foundation, Creating A Plan.

Analyzing Your Cash Flow

Your cash flow is a look at how you spend your money on a daily, weekly or monthly basis.  It shows what comes in, your income, and what goes out, your expenses.  Unlike the net worth statement which is a snapshot of your overall assets and liabilities, the cash flow is more like the running balance on your checking account.

It is important to analyze and review your cash flow on a regular basis because it provides a clear picture of how you spend your money.  Reviewing your cash flow statement will help you to find ways to save more.  It also helps you prepare for periods where your expenses will exceed your income.

The cash flow statement also shows whether you are living above your true standard of living or within your means.

The first step in analyzing your cash flow is to decide what period you want to examine.  If most of your income and expenses occur regularly every month, use at a 4 or 8 week period.  If you have irregular income (i.e. commission pay) or expenses, you will either need to figure an average per month or use a larger period like 12 weeks.

The second step is to list all of your income for the period you have chosen.  Include your salary, dividends, interest, pensions, as well as, other income like child support, alimony or other legal settlements.  These amounts represent your total cash available.

Next list all of your expenses for the period.  Include all loan (car, mortgage, personal), credit card and debt payments.  You will also need to include all of your insurance and utility payments.  Finally include any other expenses that you expect like clothing, child care, food, gasoline, transportation (buses, subways, etc.), entertainment, dining out, charitable contributions or any periodic expenses (gifts, membership dues, taxes, etc.) that will occur during the time period you are using.  These amounts represent your total cash spent.

It is important that you do not undervalue your true expenses.  You may find it useful to use bank statements as a guide to include all of your normal expenses.  The goal is to be as complete as possible.   Don’t cheat yourself by trying to make your cash flow look better that it actually is.

The last step is to compare your total cash available and total cash spent. If you spend less than you have available you can save the excess or use it to pay down debt.  If you spend more than you have available you run the risk of depleting your savings or having to rely on credit cards and loans to make up the difference.

Whether your cash flow numbers are positive or negative, knowing your net worth and understanding your cash flow are important as we move on to Step 2 of Laying a Financial Foundation: Setting Financial Goals.

Assessing Your Current Financial Situation

I am an avid roller coaster rider and I love visiting amusement parks.  Occasionally I get turned around in my quest to find the entrance to the best rides at the park.  The first thing I do is look for a map.  Once I find a map, I immediately look for the giant red dot and the words “You Are Here.”  Once I figure out where I am, I can then continue my journey to my desired ride.

Just as maps are useful for finding our physical location, they are also essential when we are on the road towards our financial goals. Before starting your financial journey, it is beneficial if you first figure out where you are.

In order to figure out the ‘You Are Here’ location for your finances you must determine your Net Worth.  Your net worth is simply the value of what you Own minus what you Owe.

The first step of determining your net worth is calculating what you own (your assets).  To figure this value, add up all of your Cash Equivalents, Investments and Personal Assets.  Cash Equivalents include cash in checking, savings, money market or certificates of deposit accounts, as well as, Treasury Bills and the cash value of life insurance policies.

Investments include the value of stocks, bonds, exchange traded funds, mutual funds and any partnership or business ownership interests.  Also remember to include the value of any retirement funds including Pensions, IRAs and Employee Savings Plans.

Personal assets include primary and secondary residences, collectibles, art, antiques, automobiles, home furnishings, jewelry and any other items that have real value.  When determining the value of personal assets, I recommend using a lower or more conservative value.  Human nature dictates that we always value personal items greater than they are worth because of our emotional attachment.  Take care not to over inflate the value of items to artificially increase your net worth.

Once you have added the value of all of your Cash Equivalents, Investments and Personal Assets you now know the value of what you own.

The next step is to find the value of what you owe (your liabilities). Add the current amount you owe on all loans.  These will include personal loans, student loans, automobile loans and investment loans.  Also include the current amount you owe on mortgages, home equity loans and life insurance policy loans.  Alimony, child support and any other legal judgments or settlements are also considered liabilities.

The third and last step in determining your net worth is to subtracting what you owe from what you own. Ideally you want your net worth to be as large as possible, however, any positive number is a good sign.  Even if your personal net worth is negative, all hope is not lost.  Remember your net worth is just a snap shot of where you are financially at a specific time.  It is not a reflection of your value as a person.

We will continue to refer to and use your net worth amount as we continue through this series on laying a financial foundation.

Join us for our next post where we discuss Analyzing Cash Flow which is the second step in assessing your current financial situation.

People employed in the construction industry understand that before any structure can be built, time must be taken to build and lay a suitable foundation.  Without a proper foundation, the structure will not be able to withstand the pressures of gravity, weather and movements of the earth.  It is impossible to build a strong structure on a weak foundation.  This is the principle of foundations.

The principle of foundations also applies to managing personal finances. For most people, the lack of a sound financial plan is the root cause of their financial difficulties.  Having and utilizing a proper foundation will enable you to accomplish more of your financial objectives.

During the month of January we will examine in detail six essential foundational components to achieving your financial objectives:

1. Assessing your current financial situation
2. Establishing financial goals
3. Developing a financial plan
4. Tracking income and expenses
5. Creating a spending plan
6. Monitoring progress

Join us on this journey and strengthen your financial foundation.

Proverbs 24:27, “Prepare your work outside; get everything ready for yourself in the field, and after that build your house.”

There are two words that sum up this scripture as it relates to the subject of personal finance: PREPARATION and ACTION.

The first step towards gaining or maintaining control over your money is to prepare.  This preparation can be in the form of goals and objectives, as well as, budgets and spending plans.  Proper planning helps you identify what you are trying to accomplish and specific steps you need to take to achieve the goals you have set.

Once you have sufficiently planned it is time to take action.  While plans are important, they do not bring success unless they are acted on.

Avoid the trap of over preparing.  Your quest to be totally prepared can easily become a disguise for procrastination.  Realize that you will never be 100% prepared before you take action.  Once you have sufficiently planned, take immediate action.

This week as you meditate on this scripture verse, look for ways to take immediate action towards your financial goals.

My personal experience with New Year’s Resolutions has taught me that 95% of the time I fail to keep them.  My conversations with friends have led me to believe that the same holds true for most people.  Why do we have such a hard time fulfilling our resolutions?

At their core, resolutions are simply goals.  I don’t seem to have a problem achieving other goals I set during the year.  So what makes my resolutions so different?  After some thought I have come to the conclusion that the key to my failure to implement my resolutions lies in one word, ‘WHY’.  That’s right my success or failure hinges on my understanding of WHY.

For example let’s say I resolve to eliminate all of my credit card debt in the coming year.  Using the SMART method for setting goals, I would do the following:

S (Specific) – I resolve to pay off the (dollar amount) I owe to (credit card name) by (specific date)

M (Measurable) – A declining balance will be the measure of my progress

A (Attainable) – Based on my current budget this is attainable by my specified date

R (Realistic) – Yes, this is a realistic goal

T (Timeframe) – Yes, I set a specific end date

All of the elements of goals setting are accounted for.  During the first couple of months of the year I will more than likely start out well.  However, by April or May I typically start losing sight of the resolution and revert back to my old habits.  By the end of the year I will look back and realize that I failed and set the same resolution again for the next year. I then repeat the cycle again and again.

This cycle can be broken if I simply take time to answer the question, “Why is this important to me?”

Referring back to the credit card example I can ask, “Why is it important to me to eliminate my credit card debt?”  The answer should be personal to me.  For example I could answer the question as, “I would have an extra (dollar amount) per month that I could use to take a summer vacation.”  Once I answer the WHY, I can then focus on it instead of the resolution.  Focusing on the WHY, which is what I really want, instead of the resolution, will provide an extra measure of motivation to continue towards the goal once the freshness of the New Year wears off.

Adding the WHY element to your goals and resolutions is helpful no matter what you are trying to accomplish.  Try it this year and see if you improve your success rate.

The Diligent Hand would love to hear what types of financial goals our readers are setting for 2010.  Throughout the year we will continue to offer tips to help you achieve your financial success.

Have a safe and happy New Year.

Bank of America and JP Morgan Chase are lowering or eliminating fees, changing the way they process transactions and allowing customers to opt out of automatic overdraft protection programs.  Customers who choose to opt out will not be able to make debit card purchases that overdraw their accounts.

Beginning October 19, Bank of America customers will be able to opt out of overdraft protection programs.  On this same day, the bank will no longer charge fees for customers who overdraw their account by less that $10 in a single day.  If the account is overdrawn by more than $10, the bank will continue to charge a $35 fee per overdraft but limit the number of fees to a maximum of four.

Beginning next year, Chase customers will also have the ability to opt out of overdraft protection programs.  Additionally, Chase will no longer charge fees for customers who overdraw their account by less than $5 in a single day.  They will also cap the number of overdraft fees in a single day at three.  The bank also announced it will start processing transactions chronologically instead of from highest to lowest amount.

Other large banks have not announced whether they will implement similar changes, but consumer and congressional pressure should eventually cause them to follow suit.

These changes will provide cash-strapped consumers with more flexibility to manage their cash flow.

“The soul of the sluggard desires, and has nothing, but the desire of the diligent shall be fully satisfied.” Proverbs 13:4

We are all born with a desire to want more out of life.  No matter how wealthy or poor we are, no matter how much education we obtain or our chosen profession, there is something in all of us that compels us to want more.  These desires do not necessarily have to be towards money or other tangible goods.  The desire can be for more wisdom, love, internal peace or a host of other emotional attributes.

The truth of the matter is we both succeed and fail in achieving our desires.  Is there a reason why some people obtain more of the things they desire while others frequently fail?  Is there some trait that some people possess which gives them an advantage over others? The answer to this question is yes and that trait is being diligent.

By definition, diligent is defined as constant in effort to accomplish something; attentive and persistent in doing anything; done or pursued with persevering attention; industrious; untiring; tireless; unremitting; indefatigable (incapable of being tired out; not yielding to fatigue).  A sluggard is defined as a person who is habitually inactive or lazy; not moving; lifeless; a procrastinator.

It is an unbreakable spiritual law that you will succeed at whatever you give constant effort and attention to accomplishing.  The corollary of this law is you will fail at whatever you do not give constant effort and attention to accomplishing.

So the question then becomes what does it mean to be diligent in a quest to become financially successfully.  The answer is simple.  Being financially successful means being consistent in how you spend your money.  It means persevering and following a budget even when you don’t want to.  It means delaying gratification until you can truly afford it.  It means focusing your attention and energy on eliminating debt.

When you develop a habit of being diligent in how you manage your money, it will become part of your character and impact all other areas of your life.

This week as you meditate on this scripture, look for ways to improve your diligence in how you handle your money.  Make a commitment to stick with your financial plan until you are fully satisfied with the results.