How Are You Doing?

The New Money Book of Personal Finance
by Editors of Money Magazine

Taking control of your finances.The very sound of it delivers a jolt of self-confidence. Once you're in control of your finances, after all, you can do what it takes to reach your most important money goals. But don't be in a hurry. Many people mistakenly think that the way to become financially independent is to plunge into stocks or mutual funds and hope for some winners. Actually, the secret to financial success is educating yourself about all the key areas of personal finance-from taxes to investing to debt management to estate planning-and then taking the right steps in each. Before you make any moves to improve your financial lot in life, you need to know how you're doing currently. By putting down on paper the true numbers representing your finances-your assets, your liabilities, and your net worth-you'll see where you need to get started improving your situation.

Determining Your Assets, Liabilities, and Net Worth

So, do you know how you're doing, really? Chances are, you have a vague notion. For instance, you may be pretty certain that your debts are higher than they ought to be.Or that you could be investing a bit more. Perhaps you've been squirreling away money for years and have amassed a substantial amount. By filling in the following worksheets, you'll know for sure.

Sizing yourself up means looking at three important financial indicators: your assets, your liabilities, and your net worth. Your assets are all the things you own: the money you have in the bank, your furniture, your home, your investments.Your liabilities are the debts you owe.Your net worth is what you get when you subtract your liabilities from your assets. In some cases, particularly if you are young and haven't accumulated much yet, your net worth is a negative figure.

Budgeting and Cash Flow

Now that you know how you're doing you can begin looking for ways to do better. Start by getting a handle on where your money goes every month.This way you can begin plugging your money leaks and find ways to spend less, save more, and boost your net worth.

Nobody likes to keep a running budget of expenses.The process is a pain and generally winds up as an annoyance.That said, jotting down how and where you spend your money can be an eye-opening experience.How often have you said to yourself: "I just don't know where the money goes. I make a decent living, but there's nothing left at the end of the month." By keeping tabs on your expenses, you'll be able to solve America's greatest unsolved mystery: the case of the vanishing paycheck.

So, try this mini-budgeting program and think of it as cash-flow management. For two months, starting the first day of next month, keep a written record of every time you spend money. (Yes, one month would be easier, but some expenses such as clothes don't show up monthly; by giving yourself two months, you're more likely to end up including the full range of your spending.) Jot down exactly how much you spent and what you spent it on. In addition, make note of every time you take cash from the bank or your automated teller machine and write down the amount.

If the old paper and pen approach seems way too Stone Age for you, go digital with computer software such as Quicken or Microsoft Money or tap into the great tools and calculators at their Web sites www.quicken.com and moneycentral.msn.com, respectively. Both programs (which sell for $30 to $90) or other, free Web sites have a computerized ledger for entering purchases and worksheets to help you create a budget.

Chances are, you'll be astounded to see where your money actually went.You might find that you spent an exorbitant amount on food, particularly for restaurants or workday lunches.You could also be surprised to see how much it cost to clothe your family or drive them around.The cost of upkeep for your home and your utility bills may also be sky-high.

Similarly, you may be shocked to see how little you saved or invested. Continue on such a path and you'll have a devil of a time meeting your long-term financial goals, such as paying for your child's college education or retiring with a lifestyle that matches your dreams.

Reining in your spending isn't easy, but it's not impossible, either. Some fixed expenses are hard to reduce, such as your health, disability, and life insurance premiums, but not impossible. Most of your other expenses, however, are what economists call discretionary. That means you could spend more or less on them if you choose. Ask yourself the following 20 questions and odds are you'll find at least one expense that you can snip without feeling much pain:

20 QUESTIONS TO TURN SPENDERS INTO SAVERS

1. How can I eat out less often?

2. How can I spend less money when I eat out?

3. How can I cut back on my vacation spending this year?

4. How can I reduce my entertainment expenses and still have some fun in my life?

5. How can I get my boss to pick up more of my business expenses?

6. Can I lower the cost of child care and education without harming my kid in any way?

7. What can I do to cut my household's medical expenses without endangering my family's health?

8. How can I spend less shopping? (Hint:Try less expensive stores, more sales, fewer trips to the mall, and hand-me-downs for your kids.)

9. How can I lower the cost of commuting to work?

10. What can I do to reduce my car expenses? (One idea: Do more work on your car instead of taking it in. Another:Wash it yourself and save the car wash fee.)

11. What can I do to reduce the cost of upkeep for my home?

12. How can I pay less in debt? (Consider charging less on your credit cards or trading in a loan or a card for one with a lower interest rate.)

13. How can I lower my home heating and cooling, telephone, and cable TV bills?

14. What can I do to pay less to the IRS and the state tax man and keep more for myself?

15. Could I fight my property tax bill and get it lowered?

16. How can I reduce my dry-cleaning bill? (How about laundering and ironing more clothes yourself?)

17. Can I cut the fees I pay to my bank, mutual fund, or stockbroker? (Try consolidating accounts so you're not hit with so many different fees.)

18. Could I lower my mortgage payments by refinancing?

19. Are there discounts I could receive to cut my homeowners and car insurance premiums?

20. Can I buy less expensive gifts without looking stingy?

Throughout this book you'll find budget-cutting ideas that will answer many of those questions. Chapter 18, for instance, is devoted to making you a wiser consumer. But only you know for sure what you can give up or scale back. Only you know the alternatives in your area to your favorite restaurants and stores.

If you're truly serious about spending less and having more cash to save and invest, set monthly or annual limits for certain expenses. For instance, you might force yourself not to spend more than, say, $100 a month on telephone bills (including your cell phone) or $200 a month on clothes. Or you could limit your annual vacation spending to, say, $2,000.That might require you to give up a vacation altogether. Alternatively, you could just find a less expensive way to relax. Make sure you let yourself have some pleasures, though. Otherwise you'll eventually get so fed up with your budget constraints that you'll bust loose and spend wildly to compensate.

You may find it easier to put yourself on a budget by deciding in advance what you will do with the savings. This means converting your budgeting into a specific financial goal. It might be using the savings to pay down your debt or to invest for your child's looming college bills.Whatever the goal, give yourself something to shoot for. That way you won't feel as though you're simply punishing yourself.

After you have a spending plan you can live with, stick with it for three months. Then, repeat your initial exercise and see how you're doing. Find out exactly how much you are spending in every category again.You may even be able to kick in for a luxury or two that you've done without. After 12 months you ought to be so used to this spending regimen that you'll no longer mind the cutbacks you have made.

A final budgeting tip: Don't carry around too much cash, since you may be tempted to spend the money. If you normally take out $150 from the bank each week for spending money, try withdrawing $125 for a few weeks and see how you manage. If you're in the habit of constantly yanking cash out of your bank's automated teller machines, cut your visits in half. If you must, change your routine so you're not anywhere near your bank's ATMs. If you can't see the machine, you can't take money out of it.

Your Finances by Your Age

A useful way both to see how you're doing financially and to figure out what you ought to be doing with your money is to understand what you should be focusing on financially today, depending on your age.

PEOPLE UNDER AGE 30: THE STARTING OUTS

1. Stop living paycheck to paycheck and start saving regularly. Ideally, you'll want to salt away 10% of your income. Then you can start investing in the stock market, through mutual funds.

2. Start investing as early as you can. For instance, if you put aside only $2,000 a year in an Individual Retirement Account earning 8% for just the 10 years from ages 25 to 34, you'll have nearly $315,000 by the time you're 65. If you wait to age 35, however, and then start investing $2,000 a year in the IRA for a full 30 years, you'll have only about $245,000. Similarly, try to contribute the maximum allowable amount to your employer-sponsored retirement savings plan, such as a 401(k) plan. (For more on great tax-deferred retirement savings vehicles, see Chapter 11.)

PEOPLE 30 TO 44: THE CLIMBERS

1. Get serious about cutting your spending and debt. This is the time of your life to break bad spending and debt habits. Otherwise you'll likely be stuck with them for life and you'll find yourself struggling to reach your financial goals.

2. Don't forget about insurance. It's easy to put off buying life and disability insurance. Don't.You want to be certain that if something happens to you, the people you care most about won't be hurt financially.

3. Pump up your savings for your retirement and your children's college education. Check out tax-sheltered plans for both in Chapters 10 and 11.

PEOPLE 45 TO 54: THE PEAK EARNERS

1. Don't let looming college bills prevent you from saving for retirement. When tuition payments approach, it's easy to decide to forgo contributions to employer-sponsored retirement savings plans-such as your 401(k) or 403(b)- IRAs, and Keoghs. That would be a mistake, however. Borrow more for college, if you must. But you need to look out for yourself as well as your kids.

2. Meet with your aging parents to discuss their finances. Your parents may need some help with the likes of investing wisely, dealing with Medicare or Social Security, holding down medical bills, or simply making ends meet.You may even want to try to save a bit for their potential nursing home bills.

PEOPLE 55 TO 64: THE PRE-RETIREES

1. Meet with a financial adviser to discuss how to handle a pension and 401(k) or 403(b) payout. You might want to take all the money at once. Or, you might prefer to get the pension in monthly installments for the rest of your life. Whichever way you go, there will be tax and investment implications.

2. Make sure you're clear about IRA withdrawal rules. Although recent laws have made this process a lot less complicated, you'll still want a pro to help you work out the details.

3. Wise up about Social Security, particularly as you approach 60. You'll need to decide when to start getting your first checks. Plus, you should determine how much of your benefits will be taxable and whether income you earn in retirement might reduce the size of your Social Security checks.

PEOPLE 65 AND UP: THE RETIREDS

1. Focus on preserving your assets and preventing them from losing value to inflation. That means keeping about half of your investments in stocks or mutual funds that buy stocks.You can put the rest in safe bonds, mutual funds that buy bonds, or the bank.

2. Don't buy a home for retirement in another part of the country until you've fully checked out the area. It's smart to rent for a year or so before you buy.That way you'll have time to see whether you like the climate, the setting, the people, and the attractions.

Setting Your Financial Goals

No matter how old you are or how much you make, you'll want to zero in on the key financial goals you hope to achieve. Too often, people have just vague notions about what they want financially. Their goals are things like "I want to have a lot of money." Or "I don't want to die poor." Or "I want to be comfortable." Or "I want mutual funds that will go up." Trouble is, these goals are too squishy to help you much.

Instead, you ought to get more precise and decide exactly what it is you want to have and when you want to have it. For instance, your goal might be "I want to be able to retire at 65 and live as well as I did before retirement." Or "I want to buy a house in my city within three years."Or "I want to have enough saved to pay for 75% of my son's college education when he is a freshman."

The best way to make the right goals is to figure out what's important, what isn't, and when you want to achieve your goals. Once you've placed priorities on your financial goals, you can start adopting appropriate strategies to hit your marks. For example, if reducing debt is much more important to you now than goals requiring you to save and invest-such as buying a house or financing education-you'll want to focus on your credit cards and loan payments. If you've been negligent in properly insuring yourself and your family, you'll want to make that a top priority and concentrate on building up protection.

Similarly, it's crucial to divide your goals into short-term, medium-term, and longterm commitments. That will help you see how quickly you need to work. For instance, if you have teenagers, paying for college is a short-term goal. So you'll need to find ways to increase your savings, borrow wisely, find scholarship or grant money, or some combination of all of these.

Complete the following two worksheets by checking off the appropriate money goals and you'll get a clear idea of both your true financial goals and your timetable for reaching them.

After you've created these master goal lists, remember to return to them from time to time. After all, your goals may change, or-with any luck-you'll be able to cross some off your list over time. At the very least, draw up new goals worksheets once a year. Be certain to make revisions when you have dramatic life changes, such as the birth of a child, a marriage, a divorce, a new job, a layoff, a move, or the purchase of a home.

YOUR FINANCIAL-PLANNING CHECKLIST

One last way to get a read on how you're doing financially: a financial-planning checklist. This one was prepared by the Consumer Financial Education Foundation. Circle the YES or NO answer for each and see how you score when you finish:

1.	Are you saving money?	YES	NO
2.	Do you know how much you spend each month?	YES	NO
3.	Do you pay all of your bills each month on time?	YES	NO
4.	Is your net worth improving over time?	YES	NO
5.	Do you have a satisfactory credit rating?	YES	NO
6.	Do you have enough life insurance?	YES	NO
7.	Do you have adequate medical coverage?	YES	NO
8.	Do you carry disability income insurance?	YES	NO
9.	Are your investments diversified?	YES	NO
10.	Do you invest according to your own tolerance for risk?	YES	NO
11.	Do you have a growth component (such as stocks or stock mutual funds) in your investment portfolio?	YES	NO
12.	Do you rely on financial information from an objective source?	YES	NO
13.	Do you learn as much as you can before you invest?	YES	NO
14.	Do you review your investments regularly?	YES	NO
15.	Do you take taxes into account when you spend and invest?	YES	NO
16.	Do you file tax returns on time?	YES	NO
17.	Do you know how much money you'll need to live on when you retire?	YES	NO
18.	Do you know how much you'll receive in Social Security benefits when you retire?	YES	NO
19.	Do you contribute the maximum amount you are allowed to your employer's 401(k) or other pension plan?	YES	NO
20.	Do you know how much you'll need in personal savings to fund a comfortable retirement?	YES	NO
21.	Do you have a will?	YES	NO
22.	Have you considered ways to minimize estate taxes that may be due on your death?	YES	NO
23.	Do you have a secure (hopefully fireproof) file for your important documents?	YES	NO
24.	Have you recorded the location of all your assets?	YES	NO
25.	Have you prepared advance directives such as a durable power of attorney, living will, and health care proxy?	YES	NO

Score (one point for each YES):

20-25 points: You have taken solid steps toward establishing financial security.

15-19 points: You have begun the journey to financial stability-continue and focus.

Less than 15 points: You need to take control of your financial life.

No matter what you scored the New Money Book of Personal Finance will help you improve in all of the areas covered in this checklist.

Copyright © 1996, 2002 by MONEY Magazine

About the Author

Money is America's most popular personal finance magazine. Taken from America's best-known magazines, Time Inc. Audio continues its exciting series of audio programs that explore current events and important topics of the day, presenting them in a multiple voice format.