Megan Branch, Intern
David Bach is the best-selling author of the eight books in the Finish Rich series as
well as Fight for Your Money and The Automatic Millionaire. In his latest book, The Finish Rich Dictionary, Bach defines 1001 essential financial terms and provides 10 essays packed with financial advice ranging from skipping your morning latte to avoiding common money mistakes. Below, we’ve excerpted Bach’s steps for creating a financial plan that will really work.
Make sure your goals are based on your values. By identifying your top five values, you can then base your goals on them. The more you base your goals on your values, the more likely it is that you will achieve them. After all, can you think of anything better or more exciting around which to plan your spending and investing than the things that really matter to you? And what could matter more than the values by which you and your partner want to live and grow? Ideally, each of these top five values should lead you to a specific key goal. You’ll write down a value and then, right next to it, a related goal on which you want to focus your time and energy.
Make your goals specific, detailed, and with a finish line. Wanting something and getting it are two different things. In order to achieve a goal, you must know precisely what it is that you’re after. In other words, you need to take those vague ideas and thoughts you have about what sort of life you’d like and make them specific. Your goal could be to buy a dream house by a lake. Or it could be getting your credit card bills paid off over the next 12 months, going to Hawaii on a dream vacation sometime in the next two years, or cleaning out the house from top to bottom in the next three months.
Put your top five goals in writing. Study after study has shown that writing down your goals makes it much more likely that you’ll achieve them. Writing down goals does something to you subconsciously that often brings the goal to you. For one thing, writing down your goals helps you make them more specific. For another, it makes your goals seem more real to you.
Start taking action toward your goals within 48 hours. If you don’t get moving immediately toward your goal, even if only in a small way, chances are you’ll never get moving at all. Even if it will take years to achieve a particular goal, there are still things you can do to start moving toward that goal right away. And you can do it within the next 48 hours. By taking this sort of specific, immediate action, your goal becomes even more real to you and, thus, even more exciting.
Enlist help. There’s no such thing as a “self-made” person. No one ever reaches a really important goal without some sort of help from some other person. It’s important to share your dreams and goals with the people you love and trust, but it also doesn’t hurt to share them with strangers, too. You never know—the person you’re sitting next to at a dinner party or a lecture may be in the perfect position to help you make your dream a reality. If you keep your goals to yourself, you could miss your big chance.
Get a rough idea of how much it will cost to achieve your goals. You need to get a sense of what it will take in dollars and cents to achieve your various goals. This will enable you to do two things: (1) understand how realistic (or unrealistic) your goals may be, and (2) get yourself started on a systematic savings and investment plan to accumulate the money you’ll need to achieve them. Some goals will take almost no time to save for, and some goals may take a lot of time and investing to reach. Since it’s important to know which is which, part of creating a Purpose-Focused Financial Plan involves estimating how much money you think you will ultimately need to pay for your top five goals. So ask yourself, What is this goal going to cost? How much do I need to start putting aside each week or month to help me get there?
If you live with a partner, make sure your goals match both your values. What’s the point of being with someone if you don’t share your most intimate dreams and thoughts with them? If you’ve got kids, share your dreams with them, too. Ask them what they’d like to see the family doing over the next three years. Ask them about their values, and then work together on a family list of five things that you all want to accomplish together.
David Bach is the author of the best-selling Finish Rich series, and the latest is The Finish Rich Dictionary: 1001 Financial Words You Need To Know. Bach defines essential financial terms and provides 10 helpful essays with topics ranging from understanding a credit score to planning for retirement. In the excerpt below Bach explains why skipping your morning latte may be the key to future riches.
The Latte Factor is a concept that represents the amount that people spend every day on items such as a double nonfat latte, cigarettes, soft drinks, and candy bars, which they could instead save and invest for their future. If you purchased a $3.50 latte every day for a year, for example, you’d spend $1,260; over a decade, $12,600. If you invested that money at 10 percent over 10 years, you would wind up with $21,870.
You may wonder what good it will do to put aside a small fraction of your income, especially if your income isn’t very large to being with. But even if you earn what seems to you a modest salary, the amount of money that will pass through your hands during your lifetime is truly phenomenal. If you earn only $1,000 a month, for example, you will have made a total of $360,000 over the course of 30 years. If you earn $4,000 a month, you’ll make more than $1.4 million over 30 years.
So, even though you may not receive much in each paycheck, you’ll accumulate a substantial amount over time. And the sooner you start saving some of it, the less you’ll need to put away. That’s because of the magic of compound interest.
Albert Einstein called compound interest “the greatest mathematical discovery of all time.” That’s because compound interest helps you earn more money not only on your own hard-earned savings, but also on the interest your saving accumulate. In the first year, for example, you earn interest on your initial investment. The next year, you earn interest not only on your investment, but also on the interest that you’ve already earned.
Compound interest has all sorts of implications for saving money. For one thing, if favors people who start saving at an early age. If you start at the age of 25 to save $100 a month, and it earns interest at a rate of 4 percent, you’ll accumulate $118,590 by the time you turn 65. If you wait till you’re 40, you’ll accumulate only $51,584…
Think about what you bought today that you could do without and start saving a few dollars. It might be something that you’re in the habit of buying every day, like two double nonfat lattes and a couple of nonfat muffins. If you cut these out of your daily spending tomorrow, how much money wold you save a day? How much would it save you in a month? This is your personal Latte Factor, and it can quickly add up to a lot of money…
Remember-the combined power of the Latte Factor and the miracle of compound interest is truly amazing. The only thing that can short-circuit it is the all-too-human tendency to procrastinate. Too many people put off doing what they know they should, and as a result, these two powerful tools never get the chance to work for them. Don’t make this mistake.
Megan Branch, Publicity Intern
David Bach is the best-selling author of the eight books in the Finish Rich 
series as well as Fight for Your Money and The Automatic Millionaire. In the latest book in the Finish Rich series, The Finish Rich Dictionary, Bach defines 1001 essential financial terms and provides 10 helpful essays with topics ranging from understanding a credit score to planning for retirement. Below we have excerpted five of Bach’s ten most interesting money mistakes people make.
Mistake #1: Having a 30-year mortgage.
A typical 30-year mortgage at 8 percent inflates the real cost of a $250,000 home to more that $666,000. If you paid off your mortgage in 15 years, the total cost of your house would come to just under $493,000. That’s nearly $168,000 less than it would have been with a 30-year mortgage.
Make a small extra payment each month or fork over a larger lump sum at the end of the year. By making an extra 10-percent payment each month and then adding an extra month’s payment at the end of the year, for example, you can pay off your 30-year mortgage in about 18 years.
Mistake #2: Waiting to buy a house.
When you own your own home, you are building equity for yourself. When you rent, you are building someone else’s equity.
The number-one reason people put off buying a home is because they think they can’t afford it. But you don’t need tens of thousands of dollars in the bank for a down payment. All lenders will provide 75 percent of the purchase price of your house or condominium, and many banks will lend as much as 95 percent.
You can probably get a substantial home for the equivalent of your current rental payment. Say you pay $2,000 a month in rent. For that kind of money, you could get a $250,000 mortgage. In most of the country, $250,000 can buy you a lot of house.
Mistake #3: Putting Off Saving for Retirement
Almost 95 percent of Americans age 65 or older have an income of less than $25,000 a year. That means only 5 percent of us are in a position of financial security, much less comfort, when we reach our so-called golden years.
The best way to get started saving for retirement is to arrange to have your monthly contribution either deducted directly from your paycheck or automatically transferred from your checking account each month. If you’re not yet using your retirement account at work, go in to the office and sign up for your plan today. Make it a goal to save 10 percent or more of your gross income. If you can’t imagine saving 10 percent, start with 3 percent and make it a goal to increase that amount by a small percentage every month (you’ll barely feel it). By the end of the year, you’ll be contributing the maximum allowable amount to your retirement account at work.
Mistake #4: Paying too much in taxes.
When you are building an investment portfolio, it is absolutely imperative that you take into consideration your potential tax liability. Financial advisers call this “looking for the real rate of return.” The more you seek to minimize your taxes when investing, the more money you’ll keep. Start by making it a goal to fully invest in your 401(k) plan or retirement plan at work. No plan at work? Make sure you use an IRA account. Once you’ve maxed out your retirement accounts, look to investments that grow tax-free (like tax-free bonds).
Mistake #5: Giving Up.
People often make a financial mistake, get bad advice, and then give up on their dream of financial security. Don’t let this happen to you.
Yes, you should be careful, but don’t become overcautious. By learning to avoid the common pitfalls investors make, you can minimize your risk and put yourself on the road to financial security. The biggest mistake you can make is to not become an investor.
Everyone should learn financial planning, even if they hire someone to make sure they stay on right path. Financial planners won’t always be there for you, meaning you need some level of an in-depth understanding of finance.
Financial illiteracy is dangerous.