Done To Zen

As I mentioned previously, one of my goals for 2009 is to earn $24,000 in side income; it’s also the hardest of all my goals. I spent a couple of hours today trying to figure out how to motivate myself in this area. It’s hard to motivate yourself to work an extra 10 - 40 hours every week and face whatever fears are holding you (me) back when your goal with the money is to invest it. Invest it for what? “Financial freedom” is one goal but it’s not enough to make me want to put in all those extra hours.

I instead decided to invest my side income for various big purchases I anticipate having to make over the next 10 years. Some of them are fun-related (such as a vacation to wherever) while others are huge expenses that I am certain to incur (for example, downpayment on a home I will buy with my husband).

As I was working on my long-term plan, I came across this article at Get Rich Slowly on purpose-driven investment:

Traditionally, most people invested for various vague goals and lumped all of their savings together in a single investment account. That’s pretty boring. It’s not very inspiring or effective.

Purpose-Driven Investing satisfies our need for a purpose and our need for instant gratification by thinking of each of our goals as a separate “basket”. Each of our baskets represents a single goal with a clear purpose that we can see and grow.

What does this mean in the real world? It means that we have a single investment account for every goal. For example, if one of your goals is to take the family on a European vacation, create a separate savings account called “Family European Vacation Fund”. This account or basket contains all of your savings toward that one goal. Every penny in the account is for the European vacation — not for retirement, a new car, your emergency fund, your kids’ college tuition, or any other goal. What was once just a plain investment account is now a dream — a real goal you are committed to achieving. Account statements have been transformed from boring pieces of paper into exciting treasure maps!

(Quoted from The Six Day Financial Makeover by Robert Pagliarini)

Purpose-driven investment is making a conscious decision on where to spend your money. That’s right — the decision isn’t so much on how much to save as it’s on where to spend the savings.

In the end, you and I aren’t pinching pennies and saving money to die with $15 million in the bank account. What’s the point if you have $5 million in retirement accounts but look back at the previous 60 years and end up regretting what you never did?

We save because we want to enjoy life to the fullest extent possible. This means being ruthless with unwanted expenditures and lavish with ones that we want. The reason we save is so that we don’t go into debt and stress out about the payments.

Whatever investment you make should have purpose behind it: investments into 401K and IRAs are to let you live comfortably in retirement while the purpose of your emergency fund is to save you in case of emergenices. Simiarly, every other investment should also have a purpose attached to it. Is it for a downpayment? Is it for college? Is it for a vacation? What?

Having finished mapping out where exactly each of the $24,000 will go (yes, this unfortunately includes taxes), I’m 300% more motivated to accomplish this goal than I was just three hours ago.

squawkfox asks the question what were your 3 worst financial decisions.

1. I bought a house that is too big: I forgot to enter in all the additional costs of owning a house (property taxes, HOA dues, water, Internet, gas, electricity, etc). I calculated only what I would have to pay in mortgage (well, mortgage and property taxes) when determining if I can afford the house. Unfortunately, what house you choose is a mistake that you can’t fix easily. I do have a silver lining: I got the house for a great deal: I think I will be able to sell it for at least that amount (the “fair” market value) once the housing market starts to pick up again.

2. Investing in a bad mutual fund: I opened a Traditional IRA account with a bad mutual fund whose expenses and fees are absolutely killing the money in there. This particular mutual fund, my friends, not only has an expense ratio of over 1%, it also has a front-end load of around 2% (a front-end load is money you pay the brokerage firm every time you make a purchase). Right now, I have only half the money that I had invested just last year. I’m waiting until I get back to the 2007-levels so I can roll it over into a Roth IRA that I hold with Vanguard.

3. ??? I can’t think of another big mistake…maybe procrastination? I had known about IRAs and 401Ks since I was 18 but let inertia stop me from investing in them. But I was still saving all the money (that would have gone to these accounts), so I wasn’t completely hopeless. I’m actively working to get rid of this habit so I don’t end up regretting not taking good opportunities that presented themselves in the past.

What about you? What were your three biggest financial mistakes?

Found at Yahoo via Free Money Finance.

1. You care what your neighbors think. No.
2. You are not patient. Indeed. I want everything by yesterday.
3. You have bad habits. Perfectionist by day and procrastinator by night, that’s me.
4. You don’t have goals. No.
5. You aren’t prepared. For alien invasion, no.
6. You’re trying to make a quick buck. No.
7. You rely on others to handle your money. No, I’m a control freak.
8. You invest in things you don’t understand. Not really, but I’m tempted to.
9. You are financially afraid. No.
10. You ignore your finances. No.
11. You care what your car looks like. I hate cars. ;-)
12. You feel entitlement. A little.
13. You lack diversification. Maybe.
14. You started too late. No.
15. You don’t do what you enjoy. Not really.
16. You don’t like to learn. No, I love learning.
17. You buy things you don’t use. A little.
18. You don’t understand value. I do.
19. Your house is too big. Yes. :-(
20. You fail to take advantage of opportunities. Nope.

Overall, I don’t think I’m doing too bad. How about you?

PT Money asks what is the best financial advice you ever received?. It’s a hard question to answer, not because I haven’t received any financial advice in the past, but rather because it’s so hard to settle on any one advice as being the “best.” Every time I think about it, I seem to pick a completely different advice as the “best” advice.

Here are some of the choices (in no particular order):

1. Make savings automatic.
2. Contribute to Roth IRA.
3. Contribute to 401K.
4. Ask for a discount.
5. Do not use credit cards.
6. Buy a house you can afford.
7. Open an emergency fund.
8. Save early and save a lot.
9. Pay yourself first.

Of the nine, I think number 8 is the most important. $500 at age 60 requires an investment (with 8% return) of:

• $23 at age 20
• $50 at age 30
• $107 at age 40
• $233 at age 50
• $500 at age 60

It’s true that it’s never too late to start saving, but it’s a lot easier when you start early.

The second most important is probably number 1. I first read about this six years ago in The Automatic Millionaire (an excellent book that should be required reading for everyone in high school), and there’s no doubt in my mind that this is one of the best steps you can take to super-charge your savings. I am convinced that the weakest link in any savings plan I come up with is me, so taking myself out of the equation can only make things go better.

What do you think is the most important financial advice you ever received?

I’m very late in posting September’s net worth update, but I had to do some soul-searching regarding whether or not to post actual numbers on this site. Posting numbers feels wrong, somehow, but I really like seeing actual numbers when reading net worth updates on other personal finance blogs, so I decided that I would do the same.

Notes

1. Of the $6000 reduction in the emergency fund, $5000 isn’t really gone. I still have it; I’ll put it back into my emergency fund account (most of it, anyway) in about two weeks. The remaining $1000 went towards Roth IRA.

2. The money in the “Other” account is artificially high because I haven’t paid a couple of my bills yet.

3. It’s surprising to see that my 401K balance went up, considering the market conditions. On the other hand, if I had kept my 401K in cash, it would have gone up way more, so maybe it’s not so surprising.

4. I finally opened a Roth IRA account. :-)

5. Credit card debt is so high because I’m paying my tuition on my card. Until now, I’ve been paying for my classes in cash, but I couldn’t stomach emptying my emergency fund again, & therefore ended up getting a 0% APR card that I plan on paying off over the next 12 months. I’ll pay off the “Daily Use” credit card in full so I don’t have to pay any interest.

Overall, net worth went down significantly. Some of it is artificial, but even without the $5K loss, net worth would still have gone down due to the introduction of the student loans. At any rate, September has been a terrible month. However, October can only get better, even considering the stock market’s death rattle.