It bears repeating…

Related:
* Are You Financially Illiterate?
* What’s the Best Money Advice You’ve Received?

Let’s pause in our back to basics series to consider the power of baby steps. Are yours big enough?

You might not consider “baby steps” a milestone on the path to budgeting, investing, and saving. But, consider how many people give up on budgeting, investing, or saving. They claim it is too difficult, intimidating, or impossible. They give up.

Here’s the secret: small actions DO make a difference. Consider this example from “Eight Steps to Seven Figures” by Charles Carlson:

If you were to improve just .003 each day—that’s only three tenths of 1 percent, a very slight edge—and you kept that up for the next five years, here’s what would happen to you:

The first year you would improve 100 percent.
The second year you would improve 200 percent.
The third year you would improve 400 percent.
The fourth year you would be a better person by 800 percent.
By the end of year five—simply by improving three tenths of 1 percent a day—you will have magnified your value, your skills, and the results you accomplish 1,600 percent.

Yes, there is a financial parallel. Carlson provides an example which I’ll boil down to these two hypothetical situations:

Situation A
Invest $95/month
Annual return: 11.4%
Holding period: 20 years
Total amount at the end: $87,544

Situation B
Invest $100/month (just $5 more than Situation A)
Annual return: 11.5% (just 0.1% more than Situation A)
Holding period: 25 years (just 5 more than Situation A)
Total amount at the end: $173,659

The reward for those baby steps? $86,115.

Do not be discouraged by small amounts. Whatever small changes you’re making will add up. Keep making these small steps. They do add up!

How to Give Yourself a Second Stimulus Check
By Mellissa Seecharan | MainStreet.com

OK, who is up for more government gravy in the form a second stimulus check? We thought so. Of course the Yea’s that really matter might not get the deal done in timely manner, if ever.

In an attempt to bring the country out of its economic rut, Senate Majority Leader Harry Reid (D - Nev.) recently proposed a second stimulus check package. (Even candidate Barack Obama is in favor of cutting more government checks: He’s been detailing a $50 billion plan.) The trouble? Congress begins their recess August 8, and there are a stack of other issues that need to be dealt with first, leaving the potential stimulus check in limbo.

So instead of waiting around for Congress to pass another stimulus package, why not create your own stimulus check? Now is the perfect time to start saving and Consumer Reports gives MainStreet the lowdown on how you will be able to write yourself a $600 check by Labor Day.

Eat Smarter

Sometimes foregoing certain items can be hard, but it means a few extra dollars will be saved. Consider choosing generic over name brand. It’s the lower-cost brands that, according to the Department of Agriculture, can save a family of four an extra $190 during monthly trips to the supermarket. Need to save another $30 to $60? Cut back on eating out. Consumer Reports also recommends taking advantage of off-hour discounts and prix-fixed meals (and always ask for a doggy bag). Amount saved: $250.

Update Your Life Insurance

With life-insurance premiums decreasing, if you bought your policy way back in the 1990s, it’s time for a change. Example: A healthy 50-year-old would have paid $2,125 for a $500,000 20-year policy from Prudential (PRU) in 1998. Today, a 60-year-old man could pay $1,385 over the next 10 years. Not comfortable with getting a new policy? Then get healthy. It’s no secret the healthier you are the lower your premium will be, so get fit before purchasing a new policy. And if you are shopping for another policy, Consumer Reports suggests checking out www.accuquote.com and www.lifeinsurance.com. Amount saved: $110.

Re-Examine Your Car Insurance

Lots of factors determine how little or how much you pay for car insurance. A New Yorker’s insurance payment will vary from a Montana car owner, which makes shopping around for a new policy even more important. Compare premium quotes online by visiting sites like www.insweb.com or www.insurance.com. If you can’t find quotes in your state, then pick up the phone and call you local insurance branch. Amount saved: $65.

BBQ Cheaper with Charcoal

It’s summer time, which means barbecues are in full use. And with gas prices on the rise, the cost to fill up a propane tank is getting expensive. In short, it’s time to cut back on your grilling, or at least switch to cheaper charcoal. It costs around $30 to fill up a BBQ tank, depending on the size - tanks range in size from 5lbs to 20lbs. Filling only half of your tank will cut your propane expense in half. Websites like www.nextag.com and the Home Depot (HD) offer consumers BBQ tank help. Amount saved: $15.

Phase Out ATM Fees

Last year, banks collected $39 billion in account fees and penalties, according to the Federal Deposit Insurance Corp. Meanwhile, the American Bankers Association reports that 52% of consumers don’t pay a fee. Now for those stuck paying at least $28 per month, per household, Consumer Reports suggests using a large bank with lots of ATMs and shopping for “free checking and strictly adhere to provisions for a minimum balance.” Amount saved: $25.

Figure Out Your Phone Situation

Cell phones, pagers, landlines and phone cards cost the average family $90 a month. When shopping for phone service, check out everything from service providers to long distance carriers to your cable TV company. Consumer Reports editors warn cell phone users to manage their minutes: “Don’t buy more than you need if you rarely go over 900 minutes per month.” Amount saved: $35.

Make an Easy Tax-Friendly Fix

Retirement will be a lot sweeter if you up the amount of your current 401(k) contribution. Not to mention, the amount paid on your income tax will be cut. How does it work? If you put $500 into a 401(k), there will be a $50 to $175 reduction on your federal tax income, which of course, depends on your tax bracket. And what should you do now? “Invest your tax savings or use them to offset rising prices elsewhere.” Hello stimulus! Amount saved: $100.

Total Savings: $600.

(And you can save another forty-one cents if you don’t feel the need to mail yourself the check. Happy saving!)

Related:
* How the Tax Stimulus Can Stimulate Your Travel Plans
* Retailers Want Your Stimulus Check! Here’s a List of Five Big Store Deals
* Don’t Fall Victim to A Stimulus Check Scam

Word!
—
Jim Cramer: If I Were You, I’d Buy Stocks Now
by Jim Cramer | MainStreet.com

When I got started buying stocks in the late 1970s, people were incredibly negative about the stock market. Most had decided that the market was never going to come back.

It had been years since people made money, or at least it seemed so, and the Dow Jones Average was something that nobody talked about because it never did anything. It couldn’t. Business was too horrible, but more important, the darned stock market was just despised.

Well, I liked being contrary and I started buying. Why not? Stocks have been a great long-term asset.

And what happened?

I was early. A couple of years early!

But you know what? It was a total homerun in two years time. And I lost next to nothing in the interim, because stocks were so hated no one cared.

I always thought if I could ever get into the game again when stocks are that hated, then I would be thrilled.

Right now, stocks are that hated. How do I know? Because each week an organization, Investors Intelligence, polls important market letter writers – gurus — and asks them how they feel about stocks. Usually about half of the people like stocks — 50% bulls. That’s too many bulls. Not enough people who don’t like stocks to convert them into stock buyers.

Sometimes 55 % of the gurus like stocks. That’s just a danger zone. You have to sell and sell hard.

And then, on rare occasion, the percent of bulls falls to the low 30s. That means way too many people hate stocks, and you can buy without that much worry because so many people dislike the market. A number that small shows there are too many bears. Not enough people in; way too many out.

Right now, the new reading is 27% bulls. That’s the fewest number of bulls since 1994! Astounding. Fourteen years since this many people hated the market. And look at the run we had within a year after the negativity of 1994. Notice I didn’t say “beginning right then.” Like when I got involved when everyone hated the market, the market stayed hated for some time.

But then it exploded upward.

When I saw the latest number, 27% bulls, I said to myself: I wish I didn’t have a daily show that appeals to everyone who is in the market. I need to find people who have never been in or never got started or never bought a stock or never made a contribution to a 401(k) or an IRA. Those are the people who need to start and start now.

This number of bears is a clarion call, a total wakeup moment for those who are new, or young, or never been in. The call is this: “I am not calling a bottom, I am saying that when you buy when stocks are this hated and you stash them away, you will be rewarded.”

Most people reading this do not have the time or the inclination to research individual stocks. And around the globe markets are under pressure.

My suggestion? Great time to buy one of the mutual funds I recommend in my book Stay Mad for Life. They are all battle-tested for crummy markets. Or, for those who really want autopilot, Vanguard — where I keep my money — just launched a worldwide fund that buys stocks all over the globe. Given that things are bad all over, this might be another opportunity.

There are NO “no brainers” in this business. There are indices of sentiment that have never truly betrayed us. When everyone hates ‘em, find something to love. Main Street has turned on Wall Street. Walk the other way and take the turn to Wall Street.

But don’t count on the road being straight up.

Just remember though, it has ALREADY been straight down. No one can ever accuse you of getting in at the high!

How do we plan for our financial future? This series covers the basics. These “basics” work in symphony. Take the time to consider each “basic” carefully to craft a financial plan that is right for you.

Now for the nitty-gritty — how do you save for a specific goal?

Name Your Goal

First and foremost you must write out a specific goal and amount. Examples: “My trip to Ghana - $1,400″, “Buy a new dishwasher - $800″, “Save for retirement in 2040 - $1M”. We’ve discussed this before because naming your goals is very powerful. And, one of the benefits of using Geezeo is that it gives you a forum to do just that. You can state your exact goal and exact dollar amount.

Estimate How Much You’ll Need

If the goal is the purchase of something physical it’s pretty easy to set the dollar amount. If saving for something less concrete (”Save for my retirement”), it’s critical that you attach a vague goal to a specific amount. The amount can always change, but, tying your goal to a specific amount helps you make laser-focus decisions. For example, use online calculators to put a specific dollar amount on you retirement goals.

Know Your Rate of Return on the “Saved” Money

The interest rate is easy to discover. The tricky part is to determine if your rate of return breaks even.

Keep Your Time Horizon in Mind

Do you need money for this goal in the next six months, or in 35 years? Will this goal be accomplished with one lump sum that earns interest, or, regular smaller investments? If you’ll need regular smaller investments, how much interest are you expecting to earn and will that outpace inflation (a concern for longer time horizons)?

Determine Your Contribution

This can be as simple as moving $10/week into your “New Dishwasher” goal. Or, as simple as “paying yourself first” and taking the first 10% of your pay into savings. Here’s my personal trick: I set a certain percentage each pay period for “savings”. From there I divide my “savings” pool into specific goals. Each goal has it’s own account. These range from somewhat immediate to long term. The only rule is that I can’t transfer between savings accounts. Works for me.

Put Your Plan in Action

It’s frequently said that money you don’t see you won’t spend. One of the easiest ways to save for short- or long-term goals is to have it electronically routed away from each paycheck. This also works if you are paid in irregular, lump sums. You might find the separate sub-accounts method mentioned above helpful.

That’s it! Set your sight on a specific goal and formulate a path to get there. It’s simple, but it’s not always easy. Practice makes perfect goal-reaching habits. Good luck!

More. That’s the short answer to “How much should I be saving for retirement?” You could immediately tell me if you are able to break-dance. Could you immediately tell me your break-even savings rate?

Most of us have heard the doom and gloom surrounding the pitiful national savings rate, disappearance of pensions, and evaporating supplemental Social Security payments. Let’s not even mention the changing job environment and our national attachment to easy credit (and its damaging effects on long-term financial security)…

Naturally the question turns to what measures an individual can do to prepare for the future. Answer: save and invest more than you are currently, and assume you can do better. Refer to this Geezeo article and calculator if you’re wondering exactly how much you should be saving for your retirement.

An important part of retirement planning is to figure out your “Break-Even Rate of Return”. To get ahead you must earn more than the amount lost through inflation and taxes.

Here’s a net return on $100. The conditions are:

5% interest earnings
4% inflation, and
a 35% tax bracket (that’s 28% federal + 7% state).

The following example comes from the book “Left-Brain Finance for Right-Brain People” (268):

If $100 earns 5% interest, at the end of the year it is worth $105. That $5 is fully taxed. In the 35% tax bracket you will pay $1.75, which leaves a net earning of $3.25, or a total of $103.25. The 4% inflation rate then reduces the purchasing power of $103.25 to $99.12. In other words, the $100 that grew by $5.00 in one year is worth $99 at year’s end after inflation and taxes take their bite.

Your dollars shrink every year that they don’t break even.

Here’s the formula to figure out your break-even rate of return:

Inflation Rate
————————
(100) - (Tax Bracket) = Break-Even Rate of Return

A standard rule of thumb: you need to receive a net 2% return after inflation and taxes. That means 2% ABOVE your break-even rate of return.

If you think the above break-dance move looks painful or impossible… think about the fiscal moves you’ll be forced to make when you’re old and gray if you don’t start saving and investing NOW.

Yesterday in our “back to basics” series we focused on how to gain an overview of your financial health. We also explored why knowing your top three financial goals is critical to your success. Today we climb the so-called “Risk Pyramid” and highlight five investment purposes.

Like the U.S.D.A.’s Food Pyramid, a personal finance “Risk Pyramid” is open to debate and interpretation. Still, it’s handy to know what the experts recommend. I take this overview from Paula Ann Monroe’s excellent book, “Left-Brain Finance for Right-Brain People”, (Chapter 6).

Here’s the structure of Monroe’s version of a Personal Finance Risk Pyramid:

Foundation - Shore Up The Basics:
Property, Casualty, Liability Insurance (to protect your assets)
Healthy and Disability Insurance (to protect your health and also your income-earning potential)
Life Insurance
Emergency Fund (I like to call this the “Emergency Prevention Fund”)
Personal Residence
Specific Savings Goal or College Fund
Retirement Plans

Income
Bonds and Government Securities
Income Mutual Funds and Blue Chip Stocks

Growth and Income
Rental Real Estate
Mutual Funds and Limited Partnerships

Growth
Common stocks and Growth Mutual Funds
Growth Limited Partnerships (e.g., movie rights, commercial real estate), Hard Assets, (e.g., works of art, precious metals) and Land (you know what land is…)

So, from bottom (basics) to top (growth) these are the financial components that make up your personal finance “risk pyramid”. As you move toward the top the investments have more associated risk.

Yes, owning empty land is one form of “risky”. This is one example where folks disagree on risk pyramid structure. Sure, they aren’t making more empty land. Unlike other investments, land value is associated with uncontrolled nearby conditions. In contrast, an asset on that land (like a home) could always be sold off or insured for financial protection against an unforeseen event.

How do you evaluate all these different investments? It breaks down like this: look at each asset in the pyramid on these criteria. Compare what you find to your goals, your tolerance for risk, and your specific situation. Here are the things to consider:

Safety
Liquidity
Income
Tax Advantages
Growth Potential

If you’re a beginner, focus on strengthening the base of your financial risk pyramid. Educate yourself and get professional opinions before attempting more sophisticated investment strategies. Use Geezeo’s tools and social resources to make more informed choices.

Finally, and the most important: finding purpose in your investments is a head and heart activity. Use your head to evaluate and implement your investment strategy. Use your heart to determine why you want to improve your financial situation. Incorporate giving to others as part of your strategy and you’ll find true purpose to stay financially fit.

Climb that pyramid!

How do you check your financial health? Today we’ll continue our series on “the basics” and discuss what you need to do to get an overview of your “financial fitness”.

Why Should I Take a Financial Inventory?

Let’s face it: motivation is key. If you are vague about your starting point (e.g., “I know I’m in debt, but God knows how much!”), it is highly unlikely you’ll swiftly reach any financial goal — even a small one.

Think about your top three financial goals. Can you name them right now? If not, chances are good you’re not maximizing your resources. As a result you might never reach your financial goals.

Here’s a personal example. My top three financial goals were: paying off my college loans, saving for retirement, and purchasing my first home. Once I was able to passionately get behind all three “end game” goals I could find the discipline to save and invest accordingly. I’m happy to report that I’ve purchased my first home and am now re-adjusting my “top three” goals. That’s the power of taking and monitoring a financial inventory.

How Do I Figure Out My Financial Inventory?

First, you must answer these three questions.
1 - How much do I earn?
2 - How much do I spend?
3 - What do I own, versus what do I owe?

Next, you’ll use two tools - they are power tools that don’t require protective gear.
1 - A cash flow statement
2 - A net worth statement
Don’t be scared!

Figuring out your Cash Flow. This compares the money you earn to the money you spend. The simplest way to do this is to make a list of every regular monthly expense you have. Yes, I know some expenses vary. Focus on the firm expenses first and then use a budget to determine your flexibility in areas that fluctuate.

Use Geezeo’s Budget tools to get an accurate look at your cash flow. Geezeo’s Spending Targets will change from green to yellow to red to let you know when you’re approaching trouble. On paper spend down your entire inflow of cash so you can direct your cash toward your top three goals.

Figuring out your Net Worth. You can do this the old-fashioned way by making a list with two columns. On one side list all of your assets. On the other list all your debts owed. Tally both columns and determine if your net worth is positive or negative. Or you can do this the hands-off way: you can see and track your net worth over time in your Geezeo Dashboard.

The point is: track your net worth because it keeps your “eye on the prize”. It’s motivation. Tomorrow we’ll discuss how to know what you want to achieve with your money. Good luck!

Related
* Stock Cash Flow 101
* Why the Statement of Cash Flow Matters
* Investing: Getting Started with Discounted Cash Flows

How does money vanish? Let us count the ways…Number one on the list — something that will get us all — is inflation.

Do you know how much a gallon of gasoline cost in 1962? Take a guess. Ready?

A gallon of gasoline cost 31 cents. Seventeen years later, in 1979, that same gallon of gas cost 79 cents. By 1997 that gallon cost $1.39. (Source: Left-Brain Finance for Right-Brain People, 41-42) Compared to today that all sounds remarkably inexpensive.

Here’s the rub: someday we’ll look back at today’s prices and think, “Gee, gas was at least reasonably priced!”.

The best laid financial plan can be ruined if inflation is not taken into consideration. Inflation is a slow and constant erosion on your purchasing power.

What is Inflation?

Inflation is rising prices due to increased spending of cash or credit. When prices rise but our production of goods and services (GNP) does not, inflation results.

Like inflammation in the body, it can grow, spread, and cause damage to the economy.

What Causes Inflation?

Any time more money buys the same supply, prices go up. Consequently, the dollar loses purchasing power.

To use a body analogy again: inflation is like inflammation around damaged cells or an infection. It is a reaction to an unwanted condition. Just like the body routinely fits inflammation with the aging process, the economy fights inflation as a naturally-occurring economic process.

Why Inflation Won’t End

We can’t stop inflation; we can only slow it down. Inflation compounds just like interest. For example, if inflation is 4% year (low), that still means prices will double every 18 years.

Inflation Isn’t All Bad

Inflation hurts those on fixed incomes. It can also diminish the value of your money.

Some ways inflation is good:

1. When inflation is high, debtors win and creditor lose. (Yay!) That’s because each year the debtor pays money back on a fixed loan, he’s repaying in dollars that have declined in value.

2. Sometimes inflation can help create wealth. In the past stocks and real estate have been excellent inflation hedges. It’s possible to earn enough with these investments to outpace inflation.

Bottom Line on Inflation

It’s your challenge to be on guard against inflation and plan accordingly. If not, you’ll see your purchasing power diminish and your savings decrease. Don’t put yourself in a position of having a fixed income in an economy where prices keep rising.

Related:
* Even Mild Inflation is Something to Fear
* Don’t Let Inflation and Taxes Erode Your Savings
* Make Sure Your Investments Beat Inflation

If your knees still work and your eyesight isn’t terrible, it’s hard to imagine what life will be like for you in twenty, thirty, or more years.

I asked Zelda the Fantastic, Geezeo’s crystal-ball gazing, tarot-card reading, financial forecaster. She’s seen your future and here’s the big news: You’ll be just like today, but OLDER.

Can you afford most of the pleasures you enjoy now? What about later when you can’t (or don’t want to!) work as hard? Wouldn’t it be easier, and more delicious to enjoy your golden years if you had more funds available?

Or — and here’s a bad scenario — do you want to find yourself looking back on your “younger years” and wishing only for the simple pleasures of a roof over your head and food on your table?

The best time to invest in your retirement was yesterday. The next best time to prepare is TODAY.

How to start:
Think of all the things you’d like to do before you die. Yes, I know that’s a big list. But you gotta think end-game, here. Still yearn to travel to India? You can do this in retirement if you’re still healthy. Want to have enough to cover expenses and travel with grand kids? You might even want a few more tattoos. Again: start with the end in mind. Plan with your passions in mind. It will help motivate you to stick to your plan.

What to invest in:
401(k) or 403(b) - These plans are offered by some employers; invest at least enough to get the company matching funds (if any!). Remember: There are limits to the amount you can save each year. These may not be enough to fulfill your hedonistic retirement plans in the future so a 401(k) should be a starting point, not the only plan. Also, cashing out earlier than age 59-1/2 will force you to pay a lot of penalties.

HOW TO: Set it up so that money from each paycheck goes to funding your 401(k). If you don’t see it, you won’t spend it.

SEP IRA or Keogh plan - If you are self-employed there are many benefits to these plans. For starters, you can save a larger percentage of your pay than as an employee. Remember: if you have employees, there are rules regarding how much compensation you can give yourself without also contributing to your employees’ retirements.

HOW TO: Speak to a certified, fee-only financial planner. Fee-only planners do not make a commission off financial instruments they recommend. They can give you a less biased recommendation on planning your financial future.

Roth IRAs and Traditional IRAs
After you’ve maxed out any employer’s 401(k) or similar, turn your attention to funding personal IRAs. These also have saving limits but benefit from tax-deferred growth. See this list of the best order in which to invest your dollars.

Other Investments
Retirement funding should come from a variety of sources to ensure stability. You might supplement plans above with additional savings accounts, cds, money market funds, bonds, or similar.

REMEMBER: All of these plans can work concurrently based on your past and present work arrangements. Planning for retirement is just one of several cornerstones to a healthy (and maybe even hedonistic) financial life. Start by committing to a putting away a certain percentage of your money every pay period.

The choice is yours and you make it today.

RELATED: What Your Retirement Portfolio Needs Now.