What do you do with extra money that you weren’t expecting? I had a side project come up that will be giving me some extra revenue and I’ve been pondering how that many should be used. There are a few areas that this money could go to and I wanted to publicly explore those different areas and 1) lay out some ideas and 2) get some feedback from folks to see what your inclination would be.

Add It to the Planned Budget

This would definitely pay off some debts that I have incurred (and am attempting to pay off rapidly) and it would allow us to invest money to our gain later on. This would mean less free money now, but more free money later. By free I mean not in bondage to the debt, not free as in unearned. This plan could mean using money for earning interest in investments later due to not having debt later.

Spend It on Something that is Currently Outside of our Budget

This plan would be fun for the short term. Its not a bad plan if you have a system in place and a budget that should achieve your financial goals. This plan may be the new television, the fun vacation or the spinner rims that you wanted (not really). If I had money to burn I might buy some musical instruments, a new road bike or a new computer. It would be selfish money and it wouldn’t be thinking long term. That’s OK in some situations, but its not my first choice.

Fifty-Fifty

Its possible that we could spend some of the money on some things we want, and use some of the money for debt reduction. Those would be nice things to have and it would be a good thing to do with some of the money. It doesn’t mean that we go crazy with all of it, and it doesn’t mean we don’t get to have some “fun money,” it just means that we have a compromise. This could also be split some other way instead of down the middle. If a new toy costs $200.00 and I have $2,000.00 I could get the new toy and also put the rest down on some other debt reduction area.

Invest The Money

The other side is the all-investment approach. The money could be put into an IRA or a high interest savings account or some other investment and turned into a long term gain. The strength of this is that the money will quadruple in 30 years at a 5% growth rate resulting in roughly $8,643.88 at the end of the 30 years if you didn’t add to the investment. At a 10% growth rate it would reach nearly 35,000.00 in value. If you had a budget and a plan that was going to take care of debt and other financial needs in a time frame that you felt good about this would give you a great long term ‘bonus.’ Your needs would be taken care of and your interest in the long term would really gain you a leg up for much bigger items down the road.

Final Thoughts

I don’t know exactly what I’m going to work out with my wife as we discuss the immediate needs of our family but I suspect this will fit into our regular planned budget to help pay off debts faster. We’ve got some savings going on for now and we need to build up more savings in the long term but right now the debt pay-down is going to dominate our focus until its gone (and hopefully never to return). However, we’re going to discuss each of the possibilities above and we’ll make a choice we feel good about.

Did I miss anything? Is there an option I haven’t listed above? What would you do if you had (for example) $2,000.00 windfall?

If you played the lottery every week for forty years and each ticket cost you $5.00.  Very rough math tells me that you’d have spent approximately $10,400.00 when it was all said and done.  You could win some money during that time period, but the chances of you winning  the lottery are still insanely small.  If you put $5.00 a week into a high interest savings account making 5%, you’d more than likely have around $33,000 dollars [again, rough math].  If you were to spend $10.00 a week that would quickly turn into a potential savings value of $64,975.00!  Instead of gambling you could be making calculated decisions like that.

Putting aside $100.00 a month (or four weekly $25.00 stashes for the bigger gambler) would yield you $165,010.00 or so.  Not a bad return with greater certainty!

Looking at the number I set for my goal (here) you might think that I’m greedy or an over achiever.  That is certainly not the case.  I put in some numbers into a retirement calculator and it suggested an amount.  Not an amount I would have dreamed of, but one it suggested as ’safe’ for my needs.   Lets take a look at some other motivators that might be less valuable.

Greed

Greed is not a great motivator.  Simply put its goal is not satisfied, there is never enough and it can motivate people to operate in a selfish or wrongful manner.  I don’t need to explain to you how it makes most of us feel when we feel shafted, mistreated or ripped off because someone was greedy and we paid the price for that greed.  The number of my goal is based on the concept that I will be able to live of less per month than I do currently now because I will have my house paid off and our children will no longer be in the house with us (more than likely at least).

Ignorance

The worst motivator for thoughts is ignorance.  My goal is based on probability and assumptions about how things will continue in the future - I am uncertain about the future because it is unknown, but I am not ignorant of what it has a plausible chance of holding.  Don’t set a goal based on ignorance (for example, “Inflation, what inflation?”).

Naivete

I am setting the goal higher because I don’t expect the cost of living to go down.  There is very little in our current world that is decreasing in price except for maybe certain types of technology.  Gas prices continue to grow as demad increases (hopefully that will plateau or decline soon), the cost of food continues to ascend as various elements play into that, and you’ve probably noticed that the price of transportation isn’t dropping either.  The cost of housing is declining, but since I’m in a house and I feel comfortable here its not my highest priority to find cheaper housing.  One of my motivations for choosing this house was that it would fit into our budget comfortably and leave room for other financial expenditures and savings.

Conclusion

Ask yourself why you’re saving for what you’re saving for!  Determie your motivations and make sure that the motivation is a good one - your goals need to not change on a whim, and having strong foundations and motivations for them will keep things healthy and your goals easier to focus on.

I haven’t set my financial goals yet, but I’m going to attempt to do that within the next week or so. There are several things that need to be taken into account when considering financial goals:

1. A guessed rate of inflation
2. The cost of living for your current standard of living
3. Expected interest return on your total investments upon age of retirement

The upside is that you can set some guessed numbers here and start to work out where you really need to be, there are calculators online as well that will help you estimate these things as well [click here to do a Google search for retirement calculators]. The downside is that this is going to be an algebraic equation that has no known numbers and you’re dealing with all variables. However, there are strong, well established numbers that you can use. For example you could use 3.5% as the average rate of inflation, you probably know what your current cost of living is, and you can optimistically assess various investments with the assumption that there will probably be other investments like it upon your retirement (and more than likely those same investments will still exist).

A rough look at my current investing and retirement calculations tells me that I’m going to die working. I will never be able to retire in with my current spending, saving and investing goals. That means I need to change my goals! According to one calculator I should save 6.145 million dollars before retiring. At my current rate of savings and conservative interest on my IRA I will never reach that in my lifetime.

Setting Your Own Financial Goals

Now that I can see I’m not going to be able to cut it with my current strategy I’m convinced that I need to wipe out all debt (duh!) and aggressively feed my investment pyramid so that I can retire with my wife and live at a comfort level I’m used to. Because I know things change financially due to job changes, medical needs and life being complex I’m going to have to set a goal and then revisit it over time to make sure its realistic and that I’m on course to achieve those goals.

My personal goal is to have roughly 6 million dollars in savings for retirement. I’m not confident that I can do it now because I don’t know enough now about how to invest and reach those goals, but if you’ll read along with me and we learn together we’ll set some goals and find ways to refine them and achieve them!

The investment pyramid is a concept my father showed me when I was younger. This pyramid shows three different levels of risk and a pyramid showing the different percentage levels affiliated with each risk level. For example if you had $10,000 to invest you would want a larger chunk around $5,500 invested in lower risk investments like CD’s (or any other lower risk investment, but probably not just a savings account). The next level up is the medium risk investment section. You might choose to invest in some medium risk mutual funds because those funds will have a higher return than a CD will have. To prevent yourself from losing all or most of your total $10,000 you’d want to make the medium risk chunk closer to $3,250. At the top of the pyramid is the high risk section. This section has the highest amount of interest you might earn on an investment, but because of its high risk you might want to invest $1,250 (or less) here.

Investing requires you to know where you are comfortable investing, you’ll definitely want to have someone you trust such as a financial adviser who can help you find the right investment in each section. Because my own knowledge is limited it would be unwise for me to invest in things beyond mutual funds at this point in time. By throwing my money at stock or options I might just blow all $1,250.00 because I don’t have competence on that level. Because I can’t babysit various investments due to my full-time work requirements there is greater risk for me to invest in such marketing tools - they’re a double edged sword and if I lose control the blade will cut my investment money rather than increase it.

Another aspect of this pyramid is that differently aged investors may want to adjust the angle of the pyramid, you might feel that at a younger age higher risk investments can take a larger percentage of your total investment strategy because you’ll have more time to recover if the investments go sour. You’ll want to talk to a financial adviser in this case because you’ll need to evaluate your goals.

A look at those numbers will show you the rough percentages that I’ve used:

Low risk: 55%
Medium risk: 32.5%
High risk: 12.5 %

You may want to adjust those numbers in some cases, but that’s for another article

This weekend our fridge went out. It kinda threw my Sunday night off because I had to transfer things into our ‘extra’ fridge in the garage (I swear that makes me feel affluent) at 11:00 PM instead of going to bed. Our kitchen fridge got the works from my wife today and it appears that it may be coming back to life due to not having ice build up and a banana frozen over one of the circulation vents. We should be cleaning out our fridge & freezer at least once a year to keep it running efficiently so we’re not paying extra for the already expensive cost of running a fridge every day, twenty-four hours a day.

The second reason that everyone should keep their fridge clean is this: when you keep food around on a Just in Time (JIT) basis, you don’t waste as much food. When I worked in retail during my formative college years we learned about JIT because it allowed us to sell our last or second to last of an item and then order in a replacement, often receiving it the next day. This was great for back-catalog options that sold fewer and it kept the store’s cost to run down to a minimum. The same goes for left-over food. If you have left-overs (and you should, it can help you create two meals a day) make sure they don’t become left-for-the-dogs or left-for-dead. Efficiency in your fridge on two levels will help you keep your budget in line and help you save up for big-ticket items that were out of reach because of nickel-and-diming your were doing to yourself. Or better yet, take that saved money and set it aside for retirement! By then you’ll be able to afford one of the food replicators that we only see in TV and the movies