The Wall Street Journal. Personal Finance Workbook

by OPDYKE, JEFF D.

• ISBN13: 9780307336019
• ISBN10: 0307336018
• Format: Trade Paper
• Copyright: 2006-04-11
• Publisher: Three Rivers Press

Summary

A hands-on, interactive guide to managing your monday and building your financial future Many of the worksheets in this book are available online and can be saved, printed, and recalculated at any time. Go to: WSJ.com/BookTools Understanding your money, and getting it to work for you, is more important today than it ever was, because you alone are responsible for every aspect of your financial life, from managing your day-to-day living expenses to planning a college savings fund and, ultimately, retirement. The sooner you start taking control of your financial life the better, and there's no greater authority on financial matters thanThe Wall Street Journal. This workbook takes the mystery out of personal finance and addresses every topic you'll need to master, from building a solid financial base to growing your financial assets. Worksheets, charts, and step-by-step instructions throughout help you do the math and work through the basics, making it quick and easy to organize your cash and eventually build wealth. Learn how to: Create a spending plan and budget Balance a checkbook Make decisions about what types of and how muchinsurance you need Manage credit and debt Finance big expenses like real estate and education Understand and properly assess your own appetite for risk Formulate the right asset allocation Start building an investment portfolio Make real estate decisions like purchasing vs. renting Refinance a mortgage Manage your 401(k) Deal with taxes Plan for college expenses Also availablethe companion to this workbook:The Wall Street Journal Complete Personal Finance Guidebook, by Jeff D. Opdyke Get your financial life in order with help fromThe Wall Street Journal. Look for: The Wall Street Journal Complete Money and Investing Guidebook The Wall Street Journal Complete Identity Theft Guidebook The Wall Street Journal Complete Real Estate Investing Guidebook From the Trade Paperback edition.

Author Biography

Jeff D. Opdyke is a financial reporter who has covered investing and personal finance for The Wall Street Journal for the past twelve years. He is the author of Love and Money: A Life Guide to Financial Success. He lives in Baton Rouge, Louisiana, with his wife, Amy, and their two kids.

Table of Contents

Introduction	1	(6)
PART I BUILDING YOUR FINANCIAL BASE
Budgeting	7	(28)
The Personal Budget	9	(3)
The Spending Plan	12	(8)
Pay Yourself First	20	(5)
Emergency Savings	25	(2)
The Annual Budget	27	(8)
Banking: Checking, Savings, and Certificates of Deposit	35	(14)
Checking Accounts	36	(4)
Certificates of Deposit---and When Breaking One Makes Sense	40	(7)
Building a CD Ladder	47	(2)
Planning: Preparing for the Worst	49	(12)
Insurance	49	(1)
Do I Need Insurance?	50	(2)
How Much Insurance Do I Need?	52	(9)
Borrowing: Accumulating and Managing Debt	61	(42)
Warning Signs You Carry Too Much Debt	62	(1)
Is Your Debt Too High?	63	(1)
Paying Down Debt	64	(4)
Buying a Home	68	(1)
Renting Versus Buying: Weighing the Trade-Offs	69	(3)
How Much Can You Afford?	72	(4)
Shopping for a Loan	76	(2)
Tax Savings	78	(1)
Calculating the Equity in Your Home	79	(2)
To Refinance or Not	81	(1)
The Old College Try: Saving for a Child's Education	81	(5)
How Much to Save?	86	(6)
Buying a Car	92	(3)
The Ins and Outs of Auto Leases	95	(4)
Turning a Money Factor into an Interest Rate	99	(1)
Comparing Leases	100	(3)
Be Prepared---It's Not Just a Motto for the Boy Scouts	103	(14)
The Wallet Register	103	(1)
Financial Accounts	104	(2)
Safe-Deposit Boxes	106	(11)
PART II BUILDING YOUR ASSETS
Investing	117	(28)
Determining Your Net Worth	118	(2)
Rating Your Tolerance for Risk	120	(2)
Short Term? Long Term? Something in Between?	122	(5)
Compounding: The Most Powerful Force in the Universe	127	(1)
First Things First	128	(1)
Brokerage-Firm Basics	129	(3)
Wall Street in Words and Formulas	132	(3)
Calculating Your Rate of Return	135	(3)
Index Investing: No Effort Required	138	(1)
Exchange-Traded Funds: Minimal Effort Required	139	(1)
Dollar-Cost Averaging	140	(5)
Retirement Planning: Feathering the Nest Egg	145	(26)
How Much Will I Need in Retirement?	145	(8)
Asset Allocation: Rocket Science for Beginners	153	(1)
Asset Allocation Models	154	(2)
Where Do I Invest?	156	(4)
What Might a Diversified Portfolio Look Like?	160	(2)
Company Stock: Buy, Sell, or Hold?	162	(1)
The ABCs of IRAs	162	(2)
Annuities: Great for Some; Lousy for Many	164	(4)
Which Annuity Is Right for Me?	168	(1)
A Taxing Matter	169	(2)
Conclusion	171	(2)
Index	173

Excerpts

CHAPTER 1

Budgeting

Have you ever driven from Mount Sterling, Utah, to Dixville Notch, New Hampshire? Do you even know how to begin planning that route? If you’re fairly fluent with the points on a compass, you could probably wind your way out of the Wasatch Mountains and head in the general direction of the East Coast, but you’d likely have a challenging time with the finer points of efficiently finding your way to Dixville Notch in the far northern tip of New Hampshire.

A road map would offer immense utility.

In many ways, budgeting is the roadmap to your finances. After all, moving in generally the right direction is fairly easy, but it doesn’t necessarily get you to where you think you’re going. You know you have to set aside enough money from each paycheck to pay the bills, and you know you’re supposed to save something, if you can, for that proverbial rainy day. For a lot of people, that defines the extent of their budgeting—spend what you need; save what you can.

Imagine, though, having a benevolent guide to steer your path, to show you where you’re spending. You’d have a better grasp of the costs that are necessary in your life, and those that are extraneous. Thus informed, you’d be prepared to make smarter decisions on spending and saving. That doesn’t mean you’d be tethered to a budget that sapped the fun from your days and nights. Rather, you’d be empowered to decide for yourself what you want to spend your money on. It may be that you want to spend $3,000 on a vacation to Cairo instead of fund an individual retirement account, and that’s fine. But your problem is you can’t spare the cash because your expenses never leave anything but pocket change at the end of every month.

With a plan, however, you might quickly find that many of the daily expenses you have in life aren’t necessary, and that with a little jiggering you can alter your monthly spending so that you can actually save for what you want: that trip—or the money to fund that IRA, or cover the down payment on a new car, or whatever want sits atop your wish list.

The key to all of this and more is your budget.

Of course, for many people the word budget immediately conjures up disagreeable images of a binding straightjacket—a confining document that tells you what you can and can’t spend.

Budgets don’t have to be that way. Budgets don’t even have to be budgets. You can think of them, instead, as spending plans. Though it sounds like so much semantics, budgets and spending plans are different if only because of the psychological reaction they each illicit. Where budgets bespeak confinement, spending plans epitomize freedom because they allow you to make the decisions on how you want to spend or save your money. Here’s why the psychological impact of a spending plan is relevant: Money is as much about psychology as it is about finance. How you think about money and the lessons you’ve learned about money through the years—from parents, in particular—shape the way you spend and save, often without your even realizing it. By using a different type of budgeting system, a spending plan, you regain control psychologically, often the trick many people need to better live within their means.

Essentially, a spending plan works by matching your known income to your necessary expenses each month. Then, the plan allows you to resolve how you want to distribute any excess cash that remains—your discretionary income. You can choose to pay down your credit card or car note, erasing your debt quicker. You can choose to put that money toward a vacation, a new washing machine, a fancy meal at a restaurant with your significant other. You can opt to bury it in the backyard, buy shares of a mutual fund, open a Roth IRA, or fund a college savings account for your child. Basically, you can do whatever you want with your money because you’re the one calling the shots.

That might not seem like such a huge leap forward in the art of budgeting, but, again, money is often a psychological and emotional game. If a spending plan leaves you feeling in charge of your money, while a budget leaves you feeling like a slave to your money, chances are very good that the spending plan survives to help you achieve financial success, while a budget is exiled to the garbage bin, never to help you achieve much of anything.

Ultimately, a personal budget and a spending plan accomplish the same goal—providing a framework for sensible spending and healthy saving. In order to see that, and to build the financial foundation you need so that you can better understand the way your money flows through your life, starting off with a personal budget and working your way up to a spending plan is a solid idea.

THE PERSONAL BUDGET

You don’t have to rush into a full-blown, detailed spending plan immediately if the thought of trying to wrap your arms around all of your monthly finances is intimidating. Instead, this personal budget allows you to set an expected spending limit in various broad categories at the start of the month, and then at the end of the month you compare your actual costs with your budgeted costs. Seeing those differences month in and month out gives you a clearer understanding of where you’re really spending your money, knowledge that ultimately will allow you to scale back spending on what you determine is wasteful or unnecessary, and beef up your outlays in those categories that are more meaningful to your life.

More important, the personal budget will reveal—before your spending begins for the month—whether your expectations exceed your bankroll. If they do, you’ll need to recalibrate your expected spending to match your expected income, otherwise you’ll be the embodiment of “living beyond your means,” an assured path to financial ruin if the trend persists.

Come month’s end, you have a few tasks: foremost, if your spending has exceeded your income, you need to examine those categories where you overspent and ask yourself what happened. If over several months you see that you consistently overspend in certain categories, the problem could be that you are underestimating how important these areas are to your lifestyle. Basically, you’re underbudgeting and will need to readjust. Or it could be that you’re not exercising enough self-restraint in your discretionary spending, something that you must address, because a certain amount of discipline is a key component for anyone who wants to succeed with their finances. At some point, you have to be accountable to yourself.

In similar fashion you should discipline yourself to examine your personal budget every month, looking for categories where you not only exceed your anticipated expenses, but also those where you overbudgeted. Then you can effectively shift your spending away from categories that have proven to be less important to you than you imagine, and into those categories where you are actually spending your dollars.

Building a Personal Budget

•First, make several copies of this worksheet so that you have a blank one handy each month.

•Start each month by estimating your income and expenses in each of the various categories. With certain expenses, such as a car payment or rent, this will be easy. With other expenses, such as food and entertainment, it’s more of an educated guess.

•During the month, save all of your receipts, or keep a running tab of your costs in each category on a separate sheet of paper.

•At the end of the month, tally up your actual costs and compare them to your expected costs.

•In the first three months, the goal of this exercise is to see where you’re over- or underbudgeting so that you gain a better feel for the true expenses you have in life. After the first few months, the purpose of this exercise shifts to encourage you to think at the beginning of each month about how you want to allocate your cash. If you know, for instance, that you would like to replace your aging DVD player, you will have an intimate enough understanding of your budget to cut back on items such as meals out, entertainment, or clothing expenses.

•Remember: This is a simplified, down-and-dirty version of the more detailed Spending Plan. When you decide to move up to the Spending Plan, your entries here can be transferred directly across.

•If the Balance is a negative number in the Budget column, you need to rethink some of your expected expenses, otherwise you’ll go into debt for the month.

•If the Balance is a negative number in the Actual column, you went into debt for the month, and must now take a hard look at your spending to determine where you went too far off track. Pay closer attention to your spending in that category in the future.

•If the Balance in the Actual column is positive, you need to allocate that money somewhere—additional spending in categories important to you, particularly focusing on earmarking unspent income on paying down faster any credit-card debt, car loan, or mortgage you might have, or funneling it into additional savings. Ultimately you are trying to get to $0, meaning a balanced budget.

THE SPENDING PLAN

Many of the same processes used in a personal budget play out with a spending plan, though a spending plan provides a more detailed method of estimating, tracking, and analyzing your income and outflow on a monthly basis. Putting the plan together will take some time in the first month or two, though it shouldn’t take more than about thirty minutes to an hour. After you’re accustomed to how the plan works and how your money flows through the various categories each month, you’ll be able to whip out and review your monthly spending plan in just a few minutes, since your income and many of your expenses generally won’t change drastically from one month to the next. By the way, you might want to make several copies of the plan so that you have one available at the start of each month, or visit www.WSJ.com/BookTools and print as many copies as you need.

To use this spending plan, start with some projections. In the Projected Month Total column, estimate how much you anticipate spending in all of the categories appropriate to your life. Many won’t be. Some might be missing; go ahead and pencil them in under the appropriate heading (i.e., Home, Food, Clothing, etc.). Tally all your projections near the bottom of the spending plan in the Total Expenses row.

Don’t view these projections as just wild guesses you hope to meet. These ultimately form the boundaries you set for yourself in terms of both spending and saving. It does not matter if the limits you set for yourself include $500 a month at Starbucks and an equal amount downloading iTunes into your iPod. So long as you’re happy with the spending decisions you make, and so long as your spending stays within the limits of your income and doesn’t cut into your monthly savings, you’re living within your means and there’s a very good chance you’ll stick to you plan.

Now, under the Income category at the bottom of the worksheet, estimate the cumulative amount of all income you expect to earn for the month. Include everything here, not just salary. Maybe you supplement your pay by painting and then selling Velvet Elvises (Elvii?) on eBay. Whatever income you expect to pocket, include it here. Keep in mind that this is after-tax income, or your take-home pay.

So you have two projected numbers now: Total Expenses and Total Income. If the latter is larger than the former, you’re good to go. This means your paycheck can handle your spending for the month, and whatever extra amount of income you have remaining you can shovel into savings, an investment account, or you can return to your spending plan and assign some or all of that money to categories that are important to you that month.

If, however, your expenses are bigger, then you have a problem; you’ll need to pare your expectations. Once you have your expenses equal to or smaller than your income, you’re ready for the month.

You’ll notice that the plan is divided into four weeks. This division helps you keep track of where you are at any point in the month in relation to your projections. In the early months, keep every receipt you receive; drop them into a jar, a basket, a drawer or whatever container is convenient. Each week add them up for each category in which you have transactions, and jot down that number in the appropriate box for the week.

The aim of this exercise is to keep you interacting with your spending plan and to allow you to alter your plan on the fly when necessary. For instance: You’ve projected that for the month you’ll spend no more than $200 eating out. As the final week of the month starts, you see on your spending plan that you’ve already spent $185 on restaurant meals, including an unexpected $90 tab you got stuck with when you and a dozen friends hit the priciest Italian eatery in town. You know instantly that you’ll be noshing at home in Week Four since you only have $15 to spend on eating out and you just don’t cotton to Happy Meals five nights straight.

Or, consider this: It’s the second week of the month and a group of friends invites you to the beach for a long weekend. The cost: $200 for gas and food and festivities. You peek at your spending plan and see that you can cut $70 from your entertainment and can easily put off until next month that new $100 blazer you wanted. And you’re more than willing to cut $30 this month from your grocery bill. Just like that, you’ve worked directly with your spending plan to finance a long weekend at the beach without negatively impacting your finances or relying on the good graces of American Express to front you the money.

Most traditional budgets aren’t as malleable, because people often set them up once during the year and determine an average amount they expect to spend in each category. Then, they don’t typically interact with their budget unless something dramatic changes, like they get a raise, buy a new car, move to a new apartment or house. Yet your spending each month is fluid because your life is fluid. As such, aside from your fixed costs, you’re probably not going to routinely spend exactly that average, budgeted amount in some category. That’s where budgets start to go haywire.

---

Excerpted from The Wall Street Journal. Personal Finance by Jeff D. Opdyke
All rights reserved by the original copyright owners. Excerpts are provided for display purposes only and may not be reproduced, reprinted or distributed without the written permission of the publisher.