The Savage Truth on Money

CHAPTER 1

The Savage Truth on Getting Rich

Financial Security Demands Smart Choices

Everyone wants to know the secret of getting rich. And lately, people are wondering if it’s even possible to get rich—or at least to live well and then retire confidently. The perceived wide differences between the ordinary American and the very wealthy have created not only financial but political divisions that seem to threaten our future. But those divisions mask the opportunities that are still very much in existence and will be the foundation of our next wave of prosperity.

America faces real challenges, given our country’s burden of debt and our political extremes. It’s tempting to give up, to forget that this is not the first time America has surmounted challenges and gone on to prosperity.

So here’s the Savage Truth: The American Dream is still within reach.

Achieving financial security will require personal traits that have always worked: optimism, persistence, and self-discipline. If you’re willing to try, or try again, you can succeed. You need only to understand the basic Truths, which have not changed despite market volatility, economic uncertainty, and divisive politicians on both sides of the aisle.

It’s a tribute to America that over time there have been many roads to wealth in this country, and they are open to all. It may seem as if barriers and inequities have increased in recent years, but in fact, quite the opposite is true. Technology has given access to new ways of educating our younger generations, who are no longer subject to the limitations of neighborhood schools to find knowledge.

Access to higher education (despite the burden of student debt) has given opportunity to build careers and fortunes in areas incomprehensible to the baby boom generation. (Okay, how many of you boomers know that participants in eSports gaming earn six figures and are sponsored by major corporations?)

Forget the Forbes 400 list of wealthy Americans. There are 183 tech billionaires on the Forbes most recent list—and they control more than $1 trillion of wealth. Nearly half are Americans, but the Chinese are catching up. Most have been minted in the past 30 years of our technology revolution, and very few started with inherited wealth.

Youth seems an asset, not a barrier to creation of great wealth. Bill Gates was in his early 20s when he and Paul Allen founded Microsoft, and he was a billionaire by age 30. Michael Dell founded his computer company at the age of 19, and by age 34 was worth $16 billion. Jeff Bezos quit his job at age 30 to found Amazon. And Mark Zuckerberg famously started Facebook in his Harvard dorm room.

Today, all are deeply involved in giving their fortunes away to good causes, as well as continuing to grow their businesses and seed others with venture capital. All had those three basic characteristics: optimism, persistence, and self-discipline.

But the path wasn’t easy. They started in a slow-growth economy, weathered booms and busts (think dot-com in 2001 and global financial crisis in 2008), but they never gave up.

The Savage Truth: Even in tough economic times, entrepreneurs with good ideas can build companies that defy the most pessimistic mood of the nation.

There is no one template for success in America, but building a business does require an entrepreneurial spirit born of optimism. In America, age, race, and gender do not stand in the way of success—nor does the economic climate.

As entrepreneurs build businesses, they create opportunities for others—either by creating jobs or by selling shares to public investors. Even as jobs in more traditional manufacturing have disappeared, millions more jobs have been created by today’s new technology entrepreneurs and the businesses that develop around their technology. That’s how success spreads and an economy grows.

And that growth opens the door to your own personal opportunity to create wealth. While you may not start a billion-dollar company, you can invest in those who do. And, you may find a career path that suits your own talents and enthusiasm.

Technology has truly leveled the playing field by illuminating the opportunities for individuals to profit while providing services and cutting costs for those they touch. Progress is painful for those who cannot change—but it’s empowering for those willing to embrace the future. Whether it’s blockchain or a cure for dread disease or simply a safer way to drive a car, technology is changing our lives, quickly. And it’s impacting financial services dramatically, spreading knowledge, creating cost efficiencies, and saving money for investors.

So whether you’re a retiree wondering if your investments will carry you through your life expectancy or a college graduate looking for the best way to pay off your student loans, an employee trying to choose appropriate funds in your 40l(k) account or a young parent trying to save for college for your children, technology will help you achieve your goals.

Yet, while technology is changing the game of wealth creation, it cannot overrule the human element. It can provide tools to structure your future, but only you can provide the human ingredients that are the basis of the Savage Truth.

First, though, you need the capital to invest. That’s a matter of simple mathematics.

You Can Get Rich on a Paycheck If You Don’t Spend It All

There are two simple rules for amassing investment wealth:

Spend less than you make.

Invest the difference—both money and time—to maximum advantage.

Here are two stories that illustrate these truths:

Retired Secretary Leaves $18 Million To Hospital

Chicago Sun-Times—A secretary who made her fortune investing bonuses from her salary, which hit an estimated high of $15,000 a year before she retired in 1969, left her fortune to Children’s Memorial Hospital. Few friends suspected that Gladys Holm, who lived in a modest two-bedroom apartment, was wealthy.

Holm’s boss, the company’s founder, had advised her to invest her yearly bonuses in the stock market, a longtime friend said. If he bought a thousand shares of some company, Gladys would buy ten shares of the same thing. Nobody gave her that money; she earned it.

New York University to Get One-Fourth of Couple’s $800 Million Estate

Associated Press—Professor Donald Othmer and his wife, Mildred, lived modestly in a Brooklyn townhouse and rode the subway. In the 1960s, they each invested $25,000 with an old friend from Nebraska, Warren Buffett. In the early 1970s, they received shares in Berkshire Hathaway, then valued at $42 a share. When the couple died at ages 90 and 91, the stock was worth $77,200 a share—making their fortune worth an estimated $800 million.

All of these successful investors lived modestly all their lives. At no point did they decide it was time for an expensive vacation, an impressive vacation home, or even a new car. Thus, they were able to accumulate, invest, and leave behind a huge fortune. Surely, there must be a happy medium between living daily on credit card debt and dying with a huge fortune. Most people I know would like to live in that middle ground.

There is one other similarity to note: Neither Gladys Holm nor the Othmers had children. Children may be nature’s way of making sure that we can’t possibly die with a fortune!

Most important—neither Gladys Holm nor Professor and Mrs. Othmer ever sold any of their stock. Think of the temptations. As their fortunes grew, there was surely the temptation to spend just a little of their profits. And at times of stock market crisis, surely there was a temptation to sell and cut their losses. But they stuck to their long-term plan.

Don’t doubt that this kind of investment success can happen again in the coming decades. Think what a great leap of faith it was for these ordinary people to invest in an uncertain future. Their profits were built slowly, but were accelerated by the fact that they were investing when others were skeptical.

Today’s true headline success stories are the current generation of technology entrepreneurs. They built businesses, and their wealth is scored by the value of the stock they sold to the investing public and the shares they still hold. But behind each overnight success story is the truth that they followed the two principles at the top of this chapter. They lived frugally—primarily because they were too involved in their businesses to spend time on recreation and consumption. They also invested their resources, mostly their time, in building their businesses.

Steve Jobs, who founded (and later rescued) Apple, was renowned for starting the business in his garage. Only after his company proved itself did he share in the rewards. Bill Gates built his mansion after he built Microsoft. And then he started giving his money away through strategic philanthropy. Mark Zuckerberg and his wife Dr. Priscilla Chan have vowed to give away 99 percent of their Facebook stock to a charitable foundation they started. And Jeff Bezos is giving $2 billion to homeless charities and not-for-profit preschools, while his ex-wife, Mackenzie Bezos, has promised to give half of her $36 billion in Amazon stock to charity.

At some point, it’s not the money that motivates. As one successful entrepreneur remarked to me on the occasion of a new accomplishment: After a certain point, it’s not the money. It could be lollipops. It’s just the way you keep score!

For most of us, it is the money. We need it to take care of our families, to put our children through college, to plan for retirement. But we can take lessons from these success stories. And even if we may not reach that pinnacle of great wealth, we can participate. It would be nice to give money to our family members who need it, or to causes we value.

There’s no question that their inherent brains and timing (sometimes referred to as luck) helped make these entrepreneurs rich. Their success stories are notable because they took a relatively short time to build dramatic wealth. But they followed the basic principles: They invested their time and money before they reaped the rewards. Yes, they dreamed, but they didn’t buy lotto tickets or create extravagant lifestyles before they were financially successful. They worked to turn their dreams into reality instead of living as if their dreams had already come true. And they didn’t quit when things got tough. Many of those tech multimillionaires (even billionaires) saw their paper fortunes melt away in the stock market declines of 2001 and 2008. Others lived through the declines and went on to amass even greater wealth.

It’s a Savage Truth: Persistence pays.

So, how can the Savage Truths in this book get you on track—or back on track—to financial security? Life doesn’t come with guarantees, but it does come with opportunities.

The secret of getting rich is to make choices that help your money work for you and stop working against you. If your money works at least as hard as you do, and if you have a sensible plan you can stick to, over time you’ll come out a winner. And that’s the Savage Truth.

THE SAVAGE TRUTH ON YOUR RELATIONSHIP WITH MONEY

Money Is Power

Before you make any investment or saving decision, before you set financial goals or choose a career, you must come face to face with the power of money in your life. Your relationship with money must be reevaluated as you reach different stages in life. Only by facing money issues directly can you become comfortable with so many other personal decisions that confront you.

In an earlier era, it might have been possible to coast along, expecting pay increases and a comfortable lifestyle that would lead to retirement. Now we’ve all seen a compelling demonstration of the importance of financial security, and the importance of financial planning. The millennial generation will be forever changed by the steepest recession since the Great Depression. Today’s children will never take money for granted the way their boomer parents might have done. And out of these experiences comes a new respect for the power of money.

Recognizing the power of money can be exhilarating or intimidating. If other people have money, and therefore a degree of power over your life, you may react negatively. If your boss holds the power of the paycheck, you may feel forced to work certain hours or perform unpleasant tasks. If your parents hold the power of the purse, you may feel coerced into making concessions about your lifestyle.

However, if you have the money, you are empowered to choose how you spend your time as well as your cash. You may choose to work even harder, to enjoy more leisure, to become philanthropic or artistic, or to devote more time to making your fortune grow. Money certainly isn’t the only powerful force in your life, but having money can empower you to take greater control over your lifestyle.

Saver or Spender?

You know who you are, when it comes to your money personality. Are you a saver or a spender? I’m not quite sure where our money personality is created. It could be from the experiences you had as a child. But, then, how do you explain two children, growing up in the same household, who have completely different money personalities? Give each an allowance, and one hoards every penny while the other can’t wait to go to the store!

Whether it’s determined by heredity or environment, by this stage of your life your money personality is firmly ingrained. If you realize how hard it is to change yourself, you’ll know how impossible it is to change your spouse or partner. So the entire concept of money management is to set up systems to deal with your inner self—your fears, your compulsions, and your desires. If you can channel all that energy into a disciplined plan, you can be successful financially no matter what your basic personality traits.

The Most Powerful Money Emotions Are Fear and Greed

Decisions about money unleash these two powerful emotions, which are frequently the cause of financial downfall. Noticing the symptoms and gaining the courage to surmount these emotions is the first task in managing money. Lack of emotional control will negate all the benefits of good advice and good planning.

Greed is understandably dangerous because it is the emotion that makes us take risks we cannot afford. Greed convinces us that we need instead of simply want to make that purchase. Greed urges us to spend for today instead of investing for tomorrow. It can distort investment decisions and blind us to long-term consequences and risks.

Fear can be equally dangerous. Fear keeps us from taking appropriate risks or making changes to improve our lives. It paralyzes us and blinds us to opportunity. Indeed, this paralysis can be an actual physical reaction to making money decisions. It’s as difficult to conquer a fear of money as it is to rein in overwhelming greed.

These emotions may be triggered by our childhood conditioning about money, by cultural expectations, or by recent experiences with money decisions. There’s no doubt that people have money personalities. By nature or nurture, they become savers or spenders.

Inside each of us is a small persuasive voice that dictates how we respond to fear and greed. Those twin emotions assault even the wisest investors and smartest traders. Taking control of your financial life requires not only knowledge of money, but also the self-discipline to use your knowledge to conquer fear and greed. What good is a financial plan if you don’t have the self-discipline to stick with your decisions?

Self-Discipline Is the Essence of All Decision Making

Self-discipline should not be confused with self-denial. Self-discipline means making knowledgeable decisions based on a rational assessment of likely results and then sticking to your decisions in the face of emotional upheaval. That principle applies to every financial decision—from buying a car or a dress to investing in a stock or mutual fund. People recognize the importance of discipline when they turn to financial advisors for help—not only in determining the appropriate investment, but in sticking to that decision in the face of market reversals. It’s human nature to seek advice, reassurance, and counsel about when to alter a decision based on new realities.

Can you do it alone? Most people are capable of managing their own finances, given the knowledge and tools that are now easily available. You’ll learn how to use Quicken or Mint to gain control over your everyday spending and to plan for the future (see Chapter 2).

However, I know that many people who post their questions on my blog at www.TerrySavage.com are overwhelmed by their relationships with money. Just as all the desire in the world cannot help alcoholics or gamblers to overcome their compulsions, all the investment books and rules cannot make the fearful bold, or the greedy self-controlled.

Help is available in many forms. As you’ll see in Chapter 3, there are several national, nonprofit consumer credit and spending counseling services. Your local community college may offer classes or help in setting up a budget and managing your money. Later in this chapter I’ll show you how to find a qualified and certified personal financial planner who will put your interests first. Automatic monthly investment plans can create the structure to override your emotions and build an investment program, just as automatic deductions can be used to cope with debt repayment.

Keep in mind that knowledge is one ingredient of your relationship with money, but conquering your emotions is quite another aspect of financial success. Smart people do fail, but failures can always be overcome. Impulsive and irrational people rarely find financial success.

Bulls, Bears … and Chickens—Your Relationship with Money Is Unique

No matter how smart your advisor, or how sophisticated your investments, your personal relationship with money is unique, and it affects the decisions you make. No one else has quite as much insight into your desires, anxieties, and tolerance for risk. The most difficult task is to step back from your emotions and calculate the risk it is appropriate for you to take.

This is a process of self-discovery that I have long referred to as sorting out the bulls, the bears, and the chickens. In any financial market, the bulls invest believing that prices will move higher, while the bears sell out in fear that prices will drop. But the chickens stay on the sidelines, unwilling or unable to risk their capital. There’s a little bit of chicken in all of us, and it’s nothing to be embarrassed about. In fact, those who had adequate savings were cushioned from the impact of the previous recession and job losses.

Sometimes it’s wise to be chicken because you have a very short time horizon. If college tuition is due next fall, or if you’re saving for a down payment, you don’t want to risk investing in the stock market. Short-term losses could jeopardize your significant long-term goals. It’s important to sort out the portion of your finances that can, and should, be exposed to the opportunities that risk provides. But it also takes discipline to set aside a portion of your assets and keep them safe from risk.

Sometimes you’re forced to be a chicken because this is the only money you have. While it’s tempting to risk doubling your resources in some exciting investment, you can’t afford to lose even a portion of your capital. There’s an old saying in the markets: Desperate money never makes money. The world is littered with losing tickets from racetracks and lotteries. Long-shots and jackpots make news when they pay off because it’s so rare. Those huge lottery pools are created by all the people who buy losing tickets.

Risk and reward are two sides of the same coin, but unlike a coin toss, on which the odds are always 50–50, risk and reward are not always equally balanced. The science of money management is built around understanding your own tolerance for risk and acting when the rewards can objectively be considered to outbalance the risks. Unfortunately, this is not a subject for intuition.

At the top of the market, an investment seems least risky and most enticing. At market bottoms, it appears most risky to invest your cash—but hindsight shows that’s just when you should have taken the risk. The big money is made—and lost—at the extremes. But an ongoing and disciplined program can keep you from being wrong at those turning points. And some chicken money sitting on the sidelines can give you courage to follow your plan.

Never be chicken out of ignorance. There are objective ways to balance risk and reward. Nobel Prize–winning economists created the concept of beta, a way of measuring inherent risk and volatility in individual investments. And computers can theoretically measure and limit portfolio risk, when markets run true to form. But no one has yet developed a way to measure the risk inherent in human emotions. So let’s just set aside some chicken money and follow the old market saying: Sell down to the sleeping point. If it keeps you awake at night, it isn’t worth the risk.

The Savage Truth on the Consequences of Choices

In the midst of life’s turbulence, you’re reminded of the consequences of the big choices you made over the years: the choice of a college, a marriage partner, or a career, or a decision about having children. These turning points stand out as defining moments that changed the direction of your life. But small decisions, compounded over time, can have an equally significant impact on how your life turns out—especially when it comes to money. Little choices along the way have big consequences.

Your money can work for you or against you. It all depends on the choices you make. If you make the correct choices, even a small amount of money can grow to become a powerful ally. If you make the wrong choices, your money will leverage its power against your own best interests. One thing to keep in mind: It’s never too late to change course for the future.

Every day we’re faced with money choices: Spend or save; buy or sell. They may appear to be decisions of the moment, but today’s choices can have long-lasting consequences. That’s because the consequences of our financial decisions are magnified over time.

Think of the problems NASA has in sending a rocket to Mars. Sure, the planet is a huge target. But if the navigation calculations are off by just a fraction of a degree at the launch, the rocket will miss Mars by millions of miles. Small errors, magnified by distance or time, can take you very far off course. Nowhere, except in astronomy, are those dramatic consequences illustrated better than when it comes to money decisions about spending versus investing.

My favorite story about choices shows the long-term effect of time on money when it comes to spending decisions. Suppose you charge $2,000 on your credit card this month and make only the required minimum monthly payments on your bill. At an annual finance charge of 19.8 percent and a $40 annual fee,

It will take you 31 years and 2 months to pay off that $2,000!

Along the way, you could pay an additional

$8,202 in finance charges.

If you had made a different decision, the results would have been equally dramatic and far more pleasing. If you had invested that same $2,000 in a stock market mutual fund that returned the historical average of 10 percent and placed your investment inside a tax-sheltered individual retirement account (IRA), in 31 years—about when you’d be paying off your final credit card bill—

Your IRA would be worth $38,389.

If you made that same spending-versus-investing decision every year and set aside $2,000 in your IRA for 31 years at the same rate of return,

Your IRA would be worth $364,000.

Special attention to twenty-somethings: If you started your annual $2,000 IRA contribution now and averaged a 10 percent annual return, in 50 years

Your IRA would be worth nearly $2.5 million!

This is a classic example of how small choices, leveraged over time, can change your life. You may not remember every small spending or saving decision as you look back over your life. They may not compare with the major life-changing choices you agonize over. But these small decisions reveal one of the greatest money secrets: The power of time in compounding money. Money makes money.

In recent years, regulations have offered some protections against many credit card practices, including requiring higher minimum monthly payments. Still, the average rate being charged on outstanding balances is 17.5 percent, and many consumers who have missed payments or charged over the limits are paying rates over 30 percent.

By way of comparison, the average long-term annual rate of return, including dividends, on large-company American stocks is 10 percent, going back to 1926, according to Ibbotson, the market historians.

The basic Savage Truth is more valid than ever: Debt will destroy you.

If you’d invested that money in stocks—over the long run—you would have come out far ahead, despite the scary setbacks in the market. And you can do that by putting your 40l(k) money or IRA into an S&P 500 stock index mutual fund. (I’ll show you how in Chapter 7.)

Sadly, too many people learned the lesson about the dangers of debt the hard way. Fortunately, America does not have debtors’ prisons. Bankruptcy—a last resort—allows you to start over. But this time, learn the lessons and do things differently to get different results.

Here’s a reminder of an important Savage Truth: The lessons that cost the most teach the most.

One Step at a Time

I’ve often told this story of how you could easily turn a $2,000 IRA into a million dollars or more by investing conservatively in a mutual fund that just matched the performance of the stock market averages. But some people who post at my website are buried in debt, wondering whether to take the bankruptcy route or continue to struggle with bills. Where would they ever find the money to make a monthly investment in the American Dream?

That’s the problem with big numbers like a million dollars. They’re so overwhelming. So let’s make it more realistic. Just in case you were intimidated about finding that $2,000 a year to set aside in your individual retirement account, let me point out that

$2,000 a year is only $38.46 a week.

Surely, you can adjust your spending—or your earnings—to find an extra $38.46 a week.

If you’re already buried in debt, then an extra $38.46 a week will pay down $2,000 of your debt within one year, to say nothing of the interest payments you’ll save. Perhaps finding that weekly sum will require working in a restaurant instead of dining out. Or consider sharing expenses with a roommate or friend. How much do you spend mindlessly on the Internet? A weekend or part-time job may bring in more money if you can’t possibly cut back your spending. But don’t give up, because it’s always easier to earn more than to cut back.

Do you still think you can’t afford to get out of debt and start investing for your future? Take a quick look at your paycheck. For sure, there’s a deduction for Social Security taxes that’s much larger than your $38.46 weekly target. You get along fine without that money—and you’re not likely to see much, if any, of it at retirement. Doesn’t it make sense to put an equal amount away every paycheck in a savings and investment plan that will pay off in the future?

A $2,000 debt seems relatively insignificant now, in an era when households average more than $7,000 in credit card debt (or nearly $136,000 if you include mortgage debt), and students graduate from college with an average debt burden of $37,000. But the principle remains the same: Break it down into monthly and then weekly chunks and attack the problem one step at a time.

In Chapter 3, you’ll find specific resources for dealing with debt—from counseling you can trust, to bankruptcy procedures, to recognizing and avoiding scams such as debt negotiation offers. And even if bankruptcy is your only way out, you’ll want to do things differently next time, so read on.

Time Is Money

You may have heard the story about the boy who was asked whether he’d rather have $5 million in 31 days—or 1 penny doubled every day for 31 days (see Figure 1.1). The boy chose wisely.

One penny, doubled every day for a month, will grow to $10,737,418.24.

Figure 1.1 Growth of a Penny Doubled Daily

That’s certainly a huge consequence from a small choice. Although this book won’t show you how to double your money every day, you will certainly learn how to invest very small amounts regularly to create dramatic long-term growth.

Taxes Impact Tomorrow More than Today

No one likes to see the bite that taxes take out of a paycheck or to compute the amount owed to the government every April. Despite the business and individual tax cuts enacted in December 2017, federal spending continues to soar. More than $1 trillion of that annual spending in recent years has come in the form of deficit spending—money borrowed by selling IOUs—Treasury bills, notes, and bonds.

And as our population ages, more of this annual spending becomes nondiscretionary. Currently this non-discretionary spending consumes 70 percent of the federal budget. Within a very few years, government spending on mandated programs and promises such as Social Security, Medicare, Medicaid—and interest on the national debt—will consume every penny of income taxes collected. That will leave nothing for national defense, roads, education, or any of the other programs we’d like government to provide.

We confront some devastating choices as a nation. While income tax cuts could help our economy grow out of its problems, the political reality is that Congress is likely to increase taxes in your lifetime. Or they will push the Federal Reserve System to create more money, devaluing the dollars you’ve saved for retirement.

That turns some standard investment advice on its head. You’ll want to plan ahead for the potential impact of inflation on your retirement savings. Since we save and spend in dollars, it will become very important to consider what those dollars will buy in 20 years or more.

When it comes to tax decisions, you’ll also have to reconsider your historic plans. Traditionally, the idea was to invest in tax-deferred programs such as an IRA, because you assumed you’d be in a lower tax bracket at retirement when the money is withdrawn.

But if you believe income tax rates will rise in the future, you’d want to pay taxes now, and invest your money for tax-free growth, in a Roth IRA, for example. At the very least, you might want to split some of your retirement savings into before- and after-tax types of plans.

Whether you save pre-tax or after-tax, the most important thing is to save. Set some money aside from every dollar you make. Later in this book, you’ll learn how to hedge your bets on the buying power of those dollars in the future. (More on that in Chapter 7.)

The Savage Truth on Goals and Choices

Now that you know financial independence is within your reach—if you make the correct choices—it’s time to set some personal financial goals. These are your most important choices because they create the framework for all your other investment and lifestyle decisions. These are the beacons to keep you on target; they are the guardrails that keep you from taking emotional wrong turns. Your goals are your most personal financial decision.

Whether your goal is getting rich or simply having financial security (which I define as not waking up at night worried by money issues), it’s important to define that goal on your own terms. Take a moment to think about your own definition of being secure enough to not worry about money on a daily basis.

For some people, financial security is defined by being out of debt; others total up the amount of their investments to get a perspective on their current and future situation. Some people define financial security as being able to live for six months to a year without a job; others define it as having their money last as long as they do—a secure retirement income.

Some may put a specific dollar figure on their target; others recognize that the possibility of inflation or changing health needs requires a flexible financial cushion. For some, getting rich implies having enough money to do whatever they want—and they have an extravagant list of wants. Still, most multimillionaires will tell you that money can’t buy freedom from problems.

The best—and worst—thing about setting goals is reaching them. That means you have to set new, higher goals. Keep in mind when setting goals that you’re posting both a target and a direction. You may reach milestones along the way to your ultimate goal of financial freedom. The day you’ve paid down all your debt will certainly be an exhilarating one. Now you can travel further down that same road, using the money you set aside to pay bills to start investing. I never heard anyone complain about retiring with too much money! I hope your biggest problem is that you’ve reached all of your financial goals.

Set No Goal You Can’t Control

The key in setting goals is to set targets you can control. If your goal is to set aside a certain amount of money every month to pay extra on bills or to start investing, don’t count on a pay raise to make it happen. A raise is up to your boss. But you could reach your goal by spending less on dining out each month. That’s a decision under your control.

Since the whole idea of goal setting is to motivate yourself, you’ll need some financial targets that you can reach in a far shorter period of time than it will take to hit more distant targets such as retirement. Start by listing your short- and long-term financial goals.

Your short-term goals might include paying off all your credit card bills or student loans. You might set a goal of saving enough money for a car or a down payment on a first home. Short-term goals might take anywhere from six months to five years.

At the same time, you should also be setting longer-term goals such as college for your children or retirement savings. Those numbers may seem larger, and more intimidating—but you have the advantage of time on your side if you start working toward those long-term goals now.

Tape your list of goals to your mirror, where you’ll notice it every morning and evening. Your goals should be motivating, not intimidating. Be realistic about your expectations, and set goals in manageable increments. Your short-term goal of paying off your credit cards might start with paying off the highest-rate card, or the largest balance, first. Then move on to the next objective.

Remember: No matter what the time horizon or size of your financial goals, you’ll never reach them if you don’t get started. The first two letters of the word goal are go.

A Goal without a Plan Is Just a Dream

Only in fairy tales do castles get built without a plan. In real life, you have to hire an architect to create a drawing and then engage the services of a builder to help you achieve your dream home. Then you have to have a reasonable financial plan to make your mortgage payments, consider rising property taxes, and have savings to pay for repairs. And as millions of Americans have now learned, you can’t plan for rising home prices to automatically take care of these needs.

A financial plan is not engraved in stone; it can always be adjusted to fit your circumstances. But having a plan is the only way to put the odds of achievement on your side.

Life doesn’t come with guarantees. When you define financial security for yourself, you’ll need to make some assumptions. How long will you live? How much money will you need to maintain your lifestyle? How much will your investments grow? How much will inflation erode your savings?

Those projections will change as you redefine financial security and as the economy changes. You may have lifetime goals but be forced to revise your plan because of current events. Always keep your actions on track to meet your goals.

In Chapter 2, you’ll find links to programs that can help you plan for the impact of inflation, or changing tax rates or investment returns, to help you decide how much you should be saving now.

Your financial plan is a framework that needs to be adjusted—but not entirely replaced—as circumstances change. If you are self-disciplined and willing to invest the time to stay current, you can certainly do this yourself. But you are likely to decide that you need professional help, if only to mitigate the emotion that can overwhelm you in both bull and bear markets, in good economic times and bad.

Finding Trusted Help

Don’t be led astray by salespeople who call themselves financial planners. In recent years, all sorts of financial salespeople have started calling themselves advisors or planners. Even the most recent SEC rule that says advisors must act in the best interests of their clients, has a huge loophole that will allow them to continue to recommend expensive products with high commissions and fees.

The most important word in your search for financial advice is fiduciary. A fiduciary is a person who promises two things: to fully disclose all fees, commissions, incentives and rebates—and to put your interests ahead of his/her own.

If an advisor won’t sign the pledge to be a fiduciary, look elsewhere. This concept of fiduciary is so important I’ve devoted an entire chapter to the subject, Chapter 5.

Financial planning is