We aren’t always financially diligent. We slip. We stumble. We spend money we shouldn’t spend and we don’t save the way we should.

But what if you’ve corrected those behaviors? You’ve started (or maybe finished) saving up an emergency fund of 6 to 12 months of expenses. You spend less than you earn.

In short, you’re making progress.

Before you have time to get comfortable disaster strikes.

Handling Financial Emergencies

The car dies. A tree falls on the garage. You break your arm. Your company gets bought out and lays off your entire division.

Frustrating emergency. Scary emergency. Painful emergency. Life changing emergency.

Just as soon as you were making financial progress an emergency pops up in your tracks. You slow down. You stop. You may even take a few steps back.

We’ve all experienced these types of emergencies. Some of us were prepared financially, some of us were not.

How should you react?

Breathe First

Stop. Before you do anything you need to breathe.

Our first reaction during an emergency is to do something, anything. It’s part of that fight or flight instinct deep within us.

A quick, rash decision that we haven’t put any thought into is not the right way to react to an emergency. Sometimes a quick reaction is needed to get you and your family safe and secure, but once you’ve resolved basic needs take a step back.

If you didn’t think it through you might rush to the bank to cash out that certificate of deposit (and end up paying an interest penalty) rather than realizing you had enough money in your budget to handle it this month.

Analyze the Situation

Take an honest assessment of the situation before making a huge financial decision.

Let’s use the car dying example. A rash decision would mean paying any price to get the car fixed. It would mean trying to find someone to fix it immediately. This weekend. Now. Over a holiday. Surely someone will take all of my hard earned cash to get me up and running for next week.

If you took a step back you might consider if the car was worth fixing. Or if you could wait until a non-holiday to get a diagnosis. Or if you were able to have someone diagnose it today that you wouldn’t be obligated to paying outrageous fees to get it fixed because you would get up front pricing that you could sleep on. If you absolutely needed wheels today you could rent a car or borrow one from a family member or close friend.

In other words you would look for other options with a clear head rather than emotionally reacting to what has happened. It’s a smart move.

Have a Plan to Fall Back On

The best way to handle any emergency is to have a plan in place for that specific situation.

Of course you can’t create an intense detailed plan for every situation that could pop up. But you can plan for the major disasters that could strike.

Here’s some emergencies to consider planning for:

• income emergencies like job loss, pay cuts, or furloughs
• house emergencies like appliances dying or structural issues like holes in the roof
• medical emergencies that might require disability insurance (this also ties into income emergencies)
• car issues like the battery dying, on going maintenance, or major engine or suspension part failure that would prevent you from getting to and from work

Of course you need to know how large of an emergency fund you need before you can make any plan. (And you did know that amount for one income families is different than two income families, right?)

If you’ve been reading this blog for any amount of time you know I’m a huge fan of creating and sticking to goals. Financial goals, workout goals, writing goals… it’s all goals all the time in my book.

I definitely think goals should have some sort of reward aspect to them. The carrot on the stick, if you will. Yes, financial freedom, dropping weight, and personal enlightenment are all well and good, but you and I both know that a little extra motivation (“Oooo, a milkshake!”) can go a long way. Sad, but true.

But goals are hard. They are challenging. Sometimes we set goals so far above where we’re currently at they seem impossible to reach. These are our stretch goals. They force us to grow. Force us to get better.

Some of those stretch goals we will never achieve. They are impossible. That’s okay — we’ll end up better off just by seeking those higher expectations.

But sometimes there are goals that are achievable that we give up on. We get lazy. We get tired. We get distracted by the other things in our lives.

Even though we officially fail on reaching the goal we still end up giving ourselves the proverbial milkshake.

Avoid Setting Yourself Up for Failure

Shame on us. We’re putting reward before work. We shouldn’t do that, and I’m here to show you how. This definitely applies to your personal finance issues, but I’m sure you’ll find other uses for it as well.

Set Up SMART Goals

No, that’s isn’t a typo.

SMART is an acronym I’ve written about before (Don’t Let Your Goals Be Dumb). Each letter represents something that every single goal you set should have.

Goals should be…

• Specific
• Measurable
• Attainable
• Realistic
• Time-Bound

Goals like “achieve personal enlightenment” or “achieve financial freedom” are actually terrible goals. How do you measure enlightenment? How do you measure financial freedom? Does it matter when you achieve the goal?

Asking yourself those type of questions will guide you in making your goals better, stronger, and in the end… more attainable.

Track Your Goals

You have to have some sort of system to track your progress toward your goals.

I’m a huge fan of using Excel (or OpenOffice) spreadsheets. They are dynamic and customizable to your individual tastes.

Others prefer automated systems that will gather data for you and display it with shiny graphics like Mint.com.

At the end of the day it doesn’t matter what I or anyone else says you should use.

Use a system you are comfortable with. If you try to force yourself into a system that you’re really not comfortable with the odds are pretty good that you’ll get frustrated, stop tracking your goals, not achieve those goals, and give up.

Reward Yourself After Success

This is a critical piece missing from the SMART acronym. (Maybe it should be SMARTR!)

Attaining goals is hard, right? It usually requires some sort of sacrifice. When you’re setting up your goal and tracking system, why not also go ahead and dangle that carrot in front of your face?

If I…

• lose 20 pounds I’ll buy that new cellphone I’ve been jonesing for
• get to 12 months of savings in my emergency fund I’ll take my wife out for a nice dinner
• read 12 books this year I’ll buy that new computer game

The incentive of the reward in front of my face definitely keeps my motivated to continue on during the rough times.

What strategies do you use to stay focused on your goals?

College is kicking off this month at academic institutions across the country. Seniors are gloating their off-campus apartments. Juniors press on toward graduation. Sophomores are glad to have it all figured out. And Freshmen walk around campus attempting to look like they have it together while truly feeling dazed and confused.

And somewhere, usually in a large ballroom area, the bankers lay in wait.

A [Cheap Marketing Material Knicknack] for your Financial Loyalty

You know what I’m talking about. Banks line up with t-shirts, pens, koozies, mouse pads… you name it. Cheap marketing materials with their logo all over it.

These free things are for you! Honest! We like you so much we’ll give you a t-shirt and a book light!

Of course we do need you to sign up for our amazing, no interest for the first 60 seconds, 19.99% interest rate credit card to get this expensive marketing shwag.

The Risks of Using Credit Cards in College

A lot of financial damage has been done by inexperienced college students and their first credit cards. When you hand someone with no training a danger tool you can’t really be surprised when that same person ends up losing a finger.

Our society does so little to train the next generation on the tricks and trade of the financial industry that it really isn’t shocking that college students fall for credit card traps. The banks have a perfect market on college campuses: inexperienced clients with little free cash that want to impress as many strangers as possible.

The allure of this free money can be extraordinarily costly. Let’s say a college freshman signs up for a 19.99% credit card on his first day on campus. He decides to outfit his room and puts $5,000 on the card. He also decides to just pay the minimum until he pays off the charge.

That $5,000 charge will cost him $100 per month for 49 years and cost him $21,107. A costly financial lesson.

Our freshman wouldn’t be alone, unfortunately. A recent study by Sallie Mae showed 30% of students put tuition on a credit card, and only 17% paid off their cards in full every month.

The Benefit of Using Credit Cards in College

However, it’s not all bad news.

Let’s say our college freshman has been taught how to use credit wisely. He understands a budget. He knows he can only make so much pulling in minimum wage with his on campus job.

He, too, signs up for a credit card, but he doesn’t immediately blow his credit line on outfitting his dorm.

Instead he uses the card when he has money budgeted to spend, and pays off the balance every month. He continues this use throughout his college career and graduates not only with a high grade point average, but also a gleaming credit score.

That credit score will literally save him thousands of dollars throughout his adult life… if he can maintain that same financial discipline.

How?

Car loans, home loans, credit card, even his private student loans for graduate school… all will allow him to borrow money at much lower rates with his high credit score than if he had made poor financial decisions with that collegiate card.

What Should The Freshman Do?

Should the freshman sign up? Hold the phone — even if the college freshman wanted to sign up for a new credit card he wouldn’t be allowed to. The CARD Act prohibits people under the age of 21 for signing up for a credit card. That is, of course, unless they have a cosigner. That cosigner could be a parent, legal guardian, spouse, etc.

Is this a good thing? Possibly. But how many parents also have poor financial habits? How many parents will shrug and sign the papers without looking at the interest rate?

There is no blanket statement that can apply here. Some 18 year old college students can handle a credit card just fine. They’ve been taught the benefits and risks. (I was one of those students.)

Others shouldn’t even walk into the banker’s ballroom. The risk is far too great for them.

For each, personal introspection of their own habits and impulses should guide them.

In my last article I showed you how to rebalance your portfolio. Today I’m going to attempt to convince you that you should rebalance your portfolio every August.

Yea, I’m posting this with 5 days left in the month. Don’t give me any flak. If I had posted this on August 1st most of you still wouldn’t have done anything with your portfolio. Admit it. You know it’s true! Financial inertia is difficult to get past. So let’s get moving before the end of the month.

Now, step up, open up your retirement accounts online, login to the account management tools, and let’s get to work.

Why You Should Rebalance in August

To be completely honest just picking a month to rebalance every year and actually sticking to your commitment would make me a happy personal finance blogger. Even better it would improve your portfolio’s performance.

That having been said I think August is one of the best months to rebalance your portfolio. Here are three reasons why.

Many Portfolio Changes are Made at the End of the Year

One of the first times of the year that people pick to rebalance is the end of the year. Which is odd because I believe the end of the year is one of the worst times to rebalance your portfolio.

Why?

Because at the end of the year everyone is in a panic because they forgot to take their profits and they have some losses to offset those gains. Or more likely, they’ve been hoping those down investments would pop back up (and they haven’t) so they sell in the last week of the year so they can claim the losses on their income taxes. (Quick note: you can deduct up to $3,000 in a realized losses each year from your taxes.)

While the impact might be negligible in the long run I would personally rather not be buying and selling investments at the same time the rest of the world is to avoid paying a higher price (or accepting a lower price if selling).

Plus, I like to relax over the holidays. Dealing with finances and portfolios isn’t ultimately relaxing.

Money is Dumped Into IRAs Close to Tax Day

Another time of year you might consider rebalancing is as you wrap up your taxes close to tax day, April 15th.

Again, bad choice. It is the same scenario as the end of the year. However, I definitely doubt the affect is as strong as what happens at the end of the year.

A lot of money can be dumped into IRAs around tax time. Why? Because you have until you file your taxes (or tax day, whichever comes first) to invest money into an IRA. (For example you have until April 15, 2011 to invest money into an IRA or Roth IRA for the 2010 tax year.)

Since many people are financially lazy or broke they wait until the last possible minute to get money into the IRA for last year before they start working on this year.

I doubt the impact on the financial markets is all that dramatic right next to tax day, but I’d rather not take the chance if I don’t have to.

August is in the Middle

August is the perfect time to rebalance when you look at the financial calendar.

There is nothing of any significance going on financially. Okay, so maybe your kids are back in school, maybe you have a new tuition bill to deal with, but that’s about it.

If you’re trying to avoid Tax Day (April 15th) and the last week of the year, August is pretty much in the middle of both of those. It’s four months in either direction from August to get to the two major times of year that I like to avoid.

Pick a Day, Rebalance, Be Done

You think August is a terrible time to rebalance? That’s fine by me.

Just pick your date, make your rebalancing adjustments, and be done for the next 364 days.

Another financial task to add to your to-do list. But it can be a quick and painless one if you plan ahead. Do it. The retired you will thank you for it in the future.

Living under your means and on a budget is a great first financial step. Building up an emergency fund is a byproduct of that first step and is definitely necessary.

But you and I know you can’t just stop there. One day, hopefully sooner rather than later, you’ll want to retire and live off the money you’ve saved up.

Investing for retirement is a huge step toward securing your financial future. Setting up automatic withdrawals is another huge step as it removes the emotional side of investing.

As great as these steps are you simply can’t stop there. You have to be active in maintaining your portfolio’s balance.

What is Rebalancing Your Portfolio?

Rebalancing your portfolio is the process of resetting the balance of stock mutual funds and bond mutual funds within the portfolio.

If you start investing at a young age you should most likely have a portfolio that is close to 100% stocks. But as you age you start to build in a mix of bonds to bring down the risk level in the portfolio.

As the year goes on the stock market goes up and down. Your stock mutual fund holdings change in value. If stocks have a great run your portfolio’s allocation gets thrown out of whack.

Let’s say you wanted to have a portfolio mix of 75% stock holdings and 25% bond holdings. You start the year with this allocation.

But as the year goes on, as with this year, stocks have a great run. Your overall portfolio is up and most of that growth is due to your stock holdings. Your allocation now sits at 83% stocks and 17% bonds. Your allocation is out of whack and needs to be rebalanced.

What is the Rebalancing Process?

The rebalancing process is simple. If you are sitting at 83% stock holdings and your target is 75% you sell some of the stock holdings. Take the proceeds from selling those stock holdings and buy more of your bond holdings.

Many providers of retirement accounts (your company 401k provider, your Roth IRA company of choice) make this process easy for you by providing a rebalancing tool.

Instead of having to figure out the actual dollar or share amounts that you need to sell you can just tell the provider to set you back to your targeted portfolio allocations.

This is what my 401k provider offers as an option:

As you can see if I were going to rebalance right now I would tell the company to get my holdings back to their elections rather than their current percentages.

Why You Should Rebalance?

Simply put: ignoring your investments will lead to your allocations getting out of line… and that usually doesn’t end well.

Imagine if your portfolio was supposed to be 50% stocks and 50% bonds leading into the financial crisis a few years ago. You had set your allocations back a while back, and through growth of your funds your allocations were actually 75% and 25% bonds.

When you checked your account one day you’d notice your stock allocations having fallen roughly 30% in a short period of time. You’d feel a lot better if only 50% of your holdings were in stocks instead of 75%.

Additional Rebalancing Thoughts

Rebalancing is really important. What questions do you have? Drop a comment and we’ll see if we can help.

One last thought: your retirement account provider may also provide you the option of automatic rebalancing on a set schedule. I highly recommend this — and I’ll tell you when you should set it to automatically rebalance in my next post.

What would you do if someone walked up to you on the street and handed you a briefcase with $3,000 cash in it? And it wasn’t a trick. It was your cash to keep.

Would you…

• walk to the nearest electronic store and walk out with a cart full of expensive equipment
• blow it on a sports bet (or worse yet, plan a trip to Vegas to do it “in style”!)
• give it to charity
• integrate it into your financial plan just like you would any other windfall (because you do plan for that, right?)

Why come up with this theoretical scenario and post about it?

Because it isn’t theoretical.

The government is giving a specific set of soldiers, on average, $3,000 in stop loss pay.

Hopefully these men and women of our armed forces have a plan for a couple thousand dollars falling in their laps.

But if they don’t, I’m here to help. Here’s four ways to maximize your stop loss pay.

Let Your Budget Catch Your Windfall

I’m a big, big believer in having a financial plan. In my opinion you’ll never really get anywhere without a goal that you track diligently.

If $3,000 landed in my lap whether through stop loss pay or a bonus at work it would end up going directly into our budget.

Our budget is our master plan. We’ve put a lot of thought into. So why not let it tell us where the money goes next?

In our situation the extra cash would slide right through the budget, past our expenses (because our expenses wouldn’t go up for having this extra money), and straight to our saving goals. It would go towards things like purchasing newer cars eventually, our future kids education, and retirement.

No thoughts.

No “Hmmm, that television at Best Buy looks nice…”.

No “Honey I bought season tickets!”

None of that. Look at the budget. It will tell you what to do.

Pay Down Debt

If your monthly budget has no immediate needs (and I would hope it wouldn’t have $3,000 worth of needs or you must be in a difficult financial spot!) then you turn to your extra options.

If you are carrying non-mortgage debt one of the easiest ways to alleviate the strain on your monthly budget would be to pay off a large chunk of debt with the stop loss pay.

Hopefully $3,000 would completely knock out a car loan or credit card for you. But even if it doesn’t completely wipe it out you’ll still be putting yourself months ahead in paying it off.

Paying down your credit card is especially attractive. First, your minimum payment would go down which pulls some pressure off your monthly income. Then if you are able to maintain your previous minimum payment you’ll pay off the card even faster!

Save It for a Rainy Day

Let’s say you’re doing really well with your financial plan and you don’t have any non-mortgage debt to pay off.

That’s great, but what do you do with this extra money? Time to throw it into savings.

A few ideas:

• Build up your emergency fund toward 6 to 12 months of income replacement. Not sure how large your emergency fund should be?
• Save that money for your retirement. My favorite option is the Roth IRA.

I Can’t Decide What to do with My Stop Loss Pay

If you simply don’t know what to do with an extra $3,000 then it never hurts to simply not touch it for a while. This is common advice for people that inherit a large sum of money or win a settlement from insurance.

When someone hands you a check with a lot of zeros in it you can get emotional and do something pretty dumb and rash. A great option is to find a reputable bank and open a 6 or 12 month CD. The money will get a locked in return for the time period, you are guaranteed not to lose the principle thanks to the FDIC, and you’ll be penalized if you touch it.

It’s a great way to give yourself some time to sit down and think what to do with the extra money. And that’s a lot better than blowing it on something you will regret later.

Do you or someone you know serve in the United States military between September 11, 2001 and September 30, 2009?

If so, heads up. The government is paying out millions of dollars in stop loss pay to certain military personnel. There is a deadline to apply fast approaching, so pay attention!

What is Stop Loss?

Between September 11, 2001 and September 30, 2009 the military was given the ability to delay personnel from retiring or leaving the military. This was a combination of the United States being involved in two wars overseas and lower than expected levels of recruits coming into the military.

The military was stretched thin and if these soldiers, airmen, and sailors had been allowed to leave the service there would not have been enough new recruits available to fill the gaps. Thus calling the tactic “stop loss” to stop the loss of military personnel from military service.

If you were scheduled to retire on January 1, 2007 the military was allowed to prevent that from happening and keep you in the service. You were “stop lossed”. If you were then allowed to leave the service in June 2007 then you would have 6 months of being stop lossed. (From what I’ve read the average length of being stop lossed was about 6 months.)

What is Stop Loss Pay?

Stop loss pay is compensation being paid to those members of the military service who were not allowed to leave the service on time. This pay is on top of all other pay provided to the soldiers. It is specific compensation for not being able to leave the service.

The government is paying $500 for every month that a soldier was stop lossed.

If the average stop loss length of time is 6 months that’s $3,000 due to every single one of those soldiers (on average). That’s a significant amount of money in my eyes. Enough money to propel your savings goals forward. Enough money to fund 60% of an IRA this year.

How to Claim Stop Loss Pay

Each branch of the military has set up their own website or e-mail address to work with personnel to claim their stop loss pay. The links are available at the Department of Defense website.

I was able to get the Air Force and Army websites to pull up. The Marine Corps site didn’t work for me, and the Navy only has an e-mail address available. (The Marine Corps also has an e-mail address for personnel to contact.)

I’m sure each branch will have slightly different forms that are required to be filled out to claim your stop loss pay. Essentially you must prove that you were in the military, you had a scheduled time to not be in the military, and you were not allowed to leave the military until a later time because of the stop loss policy.

Act Quickly to Claim Stop Loss Pay

If you or someone you know were in the military during this time and are due stop loss pay you must act by October 21, 2010. That is the deadline for personnel to get their stop loss pay claims into their respective branch in the government.

On a sad side note: the family members of those personnel that were killed in action while being stop lossed may also submit a claim for them.

A recent article in the Army Times noted that there are about 145,000 eligible service members that could claim stop loss pay. Of that number, only about 25,000 (17%) have applied!

Please get the word out to your family, friends, and co-workers. These soldier, sailors, and airmen served our country. The least we can do is insure that they get 100% of the payment that is due to them.

In my next article we’ll look at some ideas of where to apply that stop loss pay to make your financial situation better. Stay tuned via RSS or e-mail updates.

Have you settled into financial apathy? Has the economy got you down? Are you not seeing any true progress toward your financial goals?

Maintaining consistent focus over a long period of time on any activity is difficult.

Do these sound familiar?

• “I promise I’ll sign up for the gym as part of my New Year’s resolution.”
• “I really am going to stick to this new diet. It’s tough, but I can do it. Ooo, look! Pizza!”
• “Well, I signed up for the gym in April, but it’s October now, and I’ve only been once. I think I’ll cancel the membership.”
• “That last diet really wasn’t for me. I just love carbs/fat/soda/food too much. But this one diet, I tell you, it’s great!”
• “Well, it’s December and I finally canceled that gym membership. I wish I had more time to work out…”

It’s easy to lose focus. Heck, it’s hard to get focus in the first place, and once you get focus it can easily slip through your fingers.

How do you keep focus once you’ve got it? Here are some tips to help you stay on track.

Get Accountable

One of the best ways to keep yourself on track is to find people to hold you accountable.

Granted, we are talking about financial focus… so naturally these people need to be close friends or family that you don’t mind sharing intimate financial details with. Sharing those details is the key to being held accountable. It will be uncomfortable at first — more for you than them, but really for both parties — but you have got to get over it.

If you aren’t willing to share what struggles you’ve had and what your plan is to move forward, then no one can really help you. You’re sunk before you even start.

Once you’ve received buy in from your accountability partners it’s as simple as setting up a set schedule for you to get together and go over everything. Maybe you grab coffee once every month.

Just make sure you’re bringing data to back up your progress — and they should know what needs to be tracked.

Otherwise you end up with this conversation:

Accountability Partner: “So, have you made any progress this month?”

You: “Of course! It’s been hard, but you know, I’ve done what I can…”

Accountability Partner: “Great!”

You: (silently sitting uncomfortably knowing you just lied through your teeth)

Surround Yourself with Reminders

Constantly remind yourself of both your end financial goal, and your progress as you go. It’s kind of like having an accountability partner popping up at random intervals to touch base.

Some quick ideas you could implement:

• Set up a calendar reminder in Outlook or Google to pop up once a week. A simple question like “Have you made progress?” to get your thinking brought back on track. This also works great if you have a smartphone and the tasks can be synced to the phone. Nothing like setting up a reminder for right when you get home at 5:45 in the evening — “Hey. You. Check the budget.” or something like that.
• Post-It notes. Yea, you know what to do. Put them in your car, on your desk at work, in your underwear drawer. A constant reminder in the places you unknowingly touch every day.
• Set up automatic e-mails from yourself. You can use services like Memo To Me to automatically drop yourself a note at some point in the future.

Take Care of Yourself

This isn’t technically part of personal finance and I think is often overlooked.

Imagine two scenarios:

1. You’re tired and frustrated. It’s been a long week. Your boss is really stressing you out about a big project at work. You stay late and miss your family. Even though you stayed late you end up taking work home. You get a quick bite of reheated dinner then get back to work — in solitude — in your home office. You go to bed late, and don’t get a lot of sleep both due to the time you went to bed and your stress levels from work.

2. You’re tired and frustrated. It’s been a long week. Your boss keeps asking for updates on a big project at work. You stay a little later than normal, but head home to find a sense of normalcy. You take the dog for a walk when you get home — just to get some fresh air and clear the head before spending quality time with your family. You grab a quick dinner, then head to work in your home office. You get as much work done as possible, but finally decide to shut it down for the night in order to get a good night’s rest. You go to bed on time.

Now imagine it is the next morning…

What are the chances you make wise decisions in the morning?

Do you wake up tired and late, rush to leave, skip breakfast, and buy coffee and a doughnut at the coffee shop next to work?

Or do you wake up refreshed, have time to gather your thoughts for the day, and sit down for some orange juice and a bagel at home?

A small decision like deciding to forgo breakfast can add up over time. Not only are you spending a lot more on breakfast than you could if you ate at home, but it is also not going to be as nutritious.

And at what point in the above two scenarios do you think you would have time to stop and think logically about your finances?

Keep your head clear and your body rested.

• Get a good night’s sleep. One of the worst feelings in the world is going to bed tired and waking up still tired. Going through another full day on 50% energy is the worst, and can cause you to jump into the energy drink/coffee/caffeine cycle. I know I make worse decisions when I’m tired than when I’m well rested and have energy.
• Get some exercise. Exercise releases endorphins. Endorphins are crazy things, you should Google them sometime. Exercise helps me think through issues and get my mindset right. Regular exercise will also help you keep weight off which will save you a ton of money in the long run. It can also help increase your energy levels.

The bottom line is there is no realistic way you’ll be able to keep a focus on achieving your financial goals if you aren’t taking care of yourself mentally and physically. You’ve got to get those things right first before you can tackle your finances.

And don’t try to do this alone. Bring in additional help and support with an accountability partner and by reminding yourself consistently of the end goal.

I wrote that we were considering bumping our “new to us” car timeline, and two other options. We’ll review those two other options. Maybe you’re going through a similar financial discussion in your household?

Option Two: Develop a “Wife Gets to Stay Home Once We Have Kids” Fund

We currently live a debt free life. We’re actually saving about 40% of our after-tax income every month. We have been very blessed to do this.

That having been said we would love for my wife to be able to stay home if and when we have kids. Even with living well under our means it would be a stretch. We would probably have to stop saving for all of our extra categories to make work.

Categories like retirement, kids’ future education, and our new car funds. Not exactly things you want to just cut out of the budget entirely.

This is proof that even though we live under our means we’ve still made choices that put us into a tough spot if we want to become a one-income family. Major expenses like our mortgage make that difficult, although one could argue that our mortgage is comparable to apartment rents in our area…

Nonetheless our goal is to one day let her stay home for at least 12 months with any children we bring into the world. Part of that would be covered by maternity leave from her work, and the rest would be on us. We could start banking that extra cash flow we have now for those (potentially) future dates.

Option Three: Develop a “Cover the Cost of Selling Our Home When We Decide to Move” Fund

You might be sitting there thinking, wait a minute, he just told us he aggressively paid down his second mortgage… why worry about the cost of selling the house?

The easy answer is I’m a nerd. At the end of the day it is six in one and half a dozen in the other. The money is being saved. That’s the important part.

We are considering moving in the relatively near future. Yes, we bought this house 3 years ago. Yes, it could be seen as a mistake. (More on that in a future post.)

I had a discussion with a close friend the other day. He used to run a business in the title and closing part of real estate during the boom. I picked his brain a bit on the costs of selling a house. I was a bit shocked. Even not counting the realtor commissions you are still looking at several thousand dollars in title insurance fees, a real estate attorney, etc.

Instantly my financial brain started turning. We would need to save up for these costs.

Sure, we could pay for the fees out of the proceeds of selling our home. But this is how it made sense to me. If we could save up for the home selling costs then the proceeds for selling were all ours. (You might also look at this way — we would pay the fees out of the proceeds and these additional savings would be additional down payment funds for our next home.)

How to Decide Our Next Financial Move

Again at the end of the day it amounts to putting a name tag on our savings money. Whether we call it car money, wife staying at home money, or covering the cost of selling our home money it’s still money. It’s still sitting in one of our accounts earning interest. And we’re still using it for our purposes.

The issue I want to stress here is that we are actively thinking and planning where our money is going to go. If you don’t tell it where to go, if you don’t give it a name… it will spend itself. Our society makes it far too easy to spend money to just go about it without thinking. So we think. We plan. We budget.

We’ll end up doing a lot of praying, but for now the money will probably just be lumped together. I’m not a big fan of moving up our “new to us” car purchase unless one of our other vehicles dies. The other two options are more contingency funds for those specific issues. We’ll cross those bridges as we get closer to those situations.

For those of you that haven’t been reading No Debt Plan very long, let me fill you in on our stance on personal finance.

Don’t Hate on the Financial Nerds

I am what Dave Ramsey calls a nerd. I’m actually a very big nerd. I’m a big believer in planning ahead for both the hiccups and the enjoyable moments of life. Things like emergency funds and saving up for vacations rather than relying on emergency credit cards to handle these life issues.

Also, I love spreadsheets.

Here’s a snapshot of what we believe:

• We live a debt-free life (except for our first mortgage). That means no credit card debt, no student loans, and no car loans.
• We believe in having a 12 month emergency fund specifically for unexpected illnesses or being laid off.
• We maintain (and continue to build up) separate maintenance “emergency funds” for things like cars, home appliances, etc.
• We aim to maximize the return on the money that has been graciously placed under our control. That means using things like reward checking accounts and a credit card with a strong cash back program.
• We will pay cash for all vehicles for the rest of our lives (barring any amazing 0% financing deals on new cars that have been heavily discounted to make it worth not buying a used car).

Note that this is exactly how we live, too. I’m not sitting up on my blogging pedestal telling you how to live your life while living completely opposite of what I tell you.

We live it. Daily. It can be done.

One day, long in the future, I plan to turn my No Debt Plan into a book or eBook or program of some sort. I want to help you change your life by making smarter financial choices.

You can do it. Just like I did.

Where to Focus After Paying Off Second Mortgage?

Looking at our list we’re still living a debt-free (except the mortgage) life. And we recently topped off our emergency fund to a full 12 months!

So where are we placing our financial focus next?

When we paid off our second mortgage two great things happened.

First, we paid off the mortgage. That frees up a monthly payment that was a couple of hundred dollars. That is now free cash flow that we can use elsewhere.

Second, it allows us to move the focus of the income stream that we were pointing at the second mortgage to pay it off faster. This was about three times larger than the actual second mortgage, so you can imagine the money we’re now able to point toward something else.

Our home and car repair funds are funded monthly and we’re content with their current levels.

There are several options we are considering for this extra cash:

• increasing how quickly we are saving for vehicles to replace our current cars
• developing a “my wife gets to stay at home once we kids” fund
• developing a “covering the costs of selling our home whenever we decide to move” fund

Let me walk you through our thought process as we make this decision.

Option One: Save for Cars More Quickly

Currently we have a set amount that we set aside each month for new vehicles. Back when we first started budgeting we laid out our “master plan” for the next several years. Replacing our vehicles is on the schedule for 2012 and 2014. (I told you I was a nerd!)

We are on pace to hit those goals as we have been consistent with our saving each month. (We’ve also been blessed to have the income to set aside each month to do that.)

We could take the extra cash and start saving for our new vehicles. We could really bring this goal to be completion a lot faster than we are currently are.

This is appealing in that my wife’s car is getting up there in mileage, and I’d like to get her something more comfortable.

The downside is it moves up the timeline in the future when we would need to replace the “new” car. For example if we wait until 2012, my wife’s car will be 10 years old. If we buy a “new to us” vehicle in 2012 then we can anticipate replacing that vehicle in the 2021 to 2022 time frame.

If we buy that “new to us” vehicle before 2012 that just pushes up the timeline for the next vehicle from 2021 to 2022 to somewhere around 2020.

I told you I was a nerd.

Where Would You Put Extra Cash?

I’ll go into the other two options in my next post.

But first a question for the readers: what would you do with a few hundred extra bucks per month? What would be the most effective use of that free cash flow for you?