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This is a guest post from Shaun Connell, author of Learn Financial Planning, a series of free, comprehensive financial planning tutorials. Feel free to subscribe to his RSS feed for more great articles.

It’s hard to watch the news or keep up with anything financial without hearing about inflation, deflation and our current money supply. Understanding inflation is essential to the basics of personal finance. It’s not just an economic concept – it impacts you every day, and is only of the biggest obsticles your investments will face.

“Inflation” is when your dollar loses it’s buying power. Inflation is when is takes more currency to buy the same amount of stuff.

Take penny candy, for example. I still remember when I could buy a small piece of candy for a penny. Now, I haven’t seen penny candy in years. This doesn’t mean the candy disappeared. No, you can still buy the candy I used to buy… now it just costs ten cents or more. This means one of two things:

1. Candy is becoming more valuable, OR
2. Our currency is becoming less valuable

The second is, by far, the most important concept to understand. That’s because the price of almost everything has gone up over the past few decades. Overall, our money is becoming worth less and less. The penny isn’t what it used to be.

But why? What does this mean for us?

What Causes Inflation?

One of the most basic principles of economics is how the law of supply and demand affects prices. If there’s a bunch of something, it’s usually not valuable. If there’s not much of something, it’s usually pretty valuable. To simplify the concept: the more that’s available, the less it’s worth.

For example, a truckload of gold is worth more than a truckload of sand. It’s all about what economists call “scarcity.”

Remember, our money isn’t inherently worth anything. It only has worth because people think it does, and because it’s relatively scarce. There aren’t millions of dollars under every bed. Money simply represents the real material wealth that others own. If there’s more paper and less wealth, then the ratio of dollars to value goes down… the dollars are “worth” less.

So what causes inflation? Though there are an incredible number of complicated smaller causes, the biggest cause is simple: the government decides to print more money. The actual material wealth in the economy isn’t changing. The government doesn’t make money; the government just prints money.

Inflation is what happens when there’s more “money” being created than there is worth being added. In other words, if the government prints 100 trillion new dollars, and our real GDP only grows about 10 trillion dollars, we’ll be seeing roughly 90 trillion dollars diluting the value of other dollars. That’s inflation.

But why should we care about inflation?

How Inflation Hurts You

Inflation slowly erodes the value of your wealth. The average yearly inflation is about 3.43%. This means that every single year, the cash you have is worth 3.43% less. That might not sound like much, but it’s simply mindboggling:

• Fact: Investments really make less than you think. If you make an average of 6% return in your investments every year, you’re actually only making about 2.6% per year after factoring into account inflation.

• Fact: Savings accounts aren’t cost effective for the long run. If you have a high-interest savings account, you’re still losing money after factoring into account inflation.

• Fact: For most people, a “raise” breaks even… maybe. If you get a 10% raise every three years, you aren’t actually getting a raise at all. You’re actually living on 3% and 6% less for two years preceding your raise after factoring into account inflation.

Inflation especially affects the people in the lower income rungs. Right now you can’t get away from hearing about inflation and deflation — it’s all over the news. Why? And what should you do?

What’s Happening Right Now?

Right now, we’re actually seeing a major amount of deflation, caused by the recession and low oil prices. This means that your money actually has a bit more buying power than usual.

But don’t get comfortable. We’re about to see record levels of inflation in the next few months and/or years. Just consider the following facts:

• Fact: More Fed loans are given, increasing inflation. All over the news, you can see reports that the Federal Reserve is lowering interest rates down to nearly 0%. This means the Federal Reserve (the people who print money) will be giving out more “loans.” A “loan” is when we give money that doesn’t yet exist for banks to loan out. The lower the interest rate, the more loans are given out, the more money is printed.

• Fact: We’re already printing a lot, increasing inflation. In the past few months, the Federal Reserve has already printed more money than the last 19 years combined.

• Fact: Spending increases printing, increasing inflation. Over the past few months, Bush has spent over a trillion dollars to help the economy. Obama has already pledged at least another trillion towards his economic stimulus alone. Spending several trillion dollars is a surefire way of increasing inflation.

I’m not saying the world is going to end — just that inflation is going to start again, and soon. We’re seeing deflation right now, which means one thing: This is the perfect time to get prepared.

How to Beat the Future Inflation

Understanding inflation isn’t enough; you have to be willing to take actions to “beat” inflation. Though there are many tactics, the four tips below are simply a must for a rational financial plan:

• Stock Up. Remember, as we’ve talked about before, we’re currently in the middle of deflation. That means that items that will be increasing in costs in just a few months to a year are actually much, much cheaper. So stock up. Buy bigger boxes and value packs. This is usually still a good idea, but right now it makes even more sense.

• Precious Metals. Usually, I’m not a big fan of precious metals like gold and silver, and encourage their purchase only for the sake of diversity and financial security. But due to the recession, the price of gold looks good. Precious metals are also a great “crisis hedge” in the sense that during times of crisis, investors often flee back to precious metals.

• Save, Save, Save. As mentioned before, a high-interest savings account will allow you to just break even. But right now, with deflation, you’ll actually be making even more. Remember, deflation is the opposite of inflation, which means for every 1% of deflation, your money’s value increases about 1%. This means that you should be storing your money away while in deflation periods for two reasons:

1. To have extra money on hand when prices increase, and
2. To make an extra couple of percentage points due to the deflation.

• Get That Raise. Though this might be considered a “duh” point, it’s important to understand. Inflation means you’re getting a built in pay cut of at least 3% every year. In the next few years, that’s going to get worse… a lot worse. This means that now, more than ever before, is the time to focus on working harder and doing things that will get you noticed. At this point, getting a raise is often still just a defensive measure.

Conclusion

Remember, the laws of economics don’t change just because we’re having a financially rough time. If anything, this is the time we should focus on the economic and financial principles that get us to prosperity.

This means you don’t have to do anything “special” to combat inflation: just do what you already know you should do. Extraordinary financial times call for extra ordinary financial measures.

To the Readers:

How is inflation impacting your long-term savings plans?

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In a life changing event, that is. Hyundai has begun to promote a new program that claims that “if you cannot make your payment because of a life changing event, we’ll allow you to return your vehicle and walk away from your loan obligation - and in most cases, we will cover most, if not all of the difference”. This program is good up to one year, post purchase, and at least two payments must be made in order for it to become effective. But is it a good deal?

What is a ‘Life Changing Event’?

According to Hyundai, it could be one of the following:

• involuntary job loss
• physical disability
• loss of license due to medical impairment
• personal bankruptcy if self-employed
• getting transferred overseas
• accidental death

Looking into this a bit further, the plan is managed by an auto dealer insurance and finance company called Walkaway. Hyundai appears to be the only automaker using this offer on a national level, but other automakers could potentially offer something similar through Walkaway or another provider. Hyundai has previously sold this program in Canada as an add-on insurance product for buyers and lessees. However, this time, it looks like Hyundai is footing the bill.

Thoughts on this Promotion

• I’m sure the Hyundai has run some numbers to see if this promotion makes sense for them financially. So any new sales that they wouldn’t have had from those overwhelmed by fear in the current economy and all of the free publicity that comes from it (sorry GM, Ford, and Chrysler) is an added bonus for them.
• I’d suggest reading all of the fine print before jumping at a promotion like this. The ‘and in most cases, we’ll cover most, if not all the difference’ line is incredibly vague. That’s two too many ‘mosts’ for my blood.
• It is a clever promotion, I must say, and I’d love to see U.S. automakers try something creative like this out. What have they got to lose? They might as well go out with a bang, right?
• I’ve driven a few Hyundai’s, I don’t like them. Buy American, not only to save your neighbor’s job, but because the quality these days is as good or better.
• From a personal finance perspective, if you are so concerned about potential negative equity from an auto purchase or lease that you are willing to make a purchase for re-assurance, you are probably getting the wrong car (or getting a car for the wrong reasons). There are plenty of great used vehicles out there that are depreciating at a much slower rate and are much cheaper than those just driven off the lot.

Your Thoughts?

• Does this promotion appeal to you at all?
• Would it make you switch from another automaker to Hyundai?
• Are you considering a new vehicle purchase or lease due to, or in spite of the current economy?

If you found this article helpful, subscribe to my free RSS feed, or sign up for free email updates! You may also find the following articles of interest:

How Old Are Your Tires? Your Safety May Depend on the Answer

How to Save on Auto Insurance

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According to the Financial Times, $320 billion in net outflows occurred in stock, bond, and balanced (stock +bond) mutual funds in 2008, an annual record for dollar amounts and percentage of assets. Most of that outflow occurred from October through December. At the same time, money market (cash) accounts enjoyed net inflows of $422 billion during the year.

Volatility Ruled From October and November

This massive movement from mutual funds to money market accounts really points to investors getting scared and running from the volatile stock market. The first 8 days of October resulted in a 22.6% loss in the S&P 500, at which point the Volatility Index (ticker: VIX) skyrocketed.

Here’s a look at the VIX, which measures market trading volatility from August of 2008, through the end of the year:

This chart shows a doubling in volatility from the start of October to a high point of about 80, at the time when many people started running scared from stocks. Since then, volatility levels have decreased to 40, which is back to pre-October, and pre-crash levels.

After those first 8 days in October, the S&P 500 has experienced a 4% gain through this past Friday (Jan. 4, 09′). So, the end result of cashing in your funds and avoiding all the market chaos would have saved you - OK, it wouldn’t haven’t saved you, you actually would have avoided a 4% gain.

Where does the Market Go from here?

Volatility has been cut in half and has been trending downwards. The market is taking bad news in stride, which could be a sign of stability on the way to a rebound.

With workers reallocating their funds and seeing more market stability at the same time, I would expect that fund inflows would pick up again in early 2009. Of course, when funds have money and stocks are relatively inexpensive, stocks also benefit (funds have to buy something, right?).

Also, for all of those employees who had maxed out their 401k’s earlier in the year and are now starting out fresh, you can expect more cash inflows going back into funds.

At the same time, political optimism seems to have settled many people’s fear. All of these things together point towards a solid start to 2009. What do you think will happen?

What are your Thoughts on Investing in 2009?

• What do you think the market will do in 2009?
• Have your fears subsided?
• Are you confident that the U.S. economy will rebound this year?
• How are you investing in 2009? Take the poll!

If you found this article helpful, you can subscribe to the 20somethingfinance RSS feed, or sign up for free email updates. You may also find the following article of interest:

5 Reasons why Dollar Cost Averaging is Back with a Vengeance

The 5 Best & Worst market Sectors to Invest in over the Next Decade

My Review of Zecco.com

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I just finished David Allen’s Getting Things Done: The Art of Stress-Free Productivity. The book has sold hundreds of thousands of copies and is preached as the go-to manual for the ‘Lifehack’, or knowledge information age of personal productivity. But should it be?

First, I’ll give a chapter-by-chapter summary (think Cliff Notes) of Getting Things Done, and then give the positives and negatives on the book (and GTD movement) - including some very inspired thoughts about Allen and his credentials. I guess you could call it a ‘GTD’ summary of Getting Things Done.

Chapter 1: A New Practice for a New Reality

The first chapter essentially states that the true art and challenge of knowledge workers is to determine what to do with ambiguous tasks and projects. Work has no boundaries so in order to have a ‘mind like water’ (Allen use to be a karate instructor after a trip to a mental institution) you have to:

• Collect the data
• Clarify the next action
• Remind and review

This will wipe out all the stress of the ’stuff’ that is cluttering your life. You should keep record of everything you need to do so that your mind can be free to deal with actions, or ‘getting things done’.

Chapter 2: Getting Control of your Life: The Five Stages of Matering Workflow

There are five steps to mastering your workflow:
1. Collect. Use an in-basket, paper notes, voice, email, and electronic methods to collect 100% of everything.
2. Process (what to do about them). What is it? Is it actionable? If no, then trash it, save it, or reference it. If yes, will it take less than 2 minutes to do? If yes, then do it. If no, then delegate it or defer to doing it later (put it on your calendar).
3. Organize the results. If you can take an action, calendar it or write it down on a next action list. If no, trash it, write it down to do later, or save it in a reference file.
4. Review next actions. Glance at your list to determine what to do and have a weekly review to gather and process everything, review your system, update your lists, get clean, clear, current, and complete.
5. Do the actions. Allen highlights 3 models to decide what to do:

• A. The 4 criteria model for determining actions in the moment: in order: a. context, b. time available, c. energy available, d. priority.
• B. The 3-fold model for evaluating daily work: a. doing pre-defined work, b. doing work as it shows up, c. defining your work.
• C. The 6 level model for reviewing our own work: work from the bottom up a. runway (current actions), b. 10,000 feet (current goals), c. 20,000 feet (areas of job responsibility), d. 30,000 feet (1-2 year goals), e. 40,000 feet (3-5 year vision), f. 50,000 feet (life goals)

Chapter 3: Getting Projects Creatively Under Way: The Five Phases of Project Planning

For projects (work that takes more than one action step to complete), here’s how to handle it:

• Step 1: Define purpose and principles.
• Step 2: Envision an outcome.
• Step 3: Brainstorm.
• Step 4: Organize.
• Step 5: Identify next actions.

Chapter 4: Getting Started: Setting up the Time, Space, and Tools

• Time: Create a block of time to get everything organized.
• Space: Set up space at home, work, and in transit that are all basically identical. If you are using cloud computing to keep track of things and have internet access, you’re basically already doing this.
• Tools: Allen recommends getting the following tools: at least 3 paper holding trays, stack of letter size paper, pen/pencil, post-its, paper clips, binder clips, stapler, staples, Scotch tape, rubber bands, automatic labeler, file folders, calendar, wastebasket, recycling bin. Allen also recommends setting up an A-Z filing system to organize everything. Here, Allen, and his book, are showing their age a little bit. If you’re working in a knowledge job today, you probably don’t need half these things and they only add to clutter, and the resulting stress.

Chapter 5: Collection: Corralling your Stuff

• Gather all physical things you need to process: paperwork, business cards, notes, etc.
• Do a mental mindsweep of everything you need to process. This includes professional and personal commitments.

Chapter 6: Processing: Getting in to Empty

After collecting everything, you need to process it. This means you should:

• Trash what you don’t need.
• Complete any less-than 2 minute actions.
• Delegate stuff you can’t complete to others.
• Sort into your own organizing system reminders for actions that will take more than two minutes.
• Identify any larger commitments, or projects, that you have.
• Identify things to save for later and use as reference material only.

Chapter 7: Organizing: Setting up the Right Buckets

Allen identifies 7 basic categories of things you have processed and will want to keep track of:

• A projects list.
• Project support material.
• Calendared actions.
• Next actions: could be categorized by type of action: calls, computer, email, errands, at home, at work, agenda, or read/review.
• A “waiting for” list (waiting for others to complete).
• Reference materials.
• Someday/Maybe list (i.e. CD’s to buy, websites to visit, recipes to cook, etc.)

Chapter 8: Reviewing: Keeping your System Functional

Review your calendar first, and then your action list.

Do a weekly review and period ‘big picture’ reviews.

Chapter 9: Doing: Making the Best Action Choices

This chapter is almost a word-by-word repeat of Chapter 2, Step 5, which covers the three models to get work done.

Chapter 10: Getting Projects Under Control

This chapter is a repeat of chapter 3. Nothing new here.

Chapter 11: The Power of the Collection Habit

If you feel dissatisfied with yourself, you have three options:

• Don’t make the agreement.
• Complete the agreement.
• Renegotiate the agreement.

Basically, Allen is saying that it’s better to set limits with yourself and others versus saying yes to everything and letting yourself and others down.

Chapter 12: The Power of the Next-Action Decision

Allen uses this chapter to self-promote that organizations and people who look at projects by focusing on the ‘next action’ are much more efficient than those that don’t. He also says that intelligent people who over-think can benefit by intelligently dumbing themselves down with this technique.

Allen argues that this technique forces: clarity, accountability, productivity, and empowerment.

Chapter 13: The Power of Outcome Focusing

Self promotion and yada, yada, yada. Nothing worth mentioning.

My Review: The Good, The Bad, and The Ugly of Getting Things Done

Good:

• The book consolidates some basic efficiency principles.
• It’s good for those who are overwhelmed and don’t know how to improve their productivity.
• It’s good for those new to an office environment.
• I can see how students could use some of the principles to get more studying done.
• It helped me accomplish something I needed to do: focus on ways to optimize my workflow.

The Bad:

It’s 260 pages and the useful information in it is covered in 5 pages. This means that there is 255 pages of fluff and repetition. I would not recommend buying the book, because just about any summary you’ll read on it will be pretty comprehensive and get rid of all the crap.

The Ugly:

Allen is primarily a salesperson. His book takes basic principles that can’t really be refuted. Yes, there is wisdom in some of the time-tested methods that he has taken claim for, but he has created a cult of personality through self-promotion, common sense preaching, and a catchy book title. He’s running a multi-million dollar business that charges $600 per head for seminars based on the catchiness of the brand that essentially recap the basic principles in the book.

In doing some research on Allen’s career, I found that he has had dozens of different careers in his life: karate instructor, vitamin salesperson, moped salesperson, landscaper, waiter, magician, glassblower, travel agent, and ordained minister of the Movement of Spiritual Inner Awareness church. This church is a new age religion church that has been called a cult of personality by many, and it looks like Allen has utilized a lot of cult and ministry methods in his book to create a cult of personality amongst many knowledge workers.

Final Thoughts:

The book has some good content, but is vastly overrated, and the self promotion within the book is tough to take at times. Use some of the basics within it to analyze whatever workflow system you are currently looking to look for areas of improvement. In general, it’s good to really sit down, reorganize, and be creative about your own personal workflow, but I would not recommend spending the time to read the book to do that. The Cliff Notes should suffice.

To the People:

• Have you read the book? What are your thoughts?
• What are the basics of your workflow method?
• What productivity/efficiency tips have you found to be the most effective?

If you found this article helpful, you can subscribe to the 20somethingfinance RSS feed, or sign up for free email updates. You may also find the following article of interest:

5 Easy Steps to Eliminate your Junk Mail

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20SomethingFinance officially turned 1 on Monday. It’s been a huge learning experience over the past year with some bumps and bruises, but hopefully you’ve gained some value from the content. A big thanks goes out to everyone who has supported the blog by commenting or promoting it to others.

I thought it would be appropriate to reflect on the last year by recapping 5 of the most popular posts:

• Forget Dave Ramsey, Five Ways I’ve Used Credit Cards to Better my Financial Health
• 3 Reasons why Tax Refunds are Bad and how Allowances can Help
• Who Should Pay for the Date? The Dreaded Dilemma Examined
• Which Vehicle should I Sell? You Decide!
• Life Insurance: How much Coverage do I Need, if Any?

I also wanted to highlight the posts that I think represent some of the best content on the site. Many of these posts had limited readership and commenting because the site was brand new and took some time to gain traction for most of the year. If you feel so inclined, check them out and breath some life into them, they’ve been lonely:

• Dec (2007): What is a Mutual Fund?
• Feb: The Complete Guide to Choosing Between a Traditional 401k and Roth 401k: Part 1 and Part 2
• Feb: Free Google Docs & Excel Personal Budget Spreadsheets!
• April: Why Pay for Lifelock when you can Prevent & Monitor Identity Theft for Free?
• April: How to Get out of Debt: Part 1 and Part 2
• May: Who Keeps Killing the Electric Car?
• May: How is a Mutual Fund’s Share Price Determined?
• June: Save 63% on Beer & Enjoy 10 Other Benefits with Home Brewing
• June: Emergency Savings Funds: Why, how Much, and Where?
• October: 8 Rules you Must Follow when Buying Stocks During a Recession
• November: Will your Cost of Living Adjustment (COLA) Allow you to Break Even?
• November: How has Technology Impacted your Finances over the last decade?
• December: My Review of Zecco.com

Also, check out the entire Green Matters: Eco-Friendly Cost Savings series that discusses ways to save money and the environment at the same time. When Obama hits office, I expect that you’ll see a whole bunch of new tax credits for energy efficient products.

For 2009

I’m very excited about the current direction of the site and expect some big strides in 2009. I’ll shamelessly ask that if you have received value in the site’s content over the past year, please help it continue to grow and thrive by inviting anyone and everyone whom you’d think would also gain value a link to subscribe to the site.

Have a safe, happy, and prosperous 2009!

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20SF is now accepting guest posts in order to add a few more voices, variety, and experiences to the site.

Why guest post on 20somethingfinance.com? Two good reasons:
a. It’s a great way to get exposure to your site or to your writing skills. The site is currently getting tens of thousands of visits per month and growing fast.
b. You can include a link to your site and a short bio at the start of the post to increase traffic to your site.

A Few Guidelines:
Nothing out of the ordinary here, if you’re familiar to guest posting. Your guest post content must be:

• Yours: Your content must be original and unique. You have written and are holding the copyright for your material.
• Unique: It must be unique material for this site - not a reproduction of something from your site or another site. It also shouldn’t be re-posted on your site or another at a later time. That is called ‘duplicate content’, and we can both get dinged for it by search engines.
• Relevant: This is a personal finance site that teaches sound personal finance principles. Any content should be somewhat related to this theme. That being said, I’d love to see posts on health, personal improvement, career, and other indirectly related topics.
• Good: If you send me a messy post that has bad advice in it, it won’t see the blog.

Also:

• No affiliate links.
• No advertisers. If you’d like to advertise on 20somethingfinance, please visit the advertising page.
• 750 to 1,500 words, with exceptions.
• I’ll reserve the right to edit and add images.

Here are a few other tips so that you can get the best results from your efforts:

• Bring your best stuff. This speaks for itself in terms of getting the most traffic from your post.
• Have an easy means for subscriptions on your site so that visitors are able to easily subscribe to your content.

If you have any further questions or are interested in sending a post, please let me know through the contact form.

Happy posting!

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My apologies for those of you I sucked in by invigorating memories of dried noodles and chicken-like scents - this post will not encourage Ramen noodle eating (but it certainly wouldn’t hurt from a financial perspective). Seriously folks, for those graduating for the first time, the trends you set while being a student will carry over for many years to come. When in school I noticed some key blunders that many of my peers and I made that later led to some financial hardships.

The average student graduates with $20,000 in debt from tuition and room and board. Isn’t that a deep enough hole to dig out of? Here are 8 common financial blunders that students make that only add to the tab by building bigger debts or limiting future earnings potential. 

1. Holding More than One Credit Card

Unless you are married or living with a significant other (and have a joint credit card), there’s really no reason to have more than one credit card. If you have more than one card because your credit line is maxed out on your other cards, you’re digging yourself a huge hole that will be hard to get out of, no matter what your earnings potential is when you graduate.

2. Carrying a Balance on your Credit Card

Under no circumstances should you finance your college lifestyle at a 10%+ effective annual rate (EAR). Living within your means especially applies for students. Unless daddy (or mommy) is sending your bailout checks at your beckon call, then creating a well balanced budget, financed by a job or your personal savings, is strongly encouraged. It is possible to have fun and not finance your future at the same time.

3. Dressing to Impress

When in school, I was always baffled by the $40, 50, and 60 thousand dollar vehicles that many students were sporting around. My guess is that many of them were leases financed by credit card debt. This is just one example of frivolous spending by students designed to impress others. Sure, it might impress your hot date at first glance, but that’s about the only thing it can accomplish, besides putting you in the poor house.

4. Neglecting to Save

The prevalent attitude amongst my peers while in school and the majority of them after graduation is “it’s never too late to start saving”. Granted, very few students save for retirement while in school, but those that do will be building positive lifelong financial habits and harnessing the power of compound returns.

5. Delaying Graduation

Completing a four year degree in four years is more than enough to put you in some serious long-term debt. Completing that same degree in 5, 6, or 7 years can add significant living expenses to the tab. Many on extended plans simply aren’t sure what they want to do with their lives. The thing is, you’re going to find many 30, 40, and 50 year-olds who still don’t know what they want to do. A degree mostly shows that you are a person who can apply yourself. Most people don’t end up working in the field of their degree, and there’s nothing wrong with that.

6. Not Applying yourself in Every Course

In my application for my most recent job, my coursework and GPA were looked at very extensively. GPA might not be the most important thing to every employer, but when you have zero experience to back it up, it’s the only thing that reflects your work ethic. Unless you’re in a high demand field, GPA should matter.

7. Not Challenging Yourself with Internships

If your only work experience at graduation is Subway, you might be in trouble. There are TONS of great internship experiences out there and I really regret not challenging myself every summer to try a different one. They don’t need to be 100% relevant to the field you want to get into, but they should provide some sort of transferable skills and challenge you in a way that builds confidence in you (and your future employer in you).

8. Working for Minimum Wage

A little research and thinking outside the box resulted in an office job that paid $12 per hour with the State of Michigan. This thankfully afforded me the opportunity to make the same amount of money and work half the hours (allowing me to focus more on my studies and extracurricular activities). The benefit of extending your job search can pay huge dividends. There are opportunities out there, they sometimes just require a little digging.

Possible Comment Topics:

• What are (or were) your financial habits while in school? Is there anything you regret doing or not doing?
• Do you have any tips for current or future students?

If you found this article helpful, you can subscribe to the 20somethingfinance RSS feed, or sign up for free email updates.

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Among the melting pot of New Years resolutions posts over the next week you’ll see a lot of the familiar staples: save X amount per month, pay off X in debt, eat out less, exercise 3 times a week, give more to charity, etc. All good stuff, but I thought I’d go with a little something more concrete this year that can be carried over from year to year.

Here are six steps that you can set goals towards over the next year (and every year). Each step will ideally lead you one step closer to financial freedom over the long haul. I realize that this list will not be applicable to everyone and few will have the financial resources to do everything on this list every year, but that shouldn’t prevent us from setting stretch goals.

1. Set a Budget

Before you can attack debt and figure out savings, you have to know how much is coming in and how much is going out every month. I’ve created a free budget planner to help you do so. You can also utilize budgeting sites like Mint, Yodlee, and others.

A budget will help you square away all the necessities in your life (water, energy, food, shelter, insurance, etc.). Beyond necessities, have the attitude that you are going to attack your ‘wants’ to get them down to a minimal level that results in the optimal return on your happiness (i.e. scale back your cable, phone, and transportation expenses). After that’s been accomplished, move to step 2.

Whether you’re in good or bad standing financially, without a concrete budget you’re in no place to strategically plan how to move yourself forward towards other financial goals. You should re-budget at the outset of every year or more frequently if circumstances demand it.

2. Attack High Interest Debt to Stop the Bleeding

If you have any credit card debt that carries over from month to month, attack it, so that you can stop the bleeding. You should not have any savings in the bank or elsewhere if you have this kind of debt. The odds of your savings outperforming the 10+% you’re probably paying on credit card fees consistently over time are not very good. Any positive cash flow after creating a budget should go towards this goal before savings.

Part of this process is going to be knowing the difference between good debt and bad debt and negotiating lower rates on your bad debt. The following debt spreadsheet should help you classify your debt as a good starting point.

3. Get your Employers Full 401K Match

The one exception to the previous rule would be if the rate of return on your 401k match is better than your credit card fees. In this case, I would personally go for the 401k match first. For instance, if you get matched 50 cents for every dollar that you contribute to your 401k up to a given amount, your return on that match is 50%. This is probably a much higher return than what you are paying on most, if not all, of your debt. More simply:

• If 401k match return rate > debt effective annual rate (EAR) then max out the match.
• If 401k match return rate < debt EAR, then pay off debt (each debt should be judged separately).

4. Max Out your IRA’s

The max IRA contribution for 2009 is $5,000. After getting your employers full match and paying down high interest debt, this is ideally the next place to put your money. I suggest going this route vs. non-matched 401K because you will have wider flexibility in the investment options in your personal retirement accounts than you have in employer sponsored plans, such as 401k’s.

5. Max Out your 401k

Next, continue capitalizing on the tax benefits of retirement accounts by fully maxing out your 401k. This means contributing the amount from where you left off with getting your employer’s match all the way up to the maximum amount allowed by the IRS. The max 401k contribution in 2009 goes up to $16,500, for an increase of $1,000 over 2008.

6. Save for Life Goals

You can’t save for everything at once, so you’ll have to start with budgets for each. Life goals could include things like going to school, early retirement, saving for your children’s college expenses, down payment for a house, etc. I can’t tell you where or how much to allocate towards these goals because it all depends on your personal priorities.

The immediacy of some life goals may force you to take funds away from previous steps, such as maxing out your 401k. That is OK, and you shouldn’t feel guilty about it.

The one thing that is very important to keep in mind is that many ‘life goals’ can be financed very cheaply. For instance, why save for own school expenses when you may very likely be able to get very low interest loans to pay for school?

Your savings should, at the very least, be earning 3% or so from a high interest savings account, money market account, certificate of deposit, or savings bond. Those with a longer time line to their life goal (i.e. early retirement) may want to seek higher risk, higher reward potential from stocks or mutual funds.

Conclusion

Perhaps you won’t get all the way to step 6 with this plan, but use this list to push yourself to the next level. For instance, for those who’ve never gone beyond step 2, perhaps you push yourself to get to step 3 this year. Best wishes for financial and personal success in the new year!

Readers:

• What are your financial goals for 2009?
• If you’ve followed a similar path, how far did you get this year and where do you plan on getting to next year?

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