I always hated math.  I know it isn’t evident from my writing style or the plethora of monosyllabic words used throughout this blog, but I always preferred English…well band, athletics, and lunch really.  However, I do love simple formulas that reveal useful things that are applicable to the real world. Hence, The Rule of 72:

The rule of 72 refers to an easy mathematical formula that can be used to quickly determine how long it will take your money to double via compound interest.

72 / interest rate = years it will take for initial investment to double

72/8 percent = 9 years

Remember Algebra class?  This formula can also be used backwards to determine what percentage rate one needs to achieve in order to double their investments in a predetermined number of years.

72 / years = percent needed to double money

72/9 years = 8 percent

Time is Money

When looking at the chart, you’ll notice there is a huge difference between a 1% return and a 12% return.  The sooner you start investing, the more time compound interest can work its magic and double your money.

Have you ever been asked if you would rather receive 1 million dollars now or a penny on the first day of the month, with the caveat that your penny and the total amount at the end of each day would double for an entire month?  Most people choose the 1 million dollars, but the penny that turns into 2 cents the second day, 4 cents the third day, and 8 cents the fourth day eventually totals over 5 million dollars by the end of the month.  That is how important your interest rate is to your final balance over the years.

Oh, and if anyone knows where I can find consistent 10% – 15% returns, be sure and let me know.

Why You Need A Hobby

There are countless benefits associated with hobbies.  If you need to kill some time, clear your head, or just unwind after a long day of work, you need a hobby that will help “get you there.”  Studies show that participating in hobbies can reduce stress, lower blood pressure, and sharpen the mind.  They can decrease the risk of dementia, depression, and even delay Alzheimer’s.  There are also social implications.  Hobbies allow people to connect with each other while exchanging new techniques or ideas.

Choose Your Hobbies Carefully

If your hobby includes the accumulation of stuff, do yourself a favor and consider a new one. Stamps, coins, baseball cards, comic books, books, cds, or anything else that involves accumulating things is going to cost some serious money over time.  I’m not suggesting you completely give up your collection hobbies, wait, maybe I am…

Instead, take up a hobby that encourages personal growth or development, or one that can be monetized.

Learn how to play a musical instrument.  There might be small upfront costs associated with purchasing an instrument, but it’s a hobby that costs almost nothing when the hours spent playing are divided out over one’s lifetime.

As a musician, I can personally attest to the many benefits listed in The Top 10 Benefits of Playing a Musical Instrument.  I learned how to play the piano at the age of 5 and literally spent thousands of hours just playing as a percussion major in college.  It was awesome.  I can personally attest the following are all very real benefits that musicians enjoy:

• Better Intellectual Capacity
• Discipline and Patience
• Relieve Stress
• Communication of Your Emotions
• Emanate Your Personal Style
• Teamwork
• Phsyical Workout (especially for percussionists)
• Bragging Rights
• Fun

What Is Your Favorite Hobby?

If music isn’t your thing, there are countless other hobbies that still meet either the personal development/monetary criteria.  What about quilting, woodworking, or photography?  It doesn’t matter what it is as long as it isn’t getting in the way of the other facets of your life.  If your hobby is prohibiting you from reaching your financial goals, find a new one.

What are some other hobbies that you enjoy that don’t require an ongoing stream of cash?

The merits for establishing an emergency fund are solid. If your furnace quits working in the middle of winter or you lose your job, you’ll eventually need quick money to cover life’s potholes.  The recommended amounts often vary from $1,000 to a full year of expenses.  Personally, we have an emergency fund that would keep us afloat for 3-4 months if both my wife and I lost our jobs at the same time.

But what if you’ve already established your primary emergency fund?

There are plenty of places to send your money.  Retirement, college, vacations, home down payments and an infinite number of competing goals are fighting for each dollar.  However, before allocating all of your extra cash to your Tahiti vacation fund, I suggest saving monthly for life’s “guaranteed surprises,”  outside of your primary emergency fund. To me, an emergency fund is for the unforeseen worst case scenario, not for life’s guaranteed expenses (even if you don’t know exactly when they will occur.)

What are Guaranteed Surprises

If you drive you car long enough, repairs are guaranteed.  It’s still a surprise since you won’t know exactly when your car will sputter or how much it will cost you.  The same goes for home repairs.  Some experts recommend saving at least 1% of the homes value each year for this guaranteed surprise.  We use separate sinking accounts for what we currently think fits this category:

• Car Repair Fund ($50 per month)
• Car Replacement Fund ($350 per month)
• Home Repair Fund – for repairs only, not upgrades ($100 per month) – will start funding next month

Of course there are other guaranteed surprise expenses, but these three are the only things that currently come to mind.  I’m aware that my unexpected surprises may vary greatly from yours.  For example, if you have health problems, are an active runner/athlete prone to injury, or work around children all day, then you might consider your medical expenses to be a guaranteed surprise worth saving for outside of your normal emergency fund.  If your earn your living on your computer and it’s only a matter of time before it completely dies, then it might be one of your life’s guaranteed surprises worth saving for.

On a Side Note – Sinking Funds With Guaranteed Due Dates and Amounts

Notice the “Guaranteed Surprise” sinking accounts are different than these with specific due dates and amounts.  I know exactly how much money I need to save in each account at the beginning of each month to cover the amount due when the due date arrives:

• auto insurance bills due every 6 months
• life insurance bill due once every 12 months
• gift fund for Christmas

Obviously we love our sinking accounts.  They are a great way to save for both the known intermittent expenses as well as life’s guaranteed surprises.

Do you have similar “guaranteed surprise” funds?  If so, what are they?  If not, would you consider creating them outside of your normal emergency fund?  Why or why not?

If you’ve ever purchased an expensive item, you’ve probably experienced the wild swing in emotions that are a natural part of the negotiation process. Are you an adrenaline junkie who loves to take control of a situation and score the best deal possible? Or do you dread dickering and worry about being taken to the proverbial cleaners? Regardless of how you feel about negotiating, there’s no avoiding it. It’s part of everyday life.

I’m going to share something that has been extremely beneficial for me. I promise that if nothing else, after reading the rest of this post, you will at least have a step by step method for establishing a clear plan of action before your next important negotiation.

Picking a Negotiating Strategy That Works

For the sake of example, let’s assume you are in the market for a new car. There are two simple questions to ask yourself before you begin:

Is the relationship outcome very important?

By definition, negotiating involves you and at least one other party. Is the other party the stereotypical car salesman with one eye on your wallet, or is it your mother? More than likely, the value you place on each relationship is drastically different. (If not, maybe your time would be better spent visiting this website.)

Is the substantive outcome very important?

Are your finances so tight that you must have the best deal available? Or are you indifferent about the car you drive and the price you pay?

While this example lends itself to clear yes and no answers, this may not always be the case. Do your best to answer each with a definite yes or no.  How you answer each question will determine the negotiation strategy best suited heading forward.

Based on your answers, which negotiation strategy suits this particular situation (Savage, Blair, & Sorenson, 1989)?

Exhibit 1

Exhibit 2

Car Purchase Continued

Let’s pretend you are purchasing your loving mother’s 1996 Crown Victoria. A sweet ride, I know. Since you love your mother, call her every day on your lunch break, and visit once a week, you answer YES to the first question. The relationship outcome is very important.  And since money is no object in your world, you answer NO to the second question. The substantive outcome is not important.

Take a look at Exhibit 1. The chart suggests you head to the negotiation table (or your mom’s dining room table) with an “Openly Subordinate” strategy. Exhibit 2 suggests you concede to your Mom’s demands and requests, even if that means overpaying by $3,500 and leaving the “my kid is an honor roll student” bumper sticker on the rear window. You may get screwed on the deal, but that’s OK since we’ve already established the substantive outcome wasn’t important. You walk away a winner because the relationship outcome was saved and you and your mommy still adore each other.

Many times, the negotiation strategy will be easy to pick. If that’s the case, I encourage you to at least spend some time with table 2 to get some ideas before your next major negotiation.

Questions

• Have you consciously used one of these strategies before?
• Were you successful?
• What problems do you see by using this methodology when picking a negotiating strategy?

Savage, G. T., Blair, J. D., & Sorenson, R. L. (1989). Consider both relationships and substance when negotiating strategically. The Academy of Management Executive, 3 (1), pp. 37-48.

How much is enough? JD Roth, founder of Get Rich Slowly, posted the question on Twitter this morning. (You can follow both of us on Twitter at @thebrokemba and @jdroth.)  I’m not sure why he asked, and at first read, I didn’t give it much thought.  However, when my work day slowed a little, I re-read the question and began to think through my answer…

“…There is no such thing as enough”

This was my first thought, and it really bothered me. I know many of you have thought “if only I earned a little bit more, then I will have enough.” Of course, once you are earning more, you learn that you once again want “just a little bit more.” Will we ever be satisfied with what we have?

An hour or two later, JD tweeted again:

“How much is enough?” is more of a rhetorical question than anything. I’ve been thinking about it a lot lately. I feel like I have enough.”

Wow.  With the turbulent market and recent recession on everyone’s mind, it was refreshing to hear someone say they felt like they had enough. As much as I would like to feel this way, I knew that I couldn’t say the same. And I don’t feel like I’m in the minority.

My guess is that most people’s primary motivation for working each day is the accumulation of newer cars, bigger homes, and just trying to keep up with the Joneses.  However, it was obvious from JD’s tweet that his primary motivation was not the accumulation of more “stuff.”  So I asked:

“@jdroth Interesting. If you feel you have enough, then the desire for more is no longer your motivation.  What is your primary motivation?”

His reply?

“@thebrokemba Happiness. Fulfillment. Helping others achieve the same.”

Now this really got me thinking.  Of course there are motivations other than money.  But in order to figure out “how much was enough”, I decided that I first needed to define what “enough” really meant to me:

Enough - when your primary motivations have changed from the accumulation of more stuff to the accumulation of things more altruistic;  such as happiness, fulfillment, and helping others achieve the same, without regard for monetary gain.

By this definition, for some, enough is very little.  The most extreme case might be a monk who has given up mainstream life and taken a vow of poverty for pursuit of less worldly things.  For others, there is no such thing as enough. Some people’s purpose in life will always be the “networth” scorecard, and they may never get off the hedonic treadmill.

For me? Enough is as I explained to JD:

“@jdroth  I guess enough for me is when I have the freedom from financial obligations to solely pursue what already motivates you.”

What about you?  How much is enough?