Archives For June 2010

       Last week, I talked about the identifying your values. The next step is to examine and evaluate your values. You’ll want to make sure the list you’ve come up with reflects your true values. Then you can start to evaluate your life and begin living according to your values.

Examine Your Values

       Now that you have your prioritized list of personal values, it’s time to examine these values closely. Are there any that you feel do not fit? Are there any you’d like to change? This can mean dropping a value, adding a value, or tweaking your priorities. Your values may change over time, so feel free to reexamine this list as needed.

       After examining my prioritized list of values, I decided to drop 3 of the values I had listed leaving me with 10. Here’s the list of my top ten values in order of importance:

      Paul’s Top 10 Values

  1. Faith & Relationship with God
  2. Devotion to Family
  3. Compassion & Love
  4. Giving
  5. Integrity
  6. Curiosity & Wonder
  7. Contentment & Simplicity
  8. Fun & Youthfulness
  9. Prudence & Wisdom
  10. Balance

Evaluate How Your Values Should Affect Your Life

       Finally, it’s time to consider how your specific list of values should affect your life. If these are the things that are most important to you, how should they guide your decisions? You might feel like you’re not following your values very well at this point in your life, but you have the ability to change that starting now.

       With your list of values in hand, you can evaluate each decision with intelligence and confidence. You just have to ask yourself: What should I do in this situation if these are my guiding principles in life? Apply this method to every area of your life, and you’ll see your actions becoming more aligned with your values. As your situation changes, you might need to revise your values. Adapting to changes in your life will be crucial to your success in accomplishing your goals and living with integrity.

       Now that you have your list of personal values, you can proceed with evaluating and planning your personal finances. These values should help you in making the necessary decisions about your goals, priorities, necessities, and the things you’re willing to sacrifice. All of these are important in reaching a financial future that aligns with your values.

       This entire process is especially important for Christians. We must strive to live according to the example we have in Jesus. Our values should reflect that fact – and our lives should reflect Godly values. From my list of values, I can see some areas where I am following God closely and others where I need to make improvements.

       Life as a Christian is about denying yourself – your wants and desires – and following God’s will instead of your own. How do your values align with God’s will for your life? And are you living out those values in your day-to-day actions? Remember that becoming like Christ does not happen overnight. It’s a process – a lifelong process. And we won’t fully attain the goal until we are reunited with Him in Heaven.

Your Take

       Now it’s time for you to share your thoughts on this process of identifying and examining your values. Did you find the process helpful? How would you improve it? Did writing down your values open your eyes to areas of your life that are not congruent with your values? Share your thoughts and stories in the comments and let us know!

       You’ve heard that you should be diversified, but do you know why? Diversification reduces your risk and your volatility. Here’s how.

Diversification Reduces Risk

       This aspect of diversification is simple. By spreading your portfolio out among several investments, you reduce the total amount committed to any one investment. If you evenly split your portfolio between 5 investments and one goes down the drain, you’ve still got your other 4 investments to fall back on. If you’d put everything in that one bad investment, you would have nothing left.

       In this sense, diversification is putting your eggs in different baskets. By not betting everything on one investment, you lessen the risk of losing everything all at once.

Diversification Reduces Volatility

       Volatility is that nasty stuff that makes your investments go up and down until you can’t stand it anymore. But you can reduce the volatility of your portfolio by diversifying among investments that don’t all move the same. (Technically, you would say you’re investing in assets that are not “correlated”. It’s possible to be very diversified without reducing volatility. We’ll assume that your diversified investments include assets that are not correlated.)

       When one investment goes up, another might be going down. Your portfolio will do something in between. An illustration can help you see how this works. We’ll use just two investments in our sample portfolios to keep this simple. If your investments move in the exact same way, diversification won’t help. This is because your investments are correlated. “Perfect correlation” looks like this:

No Diversification (Perfect Correlation)

       As you can see, investments A and B move in lock-step. When one goes up, so does the other. This means your portfolio will also move in exactly the same way. You haven’t reduced your volatility.

       The best scenario possible is that your investments are perfectly non-correlated. This means that one always goes up when the other goes down and vice versa. If your portfolio was invested in two investments like this, you’d get a constant return all the time. “Perfect non-correlation” looks like this:

Complete Diversification (Perfect Non-correlation)

       The only problem is you’ll never find a real investment C and D. Perfect non-correlation doesn’t exist in the real world. The best we can do is “non-correlation”. In this case, some investments generally move opposite of others (but not always) OR they generally move the same direction (but not always). Here’s what non-correlation looks like:

Some Diversification (Non-correlation)

       An example of investments E and F might be stocks and bonds. Generally, they don’t move together but sometimes they do. A real-world portfolio is going to look something like the dotted line in that last chart. It’ll have some volatility, but not quite as much as its individual components. This is the goal of good diversification – spreading out risk while using assets that aren’t correlated.

Good Diversification Means Investing in Different Types of Assets

       As I pointed out before, you can be “diversified” but still not reduce your volatility. If you invest in ten different banks but the financial industry goes down, your portfolio is going to go down despite the fact that you’ve “diversified” your money by not putting it all in one stock.

       But if you want good diversification – the kind that reduces your volatility – then you need to invest in different kinds of assets. You’ll want stocks from different industries and different countries, large companies and small companies, growth stocks and value stocks. Then you’ll want assets that are different than stocks – real estate, bonds, commodities, etc. By mixing all of these together, you’ll have a portfolio that reduces your risk and your volatility at the same time.

       If you want to see what a diversified portfolio might look like, check out my free portfolio allocation calculator. It shows you how to split up your investments using Vanguard mutual funds (because that’s the cheapest, most effective way to get good diversification easily). Try it out!

       This article is the seventh in a series on how to get out of debt. If you haven’t already, you should check out the previous articles:

Step 7 – Focus on Paying Off Your Debt

       You’ve got your starter emergency fund, and you’ve got a plan. Now it’s time to focus intensely on paying off your debt! The amount of energy you put into this step will determine how quickly you get out of debt. More focus means a faster victory.

       In Step 4, you started looking for ways to cut back and earn more. The purpose was to help you stop spending more than you earn so you could build a starter emergency fund. Now, you’ll use that extra cash to pay off your debt according to the plan you made in Step 6.

       To destroy your debt as fast as possible, you must focus on finding every single dollar you can and putting it toward your debt. Sell stuff you don’t need. Get a raise. Stop wasting money. Start a side business. Choose to cut back on some areas. Get a second job. Negotiate lower rates on your bills. Then take the dollars you earn or save and pay off your debt.

       You’re going to stick with this step until you’ve finished your debt payoff plan. But don’t worry. You can still have fun during the process. You’ll get out of debt faster if you put every single dollar you can find toward that goal. But if you make yourself miserable because you don’t allow yourself any comforts or luxuries, you will give up.

       That’s why the next step is so important. As you make progress on paying off your debt, you need to celebrate your milestones – give yourself rewards. Make sure you’ve signed up for free updates to Provident Planning so you don’t miss out on the next step.

       How will you focus on paying off your debt? Let me know in the comments below!

Paul & Michelle       Welcome to the 232nd Festival of Frugality – Anniversary Edition. If you’re new to Provident Planning, take a chance use my Start Here page to learn what this website is all about. You can also find some free stuff here, so be frugal and check it out!

       As of this coming Sunday, my wife, Michelle, and I will have been married for one year! It’s been a great year, and I’m looking forward to many more. Since I’ve got our anniversary on my mind, I thought I’d make this Festival of Frugality all about anniversaries and events for June 1st.

Editor’s Picks

CNN by hyku on Flickr

CNN celebrates 30 years of broadcasting today.

       BWL presents 10 Creative Ways To Give posted at Christian Personal Finance. This was actually a guest post by Craig Ford. I really liked the ideas he gave for creative ways to give.

       vh presents How to Rescue a Scorched Pan—Easy! | Funny about Money posted at Funny about Money. I’m including this as one of my picks because it’s such a great way to clean a scorched pan. The results were excellent (with pictures).

       Donna Freedman presents Why you need a nap. posted at Surviving and Thriving. She makes some good points as to why rest is important for frugality.

       Christine Talley presents The Folly of Buying Things Twice posted at Chicago: cheap!. Christine reminds us that quality is very often more important than price.

Making Money

Beatles the early years by burwell on Flickr

       My article for this week’s Festival of Frugality is Frugal Tips from The Complete Tightwad Gazette: Calculating Your True Hourly Wage. How much do you really make from your job after you account for all the expenses it takes to get to work, prepare for work, and relax from work? Your true hourly wage may shock you.

       Unfortunately, there weren’t more articles in this category. I know it’s the Festival of Frugality, but let’s remember that there are two sides to the “spend less than you earn” equation. Let’s see more articles in this category next time!

Saving Money

Thomas Edison by Sheepback.Cabin on Flickr

Thomas Edison received his first patent 141 years ago today.

       Mike Collins presents How to Save Money on Groceries posted at Saving Money Today and says “Learn some easy tips for saving money at the supermarket.”

       FMF presents A Great, New Way to Save at the Library posted at Free Money Finance and says “A simple but very effective way to use your library memebership to save on something you might not expect it to cover.”

       Mrs. Money presents Homemade Soft Scrub Recipe posted at The Ultimate Money Blog.

       Jason presents 10 Tips to Help Parents Stay Out of Debt posted at Live Real, Now.

       Karen McLaughlin presents How I Got a Gorgeous Perennial Garden for FREE! posted at Abundance on a Dime and says “How I went from “nothing” to a completely filled in, great looking garden bed without spending a cent!”

       Wise Bread presents Ultimate Credit Card Perks Checklist – Benefits You Don’t Know About posted at Wisebread.

       Tim Chen presents Getting The Most Out Of Your Thank You Points posted at NerdWallet Blog – Credit Card Watch and says “If you’ve got a Citi card, you may not be getting the most bang for your buck. You not only have to know how to earn points, but you have to know how to redeem them to make sure you can at least get your 1% back.”

       Silicon Valley Blogger presents How Nintendo Wii Sports & Wii Fit Cut Down on Gym Membership Costs posted at The Digerati Life and says “Here’s one way to cut down on exercising costs. Choose the cheaper and entertaining alternative.”

       Bucksome presents Bringing Entertainment Closer to Home posted at Buck$ome Boomer’s Journey to Retirement.

       Squirrelers presents The Frugal Athlete posted at Squirrelers and says “We can apply principles from athletic training to our money management skills.”

       LeanLifeCoach presents Frugal Printing, Is It Possible? posted at Eliminate The Muda! and asks “How frugally can we print?”

       freefrombroke presents Comparing TV Services With BillShrink posted at Free From Broke and says “BillShrink developed a system to help you see if you can save money on TV providers in your area. I gave the site a shot to see how well it worked.”

       Tom @ Canadian Finance Blog presents Saving Money With An iPhone posted at Canadian Finance Blog and asks “Ever wondered if buying an expensive cell phone can actually save you money? Here’s some ways it just might.”

       Mr Credit Card presents Marriott Discounts posted at Ask Mr Credit Card.

Managing Money

Anne Boleyn

Anne Boleyn was crowned Queen Consort of England 477 years ago.

       Neal Frankle presents How To Shelter Retirement Account In Divorce posted at Wealth Pilgrim and says “There are some new ideas to shelter your retirement account in a divorce. It’s not difficult to do but you have to be proactive.”

       Craig Ford presents How To Pay Off A Mortgage Early posted at Money Help For Christians and says “Paying off your mortgage is a great way to save some money in the long term. This post shares some tips for paying off the mortgage.”

       Jeff Rose presents How To Get The Best Rates For Term Life Insurance posted at Jeff Rose and says “Follow these steps to save yourself a pretty penny on your life insurance premiums.”

       Adam presents Should I Invest Using Pre-Tax or Post-Tax Money? posted at Magical Penny and says “It’s not frugal to avoid paying taxes by saving as much as you can pre-tax -sometimes you need to find a balance between paying taxes now and later. I outline the pros and cons of saving using Pre-tax and Post-tax money.”

       PT presents Stop the Money Leak or Divert the Flow? posted at PT Money and says “There are two ways to save more. Why not do both?”

And the Rest…

Babe Ruth and Lou Gehrig by Mojumbo22 on Flickr

Eighty-five years ago, Lou Gehrig began his streak of 2,130 consecutive games played.

       Madeleine Begun Kane presents Charge! posted at Mad Kane’s Humor Blog.

       Jim presents International Restaurant Tipping Guide posted at Wanderlust Journey.

       Cheapskate Sandy presents The Best Frugal People to Follow on Twitter posted at Yes, I Am Cheap and says “Social networks can be used to just make connections, but to save you some serious money. These are the best people on Twitter to help you save.”

       MoneyNing presents How to Downsize Your Lifestyle posted at MoneyNing.

       Miss Thrifty presents Introducing Erica’s Garden Pantry – and her pond-bath posted at Miss Thrifty.

       Thanks for visiting this edition of the Festival of Frugality! Be sure to tune in next week at Learn Save Invest for the next edition.