Today I’m going to show you how to generate an extra $200/month, which you can use for savings, investments, or even spend it on something you love. But I’m going to challenge you to put aside some assumptions:

• Myth #1: We need to track ALL of our spending to save money by keeping a budget. Not true. By focusing on your two biggest discretionary expenses and relentlessly cutting them down, you reduce the Paradox of Choice and limit the overwhelming number of choices we each have every day.
• Myth #2: “There’s no WAY I can save $200/month!” Maybe, maybe not. Many people waste 20-30% of their money without ever knowing where it goes. But even if you can’t save $200, perhaps you can save $150. Or $100. Or $50. The point is not the exact amount, but the process of optimizing your financial system. (And it can be done: Thousands of my readers took the challenge to save $1,000/month.)

Every day, we wake up and have 50 financial to-dos we can tackle. Should we pay off debt or increase our 401(k) contribution? Should we adjust our asset allocation or try to get a side job? Ultimately, those choices become overwhelming and we invariably do the same thing: nothing.

Today, I’m going to show you how to focus on two areas — just two — and relentlessly cut down on them to generate significant savings. While your friends worry about 50 things (like saving a paltry $4 on lattes), I’ll show you the system I use to save hundreds of dollars each month on just a couple of expenses — letting me spend time on the important things in life.

How most people manage their money

We love to believe that more information is always better. But as behavioral psychologists have discovered, more choices are not always better. In fact, they can paralyze us with indecision. Barry Schwartz writes about this in The Paradox of Choice:

…for every ten mutual funds offered by the employer, the rate of participation went down 2%.

There are hundreds of examples in the behavioral-psychology literature of increased choice leading us to paralysis by analysis. This is why humans use stereotypes and heuristics to deal with complexity: because to systematically analyze, consider, and act on every decision we face every day would be overwhelming. This is not about being smart or stupid — it’s about adaptive human behavior.

So, what does this mean for your finances?

It means you should focus on fewer, more important things. And despite the personal-finance “experts” who have cried out for us to keep a budget for the last 50 years — has that ever worked? — I prefer to use techniques that actually work. I recommend you figure out your two biggest discretionary expenses…and then crush them and save hundreds of dollars per month.

I call this The Two-Headed Savings Approach.

The Two-Headed Savings Approach: How to use save $200/month by focusing on LESS

1. Pick the two most important areas that you need to save on. You know what they are — the ones where you overspend and it’s clear you could be spending less. For me, these are (1) eating out and (2) going out.

2. Figure out how much you spend on these areas. If you don’t already have a free Mint account, go there and import your transactions. It will take about 10 minutes to tell you how much you’re spending in any category. Remember — although this is the least-sexy part of the tip, without knowing how much you’re spending, how can you set a target for savings?

3. Pick a savings number that you want to target within 6 months. I recommend you try to reduce the costs by 25% to 33%. Those numbers are guidelines, but I’ve found that range to work well because it allows me to cut costs in a significant way while not completely depriving myself. So if you’re spending $1,000 in one category, cut it to $750. If you’re spending $200, cut it to $150 — over 6 months. Rather than trying to cut 50% of your spending in 1 month, it’s important to set smaller goals and actually achieve them

4. Set up a spending reminder to help you keep track. You can do this the low-tech way or the high-tech way.

Recommended way: If you already use Mint, click “Overview” >> “Add Budget” and enter your target savings number. If you’re over the targeted amount, Mint will automatically notify you.

Low-tech way: But maybe you don’t use Mint — no problem. Just set a calendar reminder for each Sunday to make sure you’re on track. For example, if your target spending on eating out is $375/month, that’s about $94/week. Each Sunday, just log in to make sure you’re roughly on track.

If you are, great!

If not, you know you need to cut spending in the coming week.

This way, you can consistently correct any overspending and hit your target goal.

Example: You want to cut down on eating out

Let’s say your current spending on eating out: $500/month.

Target: I want to save $125 per month, so my spending should eventually be $375/month. ($500 * 0.25 = $125. $500 – $125 = $375)
Month 2: $450/month

Month 3: $420/month

Month 4: $425/month (notice you can still hit your goals even if you don’t consistently go down each month)

Month 5: $385/month

Month 6: $375/month

You’ve just saved $125/month, which is $1,500/year. And that’s just for one head of the Two-Headed Savings Approach. Do the same for eating out, and that’s $3,000 per year. You’re now generating $250/month in cash flow that can be used to invest or save.

Invest that $250/month for 20 years and you’ll end up with around $143,000 cash (run your own calculations). Is it worth it?

The keys to the Two-Headed Savings Approach

• Don’t try to do everything at once. Nobody can manage saving money on 15 categories — you just spread yourself too thin and don’t even make a serious dent in your savings amount. I’d rather save 30% on two areas than 5% on 10.
• Why a 2-headed approach? Why not just one? I learned this from a professor at Stanford, who told me to always be working on two projects at work, so if one stalled, you’d still be moving forward on something else. Sometimes, you may have unexpected expenses come up: If you’re saving on eating out, and a friend comes to visit from out of town, it’s going to be tough to keep your costs down. But if you have two savings tracks going on in parallel, you’ll still be able to make progress on your overall goals. And because you’ve extended the timeline out to 6 months, you’ll probably be able to get back on track.
• Slow down. When people come to me and tell me they’ve cut their spending on clothes from $500/month to $10/month, I just sigh and stare at them, blinking in unwavering hatred. You can’t make rapid behavioral change that stick in such a dramatic way. I’d rather extend it out, slowly, over six months and guarantee that you stick with the savings amount. I’ve written more about this here: Set Smaller Goals, Impress Friends, Get Girls, Lose Weight. You’ll see how you can apply this approach to virtually anything that requires behavioral change.
• Stop feeling guilty! Forget about those $1 bags of Skittles you buy or $4 lattes. By focusing on the Big Wins, you’re saving significant amounts of money. As long as you’re hitting your savings goals, that’s the most important thing. Note: The biggest wins typically come from subscriptions, like cable. If you can cut $30/month off cable, that’s roughly $400/year. (How? Use the A La Carte Method.)
• This is a good example of being goal-oriented. Instead of randomly trying to save on expenses, by setting a goal, your tactics become very clear. If your four friends ask you out to dinner and you’re behind in your savings goals, you can easily say, “Sorry guys, but I’m trying to save money and I’ve got to skip this one. But I can meet you afterwards.” In other words, when it comes to dealing with others, focus on the plan and not the person — and work within the savings system that you’ve created.
• Now that you’re going to be saving $20, $200, or even $1,000/month, make sure you put that money somewhere where you won’t spend it. I recommend you store it in your savings account and consider investing part of it for long-term growth. Whatever you do, don’t leave this new-found money in your checking account.

Lots of people wonder what they would do with a 5% or 10% raise. By implementing this, you’ve just gotten yourself a significant raise. What will you do with the extra cash flow each month?

The Two-Headed Savings Approach is one part of the bulletproof financial system that I outline in my book, I Will Teach You To Be Rich.

Ramit Sethi is the New York Times best-selling author of I Will Teach You To Be Rich. He writes at http://www.iwillteachyoutoberich.com.

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Every year it’s the same old story. You start with the best of intentions but somehow never manage to fulfill your New Year’s Resolutions. Perhaps you don’t even know how to get started. When it comes to getting your financial house in order, it’s even more important that you start now, so that you can meet specific deadlines that occur throughout the year. Follow this handy action plan in order to set New Year’s Financial Resolutions you can actually keep.

Common wisdom says that goals need to be concrete and include specific details about how and when they will be fulfilled. If you have gained weight in 2008, don’t just renew your gym membership and make vague promises of getting back to the gym. Instead, sign up for a workout with a personal trainer three days a week. When it comes to your personal finances, a general plan such as knowing more about how much money you are spending and where you are spending it is fine. But you should also set realistic budgets that mirror your actual spending in prior months.

Maintaining good credit is an important foundation for achieving the rest of your financial goals. So start by finding out where you currently stand with a credit report from CreditReport.com or Equifax. If your credit score is lower than 700 due to some outstanding debt, see if you can get those bills paid off as early in the year as possible. Pay the credit cards with the highest interest rate first and then move on to the ones that can be paid off in full so you can start with as clean a slate as possible.

Experts in “getting things done,” agree that it is best to list small, attainable goals rather than go for a lifestyle change overnight. By giving yourself simple tasks that you can even complete in five minutes, once a day, you will make headway over the course of a month.

The following questions are intended to help you set specific, measurable goals within different aspects of your finances. Use a personal finance management tool such as Mint.com to help you gain insights into your spending patterns and come up with answers to these questions. If you have a great suggestion or method that has worked well for you in the past, please comment and feel free to share links to interesting articles and websites that have helped you.

• What is the category of spending that concerns you the most?

  ___________________________________________________________

• How much did you average spending in this category last year?

  ___________________________________________________________

• What was the highest month within this category?

  ___________________________________________________________

• What was the lowest month?

  ___________________________________________________________

• What are your spending goals for this year compared to last year. In which categories and months can you lower your spending?

  ___________________________________________________________

i.e. if you spent $250 per month going out to eat in 2008, give yourself a target of $125 this month

• Who is going to hold you accountable? Email or call them now.

  ___________________________________________________________

• What are you going to do with the amount you save within this category (make it automatic thru electronic debit) – save or give?

  ___________________________________________________________

• How much money did you have in emergency savings at the beginning of 2008?

  ___________________________________________________________

• How much money do you have in emergency savings now?

  ___________________________________________________________

• What is your goal for the end of January for your emergency savings account?

  ___________________________________________________________

• By the end of February?

  ____________________________________

• By the end of the 2009?

  ____________________________________

• Have you seen a recent credit report?

  ____________________________________

  If applicable, list the most annoying and/or severe derogatory item on the report (i.e. collection, judgment, late credit card, car that was reported late but was actually on time).

• What is one action step that you can take TODAY towards resolving this (i.e. Make an initial phone call, draft a letter to the credit bureaus)?

  ____________________________________

Write down the next action step here and the date that you are going to do this by. Print out our financial resolution worksheet, fill it out and stick it on your fridge while you’re at it.

This should hopefully get you started, and help you to consider other areas of your finances (or other aspects of your life) that you want to transform in 2009. Again, we look forward to hearing your goals and how you plan to attain them along with your own success stories.

If you’ve been contributing to a 401k and socking away money for retirement, you probably think you have enough. But you’d better brace yourself for the shocking truth. Unless you’ve taken into account how old you were when you started on your retirement plan, you most likely don’t.

The bottom line is that most people don’t really know how much they’ll need for retirement and without knowing that how can you be sure you’re on the right track to get there? Consider that the average American works hard and plays hard, but reaches age 65 with a median 401k balance of $110,000. Is this enough?

That depends. You’re going to need a bigger nest egg than you probably think – 10/10/4 is a handy principle you should learn.

What is 10/10/4 and how can it help?

In short you need to save at least 10% of your income for retirement. You need to have a nest egg lump sum which is 10 times your annual earnings upon retirement. Finally, you should withdraw up to 4% of your next egg in retirement to avoid outliving your money.

Put simply, 10/10/4 is a strategy that takes into account which leg of the journey toward retirement you are on and provides appropriate recommendations along the way. It’s easy to remember and can be put into practice at any time.

Rule #1

If you are in your 20’s now is the best time to start contributing to your eventual retirement. The first “10″ in 10/10/4 refers to the idea of contributing 10% per year to your 401k or IRA.

At age 25, only saving 10% of your income per year into a 401k or IRA, is required to replace 70% of your pre-retirement income, and at age 20 it’s only 8%. Note this includes any company matching, so if your employer matches 2% for example, you would only need to save 8% per year. At age 20 or 25, time is on your side.

If you did start saving at age 20 or 25, go out and celebrate, you are on the right path already. You can enjoy 90% of your income today and save 10% for tomorrow – this will take some sacrifice, but it’s doable.

However, most of us did not do that early enough.

Missing this “window” is all too common. After many years go by, you will eventually wake up and look around, and see time is the real problem. The closer you get to retirement, the harder it gets to save for it.

For example, if you start saving for retirement at age 35, you would have to save 17% of your income to achieve the same goal, a daunting task. At age 45, the percentage of your income you would have to save is 31%, which, for most of us is essentially impossible.

All of these questions assume you start at a set age and continue to save at a set rate. But in reality, life is much more complicated.

For example, what if you start saving at age 25, then move to another job; stop saving for a few years and then start again? In other words, what if your savings are not linear?

There is no calculator we have ever found that will model this real world possibility of skipping years, or playing catch-up very fast without making the estimation process extremely cumbersome.

This is where the second “10″ comes in. This means that if you missed rule #1, and your life got complicated, then you must save enough to reach rule #2, which is often much harder than starting early.

Rule #2

Rule #2 says that, by the time you are 65, you will need 10x your income immediately prior to retirement to retire at the level you want. Therefore, say you plan a lifestyle of living in the south, on a beach, but with health care coverage, some travel and a few hobbies. You’ve calculated that will require $100,000 in yearly income.

Therefore, you will need 10x that income, or $1,000,000 at age 65. The second “10″ gives you the proper perspective.

Even if you get your target income down to $80,000 before taxes, you will still need $800,000 at age 65, significantly more than $110,000.

Rule #3

Okay, now you are ready for the third and final level of 10/10/4, so what is the “4″? The “4″ means 4% is all you can take out – especially in the early years of retirement and still have confidence that your money will last throughout retirement. If you plan to take out more in the early years, you could have a big problem in volatile market times such as those we are experiencing now.

The issue is the fluctuations in the stock and bond markets are a natural occurrence. Therefore if you retire at age 65, and have 60% in equity and 40% in bonds (a moderate investment allocation), you might still have 30 more years to live and no job because there are not a lot of jobs of jobs available for a 65 year old. Yes, the problem is that we live too long after age 65 – health care advances have been too successful.

The related problem is the wide range of normal volatility in these stock and bond markets and the fact that you may end up retiring in some very difficult times for returns, such as 2000, 2001, 2007, or 2008. If the markets are in decline right at the time you retire, it is going to be much more difficult than anticipated to make ends meet.

The experts look at all the probable outcomes and the models show that a 4% withdrawal rate in the early years is the maximum rate that will preserve capital with normal volatility, until you have been retired for 5-10 years. That means that if times are really rough in the first few years that you retire, and your target was $1,000,000, you might really have to live on 4%, or $40,000 per year until you get through the bad years. That is the realty for many people who have retired recently.

Think of 10/10/4 as 3 windows into your life plan. If you are fortunate enough to have succeeded in hitting the first “10″ (saving 10% of our income and you started in your 20’s) and the second “10″ (on track to hit 10 times your income goal at age 65), then to be sure of a secure retirement work on this third and final goal, “4″.

There are practical ways to live for a few years on 4% of your retirement balance if times are tough in the early years of your retirement. You may want to work part time if needed by obtaining a skill that does have a market at age 65. Perhaps you can turn a hobby such as photography or playing a musical instrument to your financial advantage? Or build an extra cushion in your balance for these contingent years if you retire and then experience some bad stock and bond market performance in your first few years.

10/10/4 is a tool you can use at any age and it will serve you well. If you are in your 20’s sign up for 10% in your 401k or IRA and think of the 90% you get to enjoy today. Live 90% today and 10% tomorrow. You will have to make a few sacrifices but you can do it.

If you are in your 30’s or 40’s you are starting to see the problem. If you do not see progress toward the 10x goal, usually because you started too late, or skipped some years, then you will have to save much more now to catch up.

That’s why it’s so important to make sure you aren’t leaving money on the table. If you’re in your first job, make sure you are enrolled in your employer’s 401k plan. If you’ve just changed jobs, don’t leave money sitting in your previous employer’s 401k account. Instead, move it into an IRA rollover account where you have more control over fees and more investment choices.

Start today because your future depends on it.

It wasn’t until he graduated college in May 2008 that my friend Ben realized the depth of his student loans: $40,000 owed upon completion of a liberal arts bachelors degree. Like many students, he didn’t worry too much about the numbers as he signed loan papers at the start of each semester. The debt totals and their corresponding monthly payments, due some time in the future, weren’t overly concerning at the time.

In the past ten years, debt levels for college graduates have more than doubled. In 1993, the average graduating student who had loans owed $9,250. Contrast that to 2004, when the average indebted student carried $19,200 in college loans. While less than 50% of four-year college grads had college debt in 1993, by 2004 that number has increased to 66%.

One of the main factors contributing to this rise is the decrease in public money available for colleges in the wake of the financial crisis. As state and local budgets tighten, colleges and universities often lose a portion of their funding, and this shortfall is passed on to students, who with their parents must bridge the gap with larger and larger loans.

Ben is not alone when it comes to higher-than-average college debt. At private non-profit colleges, like the one Ben attended, over 73% of graduating seniors carry student loans. Of those, a full 10% have loans in excess of $40,000. These high levels of debt are problematic for those entering the workforce and beginning their careers. Instead of being able to save money and invest enough for their future, let alone save for their own children’s educations, they are spending hundreds of dollars each month on loan payments.

Large debts likewise prevent college graduates from furthering their education. More than 40% of college grads who choose not to pursue a Master’s degree or doctorate cite college debt levels as a primary reason. Faced with tens of thousands of dollars in debt, many decide that enough is enough.

Rising student debt has a hidden cost to society: talented graduates forgoing good but lesser-paying jobs, in order to make enough to pay back what they owe. Faced with large monthly debt payments, Ben decided to work as a salesman where he’d make more money than in the other positions he considered-and even preferred.

“Student debt has a major impact on what careers young people choose. Large college loan payments discourage students from rewarding, albeit low-paying, sectors such as teaching or public service, that they would otherwise consider,”  said Edie Irons, communications director at the Project on Student Debt.

In 2002, a full 54% of former students reported that they would have borrowed less money for college if they had it to do over again. While it is little consolation to those already deeply in debt, students starting their college careers can find ways to limit their student debt loads as much as possible. Irons does not see debt-free college as realistic for most average American families, but believes the average amount of debt should and can be less than it is. To that end, it’s important that prospective college students seek as much grant money and private scholarships as possible, before relying solely on loans that need to be repaid.

Students should meet with financial aid officers and career development personnel to get a realistic view of how much debt they will incur while attaining their degrees, and how much they will likely earn when beginning their chosen professions. An accurate projection of their financial picture upon graduation can help students make better financial decisions while in school. Financial counseling for students needs overall improvement, as scores of students leave their alma mater with credit card balances and expensive car loans in addition to education debt.

In an effort to ensure that student loans don’t hurt more than they help, the Project on Student Debt works to identify and develop solutions for those burdened with unmanageable college debt. Income-Based Repayment is one of these.

Under a new federal loan repayment plan based on a model developed by the Project, students with federal loans are guaranteed  that their monthly student loan payments won’t exceed a certain percentage of their income (15% of discretionary income, which is classified as everything over 150% of the federal poverty level). This legislation, signed into law a year ago, takes effect  in July 2009 and applies to all federal student loans, past or present.

“Income-based repayment is important because it provides a guarantee that if a student makes a bad calculation and borrows more than he’s able to afford, there’s a reasonable safety net. It’s not a free pass. They still owe the money and have to pay it back, but this makes it affordable,” said Irons.

Loan forgiveness programs for those working in the public sector or for charitable non-profits are also underway. Ten years of qualified employment as well as loan payments are required for an applicant’s remaining debt to be erased. Irons believes that this incentive will encourage more jobs in fields such as teaching, law enforcement and state and local governing.

While many students and former students will benefit from the new legislation, Ben won’t be one of them. His student debt is primarily private loans through his college, and the legislation applies only to federal student loans. A full 80% of student loans are from government sources, and private college loans makes up the other 20%. For students with private debt, benefits such as loan deferment and forbearance are not guaranteed by the government. Their interest rates are also usually higher, translating into larger payments.

For Ben, the reality of a $40,000 debt has just begun to sink in.

You were miserable in your old job and you’re excited to be starting a new one that’s much more to your liking. Say good riddance to an overbearing boss, long hours, low pay and high stress. But there’s one thing you shouldn’t leave behind.

If your money is still sitting in your previous employer’s 401k account, it’s time to move it into an account where you can control the fees and investment choices instead of letting your old employer make those decisions. This move is commonly referred to as a “401k rollover,” and depending on how quickly you act, it can have a significant impact on how much you’ll have at retirement.

Why Roll Over?

Rolling over your previous employer’s 401k account into a single IRA is the only way to make sure that your 401k accounts follow proven investing strategies such as asset allocation and diversification, as well as paying the lowest fees you can and being able to invest in the best performing securities. And with an IRA rollover, you preserve all of the existing tax advantages of your 401k. Here are some of the advantages to rolling over:

1. More and Better Investment Options

In an IRA, you can select your own investments. You won’t be limited to the funds and managers selected by your employer. Consider that the average 401k employer plan contains just 13 investment choices making it difficult, if not impossible, to achieve a diversified portfolio whereas an IRA can give you access to thousands of investments, including stocks, bonds, CDs, and mutual funds.

2. Lower Fees

Under a 401k, the average annual administration fee charged to your account is 0.50 percent. These fees represent money that is being wasted and worse, this money isn’t being used to fund your investments. Most IRA rollover accounts do not have any administrative fee associated with them and this represents an immediate saving. In addition, because you can choose where to invest with an IRA account, you’ll get to take advantage of funds that typically have lower expense ratios than funds available through your 401k.

3. Easier Account Management

With your retirement money earned from prior jobs in a single place, you’ll be able to see whether you are on track for retirement, without having to check multiple accounts. You can easily calculate your real return and drill down into the performance of individual funds or other investments.

4. Easier Asset Allocation

With one account for consolidating your retirement assets, you’ll be able to more readily see the mix of investments in your portfolio and adjust the balance as necessary to stay on track with your retirement goals.

How Mint Can Help

Let Mint track your new IRA. Mint can provide unprecedented visibility into your retirement accounts. You’ll see how much you are holding in your preferred asset classes and if your portfolio matches your intended asset allocation. In addition, Mint will show you how your portfolio is performing compared to the S&P 500 index, right down to the level of individual stocks.

The financial meltdown of late 2008 may have left you with a feeling of uncertainty about your financial future. But death and taxes notwithstanding, there are still some things you can control. First and foremost is taking charge of your 401k. Don’t leave money on the table. Rollover those 401ks from a previous employer today and start taking advantage of the broader investment choices, lower fees and simplified account management that comes from an IRA rollover account.

With the Dow Jones Industrial Average dropping more than 800 points Monday as the credit meltdown pushes the world’s economy into a recession, how should prudent investors respond?

More likely than not, the value of the stocks and bonds held in your company’s retirement savings account or your IRA are down.

If you’ve invested in a stock index fund based on the Standard & Poor’s 500, you’ve suffered a loss of roughly 35 percent since last October, the date economists agree the bear market began.

Depending on how long you’ve held your stocks, the average cost of shares in your account may be less than what you paid for them over time (the average cost basis).

That’s enough to make you want to cut your losses now and hold only cash or to cut back on what you’ve been setting aside as tax-deferred for retirement. But before you rush into these potentially disastrous decisions, consider the following:

Risk flattens over time. The worst one-year return for small company stocks over the past eight decades was nearly 60 percent. As you move out 20 years, the worst-case scenario for those stocks is a positive six percent, according to Ibbotson Associates, Inc.

True, although it has taken the S&P 500 on average 13 months to recoup losses completely, you may have to wait as many as three years for stocks to rebound and enter bull territory if past history is any guide.

Even still, over time, those who are willing to commit to a diversified, consistent long-term investment program will see their capital grow.

Why? As in life, so too, with investing. How many times have you been right—even with the most rigorous analysis to support your decision?

Timing the market is impossible. Though many hardcore investors think they can do this, the facts say otherwise. Studies show that investors who bail out of the market and then re-invest when the market recovers to pre-bear market levels do worse than those who remained fully invested.

Given that shares have likely priced in all available information about their worth, it’s unlikely that you have an edge in stock picking. That’s the point Princeton University Professor Burton G. Malkiel makes in his book, A Random Walk Down Wall Street.

Malkiel builds a strong case for index investing. Transactions costs are low, which can cut deeply into returns. All my investments are in index funds because Malkiel’s argument convinced me. The one time I saw an outsized gain with a stock pick was wiped out by a loss from what appeared to be a sure win until a lawsuit hit.

Through dollar cost averaging, too, your costs are spread out over time, benefiting from market dips. You buy more shares when the price is low and fewer shares when the price is high.

Diversification is a hedge against market irregularities. Given the turbulence in the markets, now is a good time to look at your portfolio’s diversity. A general yardstick to determine the percentage of stocks and bonds you want to hold is based on age.

If you’re 25, you may want to hold 75 percent in equities, with a good portion in the more risky small size companies that tend to experience the greatest gains and losses compared to blue chip stocks. Investing a percentage, too, in an international stock fund, will help you to profit from a global economy that is shifting away from the US.

Investment advisers differ about this formula though, with some arguing recently that you may want to hold a disproportionately higher level in fixed-income given the equity markets’ volatility, which one is today above historic peaks (CBOE volatility index).

The mix of stocks and bonds that you’ll choose will depend on your tolerance for risk.

So, looking ahead, here’s a checklist:

• Review your holdings now to determine if you are adequately diversified and if your holdings are appropriate given your tolerance for risk and your financial goals.
• Don’t give up saving, particularly if your employer matches your contribution to a retirement plan. Your nest egg will likely be your largest source of retirement income.
• Resist the temptation to cash out. Stocks over the long term, and I emphasize long, outperform other investments. But you may have several years of a bear market before you see any bounce in your portfolio’s performance.
• Seek out advice. Understanding how markets perform over time is important to help you make decisions.

James David Spellman is principal of Strategic Communications LLC based in Washington, D.C. and an adjunct professor at George Washington University.

After the recent market meltdown and subsequent federal bailouts, public confidence in the US economy is on the wane. Sure, if you’ve got less than $100,000 in a deposit account, you are covered by federal insurance. But the obvious next question is, “what if the FDIC goes broke?”.

On September 25th, John McCorry, the executive editor of Bloomberg published a piece in which he questioned the stability of the FDIC and pondered how much is needed to cover their losses. After all, the reserve fund of the FDIC stands currently at $45 billion, which sounds paltry in comparison to the amount of money being pumped into banks to keep them afloat, let alone the amount it would actually take to cover the deposits of customers in the bank failures that could still potentially come our way. He wrote that “emergency federal lending to the FDIC could swell the cost of government rescues of failed financial institutions to more than $400 billion—not including the $700 billion general Wall Street bailout now under discussion in Congress.” The FDIC is required to pay back any such federal lending, and such debt is repaid through premiums that banks pay to have their customers’ deposits insured. Banks are willing to pay these premiums because it helps uphold the key ingredient of the banking system–trust.

In direct response to this article, Andrew Gray, Director of Public Affairs for the FDIC, reassured the public that “Congress, understanding the need to ensure that working capital is available to the FDIC to provide bridge funding between the time a bank fails and when its assets are sold, provided broad authority for us to borrow from Treasury’s Federal Financing Bank.”

In addition, because the banking system is so dependent on the faith of the public, which is partially reinforced by the federal backing, the FDIC itself will receive income in perpetuity because any surviving banks will pay any premiums necessary to have that seal of trust on their front door. He went on to state that, in the only instance when the FDIC actually had to borrow money from the Treasury in the early 1990s, the money was paid in full with interest in two years. In a further move to reassure the public, he reminded us that “no depositor has ever lost a penny of insured deposits, and never will.”

Historically, the FDIC has a good track record of repaying its debts to the Treasury, beginning with its $289 Million initial funding when it was established in 1933, which was repaid in full by 1948.
In some cases, such as JP Morgan Chase Co.’s acquisition of WaMu, the fund is not dented by a bank failure. In others, such as the takeover of Wachovia by Citigroup, the exposure is potentially far greater as the FDIC is covering all losses above $42 billion. Earlier, with the failure in July of IndyMac, the fund fell below its 1.15% reserve requirement (the total fund divided by the $4.29 Trillion in deposits that are insured), so the FDIC is holding mandatory meetings this month to develop a restoration plan for the fund.

Stay tuned as the revised Bailout Bill that passed the Senate on Wednesday and goes to the House on Friday will also have a large impact of its own, as it will increase the consumer protection on FDIC insured accounts to $250,000 if it passes. This increase will match the amount of insurance coverage in place since the Federal Deposit Insurance Act of 2005 passed, which protects an Individual Retirement Account at a member bank up to $250,000. As this increases the potential liabilities of the FDIC, they will certainly need to tap their Treasury lines of credit at some point, but it is reassuring that they have the full backing of the government as it is obviously in everyone’s best interests to make sure that the money of the people is protected and guaranteed. If the bill passes the House vote, it will give the FDIC unlimited borrowing authority to cover bank losses. Though heavily criticized by some, most believe it is necessary to shore up the confidence and trust to prevent the bank runs that crippled the country further in the early 1930s.

Keep in mind that credit unions are covered through the National Credit Union Share Insurance Fund, and if your deposits are with a credit union you can find most of the answers to your questions and concerns here. For more information on what is covered by the FDIC, see our previous post “Bank Fail! Is Your Money Safe?”.

Until last week, the expression, “money in the bank” was considered the ultimate in security. But after the WaMu firesale, many are getting a little worried that their own bank might fail.

So how can you make sure you are protected?

Before you pull out all of the money you have in the bank and stuff it under your mattress, know that the money in your accounts (not just savings and checking but also investment accounts and IRAs) is protected by federal insurance. But there are limits. Depending on how much money you have and where you keep it, you may or may not be fully covered. The best thing you can do, as with so many matters related to personal finance, is to educate yourself. Knowing what is protected and what isn’t will help you determine what to do with your money.

Even if your own bank suffers the unfortunate fate of WaMu (and even if you bank with WaMu) you probably don’t have anything to worry about. In most cases, as in this one, when one bank fails, its accounts are acquired by another bank.

At WaMu it is still business as usual. The quirky WaMu brand may be disappearing but your money won’t be. When a bank takeover like the one last week occurs, the law mandates a speedy transition with no downtime in being able to access your accounts. Even if the bank is physically closed, customers usually have access to their money by check, debit card or ATM. In most cases, a bank closed on a Friday will be open on a Monday. In those rare cases when a buyer can’t be found right away, ATM and debit cards will stop working and checks that haven’t cleared the system will be returned. There may be some delay in receiving your insurance checks and you’ll have to do the work of contacting each merchant to make other payment arrangements. But the good news is you won’t lose your money.

Know the facts

The Federal Deposit Insurance Corporation (FDIC), an independent agency of the federal government, was specifically created as a means of shoring up the US economy in response to the thousands of bank failures that occurred in the 1920s and early 1930s.

The FDIC insures all bank deposits (checking accounts, savings accounts, certificates of deposit, and money market accounts) up to $100,000 per account per owner of that account. This means that, in the case of a joint account, each co-owner is insured up to $100,000. Not covered are stocks, bonds, mutual funds, or money market funds (as distinct from money market accounts).

Most banks are FDIC insured (and you can find out if yours is by checking with the Bank Find tool on the FDIC’s web site).

The FDIC provides separate coverage for certain kinds of retirement accounts such as individual retirement accounts (IRAs), and Keoghs, insured up to $250,000. Note that this is in addition to the $100,000 per account for bank accounts. Living or revocable trusts are protected up to $100,000 for each beneficiary.

Use the FDIC’s Electronic Insurance Estimator to find out how much coverage you have.

Maximize coverage

Remember that insurance is provided on a per owner basis. A married couple can have as many as three accounts, two individual and one joint account to increase coverage for your family up to $400,000.

One sure way to increase your coverage is to open multiple bank accounts with different banks. FDIC insurance is provided on a per bank basis and there is no limit on the number of banks you can open accounts with. Use Bankrate’s Safe & Sound rating system to determine how stable a particular bank is.

Even if you have more money than what is covered by insurance, all is not lost. You become a creditor of the failed bank’s receivership and you’ll be first in line to receive payments when the FDIC sells the assets of the failed bank. The FDIC says that uninsured depositors typically receive anything from 40 cents on the dollar to 100 cents on the dollar with an average of 72 cents on the dollar.

Managing your money shouldn’t get in the way of living your life. That’s why personal finance apps are such a natural fit for the iPhone. They let you track your stocks, convert currencies, calculate how much you owe, and track expenses—all on the go. The more full-featured among them even let you manage multiple accounts and transfer money between them. The best apps are those that take advantage of the iPhone’s finger-friendly interface or unique features such as location-awareness. For example, GPS or WiFi can be helpful in finding the way to the nearest ATM. Most of these apps are free or available for a nominal charge so there’s little to lose by trying them. Here’s a look at 10 that count.

Bloomberg Mobile (Free)

Bloomberg

Wall Street Traders swear by the Bloomberg Terminal to analyze real-time financial market data, place trades, and get news and price quotes. Bloomberg Mobile isn’t quite the same thing but it is a beautifully designed app that provides up-to-the-minute news, stock quotes, company descriptions, and price chart and market trend analysis. The My Stocks feature is a more detailed replacement for Apple’s stock Stocks app. And Bloomberg Mobile takes full advantage of the iPhone’s position sensor by providing larger charts when you rotate the phone to a horizontal position.

Mobile Banking (Free)

Bank of America

Bank of America’s iPhone app, Mobile Banking is little more than a wrapper around its existing mobile site (which isn’t optimized for the iPhone) but if this is your bank you’ll still find it useful. You can use it to check available balances, pay bills, and transfer funds on-the-go 24/7. Its best feature is its ability to find the nearest ATM and Banking Center locations using the GPS in the iPhone, something that isn’t possible with the mobile site. BofA’s Online Banking Guarantee is its assurance that you won’t be responsible for any unauthorized transactions and it uses advanced encryption technology to prevent unauthorized access to your accounts and to protect your online identity.

PayPal (Free)

PayPal

In Japan many have thrown away their wallets in favor of paying for everything from train tickets to beer from a vending machine with their mobile phones. We’re not quite there yet but the PayPal app provides a tantalizing glimpse at this future. It provides complete access to your PayPal account allowing you to check your balances and send money to your friends and family, all from your iPhone. It supports 16 currencies and is secured by your existing PIN or password. It’s a good start but I’d like to see it go further. Missing is any way of displaying your transaction history and I’d also like to see it use the notification indicator on the app icon to show when money has arrived in your account.

Loan Shark ($4.99)

FoggyNoggin Software

Designed to help you navigate the often treacherous waters of financial lending, Loan Shark provides a number of features that let you calculate and compare loans from different vendors. You can calculate any component of a loan, including payment, interest rate or loan amount, see the full Amortization Table for the loan’s lifespan and play with “what-if” scenarios that let you determine the effect of making extra, higher, or lower payments. Loan Shark can help you determine how long it will take to pay off that credit card, determine how close you are to paying off your mortgage, and compare the cost of different loans, among many other uses. Kudos to FoggyNoggin Software for an easy-to-use and good looking interface that works well on a mobile device.

Bonus feature: Lets you locate nearby banks using the iPhone’s location-awareness

Tipulator (99 cents)

Tap Tap Tap

Tipulator stands out in a crowded field of tip calculators (it’s often said that the true test of how successful a new platform will be is how quickly a tip calculator appears for it) by marrying cute graphics with easy-to-use number dials. You can probably split the check without it but you won’t have as much fun doing it. And for 1/3 the price of your last latte, you owe it to yourself to at least try it.

Tiptap (Free)

Made With Bananas

More traditional but no less useful is the free Tiptap which is one of the most straightforward tip calculators I’ve seen. Featuring a large custom keypad and a large picker wheel, it’s extremely finger friendly, a plus when when your dining companions are tapping on their wallets and waiting for you to tell them how much they owe. You can choose to enable rounding, splitting, or tax support and Tiptap works with multiple currencies and multiple languages (English, French, Spanish, Italian, Dutch, German, Swedish and Japanese).

PocketMoney ($9.99)

Catamount Software

This venerable mobile checkbook first appeared 14 years ago on the Apple Newton and has since been available on Palm and Windows Mobile devices. Long time PDA users transitioning to the iPhone and former Quicken users alike will welcome its powerful approach to tracking your finances. PocketMoney can track an unlimited number of accounts, can auto-complete transactions based on payee, and will generate expense reports and pie charts. PocketMoney can import database files from the Palm version and also Quicken Interchange Format (QIF). You can even sync these files over a WiFi network using a free desktop app.

SplashMoney ($9.99)

SplashData

SplashMoney is another mobile checkbook that is well known from its implementation on Palm and Windows Mobile. SplashMoney allows you to track different account types: checking, savings, credit card, cash, asset, liability, money market and line of credit. You can create a budget and track and analyze your spending with customizable reports and charts. SplashMoney bests PocketMoney by connecting wirelessly to many online US banks using the same DirectConnect service as Quicken and Microsoft Money. In order to sync with the desktop, you’ll need to purchase the desktop version of SplashMoney separately.

Day Bank ($3.99)

Quantum Quinn

Day Bank is a pocket-sized check register that has been built specifically for the iPhone with a number of features that take advantage of the phone’s capabilities. Unlike the others included here, Day Bank seems particularly suited for entering transactions on the go and tracking your cash spending. Transaction entry is particularly speedy and the app uses the iPhone’s camera to capture images of receipts or purchased items. I like the ability to easily filter the view by day, week, and month. Day Bank isn’t as full featured as its competitors and currently can’t serve as your primary money manager due to its inability to reconcile transactions but it is improving rapidly and in its next version will support transaction geo-tagging, the ability to rename categories, QIF, CSV, & XML export, WiFi backup and restore and more.

Pennies ($2.99)

Design By A Knife

Pennies is a slick expense tracker with an interface that looks like it could have come straight from Apple. It doesn’t pretend to be a full-featured money manager like SplashMoney or PocketMoney but what it does do it does exceedingly well. It lets you quickly establish a monthly budget and record and track your daily expenses against it. Large finger friendly buttons and fun features such as a fuel gauge that indicates how much money is left in your budget make Pennies a joy to use. If you still rely on cash for your daily purchases and only want to make sure you are meeting your budget goals, Pennies is a good choice.

When giants fall, how can the average person resist getting caught in the financial crisis?

The markets are reeling from the recent news that Bank of America acquired Merrill Lynch, a 94-year-old institution that was one of the last remaining independent holdouts on the street, while at the same time the 158-year-old securities firm Lehman Brothers has filed for bankruptcy protection. And the bad news doesn’t stop there. American International Group (A.I.G.), still woozy from the credit crisis joined troubled mortgage finance companies Fannie Mae and Freddie Mac in receiving a bailout from the Federal Government. The Dow dropped 449 points on the news of the AIG bailout. And shares in the last two independent investment banks, Morgan Stanley and Goldman Sachs fell precipitously on fears that they might go the way of Lehman and Merrill.

Coming on the heels of the forced sale of Bear Stearns to JPMorgan Chase earlier this year, its more than enough to make the average person wonder if our entire economy is on the verge of collapse. When such seemingly solvent financial institutions get shaken to their foundations, it leaves a lot of rubble.

So what can you do to make sure you are protected?

Don’t Panic

Resist the tendency to respond emotionally. The Three Principles of Personal Finance haven’t changed just because Lehman Brothers made some poor financial decisions. Stick with the three principles and you will be prepared for any crisis.

1. Spend less than you earn
2. Make the money you have work for you
3. Be prepared for the unexpected

Don’t try to time the market

Dollar cost average your way into the market instead.  Dollar cost averaging is an investing approach that reduces exposure to the risk associated with making a single large purchase. Spend a fixed dollar amount at regular intervals on a particular investment regardless of the share price. More shares are purchased when prices are low and fewer when prices are high.

By following the most basic investing principle, “buy low, sell high,” you can turn the market volatility to your advantage and lower your average cost basis. This means higher returns when the market eventually rebounds.

Take a long-term approach and keep making regular, steady investments into your 401k & IRA. Bull and bear markets cycle through every few years. Many investors saw a growth in their portfolios in the 90’s only to see their profits dissolve by 2002. But the ones that panicked, abandoned the stock market, and put what was left of their remaining assets into low-yield CDs were not well positioned for the rebound that occurred between 2003-2006. Keep this simple fact in mind. According to Jeremy J. Siegel, there is not a single 20-year-period in the last 100 years where the stock market has not increased in value*

Still worried? See if your employer offers dollar-for-dollar 401k contribution matching. That’s like getting an instant 100% return.

Diversify

While consumer financial services are down 54% over the past year, healthcare has outperformed the S&P 500 by 10% – just a few years ago, the situation was reversed.  Rather than investing in a single stock or single sector of the economy, look for mutual funds that invest across many businesses.  Another option, index funds, which are less subject to seismic shifts in the market because they are based on a set of rules of ownership that remain constant, regardless of market conditions.

Remember these principles when making investment decisions and you can rise from the rubble.

* Stocks for the Long Run, by Jeremy J. Siegel, McGraw-Hill Companies; 4nd edition (November 27, 2007, ISBN 9780071494700)