(photo: JD Hancock)

For about ten years, I’ve been running a service business, selling my writing. By the Small Business Administration’s definition, I’m a small business. But the SBA has a big tent: they define a small business as one with under 500 employees. That covers 99.9% of all the businesses in America (by number of employees, not by revenue).

There’s no cachet in being in that kind of non-exclusive club. I’m a microbusiness. My business consists of me and no one else. The census calls us “nonemployer firms.” And it’s still a pretty big club: there were 21.4 million nonemployer firms as of 2008. Most are unincorporated sole proprietorships, like me.

I was wondering about these figures partly because I’m a number-loving nerd and partly because of my friend Molly Wizenberg. Like me, Molly is a self-employed freelance writer, and she has spoken highly to me of her accountant. I’ve never hired an accountant; I do all my books and taxes myself. So I asked Molly if I could call up her accountant and see what I’m missing out on. (Molly, I should disclose, is also my business partner in a very small venture.)

“Money is very important to me and I’m easily overwhelmed by it,” said Molly. “I’m fine with handling Quicken and doing my own personal bookkeeping, but I’m not comfortable going any further than that.”

The question I had in mind: should I have an accountant? Should everyone who runs a microbusiness have an accountant? Or are we better off bringing our DIY ethic to our dealings with the authorities?

So I called Molly’s accountant, Charlene Fleming of KE & Associates in Seattle, who began with a denial. “Molly doesn’t have an accountant so much as she has someone who does her taxes,” Fleming explained. An accountant is a big-time bookkeeper who prepares financial statements for a business. Molly keeps her own books in Quicken.

I put the question to Fleming directly: should I hire a tax preparer, too? I expected this to be like asking an insurance salesman whether I should buy some insurance, but she didn’t give me the hard sell. “When you think that you’re going to save more money than it’s going to cost you to do this thing, that’s when you pay someone to do it for you,” she said. How do you know when you’ve hit that point, though? “When the numbers seem to be getting out of hand for you. When it’s taking you two weeks to do the TurboTax.”

It takes me about two hours to do the TurboTax, I told Fleming. Fine, she said, with one caveat. “I tell people that the difference between them and me is that they do one [tax return] a year and I do 500 a year. I speak fluent IRS-ese.”

Deduction junction

At this point, I had convinced myself that regardless of Charlene Fleming’s foreign language skills, I could handle this myself just fine and save on her fee, which is about $150 for a sole proprietor’s tax return.

Then we started talking about deductions.

“Usually one of the first questions that a person asks me are the types of things they can deduct,” said Fleming.

I have always been hopelessly unclear on this, and so (is the IRS reading this?) I am extremely conservative about what I deduct. If it’s not obviously an expense incurred in the course of a paid assignment, I leave it off. “There are people in the population who are a little more timid about their deductions,” said Fleming, “and I have to tell them that while it’s their choice, they are leaving money on the table.” (Of course, she also sees people who think they can deduct everything in sight.)

Fleming hasn’t taken a look at my books, but my interpretation of what she told me is that I’m probably underreporting my R&D expenses, and that if I think I’m avoiding an audit by being timid about deductions, I don’t understand how the IRS works. “Things typically don’t get defined in granite,” said Fleming. “They end up being a range of possibilities for deductions.”

Molly pointed out that if she does get audited, she wants an experienced tax professional on her side. Actually, the way she put it was, “I like knowing that if the s—- goes down, she’s the one who has to speak for it, not me.”

I haven’t decided yet whether I’m going to give Fleming a call next spring. I’m leaning toward yes. In the meantime, I have two contradictory recommendations:

1. If you’re a microbusiness and are flying blind when it comes to deductions, spending a couple hundred bucks to talk to a tax professional could save a bundle down the road. Ask a friend in your field for a recommendation.

2. If you’re a microbusiness, know what to deduct, and have always had a professional prepare your taxes, consider doing it yourself one year. TurboTax.com makes filing a Schedule C easy, and it’s cheaper than a human tax preparer. (I’ve been using it far longer than I’ve been writing for Intuit (INTU).) You don’t have to pay for the product until you file, so if you get partway through and give up, you only wasted an hour.

(Hugo90)

Financing a small business is rarely an easy task. Unless you have spotless personal credit, getting a corporate credit card will be difficult. Without a large savings account, bootstrapping is also problematic.

So what’s a creative-minded entrepreneur to do: give up? Of course not.  Businesses throughout history have grappled with the financing problem, and the successful ones all found ways around it. More often than not, the very same strategies can be used to get over your personal financing hurdles.

“Cash Floats”

Despite being remembered as a towering business legend, Henry Ford did not begin as a wealthy man. Quite the contrary: as Ford Motor Company (F) explains on its corporate website, Henry came from humble roots and never forgot them. Despite deriving greater financial security from a job promotion at Edison Illuminating Company in 1893, he did not have the luxury of a large cash reserve with which to start Ford Motor (the epitome of a capital-intensive business.) The way Henry Ford managed to start, sustain and grow his business was by using so-called “cash floats.”

Ford knew he could never afford to pay for all the materials needed to build a car up-front. So instead, he negotiated deals with dealers obligating them to pay cash for his cars. Then, he convinced suppliers to let him pay for the materials 30 days after receiving them. In this way, Ford could get his parts right away, build his cars and sell them to dealers at a profit before any of his expenses came due.

Silent Partners

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Another creative financing technique at your disposal is to seek out a silent partner. A silent partner is any investor who puts money into your business in exchange for future profits but does not have a voice in decision making. This could be a wealthy relative, a co-worker or anyone else you can persuade to invest. Be careful, though, not to accept silent partner investment from just anyone. The ideal scenario is taking a little from someone who has a lot, as such people are unlikely to freak out about the inevitable ups and downs of a new business venture.

Conversely, taking $50,000 from your retired Aunt Mildred could cause her to be extremely antsy about every little cash flow problem.

Consulting Work

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In his essay How To Fund a Startup, Paul Graham of the venture firm Y Combinator writes that consulting work can help provide early seed money for new businesses:

“Another way to fund a startup is to get a job. The best sort of job is a consulting project in which you can build whatever software you wanted to sell as a startup. Then you can gradually transform yourself from a consulting company into a product company, and have your clients pay your development expenses.”

While Graham’s advice was admittedly tailored to technology startups, it is easy to envision the same model being applicable to other service businesses. Someone looking to start a small to medium-sized accounting firm, for instance, can take on freelance jobs in the early going and resolve to put most or all of that money toward growing his company. Different types of services businesses could conceivably do the same.

Hard Money Lenders

(taberandrew)

If your business is in a pinch and absolutely needs money by yesterday to capitalize on an opportunity, there are always hard money lenders. Payday lenders, for instance, make short-term loans at high interest rates.

But beware: there are very few circumstances when going to this type of lending establishment makes sense. The correct time to utilize a payday lender for business purposes is when you face a money-making opportunity that is certain, but fleeting, and which requires cash at once. If you can get the money quickly and use it for a deal that returns $50,000, what does it matter that you paid $5,000 in interest to get it? Then again, consider this your last resort for financing, to be approached only if you’ve exhausted all other options listed above.

(photo: iStockphoto) 

You’ve been laid off and want to return to school. It’s a path many unemployed individuals consider, whether it’s because they hope it will give them an edge in this competitive job market, or they’ve been wanting to continue their education for a while but never mustered the courage to exit the workforce voluntarily.

Whatever the reasons for your decision, one thing you should definitely do is apply for federal financial aid. Grants and subsidized federal student loans can go a long way in decreasing the monetary burden of continued education — especially in a situation like yours, where money is tight.

But many unemployed people – especially those who’ve lost their jobs within the past year, encounter a problem. When filling out the FAFSA (the Free Application for Federal Student Aid form), they are determined ineligible for grants and subsidized federal student loans because they earned too much money the previous year, while they were still employed.

What should you do if you find yourself in this situation?

Don’t give up. You can actually make a case for yourself by filling out a special circumstances form and show that you are no longer earning what you did on your last tax return. 

What is a Special Circumstances Form?

You submit this form to the schools of your choice to request  that they reevaluate your financial aid status for reasons such as a job loss, pay cut, high medical expenses or divorce.

Where to Find Special Circumstances Forms

You can get one from your university financial aid office online or in person. You must fill out your FAFSA first. If you can’t find the form on the financial aid section of your school’s website, call the financial aid office. Have last year’s tax form in front of you when you fill it out, as well as your latest paystub to prove a pay cut or a termination notice if you’ve been laid off – if you have it. If your financial situation has changed because of a divorce or medical expenses, you should provide a copy of your divorce decree or the medical bill.

Processing Time

Processing may take several weeks, so it is crucial that you turn in your form as soon as possible. If you apply to a school nearby, go to the financial aid office in person to submit the form. Have a financial aid counselor double-check that you filled out your form completely and with any proof needed. Ask how long processing will take and follow up after the suggested processing time. The financial aid office may request additional information or have further questions. Staying on top of the process could help you get your financial aid faster.

Additional Sources for Retraining and Career Guidance

Federal financial aid isn’t the only way of getting financial help after a layoff. Consider these sources:

* Government Retraining Programs

The U.S. government has set up over 300 One-Stop Career Centers across the country to help you find a new job, hone resume and interview skills, and help you find federal or state government sponsored retraining programs for a new career. If you qualify for a retraining program, you could receive a tuition voucher. To find out which careers you could potentially train for via government funding, go to the Education and Training Finder.

Will utilizing government retraining programs effect unemployment compensation eligibility? According to a Department of Labor spokesman, “it used to be the case that in some states entering education or training meant that an individual could no longer receive unemployment benefits.  This is because some states had laws that said an individual must be actively seeking employment to qualify for benefits.” It is now possible to use both government-supported retraining programs and unemployment due to changes that occurred in this presidential administration.

* Severance Packages

Your severance package from your employer could help you cover tuition costs. Many employers actually offer retraining stipends as part of their severance packages. You could use that money to pay for whatever form of education best fits your needs, whether that’s attending a culinary institute, a university, or enrolling in an apprenticeship program or certification course.

* University Career Centers

If you previously graduated from a university or community college, don’t hesitate to reach back to its career center. Many education institutions help graduates find work years after graduation. These centers can also guide you towards your next career field before you seek further education.

Consider All Retraining Options

Filling out a special circumstances form can make a huge difference in your out-of-pocket costs for returning to school. But don’t eliminate other options such as government-sponsored programs. Once you are certain of your new career path, use all available resources to find the least expensive way to get the education you need.   

 Reyna Gobel is a freelance journalist who specializes in financial fitness. She is also the author of Graduation Debt: How To Manage Student Loans and Live Your Life.

photo: elycefeliz 

Do you want to become rich beyond your wildest dreams? The question may seem right out of a late-night infomercial — unless you follow one strategy that may actually help you achieve it: Act poor.

If you do this, you’ll be fast on your way to having a million dollars — or more. That money can buy you a lot of stuff, of course, which would allow you to act rich and show off in no time. But if you’re smart, you’ll use it to buy freedom and give yourself options that the rest of your graduating class won’t have because they just weren’t as smart coming out of the box.

What do I mean by “act poor?” Pretty much act like you have for the past four years. Maybe even live with Mom and Dad for a year or so, promising that you’ll tell them when you’re coming home at night and help with the dishes. (As a parent, I had to say that.) The point of keeping your expenses low is to save your socks off.

Your friends probably won’t be doing this. The moment they get jobs, they’re going to want a better car; fewer roommates; dinners on the town. And that’s ever so tempting to do since you’ve likely suffered through lean years as a college student. And that new job you’re getting could allow you to pay for some luxuries, even if it doesn’t pay a lot.

But there’s a great pay off to living like a college student. If you manage to save really prodigiously for just a couple of years, you can build an emergency fund that will tide you over when times are really bad. And you can get started on long-term stock market investing at the best possible time.

How could I possibly say that this is the best possible time to be investing in the stock market, when stocks have gone nowhere for a full decade? I’m a student of the market, the author of Investing 101 and can say with some authority that the market’s miserable decade-long performance is exactly what spells huge opportunity for you.

A company called Ibbotson Associates has been compiling data on investments for decades. Let me throw a few of their statistics at you so you can understand why I’m so bullish — and particularly bullish for those of you who get to start investing now.

Average stock market returns from 1926 to the present work out to 9.6% for big company stocks and 11.67% for small company stocks. But stocks rarely hit that average in any given year. Instead, prices dive and soar, scaring out the faint of heart — and those who don’t understand why they’re investing. These price swings are often lasting, which is why you never invest short-term money in stocks. Put the rent money in the stock market, and a normal market swing might just send you back to living with Mom and Dad. But over the long run, those downswings are matched by equally rewarding upswings.

Consider: During the decade of the 1920s, big company stocks returned an average of 19.2%, according to Ibbotson — way above the long-term average. But the next decade was miserable, with returns on big company stocks dropping 0.1% over the 10 year period. In other words, if you invested $10,000, at the end of that decade, you would have a little less than $10,000 and probably feel demoralized. What happened then? In the 1940s, market returns were pretty manic — alternating between big losses and huge gains. The average return, however, ended at 9.2%. Still, because of the really rotten returns in the 1930s, investors could expect a “catch-up” decade and they got it. During the 1950s, average stock returns rose 19.4%.

Stock gains were below average in the 1960s and 70s —  up 7.8% and 5.9% respectively; then way above average in the 1980s and 1990s — up 17.8% and 18.2% respectively. Are you detecting a pattern?

Okay, so the relevant decade for you was the one just completed, when stock prices fell 1% on average, according to Ibbotson. That’s the worst decade in history, which is a really good sign when you’re starting now.

It’s not clear whether your “catch up” returns will hit this year, next year or some time in the future, but the chances are great that you’ll get a stretch of above-average returns. What does that mean in dollars and cents?

For the updated version of Investing 101, I did an analysis of what would happen to somebody who put $1,000 a month into the stock market starting in January of 1970 — the last really miserable decade for stocks– and stuck with it for 30 years. The first decade was rotten (5.9% returns), but the next two decades were awesome.

At the end of 30 years, this investor had $4.03 million. If he earned just the average return over that time– or earned his returns in a different order — he would have had $1 million less — $3.08 million to be precise. Why? He had the least at stake when returns were rotten and a lot of money to compound when times got good.

I know $1,000 a month is an insane amount and feels really crazy to you now. You don’t have to save that much to get a big reward; you just have to start saving as much as you can.

But if you get a job where your employer offers a 401(k) plan, it’s not as hard as you might think to save even that stunning $1,000 a month. That’s because your contributions come out before tax, which reduces your out-of-pocket cost because it also cuts your tax withholding, and most employers match your contributions — some even at 100% on the dollar.

In other words, you contribute $500 and your employer contributes $500. And because your contribution comes out before tax, your paycheck is reduced by just $400 (assuming you pay 20% of your income in state and federal tax).

Think you can’t save that much — or even at all? Try tracking all of your expenses, suggests Danny Kofke, a special education teacher and author of How to Survive (and Perhaps Thrive) on a Teacher’s Salary.

Little things like going to lunch each day, instead of packing a sandwich, are likely to cost you about $5 bucks a day, $25 a week and $1,300 a year. The soda that you buy from a vending machine is likely $1 more than the one you bought at the store. And, of course, if you put off buying that new car and drive your junker (or take the Metro or bus), you’re likely to save $150 to $300 each month on car payments, too.

“Times are tough to get a job, but if you can start off without immediately getting used to spending how much you’re making, you can get way ahead,” Kofke said.

This is the formula that Thomas Stanley explains in The Millionaire Next Door and is, in fact, the most reliable way to get rich. If you play your cards right, you could be the youngest millionaire on your block.

Kathy Kristof is a syndicated personal finance columnist, speaker and author of three books, including the recently updated Investing 101 (Bloomberg, 2008).

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The central line is a mainstay of modern medicine: a catheter inserted directly into the jugular to administer drugs, monitor blood pressure, and facilitate a dozen other vital tasks. If a tube running into your jugular vein gets infected, you are screwed. And patients at Johns Hopkins Hospital were getting sick and dying from central line infections.

So the hospital applied a new technique to the problem. It wasn’t a new antibiotic or type of catheter. Author Atul Gawande reports that the new technique reduced the incidence of central line infections from 11 percent to zero. The title of Gawande’s new book gives it all away: The Checklist Manifesto. Did you wash your hands? Check. Clean the insertion site? Check. The whole list has five items.

A checklist is not the same as a to-do list. It’s a list of steps to be done in sequence in a particular recurring situation. A good checklist gets used over and over and is refined to the most important steps. As Gawande puts it:

Checklists seem to be able to defend anyone, even the experienced, against failure in many more tasks than we realized. They provide a kind of cognitive net. They catch mental flaws inherent in all of us—flaws of memory and attention and thoroughness.

The checklist has enjoyed equal success in other high-risk professions: flying planes (Captain Sullenberger used a checklist), building skyscrapers, and doling out venture capital. This made me wonder about personal finance—can checklists help us avoid preventable financial mistakes?

I think they can. Let’s start with a checklist you can make right now that will take the stress out of tax time. (Okay, 10 percent of the stress. But still.)

Tax time

April is just around the corner. Do you have all those annoying one-page documents you need? W-2s, 1099s, K-1s? Have you ever done your whole tax return and then received one last 1099 and had to file the dreaded 1040X to amend your return?

Yeah, I did that once. Now I use a checklist. My current one has eight items. It’s not tax time until everything is checked off. If I get a new client this year (please!), I’ll add their 1099 to the list.

Hitting the road

Here’s another dumb thing I’ve done. Twice. I’ve forgotten to pay the rent before going out of town. Dumb, dumb, dumb. Now, in the same place I keep my standard packing list, I have a list of things I might be forgetting to do before I leave on a trip: change money, pay the rent, file away credit cards (and noodle shop loyalty cards) I don’t need to carry in my wallet, check where the no-fee ATMs are at my destination, buy international data units for my phone.

Credit, debit, and direct deposit

Ever gotten the call of shame from the cable company informing you that your card was declined and (strongly implied) you are some kind of deadbeat? All you did was activate that shiny new card the bank sent you, with the new expiration date, and the new three-digit code, and, oh crap.

Guess how you solve this problem? Magic! Okay, a checklist. I keep a list of every place my credit card, debit card, and bank account information (for direct deposit) is on file. When I get a new card, I work down the list. Almost all of it can be done online.

Similarly, I have a change of address list for when we move, so they don’t send my 1099s to the wrong place.

Da bills

You would never just totally forget to pay your water bill and get slapped with a late fee, so I’m not even going to mention it.

The annual report

Every year, after we do our taxes, I like to go through a short checklist that asks questions like:
• Are we meeting our retirement savings goals?
• Do we need to make any changes to our health insurance during open enrollment?
• What vacations are we planning to take in the next year, and how much will they cost?
• Are there any major household purchases we’d like to make in the next year? (Is any furniture wearing out, for example?)

Where do you keep your checklists?

A checklist is no good if it isn’t there when you need it. I’m online most of the time, so that’s where I keep my checklists.

I use a service called Backpack. With Backpack, I can make as many lists as I want, check items off, rearrange items, email myself a list, and share lists with family and friends. It’s like Mint for everything else in my life besides bank accounts and budgeting. There’s a free version that might well have plenty of capacity for your checklists.

You are smart, but…

Throughout The Checklist Manifesto, Gawande uses the word “stupid.” Yes, it is stupid that we have to use a checklist to remember to pack socks for our trip or wash our hands before sticking a tube into a patient’s neck. A checklist reminds us to do simple things we probably wouldn’t have forgotten anyway. It requires us to admit that there’s a bit of the absent-minded professor in each of us.

But checklists work. They help us do the important but boring stuff so our brain can concentrate on more interesting things, like inventing flubber.

I can live with being Fred MacMurray. Can you? I’d like to hear your financial checklist ideas in the comments.

Have you ever put an old chestnut like “save more” or “spend less” on your list of New Year’s resolutions? I’ve done it, too, with results undetectable by the most precise financial calculator.

Instead, here’s a top ten list (in traditional David Letterman order) of concrete resolutions you can actually accomplish. I’m not saying they’ll be easy, but all of these are either on my list for 2010 or are resolutions I’ve successfully completed in years past. Pick a couple of favorites and go to town on them. Happy new year.

10. Make or update your will. The number one reason people don’t do this is that they believe they will never die. If you are, in fact, immortal, go ahead and skip this one. Otherwise, if you have a simple estate, you can make a will on the cheap: get Nolo’s Simple Will Book or use their Online Tool for $70 (and it’s on sale for $50 until January 7). If you have a complex estate (do you employ a chauffeur with a name like Worthington?), get a lawyer and remember the first rule of estate planning: don’t forget a little something for your personal finance columnist.

9. Set up an automatic savings plan, if you don’t already have one. Even $5 a week is a fine place to start. SmartyPig works well for this. Pick a specific goal, check your progress periodically, and don’t mess with it—except to increase the weekly allotment.

8. Get rid of useless crap. No time like the present

7. Start a business. Hmm, that sounds too ambitious. Instead, start a side project that happens to be tax-advantaged. And start small. It could be selling crafts on Etsy, any kind of shop or repair work (I sharpen knives, for example), or even freelance writing. Go legit—get your city business license and file Schedule C. Why? Even if you don’t itemize, business expenses are tax-deductible. It’s fun to get paid (even a little) for something you enjoy. And if you become un- or underemployed, having an existing side business gives you something to focus on. Which brings us to…

6. Simulate bad news. Armies and city governments run disaster simulations. You can play the home game, the financial equivalent of testing your smoke alarm. Are you doing enough to prevent an emergency or life change from becoming a financial disaster? (Oh my God, I totally sound like an insurance salesman.) This year, evaluate your insurance, your emergency fund, and your family’s plans in the event of job loss, natural disaster, death or illness, and other bad things. This will not be fun, but you know what would be less fun? Doing it during the actual emergency.

5. Plan for financial good news. Now, this is more like it! Here’s hoping you get a raise, bonus, or inheritance this year. It’s about damn time, right? (I mean, not that I’m actively hoping you get an inheritance. Unless it’s from a rich uncle you never met.) Furthermore, here’s hoping you spend some of it on fun and some of it on long-term goals. Decide now. It’ll take you five minutes. What percent of any unexpected income will you set aside for retirement or the emergency fund this year?

4. Talk to your relatives about a gift moratorium. I know, sounds like negotiating with North Korea. But if you do raise the idea, do it in the summer—far from winter holidays and not too close to anyone’s birthday—and make the terms clear (maybe children and handmade gifts are excluded from the cease-fire, say). Explain that it’s not because you don’t love getting presents, but because you’re taking charge of your financial situation and find it hard not to spend on your wonderful siblings and cousins and uncles without making a pact. Oh, if my parents are reading this, next year I’d like a stocking full of candy and a donation to my favorite charity. And a chauffeur. Kidding!

3. Look into Roth IRA conversion. As of 2010, there’s no longer an income limit for converting a traditional IRA to a Roth IRA. (If you couldn’t convert to a Roth in the past because you made over $100,000, congratulations.) Converting your traditional IRA (or an old 401k or 403b) to a Roth may or may not be the right move for you—talk to your financial adviser—but if you’re even considering it, you’ll need to think about where the money will come from to pay the tax on the conversion. Good news: you can pay the taxes over the course of two years.

2. Take a nice vacation. You’ve earned it. Just one rule: you have to pay cash, and you have to save up the cash with the vacation in mind. This year we’re taking a family vacation to Japan; we’ve been planning and saving for it since 2007. If you follow through on this resolution, do me two favors: have a great time and don’t invite me over to watch your slide show.

1. Don’t buy a house. Okay, maybe this one is just for me. Have you ever saved up for something and then realized you didn’t want it anymore? For years, my wife and I have been socking away money every month into our down payment fund. And it’s getting awfully close to our goal. Due in part to the housing collapse, however, we have completely lost interest in buying a house. So one of our resolutions for this year is to determine how to reallocate that money—probably to beef up our retirement savings and emergency fund. Although, come on, how much can a chauffeur cost? Seriously, that much? Never mind.

Matthew Amster-Burton, author of the book Hungry Monkey, writes on food and finance from his home in Seattle.

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.