When he was much younger, Dad kept up with his allowance and gifted money and doled out just enough to pay for whatever toys he picked up in the store. However, these days I’m trying to shift that responsibility to him, and teach him to not only spend his money wisely, but manage it wisely (to include safely transferring it from wallet to cashier and back).

Spending Cash Hurts

It probably sounds elementary, and in a way it is, but I strongly believe in something I’ve dubbed “transactional pain.” That is, the twinge you feel when you hand over cash from your wallet to someone else who buries it in their cash register drawer and slams it shut, leaving your wallet a little thinner.

This transactional pain is hard to duplicate with plastic, and it is certainly hard to replicate when someone else handles the transaction for you. You need to see it, feel it and experience it for yourself.

Over time, I’ve noticed my son has become more frugal during these infrequent trips to the store for a “prize.” Just the other day he spent nearly 10 minutes in the toy aisle agonizing over buying one Lego set or two.

I explained that if he bought two it would leave him with $10, but if he bought one he would still have $30. I assured him that he could buy both if he wanted, since the bulk of this money was left over from Christmas. The choice was his, even though deep down I wanted to steer him in a certain direction.

He decided he wanted both toys and we headed for the checkout. He was quiet, and I knew what he was thinking. About half way through the store he said, “Dad, I don’t really need both of these. I want to put one back and save my money.” Naturally, I told him that was a smart move and we returned to the toy section to put back the second Lego set.

Future Frugal or Future Cheapskate?

I shared the story with my wife and we joked that he will probably grow up and have more money than all of us, but we also don’t want to raise a Scrooge, or a cheapskate. That’s why, if you will indulge my recounting another moment of parental pride, the next money decision from my son made me even more proud.

Over the weekend my daughter shared with us that a school fundraiser she had participated in didn’t do so well and the organization for which they were raising money was hurting. Her teacher asked students to take the forms back home and ask if anyone else might be interested in buying a discount card (local business sponsor this endeavor by offering discounts for holders of this card throughout the year).

The cards are $10, and nearly everyone we knew that wanted one bought one during the first round (yes, even Mom and Dad). Hearing my daughter’s passionate pitch my son responded, “I’ll buy a card from you. I can save money at Krispy Kreme!”

This drew laughter from the dinner table and I explained to my son that Mom and Dad already had a card, and really only one member of the family needed one to get a discount if we went out to eat (or bought a box of doughnuts). He frowned, insisting that he wanted to help his sister.

When You Can Afford to Give, Give Freely

I immediately backed down, recognizing a teachable moment, and told him if he wanted to support the cause with this own money he could give $10 to his sister in exchange for his own card. He excitedly ran off to get his wallet, not asking how much money he’d have left, and without agonizing over his giving decision.

It was one of the times when you look back over all the lessons you try to teach your kids and see that maybe, just maybe, one of those lessons stuck. If my son grows into a young man who continues to give to worthy causes without hesitation, to help his family, and to agonize over buying toys, well, I have to say my wife and I have succeeded as parents.

Let’s just hope these ideals survive the teenage years!

Take emergency funds as an example. While I advocate most people save one year of basic living expenses in a liquid emergency fund, many others advocate living on much less. The old standard 3-6 months is still often touted as the way to go.

In this economy, with the average length of economy ranging from several months to a year, it just seems prudent to put away a year’s worth of household expenses – to keep the lights on, a roof over your head, gas in the tank and food on the table. In my opinion, anything less puts your family at risk of financial hardship should you lose your primary source of income.

Some people don’t get that message, and instead squander every penny the have that could go towards savings on something they want now. I get that. For a long, long time we operated our household at the edge of a very steep cliff, with no emergency fund, and we are lucky nothing serious like an illness or a job layoff came along and wiped us out (it wouldn’t have taken much).

The Extreme Saver

There are others who go too far in the other direction – allocating every single dime in their portfolio to cash savings. These folks often have several years worth of mortgage payments and expenses saved in cash.

That’s fine if it helps you sleep at night. However, consider the opportunity cost of simply parking that money in a cash-based investment vehicle earning less than inflation (which unfortunately is still the case even at the best online banks). Over time, inflation, and the further cheapening of the U.S. dollar, will conspire to erode your savings.

With our one-year emergency fund I largely ignore interest rates, because I don’t have money set aside to work for me. Rather, I have it set aside to be there if it hits the fan.

Rather than keeping three or four years of savings in cash, consider dropping down to a year, or two, as a compromise. The remainder can be invested in a variety of vehicles depending on your appetite for risk.

Five Places for Your Surplus Emergency Fund

Keep in mind, I’m only suggesting the following locations as options for money you’ve saved beyond your one-year emergency fund. I do not recommend these savings vehicles serve as your primary emergency fund because they are often exposed to more risk, and/or fees for withdrawal, etc.

Dividend stocks. Investing in dividend stocks with a 25-plus year track record of increasing dividends may be a good spot to park a portion of this money. By reinvesting those dividends of the long-term you can take advantage of compounding to grow significant wealth.

Roth IRA. If you are not contributing to a Roth IRA, use the first $5,000 to open one. And remember, Roth IRA contributions can be withdrawn at any time, so you may consider them an extension of your emergency fund, but with some additional risk exposure if invested in equities.

Real estate. If you have ever been interested in investing in real estate, now might be a good time to put some of that surplus to use. Rates are near an all-time low, and housing prices have not yet rebounded in many markets.

Gold and/or silver. I’m not one to push gold and silver often, but the case could be made for putting 10% or so of your savings into one or both of these investments. Personally, I like silver because it is still cheap enough for me to buy the real thing, rather than a certificate or exchange-traded fund that tracks the price of silver.

CD ladders. Creating a CD ladder is a smart way to boost the earnings on your cash savings without locking it all away under the threat of penalty for early withdrawal.

The bottom line is this, it is smart to save for emergencies, but do not allow an irrational fear drive you to only save for emergencies. There are other savings objectives that must be met to have a healthy portfolio such as college savings, retirement, rainy day funds (and sunny day funds, too!).

Spending decisions were pretty easy back then. We spent the bare minimum for just about everything to free up as much income as possible to repay debt.

As we began paying off debt, our discretionary income increased, and while there was some pressure to spend more, we still had our eyes trained on the debt before us and it seemed easy to keep plugging away on the debt.

Eventually, we managed to whittle away all our non-mortgage debt, and were faced with the challenge of saving money. I’ve alluded to these struggles before in previous posts, and I keep coming back to this point in our financial turnaround because it seems to be such a pivotal moment in financial maturity.

When you get back to zero, you basically have three options:

1. Spend everything you earn and stay in the same spot.
2. Spend more than you earn and go back into debt.
3. Spend less than you earn and begin to build savings.

Unfortunately, option 1 seems easiest at this point. After all, you’ve been paying off debt for months (or years) and it is easy to justify taking a breathe from a Spartan existence. We can just hang out here for a few months and enjoy the things we’ve been missing out on while paying off debt. That’s a slippery slope. Soon, you might find yourself spending more than you earn and falling back into debt.

To build savings, you must continue to live much the same way you did while getting out of debt. Sure, you can add in a luxury or two, but keep in mind that every new service you sign up for, every new item that must be maintained and/or insured (a newer car, for instance), reduces the amount of discretionary income you have left over to devote to savings.

Adding too many of these things is often described as lifestyle creep – which Investopedia describes as:

A situation where people’s lifestyle or standard of living improves as their discretionary income rises either through an increase in income or decrease in costs. As lifestyle creep occurs, and more money is spent on lifestyle, former luxuries are now considered necessities.

Of course, the key to avoiding lifestyle creep is to find contentment in the things you already own. That’s tough to do in a world where the ownership of every new technology product is pitched as the difference in life or death.

Did you hear the story of the kid in China who sold a kidney to buy the new iPad 2? Seriously, you can’t make this stuff up!

The newest technological rage is Apple’s iPad 2. Like any new gadget, it will be outdated about the same time as that carton of milk in your refrigerator.

Zheng, a 17-year-old high school student in the Anhui province of China, didn’t know that. Or didn’t care. He was so bent on getting one that he sold one of his kidneys to an internet broker for 20,000 yuan (about $3,000). After the April 28 operation, he used part of the money to purchase the iPad.

Check out the rest of the story at MyTotalMoneyMakeover.com

Fortunately, most of us aren’t willing to part with a kidney to buy the latest fad, but many of us will part with a large sum of our hard-earned paycheck. And that chunk of money could be set aside for saving and investing.

So how does one motivate themselves to save money? Here are three strategies I’ve used personally to motivate myself towards saving money, instead of spending it.

#1 Set a Target

While deep in debt, my target was easy to spot: $0.00 in non-mortgage debt. Once we arrived there, the next target was largely undefined. I set a big goal of having one year’s worth of expenses in cash as a sort of super emergency fund. The bad part about setting such a large goal is takes a long time to achieve, and often you reach burn-out before you cross the finish line.

Instead, set a goal that is attainable in just a few months, like saving for a cash-only vacation, or saving enough to invest in a Roth IRA, etc.

#2 Pay Yourself First, and Last

We’ve all heard the idea of paying yourself first. Makes sense. Transfer money into savings vehicles as early in the month as possible – right off the top of your paycheck is ideal, as many of us do with 401k contributions. I also like the idea of paying myself last, sweeping any money left in our checking account at the end of the month over into a savings account so it is harder to spend.

#3 Make it Visual

Many kids’ savings products advise parents to find or print a picture of something kids are saving for and place it prominently near their savings jar (or piggy bank, whatever the case may be). I find this works well for adults, too.

If you are saving for a new car, or a pool, or a down payment on a new home, print a picture and put it on your refrigerator with the dollar goal you’d like to save. Print a miniature version for your wallet to remind you of your goal the next time you reach for your credit card inside a store.

I could simply stash my emergency savings with ING Direct, but I prefer to keep a portion of the savings local. So, I’m off to find a way to boost my returns on local savings products.

So now I’m left to find a new home for some of our savings. Keep in mind this money is targeted for emergencies and short term (less than a year or two) goals. With everything else we are investing in dividend stocks and conservative life-cycle mutual funds inside Roth IRAs and my 401k.

Rather than leaving our money to languish at 1% interest, I would like to find a way to triple the earnings, without too much effort (after all, this isn’t “investing” money). Over the last couple weeks I’ve been investigating CDs.

I have to first confess, I’ve never owned a CD – mostly because up to this point I have never had enough money to invest in something that is locked up with a penalty for cashing out. Thankfully, that is beginning to change after our family recently reached debt freedom.

CDs may offer a slightly higher yield than I receive now from my local bank (and most online banks), however the requirement to tie up money for a number of years is not attractive to me. That was until I discovered the concept of CD laddering.

How to Ladder CDs

The real beauty of creating a CD ladder is that you don’t have to obligate your entire amount of savings into a 12-month CD to get a positive result. Instead, I recommend starting in the smallest increments you can tolerate and build from there.

Here’s an example using average rates collected from a number of CD offerings at Ally Bank, ING Direct, MonitorBankRates.com, and my local credit union. (I decided an average for each term would be easier than pinpointing a specific rate that could change before this article is even published). September rates are a wishful guess at what rates might look like by Fall, and were only changed to give you an idea why laddering could be a smart move given the idea rates will rise in the near future.

July Purchases ($2,000):

• $500 3-Month CD matures in October 2010 (0.75%)
• $500 6-month CD matures in January 2011 (1.15%)
• $500 9-month CD matures in April 2011 (1.15%)
• $500 12-month CD matures in July 2011 (1.50%)

August Purchases ($2,000)

• $500 3-Month CD matures in November 2010 (0.75%)
• $500 6-month CD matures in February 2011  (1.15%)
• $500 9-month CD matures in May 2011  (1.15%)
• $500 12-month CD matures in August 2011 (1.50%)

September Purchases ($2,000)

• $500 3-Month CD matures in December 2010 (0.90%)
• $500 6-month CD matures in March 2011 (1.25%)
• $500 9-month CD matures in June 2011 (1.50%)
• $500 12-month CD matures in September 2011 (1.65%)

*Note, I am using a 3-6-9-12 month maturity schedule to build a 12-month CD ladder. You could use a 6-12-18 month maturity schedule (or greater) to build an 18-month (or longer) ladder. A longer term ladder will earn higher rates, but will take longer to get going and will tie up your money for a longer period up front. It’s up to you to determine how much of your savings you can tie up, and for how long.

Beginning in October 2010, when our first 3-month CD purchase matures, I will use that original $500 (plus accumulated interest) to purchase a 12-month CD at a higher interest rate. In November, when the second 3-month CD expires, I’ll roll it into a 12-month CD purchase, and so on. In one year, I’ll have a rolling 12-month CD ladder of twelve one-year CDs.

One advantage of using these shorter terms is that when rates are rising, which I suspect they will be doing slowly over the next year or two, you can quickly take advantage of these new, higher rates without having to wait for a 6-month CD at a lower rate to expire.

Why Not Purchase 3-5 Year CDs At Higher Interest Rates?

If you lock into a CD for three or five years, you will miss out on interest rate increases. And this would be bad assuming they increase at a pace faster than the premium received for locking your money in longer.

It’s a bit of a guessing game – kind of like investing in the stock market. However, because these CDs represent a portion of my emergency fund (just a portion – not the entire thing), and funds for short-term goals, I’d rather have a little money coming back to me month-to-month, just in case.

Some lenders offer “penalty-free” CDs, which offer a lower interest rate for the option of cashing out without penalty before the CD matures. Personally, I’d probably go with the higher rate if my finances were sound with the understanding in a real emergency, I’d sacrifice a month’s interest as a penalty for accessing the money early.

Other lenders are offering what’s known as a “step up” CD. The Ally Bank Raise Your Rate CD is one such a product, which offers the ability to step up to a higher interest rate once during the term of the CD. It’s an interesting idea, but the minimum terms are typically longer than my liking.

CDs laddering seems to be something worth trying, and could be more profitable when interest rates rise again. I will go ahead and get the CD ladder in place now so that I will be ready to take advantage of higher interest rates in the future. If nothing else, I’ll earn a few more dollars on my savings for my troubles.

That’s a question that a lot of people ask while in debt. Dave Ramsey, possibly the most popular debt counselor, recommends that you stop ALL retirement saving while eliminating debt. He argues that it gives you a huge advantage because you have a lot more money for your debt snowball.

I am a little more liberal when it comes to this rule. I think that it should be based on some other factors as well. For example, our current pile of debt is so large that we will be missing out on 5+ years of retirement saving (the amount of time it’s going to take us to pay off this debt). When you add compound interest into the equation, it means that we would be missing out on a lot more money. Let me give you our situation as an example:

I currently work for the Government and am offered a 5% match for money I put into the Thrift Savings Plan (fancy government word for 401k). That means that for every dollar I put into the plan, they match me 100% up to a 5% of my income. That’s a guaranteed 100% return on my money and I can invest it in any of their funds. However, if I didn’t contribute to the plan, I would miss out on that free money. Plus, I would miss out on 5+ years of compound interest.

Now, I am going to put some numbers to the scenario. Let’s say I start putting 5% of my income (plus the match) into the plan starting today (age 25). By the time I reach age 70, I will have almost $2.5 million in the account assuming an 8% return. Now, if I wait 6 years (best case scenario for debt repayment) and start investing the same amount per year, I will only have $1.7 million in the account. Still not bad, but almost $800,000 less than if I would have started at 25. Here is a graph of this example:

So, as you can see, starting to save for retirement 6 years from now instead of today will cost me about $800,000 in retirement savings by age 70. Am I really going to pay that much more in interest by not stopping my contributions? I don’t think so!

So, I guess the question is, when should you stop contributing to retirement in order to clean up your debts? Should you do it if you can get the debts paid off in 2 years or less? 4 years or less? What is the magic number?

All I can say is, I am not missing out on almost $800,000 in retirement growth to save MAYBE a couple thousand in interest charges.

What are your thoughts on the subject? Can you think of any reasons why I should be STOPPING my contributions?

You ever notice how there are older people that don’t know the first thing about the world of personal finance, yet they seem to be experts at saving money? These people have also not heard of personal finance gurus, such as, Dave Ramsey or Suze Orman, or even Frugal Dad. Yet they still save money. They don’t read personal finance blogs nor do they ever want to listen to a full personal finance podcast.

Photo by eyg2158

Many of us twenty-somethings are completely lost sometimes when it comes to personal finance, yet we have all the information about money management available to us within a few clicks. We have a lot to learn from older generations when it comes to saving money.

How do these old school people manage to save money? What are their money saving tips?

They follow the “pay yourself first” mentality.

Instead of waiting for the end of the pay cycle, these ambitious individuals put their money away as soon as their paycheck comes in.
Whether they choose to invest in CDs, mutual funds, risky stocks, online savings accounts, or keep it under their pillow is irrelevant. Savings come first. Bills come second. Third is the necessities of life. Whatever is left over is used to enjoy life a little.

The key takeaway is that savings are always done first. Before you buy that new cologne it’s imperative that you have reached your set savings target for that pay cycle or whatever deadline you have set for you financial goals. If not, then the new bottle of cologne is going to have to wait.

They live below their means.

Not a revolutionary concept but a getting rich slowly basic that needs to be reinforced into all of us. These people are usually the millionaire next door that drive the car you would never dare step foot in because it’s embarrassingly ugly. They will never be the nicest smelling person in the room nor will they wear the most expensive pair of shoes.

These old school money savers understand how much money they earn and their lifestyle is directly proportionate to their income. If they earn $50,000 a year before taxes, they will likely not go all out and buy a BMW. They simply don’t see the need to acquire debt for a car (or home for that matter) that doesn’t fit their lifestyle.

They avoid external influences.

Advertising does have an affect on everyone. However, it is more severe on certain individuals. The old school money savers are less susceptible to fall victim to new age marketing techniques. How come? Because they have everything they need in life and don’t go looking for more. Sure they may occasionally splurge and buy something they really don’t need all that much. At the end of the day these scenarios are few and far in between.
Impulse purchases are kept to a minimum.

You have to work for their money.

It is fairly easy to extract money from most of us. The old school crowd feels that everything is a scam. They do not want to hear your sales pitch. They will not even humor you by pretending to listen to the sales pitch. You have to work your butt off to get your hands in their pockets.
You will have to sell something really good at a bargain price to get into their wallets.

At the end of the day we have a lot to learn from these old school folks (don’t worry guys I’m not calling you old, just old school).

Are there any other old school money saving tips that I missed?

What have you learned from older generations about saving money?

Any post about saving for early retirement should first define the author’s meaning of “early” and “retirement.” Combined, these words are typically understood to mean walking away from paid employment earlier than the traditional retirement age. I guess I agree with that broad definition, but I’d like to take the definition a little further before getting into the actual numbers.

What Does Early Retirement Mean To Me?

The older I get, the more my definition of retirement changes. When I was young, I envisioned retirement as a time of leisure, where older people traveled to exotic locations, took cruises, and when they weren’t traveling, played golf, went fishing, and generally enjoyed a life of leisure.

Of course, now that I’m older, I recognize this is not how the average retiree’s years are spent. Unfortunately, thanks to the Great Recession of 2008, many soon-to-be retirees saw half of their retirement saving disappear. This has lead many retirees to hang on to their jobs, or return to other types of jobs (often times lower paying) than the careers they had for most of their adult lives. This is a sad reality for many, and a cautionary tale for the rest of us.

For me, early retirement is all about options. Living without the worry of needing to work a traditional 8-5 job frees up many opportunities for more worthwhile ways to spend time. For us, that means doing some travel and doing more things with our time to make a difference in the lives of others, particularly young people. We married young, had kids young, and skipped over the period in our lives where we would be able to do these types of things, so we’d like to recapture a bit of that after the corporate grind is completed.

Saving For Each Phase of Retirement

Uncle Sam has dictated retirement for many people to mean age 59 1/2 (the age you can tap most retirement accounts without penalty), or 62 (if you plan on receiving early benefits from social security). Personally, I use neither of these age milestones as a guide, and plan to save in such a manner that I can experience freedom from paid, full-time employment long before reaching 59 1/2.

To identify the types of savings we’ll need to have in place to meet our own milestones, it’s best to work backwards from the next upcoming event. In this case, let’s start with early retirement at 47 years-old, some 15 years away.

Phase I: Early Retirement on Taxable (and Tax Free) Savings

Over the next 15 years my wife and I plan to maximize both our Roth IRA accounts, and my 401(k) through my employer. Using the current maximum contribution levels for Roth IRAs, this would provide $150,000 in contributions. Remember, Roth IRA contributions may be withdrawn at any time, without tax or penalty. Assuming we plan to live on about $50,000 a year, this would only last 3 years, barely getting us to 50 years-old.

A better plan would be to use taxable savings to bridge the 12-year gap between 47 and 59 1/2 (the age we can begin to withdraw from retirement accounts).  We’d only need about $600,000 in savings outside of retirement accounts to pull this off. Only. I laughed at myself after writing that.

Pretty tough to carve out $600k in savings in the next 15 years (even earning a modest 6.5%) while maxing out retirement accounts, funding college savings, and meeting our previously mentioned short-to-medium range savings goals. Not like we have an extra $25,000 a year sitting around to invest.

So the numbers appear unattainable, but the exercise was still worthwhile. It provides us with some real feedback for the variables we set, and we can now tweak those inputs to determine the impact. For instance, if we delayed early retirement just three years to age 50, we’d have another $30,000 in Roth IRA contributions. Our taxable nest egg required to fund the gap from 50 to 59 1/2 would drop to $500,000, and since we’d have a little longer to save, we would only have to divert $1,200 a month to taxable savings. The $1,200 a month figure sounds eerily similar to an average mortgage payment, doesn’t it?

When you break the numbers down this way, two things become apparent. First, early retirement is not just a pipe dream, if you are a disciplined saver and avoid debt. Second, I sure wish I had started this plan 10 years ago!

Up next – Retirement Savings Phase II: Drawing from the Nest Egg

We have all heard of SMART goals. You probably know the acronym by heart…Specific, Measurable, Achievable, etc. Identifying savings goals is no different. As I mentioned last week when first introducing this series, my family has been pretty good at saving money since getting out of debt. However, we find ourselves trying to pile up money for no specific reason, other than we recognize saving money is the smart thing to do.

This wasn’t enough for me. I want to set very specific savings goals and then track them to completion. When we accomplish the first savings goal, we’ll move to the second. When we accomplish that goal, we’ll move on to the next, and so on. Think of it as a “savings snowball.”

Of course, some goals will run concurrently, particularly the big, long-range goals such as retirement and college savings plans for the kids.

To kick things off, my wife and I sat down to identify our short-term savings goals. That is, things we hope to accomplish in the next year or two, or have already saved for, but don’t want to tap for competing priorities.

Short-Term Savings Goals

Goal 1: Save $25,000 Cash for Emergencies. Any financial planner will tell you this is the cornerstone of any solid savings plan. After all, rainy days are inevitable. Whether you are covering the costs of a new roof, a new transmission, or covering expenses during a layoff, the emergency fund is a must-have savings goal.

Most also agree that 3-6 months of expenses is a good starting place when determining how much one should save. For us, our goal amount is around eight months of expenses – we added two additional months since we are a one-income family.

Goal 2: Save $10,000 Cash in an Opportunity Fund. The problem with emergency funds is that they are only supposed to be used in an emergency. Life throws plenty of opportunities, too, and we want to be prepared for them. In our first 12 years of marriage, we had to pass on many opportunities because we were carrying debt and had little savings. We like to think of this fund as our personal line of credit – there to use and replenish as opportunities arise.

One real-life example of these types of opportunities is blogging conferences. Previously, the attendance fee, transportation and lodging made attending these types of events difficult. Now, if the right opportunity came along, I could attend such an event, which could lead to making valuable connections for building Frugal Dad.

Goal 3: Save $10,000 Cash Towards a Car Replacement Fund. Let’s face it; our cars won’t last forever. Their demise is inevitable, no matter how well we take care of them. So why not begin planning for their replacement now, rather than turning to banks or auto finance companies.

In our case, my truck will likely die first since it is several years older than our family vehicle, and has about 100,000 miles more on the engine. At current prices, I could buy a replacement truck for about $8,000 – $10.000. Accounting for a little inflation, with the hopes that my current truck lasts a few more years, and accounting for the remaining cash value of my current truck, that puts the replacement truck cash need at about $10,000.

Goal 4: Save $5,000 for Home Improvement Projects. Our house was built in 2004, so fortunately very little is in need of upgrading. However, there are a few small home improvement projects  we are interested in doing around the exterior of our home, such as installing gutters, paving a patio (or building a deck), and planting more mature trees on the property.

We’re also considering hardwood or laminate flooring in the kids’ rooms as they both suffer from allergies, and carpet seems to hold in the dust and pet dander making their symptoms worse. A few thousand dollars should cover these expenses, but we believe in saving the cash first before upgrading the home, even if other lines of credit are there.

I’m happy to report that Goal 1 is accomplished, and we are working on Goal 2 (the Opportunity Fund). We’ll save for goals 3 and 4 at the same time, with the hopes that our outside home improvement projects will be funded by late spring or early summer, and our new trees can be planted in the fall.

Stay Tuned

Next up in the series, we’ll take a look at college savings for our kids, our next big savings priority and something we know we are behind on. I’ve done some preliminary research for the costs of tuition for both kids, and the numbers are staggering. I’ll share the specific numbers with you, and our plan for reaching the goal in the next decade (even less time for our oldest – yikes!) just in case they don’t land full scholarships. Hey, a frugal dad can dream, can’t he?

I felt pretty good about myself. We have already maxed out Roth IRAs for 2010, and now we were maxing out the 401k at my job. To celebrate, I decided to skip the brown bag and head out for lunch. And then it hit me like a glass of cold water smacking me right in the face. Why did I just sign up to have $16,500 in annual salary diverted into retirement savings? Aren’t there other things I could do with that money?

I guess you could call it ”saver’s remorse,” and I had it bad. I choked down my lunch while trying not to think about how much lighter my next paycheck would be. I replayed the events in my head and it finally occurred to me that I had made the move in an effort to sort of pat myself on the back. Hey, look at me…I’m maxing out my 401k!

My gut reaction was to fly back to work and withdraw the form before payroll started siphoning away hundreds of dollars from my check. However, since I was already guilty of one emotional decision that day, I decided to let it go and reflect on what I would do with that money.

Saving With Purpose

After starting Frugal Dad two years ago I started day dreaming of trading in the corporate badge for a full-time writing career. Unfortunately, a couple things stand in the way of that dream. First, I’m not a particularly great writer. Second, I don’t make quite enough here to replace my full-time income. And finally, we have many aggressive financial goals that require more than a modest income to fulfill. Indirectly, these goals have prevented me from making the leap to a full-time blogger. And for the first time in a while, I don’t resent that fact.

My savings goals, like many others, have always been rather nebulous. Saving for retirement, or kids’ college expenses, or even a “rainy day” have no real definition. It’s like saying, “I need to lose weight.” I finally accepted the reason I’ve been floundering, financially, even after paying off debt, was because I never actually sat down and identified my savings goals. I was starting to do smart things with money, but only because they sounded smart – I never applied them to our situation and made the goals personal.

Just think of all the “smart” advice we hear from financial gurus. Save 15% of your income for retirement. Put 3-6 months of expenses aside for emergencies. Pay off your mortgage early. The list goes on. But none of these instructions come with a “why.” Why are we saving 15% of our income towards retirement? What are we going to do when we get there? Why 15%? Why not more…or less?

Take some time to reflect on why you are saving money. Your list should be comprised of both short-term and long-term goals, from saving for next year’s Christmas shopping, to funding a retirement still 20 or 30 years away.

A New Series Here at Frugal Dad

Beginning next Monday, I plan to share some of our personal savings goals with you in a series I’m calling, “Saving With Purpose: How To Live A More Intentional Financial Life.” It’s my hope that by sharing our goals with you, I might inspire you to put pen to paper (or finger to keyboard) with your own goals. As the saying goes, “If we aim at nothing, we’ll hit it every time.”

The first thing we did after reaching debt freedom was realign our financial goals. The first, of course, was to secure a fully-funded emergency fund, one that represented about six months of expenses. Admittedly, it was tough to keep up the same intensity towards saving money as we had for paying off debt. That brings me back to the thought-provoking comment left by Rob from PassionSaving.com. Here’s a portion of that comment that struck me:

If your experience is like mine, it won’t be all smooth sailing from this point forward. I say this not to be discouraging, but to point out what might be a basic reality of human life — it is a journey of ups and downs no matter how skilled one becomes at handling one’s money issues.

What I believe today is that accomplishing a big money goal like paying off one’s debt does not so much solve all your problems as open you up to a higher class of problems. The old problems truly are solved. But solving them provokes you into taking on new adventures, which lead to new problems. You will continue to find yourself frustrated and stuck and in pain and in fear in days to come.

My initial reaction? Yeah right! What could possibly be any more painful, financially, than going through the motions of paying off debt? What money struggles could we face that are even close to the struggles faced in the past? I suspect most people still deep in debt probably had that same reaction. But as I thought more about Rob’s comment, and began to experience life after debt, I understand his point.

Yes, we no longer have to contend with debt, but that doesn’t mean more daunting financial challenges aren’t ahead. My oldest child will soon be ten years old, which apart from terrifying me as a father, also serves as a wake-up call to get her college savings in order. Because we spent so many years toiling with debt and trying to get on solid footing, her college savings have suffered. The good news? Without debt we can afford larger contributions to her 529 plan, which should help us make up ground.

It’s a similar story for our own retirement plan. I diverted money we could have, and probably should have, used for retirement savings to pay down debt. Unfortunately, this means we missed a great opportunity to invest in our 20′s and let that money compound for a few decades. Are you reading 20-somethings? Make long-term savings a priority now!

In the final analysis, I would have to admit that yes, life is easier after debt. Paydays are now an exciting event because it means making more contributions to savings, rather than distributing most of your income to credit card and auto finance companies. But life after debt is not without challenges. And those challenges can conjure up the familiar fears and anxiety felt when looking at a pile of debt.

How will I even save enough to retire? How much will my kids need for college? Will I ever be able to save in taxable investments to chart a course to early retirement? I’ll approach these new challenges the same way I approached, and overcame, the ones related to debt. We’ll tackle them head on, and remain disciplined through the same frugal approach we take towards nearly all of life’s ups and downs.