What I really love about the Fourth of July weekend, however, is the opportunity to celebrate success. After all, that is precisely what this holiday is all about. Just 234 years ago, our forefathers accomplished something great by declaring the United States a free country. A day before the signing of the Declaration of Independence, John Adams wrote the following in a letter to his wife:

The second day of July, 1776, will be the most memorable epoch in the history of America. I am apt to believe that it will be celebrated by succeeding generations as the great anniversary festival. It ought to be commemorated as the day of deliverance, by solemn acts of devotion to God Almighty. It ought to be solemnized with pomp and parade, with shows, games, sports, guns, bells, bonfires, and illuminations, from one end of this continent to the other, from this time forward forever more.

While our observance of the holiday occurs on July 4^th (the day the Declaration was signed) instead of July 2^nd (the day it was complete), the vision of John Adams rings true across our nation. We gather with friends and family, immerse ourselves in our communities, blow-off fireworks, have barbeques and bonfires in our backyard, and attend parades and picnics to celebrate our country’s independence.

In our personal, business and financial lives, however, we often forget to pause to celebrate our successes. No matter how big or small our accomplishments may be, we must consciously take the time to acknowledge them. A celebration can be something simple and can be either personal or shared, but certainly does not have to involve parties, noise-makers and fireworks. Getting a raise or promotion does not mean you should celebrate by buying a new car. Celebrating success and acknowledging your accomplishments doesn’t even have to involve money! However, if you successfully cut enough waste out of your budget, by all means, take your family on that vacation you have always wanted.

In our financial lives, it is easy to overlook our victories because they can often manifest as the result of us depriving ourselves of something we want. Further, we have an innate tendency to always want more, pushing us to look beyond our accomplishments and notice what is missing instead. As a planner, I have been guilty of this with clients at times, focusing on the fact that we have not reached our goal of reducing spending by $1,000/mo instead of celebrating the fact that the clients have cut $500/mo out after years of overspending. In reality, that $500/mo reduction is a big accomplishment and they ought to be recognized for it.

Just as our country’s journey toward independence did not happen over night, your path to financial independence may take considerable time, effort and perseverance. Financial planning is not an event. It is an ongoing process that helps you arrange your financial resources and priorities into an ever-evolving series of life events. As you reach and pass by these milestones, make sure you take time to celebrate all the mini-victories along the way.

This blog was originally published on the Financial Planning Association’s All Things Financial Planning Blog.

Eventually, you refine and revise the numbers to arrive at a budget. Some folks even track their spending through software programs such as www.mint.com and Quicken. A few months later, however, you realize that your actual spending has deviated from the budget you set and struggle to figure out how it went wrong. As frustration sets in, you begin to believe that this whole budgeting thing just isn’t worth the time and effort.

The breakdown that occurs in this process is simply that budgets are an incomplete cash flow plan. Further, the tracking systems listed above provide an excellent backward-looking perspective on your finances, but do little to help you maintain control moving forward. Without a system in place to effectively manage your cash flow on an ongoing basis, a budget alone is worth about as much as the paper it is written on. A proper cash flow system will keep you in control of your money rather than allowing it to control you.

One highly effective method to manage household cash flow is to automate and segregate your spending. A decade ago, this method was very difficult to implement due to technology barriers. The systems that existed at the time typically included the use of envelopes and cash. Today, advances in online banking have made it incredibly easy to put an effective system in place.

In my last article (add link), I outlined that the financial world we live in continues to get more and more complex as we continue to advance as a society. It is virtually impossible today for a household to remember all of the expenses that flow through a household in a given month, let alone the irregular expenses that pop-up along the way. As such, it is important to systematize your cash flow to ensure all of your spending needs are met.

Ramit Sethi writes about the importance of automating your finances in his NY Times bestseller, I Will Teach You to be Rich, and has a short video on his website to describe the process in detail (http://www.iwillteachyoutoberich.com/blog/automating-your-accounts-video/). In our firm, we use the First Step Cash Management System (click the video link at www.firststepcashmanagement.com) with our clients, which takes Ramit’s system a step further.

In a nutshell, the First Step system breaks down your spending into three buckets – Static, Control and Dynamic. The objective is to automate as much of your spending as you possibly can so that you have a much smaller and more manageable amount to think about on an ongoing basis. While it may appear on the surface that you are giving up control by doing so, you will find that it is incredibly liberating.

The Static bucket consists of predictable expenses that repeat each month. All of these expenses are the result of a spending decision or commitment you have made in the past.  Your decision to buy a home, vehicle, or take out loans to attend college has led to an ongoing, predictable financial commitment moving forward. Often, these commitments take shape in the form of debt or utilities, but would also include commitments to own a cell phone, subscribe to the newspaper and cable TV, or membership at a golf or health club. Because your income is a finite amount, these commitments you have made have a direct impact on the other two buckets. Since they are very easy to plan for and often carry severe repercussions if you miss a payment, every expense in this category should be set-up with automatic payments each and every month.

The Dynamic bucket consists of savings to meet short-term (real estate taxes, auto insurance, season ticket renewals), mid-term (remodeling, dream vacation) and long-term goals and obligations (Roth IRAs, college funds). In many respects, this bucket represents savings. However, it is also comprised of irregular expenses such as home maintenance and car repairs that occur infrequently, but tend throw a damper into your finances when they inevitably do.

Technology has provided the means to plan for all of these expenses in a very effective manner. Most banks will allow you to open as many savings accounts as you desire. As such, if you have 10 savings goals, you can open 10 savings accounts, label them according to the goal you are working toward, and automatically fund each account every week, month, or every time you get paid. For example, if you wish to take a $5,000 vacation each year, you simply create an automatic transfer of $416 per month into your “Vacation Fund” and can be 100% confident that you will have the resources to go in 12 months, and you know exactly where that money will come from. The Dynamic bucket is the place to make your life goals a reality.

Finally, the Control bucket consists of everything left over. By this point, you have automatically funded every obligation and goal that is important to you. As such, whatever is left over is the only amount you have to exercise control over. It is notable that this bucket must be used on certain items that many people would consider needs, such as gasoline, groceries and clothing. However, to varying degrees, you have control over the amount spent on each of these categories. If you decide to eat out more often in a given month, your grocery bill will be lower. If you take a long road trip to visit family, your gasoline bill will be higher. As such, the Control expenses typically represent the areas that your “budget” goes wrong. By lumping them together, you can plan for these inconsistencies by altering your behavior in small ways. To simplify the decision-making process further, you can automatically fund this bucket as a separate checking account on a weekly basis.

The direct link between the life you desire and your ability to fund that lifestyle is cash flow. Automating your finances will help you gain control, make smarter decisions with your money, and instill confidence that the life you desire is attainable.

This article was originally published at the Financial Planning Association’s All Things Financial Planning Blog.

One of the recent arguments between economists and analysts alike centers on inflation. With governments around the globe continuing to pile enormous amounts of debt onto their books, many folks believe countries like the US will have to inflate their way out of the massive liabilities. A growing minority, however, believe that a bigger risk looms ahead of us in the form of deflation. At the end of the day, the average American has no control over the eventual outcome of this debate and we are going to have to deal with it together either way. However, a more personal, predictable and equally serious threat to your financial well-being is a concept I am going to call lifestyle inflation, and it refers to the way additional goods and services seem to creep into our budgets over time.

Lifestyle inflation comes at us in a variety of ways, however, the primary cause is innovation. Venture capitalist and author, Guy Kawasaki, states that innovation is simply creating something that people do not know they need yet. The past decade has provided some of the most glaring examples of this phenomenon in history. The technological advances we have made are simply astounding! Many are designed to make our lives more efficient and connected, and for the most part, they really do. However, we have to remember that the ultimate goal of marketing departments is to convince consumers that they can not live without their product. In other words, they are attempting to subconsciously change wants into needs. And many are shockingly good at it!

One great example of the power of these marketing machines is Apple. Whether it is the iPod, iPad, iPhone, iTunes,  iWhatever, Apple has created an entire legion of folks that line-up for hours leading up to the release of a new product. They can’t even wait a day for the product…they need it now!

Another example is the outgrowth of the internet. I was introduced to the internet through AOL and a dial-up modem in the mid 1990’s.In 1999, I was introduced to high-speed internet. Prior to then, I thought the internet was a pretty cool thing, but as soon as I got my hands on high-speed service, the internet became my go-to source for everything. Today, I can’t imagine life without it. In fact, it comes with me wherever I go!

I bought my first cell phone in the year 2000. The thing weighed about a pound and I was lucky to get service in my own house. Today, my wife and I do not even have a land line in our home. We can travel almost anywhere on Earth and continually remain connected to the internet, watch movies and make phone calls from the same palm-sized device. Our society lives on these devices and would not be the same without them.

Unquestionably, innovation is a wonderful thing, however, it comes at a cost. Ten years ago, most households in the US did not have a single cell phone. Today, we do not even blink an eye at a $150/mo phone bill, on top of the monthly service fee for the land line we rarely use. Further, we buy a new phone every two years because we have to stay up on the latest technology.  Ten years ago, a good cable TV package carried about 50 low-def channels to choose from. We can not live today without our 50 inch TV’s beaming digital HD cable on 500 channels through our DVR boxes at another cool $150/mo.

As a society, we have effectively doubled or tripled what we call “needs” in our lives, but our incomes do not always appreciate at the same pace. Innovation is not going to go away. In fact, most people welcome it with open arms. As responsible consumers, however, we have to maintain a cushion in our household cash flow for this inevitable phenomenon. Further, for every new need that enters our life, perhaps we can find an old one we no longer want.

This article was originally published on the Financial Planning Association’s All Things Financial Planning Blog.

The real value of money lies in what it allows you to experience. In our society, money provides a mechanism to get the goods and services we need and want. As we continue to achieve higher success, we begin to mentally recategorize many of our wants as needs. We all know that money does not buy happiness, but that sure doesn’t stop a lot of folks from trying!

In his book, Peaks and Valleys, author Spencer Johnson describes the journey through our lives and professional careers as a series of peaks and valleys. The key to living a richer life is centered on the way you perceive and experience them. When we reach the summit, it is very easy to feel accomplished and pat ourselves on the back for the successes we have had. We often believe that a well-deserved celebration is in order after all of our hard work. However, as the celebration begins, many folks begin to look around at the new view and focus their attention on all the other people that have reached a higher summit. We are better off looking back down into the valley to remind ourselves of what got us there, and shift our focus toward remaining at the peak as long as we can.

When we reach a peak in our financial lives, the belief that one can buy happiness causes many smart and successful people to sacrifice what they truly value for stuff. This peak we are feeling is not a reflection of how much we have, but a series of strange feelings and emotions that lead to that evasive state we are searching for – happiness. We often do not recognize these feelings because they rarely occur. When they do, we rush to suppress them rather than welcome them into our lives. Instead, many folks reach the pinnacle, only peer over the top and focus on the entire range of higher peaks (the Joneses) that lie beyond it.

Inevitably, this frustration often leads to destructive financial behavior. Folks cut back on their savings to buy a bigger house or nicer car. People take their money out of their emergency funds and shove it into stocks expecting their run of fortune in the market to continue. They forget all about the discipline and hard work that got them there and soon find themselves spiraling back into the valley.

On the surface, the view from the valley is much less glamorous than the peak. People that find themselves there may have feelings of shame or regret, and they may go on a man-hunt for others to blame. Inevitably, they will ask the question, “what now?” Buried in this simple question is the existence of choice.

As you begin to look around from the valley, you notice that it is really not all bad. You notice a lot of hard-working friends and neighbors interacting with one another and working to provide the goods and services we took for granted on our way to the top. In fact, looking back up at the peak, you can’t help but notice how lonely it looks up there above the tree line. You begin to realize that as you climbed out of the valley, you left many of the things you love and value behind, but you sure miss those feelings of security and balance you felt as you reached the top.

Johnson states that “the path out of a valley appears when you choose to see things differently.” Tough times provide an opportunity for people to refocus on the things they truly value. Your next visit to a financial peak will be a much longer and more pleasant journey if you forget about the Joneses and simply bring the things you value along with you.

This article was originally published on the Financial Planning Association’s All Things Financial Planning Blog.

The main focus of this blog is to explore the conscious and unconscious financial decisions people make and the emotional and economic realities of that behavior. More specifically, it discusses how we as humans tend to gravely underestimate the overall impact of the financial decisions we make in our day-to-day lives. Since money is so innately intertwined in everything we do in society, the financial implications are only a fraction of the true cost.

I define financial success as simply being in control of your money rather than allowing it to control you. We gain control of our money by understanding the habits and values that got us where we are today, what we want to accomplish and prepare for in the future, and what we need to do today to make that a reality. We remain in control by being mindful (attentive and aware) of our financial behavior on an ongoing basis. People in control of their money worry less, have a greater appreciation for the role money plays in their lives and are far better equipped to weather the inevitable storms that will come up along the way.

While the media and our social circles tend to focus on investing and the markets, our financial well-being is largely defined by our behavior elsewhere. Of course, investment behavior is a part of the puzzle, however, it is a smaller piece than we are taught to believe. Welcome and please send your feedback and comments to me.