This site, like most personal finance sites, has lots of articles about all the different aspects of personal finance: savings, FI plans, allocation percentages, tax strategy, etc.
And sometimes, it’s easy to lose the forest for the trees.
So, I really wanted to try and bring all of those subjects together into one brief, but comprehensive personal finance plan. That way you can see how all the puzzle pieces fit together.
Oh no, I’m mixing metaphors aren’t I?
In any case, my hope is that by seeing the whole process from beginning to end, you’ll have the clarity and confidence to get moving and dig into the details for yourself.
The roadmap is split into three sections, planning, doing and adjusting. The point of the planning phase is to figure out what you want your life to look like and to create a financial plan that supports that life. The doing portion deals with how to invest so that the plan becomes a reality. Then the adjusting phase discusses how and when and how to adjust or speed up the plan.
On final note before we get started, personal finance is by definition, well, personal. So, your big picture objectives may look different. Also, your life phase and circumstances can greatly impact the strategy. But even if your “why” is quite a bit different, I think you’ll find that the principles and tools are helpful no matter the situation.
Planning
Step 1 – Determine your “why”
What would you do if money were no object? Money is a tool to help you live the life you were called to live. Don’t mistake the means for the end. Get an idea of what you want your life to look like and work backwards from there.
Step 2 – Create a budget
First, create a current-state budget. This will be necessary so that you can determine how much you can save every month towards your future goals. It will also serve as a baseline for your future-state budget.
Once you’ve got your current-state budget, create a future-state budget. This is based on how you want your life to look in the future. Which of course, is based on your “why” from Step 1. For example, if you want to travel a bunch then you know you’ll need to increase your current budget line item for travel. If you want to keep life “as is” but be extravagantly generous, then adjust accordingly. Have fun dreaming!
Step 3 – Create a FI plan
Once you have an idea of what you want life to look like and how much it will cost I recommend that everyone create a Financial Independence Plan. I can’t underestimate how enlightening and empowering it is to be able to say, “I can make my dream life a reality in 5 years!” Or, “If I were able to save a little bit more, I could go ahead and pursue my dream job next year.” Even if you don’t want to change much about your life, I believe creating a FI plan will really help demystify your financial situation, and give a clear picture of “how much is enough.”
Doing
Step 4 – Save and Create an Emergency Fund
In Step 2, we created a current-state budget. In this step, we put it into action! Admittedly, there are people way more passionate, with much better ideas about how to save creatively and stick to budgets. I’d recommend checking out Mrmoneymustache and rootofgood for some truly creative ideas on not just how to save, but how to live and good life and be content with a lot “less” that our culture says is necessary.
Ok moving on, The first thing we must save for is the emergency fund. The emergency fund should be anywhere from 3-6 months worth of your budget. The reason we do this first is so that life’s unexpected surprises don’t blow up your whole financial plan when they arrive (and they will).
Step 5 – Pay Off Consumer Debt
Once the emergency fund is saved for and tucked away (untouched) in a safe high interest savings or checking account. You begin to pay off all debt other than your mortgage. I don’t agree with 100% of what Dave Ramsey says, but he’s right on a lot and he’s right on this. Paying off credit card, student loan, automobile and other types of consumer debt will most likely give you the biggest return on your money. Do the math!
Step 6 – Invest Your Savings
Volumes have been written on this topic. But this needs to be one-page, so we’ll keep it simple. Here’s how I invest:
- 50% – Total US Stock Market Fund
- 10% – Total International Stock Market Fund
- 10% – Total Market Bond Fund
- 30% – Real Estate
I believe that historically, this allocation mix provides the best return at the least risk (here is an article breaking down the details). I’m also a big fan of keeping things as simple as possible, so I use one brokerage (Charles Schwab) because their customer service is fantastic and they make it really easy on people that live internationally. However, there are several other good brokerages, just pick one and keep it simple.
Step 7 – Optimize tax strategy
Like step 1, how you approach your tax strategy is going to vary a lot based on your personal situation and goals. However, there are some universally beneficial strategies. Most of which, I picked up compliments of The Mad Fientists’ Articles on HSAs and Mega Back Door Roths, and Go Curry Crackers articles on Foreign Earned Income Exclusions and Roth Conversions.
- Max out HSA
- Max out employer match on 401k.
- If you’re able, take advantage of back door and mega back door Roth IRAs.
- Max out Roth IRA conversions
- If you’re an expat, take advantage of the FEIE
- If you own your own business take advantage of a Roth 401k
Here is a detailed breakdown of my Ultimate Tax Strategy. I am an expat, with foreign earned income, rental income and capital gains. However, I have been able to take advantage of these strategies to pay very little tax and complete large Roth conversions that get me closer to FI every year!
Adjusting
Step 8 – Rebalancing
For long-term, buy-and-hold investors, never sell, just rebalance. As discussed in this article, time in the market beats timing the market, and getting out will get you crushed. However, there is a strategy to have your cake and eat it too. By rebalancing periodically, you can stay fully invested and buy discounted equities during a pull back.
Step 9 – Build passive income streams
I am a big fan of building passive income streams, primarily through residential and commercial real-estate holdings. There are benefits to being diversified, there are tax benefits and as people move into FI, I like that it provides a steady stream of income that reduces the need to sell equities during a market pullback. I started buying rental properties a few years ago and plan to slowly continue adding properties. For those that are interested, here is an article breaking down how we got into rental real estate and some of our lessons learned.
There you have it, the ultimate one page…well, maybe slightly longer that one page…financial plan. I sincerely hope this helps you see how all the trees fit together.
C’mon, what a setup, right?!
No, I should just stop.
Ok, please don’t stop coming to my website.
