I received an email yesterday from a reader named Jared that reminded me among my recent posts about investing and Buffett I may have been ignoring some basic tenets of personal finance. Jared wrote me and asked,
First off, THANK YOU. Your blog has been wonderful to read and has been very useful to my own journey.
You may have written a post about this, and I apologize if I’ve missed it.. but I hope you might be willing to answer my question:
You have a “savings” bar on your website that shows your goals. How do you dictate how much money per month goes into these sub accounts? My wife and I are currently in a similar boat and I’m just lost as to how to decide on how much per money goes into retirement, our long-term future (down payment, investment properties) and short-term savings goals (bathroom remodel, vacation, new vehicle, etc).
I know everyone has a different situation, but I would be curious as to how you’ve come to your allotment amounts.
We are about $6,000 away from being completely debt-free (except the mortgage) and we’ve been discussing how we want to start using that money once it’s freed up from debt.
Again, I appreciate your time and your blog. It’s been tremendous in helping me learn.
I never really put together a list of “do X, Y and Z” and with good reason. First of all, I have not hit my goal. Without a major life change I am a long ways away from the “millions” mentioned in my domain. I find it inspiring when I read about the passive income created by someone like Financial Samurai or someone like Retireby40 who laid out a goal of raising his son as a “stay at home retired dad” and actually did it! For me to tell you to do X, Y and Z feels like I am just faking it because one look at my net worth statement would be evidence enough that I am just not there yet.
Second, I truly believe there are no “rules” for personal finance other than the cardinal law – most people can’t spend more than they earn for an extended period of time and get ahead. Concurrently, personal finance is way too damn personal to provide a cookie cutter response. For example, I spent a good amount of time saving almost $100,000 in cash as a down payment on a house where I live (Long Island) in many parts of the Country that would be a house (this account and the subsequent house was at the direct expense of my dividend portfolio which would be a lot bigger today…shoulda, coulda, woulda).
So if I can’t (or won’t) give you the answers in terms of a laundry list of savings/investing what can I help out with?
With Personal Finances YOU Have to Know Your Goals and Build an Appropriate Plan
While I won’t give you a laundry list of saving X to Y I think there are basic tenets that can help.
- Know your Goals and Objectives
- Find an Accountability Partner
- Take an Honest Look at Where you Are at Today
- Finally, start Planning
The very first thing you have to discuss, write down or otherwise capture your long term and short term financial goals. If you are going the traditional route of working until you are 65 you will have very different plan then if you are looking for fast financial independence like my go to guy on the subject, Mr. Money Mustache. For example, if you looking for FI in 10 or so years you are going to need to save a lot more than someone going the traditional route, and that money is going to have to be working hard.
Second step would be to figure out a way to be accountable. I believe (read: I have never studied the subject) for most people, accountability will lead to success. Maybe your accountability partners are the people who randomly find your blog (cough cough) or maybe it is an interested spouse. It doesn’t have to be a formal relationship of “I did X this month do I get a gold star?” It could be just an easy conversation with a buddy over a few beers. In today’s world of the internet if adults who love My Little Ponies enough found each other to create a convention (Yes, Brony Con is somehow a real thing) I think you can find someone on a forum. I think financial planners bring a lot of value to this step.
Third step would be to figure out where you currently are. How the hell do you know where you are going without an honest look about where you are? If you are 52 and want to retire by the time you are 53 and you have no money saved then this step should course correct you. Similarly, if you are 25 and your goal is to amass a $10,000,000 “nest egg” then this step should tell you, “I need a high paying gig and a discipline investing schedule.
The Fourth Step would finally be to plan. As alluded to above, this part of the process is so personal it is hard to give blanket rules, but I can try to help with guidelines that I think a lot of people would agree with. I should include the obligatory disclaimer that you shouldn’t listen to me.
Building Your Personal Finance Plan
Going back to Jared’s original question I assume that a budget or spending guide of some sort has already been completed. If you are running a deficit then we have another set of issues. So assuming you have some type of surplus here are some guidelines when creating your plan (not rules and refer to the disclaimer):
- Consumer debt, unless at 0%, should be eliminated as soon as possible. If it is at 0% maybe create an elimination plan. If you have student loans be honest with yourself about the payment and interest rate. My law school loans are at 3.5% I can sleep at night so I’d rather be investing what I can in the market versus paying them down aggressively.
- Fund an emergency fund. Stuff happens…it just does. A lot of the stuff that happens to us can be fixed with cash. The amount of the emergency fund should allow you to sleep at night but be realistic. I know I’d sleep like a freaking baby with $1,000,000 of cash in the bank but doing that would almost invariable cause financial demise as I am going to need the market to do a lot of the heavy lifting for me. Alternatively, $2,000 feels like it is too low since a financial emergency is going to cost more (yet most Americans can’t even come up with that amount should there be an emergency!)
- Speaking of emergencies – Know how much life insurance and disability insurance you have. Nothing throws off a well laid out plan like a premature death with no protection!
- Fund short term (and possibly mid term) accumulation goals with cash or cash equivalents. You don’t want a short term goal to sneak up on you and the market is in the middle of a correction.
- LEARN ABOUT INVESTMENTS OR HIRE SOMEONE WHO KNOWS WHAT THEY ARE DOING – No one is going to care about your money like you do but if you don’t feel like you want to learn then being a damn ostrich is not helpful. Do you have a match at work? It is probably a good idea to at least invest up to that match as it is free money, but after that there is a lot of gray area. Do you do it in non-qualified accounts? qualified retirement accounts? Roth vs Traditional? insurance based products? What’s your risk tolerance? etc. All of these have pros and cons it is up to you to either know what they are or hire someone who can explain them to you.
- INVEST – Maybe you are using dollars to invest in yourself, your business or just the plan market, but you need your money working for you so someday you don’t have to.
I find that a lot of people take an all or none approach to the plan they are creating and life just hasn’t to be that way. Let’s say you have $500 a month surplus that you know you can use for your plan each month. Maybe your original plan looks something like:
- $250 to 0% Debt
- $100 to Emergency Fund
- $150 to retirement Account
A few months go by and you don’t have any more debt – if you are anything like me you need to reallocate those dollars ASAP otherwise they will be spent on food and booze and your plan morphs to:
- $150 to Emergency Fund
- $50 to a vacation fund so one day you don’t have to eat into cash or credit to go away (if travel is in fact one of your short term goals)
- $200 to Retirement Account
- $100 to future down payment accumulation goal
Emergency fund is eventually at a point where you are comfortable and then that money gets reallocated immediately, or maybe you get a bonus and can fill up the emergency fund asap…fantastic since you didn’t write your plan in baby’s blood etched into stone! We can drop the ER savings and start putting that money into either short term cash goals, or if you are comfortable, lets get into the market or real estate.
1,500 words later and I am not sure I answered Jared’s original question the way he wanted me to, but I can’t possibly do so since we have never met! And that’s the point! How could I possibly give sound and specific advice to someone when we have never spoke about his goals, his wife, his family, his income, his risk tolerance, etc.