Your Financial Management System

It’s likely some aspects of your 10 year vision include financial targets. And hopefully when you did your plans in week 3 you got visibility into what it would take to achieve them. Now it’s time to get concrete.

Secure, comfortable, wealthy

One of the best exercises my wife and I did early in our marriage was create three financial plans - a secure plan, a comfortable plan, and a wealthy plan. It was only about a page:

Secure

• 1k in an emergency fund
• Term life insurance policy
• Long term disability policy
• Pay off all credit card debt, smallest balance first, roll that amount into next smallest balance, and so on.
• Get a living trust and will

Only once we did all of these things did we move on to the comfortable plan:

Comfortable

• Get emergency fund up to 6 months expenses
• Allocate to 401k first, up to employer match.
• Max out IRAs (more flexible investment options).
• Max out remaining 401k.
• Allocate investment accounts according to an asset allocation model (we used the Permanent portfolio first, and then the Yale portfolio later). Rebalance each year.
• Once we had kids, allocate to 529s up to IL tax deduction.
• Fixed rate mortgage, make bimonthly payments, with goal to eventually make an extra principal payment each month.
• Put most expenses on mileage credit card, pay off in full each month.

Only once we were consistently doing these goals, did we move on to the wealthy plan:

Wealthy

• 12 months emergency fund
• Start a company
• Invest in startups (LP investment in funds, but mostly through Manifold)
• Pay off mortgage in full
• Take advantage of opportunities to purchase equity in Michelle’s company, and/or investment opportunities that arise through their investment group
• Work with financial planner
• Bitcoin (no more than 5% of net worth)

Consider creating a similar plan.

You probably need a budget

Plans are one thing - if you don’t have a practice of reviewing where your money goes and making decisions about it up front, you’re unlikely to execute the plan well.

Ideally your budget nets out at zero - this forces you to make up front decisions about every dollar that comes. It’s unlikely that you’ll stick to your budget exactly. But I guarantee you’ll get much closer to your goals if you have one than if you don’t.

Decide on your allocation percentage, and try to maximize it

Consider a goal to save and invest a certain % of your income. You can start small - if you aren’t saving anything right now and are living on 100% of your income, you can certainly live on 99% of your income.

Consider creating a separate account and moving that 1% over there as soon as you get paid. If you can automate it, even better. If you don’t trust yourself to not raid the account, make it as difficult as possible to access the money.

Once you get used to saving 1%, you can increase to 2%. Then 3%. Or whatever.

Look at your budget and see what you’re allocating to your saving and investing goals. Ask yourself if you can find places in your budget to allocate more.

You can also make up front decisions about future things that will happen. If you have credit card debt, you could plan to allocate the budget currently spent on making payments to saving and investing once you’ve paid them off. Similarly, you could make a decision up front to always allocate bonuses or raises toward your saving and investing goals.

My wife and made the decision we would live off of her income and save or invest mine. This was relatively easy at the time because our burn was low - we didn’t have kids yet or a mortgage. But using an approach above one could theoretically move that direction over time. This allowed us to pursue “riskier” stuff - me starting a business, etc. It also allowed us to not have to obsess over whether we earned 8% or 10% on our money - our focus was on what % we put away. We almost never sell anything.

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