Money 101: My Basic Financial Plan

If you subscribe to the do-it-yourself approach to managing money, then we’re on the same page. Many people have asked me through the years the same questions: What’s the best savings account? How do I invest what I have? What should I do with my money? How did you create your financial plan? Who’s the best online broker you can recommend?

For me, it all started right after I got my first job, with my mother handing me a book called Making The Most Of Your Money by Jane Bryant Quinn and some other book that discussed finances for people under 30. At that time there was no internet so I gleaned all my information from books, magazines and periodicals.

I proceeded to form a basic financial plan for myself rooted on the following points:

1. Pay off all debt

   I’m the type of person who prefers to have no debt whatsoever. It’s no surprise then that I would advocate trying to get rid of debt as much as possible. But if you have it, then try to get rid of the bad debt before the good. Bad debt involves high interest, prepayment penalties and depreciating property. Good debt has tax advantages, low interest and covers possibly appreciating property. So borrowing to buy a house is typically good financial sense, while borrowing on credit cards would be something to avoid.

   I try to pay off my credit cards in full each month and if I notice I’m unable to do so, I stop buying stuff I don’t need. It’s darn tough though!

   Some people use good debt as a financial strategy for getting rich — what is otherwise known as getting rich with OPM (other people’s money) or using leverage. I’d say don’t do this unless you really know what you’re doing.

2. Adhere to a budget

   The nice thing about budgets is that it’s something you make up. I’ll be honest — I’ve never really “budgeted”. My basic strategy was to do without a lot of things such as travel or new things. I’d accept hand me downs and a car would last me 6 years at least. But budget? It was for informational purposes only. Somehow by “doing without”, I found some extra money to invest in the 90’s bull market. With steady contributions, that did more for me than watching a budget like a hawk. But I don’t discount the power of knowing what your limits should be either! It may be what works for you.

3. Start an emergency fund in a savings account

   After getting rid of bad debt, set aside some amount, typically 3 to 6 months’ living expenses for the proverbial rainy day fund. In case of emergencies, use the funds here to bail you out. There are those who don’t have such funds and decide to use their credit cards as backup and the money they would otherwise put here, they shovel into the stock market; they rationalize that the risk of an emergency is worth covering with a credit card and the money would be better off growing in an equity account somewhere.

   I’d do it slightly differently: I would build an emergency fund and apply it into equities only if the market truly tanks and there is a once-in-a-lifetime opportunity to invest at rock bottom prices. After which I would build up the fund slowly again and take the risk of getting hit with an emergency in the interim. In the worst case, I would rely on my trusty credit card. In this case, I would have such savings that can do double duty as potential investment capital. Warning: this is definitely more risky and depends on experience, comfort level and ability to judge and time the stock market.

   The traditional approach is what I personally prefer, which is to keep the emergency fund in a stable, liquid account, say in one of the best high interest savings accounts available. Who knows when you’ll need it? Don’t get caught scrounging for cash once a tree crashes on your house!

4. Take advantage of all your company benefits

   Check on your company benefits and take advantage of them. Perks such as a 401K plan, insurance plans, health care coverage, ESPP (Employee Stock Purchase Plan) and such can add up to 10% to 25% of your salary. So don’t let them go unused — start contributing to your 401K plan today!

5. Discover your financial profile

   Before delving into investing, know what kind of investor you are first. Take some quizzes, answer some questions and determine your comfort level with investing. The more you know how much risk to take, the better you can keep with an investment plan. Fiscal discipline and resolve will come into play especially during tough times when you the market goes wild. On this note, I found this writeup by Uncle Jack rather thought provoking. Unlike me, Uncle Jack is an actual professional in the financial field.

6. Know your financial goals

   What would you like your money to do for you? Aside from paying for your day to day living expenses, survival or even luxuries, if you’re like most people you’d like to figure out a way for money to cover the big ticket items that we all dream of having. For most people, they’d like money to:

   • Buy them a house
   • Plan for their children and their schooling
   • Build their retirement nest egg
   • Grow indefinitely (no real concrete goals here)

   If you know what you are saving and investing for, then you’ll be able to determine what kind of investments to get into. Service your short term goals with short term vehicles such as money market funds, liquid or no-penalty CDs, CD laddering, and short-term to medium-term bond funds; long term goals can be addressed by stock funds, equities, long-term bond funds, REITs and more aggressive investments.

   Unfortunately, not everyone is capable of setting money aside for funding these goals. But I believe it’s a great thing to hold on to a dream. Life has a funny way of working out those dreams.

7. Invest in mutual funds and real estate

   Once you know what you are investing for, then you can start choosing what types of investments to get into. I’d start with index mutual funds and work it up to more sophisticated vehicles with time. I prefer to keep it simple and am quite happy with tracking the indexes through various mutual funds and ETFs (exchange traded funds). Real estate will require more money and mettle. I’ll try that once I have more capital to work with.

That’s how I mapped out my future. Now it’s all a matter of execution! And there’s the rub. The good news is that for many of us, there are several decades or even an entire lifetime to put such a plan into action.

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Categorized under: Frugality, Investment, Money Management