Tuesday, November 10, 2015

Our Current Financial Plan



Today I wanted to give a quick call out for the need to, and benefits of, creating a detailed financial plan (and writing it out so that you will be better able remember the details of it).

Recently my wife and I sat down and took a look at our finances together. We had created a budget a few months ago but other than following it we haven't really revisited it since then. Since it seems to be working for us we haven't felt the need to change anything with it so we've just kept an eye on it.

So far in our marriage we haven't really developed a solid save/spend/invest plan that would hit all of our needed categories simultaneously. The first few years we saved all we could to make sure we could get through school and buy a house when we got out. When we first bought our house we decided to try putting 65% of our take home pay towards paying it off fast. That only later a few months before we realized it was making us house poor and leaving us too vulnerable if something unexpected happened. Especially since 10% was already going to tithing, so we were only living on 25% of my take home pay (approximately $750 per month), doable but draining.  This plan stopped when we got pregnant and shortly thereafter lost my job.

Then while starting a new career and preparing for a birth we stopped investing (other than in our 401(k) anyways) and paying extra on the house and started piling up cash instead. The career change also meant that I couldn't take the bus to work any more so we would need another car. So we set aside what we would use to buy a car and worked with the rest.

But now that all of the hospital bills are taken care of we are finally ready to implement a new plan that will help us attack our multiple financial goals of investing and paying off our house while maintaining a healthy emergency fund and spend rate.

The Plan

First, we have a few checking and savings accounts to work with so we're going to dog ear certain accounts for specific activities instead of whimsically managing all of the account.

Emergency fund: We determined the amount that we thought we would need in our emergency fund and we opened a "high" interest savings account online to hold that cash. We were almost able to fully fund it when we open it but all of our extra cash at the end of the month went into it until it hit what we want it to be, then we just left it all alone.

Car fund: Since we still haven't gotten a second car we will leave all of our car money in a bank savings account so that we can easily access it when needed. This will also be the only money in that account so that we don't accidentally misallocate anything.

Mortgage: I have a checking account that a portion of my check goes into each pay period. When we did our budget we decided to put $1,050 on the mortgage on the first day of each month so that we are paying an extra $50 and always a month early. So I set my direct deposit to this account to be $525 (half of our budgeted $1,050) every two weeks. The plan will be to liquidate this account into the mortgage on the first of every month. This means that twice a year we will be putting $1,575 on the house and only $1,050 for the other 10 months, from this account.

Living fund: We decided that we would have one checking account that we use for all of our day-to-day living expenses. After looking at our budget we decided that we should be able to live a full month off of $1,000 since the mortgage is taken care of somewhere else. Therefore, our plan is to start each month with $1,000 in this account. During the month the remainder of my paycheck, and any additional income, will be but into this account and all of our expenses will come out of it. At the end of the month any money from our budget that wasn't spent will be withdrawn and put into our "Residual Budget Savings Account" so that we have the budgeted money available when the expense arises.

Investing: If, at the end of the month, our living fund account is still over $1,000 after taking out our budget underspend we plan to invest the rest. We have two different investment categories as we see it. 1) Our taxable accounts at Vanguard (all of our retirement investing is done in our 401(k) until we are able to start maxing it out, this is basically a long term savings since I plan to retire before age 59.5) and, 2) Paying down additional principle on our house. We hope to see our Vanguard accounts have an average growth of 8% per year and we know that investing in our mortgage will save us guaranteed 2.875% APY and a lot of stress. We could have looked into a complicated formula to determine how much we should optimally put into each but decided to keep it simple and do half-half in each.

There it is, our new financial plan. I am so excited to begin implementing it on the first on the month. Hopefully it all works out well and spurs us on our quest even faster. But if we find that it isn’t working we will make changes to it and move on. This is a trial and error game that can take several tries to get right.

So my challenge for you is to take a few minutes and write the financial plan that you are currently using to move towards your goals, then look to see if you can find any ways to improve it.



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12 comments:

  1. Great post as always. I am writing a post about budgeting and balance should be out tonight CET :). Check it out on www.myricketyroad.com

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  2. Why not increase your amount put in your 401k, during the month after you have "extra" money instead of putting it in a taxable account.

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    Replies
    1. Great point to bring up. And a question that I definitely have some answers to.

      First off, my company’s 401(k) contribution structure is set up such that I can't specify a dollar amount to contribute; the contribution amount has to be a whole number percentage of my income so it is very difficult to increase my contribution to match a specific dollar value. The solution to this could be to open a Roth IRA and put this extra amount in to that as a way to avoid having to use a taxable account. But I already invest 17% of my gross income in my 401(k) and don't want all of my money tied up in retirement accounts. I still have almost 40 years before I can withdraw from my 401(k) without having penalties and I am hoping to retire and need to live off of investments long before that. This is one of the reasons that I maintain additional investments in taxable accounts, so that I can retire early. If I have $1 Million in my 401(k) when I'm 50 I still can't retire since, at that point I would have no liquid assets to live off. But if I have $400K in Vanguard and $500K in my 401(k) then I can feel comfortable retiring.

      Also, I use my Vanguard investments as a worst case scenario emergency fund. If something happens and I can't find work for a year I know that I can live off of my taxable investments for at least that long without putting our home at risk of foreclosure instead of having it all tied up in a retirement fund that I'd have to pay a penalty on if it absolutely had to be used. I've also toyed with the idea of building our Vanguard account until it is equal to our mortgage value then liquidating it and paying off the mortgage early in one large sum thus freeing up and additional $800+ each month to use to rebuild our Vanguard accounts.

      I guess that the take home point of all of this response is that I have structured it this way to mitigate risk the risk of uncertainty and make it easier to invest even though it might not yield quite as good of benefits.

      Thanks for the comment and inspiring me to explain more of the logic behind the process.

      Delete
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  4. Have you thought about other investing avenues besides a 401k and a primary residence? For non-accredited investors, here are a few non-conventional online options:
    https://fundrise.com/ (eREITs)
    https://www.prosper.com/ (Unsecured Loans)
    https://www.lendingclub.com/ (Unsecured Loans)

    There are plenty of other non-online options as well. I like real estate investing myself but it's not as passive as online options.

    ReplyDelete
    Replies
    1. Great point. I am only once voice with one set of life experiences. I would love to have others give their advice and strategies as well so that people can better understand the vast array of options that are out there for them. I am only writing about what we do. Thanks for bringing this up Dan.

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