Sometimes I think it’s worth taking a step back and outlining our financial strategy. The process of writing clarifies my thinking and there are plenty of research studies showing that writing something down helps get it done.
I’ve outlined our financial plan using my four-part approach that incorporates the four parts of the financial picture — Income, Expenses, Assets and Liabilities (Debt).
I advocate this approach in contrast to others who have a laser focus on paying down specific parts.
- Debt freedom (Dave Ramsey)
- Lowering expenses (Mr. Money Mustache)
- Building business income (Ramit Sethi)
- Asset investment (I have yet to find a good one for this one. Financial Mentor might come close.)
That’s not to say it’s bad that they’re focused on each area, because certain people need/want help in one of those. But everybody will need to manage the four different parts at some point. For example, if someone pays off their debt and has extra monthly income, then what next? If they haven’t been thinking about how to invest the extra money, they might be caught without a good plan and do something stupid with it. And what about folks who aren’t in dire shape, but simply want to get better. Maybe they have decent income, semi-controlled expenses, medium debt, etc, but lack a coordinated approach. Also, sometimes someone is knocking it out of the park in lowering expenses but could be doing even better if they were increasing income or moving the asset allocation into income producing at the same time.
The only one that comes close to a great balanced approach is ESIMoney blog.
Anyway, let’s get to it…
- BALANCE SHEET: Assets
- Strategy Summary – Invest steadily every month in broad market ETF and on the side try to find long term cash flow investments with a good ROI.
- Stock Market: We automatically invest 15% of income in the stock market through Roth 401k.
- Rentals: My long term goal has been to own 10 by 45, 20 by 50 and 30 by the age 55. I’m not sure I’m going to hit that, but we’ll see. Here area few comments about this part of the plan.
- Now isn’t a good time to buy in our part of the country since real estate is really expensive. So, we’re going to just start setting aside what we’re calling a “Real Estate Investment Fund”. The more we can put down, the better to help it be cash flow positive.
- I’ve committed to analyzing at least 100 potential rentals before buying anything.
- We currently own one that cash flows great and previously we owned another, so we’ve definitely learned some lessons and feel ready to do more. I’m also reading real estate investing books and developing a financial model to quickly evaluate deals.
- P2P lending: I’ve been doing this for a long time and it’s consistently produced 9-10% returns. So it’s a nice place to park extra funds for 2-3 years (which is how long the mini $25 loans are).
- BALANCE SHEET: Liabilities:
- Strategy Summary – Pay off all non-mortgage debt and then slow this down to allocate more towards investments.
- Non-Mortgage Debt: I only have student loan debt and the plan is to pay that off by Q2 of 2017. After that we’ll only have our home mortgage left.
- Home Mortgage: If we throw everything at the mortgage, we could knock that out in about 3-4 years. If it takes 4 years, I’ll be 41 years old. Alternatively, we are thinking about splitting the debt pay-down money with half paying down the mortgage and the other half going into a separate account for future rental investment. OR … rather than using half to pay down debt every month, we might set aside the whole thing over the course of a year in a separate account. And if a rental opportunity comes up, we’ll plow it into that and if nothing comes up, we’ll use half to pay down debt. That way we can stick to our goals and stay open to opportunities.
- INCOME STATEMENT: Income
- Strategy Summary – Stay the course at current job, but continuously look for other opportunities.
- Salary: This one is hard because I have a steady career income that only goes up by 2-3% per year. It fluctuates by a yearly bonus, but I have very little control over that. I feel fortunate that I have a steady, decent income, but I don’t have the ability to increase it easily with more effort.
- I know I could get a higher paying job, but everything I see comes with a much heftier travel schedule and I don’t want to compromise my family values.
- Rentals: Interesting how this one is on the balance sheet also? This is a deep subject, but suffice it to say that I think it’s a good, solid long term investment if done right. The broad strokes are to buy at a great price, with a decent down payment, make sure it has solid cash flow, attracts a good pool of tenants and have a separate emergency fund for each unit.
- Side gigs: These don’t come up very often, but I’m open to them. The challenge is balancing a very busy home life with 3 little kids and a job that sometimes gets very busy and requires travel.
- Uber driving?: Been thinking about this more lately. Sometimes I can’t sleep, so it would make sense to hop on Uber just to check out what opportunities are around. … stay tuned.
- INCOME STATEMENT: Expenses (just the big ones)
- Strategy Summary – Have a solid budget, sticking to it and always work on reducing expenses where possible. I feel like we’ve done so much to lower expenses over the years that there isn’t much left to do on this one.
- Taxes: Can’t do much about this except that the rentals have a better tax rate, so if I can get that income up, my tax rate will drop.
- Debt Payments: Need to reduce these. See Balance Sheet: Debt item.
- Groceries: We’re at about $500/month for 5 people which I think is pretty good. All the credit goes to my wife for this. We definitely collaborate, but she does the work. It is going up faster in the past 2 years because the kids are eating more, but that’s a blessing in itself!
- Tithing: This is a non-negotiable 10% after taxes and before everything else (since taxes are the only thing I can’t control). It’s not going away. Note that early on we decided to tithe on the post-tax amount rather than after all the other deductions like life insurance, health insurance, HSA contributions, 401k contributions etc because it was the right thing to do.
- Blow Money: It’s not a big expense, but worth mentioning. We each get $50/month to do with whatever we want. It used to be tough, but now it’s just normal.
Each of these is a fairly deep topic that I might write about more later. Email me or comment if you have any thoughts about this.