10 Steps to a Rock Solid Personal Financial Plan

Years ago, Scott Adams, of Dilbert fame, wrote a very simple one page list to get your personal finances in order. There’s not much to improve off that list though I’d like to provide a more thorough list and some recommended resources for anyone who wants to get control of their finances. 

Note that this plan applies to probably 98% of people. The other 2% either have a higher or lower risk threshold, have unique investing knowledge (especially insider) or are a multimillionaire/billionaire where the normal rules don’t apply. 

First, let’s start off with some very simple financial principles. 

Personal Financial Principles:

  1. Have a goal in mind. If you don’t have an idea of what your end goal is then you’ll wander aimlessly, many times working or worrying when you don’t even need to. Seriously, most people underestimate what they need to retire but some also overestimate and are working for no reason, so it’s worth spending a few minutes making a simple plan and goals. 
  2. Stick to your plan. The absolute #1 problem with investing is that people either panic buy or panic sell and that destroys your ability to make long term gains. Remember, if you own investments and they go down, you don’t actually lose the money until you sell. So panic selling can be devastating to your plan. Some years will be “down years” or bear markets and that’s just a normal part of investing. 
  3. Most good investments are boring decisions. Having a modest car, a modest house, investing in simple index funds, etc. These are the things that tend to win long term. 
  4. Rethink retirement. A lot of people just want to stop working in their current job but don’t really think retirement through. In many cases, severe boredom or a lack of purpose simply replace their hatred of their job. Or their health is so deteriorated by the time they retire that traveling or “working on the yard” are not possible. Consider that it might be worth retiring earlier, doing “mini retirements” (take a few months off occasionally) or taking longer vacations when you are younger and have more energy and fewer health issues. Many retirees take a simple part time job, volunteer or have a side gig to keep them busy. 
  5. Have a backup plan. The key to relaxing about your finances is to plan well and that includes a backup plan. For example, if your investments don’t work out, consider social security (or other programs), inheritance, a reverse mortgage, moving in with family, part time work, etc. 
  6. Have a drawdown strategy. It’s very hard to predict how much you’ll need to retire, mostly because we don’t really know how long we will live or what life circumstances will come up unexpectedly. Therefore, you’ll want to try to draw down your nest egg in a manner which will maximize your pleasure but not leave you broke. Some people have a plan to “die broke” whereas others prioritize their estate for their loved ones’ inheritance. Either method will require you to be smart in how much you take out of your retirement funds.
  7. Pay yourself first. This is a classic principle but you need discipline to make it work. The best way is to have an investment or savings account that simply takes money from your checking account every month automatically. The sooner you do this and the more you save, the more you will have for retirement. 
  8. Review your plan at least yearly. Life circumstances will change so review your plan regularly (or with an advisor) to make sure you are “on goal”. Some people have no idea what they’re invested in so it’s good to review with an expert if necessary. 

10 Steps to a Rock Solid Financial Plan:

Step 1: Know what you have.

It’s hard to plan if you don’t know what you have right now. So either make a simple spreadsheet with all your accounts, assets and debts or use a free service like Mint to do all of this automatically for you. Mint will even monitor your investments and calculate your net worth. Personal Capital is a Mint alternative. YouNeedaBudget is also a popular tool. 

Step 2: Pay off debt (strategically). 

If you have high interest, short term debt, then it almost certainly makes sense to pay that off before you save money or invest. Think about a credit card with 15% APR, you would need to find an investment that pays more than 15% a year to justify not paying that off immediately. 

There are several strategies to paying off debt (for example, pay off your smallest account first, or paying off the one with the highest interest first). That link includes a calculator too. 

One warning: if you have long term debt like a mortgage that has a very low APR (especially if it’s below the inflation rate or the return rate of a safe investment like index funds), then it probably does not make sense to pay that off. Instead, if your investments can make more money than say a 3% APR mortgage then it probably makes more sense to keep the mortgage and invest the money instead of paying it off. 

Step 3: Have 3-6 months of cash saved. 

Even if your debt is not fully paid off, you’ll want to at least start “paying yourself first” and work towards building 3-6 months of your average monthly expenses. This is for emergencies, times of unemployment or just to let you sleep better at night. Put it in a high yield savings account or money market account. Make sure it’s not too easy to withdraw (don’t get a debit card attached to it otherwise you may use it in times of weakness). 

Step 4: Invest early and wisely.

Entire libraries cover this topic but let’s try to simplify as much as possible. After you’ve paid off your expensive debt and have some savings, the next step is to start investing in time-tested investments. The trick here is to start early (even with very small amounts, say $25/month), reinvest any earnings and don’t touch it for many decades. This is how you get the benefits of compound interest otherwise known as the “8th wonder of the world” according to Einstein. Seriously, only $25/month over 30 years invested in a basic index fund ends up being over $50,000 (whereas it would only be $9,000 if you put it in a checking account). 

What do you invest in? The safest investments are bonds and index funds. An index fund is simply a “basket” of all the best companies in America (or other countries/regions). They’re the best performing investment over decades and have been for nearly a century. A popular one is a S&P 500 index fund which has returned about 7-10% annually for many decades. 

Bonds are even safer, usually ones that are issued by a federal or local government, but obviously will return less. A good strategy is 70/30 stocks/bond split while you are working and more like 50/50 as you get closer to retirement. 

The easiest way to invest is to max out any employer plans like a 401k or get your own IRA or Roth IRA. You get to take this money straight out of your paycheck and into an investment of your choosing (again, index funds being the safest) and you even get a tax break. 

Where do you start? You can’t really go wrong with Vanguard, Betterment or WealthFront. The important thing is to set up the account, get it funded automatically and basically forget about it until retirement. All of those companies provide a free “robo advisor” that will help you pick safe investments. Until you have several million dollars in investments, you likely won’t need more than a simple index fund strategy and you can always get an advisor to review your portfolio. 

Step 5: Cover your back with insurance. 

Many bankruptcies are caused by a surprise medical emergency so having health insurance is mandatory. At least have a “high deductible” policy to cover the really big stuff. 

If you have a lot of debt and/or a family you want to provide for (and you’re not sure your investments will cover that), you’ll want to look into life insurance. There are 2 main types: “Term” which is only good for a certain time period (typically 10 or 20 years) and “Whole Life” which covers you regardless of when you die. 

The simple strategy with life insurance is to get enough that will cover your debts and provide for your family (at least for a few years while they get back on their feet). If you have a lot of money already and no worries about debt then life insurance is not as necessary. Most people get a Term policy because they are much cheaper and you typically know how long you’re expected to live (a good backup plan, discussed below, can cover if you exceed the term or many insurance companies will extend the term). PolicyGenius and SelectQuote are good places to start. 

If you have a considerable amount of assets and want to protect them (especially in a litigious society like America), consider an umbrella policy to provide liability protection and additional protection on top of your homeowners, auto and other insurance. 

Finally, if you don’t have children or extended family to take care of you as you age, consider “long term care” insurance that will cover things like a good retirement home. Otherwise, you may need to basically “bankrupt” yourself and go on Medicaid or other government programs. 

The earlier you get any of these policies, the better and cheaper. Also, speaking from experience, do not under any circumstances allow your payments for insurance policies (or those of close family members) to lapse and certainly don’t cancel it if it might be used anytime soon. 

Step 6: Use real estate wisely.

Most American’s wealth is tied up in their house and often times, their house is their retirement plan (they intend to sell for a profit and downsize in later years). Owning a house also allows you to get a “reverse mortgage” later in life to help with retirement (but be wary of scams). That said, many times home ownership is not for some people who either don’t like the maintenance/cost/hassle or simply cannot afford it. 

If you can afford it, again, be wise about how much house you can afford and be wary of things like “zero down” or “interest only” or “adjustable rate” mortgages as these can get you in trouble fast.

Finally, owning rental real estate is a very common way to wealth so if you like owning/managing property then this is a good strategy to earn passive income and build equity over time. One way to invest in real estate without owning it is to invest in various funds like “REITs” which tend to have some of the highest returns

Step 7: Drawdown wisely and have a backup plan. 

After you’ve built up some investments and assets, the big question as you get older is how much can you safely withdraw. This, again, depends on your goals and what you want to leave for others (if anything). 

This topic can get complex because the economy, interest rates and inflation can all have dramatic influences on the correct amount. You can read a deep dive on this topic here, but overall, the rule is to take the amount of money you need to live per year and have X amount of years available (remember you will still earn on invested money going forward) until your life expectancy. 

The famous 4% rule says that you can usually safely withdraw 4% of your total assets each year (e.g. if you have $1 million in investments, you can safely withdraw $40,000/year) and not really lose anything over time (assuming you make more than 4% average each year on your investments). As you get older you may want to take higher amounts or simply have no other choice. 

If you want to pass on an inheritance then minus that from your calculation but otherwise, if you want to “die broke” you can estimate that and then depend on your backup plan if you dramatically outlive your plan. A backup plan includes: social security, selling property or valuables (downsizing your living expenses), inheritance, part time work, living with relatives and going on financial aid from the government. 

Step 8: Plan for the end. 

If you’ve ever dealt with the death of a loved one and there was no real plan, you know what a burden this is on an already painful process. At the absolute bare minimum, get a will online, they cost less than $100. This is one place I’d recommend spending an hour or two with a local attorney, going through everything properly and setting it up right (this should be about $1000). Make sure to include a health care directive to give instructions on how you should be treated in a life or death medical situation (remember, this can bankrupt you or your family if not addressed properly). 

For those with significant assets or want a more comprehensive plan, look into setting up a living trust that can hold all of your assets while you are alive and simply transfer them (usually tax free) to someone else after you pass. A good trust may cost up to $5,000 and requires an attorney familiar with your local laws. If you don’t have a family member who can be the “trustee” then you can appoint a professional trustee to manage affairs after you pass. 

Make sure all of your financial accounts have a beneficiary (either a family member or your trust if you have one). Also, create a one page document with a list of all your physical and digital assets and account #s and contacts (cryptocurrency, passwords, etc.) to be included with your will. This will just make things easier for the surviving family members and frankly will let you sleep better at night knowing your affairs are in order and you don’t need to panic about anything if you die unexpectedly. 

Step 9: Swing for the fences (optional)

The previous 8 steps are for a very nice and safe financial plan. But some people want to take more risks and/or have extra money they are willing to lose with the potential to get enormous gains (much more than the standard 7-10%/year of index funds). If you are risk averse, I’d recommend not spending more than 10% of your savings on these types of investments. But, if you want to get outsize gains you have to take outsize risks. 

Here are what are generally considered the investments with the most potential returns:

  • Businesses and franchises. The vast majority of multimillionaires on earth are business owners. Starting and building a great business is a well known path to wealth.
  • High risk investments. Hedge funds, Venture Capital funds, Angel investing, Private Equity funds and other types of investments are usually available only to “accredited investors” and are usually much more risky than regular funds. 
  • Individual stocks. If you think you can beat the S&P 500, more power to you (even professional traders only beat it about 10-20% of the time and they have much more information and resources than the average investor). Some people like to focus on high dividend paying stocks which is another strategy. 
  • REITs. Note that you can use a service like Fundrise or Crowdstreet to invest in smaller amounts. 
  • Art, coins, etc. Wealthy people own lots of art and other valuables. One way to invest in stuff like this is Masterworks
  • Cryptocurrency. Bitcoin, Ethereum, etc. 
  • Family offices. Some families are so wealthy, they have an entire office dedicated to actively managing their wealth. For example, Bill Gates has his Cascade Investment company to simply grow and manage his wealth and charity work. 

Step 10: Review your investments yearly.

Put a yearly review on your calendar and go through all your accounts and investments top to bottom. Move money around or change investment types if necessary as you change strategies or get closer to retirement. If you’re not great at stuff like this, hire a pro to go over things with you. Make sure they are a “fiduciary” who has your best interests in mind. 

Your One Page Financial Plan:

Here’s a simple plan that fits on one page. Print this out or copy/paste into a document and get this done. 

  • I’ve set up a spreadsheet of all my financial accounts (or used something like Mint).
  • My retirement goal is $__________ in total assets allowing me to drawdown $__________ /year safely (via the 4% rule or similar) and my backup plan is:
    • Social security
    • Inheritance 
    • Downsizing
    • Reverse mortgage, loans, etc. 
    • Living with family/friends
  • My monthly expenses are $_______ and I’ve saved 3-6 months of cash in a high yield savings account (or I’m planning to save $_______/month for ___ months to build up my savings).
  • I’ve paid off my high interest, short term debt or have a plan to do so. 
  • I’ve opened a retirement/investment account and have automatic contributions and reinvestment of dividends set to either bonds, index funds or a combo of both. 
  • I’ve contributed the maximum amount (or amount I can afford) to my IRA or 401k and have chosen safe investments for that. 
  • I have the necessary insurance to protect me and my family:
    • Health insurance
    • Life insurance (Term or Whole Life)
    • Umbrella insurance
    • Long term care insurance
  • I’ve planned for the end to make things easier for me and my family:
    • Will or Trust is setup (with health care directive)
    • All financial accounts have a beneficiary. 
    • I have a one page document listing all my accounts, debts and property that is attached to my will or trust. 
  • If I want outsize returns, I will dedicate ___% of my savings to riskier investments knowing that I may lose it all. 
  • I have a yearly calendar and reminder to review all of the above. 

That’s it! Let me know if you have further advice in the comments.