Part 11 - Plan

If you haven’t read Parts 1 - 10 of this 12-part series, you may find it helpful to go back and read through them. Please leave any question, comments, or suggestions in the comments at the bottom of each post, or email me with the contact page. Thanks!

I know what you're thinking: why did we wait until step 11 to write a financial plan? The reason is that I wanted to encourage you to dive in and just get started with investing and see how painless it can be. You should now have a good grasp of the basics of investing and be more prepared to write a financial plan that actually makes sense.

Momentum vs. Perfection

I think people sometimes get too caught up in the idea that you have to have a complete and perfect plan before you can start investing. That's just not true. While the details absolutely do matter over a long period of time (as demonstrated by our example of the effects of a 2% interest rate difference), you can always adjust your plan as you go, and probably should! Your optimal asset allocation plan is likely to change over time, and hopefully as your income increases, you'll be able to contribute more to your financial goals. The most important thing right now is just getting some forward momentum, which is what most people struggle with. My view is that if you start saving money AT ALL, you're doing well and you should be proud of yourself. Just make sure you're reviewing your financial plans and goals on a regular basis and looking for ways to improve. Just like the fable of the tortoise and the hare, early momentum and consistent forward motion counts for a lot, as demonstrated by this example:

Julie starts investing at age 22, putting $300 / month into her 401k. She doesn't really understand investing but she knows she should, so she just invests in whatever options her HR department tells her to. However, because she doesn't invest wisely, she ends up under-performing the market with an 8% return for the next ten years, at which point she decides that she needs to really start taking this seriously and revises her investment strategy. She's now 32 years old. She continues funding her retirement accounts with just $300 / month for the next 30 years, but now she matches the market at gets a return of 11%. At age 62, she'll have about $2.3 million.

Kevin waits to start investing until he's 32, because he doesn't want to put the time and effort in to create the perfect investing plan. At age 32, he starts investing $300 / month. It turns out that Kevin is a genius and consistently beats the market for the next 30 years, returning 15% per year. At age 62, he'll have just over $2 million, or about $300,000 less than Julie.

The point is that the most important thing is to actually get started. Every single day counts. Sure, you won't make much tomorrow from your investments, and it's true that your total returns from 40 years are likely to be much different from those of 39 years and 364 days. The problem is that for many young people, the "tomorrow" in "I'll do it tomorrow" turns into next week, next month, next year, and next decade and by then you've already lost that incredible earning power. Don't let that be you.

Why write a plan?

The vast majority of people never bother to sit down and create a written financial plan, which is a big mistake. A written plan helps you stay focused and gives you something tangible to gauge your progress against. A written financial plan doesn't have to be that complicated...a single page may be enough for your situation.

What to include?

Budget

Remember that budget you created back in part 3? Go ahead and look over it again. If you've been living according to your budget for the last few weeks, it should be very familiar to you by now and you will likely have made some changes as you've began to better understand your spending patterns and how your goals match up with those patterns. Make any further refinements to your budget and file a copy with your financial plan. Thought the budget is likely to change over time, it's useful to look back at it when you review your financial plan.

Retirement goals

The majority of this series has focused on retirement savings and investment for one reason: it's the largest financial challenge that most Americans will face, though sadly, many apparently don't yet realize how big of a financial challenge this will be. Your plan should include the things we calculated throughout the series, such as when you'd like to retire, how much you'll need by then, how much you plan on investing each month to get there, etc.

Other asset classes

We focused on stocks and bonds in this series because they're extremely accessible to the average investor and are the closest thing to a truly passive investment that you'll find. However, there are lots of other asset classes out there, including real estate, private businesses, collectibles, precious metals, commodities, and more. In general, each of these asset classes are more complex and risky for the average beginning investor. However, I'm a strong believer that you can have fun investing, and after you've mastered some of the basics, you might want to try your hand at some other forms of investing. I love real estate and own three investment properties. They take a lot more time and effort than stocks, but I have a passion for real estate. Buying vacation homes can be a good investment if done correctly, and they have the added benefit of allowing you to use them for your personal enjoyment while you own them. Similarly, buying art that you enjoy and is likely to increase in value is not only a fun hobby, but can be a profitable investment as well. Think about any other types of investments you'd like to learn more about and include some goals to look into them on your financial plan.

Education / health / etc

Although we focused on retirement investments, there are other major things in life you'll want to save for, including buying a home, education savings for your kids, health care, etc. I'll have more articles about each of these later, but for now, just think about your future life goals and any other major purchases you'll want to start saving for. Remember, the sooner you start, the less you have to save each month to accomplish that goal.

Charitable giving

One of the best things about money is the opportunity to share with those less fortunate than you are. Of course, it's always your choice, but I strongly urge you to think about some ways in which you'd like to use your wealth to give back and improve the lives of others. There can be great tax benefits as well, which we'll discuss in a later article. Also, don't make the mistake of thinking that you have to be a millionaire to be generous. Start building the habit of generosity now with what you can.

Professional advice

In general, I advise people to handle their own finances when they're young and just getting started. Generally, people in their twenties have relatively uncomplicated tax situations and lack the assets necessary to justify professional portfolio management. However, one of the great things about starting investing young is that this will no longer be true at some point. Eventually, you'll have enough wealth that you'll need some professionals to help you protect, manage, and grow your assets. Add a couple goals in your financial plan to learn about this part of the financial journey, which will help you be more prepared to choose competent and honest professionals when the time comes. I'll have more articles about this in the future.

Reevaluation / Rebalancing Schedule

Finally, as we discussed in the last lesson, remember that you need to evaluate your goals, portfolio, plan, and progress once or twice each year. Pick a date or two and put it on your plan.

Task: Write your complete financial plan.

Now that we've covered everything that your plan should cover, sit down and write it. It shouldn't take long and it doesn't matter if it makes sense to anyone else, as long as it makes sense to you. Once you've finished it, make a copy that you can post somewhere visible (like on your fridge) to help keep you motivated. File the original away in your filing system. You might want to set a reminder on your calender to review your plan once per quarter, or even monthly.

Disclaimer: I am not a professional financial adviser. All information herein is provided in good faith. It is not intended to be, and should not be relied on as, a substitute for independent legal, financial, tax or other professional advice. Readers should seek appropriate legal, taxation, accounting, investment or other expertise in their local and overseas jurisdictions.