2019 starts out on TLRG with a basic primer on how to get a grip on your money. As we go through the year, we’ll go further down the rabbit hole into investing specifics, success mindset, even an opportunity to work with me professionally for free, but for the next few posts, we’re going to tackle what I call the Founding Four money principles – the genuinely important first steps of a financial plan, and why you need to be doing all of them today.
When I meet with most younger families and we start to work out a financial plan, we may uncover unique little quirks of their particular financial situation (or have to address their emotional biases regarding their situation). It’s pretty common to have one spouse worried about this month’s bills when the other one isn’t, for instance. So we work on those planning idiosyncrasies individually over the relationship.
But in every instance, we have to address these Founding Four principles of money management. In my 11 years as a financial advisor, I honestly can’t remember a time when that was not the case.
Since TLRG is read mainly by people who want to do it themselves, I’m going to walk you through how to manage your own Founding Four. I’ll lay out my best advice as a money pro, give it to you fast and straight (and exactly how I’d do it myself if I didn’t have a guy like me), and then send you out into the world like my educated but prodigal child.
Now, what are the Founding Four money principles?
They are the four most basic financial concepts: how to spend less, how to save more, how to make your savings grow, and how to protect it from disaster.
Let me use the analogy of American football: if you can’t run, pass, block and tackle, then don’t try to be fancy (I’m talking to you, Denver Broncos). Get the fundamentals right first, and then try to be smooth and sexy for the cameras.
Financial management is the same thing. I see people want to delve deeply into aggressive stock trading strategies, or outright scams like cryptocurrencies, before they get these basic “plays” right.
So here are our Founding Four financial objectives, laid thick with football analogy.
The RUN: Create short-term savings (to stay out of debt)
The PASS: Create long-term investments (for much later in life)
The BLOCK: Protect this whole plan in case something happens to you
The TACKLE: Get out of debt
(Notice that I differentiated between saving and investing. These are different disciplines with different strategies, risk tolerances, and time frames that we will cover extensively on TLRG. Stay tuned for much more on these important but very different money strategies. But I digress.)
So now that you have the Founding Four broadly defined, what should you deal with first? How do you prioritize?
There’s wide difference of opinion on that in our industry. Some well-known financial “personalities” (I can’t really call them advisors) tell their listeners to live on rice and beans for 10 years and pour 100% of their surplus money toward debt paydown. Your insurance agent will push an expensive life insurance policy or annuity on you, claiming it’ll solve the other 3. I can’t agree with either of these approaches.
In principle, it sounds good. But we all know that life doesn’t let you subsist on ramen noodles for 10 years while you work on your huge pile of student debt and credit cards, and plunking a few hundred a month into a whole life policy with 10-year surrender charges to access your savings will most definitely not solve your money woes, no matter how many glossy brochures the guy shows you.
In fact, focusing solely on any one of these Founding Four while ignoring the other three, leaves you exposed to even more risks you really don’t need to deal with.
Let’s say you go all-in on debt paydown, like Mr. Radio Money Guy tells you to. My bone of contention with this advice as a financial planner is, without some savings being built up at the same time your debt is being paid off, you’ll have nowhere to go but back into debt if something unexpected happens along the way. And forcing you onto a debt treadmill that you can never get off of is not sound financial management.
Plus, if you spend several years just paying down debt, you’ll miss out on the extremely important early years to allow compound interest to grow your long-term investments in amazing, exponential ways. In investing, time is your ally; the more time you have, the less money you need to invest to reach your goals.
So how do you do it? What’s the right way to tackle the Founding Four?
Simple: You do all of them at the same time.
As much as it pains me to ponder, some of you may not be football junkies. So let me give you a different analogy: think of these principles as a chair with 4 legs.
One leg is DEBT PAYDOWN. Another is SHORT-TERM SAVINGS. The third is LONG-TERM INVESTING. The last one is INSURANCE. Without at least 3 legs, the chair won’t stay up (and with only 3 legs, sit at your own risk).
If you never got more complicated about your finances than employing this simple analogy, you’ll do better than more than half of the Average Guys in America. Think about that.
In future posts, I’m going to tackle each of the Founding Four “legs” in greater detail, but for now, just remember that these are the four primary objectives you absolutely must accomplish to have any chance at financial independence, and it works best if you tackle all 4 at the same time.
Many times, a client will say they just don’t have the disposable income to fully fund all four at once. And that’s fine, for now.
(If money is really that tight, you need a second job or a side hustle before you worry about any financial independence goals. You have to crawl before you walk, and walk before you run.)
Let’s say you only have $300 a month in surplus that you can commit to your Founding Four. Here’s how I would advise a client to proceed:
Divide the money up and allocate some to each objective. In the scenario of having only $300 extra, let’s say we decide to allocate it this way:
- $100 toward debt service (and we’d create a paydown schedule that I’ll explain in an upcoming post).
- $100 toward short-term savings (this will initially be your emergency fund, but will later become available to fund other things).
- $50 for some term life insurance (you’d be surprised how much term life insurance $50 can buy a couple in their 20’s or 30’s).
- $50 for long-term investing (getting this started as young as you can will give these small amounts the longest time period for compound interest to work its magic).
Does this solve all of your woes? Of course not. But it does start the process of correcting major deficiencies in your financial life. And like anything worthwhile, it just takes time for your financial seeds to grow into a harvest of independence. Remember, you didn’t get into a financial mess overnight; fixing it won’t be an overnight process, either.
But here’s what will happen:
- Your debt will start slowly chopping away. Using a debt acceleration (often called a “snowball”) method, and paying debt off in an orderly, smart way, your debt will pay down at a startling rate.
- Meanwhile, your Emergency Fund starts to grow. This is the “relief valve” for unexpected or emergency expenses only (not for Christmas presents or vacations). Slowly growing this as you pay down debt will give you a place to go, other than a credit card, for those surprise car problems, insurance deductibles, broken arms, hail damage, etc. Without some savings, your only option is to stay on a debt treadmill forever.
- Life insurance in case something happens to you before your financial goals are met. This is the responsible, adult thing to do if someone is relying on your income to make ends meet (and is needed even if you’re single, as long as you have any debt obligations left and aren’t donating your body to science.)
- You’ll start to develop the discipline and see the benefits of investing. Most of my “starter” clients do this part in a ROTH IRA, but talk to your advisor to determine what’s right for you. Just stay away from an annuity. (And if you don’t have an advisor, I know a guy.)
As you slowly complete one leg of your Founding Four chair, you simply move that money over to one or more of the other three, to speed that leg up.
Let’s say you complete your emergency fund at the level you wanted. What do you do with that $100? Maybe add $50 to the debt service and the other $50 to long-term investing. Once the debt is paid off, you’d move the $150 (plus all of the debt payments – we’ll go over that in the next post) to long-term investing, too.
At the end, the entire $300 (plus your original debt payments) is funding the needs of your last “leg”, which will usually be your long-term investments. This will move it pretty quickly. You may be investing $1500 or more, each and every month once it’s all said and done. Amazing! (Or, you’d invest a lot but begin a new short-term savings goal with some of it – the choice is yours.)
In the next few posts, we’ll tackle each of the Founding Four in detail, including a step-by-step process for each one. I’ll throw in some calculators, worksheets, and even a video or two, to help you out. And then, I’ll give you my best suggestions for how and where I’d do each one if I was going to do it myself.