I thought it would be fun to create a flowchart based on the stuff I put in The Hero with a Million Dollars. They say a picture is worth a thousand words, I think my picture is worth maybe 2-300 words. More importantly for me though, It has been worth many thousands of dollars.
Before we look at the chart, there are a few questions that come up right away when you look at this process:
Q. If I give 10% to charity, pay 10% to debt elimination and fund my 6-month contingency fund with 10% that leaves only 70% to live on.
A. Was that a question?
Q. How can I be expected to live on 70% of my meager salary?
A. It ain’t easy but it can be fun if you look at it the right way. Living frugally and trading down to wealth help us create rituals that serve us. The rewards are delayed somewhat but once the habit is set we swiftly forget about the downside.
Q. No. You don’t get it. I have a mortgage, car payment, student loans, credit card payments…did I mention my mortgage?
A. I get it. I’ve been there. Trading down to wealth takes some time but you can start where you are. You can start to look for a reliable, pre-owned car that makes sense for you. You can start to look at a living arrangement that encourages frugality. This could be buying a smaller house in a nice neighborhood. It could be renting a less costly room or apartment. How many new things do you own that could have been purchased pre-owned for a fraction of the cost?
It is the habit that counts most. You must develop positive money habits. The percentages can be adjusted at first while you are starting out. Try 5% – 5% – 5% [Charity- Debt Elimination - Contingency ]
Q. Can I just skip the charity stuff? I need charity more than I need to give charity.
A. Nope. Lots of reasons but I like this one best: Helping others is a fundamental human need. You send yourself a powerful message when you contribute to the health, happiness, growth or well-being of another. Most of us will work harder, longer and strive to be more effective when we know that others will benefit from our toil. Trust me on this one. It is vital. Also, helping others is being a good human. You want to be a good human, right?
If you can’t feed a hundred people, then feed just one.
Q. What is Asset Allocation? What do I invest in?
A. Asset Allocation in this example is simply the percentage of stock index funds vs. bond index funds. When you are young – (20s & 30s) 70-100% of your investments should be stock-based. As you age, bond funds should start to garner a heftier slice of the pie.
I have invested with T. Rowe Price for a long time and while some of their expense ratios are a bit higher than Vanguard and Fidelity, I especially like their Automatic Asset Builder program that allows you to start building a world-class investment portfolio for as little as $50.00 per month. Set it and forget it! Whichever investment house you choose, you can’t go wrong.
Q. I have a secure job, do I need a contingency fund?
A. Yes. See my article Contingency Theories for more info on this important but sometimes overlooked topic.
This hypothetical Q&A could have happened but did not. I made it up. If you have real Questions, let me know.
Some of you have commented that this site has been quiet for a little while. While I have been working on several projects and closing a few deals, I am eager to provide more regular updates. There are also 2 things I want to mention:
Trent Hamm’s book “The Simple Dollar: How One Man Wiped Out His Debts and Achieved the Life of His Dreams” is a good read, especially if you are young and struggling with your finances. His blog, The Simple Dollar, is a favorite of mine.
My friend (If he will let me call him that) J. Money over at Budgets are Sexy has one of the most open and refreshing sites on personal finance I have seen. There are so many “Do what I say not what I do” blogs out there it is nice to find one that is at once authentic and interesting. I find myself rooting for him and hoping his investments go well. Worth a look!
Here’s the flowchart. Tell me what you think…