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The Order of Battle in Financial Planning for Ordinary Folks

I sat down to talk with a young couple with three kids about personal finance.  This taxes me, because I’m not a financial planner.  I can remember most but not all of the rules on the taxation of various investments.

But this is the way that I handled it:

Do you have your risks covered?

  • Life insurance on the husband, because the wife stays at home with the kids.  Bright lady, highly employable, but she wants to raise the kids.  Not enough insurance for this family.
  • Disability insurance — covered by his employer.
  • Health insurance — ditto.
  • P&C insurance for cars and house — difficult to avoid, but wise to check.

Do you have a buffer built of 3-6 months of expenses?

Remember my stoplight rule:

  • Less than 3 months expenses in the savings fund? Red light. Defer all discretionary expenditures.
  • 3-6 months expenses in the savings fund? Yellow light. Some discretionary expenditures allowed, so long as you don’t dip back into the red light zone.
  • More than 6 months expenses in the savings fund? Green light. Discretionary expenditures allowed, so long as you don’t dip back into the red light zone.

When my friends asked me how to define a month of expenses, I said take half of your discretionary expenses over a year, add it to your non-discretionary expenses, and divide by 12.  In this case, it revealed that they weren’t tracking their income and expenses, and so I suggested getting Quicken.

They need to build the buffer.

After the buffer comes expenditures that improve life, or reduce long-term costs.  Use cash payment to get discounts.

After that, invest the excess.  50-50 stocks and bonds in index funds is an excellent start, with annual rebalancing. Or 25-25-25-25 cash-gold-stocks-bonds works really well across a wide number of economic environments.

The most important thing is to spend less than you earn, build the buffer, and then invest, or reduce debt, whichever is more promising.  How you invest is secondary.  The first priority is to be wise with your spending money, and then, save.  Especially in a low interest rate environment, the biggest benefit of saving is saving, and not what you earn.

One more note: there are two ways to make sure you spend less than you earn.  The first way is to budget strictly.  The second is to make sure your cash balance grows over every six months.  The latter has been my way.  It is more flexible, but it requires that people have limited desires, viewing spending as a necessary evil at best.

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2 Responses to The Order of Battle in Financial Planning for Ordinary Folks

  1. [...] Don’t skip step one in the financial planning process.  (Aleph Blog) [...]

  2. [...] 13. The Aleph Blog offers readers the insights of David J. Merkel, owner of Aleph Investments. The blog covers the personal thoughts of the author on investing and the right way to manage other people’s money. Highlight: The Order of Battle in Financial Planning for Ordinary Folks [...]


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.

Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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