There really are only six steps you must take when creating a financial plan:
- Set your goals
- Protect against bad things
- Prepare for the future
- Enjoy the journey
- Give back to society
- Execute your plan!
Each step is important and I encourage you to do them in order. In this article, I will focus on step 3, which is preparing for the future.
Prepare for the future - how to build wealth
Until you have saved somewhere between 5x and 15x your annual income, you don't need a lot of numbers in your financial plan, if any. You need more money. It is that simple.
The three main categories for building wealth are:
- Budget & savings
- Your credit score
- How you invest your money
Follow the tips below to get your financial plan in tip top shape.
Are you retired or near retirement?
1. Budget & savings
The less you save, the longer you work. More importantly, savings creates flexibility. Flexibility reduces stress throughout life. So, savings = less work and less stress.
- You must save between 10% and 30% of your income.
- 15% is good.
- 20% is perfect.
- You should enjoy the rest.
- Your bill payment and savings should be automated.
- If you aren't at 20% now, get there over time. Drastic action tends to get drastic results (success or failure). I suggest a more gradual path and, ideally, an automated path.
2. Your credit score
You should always strive for excellent credit. Excellent credit will:
- Save you thousands and potentially tens of thousands of dollars over your lifetime.
- Help you get the things you want and need.
- Protect you in bad times.
3. How you invest your money
You must first build a foundation, a solid base. Then you can introduce other investments.
An excellent and simple (yet surprisingly sophisticated) approach would be to put the 100% of your savings into the Vanguard Total World Stock (ticker symbol VT) until you accumulate a position equal to 5x your annual income.
For example, if you make $100,000 target building up a $500,000 position in this globally diversified, low-cost index fund first. Then, look to add other investments.
This will form the base of the rest of your investments. Until you have this base you do not need anything else.
Most people can continue this approach until they accumulate 15x their annual income. For example, if you make $100,000 you may consider this approach until you build up $1.5 million of investments.
Things you do not have to worry about with this approach:
- Diversification. It is extremely diversified. You own over 8,000 stocks around the world.
- Rebalancing. There is no need to rebalance. It happens within the fund.
- Tax efficiency. It is extremely tax efficient. There is no need to ever sell.
- Fees. Unnecessary. Never pay an asset management fee on this part of your portfolio.
- Performance reporting. There is nothing to report. You own the global index.
Learn more about how to invest your money and the importance of a solid foundation.
For those who want a more sophisticated approach to investing or more detail, let me guide you with my free financial plan.
Continue on to learn how to enjoy the journey.
How may I help you?