Success in life is predicated on having a solid foundation.
Financial success is no different.
It requires a solid financial foundation, one where ever block is carefully laid so you have the stability to grow.
Why is this important? An incomplete foundation is the same as a poorly constructed one. If you’ve never been given a blueprint for how to build a rock-solid financial system, you may be missing something important. For years, we didn’t have an estate plan (we didn’t create one until after our second child – a mistake that we were fortunate didn’t hurt us). And, if nothing else, it’s always good to have peace of mind.
Take a few minutes today to review the list and fill in your system with anything you missed.
This guide includes everything I’ve done to create a rock-solid financial system and is a living document. As we grow, so will this guide. As we face new challenges, they’ll be integrated into this guide. A system is never finished, it’s always being improved.
Who is this guide for? If you’re new to managing your finances and want to make sure you have your bases covered, this guide will make sure you hit each one. If you’re an old hand and aren’t sure if you missed anything, this will help you out too. This guide is a step-by-step recipe of how I built my financial system.
It’s also useful as a checklist for those who moved geographically or started a new job. It’s set up in an order that saves you the most amount of time and effort. While the list assumes you start from zero, you can skip the steps you’ve already completed.
Table of Contents
Draft Your “Finances At A Glance” Documents
I created three documents to give me an instant snapshot of my finances. I take everything in my head and put it down on paper. Those three are:
A Treasure Map is a Word Document that explains all of my accounts, why they exist, and who to talk to to find out more. It’s written in so that if I were to die, someone could take over my finances and, if necessary, perform an orderly liquidation.
A Net Worth Record is an Excel Spreadsheet that keeps a running record of my account balances. It acts as a historical record and each of the columns is linked to a description in the Treasure Map.
A Financial Network Map is a drawing that illustrates my financial accounts and how they are interconnected.
Years ago, when doing process improvement work as a consultant for Booz Allen Hamilton, the first step was always capturing the current process. It’s often (very) much different than what is pictured in the minds of the participants and this crucial step is as important in establishing your rock-solid financial system. Before you start adding and removing accounts, you need to know the current state. These documents help me tremendously.
As you build your system, keep all these documents updated. It’ll save you time later.
Open a Checking Account
When you think about your financial network map, the central node is your checking account. Your income flows into your checking account and your expenses flow out of your checking account.
Here’s what you need from a checking account:
- Free and easy ATM access: We use Bank of America because they have an enormous geographic footprint. I also have an Ally Bank account that gets me reimbursed ATM usage anywhere.
- No fees: Ally Bank, and almost all online banks, have no minimum balance required to avoid fees but brick and mortar ones often do. Bank of America has a minimum daily balance to avoid their fee but we keep the account simply because it offers a few benefits an online bank doesn’t (depositing cash, medallion guarantees, etc.).
If you have a bank account from your college days, now is a good time to revisit whether it works for you. The account may transition to another product (you won’t have a “college account” forever, usually it also graduates after 5 years) so you’ll want to check the fees and terms of that one.
Credit Unions: If you can’t find a local bank, consider looking up a credit union. You won’t have as large of a geographic footprint for ATMs and branches but many credit unions offer ATM reimbursements plus you can supplement your needs with an online bank. Use the National Credit Union Administration’s Credit Union Locator tool to find one near you. And at a credit union, a checking account is called a share draft account (since you’re part of a union and it offers a draft privilege). Those are just a few of the differences between a credit union and bank.
Online Banks: If you use an online bank that offers free ATM access and has an app that lets you deposit checks (or by mail), that can be your main checking account. You don’t always need a physical bank nearby. I can count the number of times I’ve needed a medallion guarantee on one hand.
Would you ever want more than one? You don’t derive much benefit from more than one and you’re introducing complexity (more accounts). Most online checking accounts will give you nationwide ATM access, which is often controlled by ATM networks and not bank networks, so outside of the ATM what reason is there to get multiple checking accounts?
Open a Savings Account
If you went with an online checking account, open a savings account with that bank too. It’ll offer a marginally higher interest rate on your savings but every bit counts.
If you went with a local brick and mortar, find an online bank you like and open a savings account. Don’t open a savings account with a brick and mortar bank, their rates are trash.
Want to save for a vacation? Create a new account.
Want to save for a new car? Create a new account.
It lets you see, in a snapshot, what you’ve saved.
Open a Credit Card Account
Credit cards are an important financial tool that:
- Provides you with short term funds in emergency situations (but at a high cost in interest),
- Helps you build and improve your credit history and score,
- Provides cash back and other rewards in return for your spending loyalty.
Cash is king but cashback is the crown. Get yourself a good credit card that provides a good rewards structure as soon as you can.
After you open an account and set up online access, make sure to establish a bill pay link to your online checking account. It’s up to you whether you want to set up autopay, where the balance gets deducted automatically, but I do just to make things easier. You can’t miss a payment if the computers do it for you… just make sure your checking account is always going to cover it.
Link Up Online Billpay
As a corollary to the automatic payment link with your credit card, you’ll want to simplify your bill payment as much as possible. Missing any payment can hurt your credit, so it’s important to ensure you make your payments and there’s no better way than creating the electronic links now so payment is easy.
For most of your bills, you’ll be able to pay by credit card. We pay our cable/internet, heating oil, and several other utilities with a credit card automatically. This earns us points and ensures you never miss a payment.
For others, you’ll have to create a bill pay link on your bank account so that the service notifies the bank and the bank makes the payments automatically. Our electric utility, BG&E, currently notifies Ally Bank each month and Ally Bank automatically pays it. I do nothing except delete an email.
The first step to building wealth is by accumulating capital, i.e. money. The more money you save today, the more you have to invest in assets like the stock market or business. If you have no money, you have to borrow it and pay someone else for having money on hand to lend you. Sometimes that price is steep.
In order to save money, you have to budget.
For other’s, it’s the envelope method.
If you’re a fan of tools, there are plenty. Here are two that I think have separated themselves:
- You Need a Budget: I’ve known founder Jesse Mecham for years back when YNAB was a far simpler tool and not as feature-rich as it is now. YNAB is more than a tool, it’s a mentality and methodology that works based on four core Rules – Give Every Dollar a Job, Save for a Rainy Day, Roll With the Punches, and Live on Last Month’s Income. Read more about the rules here. (the one thing they don’t do is import transactions because it impacts your awareness of your spending)
- Mint: Owned by Intuit, who once owned another tool popular tool Quicken, it’s a free budgeting tool that integrates seamlessly with a lot of data sources to make budgeting easy. You’ll need to help categorize some of your purchases but the integration takes out the step of entering in expenses. If you’ve tried Mint and it’s not your thing, here are some alternatives to Mint.
When establishing a budget, make saving a priority. Whether it’s saving for retirement or for something in the nearer term, like holiday gifts, saving is how you get ahead. Making sure you save starts with putting it into your budget. It starts here.
Start an Emergency Fund
This is the final step in the financial preparation of Your First Job.
An emergency fund, also called a rainy day fund, is a fund designed to help you weather life’s emergencies. Whether it’s something as financially significant as a layoff to something less serious like a minor car repair, emergency funds help you pay for things without having to rely on expensive sources like a credit card or a short term loan.
You should aim to save six to twelve months of expenses, depending on your level of risk tolerance. The primary goal is to help you survive a layoff so you can determine how likely that is compared to all the other potential financial risks you face.
Insurance is a funny thing. You pay for it and hope you never ever have to need it, but when you don’t need it to lament the fact that you paid for it in the first place. And if you do happen to need it, you’re glad you “threw money away” on it for all those years… but hey, what can you do?
This is how I think about risk and insurance — it’s all about figuring out likely something will happen (probability) and the potential damage (severity) it can do. That’s all risk analysis is and everyone simply guesses on probability. We don’t know the likelihood we’ll get into a fender bender, but we guess it to be pretty low.
Here’s the thing — the severity can get high. If you have kids and you die, someone has to take care of them. If you can afford life insurance, get it.
As for the universe of insurances – there are several types of insurance you’ll want and I like to think of them in tiers.
Tier 1 Insurances: These are insurances you must get, without question, if you have the underlying asset. If you don’t own the asset outright, the lender will require you to get insurance (your mortgage lender will require homeowner’s insurance because the home is collateral for the loan). Tier 1 Insurances include auto, homeowner’s/renter’s and health/dental/vision.
Tier 2 Insurances: These are those that are recommended if you can afford it because they protect less likely events but potentially financially devastating ones should they occur. Accidental death & dismemberment (AD&D), short-term and long-term disability, and life insurance. Sometimes your employer will offer these at a discount to market rates, take advantage of that. It’s also important to get supplemental if you feel the offered coverage is not enough.
A quick note on life insurance – if you do not have children, it’s recommended you get enough to pay for all your outstanding debts. If you do have kids, you should get enough to pay off your outstanding debts and replace your income so that your children will be provided for (they are, in fact, a “debt” of sorts).
Tier 3 Insurances: These are those that are recommended if you fit certain criteria, specific to the insurance. If you are nearing retirement, you may wish to consider long-term care insurance. If you run a business or otherwise have a higher risk of litigation, umbrella liability insurance may be valuable.
Get as much insurance as you can afford because you can’t afford to be without it.
Start Saving for Retirement
Saving for retirement is one of the most important things you can do, especially if you are young and have time on your side. Every dollar you save today will allow you to retire that much sooner.
There are two main savings vehicles for most workers – a 401(k) and a Roth IRA.
A 401(k), or the equivalent, is a tax-deferred investment vehicle you participate in with your employer. Tax-deferred means that every dollar you contribute will be deducted from your income for tax purposes, you won’t pay taxes on that amount. It can then grow tax-free until retirement. That’s when you will take disbursements and pay taxes on it. Employers often offer a contribution match on 401(k) contributions and you will want to take advantage of that free money.
A Roth IRA is an individual retirement account that offers tax-free gains on your investment but uses post-tax dollars to do so. You don’t deduct contributions from your income but when you take disbursements in retirement, you won’t owe taxes on that either.
I urge you to research both and to participate in both to the full extent you can. When deciding where to put your next retirement dollar, go with your 401(k) up to the match from your employer, then the Roth IRA to the maximum contribution limit, then the 401(k) to the max.
Prepare an Estate Plan
An estate plan can be a morbid thing to think about, it’s what someone should do in the event you die, so I get it.
But look at it this way, life for your executor is so much easier if you have a well laid out plan. Your beneficiaries get access to their assets faster and the state doesn’t get to decide based on laws you probably don’t even know.
It’s not fun but doing it can make things a lot easier for everyone else when you die.
Consult with an estate planning lawyer to ensure you are doing things correctly.
An estate plan can be as complicated or as simple as you need, it all depends on your situation and what you need to spell out. If you are unmarried with no major assets or beneficiaries, it’s simple. If you have a lot of assets, children, … then you’ll want to spell things out more carefully.
At a bare minimum, you can do it yourself with software or with a service. How much you spend is not related to how “good” something is — a good estate plan is one that accurately spells out what you want to be done.
At a bare minimum, your estate plan should include:
- Last Will and Testament: This covers what should happen to your property when you die. If you have children, make sure it includes clauses about guardianship of your children. Here’s more on how to write a will.
- Living Will: Sometimes called a directive or advance directive, this covers end of life medical care if you’re unable to communicate it.
Beyond that, there are several other documents (or steps) that are important:
- Power of Attorney (Financial): This authorizes someone to make financial decisions on your behalf.
- Power of Attorney (Medical): Also known as a health care proxy, this authorizes someone to make medical decisions on your behalf.
- HIPAA Release Form: This gives the individual with power of attorney access to your medical documents and may be included in the Power of Attorney.
- Designate Beneficiaries: Remember to designate beneficiaries for assets that ask for them, like your retirement plans and insurance policies.
- Letter of Intent: This is a letter from you to your executor or beneficiary that explains what you were trying to do. In case the will is out of date or if beneficiaries decline an asset, it gives the executor more information than the legal document of the Last Will. It’s not legally binding but can help people understand what you were trying to do.
If you have substantial assets (especially if you’re near the level of paying an estate tax), you may want to consider a trust. If you are at this point, chances are you want to talk to an estate lawyer and most will speak with you for free for a quick consultation.
Write Your Treasury Map
Last but not least, write it all up. A financial map is great and all but it’s just a map, it doesn’t explain the nuances with your approach.
For that, you need a Treasure Manual.
You need a guide to your finances… and this is how I wrote my Treasure Manual.