The Four Mandatory Buckets Of Personal Finance

The Four Mandatory Buckets Of Personal Finance



The Four Mandatory Buckets of​ Personal Finance
I have already written about the financial necessity of​ saving a​ portion of​ any income payment that you receive. This means that a​ percentage of​ every single source of​ income is​ set aside, marked, or​ tracked as​ money that you cannot spend. This task isn’t optional if​ you want to​ have some basic financial stability or​ start growing some serious wealth. Saving is​ the first step and it​ is​ the easiest, simplest, but the most emotionally difficult step. I ​ know that starting to​ save money is​ emotionally painful because spending money is​ easy and pleasurable, while saving money feels difficult and challenging. But like any behavior, it​ becomes easier and natural the more you do it.
As a​ review, the billionaire John Templeton started out working during the Great Depression but he saved 50% of​ his income. This guy was serious! OK, you may have a​ lot of​ fixed expenses that you just can’t cancel immediately, but at​ least enroll in​ financial nursery school by saving 1% from all the income that you receive. or​ start with only $3 a​ month and then ratchet up your savings rate continually until you are at​ least over 10%; or​ if​ you are ambitious get it​ over 30%. if​ you are trying to​ find the loophole, this savings is​ your aftertax income that you can spend don’t count your 401K or​ medical savings accounts or​ any other qualified money that you don’t have full/immediate access to​ spending.
The remainder of​ this article is​ about what to​ do with that savings. Economics is​ the study of​ allocating scarce resources. Personal economics are similar, but I ​ think that it​ is​ better described as​ The allocation of​ your income that you can’t spend. if​ you don’t spend this money, and maybe have it​ setting aside in​ savings account, what do you do with it? Do you pay down on a​ credit card, save it​ for a​ car, donate it​ to​ a​ worthy cause, or​ purchase a​ bank certificate of​ deposit? How do you go about deciding?
Well, I ​ have given this some thought and have reached a​ few conclusions. it​ is​ my view that your monthly savings needs to​ be divided among four mandatory categories. By this, I ​ mean that among the zillions of​ things you can do with savings, it​ is​ my view that four of​ them are absolutely mandatory. For example, if​ you earn a​ paycheck and after all of​ the taxing authorities take their share of​ $1,000 that you can deposit into your checking account and you’ve chosen a​ personal savings percentage rate of​ 8%, then you move $80 $1,000 X . 08 into a​ separate savings account. Now, you will take this $80 and divide it​ up into at​ least the four mandatory categories I ​ am going to​ discuss, along with any other categories that you value. in​ this way you’ll have the whole $80 assigned to​ specific financial duties to​ meet your financial goals.
Here are the four categories in​ priority order
1. The Vault this is​ your wealth account. Money gets deposited into this account and it​ never leaves, like a​ oneway valve. The Vault is​ invested and the principal is​ never spent. it​ will grow into the largest part of​ your net worth, generating nearly all of​ your investment income. if​ you don’t start creating wealth pennybypenny, you’ll never have any.
2. Soft Savings a​ delayed spending account. This money is​ marked for things that you want to​ buy, but can’t afford to​ purchase with normal pocket money. For example, a​ house, car, boat, vacation, college fund for kids, planned medical care, clothing, jewelry, etc. But this also includes maintenance to​ your home, like a​ roof, new appliances, new siding, paint, landscaping, remodeling, etc.
3. Paydown Debt Balances making extra principal payments on your credit cards, car loans, and your mortgage. By chipping away at​ these expenses you will eventually eliminate them all, and then have more money available for other categories. Personal debt is​ the opposite of​ financial freedom and dramatically makes it​ more difficult to​ reach your financial goals. if​ you doubt this, look at​ the interest charges you pay each month and imagine if​ that money had been invested instead.
4. Financial Education books, magazines, newsletters, seminars, software, investment memberships. Also, hiring professional financial advisors, tax accountants, estate attorneys, etc. Avoid free advice a​ buddy, your cousin, or​ a​ friend’s neighbor buy the best, most expensive professional advice you can afford.
As I ​ mentioned before, you can put your savings into places that are only limited by your creativity. But it​ is​ my view that these four areas are so important that they need to​ be continually fed money in​ a​ systematic manner.
If you are missing the first account, The Vault, you’ll never have the money to​ start investing so you’ll never receive any investment income. This is​ pretty much the goal of​ all personal finance, to​ help you generate the most investment income. That is​ why this is​ the most important of​ the four categories, to​ get your money earning money so that you don’t have to. I ​ do not consider any retirement accounts or​ qualified accounts to​ be Vault money. This is​ because you do not have direct control to​ invest the money or​ receive any investment income until the government decides that you can.
If you are missing the second account, Soft Savings, you either can’t buy what you want, or​ you have to​ increase your personal debt. This is​ moving in​ the opposite direction of​ financial freedom you are reducing the amount of​ money that you can spend each month by the amount of​ the debt payment, and you are reducing your net worth by the principal and interest that you’ll be charged. Another symptom of​ a​ lack of​ Soft Savings is​ disrepair to​ your car, home, and health because you don’t have the money for upkeep. Everything physical needs to​ be maintained, from your teeth to​ your vacuum, and it​ costs money to​ do so. This depreciates the financial assets that you own, and puts at​ risk the most important quality of​ life your health.
If you are missing the third account, Paydown Debt Balances, you are simply going to​ be the patsy in​ the financial game of​ life. People that are building their wealth collect lots of​ little interest payments from the people that are destroying their wealth by making lots of​ little interest payments money is​ transferred every month from one group of​ people to​ the other. Which group do you want to​ be in? Well, your Vault can automatically put you into the group of​ wealthbuilders and your Paydown Debt account starts to​ extract you from the group of​ wealthdestroyers. The Paydown Debt account puts you on track to​ permanently extinguish all of​ your personal debt. The sooner a​ personal debt is​ paid off, the more rapidly you can take all of​ this money and put it​ into the other categories.
If you are missing the fourth account, Financial Education, you won’t know how to​ captain your Vault, and you may run it​ straight into the rocks. Only you will manage your money in​ a​ manner that will be to​ your maximum benefit. So it​ is​ best if​ you pay to​ learn how to​ handle money and learn where to​ put it. But not everyone has an interest in​ these subjects, and that is​ fine. For them, instead of​ personally managing your money, you are going to​ personally manage your financial advisors. You’ll be spending money and time to​ hire and manage the advisors to​ attend to​ financial details.
By allocating your savings into these four categories you are addressing the four most important elements of​ financial management. You’ll be making certain that Your investment income will always increase by adding to​ your Vault; you’ll have money available for extra expenses with your Soft Savings; your net worth will always be increasing with a​ Paydown Debt account; and you’ll intelligently learn how to​ lower your investment risk, raise your investment returns, and lower your tax liability with your Financial Education account. The only source of​ money to​ build these critical financial functions to​ increase your income, net worth, and stability is​ your savings you simply have to​ do it.
I recommend you fund these accounts simultaneously do not focus only on debt or​ only on education because I ​ have seen how it​ is​ financially detrimental to​ do so. For example, let’s say that you really want to​ paydown your debt so you don’t contribute anything to​ The Vault. I ​ have found that if​ you don’t have any investments, your investing skills will be under developed. You will not know how to​ invest once your debts have been paid off, you’ll have no investment income to​ manage, you won’t be looking for investing opportunities because that is​ something you can’t afford right now, etc. And as​ a​ result, it​ will be harder to​ get into the investing game later, you’ll have more to​ learn in​ a​ shorter amount of​ time, and may just avoid it​ altogether and put Vault money into a​ low paying account.
How much do you allocate among the four categories? Anything more that zero! it​ is​ up to​ you, and your financial situation will fluctuate and be different from others. Just to​ get some starting percentages, below is​ my allocation. it​ is​ not a​ recommendation for anyone, it​ is​ just what works for me right now.
My current savings rate = 20% of​ all aftertax income.
This does not include 401K, medical savings accounts, or​ other deferred/qualified withholding. This means that 20% of​ all cash income that hits my checking account each month is​ set aside into these categories
1. The Vault receives 50% of​ total savings each month.
2. Soft Savings receives 20% of​ savings each month.
3. Paydown Debt receives 20% of​ savings each month.
4. Financial Education receives 5% of​ savings each month.
5. And that leaves 5% for other categories each month.
You may receive continual, ongoing income, in​ addition to​ some rare, onetime inflows of​ money. The percentages detailed above are how I ​ allocate regular income savings. But if​ there is​ any onetime inflow of​ money garage sale, bonus, extra project, then I ​ take 90% of​ the proceeds and split it​ among the four accounts, and the other 10% is​ just spent. You can create your own money rules for different types of​ income; you can tell by my allocation percentages that my primary focus is​ to​ build up the balance of​ the Vault.
The amount of​ money that you can save from every source of​ income is​ your key to​ a​ brighter financial future. Contrarily, a​ risky and dimmer financial future awaits those that refuse to​ systematically save money. So be sure that you take the steps necessary to​ set savings aside and then simultaneously divide it​ among the four mandatory accounts by consistently allocating money to​ them. You don’t have a​ financial foundation without these four accounts, but with them, you can build as​ high as​ your ambition takes you.




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