“I want to retire comfortably”; “I want to be financially free”.

How can we attain financial security?  How can we approach such a daunting goal, with a timeline spanning decades away?

Morningstar’s Financial Priorities Pyramid



With this financial priority pyramid, we can determine what is most important, and climb the pyramid to become financially savvy and secure.  We want to start at the bottom, and move our way up to the top, accruing knowledge, skills, and the right mindset on the way towards our financial goals.

Let’s begin.

Set Your Goal – Short vs. Long Term

What is it that you’re aiming for?  Financial freedom where you have 25x-33x your expected annual expenditures in investable assets?  A comfortable retirement, which would perhaps entail $40,000/ year in today’s dollars?  To be free of consumer debt?

Whatever it is, we can detail it using the VMOST method:

Image result for VMOST

The vision and mission may be to retire comfortably, which for this particular family would be a nest egg for $500,000 plus social security benefits.

The objectives will all help you reach the mission: have $400,000 in 401k by Age 62, have $100,000 in Roth IRA by Age 62, 800+ FICO Credit Score to ensure low interest loans, maintain 12 months of expenses in a High Yield Savings Account, etc.

Now that we’ve determined our objectives to shoot for, what strategies can we deploy to help achieve these objectives?  Perhaps we can pick up minimalistic attitudes.  Perhaps we can throw as much as we can into investments.  Perhaps that includes investing in higher education to bolster future earning power.  This one should carefully be analyzed:  What degree/certifications should I pursue?  What is the time frame for the program?  What are my opportunity costs for all the time, energy, and money expended in exchange for the knowledge and degree?  What is the cost/expected ROI?

Breaking the higher level view down into day to day activities that fit into the general strategy is next.  This is where we have the most influence.  Forgoing take out for a bagged lunch can save $2,000 a year.  Drinking free coffee at work instead of drinking a $4 Starbucks coffee could save another $1,000.  The little day to day tactical activities add up and accrue into impactful figures over the course of a month, year, and lifetime.  Not carrying a credit card balance every month will increase your credit score.

Notice how these activities, however seemingly insignificant, tie into the bigger picture of accruing $500,000 by Age 62.  Even though Age 62 seems an eternity away, all of these smaller goals will nudge you closer and closer, year after year.  Investing in higher education could potentially increase earning power, thus potentially increase savings.  Increasing your credit score will help lower interests rates for a mortgage, thus potentially saving thousands of dollars in interest later on.  The key is to mine out and reduce “wants” in the budget; we can do so by wanting less in the first place.


Your Savings Rate

Ah, the almighty savings rate.  How long until you retire is not dictated by how much you make, but what you save.  If you spend less, you save more; if you spend less, you need less to live.  Most people jump the gun and dive right into asking the more exciting question: What should I invest in?  

Alas, budgeting is boring.  Track your expenses, and separate transactions into necessities and wants.  No, cable is not a necessity.  No, that new iPhone is not a necessity.  I’m not saying to deprive yourself, but let’s take an honest look and examine if these purchases truly bring value into your life.  Could you get by with streaming services like Netflix?  Could a gently used and older model phone make more sense?  Identify and eliminate the wants that do not bring value to your life.  At the very least, reduce them.


Now that we’ve categorized and reduced our frivolous expenditures, we can use Supply Chen Management’s Nest Egg Calculator to determine how much will it take each year to get to the aforementioned goal.  How much will be required each year to reach the end goal of $500,000?  Starting at even $25,000 in debt at age 25, allocating $6,000 each year will yield the nest egg desired at age 62.  The power of compound interest is quite astounding.


Choosing Your Asset Allocation

Now that we’ve detailed out our expected cash flow for the year, we have our savings to invest.  What asset class should I park the savings in?  Should I hold more stocks? Bonds? Cash?  What is the percentage of each to hold?  Generally, the younger you are, the riskier you can afford to be, as you are able to withstand a downturn in the economy.  As retirement draws nearer, the percentage of stock holdings goes down.  Cash and bonds can provide peace of mind in the short term, but inflation will each up purchasing power quickly.  Rather than keeping your emergency fund in the form of cash in a checking account earning .01% interest, why not park it in a High Yield Savings Account (HYSA) and earn 1%+?  A $10,000 balance in a HYSA will earn over $100 a year, compared to a dollar or less in a checking account!

Because of survivorship bias, it’s easy to get caught up in the latest and greatest company to come out.  However, I recommend the majority of retirement funds invested in Index Funds, specifically total market indexes or S&P 500 indexes.  Betting on the market is not as exciting as the next “Tesla”, but it’s the way to slowly accrue wealth.  Even the legendary Warren Buffet is an advocate of index funds!


Managing Your Own Behavior

Now that we’ve detailed our goals, created a budget, figured out our cash flow, and allocated our assets into different classes that make sense, acting on logic and forgoing emotions will be the next step.  All the aforementioned will be for naught if one panics at the slightest downturn in the economy.  Time in the market will always beat timing the market.  If you’re young and a severe depression happens, stay the course.  If possible, even throw more into the market!  If you’re older, your asset allocation should be comprised of more bonds and cash, thus throw more into the market.  A black swan event is bound to happen; do not panic and let emotions dictate your actions.


Being Tax Efficient

We’re so close to the top!  Now that we have the foundation set in place, we can tweak our cash flow to lessen our tax burden to align with our long term goals.  Minimizing taxes is not against the law; evading taxes, however, is illegal.  Take advantage of tax advantaged accounts such as Individual Retirement Accounts (IRAs), 401k plans, Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), etc.  Do some research  and find what makes sense for you.  Do I expect to be in a lower tax bracket in retirement?  If so, perhaps it’s better to defer taxes until retirement then.  Taking a look at Root of Good’s breakdown, where he only pays $150 tax on a six figure income is quite inspirational!  That’s a .1% tax rate!


Investment Selection

Finally we’ve made it!  Although investment selection is at the top, does not mean it should be overlooked.  The fact of the matter is, it’s much more important to develop a firm foundation, with good habits and a strong grasp of your vision and overarching objectives, before tinkering with the minutia that is investment selection.  The truth of the matter is, ratings for funds are fickle.  They are high, then they are low.  This is why I recommend index funds or better yet, a mix of total stock market, total international stock market, total bond market, and total international bond market funds.  If you don’t have the time to research heavily, or don’t have the interest, throw your money in a low cost target retirement date fund.  Vanguard, Schwab, or Fidelity are all good choices.


We can see now how starting at the bottom and developing a strong foundation will truly benefit the top levels of the pyramid.  This is true with virtually anything in life.  We cannot learn algebra until we’ve mastered the concepts of addition and subtraction; we cannot learn to run before we learn to crawl.  With a set mission in mind, and measurable objectives to help you reach the mission, we can develop a winning strategy comprised of a plethora of daily tactics that will bring you towards your objective.




DISCLAIMER: I am not a CFP, nor licensed to give financial advice.  I merely enjoy the topic of personal finance.