In today’s post, I want to introduce to you a financial framework. A framework is an essential supporting structure or concept.
It’s not a plan. It’s not a strategy or even a tactic, but it’s just as equally as important to them.
This framework provides the overarching or umbrella for all financial activities, whereas a plan is more specific in nature and has actionable steps.
So, this financial framework that I’m going to share with you today provides for the major building blocks of a solid financial end state, but it doesn’t give you the underpinning details of each aspect.
Within each step, there’s going to be a lot of nuances associated with that and interdependencies upon the other building blocks.
The Framework’s Structure
Essentially this framework has a floor, a ceiling, two rails, and several steps inside of it.
If you want to get a copy of this financial framework, you can click the resources tab, and you will find it on that page called financial framework dot pdf. And it might help you visualize this as we are going through it.
The Floor
So, let’s first talk about the floor. The floor starts with money management or cashflow planning.
This is critical for no matter what stage of life you’re in. For wealth builders, it’s extremely important as well as it’s important for retirees.
For wealth builders, your income is your number one wealth building asset you have. The average American, the average household in America makes about 70, 000 a year. household. Not everybody. Some make more, some make less. But that means on a 40-year working career, about 2. 8 million are going to pass through your hands.
They’re going to come in from your income and they’re going to go out in your expenses. And if everything comes in and everything goes out, then there’s no money to do anything with in terms of wealth building. So, money management and cashflow planning is the underpinning really to all of this.
It’s equally important for retirees. Retirees generally are living off a fixed income or a certain amount of income each month, intentionally. Or due to circumstances and you must run the risk of not running out of money on the back end if you’re pulling money from your retirement assets.
So, this is still equally important. Having a cashflow plan, having a budget is the primary tool to manage your money. So many people hate this step, so many people undervalue this step, so many people begrudge this step, but the reality is you must manage your money or someone else will.
The Left Rail
The first rail is that of estate planning. So, if you notice on the diagram, if you downloaded it, there are essentially two rails. The first one on the left is estate planning. So, everyone needs an estate plan.
Doesn’t matter whether you’re poor or wealthy or building wealth or retired, no matter where you’re at, everybody needs at least a basic estate plan.
This plans for either death or incapacitation, meaning you’re in a vegetable state brain dead, you’re in a coma, things like that. At a minimum, there are three documents that everybody should have a will, a power of attorney, health directive or what’s called also referred to as a living will.
Those documents outline the responsibilities as well as the people who are engaged in helping you make decisions for you, executing things on your behalf and in terms of your will, who gets what.
Now, obviously, as you build more wealth, as you get up the various other steps associated with this framework, there’s more complexity that could be involved from a trust perspective from various kinds of different decisions, people, roles, et cetera.
But at a, even at a base level, everybody needs. and estate plan.
The Right Rail
The right rail, right guardrail if you will, is that of insurance.
So, insurance protects the financial impacts of bad events occurring. The reality is we live in a world where bad things happen and when there’s an event and then a lot of times there’s a financial impact because of that event.
There’s a house fire. That’s an event. There’s a financial impact to that. There’s a car accident. That’s an event. There could be a financial impact to that. There’s a death or a disability. That’s an event. There could be a financial impact associated with that. Well, what insurance does is allows you to transfer the financial risk from you. to a financial firm, an insurance firm, which then potentially protects your wealth.
It transfers that financial impact of those events.
Now, the thing is, we don’t know if those events are going to occur or not, but there’s a risk of them and we want to minimize the impact to our wealth. In case of those events occurring.
There are generally six to seven different types of insurance health insurance, life insurance, auto homeowners or renters, if you’re renting disability, long term care and potentially personal liability umbrella protection.
The idea with insurance is you want to have the right amount, but not too much. It’s kind of like that Goldilocks thing, warm enough, but not too hot. You want just the right amount.
So that takes care of our two rails.
So, everybody needs an estate plan, and everybody needs some level of insurance.
Path To Financial Success
Then after that, there are. seven steps or what I call the path to financial success outlined of what to do first, what to do second. So, assuming you’re managing your money, you have a good cashflow plan, you’re doing a monthly budget.
This is then the steps of what to do with the extra income. that you have that’s not going out in expenses.
So, number one, what do we do? We get a minimal emergency fund.
That is a thousand dollars placed in a savings account saved for emergencies. So, emergencies are unknown, unexpected events that could occur.
Air conditioning goes out, medical emergency, copay for an ER visit. Lost wages for some reason.
Now 1, 000 is not going to be enough to cover you from everything but what it does do is it puts a little bit of buffer for you between you and life if you’re like most people 70 percent Americans who are living paycheck to paycheck.
So that is the first step is to get a thousand dollars in an emergency savings account.
The next then goal would be to eliminate all your nonmortgage debt. So, think credit cards, car loans, student loans, boat loans, RV loans, signature loans collateral loans. Any type of loans that are non-mortgage related, ideally, we want to eliminate them.
Why do we want to do that?
Because again, your wealth, your number one wealth building asset is your income. And if all your income comes in and it goes out in past liability, debt payments, there’s very little money to invest in a couple of stages. I’m going to tell you to put 15 percent of your income in the retirement.
And what a lot of people say is. Mike, I don’t have 15 percent to put into that. Well, that’s because it’s all going out in debt payments.
You’d be surprised if you add up all your debt payments and compare that to your income, more than likely for most of you, it’s going to be more than 15 percent of your income.
So, what we want to do is we want to focus on eliminating that, those nonmortgage debts to then free up your income. So that we can then. Build your wealth thereafter.
Okay, step three on the path to financial success is to have a fully Funded emergency fund.
So, what we’re going to do is we’re going to go back to that thousand-dollar savings account and we’re going to build it up with the money we’ve just freed up generally from having no more debts to an account balance of three to six months of household expenses.
So, if you’re doing a monthly budget based upon that money management, cashflow planning, you’ll have a good idea of what your monthly expenses are, especially now that we don’t have any debt times that by three or six and we have a range of amount of money.
So, people say, well, should it be three or should it be six? Well, it can be anywhere in between. If you like three months, that’s fine. Generally, if you’re in a family where you have two incomes, stable jobs not self-employed, W2 employees, three months is sufficient. If you’re a little more risk averse and you want more, nothing wrong with that.
You can build it up to six. If you’re in a single income household, self-employed, you might want to cheat more towards the six-month mark, but it’s really your discretionary.
The key thing is you want it liquid. You want it available. Ideally, you want either check writing or debit privileges associated with that account.
Because again, this is for emergencies. Need a new roof? Need a new car? Disabled out of work for months on end. That’s what this emergency fund is for.
Then step four is retirement planning. So, step four is retirement planning. This is where you’re ideally putting 15 percent of your gross income into retirement plans.
It doesn’t count the company match. It doesn’t really count even the pensions that you might have that your employer has on your behalf.
It’s the idea of you putting 15 percent of your money into retirement for your future needs. Retirement is the state where you are getting income from your Well, when your wealth building, you must build up that nest egg so it’s there to provide you an income in the future.
No money going in, no nest egg, no money coming out. It’s a relatively simple concept yet hard to execute.
So, to help you execute it, ideally if you put 15 percent of your income, every paycheck, every month, every year away in retirement, forget about it. It’ll be there for you when you are ready.
The next step in the path of financial success, if applicable, is that of college planning.
So, college planning for yourself, for your spouse, advanced degrees, or children. Obviously, that is a very broad thing. You might not have children. If that’s the case, you just skip it and go on to the next step.
Here, if you’re saving for children, you can use 529s, Coverdale educational savings accounts, prepaid tuition, or options to you.
There’s various tax advantage, education savings plans out there where you want to begin tributing to it.
The college obviously varies depending on whether you’re going in state or out of state, whether you’re going private or public. So, the amount that you need, there’s no Broad-based threshold of what to contribute to it.
It’s very individualized number of kids, the willing amount you’re going to contribute expected scholarships. It’s very nuanced in nature. So, but the idea is you want to have a plan for it, and you want to ideally being, consistently contributing to it, but not before you contribute to your own retirement.
Why is that?
College planning comes after retirement planning contributions because even though on a timeline, your kids generally might will go to college before you retire. The thing is your kids might not go to college. You are going to retire.
You’re going to not have an income either because you’re tired and you quit, you get fired, you’re disabled You can’t do it anymore or something happens to you, the marketplace shifts, generally You’re going to need an income your entire life There’s ways for the kid to pay for college without your help. So that’s why it comes after retirement planning.
The next step on the path to financial success is that of paying off your mortgage.
What a day that will be when you are 100 percent debt free.
So, at this point we have three to six months of savings in the bank. We’re
putting 15 percent of our income to retirement. We have a plan for kids’ college, and we have paid off the mortgage. Think about that wealth building tool you have now.
When you get paid, all you must pay for is food, gas, utilities, a little bit of insurance and all the rest of that is now yours to spend, to give and to build wealth.
And that’s what step seven is. Step seven is to build Wealth and be generous, give it away, help others prepare for your future, be intentional about what you are doing with your life based upon making that compelling why and that vision a reality.
The Ceiling
Just like every other structure, there is, there’s a ceiling on top. So, we have a floor, we have our two supporting rails, we have seven steps in between. And on the top ceiling, we have tax planning or tax management.
As good American citizens and patriots, we want to pay every Penny to Uncle Sam that we legitimately owe, but we don’t want to overpay him. We don’t want to tip him for good service. We don’t want to contribute more to the treasury coffers than we legally must. And so, you want to take advantage of every legal tax provision and regulation you can to minimize your tax burden.
As a rule, in retirement, taxes are your number one largest expense. Because for most retirees, especially if they’ve done this stuff, your mortgage is retired and eliminated. You no longer have it. At age 65, you transition onto Medicare for most of you. So, you don’t have the large health insurance premiums anymore. Therefore, taxes become your number one expense, especially. as you’re getting into that required minimum distribution age.
But there’s a key. You can do a lot of things, especially in retirement to minimize that future tax burden. There’s nothing noble about paying more tax. You don’t get a nice badge for saying, I overpaid my taxes this year, that doesn’t happen.
So, there you go. This is a financial framework that’s available to you.
We are going to unpack all these steps and nuances in various episodes going forward, but I wanted to present this overarching framework to you for reference.
Again, you can get a copy of it by clicking the resources tab.
Weekly MicroAction
So here is your micro action for the week. What I want you to do is to identify where on this framework you are and what your next step is.
You might be just starting out and you might need to work on money management.
You might have to shore up one of your two rails estate planning or insurance. You might have all that taken care of, and you might be on those steps. What step are you on and what is your next step? What I want you to do this week. is identify where you are.
Thanks again, as always for listening. If you have any questions, comments, please feel free to reach out.
You can put them down below or send me an email at Mike at the true health show. I’ll be glad to respond to the best of my ability.
Thanks as always for listening or watching. I hope this helps you on your financial journey. And until next time, I hope you have a great day.
