Financial Planning

This should be done in tandem with budgeting.

Basic Strategy[2]

save a lot,

select an asset allocation containing both stock and bond asset classes,

buy low cost, widely diversified funds,

allocate funds tax-efficiently,

and stick closely to a plan.

Prepare to invest
- Live below your means (spend less than you earn and use a budget).
- Develop a workable plan (use a budget, avoid high-interest debt, put money into savings, and make a plan for yourself).
- Never bear too much or too little risk (if you are too risky, you could lose it all; not risky enough and you are effectively losing money).
- Invest early and often (compound interest is exponential!).
Create a portfolio (see below section on investments)
- Diversify (Maximizing one space of investment is just gambling, and the house always wins).
- Invest with simplicity (Bogle recommends a simple portfolio of only two funds for many investors: Vanguard Total Stock Market Index Fund and Total Bond Market Index Fund).
- Use index funds where possible (The best and lowest cost way to buy the whole stock market is with index funds, either through traditional mutual funds or exchange-traded funds/ETFs).
- Minimize costs (After 30 years, a fund with a 1.5% expense ratio will provide you with several hundred thousand dollars less for retirement than a 0.15% index fund with the same growth).
- Minimize taxes (Learn more on this at [2]).
Maintain discipline
- Never try to time the market (Mutual fund investors actually perform far worse than the mutual funds they invest in because they buy after a fund has done well and then sell when it has done poorly).
- Stay the course ()

Savings and investments[1]

This is from the Bogleheads school of thought[2]. In order of importance, do the following. The number preceding each item is the approximate after tax return.

Start an emergency fund. A common rule of thumb is to start with one month of expenses, and as you satisfy other financial priorities, grow it over time to around 3-12 months of expenses.
50-100%: Get an employer match. If you work somewhere that has a matching 401k or something, maximize it! Not getting a match is like letting your employer keep part of your salary.
10-30%: Pay off high-interest debt (e.g. credit cards). Paying off a high-interest debt is a guaranteed high return on your investment, the next best thing to free money. However, some debt is actually a worse return on investment to pay off than just investing, so check out the rates against an average annual return accounting for inflation.
8-10%: Invest in a health savings account (HSA). HSAs offer tax-free contributions, growth, and withdrawals when used for qualified medical expenses. You can view HSA contributions as being matched by the IRS.
8%: Invest in retirement accounts (401k, IRA, etc.). Retirement accounts offer either an immediate tax deduction and tax-deferred growth (traditional) or life-long tax-free growth (Roth), plus asset protection and estate planning benefits. These accounts have annual contribution limits which are lost if not used.
6-9%: Pay off medium-interest debt. Typically these include student loans, car loans, personal loans, and Home Equity Lines of Credit (HELOCs).
8%: Invest into a 529 college savings plan (if you have/plan on kids).
5-7%: Invest into taxable investments. Keep in mind that your asset allocation (ratio of stocks to bonds), which sets your portfolio's level of acceptable risk, is the single most influential decision you can make on your portfolio's performance.
2-5%: Pay off low-interest debt. Typically these include mortgages and other secured debt. Paying off low-interest debt on good terms should be a lower priority than most other funding options, but a higher priority than investing in low-return investments with no tax advantages.

References

Last modified: 202507271725