Adam Lowe

Operator, Technologist, Advisor

A Field Guide To Personal Finance

A Field Guide To Personal Finance

Updated March 04, 2023

The disciplined application of solid, personal financial knowledge is one of the most powerful tools we have available to us. This is true whether you are of modest means and successfully avoiding predatory payday loan scams or deploying your wealth building the next generation fortune 50 company.

Disclaimer: I am not a financial advisor. I have compiled the following resources in the course of managing our family’s personal finances. I would encourage you to use this information to educate yourself. I do not receive any compensation from any of the organizations that I reference below.

Beyond using this information as an educational resource, I would encourage you to consult a financial advisor, a tax professional, an insurance broker, an estate planning attorney and an asset protection attorney as they apply to your personal situation. As you vet prospective advisors I agree with Dave Ramsey’s philosophy that you want to find someone who “has the heart of a teacher.”

Questions for a financial advisor:

They are going to know all of your financial details. Just like you would want to know a coach’s track record before playing for them or would want your fitness trainer to be fit, you should want the same of your financial advisor. If you can find one that is a CFP (Certified Financial Planner) they have a higher fiduciary standard of responsibility than a broker-dealer.

I think that Dave Ramsey provides extremely solid advice on getting out of debt, budgeting, building wealth and the motivation to do so. However, I do not share his affinity for actively managed mutual funds. Beyond looking at returns, one needs to be aware of the dramatic negative impact the fees of an actively managed fund have on your gains.

I will plug them again later but I prefer to invest in the market through Vanguard Admiral Funds. They are straightforward, perform well and have very low fees and tax liability. This is especially true in a Roth IRA or Roth 401k. If you are unfamiliar with the differences, read Warren Buffett’s thoughts on the matter.

That being said, neither option is right or wrong. Life is a math problem and the different fund strategies simply introduce different variables. Do your research and pick the one you believe is best for you. Brian Preston, who is both a CFP & CFA, and his team at moneyguy.com provide a great video library of information you can dig into to inform your strategy choices with investing.

Budgets

One of the advantages of having and keeping an annual budget is that it will allow you to understand what your household’s personal operating capital needs are. In business operating capital, often referred to as working capital is defined by the following equation:

Working Capital = Current Assets - Current Liabilities

On its face value, this definition of working capital is a reactive metric. How much money do I have that is not spoken for right now? I like to make a nuanced distinction between working capital and operating capital. I think of operating capital as the more proactive version of this number based on a forecast of revenue (income) and future liabilities, i.e. a budget.

A monthly budget created at the beginning of the month is essential for financial success. It allows you to understand what your working capital for the month is that can be used for saving, investing or enjoyment. When you extend that out to an annual budget you are able to account for irregular expenses like insurance premiums, seasonal variations in utility bills, vacations etc. This comprehensive picture of your annual finances enables you to proactively and strategically calculate your operating capital for the best returns.

If you aren’t already doing this imagine how much less stressful your life would be if you were paying this month’s bills with last month’s income. Imagine further if you were paying this month’s bills with money you already have AND you have a 3 to 6 month cushion of emergency savings.

If the thought of budgets makes you cringe and you want a low overhead tool Every Dollar does a great job. If you are a finance nerd like me and want a more robust system with detailed reports then you might prefer You Need A Budget. We have used both at different times.

In our house we maintain an annual budget forecast, adjust monthly and have weekly meetings to review and reconcile.

Emergency Savings

According to the annual Bankrate.com emergency savings report only 43% of Americans would be able to cover an unexpected $1,000 expense from savings. This is a disheartening statistic. The amount you need in your emergency fund will vary depending on your monthly expenses, financial means and level of risk you are comfortable or uncomfortable with. Both Dave Ramsey and Brian Preston advocate for 3-6 months of expenses. They both provide fairly similar steps and guidelines on how to get there. This may simply require a quick balance transfer or weeks, months and even years of saving towards smaller goals to get there.

Depending on your means and the volatility of your income you may choose a different financial vehicle for your emergency fund. If you are not someone that considers themselves financially savvy, the simplest answer is a savings account with your primary bank.

Be aware that most traditional, big banks provide very low rates of interest on checking and savings accounts (some as low as 0.01% APY). There are banks that specialize in this space and provide relatively high interest rates (some over 4% APY in the current market) and low to no fees. These are largely online banks that are able to do so as they do not have the infrastructure costs of brick and mortar operators. Both Bankrate and Nerdwallet maintain a rating and review list of the banks offering the best rates. As always make sure any account you choose is FDIC insured and be aware of any fees and minimum balance requirements. Also, be aware that these accounts tend to have their own fee structures and restrictions tailored to their specific niche in the market. Be sure to understand them completely and that they will fit your unique requirements.

Outside of banks, credit unions provide another option for your banking needs that can offer many advantages if you qualify for membership. Since credit unions are owned by their members they have greater motivation to keep fees low and return money to their account holders.

An example of the difference in interest rates and the impact they have on your money:

$30,000 x 0.01% APY = $3.50 annually

$30,000 x 2.55% APY = $892.50 annually

These are not investment rates of return that you are going to build wealth and get rich from. Your emergency fund should be secure and accessible. Its primary purpose is to insure you against emergencies and provide peace of mind. You aren’t going to brag about the meteoric annual return on your emergency fund but it does represent a significant amount of additional cash over your lifetime.

Retirement Savings

A good a rule of thumb is that the sum of these contributions should equal at least 15% of your annual income using the vehicles below as well as any tangible, appreciating or revenue generating assets you might have expertise and opportunity to leverage (i.e. rentals, land, precious metals). That number may also need to change depending on you situation and how close you are to retirement. I would encourage you to evaluate your situation with a retirement tool like this one by Vanguard.

It is important to review the income caps for each of these vehicles to make sure they are available to you. You should also work with a tax professional to ensure that you don’t get bitten by things like being classified as a “highly compensated employee” or “HCE”. You might be surprised how little you have to make in order to meet this definition. This article from the IRS is a good survey level view of the definitions and regulations for retirement accounts.

Please read the detailed breakdown below, do your research and consult professional counsel but at a high level I prioritize retirement account vehicles in the following order, subject to personal availability.

  1. Roth 401k (With A Match)
  2. 401k (With A Match)
  3. Roth IRA
  4. Traditional IRA / SEP
  5. 401k (Without A Match)

The order of priority that makes sense for you is subjective to your personal financial situation. I encourage you to do your homework, build an understanding of the vocabulary and work with a competent financial advisor. You don’t need to have a comprehensive knowledge of every investment vehicle in the world but you do need to completely understand everything you are invested in.

401k

If your employer offers a match this is a great resource to take advantage of. Sometimes your company will offer a traditional 401k as well as a Roth 401k option. If it is possible to get the match with the Roth I prefer the tax free growth the Roth provides in most cases.

Note: At times there are restrictions on contributions if you are classified as “highly compensated employee”.

When you leave an employer you should rollover your 401k with them into an appropriate personal retirement account. You should make sure this is a “direct transfer rollover” or you will lose a large portion of your investment to taxes. This article from Nerdwallet gives a solid overview of the process and vehicles available.

Roth IRA

A Roth IRA is a tax advantaged retirement account. After taking advantage of any employer match you might get through your company 401k I would take advantage of the Roth IRA up to the annual contribution limit if eligible. If you don’t get an employer match I would take advantage of the Roth IRA first. The one caveat here is if you are not eligible for the Roth IRA and your employer offers a Roth 401k. In that case I take advantage of the Roth 401k.

Traditional IRA

When the Roth IRA is not an option then I would contribute to a Traditional IRA up to the annual contribution limit.

I no longer trade individual stocks. That is your prerogative. I did actively trade individual stocks for many years and actively reviewed my portfolio day in and day out. I came to the conclusion that for me the effort to risk / reward ratio was better investing in index funds and personal business ventures.

Other Retirement Accounts

There are a number of other retirement account vehicles that I am not familiar with and if you are eligible for them you might want to evaluate with your financial advisor. I will say I would not be comfortable tying my retirement to something like a company pension where my livelihood and fortune are tied to a company or other organization surviving and / or not having my retirement fall victim to legislative change.

Additional Investing

If you need to save more than the contribution limits in order to attain your desired retirement or simply desire to in order to build wealth, I am a fan of Vanguard Admiral Funds and additionally believe there is a strong case for rental properties if handled correctly. That being said I do not have personal experience in the rental property space or at large scale with other tangible assets other than investing in privately held companies.

Investing in private individual companies requires a high level of knowledge and is extremely risky. Only someone with immense knowledge and experience should venture into this arena.

Key Concepts

Key concepts to understand as you weigh your investing options are:

I am a big fan of Vanguard and their Admiral Funds specifically as they have a strong long term performance record and low fund fee ratios. Take a look at the expense comparison for their Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) fund.

Education Savings

One of the best ways to set your children up for success, if possible is to set aside money to fund their higher education. Of note, I don’t say “college savings” because in some cases these can apply to a qualified trade school. I have been fortunate to witness a number of friends build extremely successful, high paying careers in blue collar trades.

In 2021 the average student balance was over $38,000 and this average paints a rosier picture than the harsh reality when you factor in other debts most of them are also carrying along with the fact that many of their parents also took out parent PLUS loans.

I would encourage you to watch Borrowed Future. It paints a vivid picture of both the burden that student loan debt can place on your life and productive paths you can take to avoid it.

Coverdell ESA

“The Coverdell is a tax-advantaged vehicle that allows you to save for higher education expenses. It allows parents, grandparents and other individuals to contribute up to $2,000 per year total on behalf of an eligible student under the age of 18. Those funds can be withdrawn tax-free when used for qualified education expenses. All funds in an ESA must be distributed within 30 days of the beneficiary’s 30th birthday.”

Investopedia has a detailed run down on ESA’s that along with your financial advisor can help you determine if you are eligible to take advantage and set one up.

529

After the Coverdell ESA, another solid option is the 529 plan. That being said there are good 529’s and bad 529’s depending on what investments they allow you to utilize within the plan and who administers it. The one offered by your bank is likely a bad one. I am a fan of the Vanguard 529 and is what we used for our children.

Prepaid tuition

I am not a fan of prepaid tuition. The proposed advantage here is that you are negating inflation rather than counting on gains from compound interest. I would rather bet on compound interest than hope for inflation and additionally not be subject to the constraints of a state’s prepaid tuition program. Additionally, in almost all cases it lacks the flexibility of application and transfer of beneficiary that the other options will afford you.

Healthcare

Healthcare continues to be an ever increasing expense. Group insurance policies can help mitigate these costs but even a great group health insurance plan isn’t what it used to be in value or cost. Evaluate the health insurance options available to you and consider the impact of other savings vehicles available to you in addition to your core health insurance coverage. If you are in debt and, or have consistently high medical expenses these plans may not make sense for you. I would encourage you to evaluate your options with your broker and financial advisory to decide what makes sense for you.

HSA Plans

When it makes sense and you meet the requirements, I am a big fan of HSA Plans as they are triple tax advantaged.

  1. Your contributions are tax free.
  2. The growth is tax free.
  3. The withdraws are tax free.

There are a number of caveats to being able to take advantage of an HSA, including the fact that you must be in a high deductible plan and there are annual contribution limits. There is pending legislation that could loosen the requirements on the HSA that is worth tracking if you are not currently eligible.

With many of our largest medical expenses occurring later in life, an HSA can be a powerful component of your retirement savings or just a powerful savings account to hedge against unexpected health events overall. As with any investment, be sure to understand the investment vehicles and fees associated with your chosen HSA provider to ensure they are fair and not eroding your gains.

Legacy Planning

Wills, Trusts and Asset Protection

Have a will and update it annually. Especially if you have dependents or significant assets. If you don’t have a will and you die it will cause tremendous pain for your loved ones. Additionally, the government will take as much as you let it in the absence of a well planned strategy. I recommend meeting with an attorney that specializes in wills, trusts and asset protection. Your accountant or financial planner is not the person to drive this conversation, though their input is valuable. An online service is no substitute for an attorney.

Life Insurance

Whole, permanent, universal, or any life insurance with a savings component / investment component is generally terrible and unreasonably expensive. I prefer to have a term life insurance policy that covers 10-12 times your annual income if you have people that depend on your income other than yourself. I recommend buying this through an “independent broker” like Zander and not from a “captive agent”. An independent broker is incentivized to shop multiple insurance companies on your behalf. A captive agent works for an insurance company and is only able to sell their products.

Do not depend on the policy from your employer. It can be a bonus cushion if it is free to you or heavily subsidized. However, if you leave the company, you lose it. You want a policy that protects your dependents even if you change jobs and you don’t want to gamble that each employer will cover you. Plus employer policies tend to be lower than the total insurance you would need and the buy up rates on employer sponsored policies aren’t generally great.

The exception to this is if you have no dependents or are self-insured. If you have no dependents then most people just need around $10,000 in coverage to pay for funeral expenses so your passing is not a burden to others. You are self-insured if you are so wealthy that your estate (the assets you leave behind) will be more than enough to bury you and if applicable to support any dependents you may have. Dave Ramsey’s team provides a great set of detailed guidelines in their post on Term Life vs Whole Life Insurance.

Even if you do meet the criteria to be self-insured, in many cases a term life insurance policy can still be worth considering and doing a cost-benefit analysis on for the money it will provide your heirs when you do pass.

Final Thoughts

Many people will offer financial advice and hot tips in the course of life. The vast majority of these people are living beyond their means, paycheck to paycheck. This sadly holds true even in households making over well over 200k a year. You cannot save for a financially healthy retirement, fund your children’s education and build wealth if you are living with the stress of debt and struggling to make ends meet. If you have debt and / or just want further detailed information on being successful with money I would encourage you to read the Total Money Makeover.

Beyond being debt free and having financial mobility, the other area of your life where the largest portion of your money is lost is taxes. I would encourage you to read Tax-Free Wealth by Tom Wheelwright and to work with a solid CPA.

For many people personal finance is boring at best and extremely intimidating at worst. You need a dream to rally towards. This dream can change over time but without this destination and a rudder to steer you towards it, you risk floating aimlessly off course.

Once you have decided to be intentional with money, one of the biggest challenges to success is a lack of alignment as a family. I am a big fan of 3 Big Questions For The Frantic Family and the tools it provides to work together towards that dream.

Your home is likely one of the biggest monthly expenses in your life next to taxes. Paying it off is also a huge opportunity to free up monthly cash flow towards building wealth, career mobility, enjoying life and being generous. Think about what you would do differently if that money going to rent or a mortgage every month was free to save, invest, spend or give.

For a quick look at what paying off your mortgage early would like Dave Ramsey has a calculator. If you want a detailed look at how it would impact your mortgage schedule and want to track progress make a copy of this spreadsheet, Mortgage Payoff Schedule.

Brian Preston, a.k.a. “The Money Guy” is a person I respect from a content perspective and he disagrees on the subject of paying off your home early in all circumstances. I think his perspective is worth understanding. Life is a math problem and he sets out some compelling numbers, especially for young people. My word of caution here is that many people use the excuse of the long term, compound interest rate of return on money being more valuable than the interest saved by paying off your home early but then they don’t invest the money. They spend it. Do your research and pick your path. To be clear this money should be money outside of your normal mortgage payment and retirement investment. This is additional money you are working to carve out of your budget to work towards financial mobility. Just don’t pick the path of not investing early AND not paying off your mortgage early.

We live in a world that is constantly glorifying irresponsibility, thinly veiled in a false veneer of adventurous risk. You are constantly incentivized to do the opposite of a great Warren Buffet quote in this Berkshire Hathaway Annual Shareholder Letter , “Rational people don’t risk what they have and need for what they don’t have and don’t need.” Ignore the stories that venerate those mortgaging their homes, cashing out their 401k’s and being in debt up to their eyeballs but somehow barely surviving to attain success in their business or financial lives. For every person that survives that ill-fated gauntlet there are exponentially more lives ruined. Even if you do make it through, it is no way to live and takes a brutal toll. Building successful business ventures is challenging enough without added personal stress that will cloud your judgement.

Take risks. Test business and investment theses. But do so thoughtfully from a place of financial, physical and emotional strength. Even the most well planned, well timed, well funded and well executed plans will exhaust you and greatly test your mettle.

My family’s household has no debt. We own our home and do not have a mortgage. We are weird people, for the Ramsey fans. We have extremely healthy investment & retirement assets as well as education funds for our children. We did not accomplish any of this through inheritance or lottery winnings. It was done by following a plan over many years. None of us would take golf tips from a terrible golfer and while it is quickly apparent whether or not someone is a scratch golfer, it is not always apparent whether someone’s lifestyle is real substance or a financial fabrication.