Become a Financial Minimalist

What is Financial Minimalism?

Financial minimalism is simplifying your finances so you can live your life the way you see fit.

Financial Minimalism

Financial minimalism takes principles from minimalism and applies them to personal finance. One principle of financial minimalism emphasizes that less is more. This may look like reducing any unnecessary spending, devaluing the perceived value of your possessions, or emphasizing quality over quantity. It is up to the individual what ”less is more” means in their own lives. A best practice that supports the principle of ”less is more” is to live within your means. Living within your means is simply spending less than you make. This practice alone will be sufficient for most people, and should act as a high-level guide for your own personal finances.

The second component of financial minimalism is to establish positive habits in your day-to-day life. These habits reinforce the simplicity you establish with the first component of financial minimalism. While it would be true to say that habits such as avoiding frivolous spending would qualify as positive financial habits, the intent of this component is at a higher level. A more appropriate example would be to stick with the financial goals you’ve set for yourself.

This is where the final aspect of financial minimalism comes into play, patience. Focus on one thing at a time, and once you’ve achieved that, move onto the next. This process will take time, a lot of time, but at the end, you will have successfully invested your time and money into what is most important to you.

In reality, financial minimalism can only deliver in proportion to the effort you put into it. If you choose to live below your means, that extra money can go to any one of the above promises. Unless you are extremely fortunate or practicing a form of extreme minimalism, you will most likely only be able to work towards one of those goals at a time.

Time Is Money

Society wants us to be dissatisfied with what we own so we can be sold something “better,” or some experience that is superior to the experiences we would otherwise have. This goes beyond separating us from our money, but is a capitalization of our time. To exist within our society, we trade away our time for money. When we aren’t grateful for what we have, we trade away our valuable time in pursuit of something that makes us happy.

The secret of gratitude is that happiness comes with being thankful for what we have and not what we don’t. The fact of the matter is what we don’t have is an infinite supply of time. When we aren’t grateful for the things we have, we aren’t grateful for the time we have, time we would otherwise spend with the people or doing the things that make us happy. This is where minimalism’s strength lies; by being grateful for our time, when and how we choose to spend our time directly brings us joy.

In reality, time is not literally money. Time is the only resource that is inherently ours. However, we live in a society that demands we trade our time away in order to participate in it. As such, time is not, strictly speaking, money, but rather our inherent value. We trade our time away for money – we convert our inherent value for pieces of paper and bits of metal – which is how we can continue to exist in society.

It stands to reason that if our own time is ours to manage, then we hold all the cards when it comes to negotiating with how we spend it. Unfortunately, there are many ways we are coerced out of our time. The threat of starvation and homelessness are not the least of these coercions. Promises are made to us as well, if only we could trade enough of our time away to purchase some product or service, then we would be happy. However, we are so busy trading our time away, chasing a promise of happiness, we never pause to consider what happiness looks like for us in the first place.

Quantitative costs aside, there are qualitative costs as well. The cost of trading your time away for money is more than just the minutes and hours you’re giving up. There’s a mental cost, as well. You are sacrificing your happiness in the form of anxiety and stress during the time you’re working, the commute to and from your job, and perhaps for hours after you return from work as you decompress. And so, you are trading more than just two hours of your time away, but also many more hours that would otherwise be happy. Any happiness you gain from reading the book you purchased is offset by a negative happiness to obtain the book in the first place. This is paradoxical to the end goal – it doesn’t make sense give up some of your happiness to obtain happiness.

Less is More

“Less is more” is a practice of minimalism, though not an outright principle. When you are faced with a decision of quantity, ”less is more” implies the option with the lower number is the appropriate option. However, this implication is a misconception of the practice. “Less is more” is about ensuring the choices you make are worth making.

To illustrate the practice of “less is more,” say you have a choice between breaking a dollar into a hundred pennies or four quarters. A hundred pennies and four quarters have the same value. A hundred pennies, however, is more difficult to count and carry around than four quarters. It is important to note that ten dimes, twenty nickels, or a mixture of coins might be more appropriate to the person making the decision. What “less is more“ is pointing at is not to sacrifice value for the sake of a number, but rather to recognize that often times value can be consolidated into a more manageable quantity.

Quality Over Quantity

When you are faced with a choice, the practice of “quality over quantity” implies the option with the greater quality should be chosen over the one with a greater quantity. Intrinsically tied to less is more, “quality over quantity” is a practice that recognizes your resources are better allocated to fewer, better things than many, lesser things.

Other Financial Philosophies

Financial Wellness

Financial wellness is about being at peace with your financial situation. It’s no secret that finances are stressful. If you are worrying about paying your bills on time, or if you can afford a necessity, then you may be in need of some financial wellness.

What financial wellness may look like is dependent on what is stressing you out. If you can pay your bills on time and afford all of your necessities – even if you don’t have anything left over for yourself – then you may have achieved financial wellness. Having the ability to spend some of your hard earned money on yourself may be another facet of financial wellness. Working for yourself instead of fearing the loss of your job for someone else may be yet another facet. Find the areas that are stressing you out, and look for ways you can eliminate that anxiety.

Financial Literacy

If you don’t know how to approach personal finances or the various tools available to you, then financial literacy is the first component that needs attention on your journey to financial wellness.

Financial literacy does not imply that you need to know everything there is about personal finance. Indeed, this would be counterproductive to wellness because the sheer volume of rules, tricks, and tools can be overwhelming. Unless you career or situation requires it, only the subset of tools that are relevant to your situation comprise your extent of financial literacy.

Financial Freedom

Financial freedom is all about choice. Having financial freedom allows you to choose where you spend your money. While there may always be expenses in your life that you are stuck with – such as housing or transportation – where the rest of your money goes is up to you.

There’s no number or goal post with financial freedom that you can measure yourself against. This is because, at the end of the day, it will look different for everyone. For some, financial freedom may look like no debt. For others, it’s to have a portion of their budget set aside for discretionary purchases. Financial freedom is personal, and as such should not be measured against others’ definitions.

Financial Independence

Financial independence is all about relying on yourself, and not others, for your income. Often times, financial independence is measured by how long your investment portfolio will last before it’s used up, or whether you have the ability to retire. At the extreme end, it’s about having so much money that you can’t possibly spend it all. However, like financial freedom, financial independence is not a one-size fits all concept.

You can choose a number to represent your financial independence, such as 25x your annual expenses. However, a more forgiving method to measure financial independence is whether you are dependent on another for your income. This could look like having a job so you’re not dependent on a parent, spouse, roommate, or someone else for your income. It might also look like working for yourself instead of someone else. It could also look like the extreme end, where your investment portfolio is large enough that you never have to work again. What financial independence looks like for you is up to you.

Track Your Money

The first step to any tracking your money is to understand where your expenses currently are. Write down all your recurring expenses, such as rent and utilities, car loan and insurance payments, subscriptions, and other future expenses.

Once you have your expenses recorded, order them by when they are due. An actual calendar may be helpful in this situation as it gives you an overview of when your money is going out on a monthly basis.

A handy rule of thumb when deciding what is necessary or unnecessary is whether the expense helps you to fund the rest of your lifestyle. This may seem counterintuitive – after all, how can an expense act as an income? A car is an example of this. You may need a car to drive to and from your place of employment. Thus, your gas, insurance, and car payments are all necessary expenses because without them, you may not be able to make any money. If you aren’t bringing in any money, then you certainly won’t be able to pay for anything, necessary or unnecessary.

The Different Types of Expenses

Frequent Expenses

Frequent expenses both happen on an irregular and unpredictable basis. These types of expenses are often the most discretionary. Groceries, dining out, entertainment, home goods, and anything else that tends to be ephemeral are frequent expenses. Frequent expenses are variable, meaning the actual amount of the expense can be different from expense to expense – groceries can be a larger expense than a coffee on the way to the store. These expenses are also unpredictable, which means they can crop up at any time during the day or week.

Regular Expenses

Regular expenses are most often your bills. Rent, utilities, car payments, and other types of bills which are both frequent and predictable are all regular. Generally, these types of expenses are either the same or slightly variable from payment to payment, and they happen on a more or less monthly basis. Regular expenses are the easiest to plan for in a budget.

Infrequent Expenses

Infrequent expenses are predictable in value, but irregular in when they must be paid. This is not to say you don’t know when they are due, but rather that they don’t neatly fit into a weekly or monthly budget. These expenses can happen every couple of months or even years. Examples may include car registration renewals or semiannual insurance payments. Due to the predictability of these expenses, they are the perfect candidates for expense calendaring.

Irregular Expenses

Irregular expenses are both unpredictable and infrequent. They are the kind of expenses that aren’t necessarily tied to time – such as car maintenance, which is tied to how many miles the car is driven. While these expenses can be made predictable with significant effort to project and forecast when they might occur and how much you should be setting aside, it is often a better use of your time to set aside money to cover these expenses if and when they do come around. Irregular expenses should not be conflated with an emergency fund, as they each serve their own purposes.

Cost of Living Expenses

Cost of living expenses are similar to necessary expenses; those expenses which you must pay in order to live. Cost of living expenses are housing and utilities, transportation, health and wellness, food and groceries, debt payments, and any other expense which you must pay.

Lifestyle Expenses

Lifestyle expenses are all other expenses. Our lifestyle is what most directly brings us joy. However, our lifestyle and our joy is perhaps the largest set of expenses we have. Thus, it seems silly to write off these expenses as unnecessary. Instead, we must seek to build positive spending habits to balance our resources and our joy.

Create a Budget that Works

How Minimalist Budgets Work

Your budget should reflect the simple and intuitive characteristics of financial minimalism. Priority is given to covering your living expenditures. There are times when 90% or even 100% of your money is going to your cost of living. Similarly, there may be situations where your lifestyle far exceeds your cost of living and savings. These situations heavily emphasize purchasing what is important to you because all your needs and financial goals are relatively easy to meet.

After your cost of living, priority is given to savings. Savings are an important component of financial minimalism because they are an intentional allocation of your money to what is important to you. While savings can be used for larger life events, such as a wedding or down payment, the only requirement is that you have a plan for your savings.

Finally, as your cost of living decreases—or your income rises—your discretionary funds grow. These are the funds that you can most freely spend on what is important to you. Discretionary purchases are often considered smaller, every day purchases, they can include bigger purchases. It is important to note that discretionary purchases are the most direct measurement of your lifestyle. Because of this, as your income increases, your purchases must reflect what is important to you, and not merely what you can afford.

The Different Methods of Budgeting

The Top-Down Method

The top-down method focuses on your goals. This is where you create a list of your goals and then allocate a desired proportion of your money to them.

The Bottom-Up Method

Bottom-up, on the other hand, is where you categorize a list of all your expenses and then allocate an appropriate proportion of your income to those expense categories. The top-down method can be somewhat obtuse with its allocation without fully understanding where your expenses actually are, and the bottom-up method can misrepresent the importance of the various categories.

The bottom-up budgeting process reveals your current expenditures. Your expenditures represent your priorities because that is what you are currently spending your money on.

Another principle of minimalism, decluttering, helps you to focus your priorities. Because the bottom-up budgeting stage results in a list of your expenses, you have the information you need to apply this principle to your expenses. Minimalism encourages decluttering—or removing—expense lines that don’t align with your goals.

Important Parts of Your Budget

Planning Ahead

If you're paid every-other week, can split all of your monthly expenses in half and set aside half a payment from each paycheck. As an example, we can set aside $500 per paycheck for rent. If we split our expenses this way, we can smooth out our month-to-month balances.

Not all predictable expenses fit neatly into a monthly payment. Take, for example, a car insurance payment every six months, or annual subscriptions. Instead of dividing each payment in half, you divide them by the number of paychecks between each payment. So, a $600 car insurance payment every six months would require setting aside $50 each biweekly paycheck, or $100 for monthly.

There are two more points that should be made. The first is that only 24 paychecks are assumed each year for biweekly payroll, when in reality there are actually 26. Twice a year you will receive a bonus paycheck. These paychecks are entirely extra, and so you can do whatever you want with them without needing to set aside anything on the expense calendar.

Create an Emergency Fund

The general idea of an emergency fund is to cover the costs of unexpected expenses.When people first begin their personal finance journeys, the first rule of thumb is to set aside a $1,000 emergency fund. Most common emergencies can be absorbed by a $1,000 emergency fund. Whether the emergency be car repairs, home repairs, or other urgent and unplanned expenses, these types of events can often cost only a couple hundred bucks, but still have a major impact on your wallet if you don’t have the cash to spare. While $1,000 won’t be enough for every emergency, the ones we are likely to encounter in our daily lives will be taken care of.

Once you've set aside $1,000, work towards 6 to 8 months’ worth of expenses. This type of emergency fund is a rule of thumb meant to maintain your current spending habits.

Say you pay $2,500 a month for your housing, transportation, food, and other cost of living expenses. 6 to 8 months of expenses would be somewhere between $15,000 and $20,000. Similarly, if your monthly expenses were actually $3,000, then your emergency fund should be between $18,000 and $24,000. This size of emergency fund will absorb most unexpected scenarios.

Because the focus of the 6 to 8 months emergency fund is intended to cover you over time instead of anticipating some unknown, singular expense, the focus of this emergency fund shifts. This emergency fund mitigates the impacts of a specific type of event: unemployment.

How to Reduce Your Spending

The Impact of Reducing Your Spending

The math works out like this: a safe withdrawal rate of 4% means that you need to have 25 times your annual expenses set aside. This is because 4% of your portfolio needs to be equal to your annual expenses, and 4% is one twenty-fifth of your portfolio. So, if your annual expenses are $40,000, you will need a $1,000,000 portfolio.

Because there’s a multiplier on your expenses for financial independence, every dollar you can save in your budget is 25 dollars less you need for financial independence. So, if you can reduce your annual expenses down to $39,000, you would only need $975,000 for financial independence.

Determine the Purpose of the Purchase

The easiest way you can incorporate intentionality into your buying habits is to ask what the purpose or value of the purchase is. If you believe that the item brings lasting value to your life, and isn’t just a spur of the moment purchase, then go ahead and make the purchase.

Procrastinate Making the Purchase

After you’ve decided to make a purchase, hold off on buying it for at least a couple of days. The time you hold off on making a purchase is called a cooling off period. If you still think you should make the purchase after the cooling off period, then go ahead. However, you may find that after a couple of days, the desire to buy it may no longer be there. The longer you can wait between deciding to buy something and actually buying it, the more you may realize that it doesn’t actually provide any value to you.

Calculate the Cost in Terms of Time

We all make our money by trading away our time. Whenever we buy something, we’re not just trading away our money, but also the time it took us to make that money in the first place. When you’re considering buying something, take a moment to find out how many hours it will take you to earn enough money to buy it. All you need to do is divide the price of the item by how much you make every hour (after taxes), and you will have the number of hours it takes for you to earn enough money to pay for the item. If you’re trading away too many hours for it, it’s probably not worth buying.

Search for Deals

After you’ve found something worth buying, shop around before handing over your hard-earned cash. You may be able to find the same item somewhere else for cheaper, or a generic brand that works just as well, or maybe even a used or refurbished version. What you’re really buying is the utility of the item, and not the newness of it. If all you want is to have something that’s new, then perhaps there isn’t any value to making the purchase at all.

Don't from Your Mobile Device

If you shop online a lot, don’t shop from your phone. Instead, only shop from your computer. Remove all shopping apps from your phone and maybe even turn on grayscale so that you have to use a computer to see how an item really looks. Another way you can shop intentionally online is to remove your saved credit cards so you have to type in the number every time. This makes shopping online a little bit more difficult and time consuming, giving you a moment to think through your purchase. As a bonus, you can let an item sit in your online shopping cart for a few days to implement a cooling off period.

The Different Types of Budgets

80/20 Budget

80/20 is perhaps the simplest allocation you can make for a budget. The breakdown is straightforward with 80% of your money going to your needs and wants, and 20% to savings. The entire scope of your cost of living and lifestyle should be covered by 80% of your income, including housing and other bills, groceries and eating out, and other discretionary purchases. 20%, however, is set aside for larger purchases, such as a new car, a dream vacation, a wedding, a down payment on a house, or anything else that requires a larger sum of money.

70/20/10 Budget

The 70/20/10 budget is slightly more complicated than the 80/20, but introduces a tighter constraint on discretionary spending. 20% of your budget still goes to savings, however only 70% of your budget goes to your cost of living. The remaining 10% is set aside for discretionary purchases. While all purchases should add value to your life, discretionary purchases are those that most directly reflect what is important to you. This is because a discretionary fund is the most flexible. The cash in these funds aren’t already earmarked for rent, bills, savings, and other things. Instead, as the name implies, it’s up to your discretion on where you spend these funds.

60/20/20 Budget

The 60/20/20 budget shaves off another 10% from the fund for your cost of living and adds those funds to your discretionary budget. The same principles as the 70/20/10 budget still apply, however there are additional considerations for what may or may not qualify as cost of living versus discretionary. Housing and groceries are certainly a component of your cost of living as you need to shelter and feed yourself, but clothing and eating out may be considered discretionary purchases. The 60/20/20 budget’s higher discretionary allocation lends itself reclassifying certain purchases as discretionary.

50/20/30 Budget

The 50/20/30 budget is the final budget in this list, but is far from the last budget that financial minimalism can be applied to. This budget continues the trend of allocating an additional 10% to your discretionary fund by reducing your cost of living fund. The increased discretionary allocation emphasizes that not all expenses are required. Rather you have a greater deal of freedom to decide where to spend your money. The 50/20/30 budget is appropriate when you have enough disposable income for a comfortable lifestyle.

Invest for Your Future

Investing Rules

Dollar Cost Averaging

The idea of dollar cost averaging is to invest the same amount at a regular interval. Because the stock market goes up more often than it goes down, a regular investment will be made on the upswing more often than a down.

Dollar cost averaging lends itself to automation. You can set a recurring investment, say even as little as $100 on the first of the month, and never have to worry about timing the market again. This is the power of dollar cost averaging, you can literally set it and forget it.

Diversification

To mitigate the risk of investing in only a single company, you can purchase stock in two companies. One makes money and the other doesn’t. The stock you own in the company that made money will gain value, but your stock in the company that lost money will decrease. While any gains and losses in your investments are likely cancelling each other out by owning only two stocks, what if you could own more? What if you owned stocks from every publicly traded company in the United States? If you own stock from every company in the United States, the odds of more companies doing well than not is in your favor. This is the essence of diversification, spreading your investments so your overall bet is safer than investing all in one place.

There are investment portfolios you can invest in that already goes through the trouble of diversification: index funds. However, there are many of these index funds, which one makes the most sense to invest in? Generally, the larger the index a fund tracks, the less risk there is. However, this comes with a cost because the larger the index, the less of a return on your investment you’ll see. You will still see a return, but an index of the top 500 companies in the United States will make more money than an index of all companies in the United States. The same is true for all companies in the world.

Diversification doesn’t need to stop at stocks. You can invest in other ways, as well. One such investment is bonds. Bonds are loans you give to a company, and they pay you a little bit on top of repaying the loan – in the form of interest – for borrowing your money. You can diversify your bonds in the same way you can with stocks, by investing in multiple companies.

Bonds

A bond is, in its essence, a loan. You could loan your money to a company, a government, or some other entity directly and receive interest payments over the life of the bond. Bonds are an important part of a minimalist investor’s portfolio because they can offer a cushion during downturns in the stock market. While nothing is guaranteed, they can help to reduce the volatility of an otherwise all stock portfolio.

Your Age in Bonds

The most traditional rule of thumb is to own your age in bonds as a percentage of your portfolio. So, if you are 30, your portfolio would consist of 30% bonds, and 70% stocks. If you were 50, your portfolio would be split 50/50.

Owning your age in bonds is the easiest allocation to remember. Periodically, you’d rebalance your portfolio so that your bond allocation matched your age. While intuitive, this rule of thumb can be overly conservative.

Say you begin investing at 25, your portfolio would consist of 25% bonds. With a 35+ year career ahead of you, there isn’t a need for many, if any, bonds at all. Instead, a portfolio that is primarily or entirely stocks would serve you better so that you can tap into exponential gains early on.

At 65, your portfolio would contain 65% bonds, which is a significant portion of your portfolio at the onset of retirement. You may live another 30 years, in which case you run the risk of your portfolio running out before you’re done with it. Both losing out on potential gains early on in your career, and an overly aggressive bond allocation later on in life may mean that your financial goals will be more difficult to achieve.

Your Age Minues Twenty in Bonds

Due to the shortcomings in the above rule of thumb, it has been proposed that the percentage of your bond allocation should be your age minus 20. This can help to address the shortcomings on the front-end of your career, but your retirement still may suffer from being overly conservative.

So, at 25 your bond allocation would be only 5% and at 65 your bond allocation would be 45%. This sets your bond allocation within the recommended range validated by the Trinity Study, where your bond allocation would be between 25% and 50%. This is especially helpful for those who plan to retire early, as at the age of 45 your portfolio would contain 25% bonds, the lower bound of the recommended range.

Continuing on, past the age of 70, your bond allocation would begin to tip into the majority of your portfolio. You would have received more gains earlier on in your career with this rule of thumb, but your portfolio begins to become overly conservative when you need it most—or, in other words, when it may be your only source of income.

The 15/50 Rule

Another rule of thumb is the 15/50 rule. While not exactly pertaining to bonds, this rule states that so long as you expect to live more than 15 years, your portfolio should contain at least 50% stocks. The converse is that if you expect to live another 15 years, your portfolio should contain no more than 50% bonds.

The Different Types of Investment Portfolios

The One-Fund Portfolio

The one-fund portfolio is just that, a portfolio composed of only a single fund. The single fund is what is called a target date fund.

Target date funds are portfolios that are actively managed until a certain date. The goal of these portfolios is to accumulate value quickly in the early years from the creation of the fund to the date at which it is no longer actively managed. In the later years, the portfolio’s composition changes to protect the value accumulated in the early years. After the end date, the portfolio’s composition remains as it is, waiting for withdrawal.

Target Date Funds

Target date funds are portfolios that are actively managed, meaning there is an actual person who is determining the portfolio’s investment strategy. This is opposed to other types of funds that are managed by computers and algorithms. While there is certainly a time and place for electronically traded funds, target date funds may not fit the mold.

The general philosophy of target date funds is to hold more equity, or stocks, early on in the fund’s lifecycle and to slowly change the allocation to include more bonds over time. This is because earlier on in your career, you have more of an opportunity to tap into compounding interest, meaning your money earns more money the longer it is invested. Because stocks tend to earn more than bonds, they can earn more in the long run. Stocks, however, carry more risk with them than other types of investment vehicle.

Later on in your career, your focus isn’t to earn as much money as possible, but to keep the money you have already earned, the portfolio is shifted to include more bonds, an investment that typically doesn’t earn as much as stocks, but benefits from lower risk of losing money. The chart below illustrates how a typical target date fund’s investments change over time.

Because there is a shift from the portfolio containing investments that earn more to those that earn less, there is an overall shift in how much the portfolio will earn overall. By looking at the historical returns for stocks, bonds, and money market funds – a type of cash investment that earns lower returns than bonds, but likewise has a lower risk return and benefits from liquidity – we can determine the average expected return of a target date fund over time.

Based on this philosophy, the general characteristics of target date funds is that they earn more money earlier on in the fund’s life. Later in the fund’s life, a target date fund earns less, but is more likely to retain the earnings gained earlier on. Because of these characteristics, target date funds remain a popular choice for retirement.

By knowing a target date fund’s investments and the historical returns of the various components, we can build a model that will help us to find the percentage of your income you should be setting aside for retirement.

Target date funds are ideal for investors who want to be hands off with a long term strategy. Because of the long time horizon of active management, these funds are popular for traditional retirement. Indeed, many retirement plans offer target date funds in their catalogue.

Target date funds are popular for retirement because they’re easy. They package up a lot of generally sound advise into an easy-to-invest portfolio. These funds have a large stock allocation earlier on in their lifecycle, but as they approach the end of their life (the target date of the fund), they become more conservative.

The Two-Fund Portfolio

The two fund portfolio composition is one stock fund and one bond fund. Similar to target date funds, each fund is composed of a portfolio designed to mimic the composition of a market. An example would be a fund which tracks the total U.S. stock market. Such a fund would could own a single share of every publicly traded company in the United States.

A total stock market fund would be paired with a total bond market fund to create the two fund portfolio. This portfolio’s historical research makes it popular among early retirees who seek to maintain their portfolio for a long, if not perpetual, timeframe.

The Trinity Study

The Trinity Study – named for the college the study came out of – looked at the success rate for every 30-year period between 1926 and 1995. The study came to the conclusion that a portfolio that was half stocks and half bonds lasted at least the whole 30 year period. The key to maintaining the portfolio is a 4% initial withdrawal and adjust for inflation in subsequent years.

Financial minimalists are pragmatic investors. Based on your goals, consider a portfolio composed of 50-75% stocks tracking a major index (such as the S&P 500), with the remaining invested in bonds. When it comes time to utilize your investments, look at only withdrawing 3-4% of your portfolio’s value, and adjust for inflation every subsequent year.

The implications of a two-fund portfolio are twofold. First, it shows that with an easy-to-build portfolio, a steady source of income can be maintained for very long periods of time. And second, it makes planning for target incomes easy to calculate. Determining how large of a portfolio is needed to return a target annual income is as easy as dividing the target income by 4%. So, a target income of $40 thousand dollars per year requires a $1 million dollar portfolio.

The Three-Fund Portfolio

If traditional and early retirement aren’t the goal, or the investor prefers a more hands-on approach, then the three-fund portfolio would be more appropriate than the one- or two-fund approaches. The three fund portfolio is composed of a total domestic stock market fund, a total world stock market fund, and a total bond market fund.

Automate Everything

Pay Yourself First

Pay yourself first by prioritizing your time before you prioritize your money. The concept of paying yourself first is often called reverse budgeting. In traditional budgeting, you allocate your money towards your bills, debts, financial goals, and – if there’s anything left over – to discretionary spending. Where you money goes is determined by priority or urgency. However, in a reverse budget, the highest priorities are your savings or other financial goals.

Direct Deposit

Perhaps the easiest automation you can implement is to directly deposit your paychecks into your bank accounts. Some employers also offer you the ability to split your paycheck across multiple accounts. There’s more than just the benefit of skipping the errand to the bank to cash our checks. You will also often have access to your money sooner. Once your money is in the bank, you can automate where it goes from there.

Saving

Saving is another important goal. Whether you are saving for a bigger purchase, such as a house, a car, or something else entirely, you can practice paying yourself by setting aside a portion of your paycheck for this purchase. If you are utilizing direct deposit, you may be able to set up an automatic savings deposit directly from your paycheck with your employer. If you’re unable to, then you can still transfer money to your savings each paycheck.

Investing

Investing for your future is important. In fact, it’s so important, you may already be doing so before your paycheck ever hits your bank account. The easiest way to invest is through retirement accounts, and if your employer has one set up for you, chances are you’re already contributing. A retirement account, such as a 401k or 403b, automatically invests a portion of your income before taxes, before your paycheck is deposited into your bank account, and – most importantly – before your bills and debts are paid. If you’re not taking advantage of your employer’s retirement accounts, then take some time to check it out and start investing.

If your employer doesn’t offer a retirement account, there are other ways to invest. You can set up your own retirement account, such as an IRA, or a brokerage account to purchase your own index funds. While these types of accounts don’t automatically invest a portion of your paycheck, you can still prioritize investing every time you are paid.

Spending

If you only need to make sure you have some discretionary budget set aside for other important aspects of your life, such as your friends or your family, you can likewise prioritize this aspect by having a dedicated savings or checking account. You can even set up a portion of your direct deposit for this important part of your life.

Often times, you can just use direct deposit or a transfer to move money into a checking account. However, if you use credit cards, many credit card companies offer the ability to automatically pay your credit card off each month. You would need to connect one of your bank accounts – such as a savings or checking account – for the credit card payment to come out of. Don’t forget to automate deposits or transfers into your bank account so you have the money to pay off your bills.