Charter

My Personal Finance Charter allows me to stay the course on my financial journey because it defines my goals and the rules / philosophy I will follow in making financial decisions and managing my finances. It also includes Investment Policy Statements (IPS) for my two Income and Retirement portfolios.

This Charter categorizes all money, investments and assets into one of the following classes.

  • Cash
    Money used for daily living expenses
  • Debt
    All money owed from credit cards, personal loans and mortgages
  • Savings
    Money reserved for larger future purchases that are outside the scope of daily living amounts
  • Emergency Fund
    Money to be used in the case of loss of employment
  • Income Fund
    Investments with surplus money for current income and financial independence
  • Retirement
    Investments to be used during retirement
  • Assets
    Fixed assets such as house, car and appliances

Goals and metrics

Wet Worth

Wet-Worth is defined as the total of all accessible (liquid) money classes, i.e.
Wet-Worth = Cash + Savings + Emergency Fund + Income Fund – Debt
A positive Wet-Worth implies that I could pay off all Debt without affecting my Retirement accounts, providing the comfort of being “debt-free” but with the additional leverage that (good) debt provides.

Net Worth

Net Worth is defined as the total of all money classes, i.e.
Net Worth = Wet-Worth + Retirement + Assets
I will pay only minor attention to Net Worth figures since I do not find it a very meaningful metric and it shall not be used in any financial decisions. It is included here to distinguish it from Wet-Worth.

Target Income Allocation

  • Cash and living expenses below 50% of net income
  • Savings at least 15% of net-income

General Rules

Allocation of income shall be prioritized in the following order (highest priority first)

  1. Satisfy Retirement IPS
  2. Satisfy debt payment plan
  3. Satisfy current spending plan
  4. Satisfy Emergency Fund plan
  5. Satisfy Savings plan
  6. Any excess money after the above shall be allocated to the Income Fund IPS

Whenever my Wet-Worth is positive, any financial decision which would lead to a negative Wet-Worth must be carefully scrutinized and justified in an amendment to this Charter.

Opening new accounts or closing existing accounts requires justification in an amendment to this Charter. Account changes may impact credit scores and also require additional maintenance to link to existing accounts.

Taking on any new Debt requires justification in an amendment to this Charter, including interest rates, payment plans and proof that the loan amount is covered by existing accounts.

Cash

Account Structure

Three checking accounts are assigned to the Cash money class as follows

Name Usage Mandatory characteristics
Income Receives income payments and distributes money to other money classes. – No monthly fees
Bill Payment Contains the monthly budget and pays all living expenses & bills. – No monthly fees
– High interest
– Free payment of bills via bank checks
Cash Spending Used for cash withdrawals. – No monthly fees
– ATM card with no transaction fees worldwide

Living Expenses & Budget

A defined Budget shall be followed to track, monitor and optimize monthly and yearly expenses.

An amount equal to the monthly Budget shall be automatically deposited into the Bill Payment Account each month from the Income Account.

The Budget shall be reviewed twice yearly and adjusted if necessary.

The Budget shall accommodate the total amount of all expenses during a calendar year from January through December.

The Budget shall consist of spending categories where underspending or overspending is carried over to the next month.

The Bill Payment Account shall target to hold a total value of three times the monthly Budget amount. This allows a three-month interruption in income or funding for unanticipated expenses.

If the total Bill Payment Account value falls below two times the monthly Budget amount, spending shall be reduced below the budgeted amount to allow the buffer to be restored within twelve months.

Budget Amounts

The following table shows current and previous monthly budget amounts.

 Year  Amount  % Change
 2016  3,900  1.3%
 2015 (2)  3,850  -1.28%
 2015  3,900  -1.52%
 2014 (2)  3,960  -0.38 %
 2014  3,975  -16.14%
 2013  4,740

Debt

Good debt may be used to preserve cash on large purchases as long as the loan amounts are covered by existing accounts.

Good debt is debt with fixed low (or zero) interest or offers additional benefits such as tax deductions.

Credit Card Accounts

Credit Cards providing useful loyalty programs or benefits shall be used.

All credit card accounts must be linked to the Living Expense account with automatic payment of the entire monthly amount.

All credit card charges shall be categorized into spending categories and considered part of the monthly Budget.

Credit Card Usage Mandatory characteristics
Primary Card Used for all living expense payments Air-mile travel rewards
Secondary Card Used where Primary Card is not accepted Hotel travel rewards
Supplemental Card Held to improve credit score only No monthly fees

Provides free credit score

Current Loans

The following table shows active loans and their estimated end date.

Debt Interest Start date End date Covered by
Mortgage 4.375% 2013 2043 Income Fund
Car Loan 0% 2013 2017 Savings

Savings

Savings is used for planned (larger) purchases outside the living expense Budget which have a timeframe of one or more years.

Current Saving Goals

Goal Target date Target Amount ($)
Mortgage repayment 2034 88,000
New car down payment 2018 8,000

Account Structure

Name Usage Mandatory characteristics
Cash Savings Used for short-term savings with purchases expected with 1-2 years, or for planned purchases on a specific deadline. High-interest online savings account
Savings Fund Used for long-term savings with purchases expected 2+ years in the future that have an arbitrary purchase date. Low-cost investment funds

Savings Fund Components

The Savings Fund shall consist of the following low-cost funds.

Name Allocation ER (%) Type
Vanguard Wellington Fund Investor (VWELX) 100% 0.26 2/3 stocks; 1/3 bonds

Emergency Fund

The Emergency Fund is reserved for supplemental income in the case of unemployment.

Emergency Fund target = (12 – Income Fund Target Months) * Monthly Budget

As the Income Fund Target increases, the Emergency Fund should be reduced accordingly.

Account Structure

Account Usage Mandatory characteristics
Emergency Cash Used for immediate cash High-interest online savings account
EF Fund Investment account for longer-term Low-cost investment funds

Asset Allocation

Name Allocation ER (%) Type
Cash 30% Cash
Total Stock Market Investor Shares (VTSAX) 70% 0.05 US Stocks

Income Fund

Philosophy

The goal of my Income Fund is to reach Financial Independence by providing monthly income equal to my monthly budget.

All dividends from the Income Fund shall be manually reinvested.

Changes to the Income Fund philosophy, target allocation or structure shall be justified in an amendment to this Charter.

Funds and Accounts

Name Type Notes
Vanguard Brokerage Taxable Vanguard Funds, ETFs and some stocks
CapitalOne Brokerage Taxable Stocks

The majority of investments will be held at Vanguard.

Target Asset Allocation

Name Account Allocation ER (%) Type
Vanguard High Dividend Yield Index (VHDYX) Vanguard 50 35 0.18 US Stocks
Vanguard International High Dividend Yield Index (VIHAX) Vanguard 25 15 0.30 Int. Stocks
Vanguard High-Yield Corporate Fund (VWEAX) Vanguard 10 0.13 US Bonds
Vanguard Long-Term Investment-Grade (VWESX) Vanguard 5 0.22 US Bonds
Individual Stock and ETF Portfolio Vanguard

CapitalOne

10 35 Stocks

Notes

The Income Fund does not currently meet the above allocation but will be re-balanced over time through addition of new capital.

Individual Stock and ETF Portfolio

The Portfolio shall contain stocks from each of the 10 major sectors with per-sector limits on the annual dividend contributions.

I shall follow a Buy & Hold approach and never use Options, Margin, Short Sales or attempt to time the market.

The Portfolio shall be weighted by dividend income per sector according to the following targets

Sector Dividend % Sector Classification
Utilities 13 Defensive
Consumer Defensive 13 Defensive
Healthcare 11 Defensive
Communication Services 11 Sensitive
Industrials 10 Sensitive
Energy 10 Sensitive
Technology 9 Sensitive
Consumer Cyclical 9 Cyclical
Financial Services 8 Cyclical
Basic Materials 6 Cyclical
Real Estate (REIT) 0 Cyclical

I shall limit stock selection to no more than six stocks, including one international stock, in any one sector for a maximum total of 60 stocks (50 US and 10 international).

Individual stock purchases must meet the following criteria

      • Yearly dividends from the stock are less than 5% of total stock dividend income
      • Average dividend growth greater than 3% over the last 5 years
      • Annualized dividend yield between 2.25% and 6%
      • A market capitalization of $250M or more
      • TTM Price/Earnings less than 20 or within 10% of its 5-year average.

Sector ETFs may be used instead of a single stock but must meet the following criteria

      • Yearly dividends from the ETF are less than 5% of total stock dividend income

I shall consider, but not be obliged to, sell a stock if:

      • It stops paying, reduces or freezes its dividend
      • Dividend yield falls outside my target range which may indicate high-price or poor performance.

Retirement IPS

Philosophy

I will follow the Bogleheads investment philosophy for my Retirement investments:

      1. Develop a workable plan – live below your means
        Satisfied via my personal finance charter.
      2. Invest early and often
        I will make automatic 401k contributions to achieve maximum employee matching.
      3. Determine a suitable amount of risk
        I will target a 70% stocks / 30% bonds asset allocation.
      4. Diversify
        I will invest in US Stocks, US Bonds and International Stocks, with a small tilt towards the REIT sector.
      5. Never try to time the market
        401k contributions are automatic based on paycheck. Fund distributions are set to re-invest automatically.
      6. Use index funds where possible
      7. Keep costs low
        Low-cost index funds will be used with expense ratios of < 0.4%
      8. Minimize taxes
        My retirement portfolio will use Tax-Free (Roth IRA) and Tax-Deferred (401k, Traditional IRA) following these general guidelines.
      9. Invest with simplicity
        The overall asset allocation is a Three-Fund Portfolio with a tilt towards the REIT sector.

        • US Stocks             50%
        • International Stocks  15%
        • US Bonds              30%
        • US REIT               5%
      10. Stay the course
        Changes to my retirement portfolio and strategy require a written amendment and justification.

Retirement Goals

My target retirement amount is $1,400,000 in 2036 dollars which would provide a monthly income of $4,800 assuming a 4% SWR against a projected budget of $5,670.

Retirement Income Amount
Retirement Accounts 4,800
Social Security 2,500
Income Fund 5,670
Expenses -5,670
Total 7,300 above budget

Funds and Accounts

Name Type Notes
Vanguard Roth IRA Tax-Free Income limit exceeded for contributions.
Vanguard Traditional IRA Tax Deferred Contains pre-tax investments. Only post-tax contributions allowed.
Fidelity 401k Tax Deferred Allows both pre and post-tax contributions
Vanguard Taxable Taxable Not currently in use for Retirement funds

Asset Allocation

The table below shows target allocation per account and fund.

Name Account Allocation ER (%) Type
Vanguard Total Stock Market Index (VTSAX) Roth IRA

T-IRA

50 0.05 US Stocks
Vanguard Total International Index (VTIAX) T-IRA 15 0.18 Int. Stocks
Vanguard Total Bond Market Index (VBTLX) T-IRA 30 0.07 US Bonds
Vanguard REIT Index (VGSLX) T-IRA 5 0.12 REIT
SSGA Large Cap S&P 500 Index 401k 30 0.01 US Stocks
SSGA Small/Mid Cap Index 401k 20 0.04 US Stocks
SSGA International Index 401k 10 0.081 Int. Stocks
SSGA Emerging Markets 401k 5 0.127 Int. Stocks
SSGA REIT Index 401k 5 0.08 REIT
Pimco Core Plus Bond 401k 30 0.37 US Bonds

Notes

SSGA International (65%) and SSGA Emerging Markets (35%) are used as a surrogate for Total International.

The asset allocation is replicated in both the 401k and Vanguard accounts. Although not ideal, this approach ensures that the asset allocation can always be met since the Vanguard accounts cannot be added to.

Options to consider include holding 100% of Bonds in the cheaper Vanguard fund and adding Total International in Taxable to provide space for future rebalancing.


Assets

The following guidelines should be used to value assets and track any depreciation.

Asset Valuation Notes
House Zillow.com Zillow’s ‘ZEstimate’ less 6% sales fee
Car Kelly Blue Book Appropriate KBB value for dealer trade-in

Changes & Amendments

Moved projections to Goals page (03-Mar-16)

Moved projections of Income Fund totals to the Goals page.
Exchanged Total International for International High Yield Dividend for income focus as described here.

Updated Income Fund Allocation (17-Jan-16)

Reduced allocation to individual stocks from 35% to 10% and increased US Stock (Fund) from 35% to 50%; International Stock from 15% to 25%. See Stock Portfolio Review 2011 to 2015

Initial Draft (02-Jan-16)

Rewrote charter to its new format and added more content.

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