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.
Money used for daily living expenses
All money owed from credit cards, personal loans and mortgages
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
Investments to be used during retirement
Fixed assets such as house, car and appliances
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 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
Allocation of income shall be prioritized in the following order (highest priority first)
- Satisfy Retirement IPS
- Satisfy debt payment plan
- Satisfy current spending plan
- Satisfy Emergency Fund plan
- Satisfy Savings plan
- 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.
Three checking accounts are assigned to the Cash money class as follows
|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.
The following table shows current and previous monthly budget amounts.
|2014 (2)||3,960||-0.38 %|
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
The following table shows active loans and their estimated end date.
|Debt||Interest||Start date||End date||Covered by|
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 ($)|
|New car down payment||2018||8,000|
|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.
|Vanguard Wellington Fund Investor (VWELX)||100%||0.26||2/3 stocks; 1/3 bonds|
The Emergency Fund is reserved for supplemental income in the case of unemployment.
The Emergency Fund shall be at least a 10% asset allocation of my Income Fund held in short and/or intermediate term passively managed Bond Funds.
Number of months of Living Expenses. The Emergency Fund shall be reported based on the total market value of the allocated investments divided by the current monthly budget.
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
|Vanguard Brokerage||Taxable||Vanguard Funds, ETFs and some stocks|
The majority of investments will be held at Vanguard.
Target Asset Allocation
|Vanguard High Dividend Yield Index (VHDYX)||Vanguard||50||0.16||US Stocks|
|Vanguard International High Dividend Yield Index (VIHAX)||Vanguard||20
|Vanguard High-Yield Corporate Fund (VWEAX)||Vanguard||10||0.13||US Bonds|
|Vanguard Intermediate-Term Investment-Grade (VBIIX)||Vanguard||10
|Individual Stock and ETF Portfolio||Vanguard
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|
|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.
I will follow the Bogleheads investment philosophy for my Retirement investments:
- Develop a workable plan – live below your means
Satisfied via my personal finance charter.
- Invest early and often
I will make automatic 401k contributions to achieve maximum employee matching.
- Determine a suitable amount of risk
I will target a 70% stocks / 30% bonds asset allocation.
I will invest in US Stocks, US Bonds and International Stocks.
- Never try to time the market
401k contributions are automatic based on paycheck. Fund distributions are set to re-invest automatically.
- Use index funds where possible
- Keep costs low
Low-cost index funds will be used with expense ratios of < 0.4%
- Minimize taxes
My retirement portfolio will use Tax-Free (Roth IRA) and Tax-Deferred (401k, Traditional IRA) following these general guidelines.
- Invest with simplicity
The overall asset allocation is a Three-Fund Portfolio.
- US Stocks 50%
- International Stocks 20%
- US Bonds 30%
- Stay the course
Changes to my retirement portfolio and strategy require a written amendment and justification.
- Develop a workable plan – live below your means
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.
|Total||7,300 above budget|
Funds and Accounts
|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|
The table below shows target allocation per account and fund.
|Vanguard 500 Index Fund (VFIAX)||T-IRA||35||0.04||US Stocks|
|Vanguard Extended Market Index Fund (VEXAX)||T-IRA||15||0.08||US Stocks|
|Vanguard Total International Index (VTIAX)||T-IRA||20||0.18||Int. Stocks|
|Vanguard Total Bond Market Index (VBTLX)||T-IRA||30||0.07||US Bonds|
|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||15||0.081||Int. Stocks|
|SSGA Emerging Markets||401k||5||0.127||Int. Stocks|
|Pimco Core Plus Bond||401k||30||0.37||US Bonds|
|Vanguard 500 Index Fund (VFIAX)||Roth IRA||75||0.04||US Stocks|
|Vanguard Extended Market Index Fund (VEXAX)||Roth IRA||25||0.08||US Stocks|
VFIAX (~75%) and VEXAX (25%) are used as a surrogate for US Total Stock Market (VTSAX). See this link for the correlation.
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.
The following guidelines should be used to value assets and track any depreciation.
|House||Zillow.com||Zillow’s ‘ZEstimate’ less 6% sales fee|
|Car||Kelly Blue Book||Appropriate KBB value for dealer trade-in|
Changes & Amendments
Split VTSAX into VFIAX / VEXAX (September-17)
I want to buy VTSAX in my taxable account and potentially use it for Tax Loss Harvesting, so I’m converting former IRA holdings in VTSAX into 75% VFIAX and 25% VEXAX. This is essentially the same allocation.
Adjusted Retirement Asset Allocation (04-Jan-17)
I removed the 5% REIT allocation and put it into International stocks for a new allocation of 50% US Stocks, 30% US Bonds and 20% International. This is simpler and 5% in the REIT sector which overlaps with Total Stock anyway, isn’t going to affect much over the long-term.
Adjusted Income Fund Allocation (22-Dec-16)
I improved the quality of some bond holdings to accommodate Emergency Fund reserves and reduced the international allocation by 5%.
Updated Emergency Fund (18-Dec-16)
The end of my Emergency Fund? Well not really, it’s now being consolidated in my Income Fund.
Moved projections to Goals page (03-Mar-16)
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.