Writing my personal finance plan (part 1)

I’ve been wanting to update my personal finance plan for a while now, but I finally made time to sit down and actually do it. Here’s a summary of the more interesting changes since it’s a pretty dry read and I’ve focused more on my Income Fund in this post.

What is a personal finance plan?

The short answer is that it’s a document or file which defines your goals and financial management system. From there it can contain pretty much anything else that you want to include. The most important thing is that it helps you reach your objectives whether that’s to retire early or buy a new car.

In writing mine, which I’m calling my “Charter” just because I can, I also decided to include my investing strategy too. And that’s really the part I’ll be mentioning here.

Every dollar has a purpose

In case you’ve not realized from my blog; I’m quite OCD. Which is a good thing I think since it helps with budgeting and financial planning. And as part of my OCD-ness, every dollar I own gets labelled and assigned to one particular purpose. I’ve listed the categories below.

  • 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
  • Retirement
    Investments to be used during retirement
  • Income Fund
    Investments with surplus money for current income and financial independence
  • Assets
    Fixed assets such as house, car and appliances

My Charter explains the targets, account structures and rules that I have for each of the above categories.

Predicting the future

I also wanted to know if I have a chance of reaching Financial Independence with my current approach. It goes without saying that it’s impossible to predict the future (so I’ll say it anyway), so instead I estimated where I would end up if I continued my current Income Fund contributions based on an annual 2% growth of my current budget 4.0.

My dividend income projection showing Financial Independence in 2036
My dividend income projection showing Financial Independence in 2036

Now it’s not the sexiest graph ever, but the top gray line shows the yearly income needed per the budget (which is growing at 2% annually). The bump in the gray line in 2013/2014 is when I increased, then decreased the budget. So changing the budget can have a big impact on potential retirement dates – if I could freeze my current budget forever, then that alone would bring Financial Independence ahead by 5 years or so.

The blue line is my estimate for dividend income I might expect with the current contribution rates. And the orange line is what I managed to achieve so far; so I’m a little bit ahead at the moment ($856 per year if you want to be exact).

So I’ll reach Financial Independence when the orange line crosses the gray line. Since that’s years away, the blue line will have to suffice as an estimate and it shows that it’ll happen in 2036… when I’m 65! Not the best answer, but I tried to be quite conservative in my estimates and at least now I’ll be able to see when I’m slipping behind.

There are many assumptions in such a calculation and I won’t repeat all the data that’s available in the Charter page so here’s a summary of what I did.

1. Estimate my future budget

This is the easy part – I simply projected my current budget out until I’m 90 years old with a 2% increase each year. Which resulted in a monthly budget of $5,670 in 2036 when I’m 65 and went on to reach $9,130 should I ever get to being 90 years old.

What this means is that as long as I don’t increase my living expense budget more than 2% annually I won’t delay Financial Independence further. And any year that I increase my budget under 2% brings FI closer.

2. Estimate dividend income

This is the hard part, because who knows what the markets and investments will do over the long-term.

Here’s a snippet of the projected estimates from my Charter.

Year Age Budget Contrib Growth Total Est. Divs Target Months Monthly Target $
2011 40 3,650 7,000 0 7,000 0 0.00 0
2012 41 3,700 45,000 1,918 53,918 245 0.05 185
2013 42 3,750 45,000 4,967 103,885 1,887 0.50 1,875
2014 43 3,960 45,000 8,215 157,100 3,636 1.25 4,950
2015 44 3,900 45,000 11,674 213,774 5,498 1.50 5,850
2016 45 3,900 24,000 14,675 252,449 7,482 1.75 6,825
2017 46 3,970 24,480 17,205 294,134 8,836 2.00 7,940

The projected budget is in the “Budget” column; it starts the 2% increase from 2016 onwards so the 2017 value of $3,970 is 2% higher than the 2016 value but rounded to nearest $10.

The contributions show the minimum amount of new capital that I know I can contribute. I can probably do better as this is a conservative estimate. For 2016 it’s $24,000 and I increase this annually by 2% for 2017 onwards.

Growth is the magic number; I used the following formula:

Year N Growth = (Year N-1 Total Value * 0.065) + (Year N Contributions * 0.0325)

This means that to reach the 2017 Total value, I increase the 2016 Total Value by 6.5% and also add half of that growth rate (3.25%) to the contributions made in 2017. The Growth figure includes dividend income as well as any capital gains.

So the “Total” column is the prior year total plus the year’s Contributions and Growth, and it represents the total market value of the portfolio. Then the dividend income amount is 3.5% of the total portfolio value.

Finally I convert the estimated dividend into a whole number amount of months based on the current budget for that year, so in the case of 2016 my target dividend income will be 1.75 * $3,900 => $6,825; which happens to be a little below my initial estimate.

I don’t know how accurate it’ll be in 20 years time, but for now the table is a useful tool that I can use in determining my future budgets and new capital contributions as well as tracking my performance.

Income Fund Investment Policy Statement

I’ve been persuaded by several of the threads over at the Bogleheads forum about the value of an “IPS”. There are many different styles and templates and they vary in the amount of detail. The Bogleheads have some suggestions on their Wiki site as do Morningstar.

It’s similar to a financial plan in a way, but more specifically aimed at investments and in defining your investment goals and strategy. The main purpose is to keep you on track and support you in your investments. That said, some of the proposed template sections didn’t add much value in my mind so I skipped those in order to concentrate on overall goals, timeline, asset allocation and account structure.

Changes to my Income Fund Target Allocation

I’ve never actually written down my ‘ideal” target allocation so here it is. It’s significantly different than my current allocation however:

Name Account Allocation ER (%) Type
Vanguard High Dividend Yield Index (VHDYX) Vanguard 35 0.18 US Stocks
Vanguard Total International Index (VTIAX) Vanguard 15 0.18 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 VanguardCapitalOne 35 Stocks

Vanguard should be adding a High-Yield International Dividend fund this year so I’ll be switching from VTIAX to that fund when it opens.

Now I’m quite a bit out from that allocation so I’ll be slowly (as in several-years slowly) be moving towards that over time. I’m not in a particular hurry to get there though but this is The Plan.

I’m eventually targeting about 35% of the portfolio to be in individual stocks; I’m currently at 19%. I may increase this number above 35% eventually but for now I have some side goals in increasing my holdings at Vanguard to qualify for $2 trades.

Bonds will be about 15% as a source of higher-yield income.

Target Sector Allocation

I also wrote down my current stock allocation to each sector. I’ve written about my sector allocation previously and the current one has changed a little since then. I define my allocation based on dividend weight than market cap and made some adjustments depending on how much I like each sector for income.

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

Changes to my Retirement portfolio

I’m going to write about this in a follow-up post since my Retirement account follows an entirely different strategy than I use for the Income Fund.

Changes to my Emergency Fund

Emergency Fund means different things to different people. My Emergency Fund (EF) is really only aimed at supporting any period of unemployment; I generally have enough cash in my Cash accounts if unexpected expenses come up.

I’m planning to phase out my Emergency Fund over time; however the target amount is the amount of living expenses that my Income Fund doesn’t cover. So if my Income Fund covers three months of expenses then my EF should be around 9 months of expenses. What this really means is that 2017 should be the turn-around point where I first freeze and then start drawing down my EF.

In the mean-time, I’ve eliminated the prior bond holdings (VBIRX) that I considered part of my Emergency Fund and moved it all into the more tax-efficient Total Stock Market (VTSAX). I now hold only cash (3 months of expenses) and VTSAX (6.5 months). I had no real issues holding a bond fund in taxable since I considered it like a higher interest savings account which is taxed the same way. Performance-wise VBIRX wasn’t so great this year – paying about $230 in dividends but losing the same in market value, so my 1% online savings account came out ahead.

Changes to my Cash. Savings, Debt and Assets accounts

Nothing changed here in these areas; I’m still targeting a three-month buffer of living expenses as Cash which acts as a form of emergency or rainy-day fund.

I continue to add to Savings automatically each month. I’ve planned a minimum of 15% of income going forward.

I did make myself write out my current loans and require any new loans to be covered by money that I have. I don’t consider all debt to be bad; but it’s comforting to know that I can always pay off all my debts immediately if I wanted to.


I hope you’ve found this post useful, especially if you haven’t though much about the planning side of personal finance; I pretty much knew that my timeline for Financial independence was about 20 years away as it’s the second time I’ve done an estimate and reached similar conclusions. At least now I can track progress better against a glidepath.

In a follow-on post I’ll go over the changes to my Retirement Account and try to explain why my brain cell selected a new asset allocation for the long-term.


Quote of the Day

Setting goals is the first step in turning the invisible into the visible.

2 thoughts on “Writing my personal finance plan (part 1)”

    1. Hi DFG,

      Thank you. While I’m probably more OCD in my financial processes and strategy than most; I think it’s a helpful exercise to write it all down so you have something to refer back to.

      Best wishes,

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