Go Ahead, Sweat the Details – But First You Need a Plan!

In this post:

Budgeting is great (and necessary), but Planning is powerful!
• Planning is not just numbers, but a Mindset
• The key to an effective plan are the use of Buckets and Assumptions (and again, I can send you a spreadsheet that does this for you!)

Guiding Quote:

“You can either live like a millionaire, or be one”

Do you aspire to wealth and independence, but tell yourself that planning will happen “later”, sometime after you’ve experienced the fruits of being young and newly employed – nice dinners, a new car, expensive trips?

Of course those things can all be incorporated into your lifestyle decisions (if you’re into those sort of things). While I was meticulously planning each year of our family’s finances we made the effort to experience life along the way, but always being prudent in our decision-making. In fact, several family trips to Mexico, Thailand, and the Caribbean were ultimately enjoyable for me in part because they were “in the Plan”!

A Cautionary Note From The Floyd …

I was a wide-eyed 16-year old experiencing the mysteries of Pink Floyd’s “Dark Side of the Moon” for the first time when these words seemed to jump off the vinyl (you know, those big black discs called ‘records’?):

“And then one day you find, ten years have got behind you. No one told you when to run – you missed the starting gun”

As a kid I remember thinking, “wow, I hope I never feel like that when I get older”. Leave it to Pink Floyd to assume the mantle of your financial planning conscience!

If you are well past sixteen and have had those moments of panic, this is not meant to make you feel worse. It’s just that chunks of regret, sometimes conveniently bundled into 10-year increments of your life, are completely avoidable.

However, you say“Planning is boring, investing is complicated, and I want to enjoy life now!”

That’s not a Guiding Quote – rather a collective whine (maybe you hear yourself in there?) I completely understand that we want to live enjoyable, in-the-moment lives. And I’m certainly not going to be the wet blanket that tells you not to! But what I personally find difficult to understand in people’s financial decision-making is what I call, for the lack of a more articulate description…

… Showing Off

Conspicuous Consumption. Especially when the task at hand is something as critical as ensuring your long-term future. Rather than just accumulating stuff and putting on a financial façade, shouldn’t the goal be more contentment without resentment, being the type of person your kids can look up to, spending time around people who share and appreciate your interests (whether it be art, music, a nice vacation spot)? And of course a good cup of coffee?

Now, maybe you like to show off. On some level we all like nice things, appreciate well-made products, and like to splurge occasionally on gadgets or vacations. But if those things ultimately keep you from GBC’s vision for you of Independence and Contentment, are they worth it?

To this point, it might give you pause to check out one of the all-time great books on this topic, “The Millionaire Next Door”, by Thomas Stanley and William Danko. In short, most millionaires don’t drive luxury cars, own huge houses, or buy expensive watches. They quietly accumulate wealth, not destroy it with depreciating assets.

Beyond establishing a budget that lets you navigate your monthly and yearly finances, have you thought about your long-term future? Ten years out? Maybe 20 years? What about 50 or 60 years? (Yikes! We’ll get to that below).

If you’re truly looking to establish a net worth and/or passive income stream that will sustain you for life, you have to be able to plot the steps, and have the mindset, that will get you there.

As usual, I am offering you an escape hatch in tracking your long-term plan in the form of my free personal spreadsheet template  (although I strongly encourage reading the rest of this post!). Just Contact Me  for your copy!  Like the budget model I have used since WAY before Kim and Kanye were a thing, it’s simple but effective in allowing you to input some key assumptions and see how your plan shapes up over time. 

I believe the key is to visualize your financial future

I have heard athletes describe visualization as being critical to their success – making the perfect pitch in the World Series or actually seeing themselves hoisting a national championship trophy. Similarly, you should be able to “see” what types of financial successes you hope to achieve as a precursor to actually planning for them. Do you see a bigger house? Paying that college tuition for your kids? A large 401(k) balance that will help sustain you throughout retirement?

When I first developed my long-terms plan, along with my very first budget after finishing grad school and starting my first Big Corporate job, I modeled what was essentially a 60-year plan (consisting of 30 or so years of earning and saving, and 30 years of managing the results in retirement).

While 60 years may sound extreme, it was actually just a summary roadmap with key financial mileposts from age 25 to 85 – not at all unusual if you are attempting to visualize what you hope to achieve (and more importantly to model it with some “real” ‘numbers – see the Assumptions section below).

Coffee Break – While I’m no coffee expert (I’m more of a volume guy than coffee snob), I sometimes like to brush up on my coffee knowledge and came across this amazingly extensive list of coffee terminology  from the people at Zecuppa.com. A great way to learn something new, and maybe impress your friends.

The Bucket Approach

Remember in the discussion on creating your Budget, you may have established different Account Balances such as Current Savings, Special Savings, Retirement, etc. These are not just merely ways to efficiently track where your money ends up. They also serve an important function as you extend expectations out to several years — where you expect growth in your net worth to come from, and where you can plan to utilize various funds when you need to execute a withdrawal strategy.

I use these buckets for the following purposes:

Current Savings – The main repository for “everyday cash”. This can be a checking or savings account where your pay is directly deposited, or where you tend to first put any new income from other sources.

Intermediate Savings – This bucket serves two purposes: (a) to funnel extra cash to an account that may be able to earn more interest, and (b) as a way to get cash out of the “immediately available” bucket, which tends to be a magnet for impulse spending for all but the most disciplined among us.

Special Savings – While I tend to just use Intermediate Savings to accumulate funds for potential future larger purchases, you may like the visibility (and hand-holding nature) of establishing a dedicated fund named for a specific purpose: House, Car, College, Coffee Plantation*

*This is in reference to what could have been. A few years ago my wife and I visited the Kona area of the Big Island of Hawaii, home to some of the best coffee in the world. At one of the hillside cafes a man approached us and offered to give us a tour of his coffee plantation, just a mile or so up the hill. It was fascinating, and made me fantasize about ditching Big Corporate way early and escaping to a life of coffee growing. We then saw a For Sale sign by the side of the road where a smaller coffee farm nearby was being offered for a mere $375,000. That was much more than we could afford at the time, but what if …

Retirement Savings – Besides the obvious 401(k) or other employer-sponsored plan you may participate in, this bucket can include tax-deductible IRA’s, Roth IRA’s, or self-employment retirement plans such as a SEP. The point being that this bucket has the key characteristic as being off limits for current distribution based on various rules on when you can get at the money. This could very well be your most important bucket as you plan for the really long term!

Other Investments – I strongly advise that you start to accumulate and maintain funds in an investment account in addition to any tax-favored retirement plans. You may not be able to dedicate funds to this bucket right away if you are in the early stage of your career and are focused, as you should be, on the tax advantages of retirement plans.

But please keep in mind the value of having longer-term funds growing outside your investment accounts: These funds are not restricted by the rules of retirement accounts, so you can tap them either for significant investment opportunities that may arise over time, extra or unexpected costs like health care, or (as I have done) use them to fund the “bridge” period between your main earning years and the tapping of the 401(k)**.

** More on this in a future post as we discuss withdrawal strategy alternatives, but please note that just because you can start withdrawing from your 401(k) at age 59 ½, or IRA at 55 (with some restrictions), does not mean this is your optimal strategy! Your first required withdrawals start at age 70 1/2.


Made the trek today to Java Hutt in Ferndale, MI to write and publish this post. Great town, great coffee. One of my old standbys from many years ago.

It’s All in the Assumptions

You’re all psyched to have your buckets in place, ready for the numbers to just roll in over the years to where you have to expand the columns to accommodate the extra digits in your investment accounts (you will love the moment you realize you need to do this!)

However, using unrealistic assumptions can be your worst enemy, and frankly set you up for massive disappointment down the road if you suddenly realize that the funds you thought would be available to you were just a mirage.

Personally, I have always used what I consider to be realistic, somewhat conservative assumptions for what I thought my savings and investments might earn over time. As so many of you know already from experience (unless your investing experience started after 2009), stock markets can be wrought with periods of extremely high volatility (e.g. losses). So using “average” returns in your planning is just that, average — and are not guaranteed.

NOTE: A more complex way to look at your projections, especially as you get closer to retirement, includes a concept called sequence of returns (i.e. it matters greatly whether that stock downturn occurs in your formative years or closer to when you actually need the money). For now I’ll stick to using realistic averages for each year, as I have done for decades in my own planning model, but we can also explore the impact of the return sequence later.

So, here’s what I have assumed over the years:

Current Savings – 0%-1% return

This is your safe, cash-on-hand money, so don’t put it anywhere where it is at risk of loss. Have it in a checking, saving, or money market account and don’t expect to earn anything more than the paltry interest banks are offering in this extremely low-rate environment. Frankly I always assume zero here.

Intermediate Savings – 1%-3% return

Since you may be allocating these funds to a savings/investment mix to squeeze out some return, you can assume you get a little something for your efforts. For example, money markets, short-term bond funds, and floating rate funds all offer more than the near-zero rate on savings accounts, but there is some risk.

Special Savings – 0%-3% return

If these savings are truly intended for a specific purchase assuming it is not more than five years away, you don’t want to try to hit a home run with stock market returns! Keep this money safe and assume minimal return, so you know it will be there right on schedule. Sort of a mix of the first two categories.

Retirement Accounts – 6%-7% return (pre-tax)

Here’s where it gets more fun, and a lot trickier. Most people see that the stock market has returned on average around 10% for the past 100 years or so, and think this is a perfectly sound expectation. While you may indeed achieve this return, these averages have played out over very long stock market cycles.

Even in a 30- or 40-year investing plan, I am not comfortable assuming this historical level, so I have consistently used 7%. Not to get too technical here, but I simply think the basis for many years of future returns will be around 5% “real” growth in corporate earnings (on which stock prices are ultimately based) and around 2% from dividends (about what the S&P 500 has historically, and currently, yields).

Most of the past decade has been a pleasant surprise, but I have my planning guard up with respect to what I can realistically achieve going forward. Markets do still go down!

Because of the vast power of compounding, it may be exhilarating to see what your investments could grow to at a 10%, 11%, 12% return. Don’t be seduced into believing these numbers! If you do succeed in “beating the averages”, or the market blesses you with a long period of returns above the historical average, fantastic! However, in that case you were probably not sufficiently diversified if you achieved outlier-type  profits. And, most importantly if you assume this and are wrong, it could literally throw your long-term plan off by hundreds of thousands, or even millions, of dollars.

Other Investments — 5%-8% return

This one varies as well based on your time horizon and what you intend your “other investments” to accomplish. Personally I always knew that for me these funds were (a) longer-term in nature, and (b) included growth-oriented stocks that may be riskier but also might achieve a slightly higher return than a more conservative mix, thus the 8%. A hybrid of this assumption is to use the 8% for the first few years, then plan to re-allocate these funds when you’re closer to using them toward more of a 5% expectation. (I did a major re-allocation recently when I turned 50, with much more focus on historically solid dividend-paying stocks).

NOTE: The same could be said for college funding. If you start saving for your kids, as I did, the month they were born you have 18-21 years for this money to work for you. So early on I chose an asset mix that would take advantage of market growth, but was careful to shift funds to conservative investments starting about 5 years before the actual first tuition check.

That’s all you need – Now Start Modeling!

Here’s a snapshot of the model I’ve used and that is described throughout this post:

Again, if running these assumptions through your own spreadsheet isn’t your cup of coffee, just do what I suggested with my Budgeting template and let me send one to you. It’s totally FREE – Contact Me. There’s no catch — I just want everyone to have the simple tools optimize your planning.

Remember my mantra — planning gives you Visibility, which gives you Options, which results in Peace of Mind.

And on that note, see you next time!