man and cow

So often a person has a question about how to get started, or how to deal with a particular issue, but what does a finished, solid, maintainable personal finance picture looks like? How easy is everything to setup, and then maintain? The more I repeat this on the forums, the simpler it seems (So, after you’ve read this, go out to the forums, or to a friends, and tell them what you read in your own words, and it’ll get more and more basic the more you describe and explain).

Of course, the simplicity of what I’ll describe can depend greatly on where you are financially now. Explaining to the guy who graduated college with $40k in savings, no credit card debt, no other debt, and a near six figure job (plus signing bonus) wasn’t that tough. He had way more than he needed, and wouldn’t have any hardships putting bunches away in different places for different uses (He was also slightly educated already on money and had done some of the things talked about in the forum, so don’t think just because he had lots of money he had a clue what he was doing – he was a smart guy who had already prepared himself).

On the other side, there have been plenty of people who had loads of credit card debt, poor credit scores (FICO score), no savings, and relatively little earnings (although I always want to hit the person that’s earning $60k, $80k, and even $100k+, has spending/saving problems and bitches about it like it ain’t their fault – even though they know they need to fix something or they wouldn’t be asking for help). Their situation didn’t change what was advised, but it wasn’t so easy getting to the end point because they had created plenty of financial hurdles to overcome for themselves.

With no further ado, the finished financial picture – in order of importance (this can change slightly from situation to situation, but will generally suit anyone’s needs):

1 emergency savings account setup in a high interest rate savings account (ING, HSBC, Emirates are names that go around a lot for these). Roughly an amount equal to 3-4 months worth of your basic living costs, rent, car payment, cell payment, food costs, etc.

1 regular checking account with a credit card and debit card attached to the account. Drop your weekly, bi-weekly, monthly whatever, paychecks into here, then filter/wire out to your other accounts (now adays all of these money transfers can be handle very easily using your banks website or the website of your other financial companies)

1 Roth IRA account (Vanguard is my favorite, but I’ve heard decent comments about Fidelity nearly as often). Maxed out yearly to the $4k limit (this limit will go up over time, next in 2008 to $5k). You’ll use this like a brokerage account by buying stocks and bonds (based on your planned asset allocation), but with tax free earnings (instead of buying individual stocks and bonds, you’ll work with index funds). For those earning big bux or growing their salary like the kid mentioned above, once you earn $95k annually, your max contribution gets cut off, so plan for this and talk to a tax agent (EA or CPA) about the implications.

1 401(k) with your current company. Usually you’re told to contribute only up to your company’s matching amount, then max out a Roth IRA. For those who don’t have matching either at this time or at all, you still want to use this retirement account for its tax benefits, but after you’ve maxed your IRA typically. This works the same as with a Roth IRA (index funds preferably if your company offers them, otherwise mutual funds) having a predetermined asset allocation to help you figure out what type of funds to buy.

1 brokerage account (Scottrade is a good name that goes around for this type of account, although companies like Vanguard, Fidelity, etc. will also have these, but with higher costs). This is your taxable retirement account. This comes last! If you can’t put money away in the other accounts first, then you don’t have the money to be doing stock trades. Still, you shouldn’t really be day trading, but buying index funds along your planned asset allocation.

That’s basically it – 5 accounts – an emergency account, a checking account, a Roth IRA, a 401(k), and a brokerage account. As your situation changes there are other types of accounts that might suit your specific needs, but generally this is what you’ll work with. Otherwise, you’ll want advice from a tax agent about more complex options like special savings accounts for your kids’ college expenses.

Maintaining these accounts is rather simple once you have your system/process setup. Generally, everything will sit still and you put money into your checking account. As you get enough money, every quarter or every month, you move that money into the appropriate account for better earnings. You should have an asset allocation plan thought out (see the side links for more help with that, especially Richard Ferri’s books) that guides what stocks/bonds/index funds you buy as your next pay check comes in. Then once a year, you’ll do something called rebalancing (also described in Richard Ferri’s books). If you aren’t there yet, it might seem like a lot, but once you have it setup, and you’re comfortable with moving your money around, it really want take much of your time at all.

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