I have eleven days to think about and plan what I am going to do about my 2019 savings. I put some time into this because I really don’t like to change in the middle of the year. The purpose is to set a target, a plan to reach it, and a path to follow.
There are two objectives to obtain — determine the amount of savings required for the retirement plan and determine the mix of accounts to receive that savings amount.
The first goal is constructed with a spreadsheet and a long planning horizon. The amount required within that spreadsheet does not take into account where I am along the path towards the level of retirement savings I think I need. Right now, I am a few years behind on the path. In general, I want to save enough so that it hurts. By that, I mean I want it to be difficult to consider buying a luxury item. I have plenty of food, clothing, and shelter and those are budgeted for in the cash account. I would rather save a little more than accumulate more stuff.
It seems like I can easily get to 120% just from my 401(k) plan at work plus the maximum amount I can save in my IRA. My goal is to get to 150%. At this point, I pivot to the account allocation. With the 401(k) and IRA, almost all of money is allocated towards equity investments. The remaining amount needs to be targeted towards other types of investments.
Because so much is put into the 401(k) and IRA, I am over-invested in equities. There are three other security types I want to look towards — fixed income, real estate, and cash. Fixed income is divided between an account at Lending Club and an account at Treasury Direct. Both are significantly under-funded so I will allocate 15% there. Real Estate is handled through Fundrise. It is also significantly under-funded and I will allocate 15% there. Cash is only slightly under-funded and I will hold the position for now.
The next step is to determine the path to achieve this plan. To begin, I convert the percentages into dollars and divide by the number of paychecks per year. I then create a budget for each paycheck and determine if I can afford those amounts based on historical spending patterns. In the past, I have almost always confirmed it was possible. Yet at the end of the year, it always seemed like such a struggle. After several years of experience, it seems to me that I never use the emergency fund for the purpose of smoothing out the expenses. The emergency fund has a range that I want to achieve. It is currently well above the minimum level. I continue to add to the account with each paycheck, yet I never pull back if there is an unexpected expense. Instead, I just charge the expense and work out a payment plan.
Pulling from the emergency fund for ordinary expenses is a bad idea, but forgoing the emergency fund to use the credit card is worse. I suppose this could be abused, so I will need to be vigilant and watch the expenses and the cycle of usage.
This is day one of the annual planning cycle. This is how I start. I expect at least two revisions over the next few days.
The Analytical Road 