How to be a Money Strategist to Reach Your Financial Goals (Part 1)
Mr. ToughMoneyLove is a Money Strategist
Setting and reaching financial goals is at the core of personal financial planning and retirement planning. This two part article explains how being a money strategist provides a structure for me to reach my family’s financial goals. In this part 1, we define financial goals, money strategies, and money tactics. I provide examples of these in my financial life. In tomorrow’s part 2, I will suggest how others can become money strategists themselves.
Mr. ToughMoneyLove likes to think of himself as a money strategist. (I hope that is not too pretentious sounding.) Others in the world of personal finance apply labels to themselves such as “bargain hunter”, “frugalist” or “extreme saver” or even “money hacker.” That is not me, although I might use some of the same strategies and tactics as those folks do. So, let’s first discuss …..
Goals, Strategies, and Tactics
Before I try to explain what I mean by “money strategist”, let’s agree on some definitions. I’m guessing that most folks are familiar with the terms “strategy” and “tactics” in the context of warfare. (I’m aging myself again, but I remember playing “Stratego” and “Tactics” board games as a youth. I think you can still buy Stratego. Anyone else remember these?) Strategies and tactics are also commonly discussed in the finance world, as businesses develop plans to achieve certain financial goals. On the individual and family levels, we should have financial goals. We also should investigate and select strategies to achieve those goals.
Our Financial Goals
Examples of goals in personal finance would include goals that my wife and I have discussed and agreed on: (1) achieve financial independence (more about this later) within 7 years; (2) finish putting our sons through college; (3) keep our present vacation home as a part time residence during financial independence (a/k/a retirement); and (4) keep our horse Belle pastured and well-cared for in our golden years and in her golden years.
Now you might be thinking, what about being debt-free – isn’t that a goal? I don’t think that being debt-free is necessarily goal but it could be a strategy. We want to be debt free but primarily because it is an excellent strategy to use to achieve our goal of being financially independent. To me, being financially independent means being able to work when, where, and as much as I want – or not at all – while maintaining a reasonable standard of living and without having to worry about surviving a financial crisis. Some people say their goal is retirement but to me that is not an accurate description of our goal because it is too narrow in scope. I might want to work during our financial independence. I just don’t want to be forced to work due to money problems.
Regarding the “debt-free” goal vs. strategy, some people have acquired enough wealth that they are financially independent even though they might have debt. That debt is probably a low interest mortgage. If they chose to, or if they needed to, their substantial liquid net worth would allow them to pay off that mortgage. So, they have achieved their goal of financial independence without using a debt-free strategy. We will not be able to do that so we have adopted a debt-free strategy to get us to our goal of financial independence.
What about being “frugal” – isn’t that a goal you might ask? I don’t think so. Again, I think that being frugal is a strategy that one would adopt towards any one of a number of different goals. Those goals could include those that we are focused on. Or they could be goals such as saving for college or for a down payment on a house. I suppose that there are people out there who just enjoy being frugal even though they do not need to be, treating it like a life game. That’s fine but I would then say their goal is to challenge and entertain themselves or perhaps reduce their personal impact on our environment. Those goals are also fine.
Our Money Strategies
Returning to the dictionary, it tells us that a is a “plan of action toward achieving a specific goal.” In the financial world, the definition can be refined to “practices a person adopts to pursue his or her financial objectives.” We have already mentioned some strategies that can be used to achieve financial goals, including elimination debt and adopting a frugal lifestyle. If one of your goals is financial independence like ours, other strategies for achieving that goal could include: (a) investing to increase your net worth so that it would provide enough passive income to sustain your lifestyle; (b) working long enough to qualify for a pension; and (c) insuring against known financial risks.
In our case, we have adopted the following money strategies to help us reach our first goal of financial independence: (a) investing to increase net worth so that at the end of it will generate and sustain sufficient passive income to maintain our lifestyle; (b) pay off the existing mortgages on our primary residence and vacation home so that we will have no debt; and (c) accumulate sufficient liquid assets that will support us through market downturns or other financial crisis that might interfere with strategy (a). You can probably think of other money strategies that you might use to achieve your financial goals.
Our Money Tactics
This brings to the final piece of the goal-achievement puzzle: money tactics. In the world of business management, “tactics” are the specific actions, sequences of actions, and schedules that you implement and use to fulfill your strategy. If you have adopted more than one money strategy toward reaching your financial goal, you may have different tactics for each. In a nutshell, money tactics are those actions you take in the short term to implement your strategy.
Let’s use our money strategies again as an example. For implementing strategy (a) – investing to increase net worth – we are using several different money tactics including fully funding my 401(k) account, using my HSA fund as a Roth-type investment, and allocated these invested assets to provide an all weather portfolio. To implement strategy (b) – paying off our mortgage – we have increased our savings rate by cutting various expenses including lawn care expenses, phone expenses, and automobile insurance. As a further money tactic in this strategy, we have opened up several online high yield savings accounts. We are putting surplus cash in these accounts where it will stay until we have accumulated enough to pay off the mortgage. Finally, the money tactics we are using for money strategy (c) – accumulating liquid assets – include purchasing government I-bonds which in five years will be liquid, tax-deferred, and inflation-protected, and building a CD ladder. We will continue to do this until we have at least three years of anticipated living expenses accumulated. That way, we will not have to sell any of our long term portfolio (strategy (a)) in a market downturn.
Our Complete Package of Goals, Strategies, and Tactics
To summarize, Mr. ToughMoneyLove (and his tolerant and lovely wife of 30 years) have defined and implemented the following financial goals, money strategies, and money tactics:
Financial Goal 1: Achieve financial independence within 7 years
Strategy A: Invest to increase net worth to generate passive income stream to maintain standard of living
Tactics: fully fund 401(k); use HSA account as Roth investment vehcile; design asset allocation to create all weather portfolio; estimate cost of standard of living at 7 year point; periodically test portfolio allocation and expected income generating performance using Financial Engines and Firecalc analysis tools
Strategy B: Pay off existing mortgages to become debt free
Tactics: eliminate or reduce recurring lawn care, phone, and auto insurance costs to increase savings rate; determine mortage payoff amount at end of goal period; open and deposit surplus cash in high yield savings accounts to accumulate needed payoff amount; keep sons on four year college plan.
Strategy C: Accumulate liquid assets for protection against market downturns and financial emergencies
Tactics: Periodically purchase government I-Bonds; build a ladder of short term CD’s.
Financial Goal 2: Financially support sons through college.
Strategy A: Put sons on 4 year plan
Tactics: Adopt and enforce rule that support ends after 4 years; require son to pay own expenses beyond tuition, room, and board
Strategy B: Budget for and pay college expenses from cash flow
Tactics: Use tuition periodic payment plan offered by college bursar; defer other major non-educational expenses pending availability of cash flow surpluses
Financial Goal 3: Maintain existing vacation home as part-time residence throughout period of financial independence.
Strategy A: Pay off existing mortgage
Tactics: See Goal 1 above
Strategy B: Reduce long term maintenance costs
Tactics: Replace shingle roof with metal roof; replace wood siding with fiber cement siding; replace wood decking with composite decking
Strategy C: Include taxes, insurance and maintenance costs in standard of living estimate for Goal 1
Tactics: Document and estimate future recurring and expenses from Quicken data
Financial Goal 4: Keep horse pastured and well-cared for in “golden years.”
Strategy A: Include pasture board and other expenses in standard of living estimate for Goal 1
Tactics: Document and estimate future expenses from Quicken data
Strategy B: Increase cash flow from other income sources
Tactics: Defer taking Social Security until age 70; develop income streams from future blogging activities
Of course, we could adopt new and different money strategies for our goals as we discover them. Also, there are likely other money tactics that we have used or will use to implement our strategies. But some of these are of such short duration that we may not even write them down. But I hope you can see the big picture of how Mr. ToughMoneyLove has investigated, selected, and organized money strategies and tactics to achieve our financial goals.
Why You Should Be a Money Strategist
Surely we can all agree on the wisdom of establishing financial goals for our life and writing them down. It is equally logical to say that it is pointless to have financial goals if we don’t also have a plan – one or more money strategies – that will enable us to reach those goals. Finally, a strategy needs to be implemented using one or more short term actions that are carried out in parallel or in sequence over tome. We call these money tactics.
Without thinking about and executing these money tactics, our strategies are stuck on paper and the goal itself becomes unachievable. Similarly, if we confuse a money strategy – becoming debt free or adopting a frugal lifestyle – with a goal (e.g. buying a house or retiring), we may not have the proper motivation to implement the plan with appropriate money tactics. In fact, without clear articulation of financial goals and related money strategies, we will be handicapped in our efforts to investigate and select available money tactics. Conversely, if you select different money tactics without knowing why they are important and how they are related to money strategies and financial goals, you could end up using tactics that are inefficient or that even conflict with one of your goals.
So if you agree that being a money strategist may work for you, come back tomorrow for Part 2 of this article when I will suggest a plan that may help you do that. Meanwhile, please let me hear about financial goals you have established and the money strategies and money tactics you have implemented to achieve those goals.