Three Parts of a Financial Plan

We used to worry about money a lot, but we don’t anymore, because we have a simple strategy. It comes in three pieces, and it works. Anyone can learn it. It goes like this:

1. Automatic payroll deductions
2. IRA once a year
3. Low overhead.

When I was younger my eyes used to glaze over when I read lists like that. I didn’t want to have to think about anything with an acronym. I didn’t want to learn new technology. I figured I would think about it when I was older.

Now I AM older and I’m feeling pretty smug that Young Me read so many personal finance books and made the effort to learn these concepts.

It takes about 15 minutes to fill out the paperwork to max out your payroll deductions and put them in a 401(k) or equivalent. You literally only have to do it once per job. That’s the first step, and after those 15 minutes then you never have to think about it again.

The third step, living on less money than you earn, can be tricky. It can be hard to believe it can be done. It sometimes means making radical lifestyle changes, and those can be emotional and hard to explain to other people. Following the plan itself, though, becomes automatic.

It’s the second step, setting up an IRA and putting money in it every year, that trips people up. I knew what it was and how to do it, and I never bothered to get around to it until a few years into my second marriage. When I think back to all the tens of thousands of dollars I would have if I hadn’t procrastinated on this, it makes me want to slap myself.

UGGGH!

The reason it’s so easy to procrastinate is that there isn’t an HR person to walk you through it. Nobody sends you an email reminder. You have to find a bank and set up a brand-new account. You have to decide which of two types of account work for you. Then you have to get the money together and remember to deposit it before the deadline every year.

In practice you can do it in an hour, set up a reminder on your phone in one minute, and then spend ten minutes a year moving the money.

It’s not the time, it’s the mental bandwidth.

Now that I know how to do this stuff, and I’ve seen it work, it seems simple and easy. In fact most people I know put more thought, focus, and attention into following the plot of complicated prestige television than I do into investing. It’s just that hump of studying up and learning how something works, especially if nobody you know does it or talks about it.

Setting up an investment account is free. You don’t have to keep putting money in it; you can skip a year if you have to. You can also catch up and do the previous year. You don’t have to have the maximum amount, either. Even if you only have a dollar to put in one year, that’s better than nothing.

This is a conversation I had with my husband when we first met, when we were just work buddies. He was complaining about his expensive divorce, child support, and alimony, and he said he couldn’t even afford to invest in his retirement plan.

“What??” I bawled him out. “You make three times as much as me and I’m maxed out. You’re trying to tell me you can’t even save one percent? I don’t believe you.”

(This is actually why we are married today, because he respects my frugality and I always tell it like it is).

He told me later that he went in to HR and filed the papers. He immediately maxed out his retirement contribution and, of course, it was fine. He could afford it after all. Emotionally, he had just been feeling the divorce drama. Mine had come and gone five years earlier, so I recognized it.

The thing is, there’s no such thing as CAN’T AFFORD. You’ll never be as young again as you are today. One day, Older You is going to have some kind of problem that only Younger You can solve, because Older You won’t be able to work or earn more money. The emergency you have in the future is going to be harder to solve than any problem you have today. Almost definitely.

You can never allow yourself to believe that it’s impossible. You can never give in to the idea that you can’t even find a penny on the street once a year. (A guy at the next table in my cafe literally dropped a penny on the floor AS I WROTE THAT and he still hasn’t picked it up. It’s the second penny I’ve seen on a floor today).

The main advantage of being poor (or thinking you are) is that you know how to live with a low overhead. That means you understand austerity, that you can emotionally handle spending as little as possible on things like rent, transportation, healthcare, heat, and food.

The disadvantage of being poor is that scarcity mindset prevents us from having better ideas about how to earn more money.

I did my husband the favor of snapping him out of his divorce blues and convincing him to start investing toward his retirement again. That paid off for me because now his financial future is also mine... He returned the favor to me, many times over, by painstakingly teaching me how to replace my scarcity mindset with abundance mentality.

None of the rules that worked for my life when I was poor, a broke student, an entry-level career person, none of those rules make any sense in my life as a comfortably established married person.

Another way to express that there are three parts to a financial plan is like this:

1. Emotions
2. Knowledge
3. Action​

Feel that your anxiety and dejection about money is an emotional state, not reality. Understand that the only difference between you and a rich person is that they know things you don’t. Figure out what it takes to kick yourself, to make yourself do things. How do you get yourself to make phone calls or log in to websites or drive to a bank? How do you set up reminders for yourself to do things by a certain date? How do you inspire yourself to learn things you don’t already know? What do you do when you realize you need help; do you ask someone?

Everyone has a financial plan. For most people that is, “Don’t think about it right now.” Please reward yourself by using your imagination, your creativity, and your intelligence to come up with a more interesting plan. Maybe part of that could be setting up an account for your IRA, even if you don’t have any money to put in it quite yet.