The same principles that guide the most successful companies in the world can be used to radically improve your personal finances. In Part One, we introduced the personal finance mission statement. Part Two explores how to translate this mission into action.

Where We Are: Charting Progress on the Fortune 500 Framework

Recap

In Part One of this Fortune 500 Framework series, I introduced the idea of implementing best-in-class corporate strategies into your personal finances.

That post honed in on the power of the corporate mission statement. Concise. Ambitious. Timeless. The mission statement guides an organization on a macro level. It helps executives make their largest decisions. And it serves as a foundation for growth and prosperity.

The personal finance application of this mission statement is what I deemed the “personal finance statement.” Like its corporate cousin, the personal finance statement fosters high-level commitment and awareness. And remember, it’s deep. It doesn’t represent what you want your personal finances to look like, but why.

Next Up

So that’s all well and good. You wrote your statement. You established a clear vision of your purpose and built increased intentionality in your life. Time for us to gather round a campfire and sing “Kum ba yah” as millions magically flood our bank accounts?

Not quite. The fun has just begun.

Now, it’s time to translate the mission into action. In the corporate world, this transition is facilitated by an employee handbook. The handbook outlines organizational standards and behavioral expectations. It’s a one-stop-shop for employees looking to answer questions about policies, procedures, rules, and expectations. Crucially, it’s also a living, breathing document. Often, the HR team updates the handbook annually as a company grows and the business climate shifts.

We’ll call the personal finance parallel to the employee handbook a “financial handbook.” It will serve a similar purpose. However, this financial version strips out the junk. No legal jargon. No fluff. Just 2-3 pages of impactful, core principles that will help your personal finances flourish.

Your high-level personal finance statement means nothing if you don’t create a plan to execute. Once you write down your principles and policies, ambiguity will fade. Human nature will take over. We innately crave a sense of direction and daily progression. The financial handbook will appeal to these internal desires and put you on track to win. Daily.

Corporate Concept – The Employee Handbook

If you’ve started a new job in the past few years, you probably remember HR sending you some sort of employee handbook to review. Before starting my first job, I think I spent about 30 seconds scrolling through mine. I saw it was over 100 pages and closed it immediately. I was a college senior at the time. It looked overwhelming and I had more “important” things to do with my time (read: a beer pong match).

By the time I started my second job, my priorities had shifted dramatically. This time, I spent a few hours reviewing the handbook. I wanted to gain an intimate understanding of every single ancillary benefit provided outside of my base pay and bonus. I came to view compensation as a “package” not a number. Also, I realized that I could glean significant insight about my employer’s core values by analyzing 401K matching policies, insurance offerings, disciplinary protocols, vacation guidelines, etc.

I mention all of this not to tee up a deep dive into the nuances included in a typical employee handbook. Your HR rep can walk you through that.

My point is simply that these documents present treasure troves of information once you know what to look for. The handbook translates an overarching mission into action through employee policies and procedures. And as mentioned, it serves as a living, breathing document for employees to consult as various issues and questions arise.

Personal Concept – The Financial Handbook

The financial handbook functions similarly to the corporate world’s employee handbook. But instead of outlining the expectations around your conduct and responsibilities as an employee, the financial handbook explicitly sets the daily standards for your personal finances.

To create your financial handbook, take your mission statement and work backwards. What must you do on a day-to-day basis to achieve the results that your financial mission demands?

Check out my recommended structure below.

Section 1 – Spending & Saving

First, establish the guidelines for your spending and saving decisions. Grouping these together works well because your spending behavior directly dictates your ability to save. They are inextricably linked.

Target Savings Rate

The most important component of this section is deciding on a target savings rate. In other words, the proportion of your take-home pay that you’ll save out of each paycheck. This will serve as the backbone of your daily financial plan and dictate your investing strategy, retirement timeline, etc. The savings rate decision will influence the rest of your handbook. Increasing the rate allows you to accelerate progress towards almost any financial goal.

I use a target savings rate in lieu of a rigid budget. If my savings rate dips way below my target, I can always dig into the details to see what happened. But some may prefer the granular spreadsheet approach with category-by-category spend targets in place. If so, memorialize how you plan to track spending and allocate it across categories. This is your handbook and your choice. Figure out what makes you happy.

Additional Topics

Another crucial piece of section one: how will you physically spend money? I spend almost exclusively on a credit card for ease of tracking / rewards. Alternatively, you may prefer debit cards or even an all-cash approach like the Envelope System to cultivate discipline. Again, your handbook, your choice.

Section one should also include your emergency fund policy. Consider the optimal size of your emergency fund and how you’ll store it. This is heavily dictated by your risk-tolerance.

Finally, designate one (or two) guilt-free spending categories. This is based on the premise that you can afford anything, just not everything. It facilitates an abundance mindset around your financial life. Money is meant to be enjoyed. The whole purpose of this exercise is to foster happiness and intentionality. Not deprivation.

Section 2 – Investment Policies & Procedures

The goal here is to document: the types of assets you’ll buy, how you’ll buy them, and what accounts these investments will flow through.

Asset Allocation

First, determine your asset allocation. This means deciding the percentage of your total investment portfolio that will go towards stocks, bonds, real estate, cryptocurrencies, commodities, etc.

Within this asset allocation, strive to flesh out further detail. For instance, say you plan to invest the majority of your net worth in equity markets. Will you invest in passive index funds, active mutual funds, individual stocks or some combination? Do you have a target expense ratio or long-term return? Will you prioritize higher cash flow (through dividends) or higher growth strategies with upside potential.

Investment Process

Next, consider how involved you’d like to be in the investing process. If studying financial markets and frequently logging into your brokerage account sounds like torture, building an automated investing system likely makes sense. Also, decide if you will invest in lump sums or dollar cost average to smooth returns.

Anticipate market volatility and downturns, and proactively plan your response. I personally like to build flexibility into my handbook which allows me to invest more aggressively during market drops. For example, this could look something like “triple biweekly investments into my taxable brokerage account when the S&P 500 decreases more than 10% in month.”

I’ve used equity investing to illustrate my points here, but you can extend this concept to any form of investing. For instance, if you plan to invest primarily in real estate, this section should still outline your desired level of involvement with your properties and how you’ll respond to shifts in the housing market. If you want limited participation, perhaps you buy turnkey properties or invest in syndicated apartments. On the other end of the spectrum, a house flipper might spend nights and weekends personally renovating their projects.

There’s no one “correct” investing strategy so this section will vary greatly among investors. What matters is that you design a plan that aligns with your goals and document it to hold yourself accountable.

Investment Vehicles

Finally, address which accounts will house your various investments. Will you prioritize tax optimization by investing primarily with tax-advantaged options such as the 401K, Roth IRA, HSA, etc.? Or do you desire greater short-term flexibility and access to your funds?

I tent to opt for whatever strategy allows me to pay the absolute bare minimum in taxes. But there’s an inherent tradeoff. Aggressive tax optimization generally means investing through retirement vehicles that place restrictions on when the funds may be withdrawn. Weigh this balance. Then write your preferences in the handbook.

Section 2 Personal Example

Here’s a quick look at some principles I personally include in section two of my own handbook:

  • Prioritize the lowest-fee, lowest-tax, most diversified investment options available
    • Target sub-0.2% expense ratios on funds (this almost always leads me to passive ETFs / index funds)
  • Automate investments in tax-advantaged retirement accounts according to my bulletproof plan for building wealth using dollar cost averaging
  • Contribute the remainder of my monthly savings to my taxable brokerage account, again dollar cost averaging into low-cost index funds
  • Keep ~15% of net worth in liquid money market funds for opportunistic investments

Section 3 – Debt Management

Diagnose your debt situation. What kinds of debt do you hold and what are the terms?

After laying this out, craft your debt management policy. Some people are much more comfortable holding debt than others. Just remember, not all debt is created equal.

I almost always suggest prioritizing the payoff of any high-interest consumer debt like credit cards. Beyond that, the debt world turns gray. If you carry student loans or a mortgage, decide how you’ll balance debt paydown and investments when you generate incremental savings each month. Would you prefer to pay off the mortgage on your primary residence ASAP for peace of mind, or optimize your total returns by investing in the market?

You might even define an interest rate threshold to add structure here. For instance:

  • Make minimum payments on debt with sub-4.5% interest rates and invest remaining savings in appreciating assets
  • Prioritize paydown of any debt with interest rate over 4.5% before investing incremental savings in additional assets

I might’ve avoided one of the biggest money mistakes in my life if I had adopted this sort of framework!

Section 4 – Philanthropic Activity & Legacy

Finally, put some thought into the causes and relationships that matter most to you. How would you like to use your money to create an impact in the world and empower others?

For some, this might simply mean giving $5 bills to every homeless person they pass. Others might hope to create scholarship funds at their alma maters or build philanthropic foundations to serve their communities.

The possibilities are endless, but if you have an underlying desire to give back, put it down on paper. It’s just as critical to document your philanthropic ambitions as it is your saving, investing, and debt policies.

Also in this section, contemplate the impact of family and how this will shape your goals. If kids are in the picture, or on the horizon, think about estate planning and the kind of life you envision for them. What about parents and other relatives or friends that fall on rough times?

Think proactively about the role that you’d like money to play in these relationships and the legacy that you would like to leave. This will provide enhanced clarity and prevent you from defaulting to panic in the midst of tough moments.

Key Takeaways on Fortune 500 Personal Finances (Part 2)

Part One of this series introduced the concept of bringing corporate tools into the realm of your personal finances. We focused particularly on the personal finance statement as a way to focus attention and foster commitment.

Here in Part Two, we explored how to translate overarching goals into everyday behavior using a streamlined financial handbook. With just four simple sections (Saving / Spending, Investing, Debt, and Philanthropy / Legacy) the financial handbook represents a comprehensive document that will ensure daily actions align with our personal finance statement.

So, we’ve established the big vision. And we’ve created policies to encourage habits that will propel us towards the vision. But how can we measure performance? How do we know that we’re on track at any given moment?

Corporations institute quarterly reviews, Key Performance Indicators (KPIs) and annual board meetings to track their activities and create expectations for success. Stick around for Part Three to discover how to apply similar tactics to your personal finances.