How to Craft An Annual Financial Strategy with TNFG
Crafting the right financial strategy for your household is the key to building wealth and minimizing debt.
All right, here goes the 2022 financial review and goals along with the 2023 financial strategy. In this post, I will be giving an overview of the TNFG household’s personal finances, talking about things such as the importance of Cash Flow Management, Why Boosting Your Savings Rate will help you, and Why Investing is Mandatory.
As a bonus, you will also get a deeper dive into our investment accounts and strategies, including but not limited to Investment Account types, Overall Portfolio Composition, and Investment Performance.
There is a lot to cover.
Table of Contents
Either Use Net Worth or Cash Flow for Your Financial Strategy Review
Since most Americans don’t know their Net Worth, just remember that Net worth is the net of all your assets minus all of your liabilities. Your assets range from liquid capital in your bank (i.e. checking and savings) to retirement accounts, homes, and even in some instances your pension. Your liabilities include your consumer debts (i.e. credit cards, personal loans, and auto loans), student loans, and mortgage. Boiling down to everything you owe. If you don’t know what Net Worth is, you can use Mint.com for free.
In contrast, your cash flow measures Income Minus your Expenses. You can track that monthly or annually with Personal Capital.
You can use either to track and revise your personal financial strategy.
Our Net Worth Review
Check out the TNFG 5-year snapshot of our net worth as far back as January 2018.
| Net Worth | Investments | Credit Card Debt (-) | |
| January 1, 2018 | -$23,747 | $46,142 | $6,698 |
| January 1, 2023 | $756,740 | $472,863 | $12,148 |
| Change in $ | +$780,487 | +$426,721 | +$5,450 |
| Change in % | +3,287% | +925% | +81% |
Even though our credit card debt balance grew, our investments pushes our wealth upwards. This is a core tenant of the Net Max Financial Plan.
A great financial strategy doesn’t trade debt repayment over wealth building. Rather it balances both concepts to improve our overall financial strategy. See Table #1
Think of it in simple numbers.
Your matching contribution represents a 100% gain on your investment. There is no other investment that can match it. Secondly, your credit card is charging you over 20% APY while you are earning 8%-9% on investments. This is why paying off high-interest credit card debt is important. And finally, your bank is giving you 0.01% on every dollar you save while investing for the long-term nets a historical average of 8%-9%. Which one is the bigger number?
These are all important considerations from a financial strategy point of view.
Analyzing Cash Flow
| Annual Cash Flow | Monthly Cash Flow | |
| Yr. 2018 | $5,174 | $431 |
| Yr. 2022 | $24,767 | $2,065 |
| Change in $ | +$19,593 | +$1,634 |
| Change in % | +379% | +379% |
Cash Flow is definitely king. We notice in 2019 a massive shift in how we were managing our expenses translated into a more efficient financial strategy.
Even though we travel each year, it didn’t slow down our growth. We are now pulling in +$2,000 per month. This works out well since we can use this amount to pay down extra debt and/or invest.
By paying off our credit card balances, we incur fewer interest fees per month. And by investing, we can also net more dividends throughout the year. It’s a win-win balancing act.
As you can see, over the last 5 years we made a 379% improvement in our cash flow. As we go into less credit card debt, the goal is to shift into building our dividend portfolio for early retirement.
More Income, Tax Avoidance, and Matching Contributions
| Actual | 2022 Income |
| His base salary | $121,065 |
| (His) 401k match @5% | $6,053 |
| (His) Bonus | $1,549 |
| Our Family HSA Match | $1,600 |
| Her base salary | $98,500 |
| (Her) 401k match @4% | $3,940 |
| TOTAL INCOME | $232,707 |
If more income leads to more taxes, the way to improve your financial strategy in this department is to use tax mitigation. The best way to cut taxes is by contributing to your own employer-sponsored plan, traditional individual retirement account, and Health Savings Account. In 2023, a single person can avoid taxes on as little as $30,000 per year.
In 2022, our household income comprised of our base salaries plus our 401k matching contributions as well as our Health Savings Account match.
While we can’t count on bonuses, we earned a net of $1,549. We made a total of $219,565 in base salary before taxes, plus an additional $11,593 in employer matching contributions. See break out in table #3.
If you are not taking advantage of your employer matching, you are leaving some of your own money on the table. Even an annual matching contribution of $3,600 (or $300 per month) could be worth $966,324 if invested for a 40-year working career at 8%.
Feel free to run the numbers by yourself. It’s worth factoring that into your financial strategy.
Keeping Our Expenses in Check
| Expense Categories | 2021 Annual | 2022 Annual | Est. 2023 Annual |
| Housing | $26,222 | $36,366 | $25,393 |
| Travel | $5,111 | $25,251 | $17,267 |
| Food & Dining | $8,340 | $9,134 | $8,305 |
| Transportation | $2,125 | $3,874 | $6,581 |
| Fees & Charges | $446 | -$1,272 | $1,204 |
| Health & Fitness | $3,164 | $6,603 | $1,281 |
| Bills and Utilities | $4,385 | $5,040 | $3,579 |
| Shopping | $5,626 | $6,797 | $4,330 |
| Personal Care | $952 | $4,654 | $2,297 |
| Entertainment | $1,631 | $2,673 | $1,916 |
| Education | $205 | $205 | $4,250 |
| *Misc. Expenses | $7,063 | -$16,843 | -$11,466 |
| TOTAL EXPENSES | $65,267 | $82,481 | $64,687 |
*Misc. expense is offset by Misc. Passive Income
All financial strategies rise and fall based on our day-to-day expenses. Watch out for these issues. Our expenses increased in 2022 on the weight of health emergencies, capital repairs on our homes, and a massive travel bill.
A historic 40-year high inflation didn’t help matters as we paid way more for just about everything we had. However, since travel is our vice, we made room to spend for our Quebec trip as well as the Portugal-Spain trip.
No regrets here.
What we ended up going is cutting back on average entertainment expenses in order to prioritize what we love to do.
Since we are traveling to Mexico for a wedding and South America for our annual end-of-the-year trip, we will be budgeting extra hard in 2023. See our expenses and how they changed over 3 years in table #4.
No matter how your budget breaks out, just remember to live below your means. Where possible cut down on unnecessary expenses and improve your cash flow.
Some rules of thumb include not carrying a total housing income of more than 25% of your take-home pay.
Why is Savings Rate so crucial for your financial strategy?
The savings rate is often overlooked. In a nutshell, the savings rate is the percentage of your total income going towards savings or investments. A high percentage rate will allow you to reach Financial independence faster.
We are seeing more and more stories of people making over $100,000 living paycheck to paycheck. Most wonder why but it’s quite simple. If a household makes $100,000 per year but spends $90,000, it’s likely that they didn’t even factor taxes or inflation into the equation. In truth, they are over-leveraged by at least $10,000 (net of 22%-24% tax brackets). Furthermore, their savings was sub $8,000 or 8%.
At that rate, you will need to work for the rest of your life. On the other hand, there are households making less than $75,000 per year but saving $25,000. Their 33% savings rate is much greater even if their income is 25% less. This is why your savings rate is so crucial.
The average household in America has a savings rate of less than 8%, which is not enough to have a comfortable retirement, and in many cases, not enough to retire at all. The Financial Samurai provides the best Savings Rate Chart For Financial Freedom online. At less than 10%, you are looking at working for more than 51 years. However, if you boost that number north of 30%, you shave off 21 years of grueling labor.
For our household, we plan to boost our Savings Rate to 47.85% for 2023. This is a calculation of the estimated after-tax base income divided by our investment contributions. See table #5.
Investments Compared To Income Sources
| Est. 2023 Investments | Est. 2023 Total Income | ||
|---|---|---|---|
| His 401k Contributions | $22,500 | His Base Salary, net of taxes | $101,520 |
| (His) 401k Match | $6,345 | Her Base Salary, net of taxes | $78,800 |
| HSA Contributions | $7,750 | Net Rental Income, of expenses | $4,020 |
| HSA Match | $1,600 | Qualified Dividends | $4,000 |
| Her 401K Contributions | $22,500 | Other Passive Income | Unknown |
| (Her) 401K Match | $3,940 | Bonus | Unknown |
| His Roth IRA | $6,500 | ||
| Her Roth IRA | $6,500 | ||
| Brokerage Account | $12,500 | ||
| TOTAL | $90,135 | TOTAL | $188,340 |
Investing is no longer optional
Why Investment Performance is important to Your Financial Strategy
Every year, there are about 10 people who want to get a deeper dive into our investments. Just know that I’m far from an expert. I’m a goofball most of the time. However for kicks, here are all our investment accounts as of December 2022. See Table #6.
The snapshot includes how the money is distributed and its performance, per account.
You can see that in total, we contributed $81,744 towards investments in 2022. Although 2022 was a down year in terms of stocks, it presented a great opportunity to buy low-by-dollar cost averaging into it. The golden rule is to BUY low and HOLD for dear life.
Investment Performance Figures for 2022
| Beg. Value | Contributions | Change | End Value | Numeric Performance | Mkt. Performance | |
| His 401K | $229,354 | $20,500 | -$21,235 | $208,119 | -9.26% | -17.65% |
| Her 401K | *$0.00 | $8,532 | +$10,293 | $10,293 | +100% | -16.83% |
| *Her 401k | $60,717 | $22,462 | -$60,717 | $0.00 | -100% | +14.37% |
| Her Traditional IRA | $18,901 | $0.00 | +$52,825 | $71,726 | +279% | -26.18% |
| His Roth IRA | $47,325 | $6,000 | +$6,162 | $53,487 | +13.02% | -19.97% |
| Her Roth IRA | $13,946 | $6,000 | +$4,270 | $18,216 | +30.62% | -9.78% |
| HSA (family) | $31,727 | $7,500 | -$3,051 | $28,676 | -9.62% | -9.27% |
| Brokerage | $40,083 | $10,750 | -$2,956 | $37,127 | -7.37% | -16.78% |
| TOTAL | $442,053 | $81,744 | -$14,409 | $427,644 | -3.26% | -18.35% |
*Job Switch – 401k Roll Over to Traditional
How did we allocate our portfolio?
If you look at our portfolio composition in table #6, you will see that we have a fair amount in our retirement accounts. We have a total of 42 holdings with 88 percent in stocks and 12 percent in bonds. There is a total of $37,381 in cash drag which represents 7.49% of our portfolio.
Our asset allocation is aggressive. While historically this would have led to higher returns, it also means greater volatility and uncertainty. For our level of expected return, our current Asset Allocation is efficient, as indicated by our proximity to the efficient frontier.
It might be time for us to re-balance our portfolio for better long-term results. Compared to our target allocation, we are most over-weight in US Stocks and most under-weight in International Stocks. This means we would need to decrease US stocks by $145,000 and increase international stocks by $83,100 along with US bonds at $54,100 and International bonds at $11,000.
A lot of slight micromanaging toward 2024. Read about how to achieve optimal asset allocation with Investopedia.
Aligning Your Financial Goals and Making Bold Projections
The name of the game is alignment. While we aren’t looking for big returns, it will be interesting to see if we could be more efficient as well as move toward a Business Cycle investment approach. Here are our projections for 2023:
- Based on our data, we project that our Net Worth to grow to $906,211 by the end of 2023. At the same time, our investment accounts are projected to be at $582,695.
- Our million-dollar net worth goal is lining up with April 2024. The best thing we can do now is to hope that NIO rebounds so we can sell out of that positions as well as VTI. These under-performers need to go.
- We need to concentrate our position on building dry powder for the next 20% drop in the market. This will require about $50,000 on standby. I’ll likely throw that into a specific dividend income account. It’s important to never hold on too tight to cash.
- Finally, once our student loans are canceled, we will be full steam ahead with our after-tax account.
Building Wealth While Buying Back More Time
While most people from the outside, think that building wealth is about having money to buy a yacht and expensive material items; those on the inside know better. The main goal is to buy back more of your time to live a life outside of trading time for money just to spend it on delivery.
As my wife and I align our values, we are trying to cover our living expenses to include our long-term health. Beyond that, we want to travel the world and make knowledge accessible to anyone who wants it. This is why the website exists. It’s a repository of information. The solutions and ability to reach millionaire status in one lifetime and to go further. In the end, a great financial strategy helps you buy back your time.
And there you have it, the TNFG financial review for 2022 along with the Financial strategy for 2023. Doing one of these annually should be your norm. For a more measured approach, you should consider Biannually or even quarterly.
I hope this encourages you to start tracking your own personal finances. Turns out, “What isn’t measured doesn’t grow.”
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