Why should you have an Investor Policy Statement?
- Life is full of variables. These variables force us to react. The decisions we make today have a dramatic effect on our outcomes over time.
- Plan your reaction before facing a new situation
When should you create an Investor Policy Statement?
- When you start investing
- If you’re like most people, you missed that boat, so now is a great time.
- Anytime, unless we are in a recession. Not the best time for this type of planning.
How should you create an Investor Policy Statement?
I have created ours based he White Coat Investor template:
FI Chronicles Family Financial Policy Statement:
- I define Vocational Flexibility as the ability to choose your job based on your schedule, interests and work-life balance. Not based on maximizing income. A few low-stress, simple jobs involving great interests of mine:
- FC Dallas stadium usher
- soccer referee
- part-time librarian
- trumpet gig performances
- dividend income
- blog income
- Maintain a 20% savings rate (including employer match) and increase this by at least 1% per year through my 40s
- Leave retirement assets to grow from age 50-60. Live off Vocational Flexibility jobs and passive income during this decade. Ok to reduce retirement savings percentage during this time.
- Have zero mortgage at age 50 (or able to pay it off with after-tax funds)
- Provide a lump-sum gift of 25k to our children to help them off to a good start. They could use it for home down-payment, investment portfolio jumpstart or business seed money in their early 20s.
- Keep at least 70% of our portfolio in either S&P 500 or Total Stock Market index funds even during more conservative retirement years. (Core and satellite investment approach)
- If electing to do single stock selection, cap at 5% of total portfolio
- When available, choose passive over actively managed funds
- When making satellite investment decisions, document the rationale and allow at least 3 years to work before changing. These are not short-term decisions.
- Rebalance at least every 3 years
- If investing a lump-sum of less than 50k – deploy it without delay. If greater than 50k – we may elect to dollar cost average over no more than 6 months.
- If the market is down more than 10% YTD, we will not make any allocation changes. Instead, we will listen to (A Guided Meditation for When the Stock Market Is Dropping – YouTube) and chill out.
- If we plan to make a satellite allocation change, we will wait one month to execute once deciding to make the change.
- We will keep a cash balance of 10k in checking/savings. In an extreme situation, we could survive on this for about 3 months.
- We will keep a HELOC open – in the event that we face a longer-term income shortage. We will only use the HELOC for home improvement (not appliances or furniture) or during unemployment.
Home Ownership and Debt
- Home ownership is important to us. We plan to own a home for security, stability and personal freedom reasons.
- We will keep our payment under 25% of our gross monthly income (full PITI payment).
- We will pay off our home by the time we are 50 years old.
- We will pay off our credit cards monthly.
- We will not cosign student loans for our kids. If they take out student loans, we will recommend they keep the total balance under their first year’s expected income.
- We will not have combined car payments of greater than $250 at any time.
- We will not borrow for our kid’s vehicles.
Spending and Giving
- Maintain a monthly budget meeting to review expense categories, communicate and stay financially in sync
- For any purchase over $250, we will discuss it and consider the purchase for at least 1 day before making it.
- Save $200 per month for travel/extras budget and supplement travel with credit card points
- We will not use credit to fund vacations, recreational toys, furniture or appliances
- We will give to our local church
- We will give to others that we can help – with a spirit of gratitude and joy
As you might have guessed by now, I’m the money nerd in this household. I drafted this statement, but I As you might have guessed by now, I’m the money nerd in this household. I drafted this, but I know how important it is to get my wife’s buy-in on financial decisions. That is what this Financial Policy Statement is: predetermined decisions. We spent some time discussing each of the sections. I realized how different we approach financial planning. Reviewing this document was less enjoyable for her. She mentioned two reasons:
- Does not enjoy planning finances. I know that she is a great planner in her work, our schedule and lately, Disney travel planning. She enjoys planning in other areas.
- Too much can happen over the next 10 years. Long-term planning is not her interest because life changes a lot and it’s difficult to plan that far out.
These two points show how personality type and interests vary. Planning personal finances is a big interest for me. And she’s right a lot will happen over the next decade. But striving to stay on a plan is better than having no plan. In the end we’re wired differently and that’s part of what makes relationships work.
I value her input because she makes sound decisions. And I recognize two things:
- I have blind spots and need her perspective
- For us to work together as a team we must both agree on goals
Changes she proposed:
- Title change from “Investor Policy Statement” to “Financial Policy Statement”. She thought these goals were broader in scope than only investing, agreed.
- Add a monthly travel/extras budget because she does not want to wait until 50 to travel and enjoy some of life’s extras. A concern she mentioned is that if by raising our savings rate over the next decade, we can’t do these things, she’s not for it. So, we have now written an amount for travel/life’s extras into our budget. Great point and one that I had missed.
What is most important for me about writing down this Financial Policy Statement?
I’ve had many of these goals in rough form mentally, but never written down. When a goal is only in your head, it is subject to change. Reviewing our Financial Policy Statement during hard times or when facing big decisions should help us.
Read about the genesis of our FI Chronicles family financial policy statement.