Takeaway:
- Frameworks help us make decisions and take action. We use it in all parts of our lives. We can apply frameworks to our finances.
- A Personal Finance Reddit community user created a thoughtful and straightforward framework.
- The framework and concepts are discussed below.
The ultimate money flowchart
We rely on frameworks, habits, and guardrails to make decisions and take action in many situations. Similarly, there are frameworks for personal finance. One of the best frameworks is the money flowchart posted by /u/atlasvoid in the Personal Finance Reddit channel (see here).
The flowchart may seem complex, but the core concept and steps are as follow.
1. Create a budget.
As people say, “what gets measured gets done.” Creating a budget is the underlying foundation for understanding where money has gone, where it should go, and the key levers for change.
See this article on how to pull a budget together.
2. Cover necessities.
The first bucket is the absolute bare minimum costs to survive. This bucket includes rent and food. It also includes expenses required to make a living (e.g., phone, transportation). Last but not least, healthcare expenses are critical as well.
I believe having a minimal emergency fund of 1-3 months of living expenses is in this bucket too. Having a small emergency fund could literally be a lifesaver in the worse situations.
3. Payoff debt and liabilities, starting with the highest interest ones.
Debt with high-interest rates (e.g., credit card debt) could snowball into monsters if not paid off timely, which would destroy any financial plan and significantly impair a financial future. That’s why it’s essential to pay the minimum on all debt and loans (if not paid off 100% of the statement balance every month; paying off the entire statement every cycle is ideal).
4. Take advantage of all “free lunches” available.
Some companies offer excellent employee benefits. As an example, some companies offer 401K matches. The matching programs are a great way to accelerate wealth creation because the matches are essentially a pay increase and investments in retirement accounts have tax advantages.
5. Explore other tax advantage accounts.
There are other tax advantage financial accounts to explore. Again, these accounts have fantastic long-term potential due to their tax-efficient characteristics. These accounts may include high-deductible savings accounts (HSAs) for medical expenses or a college savings account (e.g., 529 plan) for a child’s college education.
6. Discretionary savings for individual investing and brokerage accounts
There’s much more flexibility and freedom for the remaining money. It is up to you to decide on how to spend it. You could save and invest for the long-term if there are no known near-term purchases.
Here’s the flowchart
See here for the original Reddit post.
Disclaimer: The contents of this website are opinions and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.