financial-planning

Financial Planning

This is an educational financial planning framework, not personalized financial advice. For advice tailored to your complete situation, consult a fee-only fiduciary financial advisor.

The Financial Priority Ladder

Work through these stages in order. Each stage builds on the previous one — don't skip ahead unless the earlier stages are covered.

Stage 1: Stabilize Cash Flow

• Track income and expenses (use the budgeting skill)
• Build a starter emergency fund ($1,000–$2,000) to break the paycheck-to-paycheck cycle
• Set up a system: checking for bills, savings for emergencies, automate what you can

Stage 2: Capture Free Money

• Contribute to employer 401(k)/403(b) up to the full employer match
• This is an immediate 50–100% return — no investment beats it

Stage 3: Eliminate High-Rate Debt

• Pay off debt above ~6–8% interest (credit cards, personal loans, some private student loans)
• Use avalanche method (highest rate first) for math-optimal payoff, or snowball (smallest balance first) for motivation
• Use skills/budgeting/scripts/debt_payoff.py for comparison

Stage 4: Build Full Emergency Fund

• 3–6 months of essential expenses in a high-yield savings account
• Stable job, dual income, no dependents → 3 months may be enough
• Variable income, single earner, dependents, health concerns → 6+ months
• Self-employed or commission-based → consider 6–12 months

Stage 5: Fill Tax-Advantaged Space

Work through in priority order (see investing skill's account hierarchy):

1. HSA (if eligible) — triple tax advantage, best account in the tax code
2. Roth IRA (or backdoor Roth if over income limit) — tax-free growth forever
3. 401(k) up to maximum ($24,500 in 2026) — pre-tax or Roth depending on situation
4. Mega backdoor Roth (if employer plan allows) — after-tax 401(k) → Roth

Stage 6: Medium-Rate Debt vs Investing

For debt between ~4–6% interest (some student loans, auto loans):

• This is a personal decision, not purely mathematical
• Guaranteed "return" of paying off 5% debt vs expected ~7% market return with risk
• Emotional weight of debt matters — being debt-free has real psychological value
• Split approach works: pay extra toward debt AND invest simultaneously

Stage 7: Taxable Investing and Beyond

• Open a taxable brokerage account for goals beyond tax-advantaged space
• Same index fund philosophy applies (three-fund portfolio)
• Consider tax-efficient fund placement (see investing skill's asset location guidance)
• Low-rate debt (<3–4%: mortgage, some federal student loans) generally fine to carry while investing

Emergency Fund Sizing

Situation	Suggested Range
Dual income, stable jobs, no dependents	3 months
Single income, stable job	3–4 months
Single income, dependents	4–6 months
Variable income / commission	6–9 months
Self-employed	6–12 months
Pre-retirement (within 5 years)	12–24 months

"Months" means monthly essential expenses — not gross income. Housing, food, insurance, utilities, minimum debt payments, transportation.

Goal Prioritization Framework

When someone has multiple financial goals competing for dollars:

1. Non-negotiables first: employer match, minimum debt payments, basic emergency fund
2. High-impact next: high-rate debt payoff, full emergency fund
3. Long-term growth: tax-advantaged retirement contributions
4. Time-sensitive goals: home down payment, education funding (use scripts/goal_projector.py)
5. Optimization: taxable investing, low-rate debt acceleration, charitable giving

Net Worth Tracking

Net worth = total assets minus total liabilities. Track quarterly or annually to measure progress.

Use scripts/net_worth.py to calculate and categorize:

• Liquid assets: checking, savings, taxable investments
• Retirement assets: 401(k), IRA, Roth IRA, HSA
• Illiquid assets: real estate equity, vehicles, business interests
• Liabilities: mortgage, student loans, auto loans, credit cards, other debt

The number itself matters less than the trend. A negative net worth is common early in life (student loans, mortgage) — the trajectory is what counts.

Life Event Triggers

Major life changes often require revisiting the financial plan:

• New job: Review 401(k) options, update contributions, roll over old 401(k)
• Marriage: Combine or coordinate finances, update beneficiaries, review insurance
• Children: Life insurance, 529 plans, update emergency fund, estate documents
• Home purchase: Down payment strategy, mortgage pre-approval, budget adjustment
• Job loss: Shift to emergency mode, review COBRA/ACA options, pause non-essential goals
• Inheritance: Don't rush decisions — park in HYSA for 6 months, then plan deliberately
• Divorce: Separate accounts, QDRO for retirement splits, update beneficiaries and estate docs
• Approaching retirement: Shift allocation, build cash buffer, Social Security timing analysis

When to Seek Professional Help

See references/professional-referral-guide.md for detailed guidance on when to consult:

• Fee-only fiduciary financial advisor (CFP)
• Tax professional (CPA/EA)
• Estate planning attorney
• Insurance specialist

General rule: if the decision involves more than $50,000, has significant tax implications, or you're uncertain after researching — a professional consultation is worth the cost.