Personal Finance Framework and Long-Term Wealth

John Tuld's picture
Rank: Baboon | 171

Hi all

Have a feeling I won't get many replies on this, but hoping for the best.

I'm still a student, but I'm planning on mapping out a robust financial framework for my personal finances. For context, I have a tentative graduate offer at a privately owned investment bank. Salary of A$90,000 and an interesting bonus structure (in a very low-cost city). Because we are privately owned, we can take equity positions in client mandates and depending on the particular deal (escrow etc) the bonus is typically paid throughout the year on a completion basis, rather than a lump payment at the end of the financial year. In the interest of simplicity, let's assume my compensation (salary, bonus, and growth of both is in-line with what the street would expect for banking).

Here's what I've whipped up. Hoping for some comments, criticism or opposing views.

1. Developing a foundational budget

My personal (forecasted) preference is for 40/40/20 with 40% of after-tax pay being saved (for investing), 40% being spent on necessary expenses and the remaining 20% on personal wants (entertainment, bars, and the sorts). I am frugal in nature and have simple pleasures, based on the cost of living in my city - I am confident I can adhere to this.

2. Establishing an emergency savings fund

Simply 3 months worth of living expenses kept in a liquid checking account, based on the budget created in the previous step.

3. Establishing a liquid fund for short-term investments

This is the more lucrative, shorter-term approach to investing. To those at large banks with big compliance departments, I presume this is not applicable to you. I would keep perhaps A$50,000 in this account for all lucrative, short-term investments. Initial public offerings, seed placements, convertible notes and so on fit this description. To color this with a practical example: assume I took A$10,000 for a seed placement (at $0.10/share) and 6 months later, the company lists (at $0.20/share) and I manage to sell all my units at $0.35 for A$35,000. I would firstly, replenish the balance of this account and then determine what to do with the profits, ideally invested into the long-term investment fund (step 4 beneath) All firm-based co-investment (or principal investing) would fall under this category.

4. Contributing to illiquid, long-term investment fund

By this stage, I'd have a solid budget, an emergency savings account, a liquid sum of money for short-term, lucrative investments - here is the longer-term wealth building. I've evaluated lots of investment classes: real estate (big no in Australia, at least in the prominent cities), peer to peer lending, listed investment companies and so forth. I've arrived at the idea of Vanguard and I'm primarily interested in dividend/income investing and secondarily, capital appreciation. The VAS seems to have a dividend yield of circa 5% and VAF has a lower yield of circa 3% (Australian Shares Index and Australian Fixed Interest Index - there are also concerns around diversification and multi-ETF portfolio construction). What should I be looking at when evaluating long-term index investing when income is the primary concern?

To put this into practice, when I get paid I turn to my ratios. I allocate 40% to my 'need' expenses (rent, bills and so forth) and instantly invest 40% in my long-term vehicle (step 4) assuming my short-term liquid fund in step 3 is up to my desired level. Lifestlye inflation is only natural and as my passive income increases (as well as my salary and bonus through banking), the 20% allotment to 'wants' (and 40% to 'needs') would increase, meaning I can buy a new watch, afford a nicer place to rent and so on..

Is this a scalable strategy? Assume I do this for 10 years (and have earned 10 years of IB compensation, with a rigid budget) - would it be wise to continue pumping the long-term vehicle (for further compounding and passive income)? Just at the drawing board for now... I do know of someone (not personally) who works in finance and has done something similar - he is mid-30s now and earns 6 figures passively through dividend/income payments. This is of course, on top of a decent salary (and bonus).

Thanks all.

Comments (19)

Jun 6, 2019

This is a fairly good plan when you lay it out.

However, it is also only a plan. Investing comes down to two (three) things, discipline and skill (and luck). It sounds like you have the first two and no one can really capture the third. But luck weighs in more than people like to admit. Your plan could definitely work, but you could also get blown out on your first couple micro purchases.

I would take a look at Warren Buffet, and the levels of wealth he achieved and at what time frames. It's like the "penny doubled every day for a month" scenario. If you do that, you end up with millions; but the millions only come toward the end.

    • 2
Jun 6, 2019

Thanks for chiming in, appreciate the comment. What do you mean by blown out on the first couple of micro-purchases? Are you referring to the short-term (riskier) investments? Assuming you are, it might help if I point out that some of the short-term investments are allocations with no up-front investment (meaning we may take equity over cash for a deal) so it's not always as risky as some other early-stage investments. I think of this bucket (step 3) as co-investment or carry in a sense, tied to the firm.

Most Helpful
Jun 6, 2019

I'm talking about that yes, but I'm also talking overall.

I listen to a lot of personal finance guys on podcasts, and a lot of them project a "10%" yearly return, and give projections based on that. I'm saying, investing can be more up and down, and the best laid plans sometimes don't work out. You need to take that into consideration.

Also, with personal finance/investing, everything thinks you need to do something crazy to get ahead (forex, crypto, day trade, buy goats in Austria). Really it's about investing in what you know, not getting too risky, and being disciplined. I would say it's like dieting. Say youre 300 lbs, the proper way to lose it is 2-3 pounds a week(bc you put on 2-3 pounds a week). Everyone always "knows" someone who lost 50 pounds in a month. Those are few and far between, and it's usually not sustainable (as an aside, they normally lose muscle from no eating and the skin hangs, so they weight less but look worse from the loose skin).

Hate to bring this back to Buffet, but I don't think its a coincidence that the guy who made the most from investing also made some of the more simple investments (relativity).

    • 2
Jun 6, 2019

If you can make 50%/50% work (50% savings, 50% needs+wants) the extra money would be worth a lot after 10 years, certainly would help with eventual home purchase.

What I basically did was keep the dollar value of my needs flat or growing at a very slow amount, and increased my savings in line with each pay raise / bonus / promotion. Lived in the same apartment for 6 years and drove the same car. Bought very modest things like computers / games / camping equipment and went on 1-2 vacations per year. Savings rate therefore went from a very small amount just out of school (I started out Big 4, not IBD) and increased to 75%+ by the time I started business school.

    • 1
Jun 6, 2019

Thanks for the idea, would be open to adjusting my budget ratios. When you say home purchase, would you be selling some/all of the portfolio in order to buy the house, or, have a big enough portfolio that the passive income/dividend stream can support the mortgage payments?

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Jun 7, 2019

Curious about the long-term part. I hope by illiquid you just mean your use of the fund, not necessarily the assets. I don't really know that you should be in anything particularly illiquid in the near future. I'd think just many different ETF's with a low overall equity market correlation would be sufficient, low cost, and still liquid. Outside of this I would say maybe duration targeting with laddered bonds, but that's a lot more demanding.

JUST DO IT. Don't let your memes be dreams.

    • 1
Jun 6, 2019

Spot on. It's not truly illiquid - I just want to view it as 'illiquid' like a vehicle that I regularly contribute to, rather than actively trade. At the minute, I'm looking at various Vangaurd index ETF products.

Jun 7, 2019

Since you've bothered to map it out this much already, I'd really suggest going in and actually running correlations for these ETF's against GSPC and get that number fairly low. Let the short term fund track equity markets more closely.

JUST DO IT. Don't let your memes be dreams.

Jun 7, 2019

For your short term investment, I would rather keep the profit within the same account for future investment for higher return in the future. Let's say you have a placement opportunity now that would turn your meager $10,000 to $20,000; you take your $10,000 profit and move it to your long term account would be the conservative approach. OR you can leave the money in the short term account in cash and wait patiently for the next one. The opportunity cost would be the market return+whatever inflation rate is (7 to 12 percent); but when you finally have a big deal ripe for juicing, you would have enough funding ready to make real money. Just my $0.02, your approach is plenty good already.

Cash and cash equivalents: $138,311
Financial instruments and other inventory positions owned: $448,166

    • 1
Jun 6, 2019

Thanks, definitely an alternative I've considered and still will. SB for you once I get more credits.

Jun 8, 2019

3 - If you really think these returns are possible, then you should load up as much money as you can into this account (read: this are atypical returns and you should be skeptical)

4 - Not sure why it needs to be illiquid. Can construct a liquid portfolio using index funds. Not sure why you want dividends too? Highest risk-adjusted total return should be the objective. Seems like you are mostly on the right track here though

Best of luck

Jun 6, 2019

3 - They're not typical market returns, rather they are returns made through principal investing with the firm. If you're advising a firm on a mandate and secure very cheap equity, you can make 50 odd percent implied on initial value - this is different to making 50% in the secondary capital markets (nobody is that good, not with any degree of regularity anyway and I wouldn't fool myself into trying).

4- It's not truly illiquid - I just want to think of it as illiquid, meaning I contribute to it on a regular basis rather than actively trade it and/or try to time the market. I don't understand why I would want a huge portfolio without any form of cash flow? Would I just sell the portfolio in order to purchase a house outright? Why not get a mortgage and have it primarily financed with quarterly dividends? At the end of that, I still have the (appreciating) portfolio, rather than tied up in residential equity.

Appreciate the comment! SB once I get more credits.

Jun 8, 2019

If you're solely maximizing for long-term wealth then these are the top things to do in order...

1) Don't have kids. I have a child and have another on the way, and wouldn't change that for anything, but kids are ridiculously expensive if you don't plan on being a dead beat parent.
2) Marry a partner with a minimum high 5-figure salary who plans to work long-term. Don't get divorced.
3) Max-out all tax-sheltered retirement vehicles. 401(k), HSA, FSA, IRA.
4) Invest in a diversified liquid portfolio. Stocks, mutual funds, ETFs. Can use this for an emergency fund if needed.
5) Start thinking about illiquid assets.

    • 2
Jun 6, 2019

1) Don't plan on having any kids haha

2) Not sure I see the benefit in being married in today's climate either

3) Worth considering for sure, I will look into additional tax-free contributions to superannuation (our retirement fund in Australia).

4) That's the plan, currently looking at a ETF portfolio which appreciates in capital but also pays a growing dividend.

5) Such as real estate? We have quite a property bubble in our major cities and I'm worried about the amount of time required to do this properly.

Jun 9, 2019

For a large portion of your cash holdings, I would look at an online bank where you can get 2%+

Jun 10, 2019

Sounds like you're in good shape but remember to have fun too.

Some things not said:
- Automate. Sounds easy to do but very few people actually do this.
- Set, forget and consolidate all your accounts in one place. I use Personal Capital to see how to allocate. Don't chase returns.
- Lifestyle creep is dangerous and a very real thing.
- There are fakes and liars everywhere. Fuck them.

Jun 10, 2019