The Architecture of Personal Finance: Choosing the Right Materials

Nearly three years ago, in the original Get Rich Slowly post, I compared smart personal finance to building a house. This is the first part in a series that will explore that analogy.

In his excellent Weinberg on Writing: The Fieldstone Method, Gerald Weinberg describes a simple metaphor for the writing process. Writers, he says, gather fieldstones (ideas) and use them to construct walls or buildings (finished stories). But each stone is different, and so is each project. To produce something useful and lasting, the builder (author) must pick the appropriate stones for his situation.

The same is true with personal finance.

Preparing the foundation
I've recently completed the foundation for my financial “house”: I've eliminated my non-mortgage debt, reduced my spending, and increased my income. This didn't happen all at once, and I didn't do it using advice from just one source. I recognize now that I built my financial foundation by using Weinberg's fieldstone method.

It took a long time, but ultimately I constructed a solid foundation using fieldstones from a variety of sources, always looking for those that fit with my plan and my temperament. Once I realized that there was no single “right” way to achieve financial security, it gave me the freedom to look for those methods that were most applicable to my situation.

Blueprint for financial prosperity
Now that the foundation has been laid, it's time for me to build the framework of my house. There's a lot of work ahead. I have a blueprint for my financial future, and have plans for the first steps of the framing process. But there's still much for me to learn. I don't know exactly how I'm going to accomplish my goals, but I have faith that I can find the answers. At the moment, I'm building a framework that incorporates:

  • Elizabeth Warren's “big picture” budgeting.
  • Regular investment in low-cost indexed mutual funds, as advocated by John Bogle, Burt Malkiel, and others.
  • Accumulation of a cash reserve, another component inspired by Dave Ramsey.
  • Some modest mortgage acceleration, as described by Charles Givens (and which I'll share with you in a few weeks)

As I find more pieces that seem to fit with the plans for my financial house, I'll add them to the blueprint and make them a part of the framework.

Choosing the right materials
If you read five different personal finance books, you'll find five different methods to repay your debt and five different plans for retirement savings. How can you possibly determine which technique is best? There isn't a best technique. The best method for debt repayment, or for retirement savings, is one that you will actually use. None of the others matter.

That's not to say that every idea is equal. There's no question that some methods make more mathematical sense than others. It's smarter mathematically to invest your money rather than prepay your mortgage. It's smarter mathematically to first repay your debt with the highest interest rate rather than starting with your lowest balance. But money isn't just about math — psychology and emotions play large roles, too. Whether you choose to emphasize math or mind is up to you.

Some people will argue that if you don't use Method X, you're doing something wrong. Don't listen to them. The only wrong choice is not to try. You know yourself better than anyone. If you've tried one method and failed, move on to something else. Select the best materials to construct your financial house. Always remember: Do what works for you.

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The Saving Freak
The Saving Freak
12 years ago

The realm of personal finance is broad and varied and that is what makes it fun to talk about. Wouldn’t it be great if we could just get everyone to the point where they are discussing whether or not to pay off the house or invest that money in the stock market? I mean, we can’t get the majority of Americans to just budget properly

PW
PW
12 years ago

Thanks JD! I’m trying to come up with a new financial plan for 2008 and this post is very helpful. Thanks!

FourPillars
FourPillars
12 years ago

I think you might be over complicating things a bit. Building a house is pretty complicated but managing your finances doesn’t have to be.

As long as you stick to the basic rules of saving (spend less than you earn) and low cost diversified investing you will do quite well.

Mike

Mira
Mira
12 years ago

JD, I absolutely agree with you that we have to find what works for us. I just became dept free except for my mortgage on 12/21! I basically used Dave’s plan but tweaked it a bit. My last two depts (student loan – 6% and personal line of credit – 11%) I transferred to credit cards that offered 0% interest for the first year. I dumped large payments on those while building my savings. Since the balance on the cards were not earning interest and I was not charging anything on them, I felt comfortable building my savings at the… Read more »

Mrs. Micah
Mrs. Micah
12 years ago

While Mike is probably right that the actual process of building a house may be more complicated that PF (though sometimes PF can get annoyingly complicated), I think the theory is similar for both of them. I like the metaphor.

It also fits quite nicely since not everyone has the same needs or desires, whether in housing or finance.

Dividends4Life
Dividends4Life
12 years ago

> Do what works for you.

Excellent point! We are not all assembled the same way – what motivates me is way different than what motivates my wife. I’ve figured me out and I’ve spent the last 25 years trying to figure her out. 🙂

Best Wishes,
D4L

KC
KC
12 years ago

Mira – take your time with investing. It is ok to continue to save money in a boring bank account until you have educated yourself about investing. The first investment I ever made was VFINX (Vanguard’s index fund that mimics the S&P500) – I still regularily contribute to this. Eventhough my portfolio has expanded to include individual stocks and ETFs – the foundation is still in low cost index funds – you just can’t go wrong there, IMO. But don’t just take my word for it – read up on it. No one will ever care as much about YOUR… Read more »

Daniel
Daniel
12 years ago

Mira, You’ve made great progress, but don’t let starting to invest be intimidating. It’s MUCH easier than I imagined before I started. 1) If the company you work for has a 401K (403B/457 for non-profit/gov’t), use it. For every $100 you contribute, your paycheck will only be reduced $60-70. 2) Open a Roth IRA or IRA. It’s incredibly easy through Fidelity, Vanguard, or T. Rowe Price. To start, use their simple S&P Index 500 fund, or a target date fund, depending on your age. I’ve always had excellent help over the phone from Fidelity. Love ’em! If you WANT to… Read more »

Grant
Grant
12 years ago

I’ve been reading your site for a few weeks now and this is one of the best pieces you’ve produced yet. Your acknowledgement of the psychological side of successful personal finance brings in a necessary amount of balance.

Kudos and keep up the great work.

Grant

JAS
JAS
12 years ago

I just read your first Get Rich Slowly article that you link to. You say in it that you paid off your debts in 4 months but here you are 3 years later saying you just got out of debt. What am I missing here?

J.D.
J.D.
12 years ago

Ah, great question JAS — this bugs me, too. When I wrote that original piece, I was engaging in some exaggeration. First, I left off my $21,000 home equity loan. Second, I left off several thousand I owed my wife (we keep separate finances). Finally, I left off a $2,000 loan from my family’s business. Looking back, I can’t say that I was intentionally lying — I really did feel like I was debt free — but I lacked perspective. It didn’t take me long to realize that I was deluding myself. So, yeah, four months to pay off my… Read more »

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