Dilbert’s nine-points financial plan, revised for early retirees

Years ago Scott Adams, author of the Dilbert cartoon, was thinking about writing a book on personal finance. When he was doing the research for his book he realized that all one needed to know and do to stay in financial shape actually fit in one page. Only nine things. The plans for the book fell through (because, reportedly, no publisher was willing to endorse a one-page book) so he weaseled-in his immortal plan into this other multi-page book:

I read his 9-points years ago and just reviewed them to “sanity check” my plans and to see if they added anything to someone pursuing financial independence (FI), someone like me.

1. Make a will

I’ve read this somewhere. Everywhere. Sounds complicated. Sounds like it could involve lawyers. However, I think you can also download some online form and do it yourself.

But I am much too lazy for a will (don’t have the will for a will) and allergic to lawyers, so I just made sure I have beneficiaries in all my financial accounts. Online, it takes a minute. Beneficiaries take precedence over any other provisions you may make in your will, so they will take care of things should anything happen to you (like dying). And the mention of death reminds me I also have “transfer on death” clauses in my real estate properties. I had to use a lawyer for this, oh well… but it was a quick and cheap deal.

2. Payoff your credit cards

This means paying the whole balance every month. If you don’t, you will likely pay ridiculously high-interest rates. If you pay every month and look up your rates and see a tempting deal just disregard it. That deal is for people who don’t need it and don’t use it. As soon as you let any balance creep up to next month that rate will go up. I hardly use any cash and use credit as much as possible. It is a very clean and easy way to keep track of how much you spend on what and where. Dilbert (Adams) used “cards” and not “card” but all you need is one card.

Of course, I have three. And I pay them off monthly. For ages, I’ve had two: one for everything that gives me travel miles and one for car rentals (it gives me free rentals insurance). But I’ve just started learning about “travel hacking” so I got a third card that came with a huge sign-on bonus paid in travel miles. This one does have rental car insurance so I may ditch card #2 and keep my old card #1 to keep the average age of my credit lines as high as possible.

3. Get term life insurance if you have a family to support

And make sure it is “term life” insurance and not “whole life” insurance. The difference is not one to overlook. Term life is like your car insurance, you are insured while you pay and you can stop whenever you want. Whole life is like a big special account where you deposit money that someone else will invest for you, and the only way to get the money out is to die.

Luckily FI people don’t need any of these. Life insurance is supposed to replace the income that supports your family if you die. This only applies when your income is tied to your being alive. But if you are FI then your income should come from investments or other passive means, independent from your time and effort and, incidentally, also likely independent from you being alive. So, no need.

4. Fund your 401k to the maximum

Yes. This is probably how most people achieve early retirement or financial independence. “To the maximum” may mean as much as possible, but hopefully you max it out. And it should preferably be a deductible 401k (unless you are in a very low tax bracket), not in a Roth 401k (I guess Adams wrote this before there were Roth 401k’s?).

Just looked this up: 401k is for private companies, and similar plans are the 457 (government) and 403b (non-profits). Never remember which one is which, but the same thing as far as I know.

5. Fund your IRA to the maximum

Yes, you can have (and contribute to) both a 401k (or equivalents) and an IRA. Max out the IRA too. I decided to make my IRA contributions post-tax, so I have a Roth IRA. Since the 401k limits are higher I ended up with more pre-tax than post-tax money, and this is a good thing that will help me work on a Roth conversion ladder. Which you can do too…

6. Buy a house if you want to live in a house and can afford it

Seems like there is an “only” missing before the “if” up there… I keep reading more and more that a house is such a bad (financial) idea for so many reasons. It is not really an investment, it locks you in a place making you lose flexibility for job opportunities, the math doesn’t work, in big cities renting is better, etc, etc.

I’d say buy a house if you want the roots it grows on you: if you are raising a young family you probably want some stability, if your job won’t make you move, etc. Make sure you want to be in the location for at least 5 years and don’t buy more than you really need; if you can buy three bedrooms but need only two, buy two.

I bought a duplex after my first “real” job to live in it, the other side has been rented almost all the time and it opened the door for me to buy other investment properties. But being a landlord is not for everyone, probably not even for me.

7. Put six months’ worth of expenses in a money-market account

I’ve read six months. I’ve read three months. In something very liquid. The advantage of a money-market account is that it pays some interest. Haha to this.

Since interests are so low these days, I really don’t bother to have a money market account. I have an “interest checking account”, it pays a few cents every month. Hey! but it’s simple… And I actually keep less than three months of expenses there, seems like I never need those extra funds and there would be a lost opportunity. If I ever need more I will use my credit card, this will buy me 15 to 45 days to figure out what to sell: probably some stock which is almost as liquid as the money market account, except that I may have to sell something at a loss.

8. Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement

Pretty straightforward. This also goes for the money you put in your 401k and IRA.

I’ve never bought bonds or bonds funds: don’t understand them and, though safe, they seem like a lost opportunity to make money work harder. Bonds are supposed to be the “fixed income” portion of your investments. I already have rentals that provide a fixed income and, if I look at my equity in them they probably make up the 30% of my assets suggested, except that I think this is too conservative. So I call this one covered (of course rentals are not, at all, as liquid as bonds…)

I have my retirement accounts with Fidelity and Vanguard, that I assume are discount brokers. Since I started blogging (reading blogs) I’ve learned of the benefits of Vanguard, a company owned by the funds themselves. So when you have a Vanguard fund you own Vanguard. I think I will eventually consolidate everything under Vanguard.

9. If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio

I learned this one from listening to NPR’s Marketplace Money on Saturday mornings a few years ago: if you want a financial advisor go find it from the National Association of Personal Financial Advisors, NAPFA. They have the fiduciary obligation to put your interests first (especially important nowadays in light of how the new administration in Washington may roll back changes from the previous administration).

Not sure I’ve ever needed one but never hired one.

All in all, I give myself a B- in my sanity check test of the nine points. I got a few dings: no will, no bonds, and no emergency fund.

How did you do?

PS I hope this blog does not end up being a one-post blog…

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