Advanced Money School Lesson 2: Design Your Wealth Map
Written by: David Weliver
I’m sure you’re familiar with the concept of financial planning.
The idea behind financial planning is surprisingly simple – it’s the process of estimating your future financial resources (income and assets) and needs (expenses) over your lifespan and designing a plan to best allocate resources to meet those needs. Financial planning is invaluable for many reasons. But, perhaps most importantly, it helps you look beyond the here-and-now and near future to anticipate how your finances will change over time so that you can make the best decisions possible for your future self.
Unfortunately, many people never take the time to create a financial plan. And many more don’t begin financial planning until they are in their 40s or 50s.
Better late than never, yes. But I would maintain that by this point – it’s 2020 after all – most of us really know better. The sooner you begin financial planning, the longer you have to benefit from the insights your plan will provide.
Designing your wealth map
Now, this free Advanced Money School course is not long enough to provide you a truly comprehensive financial plan. There’s a reason becoming a Certified Financial Planner® requires specialized education, hundreds of hours of experience, and the successful completion of a rigorous exam.
What this course will do, however, is give you the knowledge and tools necessary to complete what I call a Wealth Map. Just as your GPS will plot the best route to help you drive to a destination, your Wealth Map will show you the best route to arrive at your financial goals.
Undoubtedly, the biggest challenge in financial planning is trying to predict the future. Life is uncertain. Financial markets are unpredictable. And we don’t have a crystal ball.
A top-notch financial plan will include a variety of scenarios to adjust for the different potential outcomes. Indeed, the younger you are, the more difficult it will be to accurately predict every scenario, and the more likely your plan will change (perhaps dramatically) over time.
Your Wealth Map is the same way. Just as your GPS recalculates to adjust for traffic or a spontaneous stop along the way, your Wealth Map will inevitably change. And it’ll change many times over.
You’ll still be far better off with a map than without one. At the very least, it will prevent you from going East when you need to be going West.
The stages of wealth
Just as there are stages of life – infancy, childhood, adolescence, and early and late adulthood – there are stages of wealth.
I’ve seen these described in many different ways, but the idea is the same. I categorize the cycle of wealth into four distinct phases or stages:
- Stage 1: Establishment.
- Stage 2: Accumulation.
- Stage 3: Drawdown.
- Stage 4: Redistribution.
Stage 1: Establishment
The Establishment Stage involves learning to manage money and setting yourself up for a lifetime of financial success.
This first stage begins when you earn your first dollar and continues until your finances are relatively stabilized – when you’re no longer sweating as you await payday or feeling like your debts are the primary drivers of your financial life.
The transition from the Establishment Stage to the second stage, Accumulation, is different for everybody. If you begin your first job without debt and immediately start saving a large percentage of your income, you may graduate from the first stage quite rapidly.
Personally, I entered adulthood with a large amount of debt and dragged my feet on learning to be responsible with money. I spent the majority of my 20s in the Establishment Stage.
Others may not leave the first stage until their 30s, or later. It all depends on your level of financial knowledge, responsibility, and ability to save.
And I’ll say here, of course, that some folks never get out of this stage. But my hope for you is that by taking this course, I’ll be able to help you push forward to the next stage earlier than later – with careful planning and lots of hardcore discipline around your finances.
Stage 2: Accumulation
Most people will spend many decades – or even the majority of their lives – in the Accumulation Stage. Just as it sounds, this is the time you are accumulating wealth through working, saving, and investing.
While you may indeed begin saving in the Establishment Stage, you’ll know you’re in the Accumulation Stage if your finances feel stable.
You may very well still have debt: Student loans, a mortgage, even a little bit of credit card debt. However, as long as you’re comfortably making progress paying your debt down and simultaneously putting money into a savings account and/or retirement account like a 401(k), you’re in the Accumulation Stage.
Stage 3: Drawdown
The Drawdown Stage begins when you begin to withdraw more money from your savings than you are putting in. Often, retirement marks the beginning of the Drawdown Stage – but not always. In some cases, you might be retired but not in Drawdown. For example, if you define retirement as working part-time on your terms, and that work brings in enough money to live on such that you’re not needing to touch your savings.
In another example, someone may spend their entire life in the Establishment Stage – living paycheck to paycheck for their entire working career and then going on Social Security. They never accumulate any wealth, and they never enter Drawdown because they traded income from a job for income from the government. Obviously, this is the worst-case scenario!
Stage 4: Redistribution
Many people never reach the Redistribution Stage, which begins towards the end of life if and when you realize your money will outlive you. In the Redistribution Stage, you begin making gifts, charitable donations, and changes to your estate plan to allocate the wealth you’ve accumulated to other people and organizations.
The tools you’ll need
Your Wealth Map will consist of three inter-related documents:
- Your Balance Sheet (or Net Worth Statement), which provides a real-time snapshot of your wealth.
- You Annual Spending Plan (or Budget), which outlines your financial needs for the upcoming year.
- Your Financial Independence Plan, which estimates your financial needs and resources for the rest of your life.
By the end of this lesson, we will cover how to create each of these three documents. First, let’s talk about the tools you’ll need to do so.
You could be old-school and create your entire Wealth Map using pen and paper. Nothing wrong with that, but it’s definitely not the most efficient way to go.
There are a number of apps that can speed the process of creating parts of your Wealth Map.
One app, Personal Capital, can help you create all three parts. If you’re not familiar with it, Personal Capital is a powerful free web and mobile app that can aggregate all of your financial accounts to analyze both your cash flow and your investment portfolio. Where Personal Capital outshines almost every app on the market is in its retirement planning tool, which essentially can help you create the Financial Independence Plan in this exercise.
To use it, you’ll need to link all of your checking, savings, credit card, and investment accounts. Personal Capital is entirely free to use because Personal Capital is a wealth management firm. They’re in business to convert a small number of users into paid asset management clients. Everyone else can benefit from their powerful free app.
Personally, I have recently rediscovered Quicken for tracking my net worth and cash flow.
It’s not perfect, but Quicken has gotten a lot better over the years. And although it’s a paid app in a sea of free options, I’m finding I like it because I can keep my data locally on my computer, not in the Cloud; it’s not cluttered with ads, and I hope that paying for the app will ensure its future development and support.
One complaint I’ve had with free apps is they start out strong but get overly focused on selling you stuff or get even buggy over time. (I should note that Personal Capital is an exception – since they are in the business of selling wealth management, there are no other ads, and the app continues to work well.)
Yes, apps are cool and can do some of the heavy lifting for you. So I’m definitely a fan overall. That said, there’s one tool I prefer to any of these, and that is a simple old-fashioned spreadsheet. Microsoft Excel, Google Sheets, or something else – it doesn’t matter.
When it comes to personal financial planning, the spreadsheet is still king in my book.
Learning to Love Spreadsheets
If you’re already an Excel whiz, you can skip this section. Likewise, if you have pivottablephobia and have zero interest in learning your way around a spreadsheet, you can complete this lesson using a combination of apps and a pad of paper – no judgment.
If, however, you have at least a basic knowledge of using a spreadsheet, keep reading…
The lowly spreadsheet is far more powerful than you’ve perhaps ever realized. I’ve been in factories building high-tech equipment that manage their entire operations with some of the biggest spreadsheets you’ve ever seen. Software companies come knocking on their door trying to sell them $500,000 applications and these guys are like “no thanks, I’ve got Excel.”
OK, maybe those guys should be looking at more sophisticated solutions. But the point is, for something as relatively straightforward as mapping out our personal finances, a spreadsheet is an ideal tool.
While I’ve included templates for the three tools you’ll need in this course, there are a few functions in the world of spreadsheets that you should become familiar with if you want to start crunching data on your own.
- Using simple formulas.
- Cell references.
- Pivot tables
You can go way beyond this, but these are the three I recommend you master and become almost addicted to. Because once you do, it changes the trajectory of absolutely everything financial.
Trust me on this one…..
For the following examples, I’m using (and describing) Microsoft Excel for Mac Version 16.31 (2019). Some functions may be named slightly differently even in other versions of Excel and certainly in other spreadsheet applications. However, any good spreadsheet – including free online options like Google Sheets – will do the things I describe below.
Using simple formulas
Each cell in a spreadsheet is a calculator that can display the results of whatever formula you specify. For example, if you type =2+2 into a spreadsheet cell, the cell will display the answer 4.
What makes spreadsheets powerful is the ability to perform calculations based upon the contents of other cells – these are called cell references.
Spreadsheets are arranged as a grid – letters across the top, numbers down the side such that each cell has an individual cell address – A1, B1, B2, etc.
If you want cell A3 to display the sum of cells A1 and A2, you would type into cell A3: =A1+A2 or =SUM(A1:A2)
Other examples of formulas that will come in handy:
=A1-3 Subtract 3 from cell A1
=A1/A2 Divides cell A1 by A2
=A1*0.80 Multiplies cell A1 by 0.80 (finding 80% of cell A1)
=SUM(A1:A10) Adds all the values in cells A1 through A10
=AVERAGE(A1:A10) Finds the average value of cells A1 through A10
The following page provides an excellent and easy-to-follow guide to creating formulas in Excel:
As you begin to play with formulas, one thing to be aware of is that if you copy a formula from one cell and paste it into another, the cell references will change.
For example, if in cell A3 you have the formula =A1+A2 and you copy cell A3 to cell B3, the pasted formula will be =B1+B2. If you pasted it again to cell C30, the formula will read =C28+C29.
Often, this produces the desired result. However, there are times in which you want to copy a formula but reference one fixed cell. You can make an absolute cell reference by inserting the $ into the cell reference.
- $A$1 will reference cell A1 no matter where the formula is pasted.
- $A1 will always reference column A, but the row number will be relative to where the formula is pasted.
- A$1 will always reference row 1 but the column will be relative to where you paste the formula.
To learn more about absolute cell references, go here:
Sorting and filtering
When you have many rows of data, it’s useful to be able to sort the data in a variety of ways (for example, by date, alphabetically, or by descending or ascending value).
Sorting data in a spreadsheet is as easy as selecting the columns you want to sort, clicking “Sort” and then selecting the column you wish to use as the filter. Sorting can be useful, for example, when you’re looking at several months of financial transactions and want to organize them by date or in order from largest to smallest dollar amount.
In addition to sorting, you can also filter data. This becomes useful when you have hundreds of rows of data and only want to look at a certain subset of the data. For example, if you’re looking at a list of financial transactions and only want to see those transactions that exceed a certain dollar amount or transactions in a certain category – or both.
To filter data, select the columns to filter and click “Filter” which you’ll find under the “Data” in excel. Small arrows should appear at the top of the selected columns. Click the columns you want to filter. You can individually select the values you want to appear OR you can specify how you want to filter the data. For example, you can include only rows in which the category column contains the word “Restaurants” or only the rows in which the amount column is greater than $10.
It’s important to note that, in order for either sorting or filtering to work correctly, you must have a header row that specifies the contents of each column (for example Date, Description, Category, Amount).
You can learn more about filtering and sorting here:
Pivot tables are an advanced feature of a spreadsheet that allows you to “slice and dice” your data in some incredibly useful ways. Trust me that pivot tables will open up your world in the land of finances – and I’d even say can they can become addicting once you realize what you can see.
I’ll give you an example of how I use pivot tables all the time in my own budgeting:
In one sheet (tab) of my spreadsheet, I’ll dump a long list of transactions from my checking account and credit cards. Each row contains the transaction date, merchant, account, category, and transaction amount. While I can use the sort feature described above to look at, for example, how much I spent on groceries for a certain month, this isn’t a very efficient way to obtain useful insights from this long list of data.
Instead, I create a pivot table.
Here’s an abbreviated example of what the raw data might look like.
It’s easy to create the pivot table: Simply select all the data and go to the “insert” tab and click “Pivot Table” or “Summarize with Pivot Table” (depending on the application). A table will open in a new tab in the same worksheet. The new table, however, will be blank. You need to specify how the table will display data, and this is the part that takes a little know-how.
In the pivot table field list on the far right, you can now decide how you want to drag the data columns you want to display into the appropriate position in the table (columns, rows, or values). In the above example, I’ve chosen to put the dates as columns and the category and merchant as rows. Of course, the values I’m looking for are the sum of the amounts.
You could organize the table however you want. For example, you can put dates as rows and categories as columns, omitting the merchants. It just depends on what information you’re trying to get at and understand.
What I would say here is that if you don’t know what you’re trying to find, play around with the pivot table a bit and it’ll help you get you that answer. Just keep dragging and dropping and it’ll become clearer how you want to arrange it.
One important note is to ensure the values are displayed as a Sum. In this example, if you were to click on the Sum of Amount box under Values, you have the option to change how the Values are displayed. For example, you could display a Count that would simply add up how many values there are for each row. Obviously, that’s not helpful in this example. But I only mention it because sometimes the application defaults to something other than Sum.
Finally, you can filter a pivot table just like you can filter rows of data. To do so, click the down arrow next to Row Labels and Column Labels and choose your filters.
Go here to learn more about using Pivot Tables in Excel:
If you’re new to one or more of the above spreadsheet features, I hope you found this interesting. Although this is by no means a complete primer on using spreadsheets, it’s my hope that this introduction to cell references, formulas, sorting and filtering, and pivot tables will help you see how valuable of a tool a spreadsheet can be for helping you both organize and plan your personal finances.
Even if you end up using another application to automate your spend tracking and budgeting, I’m confident as you progress on your wealth-building journey, there will be times when you will want to customize how you look at your financial picture.
When that time comes, spreadsheets will be your best friend.
How to design your Wealth Map
At this point in the lesson, you’ve learned about:
- The four stages of wealth.
- The three must-know spreadsheet skills for wealth planning.
Now, we’re going to dive into how to begin designing your personal wealth map.
As I described earlier in the lesson, your Wealth Map is a roadmap for your money. A complete Wealth Map should chart a predicted route between today and, believe it or not, death. Obviously, the younger you are, you hopefully have a long, long road ahead of you. And of course – yes – it can be nearly impossible to visualize all the things that might happen to you over 50 years or more.
The bottom line is, it’s OK to use wild guesses at this point. One of the most important outcomes of going through the exercise of creating a Wealth Map is to gain an understanding of just how important flexibility is in financial planning. In my opinion, people who expect to stick to their financial plan to the letter are no better off than people who have no plan at all.
And once you writer your Wealth Map, you can make adjustments and tweaks left and right. That’s part of the fun of doing it.
What you’ll need
In order to begin work on your Wealth Map, you’ll need:
- A Net Worth Statement showing a snapshot of your current finances
- Current statements from all bank, credit card, loan, and investment accounts, and insurance policies
- A reliable estimate of your current annual expenses (Note: We will create this together in the next lesson)
- Your Mission Statement from Lesson 1
- A list of any and all financial goals that you have
Note, if you’re married or sharing expenses with a partner, it certainly makes the most sense to involve them in this process!
Step 1: Create an honest picture of where you are now – aka your Net Worth Statement
Before you can determine the best route to where you want to go, you need to be clear about your starting location.
Therefore, the first step in creating your Wealth Map is to generate a list of all of your assets and all of your debts, or liabilities, in what is called a Net Worth Statement. You may very well already be familiar with a Net Worth Statement, but it’s so important as to merit reading this section anyway.
A Net Worth Statement is a simple document that lists the total value of all of your assets, the total amount of all of your liabilities, and the difference between the two, which is your net worth.
Your net worth – and how it is trending over time – is the most important piece of data in personal finance. It is so important so much so that the total value of your assets and the total amount of your liabilities are the only two pieces of information I would need to measure how well someone is doing financially.
Of course, we rarely, if ever, know other people’s net worth. You can be living in a $20,000-a-month villa, flying first class to Dubai, and driving a Lamborghini, all-the-while sporting a negative net worth. Conversely, you might have millions in the bank while living in a fixer-upper three-bedroom, driving a dented Subaru, and flying Southwest. Both are more common than you think.
To be clear: I’m not a “FIRE Fundamentalist” who preaches radical anti-materialism as the “one true path to financial independence.” I’ve learned to be disciplined financially, but I enjoy some luxuries in life. The right path for you is the one you feel good about.
Your Net Worth Statement will look something like this:
Attached to this lesson is a simple spreadsheet template for creating your Net Worth statement. Alternatively, you can use an app like Personal Capital or Quicken.
When creating your Net Worth Statement, it’s critical that you include 1) everything and 2) be completely honest in assessing what your assets and liabilities really are.
- If you pay estimated taxes every quarter or anticipate you’ll owe the IRS at tax time, include an estimate of the taxes you owe in your liabilities.
- If you know you’ve got a large bill coming due within the next month or two, you may want to include this as a liability too.
- If you own your home, be realistic about what you could sell your house for today. Don’t just go with the latest Zillow Zestimate if you know it’s likely inflated. Also, take into consideration selling costs like a realtor’s commission.
- Also, don’t forget to include credit card balances even if you pay them off-in-full each month. Your Net Worth Statement has to be a real-time snapshot of your finances.
One question that often comes up is whether to include autos or other physical valuables. Personally, I don’t include them unless there is a corresponding liability like an auto loan. In that case, it’s reasonable to put the depreciated value of your car to balance the outstanding loan balance. The reason I don’t otherwise include cars on my Net Worth Statement is that they are depreciating assets that I own for their utility. It’s very unlikely that I would sell a vehicle to raise cash because, at the end of the day, I’m still going to need a car to get around. And, if I own the car long enough, its value will fall to $0 anyway.
That’s just my take – do what works for you.
Got your Net Worth Statement complete? Great! How does it look? Did the result surprise you?
Often, completing a Net Worth Statement can be eye-opening. It may reveal that you’re in better financial shape than you would’ve guessed. Or, it may be a sobering wake-up call that you need to buckle down and save more.
Whatever your result, don’t stress! This lesson and this course will set you on the right path, wherever you are now.
Step 2: Figure out where you want to go
With a clear picture of your net worth in hand, it’s time to write down your financial goals.
Begin by copying the Mission Statement you created in Lesson 1. This Mission Statement should guide each of your individual goals.
Now, start with a 20,000-ft view of your financial dreams.
What does financial success look like to you?
If you don’t know a dollar amount, that’s fine. Simply paint a picture of the life you realistically hope your money will create for you someday. Does it include a new or larger family? A new or larger home? Location independence or at least frequent travel?
If your dream includes retiring or redefining work, at what age do you want to stop or change your work? At a “typical” retirement age of 65 or 70? Or much sooner?
Once you have your big picture, begin working backward.
- At what age will you retire or redefine work?
- At what age will you have kids, or will your kids go to college?
- When might you move, begin traveling more, or make other large purchases?
As you write down your goals, don’t hesitate to include everything, even if you’re not sure they’re practical. We’ll sort that out in a later step.
Also, don’t forget to include all realistic expenses, even if they’re not exactly “goals.” For example, there’s the unpleasant reality of medical expenses in later life and, potentially, long-term care.
If you have kids who ultimately go to college, it won’t be cheap. Will contributing to their financial education be important to you? If so, include it.
And you’ll want to hone in on your short-term goals in the next two to five years.
- Do you have any larger-than-normal expenses coming up? A vacation or home improvement project?
- What about life changes like changing jobs, moving, getting married, or having a child?
Finally, what will financial success look like to you in five years? Will you have paid off one or more debts? Saved a certain amount? Increased your income?
When you’re done, you should have a page or so of goals and notes.
Before the conclusion of this course, we will complete your Wealth Map by assigning dollar amounts to your goals, projecting your future earnings, savings, and investment returns to give you a sense of what adjustments you need to make to your plan to align your money with your goals.
For now, we’re going to remain abstract. I promise you that it’ll get less abstract as we continue through the course.
Here are your next steps:
- Using your rough list of goals, take a new sheet of paper and draw a line in the middle of the page running from the top of the page to the bottom. At the top of the page put your age now. At the bottom, put 100, as we’ll assume you’ll live to this ripe old age.
- Next, transfer the most important goals from your rough list to the right side of the new timeline, placing each roughly where you think they will fall in your life. On the left side, place an estimate of what you’d like your net worth to be at that point in time. If you’d like, you can put ages or years next to each entry, but I actually find it’s interesting to do this exercise without writing specific ages – only placing the events in the appropriate space relative to the present. It’s a good reminder of the uncertainty of life and the importance of flexibility in any financial plan.
- Finally, go back to the four stages of wealth. Once you have put all of your goals onto your timeline, the last thing you will do is draw horizontal lines at the points on your timeline where you expect to transition from one stage to the next. If you’re already past the Establishment Stage (or, indeed – if you’re already financially independent and drawing down your savings) you won’t note these transitions.
Lesson 2 wrap-up
Congratulations! You now have a rudimentary Wealth Map. It shows you where you want to go, and roughly speaking, what it will take to get there. In future lessons, we are going to refine this map and fill in some details to make it more detailed and practical.
For now, be sure to do this Net Worth Worksheet, a great exercise, and do note how you feel after completing it.
In this lesson, you have hopefully made two important discoveries:
- Your honest net worth right now
- Why you’re doing this – the reasons you’re earning and saving money
Practically speaking, I have found that it’s so much easier to be on a financial journey when you know where you’re trying to get to – and you’ve got specific goals in mind. It helps give you the discipline to keep on slow and steady, to reach your financial goals.
Remember – no risk, no reward is one of the mantras of the course. I’ll add here to say that figuring out your net worth and the ‘why’ you’re on this financial journey – is tough. The calculations take time, and the honest assessments you need to make in your information gathering is hard.
But hard is good – so that’s my second mantra for Advanced Money School.
In the next lesson, we’re going to use the information you gathered here to take a critical look at your current spending. Although you likely have an idea of how much money you’re currently spending each year and where that money goes, I’m going to guess that you might feel differently about one or two things you’re spending money on after doing this exercise.