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Personal Financial Planning — Part 2: Managing Basic Assets · 8 of 12
Personal Financial Planning — Part 2: Managing Basic Assets
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Implementation Playbook

Personal Financial Planning — Part 2: Managing Basic Assets Gitman, Joehnk, and Billingsley
action-sequences liquid-reserves accounts automobiles housing implementation

Purpose

Four ordered action sequences that translate the book's frameworks into concrete steps. Each sequence is self-contained: follow the steps in order, using the rationale to adapt to your situation.

Sequence 1: Building Your Liquid Reserve (Ch 4)

  1. Calculate your target. Multiply monthly after-tax income by 3-6. Use 3 months if you have employer salary continuation or a sizable credit line; use 6 months if you lack those backstops. (p. 130)
  2. Make saving a budget line item, not a residual. Set up automatic payroll deduction or bank transfer on payday. Saving must happen before discretionary spending, not after. (p. 130)
  3. Choose the right vehicle for the rate environment. If rates are high and expected to fall, lock in with a CD. If rates are low and expected to rise, use an MMDA or MMMF so you can reinvest quickly. (p. 130)
  4. Compare effective rates, not nominal rates. More frequent compounding increases actual return -- 5% compounded semiannually yields an effective rate of 5.06%; daily compounding at 7% yields 7.25%. (p. 132)
  5. Exploit behavioral inertia. When a loan is paid off, redirect the same payment amount into savings. When you get a raise, bank the entire difference. (p. 131)

Sequence 2: Optimizing Your Accounts (Ch 4)

  1. Centralize all spending through one checking account. This makes deviations from your budget observable and enforceable. (p. 110)
  2. Run a cost analysis on your checking account. Compare monthly fees, minimum balance requirements, and per-transaction charges across banks. Credit unions often offer structural cost advantages due to nonprofit design. (pp. 112, 123)
  3. Know your EFTS liability tiers. Report a lost debit card within 2 business days to cap loss at $50. After 60 days, liability is unlimited. (p. 121)
  4. Reconcile monthly. Use the 6-step process against your bank statement to catch hidden fees, unauthorized charges, and overdraft cascades before they compound. (p. 126)
  5. Allocate beyond the reserve. Hold 10-25% of your investment portfolio in savings-type instruments (MMDAs, MMMFs, CDs), scaling up to 50%+ when rate conditions warrant. (p. 131)

Sequence 3: Buying a Car (Ch 5)

  1. Set hard affordability limits before shopping. Calculate available down payment (not from emergency reserves) and maximum monthly payment (no more than 20% of monthly net income). Together these determine your total budget. (p. 143)
  2. Research invoice pricing and get competing quotes. The sticker price "means very little" (p. 147). Use dealer invoice as your baseline and solicit quotes from multiple dealers to create competition.
  3. Consider a used car under 18 months old. New cars lose 20-25% of value in the first 18 months. Buying slightly used captures this depreciation savings while still getting a near-new vehicle. Have any prospect inspected by an independent mechanic. (p. 145)
  4. Negotiate in strict sequence: price, then trade-in, then financing. Bundling these lets dealers shift value between components to obscure the true deal. Isolate each negotiation. (pp. 143, 148)
  5. Shop for financing separately. Rates can differ by up to 2% across lenders. Pre-arrange your loan before entering the dealership. (p. 144)
  6. Skip extended warranties. Most experts consider them unnecessary given manufacturer warranties of 3-7 years/36,000-70,000 miles. (p. 146)

Sequence 4: Buying a Home (Ch 5)

  1. Run the rent-or-buy worksheet first. Compare total annual renting costs (rent + insurance + opportunity cost of deposit) against total annual buying costs (PITI + maintenance + opportunity cost of down payment, minus tax savings and appreciation). Do not assume ownership is cheaper -- the analysis often surprises. (p. 158)
  2. Apply the dual-constraint affordability test. Your maximum home price is the lower of two limits: (a) the income ratio (PITI no more than 28% of gross income) and (b) available down payment. The binding constraint wins. (p. 164)
  3. Budget for closing costs on top of down payment. Closing costs run 5-7% of home price. On a $200,000 home with 20% down, total cash needed is roughly $49,530. Lower down payments increase closing costs through additional points and PMI. (p. 162)
  4. Choose your mortgage type based on time horizon and rate environment. Fixed-rate suits buyers staying 5-7+ years who want certainty. ARMs avoid locking in high rates but shift interest rate risk to you, including potential negative amortization. (pp. 176-178)
  5. Evaluate points against your holding period. Each point costs 1% of the loan upfront. Held 30 years, a point adds only 0.11% to effective APR; held 3 years, it adds 0.70%. Points are a bad deal if you expect to move or refinance within 5-7 years. (p. 161)
  6. Track PMI cancellation actively. PMI is required when down payment is below 20% and costs roughly 0.50% of the loan balance per year. Federal law requires automatic termination at 78% loan-to-value on loans originated after July 29, 1999. Do not pay longer than required. (p. 161)

Key Quotes

"Saving should be a priority item in your budget, not something that occurs only when income happens to exceed expenditures." (p. 130)

"A good way to keep your spending in line is to make all household transactions (even fun money or weekly cash allowances) using a tightly controlled checking account." (p. 110)

"The 'sticker price' on a new car represents the manufacturer's suggested retail price... This price means very little." (p. 147)

"It's important not to base the rent-or-buy decision solely on the numbers. Your personal needs and the general condition of the housing market are also important considerations." (p. 159)

"Paying only an additional $25 per month on a 30-year, 6%, $100,000 mortgage reduces the term to about 26 years and saves about $18,500 in interest." (p. 181)

Rules of Thumb

  • Liquid reserves: 3-6 months of after-tax income before any major purchase (p. 130)
  • Auto affordability: Monthly payment no more than 20% of net income (p. 143)
  • Housing affordability: PITI no more than 25-30% of gross; total debt no more than 33-38% of gross (p. 164)
  • Closing costs: Budget 5-7% of home price (p. 162)
  • Refinancing trigger: Rates drop 1-2%+ below your current rate (p. 180)
  • Refinancing break-even: Total costs divided by after-tax monthly savings must be well below remaining months in the home (p. 180)
  • PMI threshold: Required below 20% down; auto-cancels at 78% LTV (p. 161)
  • Points payoff horizon: Only worthwhile if holding 5-7+ years (p. 161)