PERSONAL FINANCIAL PLAN

March 20, 2017

Creating the Path to a

Sunny Retirement Horizon
 Table of Contents
Introduction…………………………………………………………………………………..1
One-Year Plan………………………………………………………………………………..1
Three-Year Plan……………………………………………………………………………...2
Five-Year Plan……………………………………………………………………………….4
Financial Positioning..……………………………………………………………………….5
Financial Risks...…………………………………………………………………………….5
Retirement Positioning...…………………………………………………………………….5
Risk Tolerance……………………………………………………………………………….5
Assumptions………………………………………………………………………………….5
Appendix……………………………………………………………………………..............6
Appendix A……………………………………………………………………………………….6
Appendix B……………………………………………………………………………………….6
Appendix C ……………………………………………………………………………………….7
Appendix D ……………………………………………………………………………………….8
Appendix E …………………………………………………………………………………….....8
Appendix F ……………………………………………………………………………………...9
Appendix G …………………………………………………………………………………......10
Appendix H.....................................................................................................................10
Appendix I......................................................................................................................11
Appendix J......................................................................................................................12
Appendix K.....................................................................................................................13
Appendix L.....................................................................................................................16
Appendix M....................................................................................................................17
Appendix N.....................................................................................................................18
Bibliography………………………………………………………………………………...19
 1

Introduction
Financial literacy is an essential part of life that ultimately dictates how financially successful a
person will be in the future. Through my involvement with financial literacy outreach efforts, my eyes have
been opened wide to the poor state of financially literacy. With the average American spending $1.22 for
every $1 they earn1 and only 32% of Americans creating a budget2, it is clear that Americans can greatly
benefit from one very important phrase: “Let your savings dictate your spending, not the other way around.”
As a result, I am very fortunate to have the ability to implement a solid budget into my life from a young age.
Building a solid budget will allow me to establish a strong financial investment base, which will help lead to
a successful financial future.
My financial plan is based upon my career aspirations upon graduation. My initiation date is the first
day of work as a financial analyst for an investment firm in Pittsburgh, PA. In order to establish my starting
salary, I utilized data from the Bureau of Labor Statistics website for Financial Analyst’s wages in the
Pittsburgh metropolitan area3. Since I will be sitting for my CFP exam in July and CFA Level I upon
graduation in June of 2018, I assumed a slight inflation in my starting salary. Following graduation, I plan to
work in financial analysis for the first 5 years within either an institutional investing or wealth management
firm. In order to establish a plan to meet my individual goals, I established an individual budget for years 1, 3
and 5 of my career. The overall goal of my financial plan is save aggressively and pay off all of my current
debts within the first 5 years of working, so that I am able to invest a substantial amount of money while I
am young. By establishing a solid investment portfolio at a young age, I will be able to reap the benefits of
compounding interest as time progresses.

Year 1
Goals
My top priority for year 1 of my plan is to invest 25% of my income for year one. While this seems
like a large savings goal, it is attainable through devoted budgeting and self-discipline. I will invest the 25%
using multiple tax-advantaged accounts in order to create a diversified investment base. In addition, I want to
save an additional $2,400 towards building my emergency fund. Building an emergency fund is crucial to
preparing myself for any potential unexpected financial issue that arises.

Job/Salary
As discussed previously, I plan to work in investments as a financial analyst in the greater Pittsburgh
area . I am assuming that I will earn a starting salary of $56,000, which is slightly higher than the 25th
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percentile for the Pittsburgh metropolitan area. My starting salary is justified by the fact that I will likely
have passed the CFP examination and will be sitting for the CFA Level 1 examination upon graduation. For
this reason, I assumed $56,000 as a justifiable salary.

Taxes
Upon graduation, I will not be married, so I will file using the “Single” IRS filing status. Although
my projected salary is $56,000, my taxable income will likely be much less. First, I will take advantage of
saving into a deferred tax retirement account, such as a 401k, which will lower my taxable income. In
addition, I will claim the standard deduction for single of $6,350, as well as the personal exemption amount
of $4,050. After applying the previous deductions, my overall taxable income will be $37,100, meaning that
I will be in the 15% marginal tax bracket4. In addition to federal income tax, I will also need to pay FICA5,
state6 and local7 income tax. A detailed breakdown of my taxes is shown in Appendix A.
 2

Investments
With my top goal for year one being to invest 25% of my income, it is important to choose the right
allocation and investment vehicles. If I save 25% of my projected income, I will have $14,000 to invest in
year one. First, I want to diversify the taxability of my investment contributions, so that I have better
liquidity available in the future. For this reason, I will maximize my contributions to my Roth IRA of $5,500.
Investing in a Roth IRA will allow me to build up an investment account that I will not have to pay taxes on
the returns of, while also giving me complete autonomy to choose my own investments. Since I will likely be
in a much higher tax bracket near retirement, it is important to build up a retirement account in which I can
make tax-free withdrawals in the future. This will give me much more financial flexibility in the future. I will
invest the additional $8,500 in my 401k. Since the 401k is a tax-deferred retirement account, I will be able to
deduct it from my gross income to lower my taxable income. In addition, I will likely have an employer
match. Assuming that my investor is willing to match the median 3% of my income8, I will add $10,180 to
my 401k during year one. By creating a substantial investment base in year one, I will be able to take full
advantage of compounding interest over a significant amount of time.

Debt & Expenses

Fortunately, I will graduate college with very little debt. Assuming I continue receive scholarship
money in my senior year, I will graduate with $2,500 in student debt. In addition to my student debt, I will
have $12,113.40 in auto loans. A detailed breakdown of my debt amounts at the beginning of year is shown
in Appendix B.
As a result of my very low debt, I will have the financial flexibility to reach my lofty savings goals.
Although I have the flexibility to meet my goals though, it will require a disciplined savings behavior.
During year 1, I plan to live at home and commute to work, which will significantly lower my living
expenses. Since I projected my income as pre-tax monthly, I included the Federal, State, Municipal and
FICA taxes as expenses on my budget. Furthermore, I will need to pay for auto insurance and short-term
disability insurance. Another significant expense category that I have is “Food, Clothes & Car.” Finally, my
tithing and miscellaneous expenses include church donations, golf, haircuts, and vacation money.
Appendices C & D show my budget and net cash flows for each month of year one. The following
percentages show the breakdown of expenses:
• Investments & Savings: 29.51%
• Taxes: 19.46%
• Debt & Rent Payments: 17.14%
• Utilities: 3.96%
• Insurance: 2.46%
• Food, Clothes & Car: 13.93%
• Tithing & Miscellaneous: 13.54%

Year 3
Goals
My top priority for year three of my plan is to continue to invest 25% of my income for year three. I
will continue to invest the 25% using a 401k and Roth IRA as my investment savings vehicle. Aside from
my building my investment portfolio, my other main goal is to rent an apartment in Cranberry Township. In
addition, I want to continue saving $200 per month towards building my emergency fund. By focusing upon
building up an investment portfolio and emergency fund, I will establish excellent financial positioning at a
young age. Renting an apartment instead of purchasing a home will also allow me to avoid the burden of
mortgage debt, as well as allow me to save up for a nicer home in the future.

Job/Salary
I plan to continue working in investments as a financial analyst in the greater Pittsburgh area. During
my first three years, I will be studying for the CFA examinations. I am assuming that I will pass Levels I and
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II of the CFA exam, which will lead to an increase in pay. According to a survey of CFA candidates9,
passing Level II of the CFA exam leads to an average pay increase of 20%. Therefore, I am assuming that I
will earn a salary of $69,216. This salary reflects the appropriate increase related to passing the Level II
exam.
Taxes
Since I currently am not in a relationship, I am assuming that I will not be married in three years.
Thus, I will file using the “Single” IRS filing status. Although my projected salary is $59,216, my taxable
income will likely be much less. First, my 401k contributions will significantly lower my taxable income. In
addition, I will claim the standard deduction for single of $6,350, as well as the personal exemption amount
of $4,050. After applying the previous deductions, my overall taxable income will be $47,012, meaning that
I will be in the 25% marginal tax bracket4. In addition to federal income tax, I will also need to pay FICA5,
state6 and local7 income tax. A detailed breakdown of my taxes is shown in Appendix E.

Investments
With my top goal for year one being to invest 25% of my income, it is important to choose the right
allocation and investment vehicles. If I save 25% of my projected income, I will have $17,304 to invest in
year three. First, I want to diversify the taxability of my investment contributions, so that I have better
liquidity available in the future. For this reason, I will continue to maximize my Roth IRA contributions at
$5,500. Continuing to invest in my Roth IRA will allow me to invest in individual stocks and earn a higher
potential return, while also increasing the pool of money that will be eligible for future tax-free withdrawals.
I will invest the additional $11,804 in my 401k. Since the 401k is a tax-deferred retirement account, I will be
able to deduct it from my gross income to lower my taxable income. Assuming my employer continues to
match the median8 amount of 3%, I will add $13,880.48 to my 401k in year three. Continuing to build my
investment base at a young age will help me to take even better advantage of compounding investment
returns.

Debt & Expenses

Since I had such low student debt, I will no longer owe any money on my loans by year three. Using
a loan amortization schedule for my auto loan and paying more than the minimum monthly payment will
allow me to quickly deplete my auto loan debt. In the beginning of year three, I will owe only $5,721. If I
continue to pay more than the minimum, I will pay off my debt four months sooner than my original term
length.
During year three, I plan to rent an apartment in Cranberry Township. To lower my expenses, I plan to
co-rent my apartment with a friend. After researching, apartments near Cranberry Township, I determined
that I can find a quality apartment for $850 per month10. All individual budget account names remained the
same as in year one. Appendices F & G show my budget and net cash flows for each month of year three.
The following percentages show the breakdown of expenses:
• Investments & Savings: 29.21%
• Taxes: 21.29%
• Debt & Rent Payments: 19.94%
• Utilities: 3.21%
• Insurance: 2.22%
• Food, Clothes & Car: 11.27%
• Tithing & Miscellaneous: 12.86%

It is important to note that the majority of expenses categories have fallen in percentage. The
decrease in percentage is due to the fact that my income is projected to grow at a much faster rate than my
expenses. My major goal is to maximize savings when I am young, which means that I want to keep my
standard of living stagnant even as my income increases to maximize my net worth.
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Year 5
Goals
My top priority for year five of my plan is to continue to invest 25% of my income for year five. I
will continue to invest the 25% using a 401k and Roth IRA as my investment savings vehicle. In addition to
investing, I want to save $500 per month for a down payment on a home. Also, I want to continue saving
$200 per month towards building my emergency fund. Letting my savings dictate my spending has allowed
me to develop my budget in a manner that I can realistically reach my savings goals.
Job/Salary
I plan to continue working in investments as a financial analyst in the greater Pittsburgh area. In year
five of my plan, I plan to have passed all three levels of the CFA examination. According to the earlier
survey of CFA candidates9, passing Level III of the CFA exam leads to an average additional pay increase of
34% from the baseline starting salary. Therefore, I am assuming that I will earn a salary of $77,291.20. This
salary is slightly above the average for the financial analyst in the Pittsburgh metropolitan area3, which is a
conservative estimate, as CFA’s tend to earn more than the average financial analyst salary.
Taxes
Although I plan to have a fiancé in by year five, I am assuming that I will not get officially married
in year five; thus, I will file using the “Single” IRS filing status. Although my projected salary is $77,291.20,
my taxable income will likely be much less. First, my 401k contributions will significantly lower my taxable
income. In addition, I will claim the standard deduction for single of $6,350, as well as the personal
exemption amount of $4,050. After applying the previous deductions, my overall taxable income will be
$53,068, meaning that I will be in the 25% marginal tax bracket4. In addition to federal income tax, I will
also need to pay FICA5, state6 and local7 income tax. A detailed breakdown of my taxes is shown in
Appendix H.
Investments
If I save 25% of my projected income into tax-advantaged accounts, I will have $19,322.80 to invest
in year five. I will continue to maximize my Roth contributions at $5,500. I will invest the addition
$13,822.80 in my 401k. Assuming my employer continues to match the median8 amount of 3%, I will add
$16,141.54 to my 401k in year five.
Debt & Expenses
In year five, I will be completely debt free, so I will no longer have the obligation to make debt
payments. Since I will be debt free, I intend to start saving $500 per month for a home down payment, which
is included in “Investment & Savings.”
I intend to continue co-renting my apartment in Cranberry Township. Aside from saving for a home,
all other expense account names remained the same. Appendices I & J show my budget and net cash flows
for each month of year three. The following percentages show the breakdown of expenses:
• Investments & Savings: 38.97%
• Taxes: 22.14%
• Debt & Rent Payments: 13.20%
• Utilities: 2.87%
• Insurance: 1.99%
• Food, Clothes & Car: 10.09%
• Tithing & Miscellaneous: 12.56%

It is important to note that the majority of expenses categories have fallen in percentage. The
decrease in percentage is due to the fact that my income is projected to grow at a much faster rate than my
expenses. My major goal is to maximize savings when I am young, which means that I want to keep my
standard of living stagnant even as my income increases to maximize my net worth.
Financial Positioning
After creating a budget, it is essential to assess how the intermediate decisions will affect my overall
financial positioning. In order to accurately assess my financial positioning, I developed a balance sheet for
 5

the beginning and end of each year that I analyzed. My balance sheet reflects my savings and investment
accounts as assets, while showing my outstanding debts as liabilities. The asset values increase using the
projected annual contributions from my monthly budgets, while the debt values refer to the loan amortization
schedules for my debts. Using the balance sheets, I am able to gauge my change in net worth. The beginning
and ending balance sheet for years one through five are shown in Appendix K. If I abide by my financial
plan, I will have a net worth of $150,231.

Shelter from Destruction—Protection against Risk

Although it is not enjoyable to think about, many risks could potentially destroy an entire financial
plan. Fortunately, it is possible to manage potential downside risks and avoid a financial disaster. I
established two major risk management strategies in my first five years: establishing an emergency fund and
purchasing adequate insurance. An emergency fund is essential, as it is impossible to predict a surprise
expense that may randomly arise. While an emergency fund seems logical, 63% of Americans do not have
enough savings to pay a $500 emergency bill11. To prevent myself from having the same problem, I saved
$200 each month for 5 years to establish my emergency fund. Additionally, I assumed purchasing a short-
term disability policy, which will help me cover my expenses until I surpass my work’s long-term disability
elimination period. My emergency fund savings and insurance premium only cost $328 combined per month.
When considering the amount of downside protection provided, it is definitely worth the price.

Eyes on the Prize—Retirement Positioning

Throughout my five-year plan, I aggressively saved in order to establish a sizeable investment
portfolio to prepare for retirement in the future. At the end of year five, I projected to have an investment
portfolio value of $133,609. Of the total investment portfolio, I will have $73,186 in 401k and $41,278 in my
Roth IRA. Therefore, I will have achieved my goal of diversifying the taxability of my future withdrawals. A
full retirement projection value is shown in Appendix L. Although I will establish a great base in my first
five years, I must continue to save responsibly in order to enjoy a happy retirement in the future.

Strong Returns Require Strong Stomachs

Although everybody wants to earn the highest return possible, the truth is—most people simply do
not have strong enough stomachs to handle the volatility associated with high return. In order to gauge my
risk tolerance, I utilized a Charles Schwab questionnaire12. The questionnaire reaffirmed my premonition that
I am an aggressive investor. As a result, my portfolios will be mainly comprised of equities, allowing for a
higher projected return.

Reality Check—Realistic Expectations Require Realistic Assumptions

Since the majority of investment planning is based upon expected future rates, it is important to
remain conservative with investment return estimates. For this reason, I decided to split up my investment
return assumptions by investment vehicle. I anticipate the highest returns for my Roth IRA account. In my
Roth IRA, I will have a long time horizon and I will invest in individual securities, both of which are
important factors of potential return. I anticipate the lowest returns within my 401k, as I will have a limited
pool of investments, which consists of mutual funds. As a result, I plan to invest more conservatively than in
my Roth IRA and earn a lower return. My brokerage return will likely return less than my Roth IRA, but
more than my 401k due to my time horizon and allocation. In addition, inflation is an important factor to
show how much a future value will truly be worth in spending power. My assumed rates are shown in the
table below. I heavily considered my risk tolerance when determining the expected returns for each account.
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Appendix A – Tax Year 1

Appendix B – Initial Debt Year 1

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Appendix C –Budget Year 1

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Appendix D –Net Cash Flow Year 1

Appendix E – Tax Year 3

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Appendix F – Budget Year 3

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Appendix G – Net Cash Flow Year 3

Appendix H – Tax Year 5

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Appendix I – Budget Year 5

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Appendix J – Net Cash Flow Year 5

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Appendix K – Balance Sheets Years 1-5

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15
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Appendix L – Retirement Analysis

*Future Values if no additional Investments
 17

Appendix M – Auto Loan Amortization

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Appendix N – Student Loan Amortization

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Bibliography

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2
http://www.gallup.com/poll/162872/one-three-americans-prepare-detailed-household-budget.aspx
3
https://www.bls.gov/oes/current/oes132051.htm
4
https://www.irs.com/articles/2016-federal-tax-rates-personal-exemptions-and-standard-deductions
5
https://www.irs.gov/taxtopics/tc751.html
6
http://www.revenue.pa.gov/GeneralTaxInformation/Tax%20Types%20and%20Information/Pages/Personal-
Income-Tax.aspx#.WMtxTm_ythE
7
http://www.northsewickleytwp.org/boardmembers.html
8
https://20somethingfinance.com/401k-match/
9
http://www.300hours.com/articles/will-your-pay-increase-as-a-cfa-candidate-or-cfa-
charterholder#.WMtmmW_ythE
10
https://www.forrent.com/find/PA/metro-Pittsburgh/Cranberry+Township
11
https://www.forbes.com/sites/maggiemcgrath/2016/01/06/63-of-americans-dont-have-enough-savings-to-
cover-a-500-emergency/#20d157704e0d
12
https://www.schwab.com/public/file/P-778947/InvestorProfileQuestionnaire.pdf