Steps to Building a Complete Financial Portfolio

You have a dream about your life. You know where you want to live, what you want to drive, and the type of clothes you want to wear. Have you ever stopped to calculate exactly what it would cost you, in financial terms, to achieve that desired lifestyle? If you’re like most people, the answer is no.

This step-by-step guide empowers you to take action by building a complete financial portfolio. This means that you have fully funded retirement accounts, are debt-free, have a six-month emergency cash reserve, own diversified investmentsacross different asset classes, and invest in yourself.

Before you Begin Building your Complete Financial Portfolio

Make a list of everything you own (e.g., assets such as cars, stocks, bonds, mutual funds, cash, bank accounts) and everything you owe (e.g., liabilities such as student loans, credit card balances.)

Be brutally honest—don’t keep something off the list because you’ll “get to it tomorrow” or “it isn’t a problem.” The key to changing your life is to determine exactly where you stand right now.

This balance sheet is going to be extremely important as we craft our way through the following steps. It’s a picture in time, the first step in understanding your net worth, it’s a benchmark as you build your financial future.

Contribute to Your 401k With Your Employer’s Matching Funds

Many businesses match contributions employees make to their 401k accounts. The amount of these matching contributions can vary widely from company to company; most providing an escalation in benefits based upon tenure.

Yet, despite this free cash, some individuals do not take advantage either because they don’t understand the time value of moneyor don’t believe they can afford to have their take-home pay reduced.

The fact is you can’t afford not to contribute. If your employer matches $1-for-$1 up to the first 5 percent of your contribution, you are immediately earning a 100 percent ​return on your investment. There is no investment in the world that can guarantee returns even close to that amount.

When you consider these funds will also grow tax-deferred in your 401k for the next 20, 30, or 40 years, the opportunity cost over a career can be millions of dollars!

The bottom line: Even if you are buried under a mountain of credit card debt, can’t pay your monthly bills, and have your telephone disconnected, you must contribute to your 401k up to the amount of your employer’s match. If your employer doesn’t match, don’t contribute anything until you’ve completed the next several steps.

Pay Off High-Interest Credit Card Debt

The next step in building your complete financial portfolio is to develop a plan for paying down high-interest credit card debt.

  • Take the balance sheet you prepared and, on a separate sheet of paper, rank all of your debts by the interest rate you are paying starting with the highest.
  • Decide how much you can afford to dedicate to debt reduction each month from your regular income. If you are making regular contributions to a mutual fund or investment account outside of your 401k match, temporarily stop and add that money to your “debt-reduction” funds.
  • Pay the minimum balance on all of the debts except the highest-ranked on the list (the card with the highest interest rate). The highest ranked card should receive all of the capital (less the minimums on the other debts) you can afford to part with until it has been completely paid off.
  • When you’ve wiped out a balance, cross the card off your list and put it in a drawer (do not cancel the card; this will lower your credit score and cause the interest rate you pay on ​the variable rate and new debt to increase). Do not charge to it again.
  • Continue this process until all of these accounts are paid in full.

The process may take months or even years. The key is to avoid making new charges and find extra money to pay down debt faster. This doesn’t mean you have to abandon your cards altogether; they are not inherently evil. In fact, credit cards can be a valuable financial tool if used responsibly.

Open and Fully Fund a Roth IRA

The Roth IRA is the greatest financial account available to investors in the United States. The odds are good you qualify; as long as your annual income does not exceed $137,000 (single) or $203,000 (married), you can open a Roth IRA.

Contributions (subject to annual limits) are made with after-tax dollars. All Roth IRA contributions can be withdrawn at any time without any penalty. Once you reach the age of 59 1/2 (subject to the five-year rule), all withdrawals are absolutely 100-percent tax-free.

In other words, if you purchased $10,000 worth of the next-Microsoft through your Roth IRA and held it for 20 years, selling the stake at retirement for $5 million, you would owe Uncle Sam nothing.

Purchase a Home

The next step to constructing a complete financial portfolio is to save for a down payment on a house. By owning your own home, you are converting what was previously an expense (rent) into equity.

To sweeten the deal, not only is the interest paid on your mortgage tax-deductible, but you are permitted a lifetime capital gains tax exemption of $250,000 (single) or $500,000 (married) if you sell your home at a profit.

From an investment standpoint, this is particularly attractive. According to, a home typically appreciates 3 to 4 percent each year.

A $100,000 house, for example, would appreciate $3,000 to $4,000 per year, or nearly 20 percent on a $20,000 cash investment (the down payment). There is no other investment in the world that is practical, generates a comparable return, and diversifies one’s asset allocation into real estate at the same time.