Two Buffers and DVA — My Long-Term Roadmap to Being a Millionaire
Here you will find my own money management strategy. This is no financial advice of some sort, I just relate what I put in place to reach my financial goals.
This article is a description of what I put in place last year and I think is the most reliable methodology to become a millionaire on the long term. It is a long-way road, I am targeting to be there end of 2037. It depends on our personal context and I cannot be sure it will fit you, as our situations may be radically different. I live in France, I am 49, my wife and I are both employees and we pay a mortgage for our home. Our only son is independant and needs no financial help from us. I started this research when I received documents about my future retirement that is supposed to happen end of 2037, according to the French law. I started a Google Spreadsheet to evaluate how big our savings will be at that time and how much money we will still owe the bank when our income drastically drops. And I came to this story I will tell you now.
The First Buffer: The Life Buffer
Life is not linear, there are highs and downs, unexpected spendings or summer holidays. Last week, my heater eventually died after 19 years of service. It started dripping and definitely stopped three days after. I had to replace it almost instantly as I hate cold showers! And, though we are in mid-May, it is still cold here in Paris this year. 3,000 USD to pay right now. Next summer we will go to the sea and will have to rent a house for the period. No matter what the reason is, we need cash to be able to cope with exceptional events. This is what I call the first buffer — or life buffer. I try to keep it between 3,000 and 5,000 USD. When it is under 3,000, I cannot invest in anything and put all my monthly savings onto this account. When it reaches 5,000, I stop adding to it and transfer my monthly savings to the other buffer we will discuss later. In between, I share my savings equally into the two buffers.
The Dollar-Value-Averaging Method
DCA is much more known, it consists of investing the same amount of money every month. Doing so, you buy high and low and average the cost. DVA is an evolution of DCA where you invest more when prices are low, less when they are high.
DVA is based on defining goals and investing the difference between your goal and the actual value of your portfolio. Imagine, your portfolio is worth 5,000 USD on April, 1st 2021 and you can afford investing 300 USD every month. You are thus targeting 5,300 on May, 1st. If prices go up in April and your portfolio is worth 5,050 end of April, you only have to invest 250 USD and keep 50 USD for coming month. When prices are high, you buy less and keep some cash. If prices had dipped down and your portfolio had fallen to 4,950, you would have had to invest 350 USD to reach your goal. You invest more when prices are low.
As I said, I am targeting to have one million of savings when we retire in 2037. So I opened a spreadsheet, listed all the accounts we own : Savings, stocks, crypto wallets, and retirement, similar to 401(k). I took a snapshot of where we were at the end of 2019. I then estimated our yearly accruals and expected interest rate for each line. I had drafted an overall realistic roadmap for the next 16 years! It was our figures, our own money and the magic of compound rate effect was there under my eyes, it sort of became true!
The Second Buffer: The Investment Buffer
This is the entrance door to my investment accounts. As I just described before, I use the DVA method so I don’t invest every dollar at day 1 but invest what is needed to attain my goals. The overall spreadsheet defines my yearly goals and then at the beginning of each year, I split those goals into 12 monthly steps. I know beforehand, how much I want to have on each account at the end of the month. Depending on the market moves, I adjust my investments each month to be on target and only it. When market is very bullish, it happened a few times after the COVID-19 dip of early 2020, I have nothing to add to some lines and I keep my cash available for the months when bear market is here. My parents recently sold a house they owned and decided to give my brother and I some money. This big amount was placed in this Investment buffer and not invested “all-in”. Doing this way, I have cash in my hands and I can keep going forward even when the conditions are hostile.
Improvments and Planning Reconsiderations
I have being using this method for about a year now and it takes me a few minutes once in a month to invest my money. So far, I reached each milestone on the road. But markets have been rising continuously so reaching the monthly objectives was easy and my investment buffer still holds available money. I can invest next months while I refill the life buffer that has gone under the lower threshold after heater broke down. Obviously, in the next 15 years, there will be long lasting bear markets or crashes, and I will have to reconsider my plan because investment buffer won’t hold as much money as I need. I will then have to wait for better times and keep investing and fill the gap when bullish days are back. And maybe, the overall long-term performance of markets will be better than my estimated 5% per year and we will reach our goal earlier than 2037 and decide to retire younger. Who knows.
Draw your roadmap, keep investing, step by step. Do not try to go faster than the decided affordable pace and you will be there soon.
