How To Allocate Your Savings

Three Glass Jars On Wooden Shelf For Savings
I recently wrote a post about saving money and why you need to have an emergency fund saved up before you start saving for retirement. (See: How Much of My Income Should I be Saving? ( Well, a friend of mine recently asked me what I thought should be the next step in saving and this is what I told him.

I’m not a financial planner or money guru of any kind. If you have access to a professional in that field I recommend you hire one because I think everybody could use a plan tailored to their needs. But if you don’t have access to a personal planner, this is my opinion of how I think you should prioritize your savings.

First: Have at least three months worth of expenses saved up in a regular bank account. I like to see 6 months to a year’s worth in the bank, but the three months is crucial before you start putting money anywhere else.

Second: If your employer matches your 401(k) contribution- then put your money there up to the match. An employer match is a 100% return on your investment. You can’t get that anywhere in the marketplace. If you find a bank account that pays one half of one percent interest that’s considered good these days. A 100% match? That’s totally awesome! Do not miss out on that opportunity.

Third: If you have money left to save after contributing up to the match, then I would put money into a Roth IRA if you qualify. Generally you need to earn less than $129,000 a year if you’re single and $191,000 a year if you’re married. The reason I like the Roth IRA over the 401(k) or traditional IRA is that you get to take the money out tax free in retirement. It’s also a good source of funds for college, housing, or other emergencies if you should need it. There is no tax benefit now for putting money into the Roth, all the benefit comes when you take the money out. I cannot overstate how valuable that “tax-free” part of the retirement equation is.

Fourth: My next choice for savings would be back to your employer sponsored 401(k). This gives you a tax reduction benefit now.

Fifth: College savings. People with new babies always ask me about college savings programs. They will have no money in their own savings or retirement but they want to open a 529 plan. So why is college savings so far down on the list? Here’s the main reason: you can get a loan to go to college. You cannot get a loan to retire. We’re talking about priorites: savings, Roth IRA, 401(k), then college. (Remember, a Roth IRA can be used for college if needed.)

Have you gotten this far and you still have money left to save? That’s great! That also implies that you’ve got enough money to hire a professional financial planner. There are cool things you can do with annuities, life insurance, and other investments that are way beyond the scope of anything I can tell you about. Find someone that you can really talk to.

What are your plans for the future? Where do you want to be when you retire? When will you retire? How will you get there? These are all things that need to be tailored just to you and can’t be answered in some blog post.

How Much of My Income Should I Be Saving?

How much money should you save?

How much money should you save?


10%.  Ten percent of your income should go into savings.


Now people who see that tend to fall into three groups.  Group one says – “Okay, that seems right by me.”  Good, that was easy.  Group two says, “But I’d like to save more than that.”  I say to them, “Go ahead, save more.  That’s a good thing.”  Then there’s group three.  They’re saying, “You must be nuts, I can’t possibly save 10% of my income!”  This post is for you.


Seriously, if you’re living paycheck to paycheck, barely making ends meet, you’re the one who needs a savings cushion the most.  Think about it.  A rich person has some car trouble–it’s an inconvenience at most.  A poor person gets some car trouble and it can ruin your life.    Let’s say you have no savings and your car breaks down, it’s going to cost $1000 for fix.  You don’t have the money.  You can’t get to work without the car so you lose your job.  No job, you can’t pay the rent, you get evicted.  Crazy right?  But this stuff happens to real people all the time.


A little bit of savings cushion can prevent catastrophe.


But 10%, that almost seems impossible.  I know, but the lower your income, the more you need that cushion.  Let’s say you’re working and your take home pay is $300 a week, that’s $30 you need to save.  Now I’m talking about regular saving here, not sticking money into an IRA.  Before you start saving for retirement, you need to have your behind covered for emergencies first.

If you save $30 a week for a year, you’ll have over $1500 socked away.  It’s a lot easier to deal with car trouble with $1500 in the bank than it is with zero.  (Believe me, I speak from experience.  I’ve had car trouble when I’ve been broke, and car trouble when I’ve had money.  Having money is way better.  Way better.)


Now you might not have a problem, you may have that $1500 saved up and then save up another $1500 the next year and then you’ve got $3000 in the bank.  How awesome is that?


Or maybe you hit a rough patch and your savings goes back down to zero, but hopefully the rough patch was a little easier because you had some cash stashed away.


So how do you save 10% of your income?  You’ve got to pay yourself first.  I know, you’re thinking I’ll pay my bills and then save the rest.  I’ve tried that, I always wound up with no money at the end when I tried to save that way.  Pay yourself first.  I don’t care if you don’t have a fancy bank account.  You can stuff it in your mattress for all I care.  But stash it somewhere.  (Okay, I do like bank accounts, but if you really have no money, some banks won’t even look at you without $1000 or more so I understand if you don’t have a bank account at first.)


Set goals for yourself.  You can make up your own goals, but I got these from a financial seminar I took once.  I don’t think the speaker would mind if I shared them:


Goal 1:  save $100

Goal 2:  have  $1000 saved

Goal 3:  have $5000 saved

Goal 4:  start investing in a retirement account in addition to your savings.


If you’ve already reached all these goals then congratulations,  you’re already on the right track.  You want to keep saving 10% of your income, but you can be  putting some of that savings into retirement while still adding to your regular savings as well.  I like to see 6 months to a full year of income in your savings account.


You don’t get any tax breaks for saving.  It’s not sexy either.  But having some money set aside for emergencies is probably the smartest financial decision you’ll ever make.  (Well, and smart is sexy right?)



Planning Your Home Budget


Photo by Tax Credits at

Updated December 2013

Today, I’m talking about budgets.  I’ve even got a free “gift” for you.  It’s a home budget planner.   All you have to do is click on this link  RTS Budget Planner and  download the excel spreadsheet and start inputting the numbers.


The basic idea is that you want to make more money than you spend.  Now I confess, I have a little experience with this—it’s not always as easy as it looks.  I’m way better at spending than at making money (Just ask my husband).  But I also know that when I set up a budget, I’m more careful with my money, and for me that’s half the battle.


If you’ve never tried using a family budget before, here are some things that I’ve learned over the years.


  1. Expect your first draft of the budget to not be perfect.  Make your budget and try it for a month or two and see how it works.   What  did you leave out?  What did you underestimate?  What did you over estimate?  Expect to make some changes.
  2. The first draft of your budget should include everything that you really do spend money on.  You may need to trim your budget,  but you have to know what you’re spending your money on before you start trimming expenses.
  3. Budget for things that are important to you, don’t eliminate stuff just to make your budget look good.  If you go to the movies  regularly, budget for it.  If you smoke (even if you want to quit)—budget for it.
  4. If you’re married, be prepared to compromise.  When I’ve done budgets in the past, I cut my husband’s lunch money and cable  TV.  I bring my lunch to work and I don’t watch that much TV, so why pay for those things?   But if I want to stay married, my  husband needs to eat and have access to his beloved Cardinals baseball team.   We kept the cable TV and trimmed the budget  someplace else.
  5. Remember to budget for charity and savings.  Now many people do a budget to see how much they can save or how much they can  give to charity.  I suggest that you decide up front how much you want to save and to donate and stick that right into your budget  from the get go.  If you do the budget and decide to save what’s left over—you won’t be saving anything.  The general  recommendation is 10% of your take home pay for savings and another 10% for charity.
  6. Depending upon who you talk to, your housing costs should run somewhere between 25 to 33% of your take-home pay, but that’s  just a guideline.  For many people, housing costs take up a much higher proportion of their income.


Those are my main tips.  If you’ve got a good budget tip, please put it in the comments section below.   In this economy, we all need all the help we can get.


Happy budgeting.

Summer Job Super Gift

It's fun now

Photo by Eric Leslie on

Do you have a child or grandchild that has a summer job this year? If you want to give a “gift of a lifetime” I’ve got a suggestion for you. Make a contribution into a ROTH IRA account for the child to match the amount of income he or she earns this summer.


Saving for the future; sounds boring doesn’t it? I know, it’s not an I-Phone or a new car—but if you were to make a $5,000 contribution to a 16-year-old’s ROTH IRA—and he made no other contributions for the rest of his life—by the time he reached age 65 (assuming it earns an average of 7% interest per year) he’d retire with $138,000 (The Kiplinger Tax Letter, July 20, 2012). Now that’s a pretty sweet present!


Of course, there are rules that have to be met. For one thing, you can’t contribute more than the child actually makes for the year. Also, you can’t contribute more than $5,000 to a child’s ROTH IRA.


Obviously, this isn’t for everybody. You have to be at a certain stage of wealth to be gifting that kind of money to a kid’s IRA. And remember—that’s what it is; a gift. If you’re trying to avoid gift taxes—a contribution to a child’s IRA will count towards your $13,000 gift annual exclusion. You can’t give a child $13,000 and contribute to the ROTH IRA on top of that. You would have to reduce one or the other so that the total came to $13,000 or less or else a gift tax will be applied.


What about people who don’t have that kind of money to give away? You can make a smaller contribution. Maybe a thousand dollars instead; or maybe you make a deal with your child—you’ll match whatever they contribute to a ROTH IRA up to a certain dollar amount. (I recommend starting a ROTH IRA with at least $1000. Smaller sums are usually hit with more fees and wind up losing money instead of growing.)


Why put money into a kid’s ROTH IRA? So many reasons:
1. The money grows tax free
2. When it’s time to take the money out, it’s tax free
3. The money can be used for education, buying a home, or retirement
4. Giving your child a fighting chance for having a decent retirement nest egg


Why a ROTH and not a regular IRA? Regular IRAs are tax deductible when you make the contribution, but taxable when you take the money out. Most teenagers don’t need the tax deduction that comes with a regular IRA, so it really makes much more sense to invest in something that will be tax free at retirement. Note: the deductibility of the IRA goes to the owner of the IRA—so if you contribute to your child’s IRA—you don’t get the tax deduction, your child would.


I realize that this isn’t an option for everybody, but if you can afford putting money into a ROTH IRA for your child (or grandchild), it’s worth some serious consideration.

Saving for Unemployment

Save Money

Photo by 401K 2012 at

I know what you’re thinking—don’t I mean saving for retirement?  That’s what everybody talks about, right?  Correct.  Everybody talks about retirement, including myself, but this time I really mean saving for unemployment.


Why?  It’s simple really.  Hopefully, unless we die first, we all get to retire once.  Some people go back to work, but it’s usually a “retirement job”.  But for those of us in the baby boomer generation (post World War 2, 1946 to 1964), according to the US Bureau of Labor Statistics, we can expect to be unemployed an average of 5.2 times over our working lifetimes.


Us Baby Boomers are all headed towards retirement already.  So if the Boomers experience an average of 5 bouts of unemployment—what about then Gen-Xers and the groups after them?  The Boomer generation experienced some of the greatest economic growth our country has ever seen—it’s quite possible that the younger generations could experience even more bouts of unemployment than we have.


So when I say you need to save for your unemployment, I am very serious.


Here’s what I’m seeing in the tax office.  People come to me to do their taxes after they’ve been laid off.  They have no savings so they dip into their 401(k)s to pay for groceries and stuff until they find a job.  They keep spending at the same level they did while they were still employed, but their 401(k) money often has no withholding and there’s a 10% penalty for taking it out too soon.  Tax time rolls around and they are stuck with a huge income tax bill—which they can’t afford to pay—so they take more money out of their 401(k)!  It’s a vicious cycle.  Sadly, there’s not much I can do to help here, especially after the damage is already done.


The big concern all these people have in common is that they did not have anything in their savings accounts when they lost their jobs.  That’s a big problem all across America—people don’t have money in their savings accounts!


Think about this:  Suppose your take home pay is $2,000 a month.  Let’s say your rent is $1,000 a month.  You spend about $500 a month on food and other necessities, and you’ve got about $500 extra that you play with.  (Yes, I’m making the numbers easy.)  Your bare minimum to survive is $1500 a month.  Now, if you have zero dollars in your bank account and you lose your job—well you’re in dire straits in less than 30 days, right?  You can’t make your rent payment.  But if you have been putting $200 a month away for the past year, you’d have $2400 in the bank.  At least your rent would be paid for another month and if you qualified for any unemployment benefits you might have 2 months worth of rent and food.  Having some savings set aside buys you an important commodity:  time.


Ideally, you want to have enough money to support you for at least six months of joblessness.  The fellow in our scenario above would want to have $9,000 put away. ($1500 of monthly minimum expenses times 6 months = $9,000.)  At $200 a month, that would take him almost 4 years of saving and I know that’s a little intimidating.  But baby steps are how you get there.  Everybody has to start someplace.  Unless you’ve already been saving, it’s going to take some time to shore up enough money to support yourself for half a year.  The big point here is to get started.


Pick a goal.  Don’t have one?  I’ll give you one.  Start with $1,000 in the bank.  $1,000 is way better than nothing isn’t it?  Gives you a little cushion, right?  If you’ve already got $1,000 saved, then your next goal is $5,000.  If the $1,000 is still too intimidating then your goal is $100.  You don’t even have to have the $100 in a bank—you can hide that under your mattress if you want. But by the time you get to $1,000 you really need to have a bank account.


Don’t get me wrong, it’s still important to save for retirement.  But statistically speaking, you’re five times more likely to be unemployed for awhile before you ever reach retirement age.  Oh, and what if I’m wrong and you never go jobless even once during your entire working career?  Well that’s okay, now you’ve got some extra money saved for your retirement!


Oh and a note from my editor:    Also know that you can deduct certain job search expenses as miscellaneous itemized deductions only if these expenses exceed 2% of your income and the job is in the same line of work as your prior one.  Such expenses include employment agency placement fees, resume expenses, travel and transportation expenses, and local and long distance phone calls.   And another note from me:  The IRS keeps telling us that all the time, but in real life I have very few clients who actually get any tax benefit from that deduction.  Keep your receipts, just in case, but for most folks, that deduction is pretty worthless.


World Series and Wealth Building: A Baseball Analogy about Building Your Savings

Albert Pujols

Photo by SD Dirk on

I titled this blog post and later realized that people would think it’s about Albert Pujols’ income prospects after hitting three home runs in game 3 of the World Series down in Texas (Okay, don’t you think the three home runs will help his negotiating now that he’ll be a free agent?). But seriously, it’s about you.

Saving for the future is a little like baseball – you’ve got to work at it every day. Like baseball, in a regular game, the idea is to try to get someone on base, try to get a run in. If you get in a run during an inning you’re doing well. If you can save a little bit from every paycheck, you’re on the right track as well.
Sometimes in baseball, we get those great moments, like Albert Pujols hitting three home runs. That was truly amazing. But it also wasn’t just luck. Albert is out there every day. He works at it, he makes himself better. He learns from his mistakes and from his successes.

Sometimes in life we have great financial moments as well. Maybe you got a bonus at work, a tax refund you weren’t expecting, maybe even a winning lottery ticket—these are your financial home runs where it’s your chance to put your team ahead. You need to make sure you use your financial windfalls to your advantage. Unlike Albert Pujols, who can’t bank those extra runs to use for the next game, you can bank your windfall money.

When it comes to your life, you’re in it for the long haul. You need to start saving today to make tomorrow worthwhile.

The goal is to save 10% of your income. If you make $200 a week, then you bank $20. If you make $2,000 you save $200. For a lot of people, that’s impossible—at least it is to start. If you can’t do 10%, then I say you need to match your social security withholding. It’s not that much. If you look at your payroll stub, it should be listed right there. If you make $200, then your social security withholding is $8.40. That you can do. Work your way up to 10%.

If you can’t handle a bank account, you can save it in a jar or under the mattress for all I care. Once you’ve got enough to get free banking, then you can open an account and maybe earn a little interest. You always hear the people need to have money to make money—you’re slowly turning yourself into one of those people who have money. Just like baseball—one run at a time.

Tax Time Savings Bonds

Grandparents can buy US Savings bonds for their grandchildren.

Grandchildren are good reasons to buy US Savings bonds.

Did you know that you buy US Savings Bonds with your income tax refund?  You can buy savings bonds for yourself or for other people, like your grandchildren for example.  Last year, you could only purchase a bond for yourself. 

How do you do it?  It’s really easy.  If you claim a refund on your 1040, you use form 8888.  It’s the Allocation of Refund form (it includes Savings Bond Purchases) to split your refund.   The bonds start at $50 and you can purchase more in increments of $25 up to $5,000 worth if you want to.  Any money that you don’t use for purchasing bonds will be direct deposited into your bank account.

For example:  let’s say that you will get an $800 refund.  You want $100 in bonds to go to each of your two grandchildren John Jones and Mary Smith.  You will fill out the paperwork with their names on the form (you don’t need their social security numbers) and the remaining $600 will be direct deposited into your bank account.  The US Savings Bonds will be mailed directly to your home in about 5 weeks. 

The bonds will earn interest for 30 years and are tied to inflation.  It’s a safe investment backed by the United States Government.  They’re not just for saving for college.  This could be a retirement savings vehicle if you want it to be. 

You can cash the bond in after one year at most banks or credit unions if you need to.  You will need to hold the bond for at least five years if you don’t want to lose the last three months of your interest though.  The current interest rate is .74% and it adjusts for inflation every six months.    

The best part, there’s no fee for investing in U.S. Savings Bonds. 

If you’ve been thinking that you need to start saving and you just haven’t done it yet, this is a great opportunity.