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? (http://robergtaxsolutions.com/2015/06/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.

Planning Your Home Budget

Budget

Photo by Tax Credits at Flickr.com

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.

Saving for Unemployment

Save Money

Photo by 401K 2012 at Flickr.com

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 Flickr.com

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.