1. Pay Yourself First - The golden rule of financial planning success. This includes putting money into an emergency fund, retirement savings, or a specific goal you have such as buying a house. You can choose to set up different savings accounts for different goals - retirement accounts such as 401(k)s are already separate. It can feel like a lot to put money into all three at once, but allocating money to each will put you miles ahead of most individuals. This is possible provided that you…
2. Learn How To Live Off a Percentage of Your Income - If you are living paycheck to paycheck, you may find it overwhelming to save towards one goal let alone multiple goals. The key is to enact gradual change - first focus on living off 90% of your paycheck and saving 10%, then gradually reduce that percentage until you are saving 20-40% of your paycheck.
If you are not sure how to start saving, our first recommendation is to sit down and categorize 2-3 months worth of expenses and add up the total for each category. The information can easily be collated with apps such as Mint which track expenses from multiple accounts and automatically categorize them.
Sitting down and adding up the totals of each category (groceries, restaurants, rent, utilities, entertainment, etc) often reveals problem areas that you can learn to focus on improving. For example, an individual may add up their total food costs and realize that eating out vs. cooking meals at home is a huge drain on their budget. Another individual may realize that small but frequent purchases on Amazon results in hundreds of dollars a month in extra expenses. You may have an idea of what your problem area is, but often the act of sitting down and calculating a number for it ends up being an impetus for change.
3. Choose Goals and Realistic Timelines - Speaking of goals, it is important to write down goals and set realistic timelines. If you do not have an emergency fund, your first goal should be to build one. Emergency funds will ideally cover six months of living expenses, so once you have tracked your expenses you will know how much you spend in a month and can multiply by six. (For example, $2000/month in living expenses x 6 months = $12,000 in an emergency fund) It is important to base it on your current spending lifestyle because people tend to underestimate how much they spend.
If you are also saving for another goal such as buying a house, replacing a laptop, completing car maintenance, etc, you can split what you save into each goal, but keep in mind that will lengthen the timeline for completing each goal. Often, the act of tracking your expenses and setting goals will motivate your subconscious to work harder and find new ways to reduce expenses or earn more income. (The latter of which is more desirable!)
If you would like help with financial planning, please contact us at email@example.com or call 515-557-1860. We are an Iowa-based firm serving individual financial needs around the country.