Finance Friday: How to Budget + Save Money
I couldn't be more excited to share today's post - I can't tell you how inspiring it was for me (and hopefully you!) to read all of the comments last week. Someone once told me that I blog and overshare on Instagram for validation. It caught me off guard but I wasn't mad because it's actually pretty true - just not necessarily in the way you'd expect. It was unbelievably encouraging to hear/read/learn that we are not alone in figuring out how to be grown ups, prioritize our life AND our finances. I took all of your advice to heart and got a move on formalizing our plans. To start, I finally completed the first of my finance series I promised a few weeks ago. This is where I landed:
- This week and week after next, I will share two installments answering all of your financial questions from a few weeks ago, courtesy of Investment New's Top 40 under 40 Financial Advisor Maggie Johndrow of women-owned Farmington Valley Financial Group (thanks Maggie!)
- In mid-August, C and I are meeting with Maggie to finalize our goals and get a plan in motion to meet them. I will then post our plan (obviously no specific numbers - just our overarching objectives) and progress with monthly updates here.
- So far, we're taking the below advice to heart and have sworn off online shopping until Sept 1. We are also limiting eating out to once a week (easier said then done now that I'm back at work and we have a 5.5 mo. old!)
I hope this is helpful - please feel free to comment below if you're joining in on our "challenge" - it's so much more attainable when there is a community along for the ride!
Hi! My name is Magdalena “Maggie” Johndrow and I am a financial advisor with Johndrow Wealth (a division of Farmington River Financial Group®). I was lucky enough to meet Meg as I was naturally drawn to her affinity with stripes (something I also share) but also because I realized our lives were somewhat parallel: both grew up in Connecticut, started our careers in New York City, and moved back to Connecticut to marry our college sweethearts.
We both have a passion for our careers—Meg is a branding and marketing genius—and I was drawn to her blog as I was looking to start my own (TBD…). I’ve been lucky enough to be featured in national publications like U.S. News, Forbes, and Brit & Co. but haven’t taken a stab at writing myself. Thanks, Meg, for supporting your fellow strong women by giving me a shout-out on my recent award, which led to some great questions from all of you. We received so many important questions that we decided to name the next few Fridays, “Finance Friday.” So check back two weeks from now for Part II: Retirement
So… here it goes! My first attempt at blogging!
Disclaimer: this is general financial advice and it’s important you look at your own situation individually. I am available for additional questions: firstname.lastname@example.org
What is some practical advice to set a budget and stick with it?
I think of budgeting as dieting—stick with me here! If you decide to go on a diet but track what you ate at the end of the day, you’ll likely over-eat and not lose weight because you’re backward looking. Instead, you may be familiar with “meal prep Sundays” where you plan your meals for the week and can count the calories each day before you eat them. This way you can ensure you have a calorie deficit and lose weight.
Similarly, if you want to create a budget and stick with it, you need to be forward looking, not backwards looking. This is why some budgeting apps make it hard to stick to your budget. They’re great for tracking your spending and understanding your spending habits, but not great to helping you cut back on your spending.
I suggest you stick with the “60/40 rule” (sounds a lot like diet’s 80/20 rule, right?). What this means, is you should try to keep your gross fixed expenses around 60-percent. Gross means before taxes. A fixed expense in this instance is anything you know you’ll have to pay to live on. Categories include:
Housing costs: rent/ mortgage, cable/ WiFi, NetFlix, Hulu, electric, gas, house cleaning/ maintenance, natural gas/oil, phones, supplies, waste removal/ recycle, water/ sewer
Personal Care: Clothing, Dry Cleaning, Hair/Nails, Health Club, Medical
Transportation: car payments and maintenance, Uber/taxi, public transportation
Student Loan payments
Groceries (excluding dining out; that’s a “fun” expense)
The remaining 40-percent goes towards savings—10 percent into each:
Retirement (not to be used until you retire with a 10 years+ time horizon)
Long-term savings (investment account; purchases with a 5 year+ time horizon)
Short-term savings (purchases in next 1-3 years)
Fun-money (monthly spending account)
Once you’ve figured out this budget, you need to pay yourself first. This means having an automatic withdrawal from your paychecks into these four accounts. This way you don’t even have a opportunity to spend the money because it’s not sitting in your checking account!
If your fixed expenses are over 60-percent you have a few options: decrease your expenses or increase your income.
Income = savings + expenses
Increasing your income is tougher – sure we can ask for a raise or start a side hustle, but not all of us have a special calligraphy talent. Decreasing your expenses is easier. Some questions to ask yourself:
Can you find cheaper rent? Can you find a roommate?
Do you need all of those subscriptions? Can you share your Hulu or Netflix accounts with someone?
Paint your own nails, or better yet, let your nails go naked! I hear it’s good for you.
Refinance your student loans for a lower interest rate and monthly payment (*this isn’t right for everyone; it depends on your person situation more on that in my 3rd Finance Friday post)
Find a cheaper gym
Refinance your car loan for a lower monthly payment
Negotiate lower rates with your providers, including WiFi, cable, and credit cards – chances are if you’ve been a good long-standing client, they’ll work with you
Once you have your budget under control, this raises the next popular question: what type of accounts should I be using to save my money?
To answer this question, I first we need to start with my favorite personal finance topic: Compound Interest.
Think of compounding interest as a snowball: if you roll a snowball down a snowy hill, what happens to it? It accumulates more snow and grows bigger, right? You are not actually adding snow, but rather you’ve given it the momentum to grow as it goes down the hill.
Similarly to the snowball, if you invest money and let it grow over many years it too may accumulate exponentially. The money that grows every year is reinvested and that new, larger sum, grows. You are not actually adding money (though you certainly can) but by putting it into an investment account, you’ve given your money momentum.
To provide a real-life example: I had a client who was 25 years old and added a one-time payment of $5,000 into an Individual Retirement Account (IRA) (more on retirement accounts in the next post). He “forgot” about it (I know, must be nice!) and when he was 55 years old, he opened the account and saw that $5,000 grew to $250,000 without adding a single extra dollar himself! That’s the power of compounding!
If you’re interested in playing around with the numbers and seeing how this could work for you, click here for a compound interest calculator!
So, to answer what type of account you should be using to save your money: I would encourage any purchases with a medium to long-term time horizon to be invested so that you can take advantage of compound interest. Typically, I suggest:
Retirement: IRA, ROTH IRA, 401K, ROTH 401K, 403B, 457, etc.
Long-term savings: non-qualified investment account
Short-term savings: high-yielding money market savings account
Fun-money: personal checking account
One important note: I suggest that you maintain 3-6 months’ worth of living expenses saved in a short-term savings account. If you lose your job in normal economic conditions, it typically takes 3-6 months to find a new job, so you know you’ll have enough savings to get you through that time period.
Remember: small savings can go a long way, especially when compounding interest is involved!
Tell yourself you’re going to bring lunch to work every day and only will eat out on the weekends.
You’ll save roughly $10 a day on eating lunch out, or $2,600 a year.
If you invest $2,600 a year for 10 years and it grows at a hypothetic rate of 7-percent per year….
You’ll have $ 43,552 in just 10 years, simply for not buying lunch out and saving that money instead*. That’s compounding!
Why not put all of your savings into your personal checking/savings account?
Interest rates are very low right now. This is why individuals can get such low interest rates on their mortgages! While low interest rates are helpful when buying a house, they’re not helpful in your savings accounts.
A high-yielding savings account typically returns 1% per year on your savings. Your personal savings account typically returns 0.01%. So using the same example above:
In a high-yielding savings account your money would only grow $$30,346 in 10 years. In a personal savings/ checking account it would grow, $28,617 in 10 years.
Look at that difference: $13,000 - $15,000 LESS!
Of course, there is always a risk of loss when investing – nothing is guaranteed—but we find that over a long period of time, investment accounts average out to have better returns than personal savings accounts. This is why I suggest short-term savings go into a high-yield savings account and long-term savings are put into investment accounts!
I hope this post gives you a good starting point to think about budgeting and savings. Come back for the next Finance Friday where I’ll be writing about retirement accounts!
Securities and advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment adviser.
*This is a hypothetical example, does not take into consideration the fees, expenses, and charges with investing, and is for illustrative purposes only. No specific investments were used in this example. Actual results will vary. Past performance does not guarantee future results.