Go For Gold with a Budget

Team USA fans have had a lot to celebrate over the past few years, most recently the women’s national soccer team’s win against the Netherlands to secure the gold medal in the FIFA Women’s World Cup tournament. These teams put their years of hard work, determination, and will to the test against the world’s best athletes in hopes of earning a gold medal.

For years the United States teams have been dominate and are always near the top. Additionally, the United States is an economic superpower that is highly advanced in terms of technology and infrastructure and has abundant natural resources. In fact, the U.S. economy is the largest in the world in terms of nominal GDP (measured at current prices in U.S. dollars). Suffice it to say the U.S. is a world powerhouse in many ways. Yet despite these facts, when it comes to personal savings, the U.S. pales in comparison to much of the world. We can do much better!

Americans are certainly spenders, not savers. Although personal savings rates have increased recently, they remain low by historical standards and in comparison to countries around the world. So what is the solution? While every circumstance is different and may require a unique approach, by and large creating a budget can solve this savings dilemma and alleviate the stress associated with poor financial management. A budget allows you to understand where the money goes and may help you free up cash for important savings goals, such as an international vacation or retirement.

First Steps

Creating a budget requires some time and effort, but the benefits more than offset the time invested. The great thing about a personal budget is that it is personal. How you determine your budget is up to you.

The first element of any budget is the income you receive each month. This can include paychecks, alimony, royalties, and fees. One of the purposes of a budget is to be able to track what you spend, and make sure you don’t spend more than you earn; thus helping to reduce debt and freeing up cash for savings and investments. A great way to track your spending is to use an account aggregator such as Mint.

Emergency Savings

When you decide to begin saving, your first priority should be to establish an emergency fund. It is recommended that you build your emergency fund to have three to six months of expenses. Having a source of emergency funds can help you to get out of debt by avoiding more debt when unexpected expenses come up.

Once you know what your emergency fund should cover, the next step is to set up a savings plan to build toward your emergency fund goal. Decide on a specific monthly savings goal and then devote a percentage of every paycheck to savings. One of the best ways to stick to your savings plan is to pay yourself first by establishing automatic transfers into a designated savings account.

Retirement Savings

Next to establishing an emergency fund, the most important savings goal is to set money aside for retirement. Get the easy money first. For most people, that means tax-sheltered accounts such as a 401(k). If your employer offers a match, contribute at least enough to grab the maximum as this is essentially “free” money. From there, it is recommended that you contribute 10% of your pay to your retirement savings account. Retirement savings is an even higher priority than eliminating debts due to the power of compounding interest. Nothing is more financially powerful than starting early and spending time in the markets.

Noxious Debt

After taking advantage of an employer’s match on a 401(k), next on the budgeting list is to attack debt on high interest credit cards, personal and payday loans, title loans, and rent-to-own payments. All of these types of accounts carry extremely high interest rates and can take years to pay off if only paying the minimum monthly payment.

Finding Savings in Your Budget

It’s no secret, the less you spend the more you can save. Once you know where the money goes, it’s time to analyze your expenses. This can be accomplished by dividing your expenses into three basic categories: needs, wants, and savings. There isn’t much you can do about fixed expenses such as your home or car. However, if these expenses are greater than your monthly income, you are probably carrying too much debt to effectively save. A good guideline for consumer debt is using the 28/36 Rule. The 28/36 Rule states that a household should spend a maximum of 28% of its gross monthly income on total housing expenses and no more than 36% on total debt service, including housing and other debt such as car loans.

The easiest place to reduce spending is typically discretionary expenses. Begin by canceling membership subscriptions that you don’t use. You may also consider eating fewer meals out, or choosing less expensive restaurants, or even better – embracing your inner culinary artist and cook at home. Energy costs can oftentimes be a source of savings and there are some relatively cheap fixes available and many begin in the home. For example, weather-stripping or caulking doors and sealing windows can keep out cold and heat, thereby lowering your heating and cooling bills.

Budgeting End Game

At its core, budgeting is a means of ordering priorities and accomplishing basic financial goals. To do this, it is important to pay yourself first. As noted above, by setting aside a certain amount each month for savings, you can build toward your goal without missing the money. Two savings maxims come to mind, “Set it and forget it” and “Out of sight out of mind.”

Another key to success is to set savings goals, both short-term and long-term needs. Studies have revealed that families with savings goals tend to save more.

Above all, budgeting is like a muscle and it needs to be exercised regularly to stay strong. Your budget is a living document; as your circumstances change, so will your goals and needs. Review your budget every few months to make sure it reflects your goals and to see if you are saving as much as you possibly can.