My past couple of blogs have focused on saving for retirement no matter what age you are. Retirement savings is definitely an important thing to focus on. But, if all of the money you save goes Money Jarinto a retirement fund, you won’t have an emergency fund if something catastrophic happens. So, how should you prioritize? Is saving money for purposes other than retirement really that important? I mean, worst case, you could pull the money out of your retirement fund, right?

To answer the previous question, sure, you could tap into your retirement account if there is some sort of emergency and you needed cash NOW. But, just because you can doesn’t mean you should. Unless you are 59.5 or older, you’re going to be hit with a penalty and a tax bill for the money you withdrawal. Is it really worth the penalties when you could have had a rainy day fund all along? In my personal opinion (and the opinion of most if not all financial advisors), the answer is no. This is one of the few times in life where you can have your cake and eat it too! You can save for retirement AND have other money saved and set aside, all while still enjoying some of the luxuries of life. It’s just going to take some discipline and practice. Let’s talk about how to make it a reality.

One simple way to begin to budget and prioritize savings is to implement the “50/30/20 Rule”. This concept, devised and promoted by Senator Elizabeth Warren of Massachusetts, is a straightforward and effective way to save that can be applied whether you make $20,000 a year or over $1 million a year! The plan is based on dividing up your after tax take-home pay and looks like this:Budget

  • 50% of your take-home pay goes to NECESSITIES. Necessities can be classified as shelter (mortgage or rent), food, utilities, transportation (car or lease payments), and any REQUIRED debt payments (minimum credit card payments, minimum student loan payments, etc.)
  • 30% of your take-home pay goes to WANTS. This includes travel, leisure activities, shopping, entertainment, well you get the point.
  •  20% of your take-home pay goes to SAVINGS AND DEBT. The debt I’m talking about here isn’t your mortgage or your car payment. This is going above your monthly required payments to pay down the principle. So the debt being referenced here is extra payments. Savings is pretty self-explanatory. It includes retirement accounts, savings accounts, etc.

Some people may have payroll deductions for 401K accounts deducted automatically from their paychecks every pay period. That’s great! Pretend like you never had that money to start with and still plan to save the 20% listed above. By doing this, you can create a nice little nest egg to set yourself up for retirement while still having a “rainy day stash” for emergency situations.

Learning to save is an important habit to establish early on. If you spend every disposable penny that comes in, you’re going to struggle to save for major purchases like a house or car, or save for future life events like college for the kids or retirement. The longer you grow “accustomed” to spending every last dollar of income, the harder it will be to adjust to a tighter budget. My advice? The earlier you start to implement some kind of budget, the better off you’ll be.

Many parents with kids look forward to years down the road and anticipate college tuition. That type of savings would fall into the 30% section of the budget listed above. Mom and Dad, as important as college is for your kids, saving for YOUR retirement is even more important. You can take out a loan to pay for your kids’ college, but you can’t take out a loan to pay for your retirement! The greatest gift you can give to your children is by providing them with YOUR financial independence come retirement. But, as mentioned before, with some discipline, you can save for college AND save for your retirement, too! There are several savings options available to save for higher education such as 529 plans and Roth IRAs (see my blog from October). Talk to your financial planner to determine the best option for you and your family!

If you don’t have a financial planner, Wealth Builders CPAs & Consultants can help! We have over 20 years’ of experience with all things accounting and finance. We are a trusted team of financial experts who would love to sit down with you and develop a savings plan to meet all of your needs! Call us today for a free consultation. Get your budget under control so you can live a comfortable life knowing that future is financially secure!

Don’t miss a thing! Follow us on LinkedIn, Twitter, and Facebook for all the latest buzz in the finance and tax world!

 

Calonia, Jennifer. “Senator Elizabeth Warren’s 50-30-20 Rule Could Finally Fix Your Budget.” Go Banking Rates, 10 May 2016, www.gobankingrates.com/saving-money/senator-elizabeth-warren-50-30-20-budget-rule-save-pay-off-debt/.

Pant, Paula. “The 50/30/20 Rule of Thumb for Budgeting.” The Balance, 21 Mar. 2017, www.thebalance.com/the-50-30-20-rule-of-thumb-453922.