Budgeting your spending is a financial task that we all know we should do — but takes time and effort to reach a financial goal. While working to pay off credit card debt, carefully monitoring our savings, and keeping an eye on numerous bank account balances, we usually know we should be saving more. But real life gets in the way.
I get it. But, without a plan to save, the temptations of daily life — credit cards, low-interest financing, a girl’s night here and there — will cause us to unintentionally spend more than we mean to spend.
While it can be a good idea, you don't necessarily need to hire a financial planner to help you figure out your financial situation and set up a spending plan. Here's how to manage your money yourself to make sure you've got some cash flow into the bank account to pay your bills and keep yourself out of debt and any other unpleasant financial situation so you can reach any financial goal you have in mind.
If you aren’t inclined to build a detailed budget, here are some actions you can take to manage your money to ensure you’re saving enough each year...
First, start automatically saving in an emergency fund. If you haven’t created a separate savings account to cover emergencies, start today. I recommend keeping your emergency fund in a different account than your everyday spending, and the best way to start saving is to set up an automatic deposit from your checking account. Do this to coincide with your paycheck, and you’ll barely notice the difference.
How much should you transfer each paycheck? Start with the highest number you feel comfortable with — this may be $20, $200 or more. Put a note in your calendar to increase the amount at least once every three months. When you increase, do so by at least $5 — more, if you’ve got the wiggle room.
Next, determine how much you need in the emergency fund. Once you’ve started saving regularly in your emergency fund, take a moment to calculate your goal. Most advisors suggest three to six months of “basic” expenses in your emergency fund. If you are starting your emergency fund, aim first for three months — once you hit that goal, you can decide if you’d like to save more.
Basic expenses reflect the things you’d need to pay for if you were unemployed (and typically don’t include discretionary spending like eating out). To calculate your monthly basic expenses, look at your housing (mortgage / rent), grocery bills, any loans (car, education, etc.) and utilities like power and water. Add these categories and multiply the total by three to get your emergency fund goal.
You might not meet this goal right away. That’s fine — you’re working towards it, and that progress will continue to add up over time. Having an emergency fund in place provides you with a buffer that helps protect for life’s unexpected curveballs.
After you’ve started your emergency fund, start saving for retirement. Yes, you read that right — retirement! This is particularly important for women, who need to save more than men for retirement (we generally make less, invest less and live longer.)
To start saving for retirement, you should first decide which type of account you’ll invest in. Typical retirement accounts include employer-sponsored plans like a 401(k), or Individual Retirement Accounts, commonly called IRAs. You can learn more about the differences here.
Next, you’ll select a financial institution (like Vanguard, Fidelity, or Charles Schwab) to open your retirement account with. If your account is provided by your employer, then they will already be partnered with a financial institution.
To start investing, you’ll need to then select your investments and fund the account. Selecting investments can feel overwhelming if you are new to investing, but remember — the financial industry makes a lot of money from confusing average investors.
Generally, when you are investing in retirement, you’re choosing between different mutual funds. Mutual funds are investment vehicles that allow us to buy many, many stocks in just one purchase. I prefer these to individual stocks because you can own hundreds of companies in each share. This helps you avoid one of the money mistakes I’ve made — investing in one company and losing everything.
However, there’s a twist: All mutual funds are not equal. Mutual funds can be designed to fit different types of investment goals. My favorites are mutual funds that mirror a large, diverse market. One example is the Vanguard 500 Index Fund (ticker symbol: VFINX).
One share of VFINX includes just over 500 companies, including Apple, Berkshire Hathaway, Procter & Gamble, Starbucks, Goldman Sachs and Southwest Airlines. Funds like VFINX are low cost because they don't employ lots of people trying to analyze stocks and beat the market. Instead, this fund automatically includes the 500 largest US companies. This saves you money!
Here's what to watch out for when picking mutual funds:
What's the expense ratio? This is how much the company that manages the fund charges you for their work. An average expense ratio is around .6 percent — meaning, for every $100 you have invested, the fund rakes in 60 cents. Sounds small — but tiny fees make a meaningful difference in your wealth over the long term. Vanguard’s average expense ratio is .12 percent — meaning, for every $100 you invest in a Vanguard mutual fund, they charge 12 cents. That’s much, much lower, and it lets you keep more of your hard-earned money.
Are there other fees? It can be costly to create fancy, actively-managed mutual funds. So, look carefully for purchase or redemption fees, or 12b-1 fees (marketing or distribution fees.) Ask, ask, and ask again about fees before investing!
What's the 10-year return? How did this fund perform over the last decade, compared to the S&P 500? The S&P 500 is a very common performance benchmark because it includes the 500 largest U.S. companies. If the mutual fund seriously underperformed the S&P 500, it may not be worthy of your hard-earned money.
After you’ve decided how you’ll save for retirement, you need to start saving - preferably by investing automatically. Automatic saving will help your retirement savings begin to grow - but how much should you be investing in your retirement? At first, start with as much as you can afford. Remember, many retirement accounts allow you to invest with pre-tax money. This means you can divert money earned into your retirement without paying out first to Uncle Sam.
Further, if you have an employer that matches some percentage of your investment, then aim to contribute at least that much. This will allow you to take advantage of this “free money” from your employer. If you aren’t sure, contact your Human Resources department and ask about the retirement benefits offered, and specifically whether your company offers an “employer match” for any retirement investments.
Realistically, no one can tell you exactly how much of your income you should be setting aside for retirement. However, there are a few rules of thumb to keep in mind.
- General guidelines suggest 10 to 15 percent of your total income. This may not be possible right away, so start with what you can afford, and increase your savings annually (or on a more regular basis).
- Financial providers offer calculators that can help you determine how much you should save. If you’re analytically minded and particularly interested in finance, you may find these helpful. Some find the many inputs required to be overwhelming.
- The number one financial regret of today’s Baby Boomers is not saving for retirement early enough, so saving something now is always better than putting off investing.
Once you have your emergency fund and basic retirement investing taken care of, you can start to focus on other types of savings. Here are some other ways you can manage your money to ensure you’re saving enough.
Are you saving for upcoming large expenses? A regularly funded “save-to-spend” account can ease future financial burdens. I have a save-to-spend savings account for travel, home projects, and car maintenance. I estimate the annual costs of these items, and automatically transfer a monthly amount into my save-to-spend savings. This is separate from my emergency fund, which I only touch in the event of a real emergency. No, a Caribbean vacation in the dead of winter does not count as an emergency!
Have you started college savings plans for your kids? You should only begin investing in this once you have secured your own retirement investments. Kids can take loans, work while attending school, start at a lower-cost community college to offset the tuition burden and pursue scholarships. You cannot do any of those to fund your retirement!
Are you ready to invest outside of retirement? This is where you create additional financial security and flexibility. Investing in a “regular” (non-retirement) account means that you can access the money with ease at any point in time, which is a pathway to powerful financial freedom
Generally, the most powerful way to manage your money to ensure you’re saving enough is to automatically save money and put it in accounts that align with your goals and objectives. This approach - paying yourself first - means that you aren’t saving what is left over, but are spending what you haven’t yet saved.
The Feminist Financier is on a mission to help women build wealth and own their financial independence, by improving financial literacy and taking the mystery out of money. Ms. Financier is also a shoe addict, travel fanatic, and wine enthusiast.