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We all know we should save more. We all want to save more. Yet, month after month we face the same Groundhog Day scenario: paying all of the bills only to realize that – yet again – there is simply nothing left to save. Sound familiar?
Think about it for a minute. In our Groundhog Day scenario, you are dutifully paying every creditor in your life except for the most important: yourself! It’s time to change the narrative: moving forward, think of saving money as paying yourself. You spend all month working hard. You deserve to keep some of the compensation for that hard work. You on board? Great! To keep you honest, we’re going to set up automatic contributions.
Automatic contributions to savings or investments are a crucial step in building a stable financial foundation. Establishing automatic transfers tied to your paycheck schedule ensures that you will pay yourself for all of your efforts at work and invest in your future. It codifies the “pay yourself first” mentality and aligns your monthly spending with your available discretionary income. For example: if I see extra money sitting in my account, I’m likely to splurge on a fancy meal, or buy a plane ticket to visit my sister. Then the end of the month rolls around, and there is no money left over for saving and investment. On the other hand: if I never see the money in my account, I don’t miss it!
By paying yourself first (saving as money comes in), you will see less money sitting in your account and, accordingly, you will spend less. Over time, you won’t even notice the money being set aside. Your spending habits will have auto-adjusted to your new, post-savings cash flow. (I promise!)
One of the best parts of a “pay yourself first” system is that you don’t have to feel guilty about spending the money in your checking account. Having automatically set aside your monthly savings, you’re free to spend the rest of your money as you wish! Regardless of your balance at the end of the month, you can rest easy knowing your financial foundation is secure.
As a financial advisor, I find a “pay yourself first” savings model to be far more successful than any strict budgeting system. Budgets require line item expense tracking and don’t adapt easily to unexpected expenses. Establishing automatic transfers to “pay yourself first” allows you to maintain a more flexible budgeting system – while still sleeping well at night knowing that your saving objectives have been met.
If you would like to talk about establishing an automatic savings plan or your personal situation please contact me at zach.swaffer@trilogyfs.com.
The world of finance is tricky to navigate. With so many options available for your investments, it can seem complicated and daunting when trying to plan for your financial future.
The three buckets principle is a way of simplifying the complex and is suitable for people with substantial savings as well as people who are just starting out. Whether you’re well established in your career or fresh out of college, setting up your three buckets should be a priority.
How does it work?
The three buckets are:
Bucket 1 – Emergency funds
Expect the unexpected and make sure you’ve planned financially for it.
Unanticipated costs can be devastating financially. Getting laid off work, writing your car off or escalating medical costs, for example, can set you on the financial back foot for many years.
Bucket number 1 creates a buffer of cash that is only to be used for such emergencies. By having this bucket available, it means that should the need arise you won't be dipping into other savings or going into debt to cover the cost.
How much to save in your emergency fund bucket
Aim to have 3-6 months’ worth of living expenses here. Add up all your monthly costs, such as mortgage, bills, transport costs, and groceries, and that will give you the total to aim for.
Bucket 2 – The goal bucket
This bucket is for your short to mid-term financial goals. Savings for your kid's college, a down payment on a house, or even saving for a vacation can go in this bucket.
How much to save in your goal bucket
This is effectively disposable income so anything left over after you’ve attended to your monthly outgoings and buckets 1 and 3 can be added to bucket number 2.
If you've managed to fill bucket 1 already, you can use that cash to start filling bucket 2.
Bucket 3 – Retirement bucket
It's never too early to start saving for retirement, so you should aim to have this bucket set up as soon as you possibly can, ideally, as soon as you enter the workforce.
How much to save in your retirement bucket?
Aim to save 15-20% of your gross income for retirement. If your company offers a 401(k) plan, deposit part of your bucket 3 money there. If you don't have access to a 401(k) plan, consider a Roth or traditional IRA to maximize your investment.
Bucket 3 is made for investing as you want to maximize your returns for your golden years.
These three buckets will help you successfully save for your future. It's a good idea to attend to buckets 1 and 3 first. Once you have them filling nicely, you can look to start filling bucket number 2.
This simple strategy is easy to follow yet priceless for effective financial planning. If you haven’t got yours set up yet, make it a priority to do so.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
