How to Balance Saving, Retirement, and Expenses in your Budget

[00:00:00] Eric Brotman: This is Eric Brotman, the host of Don’t Retire… Graduate!: The podcast that teaches you how to advance into retirement rather than retreating. Welcome to office hours where we answer listeners’ questions about personal finance, retirement readiness, and more. We received a question from Matt who asked, how do you effectively balance among saving, retirement, and expenses.

And Matt, I’m going to disappoint you first and foremost, that there is no rule of thumb that will be helpful here because ultimately your world and my world and everyone else’s are very, very different. So with that said, let’s try and tackle these these pieces and see if we can’t figure out a way for you to determine for you how to balance that yourself. Um, the first thing is certain expenses are not discretionary. There are things you have to have. There are housing expenses, there are medical expenses, there uh, there are transportation expenses, um, there are food expenses. So some things are just going to be, um, they’re just going to be there.

And so when you look at what’s coming in from your income, your expenses, a lot of them are not negotiable. They’re not flexible. They’re not variable. You’re just going to have them. You’re going to have certain payments every month. So that’s going to come first. Um, you’re also going to have taxes. So depending on your income and depending on the withholdings, you know, if you’re a W2 employee, your taxes are going to be withheld from your check so you don’t have to do that yourself. But if you’re self-employed, you have to set aside enough money to make sure that, uh, that uncle Sam gets his, that gets his chunk. Um, beyond those expenses, you’re going to have some, uh, some amount of funds leftover that’ll be able to be used for several things. And I would actually add a fourth element to your balance equation.

One of them is expenses. One of them is retirement and sort of long-term. One of them saving and more I would call emergency fund. Um, but the last one is debt. And so if you are debt free, you’re already well ahead of the game, but for a lot of Americans, that’s not the case. And so you have to balance, how much do I put into savings? How much do I put toward my debt principle? And how much do I put into my retirement plan or other long-term things.

So Matt, what I would suggest is first, you want to make sure that you have positive cash flow. Do you have enough money coming in net of taxes every month to pay your bills? If you don’t, you already have no bandwidth for saving or retirement or potentially could be creating more debt.

So you must have positive cashflow before this equations even possible. Once you have positive cashflow, you’re going to want to start setting aside certain amounts and I mentioned earlier that rules of thumb are dangerous and I think they are, um, but start somewhere, whether it’s five or 10 or 15% of what you earn in terms of your, your personal savings rate. And savings and investments, and retirement to me are all kind of in one bucket. You want to make sure you have enough savings so that if you suddenly run into a problem, you need a car, you need a washing machine, something goes wrong. Um, you have enough money so that you don’t have to rely on visa or MasterCard. So that’s the savings element, but once you’ve built your savings fund to somewhere between say three to six months of your, uh, of your bills, once you’ve done that, then you can really start investing both in retirement accounts and potentially a non-retirement accounts. And if you have adverse debt, you can be chipping away at excess principle, refinancing, being creative with some of that as well. So I can’t give you the balance. I can’t give you the percentages that will make any sense to you. If I gave you a prescription for it, uh, without really analyzing your situation, I think that’s referred to in the medical business as malpractice.

So I’m certainly not going to do that, but somewhere in this balance, you also have to figure out those expenses that are voluntary. That are optional, the things that make life fun and that make life worth living, whether it’s, uh, whether it’s spending time, uh, on a nice dinner out, whether it’s travel, whether it’s sports or entertainment or whatever you’re into.

Um, you know, I think a lot of people run the risk of an all or nothing approach. And you use the word balance, which is helpful, but the all or nothing approach is either we squirrel away every penny we make with this idea that, that the rainy day will come and we’ll use it then. And I don’t think that’s particularly healthy.

And then there’s other folks who spend every nickel that comes in the door and obviously that’s not healthy either for financial reasons. So I think you’ve, you’ve asked the right question, Matt, which is how do you effectively balance among savings, retirement, and expenses? I do think we add debt in there.

Uh, and I do think that that balance will be uniquely yours and that you should look at each of these things, not so much in a vacuum, but as a mosaic. Look at the whole picture and figure out exactly where your priorities are. Um, and start living on less than you make. Have positive cashflow. Be putting away whether it’s five or 10 or 15 or 20% even of your income for something, long-term something you’re not going to touch. Have your emergency fund. And quite frankly, it’s a little bit self promoting, but at the end of the day, there are chapters in Don’t Retire… Graduate! on this very topic on, on how to do this and, and worksheets in our workbook that can help you figure out exactly what those numbers are and how to balance them for you.

So Matt, thank you for your question. I hope I helped you. Uh, if you’d like to send us a question, which we might answer in a future episode of office hours post it on our Facebook page or tweet us at @BrotmanPlanning. If you like what you hear, please subscribe to our podcast and leave a review on apple podcasts or wherever you listen to your favorite shows.

Please also check out our books, workbooks and online financial literacy resources at brotmanmedia.com. Thanks for coming to office hours. Be sure to tune in for new content every Thursday. For now, this is your host, Eric. Brotman reminding you: don’t retire. Graduate.