In yesterday's post, I wrote about creating a budget and bringing down debt. Today's post will continue the steps to improving financial health.
Third step, increase savings. It is not a matter of "pay-off-the-debt-then-start-saving." Not at all. Without savings, trouble can come along really quick. What if the water heater needed replacing, but there is not enough money to buy a new one? Cold showers are not fun.
My advice: Put a portion of each paycheck into one or more savings account(s). I use one, but I keep a ledger with a page for each category. Like I said yesterday, I have a degree in accounting, but I started this process many years before I got the degree.
|Comprehensive Budget Worksheet|
How did I determine how much to put in each category? Using the receipts I gathered, and my checkbook register for the last year, I separated out expenses which could be paid annually, like car insurance, and divided the expense by 12 months. If insurance is paid any way other than annually, interest and/or fees are paid each month. Paid annually, the interest and fees can be put toward something else. The first time this is done is the hardest, because the insurance might be due in six months, so there are not enough months to save the whole amount by the time it is due.
My advice: Most budgets have some discretionary spending - dining out, going through the drive-through for a morning coffee or frappuccino, etc. Make the morning drink at home or eat out less and save the difference towards the bill coming due soonest.
My advice: For annual expenses, rather than those like new furniture, put all savings into one account until it is funded, then move onto the next one, and then the next.... Again, save the difference from discretionary expenses until a whole year's payment can be saved in a 12-month period.
While I did not use the title "Emergencies," I did cover some of the categories that might include emergencies, such as "Repairs" or "New Tires." There is also an "Other" category that could include emergencies. Every person/family should have three- to six-months income in savings for emergencies.
Some retirements savings is usually funded through employment plus some from each paycheck. Not everyone receives a "Golden Parachute," so it is important to save for the future.
My advice: When a raise in pay comes, put it towards retirement funding. Increasing employee contribution is usually matched by the employer to a certain degree; to maximize employer matching, maximize employee donation at least to that degree. Beyond that level, talk to a financial planner to find the best way to increase retirement funds, but be aware of the fees that will be charged by the planner.
That is it for today. I will finish up budgeting tomorrow. Again, feel free to ask questions in the comment section or contact me privately. I wish I could find a way to smoothly incorporate my usual sign-off, but I cannot.