Category Archives: Cash Flow

50/15/5: a saving and spending rule of thumb | Fidelity Investments

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It isn’t about managing every penny. Track your money using 3 categories.

FIDELITY VIEWPOINTS – 03/03/2020

Key takeaways

  • Consider allocating no more than 50% of take-home pay to essential expenses.
  • Try to save 15% of pretax income (including employer contributions) for retirement.
  • Save for the unexpected by keeping 5% of take-home pay in short-term savings for unplanned expenses.

Budget…the 50/15/5 rule is Fidelity’s simple rule of thumb for saving and spending: Aim to allocate no more than 50% of take-home pay to essential expenses, save 15% of pretax income for retirement savings, and keep 5% of take-home pay for short-term savings. (Your situation may be different, but you can use our rule of thumb as a starting point.)

Why 50/15/5? Fidelity analyzed hundreds of scenarios in order to create a saving and spending guideline that can help people save enough to retire. Their research found that by sticking to this guideline, there is a good chance of maintaining financial stability now and keeping your current lifestyle in retirement. To see where you stand on our 50/15/5 rule, use our Savings and spending check-up.

Essential expenses: 50%

Some expenses simply aren’t optional—you need to eat and you need a place to live. Consider allocating no more than 50% of take-home pay to “must-have” expenses, such as:

  • Housing—mortgage, rent, property tax, utilities (electricity, etc.), homeowners/renters insurance, and condo/home association fees
  • Food—groceries only; do not include takeout or restaurant meals, unless you really consider them essential, i.e., you never cook and always eat out
  • Health care—health insurance premiums (unless they are made via payroll deduction) and out-of-pocket expenses (e.g., prescriptions, co-payments)
  • Transportation—car loan/lease, gas, car insurance, parking, tolls, maintenance, and commuter fares
  • Child care—day care, tuition, and fees
  • Debt payments and other obligations—credit card payments, student loan payments, child support, alimony, and life insurance

Keep it below 50%: Just because some expenses are essential doesn’t mean they’re not flexible. Small changes can add up, such as turning the heat down a few degrees in the winter (and turning your AC up a few degrees in the summer), buying—and stocking up on—groceries when they are on sale, and bringing lunch to work. Also consider driving a more affordable car, carpooling, or taking public transportation. Consider a high-deductible health plan (HDHP), with a health savings account (HSA) to reduce health care costs and get a tax break. If you need to significantly reduce your living expenses, consider a less expensive home or apartment. There are many other ways you can save. Take a look at which essential expenses are most important, and which ones you may be able to cut back on.

Retirement savings: 15%

It’s important to save for your future—no matter how young or old you are. Why? Pension plans are rare. Social Security probably won’t provide all the money a person needs to live the life they want in retirement. In fact, we estimate that about 45% of retirement income will need to come from savings. That’s why we suggest people consider saving 15% of pretax household income for retirement. That includes their contributions and any matching or profit sharing contributions from an employer. Starting early, saving consistently, and investing wisely is important, as is saving in tax-advantaged retirement savings accounts such as a 401(k)s, 403(b)s, or IRAs.

How to get to 15%: If contributing that amount right now is not possible, check to see if your employer has a program that automatically increases contributions annually until a goal is met. Another strategy is to start by contributing at least enough to meet an employer match, and then if you get a raise or annual bonus, add all or part of these funds to your workplace savings plan or individual retirement account until you have reached the annual contribution limit.

Short-term savings: 5%

Everyone can benefit from having an emergency fund. An emergency, like an illness or job loss, is bad enough, but not being prepared financially can only make things worse. A good rule of thumb is to have enough put aside in savings to cover 3 to 6 months of essential expenses. Think of emergency fund contributions as a regular bill every month, until there is enough built up.

While emergency funds are meant for more significant events, like job loss, we also suggest saving a percentage of your pay to cover smaller unplanned expenses. Who hasn’t been invited to a wedding—or several? Cracked the screen on a smartphone? Gotten a flat tire? In addition to those there are certain category of expenses which are often overlooked, for example; maintenance and repairs of cars, field trips for kids, copay for doctor’s visit, Christmas gifts, Halloween costumes to name a few. Setting aside 5% of monthly take-home pay can help with these “one-off” expenses. It’s good practice to have some money set aside for the random expenses, this way you won’t be tempted to tap into your emergency fund or tempted to pay for one of these things by adding to an existing credit card balance. Over time, these balances can be hard to pay off. However, if you pay the entire credit card balance every month, and get points or cash back for purchases, using a credit card for one-off expenses may make sense.

How to get to 5%: Having this money automatically taken out of a paycheck and deposited in a separate account just for short-term savings can help a person reach this goal.

Read more: https://www.fidelity.com/viewpoints/personal-finance/spending-and-saving

3 mistakes to avoid during a market downturn | Vanguard

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Following a decade-plus of generally rising markets, a meaningful downturn in stocks may finally be here. We don’t know how bad it will be or how long it will last.

We do know that some investors will make costly mistakes before prices rise again. Here are 3 common errors worth avoiding.
— Read on investornews.vanguard/3-mistakes-to-avoid-during-a-market-downturn/

7 ways to build wealth today, according to financial planners – Business Insider

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“The very first step to building wealth is to spend less than you make.” Brian Koslow

  • Wealth building doesn’t happen overnight, but financial planners say a few steps can put you on the right path.
  • Start by tracking your cash flow, calculating your net worth, eliminating bad debt, and, making saving and investing a habit.
  • Then, they suggest using high-yield savings accounts or a 401(k) with an employer match to keep those savings growing.

The key to accumulating wealth isn’t always simply to make more money. Sometimes, it’s about using what money you have more effectively or using what you financially control to your advantage. Maybe it’s as simple as moving your savings into an account with higher interest rates, spending less than you earn, or taking advantage of an employer’s 401(k) match.

Most importantly, experts say one of the most important elements to building wealth is to believe that it is possible and simply give it time. The best ways to start building wealth today, according to financial planners, are straightforward and simple.

The seven (7) ways, according to Business Insider, to build wealth are:

  1. Figure out your net worth
  2. Start saving automatically
  3. Take advantage of your employer’s 401(k) program
  4. Look at your cash flow
  5. Don’t just let money sit — keep it growing
  6. Make your savings, investing and accumulating wealth a priority
  7. Be patient and think long term

Financial Milestones

One rule of thumb for building and monitoring wealth says that by the time you turn 30, you should have the equivalent of your annual salary saved (that’s all savings, not just retirement assets); double your salary saved by age 35; three times the amount by age 40, and so on. If you fall short, don’t fret, it’s never too late to increase your savings rate and it never hurts to aim high—

Take full advantage of your employer match, if one exist. For example, with a $50,000 salary from an employer matching up to 6% of your contributions, you’d be turning down $3,000 each year. Most people’s pay consists of a package that includes salary and employer benefits. You wouldn’t accept a $3,000 pay cut without a fight; by letting your employer match go to waste is kind of the same thing.

Build an Emergency Fund

Each year brings economic uncertainty to many and, even for the financially secure, life happens in the form of medical bills, domestic catastrophes and other unplanned expenses. As a general rule, it’s good to maintain an emergency fund that would cover three to six months of living expenses in case you find yourself unemployed. And, once you’ve calculated how much you should save, set aside a certain amount from each paycheck to set you on your way.

Retire Bad Debts

It imperative to eliminate or reduce bad debts. We all know which ones they are: the loans used to pay for a wedding; the credit card with the sky-high interest rate whose balance keeps rolling like a Sailor at an open bar. And, making only the minimum monthly payments on credit card and consumer debt. It is recommended set a deadline for repayment and getting rid of the growing interest and debt.

Benefits of a Budget

Money is often stretched in many directions. Daily expenses, entertainment, life events and long-term goals—all competing for the same dollar. Budgeting can help ensure you’re covering the essential monthly expenses, saving for the future and, with some discipline, have some extra cash to reward yourself for your good work.

— Read on www.businessinsider.com/best-ways-to-build-wealth-starting-today-2019-8

https://www.tiaa.org/public/learn/personal-finance-101/5-must-have-financial-goals

Secret to Financial Success

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The secret to financial success is positive cash flow.

Positive cash flow means that you’re earning more than you’re spending monthly. It means your cash inflows exceed your cash outflows.

And, if you have positive cash flow, you have the basis for building and achieving financial success. How you build that financial success depends on your long-term financial goals, personal risk tolerance and your existing lifestyle and habits.

Yet, no matter how wealthy you are or how much you earn in monthly income, you must manage your spending. Many professional athletes and entertainment celebrities have earned millions of dollars of income during a professional career only to file for bankruptcy during their lifetimes due to reckless or undisciplined spending. Consequently, spending matters greatly.

Cash Flow Basics

To accumulate wealth, you must spend less than you earn. This is the fundamental law of money:

[WEALTH] = [WHAT YOU EARN] – [WHAT YOU SPEND]

This law tells us three things about cash flow:

  • If you spend more than you earn, you are losing wealth — a negative cash flow. Negative cash flow is generally an indication that you are living beyond your means and are likely incurring debt.
  • If you spend less than you earn, you are accumulating wealth — a positive cash flow. Positive cash flow may allow for you steps to save, invest or even to pay off debts.
  • If you spend equal to what you earn, you are neither accumulating or losing wealth — a neutral cash flow. Neutral cash flow is spending to the penny exactly what you earn.

Subsequently, the greater the difference or delta between earning and spending, the faster you lose (or accumulate) wealth. And, there are only three things you can do to increase your cash flow: spend less or earn more or do both.

Smart personal finance is very simple. Everything else — paying yourself first, investing ten to twenty percent of what you make, building an emergency fund — is done in support of and dependent on this fundamental law of positive cash flow.

References:

  1. https://farnoosh.tv/?s=Financial+sUccess
  2. https://www.getrichslowly.org/the-power-of-positive-cash-flow/
  3. https://financialwellness.utah.edu/counseling/cash-flow.php