Why do we make money so complicated?

From USA Today Money 
The easiest way to boost your savings rate is by first understanding where your money is going. Ask working Americans how much they make and you’re liable to get a precise answer. However, ask them where their money went once it was deposited into their bank accounts, and the shoulder shrugging begins.

Formulating, and sticking to, a budget can help middle-class Americans and their families live within their means. By apportioning funds to specific spending categories you’ll have a much better idea of what your cash flow actually looks like.

This should allow you to set aside money that can be used to pay down existing debts or to invest for your future. Best of all, a budget can be adjusted as needed, since ultimately you’re in control.


Few people can make this work and who cares what your cash flow looks like?

Rather, look at your gross paycheck. Whatever that is take a percentage (at least 5% and ideally more) and arrange for it to be automatically invested (noticed I didn’t say saved) through your employers 401k or your own long-term, tax-advantaged investment plan. Do it pre-tax or in an account that will remain tax-free for earnings. Never withdraw this money until you are ready to retire.

imageThen, do the same thing with a smaller percentage, but have this money saved in an accessible account. This will become your emergency fund … for true emergencies only.

After doing both of the above you have the income (after taxes) that forms your standard of living. Whatever you may buy (including fixed expenses like utilities) or borrow must fit into your new net income, your disposable income. In addition, this must never include the use of credit cards that are not paid in full before any interest is incurred.

You don’t need a budget, go buy whatever you want.

PS As your income rises also increase your savings rate by a portion of any raise.


Categories: Retirement

2 replies »

  1. I would like to add the following: After investing for retirement and the emergency fund, save for the known “quarterly bills”. I know what my water bill is every quarter. I know how much my car insurance should be. I know how much my property taxes are. I know how many miles I drive and what my long term maintenance cost are for my vehicles. I even know what the vet bill is for my dog every year. I know what I need to spend on Christmas and birthday gifts every year. I also save for any annual service contracts such as HVAC or the exterminator. I add all these “fixed” costs up, divide by 52 and have that amount deposited into a second bank account. Out of sight – out of mind.

    When the car insurance come due, I write the check because the money is there. I pay the whole year to avoid additional fees. My truck need new tires, I write a check and I am good to go for another 4-5 years. Water bill due, I write a check. There are no budget busting surprises that come in the mail.

    Now, with each paycheck, I know exactly how much money is left over to spend.


    • Very good point. I determine all those type of expenses (some on an annual basis) and then I transfer the equivalent amount each month to a separate checking account so when the property taxes come due, or even car repairs, the money is always there.


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