AAR27 - How do I decide how much to save?

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2:38And that is just money down the drain. You should never spend any more on it.

2:55Welcome back, ladies and gentlemen, to At Any Rate. My name is Evan Array, and we are here to help you make sustainable financial changes without breaking a sweat. Although today, I should probably say I am here because today I'm actually going to be trying something new, and it's going to be a bit different for both of us. Trust me, not just you. Today is going to be my first solo episode. So give me a bit of grace on this one if it ends up being a bit shorter. And as always, I would more than value feedback on this episode and how you feel about it. And for the future, I want to take everything into account.

3:25But I definitely am comfortable knowing that today's topic is going to be a topic that I can provide a lot of valuable information on, even if I'm just solo. In a recent episode, actually, that inspired this, Andrew mentioned, how do you decide how much you save in different places? And this has definitely been a blind spot. I'd say in the content in that I've discussed a ton of how much to save, what accounts are good to save for different reasons, whether we're talking about savings or investings or spending or even life insurance and everything. But we haven't done much to bridge that gap of, okay, I know how much I might be able to save and I know what accounts are good, but how do I actually sit down and say, how much money do I want to put in my Roth IRA?

4:02How much money do I want to put in my 401k accounts like these. And if you don't have a good grasp of how to go about that decision process, then you might just be doing it willy nilly. And hey, saving something somewhere is better than not saving at all. But it's better than anything if they're all sound process decisions that you have reasons behind. So just to start off, the most important thing here is to always work in percentages. Dollar values, they're flashy, they're exciting. Trust me, when I see somebody online that is earning$300 ,000 and they're saying, oh, I'm saving$100 ,000 a year.

4:38That's flashy. That's exciting. That's freaking fantastic. But if we're being honest here, if their net income is$300 ,000 and they're quote unquote only saving$100 ,000, then those ratios are very different than somebody who maybe is earning$30 ,000 a year and is managing to save $100 a month. When we speak in percentages, those are extremely, extremely important. So don't get drawn in by somebody online who says, hey, I'm saving a ton of money. They might be earning a ton of money. They might have other influences in their life that vary what they're able to save, and even more likely what that exact dollar amount is for them.

5:16Many of us are in very different situations. And in reality, that top 1 % that floats to the top because it's the most exciting and gets the most clicks is so far from representative for the average person. now if we're speaking on percentages they can still be be wildly misrepresentative at times but they get a lot closer to representing okay i'm saving half of my income i don't care how much i'm earning necessarily but i'm saving half that is much more representative and i also want to lay the ground rule that a great way to follow along today's episode if you're able to if you're driving please don't if you're at work please don't but if you have the time that while you're listening to do it, it's a great idea to follow along with the budgeting outline we have.

5:58And I'm not saying that because it's the best out there, it's the only option out there, or anything like that. I'm just saying because it's laid out in a way that follows my mindset and therefore follows how I'm going to be discussing these topics today. So I think it's a good place to start, but entirely up to you. So if you decide to go get it, again, it's totally free. It's at einvestingforbeginners.com slash budget. It's actually not a download, but it gives you a Google Sheet link, copy it over to your Google Sheet, download it in Excel, however you want to go about it, and you can start editing on your side.

6:30A first great place to start here is to determine target percentages. We can always change these later. These are so far from set in stone. As we've discussed before, a 50-30-20 split is a good place to start. Just a good ground rule, not somewhere you have to end up or anything like that. If it's less in certain places, more doesn't matter. But what that means is 50 % towards your needs, 30 % towards your wants, and 20 % towards your savings. And these are all based on your net income. That's also definitely a very valuable point here is that we want to talk about your net income. So what is the income that actually lands in your bank account, theoretically, if it isn't being sent anywhere else, that your employer sends you after all taxes, fees, blah, blah, blah, everything has been taken out.

7:18We want to be taking that into account. And a great way to find this, if you don't know what your taxable income is or has been, you got a couple options. You could either pull from your latest tax return. I went to mine and specifically it's labeled, it's under the federal return summary as taxable income. So you could search that document if you have that handy, or you could do some math on the IRS website by looking up what last year's or this year's estimated percentages are on different amounts of money. So it'll require you to do some math in, okay, X percent is taxed on the first 10K of your income, then X percent is taxed on the next 10K of your income.

7:54It'll be a little bit more math to get there. It's not just a simple straight percentage of your tax 20%. That's not quite how the tax brackets work. They're split up in sections and percentages of a section. So it'd be a little bit of math, but having a good solid number to pull from is very, very important here. The more solid it is, the more accurate results will be able to be. And to be completely transparent, my current savings goals and savings or spending kind of buckets rates are 50, 20, 30. So kind of a little bit flipped. So that's still 50 % towards my needs, same as the original ratios, but then flipping the next two.

8:31So we're talking about 20 % towards my wants and 30 % towards savings. My goal in maybe the next year and a half to two years is to actually shift that to a 40-20-40. I know I say these numbers, and if you're just listening to podcasts, it's kind of tough to follow along. But we're talking of 40 % towards needs, 20 % towards wants, and 40 % towards savings. So basically taking 10 % more away from my needs and putting it into savings. And that would be specifically a shift for when my car is paid off next year. That'll be a good place to be to get a chunk of money back that isn't going towards the car payment.

9:08And then also hopefully earning a little bit more income that I just want to put mostly, not entirely, but mostly into savings. And that'll up that percentage a little bit. So to actually get to the meat and potatoes of this process, for me, the most important place to start is to start with needs. So if you're looking at the budgeting outline, we're looking at the center left column. It's the red column labeled needs. The reason that's important to start here is, well, if you're not able to afford things you need to survive, then you are not going to be starting off in a good place. So we're talking about anything from rent that you need somewhere to live, food that you need something to eat, insurance, car insurance to protect you if you have a car payment that you're locked into, those sorts of things.

9:53for me again being completely transparent to walk through what i have in my needs i have my housing payment or my split of the housing payment with my wife without equity i'll explain that in a little bit but that's with equity subtracted then we have stuff like internet bills under at &t utility bills electricity and water my car payment which i just mentioned a little bit ago car insurance including a discount that we get for bundling home and auto food every month and charging for my car those are all the needs that I have tallied up in the center column, center left column. I have all those values tallied up and that equals about 46 % of my net income.

10:32So my goal is to be 50%. I'm actually at 46. We got some margin of error on these sorts of things as well. Nothing is going to be dollar to dollar perfect, but that puts me at a very comfortable, good place to be. That's right about where I want my goal to be. And so I feel really good about that. Another important thing to consider with your needs is definitely include debt payments in here. I know that debt is like, for example, a car payment. They can come about because you made a decision that you didn't necessarily need to make. But within reason, once you're locked into it, it's something you have to do.

11:02Because the alternative is you don't pay it. Maybe you choose to only pay partial, whatever, this month, or you'll put it off or something, and you start paying additional fees on it. You start paying additional interest on things. That is not where we want to be. So if you have any debt payments, they must be going under needs and just treating them as a bill that has to be paid. And that's the end of the story. I'm excited to share our friends over at the Plink app release a major upgrade featuring a sleek new look, real-time insights, smoother trades, and tools that help you feel more confident with every move.

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13:10Send at least$5 to a friend in the first two weeks. Terms apply. CASHAPP is a financial services platform, not a bank. Banking services provided by CASHAPP's bank partners. Bitcoin services provided by Block, Inc. brand. For additional information, see the Bitcoin disclosures at cash.app. slash legal slash podcast. what's the best way to get started in the market download my ebook for free at stockmarketpdf.com so then we're going to move on to the next column which is going to be moving on to must have savings so we're going to be starting on the far left column now at the green column savings and investments and what i mean what i mean by must have savings is is money that's being put into savings that is just it's it's either too good to pass up or it's something you don't really have a choice on.

13:57So examples of this that apply to me, again, I'll go through what all is in my column in a little bit, but must-have savings for me are a 401k match. If your company matches, for example, 3 % of your income, or in my company's case, I'm very happy it's 6 % of my income each month, or each paycheck, so I can contribute up to 6 % of my paycheck towards a 401k, and my employer will put that exact same dollar amount into my 401k. That is an instant guaranteed 100 % return on your investment. And you're not going to get that anywhere. You're not going to get that in stocks, in anywhere else you put your money.

14:34So that is a must have. As long as you're not completely strapped on money, please max out that 401k employer match. The next for me, a must have is a health savings account. If you have access to one at work, you don't have to put a ton of money into it. You also have options to open an HSA outside of work. Those vary by how exactly you're employed, what field you're employed and stuff in. But that's definitely worth Googling or speaking to your HR rep about asking about an HSA, which is a health savings account. Those are huge because you contribute pre-tax funds to them, they grow tax-free, and then they're spent tax-free.

15:10So taxes never touch the money that goes into an HSA, and that is absolutely fantastic and powerful and you can use it towards any health payment so again assuming you're not strapped with cash contributing something to that is huge because anytime you go to the doctor anytime you go to the dentist anytime you need to get medicine because you're not feeling good you need to get cold and flu medicine you need to get you know the band-aids or antiseptic spray is that what it's called antiseptic spray for any cuts you get any health related uh expense that you have can be put on hsa and that is essentially just making it cheaper for you that's really the best way to look at it.

15:43And that is invaluable because everybody will have health expenses. And speaking about a channel of savings that, like I mentioned before, you just don't even have a choice on, in my case, that's home equity. So I need to make my housing payment. I must. I must pay the whole thing. Now, the good news is because we have a mortgage instead of paying rent, one of the upsides is that a chunk of that payment is going towards equity. So we are building our ownership of the house at the same time as we are paying down the debt that we owe. So I calculate that out. If you have a mortgage, you can pretty easily find what's called your amortization schedule.

16:15It'll be in some of the documents related to your mortgage. And that details out as a whole table of every single year of your mortgage, assuming you don't make any additional payments, how much equity you'll be building each month. So how much of your monthly payment, your fixed monthly payment of principal and interest is going towards the principal going towards the amount that you owe. So for me, I definitely include that in savings because that is money that I am putting somewhere that I could access if I needed to. You can take HELOCs, you can take loans against your home equity. And so for me, it's important to put it in there.

16:50However, for some people, because it's something they don't have much control over, they decide not to put it there. So I will definitely leave that up to your discretion. Another is something, some goal, mid long-term goal, like maybe a house purchase, maybe a car purchase, a huge home renovation, something like this. Something that, frankly, we all need to spend money to enjoy life. And this is something far off in the future. It's going to be a larger sum of money that if you don't plan properly for, could screw you over financially. And so for me, if you're thinking of buying a car, likelihood is you're going to buy a car.

17:22I would rather that you're prepped beforehand, saving towards it and treating that as a must-have savings channel for you than trying to put it off because you want to do this or that instead in the short term and then the time comes and you either can't afford it and so you take out more debt than you had to and blah blah blah that is not where we want to end up so any longer or mid or long-term goal like that save a great place to put is a high-eld savings account i'll discuss that a little bit more in the closer to the end of the episode but a high-eld savings account is a great place to put money like this that's going to be there for a little while but not so long that you wanted to put it in the stock market and grow more and there's some great account options out there.

18:00Maybe the bank that you currently bank with has options. There's accounts like SoFi, who I personally use, and there's many other options at many, many other banks. Just make sure it's a high yield savings account, not a normal one. And the last thing here in the must have savings is a 529. So if you have a child and you want to be saving towards their future, which I sure hope you do, a 529 is a fantastic option. You can contribute to that, get a ton of tax benefits and really jumpstart that child's life in the future. And it does not have to be a large amount of money you put in there. We can be talking 10 bucks a month even will compound like crazy over the long run if you start early on in their life.

18:38And that can have a huge impact on the entire future of their lives, even after you pass. That can be massive for them. And just as a reminder, while we're going through these columns, again, it's a good idea to list out the values for yourself. So next to each of my entries, I have the value of how much of that each month is going towards that thing, whatever it is. So for me, my savings and investments, including must have, like we just discussed, and also including the rest, which we'll discuss in just a minute, my total savings rate ends up to about 34%. And again, my goal was 30%. So that's solid.

19:13And my future goal is 40%. So that's definitely looking pretty dang achievable being at 34%. Currently, I'm very, very happy with where I am there. And one kind of semi-complex caveat that I want to mention here is when you include 401k savings in your monthly budget, it can be a little bit difficult. And that's because it's one of the few things that is pulled out of your paycheck pre-tax. And depending on how much you're putting in there, it can be pretty significant. And the issue with that is that doesn't count towards your taxable income. So if you took your net income each month by going to your tax return like I did and pulling that in as your total monthly income, well, that 401k is sort of money that's outside of that taxable income.

19:53And so it can screw with your math there and artificially inflate your savings rate because you're counting savings that aren't actually part of your taxable income. My personal workaround for this, and I know there are other people that do this math different ways so that you have some options, but how I personally do it the easiest way is to just approximate what the after-tax value would be of those 401k contributions. So say your overall tax rate is about 30 % or something, and you're contributing$100, I would pretend, quote-unquote, for the sake of this budget, that I'm contributing$70, and then I would take that$70 and add it to my net income.

20:29and what that does for me is it doesn't artificially inflate the 401k by it being pre-tax and we're comparing everything else to post-tax money which would be apples to oranges and by adding it to the income it is sort of being counted into my total income instead of again just being money that's being saved without ever touching the taxable income so i hope that makes sense and that's the way i go about it to get as accurate of a picture as i can and if there's any confusion with that feel free to leave a comment or email me or anything like that we can i'd be more than happy to discuss it. Then touching the last column that you really edit on this budgeting outline is your wants.

21:05So again, my total goal was to be at 20 % with my wants. And this is just how I personally handle my discretionary spending each month is I don't really itemize it. I can definitely, I do and can go back after the fact and itemize what did occur, how much I actually spent that was discretionary and all that. But when I'm planning ahead of time, I frankly want to give myself the flexibility to not know what I'm going to be spending on in the short term. And if I know that there's something I'm going to be spending on, you know, next month or something, I'm somebody that doesn't really feel the need to write it down because I'm going to remember it because I'm pretty dang excited about it.

21:42So it's going to be at the forefront of my mind. And I can go out back after the fact and make sure that that plus everything else that I spent on once, you know, maybe these little things along the way didn't add up to more than the percentage that I allotted ahead of time. I also just want to mention that, again, you can go about this in myriad different ways. I know that Andrew likes to write things down as he goes. So he keeps a running note in his phone of these kinds of discretionary purchases that he makes or wants to make in the near future. And that way he can see everything, visualize everything and account for it properly.

22:15So feel free to handle it however you want. But again, I just take a lump money for discretionary spending and I just put that under the wants column as one discretionary entry as a whole lump sum of money. and that works out to about 18 % of my net income. So slightly below my target percentage, which is a fantastic place to be. Again, I'm very pleased and happy with where I'm able to land all these percentages currently and can't wait to improve it in the future. Now the last move you're going to be making with these columns is going back to the savings column actually and what we want to do is take anything left over and find somewhere to put it in savings.

22:52We don't want to take that leftover and say, hey, I can go bump up my wants. Hey, I can go bump up my needs or something. We want to take that and contribute it to other savings accounts in one way or another. Again, this is assuming you have leftover funds. Of course, if you don't have leftover funds at this point, then we need to go back and possibly cut down on some of the wants, possibly cut down on some of the savings, assume that the needs are pretty much concrete where they are unless there is something that you have some flexibility to change. But for the most part, you would need to go cut down either savings or wants.

23:25And you can see your leftovers at the very far right column. It says leftover. I leave it at a desired percentage of zero because I don't want to have anything left over at the end of this. The last thing you want to see is a negative number there. And so I'm okay with seeing a positive number there. I am fine with seeing, you know, two or 3 % leftover. And that gives me just a little bit more padding to be comfortable and know that I'm not going to slowly be draining myself of money by saving or spending too much. So let's say you still have 10 % left over in the far right column. So we haven't allotted 10 % of your net income anywhere.

24:00I would start working through the savings side and there are two main accounts where I would just pile pretty much everything into unless there are other savings accounts that you might have some interest in or want to try. The first option is to prioritize Roth IRA. Roth IRAs are fantastic because they grow tax-free, and then you don't have to pay any taxes when you spend the money in the end like you would with a 401k because you've already paid the taxes on the contributions and the gains that you get are completely tax-free. Another upside about it is because you already paid taxes on your contributions, you can actually pull out your contributions, not your gains, but your contributions whenever you want, penalty-free, tax-free.