December 18, 2014

My Default Savings Plan

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I don’t know about you, but I often do better with a plan. To my wife’s credit, she’s helped me become more able to enjoy going along with an unexpected or unanticipated opportunity, but there are still some areas in my life where I need some “navigational buoys” so to speak. One of those areas is savings, and I don’t think I’m alone in that regard. Without a savings plan in place, money seems to burn holes in pockets and disappear.

With that in mind, I’d like to offer up my default savings plan. Now, this plan is not exactly what I always do, it is not what I always advise accumulating clients to do, and it might not even be what I’d specifically recommend for you, but I do believe it is a good place to start for most people. Here goes:
  1. Try to live off of 60% -70% of your take-home pay. If you so choose, tithe or donate 10%, spend 10% on fun, and save 10% - 20%.
  2. Of the 10% - 20% I recommend you at least save, I’d suggest you consider doing the following, and in the following order:
    1. Save six months’ worth of your monthly expenses in a cash savings account separate from your day-to-day checking account.
    2. Pay down any and all outstanding credit card debt you may have and keep it paid off!
    3. If applicable, make sure you are contributing to your employer’s retirement plan the amount or percentage you need to in order to maximize their matching contribution.
  3. Once you’ve addressed number two, I’d propose making maximum IRA contributions (probably to a Roth IRA if you can, but it could depend…).
  4. Once number two and number three are checked off, I’d propose you utilize your savings in the following ways:
    • 1/3 as additional contributions to your employer’s retirement plan.
    • 1/3 as contributions to a taxable brokerage account (after all, you may want to be able to access some of your investments penalty-free before your 50s).
    • 1/3 as additional principal payments to reduce your school, car, home, or other debt(s).
Sure, there might be a college fund for a little one, a pending basement renovation, or an upcoming anniversary trip that needs some of your savings firepower, but this should at least get you started. It is my hope that you will use my plan as your plan. It is my hope that you will use this plan as your policy as your personal and financial situation progresses, so that one day, you don’t look back and wonder where all of that hard-earned cash went. However, if you want to talk specifics about your situation, I’m happy to. You know where to find me.

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