By Massi de Santis
Let’s face it, for most people, the first half of 2022 hasn’t been the best from a financial perspective. Inflation has been hovering around 8% for some time, with little sign of slowing so far, empty shelves are becoming the norm and your savings may have stalled! What can you do?
The bad news is that you have no control over future inflation, interest rates, or market returns. The good news is that jobs are plentiful and the pandemic is over. So, with summer in the air, let’s focus on what we can control to improve our financial situation despite the setbacks. Here are some money project ideas to do on some of your summer weekends, maybe with a smoothie or margarita nearby. If you’re new to planning, these ideas are a great way to get started and change the way you think about money. Enjoy!
Conduct a mid-year financial review
Summer is a good time to review your mid-year finances while focusing on your cash flows. First, take a look at your payslip for the current year. Start by comparing your gross income to your salary and learn about the different items on your payslip that determine how much is left in your checking account, as we do in this post.
When reviewing your deductions, make sure you’re contributing the desired amount to your 401(k) and your HSA or FSA accounts. In previous posts, we’ve recommended putting at least 10% of your gross income into your retirement account, and even more if you’re a mid-career, above-average earner. If you have room to increase your contributions, times of low market values are good times to invest more. As you look at your payslip, write down how much you’ve paid in federal income taxes so far this year. Then, make sure you’re on track with your taxes so you don’t get any surprises when filing your tax return next year.
Next, download all your transactions from your checking account and credit cards. Add up all your inflows and outflows. Your outflows also include what you’ve spent on your credit card and haven’t paid for yet. When you add it all up, you can be in the red or you can be in the black. If you’re in the black, compare that amount to your net compensation and consider automating some of your net cash flow. Automating your investments during times of market volatility and market bottoms is a great way to increase your potential long-term returns. If you’re in the red from a monthly cash flow perspective, consider changing your budget, starting with our next project, your 50-20-30 goals.
Set savings and spending goals using the 50-20-30 rule
How much you contribute to your goals (your savings rate) is a key determinant of financial success, even more so than your investment returns. However, disciplined saving is difficult to implement, especially when there are many competing needs and wants and a busy life. One tool to help you get started is the 50/20/30 rule.
The rule says that you should spend 50% of your after-tax income on your needs, 20% on saving for your financial goals, and 30% on what you want. Your after-tax income can be calculated from your payslip. Start with your gross income and subtract your tax withholdings (including Social Security and Medicare contributions).
Your necessities include rent or mortgage payments, utilities such as electricity, water, gas, phone bills, groceries, and basic clothing needs. Basic expenses for transportation needs are also included. Your first savings goal should be to fund or replenish a safety net. Next is your retirement goal. Most people should save about 10% of their income for retirement. Higher earners should make this a starting point and increase it to around 20% over time. Your desires include spending on entertainment, such as going out to eat, movies, etc., and shopping for things you enjoy, including electronics, hobbies, vacations, etc. It also includes spending more than is strictly necessary on a good or service.
Note that there’s a reason we’re writing it as the 50/20/30 rule and not 50/30/20: Saving for your goals takes precedence over your desires! After setting your goals based on your net income, the next step is to see how close or how far you are from the goals. If you are far from the goals, use the goals as goals so you can direct your income into the right buckets. Learn more about this approach to setting savings and spending goals in this post and customize it to suit your situation.
Create a one-page financial plan
If you’re not willing to hire a financial planner to do the planning, start with a one-page plan yourself. A one-page plan can be created by anyone in a matter of hours. It will not be as detailed as a full-fledged plan, but it brings with it many of the main benefits. It’s best to do this with a partner or a good friend. Take a piece of paper and divide it into three areas as follows:
Why this format? Values are the intangible things you care about, they are the WHY of your plan. Why is money important to you? Values provide the emotional reward needed to take action, monitor progress, and ultimately achieve your goals. Goals are measurable goals that require planning to achieve. You are the WHAT of your plan. Start with your list of values and ask: What measurable outcomes will help me achieve my values? This brings us to the list of measures: “What can I do starting today to get closer to my goals?”
You might say, wait, there are no numbers or complex wealth strategies? That’s correct. The point of this plan is to change the way you think, not just going through life, but having a plan, a strategy to achieve your most important goals. This is often the most difficult step. Once this is complete, you can begin tackling individual objectives. For a complete step-by-step guide to creating your one-page plan, click here. If you need more help identifying targets, check out our process.
Other weekend DIY projects
The three themes above will help you take control of your financial life. After that, consider one of the following projects to tackle this summer, with links to our posts on how to do them:
Build a safety net
Get organized financially
Create a budget, part 1 and part 2
Start your own retirement plan
Control your spending
Create your investment guidelines
Create a goal-based investment plan
Optimize your portfolio
Start a 529 College Savings Plan
Use your savings efficiently
The benefits of financial planning projects
We cannot control how the financial markets or the economy will develop in the future; We can only change our own behavior. Working on these projects helps you focus on what is important to achieve your goals and on elements that you can control. By gaining a better understanding of your finances and being more focused on your goals, you can increase your confidence in your financial future. All of these projects have one thing in common: they give you measurable goals to work towards, help you improve your saving and spending habits, and provide a way to track your progress.
Even if the savings targets suggested here do not seem achievable, an early start and consistent saving is the best way to start. Iterating through these projects can help you move in more directions, including creating a safety net or an investment portfolio for long-term goals. Once you’ve attempted or completed these projects and learned the basics of financial planning, you may want to consider speaking to a professional for help. A trusted financial planner can provide you with objective advice to help you navigate uncertain markets and make the most of your resources.
About the author: Massi De Santis
Massi De Santis is a fee-based financial planner based in Austin, TX and the founder of DESMO Wealth Advisors, LLC. He is also an associate professor of finance and economics at Texas State University. DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow, and protect their resources throughout their lives. As a fee-based, fiduciary and independent financial advisor, Massi De Santis never receives commissions of any kind and is legally bound to provide unbiased and trustworthy financial advice.