Roger Abel, AIF
We've all seen the traditional budgeting template. It starts with listing your housing expenses, then moves on to transportation, groceries, entertainment, debt payments, and even charitable giving. Then finally at the very bottom, after most of your money has been allocated, we get to what I would argue is the most important part of your budget: yourself. Often there isn't much left at the end of the budget to save or invest. Whether we realize it or not, this method of budgeting creates a false reality in our minds that funding the right now (your current desired lifestyle) is more important than saving for the future. We see it everyday in talking with people, "I will start my 401(k) when...."
Delaying saving for yourself can cost you in the long run. Below is an example of the impact of compounding interest over time.
As you can see, the earlier you start the better off you will be in the end. Using a traditional budgeting method, most people allocate their dollars to spending & expenses first and then save what is left over. However, this often results in not saving for yourself at all. 10% of your income should be allocated to paying yourself. So, where do you start? If your employer offers a match in your workplace retirement plan, make sure you are contributing enough to receive the maximum employer match.
After you have reached the maximum match, you can continue to save in your employer plan, up to the contribution limit, or you can save outside of your employer plan in accounts like a Roth IRA, Savings or Brokerage Account. Set up your savings automatically. This will help you keep
consistent and pay yourself first without allowing the temptation to spend the money somewhere else impact your decisions. As your income increases, increase the amount you are saving to maintain the 10% savings rate. Check with your employee benefits department as some plans allow you to set up automatic increases as your income increases.
So, the next time you want to budget - do it backwards. Start saving for yourself first, and then allocate the remaining dollars based on your lifestyle design (that's a topic for another day).
The opinions voiced in this material are for general information only and are not intended to provide specific investment advice or recommendations for any individual.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.