Rosalind Evans
The current economic climate, marked by steady inflation, stagnating federal debt limit talks, and a potential recession on the horizon, has sparked serious concern among Americans. The question of how to properly manage finances in these times remains a difficulty for many.
According to a recent Northwestern Mutual survey, around two-thirds of US adults predict an impending recession later this year, with three-quarters expecting it to severely or moderately affect their financial situation in both short-term and long-term scenarios.
Despite this, knowing how to allocate funds for day-to-day needs, initiate investing for future growth, and ensure sufficient retirement savings, can seem like an uphill battle.
We answer three pressing queries from “Today” viewers, encapsulating common concerns:
Question 1: ‘Formulating a budget appears daunting for someone inexperienced. Do you have any advice on how to start and determine a reasonable budget?’ There are three basic steps to guide you through the process:
Ascertain your net worth.
Knowing your financial standing forms the foundation of budgeting. To calculate your net worth, you sum up all your assets and deduct your debts.
Your assets comprise cash, retirement savings, house, cars, investment properties, and valuables. At the same time, your liabilities include long-term debts like mortgages, student loans, credit card balances, car loans, and other personal loans.
A negative net worth is not uncommon and indicates the need for more savings and less spending.
Consider the “60% Solution”.
This is a budgeting approach to allocate funds for necessary and discretionary expenses and long-term and short-term savings.
In this method, 60% of your gross income is dedicated to committed expenses, 30% is set aside for savings, and 10% is your discretionary spending.
Track your earnings and expenses using a spreadsheet, software or mobile app.
Monitoring where your money is spent will help manage your finances to enhance your net worth. Free budgeting tools are easily accessible online or as smartphone apps.
Question 2: ‘I have substantial savings that could be earning interest. However, the stock market intimidates me. Any suggestions for a beginner?’ Before embarking on your investment journey, clearly define your priorities and financial goals. These should include funding an emergency savings account, settling high-interest debt, and contributing to retirement savings.
Set aside three to six months’ living expenses in an emergency fund, and strive to pay off high-interest debt like credit card balances. Subsequently, focus on long-term growth through stock investments while starting with contributions to workplace retirement savings accounts or a Roth IRA if your job doesn’t provide a plan.
Investing in an S&P 500 Index fund is a simple way to start. If you’re averse to risk, consider stable-value funds that invest in a mix of bonds. Once you have a solid emergency fund, minimal high-interest debt, and have maximized your workplace retirement plan, consider opening a brokerage account.
Question 3: ‘As a mid-50-year-old, I haven’t saved enough for retirement. How can I estimate the required amount, and how long should I plan for my retirement?’ While inflation concerns retirement savings, life expectancy may be a more critical factor. With the possibility of living into your 80s or beyond, you might need to rely on retirement income for 15 to 20 years or more.
Here are a couple of planning suggestions:
- Conduct a “retirement checkup”: Ponder on your ideal retirement age and the corresponding Social Security or other benefits. Consider your preferred lifestyle during retirement, as it significantly influences your expenses.
- Formulate a “retirement budget”: Create an estimated budget for retirement, factoring in daily expenses, housing costs, health care, and long-term care. Consider downsizing or moving to a lower-cost area to reduce the costs. Then, calculate potential income during your retirement years.
If your current savings are insufficient for retirement, consider working part-time early in your retirement and increasing your retirement plan contributions now.
While the current economic landscape may be challenging, it is manageable. You can navigate through the uncertainties by understanding your financial position, setting clear goals, and taking strategic steps toward investing, budgeting, and planning for retirement. Remember, the key lies in planning, staying informed, and making thoughtful decisions that align with your financial circumstances and goals.
