Controling Your Finances Using The 50/30/20 Rule

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TRANSCRIPT:
I see it time and time again, someone seeks me out for some guidance, and their budget is a mess. They don’t have a system in place, they don’t know what they’re spending their money on, they’re not saving, and in a lot of cases, they’re living beyond their means, and worse yet, they’re a mountain of debt. And I get it, I used to be the same way, until I learned about the 50-30-20 budgeting rule. Hi, I’m Kyle Howell, and I’m here to teach you the 50-30-20 budget rule, how it can help you clean up your finances, and finally get on the investment track to compound gains. The 50-30-20 rule is pretty simple to follow, after paying taxes, you allocate 50% of what’s left to your needs, 30% to your wants, and 20% to your savings. Needs refers to your mortgage, rent, utilities, insurance, bills, and any other expenses that come with living your life. Th 30% will go to movie nights, family vacations, going out to eat, hobby expenses, and any other form of entertainment. Unfortunately, you can’t spend it all on golf clubs and grills.

Finally, 20% goes to your savings. We’ll get to that later. So first, you need to figure out what’s left after paying taxes. Now add up every kind of bill you can find. Is it more than 50% of what’s left of your salary? You’re living beyond your means. Same goes for expenses. And this is a really easy one to go over on. If your entertainment is costing you more than 30% of your budget, you have to cut back. So how can you cut back? That’s where the tough decisions come in, though the easiest ones are usually about entertainment. If it’s all entirely confusing, look into a budgeting app that can help you track your expenses or reach out to me for assistance. But you have to do it because you absolutely need to save at least 20% of your post-tax salary for your savings goals.

Let’s go into savings. What are we talking about here? Before we go into savings, let’s talk about something that can probably provide a greater return on investment getting out of high interest debt. The S&P 500 has a historical growth rate of about 10% a year. What’s your credit card interest rate? I bet it’s a lot higher. So from a purely mathematical perspective, it makes zero cents or $0 to start investing until you have that debt paid off. One more thing before we get into investing, an emergency fund. God forbid something does happen, you don’t want to have to sell your investments. Why? For one, the markets may be down, meaning you could be selling at a loss. Two, if you sell your assets in a retirement account, you’re facing early withdrawal penalties. In any case, you can expect unexpected tax consequences. If you’re in an emergency situation, do you want to have to pay a tax bill and penalty on top of that? Or is it just worse than your situation?

On a side note, there are certain conditions that allow you to make an early withdrawal without the IRS slapping you with a penalty. But why slow down the momentum of your investments? Make an emergency fund so you never have to do that. Okay finally on to investing. What account do you need and what do you buy? First, it depends on whether you have a workplace retirement plan. If you have a 401k with a company match, take that match. Contribute as much as necessary to get it because it’s basically free money. If you don’t have a 401k, you can open an IRA that has similar tax advantages such as tax deductions and tax deferred growth. Alternatively, you can contribute to a Roth IRA where you pay your taxes first and get tax-free growth at withdrawals and retirement. Finally, you have the traditional brokerage account. It doesn’t come with immediate tax benefits like a 401k, but you can easily purchase tax efficient assets within it such as ETFs. So you have a budget in place, you’ve cut out unnecessary expenses, and you’re stocking away at least 20% of your salary into an investment account.

Now, what in the world do you invest in? First, diversification is key. We’ve all heard the saying, don’t keep all your eggs in one basket. So don’t go out and spend your savings on a video stock no matter what you hear about it. In fact, as a beginner investor, you probably shouldn’t buy any individual stocks at all. You’re presumably working a full-time job, have a family life, and a social life, so where are you going to find the time to do the research necessary to choose the right stocks? Instead, look into low-cost diversified stock and bond ETFs. You can easily find them on Vanguard, iShares, State Street, Charles Schwab, just to name a few. Once you choose some ETFs, you need to figure out how many of each to purchase and for which account. Each person’s situation is different. It’s important to sit down with a financial advisor to help you with your allocation to make sure you don’t your finances at risk. So this is all very basic simplified overview that can at least get you started on your investment journey.

But trust me there’s a lot more to this stuff and there’s always room for improvement. Once you get to the more complex aspects of investing you can optimize your tax brackets now and all the way to retirement. Create a withdrawal strategy, figure out optimal social security claiming strategies, and identify any kind of gaps that need to be filled such as insurance. That’s a lot of work though and requires a trained and experienced financial professional. That’s where we can help. The basics you can do on your own but you’ll get a lot more out of the journey with a professional on your side. We have software that can link all of your accounts to see exactly where your money is going. We can even connect all of your investment accounts for a more straightforward portfolio rebalance and tax planning. If you’d like to see how I can help you clean up your finances and get you on the right path to long-term financial success, click the link below or email me at kyle@basewealthmanagement.com.

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2022 Tax Document Information

As a Base Wealth Management client, you should receive your paper tax documents via mail in the coming weeks. Or, if you previously had an online account with Pershing’s NetX360, you should be able to access your 2022 tax documents through that portal. 

If not, or if you experience any issues, please reach out to Tim O’Brien (tim.obrien@intervestintl.com).

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