Barron’s – June 7, 2021

While the pandemic may have blown out household budgets for families who faced illness, job loss, or other hardships, retirement savers should aim to get back on track as soon as possible. And those who emerged from the pandemic relatively unscathed or with an improved financial situation should take the experience as a call to review their spending and saving plan.

“Most people don’t think big picture,” says John Smallwood, president of Smallwood Wealth Management. “Without a budget and an overall plan, you’re flying blind toward retirement.”

Smallwood has four budgeting strategies that can help workers repair their budgets or optimize them to help workers save for retirement. Here they are:

  • Establish a savings rate, and stick to it: Workers seeking to live comfortably in retirement should make saving a part of their monthly budget, like a recurring bill, instead of just hoping to save a portion of whatever’s left at the end of each month, Smallwood says. Those making less than $100,000 a year should save at least 10% of their income, and those earning $250,000 or more should save 25% to 30%, he says.

    As workers’ income rises, monthly expenses like cellphone, internet, cable, and streaming services typically stay the same, so workers should save a greater percentage of their income, Smallwood says.

    “If you have a family, it’s hard to live in today’s world and actually save money if you’re making under $100,000,” he says. “But the reality is that we live in a world where pensions are gone for most people, so we need to make sure that we’re in control of our spending and are putting money aside that’s not being touched. It’s about training yourself to pay yourself first.”

  • Evaluate your lifestyle If you’re accumulating credit-card debt or having a hard time paying down debt, then your lifestyle likely is too expensive, Smallwood says. By tallying up your discretionary purchases at the end of each month, you can get a better picture of where your money is going and can evaluate whether those expenses truly are worth it to you.

    Smallwood says workers often are surprised to discover how much they’re spending on dining out and other small luxuries, and those expenses often lead people to believe that they don’t earn enough money to save consistently.

    “So many people don’t really know what they spend on a monthly basis,” he says. “Their lifestyle just creeps out of control.”

  • Eliminate wasteful expenses. Many workers pay monthly fees for services they either don’t use or don’t benefit from enough to justify as an expense, such as gym memberships, streaming services, satellite radio, and subscription services that automatically deliver products to their door each month, Smallwood says. He recommends reviewing credit-card statements to look for recurring expenses that you may have forgotten about or really don’t need.

    Maybe you signed up for a cable package or other service at a low introductory rate but are paying significantly more now. Can you justify that added expense based on your use and enjoyment of the service?

    “Those discretionary expenses can add up to a couple of hundred dollars every month or every quarter,” Smallwood says. “In most people’s budgets, 5% to 10% is wasteful expenses.”

  • Plug financial leaks. Workers making monthly payments on their life-insurance or car-insurance premiums are paying more than those who pay their premiums all at once, Smallwood says. And over time, that added expense can be significant.

  • One major financial leak Smallwood points to is paying too much in mortgage interest because you haven’t refinanced and taken advantage of historically low interest rates.
    “What’s a great rate today doesn’t necessarily translate into a great rate tomorrow,” he says. “You have to look at where the leaks are in your plan and figure out how to plug them.”

By Nick Fortuna

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