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Written by Greg Palacorolla, CFP®

One of the biggest challenges for families at all stages of their financial lives is how to set a reasonable budget and save for retirement. While this seems like a relatively elementary step in the financial planning process, it intimidates many, and is often overlooked. If you aren’t putting money away each year, how do you expect to live once your income stops?

Setting a budget and managing cash flow should become a priority for everyone. It is never too late to begin, nor are you ever too young to start. At a minimum, we encourage our clients to implement a budget as soon as their careers begin. Budgeting and saving should be habitual. Start early, do it automatically and never see it, and you won’t miss it. The longer you wait to start, the harder it is to break those poor spending habits that you’ve developed. Annual budgeting and cash flow management allows you to achieve your goals each year. When the annual goal accomplishment is compounded, significant wealth generation and a comfortable retirement results.

The Three Categories of a Budget:

When creating a budget, organization is key. Truly understanding your different monthly expenses will help you reduce or cut out those that are unnecessary. Once you determine which expenses can be terminated, go through the remaining bills and contact the provider to ensure that the rate you pay for each service you is the best available. The less you pay, the more you are able to save. We suggest breaking your budget into three sections: Housing, Fixed, and Discretionary.

Housing Expenses

The first category in your budget should be housing expenses. Often the most significant expense to families, it is important to understand specifically how much it costs to live in your home. Some expenses that fall under this portion include: mortgage/rent, property taxes, insurance, utility bills, landscaping, HOA dues, security, and repairs/maintenance. Remaining in your current home is a priority for most, so it is important to analyze the cost of carrying your property. We consider housing expenses to be a “required” portion of the budget.

Fixed Expenses

The second part of your budget are your fixed expenses. These are the normal “costs of living,” usually unavoidable. However, it is important to scrutinize these regularly in an effort to ensure the price you are paying is competitive. Fixed expenses include but are not limited to: cell phone, auto and life insurance, groceries, gas, education, and childcare. Along with housing expenses, fixed expenses are a “required” portion of the budget.

Discretionary Expenses

The last section of the budget comprises discretionary expenses. Unlike housing and fixed expenses, this category is controllable and includes leisurely items. While it is important to relax and enjoy life, this area is where most people get into trouble. Expenses such as a dining out, clothing, entertainment, and travel cause many people to “spend more than they make.” This category can be dangerous if not addressed. A strict budget must be set to these expenses; otherwise monthly savings will be limited or unavailable.

Incorporating Your Budget Into Monthly Cash Flow

Once you have a full understanding of your monthly expenses, it is time to build the budget and begin saving for retirement. First, outline your monthly income for all sources—salary, rental income, investment income, etc. Next, apply a tax rate to those earnings (contact your financial or tax advisor for assistance). Remove the estimated taxes from your gross income, leaving you with your net cash available. From there, implement the housing and fixed expense portions of your budget as these are required expenses. Now, you are left with the amount of cash available to spend and/or invest, known as disposable income. At a minimum, you should save/invest 50% of your disposable income. The balance should make up your discretionary budget. Most people that have trouble saving for retirement will spend all of their disposable income, also known as living “paycheck to paycheck.”

Saving & Investing Your Disposable Income:

Investment of disposable income varies based on the person. However, it usually makes sense to contribute to your company retirement plan. In addition to the tax benefits of contributing, firms often provide a match to their employees. This is a bonus benefit that should not be discounted or ignored. If additional funds are available following a retirement plan contribution, funding an IRA (Roth or Traditional) would be a great next step. Once those two buckets are filled, additional savings in a brokerage account would be beneficial.

It is important to not only contribute to these accounts, but to properly manage them. Outline your risk profile, time horizon, and objectives for the portfolio. Then, construct an asset allocation that fits your situation. If properly allocated and managed, compounding growth will result, and your budget/savings plan will lead to a prosperous retirement.

How Geier Asset Management Assists

Budgeting may seem simple to some, but it is overwhelming and intimidating to many. This leads to negligence of the process which significantly limits your ability to retire comfortably. Therefore, we work with our clients to reduce the pressure associated with the budgeting and cash flow management process. Our course of action entails:

  • Analyze and organize monthly expenses
  • Run annual tax projection
  • Develop a three-part budget
  • Determine a monthly savings amount
  • Automate the contributions into retirement plans, IRA’s, and brokerage accounts
  • Invest and actively manage the portfolio

Partnering with a financial and tax advisor in the budgeting and cash flow management process will help you stay organized and disciplined, which will lead to the accomplishment of your annual savings goals.

If you are looking for an independent, trustworthy financial advisor in Maryland, look no further than Geier Asset Management. Call us today to speak with an advisor.


© Geier Asset Management, Inc. July 2017. Greg Palacorolla is the Director of Wealth Management for Geier Asset Management, Inc., a Registered Investment Advisor. The above blog reflects the opinions of Mr. Palacorolla and not necessarily the firm. Any advice given is general in nature and investors must consider their own individual circumstances. Past performance is no indicator of future performance. The firm makes no warranties or representations of any kind relating to the accuracy or timeliness of the information provided.

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