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Frequently the biggest financial hurdle that people face isn’t the struggle to meet current expenses but the ability to better manage money over their lifetime.
Most people know that they should make a budget and stick to it. But many don’t really consider that the long-term impact of spending 100 percent of their pay check each month and not saving, could result in their inability to financially provide for themselves during retirement.
It might seem almost impossible to adequately save but, regardless of whether you are a “spender” or a “saver” by nature, there are actually many ways to free up money from your existing budget which you can use to save for the future.
It’s time to think about your spending habits differently
A great next step is to consider adopting a financial management strategy that is flexible enough to be applied over the course of your life journey, and yet structured enough to successfully provide for your future.
According to research conducted by global asset manager and investment advisor Fidelity, the key to establishing financial stability over the long haul might be as simple as sticking to the 50/15/5 Spending Guide, summarised as follows:
- Limit Your Current Expenses – Limit your “must have” items - including housing, food, healthcare, transportation, childcare, and debt obligations (such as credit card payments and child support) to 50% of your take-home pay - even if this means finding ways to reduce your current living expenses to achieve this. For small modifications, look for ways to reduce your energy and transportation costs. For a major budgeting realignment, it might make sense to move to a less expensive residence or take staycations instead of costly foreign travel. It’s ok if making the adjustment takes time. As long as you are actively working on the goal, you can get there.
- Save For Tomorrow - Regardless of your age, set aside 15% of your current income each month for retirement. Given the fact that mandatory employer pensions were only introduced in Bermuda in 2000, and only represents 10% of income being saved, you may have to rely on your personal savings for up to 45% of your income in retirement. This could also mean that you may well need to continue to save 15% of your overall monthly retirement income even after you retire, to ensure that you have sufficient funds to last your entire life.
- Establish an Emergency Fund - Set aside an additional 5% of your income each month to cover unplanned expenses (e.g. your car breaks down) instead of charging them to one of your high interest credit cards. You should aim to build an emergency fund of between 3 – 6 months of your necessary living expenses to cover the unexpected.
The 50/15/5 guide is a great tool for managing your spending and savings. Be sure to evaluate your situation regularly and make adjustments as needed. Studies show that incorporating this guideline can help to increase your chances of maintaining financial stability now and well into retirement.
What to do with the remaining 30%?
Whatever you want. Save additional funds for retirement or for your child’s college tuition, pay down high interest credit card or mortgage debt or treat yourself to a Caribbean cruise.
Looking for more ideas?
Argus has an array of articles, online investment planning tools and calculators to support your budgeting and planning needs. You can also contact us at insurance@argus.bm or call 441-298-0888 to speak to one of our customer service representatives.