How much of your pay should you save?

12:30 PM pay, save, should No Comments

| By Libby Kane, LearnVest

Often, the last thing on your mind when you get your paycheck is 'How much of this am I going to put in the bank?' But you know you have to save -- here's a primer on how to do it.

When it comes to making financial progress, we can all agree that saving for the future is a critical part of the equation. But how much are you supposed to be socking away exactly?

According to the 50/20/30 rule, your monthly budget should be divided into three distinct categories of expenses: 50 percent should be reserved for essentials (think housing and food), 30 percent should be allocated for lifestyle choices (things like nights out and 121 channels of cable) … and at least 20 percent should go toward what we call “financial priorities,” which include debt payments, retirement contributions and, of course, savings.

Since these percentages are divisions of your net pay -- the after-tax income that you bring home -- someone who makes, say, $35,000 a year should set aside at least about $4,800 for financial priorities.

Think that sounds like kind of a lot? You aren’t alone.

That’s why we spoke to LearnVest Planning Services CFP® Tonya Oliver-Boston to find out if we really need to allocate 20 percent of our income toward financial priorities each year—and how much of that 20 percent should go into savings.

For many people, putting at least 20 percent of their net pay toward financial priorities isn’t actually all that difficult. In fact, Oliver-Boston finds that the biggest problem clients generally face isn’t that they can’t manage to allocate the 20 percent for financial priorities—rather, it’s that outsized debt, like student loans and high credit card balances, that eats up most of that 20 percent, leaving little left over for savings. But as Oliver-Boston cautions: ”Even if you have debt in excess of 20 percent of your net income, you still need to find a way to save!”

Translation: Prioritizing one financial priority doesn’t mean that you can ignore the others—be it debt payments, adding to your emergency fund, contributing to your retirement, or other savings goals, like accruing enough money for a down payment on a house.

So what’s the best way to divvy up that 20 percent across all of your financial priorities? ”It depends on the individual situation,” says Oliver-Boston. “But emergency savings and payments on high-interest debt tend to fight for first priority.” Retirement, she adds, is usually a strong third because it’s critical for your long-term financial health, followed by other savings goals, like that down payment we mentioned.

Need real-life examples? According to Oliver-Boston, if a client has a lot of high-interest debt but also has emergency savings, the client’s first priority would most likely be the debt because she has money in place to support her should she find herself in a situation in which her income could no longer cover her living expenses. If a client is cash-strapped, however, putting money into an emergency fund would probably take priority because the client doesn’t have the necessary cushion to cover her day-to-day expenses should an emergency arise.

In most cases, it’s unlikely that you simply don’t have the money to put toward your financial priorities. It’s more likely, explains Oliver-Boston, that you’re devoting too much of your income to another category of spending.

For instance, if your essential expenses are in excess of 50 percent, there’s a good chance that the culprit is a rent or mortgage payment that’s too high for your income. There’s good news and bad news here: On the bright side, you can quickly free up a lot of money. On the not-so-bright side, you’ll have to make a big change to do it … like a move.

“It’s a sticky situation,” says Oliver-Boston, “because you can’t make a client move. But when it’s pointed out to you that the troublesome element of your budget is a fixed percentage, it shouldn’t be surprising that you don’t feel like you’re getting ahead.”

If it isn’t your fixed expenses that are throwing your budget out of whack, then it’s probably your lifestyle choices. This, too, is changeable. Since few things you truly need fall into this category, you should be able to eliminate lifestyle expenses fairly easily. That said, since dinners out tend to add up slower than, say, rent, it might take a while.

“It’s almost like weight loss,” says Oliver-Boston. “Changing your essential expenses is the equivalent of having surgery—it’s immediate, so you see the change right away. But changing your discretionary spending is like losing a pound a week. It will take a bit, but you’ll get there.”

To be fair, Oliver-Boston qualifies, the people who are having trouble saving 20 percent aren’t necessarily making unwise choices when it comes to properly allocating their money. “During the downturn, a lot of people used credit cards to get by without an understanding of how much debt is too much,” she says. “And now they’re getting jobs at lower pay rates, plus the student loans they deferred are now due.” So although many people in this situation are working, she says, they’re not making as much, so they continue to use credit cards to get by. “For these people,” she says, “the change they would need to make in their lifestyles to save enough money would be dramatic.”

But regardless of whether your budget is a little unbalanced or you’re recovering from a major financial shock, Oliver-Boston’s advice for finding the funds for your financial priorities is the same. “First of all, you need to take a realistic look at your expenses, because turning a blind eye isn’t helping anybody,” she advises. “And, second of all, you have to be willing to change.”

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Can we save the US economy?

7:00 PM American Dream, economy, save, US No Comments

| By Anthony Mirhaydari, MSN Money

Five years after the financial crisis, the economy is still just limping along. It's clear that deeper problems are plaguing the country. We can solve them -- but will we?

Let me start by saying I love this country.

It remains the hope of the Earth, a beacon of hope for the distressed and oppressed, and a reason people all across this country, including my father, left their country of birth to come in search of freedom and opportunity.

But as we mark the fifth anniversary of the financial crisis -- the bank bailouts passed on Oct. 3, 2008 -- it's clear that the American economy is still faltering, and that our problems go deeper than that financial mess.

The middle class in this country faces an existential threat. The expansion of government benefits hasn't stopped its decline. The expansion of cheap credit hasn't solved the problem, either. Our problems predate the financial meltdown, and the two asset bubbles this century -- in stocks and homes -- only made the existing problem worse.

The American Dream is quickly becoming a false promise for many. A higher education is no longer a guarantee of success. Homeownership isn't necessarily the road to riches, or even financial security. The stock market looks to many like a den of thieves armed with weapons-grade computer trading algorithms.

I've explored these issues in a number of recent columns, including "No recovery for the middle class." Today, I want offer a few ideas on what it'll take to turn things around. Because I believe we can, if we have the will.

The core of the matter is that, while the overall U.S. economy continues to grow, albeit at a slower pace than what we're used to historically, average families aren't capturing the benefit. You can see this in the way household income is badly lagging each family's share of the economy.

Anthony Mirhaydari

In 2009, which is the most recent data, the average household pulled in $34,100. But the share of the economy the average family produced was $47,041; the difference goes to things like business profits and executive pay, which are rising quickly.

Back in the late 1970s, an average household's income slightly exceeded its share of the economy. So this is a recent change.

Part of the problem is that fewer folks are working, with the percentage of full-time workers in the population down to 37%, versus 41% in 2000. And part of the problem is that wages for most working people have stagnated as laborers have lost the negotiating power they once enjoyed to the pressures of outsourcing, offshoring and automation. These have hollowed out the medium-skill jobs that are the backbone of the middle class.

That growing difference between productivity and pay has, in fact, benefited somebody. Corporate profits are at record highs and have grown, as a share of the overall economy, by 34% since 1981. Middle-class income, as a share of the economy, has fallen 20% over that period.

That, in turn, has benefited the wealthy who own the vast majority of corporate equity, including stocks. The gross before-tax real income of the top 1% has more than doubled since 1979, rising from $523,300 to more than $1.2 million. The middle class has seen a paltry 21% gain, from $53,100 to $64,300.

The result? More than one in seven Americans are on food stamps. And 47 million Americans are now living in poverty.

So far, our elected (and unelected) officials have tried to battle our economic malaise using low taxes, more spending and more money printing from the Federal Reserve.

The results speak for themselves. We're in the midst of one of the weakest economic recoveries in the country's history, after one of the sharpest downturns.

Tax cuts haven't worked because businesses and investors view them as temporary. Increased welfare spending (up 158% since 2001) is encouraging many to simply give up. Disability enrollment is up 53%, with the ratio of disabled to active workers above 6%, versus the nearly 2% seen in the 1980s. This suggests some people are using disability to avoid the chaos in the job market.

As benefits are structured now, ambition and drive are discouraged amongst the disadvantaged. This undermines one of the core tenets of the American Dream: The idea that hard work, risk taking and self-determination are the way to a better life.

According to a presentation by Gary Alexander, Pennsylvania's secretary of public welfare, a single mom is better off earning a gross income of $29,000 and applying for welfare benefits (including children's health insurance, child care and housing subsidies) that would bump up her total income to $57,327. If she worked hard and earned a gross income of $69,000, her after-tax take-home pay would be just $57,045.

Why then, would she take that extra shift at work or apply for a promotion, even if it's offered?

The other big economic problem, over the long term, is health care. We are all simply overpaying for substandard care early in life and avoiding the tough end-of-life decisions that cause 25% of all Medicare spending to go to the 5% of recipients who die each year -- with 80% of that going to those in the last two months of life.

There's also no reason an MRI screening should cost $1,080 in America but just $280 in France, according to the International Federation of Health Plans. Or why the cost of an MRI in Washington, D.C., varies from $400 to $1,861, depending on provider. Or why, in 2009, Americans spent $7,960 per person on health care versus $4,808 in Canada, $4,218 in Germany and $3,978 in France. We're no healthier.

There's also no reason why less expensive, palliative hospice care that allows people to enjoy their last days on this earth in peace at home is shunned in favor of having loved ones poked, prodded and intubated, floating in and out of consciousness under the fluorescent lights of a $30,000-a-night hospital room.

We've also overpromised entitlement benefits without collecting enough in taxes to fund them. The average two-earner couple that retired in 2010 will enjoy $387,000 in Medicare benefits after contributing (assuming a 2% real rate of return) $122,000 in Medicare taxes.

Whatever you think of Obamacare, it doesn't make enough of the hard decisions we need.

The Fed's constant flow of cheap money has kept the recovery trickling along. Short-term interest rates have been held near 0% since 2008 to help the nation get past the financial crisis. Multiple iterations of long-term bond purchases -- dubbed "quantitative easing" -- have taken the monetary base from $800 billion before the financial crisis to nearly $3.6 trillion now.

That's helped inflate asset prices on Wall Street. And last week, the surprise "no taper" decision shows the Fed will keep pumping money in until inflation gets out of control, which it inevitably will.

But all this monetary malfeasance hasn't benefited middle-class families or spurred robust job gains, because among the many problems we face, a lack of low-cost credit isn't one of them. We're already too deep in debt, as the chart below shows. And the harder the Fed pushes, the higher the risks are down the road.

Societe Generale U.S. economist Aneta Markowska believes that, based on the classic "Taylor rule" interest-rate setting formula created by Stanford economist John B. Taylor, the Fed shouldn't just have already stopped its ongoing, open-ended $85 billion-a-month QE3 bond-purchase program. It should already be raising short-term interest rates from near 0% toward a target of around 3% next year.

The longer these problems stand unaddressed, the worse America's finances get. Unless things improve soon, we'll run out of runway.

The long-term federal budget is broken as the state, and the promises it's made, overwhelms the private economy. The Congressional Budget Office is warning of serious trouble if we don't get a handle on it, despite all the budget cutting we've already done over the last few years. (For details on what the CBO said, read last week's column, "Caution: Budget fight dead ahead.")

As I touched on last week, the only way out is to reform both spending and taxes in a pro-growth way that kick-starts the economy. Welfare programs need to be restructured. On entitlements, we need to recognize that there are better end-of-life options, that the rich don't need the same level of assistance as everyone else, that hospitals and doctors should be subject to the forces of free market competition (price transparency and quality rankings), and that some medical treatments do, in fact, provide more benefits than other more expensive options.

But given what we're seeing in Washington, it seems we'll be lucky if they can even agree to pay bills they've already run up.

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