Veteran financial advisor gives budgeting pointers

Robert Steen, USAA Advice Director for Retirement and Complex Planning and CFP® professional, has a secret superpower: He knows how to get things done with minimal exertion.

Take exercise, for example. “I hate going to the gym. I never have liked it,” he says. To make it as easy as possible, he asks himself, “What's the point?”

“I do want to be healthy,” he admits. Steen determined the easiest path to cardiovascular health: Take a walk each day. “I don't spend hours on the treadmill at an indoor gym, I just walk whenever and wherever I can.”

As a financial advisor with many years of experience, Steen's low-effort, maximum output superpower extends to personal finance. Specifically, he's figured out how to decomplicate budgeting.

“There are definitely people who enjoy the process of making a spending plan,” says Steen. “They like the process of using spreadsheets or writing down their income and listing out all their expenses. They like the discipline and the accountability.”

But like many people, Steen does not enjoy that much structure. This is where his superpower comes in handy. “When things seem complicated, I think it's helpful to ask: ‘What's the point?'”

What's the point of budgeting?

It's actually pretty simple, Steen says. Imagine a squirrel putting away acorns for winter. In a nutshell, that's why we budget.

“Instead of saving for winter, we're saving for retirement,” explains Steen. “We make a budget so we don't forget about putting aside money for later, when we are no longer working. That's the main thing we want to accomplish with a budget, whether the savings goal is for retirement or something else.”

What about our income and expenses? What about slicing and dicing so we have money to eat out, go to the movies, pay for our kid’s college and pay down debt?

Steen says, “To guide your spending, most of us need some type of budget. But if you feel overwhelmed and you want to streamline it as much as possible, you can use the principles of budgeting to be sure you're saving enough for retirement. Then you can spend the rest.”

Save for immediate and future needs.

A lot of people don't like budgets, but they still want to be sure they're saving enough for future financial needs, such as retirement or for an emergency fund. For the budget wary, Steen sometimes suggests the 2-5-3 rule, a general spending plan framework. “The 2-5-3 rule means that 20% goes to savings or paying down debt, 50% of your money goes to needs, and 30% goes to wants,” Steen explains.

In the interest of keeping things simple, consider Jackie, a recent college graduate fortunate enough to enter the job market with no debt. She just landed a job that pays $50,000 a year.

“Of course, starting with a blank slate is not realistic,” Steen acknowledges. “But it helps us illustrate the point, and once you get the point, you can apply it to different scenarios.”

Jackie's first move should be saving for emergencies and retirement. And according to the 2-5-3 rule, she should put 20% or $10,000 away.

That means some of the $10,000 can go to her employer-provided retirement savings plan — such as a 401(k), Thrift Savings Plan or 403(b), especially if she's eligible to receive matching contributions. Steen suggests Jackie ask her employer to automatically deposit that money into her retirement plan account, so she never sees it hit her checking account. The other portion can go into an emergency savings fund, which may be able to be separated through payroll direct deposit and automatically deposited into the savings account.

Be sure your needs are met.

If you're like Jackie and you're already saving 20% of your paycheck, take a minute to congratulate yourself. You've become one with that squirrel, and you haven't even had to put pen to paper.

Since you're on a roll, let's keep going. In the 2-5-3 rule, the 5 means that about 50% of your income goes toward needs, which include all your essential expenses.

With Jackie's $50,000 salary, she has about $2,000 a month to spend on essentials. Essentials include expenses like mortgage or rent, utilities, property taxes, groceries, car payments, and gas.

Then have some fun — now and later.

Now for the fun part! Steen's 2-5-3 rule allows 30% of your money to go toward things you want.

If you're already socking money away for needs like retirement and you're covering your essential living expenses, everything else is yours to spend guilt-free.

You probably don't need help coming up with items for your wants bucket, but it includes things you could live without, such as club memberships, dining out, streaming services, etc.

As you spend money on the fun stuff, consider setting some aside for more fun later. If you start saving now for your summer vacation or for holiday gifts, you'll feel a lot more festive once these occasions arrive — not to mention after they're over.
 

Balance saving for emergencies and retirement and paying off high-interest debt.

Unlike Jackie, most people don't have the luxury of starting with a blank slate when they make a budget. “Life is complicated, and we get backed into circumstances that have ripple effects on our finances,” Steen says.

For example, maybe when you bought your house, you could afford your mortgage. You didn't anticipate that your company would downsize. Or maybe you have so much student loan debt that even the thought of a mortgage — much less saving 20% of your money for retirement — is laughable.

That's OK. The 2-5-3 rule is flexible, if you understand what goes into each bucket.

According to Steen, “We've said that it's important to save 20% of your income for your immediate or future needs,” he says. “There's one exception to that rule, and that is debt repayments.”

Let's go back to our example with Jackie. Imagine that instead of starting with a blank slate, she has accumulated $20,000 of high-interest credit card debt.

Jackie really wants to save for her retirement, but she also wants to get out of debt. And she knows that her debt is snowballing. With a 16% annual percentage rate, she's paying $3,200 in interest every year — assuming no new charges on the card and the current payment she makes is enough to keep the balance from growing each month. And she knows that if she could just pay that money off, she could save so much more for retirement.

What should she do? “The important thing is for Jackie to first, stop adding to her debt, and second, get in the habit of making a debt repayment,” Steen advises.

After two years, if Jackie increases her debt payments, she could have her debt paid off. She'll also be in the habit of putting money away. And now that her debt is paid off, she can turn her attention toward her retirement and other goals.

What does savings really mean?

We've said that the 20% savings bucket refers specifically to saving for emergencies or retirement or, in the near term, paying down high-interest debt.

But what about the money we want to save for our kid’s college? Or the money we're putting aside for a down payment on a new home? Aren't all these savings goals too?

“Technically, these things are considered wants," explains Steen. “It may be an important goal for you and your spouse to fund your children's college, but remember that there are other ways available to help pay for tuition by using loans and scholarships. There are no scholarships and loans to fund your retirement.”

Steen adds that it's easy to confuse savings with wants, but remember that the primary goal of a budget is to assure your financial security over the long run. To that end, your main savings goal is retirement.

“Most people's essentials — mortgage or rent, utilities, car payment — are constant and pretty consistent other than changes to insurance premiums or property taxes,” Steen says. “It's the nonessentials you want to spot-check with each other to be sure you aren't going into debt.”

Most importantly, communicate with your spouse or partner, so you're both on the same page when it comes to understanding your needs and prioritizing your wants. “In our early years of marriage, my wife and I made a pact to talk to each other before we spent more than $50,” Steen recalls. Years later the two have expanded their limit, but the basic idea still holds.