Your Higher Savings Rate

In the Growth tier of your plan, you completed major tasks. These included funding your emergency fund up to 3-6 months of living expenses and paying off all your medium-interest debt. Additionally, in the “Growth” tier we provided a generalized recommendation to save “as much as you can” or “10-15%” of your pretax income for long-term/retirement savings.

But take note: This is the last time we’ll provide a generalized recommendation for increasing your savings rate. After this your tasks will be based on specific calculations to ensure you hit your goals.

Savings Benchmarks for Long-term Investments

Having something to shoot for can be helpful even when attempting to complete a generalized task like “increase your savings rate.” The items below represent possible benchmarks for how much you can increase your savings by. Choose one that works for you and your budget or something else entirely. But push yourself to go for the largest one you can.

• Debt Payments: If you previously had debt that you paid off in the Growth tier, use whatever amount you were putting toward debt payments to now put toward long-term saving.

• Emergency Fund Payments: If you previously set savings rate to grow your emergency fund, and your emergency fund is now between 3 and 6 months, consider diverting those payments – or 50-75% of them to long-term savings. How much you divert will depend on your comfort level with your existing emergency fund, your desire to grow it further, and the pace you still want to see your emergency fund grow (if at all).

• A Net 3% Increase: If your previous long-term savings rate was 6%, a 3% net increase would bring it up to 9%. If it was 9%, a net 3% increase would bring it up to 12% etc. Whatever your starting point, 3% is likely to feel just noticeable but not hurt too much and will help you boost your long-term savings.

• $100, $200, $300: Simple, round numbers like these are easy to quantify and adjust to in your budget. In the long run, they can have a great impact on your long-term savings.

Ways to Save More

If you’re finding you don’t have funds to increase your savings rate by any amount, use the Budget Planner tool to review your income and expenses.

• Expenses: Have you experienced “lifestyle creep” as your financial situation improved? If so, that’s understandable and possibly even acceptable. But take a moment to think about the areas of “creep” you get real value from vs. those expenses that have crept higher simply due to laziness or convenience without adding much value.
  
  If you have other very legitimate reasons for increased expenses (e.g. a new child in the family, medical costs etc.), acknowledge that. There’s nothing wrong with a leading a life that costs more than the life you lead before. However, you should also acknowledge your desire to save more for your future. Once you’ve done this, you can confidently move on to thinking about ways you can grow your income.

• Income: If your income has stagnated or dropped, you’ll need to find ways to increase your income if you want to save more. Take a moment to consider if your best avenue is through existing employment, new employment, or some kind of side gig work. Once you’ve decided the path you want to take, focus your efforts on that track since it’s the focus that is most likely to drive meaningful results. You can always change your tactic later (e.g. you didn’t get the promotion at your existing job but you learned something along the way and you can now focus on finding a new job with a different employer).

Summary

Remember, this is the last task where your plan gives you the flexibility to increase your long-term savings by a generalized amount. In the next task you’ll be faced with specific numbers that you’ll likely need to hit to achieve your goals. If you’re already using the MoneySwell Retirement Planner, remember not to get discouraged if even this new savings amount doesn’t put you on track. We recommend reading the examples of different life phases outlined here to clearly see how a person might move from being “off track” at one point, to being “on track” later.

All that said, the more you save and the earlier you save it, the better off you’re likely to be. So, push yourself to save as much as you can now and get creative with how you do it. Doing so will make it that much easier to check off your future long-term savings tasks.

This article will show you how to use MoneySwell’s Budget Planner tool and determine the dollar amount for a a three to six month emergency fund goal.

Estimate Your Planned Expenses with a Budget

You can use the Plan tab of Budget Planner to estimate your planned savings and spending. You can track spending by spending category, or, by account (i.e. I typically spend this much from this account each month). Follow these steps:

1. Enter the amount you would like to save in a given month.
2. Enter the amount you typically spend each month from all of your accounts – or – enter your spending on a per-category basis.
3. Add your total savings and total expense numbers together. 
4. Multiply that by number 3,4,5 or 6 (whatever the number of months you’re hoping to save for is). 

You now have three to six months worth of planned savings and expenses. This is your Emergency Fund Growth savings goal.

Track Your Actual Expenses Using the Review Tab

If you have been using Budget Planner for multiple months, you can use the data of your actual spending from the Review tab. Since this represents actual spending, it may provide the most accurate representation of what you’ll need for a 3-6 month emergency fund. After entering however many full months (partial months entries will distort your numbers) of actual saving and spending data you want in the Update tab, go to the Review tab and follow these steps:

1. On the Update tab, ensure you have entered multiple months of accurate spending records. (We recommend at least three.)
2. Go to the Review tab and add your total saving and total spending from the graph. 
3. Divide that number by however many full months of data you have. This will give you your actual average monthly savings and expenses.
4. Multiple that number by 3, 4, 5, or 6 (whatever number of months you’re hoping to save for).

You now have three to six months worth of actual saving and expenses. This is your emergency fund Growth savings goal.

Why include the “savings” number in your Emergency Fund goal?

It’s easy to forget and can even seem counterintuitive to include a “savings” number in your calculation for your emergency fund goal. But there are great reasons to do this. Here are two.

One – Health Insurance is a Cost

For many people, an emergency fund acts like a job loss fund. That is to say, “If I lost my job tomorrow, how long could I survive before I needed to start earning income again?” But for many Americans, a job provides more than income; it provides health insurance. And health insurance costs money. Remember: even if you pay for some of your health insurance, whether you’ve realized it or not, many employers will pay for part of those costs on your behalf (this should show up on your paystub if you get health insurance through your employer).

A full accounting of expenses may include the full cost of health insurance – something you would have to bear if you lost your job.

If you lose your job, you’ll need to pay those costs yourself or pay for a new health insurance plan. Either way, by including  savings in your calculation, you’re giving yourself extra cushion for expenses you may not have been thinking about.

Two – Keep Your Savings on Track

The idea of an emergency fund is to keep you “on track” when something unexpected happens. Staying “on track” may mean not having to go into credit card debt. Or it may mean not having to sell retirement investments in order to make ends meet. But one of the most important things to keep “on track” is your savings plan.

Your savings plan may include long-term goals like retirement, or medium-term goals like vacations or a new car. But whatever you’re saving for, by including that number in your calculation at the outset, you’re making your emergency fund that much larger and stronger should something go awry.

Conclusion

A 3-6 month emergency fund will give you a new level of confidence…even on the inevitable rainy day.

Fully funding an emergency fund at the Growth stage is a major accomplishment. If you’ve accomplished this, well done! If you’re on your way there, don’t shortchange yourself by being too optimistic and saving less than you ought to. Assume the worst and if things turn out not to be so bad, you won’t mind that you had built in a little extra buffer!

To determine how much you can put in your emergency fund and still meet your obligations, look at your MoneySwell Budget Planner tool and follow the steps below. 

Plan Tab

In this example plan, the user could potentially save $200 more a month.

Look at the graph at the bottom of the “Plan” tab. If your plan doesn’t extend past the balance line, consider increasing your automatic funding by the extra amount. If your plan is perfectly balanced or slightly imbalanced, review your other expenses and see if it’s possible to cut back. Lastly, consider if there are any ways you can increase your income. Every dollar you increase your income by is a dollar you can allocate toward saving.

Update Tab

If you have a few months of data entered, go to the “Update” tab and look through a few months. Look at the graph and see how your actual income and your actual spending compare. If you’re regularly earning more than what you’re spending and saving, take some portion of that difference and use that to increase your savings.

For example: If your net earnings average $2,000 per month, and your net expenditures average $1,500 per month, you could conceivably save a total of $500 a month ($2,0000 – $1,500). But if your automatic savings transfer is only $200 a month, you have an additional $300 you could contribute. Since spending and income may fluctuate from month to month, we wouldn’t recommend allocating the full $300. But you may feel comfortable with and increase of half that amount.

Review Tab

If you don’t feel comfortable increasing your automatic savings transfer, go to the “Review” tab and look at the “Spending” bar. If your spending is behind the dotted line, hover over that line to see what your “pace spending” would be. Then, subtract your actual spending from your pace spending. The difference is the amount you can make as a one time transfer.

If the Review tab shows you’re better than goal pace with spending, consider a lump sum transfer of the difference.

For example: If your “pace spending” says you could have spent up to $600 by this point but you’ve only spent $475, that means you are ahead of pace by $125 and should be able to make a one time transfer of up to $125 to your emergency fund. 

Do this every month or every few months to ensure you’re growing your emergency fund. 

If you’re able to do this consistently, every once in a while you may want to reward yourself by taking a portion of the amount you could allocate to savings and treat yourself guilt-free to something special. This is up to your own psychology but if an occasional reward helps keep you on track, go for it! After all, you’ve earned it with your good habits!

Take Action

Go to your bank’s website and either make an update to your regular scheduled transfers or make a one-time transfer based on what you’re currently able to do. If you plan to make additional one time transfers in the months ahead, set a reminder on your phone or calendar.

Details

1. Add Essential Expenses: Go to your Budget Planner dashboard (available to logged in users) and use a calculator to add up all expenses that are truly “Essential” (see below for guidance). Don’t forget to include some portion of “Essential” expenses that occur less than once a month.
2. Add Net Income: Next, add up all your net income. “Net income” is the money you actually receive after taxes and other deductions are taken out. Just like with expenses, you may want to include some portion of income that you receive less frequently than monthly.
3. Review the Difference: If your Essential Expenses is greater than your total “Net Income”, you’ll need to find ways to increase your income or reduce your expenses by at least the difference of these two numbers.

Now, let’s take a closer look at what to include in “Essential Expenses” and “Income.”

Typical Essential Expenses

• Housing – typically rent or mortgage
• Food – just the essentials. Ideally this is a bit more than rice, beans, and ramen but it certainly shouldn’t include fancy cocktails or expensive meals on the town if those could be supplemented with lower-cost options or forgone entirely.
• Utilities – at a minimum this will include electricity, heating, water but you may also want to include a cell phone bill and internet service.
• Transportation – gasoline, public transit costs (including monthly passes) and insurance (if you drive your own vehicle).
• Debt – including the minimum amount due to all loans and credit cards. Note: The minimum amount due on a credit card is typically a percentage of the total balance and can therefore fluctuate. If you have outstanding credit card debt consider transferring this to a single card and having a different card that you pay off in full every month. Then, only include the outstanding credit card debt payment in your “Essential Debt Expenses” (all other essential expenses – regardless of how they are charged and paid for – should fall into one of the previously mentioned categories).
• Childcare – If you have a child, and you need childcare to be able to do your job and earn income, this is an essential expense.
• Savings* – includes any money you take from your income and dedicate to saving. While not truly “essential”, and also not typically thought of as an “expense”, by including this as an essential expense, it can help you to build an emergency fund.

Net Income Sources

• Job Income – often comes in the form of a paycheck that – depending on your job and the consistency of hours – may be of a fairly regular amount.
• Tips – depending on your job this could be a significant and fairly predictable source of net income.
• Side Gig – could include babysitting, dog walking, or anything that brings in income not from a regular source. Often this income may be irregular in amount and frequency so you’ll want to take the average based on typical low and high amounts (MoneySwell calculates this for you in Budget Planner).
  

  Dog walking is a common side gig for many. Some even turn dog walking into a full time occupation!

• Government Income – this could come from SNAP, Social Security, TANF, SSI, a pension etc.
• Support Income – could include support from parents or other sources who may send you money either regularly or irregularly.
• Investment Income – could also include interest or dividend earnings from savings accounts or investments.
• Savings* – if you are planning to draw money from your savings, consider how much you want to draw in total, and divide that by the number of months you plan to draw it. For example if you are able and willing to draw $2,000 from your savings, and you need it to last four months, you have $2000 / 4 = $500 a month of “income.”

Conclusion

Now that you know your essential expenses and your net income, you can compare the two. If your net income is greater than your essential expenses, you support yourself! If not, you’ll need to find ways to increase your income or reduce your expenses as discussed in other tasks in this plan.

Details

We get it: Tracking expenses is annoying. Most people can’t stick with “tracking every dollar” for the long haul. That’s why in the task to set up your Budget Planner dashboard, we described three different methods for tracking your spending:

1. Track spending by account
2. Tracking spending by category
3. A mix of account and category tracking
   

Many people start out tracking by category to get a sense of where they spend their money and then once they feel like they have a good handle on this they move to looking at total expenditures by account. It’s much easier to update and track just one spending number per account per month than to track every single category of spending.

Our recommendation is to try one method for two months and if it doesn’t work for you for whatever reason, try another method. 

Tracking by Account

As previously stated in an earlier task:

1. Look at the “Total Purchases” line on your monthly account statements. 
2. Compare a few month’s worth of statements to get a good estimate of your low and high spending numbers. Or, you can calculate your average number between statements and enter that average number in both fields.
3. Do steps one and two for each credit card and all checking accounts you regularly use.

Tracking by Category

Review the categories below and add your low and high estimates in for any that apply to you. If you don’t have any idea what you spend, many credit card and checking accounts have a section on the site that will break down your spending by category so take a look at that if you need help.

Essentials (yours may differ)

If you have trouble tracking your spending by category, we highly recommend tracking by total account spending instead.

• Auto insurance
• Car payment
• Cell phone bill
• Child care
• Electricity and natural gas
• Gasoline
• Groceries, toiletries and other essentials
• Health insurance (only if this comes out of your net income)
• Homeowners or renters insurance
• Internet payment
• Life insurance
• Medical costs
• Mortgage/rent
• Pet-related expenses
• Property tax (if not already included in the mortgage payment)
• Public transportation
• Sanitation/garbage
• Water

Extras (yours may differ)

• Alcohol
• Cable or TV streaming services
• Clothing, jewelry, etc.
• Dining out
• Gym or club memberships
• Home furnishings
• Movie, concert and event tickets
• Streaming music service
• Travel expenses (airline tickets, hotels, rental cars, etc.)

Obligations & Responsibilities (yours may differ)

• Child support or alimony payments
• Credit card payments
• Extra payments on mortgage or student loans
• Individual after-tax retirement account (e.g. Roth IRA)
• Other loan payments
• Student loan payments
• Other investments

Conclusion

That’s it! You now have a plan set up for tracking your monthly expenses. If you track by account, you should be able to track your budget in about ten minutes per month. If you track by category, it will take you a bit longer but you’ll have a granular view of precisely where your money is going.