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Find Money in Your Paycheck: Are You Saving and Investing Enough?

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December 29, 2016
Financial guidelines for saving enough money for retirement.
RoyalFive/Getty Images

If you’re looking forward to retiring someday, you’ll likely try to invest a little money every single paycheck. Although there are several ways to save money for life after work, the most popular way is to invest in a retirement fund.

But are you saving and investing enough money to retire comfortably someday? One way to find out is by doing an annual financial check-up to see if you can save and invest more of your paycheck.

OK, that’s not what people necessarily want to do in their free time, but it won’t take too long.

Clear an hour or two off your schedule. Click the “pause” button on that video you’re streaming. Now, write down everything you spend money on in a typical month. The best way is to put the expenditures into buckets. And the big buckets for most people tend to be taxes, insurance, housing, utilities, discretionary and debt payments. Don’t forget to list what you pay each month for student loans, credit card interest and car loans.

“A financial checkup tells you where you’re spending your money; that’s the biggest question,” says David Settle, Curriculum Development Manager at Investools®, a TD Ameritrade education affiliate. “Are you spending too much on house payments or too much at the coffee house? The financial checkup shows you where you’re spending, and if there are some areas where you’re over-extending.”  

It can also represent the bedrock of a financial plan that can help you find ways to put more of your paycheck into savings and investments.

Build Your Spending Parameters

How do you know if you’re spending too much? Remember the “50-30-20” plan, which advises spending 50% of income on fixed costs like housing, utilities and taxes, with 30% going toward flexible and day-to-day expenses like groceries and entertainment. The other 20% should be going toward financial goals, including paying down debt and saving for retirement. How close do your expenditures match these metrics?

While the truth can sometimes be hard, many people actually feel better once the initial shock of their spending fades, because they see places where they can cut back without too much impact on their lifestyles. This is where the importance of having a financial plan comes in and it starts with finding savings. Where can you find more money in your paycheck? It’s there if you look and here are some of the places you could pull it back from.

  • Discretionary spending tends to be the big violator for many, with going out to eat a frequent culprit. Other discretionary items include many of the impulse purchases people tend to make while online. We all have our weaknesses, but imposing some discipline can keep you from overdoing it.
  • Tax withholding: What are you doing with that refund check from the government? “If you’re withholding more than you should, you’re kind of saving, but what are you doing with that tax refund? Are you spending it?” Settle says. A tax refund, if used as a savings tool rather than squandered on possibly unnecessary discretionary spending, could be another way to force oneself into being more financially responsible. 
  • Everyday expenses: Do you really need hundreds of cable channels or the newest phone? Is that car you’re driving worth the big payments when perhaps a gently used model could save you thousands of dollars a year? It’s far more important to have a ready source of emergency cash to cover expenses in case of emergency, and to have investments at work to reach your long-term goals. Don’t fall victim to marketing that constantly claims you need the newest and biggest to be happy.

A solid financial plan means committing to finding those savings, regularly checking your budget to make sure spending isn’t going over your 50-30-20 parameters, and remembering to schedule regular financial checkups with yourself and keep those appointments.

How Much to Save Vs. Invest? Depends on Your Goals

Once you reach the point where you’re actually taking in more than you spend, and admittedly, not everyone can get there right away, it’s important to determine how much of the excess should be devoted to building savings vs. investing for long-term goals. Deciding on this ratio depends on one’s ultimate financial horizons. What are your top considerations for goal planning?

“If you have a lot of short-term goals like buying a home or saving for education, be more focused on savings,” Settle suggests. “If you’re in early career mode, be more into investments because the main goal becomes retirement 20-30 years away.” He suggests placing funds for retirement in a 401(k) if possible and getting as big a match as one can, because it’s basically like receiving free money.

Another best practice when deciding between saving and investing is this: If you don’t have an emergency fund, don’t even think about starting to invest. Having three-to-six months of savings on hand should be your first goal, because without it you could end up having to tap investments to pay for any emergency that occurs. Longer-term goals, such as investing to pay for a house, a child’s education or retirement should be postponed until that initial emergency fund is in place, financial advisors say.

Hands-On Goal Planning

Planning for tomorrow involves setting financial goals today. Are your plans on track?

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