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By that I mean, are all of your expenses necessary and/or they too large? If they are too large you must find a way to pare them down.
There are old rules about expenses as a percentage of income. They are tried and true and if followed will serve you well.
Sources of income are generally fairly obvious, such as: wages, salary, tips, alimony, child support, stock dividends, interest on savings accounts, Social Security benefits, pensions, etc. Expenses are easier to overlook. The more obvious are: home mortgage, car loan, payment for child support or alimony, personal loans, credit cards, utilities, food, clothing, recreation/entertainment, etc.
Some expenses we tend to forget are: real estate taxes, household repairs, education expenses, child care, church/charity contributions, auto expenses (gas, repairs, insurance, etc.) life insurance, homeowners insurance, medical expenses beyond insurance coverage, dental expenses, club dues, hobbies, etc.
Perhaps looking over your bills from the last several months will help you determine the amount you spend in these various areas. This will help you establish the numbers to put into your budget.
Once you have determined your income and expenses you must include some percentage of your income for savings. Hopefully your income will be greater than your expenses thus allowing for savings. However, if your expenses are too great they must be reduced or your income must be increased.
If there is nothing left at the end of the month, you have nothing left over for investment. You cannot reduce saving. If you do you will never have an estate.
Making the house payment is a form of savings but not one that will ever produce income. In fact it requires you to pay expenses such as maintenance/upkeep, insurance and taxes which will be ongoing expenses for as long as you own your home. The only way to get money out of your home is by selling it or entering into a reverse mortgage. (See February's article on reverse mortgages.)
So you need income-producing assets to build an estate. Remember your estate is much more than just something to pass on to your heirs. It is also a necessary source of income for you to use in your retirement so you can better enjoy the "golden years."
Let's look at some of those old investment rules to help determine whether your expenses are within the appropriate ranges. While there are many rules, we only have space for a few of them. The following are the basic rules for your home, car, credit cards and savings.
Your home expenses should not exceed 28 percent of your income. This is a number established during the Great Depression. It includes your mortgage payment, insurance and taxes. Generally you can afford a home that costs 2 1/2 times your annual income.
Your other debt, car loan, student loan and credit cards, should not be greater than 8 percent of your income. You should never have a credit card balance greater than 30 percent of your credit limit. Always pay more than the minimum monthly payment and if possible pay the entire balance.
Your car should not cost more than three months' income. A car loan should never be more than five years and less if you can afford a larger payment. Remember the shorter the term the larger the payment; but, you will be charged a lower interest rate and in the long run the total cost of the car (purchase price plus interest) will be much less.
You should save 10 percent of your income for investment and have a cash reserve fund of three to six months' income to be used only in case of emergencies.
These are basic tried and true rules for saving. Which, if followed, will allow you to live within your means and save money to invest and build an estate both for yourself and to pass on to your heirs.
There are any number of helpful tax rules which have been established to help you save your money. Examples of these are 401(k) plans, Keogh, IRAs and Roth-IRAs. You should take advantage of these if you qualify. If your employer matches your contribution take advantage of that and make the maximum contribution.
The first challenge is establishing a budget which will allow you to save. Hopefully this article will be of assistance. Then comes determining how to invest the money you have saved.
The matter of actually investing your assets should be done in such a way as to minimize the risk and maximize the income. In today's investment market it is impossible for me to assist you in this area. You must discuss this with your investment adviser who will know and understand your individual needs and help you establish your investment goals.
