Budgeting

Insights from our Planning and Investments team

Budgeting, Part 1: The Savings Imperative

The last 12+ months have likely had a financial impact on everyone. What kind of impact runs the gamut, from those who lost their jobs or some part of their income to those who managed to save additional money due to their limited ability to eat out, go to movies and concerts, even gather with friends in a world restricted by pandemic concerns. Regardless of how you were affected by 2020, it can be a good time to review your financial situation and in particular, explore your family’s budget and your approach to it.

There are only 3 things we can do with money: we can save, we can spend, and we can give. According to the Federal Reserve of Kansas City, “savings as a percentage of disposable personal income rose from 7.2 percent in December 2019 to a record high of 33.7 percent in April 2020. Although the savings rate has since retraced some of this rise, it remained at 13.6 percent as of October 2020—higher than its peak in any recent recession and nearly twice its pre-recession level.”* Given that, let’s look at savings.

No matter what stage of life you’re in, savings plays a huge part in your current spending habits and your long-term goals. There’s a reason the term “pay yourself first” is so prevalent. The starting point for savings is to establish an emergency fund, which is crucial so an emergency expense does not derail your longer-term financial objectives. Your emergency fund should be equal to about 3-6 months of expenses, depending on how secure you want to be. The events of 2020 have certainly highlighted the critical need for this savings.

If you’re like many Americans, you may have some excess savings as a result of lower expenses, and less extra-curricular activities since March of last year. What should be the priority for this circumstantial “windfall”? First, it’s important to look at your competing goals. Start with retirement to determine the amount you need to save to meet your retirement goals. Next look at shorter-term spending goals like a car, second home, or future weddings. It’s a good idea to write all of these down and work on prioritizing them. We can, of course, assist with an action plan to get these goals on track.

Budgeting, Part 2: Spending vs. Giving

First, we explored the importance of savings to building your personal budget. Next, we will look at finding a balance between spending and giving.

Spending

Besides increased online shopping and probably a ballooning grocery budget, there may not have been much variability in this arena in 2020. That said, we are already seeing signs of rising consumer spending around the country, so as financial planners our recommendation would be to (surprise) plan now for a potential increase in your spending.

Just like with the savings goals, priorities are important. It is key to ensure the basic necessities like housing/utilities, food, transportation, etc. are covered first in your budget. Then begin to plot out your enjoyment of some of your hard-earned money. Supporting local businesses and restaurants may be high on your priority list, or maybe a much-needed vacation is on the horizon. Whatever your desires are, just remember it is best to map them out as a way to prevent overspending, high interest-rate consumer debt, or derailing of your other goals. A budget should not be a straight jacket, rather a plan for your money. Intentionality in a lot of ways will help you feel empowered.

Giving

Finally, let’s consider the third use of money, and it’s an important one: giving.

Giving for many people can bring a balance to the power of money in their lives. In many ways, giving and charity, can be as enjoyable or more than buying a boat or a more expensive car. Additionally, there are charities that are doing a lot of good in your communities and around the world, and they have likely struggled over the past year. If you are searching for charities who are doing good and being good stewards of their money, check out CharityNavigator.org to do your own research.

Beyond this, there are financial reasons to be generous. For those who itemize deductions as a part of their tax return, up to 100% of adjusted gross income can now be deducted for qualifying cash gifts to charities. This is an increase from 50% or 60% before recent legislation. For those age 72 or older, who may not be itemizing their tax deductions, may still be able to get the tax benefit of their donation by gifting money directly from their IRA to a qualified charity. Under normal circumstances, a distribution like this would be included as taxable income, but by going directly to a charity, it is excluded from income.

As always, but especially in confusing or trying times like we have all just experienced, we are here to help you navigate your personal situation, better understand your options, and determine the path forward that fits your family’s wants and needs. If you’d like to discuss budgeting or any other financial topic, we are just a phone call or an email away!

*https://www.kansascityfed.org/publications/research/eb/articles/2020/why-are-americans-saving-so-much-income

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Contact Information

Daren Seekins, CFS

Phone: 207.862.7247 Email: dseekins@northeastplanning.com

Maine Savings Federal Credit Union 101 Western Ave, Hampden, ME 04444 Business Hours: Monday - Friday: 8:00 a.m. - 5:00 p.m.

NOTICE: Financial planning offered through Northeast Planning Associates, Inc. (NPA), a registered investment adviser. Securities and advisory services offered through LPL Financial, a registered investment adviser and member FINRA/SIPC. Insurance products offered through Northeast Planning Associates, Inc. (NPA), LPL Financial or its licensed affiliates. Maine Savings Federal Credit Union, Northeast Planning Associates, Inc., and LPL Financial are not affiliated. The LPL Financial Registered Representatives may only discuss or transact securities business with residents of the following states: CA, FL, IL, MA, ME, MO, and NC. 101 Western Avenue, Hampden ME 04444 | 207.862.7247 Not NCUA Insured | No Credit Union Guarantee | May Lose Value

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