There are three things one cannot avoid in life: death, taxes and root canals. Of these three things, it is taxes that bite hardest and not necessarily because paying bills (no matter the size) is arguably the worst of human experiences — right up there with having your eyes forked out and brain surgery without anesthesia — but because if you, like me, consider yourself a “creative,” having to reconcile what to do with your money while wondering whether you’re doing it right is basically a reincarnation of that calculus class you failed (twice).
But we’re independent women, dammit, and part of that means getting our finances (one form of this month’s “shit“) together. To answer the hard questions and assuage our fears, Alexa von Tobel has stepped in. She’s the bestselling author of Financially Fearless and the founder and CEO of LearnVest, a website that matches clients with financial planners to create simple, affordable financial plans.
With the help of her expertise you’ll see that it’s not so bad; you can save for your future and still spend money on margaritas.
How much money should young people be saving for retirement versus short-term, rainy day stuff?
The hard-to-swallow answer is that you need to be thinking about both. Today. I know, I know. Retirement savings and a proper emergency fund (which should only be touched during an actual emergency, not when you need something to wear to a friend’s wedding) are two key components of a strong financial foundation. Here’s the deal: Your ultimate goal should be to have at least 3-6 months of take-home pay set aside, in cash, for an emergency and to be on track for your retirement.
In the short-term, focus first on putting away one month’s worth of take-home pay into a starter emergency fund. And then make sure you’re contributing enough to retirement to take full advantage of any employer match. Saving for retirement can be a massive goal (we’re talking millions), so every little bit counts. In 2016, you can contribute up to $18,000 in a 401(k) and $5,500 in an IRA. No matter what you’re contributing now, set calendar reminders to increase those contributions by at least 2% every year.
What’s the one thing you think every 20, 25, 30-year-old women should start doing immediately?
OWN your finances! Not having a plan is a plan — just a bad one. Take time to look at your financial life and put together a basic plan. I often see people blindly making financial decisions (see: trip to Tulum) without taking a holistic look at their financial priorities. A good plan makes room for your needs and your wants, so there’s no reason not to. Just do it.
How much money should I actually be spending on the fun things — food, coffee, shopping — if I am making between 40 and 50k a year? If I am saving no money, am I screwed?
Generally speaking, the 50/20/30 rule is a great benchmarking tool. This says that 50% of your budget should go toward essentials (rent, groceries, transportation to/from work — note your rent should never be more than 30% of what you take home each month!), 20% should go toward your future (goals, retirement savings, emergency savings) and 30% is for you to spend on your lifestyle expenses, which include things like shopping, coffee, gifts, etc.
In the end, a solid financial plan is all about balance. I want you to be smart and prepared for the future while also being able to enjoy your life today. You work hard and deserve to enjoy yourself in the present, but you also have to think about your future self and how you can make sure money won’t get in the way of your goals, ambitions and dreams.
Do you have any tips for setting a budget and ultimately sticking to it?
I’m really proud of LearnVest’s budgeting framework called the One Number Strategy. Here’s why: it’s actually realistic and it’s a smart way to achieve your financial plan. We start with your monthly income, deduct your financial obligations (like rent) and your goals (like student loans). What’s left is your “flexible spending number,” a weekly amount you can spend however you see fit, be it on Pilates or margaritas. The great thing about having only one number to budget with is that you can actually stick to it. You can put your dollars where they matter most to you. Mine goes in large part to workout classes, while my husband spends on golf.
What is the dumbest thing you find people aged 25 – 30 spend money on?
The one thing that always seems to blow up a budget: rent. I repeat: your rent should never be more than 30% of what you take home each month. It’s so easy to rationalize this overspending because it’s your home. But between work and life, how much time do you actually spend there? Life lesson: always underspend on your home and you’ll feel rich everywhere else in your life. Rent is also super susceptible to what we call “lifestyle inflation.” As you make more money, you spend more across all areas of your life. If you can keep your rent in line with your starter salary, it will give you that much more room to splurge elsewhere.
When should you start saving?
Yesterday. But, no, seriously. You have a massive advantage right now because in your twenties you tend to have the luxury of limited financial responsibilities, coupled with a rising salary (generally speaking it grows 101% over your 20s). Once you hit your thirties, your responsibilities tend to skyrocket, your costs triple and your income grows on average only 34%. So, it’s critical to save as much as you can now because it will likely only get more difficult to in the future. Your twenties may be when you also enter this golden era we like to call DINK (Dual Income, No Kids), when you and your partner are both bringing in the bucks and can put it toward your own financial goals.
So, using the 50/20/30 rule, a good discipline is that 20% should go toward your future goals, including emergency savings, goals and retirement. Do your best to max out your 401(k) while also building up your emergency savings.
And, finally, compounding interest isn’t magic, it’s math. Money you put away today will do a lot more for your future than what you can save if you start in ten years.
What’s the easiest way to start saving? What do you recommend cutting back on (besides eating out! I already did that!)
If you’re one of those people who just hopes that each month there’s extra “leftover” to save, then this is going to be an uphill battle. Flip the savings equation on its head. Be proactive and automate contributions to your savings accounts. I promise you won’t miss spending that extra money each month, and you’ll surprise yourself with how nice it feels to see it grow. I love setting up separate sub-accounts for each of my savings goals so that I can track my progress toward something tangible. Instead of having a massive “savings” fund, earmark your dollars for things like Christmas gifts, a trip to Italy, starting a new business.
As far as things to audit, take a look at your subscriptions (cable, gym memberships, phone bills). These are easy ones you can likely find ways to trim. One of my favorite tricks is to keep a shopping list on my phone. I write down everything I might want or need, and when I’m in a store I will stick to this list. I also take at least one thing out of my cart at every check-out line. It’s the little things.
How can you effectively and/or significantly save money when you’re just starting out and don’t have anything to spare?
Start small. Even if it’s just $20 per month, it’s really about modifying your behavior and building up your savings muscles. If you start to build good financial habits now, this will carry over as you earn a bigger income and have more funds to put away.
What does a responsible person do with their tax return?
A responsible person does not think about their tax return as a benefit. Getting a tax return just means you gave the government too much of a tax-free loan (though, I prefer that you get some money back rather than owe more). If you receive a refund north of $1K, consider changing your withholding amount at work.
I also love the 90/10 rule for tax returns. Put 90% toward a major goal (like your emergency savings fund or wiping out your credit card debt), and then put 10% toward whatever you like.
How much should I be spending on getting my taxes filed?
This depends on your financial situation — if you’re higher earning, you could end up spending a few hundred dollars. If your financial life is not too complex, I recommend using something simple like TurboTax.
How important is my credit score, really?
Very! Having a good credit score could mean a difference of hundreds of thousands of dollars in savings over the course of your lifetime. If you have no idea what your score is (or what this even means), I love CreditKarma.com. You can check your score for free anytime, and you should plan to do this at least once per quarter. (Put reminders on your Google calendar). Contrary to myth, checking your own score in this way does not lower your score, as it’s not a hard inquiry.
In terms of investing, how much money do you need to start?
First, hold on. Before you even start thinking about where and how to invest, take a big giant step back.
The only place you should be investing is in your retirement account when you are just starting out. Only after you’ve maxed out your 401(k) ($18,000/year!) and your IRA ($5,500/year!) should you consider investing elsewhere. A lot of people like to jump the gun and get straight to investing, but the truth is that most of the country isn’t in a place to do that outside of their retirement accounts.