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Financial checkup may be as important as health checkup

Published: Saturday, July 4 2015 4:54 p.m. MDT

Economists on the national level and money managers on the personal level are calling for a return to budget discipline. (Shutterstock) Economists on the national level and money managers on the personal level are calling for a return to budget discipline. (Shutterstock)

SALT LAKE CITY — When Cathy and Darnell Jackson began their married life together 36 years ago, they were living paycheck to paycheck. But over the years they have been able to develop a system of fiscal discipline that would be the envy of almost any finance guru. She is an executive assistant, while he works in apartment maintenance.

“(We changed) over to our current budgeting method of putting money in savings accounts in categories, she explained. “Car maintenance, house repair, short term savings, emergency fund savings, holidays, travel, escrow, rental (property) repairs, savings for a new car, etc.”

She uses automatic savings through payroll deduction with an investment company to fund the various accounts.

“This really helps us be able stay calm with our finances,” she said. “We have been able to live below our means and are feeling better about retirement.”

Remarkably, the Jacksons have become the exception, not the rule in America.

During the past three decades the personal savings rate among Americans has dropped more than 50 percent. According to data from U.S. Department of Commerce Bureau of Economic Analysis, the personal savings rate in January 1970 was 9.4 percent of disposable income. The highest level of savings came in 1982, when the rate climbed to nearly 11 percent before beginning its continuous decline in 1984. The lowest savings rate was reported in 2005 at just 1.6 percent of disposable income.

It has economists on the national level and money managers on the personal level calling for a return to budget discipline.

Examples of hope

Tom Merrill has also been able to devise strategies to manage his family’s finances. Merrill is a health economist for a small research firm in downtown Salt Lake, while his wife is pursuing a Master's degree. 

He said their monthly budget fits into two main categories: fixed expenses which are set up with automatic withdrawals from their checking account and variable expenses that are taken care of by a second checking account that has a predetermined budget for each category (e.g. groceries, gas, household, etc.).

He said those categories are “somewhat fluid and flexible to allow for variability.”

“We have an emergency fund and several other savings accounts that get a set amount every month on the first that we basically never see unless we are using those accounts,” he said. “We aren’t perfect, but our savings and debt repayment has really taken off in the last year and we are constantly re-tweaking the budget to fit our ever-evolving family’s needs.”

Maintaining the well-being of your finances is just as important as keeping your body healthy. But as often happens with one’s physical health, staying in shape financially can be challenging.

Heading into the final few months of the year is a good time to get a financial checkup and take a close look at the state of your financial health.

Save more, worry less

According to www.statisticbrain.com, the average American family has about $3,800 in a savings account, with about $35,000 saved toward individual retirement. Conversely, 25 percent of American families have no savings at all and 40 percent are not saving for retirement.

While most people know the importance of saving and managing money, not everyone is disciplined and organized enough to do so effectively. The average American household income is about $43,000, and approximately 38 percent have no funds set aside in case of emergency.

Earlier this month, Fidelity Investments issued new savings guidelines suggesting that workers save at least eight times their final salary in order to meet basic income needs in retirement.

Fidelity said employees should have the equivalent of their annual salary in savings by age 35 in order to reach the first benchmark en route to reach that goal.

To keep pace, individuals should then plan to have saved twice their salary by 40, four times their salary by 50, five times by 55 and six times by age 60.

Though many people will need more income, particularly at higher salaries, saving eight times your annual pay by age 67 should leave most workers with approximately 85 percent of their pre-retirement income in retirement, Fidelity stated.

The nation's largest 401(k) administrator said these guidelines are designed to help families and individuals become more active in their retirement planning.

Financial workout

Craig Israelsen, associate professor in the School of Family Life at Brigham Young University, said that while the body is designed to heal itself if it gets injured, curing financial ills takes intense individual effort.

“We have to be much more intentional with regard to our financial health,” he said. “There really is no “silver bullet.””

He suggested saving at least 10 percent of income or as much as feasible, develop and maintain a record-keeping system for receipts, tax records, important papers, medical records, etc. Prepare a 12-month estimate of income and expenses — an Income and Expenditure Statement — each year. Develop and follow a monthly or weekly spending plan. If married, prepare and monitor the family budget as a couple, not separately.

Israelsen said family and individuals should purchase insurance as protection against major loss. He also said that working toward home ownership is a worthy goal.

He also said that investing for retirement and other important goals sooner rather than later will pay big dividends on the long run.

No reason to wait

“Even when paying off loans, you can begin building an investment portfolio,” he said. “Invest in 401(k) retirement accounts (at work), especially if your employer matches a portion of your contributions.”

In addition, consider investing in a Roth Individual Retirement Account if your employer does not match your 401(k) contribution, he said.

Jim Hoch, tax manager for Salt Lake-based certified public accounting firm HEB Business Solutions, said developing a net worth statement would also serve as a helpful tool in assessing financial health. He said net worth is calculated by subtracting expenses — regular monthly costs — from financial assets — personal and retirement savings, stocks, bonds, etc.

“Determine if your net worth is growing,” he said. “If not, then you know you have to change your budget and save more.”

Hoch also said that optimizing individual payroll withholding is a key component of maximizing the ability to monitor personal or family finance.

“You should always withhold the amount of tax that you’re expected to pay,” he explained. “You don’t want a big refund because that money could be used as savings or to pay off debt early.”

He said it makes more sense to figure out the point where you break even or owe a little rather than give the government “an interest-free loan.”

Noting that some people use their tax return as a savings plan, he said, “It’s not smart.”

“Put it into an automatic savings plan (through payroll deduction) instead of giving it to the IRS or the state of Utah,” he said.

It's about discipline

Hoch said that no matter what your income level may be, being a good money manager takes discipline and the mindset to control your financial destiny.

“Savers are savers whether you have a lot of money or you don’t, and spenders are spenders whether you have a lot of money or you don’t,” he said.

Because finances are a relentless, day-to-day part of our lives, we need to apply our best talents and best efforts, Israelsen said.

“Anything that’s of value requires some consistent effort, and financial health requires consistent effort,” he said. “Just like personal hygiene, our bodies don’t wash themselves. We have to wash them.”

“Our budgets don’t’ naturally happen, we have to plan and carry out our budget,” Israelsen said.

The road to financial health

• Save at least 10 percent of income (or as much as feasible).

• Develop and maintain a record-keeping system for receipts, tax records, medical records, etc.

• Prepare a 12-month estimate of income and expenses, known as an Income and Expenditure Statement.

• Develop and follow a monthly (or weekly) spending plan — a budget. If married, prepare and monitor the family budget as a couple, not separately.

• Carefully monitor usage of debt. Avoid indebtedness whenever possible. Exceptions include housing and education.

• Purchase insurance: life, auto, property, medical, disability and dental, if available. Review all insurance policies annually.

• Work toward home ownership. Develop maintenance skills where possible. Start saving now for a down-payment.

• Start investing now for retirement and other important goals. Even when paying off loans (including student loans), you can begin building an investment portfolio. Invest in 401(k) retirement accounts, especially if your employer matches a portion of your contributions. In addition, consider investing in a Roth Individual Retirement Account (IRA) if your employer does not match your 401(k) contribution.

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