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Save and Give First

Adam M. Grossman

I’VE DISCUSSED the election in my recent articles and cautioned against timing the market. But if market timing isn’t recommended, what can you do to keep your finances on track through this potentially turbulent period?

Last week, I suggested reviewing your finances through the lenses of leverage, liquidity and cash flow. This week, I’d like to share another framework—and this is one you could employ at any time and not just in times of worry. Financial educator Brian Portnoy (not to be confused with day trader David Portnoy) offers this perspective: In the world of finance, he says, most of the discussion focuses on investments. While investing is important, it’s just one of seven dimensions of money that he sees as equally important. The other six are:

  • Earning
  • Giving
  • Saving
  • Spending
  • Borrowing
  • Protecting

I like this approach, but it isn’t necessarily easy. It requires each family or individual to find a balance among the seven dimensions. But how? I would start with the three areas that involve outflows—spending, saving and giving—since there’s a tradeoff among them. The other areas are also important, but they’re topics for another day.

1. Saving. In many—if not most—households, money is saved only after taxes are subtracted and the bills are paid. Ideally, however, you should budget for savings upfront. If you have a 401(k) or a similar employer-sponsored retirement plan, this is relatively easy because these plans make saving automatic. But if your employer doesn’t offer a retirement plan or you want to save more than your plan allows, how much should you earmark for savings? I would ask three questions:

  • How much do I need to save?
  • How much can I save?
  • How much do I want to save?

The answer to the first question is largely mathematical. If you can quantify the cost of your future goals, you can estimate how much you need to put away each month. The second question is even more mathematical: Given your income and expenses, how much are you able to save? The third question, on the other hand, is entirely personal. Some people love living frugally and enjoy saving—almost as an end in itself. Others take the opposite view: Why unnecessarily deprive myself if I don’t have to?

It may take some work, but these questions can be answered and that’s where I’d start—by deciding on a savings budget. I recognize that this may seem counter-intuitive since household savings budgets are usually just determined by what’s left over each month. And because paying the bills today is usually the priority, I also recognize that this approach may take time to implement.

2. Giving. Once you’ve determined your savings budget, I would move on to giving. Again, this may seem counterintuitive. For most people, charitable contributions are ad hoc and not formally budgeted. In some religions, there is a requirement to tithe—often 10%. That can make life easier because it’s very specific.

But if you aren’t working with any specific requirement, establishing a giving budget may be even harder than settling on a savings budget. Consider the three questions above. You don’t need to give any specific amount. Result? Your charitable budget is governed only by the amount you can afford and by the amount you want to give.

My advice: To come up with a giving budget, start with the amount you donated last year. Often, this can be found on your tax return. If cash flow permits, I would contribute that entire amount, all at once, to a donor-advised fund at the beginning of each year (or, if it helps for tax purposes, perhaps in December). Donor-advised funds carry a small cost, but they make charitable giving immeasurably easier to track and manage. On their websites, donor-advised funds will tell you at a glance how much you have put in and how much you have contributed to charities year-to-date. This makes it much easier to ensure you’re hitting your charitable goals each year.

3. Spending. For all but the most disciplined people, it’s awfully hard to formulate and stick to a household spending budget. That’s certainly the case in my house. But if you use the approach I’ve described above, I have good news: You don’t actually need a budget. If you’ve already set aside the amounts you’ll need for savings and for giving, you can—in theory—freely spend the remainder. Many people find this liberating.

When your income is limited, you have a pretty good idea of whether you can afford a specific purchase or not. But what if your income is higher and there’s more latitude in your budget? It can be hard to know where to draw the line.

In my work as a financial planner, I frequently hear this concern. The question normally sounds like this: “If a Tesla costs nearly six figures and I have the money, is it okay to buy one?” My answer is always the same: If you’ve set aside the amounts you need for saving and giving—and, of course, for the IRS—the answer is, “Yes, it’s okay.”

Adam M. Grossman’s previous articles include Don’t Play Politics, High Anxiety and When to Change. Adam is the founder of Mayport, a fixed-fee wealth management firm. In his series of free e-books, Adam advocates an evidence-based approach to personal finance. Follow Adam on Twitter @AdamMGrossman.

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R Quinn
R Quinn
11 months ago

I’m so glad you mentioned there is no need for a budget, I’ve been saying that for years. Having a budget actually makes the financial progress more difficult and frustrating IMO. It appears every day as someone looking over our shoulder. Rather, as you say save, give automaticity first and then spend what you will with what’s left. I would add one other caveat for most people. No spending with credit cards beyond what is paid in full EVERY month.

Ginger Williams
Ginger Williams
11 months ago

Early in my career, I learned the concept “pay yourself first” from The Wealthy Barber. Although the framing story strikes me as hokey now, that book is a major reason I’m on track to retire at 62 although I’ve rarely bothered with a budget. It’s the reason I transfer money to savings and investing accounts before paying bills. I haven’t always been perfect about avoiding debt, but I’ve skipped my monthly investment transfer just twice over the last thirty years. I’d changed jobs both times, resulting in ability to increase monthly transfer after a temporary cash flow issue.

One of my strategies for keeping credit card under control is to send several payments during the month. Thirty years ago, my rule was if I charged $50 in a single transaction, I sent in a payment of at least twice that amount the same day. Today, it’s $100 transaction and send enough to pay the current balance. It’s amazing how often I decide not to buy something because I don’t want to write a check or log in to bill pay.

Roboticus Aquarius
Roboticus Aquarius
11 months ago

I think budgets work well for some people and not very well for others, depending to a great degree on personality and how people approach their lives.

I very much dislike the idea of following a budget. However, I love the idea of creating a budget. Doing so not only helps me understand every bit of our spending, but also whether we are positioned to fund all our priorities for the year. It’s what I do for a living, so yeah, not everyone would want to do the same thing. Still, i’ll paraphrase Eisenhower: a plan is useless, but the act of planning is vital.

Phil Dawson
Phil Dawson
11 months ago

Excellent ideas, thank you. Budgeting seems important to me after a major life change (marriage, divorce, birth of a child, job change) to set a baseline and establish priorities. After that, your process is precisely what I would recommend. Automate savings for future needs, then spend til you’re happy.

My reservation with the Tesla advice is not about what it will cost today, but what it will cost over your lifetime.

David J. Kupstas
David J. Kupstas
11 months ago

My dad said it very simply: “If you need it, buy it. If you don’t need it, don’t buy it.” He lived through the Great Depression.

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