You might think a budget spells the end of dinners out, entertainment and pumpkin spice lattes. But it’s not! Instead, consider budgeting a roadmap for what you can spend (rather than a directive on what you can't).
Where does it go?
Chances are you know how much money you earn each month. But can you pinpoint how much you spend, and on what? The first step in creating a budget is to learn where your money is going.
So, you might try a tracking app that links to your bank account. After a month, you should have a realistic picture of your “outflows." You might find you're spending on things you weren't even aware of or that aren't particularly important to you. Knowing where your money goes helps you make more-intentional spending choices.
Once you know how you're spending, you can prioritize retirement saving. Find a budgeting method that can guide you in your day-to-day expenses. One simple approach is “50/30/20," which divides your budget into three basic categories:
Need to have. Spend no more than 50% of your take-home pay on essentials such as rent, food and insurance.
Nice to have. No more than 30% of your take-home pay should go toward discretionary spending including entertainment and dining out.
Plan-aheads. Try to plow at least 20% of your after-tax salary into long-term financial goals such as retirement and debt repayment—especially credit card balances. Of course, the more debt you have, the less you'll have for savings. But once your debt is paid off, you can redirect those payments toward savings.
Put your savings on autopilot
For some people, saving is a painful process. It can hurt to give up spending today in exchange for security tomorrow. Putting your savings on autopilot can make things a lot easier. Think of retirement as a recurring monthly payment on par with your favorite streaming service, the gym and your phone. Not only will you not have the opportunity to spend the money, you'll be less likely to miss it if savings is part of an automatic process.
A workplace retirement account is one of the simplest routes to retirement saving, because the money is deducted from your paycheck before it ever makes its way into your checking account—and your wallet.
If your employer doesn't offer a “defined contribution" plan like a 401(k), 403(b) or 457, consider establishing an individual retirement account (IRA) through a financial institution on your own. Though contribution limits are far lower ($6,000 for IRAs in 2020, vs. $19,500 for 401(k)s), an IRA can give you a wide variety of investment choices. You can choose a “traditional" account, which lets you deduct contributions from federal income taxes, or a Roth IRA, where you exchange after-tax contributions1 for tax-free withdrawals2 at retirement, assuming you are at least age 59½ and have had the account for at least five tax years. (Some employers may also offer a Roth option in their workplace plans.)
Also consider setting up a separate account for long-term savings. Having all your money tied up in retirement accounts, which you often can't access without penalty until age 59½, doesn't leave much room to fund big-ticket items like a car or a down payment on a home. Even so, retirement is the one major expense you can't borrow to pay for, so if you must prioritize, funding your life after work should be Job #1.