Your savings rate is arguably the most predictive factor of long-term financial success. The formula is deceptively simple, yet powerful: 

Income – Expenses = Savings 

Step #1: Build a personal cash flow statement 

Estimate Monthly Expenses 

Write down (or list in a spreadsheet) each of your monthly household expenses.  Add these together to determine your total monthly spending amount.

Compare Estimated Expenses to Historical Spending

Log in to your checking account and navigate to the transactions area. Add together your previous 6 months of outflows and calculate a monthly average (total spending divided by 6). How does this historical average outflow compare to your expenses listed in the previous step? If they don’t match, you’re likely missing something. Adjust any categories as needed. 

Determine Monthly Savings (or Deficit) 

Compare your monthly expenses to your net monthly income (after taxes). Your income will include your net pay from your employer pay stub, net income from business activities, and any other income sources. 

If net monthly income exceeds total expenses, you are generating monthly savings. If expenses exceed net income, you have a monthly deficit. If income or expenses do not change, you will accumulate more debt over time. 

Step #2: Monitor your expenses

This could involve downloading and categorizing expenses using spreadsheets once a month. Another options is using budgeting software such as Mint or YNAB. These software platforms will automatically download and categorize monthly transactions after they’ve been properly set up.  

Step #3: Automate Savings

You may have heard the phrase “Pay Yourself First.” This involves treating your desired monthly savings amount the same way you would treat your mandatory expenses. 

There is a powerful psychological component of keeping savings out of sight & out of mind (automatic). In theory, if money doesn’t make it to your checking account, then you’re less likely to spend it. 

Develop an automatic transfer plan based on your financial goals (eg pay down debt, build emergency fund, upcoming vacation, portfolio growth). 

Your personal balance sheet provides a snapshot of your current financial situation. It has two main columns: Assets & Liabilities.

• Assets represent the things you own: investments, real estate, personal property.
• Liabilities represent the things you owe: mortgage, student loans, auto loans, credit card balances. 

For more information on building a personal balance sheet, visit this post.

Having a cash cushion in the event of job loss, unexpected medical bills, home repairs, etc. can help you sleep better at night. Research suggests a healthy cash cushion is more highly correlated with life satisfaction than levels of earning or levels of debt. Most financial planners suggest keeping 3x-6x your total monthly household expenses in liquid savings. The amount depends on several factors including:

• total monthly expenses (looking forward)
• single versus dual-income household
• variability of income (e.g. salary vs commission)
• job security
• your profession
• your company’s industry
• personal risk preferences

Consider holding these savings in an FDIC-insured, high-yield savings account.

If you have high-interest credit card debt, student loans, or personal loans, it may make sense to pay these off before pursuing any investment opportunities. 

There are two main ways to attack debt: 

1) Snowball Method: Order all of your outstanding debt from smallest balance to highest balance. Pay off debt with the smallest balance first, meanwhile making minimum payments on all other debts. Some studies suggest paying off small balances first builds momentum and establishes a debt-payoff habit. 

2) Avalanche Method: Order all of your outstanding debt from highest to lowest interest rate. Pay off debt with the highest interest rate first, meanwhile making minimum payments on all other debts. This method will save you more in interest (higher ROI) than the Snowball Method. 

We’ve shifted to a mostly cashless world due to the convenience of credit cards. Using credit cards responsibly (paying off your balance in full each month) is critical to financial well-being.

Credit cards fall into two main categories: travel and cash-back. Depending on your spending habits, certain cards may make more sense than others. Credit cards can offer benefits such as:

• cash-back (or miles) as a % of your total purchase
• sign-up bonuses
• no foreign transaction fees
• insurance protections
• point conversions to travel partners

An effective tax strategy is a critical component of building wealth (and keeping it). You should take advantage of all opportunities to minimize your overall tax burden.

A comprehensive tax strategy could include funding a combination of these tax-advantaged accounts: 

• Traditional and Roth IRA
• Traditional and Roth 401(k)
• After-Tax 401(k) (if available through employer plan)
• Health Savings Account (HSA) 
• Flexible Spending Account (FSA)
• Deferred Compensation Plan 
• Dependent Care FSA 
• 529 College Savings Account
• Charitable Donor Advised Funds (DAF)
• Trusts

There are often tax planning opportunities in high-income years and low-income years. Understanding how your income will change over time is a crucial component of tax planning. 

Tax efficiency within an investment portfolio should be prioritized as well. Some investment funds are tax-inefficient due to their structure. These funds should be placed in tax-advantaged accounts. This concept is known as asset location. 

There are many components that go into a comprehensive tax strategy. Speak with a qualified professional if you’d like some help.

A 401(k) is a retirement plan offered by companies to their employees. Contributions are automatically deducted from your paycheck via payroll deductions. In most cases, managing your 401(k) is your responsibility. This includes:

• developing an investment strategy
• determining how much to contribute
• choosing investment options
• rebalancing the portfolio periodically
• rolling funds over when you switch jobs

Many employers match employee contributions to the company’s 401(k) plan, up to a certain percentage of annual salary. For example: let’s say you have a 1:1 employer match up to 3% of your annual salary. If you contribute 3%, your employer will also contribute 3% (matching contribution). If you contribute 2%, your employer will only match 2%. If you contribute nothing, you will not receive a match. What is your employer match? Are you taking full advantage of it? 

You’ll likely need to decide between Traditional 401(k) contributions (pre-tax) and Roth 401(k) contributions. Determining which to choose depends on:

• stage of your career (future earnings potential)
• your current marginal tax rate
• changes in income in the near-term
• expectations of future tax rates

Selecting a health insurance plan at work can be a headache. 

If you are enrolled in a high-deductible health plan through work, it may makes sense to contribute to an HSA. Funds are contributed to your HSA account via payroll deductions. You will likely receive an HSA debit card, allowing you to pay for ongoing medical expenses from your HSA account. The main benefit? Amounts contributed to your HSA throughout the year are tax-deductible.

Some employers now match HSA contributions. 

Certain companies allow their employees to purchase company stock via an ESPP. With certain provisions, these plans can have tremendous benefits (visit the ESPP section of the website for more info). 

Childcare costs can be overwhelming. Some employers offer the ability to contribute to a Dependent Care FSA account. These plans allow you to pay up to $5000 per year of childcare expenses using pre-tax earnings. 

For example: if you are in the 24% marginal tax bracket, and you contribute the maximum $5000 this year, you would save $1200 in federal income taxes ($5000 x 24%).

Contributed amounts are withheld via payroll deductions. Qualified daycare expenses can then be reimbursed throughout the year. 

What happens to your assets if you unexpectedly pass away? What happens to your children?