David is a thirty-year-old Oregon native working in the tech industry. He is happy with the current trajectory of his career and has a passion for all the outdoor activities associated with living in the Pacific Northwest. David’s employer provides him with benefits including medical, dental, and a retirement plan containing a 4% match. He uses his health insurance in conjunction with a copay program for medications.
David already has many strong financial habits. He is contributing enough to his 401k to get the full employer match. He drives a car that he owns outright and doesn’t carry any credit card debt. He watches his spending by limiting the amount of money he spends dining out and on entertainment. While David is doing so many things right, he is also concerned about the lack of headway he is making in other areas of his financial life, such as liquid savings, retirement savings, and student loan repayment.
According to data from Experian, individual student loan balances have reached a record high of $38,792 as of 2020. David’s student loan balance comes in just under that at $32,000. Like so many Americans, David has not made any student loan payments during the two years in which payments have been paused. As of August of 2022, that pause will be lifted and David has to, once again, become responsible for making those payments. He would really like to devise a plan in which he aggressively attacks them and is rid of the burden once and for all. Subsequently, David has been transferring money into his savings account periodically, building up $1,200 that can be used in case of emergencies. While he’s proud of himself for the amount he has saved, he recognizes that he hasn’t been consistent enough and would feel more secure if his emergency stash was higher. Lastly, David is doing a terrific job of capturing the full amount of the employer 401k match; however, he also has concerns that he may not be saving enough.
Overall, David isn’t in bad shape. He just needs a plan which includes paying himself first. This is more effective than doing it as an afterthought and waiting to see what remains of his paycheck. Under the 50/30/20 Budget, 20% of an individual’s income is allocated to the overall category of Goals (while 50% is for Fixed Expenses and 30% for Flexible or Lifestyle Expenses). Things like debt repayment, savings, and investing all fall under this category. Therefore, David’s primary areas of concern are all items that would pertain to the Goals category of his budget. Of the 20% of his income that should be allotted to Goals, David is already using 4% of that for retirement savings. This leaves 16% of his income in which to assign a job. Designing a budget is one of the cornerstones of good personal finance because it allows you to take charge of your money by assigning each dollar a job. In doing so, goals can be achieved faster, which in turn frees up more of your income for lifestyle choices. David might consider splitting the remaining 16% of money allocated to that category between beefing up his liquid savings and paying down his student loan debt. Once he is satisfied with the level achieved in his emergency savings (generally three months of expenses or more), he can reassign those monthly dollars to the continual paydown of his student loans and increase his retirement savings.
David also had a recent windfall of funds. Since he waited until April to file his taxes, he just recently received his refund of $2,900 between Federal and State. Being unsure of how best to use these funds, he has left them untouched in his account. He might choose to use these funds as a part of his emergency savings to expedite the completion of that goal. Alternately, he could pay down his student loans with them or split the funds between the two goals. While this refund has provided David with a nice opportunity to put one of his goals on the fast track, he should also consider revising his tax withholding at work. In doing so, David will see more money in his paycheck each month, which will be helpful now that his student loan payments are in full swing again.
Even those with good financial habits, like David, can benefit from having a plan. The very simple act of setting goals and designing your budget to give every dollar an assignment is the key to a financially satisfying future.
Alacias Enger is a performing artist, writer, and educator. She lives with her partner in New York City, and is the founder of blogs “Sense with Cents” and “Travel Cents.” If you are living with HIV/AIDS and would like to stay on top of your personal finances, email questions to [email protected] for possible inclusion in Money Matters. Follow her on Twitter @sense_w_cents.