Life in Miami can get real expensive, real quick; but hey, you’ve made it! You get to live in the Magic City! The beach is at your doorstep (or a short, 45-minute drive away), and most importantly, cafecitos and pastelitos abound on every corner.
You might be on that savings struggle, have credit card debt, and perhaps haven’t started a retirement account (or aren’t contributing as much as you could), but you’re young-ish and still have plenty of time to get it together — right?
If you’re reading this, you’re probably not nearly as young, or as rich, or as poor, as you think you are — you’re likely somewhere in the middle. And if that’s the case, we can bet that your financial house is not in 100% tip-top shape. Perhaps you don’t even know where to begin… but we do! We recommend starting by adopting a solid financial philosophy. Here’s ours: pay yourself first (save), plan for your future by making your money work for you (invest), and avoid irrational (read: superficial) frugality as it doesn’t tend to result in long-term savings.
Allow us to elaborate.
When it comes to saving, Miami scores pretty low. In fact, Interest.com’s savings opportunity study puts us at 17 out of 18 cities — the second worst place in the country to save, based on median after-tax incomes. According to the study, which uses data from the Bureau of Labor Statistics, the median after-tax income in Miami is around $32,000 ($40,000 per year gross), leaving Miamians in that pay grade with only $212 available for saving on an annual basis, after covering the basics. Clearly, this puts a serious damper on your weekly happy hour capabilities. And here’s an even more troubling statistic is provided by a recent Prudential research survey — apparently only 66% of Latinos earning $75k or more have savings accounts, compared to 87% of the general population.
If your income is higher than the median, say $75k–125k, you’re probably not feeling the pinch as much and saving is something you might think about regularly. Maybe when patting yourself on the back during one of your standard bouts of irrational frugality. For example, depriving yourself of your daily (Panther, Starbucks, Eternity Roasters) coffee fix, but then blowing $300 on a Friday night over dinner, deliciously overpriced drinks, and a night out in South Beach. Or priding yourself on not buying expensive clothes, but then buying a bunch of cheap shoes, clothes, and accessories every month that could add up to several hundred dollars.
In this income range, you are likely conscious of the fact that you still can’t make it rain per se, but you also view yourself as having a solid amount of disposable income and therefore are a lot less likely to pay attention to your overall spending – especially on all of the little things. Saving is not just about how much you make, it’s also about how much you’re spending. If you’re not careful, you could end up saving less than cost-conscious folks in lower income brackets.
It’s great to have money to burn, but if you don’t pay attention the series of smaller expenses, none of which individually seem material, over time they can add up to hundreds or even thousands of dollars. Before determining how much disposable income you really have, make sure you know how much your fixed expenses will cost you every month, including a pre-determined amount for saving and investing.
There are basically two ways to put your financial house in order — the traditional one involving paper, pen, and Excel spreadsheet, and then there’s the shortcut, which is faster, still gives you results, and doesn’t make you feel like you’ve suddenly become your parents.
Step 1 — Cut a hole in the box
You’ll need to get a handle on how you’re spending your cash — ballpark figures won’t work here, and you need to get down to the details. Unless your business involves some sort of illicit sales activity (do you, bro), you probably make and spend most of your money electronically, which means you have a trail and an easy way to track your spending. If this is the case, you could consider signing up for an account aggregation platform such as Mint.com, which will track and categorize your spending for you, making it easy to see how much money you’re actually blowing on cafecitos, cocktails, weekend shenanigans and other things. Awesomely enough, you can also create budgets on Mint and it will track your spending in each category and alert you when you’re going astray. You may have to recategorize income and expenses every once in a while, but it’s a lot easier than creating your own spreadsheet and tracking everything manually.
Step 2 — Divvy up that income
Mark your overall expenses against the median cost of living for Miami, which, like the median after-tax income, is around $32,000 a year. Then, apply the “50/30/20” rule to your actual income and see where you stand. No more than 50% of your after-tax income should go towards monthly necessities, cap your discretionary spending at 30% and make sure you’re saving a minimum of 20%. For example, if you make $75,000 a year gross ($55,293 net), you should only be spending $27,600 a year on necessities (rent, credit card payments, car payment, insurance, gas, food, student loans, etc.), $16,587 on discretionary spending (entertainment, travel, shopping, dining out, etc.) and $11,058, minimum, on savings.
And if you’re making closer to the median, or even less? It’s a rule that still applies. The glory of a percentage breakdown means it works no matter your income. Whether you’re living with your parents (Hi, Mom!), bae, roommates, or alone, the 50/30/20 rule should be your guide in deciding major future expenses like where to live next and what kind of car (or bike) you’re budgeting for.
Step 3 — Build the coziest cu$hion
In thinking about your monthly savings allocation, make sure to prepare for any emergencies that may (read: will) come up. Set an automatic withdrawal from your checking account the day you get paid, and auto deposit that 20% into your savings account. Ideally, you should shoot to build a cushion to cover at least 3 months of your fixed expenses (rent, car payments, gas, food, student loans, health and car insurance, etc.), although 6 months is preferable to be better protected under unforeseen circumstances like losing your job or dealing with a major unplanned expense.
Consider a high-yield online savings account, such as one offered by Barclays or American Express. These will give you some nice interest payments, higher than a traditional savings account. Just remember that these accounts often come with restrictions on the amount of withdrawals/transfers you can make each month and sometimes require you to keep a minimum monthly balance. Once you reach a 6-month cushion, you may be ready to think about investing.
Step 4 — Invest money to make money
Once you’ve built your 3 to 6 month cushion, start thinking about investing, a fun but sometimes very confusing world. Miamians don’t tend to fare so well in this area, either.
Begin by allocating some of your 20% into investments — perhaps ease into it with a retirement account (401k, IRA, etc.). If your employer “matches” your retirement contributions, that’s an even better way to make your money work for you. For 2015, you can contribute up to $18,000 pre-tax into your retirement account.
Then consider other options for investing your money that are cost efficient and have low barriers to entry, for example Betterment or Wealthfront, where you pick the allocation between fixed income and equities and a professional manager chooses the underlying investments and re-balances when appropriate. There are also a number of in-person resources that many banks (like Bank of America) offer for free — make sure you know what may be already available and at your fingertips.
Investing is, in a sense, a form of gambling. It can be a great way to make your money work for you, and if you’re in it for the long term, the idea is that you can absorb more of the downside risk over time (by hopefully making up for it when the markets swing in your favor). Due to the risks, however, investing is no replacement for good old fashioned saving. Find your savings rhythm first, and get comfortable putting a decent amount away each month, then consider dipping your toe into investing. Remember, with most investments you run the risk of losing all or part of the principal amount you invest, so make sure your approach makes sense given your income, age, risk tolerance (no one likes losing money, but could you withstand the loss of all of your investment?), goals, and access to resources and information to help guide you. The right investment strategy can help you establish a portfolio that complements your savings and provides a well-rounded route to achieving your financial goals.
Although Miami embodies the term conspicuous consumption in so many ways, it’s really not about how much you make — it’s about how much you keep. We may have a lot of temptations that lure us away from acting in our own best interest (the struggle is real!), but with the right philosophy and a little bit of discipline you can save, invest, and still have enough cash for (at least some) of those mimosa-fueled brunches and cafecitos.