On this episode of 'Financing Your Future', Yahoo Finance’s Rachelle Akuffo is joined by Echo Wealth Management Founder, Echo Huang, and AARP Public Policy Institute Senior Advisor, David John, as they discuss how to budget and save in today's economy. Rachelle also sits down with Yahoo Finance Senior Columnist Kerry Hannon and Yahoo Finance Personal Finance Editor Janna Herron as they share their tips for budgeting and saving.
RACHELLE AKUFFO: Welcome, everyone, to Yahoo Finance's "Financing Your Future," where we're going to explore new and traditional ways to help you reach your financial goals. I'm Rachelle Akuffo. And today, we'll explain how you can budget, save, and understand your finances when inflation is affecting your ability to do things like eat, pay bills, invest, or even plan your next career move.
Now, our expert panel is here with me. David John, AARP Public Policy Institute Senior Advisor, along with Echo Huang, Certified Financial Planner, Echo Wealth Management founder, and author of the book "Own Your Own Future." So a big welcome to you both.
Echo, I'm going to kick things off with you. There does seem to be this level of anxiety and avoidance when it comes to talking about money, talking about your finances. What would you tell people who want to get a clear picture of their finances, but they don't know where to start?
ECHO HUANG: Well, thank you for having me on the show. And I feel like the best start is try to define their goals in terms of long-term, short-term, and intermediate-term, and also understand their own net worth situation and cash flow. So I think a lot of people don't know where to start.
I would say start simply by developing a simple cash flow plan for themselves, including budgeting and tracking expenses. So at least have a good idea for the next five years what it looks like in terms of cash inflow and outflow. And ideally, create a monthly budget, and using some kind of apps or tools.
I use mint.com to track my monthly budget and expenses. So I think for a lot of people, if they don't know where to start, I think start looking at their current situation, and just make sure they do have emergency funds for at least six months of spending.
RACHELLE AKUFFO: And so David, for those who are perhaps either closer to retirement or already retired, what should their first steps be in getting a handle on their finances, if they're, say, looking at their bank statements and things, or wondering where the money is going?
DAVID JOHN: Oh, and that's absolutely key, is if you don't know what you're spending, you really don't know how you can work for the future. So much of what you've just heard is absolutely essential. The first thing is, find out what you're spending.
And find out also what you absolutely need. Because this is a very uncharted time for most people. We haven't really had much inflation for the last 40 years or so. So there needs to be a fair amount of flexibility.
Now, for retirement, the first thing to do, and the most important thing to do is to maximize your social security. And that means perhaps working longer. It means trying to delay, even if you have to live on savings for a little bit. Because your social security benefits go up until age 70.
And key in this time, social security benefits, unlike many other types of income, are inflation-protected. So you're not going to lose value there. So that's your foundation. And then from there, it's a matter of realistically looking at what you have and what you can accumulate between now and retirement, and start to make a plan. The plan is essential.
RACHELLE AKUFFO: And you raise an interesting point. Because a lot of people are sort of wondering, should I be working, or should I retire early? I mean, Echo, what are some of the most common mistakes that you're seeing some of these younger savers or investors making at the moment?
ECHO HUANG: Yeah, I think for a lot of people, younger or older, because of the recent market-- you know, stock market crash, I would say bond market crash, too-- people feel very fearful to invest. And they are afraid of potentially losing more money.
But I think they need to plan ahead to outpace inflation. So it is really-- I think a common mistake would be they stop investing, you know, stop putting money into their 401(k) plan to get the employer matching. Or they simply say, I just don't feel good losing money. I just want to get out and park somewhere I feel safe. When I feel good, then I go back.
But unfortunately, a lot of individual investors make that kind of mistakes. And they lose the potential return from the investments.
RACHELLE AKUFFO: What about some of the common mistakes that you're seeing when it comes to money management and what people are doing with their budgets and saving right now?
DAVID JOHN: Well, I mean, the key one is one you just heard about, is that people panic, or they get very uncomfortable. And if they don't stop saving whatsoever, they move into something that's supposedly safe. And the simple fact is that by doing that, you're locking in losses.
Now, the second thing, which is equally worrying, is that you go to the other extreme, that you're worried about your losses, and your brother-in-law has just heard something brilliant on the internet. And he knows that this is the way to recoup all your losses. And of course, you're only about the millionth person to read that on the internet. And frankly, any opportunity for advance is long gone. So that's part of it.
Now, there's one other thing. I mean, much of what Echo has said here sounds intimidating. And it can feel intimidating. But the key thing is to start simply.
Start right now, for instance, by just tracking what you're spending for the month, and tracking what you need to spend. And that does sound uncomfortable to people. But it is something to get you started.
And then you can start to move into the more sophisticated things that Echo just mentioned. Start simply. Don't let this scare you into saying, oh my gosh, I can't do this until X, Y, Z time finally happens.
RACHELLE AKUFFO: So with that in mind, then, how should people structure their budgets? As David was saying, a lot of-- people are saying, my brother-in-law made money doing this. People are like, oh, this is a great time to get into crypto. There's a lot of information coming at people.
Echo, how do you suggest people actually structure their budgets so they know how much-- perhaps what share they should be investing versus saving, versus putting into things for the long term?
ECHO HUANG: Yeah, of course. For my clients, we go in a lot more detail to just understand their current lifestyle and help them define the budget for what they need, and then review versus what they want. And of course, we also need to focus on the savings in order to invest for the long term.
But I think for a lot of average Americans, if they don't have trusted financial advisor, they can consider finding someone they can trust to help them. But even if they don't have financial advisor, I would say for simplicity, if they can just budget 50% of their income, take-home income for what they have to have, that's what they need. And then about 30% is what they want.
And the other 20%, I would say go with savings and invest. That 20% is really crucial not to reduce during tough times. What you can do is adjusting down by what you want. Because what you need has gone up because of inflation, like gas and food.
But general guideline, I would say people try to get to 20% of savings, first towards emergency funds. Then they can use part of it for, for example, 401(k) contribution or Roth IRA. And of course, some people need to deal with student loan payment as well.
So for simplicity, have some kind of target. Use two Excel spreadsheet or app to help you. And my tip for that is, cut out what I consider unnecessary subscriptions. Sometimes we don't remember what we have, like gym memberships and newspaper, or-- something you don't use regularly should be all reviewed and canceled.
And because unemployment rate is relatively low, I think right now at 3.6%, I suggest people take on a either part-time job or start a side hustle to increase their income so that they can continue saving while the necessary expenses have gone up because of inflation.
RACHELLE AKUFFO: Those subscriptions will really get you. Because I use Truebill, which basically lets you lay out all the subscriptions that you have. And you're like, sometimes you don't realize how much you're spending on things like that cup of Starbucks. That can really add up. And you're going to have to sort of balance that with putting gas in your car.
So David, what about for you? In terms of people who are perhaps on a fixed income, and you have high inflation, new budget constraints coming in, how should they structure their budgets?
DAVID JOHN: Oh, well, this is where you start to get into some really tough times. Because if you're on a fixed income, you really don't have the flexibility that you may have had when you were working full-time. And frankly, at that point, there are a couple of things.
Number one is, as I already mentioned, trying to maximize your social security. But if you've already retired, you've probably already dealt with that. Number two, however, is you've got to have that budget to understand what you're spending, and as the cost of food or something like that goes up, where you can cut back so that you're at least making your essentials at that point.
And number three here is actually, it may well be that this is the time, as Echo mentioned, that you want to go back to work, whether that's a part-time job, whether that's starting something that you can sell, that you can make and sell or whatever. And we are finding that the whole definition of retirement is changing. So many more people are now much more interested in that than the hypothetical thing of sitting on the golf course all day or something along that line.
But if you're on a fixed budget and your costs go up, inevitably, either you're going to have to have more money coming in or you're going to have to cut back. Unfortunately, there's no magic bullet here.
RACHELLE AKUFFO: And I want to ask you about people's homes. That used to be sort of where people would really have their wealth. But you're seeing obviously, rents are sky-high. They've reached a 36-year high in June, along with low inventory. People aren't sure what to do in terms of should I buy a house? I can't afford my rent.
What should people do if they're in that position? What sort of options do they have?
ECHO HUANG: Well, each person's situation is different, so it depends. But I think it's really important for people to have safety first before they go into invest in real estate right now. Because of course, prices have gone up so much.
So in my mind, I think they do need to analyze and say, hey, maybe renting-- yes, the renting is increasing, too. But at the same time, for people who do not have the safety net, and they make the wrong decision in terms of buying a home that they cannot afford, that could totally destroy their retirement plan. So I would definitely say each situation needs to be analyzed and to look at can you afford this home, especially with the interest rate that has gone up [? year ?] [? to date, ?] right?
So a lot of people actually cannot afford the home that maybe they could have afford last year. So I would say each person's cash flow needs to be really analyzed, especially for single income, like single parent, because they don't have another spouse earned income to fall back on. So I would say it is challenging right now. But at the same time, I don't want people to jump in there simply because they want to be a homeowner.
RACHELLE AKUFFO: We're running out of time here, but I do want to obviously get that final tip. In terms of the best ways to try and recession-proof or inflation-proof your investments and your finances right now, Echo, what would your top tip be?
ECHO HUANG: Top tip is have an emergency fund and invest for the long term. And do not try to time the stock market. Because the time in the stock market is more important than timing of the stock market.
RACHELLE AKUFFO: And David, what about you?
DAVID JOHN: Oh, for me, it would be that-- take your immediately needed funds, and you put that into something very safe like a bank CD or something like that, knowing that they're exposed to inflation. But for beyond that, keep your investing simple. And keep it in something that is low cost-- an index fund, or something along that line.
And also, continuously reexamine, even if that's uncomfortable to do. Because the circumstances are changing very rapidly. And what you may have had that was completely appropriate a few weeks ago may not be appropriate now.
RACHELLE AKUFFO: And there you have it-- some fantastic advice there. I do appreciate you both joining us today. Echo Huang there and David John, thank you for joining us on Yahoo Finance.
Welcome back to Yahoo Finance's "Financing Your Future." Now, we're continuing our conversation on saving and budgeting in order to meet your financial goals. So let's break this down with our Yahoo Finance panel. We have our Personal Finance Content Editor, Janna Herron, and Yahoo Finance's Senior Columnist Kerry Hannon joining me now. So a big welcome to both of you.
And Kerry, obviously something that we've seen, people's eyes tend to glaze over when you talk about things like budgets. It's like telling people to diet and exercise. They know they need to do it, but they're very reluctant to do it.
So how do you typically get people to at least get engaged and excited about trying to wrap their heads around their budget?
KERRY HANNON: Yeah, you are so correct. It is really the one thing everyone dreads to do. So I encourage people to think about savings as freedom. Think of savings as things that-- dreams that you have.
So one easy way is just start-- put some pictures around of things that you want to save for. Maybe it's a great trip, or maybe it's a place you want to live one day. But give yourself an image of why you are saving, so it's not just drudgery.
And then the second thing is start tracking it. Keep a little notebook, and walk around and say, how am I spending my money every day? It sounds like a silly exercise, but truthfully, you'll astound yourself at what you spend money on. And then you can look at those fixed items that-- your utilities, your rent, your mortgage, those things that aren't going to go away. But that will give you a sense of what your financial picture is right now.
RACHELLE AKUFFO: And so Kerry, obviously, it could be sort of a big jumble of short-term goals, long-term goals when you're trying to consider what you want to save for. What questions should you ask yourself when you're trying to figure out the short-term goals versus the long-term goals? Or is it better to have sort of one big goal, and then sort of go backwards, and then figure out how to get there?
KERRY HANNON: Yeah, I like starting off with that long-term one. That's that big, audacious one that you're kind of going, like, OK, this is way down the road. But start there, and then you can pull back and say, all right, this is something I can do in the short-term.
And you get that immediate sort of shorter-term gratification of saving and meeting your goal, whether it's for going for a trip, or buying something that is meaningful to you to have in your home. Maybe it's just getting new furniture or something, but a smaller goal that will feed that sort of urge. But you see the result of taking a little time to save.
But the most important thing, really, and we can get into this a little more, but for people who are starting to save, you still say, like, I can't possibly do that. I'm barely getting through my paycheck that I have right now. And the key to any kind of savings program for me, and I think for most people out there, is if you can automate it in some way, even if it's just taking $100 out of every paycheck and having it automatically put in a savings account or a money market account, something that you can-- you don't even see it, and it's gone, right? It's saved for you. So it kind of takes that extra step away and just somehow makes the process a little more palatable.
RACHELLE AKUFFO: And Janna, what's your take on that? Obviously, a lot of people sometimes-- perhaps if you're coming from a place where you're already-- money's a little bit tight, you might be tempted, once it's automated, to sort of reach back into it. What's a good way to approach this, whether it's with getting into investing or getting into savings, so that you don't just keep reaching back in and taking out of your savings?
JANNA HERRON: I think, going back to what Kerry said about having those pictures of what your long-term goals are so you can really think twice-- like, I'm taking money to use for this now. But what am I actually-- I'm robbing myself from this beautiful vacation I want to take, this retirement I want to have, this house that I want to buy. And so it's always good to-- before you want to dip into something and buy something on impulse, is really to start thinking, is it really worth this amount of money? Is it really worth putting myself behind on those other, bigger goals that really-- they're dreams, right? So you're kind of taking away from your dreams for your life. So I think that's one way to really think about it.
KERRY HANNON: I was just thinking, as Janna was talking, it's really important if you're in a relationship, couples, to be transparent so that you're both on the same page about this savings business. Because if you're meeting goals as a family, as a couple, you really need to be transparent about your different goals, and your dreams, and how much you actually are saving or have to save. And I think with couples, this can be a little tricky.
So I try to, like, have a money date with my husband. And I know that sounds like a terrible idea. But it actually-- I get a stomach ache. But when I do it, it's good because now we realize, OK, this is what we're saving for this month.
Or these are the big ticket items that are coming up. We've got a wedding we have to go to. And we're going to have to travel. And we have to buy a present, or things like that.
So on the short term, you keep track of how you're spending things. But having these money dates can be really important.
RACHELLE AKUFFO: Janna, I wanted to ask you, because a lot of people are wondering, look, money is tight. Do I need to take on a credit card? Should I start looking at some loan options? Do I dip into my savings or maybe even my 401(k)? So Janna, I want to start with you. But Kerry, I also want you to weigh in on this.
JANNA HERRON: Yeah, I think a lot of people are worried about inflation. It's eating into their budgets right now. Gosh, the cost of the avocado right now is so much higher than it used to be. But anyway, yeah, there's some things that you really should do.
First of all, I would try to avoid credit card debt. If you have it, try to pay it off. And don't lean on it for your necessities. And that's because those rates are going to go up.
The federal reserve keeps saying it's going to hike its short-term rate. And what that's going to do is immediately going to affect your interest rate on your credit card. So you're not only going to be paying more because of inflation, if you're not paying off that credit card, you're also going to be paying more because of that interest rate. So it's even more expensive.
I also think if you have an emergency savings, this is the time to look and see if you need to dip into that. If you're really facing a problem, like you lost a job, something like that, really, you should turn to a nonprofit credit counselor to really help you navigate that setback. They can help you negotiate with your lenders to get payments either paused, get hardship programs, to get an interest rate that's lower. So I think you really need to be proactive.
I know it's really scary. Nobody's happy if you lose a job. But you really have to not ignore it and just face-- face the financial consequences of it.
KERRY HANNON: Yeah, I think the point that Janna made, too, right there about having an emergency fund, when we were talking about getting started with your savings, that's kind of the first place you should do, is set some of this aside for emergencies. Because you don't know, you could lose a job. And that's a big loss.
But then again, there could be something like, you know, I have a dog. And let me tell you, if your dog has to go to the emergency clinic for something, you're talking a big ticket item. And that's not something that it's readily available. And they're not going to take care of your dog unless you can pay that bill.
So I think emergency funds, these unexpected costs that come-- your car breaks, something like that. So start-- when you're doing the savings program for yourself, think first about that emergency fund. And it doesn't have to be huge. But just if you can start setting that aside-- because that's money that you can tap into without repercussions like you would a retirement account, where you will have some penalties for early withdrawals and that kind of thing.
RACHELLE AKUFFO: And before we go, Kerry, I just want to ask-- this is for both of you, but Kerry, I want to start with you-- if all you have is basically a pen, a paper, a cell phone, and an internet connection, what are the sort of resources that will help you get started and then stay on track if you're trying to get your budget, your investment, your savings off the ground, and really try and develop some good, consistent habits?
KERRY HANNON: Yeah, there are some websites out there that are useful to look at. Mint.com is one. Or I think it's-- You Need A Budget is another. And "Friends Talk Money" is a great podcast you can listen to.
There are wonderful books out there on this topic, some that I like. I like the idea of even having a money circle with some of your trusted funds, where you can talk about money issues together. It's a safe place. It doesn't have to be a big group-- but where you can help each other out and keep each other accountable if you're starting a savings program, and say, so did you do that? Or did you--
And even when we're talking about-- when we have retirement plans through our employers, if you start at a very-- you think, I can't possibly set money aside in there-- if you automate that right there, you start with maybe 5% of your salary, your gross salary, and then inch it up-- because most employers, not most, but many have this escalation where you can ramp it up to 10%, and maybe ultimately 15%, which would be amazingly great. But those are the things to keep in mind.
But there are resources out there, more than there ever were before. So I really encourage people to be proactive about that. But I like the idea of what you said, pencil and paper, is keep that money diary.
I love the idea of just writing down-- and even at night, writing some of your dreams and what you really would like to have money to do. And that will inspire you and motivate you to continue to stay to your course.
RACHELLE AKUFFO: If you just had the basics, paper, a pen, and your phone, and your internet, what would you recommend?
JANNA HERRON: I really like an Excel spreadsheet. I know that's a little old-school. But that's how we still, in my household, keep track of our expenses, have our net worth written down. And so again, that's a great way to start tracking.
But I do think Mint-- I think a lot of the banks' apps are really good. You can do a lot of different things in there to track your spending, to see where your money goes. So I think those are-- that's where I would start.
And then there's tons of good information out there. Just make sure that you are going to a trusted site. Obviously, we here at Yahoo Finance, we feel like we give some really good advice. But also places like AARP, for example, really good place to find some good financial advice.
RACHELLE AKUFFO: All right, well, I can't thank you enough. Obviously, a lot of really great advice there, no matter where you are in your savings journey. A big thank you there to Personal Finance Content Editor Janna Herron and Yahoo Finance's Senior Columnist Kerry Hannon. Thank you both so much.