Amid economic uncertainty, here’s how to get started with investing and budgeting

With persistent inflation, an impasse on federal debt limit talks and a possible recession looming, many Americans are very concerned about the impact of this economic uncertainty on their finances and are confused when it comes to determining the right moves to make with their own money right now.

About two-thirds of U.S. adults expect the economy will enter a recession later this year, according to a new survey by Northwestern Mutual. And, 3 out of 4 of them expect it to have a high or moderate impact on their finances in both the near term and the longer term.

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Yet it can be daunting to try to figure out how to budget for the high cost of day-to-day expenses, to get started investing so that your money grows over time and to make sure you’ll have enough money to retire.

Here are answers to three questions from “Today” viewers who have common concerns:

‘Creating a budget sounds intimidating for someone who’s never done it before. Do you have any tips for where to begin and determining what your budget should be?’

Three steps can help you get started:

1. Calculate your personal net worth. You have to know where you stand financially to figure out where you want to go. Before creating a budget, you need to know your personal net worth. To calculate your net worth, add up what you own and subtract from that number what you owe.

Your net worth is essentially the sum of all of your assets — cash, retirement accounts, college savings, house, cars, investment properties and valuables such as art and jewelry — minus any liabilities, or long-term debt, like a mortgage, student loans, credit card balances, car loans and any other personal loans.

If your net worth is negative, which is not uncommon, you’ll need to work on saving more and spending less.

2. Try following the “60% Solution.” To figure out how much money to spend and save, create a monthly budget for your necessary and discretionary expenses, as well as long-term and short-term savings.

The 60% Solution is one budgeting strategy that I’ve found works well.

• The first 60% of your gross income (all of the money you have coming in for the month) goes to “committed expenses,” which includes all taxes, housing costs (rent or mortgage, plus utilities), credit card and everything else that you must pay each month.
• The next 30% goes to savings — 20% to long-term savings, including 401(k) plans, individual retirement accounts and other similar products, and 529 college savings plans, and the 10% to short-term savings like your emergency fund.
• The remaining 10% is “fun money” for you to spend on whatever you want.

3. Use a spreadsheet, software or mobile app to track your earnings and expenses: Now that you have an idea of where your money should be going, you need to know where it is going right now. Keep track of your earnings and expenses on a spreadsheet or app.

You can use a spreadsheet like Google Sheets, try budgeting software or download an app like Mint or Goodbudget. There are lots of free budgeting tools available online and for your smartphone. Find a tool that shows your income, expenses and savings goals — and helps you manage your money to improve your overall net worth.

‘I have decent savings, and I know I could be making money off it. But I’m scared of the stock market. Any advice for a beginner?’

Before you start investing, outline your priorities and your financial goals. Focus on funding emergency savings, paying off any high interest debt and contributing to retirement savings accounts.

Make sure you have at least three to six months’ worth of living expenses in an emergency fund. Top rates for high-yield savings accounts are nearly 5% right now.

Ken Tumin, founder and editor of DepositAccounts.com, recommends opening an online savings account that links to a checking account at the same bank, and then you can move cash back and forth. “That makes it real easy,” he said. “That money you don’t need right away, you can put into the savings account and get some decent yield — more than we’ve been able to get for more than 10 years.”

If you have high interest debt, like credit card debt, work on paying it off. That represents a significant return: The average rate on a credit card is more than 20%. Meanwhile, even though the overall stock market has been in recovery mode, the S&P 500, which tracks the stocks of 500 of the largest U.S. companies, is only up a little over 7% year to date.

You do want to invest your savings in stocks for the most growth over a long period of time, say the next decade or more. Start by contributing as much as you can to your retirement savings accounts at work, like a 401(k) or 403(b) plan, or on your own in a Roth IRA if your job doesn’t offer a plan. If you’re self-employed, you can contribute even more money to a Solo 401(k).

Consider investing in an S&P 500 Index fund as your initial stock investment. Investing your money in the stock market depends on your financial goals, your risk tolerance and when you’ll need the money.

Start with that S&P 500 fund as your core holding in your retirement account, suggests Winnie Sun, co-founder and managing director of Irvine, California-based Sun Group Wealth Partners and a member of the CNBC Financial Advisor Council. “You can add other stock mutual funds and exchange-traded funds as your portfolio grows,” she said. 

If you don’t want to take on much risk, stable value funds that invest in a mix of bonds may also be worth considering as interest rates are pretty high right now, she added.

Once you have an ample emergency fund and no or little high interest debt, and have contributed the maximum amount to your workplace retirement plan — or at least enough to get your employer’s matching contribution, if offered — then you can open a brokerage account to invest on your own.

Make sure you list your financial goals so you know why you are investing and when you’ll need the money: for college, a home purchase or leaving money for your loved ones. Working with a financial advisor can also help you stay on track.

‘I’m in my mid-50’s and I don’t feel like I have enough money saved up for retirement. How do I calculate how much money I will need, and how long of a retirement should I plan for?’

With inflation, many Americans worry they may not have enough money for retirement, but your life expectancy may be an even greater factor. You could live well into your 80s or longer, depending on retirement income for 15 to 20 years or more.

These two planning tips may help:

Do a “retirement checkup”: Think about at what age you want to retire or stop working full time and consider the Social Security or other benefits you would get at that time. If you’re in your mid-50s, you’ll receive your full retirement benefits from Social Security at age 67. If you retire early at 62, your benefits will be reduced by 30%. But if you delay retirement to age 70, you’ll get 124% of your full retirement benefits.

Also, consider how you’ll want to live in retirement. Will you have the same lifestyle? Downsize to a smaller home? Will you move to an area where the cost of living is lower than where you are now? Where you live and how you live can have a significant impact on your expenses.

Create a “retirement budget”: Make a trial budget for your retirement. Factor in your day-to-day expenses, like housing costs, food, health care and long-term care in the city where you plan to live.

“Roughly 70% of people age 65 and older will need some type of long-term care during their lifetime,” Sun said. “It’s a good idea to start talking about your loved ones on what your plan is if you need care and factor this into your retirement savings.”

Moving to a lower-cost area may help lower overall expenses. If you downsize, some of the costly expenses you have now, like your mortgage, may no longer exist or will be significantly reduced, decreasing your overall expenses in retirement.

Next, add up all the income you might receive in your post-working years. Factor in pension income if you have one, Social Security payments and any other dollars, such as rental income from a property, that may come your way. Match up revenue and expenses and you’ll get a good idea of what you’ll need to set aside for every year of your retirement.

If you don’t think you’ll have enough money for retirement based on your current savings, plan on working part time in the early part of your retirement — and boost your retirement plan contributions now.

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