In our modern economy, one of the major financial problems we face is what to do with our money. As small business owners, managing money is more than just turning profits, but also deciding what to do with those profits. Specifically, as we go throughout life and generate larger incomes and wealth, we increasingly understand the importance of properly allocating our resources. Every dollar you make can go to one of three possible destinations: Spending, Saving, or Giving. Finding the right balance between each can create financial stability, reduce stress, and even open doors for new opportunities. But how do you decide how much is “enough” for each category? Let’s break it down.
Spending
Spending the money that we earn is arguably the easiest of the 3 choices and requires the least amount of explanation. Money in a functioning economy is meant to be spent. Generally, the shorter time between a dollar earned and a dollar spent is an indication of a healthy economy. Spending also does not have to result in immediate personal benefits. Reinvesting the profits within a business is a good example. Therefore, it is important to understand that not all spending should be considered bad. Spending is necessary to build healthy families, businesses, and communities.
Excess spending (to each own’s definition) is when people can become unbalanced. The most obvious indication of excess spending is debt. Accumulating high-interest debt can create financial stress for families, especially if interest payments begin to take significant chunks out of the monthly income. That is why the adage to “spend less than you make” is important. There is a time to invest and leverage the assets you have, but you do not want to do so at the risk of burdening yourself past a healthy limit.
It’s helpful to think through, both on a personal level and a business level, how much income is enough. Sketching out an idea of how much you need to spend and live can give you a good indication of what to do with the rest of your money. If you take home $150,000 each year, but only need $100,000 to live on, then you can begin to plan around the remaining income (including bonuses or increases in sales) throughout the year. As the years progress, you may want to intentionally increase the level of income you need. There is nothing inherently wrong with raising your standard of living, as long as you remain balanced and spend within reason.
Saving
As a financial planner, recommending clients to save for future goals like retirement is a large part of my job. Financial literacy begins when you realize income received today must apply to your future self as much as it applies to your present self. Balancing your current standard of living with your future goals is when savings become important. If you know retirement will come at some point in the future, saving a small percentage of your income now can have major implications on your future lifestyle.
The beginning of savings is when an emergency and reserve funds start. Building up a few months of expenses in a rainy-day fund is widely regarded as a sound financial building block. Especially within a small business, having excess capital can help smooth over months when sales may be down. After that, many in the personal finance industry would recommend saving around 15% of your income or profits for retirement. While the exact answer is going to be specific to your goals, allocating 15% towards your retirement could be a healthy savings rate compared to the rest of your income.
After allocating income to the different goals you have, investments within those allocations become exceedingly important. Emergency funds and short-term savings goals usually use safer, lower-risk investments like money market funds, CDs, and/or bonds. Longer-term goals like saving for retirement decades away, through accounts like a 401k or SEP IRA, can generally have riskier investments like stocks and equity mutual funds. Remember, the purpose of saving and investing is not solely to generate more money, but to set a target in the future and work towards accomplishing it.
Giving
Depending on your stage of life, the level of giving you are comfortable with can vary dramatically. For example, people in retirement may be better positioned to give a larger percentage away than those in their working years. As with the other two choices, there is no defined right answer. Usually, though, 0% is not the wise option. Ask anyone who dedicates a portion of their income towards generosity and you can learn why it is so crucial. Especially in the Western world, one of the best ways to fight against materialism is to give money away.
People who practice tithing, or giving 10%, to their local church are a good example. Even those who are philanthropic and give regularly to their favorite charities understand the power of giving back. Starting with a giving plan is helpful when considering how much to give. How much do you realistically have available to give each year? Like most things, the extremes are not the answer. Instead, try starting small. 5% or 10% of your income dedicated to a cause you are passionate about can be a great start.
Generosity is not ultimately about money, but about positively impacting other people. Because of that, even the government attempts to incentivize you to give money away. That could be through tax deductions, donating assets that could have had large tax consequences, Donor-Advised Funds, and/or Private Foundations. Lowering your tax burden can be a simple reason why giving can positively influence you. The point is to be intentional with your giving plan as you are intentional with other areas of your financial life.
Intentionality with Money
Ultimately, a giving plan paired with a savings and spending plan can be helpful for many people. Spending money within reason is a necessary part of everyone’s financial world. Taking time to allocate money both to save for future needs as well as to impact others is important. There are no right answers to how much to spend, save, or give. But generally working towards a healthy amount in each can create more financially secure families and businesses.
TC Falkner 