King Solomon said, “through wisdom is an house builded; and by understanding it is established: And by knowledge shall the chambers be filled with all precious and pleasant riches.” Proverbs 24:3-4.

One of the most effective ways that you can prepare for retirement is by contributing to your company’s 401k plan. Unfortunately, nearly 30% of individuals who have access to 401k plans decline to participate at all. For younger workers under the age of 30, less than 50% contribute to 401k plans.

Providing for a secure financial future is one of the marks of a prudent individual. Making regular contributions to a 401k plan while you’re young results in two major advantages.

1. Since you have an early start, you won’t need to contribute as much of your salary as you would if you started saving for retirement later in life.
2. Due to the power of compound interest, your nest egg will end up much larger than if you delayed saving for retirement.

The primary advantage in contributing to a 401k plan is that most companies will match your individual contributions up to a certain level. While these matching programs vary widely, the most common formula used by companies is a match of 50 cents on the dollar up to the first 6% of pay, according to the Profit Sharing/401(k) Council of America.

An individual making $50,000 per year that contributes 6% of their income to their 401k plan receives an additional $1,500 on their $3,000 contribution. The matching contribution from your employer results in an immediate 50% return on your investment. Failing to contribute at least enough to receive these matching funds is the same as declining free money.

Most companies consider their 401k matching program to be part of the overall benefits package that they offer employees. When employees fail to take advantage of this program, they are in effect declining part of their compensation package.

While it’s always recommended to contribute at least enough to receive matching funds from your company, you shouldn’t just stop there. The end result of years of savings will be affected by two factors:

1. How your investments perform?
2. How much you contribute to savings?

You may be surprised to learn that how much you contribute generally plays the biggest role in how much money you will have when you retire. So while you should start out by contributing enough to receive the maximum matching levels, you should also strive to increase your savings levels by 1-2% each year. An easy way to do this is to just increase your 401k contribution level each time you receive a salary increase. This allows you to increase your retirement savings without reducing your take-home pay.

One of those positive outcomes has been that Americans are spending less and saving more. In fact, many economists are concerned that we may never return to the levels of consumer spending that we saw just a few years ago. However, I am not nearly as optimistic. America is a nation of consumers and it’s not likely that even the worst recession since the Great Depression will change our spending habits for long. However, it seems that at least in the short term we have shifted our focus from spending to saving.

The average personal savings rate has climbed from 1% at the beginning of 2008 to its current level of slightly more than 3%. That’s certainly an improvement on the negative savings rate that we saw in 2005, when the average American was spending more than they earned. However, that’s still a far cry from the recommended 10-20% savings rates.

Unfortunately, the lack of strong savings habits has further compounded the negative effects of the current recession. Over the past two years, many of the individuals who have lost their jobs or have seen their incomes reduced had minimal savings to fall back on. The failure to save a sufficient portion of their income during the years of prosperity has come back to haunt them as they try to survive this recession.

I believe that the words of Solomon, while uttered 3,000 years ago, are still relevant today, “there is treasure to be desired and oil in the dwelling of the wise; but a foolish man spendeth it up.” Proverbs 21:20.

So how much of your income should you be saving?

The traditional rule of thumb is to save at least 10% of your income. Obviously this will vary based on many factors, but it’s important to establish a pattern of savings while you are young and then as your income increases you can save even more.

Simply saving whatever is left over at the end of each month is never a good idea, because typically nothing is. A better way to save is to have a certain amount or percentage of your paycheck automatically deposited into a savings account on a regular basis. This way you won’t have to make a decision whether or not to save money each month, because it’s already being done for you.

In order to benefit from a regular savings program, it’s good to have a savings strategy.

Emergency Fund
The first step should be to create an emergency fund for the unplanned, true emergencies that you may encounter. This would typically be $1,000 – $2,000 set aside in a savings account that you can easily get to.

Cash Stash
No matter how much you plan and prepare, there are always expenses that arrive that you didn’t account for. These may not be true emergency items that you would tap your emergency fund for, but they are still expenses that you can’t ignore. Having cash in a savings account that you can draw on will allow you to handle these expenses without incurring the ridiculous interest rates that come from using credit cards.

Safety Net
The third step will be to build out a savings nest that would allow you to survive for 6-9 months in case of a job loss or other major catastrophe. Just a couple of years ago, it seemed like unemployment was a non-issue with the official unemployment rate at 4.4%. Now the unemployment rate has spiked to 10.2% and it’s taking an average of 6 ½ months for unemployed workers to find a new job. If this recession has taught us anything it’s that the prudent man should be prepared.

Retirement Fund
The fourth step in your saving plan should be to invest for your future. Almost everyone has dreams of retirement, but simply relying on Social Security probably won’t allow you to live the lifestyle that you envisioned. While very few companies offer pensions any more, many do offer 401k plans that you can take advantage of. Many of these plans offer company matches on the amount that you contribute. A typical plan includes a 50% company match up to a certain contribution level. This allows you to instantly earn a 50% return on your investment while increasing the total percentage of your income being saved.

In addition to taking advantage of your company’s 401k plan, you should also consider further savings options. Setting up an individual retirement account (IRA) allows you to have greater control over your investment options and further increases your savings rate.

These are simply some of the basics to help you develop an effective savings plan. From here, you could set up further savings options for a vacation fund, college fund, Christmas fund, etc. While many people will soon return to their free spending ways and neglect their savings, the wise individuals will learn from the experiences of this recession and will be better prepared for the next one.

Spending more money than you earn is certainly becoming less accepted behavior in today’s society. New credit card offers no longer arrive in your mail on a daily basis. The lack of easy credit is forcing both corporate America and individual consumers to relearn the proper habits of financial responsibility. However, the Bible has always set forth the principles of budgeting. “Be thou diligent to know the state of thy flocks, and look well to thy herds. For riches are not for ever: and doth the crown endure to every generation?” Proverbs 27:23-24. 

So just how does an individual go about setting up a budget? 

The very first thing you should do is sit down and list out all of your monthly expenses. Next, you need to compare these expenses against your income. Then you can begin to layout a monthly budget by expense category to help you better manage your finances. 

Tithes & Offerings

At the very top of any budget you prepare should be a category for tithes and offerings. All that we have came from the Lord and so He deserves to be paid first and not just with anything that happens to be left over. “Thou shalt not delay to offer the first of thy ripe fruits” Exodus 22:29. 

At a minimum, you should be giving 10% of your income to the Lord, but this truly is a minimum. As your income increases so should your level of giving. I’m not just talking about the total amount increasing, but it should increase as a percentage of your income as well. You may be giving 10% when you’re making $30,000, but you should be giving much more than 10% when you’re making $100,000. 

Savings & Retirement

It’s important to get into the habit of setting aside a portion of your income for savings. In this recessionary environment, many individuals are bemoaning the fact that they have so little set aside in savings. 

While you should certainly strive to save as much as you can, a good rule of thumb is to try and save 10% of your income. These savings goals should strive to provide 1) at least six months income in case of a job loss or other economic catastrophe, 2) an emergency fund for those unplanned expenses, and 3) money for vacations or other fun items. 

In addition to a regular savings pattern, you should also be contributing towards a retirement fund. Many employers offer 401k plans that provide company matching of your contributions. You should always try to contribute the maximum amount to the plan that your company will match. After all this is basically free money and it would be foolish to not take advantage of it. 

Housing

Undoubtedly the biggest single expense in your budget will be for your home. It is also a fixed monthly amount with little you can do to change that (outside of buying a cheaper house or possibly refinancing to a lower interest rate). So it’s very important that you when you initially buy a home, you buy one that you know you can afford. Your monthly house payments (including property taxes and insurance) should not exceed 30% of your income and a good target is 25% of your gross income. 

Transportation

The other major expense item in your budget is your car payment. Outside of a house, a car is the only other item you should ever have to go in debt to purchase. While some say you could spend up to 20% of you net income on a car, I would strongly recommend keeping this number below 10%. 

Utilities

Energy bills, water bills, phone bills, etc. they all add up. While many of these costs are beyond your control, there are steps you can take to reduce these expenses. A programmable thermostat can provide significant savings (especially if you are gone during the day). Do you really need both a home phone and a cell phone? Just switching to a cheaper plan can provide some savings each month…and every little bit helps. 

Food

Grocery costs can vary greatly from one family to another. However, it’s generally the one area of your budget that you have the most control over. Many people are surprised to find out how much they spend each month just by going out to eat or ordering pizza every week. Creating a good budget doesn’t mean you have start eating hot dogs every night either. However, maybe instead of going out to eat a steak dinner and spending $50 or more, buy some nice steaks for $10 and eat at home. You still get to treat yourself to something a little special without completely blowing through your grocery budget. 

Also, don’t forget coupons as a great way to save a few extra dollars each month. Spending a few minutes perusing the Sunday paper or visiting online can end up saving you several dollars. If you’re making a purchase online a great website to check is www.RetailMeNot.com. They often provide coupon codes that can save you 10-20% off your purchase price. 

Other Expenses

Clothes, magazine subscriptions, Netflix, cable tv, Starbucks, etc. these miscellaneous expenses can really add up. It’s not necessarily wrong to spend money on these items, but you have to make sure you only spend what you can afford. Carefully review how much you spend on these items each month – a good rule of thumb is that these expenses shouldn’t be more than 5-7% of your total income. 

Of course these are not hard and fast rules by any means, but simply guides you can use to help you in constructing your budget. No two budgets will be identical. As your income increases you should be able to spend less as a percentage of your income on your monthly expenses and contribute a greater percentage towards your charitable giving and savings.