Budget Your Way to a Better Tomorrow
You may cringe when you hear the word budget, but a budget doesn’t have to be a bad thing. Most often you hear a budget in regards to tightening down your spending and you envision this as giving up the things you enjoy and perhaps feel entitled to after a time of doing without.
The real purpose of budgeting is not to punish you or try to make you the kind of person you don’t want to be. Rather, a budget is an accounting of your spending habits so that you can anticipate your monthly expenses and start sending money to the bank. And the money in the bank is the ultimate reward. It offers peace of mind and real perks such as early retirement and major investments such as a new home. For those who are having trouble paying bills and keeping up, a budget will help manage the debt and improve your credit profile. Surely that’s worth giving up a few lattes…
Find Your Savings
If you’re already saving, you are well ahead of the majority of people today. But it could very well be that you’re not saving as much as you could (or should.) Creating first an outline of current spending and then a budget to help eliminate waste can help you find more money to throw into savings to buy you that early retirement.
Begin the Budget
If you are technologically savvy, you may enjoy using software such as Quicken to work through your budget. But you can track spending and create a budget on the back of a napkin if it’s large enough. Your first step is to keep track of all your spending for the month. Be sure to include everything in detail. Just how many cups of premium coffee are you drinking and what about those trips to the vending machines? Of course your bills are included, but it’s often the small items that add up and are overlooked when putting a budget together.
Once you have your list of expenses begin sorting them into categories. This is where financial software may have terrific advantages. That’s not to mention the software can also connect directly to your bank letting you skip a time consuming step or two.
Your categories should include fixed necessities such as mortgages, car loans and insurance. Then consider your other necessities such as groceries, utilities and phone service. Finally, dump the rest of your spending into unnecessary spending. If you’re enjoying your software you can sort it into categories such as entertainment and clothing, but that isn’t necessary for creating a basic budget.
Create the Budget
Create your budget based on two things – your income and your expenses. Your income should be the first item on the list. Include your salary and any other money you make during the month whether it is from investment or alimony. Then, start deducting expenses. Obviously fixed necessities will go first followed by other necessities. Unnecessary items will bring up the rear.
If you find you should have money left over on paper each month, but don’t in actuality, you likely left off some of your spending or just spent less this month, which can easily happen if you’re suddenly recording every dollar you spend. But that’s actually a good thing. Money left over after a month without a budget can go immediately to savings. Obviously you don’t need it, so save it.
Then, examine the rest of the budget. Are there obvious areas you can cut such as premium cable channels you don’t watch or five trips to the vending machines a day? What if you ate out less frequently or chose less expensive restaurants? How much could you save by giving up your home phone and just using a cell phone?
Trim as much excess as you can without making your budget uncomfortably tight and then commit those savings to a separate bank account. Over time, that account will grow nicely. As you get raises and windfalls, save at least a large portion of that money to increase your savings as you should be living comfortably within your budget. If you find your budget is too tight, look for extra items that you can do without to give yourself more money for the things you need. Try to avoid taking money out of savings as it is doing much more for you earning interest for the future.
Pay Off Debt or Save? Do Both!
If you’re living from one paycheck to the next, you’re likely just biding time until an emergency forces you into debt. If you manage to pay the bills but have nothing left for savings, or worse, you have to borrow from one source to pay bills to another, you have a budgeting and possibly a debt problem to solve.
But if you’re taking care of your debt, should you be concerned about savings, too? The short answer is yes. If you’re struggling to find money to save every month, it is likely the lack of savings got you so tied up in debt initially. If you’d had some money in savings over the holidays, you wouldn’t still be paying off Christmas presents in July. There are ways to save while you pay off debt, and you should really be doing as much of both as possible. With your hard work and dedication, you should have your finances turned around completely within the year.
Understand Your Position
If you’re going to save and pay off debt at the same time, you need to first understand your total financial picture. Take some time to pull together your records. How much do you have in savings currently? Where is it located – retirement funds or liquid assets?
Then work through your monthly expenses. How much are you spending and where? Find all of the small expenses you make throughout the month to gain a good overall representation for where your money goes. Subtract your total expenses from your total income. If there is money left over, you automatically have funds to start paying down debt and build savings. If you’re currently spending more than you’re making you can see where that debt is coming from and can start working to reduce it. Of course you’ll have to cut expenses in the meantime.
Using Savings to Pay Debt
If you find that you have money in savings accounts other than retirement, but also have credit card debt, you may be able to take care of your debt problem in one fell swoop. Don’t use all of your savings to pay debt. Subtract the amount you expect to spend over the next year or two from what you currently have in savings (plus a little cushion for emergencies) and then use the rest to pay off the credit cards with the highest interest rate.
If you can pay off all of your debt, do so as long as you’re not compromising your security or retirement. Then take the minimum payments you’ve been using to keep your debt alive and immediately return the money to savings over the course of the next few months. You should also budget to find more money to save as minimum payments aren’t likely to add up very quickly. Unfortunately, most people in trouble with debt don’t have any savings to speak of. This means they must save for emergencies while trying to rid themselves of the credit card debt the last emergency left behind.
Build Savings
To build savings, begin by working with your budget to see what areas can be trimmed. Then allocate a portion of the money that is not being used for bills to savings and save the rest for debt. The money going toward savings should be deposited directly into a bank savings account or money market account if possible. Arrange to have the savings pulled from your paycheck and deposited into a separate savings account before you even see the money. If you don’t see it, it’s unlikely that you’ll miss it. Initially your savings will be small, but as you pay off your debt, rather than using that money for new items, roll over the money usually reserved for debt payments into your savings accounts. When all debt is cleared and you’re saving all that money you used to be spending, your accounts will grow very quickly indeed.
Paying Debt
You’ve allocated a certain portion, probably no more than half, of your variable cash to savings. The rest goes to pay off your debt. The more money you have to allocate to credit card payments, the more quickly they will be paid off. Of course, if you neglect to save, you’ll just run your credit card back up when you need to pay for something unexpectedly. To maximize both savings and pay offs, tighten your budget as much as possible, at least for awhile. Eat in and give up some luxuries until your finances are back under control.
To pay off your debt as quickly as possible, start by arranging all of your loans and credit cards by interest rate. Revolving credit lines, such as credit cards come before installment debt. Arrange them by interest rate rather than balance. Credit cards with higher interest rates cost considerably more while you maintain a balance.
Stop spending on all of your credit cards and pay the minimum on all but one. The credit card with the highest interest rate goes first. Pay it down with the money you’ve found for credit resolution. When that card is done, close the account and start on the next one. This time, you’ll be able to use the money you found in the budget plus the minimum payment you’re no longer spending on the other card. By the time you get to the last loan on your list, you should be able to pay it off in record time thanks to the large sum of old minimum payments that get sent to it every month. When that last loan is paid off, send all of the now free money over to savings to help supplement that account as much as possible.
Plan for the Future
Paying down debt and saving adequately are both long term investments of time and money. But they are both extremely worthwhile which is why you should arrange a debt payment plan and savings arrangement that works for you and helps you meet your goals – even if it takes years.
Five Ways Save Money and Avoid Credit Card Debt
Too much debt is problems for far too many people. Credit card debt is generally the largest reason why so many of people into debt and have difficulty paying their bills. You don’t have to be a pawn of the credit card companies or fall victim to the credit card advertisements that reenforce this attitude of easy credit.
It’s easy credit for the credit card companies to seduce consumers with easy credit and walk away with a pile of cash. They make money from the merchant and by charging the card holder interest charges, late fees, annual fees, increased default rates and I am sure there is a thieving banker right now trying to invent yet another charge to throw on to the credit card bill. These interest rates and charges make you wonder where they stash all the cash they are reeling in. Just look at the standard bank savings account and money market account and compare that to the double digit credit card interest rates.
You don’t have to make the bankers rich and you can have control over your financial health without depending on a credit card. While reviewing techniques to avoid credit card debt and increase your savings, keeping track of your finances and a budget before you break out a credit card is the number one rule to avoiding credit card debt. Budget, budget, budget and don’t feed the thieving bankers.
1. Understand Your Credit Card
You should always know the deadlines and limits on your credit cards. Be aware of when your payments are due, and don’t mess around. Credit card companies love being able to charge late payment fees, which typically range from $25 to $39 regardless of whether you’re one day late or ten.
Many credit cards will also raise your interest rate the first chance they get. Low introductory interest rates only stay in place as long as you make your payments on time. The companies also report late payments to credit bureaus, which will lower your credit score.
Know what the spending limits are for your credit cards, and don’t get to close to it. If a late fee puts you over your spending limit or you forget and charge too much, an additional over-the-limit fee will be added to your bill.
2. Pay the Balance off Each Month
Paying off your credit card balances in full each month is ideal. If you can’t do this, you are overspending and living beyond your means. By paying the balance in full, you will save a lot of money in the long run by not paying interest on your purchases. Also, if you roll over your credit card balances from month to month, most companies make you pay interest on purchases immediately. Since most consumers can’t pay the full balance every month, at least try to save more money by paying more than the minimum amount due.
3. Limit the Number of Credit Cards You Have
Opening a new store credit card to save 20% on a purchase isn’t a great deal if it entices you spend until you max out the card. If you know that you can’t handle the temptation of having credit cards without using them, this tip is very important. A lot of people keep their card balances at the spending limit. Opening new accounts will only leave you deeper in debt. Don’t carry more credit cards than you can afford. Most people only need one or two.
Having a number of credit cards also means there is more information to keep track of. With various payments and due dates, it’s a lot easier to make a mistake and send in a late payment. One late payment could raise the interest rates on all of your credit cards. Multiple late payments will damage your credit score.
4. Stay Away From Cash Advances
The only time a cash advance is acceptable is in an emergency situation where you must have cash, and you have no other options. Don’t make a habit of taking out cash advances for convenience. Using your credit card this way is very expensive.
To start with, a fee of around three percent is usually charged on all cash advances right away. The also carry higher interest rates than you are normally charged for purchases, and this interest is charged immediately when you borrow the money.
5. Use Cash
Hardly anyone uses cash for purchases these days, but it might be a good idea. Carrying cash is a great way to control your spending. After all, you can’t spend more cash than you have in your hand. Compared to plastic, most people pay more attention to prices when they see the actual money going. Managing your budget is far easier with cash. And anyone who has tried knows that setting up a budget is not always easy. When you stick with cash you know how much money you have available and you don’t easily fall into a trap of buying something that does not fit your budget.
Always remember that goods and services beyond your needs do not bring happiness. A granite counter top does what? Cleans up spills by itself? An Escalade or Ford Focus? One is better for the environment, costs less, loses less value per year and is cheaper to operate. What does the Escalade do? Maybe it goes in a direction the Focus can’t. Happiness and true rewards are what is inside not physical possessions.
Start Your Finances Correctly
Congratulations! You’ve completed school and/or training and are now ready to begin your new career. When starting out in the workforce, how you handle those paychecks can have a major impact on your future. Starting your financial future on the right path can give you security and peace of mind well into the future.
Clear Debts
Your first step is to clear out all existing debt. It is likely that you have college loans and credit card debt. Your paycheck should help to clean up those accounts. Spend as much as possible each pay period on paying down old loans. You may have to get creative to find funds to throw at old balances every month, so don’t be afraid to buy a used car, live with a roommate or settle for a smaller apartment. Managing your spending by reducing credit card debt and credit card use is a key process. Every dollar you spend buying down debt is one you have invested in your future security. You can’t say the same for heated seats in a new car.
To help you clear debts, consider consolidating student loans. If you qualify for consolidation packages, the term of your loans may lengthen, but you’ll be paying less each month freeing up some cash to use on paying down credit card debt which undoubtedly has a higher interest rate. Be sure to evaluate the options first, in a rising interest rate environment the costs of the student loan consolidation may exceed the savings.
Start Saving
Once you have your debt under control, and possibly before if you’re working on a very large amount of debt, you need to begin saving. Arrange with your bank for a portion of your directly deposited paycheck to be whisked away to a savings account before you even see it. This will help you avoid the temptation of “extra” money and it will also make savings easy.
Set up a realistic budget and be sure to include savings. Then, simply arrange for the budgeted amount to be removed from the check before you see it and the rest of your funds are available to be spent as you’ve arranged.
Ideally, your first set of savings should be liquid assets enough to cover three to six months of living expenses. You can begin saving in an interest bearing checking account or statement savings account, but once you’ve reached the minimum deposit, move your money into an account with a greater yield. Money market accounts are liquid investments in safe vehicles offered by most banks. Bank money market accounts offer a higher rate of return and usually have stable rates of return, and still have guaranteed principal due to the FDIC guarantee on bank accounts.
The next step for savings is to become diversified and spread your investments out over different assets classes. Start small with a mutual fund and grow from there. Automatic deposits that can be taken directly from your checking account works great for these investments as well. The deposits can be small and the periodic investments over time mean you engage in dollar cost averaging where you are buying the same amount of a mutual fund every month regardless of the share value. This helps to stay diversified.
Get Insured
After you’ve established a steady savings plan, or preferably at the same time, find insurance. You need health insurance and might consider life insurance as well. Although at the age of twenty-five, it is far more likely that you will become disabled rather than die, so strongly consider obtaining disability insurance.
Your employer may offer these insurance packages or facilitate packages through other vendors. But if not, research insurance rates and coverage on your own and arrange to be protected.
Retirement Savings
Once you’ve met your goal of three months spending in short-term savings, turn your attention to your retirement and long-term goals. Your company may offer a retirement fund such as a 401k, and if so you should take advantage of it. If your company offers a matching contribution, regardless of other savings, contribute the percentage that the company matches. The more you save early in your career, the more that money grows. And there is almost never a good reason to turn away free money.
If your company does not offer a 401k, or even it does, research other retirement options as your alternative or supplemental choice. An individual retirement account, or IRA, is an excellent tool for retirement investing. A Roth IRA is also an excellent choice but has certain conditions that must be met. If you meet those conditions, you can invest after tax earnings in a Roth IRA to be pulled out tax free after the age of 59 ½. In 2007, you’re able to contribute $4,000 annually to an IRA.
Credit
Spend some time planning your credit’s future as well. Find a credit card that will suit your needs but also meet your financial goals. Consider the fees, interest rate, grace period and terms and conditions when selecting a credit card. Incentives are worth considering as well, but be sure you take into account your personal spending and payment habits.
Move Forward
Finally, move forward with your life both in a financial and realistic sense. Working early on to develop healthy savings habits will benefit you tremendously in the long run. Also a healthy savings habit will endure over time once you’ve learned to live within your budget and designate funds for savings every month. Soon you’ll be able to relax and enjoy peace of mind rather than worrying about making it from one paycheck to the next.
Spend Less on the Holidays
The holidays are a time of family, rejoicing, and buying. Those holiday expenses can really add up quickly, and many a careful budget has fallen prey to the month of December. Last minute deals, unexpected guests and items that are too good to pass up all contribute to make the holidays very expensive.
Plan for the Holidays
To help eliminate some of the overblown expenses in the month of December, you should start planning a full year in advance. If you know that you traditionally spend around $1,000 on gifts, decorations, parties, dinners and babysitting, put $100 a month into a special account just for the holidays. In December, empty the account as you celebrate, and then in January you can start celebrating for the next year. These savings help you avoid using credit cards and costly finance charges.
In addition to savings based on an estimate, you should be preparing a budget as to how much you actually plan to spend on each gift recipient on your list. You’ll also need to include any extra baking supplies, decorations, or special events of the holiday seasons such as special performances or trips to see relatives.
Prepare your budget immediately following this year’s season to be sure you don’t forget anything. Then, compare your savings to your budget. If there is a large disparity, you’ll need to find items to reduce on your budget or save more every month.
Holiday Savings
One of the best ways to reduce your holiday spending is to buy when you find gifts on sale throughout the year. Rather than waiting until the sales in December, buy a gift or two as you see it in the store – be it January or August. You should most definitely purchase wrapping supplies and new decorations immediately following Christmas to save more than half of what you’d have to spend next year. Store your holiday stash in a closet and add to it as the opportunities arise.
Rather than buying a present for every sibling and spouse on your list, put everyone’s name in a hat and draw. This lets you buy a single present, presumably spend a bit time and money finding just the right thing, and avoid having to buy for the five others you would normally have to give at least a token gift.
Speaking of token gifts, rather than breaking the bank on something elaborate, give a small gift of gourmet chocolates or picture frame along with a handmade item or the gift of time. Create a coupon for a free night of babysitting for your sibling with children. Take your children on a special outing or arrange a family trip rather than buying many expensive gifts.
For families that seem to have everything, arrange a present that is truly unique and customized. Order a magazine subscription or name a star after the family. When you take time to find a gift that suits the personality of the recipient, you don’t’ need to spend much. It may very well be that your CD compilation and clever coffee mug are the best presents she gets this year – if only because you’re the only one who took time to personalize her gift. The amount of money spent never decides the true value of a gift.
Planning a Vacation of Value
A vacation can be a very valuable thing. Studies have shown that vacations help to break the cycle of work and give you a fresh outlook and higher productivity. They also help to reduce stress which is a tremendous plus in all aspects of life. But a high-priced vacation isn’t necessarily the most valuable for you overall. It could be that a last minute jaunt for a steeply discounted price gives you all the rewards of a luxury resort without the worry about breaking the bank.
Stick Close to Home
Some of the best vacations may be in your own backyard. Rather than buying plane tickets and arranging a rental car, consider a drive to a national park in your area or to a city a few hours away. You’ll be away from home with new sights and scenery, but you’ll also be saving quite a bit without having to book a flight. Driving also gives you much greater flexibility when it comes to exploring as you’ll have a car along with carseats and the comforts of home readily available to take a day trip or just check out the local hot spots.
Take Advantage of Packages
Packaged travel is almost always less expensive than arranging a trip a la carte. To get a truly great deal, sign up to major travel websites and receive email alerts of last minute specials. Book these vacation packages a few days or a week from now and you can save 75% off the price others have paid. You’ll be taking up the unsold seats on a plane or the unfilled hotel rooms which are why you can arrange such as bargain. Of course, you’ll have to be flexible to find a last minute deal, but even a not-so-last minute deal can offer you savings over a traditional trip.
Go When Others Aren’t
If you want to go to Disney World, you should go when the others aren’t there. School children are free to travel over the Christmas holidays, spring break and summer. So plan on heading to Disney World in October or February when all the children are in classes and the parks have less people, shorter lines and more to see and do.
The same is true of golfing or beach vacations. Pick a destination and research when the off season occurs. Then book your travel during that time. Be leery of booking travel in the Caribbean during the peak of hurricane season (August – October), but if you do, you may be able to secure fabulous deals for being willing to take the risk.
Check Out Member Benefits
If you’re a member of a professional organization or a fraternity of some kind, look into the perks that membership brings you. Likewise, check out your insurance perks and credit card advantages. It just may be that you can get an overall discount or at least add a day for free at your hotel.
Take a Drive
Stay a bit away from the action and you’ll be able to save. Rather than staying at the base of the mountain only footsteps from the lifts, consider a ski vacation rental which requires taking the bus or driving. Likewise consider a hotel farther away for any theme parks. The farther you’re willing to drive for the day’s adventures, the more you’re likely to save. Just remember there is a balancing point between hassles and benefits. Be sure to consider your own tolerance for drive times, traffic and toddlers in car seats before booking the hotel thirty minutes from the Magic Kingdom.
Learning the Value of Money Starts Early
You can teach your children the value of money almost as easily as they can learn to count their pennies and quarters. The fact that they even have pennies and quarters to count is a huge step in the right direction. Teaching your children about personal finance will serve them with a life lesson arguably more valuable than any other.
The Source of Money
Children are often confused as to the source of money. It appears in your wallet or at the ATM machine, so why shouldn’t they wonder if it just appears when you need it. Consider carefully any question you child asks about money as it will be a valuable learning opportunity. If she asks for a dollar, rather than giving her the flip, “Do you think money grows on trees” response, explain to her how you worked to earn those dollars and you don’t know about just giving them away.
Set up a way for your child to earn money. An allowance may be tied to chores, or it may not. But offer your child a chance to make a few dollars by watering the plants or taking on a chore outside of their normal range of household duties. Then pay her for her efforts. It won’t take long to learn that work brings rewards and those rewards pay for the fun stuff in life and can be further used for savings and investing.
Children and Savings
Of course as fun as is it to spend every dollar you make, that is not the best example of wise financial planning. Instead help your children understand the value of saving money for the things they want. When your child asks for a new toy at the store tell her to save her own money. If it’s particularly expensive, offer her a deal to match her funds or pay the bulk of the price when she reaches a certain target savings goal.
To help your child learn to save, start a piggy bank. Put all of the spare change around the house in the bank to give it a satisfying rattle and add to it on a regular basis. Give your child some coins as part of her allowance so she can save those even if she spend the bills. Encourage her to save the bills as well.
When she’s saved enough, take a trip to your bank to see about opening a children’s savings account. She won’t understand the formulas for accruing interest, but she can see the result in a statement every month or as she deposits a bit more over time.
Investing
You can help your child learn about investing by giving her a piece of a favorite company – stocks. Buy her a few shares and when she is old enough to do the math, let her help you figure out their current worth and how much money she’s made. Let her keep the stocks, adding to them over the years to build a nice portfolio to start her adult investing. She will not only have a foundation of stocks and savings, but the knowledge you’ve worked so hard to impart over her childhood.