Budgeting and Savings
Money is a necessity of life. This is why it is so important to manage
your money wisely and start saving early. Making smart decisions
now will prepare you for the future and will make your financial
dreams come true. Below are some tips on how to make your
dreams a reality.
BUDGETING
If you want to gain control over your personal finances, you must first
figure out exactly where your money is going every month. Keeping track
of every expense for one month can be a real eye-opener. You might be
surprised to learn how much your family spends on unnecessary things.
Have every family member keep track of every penny spent for an entire
month. Each person can carry a small notebook, record every
expense, whether in cash, by check, on a credit or debit card
or through an automatic deduction from a bank account. Be
sure to indicate exactly what the money was spent on. At the
end of the month, list every expense according to the following
categories:
Needs
- Rent/mortgage payment
- Home maintenance/repair
- Home/renter's insurance
- Groceries
- Home supplies (cleaning products, paper towels, etc.)
- Utilities (gas, electricity, water, garbage service)
- Transportation (car payment, gas, car repair, public transit)
- Health insurance/medical expenses
- Education
- Alimony/child support
- Car and home/renter's insurance, vehicle registration, property
taxes (figure out one month's worth of the annual expense)
Wants
- Food and drinks purchased away from home
- Clothing and accessories
- Cosmetics
- Internet hookups
- Telephones
- Pet expenses (food, toys, boarding, vet bills)
- Entertainment (cable TV, movies, video rentals, concerts, magazines)
- Vacations, dues and subscriptions (divide a year's worth of expense
by 12 to determine an average monthly expense)
- Interest on credit card balances, other non-mortgage loans
- Gifts/Charitable contributions
If your family barely makes it from paycheck to paycheck without running
out of money, your list of expenses will show you why. Recognize the
difference between your expenses for things you need compared to things
you want. If you need to reduce spending, identify the "wants"
items that can be eliminated or trimmed without significantly affecting
your lifestyle.
Decide how to allocate your monthly income among your expense items
to create a monthly budget for future spending. Make sure
all family members understand what types of expenses they
need to restrict, and compare your monthly expenses to your
budget numbers every month.
To gain control of your personal finances, it's also important
to set financial goals for the future. A nice vacation, a
new home or automobile, education/training for your children,
retirement income and a nest egg to cover emergencies must
be planned and saved for. The best way to reach those goals
is to add another item to your "Needs" list - Savings.
The more you can allocate to that category every month, the
better. But saving even a small amount every month is critical
if you hope to ever reach your life goals. Saving for the
future rather than spending on items your family wants now
requires discipline, but you will find that it is well worth
the effort.
SAVING FOR THE FUTURE
If you want to:
- Set aside money for emergencies
- Make a major purchase
- Take a nice vacation
- Pay for a child's education
- Prepare for retirement
. . . you must save some of the money you earn instead of spending
it right away. The easiest way to save is to put an amount each month
in a savings account as soon as you get paid and before you have a chance
to spend it on something you don't really need.
Think about this: If you set aside just $10 a week starting when you
are 25 and put it in an account earning 4 percent compound interest,
you will have saved about $2,800 by the time you are 30, about $16,000
at age 45, and about $40,000 at age 60. If you save more than $10 a
week or earn more than 4 percent, you will save much more over time.
Your savings grow because of compound interest that the institution
pays on your deposits. Interest is compounded because as soon as it
is earned (daily, monthly or annually), it is added to your account
and that interest then earns interest too.
If you saved $10 a week at home for 10 years, you would have $5,200.
But if you put that $10 a week into an account earning 4 percent compound
interest, you would have about $6,300 in 10 years. The $1,100 difference
is from the compound interest.
Saving a set amount from each paycheck is the first step. You should
try to increase that amount if you earn more or if your monthly
expenses can be reduced.
Whenever possible, it makes more sense to save for a major
purchase in advance rather than to borrow money to pay for
it. Say you want to buy furniture costing $5,000. If you save
up beforehand and pay cash, you will spend just the $5,000.
If you borrow $5,000 with a consumer installment loan for
three years at an annual percentage rate (APR) of 14 percent
(which includes the interest rate and fees), you'll wind up
paying $6,152 for your $5,000 worth of furniture because of
the cost of the loan.
Savings accounts at banks, savings and loans and credit unions are
insured by the federal government, up to $100,000 for each depositor
in each institution. Even if the company goes out of business, your
savings are fully protected up to the insurance limit and the government
will repay your full amount, including interest earned, usually in just
a few days. You are not at risk of losing your federally insured savings.
Banks offer several kinds of savings accounts. In some, you can withdraw
your money whenever you want without being charged a penalty.
Other accounts, which usually pay higher interest, may charge
a penalty if you withdraw your money earlier than you agreed
to when you opened the account. In many cases, you can arrange
to have your savings moved from a checking account into a
savings account automatically every month, ensuring that your
savings will grow steadily.
PLANNING FOR RETIREMENT
Ensuring your financial security in your older years requires planning,
starting now, whatever your age.
You will need at least 70 percent of your pre-retirement income to
maintain your standard of living when you stop working. People with
relatively low incomes may need 90 percent.
Social Security will probably pay you less than half of what you'll
need, so you must develop other sources of income to make up the difference.
Take the following steps to ensure that you'll have an adequate retirement
income when you need it:
- Call the Social Security Administration at 800/772-1213 for a free
estimate of your expected retirement benefits.
- Start saving from every paycheck. Decide how much you can save
every month, then deposit it into a savings or investment account
as soon as you are paid. You can arrange to have savings deposited
automatically to make sure your savings grow consistently.
- Find out whether you and your spouse have pension or profit-sharing
plans with your current and past employers. When you leave a job,
roll over all the benefits you have earned into another eligible retirement
plan.
- Contribute to your employer's 401(k) or other plan that allows
you to shelter some income from taxes and perhaps receive matching
amounts from your employer.
- Put money into an individual retirement account (IRA) every year
to delay paying taxes on your investment earnings until retirement
age. You might also be able to take a tax deduction for your contributions.
- Don't dip into your retirement funds for any reason.
- Remember that taxes and inflation will reduce the value of your
retirement funds over time.
- Diversify your investments among companies, economic sectors and
degrees of risk. Don't rely on stock in the company you work for.
- Get advice from a professional financial advisor. Savings and investment
opportunities are numerous and complicated. Some banks provide this
service for free.
- If you own a home, investigate reverse mortgages. You may be able
to live in your home for the rest of your life while receiving monthly
payments.
- Review your retirement strategy and your progress toward your goals
every year, and adjust your savings and investments accordingly.
Remember that you, not the government, are responsible for ensuring
that you'll have enough retirement income to live comfortably in your
older years.
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