Financial Planning 101Tools for Financial Success
How to budget
There are a number of reasons for creating and honoring a budget for yourself and your family. A budget or personal spending plan is a step-by-step plan for meeting your expenses in a designated period of time. Following a budget can help to improve your quality of life and help to reduce your anxiety related to finances. With a budget, you will know whether or not you have enough money to pay your bills as well as when and how those bills will get paid. The four primary steps to preparing a budget are:
- keeping track of your daily spending habits
- determining what your monthly income and expenses are the month before they are due
- finding ways of decreasing your spending and
- finding ways of increasing your income.
Tracking your daily spending
Living paycheck to paycheck and spending an entire paycheck before saving any of it is not uncommon but it's certainly not something to be desired. If this is your situation then you may feel as though you have nothing or very little to show for your hard work. Keeping a personal spending diary and recording everything that you spend can help you to be more in control of your money and understand where your money goes. Once you've completed a spending diary you can then pinpoint what spending you can eliminate or cut back on in order to pay your monthly bills and possibly save for your financial goals.
Determining your income and expenses
Determining your monthly income and expenses is the next step in budgeting. Your income can come from employment wages, public assistance, child support, alimony, social security, tips, and interest and dividends. After you complete the income and expenses worksheet, you'll know exactly what your income is and whether you have enough to cover your expenses. Be sure to record your net amounts, i.e. your gross income minus all deductions and taxes. When recording your income you should also distinguish between your regular, continuous income and income that is irregular or may stop in the near future.
When establishing a true budget, your expenses should be categorized into your fixed and flexible expenses. Your fixes expenses are bills or amounts that do not change from month to month and you don't have any control over how much you pay. Your fixed expenses include car payments, rent/mortgage and property taxes. There are also expenses that are fixed per contract but you may have the ability to change the contract by changing the services that are provided to you. For example, you may have a contract or agreement with your car insurance company to pay a premium of $435 every six months for coverage but you can change your coverage at your discretion at any time. On the other hand, your flexible expenses are amounts that can control more easily by making subtle lifestyle changes. Some examples of flexible expenses are:
- gas or transportation
- car maintenance
- food and household items
- personal expenses
Finding ways to decrease your spending
By looking at your flexible expenses you can find ways in which to reduce your spending. This is a necessity especially if your expenses exceed your income. Here are some common tips that people use to help decrease their spending:
- Only carry small amounts of cash with you so you will not spend it.
- Control and limit your use of credit cards.
- Don't go shopping for fun or just for the sake of shopping.
- Only buy what you need and avoid buying items just because they are on sale.
- Use coupons whenever possible to save money.
- Use a shopping list when grocery shopping to prevent impulse buying.
- Take your lunch to work instead of eating out.
- Shop around to get the best deal to big ticket items like cars and appliances.
- Pay your bills on time to avoid late fees, extra finance charges, utilities being turned off, eviction, repossessions, and the cost of a bad credit rating.
Finding ways to increase your income
Finding ways to increase your income can be a little more challenging than finding ways to decrease your expenses. However, there are some tax credits that you may be eligible for to increase your income. Some of the tax credits include:
- Earned Income Tax Credit (EITC) - The EITC is a federal income tax credit for people who work but don't have high incomes. It reduces the amount of tax you owe, possibly making you eligible for a refund. Income eligibility is adjusted by the Internal Revenue Service each year. You may also be eligible for the Advanced EITC, which allows you to receive a portion of the credit in each paycheck during the year. If you qualified for the Earned Income Tax Credit in the past, your may contact your employer to sign up. Keep in mind that receipt of an Earned Income Tax Credit does not effect eligibility for food stamps, housing assistance, TANF, Medicaid of Supplemental Security Income (SSI).
- Child Tax Credit - Qualifying for the Child Tax Credit may reduce your federal income tax owed and increase any refund you may receive. As of 2010 there are six tests or qualifying factors.
- Credit for Child and Dependent Care Expenses - If you pay someone to care for your child who is under the age of 13, to care for your spouse or another dependent, you may be eligible for a tax credit. There are filing requirements for child and dependent credits. Also verify whether or not your dependent needs to file a tax return.
- Education Credits - The American Opportunity, Hope, and Lifetime Learning Education Credits are possible credits and are based on the amount of qualified tuition and related expenses that you paid for each eligible student in addition to your Modified Adjusted Gross Income.
- Tax Credits for Retirement Savings Contributions- If you make eligible contributions to an individual retirement account or an employer-sponsored retirement plan, you may qualify for a tax credit
For additional information on EITC and other tax credits contact the IRS at (800) 829-1040 or visit their web site at www.irs.gov.
Additional budgeting tools
Expense Envelope System
- This tool is useful if you pay your bills in cash every month.
- Make an envelope for each expense category, such as rent, gas, electricity, and food.
- Label the envelope with the name of the category, the amount, and the due date.
- When you receive income, divide it into the amounts to cover the expenses listed on the envelope.
- Pay bills right away so you will not be tempted to spend the money on something else.
Budget Box System
- The budget box is a small box with dividers for each day of the month, with one divider for each day of the month.
- When you receive a bill, check the due date and place it behind the divider that represents the bill's due date.
- As you receive income, pay all bills that are due.
- If you have access to a personal computer, you can create your own spreadsheet.
- You may also want to purchase a person finance program which are typically less than $75.
- Using a computer to manage your finances is relatively simple. Once you set up the system, updating information is
quick and easy. It is important to enter transactions frequently to truly understand your financial position.