- Budget each paycheck – I went over budgeting in my last post, so for more specific budgeting information, please refer to that.
- Sort your expenses – There will be bills that you can't make envelopes for, like bills paid by check or automatic withdrawal. You can create categories for food, gas, clothes, and entertainment. Be sure to only create categories that it makes sense to pay cash for.
- Put in the money – Now it's time to actually take all your cash and divide it up in your envelopes according to your budgeted amounts. For example, if you budgeted $250 for food, put $250 cash is the envelope marked "Food".
- Once it's gone, it's gone – Once you've spent all the money you allotted for one category, you can't spend any more money in that area. If you go out and blow all your clothes money in one day, that's it. You won't allowed to spend any more on clothes for the month. That means no trips to the ATM to get more money.
- Resist urges – While paying with debit cards doesn't usually land you in a pile of debt, they can make you overspend. Like I said earlier, paying cash hurts more than swiping a little plastic card. When you spend cash only, spending less and resisting impulse buys becomes a habit.
- Give it time – It will take a few months for you to perfect your envelope system. Don't give up after a month or two if it's not clicking. You'll get the hang of it and see how beneficial the envelope system is as you dump debt, build wealth, and achieve financial peace! See ... simple!
Wednesday, March 30, 2011
Friday, March 25, 2011
A budget is necessary for successful financial planning. The common financial problems of overusing credit, lacking a regular savings program, and failing to ensure future financial security can be minimized through budgeting. The main purposes of a budget are to help you:
- Live within your income.
- Spend your money wisely.
- Reach your financial goals.
- Prepare for financial emergencies.
- Develop wise financial management habits
The Budgeting Process
In order to make and keep a budget, you'll have to put in some time and effort, but in the long run it will be worth it. The most common budgeting mistakes people make are failing to save, never making a budget, underestimating expenses, and not planning for large costs (vacations, auto repairs, etc.). The cause of these problems is people believe creating a budget is just too difficult or they don't have enough time. To make it easier, you can break it down into steps:
- Set Financial Goals
I've said this before, and I'll say it again because it's important. You must set financial goals for yourself. Goals can help you build long-term wealth, and not having any can lead to financial disaster. Your goals should be specific, realistic, and have a definite time frame.
- Estimate Your Income
This one should be easy. Just add up all the income you get in an average month, and use that to start planning your finances. Be sure not to include any income that isn't guaranteed, like gifts, bonuses, and overtime pay. Budgeting income may be difficult if your earnings vary by season or are irregular. In these cases, try to estimate your income based on last year and on your expectations for the current year. Estimating your income on the low side will he;p you avoid overspending and other financial difficulties.
- Budget for an Emergency Saving Fund
Dave Ramsey says this a lot, and it's good advice. Everyone should have at least $1,000 in an emergency fund in case something completely random happens (your car breaking down, surprise hospital bills, your roof collapsing). Obviously, the bigger the emergency fund, the better. The size of your fund will be largely determined by your lifestyle and employment stability. The ideal emergency fund will be large enough to support you for about 3 to 6 months of no income.
- Budget Fixed Expenses
Pretty self-explanatory, but theses should be listed first because they rarely change. Things like a mortgage, auto loan, insurance payments are fixed expenses. Unfortunately, they're the hardest to bring down.
- Budget Variable Expenses
Another self-explanatory one. These expenses are harder to budget for because they fluctuate, or vary (see the correlation there?), often. Budgeting high for these costs is often a good idea. If you don't spend as much as predicted, you'll have money left over to put into other areas of the budget.
- Record Spending Amounts
Make sure you keep track of how much you spend on certain items so you can compare your actual spending to the amount in your budget. If you overspend, don't sweat it. When people overspend, they feel like they failed and end up stopping making budgets altogether. Just accept that you spent over your expectations, and try to do better next month.
- Review Spending and Saving Patterns
Budgeting is a circular, on-going process. You will need to review you budget periodically and perhaps revise it if your spending habits have changed.
Microsoft Excel (or Numbers on a Mac) is an invaluable tool for budgeting and financial planning. It can simplify the process, and make analysis a breeze.
Tuesday, March 22, 2011
Microlending was designed to help poor people in developing countries get access to capital to start small businesses, and is becoming increasingly popular. The site that got ball rolling, kiva.org, allows you to make very small loans to poor entrepreneurs in developing countries. With Kiva, you're allowed to pick the person you want to make a loan to, send the money ($25 minimum), get your money back, and repeat. But since Kiva is not a registered broker and is a non-profit organization, you'll get no interest on your principal. Even if you didn't make money off of your donation, you can feel good knowing that you helped some poor person in a far-away country make something of himself.
If you want to help people but make a little interest (1-3%) doing it, you'll want to take a look at microplace.com. Unlike Kiva, Microplace is a registered broker and you'll make interest off of your donation, which with this site is technically an investment. The minimum investment amount is $20 and you can increase that number to whatever you want to give. As stated earlier, the current interest rates range from 1 to 3 percent, beating many investments today. With Microplace, you won't be able to pick and choose from different entrepreneurs, but instead you'll pick different organizations to invest money with. I would suggest going for the highest interest rate, but as always with greater reward, there is greater risk. The repayment rate for both Kiva and Microplace are in the high-nineties, 97% and 96%, respectively.
There is some debate, however, about whether or not microloans are actually helping the poor. You can read it about it here and here.
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Thursday, March 17, 2011
Contributions are not tax deductible
No Mandatory Distribution Age
All earnings and principal are 100% tax free if rules and regulations are followed
Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
Available only to single-filers making up to $95,000 or married couples making a combined maximum of $150,000 annually.
Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).
Tax deductible contributions (depending on income level)
Withdraws begin at age 59 1/2 and are mandatory by 70 1/2.
Taxes are paid on earnings when withdrawn from the IRA
Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.)
Available to everyone; no income restrictions
All funds withdrawn (including principal contributions) before 59 1/2 are subject to a 10% penalty (subject to exception).
The difference between tax deferred and tax-free
The biggest difference between the Traditional and Roth IRA is the way the U.S. Government treats the taxes. If you earn $50,000 a year and put $2,000 in a traditional IRA, you will be able to deduct the contribution from your income taxes (meaning you will only have to pay tax on $48,000 in income to the IRS). At 59 1/2, you may begin withdrawing funds but will be forced to pay taxes on all of the capital gains, interest, dividends, etc., that were earned over the past years.
On the other hand, if you put the same $2,000 in a Roth IRA, you would not receive the income tax deduction. If you needed the money in the account, you could withdraw the principal at any time (although you will pay penalties if you withdraw any of the earnings your money has made). When you reached retirement age, you would be able to withdraw all of the money 100% tax free. The Roth IRA is going to make more sense in most situations. Unfortunately, not everyone qualifies for a Roth. A person filing their taxes as single can not make over $95,000. Married couples are better off, with a maximum income of $150,000 yearly.
You can open an IRA at a bank or a brokerage house. If you plan on holding stock or bonds in your IRA, it may make more sense to open one at a brokerage house.
Tuesday, March 15, 2011
So What is a 401(k)?
A 401(k) plan is a long-term savings vehicle that allow investors to defer income taxes until the money is withdrawn at retirement. Investors under age 50 can contribute up to $16,500 annually and investors age 50 or over can contribute $22,000 annually. Because 401(k)s are usually provided through employers, some of whom provide a match, workers are typically given a list of investment options they can choose from. But they generally can't buy individual stocks or bonds.
Growth and Withdrawals
Since 401(k) plans are usually invested in the market, they rise and fall like other investments. The average 401(k) grew, on average, 8.7 percent per year between 1999 and 2006, according to a 2007 study by the Employee Benefit Research Institute. But that was before the stock market collapse of 2008, which presaged a deep recession.
Despite the market's ups and downs, you can boost your retirement savings by simply leaving the money alone until you can start taking penalty-free distributions at age 59½ or later. Withdrawing before then will involve a 10 percent penalty on top of income taxes (which are generally due regardless of your age). Investors can take out a penalty-free loan against their 401(k), but they'll have to pay it back with interest.
Getting Funds Out
The simplest way to avoid penalties is to hold off on withdrawals until you reach age 59½ or later. You must start taking distributions by age 70½ unless you're still working. Consult IRS Publication 590 to determine the distribution amount. You can track Track your 401(k) progress with Bankrate.com's 401(k) savings calculator.
Monday, March 14, 2011
On a happier note, 91 countries and regions have offered post-quake assistance to Japan as of Monday, in addition to six international organizations, according to the Japanese Foreign Affairs Ministry. $23 million has been donated to help fund the relief effort so far.
What can you do to help? You can donate through globalgiving.org, or text JAPAN to 50555 to have $10 automatically added to your phone bill and sent directly to the relief fund.
Account types - some banks may offer only personal accounts, while others cater to both individuals and businesses.
Loans - not only do banks have account options, but many banks offer loan options as well. If you plan on buying a home or starting a business or going to college, many banks offer these loans in addition to other account services. If you're the type who likes to do all their financial business in one place, this can be quite convenient.
Credit card programs - some banks will offer different reward or benefit programs through credit cards unique to their institution.
Location - while all the factors are important in deciding on a bank, perhaps the most important issue is location. What good is a great bank if you cant get to it? Smaller banks have fewer locations, while the larger banks have many branches, as well as many ATM locations. However, in this digital age many people are turning to online banking services, so location is virtually unimportant since the bank's location is technically anywhere you can get an internet connection.
Bank type - there are two basic types of banks: commercial banks and credit unions. How do you decide between the two? Credit unions have fewer branches, but generally offer more services and better rates on savings and loans. They can also provide helpful investment ideas for you to get the most out of your money. The larger commercial banks can sometimes beat the credit unions in terms of rates, and they offer more locations. They also offer more business oriented services than the credit unions do. Banks are designed to make money for investors, while credit unions serve a particular area or community. You can find a more detailed explanation of differences here.
Obviously you'll want to go with the bank that can offer you the best interest rates, customer service, and best loan offers, but its tough to find that all in one place. Personally I bank with Regions, and have only had one negative experience to date. On the other hand, I have heard horror stories about their customer service.
Choosing the right bank doesn't have to be an impossible task, it just takes a little research. There are tons of sites like banktruth.org, gotalkmoney.com, and bankaholic.com that you can use to find the bank that caters to your needs.
Sunday, March 13, 2011
1. Eliminate your debt first
2. Stop using credit cards
3. Master the thirty day rule
4. Give up expensive habits, like cigarettes, alcohol, and drugs.
5. Be diligent about turning off lights before you leave
6. Plan your meals around your grocery store’s flyer.
7. Get rid of your home telephone
8. Pass on extended warranties
9. Buy energy efficient appliances
10. Buy store brands