Money Management

7 Easy Steps to Help You Set Up a Budget

a roll of money growing out of earth next to bamboo shoots

Are you looking to take control of your finances?

If the answer is yes, a simple but effective budgeting system can help you reach this goal. In the beginning, the budgeting may seem overwhelming and taking too much time. But if you create a good money management system it will help you to see where your money is going and how much you have left to save and spend.

Why do you need a budget?

Budgeting means managing money. Are you trying to pay off the debt, save money for retirement or increase your emergency fund? Setting up financial goals helps you to stay focused.

Take the time to set up your personal financial goals and make sure that they are realistic. You don’t want to get discouraged if for example, you want to save $70,000 for a down payment on a house in just a year when you only make $50,000.

I like to put my financial goals on a piece of paper and look at them from time to time. It reminds me that there is a purpose for why I’m doing this.

Once you finished setting up your financial goals, just follow these 7 easy steps and set up a budget.

Step 1. Collect all your financial information

The goal for creating a budget is to see a monthly average. So, the more financial information you can gather the better.

Put together in the folder (paper or electronic) your pay stubs, bank statements, recent utility bills, credit card statements, medical bills and any information regarding a source of your income and expense.

Step 2. Calculate your income

After you put together all your personal financial information, start with calculating how much money you have each month.

This step is simple if your only income comes from a stable job.

Typically, an income comes in the form of a regular paycheck where taxes are automatically deducted. So, use your payroll stabs or direct deposits to calculate how much money you bring home each month. This is your net income or take-home pay amount. Put it in your spreadsheet as a monthly income.

If you’re self-employed, combine your take-home pay from the past year and divide it by 12.

If you have an additional monthly income from your rental properties, child support or freelance job, add the amount to your monthly income.

Your main goal is to calculate the total income you receive on a regular basis.

It is important to know how much money you have coming in so that you know how much is left to save and spend.

Step 3. Calculate your fixed expenses

Most of the time budget is all about tracking your expenses.

If you don’t track your spending, you need to start. Your monthly spending should be divided into two groups – fixed expenses and variable expenses.

Fixed expenses are the ones where the amount to be paid remains the same most of the time. It’s an easy category which includes necessary expenses you must pay each month.

Start with a list of your fixed expenses:

Rent or mortgage
Car insurance
Car loan payments
Medical Insurance
Student loan payments (if you have any)
Utility bills
Cable bills
Cell phone bills
Internet bills

Step 4. Calculate your variable expenses

Variable expenses are a category that changes from month to month.

Groceries
House maintenance or repairs
Car fuel and maintenance
Clothing
Dining out
Movie or concert tickets
Gym membership

I know it’s hard to group these expenses together since they are not the same amount each month. But to make sure that you have a realistic budget, you’ll need to calculate every single expense.

Step 5. Determine your irregular expenses

I have a separate category in my budget for irregular expenses:

Property taxes
Car registration
Medical Co-pays
Christmas/ Gifts
Vacations/ Travel

This category is for annual expenses. At the beginning of the year, I combine all these expenses and add them up to my budget. I try to project the number based on previous years and typically add $1,000 to the total for anything forgotten.

I use separate savings account for this fund and call it “Vacation Fund” I don’t want it mixed in with my regular savings account. We spend a lot of money on travels, so I like to save money for this fund each month.

Step 6. Compare your expenses to your income

woman is balancing on the short stool while trying to reach for the book on the upper shelf

Now it is time to compare your total expenses to your income.

Add up your monthly expenses (step 3, 4 and 5) and subtract this amount from your total monthly income (Step 2).

After subtracting your expenses from your income, you should have zero as your balance.

Zero as your balance means your income is equal to your expenses.

But you might end up with two other options in your balance.

Budget with negative balance:

You are spending more money than you make. It’s never good and your goal is to reduce some expenses.

The cost of discretionary expenses should be the first and easiest to cut.

Look at your variable expense’s category (Step 4) and list your discretionary expenses. Discretionary expenses is the money you spend on restaurants, entertainment, vacations, gifts, various membership, spa, and massages. This category of spending takes up a large chunk of your monthly budget.

When you really need to cut discretionary expenses, this is where you should start.

Make your own lunch instead of buying it every day
Stream a movie at home instead of going to the theater
Visit the local library instead of buying books
Use public transportation instead of driving a car to work
Cancel gym membership and go hiking, biking, swimming or just walking
Trim down on special treats: brew your own coffee and pack a healthy snack

Fixed expenses are harder to cut. But you can save a lot of money by doing so. Look at your big items or necessary living expenses and see where you can cut or negotiate a lower cost.

Reduce your electrical bill by cutting down on energy consumption
Cancel a cable and sign up for Netflix or ask for a special on your cable/internet package
Cancel landline phone and use cell phones instead
Ask for a re-assessment of your home value, if your property taxes are too high
Negotiate a lower insurance rate for your house and car insurance policies
Negotiate a lower rate for your student loan or consolidate your student loans

Budget with positive balance:

You are making more money than you spend each month. Congratulations!

Look at your financial goals and decide what do you want to do with extra cash in your budget. You can put more money into retirement savings or pay off your debt faster.

The ultimate goal is to have your income and expense categories equal in the amount of money you spend in both areas. This means all of your income is accounted for and budgeted for a specific goal.

There is a simple to use budget worksheet from Kiplinger.com. If you want to give it a try, open the link below, download the worksheet to your computer and open it in Ms Excel program. The worksheet is very easy to modify and use for your own household budget.

Household Budget Worksheet from Kiplinger

Step 7. Keep track of your budget

After creating your budget, you need to make sure that it is working.

You need to monitor and adjust it on a regular basis. It might sound boring and tedious, but this is your money managing system and you need to keep it under control.

Graphic image on the white table - less is more

Find a way to track your spending. It could be done electronically using Excel spreadsheets and software programs like Quicken, Mint or Personal Capital. But plenty of people still use an old school method and stick to a paper budget.

Money management programs: Quicken, Mint, Personal Capital

I like to use Personal capital and love how easy it makes to organize and categorize my personal finances.

Whatever system you use, you need to look and asses your budget once a week or once a month. Tracking your budget should give you a general idea if you are on the right path to your financial goals.

A budget won’t work unless all parties of your household are involved and fully on board. It will be a big mistake for not having agreements with your husband and your family. There will be no point in trying to cut on cable or electricity unless everyone agrees on it.

My husband and I are both involved in managing our family finances. Roman takes care of budgeting, paying off bills and credit cards. I am mostly involved in managing our investments. But we talk and go over our budget and finances regularly. It helps to know that everyone stays on track and we work together on achieving the same financial goals.

Putting it all together

Your budget is the foundation of your financial life.

Anyone can set up an amazing money management system on a paper. Making it work is quite another thing. This requires commitment and technique. Budgeting can be hard in the beginning, but if you stick to it, all your efforts will pay off. In the end, you’ll learn how to take control of your finances and to achieve your financial goals.

Do you have a budget? Share with us your budgeting tips!

Why Everyone Needs an Emergency Fund?

by Maggie Leave a Comment

woman sitting at the round table with flowers and a cup of coffee and looking at her mobile phone

I am sure you’ve heard a million times before that you need to have an emergency fund. Life happens, and bad times comes unexpectedly bringing chaos to our finances.

Unfortunately, most people are not prepared financially and couldn’t afford to pay for unexpected. So, they go into debt by using credit cards, taking a personal loan or even taken money from their 401(k)s or IRA to cover the bill.

Life is full of unexpected surprises, many of which cost money.

Bad stuff always seems to happen at the worst time in life. If you have money to take care of these things, then you’ll have a lower risk of going into debt.

But if you don’t have any savings for emergencies, then more than likely, you’re going to have a hard time. That’s why we need to put money aside for these financial emergencies.

What is an emergency fund?

An emergency fund is a chunk of money set aside specifically for the unexpected things life throws your way.

An emergency fund is a cushion of protection against the unknown – job loss, the death of a loved one, unexpected medical bill or even home repair.

An emergency fund brings stability and calms to your financial life. Instead of panicking at every little unexpected expense, you’ have a small pot of money at hand, ready for use.

How much to save in an emergency fund?

Decide how much you would like to save for unexpected emergencies.

There are a lot of opinions out there how much money you should put into an emergency fund. I’ve seen people recommend saving anywhere from $1,000 to three to six months of living expenses. Some recommendations are up to two years of living expenses.

Honestly, I don’t think there is a magic number. Everybody’s income and financial situation are so different. The only opinion it matters is yours.

Ask yourself how much you would need to have tucked away to feel secure and try to save that money in your emergency fund.

If you can afford to have six months’ worth of living expenses saved in your emergency fund, then go for it.

If you cannot, then you’ll need to start with smaller money and build it up over time. If you don’t have an emergency fund at all, then why not start with a goal of $100 or $1,000? Then keep going until you have an emergency fund to a number that you feel comfortable with.

There is nothing wrong with taking baby steps to reach your financial goal. Everyone needs to start somewhere.

For many years Roman and I never had a designated “emergency fund”. We had savings and used it for any occasion including as an emergency fund. We tried to keep in our savings/ emergency fund account around six months of living expenses. It varied from $20,000 to $30,000. Once we draw down this account below $10,000 and had to re-built it again to the comfort level.

After staring this blog, I decided that we need to have a separate emergency fund, just for emergencies like medical bills, car and house repairs.

I have to tell you, it feels great! Our goal is to build it up to $40,000 in 2019. We will keep it untouched unless there is an emergency.

I like the idea of separating savings from emergencies for better control over our finances. With no separate account for emergencies, we were dipping into our savings for every crisis. I have noticed that our savings were not actually growing.

When you have a separate emergency fund to handle unexpected expenses, then you will no longer need to dip into your savings to cover these bills.

How to start an emergency fund?

pregnant woman and a man putting money in to piggy bank

To build your emergency fund, you need to start stashing away portion of your paycheck.

Decide how much cash you want to save in the fund.

As I mentioned before, there is no perfect number for how much you should stash away. A good benchmark is about three to six month’s of your living expenses

An easy way to calculate this amount is to make a list of all your basic monthly expenses:

mortgage or rent
utilities
transportation
insurance
groceries

Then, total your monthly expenses, and multiply by the number of months.

For example, if you need $4,000 a month to cover your basic needs, then you’ll need to have $12,000 in your emergency fund.

$4,000 x 3 = $12,000

$4,000 x 6 = $24,000

The money saved in an emergency fund will give you a breathing room if you suddenly lose a job while trying to pay for unexpected doctor bill, car or house repairs.

As you get better at saving, probably you will start working toward accumulating 12 months of living expenses in a savings account.

$4,000 x 12 = $48,000

If you work in a career that has high turnover, or afraid of the potential downside of your company, it’s a good idea to double the money saved in your emergency fund.

How to build an emergency fund?

There is a challenge for most of us to build an emergency fund. Very often there is no money left at the end of the month. Saving money is a hard task no matter how much you make. There is always one more payment to make or unexpected bill to cover.

As women, we are very protective of our families.

By creating a financial cushion in the shape of the emergency fund will help you to fill save and comfortable when bad times come to your life.

Here are 8 simple steps to help you get started:

Step 1. To build an emergency fund you need to set mini-goals and work towards them. it takes time to accumulate enough funds in your account.

Step 2. Pay yourself first. Try to set aside 10 percent of your paycheck to go towards savings.

Step 3. Set an automatic deposit to an emergency fund account. It will be paid out of your paycheck and you will not even notice it.

Step 4. Set up a plan to pay off your debts. Add the extra money to the minimum payments every month.

Step 5. After the debts are paid off, add more money to your emergency fund.

Step 6. Control spending and leave your credit card at home. Its always easier to pay for everything with credit card. Bring only cash if you go shopping. Once the cash is gone, you can go home knowing that you didn’t go over the budget.

Step 7. Once your emergency fund starts growing, don’t over-use or deplete it to the point when you need to start all over again.

Step 8. Change your mindset. Think about savings as a financial cushion or smart gift to yourself.

Where to keep your emergency cash fund?

graphical image of woman head surrounded by social media icons

Where should you keep your emergency cash reserves?

You want your emergency money to be easily available. Most experts recommend keeping it in safe and accessible accounts, like:

Bank savings account
Money market account
Short-term Certificates of Deposit (CDs)
Roth IRA account

1. Bank savings account

In my opinion, it is one of the easiest places to keep your emergency fund.

The deposits held in this account are FDIC protected against the bank failure. You can get quick access to your money whenever you need it.

Most online savings accounts allow you to transfer the money you need within minutes.

If you want to earn some interest on your money, try to open a high-yield savings account.

2. Money market account

You can open money market account online or at a local bank and manage it through web-based account management. Your funds can be withdrawn at any time and you earn some interest on it.

However, remember about money market account’s fees that could chip away at your returns.

3. Certificates of Deposit (CD’s)

A Certificate of Deposit usually pays more in interest than an ordinary bank savings account.

CD’s offer a fixed rate of return (or gain on your money) for a specific time frame. Since your rate of return is guaranteed, opening a CD could be a good idea to earn extra interest on your emergency fund money.

On the other hand, you will have to pay a penalty if you want to close your CD early. It ties your money up for a certain period, so it’s a good idea to open a short-term CD account.

When you put money into a CD, you’re agreeing to leave it there typically from three months to five years. Decide for yourself what works the best for your financial situation.

4. Roth IRA account

I have heard many times that people advocate for using a Roth IRA money as an emergency fund. It might work for many people.

But I want to highlight the number of reasons why using your Roth IRA as an emergency fund is a bad idea:

There are penalties on early withdrawals. The topic on penalties is complicated and it’s better to consult a tax professional or do research on IRS rules.
Roth IRA account is set up mostly for retirement savings. It’s funded with limited contributions of $5,500 and $6,500 if you are 50 years or older. The money grows and accumulates slowly to provide an income in retirement.
If you want to use it as an emergency fund it will be hard to sell your investments within 24-hours. And if it’s a recession you might sell your investments at a loss.

Where you keep your emergency money as important as building it.

The first part of a good emergency fund is liquidity. You need to get access to your fund within a few hours.

The second part is safety. It can’t be tied up in an investment that goes up and down in the short run (like stocks).

We keep our emergency fund in an online account Capital One 360 (formerly ING). It’s very easy to withdraw money in case of an emergency. And we earn more interest than the bank savings account.

Final thoughts

We all know that emergencies do happen. And being prepared for it can make all the difference between weathering the storm or being overwhelmed.

Building an emergency fund is possible at any income level. If you don’t have an emergency fund yet, start building it today. Everybody needs one.

Before spending or moving money around, start by setting up an emergency fund. In the case of job loss, medical emergency or any other personal crisis, you’ll want to know that you have a protection from a small disaster.

You’ll want to know that you have enough money to carry your family through to safety.

How are you saving for emergencies? Do you have a separate emergency fund?

How to Pay off Debt Before You Retire

by Maggie Leave a Comment

One of the greatest threats to baby boomers today is not that they don’t save enough, but they owe too much. According to the statistics, many baby boomers are carrying a significant amount of debt into retirement. Recently I read that as many as 61.3% of household’s adults older than 60 have the median total debt around $40,900.

Paying off debt can be a long journey and it depends on how much you have accumulated it over the years. When you retire and start living on the fixed income it will be hard to balance the fun of retirement and worries about finances – and debt is a big reason why.

Primary sources of debt

There are several primary sources of debt we have the tendency to collect during life:

mortgage debt
credit card debt
student loan debt (if you have kids)

Then there are other debts like car loans, home renovation loans, medical expenses, etc.

For most people, the largest liability is their home mortgage.

In fact, nearly 33 percent of total household spending goes toward this one big-ticket item.

On top of the mortgage debt, there is a credit card debt. Many baby boomers carry the highest amount of credit card debt than previous generations. On average people between age, 55 to 64 owe more than $10,000 in credit card debt. And if you have kids you will be already paying for their education.

If you want to enjoy a debt-free retirement, you need to pay off, reduce or get rid of as many debts as possible.

The ways to pay off debt before retirement:

1. Start with analyzing your personal problems

Do you have bad spending habits? Are you an impulsive shopper?

If the answer is yes, you need to make a plan for how to improve and control it:

There is a line between the necessities and luxuries. Too often we forget about it. It can be useful to break out your spending into needs and wants.

Your needs are the necessary living expenses like housing, groceries, utilities, transportation, health care.

Your wants are things like nice-to-haves, but not required for everyday survival. Things like travel, hobbies, expensive cars and clothes.

Popular 50/30/20 rule of thumb to follow:

According to this rule, you should budget 50 percent of your household income towards needs, 30 percent toward wants and 20 percent on savings. Paying off the debt should be included in 20 percent.

If you’re serious about reducing your debt, you need mentally say goodbye to some luxuries in your life:

- dining out every weekend
- visits to the spa and manicure/ pedicure salons
- new clothes, shoes, and bags for every season
- luxury vacation.

If you don’t control how much you spend, eventually you’ll add more new credit card debts to the old one.

2. Create a plan of paying off your debt

Creating a plan of how to pay off the debt is as important as sticking to that plan. After all, if you come up with the plan, put it on the paper or your excel spreadsheet, but never follow it through, you’ll be disappointed before you see any results.

If you have various debts, you need to decide which one to pay off first and which one is the last one.

There are two simple strategies to pay off the debt:

The snowball strategy is popular among Dave Ramsey followers.

If you want to use this strategy start by paying off the debt with the smallest balance, while continue making minimum payments on other debts. The plan is to pay off the first debt as fast as possible by adding all extra money to the principal.

When you finish paying off the first debt, move to the next one. Once the first debt is crossed off the list, use all extra money to pay off the second debt and then go on until all debts are paid off in full.

There is a psychological effect behind the crossing each debt of the list, which helps to motivate you and create momentum.

The debt avalanche strategy.

If you want to use this strategy start by paying off the debt with the highest interest rate, while continue making minimum payments on other debts. Once the debt is paid off, apply all extra money towards the next-highest interest rate debt.

You should choose whichever method makes more sense to you.

If getting a small victory is more appealing to your personality, then go with the snowball method. But it’s good to remember that credit card debt typically comes with a high-interest rate. The longer it takes you to pay it off, the more you will pay in interest.

Unlike mortgage and student loan interest, you can’t deduct credit card interest on your tax return.

My husband Roman and I created a plan before we seriously started paying off our debts.

The deck avalanche strategy works better for us. It helps to save the most money in interest payments. However, depending on the size of the debt, it might take longer to pay off the balance and finally cross the debt off the list.

Currently, we are paying off our daughter’s student loans.

We have three different loans with interest rates of 6.49% the highest, then 6.35% and the last one is 6.01%. We started paying off the highest interest rate loan of 6.49% and were very happy to cross it off the list. After that, we moved all extra money towards the next-highest of 6.35%.

We are planning to pay off the rest of student loans by the end of 2019.

2. Should you pay off your mortgage?

For many of us, the mortgage debt is the largest in our budgets.

It is my dream to pay off the mortgage before we retire. But I don’t think it is possible. And I am not alone. To be mortgage -free is a dream for many people who are close to retirement.

Roman and I refinanced our house many times. But even with a low- interest rate of 3.5 percent, the mortgage payments take the biggest chunk of our budget.

If you are like me and worry about how to afford mortgage payments in retirement, there are several options to consider:

Downsizing. Your home is one of the biggest investments. If you’ve been living there for a long time, it went up in price and accumulated a lot of equity. One of the ways to get rid of mortgage payments and home maintenance bills is to sell the house.

You can sell the big house and trade down for a smaller house or a condo. Or you can move to a cheaper area and pay cash for your new house.

Invest equity. Maybe you don’t want to have a hassle of home ownership in retirement. You want to travel or visit your family and friends. The other option will be to sell the house, invest the cash, and enjoy living on rent and mortgage-free. Investing the cash from the home sale will bring additional income in retirement. Let it grow for 10 years in your investment portfolio, and it might be enough to pay cash for your next house or a condo if you are tired of renting.

Don’t create new debts, while paying off old ones

You have created a strong plan to pay off the debt in the next 12 months. Suddenly your car broke down and or your house furnace blow in the middle of the winter. Emergencies like that could come with the hefty bill.

If you don’t have extra cash available you might be forced to take a new loan or put it on the credit card.

By adding new debt to the old ones, you might feel emotionally defeated and stop trying to pay off the debts.

But if you have saved some money in the emergency fund, it will help you to avoid taking more debts. The best practice is to have saved from 3 to 6 months of monthly expenses in a separate saving account, so you can have access to your emergency money any time you need them.

To save for retirement or pay off a debt?

It’s hard to save for retirement when you’re trying to pay off the debt. There are so many financial decisions to make and it feels like you don’t go ahead on anything.

Please don’t try to reduce your debt by cashing out 401(k) or other retirement accounts. It seems like an easy step to take money out of your retirement savings and reduce your debt. But you’ll regret it later. Retirement savings are for retirement.

If you are under 59 ½, you’ll be charged 10% penalty fee for early withdrawals from 401(k) and traditional IRA accounts. In addition to that, you could be pushed into a higher tax bracket, if you take money from your retirement accounts.

If you are older than 59 ½ and allowed to take money without being penalized, you might be still paying the price of being in a higher tax bracket.

My advice is to continue saving for retirement and create a plan to pay off the debt.

It might take longer, but in the end, you’ll be proud of yourself that you stick to the plan. Your retirement savings will be growing, and your debt will be reduced with every month. In the end it will be a win-win situation.

Discuss the plan with your partner

It’s always a good idea to discuss your plans with the spouse or partner. After all, it will be a team effort to create a plan and to stick to it.

Putting it all together

For many of us living in retirement with debts might be a constant source of stress and anxiety. If we don’t plan for reducing it now, we will be facing the challenge of not having enough money to pay for our expenses in retirement.

Paying off the debt on a fixed retirement income can be a big burden. It will be very difficult to get ahead or live comfortably if you have to pay large debt balances.

The best approach to deal with debt is to start with small steps. The earlier you develop a plan to reduce it, the easier it will be to tackle.

In the end, you’ll have a better chance to afford the retirement you’ve always dreamed of.

Please share the ways you deal with your debt. Do you have a plan to reduce it?