Category Archives: Budgeting

 Are you looking to get off on the right foot with your personal finances? Then you should take a look at 5 Basic Personal Finance Facts People Overlook.

Whether you’re starting your career or you want to get your personal finances in order, knowing basic facts about finances can move you in the right direction.

Often, people are guided by misconceptions or falsehoods, and this can lead to missed opportunities or even bad investments.

To help set you up to succeed, we’ve outlined 5 finance facts people often overlook:

1. Investment Gains

You found a perfect investment, and now it’s time to cash in.

At this point, many people fear withdrawing their money because they’re afraid of the tax penalties that go along with what they’ve earned.

However, there’s a huge misconception over what you are taxed on.

For example, if you invest $50,000 into a stock and over time you end up with $100,000, with tax, you may believe you owe a certain percentage in taxes off the sale of your stock.

That would take a huge bite out of your profits — and luckily, this isn’t how investment gains work, so be careful not to overlook this fact.

Although you will be taxed, you are only taxed on what you made.

That means anything you initially invested isn’t taxed — only the money you will take home at the end of the day.

In the above example, since you made an initial investment of $50,000 and ended up with $100,000, you made $50,000. After tax on what you earned, which was $50,000, you owe $X amount for your gains — a much better price tag than what many people believe.

So although you do have to pay taxes on what you earn when it comes to capital gains, the hit isn’t as bad as it seems.

So go ahead, take a risk and invest.

2. Higher Tax Bracket

If you’re straddling the line to the next highest tax bracket, you may be afraid working a few extra hours of overtime or that holiday bonus will put you over the edge and wipe out all of your hard work.

But this is a personal finance fact people often overlook.

A few extra dollars — even a few extra hundred — won’t hit you very hard when it comes to taxes, because not all of your income is taxed at the higher percentage.

If you bring home a lower salary per year, you’re inside of the tax bracket.

However, what happens if your boss gives you a bonus? If you get a raise to $38,000 per year, is it even worth it?

Many people believe earning an extra $1,500 per year means they would be bumped up into the 25% tax bracket, which means they’d be taxed at 25% of $38,000, which would be $9,500 compared to $5,475 previously.

At those numbers, you would be making $2,525 a year more if you made $36,500 without a raise or bonus. And that’s little incentive.

Luckily, that’s not how the tax structure operates.

If you fall into the 15% tax bracket, the IRS taxes you 10% on the first $9,725 of your income. Anything you make after this, as long as you stay in this bracket, is taxed 15%.

By using this logic, you’ll never end up in a situation where you make less even though you were paid more.

3. The “Tax-Free” 401(k)

Many employees constantly hear the term “tax-free money” when it comes to putting savings into your 401(k).

But as the saying goes, there are two guarantees in life — death and taxes.

And there will come a day when the taxes will need to be paid on the money you’ve placed in your 401(k).

It is true that in the years you contribute to your 401(k), any money you put away is not taxed and your taxable income will actually decrease by the amount you invested.

But when you retire, eventually you will need to withdraw that money — and this is when the “tax-free” notion disappears.

However, when you retire, you normally draw from your 401(k), possibly a pension and maybe Social Security, so your income should be lower than when you were working full-time.

This means you will be in a lower tax bracket, which means you will be paying less taxes — sometimes significantly less — that you would have when you were shielded from paying them when you were contributing to your 401(k) originally.

So while it may not be “tax-free” money, you can consider it “taxed-later” money.

4. Renting vs. Owning Your Home

You may think owning a home means you’ve achieved your dream and you can stop throwing your money away on rent — but this isn’t always the case.

Just because you own a home doesn’t mean you have the ability to cash out and strike it rich.

Although when you rent a property you do have to pay rent and renter’s insurance and this isn’t an investment for you, it is relatively cheap compared to buying a home.

However, if something breaks, leaks or caves in when you’re renting, you aren’t responsible for the damages and repairs.

You also won’t have to come up with the money to fix the problem right away.

Buying a house is more than investing in its equity.

When you make the initial purchase, you need a down payment (which can be as much as 20% in certain areas), closing costs, insurance and other fees. Plus, you’ll be responsible for all of the maintenance and upkeep of your home.

All of this can add up, and if you’re not financially secure, you can end up losing your investment.

However, buying your own home can be the right choice if it’s the right period in your life — if you have a stable career, a nest egg and a great credit score, this could be the right move for you.

5. Big Refund = Big Ripoff

During tax season, many people look forward to their tax returns.

But when the government gives you a payout this time of year, it actually costs you money.

The check you receive from the IRS is money you’ve already made, the government is simply sending it back to you — hence, it’s called a refund.

What’s so bad about getting this back in April every year?

If you have the money available to you throughout the year, you can do more with it.

For example, if you get a $3,000 tax refund, you could have invested that money throughout the year — so it could have been working for you and earning you interest instead of being in the government’s hands.

However, if saving isn’t your strong point, it can be a good idea to use your tax refund as a way to save — just keep in mind you won’t be making any interest off it.

Don’t Overlook Basic Finance Facts

When it comes to your bank account, being knowledgeable about simple facts can go a long way.

Click here for ways to brush up on your personal finance skills.

Contact us today with any questions about financing and getting the right loan for you.

Financial Security: Principles of Minimalist Budgeting

As of December 2016, the average Australian household is thousands of dollars in debt.

And, on top of that, one in three Australians don’t have savings for retirement.

The good news though is if you fall into one (or both) of these figures, you can get out on top.

Yes, it will take discipline. And it will take time to form new financial habits.

But, it is possible.

In order to undertake this, you’ll need to learn how to become a minimalist.

Read on to learn how to become one and, in doing so, regain your financial freedom.

Practice the 50/20/30 rule

Basically, the 50/20/30 rule tells you what percentage of income goes into what pile: necessary expenses, savings, and personal expenses.

Necessary expenses: 50%

50% of your income goes to the necessary expenses pile. When we say necessary expenses, we mean the minimum living expenses needed to survive.

Which are food, shelter, utilities, transportation, and health insurance.

No, cable TV does not count. Nor does your expensive cell phone bill.

Savings: 20%

You’ll then want to put 20% of your income to your savings pile. This pile isn’t strictly for retirement; it includes paying off outstanding debt as well as money for your emergency fund.

When it comes to emergency funds, ideally aim for three to six months of your necessary living expenses.

That way, should you get let go or need to quit your job to take care of a sick parent—emergencies—you’ll have a financial cushion during that time.

Personal expenses: 30%

And lastly, 30% of your incomes goes to your personal expenses. This includes cell phone bill, cable TV, gym membership, concert tickets, restaurants, you name it.

Pretty much, anything that increases the quality of your life.

However, should you find yourself in a financial predicament, this is the first pile to cut. (Your necessary expenses is the last. In which case, we’d assume you’re living with a relative or friend.)

Exceptions to the 50/20/30 rule

This rule may not nicely fit into every household’s or individual’s financial situation. But it’s worth following.

Like we said, if you’re in a financial bind, you’ll want to start decreasing your personal expenses pile.

If you haven’t saved for retirement and are approaching your mid-forties to fifties, you may want to put a higher percentage of your income into your savings pile.

And, if you’re in your twenties and thirties, it’s a good mentality that you don’t exceed 30% in personal expenses.

The type of financial habits you form now will likely map out your finances for a good portion of your life. (Not that you can’t change them if they turn out to be unhealthy.)

But a higher percentage of my income goes to necessary living expenses. 50% is not enough.

With a mortgage, car payment, car insurance, hefty grocery expenses, utility bills, and your child’s college tuition, 50% may not seem like enough.

If you’re making $50,000 per year, $25,000 sounds hard to live off of, if not unrealistic.

However, it is possible. It just means you have to downsize your necessary living expenses to the minimum.

Especially in western society, we believe we need that $40,000 car, and that our cell phone is our lifeline. Plus, who lives without WiFi in their homes?

The thing is, when you think about it, your $40,000 car and cell phone and WiFi bills are extra.

You can trade your car in and get something cheaper. Or, if your work is close by and the area is safe, why not bike to work?

Like with your car, trade in your phone for a cheaper one.

And, for WiFi, go to the library or a cafe that has it.

If these ideas don’t sound good to you and you absolutely need these things in your life, look into ways to earn some extra money.

So that you raise your income, increasing the dollar amount that goes into your necessary living expenses pile. (Still, keep the percentage at 50%.)

Ask yourself this question

Besides the 50/30/20 rule, how to become a minimalist requires you to ask the hard questions.

An important (if not the most important) question is this…

Is this insert-item/service-you-want-to-buy worth insert-number-of-hours of work?

So, let’s say you’re considering buying a frappuccino with two-three add-ons. The drink is going to come out to $8.

Suppose you make $16 an hour.

You’d ask yourself, is this frappuccino worth half an hour of work?

Or, you want to buy concert tickets. The tickets cost $60 per ticket, which then comes out to $120 (two tickets).

You’d say, are these concert tickets worth seven and a half hours of work? (That’s almost a standard full day of work.)

Perhaps they are. Perhaps they aren’t.

Make sure you ask this question every time you’re considering buying something.

Why is it important to ask this question?

By making a habit of asking this question, you’re becoming conscious of your spending.

Also, you’re evaluating a product or service not based on dollar amount but on the amount of time you spend earning that dollar amount.

This forces your mind to reflect on the hard work you did last week. And it starts to get personal. Because you’re remembering last Monday, where you spent all day writing that report. Are those concert tickets worth that experience?

Essentially, you’re taking it from the impersonal (dollar amount) to personal (your valuable time).

Cut your credit cards

This is an age-old practice. But since the average American has roughly 4 credit cards, many people aren’t adhering to it.

(Before you do cut your cards, look into if not using your credit cards at all will hurt your credit score.)

(If it does affect your score, really make it a point to consciously ask that important question we mentioned earlier.) If it doesn’t, get those scissors out and cut away.

Doing this will physically force you to not rack up more credit card debt.

After reading this article, you should now know how to become a minimalist. And be on your way to getting there.

Do you know how to become a minimalist?

Let us know! Plus, if you have further questions on how to become a minimalist, contact us.

And, while you’re at it, learn how to create an emergency cash fund by visiting our blog.

Do you feel like you’re always living paycheck to paycheck? Is your money spread thin? Here are 7 tools you should employ for your financial budget.

Are you running out of money before your monthly bills are paid? Or just scraping buy? Are you ready to take charge of your finances? Want to make today the first day of the rest of your financial life?

Make a Permanent Decision to Take Charge

If you said yes to any of the questions above, congratulate yourself. Seriously, many folks find it easier to avoid dealing with this stuff.

Education is a critical tool. Being proactive will give you a much better chance at future happiness than being reactive.

Now that you have made this important decision, here is how to make your financial budget successful.

Outline Your Financial Budget

The word “budget” unfortunately sounds unpleasant. It sounds like “restriction” or “buzz kill.”

If the words “financial budget” seem scary, think of it as a “spending plan” instead. You decide how much money to spend and in what category, depending on your priorities. Then you get to spend as much as you want to in certain categories, depending on what you decided.

The categories you will mainly need are: (1) Housing (2) Food (3) Transportation (4) Clothing (5) Entertainment and (6) Savings.

Housing includes your rent, mortgage, real estate taxes if they apply, insurance…anything associated with keeping a roof over your head. It would also include what you spend for heat, air-conditioning, water, etc.

Track Your Actual Spending to Create a Realistic Financial Budget

Coming up with a financial budget involves trial and error. It’s one thing to aspire to spend $100/month. But it’s not going to happen if you think you spend $75 when you actually spend $200.

Spend at least a full month writing down everything you spend money on. Whether it was a $1 candy bar purchase, a $50 ticket to a ball game or an $800 unexpected expense that hopefully, you were able to use your emergency cash fund to pay, write it down.

There is power in the pen. Writing down what you purchase can be a powerful tool (as old-fashioned as it may sound). For under a dollar, you can purchase a small notebook that is reserved for this purpose.

The most important thing is to track, however. So if you prefer, you can certainly create your budget with the help of an online tool.

Consider what is most important to you by allocating a percentage to each of your categories. Your percentages should add up to 100%.

If your income fluctuates, you can allocate percentages of your income instead of fixed dollar amounts.

You will also need to incorporate any debt repayment into your budget instead of hoping it will somehow get paid otherwise.

Decide How to Incorporate Debt Obligations Into Your Financial Budget

How much debt do you have? Are there some debts that you are delinquent on? Are there any you are in default on?

Your first step in dealing with debt might be to contact creditors to negotiate a monthly payment amount. Debts that get ignored tend to snowball into much larger financial problems.

You will need to have a strategy for dealing with unsecured debt. “Unsecured” means any debt that is not attached to a tangible item that can be repossessed if you don’t pay.

Once you have listed and totaled your debts, use a debt calculator to give you an idea of how long it will take you to be free from unsecured debt if you continue making minimum monthly payments.

Include at least the minimum monthly payment on all unsecured accounts in your financial budget. Then add as much extra as you can to pay on the smallest debt. Once the smallest debt is paid off apply that bill’s payment to the next smallest debt.

From this point forward it is important to borrow responsibly.

Execute Your Financial Budget

You have tracked, analyzed and planned. Here is where the rubber meets the road.

You will need to have a system for maintaining your financial budget. There are multiple ways of doing this and the best one is the one that you will use.

One way is to maintain multiple bank accounts with different names for different purposes. A main “operating” account acts as a clearinghouse into which you would deposit all earnings. You then automatically transfer whatever percentage or fixed amount of your earnings into the accounts designated for a particular purpose. This is especially useful when making sure you have or are maintaining the emergency cash account.

You can also install a smartphone app that enables you to set up your financial budget and savings goals, as well as connecting to your bank accounts. Choose an app that lets you know what you can spend each month, week and day based on your goals.

You will always want to know how much you have left to spend to stay on track and be alerted when you are off-track.

Consider Ways of Pocketing Some Extra Money

With all of this spending and debt talk, we can’t overlook the issue of income. In some cases, you can slash spending, but it is not going to help the financial budget if there is simply not enough income.

Consider whether you could ask your employer for a raise (after documenting some achievements you have made since your last).

Is there a class you could take to become certified in a new skill that would entitle you to a pay raise? Is there a hobby you enjoy that you could convert into a money-making venture?

There is definitely more to life than work. But perhaps if you are in a particularly tight bind you could pick up a temporary part-time job.

Don’t Let Money Stress You Out

Having a financial budget should be empowering and not limiting. Your financial budget should serve you, and not the other way around.

Having negative feelings around money does not serve your financial well-being. Respect money, appreciate it, and don’t let it see you sweat.

If you find that you have chronic problems with debt and keeping money in your pocket, it may be time to seek help from a counselor about what negative programming you are holding about money.

Please share your favorite tools for your financial budget below!