is a time to consider increasing your income or budgeting out unnecessary spending that eats up your income. Some times it is necessary to defer a purchase, if you don’t need it. Keep you credit cards at home, so you can avoid that impulse to spend when you don’t have cash.
Third, with a budget you can put into place a very important adage ”Pay Yourself First” by setting aside 5 to 15% of your gross earnings every payday for savings and investing. Note I suggest looking at your gross earnings (the money you earn, before deductions), rather than net pay.
Fourth, we all know there are only two ways to improve your financial situation:
By increasing your income through saving more, working more, increasing the yield on your investments.
By decreasing your expenses with adjustments your standard of living, spending habits, cutting costs or minimizing your debts.
A budget is simply a plan for how you will disburse your income and earnings. Although virtually everyone operates on an unwritten monthly budget, effective financial planning requires setting down on paper all of your monthly income and expenses. Budget planners are available at a number of online financial planning sites. If you haven’t already look at sites like: Mint.com, qizzle.com, Yodlle Moneycenter or Rainydaybudgt. Take some time and set-up a budget; once you can control you spending, you will be better able to have money to invest for the future.
Budget Planning
This may be easy for you, or you may even hate the idea of accounting for where you money goes.
With the Internet and smart phones it is now easier than ever to track every dime you spend if you want to. The good news is you don’t need to if you have created a budget and at least know which of several buckets your money goes.
Start with stating your income from things like monthly earnings, profits from a business, rental income, interest, dividends, or pension income.
Next list all of your fixed monthly expenses, things like the mortgage, or rent, car payments, insurance, a budget for food, utilities, childcare and anything else you pay every month.
Now list your variable expenses, those items that might only occur a few times a year. This includes taxes, perhaps insurance if paid annually, contributions, and perhaps entertainment. Now set aside some money for those emergencies that come up from time to time, things like car repairs, medical expenses, household expenses and a fund for vacations.
Add all of this up. Hopefully you have more income than expenses and you have left what is known as discretionary dollars, money you can spend on something not planned or budgeted.
Do You Have Problems
After you have completed your Net Worth and Budget Planners, (using one of the online sources I mentioned or a spreadsheet or even just a few sheets of paper, print out a copy and look for areas you may want to change. If necessary, review everything with a trusted friend, family member or financial planner. Perhaps your net worth planner will show that your liabilities are growing faster than your assets, or that you need to place more dollars in savings and investments that provide for growth.
CUTTING COSTS
There are many ways to reduce costs without dramatically changing your lifestyle. Here are a few cost-savings methods that you will want to consider as you plan for your financial freedom.
Refinancing your mortgage to get a lower rate
Cutting utilities costs through more efficient use
Comparison shopping for things you need
Saving up for major purchases and paying cash rather than using a credit card
Buying in bulk or at wholesale whenever possible
Buying cheaper term life insurance, and/or getting your life, auto, and home insurance from the same source for the multiple discounts
Cutting health cost by practicing preventive medicine, eating properly and getting exercise.
The Value of an Annual Review
The two planners you have completed help you determine if your spending, savings and investments match your financial goals. At this point you may not be sure whether you are on the right track or not. You have a few choices:
Do nothing
Learn more about personal financial planning
Seek professional help
If you decide to seek professional help, you can look to your tax advisor, accountant, banker, insurance agent, a stockbroker or financial planner. Just remember that not all of these people are experts at financial planning or may only be well trained in one thing (like taxes). Even financial planners come in two types: fee-based, or fees plus commissions. You may want to consider working with someone whose primary business is to provide planning services, rather than selling you financial products. If they have to earn a commission, they may be inclined to offer you products that yield them the highest commission.
Finally, it is a good idea to keep score of your financial growth at least once a year in order to help you adapt to changes in your financial circumstances and to congratulate yourself on the progress you are making in reaching your goals.
Your Income Taxes
A tax is a charge imposed by the government to raise money for public purposes. Citizens should expect to pay their fair share for the services they receive from the government. The good news is the government does not expect you pay more than your fair share (whatever that is). What is your fair share? That can be the subject of debate and our tax system has seen many changes over the years to allow for various deductions and credits to help you get at what your fair share of taxes should be. It is up to you to use all of those deductions and credits to reduce your taxes to the lowest “fair” share possible.
The Basics of Tax Planning
Our federal income tax system is progressive in nature, which means the more you earn the more Uncle Sam expects as his share. It is not the purpose of this book or this chapter to debated the merits or fairness of the various tax codes, but I do find this quote interesting: “If you tax people who work, and you pay people who don’t work, don’t be surprised if you find a lot of people not working. I have never heard of a poor person spending himself or herself to prosperity. It doesn’t work.” - Economist Arthur Laffer.
Suffice it to say the tax code is extremely complex, so much so that there is an army of tax preparers available every tax-filing season available to assist you.
The percentage rate at which you are taxed is referred to as your “tax bracket”. This percentage rate can change each year, if Congress passes new tax laws.
You may be aware of the tax cuts enacted in 2001 and 2003 (commonly called the “Bush Tax Cuts”) have been extended into 2012, but Congress may act on a new tax
