Week 2: budgeting and saving
If you’re anything like most of us, spending comes pretty easy; however, saving may take a little practice. And that’s what I’m here for! I’m here to teach you how to budget and save effectively.
3 main saving goals
financial emergencies
college
retirement
(Subgoals might include saving for a new car, placing a down payment on a home, luxury vacation, launching your own business, etc.)
Saving Strategies
The biggest and easiest way to budget is to simply track your spendings. This way you aren’t spending your money on things you could easily live without. I’d recommend tracking down your spendings to the last penny for a certain period of time, whether you choose to do that on a weekly or monthly time frame.
Use cash back and sign up for apps such as Ibotta and Raukten. These apps offer cash back from retailers on groceries, clothing, accessories, etc.
-credit cards also offer cash rewards , offering anywhere from 1%-6% on each transaction. The Chase Freedom card offers 5% cash rewards, but keep in mind, this is only valid if you pay your credit card in full every month! (No debt)
This one might seem easy, but is one of those that’s easier said than done; focus on major expenses. Things such as housing, insurance, and commuting costs are gonna be the things you want to pay in full every month when the credit card bill comes around (remember this affects your FICO credit score)
You must be smart with this!
Some easy things you can do off the bat is…
-refinance a mortgage (purpose is to get a lower interest rate on a mortgage)
-bundle up your insurance with one carrier and get a discount (purpose is for companies to get more business from you by offering a cheaper rate to insure your house, car, and life; WIN, WIN)-try carpooling to work or find lodging that might not even require a vehicle to get to work
As mentioned before, a popular budgeting strategy is: the 50/30/20 rule
As you can see, 50% of paycheck goes towards living essentials such as rent, utilities, groceries, 30% goes to discretionary expenses such as shopping, dining out, going out with friends, and 20% goes towards the future in a savings account for retirement or emergency fund
Now before we get into the different savings accounts, let’s make sure we understand the topic of interest
The simple definition is something you might know - Interest is monetary charge for the privilege of borrowing money
That’s usually something we’ve all heard of, but what you might not have heard is annual percentage rate (APR), which is the yearly rate charged for a loan
APR calculates what percentage of the principal you’ll pay each year by taking into account monthly payments and fees without accounting for the compounding of interest
The formula is simple to understand - periodic interest rate times number of periods a year it was applied
APR= ((fees + interest principal/n) x 365) x 100
Interest= total interest paid over life of the loan
Principal=loan amount
n=number of days in loan term
Now lets look at the two types of APR:
Variable APR: loan where interest is charged on the outstanding balance varies as market interest rates change; interest is linked to underlying benchmark or index, such as federal funds rate
Fixed APR: loans in which the interest rate charged on the loan will remain fixed for that loan’s ENTIRE time; if interest rates are low, but about to increase, you should go with a fixed rate of interest and vice versa; if interest rates are on the decline, then a variable interest rate would be better
You might be wondering which is better?
Well you should look at…
Interest rate trends and forecast: If interest rates are going up, lock in with a fixed rate (especially if it’s short term) and vice versa
Interest rate spread: evaluate both options carefully before choosing, because one might be way more expensive than the other
Loan term: nobody knows long-term economic conditions, but you need to make educated decisions based on short-term conditions if you don’t expect to have the debt for a long period of time
Anticipated personal income forecast: it’s most important to evaluate your personal income stability,including things such as your job stability, prospective salary growth, and current savings
Tax refund: the reimbursement made to a taxpayer of any excess amount paid in taxes to the federal or state government (in simple words: a tax refund is received when you overpaid your taxes the year prior)
Bonus: (exactly what it sounds like) financial compensation that is above the normal payment
-holiday bonuses: companies hand out bonuses during the December Holidays season
-performance bonuses: you get rewarded for exceptional work (may be a one time offer or periodic payment)
-reward bonuses include annual bonuses (given at the end of the year), spot bonus awards (reward employees that deserve special recognition), and milestone bonuses (ex. 10 years of employment in one firm)
Bonus inflation: bonuses are traditionally given to high-performing employees, but some companies opt to give bonuses to lower-performing employees as well in hopes to quell jealousy and employee backlash
-it can be difficult for employers to accurately assess their employee’s performance success (employee might be very hardworking, but fail to meet their activity quota)
Activity quota: minimum levels of sales-oriented actions that must be met by a salesperson during a given time period (could require a salesperson to make a certain amount of outbound calls, send a certain amount of emails to a certain amount of clients, submit a certain amount of work, etc.)
Using this information, I think it’s easier for us to understand one of our personal finance strategy: Pay Yourself First!
Pay Yourself First is a personal finance strategy in which its goal is to make sure enough money is saved or invested before paying any monthly expenses or making any discretionary purchases (the nonessentials)
-paying yourself first is easy as long as you build a retirement savings account, create an emergency fund, or are saving for some long-term goal. This way a certain percentage of your paycheck will automatically go into one of these retirement accounts (such as a 401K or an IRA)
-many people use direct deposit to avoid the temptation of spending their money. This way you can put a certain amount of money into your savings and won’t be able to take it out reducing your temptation. If you’re unsure what might come up and might still need the money for something else, you can get it deposited into your checking account and get it transferred into your emergency fund later.
As we know, the pandemic has caused a lot of changes. Things such as investing apps and platforms, zero commission trading, a historic bull market for stocks coming out of the Great Financial Crisis followed by record-breaking inflation, emergence of cryptocurrencies, and evolution of financial planning are just some of the forces that have completely reshaped the way we use, save, and invest our money.
According to statistics, it’s been proven that younger generations (such as us)
- are less likely to work at the same company all their life
- collect a pension
- ease their way out of the workforce at age 65
With all the new medical technology and innovations, people are living longer! Living longer comes with wanting to do more things, and wanting to do more comes with needing more - you guessed it, money!
In order to make sure you have enough money to live a comfortable life after retiring you must…
(have what I'm giving you now!), financial awareness
Investing strategies for your age
A balanced portfolio
Saving and budgeting in a world of inflation
Financial planning and caring for when starting a family
Estate planning (if you’re passing on your savings to your children: trust, assets, etc.)
What’s great about a retirement account is that you’re able to have money go automatically from your paycheck, but not have to pay income tax on the money!
You must be wondering what percent of your income is taxed! Well, that’s all dependent on your filing status (basically the more you earn, the more you pay!)
Filing status: category that defines the type of tax return form a taxpayer must use when filing taxes (closely tied to marital status)
Falls into 5 categories: single, married filing jointly, married filing separately, head of household, and qualifying widow with dependent children
Single: taxpayer that is unmarried, divorced, or a registered domestic partner (the head of household or person who is widowed may NOT be categorized as single for tax purposes)
Married filing jointly: an individual that is married by the end of the tax year; couples can record their respective incomes, exemptions, and deductions on the same tax return
*a joint tax return will provide a bigger tax refund or a lower tax liability (the total amount of tax debt owed to a government by an individual, corporation, or other entity is reduced)
-filing jointly is only advantageous if ONLY one spouse has a significant income
Married filing separately: an individual that is married but don’t combine their taxes
-if both spouses work and the income and itemized deductions (expense that is deducted from gross income to reduce tax bill) are large and UNEQUAL, they should file separately
Head of household: single or unmarried taxpayer who pays 50% of the costs supporting the household and lives with qualifying household members for whom they provide support for more than half a year
Qualifying widow with dependent child: for next 2 tax years after spouse's death, the widow can qualify for qualifying widow with dependent child if they’re maintaining a household for the said child
*surviving spouse won’t be able to claim exemption for deceased spouse, but may claim standard deduction for married couple filing jointly
It’s quick and easy to calculate income tax by yourself! You just add up all the sources of taxable income earned in a tax year, and calculate your adjusted gross income (AGI)
Not having to pay income tax is seen to be a really big plus.
*You can put as much as $19,500 a year into a 401K plan, which will rise to $20,500 by the next year; and when you’re 50 and over, you can contribute an extra $6,500 ($26,000 total)
-many employers might even match your contributions (add a certain amount to your 401K account in addition to what you contribute); if you’re employer chooses to kick in another 50%, an investment of $10,000 actually becomes worth $15,000
Remember compounding interest! Well, that’s exactly what happens with your retirement savings as well. Assuming that you invest the MAXIMUM of $19,500 every year and are guaranteed a 5% return, by the end of 5 years you will have $139,269 (almost 23k more than you invested!)
