Tag: Wealth Management

Debunking Common Myths about Personal Finance

It’s possible that the only obstacle to reaching your financial dream is your lack of financial knowledge. Having a job and paying taxes and rent doesn’t qualify you as financially literate. Like many of us in the United States, you’re bound to encounter repeated mistakes with money—many of which are based on false preconceived notions. It’s time to debunk some common financial myths.

That Finance is Corrupt

Start building your financial literacy by accepting the fact that money, itself, isn’t reserved for the corrupt. You need to stay true to yourself as you build your wealth, and if you find yourself in trouble due to money, a closer look will reveal that you got yourself into that trouble. At the same time, though, you can always get yourself out!

That Budgeting Alone is What Saves Money

You can’t save money just by organizing your fixed and variable costs. Your discipline, as you live according to your budget, means nothing if the influences of spending later deter you. One of the largest expenses that people fail to account for is the fact that sellers invest time and money into convincing you to casually give your money away. You won’t save money “if you keep falling into spending sprees.”

That Your Savings Equals Wealth

Money is what you earn, but wealth is only obtained from assets that create an income. Savings won’t make you wealthy, since cash is exposed to inflation, taxes, and spending. Building wealth is about positioning your money to duplicate itself without your direct effort. Your savings, though valuable and necessary, are only useful if used to acquire assets that generate more income for you.

That Retirement is the Goal

Another mistake that promising Americans make with their finances is in organizing them solely for retirement.

Retirement is paradoxical since wealth, which is money that doesn’t deplete, must come from multiple assets that produce an income. If you, at this very moment, hope to reach a point in life where you do nothing, then this mindset will reflect in and limit your personal finances. You should expect to retire, but shouldn’t sacrifice your potential for financial improvement. 

Four Easy Ways to Budget This Month

For some, creating and sticking to a budget is a simple task. For others, it’s a strenuous and seemingly impossible task. The temptation to eat out, splurge on clothes, and throw caution and cash to the wind can be huge, so it’s essential to find ways to stay on track. Here are four ways to create a budget that works and stick to it.

Meal Prep

In addition to various forms of outside entertainment, eating out is a considerable expense. Since most restaurants mark food up—sometimes as much as 300 percent—the only sure-fire way to save money on food is to cook meals at home. However, this is a lot more time-consuming and can be difficult for those without much cooking experience.

Take the time to plan meals, including the cost of ingredients, for at least a week’s worth of meals. Also, include the costs of snacks as well. One way to save on food is to buy in bulk. Look for items that can be purchased in larger quantities and divide up for later.

Set Up Autopay

Another way to stick to a budget is by setting up autopay. Instead of having to pay bills and charges every month manually, autopay lets budget-setters know what they pay and when. The same concept can also help track savings. Just have a set amount of money transferred each month into a savings account.

When it comes to paying utilities, look into budget billing. Customers pay a set amount for power and water. After a set time frame, they’re either refunded the difference or charged for any overages.

Entertain at Home

Simply put, going out is expensive. Everything from grabbing drinks to seeing a movie is expensive these days. Instead of breaking the budget, invite friends over and find ways to create a social atmosphere at home. Cocktails made at home cost half the price when ordered out. The same holds true for take-out. If your group wants pizza and a movie, rent a flick and make homemade pizza.

Track Success

Tracking success is a great motivator, so make sure you keep track of how much money you’ve saved over the month. After seeing positive results, you may feel even more motivated to stick to their budgets.

With a little planning, creating and sticking to a budget is easy. Since everyone has different needs, never compare budget planning. Finally, make sure that the budget isn’t so rigid that it’s impossible to follow. Just be sure to leave some wiggle room for the occasional splurge.

Choosing Between a 401(k) and Roth IRA

When it comes to retirement savings, two of the more popular vehicles are the 401(k) and the Roth IRA. Both are tax-advantaged retirement accounts, but there are significant differences. Depending upon your specific situation, you may find that one fits your needs better than the other.

What are the savings limits?

For workers who haven’t yet reached age 50, it’s possible to save as much as $19,000 in a 401(k) as of 2019. Those who have passed 50 can save an additional $6,000 as a catch-up contribution. Depending upon their age, those who want to save in a Roth IRA can save $6,000 or $7,000 per year. Both are great savings vehicles, but those who are looking to max out their savings would most benefit from using a 401(k).

What is the tax treatment?

Most 401(k) plans save money on a pre-tax basis. This means that it’s possible to cut your tax bill in the current year. Savings put toward a Roth IRA are made with after-tax dollars. Both accounts will grow on a tax-free basis as long as the money is left in the account. The difference comes when you decide to withdraw the money. If you wait until age 59 and a half, you’ll pay no taxes on Roth IRA withdrawals. The government treats them as if you’ve already paid the tax due when you made the after-tax contribution. On the other hand, a regular 401(k) withdrawal will be taxed at your marginal tax rate. 

 

An additional benefit of a Roth IRA is the ability to withdraw your contributions at any time. Because you’ve paid the tax on the contributions, there is no tax due. If you withdraw the earnings from a Roth IRA before hitting age 59 and a half, you’ll owe regular income taxes on any growth along with a 10% penalty for early withdrawal.

Is using both a good strategy?

Many future retirees wonder if it’s better to save in a Roth or a 401(k). It’s possible to save in both. Many employers offer a 401(k) match, and oftentimes, this match will be on a dollar-for-dollar basis up to 6% of the employee’s salary. Therefore, it’s a good idea to save at least to the full amount of this match. Any additional money could go toward filling up a Roth IRA to maximize tax-free withdrawals upon retirement. After contributing the maximum to a Roth, contributing to a 401(k) up to the maximum is a great next step. Overall, you could save between $25,000 and $32,000 by maxing out both accounts.

Tips for Financial Independence and Early Retirement

What do you consider to be “retirement age”? Perhaps early 60s or late 50s. What about 30s and 40s? The FIRE movement, which stands for “financial independence, retire early,” has gained traction with individuals as young as their 20s. The idea of working 9-to-5 jobs for several decades is an intimidating one, and FIRE offers the chance to work hard and, earlier than expected, play hard. However, FIRE is not an easy process, and it takes plenty of planning to truly retire early. Here are some considerations to take into account if you plan on retiring early.

Do Your Research

Monthly earnings from social security and pensions, costs of present and future healthcare concerns, and similar factors must be considered before an individual takes any steps towards early retirement. There are several complications, ones that often work against each other, to sort out during the planning phase of FIRE, but these factors help paint a picture of your financial future. Make sure you understand what FIRE really is, and what it means for you and your situation. In some cases, research may prove that early retirement isn’t the best option; rather, switching to part-time work or taking a temporary hiatus from work is better. 

Speak With a Financial Advisor

Financial advisors often assist individuals experiencing drastic life changes, such as making a family or retiring. When it comes to the latter, financial advisors will examine whether a client’s current financial system sets a strong foundation for retirement. Additionally, financial advisors look to the future to predict potential issues. Taking all of this into consideration, clients and advisors can develop a plan to work towards that independence. While hiring a financial advisor does come at a cost, the benefits of receiving an expert’s advice and planning assistance can be a lucrative investment. 

Don’t Rush the Process

A simple Google search can unearth a plethora of FIRE horror stories. A common trend in these tales involves early retirees jumping the gun and retiring before they’ve hit their financial goals. For some, this means retiring several years sooner than planned. While earlier-than-early retirement is enticing, it’s unwise to throw your financial goals out the window. Doing so means deviating from your financial plans, which in turn leads to increased risks of your independence returning to dependence. Remain patient and diligent as you work towards retirement, and avoid making rash decisions to save time—that won’t always equate to saving money.

Understand Your Drive

Why do you want to retire early? Is it to avoid unhealthy amounts of stress? Are you trying to spend more time with your family? Has a hobby become your life-long passion? A thorough understanding of the “why” behind your desire to retire early will help you figure out how to reach your financial goals. Anyone can say they want to have more free time. But what are you going to do with that free time? Take some time to introspect and figure out what drives you towards early retirement. 

Why You’re Overspending (And How to Stop)

Compare your monthly income with your monthly spending. Do you notice a glaring discrepancy? Are your earnings in the red? Can’t figure out how you spent hundreds on groceries? You aren’t alone. Overspending is easy to do, and purchases can accumulate in the blink of an eye. Here are some reasons why you’re overspending and advice on how to stop.

You’ve fallen into a bad habit

Do you buy lunch at the deli down the street every day? This is just one example of a bad spending habit. It may be comfortable and convenient to make a daily or weekly purchase, but ten dollars per day, five days a week, four weeks a month equals $200 each month just for lunch. 

The best way to remedy a bad spending habit is to ease yourself out of the habit. For the lunch example, try packing a meal most days each week, and only go out once a week or so as a special treat. You don’t have to quit anything cold-turkey, and easing yourself towards a better spending habit might inspire you to be more mindful of what you buy.

You ignore automatic payments

This one is easy to notice, especially if you subscribe to magazines and newspapers that clog your mailbox. Still, with the rise of streaming services and other digital subscriptions, you may not be keeping track of all the services you subscribe to. It’s easy to let automatic monthly payments slip through the cracks, but those payments are also an easy way to lose money.

Each month, carefully study your credit card statement. Write down the names of subscriptions you used during the month, whether that means watching a movie on Netflix or flipping through a copy of Sports Illustrated. Next to that list, write down the subscriptions you didn’t use. Unsubscribe from the ones that you didn’t touch. You’d be surprised how much money you can save annually just by paring down your subscriptions.

You haven’t disciplined your spending habits

It’s hard to find someone who hasn’t disciplined their spending habits. Whether you fall victim to impulse buys at the checkout line or fill your gas tank before it hits the halfway mark, everyone has a spending vice. 

No two people have the same income, interests, and habits, which can make disciplining your spending habits difficult. The key is to figure out what you’re buying and why you’re buying it. It helps to break purchases up into categories, such as “loans,” “food,” and “entertainment.” Not only will this show how much you’re spending, but it will also reveal what exactly you’re spending your money on.

Living Well Below Your Means

Most adults aspire to not live paycheck to paycheck, maintain the ability to save, and be comfortable enough to cover unexpected expenses. Unfortunately, there are many people who are not able to do so – or at least they think that’s the case. You can achieve all of these things by partaking in a simple exercise and sticking to it. I’m talking about budgeting, money management, a game plan, or a spending plan – whatever you want to call it you need to have something in place to get spending under control and to increase your saving. This blog highlights a few systems for keeping track of your expenses so you can confidently take control of your finances.

50/30/20 Rule

The 50/30/20 rule is probably the simplest budget out there, but it’s a good way to see how your spending stacks up. If you are under spending in the living or personal categories, you’re in good shape! If you find your spending is creeping out of the guidelines of this budget, it may be time to reevaluate how you spend.

Living Expenses

Living expenses are the 50% in the 50/30/20 budget. These expenses take up the biggest slice of the pie – for good reason. The things that fall into this category are the expenses you can not live without. They are housing, utilities, food, and transportation. By carving out half your monthly income for living expenses, you maintain flexibility, but put a cap on how much you should spend. If your housing has a high rent cost, you more likely live in a city and could walk to work. Thus, your transportation costs would be low. Similarly, you can keep your utility costs down by being conscious of energy use and installing fixtures that conserve water and electricity.

Personal Expenses

Personal expenses make up 30% of your monthly income. Personal expenses cover all unnecessary spending or bills that you have control over. For instance, if you are looking to cut down in this area, you can change cell phone plans, reduce cable costs, and eat at home more. This category has the most flexibility because it all comes down to your lifestyle and spending habits. Putting a 30% cap on your personal spending will give you a hard number to stay under. Just a heads up, when you begin to employ the 50/30/20 budget you very well receive a rude wake up call. Most people grossly overspend in this category. Don’t panic! Now that you are aware, you can make necessary changes.

Savings

Your saving should cover the final 20% of your income per month. Saving can also translate to “getting ahead.” You can use this money to either stow away or pay off additional debt. Either way, this money should be used to improve your financial footing. This number is also the most flexible. If you end up spending less in one or both of the categories above, then you should add the extra cash into this category. There’s nothing wrong with saving more than you’ve allotted. It may even come in handy a month you go over in another area.

Spending Plan

If a budget like the 50/30/20 plan doesn’t suit you, a spending plan can give you enough freedom to make decisions on a monthly basis. A spending plan is an alternative to the traditional budget. Budgets tend to employ a one size fits all mentality. Every month is devoted to the same budget. That method does not work for everyone.

Disclaimer: a spending plan requires a bit more work and tenacity. You need to monitor your spending closer than you would in a cap expense budget like the 50/30/20 system.

To get started, you’ll need to determine your monthly take home pay. This is what you have to work with every month, so it’s a good place to start.

Next, move on to the meat of your spending. These are your fixed monthly costs. You know, the bills you have to pay every month in order to live in your house and have everything you need. Some of these expenses will be the same month over month, but others can fluctuate. No matter what, you are going to shell out something for these items every month. Some examples of fixed monthly costs are:

  • Rent/Mortgage
  • Insurance (health & auto)
  • Internet
  • Cell phone
  • Utilities
  • Savings/Retirement

Now that you have your fixed costs for the month, subtract that from your take-home pay. The money left over is what you can spend the rest of the month. This should go without saying, but you don’t have to spend it all! If you want to save for a larger purchase, increase your emergency fund, or put money aside for a vacation, then go ahead!

The beauty of a spending plan is the simple fact that you now have juxtaposed what you need to spend with what you want to spend. You make come to some realizations because of this. You may notice that you have very little left over after the fixed costs come out. This can signal a few things for readjustment:

  1. Your fixed costs may need a little tweaking. Do you want to have more spending money? Then you may need to get rid of cable or lower your package. Maybe you don’t need as much data on your cell phone plan. Whatever the case may be, you have identified the issue and can make changes accordingly.
  2. The reason you can’t seem to get ahead with credit card bills or can’t save as much as you like is simply because you were spending more than what you should be. This can be a rude wake up call for some people, but with some work you’ll get where you want.

No matter what plan of action you adopt, set realistic expectations and be honest with yourself. Your financial goals will be the motivator between how much you spend and how much you get to bank away at the end of the month. With careful planning, a closer look, and financial adjustments, you will find yourself on better financial ground in no time.