Managing your financial health is like other habits. It can be learned, requires practice to make it stick, and you will see the results over time. Good financial health habits start at any age.
How to make a budget
Several websites provide spreadsheets that can be downloaded, or you can start with pencil and paper to build your budget. These five steps from Money Fit are similar to information from other websites.
1. Identify financial goals. Is it to remain out of debt or pay down loans? Do you need to save money for college, vacation, a special purchase or other important items? It is never too early to save for retirement. Having the goals will help you stay focused.
2. Record expenses. Expenses that you have monthly, such as rent or mortgage; cellphone; groceries; insurance for car, home and health; utilities, streaming or apps. If you pay the bill quarterly, you still want to account for the amount needed monthly. Next, include items that are variable, such as gift-giving, car maintenance or such seasonal items as school clothes and supplies. Record the expenses that are “wants.” Entertainment, dining out and shopping. Review your credit card and bank statements to be certain to include all expenses.
Stores have made it easier to pay with a credit or debit card. And this can make it challenging to track your expenses. Use the receipts to record expenses so you know if it was a “need” or a “want.”
3. Record your earnings. This is your take-home pay after taxes and other deductions.
4. Subtract your expenses from your earnings. The result will direct you to the next step.
5. Review, adjust and plan. Review the expenses. Are there items you forgot to record? Expenses that can be reduced? Can you increase your income? Rework your budget.
Once you have your budget, use your worksheet regularly to see if you are on track or need to adjust. Track your account balance carefully to avoid expensive overdraft charges. Pay credit card balances off monthly to avoid fees and high interest rates.
Include savings, too
Pay yourself first. If there is a program for automatic transfers to a savings account through your employer, use it. It is easier to save with this help. If one is not available, make it a habit of putting a specific amount in savings each time you are paid – small amounts will add up. Savings of three to six months of expenses is recommended by financial health sites. Several articles suggest saving 15% of your income. Savings is for your near-term goals and for retirement. If your employer offers a retirement savings plan, participate.
The Consumer Financial Protection Bureau website has a section on savings, including videos and online training. It also has resources for talking to children about savings.
• Save for such emergencies as car repairs or medical bills; while recovering from an emergency is difficult, savings will help.
• If you are getting a tax refund, save some or all of it.
• Open a bank or credit union account; know the fees charged and interest paid.
• If you cut back on an expense, commit to putting that money in savings.
What is compound interest?
Although interest rates being paid for savings accounts are low, it is still an easy way to save and have access when needed. Compound interest is the interest you earn on interest. For example, if you have $100 in an account earning 1% interest. After one year, you will have $101. You are then earning interest on $101. While this is slow growth, it’s better than a piggy bank on your dresser. During this time of low interest rates, be cautious about offers of high interest rates.
Similar principles apply to paying off a loan. When you take out a loan, be certain to ask questions about how the interest is calculated. Ask how they will handle payments that are greater than the regularly scheduled amount. Will additional payments be applied to the principal, allowing you to pay off the loan more quickly?
What is a 529 plan?
According to the U.S. Securities and Exchange Commission, a 529 plan is a tax-advantaged savings plan designed to encourage saving for future education costs. The 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
New Mexico’s 529 college savings plan is called The Education Plan®. This savings plan lets your earnings grow without federal tax and the money you withdraw is also federal tax-free, as long as it is used to pay for qualified education expenses. There are 100% state income-tax deductible contributions for NM taxpayers. Anyone can open and contribute to a 529 account for anyone else, including family and friends.
Your bank or credit union may offer classes on financial health. Take advantage of the service and grow your wealth.