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How to Be Smart with Money

How to Be Smart with Money.

Being smart with money doesn’t have to involve high risk investments or having thousands of dollars in the bank. No matter what your current situation is, you can be more financially savvy in your everyday life. Start by building a budget to help you stay within your means and prioritize your financial goals. Then, you can work on paying down your debt, building up your savings, and making better spending decisions.

Method 1 Managing Your Budget.
1. Set your financial goals. Understanding what you are working toward will help you build a budget to meet your needs. Do you want to pay down debt? Are you saving for a major purchase? Are you just looking to be more financially stable? Make your top priorities clear so that you can build your budget to fit them.
2. Look at your overall monthly income. A smart budget is one that doesn’t overextend your means. Start by calculating your total monthly income. Include not just the money you get from work, but any cash you get from things like side-hustles, alimony, or child support. If you share expenses with your partner, calculate your combined income to figure out a household budget.
You should aim to have your overall monthly spending not exceed what you bring in. Emergencies and unforeseen occasions happen, but try to set a goal of not using your credit card to cover non-necessary items when your bank accounts are low.
3. Calculate your necessary expenses. Your first priority in building a better budget should be those things that need to be paid every month. Paying these expenses should be your first priority, as these items are not only necessary for daily function, but could also damage your credit if you fail to pay them in full and on time.
Such expenses may include your mortgage or rent, utilities, car payments, and credit card payments, as well as things like your groceries, gas, and insurance.
Set your bills up on autopay to make them easy to prioritize. This way, the money comes right out of your account on the day the bill is due.
4. Factor in your non-essential expenses. Budgets work best when they reflect your daily life. Take a look at your regular, non-essential expenses and build them into your budget so that you can anticipate your spending. If you get a coffee every morning on the way to work, for example, throw that in your budget.
5. Look for places to make cuts. Creating a budget will help you identify things you can cut from your regular expenses and roll into your savings or debt payments. Investing in a good coffee pot and a quality to-go mug, for example, can really help you save long-term on your morning fix.
Don’t just look at daily expenses. Check things like your insurance policies and see if there are places you can scale back. If you are paying for collision and comprehensive insurance on an old car, for example, you may opt to scale back to just liability.
6. Track your monthly spending. A budget is a guideline for your overall spending habits. Your actual spending will vary each month depending upon your personal needs. Track your spending by using an expenses journal, a spreadsheet, or even a budgeting app to help you ensure that you are staying within your means each month.
If you do mess up or go over your budget goals, don’t beat yourself up. Use the opportunity to see if you need to revise your budget to include new expenses. Remind yourself that getting off-target happens to everyone occasionally, and that you can get to where you want to be.
7. Build some savings into your budget. Exactly how much you save will depend upon your job, your personal expenses, and your individual financial goals. You should aim to save something each month, though, whether that’s $50 or $500. Keep that money in a savings account separate from your primary bank account.
This savings should be separate from your 401(k) or any other investments that you have. Building a small general savings will help you protect yourself financially if an emergency comes up, such as a major repair around the house or unexpectedly losing your job.
Many financial experts recommend a target savings of 3-6 months’ worth of expenses. If you have a lot of debt you need to pay down, aim for a partial emergency fund of 1-2 months, then focus the rest of your cash on your debt.

Method 2 Paying Off Debts
1. Figure out how much you owe. To understand how to best pay down your debt, you first need to understand how much you owe. Add together all your debts, including credit cards, short-term loans, student loans, and any mortgages or auto financing you have in your name. Look at your total debt numbers to help you understand how much you owe, and how long it will truly take to pay it off.
2. Prioritize high-interest debts. Debts like credit cards tend to have higher interest rates than things like student loans. The longer your carry a balance on high interest debts, the more you ultimately pay. Prioritize paying down your highest interest debts first, making minimum payments on other debts and putting extra money into your top debt priorities.
If you have a short-term loan like a car title loan, prioritize paying that down as quickly as possible. Such loans can be devastating if not paid off in full and on time.
3. Go straight from paying off one debt to the next. When you pay off one credit card, don’t roll that payment amount back into your discretionary funds. Instead, roll the amount you were paying into your next debt.
If, for example, you finished paying down a credit card, take the amount you were putting toward your credit card and add it to the minimum payment for your student loans.

Method 3 Setting Up Savings.
1. Pick a savings goal. Saving tends to be easier when you know what you’re saving for. Try to set a goal, such as building an emergency fund, saving for a down payment, saving for a major household purchase, or building a retirement fund. If your bank will let you, you can even give your account a nickname such as “Vacation Fund” to help remind you of what you’re working toward.
2. Keep your savings in a separate account. A savings account is generally the easiest place to put your savings if you are just starting out. If you already have a solid emergency fund and have a reasonable amount to invest, such as $1,000, you may consider something like a certificate of deposit (CD). CDs make your money much harder to get to for a fixed period of time, but tend to have a much higher interest rate.
Keeping your savings separate from your checking account will make it harder to spend your savings. Savings accounts also tend to have a slightly higher interest rate than checking accounts.
Many banks will allow you to set up an automatic transfer between your checking and savings accounts. Set up a monthly transfer from your checking to your savings, even if it’s just for a small amount.
3. Invest raises and bonuses. If you get a raise, a bonus, a tax return, or another unexpected windfall, put it in your savings. This is an easy way to help boost your account without compromising your current budget.
If you get a raise, invest the difference between your budgeted salary and your new salary directly into your savings. Since you already have a plan to live off your old salary, you can use the new influx of cash to build your savings.
4. Dedicate your side gig money to your savings. If you work a side gig, build a budget based on your primary source of income and dedicate all your earnings from your side gig to your savings. This will help grow your savings faster while making your budget more comfortable.

Method 4 Spending Money Wisely.
1. Prioritize your needs. Start each budget period by paying for your needs. This should include your rent or mortgage, utility bills, insurance, gas, groceries, recurring medical expenses, and any other expenses you may have. Do not put any money toward non-necessary expenses until all of your necessary living costs have been paid.
2. Shop around. It can be easy to get in the habit of shopping in the same place repeatedly, but taking time shop around can help you find the best deals. Check in stores and online to look for the best prices for your needs. Look for stores that might be running sales, or that specialize in discount or surplus merchandise.
Bulk stores can be useful for buying things you use a lot of, or things that don't expire such as cleaning supplies.
3. Buy clothes and shoes out-of-season. New styles of clothes, shoes, and accessories generally come out seasonally. Shopping out-of-season can help you find better prices on fashion items. Shopping online is particularly useful for out-of-season clothes, as not all stores will have non-seasonal items.
4. Use cash instead of cards. For non-necessary expenses such as going out to eat or seeing a movie, set a budget. Withdraw the necessary amount of cash before you go out, and leave your cards at home. This will make it more difficult to overspend or impulse buy while you're out.
5. Monitor your spending. Ultimately, as long as you're not spending more than you bring in, you're on target. Regularly monitor your spending in whatever way works best for you. You may prefer to check your bank account every day, or you could sign up for a money-monitoring app such as Mint, Dollarbird, or BillGuard to help you track your spending.

April 11, 2020

How to Calculate Compound Interest

How to Calculate Compound Interest.

Compound interest is distinct from simple interest in that interest is earned both on the original investment (the principal) and the interest accumulated so far, rather than simply on the principal. Because of this, accounts with compound interest grow faster than those with simple interest. Additionally, the value will grow even faster if the interest is compounded multiple times per year. Compound interest is offered on a variety of investment products and also charged on certain types of loans, like credit card debt. Calculating how much an amount will grow under compound interest is simple with the right equations.

Part 1 Finding Annual Compound Interest.
1. Define annual compounding. The interest rate stated on your investment prospectus or loan agreement is an annual rate. If your car loan, for example, is a 6% loan, you pay 6% interest each year. Compounding once at the end of the year is the easiest calculation for compounding interest.
A debt may compound interest annually, monthly or even daily.
The more frequently your debt compounds, the faster you will accumulate interest.
You can look at compound interest from the investor or the debtor’s point of view. Frequent compounding means that the investor’s interest earnings will increase at a faster rate. It also means that the debtor will owe more interest while the debt is outstanding.
For example, a savings account may be compounded annually, while a pay-day loan can be compounded monthly or even weekly.
2. Calculate interest compounding annually for year one. Assume that you own a $1,000, 6% savings bond issued by the US Treasury. Treasury savings bonds pay out interest each year based on their interest rate and current value.
Interest paid in year 1 would be $60 ($1,000 multiplied by 6% = $60).
To calculate interest for year 2, you need to add the original principal amount to all interest earned to date. In this case, the principal for year 2 would be ($1,000 + $60 = $1,060). The value of the bond is now $1,060 and the interest payment will be calculated from this value.
3. Compute interest compounding for later years. To see the bigger impact of compound interest, compute interest for later years. As you move from year to year, the principal amount continues to grow.
Multiply the year 2 principal amount by the bond’s interest rate. ($1,060 X 6% = $63.60). The interest earned is higher by $3.60 ($63.60 - $60.00). That’s because the principal amount increased from $1,000 to $1,060.
For year 3, the principal amount is ($1,060 + $63.60 = $1,123.60). The interest earned in year 3 is $67.42. That amount is added to the principal balance for the year 4 calculation.
The longer a debt is outstanding, the bigger the impact of compounding interest. Outstanding means that the debt is still owed by the debtor.
Without compounding, the year 2 interest would simply be ($1,000 X 6% = $60). In fact, every year’s interest earned would be $60 if you did earn compound interest. This is known as simple interest.
4. Create an excel document to compute compound interest. It can be handy to visualize compound interest by creating a simple model in excel that shows the growth of your investment. Start by opening a document and labeling the top cell in columns A, B, and C "Year," "Value," and "Interest Earned," respectively.
Enter the years (0-5) in cells A2 to A7.
Enter your principal in cell B2. For example, imagine you are started with $1,000. Input 1000.
In cell B3, type "=B2*1.06" and press enter. This means that your interest is being compounded annually at 6% (0.06). Click on the lower right corner of cell B3 and drag the formula down to cell B7. The numbers will fill in appropriately.
Place a 0 in cell C2. In cell C3, type "=B3-B$2" and press enter. This should give you the difference between the values in cell B3 and B2, which represents the interest earned. Click on the lower right corner of cell C3 and drag the formula down to cell C7. The values will fill themselves in.
Continue this process to replicate the process for as many years as you want to track. You can also easily change values for principal and interest rate by altering the formulas used and cell contents.

Part 2 Calculating Compound Interest on Investments.
1. Learn the compound interest formula. The compound interest formula solves for the future value of the investment after set number of years. The formula itself is as follows: {\displaystyle FV=P(1+{\frac {i}{c}})^{n*c}}FV=P(1+{\frac {i}{c}})^{{n*c}} The variables within the equation are defined as follows:
"FV" is the future value. This is the result of the calculation.
"P" is your principal.
"i" represents the annual interest rate.
"c" represents the compounding frequency (how many times the interest compounds each year).
"n" represents the number of years being measured.
2. Gather variables the compound interest formula. If interest compounds more often than annually, it is difficult to calculate the formula manually. You can use a compound interest formula for any calculation. To use the formula, you need to gather the following information.
Identify the principal of the investment. This is the original amount of your investment. This could be how much you deposited into the account or the original cost of the bond. For example, imagine your principal in an investment account is $5,000.
Locate the interest rate for the debt. The interest rate should be an annual amount, stated as a percentage of the principal. For example, a 3.45% interest rate on the $5,000 principal value.
In the calculation, the interest rate will have to be input as decimal. Convert it by dividing the interest rate by 100. In this example, this would be 3.45%/100 = 0.0345.
You also need to know how often the debt compounds. Typically, interest compounds annually, monthly or daily. For example, imagine that it compounds monthly. This means your compounding frequency ("c") would be input as 12.
Determine the length of time you want to measure. This could be a goal year for growth, like 5 or 10 years, or this maturity of a bond. The maturity date of a bond is the date that the principal amount of the debt is to be repaid. For the example, we use 2 years, so input 2.
3. Use the formula. Input your variables in the right places. Check again to make sure that you are inputting them correctly. Specifically, make sure that your interest rate is in decimal form and that you have used the right number for "c" (compounding frequency).
The example investment would be input as follows: {\displaystyle FV=\$5000(1+{\frac {0.0345}{12}})^{2*12}}FV=\$5000(1+{\frac {0.0345}{12}})^{{2*12}}
Compute the exponent portion and the portion of the formula in parenthesis separately. This is a math concept called order of operations. You can learn more about the concept using this link: Apply the Order of Operations.
4. Finish the math computations in the formula. Simplify the problem by solving for the parts of the equation in parenthesis first, beginning with the fraction.
Divide the fraction within parentheses first. The result should be: {\displaystyle FV=\$5000(1+0.00288)^{2*12}}FV=\$5000(1+0.00288)^{{2*12}}
Add the numbers within parentheses. The result should be: {\displaystyle FV=\$5000(1.00288)^{2*12}}FV=\$5000(1.00288)^{{2*12}}
Solve the multiplication within the exponent (the last part above the closing parenthesis). The result should look like this: {\displaystyle FV=\$5000(1.00288)^{24}}FV=\$5000(1.00288)^{{24}}
Raise the number within the parentheses to the power of the exponent. This can be done on a calculator by entering the value in parentheses (1.00288 in the example) first, pressing the {\displaystyle x^{y}}x^{y} button, then entering the exponent (24 in this case) and pressing enter. The result in the example is {\displaystyle FV=\$5000(1.0715)}FV=\$5000(1.0715)
Finally, multiply the principal by the number in parentheses. The result in the example is $5,000*1.0715, or $5,357.50. This is the value of the account at the end of the two years.
5. Subtract the principal from your answer. This will give you the amount of interest earned.
Subtract the principal of $5,000 from the future value of $5357.50 to get $5,375.50-$5,000, or $357.50
You will earn $357.50 in interest over the two years.

Part 3 Calculating Compound Interest With Regular Payments.
1. Learn the formula. Compounding interest accounts can increase even faster if you make regular contributions to them, such as adding a monthly amount to a savings account. The formula is longer than that used to calculate compound interest without regular payments, but follows the same principles. The formula is as follows: {\displaystyle FV=P(1+{\frac {i}{c}})^{n*c}+{\frac {R((1+{\frac {i}{c}})^{n*c}-1)}{\frac {i}{c}}}}FV=P(1+{\frac {i}{c}})^{{n*c}}+{\frac {R((1+{\frac {i}{c}})^{{n*c}}-1)}{{\frac {i}{c}}}}[7]The variables within the equation are also the same as the previous equation, with one addition.
"P" is the principal.
"i" is the annual interest rate.
"c" is the compounding frequency and represents how many times the interest is compounded each year.
"n" is the number of years.
"R" is the amount of the monthly contribution.
2. Compile the necessary variables. To compute the future value of this type of account, you will need the principal (or present value) of the account, the annual interest rate, the compounding frequency, the number of years being measured, and the amount of your monthly contribution. This information should be in your investment agreement.
Be sure to convert the annual interest rate into a decimal. Do this by dividing the rate by 100. For example, using the above 3.45% interest rate, we would divide 3.45 by 100 to get 0.0345.
For compounding frequency, simply use the number of times per year that the interest compounds. This means annually is 1, monthly is 12, and daily is 365 (don't worry about leap years).
3. Input your variables. Continuing with the example from above, imagine that you decide to also contribute $100 per month to your account. This account, with a principal value of $5,000, compounds monthly and earns 3.45% annual interest. We will measure the growth of the account over two years.
The completed formula using this information is as follows: {\displaystyle FV=\$5,000(1+{\frac {0.0345}{12}})^{2*12}+{\frac {\$100((1+{\frac {0.0345}{12}})^{2*12}-1)}{\frac {0.0345}{12}}}}FV=\$5,000(1+{\frac {0.0345}{12}})^{{2*12}}+{\frac {\$100((1+{\frac {0.0345}{12}})^{{2*12}}-1)}{{\frac {0.0345}{12}}}}
4. Solve the equation. Again, remember to use the proper order of operations to do so. This means that you start by calculating the values inside of parentheses.
Solve for the fractions with parentheses first. This means dividing "i" by "c" in three places, all for the same result of 0.00288. The equation now looks like this: {\displaystyle FV=\$5,000(1+0.00288)^{2*12}+{\frac {\$100((1+0.00288)^{2*12}-1)}{0.00288}}}FV=\$5,000(1+0.00288)^{{2*12}}+{\frac {\$100((1+0.00288)^{{2*12}}-1)}{0.00288}}
Solve the addition within the parentheses. This means adding the 1 to the result from the last part. This gives: {\displaystyle FV=\$5,000(1.00288)^{2*12}+{\frac {\$100((1.00288)^{2*12}-1)}{0.00288}}}FV=\$5,000(1.00288)^{{2*12}}+{\frac {\$100((1.00288)^{{2*12}}-1)}{0.00288}}
Solve the multiplication within the exponents. This means multiplying the two numbers that are smaller and above the closing parentheses. In the example, this is 2*12 for a result of 24. This gives: {\displaystyle FV=\$5,000(1.00288)^{24}+{\frac {\$100((1.00288)^{24}-1)}{0.00288}}}FV=\$5,000(1.00288)^{{24}}+{\frac {\$100((1.00288)^{{24}}-1)}{0.00288}}
Solve the exponents. This means raising the amount within parentheses to the result of the last step. On a calculator, this is done by entering the value in parentheses (1.00288 in the example), pressing the {\displaystyle x^{y}}x^{y} key, and then entering the exponent value (which is 24 here). This gives: {\displaystyle FV=\$5,000(1.0715)+{\frac {\$100(1.0715-1)}{0.00288}}}FV=\$5,000(1.0715)+{\frac {\$100(1.0715-1)}{0.00288}}
Subtract. Subtract the one from the result of the last step in the right part of the equation (here 1.0715 minus 1). This gives: {\displaystyle FV=\$5,000(1.0715)+{\frac {\$100(0.0715)}{0.00288}}}FV=\$5,000(1.0715)+{\frac {\$100(0.0715)}{0.00288}}
Multiply. This means multiplying the principal by the number is the first set of parentheses and the monthly contribution by the same number in parentheses. This gives: {\displaystyle FV=\$5,357.50+{\frac {\$7.15}{0.00288}}}FV=\$5,357.50+{\frac {\$7.15}{0.00288}}
Divide the fraction. This gives {\displaystyle FV=\$5,357.50+\$2,482.64}FV=\$5,357.50+\$2,482.64
Add. Finally, add the two number to get the future value of the account. This gives $5,357.50 + $2,482.64, or $7,840.14. This is the value of the account after the two years.
5. Subtract the principal and payments. To find the interest earned, you have to subtract the amount of money you put into the account. This means adding the principal, $5,000, to the total value of contributions made, which is 24 contributions (2 years* 12 months/year) times the $100 you put in each month for a total of $2,400. The total is $5,000 plus $2,400, or $7,400. Subtracting $7,400 from the future value of $7,840.14, you get the amount of interest earned, which is $440.14.
6. Extend your calculation. To really see the benefit of compound interest, imagine that you continue adding money monthly to the same account for twenty years instead of two. In this case, your future value would be about $45,000, even though you will have only contributed $29,000, meaning that you will have earned $16,000 in interest.

FAQ.
Question : What does "to the power of" mean?
Answer : "To the power of" refers to a particular numerical exponent. It is a multiplication in which a number appears as a factor that many times. For example, 2 to the power of 1 equals 2. 2 to the power of 2 equals 2x2, or 4, and 2 to the power of 3 is 2 x 2 x 2, or 8.
Question : How do I find the compound interest on a 29,870 loan at 6% interest?
Answer : First take out the amount by the formulae: principle(1+ r/100) to the power n (number of years), then take out the ci by subtracting the principle from the amount.
Question : What do I type on a calculator to find compound interest?
Answer : Compound interest can be calculated in several ways. The most common is to say that A=Pe^(rt) where P is the initial amount, "e" is a constant around 2.71, "r" is the interest rate (i.e. 7% would be entered in as 0.07), "t" is the duration in which the interest is being calculated in years and "A" is the final amount.
Question : How do I know if it's better to owe interest on something or to pay a lump sum at no interest?
Answer : Cost/value analysis. Calculate the total you'll pay under both methods and find the difference. Then compare that difference to the value of buying now (with a loan) versus later (lump sum).
Question : How do I find the future value and the compound interest if £4000 is invested for 5 years at 42% p.a?
Answer : Principal=$4000, n=5, R=42%,0.42. The formula: FV=PV(1+r)r aise power n and substitute the value.
Question : How do I calculate principal in compound interest?
Answer : Principal = fv = p(1 + i/c)ⁿc. Formula for principal in compound interest (1 + R/100), where R = rate.

Tips.

You can also calculate compound interest easily using an online compound interest calculator. The US Government hosts a good one at https://www.investor.gov/tools/calculators/compound-interest-calculator.
A quick rule of thumb to find compound interest is the "rule of 72." Start by dividing 72 by the amount of the interest your are earning, for example 4%. In this case, this would be 72/4, or 18. This result, 18, is roughly the number of years it will take for your investment to double at the current interest rate. Keep in mind that the rule of 72 is just a quick approximation, not an exact result.[8]
You can also use these calculations to perform "what-if" calculations that can tell you how much you will earn with a given interest rate, principal, compounding frequency, or number of years.

April 09, 2020

How to Manage Family Finances

How to Manage Family Finances.

To live a happy and peaceful life with financial freedom, it's very important to manage family finances properly. Failing to manage spending or agree on financial decisions can cause a married couple to fall into endless arguing. To get through the many financial decisions present in married life, you have to coordinate a budget and financial planning with the whole family and keep an open dialogue going about the family's money.

Part 1 Coordinating Family Finances.

1. Talk openly about your finances. While this is important all the way through life, it is especially important to establish financial honestly before you get married. If one partner has a poor credit history or large debts that are not brought up before marriage, it can lead to resentment and problems down the road. Before getting married, you should meet with your loved one and discuss his current financial situation, including how much he makes, where that money goes, his credit history, and any large debts he is carrying. This sets the tone for financial openness in the rest of your lives together.

2. Meet regularly to talk about money. Decide on a time of the month to get together specifically to discuss your finances. Perhaps this meeting can coincide with the arrival of the monthly bank statement or the due date of monthly bills. In any case, use your time at this meeting to assess the previous month's expenditures, mark your progress towards long-term goals, and to propose any changes or major purchases that you want to make. Only by talking about money regularly can you make doing so a comfortable and productive experience.

3. Don't make one person the sole manager of the family's money. Many families choose to allow one person to take charge of all the family's finances; however, this places an unnecessary burden on that person and leads to others' being unaware of the family's current financial situation. In addition, if that person leaves through death or divorce, it leaves the others completely unaware of how to manage or even access the family's finances. Solve this problem by splitting up tasks between you or by managing finances in alternating months.

Both you and your spouse should attend any meetings with financial professionals, such as those with a loan officer or investment advisor.

4. Decide on an account setup. Families have options when it comes to setting up joint accounts. Some choose to keep everything together while others keep their finances mostly separate. At minimum, you should have a joint account to pay for household expenses and your mortgage payment. At the end of the month, you can split these expenses in half and each transfer in an equal amount of money into this account to pay these expenses. Having separate account can prevent arguments that might arise from one person's spending habits.

Just make sure to set limits to how much money each of you can spend each month so that one person doesn't end up spending all of the family's money.

5. Build up individual credit. Even though your finances will be combined, it is still important for each of you to have a strong credit score. Doing so will ensure not only that your credit will be good when you apply for credit jointly, but also that your credit history will remain intact if you split up. A simple way to manage this is by having separate credit cards, each established only in the name of the spouse who uses it.

Part 2 Using a Budget.

1. Choose a budget format. Before you create a budget, you'll have to decide how to keep that budget. While many people can get away with just using a notepad and pen, others find it easier to track their spending through a spreadsheet or financial software. There are a number of a free software platforms available online that you can use to establish and track a budget. For example, programs like Mint.com and Manilla offer free budgeting services. If you want full service financial software, try Quicken or Microsoft Money.

2. Assess your current spending habits. For a month, write down a note every time you spend money, even for very small amounts. Record the amount spent and what it was you paid for. At the end of the month, sit down with your spouse and total up both your spending. Add in major expenditures to get a clear picture of where the family's money went that month. Split up expenses by category (home, car, food, etc.) if you can. Then, compare that amount to your combined, after-tax income. This is your starting point for determining a budget.

It may also be helpful to work with your bank statement to make sure you didn't miss any recurring payments or online purchases when totaling your expenses.

3. Come together to create a budget. Look at your compiled spending habits. Do you have a surplus? Or are you spending more than you make? Work from here to identify areas where you can cut back, if needed. If at all possible, try to free up money that can be put into savings or into the retirement fund. Create spending limits on certain categories, like food and entertainment, and try to stick to them over time.

Remember to always leave room in your monthly budget for unexpected expenses, like small medical bills or car repairs.

4. Work to improve and change your budget as needed. Return to your budget regularly to eliminate unnecessary spending or to adjust your budgeted amounts as needed. For example, having a child may cause you to have to completely restructure your budget. In any case, constantly seek out areas where you can cut back and save more. You'll find that you can be just as happy while spending much less than you do now.

Part 3 Saving for Life Goals.

1. Decide on long-term goals together. Have an open conversation about your savings goals, including saving for a house, for retirement, and for other large purchases like a car or boat. Make sure that you both agree that the purchase or expense in question is worth saving for and that you agree on the amount needed. This will help coordinate your savings and investment efforts.

2. Create an emergency fund. Every family should strive to keep an emergency savings fund for when things go south. Who knows when one of you might lose a job or experience unexpected medical problems? An emergency fund can help you avoid future debt and provide some financial security and flexibility. The traditional wisdom is to keep three to six month's salary in a savings account; however, this would be more than enough for some families and not nearly enough for others. Luckily, there are several financial calculators online that you can use to calculate roughly how much you need to save to cover your expenses.

Try searching for emergency fund calculators using a search engine.

There is also an app, HelloWallet, that offers this type of calculator.

3. Reduce your debt. Your first goal should be to pay off your existing debt. Only by paying down student loans, car loans, and other debt can you qualify for more credit as a couple and move forward with saving for other goals. To eliminate debt, work together to pay more than the minimum payment on each loan (as long as there are no prepayment penalties for doing so). Work with your spouse to create a plan and schedule for paying off your outstanding debt. If necessary, have one of you in charge of making sure that debt payments have been made each month.

4. Save for retirement. Couples should start planning for retirement as early as possible. This is because, due to the effects of compound interest, money placed in a retirement fund at a young age will earn much more interest over its life than the same amount of money put in at a later age. Make sure to make every effort to increase your retirement savings, including seeking to max out your employer's 401(k) match (if they have one), maxing out IRS-limits for 401(k) savings, and regularly increasing your retirement savings amounts if you can fit it into the budget.

You should save for retirement before putting money into education funds for your children. This is because there will always be scholarships and grants available for education, but not for your retirement.

If you don't have a combined retirement portfolio, be sure to coordinate your risk profiles and asset allocations.

5. Plan for educational expenses. If you're planning to fund part or all your child's higher education, it's best to start saving early on. Start by investigating options like 529 savings plans, which have special tax benefits for students. Speak with a financial advisor to learn more and get started saving today. If you don't have much time before your child leaves for school, look into government loans and grants, as well as your option in earning federal student aid.

Part 4 Staying on Track.

1. Don't make large purchases without discussing them first. Establish a monetary limit for what constitutes a "major" purchase. Obviously, this will differ between families, but the important thing is that you have a set limit. For any purchases above this limit, decide that the spouse making the purchase must have the approval of the other before going through with it. If either of you ever breaks this rule, be sure to tell the other immediately. Keeping large expenditures private is just asking for trouble.

2. Avoid taking on unnecessary debt. Keep each other on track by avoiding taking on debt for medium-sized purchases like furniture or jewelry. Plan these purchases out beforehand with your spouse so that you can combine your resources and afford the full amount of the purchase. This will save you money on interest payments in the long term. In addition, always check in with each other about credit card debt. It may be in your best interest to help a spouse with her credit card payment if she can't make it; missing a monthly payment will hurt your combined credit, which you will need if you apply for a large loan like a mortgage.

3. Use software to monitor your finances. With all of the budgeting and financial planning software available today, you'd be a fool not to take advantage of these useful tools. For starters, try tracking your monthly budget in a shared spreadsheet like those available in Google Drive. This type of document allows both of you to access and change the sheet as needed. For budgeting, there is are apps available like HomeBudget or Mint, which summarize the family budget and assets into a simple user interface.

There are also apps for keeping track of financial paperwork, like FileThis.

Try a few of these apps out and decide which ones work for you. Most of them are free or inexpensive to use, or at least offer a trial period.

December 17, 2019

how to manage family finances

How to Manage Family Finances.

December 17, 2019

How to Understand Personal Finance Basics

How to Understand Personal Finance Basics.

Understanding your personal finances can be very overwhelming, particularly if you’re just starting out. It is tough to know how best to handle your money, how to go about paying off debt, and where and when to invest. By following some basic steps for doing these things, as well as saving for emergencies and retirement and insuring the assets you’ve worked hard to obtain, you can begin to understand your personal finances and become more confident in your ability to make good decisions regarding them.

Learning How to Create a Budget.

Gather your financial statements and information. Creating a budget is one of the most important aspects of personal finance. A solid budget allows you to plan for how you’ll spend the money you bring in each month and illustrates your spending patterns. To begin, gather all the financial information you can, including bank statements, pay stubs, credit card bills, utility bills, investment account statements, and any other information you can think of.

Most people make monthly budgets so your goal is to figure out how much you make in a month and what your monthly expenses are. The more detail you can provide, the better your budget will be.

Record your monthly income. After gathering all of your financial data, separate out your sources of income. Record the amount of income you bring home in a month. Be sure to include any side jobs you have.

If your income varies from month to month, it may be helpful to figure out your average monthly income for the last six months or so.

List your fixed monthly expenses. Next, look over your financial documents and record any fixed expenses you have, or those that are essential and do not change much from month to month.

Fixed expenses can include things like mortgage payments or rent, credit card payments, car payments, and essential utilities like electric, water, and sewage.

List your variable monthly expenses. You also need to record your variable monthly expenses, which are items for which the amount of money you spend each month varies. These expenses are not necessarily essential and are likely where you will make adjustments to your spending in your budget.

Variable expenses can include things like groceries, gasoline, gym memberships, and eating out.

Total your monthly income and expenses. Once you have recorded all of your income and expenses, both fixed and variable, total each category. Ultimately, you want your income to be larger than your expenses. If it is, you can then decide where it is best for you to spend your excess income. If your expenses are more than your income, you will need to make adjustments to your budget to cut your spending or increase your income.

Adjust your variable expenses to hit your goal. If your budget shows you are spending more than you are earning in income, look at your variable expenses to find places you can cut back on spending, since these items are usually non-essential.

For example, if you are eating out four nights a week, you may have to cut this back to two nights a week. This will free up money you can put toward essential expenses like college loans or credit card debt.

In addition, you may be paying unnecessary monthly fees, like overdraft or late fees. If you are spending money on these types of fees, work on making your payments on time and keeping a bit of a cushion in your bank account.

Alternatively, you can work on earning more instead of spending less. Evaluate whether or not you can pick up a few extra hours of work a week, work overtime, or work any side jobs to increase the amount of money you’re bringing in each month.

Review your budget every month. At the end of each month, take some time and review your spending over the past month. Did you stick to your budget? If not, where did you veer off course? Pinpointing where you are exceeding your budget will help you figure out what kind of spending you need to pay attention to most. Reviewing your budget can also be encouraging if you find you are sticking to it. You may find that it’s extremely motivating seeing the amount of money you saved by cutting back the number of days you eat out a week, for example.

Strategizing to Pay Down Debt..

Pay more than the minimum amount due each month. Even following a strict budget doesn’t mean you can totally avoid debt. Large purchases, like cars, school, and houses often require you to take out a significant loan. In addition, it can be easy to rack up credit card debt quickly. One of the personal finance basics you must understand is how to take care of this debt as quickly as possible. The first step to doing this is to pay more than the minimum payment as often as you can.

For example, say the minimum payment on your car loan is $50 a month. Paying even $60 a month toward this loan can help you pay it off sooner and cut down on the amount you pay in finance charges over time. The more you can pay above the minimum, the better.

Transfer credit card balances with high annual percentage rates. If you have a credit card for which you are paying a high annual percentage rate (APR), it might be a good idea to look into transferring this balance to a credit card that offers a lower APR or no APR for a certain amount of time. This way, your entire payment will be applied to your balance, not interest.

Read the fine print before transferring a balance. Most cards charge a transfer fee (3% of the balance, for example) and only offer 0% APR for a limited amount of time (12 or 18 months, for example). Make sure you understand the terms of your new agreement and shop around for the best option before transferring your balance.

Calculate the amount of debt on each credit card. If you have multiple credit cards, compare the amount of debt you have on each one. You can use this information in two different ways:

Some people believe paying off the credit card with the smallest balance first is best. The idea here is that getting the smaller amount of debt paid off will motivate you and allow you to focus on your remaining debt.

Alternatively, some people believe you should focus on paying off the largest balance because you will be paying the most in interest on this balance. To do this, you would try to make more than the minimum payment on this balance, while paying only the minimum on your smaller balance.

If possible, the best solution is to pay more than the minimum simultaneously on each balance.

Dedicate excess funds toward paying off debt. Once you are able to follow your monthly budget, dedicate any extra funds you have at the end of the month toward paying down your debt. It can be tempting to use this money to treat yourself to a fancy dinner or a new TV, but remember your long-term goals before doing this. In the long run, paying down debt will serve you better than treating yourself to something unnecessary.

Consolidate your debt. If you have multiple credit card accounts, student loans, a mortgage, a car loan, or any combination of these debts, consolidating them into one payment may help you manage them more easily. Typically, when you consolidate debt, you’ll get a debt consolidation loan. These loans usually have a lower interest rate and require lower monthly payments.

While consolidating your debt can make it easier to manage, it may also increase the amount you’ll pay in the long run because it extends your payments over a longer period of time.

If your credit score is not good, you may need a co-signer to be able to get a debt consolidation loan.

You can also consolidate your credit card debt by transferring all of your balances to a 0% APR credit card. If you think you can pay off your debt within 12 to 18 months, this might be a good option. However, if you think it will take you significantly longer to pay it off, this might not be a good option because the 0% APR is usually only good for 12 to 18 months.

Refinance your loans. Refinancing is generally a good option if your financial situation has improved since taking out your loan. Similar to consolidating your debt, refinancing your loans also consolidates your debts and may allow you to make lower monthly payments on your loans. Refinancing might also allow you to shorten the term of your loan to pay off your debts more quickly. In addition, depending on your financial situation, you may also be eligible for a lower interest rate.

Choose a student loan repayment plan. If you can afford it, the standard repayment plan is your best option for repaying federal loans. A standard plan requires you to pay the same amount every month over a ten year period. If you can’t afford the payments on a standard plan, however, the government offers two alternative categories of plans—income-driven and basic.

Income-driven repayment plans extend the terms of your loan to 20 or 25 years and require you to pay a certain percentage of your income toward your loan each month, rather than a fixed monthly payment. In addition, any amount still owed at the end of your loan term is forgiven.

Basic plans include standard, graduated, and extended repayment options. Standard is the best option if you can afford it, but graduated or extended plans may be right in some situations. Graduated plans start you off with low payments and gradually increase them over time. This plan can be good if you expect to make more money over the years. Extended plans extend the terms of your loan to 25 years, allowing you to make smaller payments each month, but pay more in interest over time.

Saving for Emergencies and Retirement.

Set up automatic deposits. It can be tough to commit to putting money into your savings account every month, but it is important to do so to ensure you have enough money for emergencies and for your future. If possible, make automatic payments into a saving account each month.

For example, set your bank account so it automatically transfers $50 from your checking account to savings account at least once a month.

Or, if your paycheck gets deposited directly into your account, you can usually set it up so that a certain portion (either a dollar amount or a percentage) is deposited straight into your savings account. Most professionals recommend putting 10 to 20 percent of your income towards savings each month.

Contribute to a retirement savings plan. You should start saving for retirement as soon as possible to ensure you’ll have enough money to live comfortably when you are done working. The amount you need to contribute to this savings account monthly depends on a number of different factors, like when you start saving, how much you are starting with, and whether or not you’re going to receive any kind of employer contribution.

Many employers offer a 401k, or a retirement savings plan, of some kind to their employees. A lot of companies will also match a percentage of the employee’s contributions into this account over time. If your employer offers a plan of this sort, start contributing to it as soon as you can, even if it is just a small amount.

If you are self-employed or your employer does not offer any kind of retirement savings plan, you can set up your own plan through investment websites or many banks.

Consult a financial advisor to figure out how much you should be putting away for retirement to reach your goals.[19]

Build an emergency fund. In addition to saving for retirement, you also need to save for emergencies, like losing a job, costly car repairs, or unexpected medical expenses. You can use your bank’s savings account for this emergency fund.

Financial professionals recommend you have enough in your savings account to cover a month and a half of living expenses for each person you claim as a dependent. For example, if you are married with one child, you should have enough to cover four and a half months of living expenses.

Investing for Beginners.

Invest in a Target Date Fund (TDF). Figuring out where to invest your money is one of the hardest parts of personal finance basics. Essentially, you want to invest in a variety of stocks, bonds, and treasuries—but which ones? Target Date Funds make this a little easier for you. A TDF is basically a hands-off retirement account. You enter the age you want to retire and the TDF will automatically spread the money you put into this account across a wide variety of stocks, bonds, and treasuries.

Some of the recommended companies through which to do this are Vanguard, Fidelity, and T. Rowe Price.

Diversify your investments. If you choose a more hands-on approach to investing, it is important to diversify your portfolio to reduce risk. Diversifying means that you choose a variety of stocks, bonds, and treasuries in which to invest. You should make sure your investments are spread over a number of different companies and industries. This way, if one company or industry suffers a financial downturn, you will only lose a portion of your investment, not the whole thing.

Invest in your 401k. As mentioned above, investing in a 401k provided by your company is a good idea. There are a couple really good things about this option. First of all, most of the time, the money you put into a 401k is deferred on your taxes until you take it out of the account. Some 401ks are taxed before investing, however, so check with your employer to find out which one you have. Second, your employer will often match the amount of money in your 401k (up to a certain amount) so you are, essentially, getting free money just for investing.

You should invest in a company match 401k even if you are in debt. The return you receive on this type of investing is often more than what your debt is.

The amount of money your company will match often depends how much you invest in your 401k. Usually, you have to hit certain investment thresholds, which will then determine the percentage your company will match.

Invest in a Roth IRA. Another investment opportunity offered by many employers is a Roth IRA. In a Roth IRA, you pay taxes up front on your investment. Investing in a Roth IRA is an especially good idea for young people with low incomes, considering the tax rate will likely increase in their lifetime. This type of investment can be very helpful because it will provide you with a pot of money for your retirement that won’t shrink due to taxes.]

Understanding Why to Insure Your Investments.

Get property insurance. You should invest in property insurance to protect your home, which is often one of your biggest assets. Property insurance is actually required if you have a mortgage. This type of insurance will protect you from having to pay out-of-pocket for any major unforeseen home repairs.

If you rent, it is just as important to invest in renter’s insurance. Your belongings can add up to a significant investment and getting renter’s insurance will help protect you in the event of a burglary, fire, flood, or other disaster.

Buy life insurance. Getting life insurance is especially important if you have a family or are married. Life insurance makes sure your income (or at least part of it) is supplemented in the event that you pass away. This is important because your family could face very tough financial situations if they are unable to make up for the portion of income you brought to the table.

Get health insurance. Health insurance premiums can be a small price to pay if you find yourself sick or seriously injured. Medical bills alone can put you in serious debt if you don’t have some sort of insurance policy. In addition, you’ll likely miss a significant amount of work if you are seriously injured, leaving you no way to pay these bills.

Many employers offer health insurance to their employees at a discounted rate. Usually only full-time employees are eligible to receive health insurance through the company, but some companies may offer it to part-time employees as well.

Buying health insurance independently, without the help of an employer, can be expensive. However, it is worth investing in to make sure you are not crippled by debt in the event you become sick or injured.[28]

Buy automobile insurance. Finally, you should invest in automobile insurance. In fact, it is required of anyone who owns a car in the United States. Auto insurance helps cover the cost to repair your car after an accident and medical bills for you and others involved. A major car accident can put you in debt from car repairs and time off work if you’re injured. It is also possible your assets can be seized to help pay for the other driver’s medical bills if the accident is your fault. Having automobile insurance can help diffuse some of these costs and help keep you out of debt.

Working with a Financial Planner.

Start now. One of the most important things you can do for your personal finances is to start thinking about them and working on them early. It may seem like you have plenty of time to save for retirement, but you can actually lose a lot of money in interest if you wait too long. Make financial planning a regular part of your life—like going to the doctor—and get started as soon as possible.

Get your significant other involved. If you are planning a future together, make sure to include your significant other in your planning. Talking to your partner and including them in the process will ensure you are both on the same page with your spending and saving habits and allow you to develop a plan that meets both of your needs.

Be proactive. Some people assume that everything will work out in the long-run and ignore negative cues about their finances. If you do this, however, you could set yourself up for a major loss. Instead, think about how negative financial situations, like severe drops in the stock market, might affect your financial security and plan alternative options.

Plan out the details. Many people see saving for retirement as a race to reach a certain amount of savings before the date they retire. This approach can be misleading, however. Instead, think about the things you’ll need to pay for, like housing, healthcare, eldercare, hobbies, transportation, and so on. Do your best to figure out how much these products and services will cost you and how you’ll finance them.

Tips.

Figuring out how to handle your personal finances can be very confusing whether you’re a beginner or not. It is a good idea to consult a financial planner to help you decide how to best handle your money.

November 13, 2019