how to calculate an amount to be financed

How to Calculate an Amount to Be Financed.

The full price of a major purchase such as a house, boat or car is rarely financed. Most lenders for these types of loans require a down payment of some sort, usually expressed as a percentage. Additionally, mortgage loans list a different figure, "amount financed," which does not include prepaid fees paid to the lender. Knowing how to calculate an amount to be financed will help you make informed consumer decisions.



Part 1 Calculating a Commercial Loan Amount to be Financed.

1. Determine the selling price. For a vehicle, boat, or another type of commercial loan purchase this will be the amount you agree to pay for your new acquisition. It does not include other aspects of the deal such as the trade-in allowance, fees, taxes, and other closing costs.

2. Subtract any net trade-in allowance. For auto or boat purchases, among others, a dealer may offer a trade-in allowance or credit for giving them your old car or boat when you buy a new one. The value of this item, or a credit provided by the dealer, is then subtracted from what you owe on your new purchase. The net trade-in allowance is found by subtracting the amount still owed on your trade from the trade-in allowance offered by the dealership.

If the trade-in is high enough, dealers don't typically require an extra payment, such as a down payment.

Some dealers may allow you to use the trade-in value of your old vehicle to cover the required down payment on a new one (assuming the old one holds enough value).

3. Account for any cash rebates that are applied to the purchase price of the item. Dealers may also offer cash rebates as a way to incentivize purchases. These cash rebates are simply subtracted from the purchase price at closing. They also do not need to be included in the amount to be financed. Rebates may be provided to certain buyers, like students or military veterans, or may be specific to certain vehicles.

4. Settle on a loan amount. The amount left after rebates and trade-ins is the the amount owed. This amount must be either paid in full or borrowed from a lender and paid off in installments over time. From here, you can calculate the down payment if the lender requires one. For example, a lender might require 10 or 20 percent down on your purchase. Your loan amount is then the amount remaining after the down payment is subtracted out.

5. Use the loan amount as your amount financed. "Amount financed" is a term that is specific to home loans. All other loans simply refer to the amount financed as the total amount of the loan provided to the borrower. For these types of loans, simply use the loan amount after the down payment as calculated in this part as your amount financed.



Part 2 Determining the Amount Financed for a Mortgage Loan.

1. Negotiate a price for the asset with the seller. For a home, this will be your accepted offer price. For example, you might talk a homeowner down to selling a property for $100,000.

2. Subtract any deposits. Home purchases may have required a "good faith" deposit. Other purchases may also require a deposit be made while bidding on or reserving the item. This deposit is typically paid upon submission of an offer to purchase. This money is then subtracted from the purchase price, as you have already paid it.

Deposits are either returned (depending upon terms) or converted into the down payment amount and/or closing costs.

For example, if you put in a $3,000 good faith deposit on a $100,000 home, you would subtract this from the $100,000 to get $97,000.

3. Finalize the loan amount. The portion of the original purchase price remaining after these deductions is your loan amount, assuming you are planning on financing the purchase. This amount must be borrowed from a lender and then repaid over a period of time per a loan agreement. The loan amount is the amount borrowed from the lender, not the amount that will eventually be repaid in total, which also includes interest expenses.

4. Deduct the down payment amount. The down payment is paid in full upon closing the sale. It is generally a percentage of the total purchase price and is designed to provide security for the lender in the event of default. Therefore, it is not included in the amount financed.

Many mortgage lenders require 20 percent down on a real estate transaction, although you may be able to secure an FHA-backed mortgage requiring as little as 5 percent down payment. A lower loan balance results in less interest expense and the possible requirement of mortgage insurance.

A lower downpayment is expected on government- guaranteed loans such as FHA or VA because the lender has recourse to the Federal government in the event of default.

For example, if you paid a 20 percent down payment on the $100,000 house purchase, which would be $20,000, you would subtract this from your total.

Your good faith deposit may be applied towards your down payment. This means that the loan amount would still be the purchase price minus the down payment, which is $80,000 in this case.

5. Understand how amount financed differs from the loan amount. "Amount financed" is a term set by the 1968 Truth in Lending Act to describe how much credit is provided to a borrower when they take out a home loan. It is calculated by subtracting prepaid fees and finance charges from the loan amount, since these fees are paid at closing simultaneously with the execution of the loan documents. This means that the amount financed is always less than the actual loan amount. The amount financed is provided to borrowers on the Truth in Lending Disclosure Statement, which is supplied after you apply for a home loan.

6. Add up prepaid fees. Prepaid fees are subtracted from the loan amount to arrive at the amount financed. These fees include prepaid points, homeowners association fees, mortgage insurance, and escrow company fees. They also include lender fees like underwriting fees, tax service, process fees, and prepaid interest. Add all of these fees up to arrive a total prepaid fees amount.

7. Subtract total prepaid fees from the loan amount. Subtract all of the prepaid fees from the loan amount to get your amount financed. This information will also be available on your Truth in Lending Disclosure Statement.[9]



Part 3 Using the Amount Financed.

1. Compare different lenders. If you have the amount financed for a mortgage loan, you can use this information to compare different lenders by looking at the associated fees and interest rates. This information is provided on the Truth in Lending Disclosure Statement, which is provided by all lenders to loan applicants. If you instead are financing another purchase, you can use your amount of financing required to apply to a variety of loans and look for the best combination of fees and interest rate.

2. Calculate the amount of interest you will pay. Your loan will likely be charged compound interest as you pay it off. Compound interest paid increases with the loan duration, the interest rate, and the compounding frequency (how often the compound interest is calculated each year). When you have the amount financed, you can use online interest calculators to determine how much interest you will pay on loans with different loan terms. A longer, higher-interest loan will end up costing you much more money in the long run than a shorter-term, low-interest loan.

For more information, see how to calculate interest payments.

3. Calculate loan payments. If you know how much you need to borrower (your loan amount), you can use this information to check for loan rates online. Check loan aggregator sites to find interest rates for the type and size of loan that you need. Then, input this information into an online loan calculator to figure out what your monthly payments might be. The Financial Industry Regulatory Authority (FINRA) provides a good calculator at http://apps.finra.org/Calcs/1/Loan.

4. Assess your ability to afford a purchase. Once you have an idea of the monthly loan payments, you can use this information to figure out how much you can afford to take out in a loan. Assess your ability to afford the loan by starting with your monthly after-tax income. Then, subtract any existing debt payments (mortgage, auto, etc.), monthly expenses like utilities and food, and savings or contributions to an emergency fund. The amount left is money that you can afford to pay towards a new loan's monthly payment.

Most financial planners suggest limiting house payments plus taxes and insurance to 25 to 28 percent of take-home income.

For example, if your household net income is $7,000 per month, your total outlay for housing should be no more than $1,960 per month.

5. Determine mortgage APR. Your actual mortgage annual percentage rate (APR) is calculated using your amount financed, rather than the loan amount. That is, your actual APR will be higher than the interest rate listed on your loan. To calculate your actual APR, find your monthly payment by using your stated interest rate, loan term, and loan amount and entering them into a loan calculator. Then, record your monthly payment and find a loan calculator that allows you to input your monthly payment, loan duration, and loan amount and receive an interest rate as the output. The output will be your actual APR.

A good calculator for this purpose can be found at http://www.thecalculatorsite.com/finance/calculators/interest-rate-calculator.php.



Question : Gomez family has just purchased a $2,574.54 microcomputer. They made a down payment of $574.54. Through the store's installemnt plan, they have agreed to pay $121.00 per month for the next 18 months. What is the amount financed?

Answer : The amount financed is the portion of the purchase price paid for by the installment plan. In this case, it is the $2,574.54 (purchase price) - $574.54 (the down payment), which is $2,000. The amount to be financed does not include the interest paid during the plan, which will be $178.

Question : Selling Price: $258,900. Loan term: 30 months on 5.25% interest rate. Down payment: $64,7325. What will be the amount to be financed?

Answer : You will be financing the selling price plus any fees, minus the down payment.



Tips.

When shopping for real estate, be sure that your price range reflects your planned amount financed. You may be able to afford more or less, depending upon your savings and the amount of a down payment.

Warnings.

The purchase agreement used by many car dealerships is notoriously complicated and confusing. Be certain that you understand every line item in the agreement before signing it when buying a new or used vehicle.

February 10, 2020

How to Calculate an Amount to Be Financed

How to Calculate an Amount to Be Financed.

The full price of a major purchase such as a house, boat or car is rarely financed. Most lenders for these types of loans require a down payment of some sort, usually expressed as a percentage. Additionally, mortgage loans list a different figure, "amount financed," which does not include prepaid fees paid to the lender. Knowing how to calculate an amount to be financed will help you make informed consumer decisions.



Part 1 Calculating a Commercial Loan Amount to be Financed.

1. Determine the selling price. For a vehicle, boat, or another type of commercial loan purchase this will be the amount you agree to pay for your new acquisition. It does not include other aspects of the deal such as the trade-in allowance, fees, taxes, and other closing costs.

2. Subtract any net trade-in allowance. For auto or boat purchases, among others, a dealer may offer a trade-in allowance or credit for giving them your old car or boat when you buy a new one. The value of this item, or a credit provided by the dealer, is then subtracted from what you owe on your new purchase. The net trade-in allowance is found by subtracting the amount still owed on your trade from the trade-in allowance offered by the dealership.

If the trade-in is high enough, dealers don't typically require an extra payment, such as a down payment.

Some dealers may allow you to use the trade-in value of your old vehicle to cover the required down payment on a new one (assuming the old one holds enough value).

3. Account for any cash rebates that are applied to the purchase price of the item. Dealers may also offer cash rebates as a way to incentivize purchases. These cash rebates are simply subtracted from the purchase price at closing. They also do not need to be included in the amount to be financed. Rebates may be provided to certain buyers, like students or military veterans, or may be specific to certain vehicles.

4. Settle on a loan amount. The amount left after rebates and trade-ins is the the amount owed. This amount must be either paid in full or borrowed from a lender and paid off in installments over time. From here, you can calculate the down payment if the lender requires one. For example, a lender might require 10 or 20 percent down on your purchase. Your loan amount is then the amount remaining after the down payment is subtracted out.

5. Use the loan amount as your amount financed. "Amount financed" is a term that is specific to home loans. All other loans simply refer to the amount financed as the total amount of the loan provided to the borrower. For these types of loans, simply use the loan amount after the down payment as calculated in this part as your amount financed.



Part 2 Determining the Amount Financed for a Mortgage Loan.

1. Negotiate a price for the asset with the seller. For a home, this will be your accepted offer price. For example, you might talk a homeowner down to selling a property for $100,000.

2. Subtract any deposits. Home purchases may have required a "good faith" deposit. Other purchases may also require a deposit be made while bidding on or reserving the item. This deposit is typically paid upon submission of an offer to purchase. This money is then subtracted from the purchase price, as you have already paid it.

Deposits are either returned (depending upon terms) or converted into the down payment amount and/or closing costs.

For example, if you put in a $3,000 good faith deposit on a $100,000 home, you would subtract this from the $100,000 to get $97,000.

3. Finalize the loan amount. The portion of the original purchase price remaining after these deductions is your loan amount, assuming you are planning on financing the purchase. This amount must be borrowed from a lender and then repaid over a period of time per a loan agreement. The loan amount is the amount borrowed from the lender, not the amount that will eventually be repaid in total, which also includes interest expenses.

4. Deduct the down payment amount. The down payment is paid in full upon closing the sale. It is generally a percentage of the total purchase price and is designed to provide security for the lender in the event of default. Therefore, it is not included in the amount financed.

Many mortgage lenders require 20 percent down on a real estate transaction, although you may be able to secure an FHA-backed mortgage requiring as little as 5 percent down payment. A lower loan balance results in less interest expense and the possible requirement of mortgage insurance.

A lower downpayment is expected on government- guaranteed loans such as FHA or VA because the lender has recourse to the Federal government in the event of default.

For example, if you paid a 20 percent down payment on the $100,000 house purchase, which would be $20,000, you would subtract this from your total.

Your good faith deposit may be applied towards your down payment. This means that the loan amount would still be the purchase price minus the down payment, which is $80,000 in this case.

5. Understand how amount financed differs from the loan amount. "Amount financed" is a term set by the 1968 Truth in Lending Act to describe how much credit is provided to a borrower when they take out a home loan. It is calculated by subtracting prepaid fees and finance charges from the loan amount, since these fees are paid at closing simultaneously with the execution of the loan documents. This means that the amount financed is always less than the actual loan amount. The amount financed is provided to borrowers on the Truth in Lending Disclosure Statement, which is supplied after you apply for a home loan.

6. Add up prepaid fees. Prepaid fees are subtracted from the loan amount to arrive at the amount financed. These fees include prepaid points, homeowners association fees, mortgage insurance, and escrow company fees. They also include lender fees like underwriting fees, tax service, process fees, and prepaid interest. Add all of these fees up to arrive a total prepaid fees amount.

7. Subtract total prepaid fees from the loan amount. Subtract all of the prepaid fees from the loan amount to get your amount financed. This information will also be available on your Truth in Lending Disclosure Statement.[9]



Part 3 Using the Amount Financed.

1. Compare different lenders. If you have the amount financed for a mortgage loan, you can use this information to compare different lenders by looking at the associated fees and interest rates. This information is provided on the Truth in Lending Disclosure Statement, which is provided by all lenders to loan applicants. If you instead are financing another purchase, you can use your amount of financing required to apply to a variety of loans and look for the best combination of fees and interest rate.

2. Calculate the amount of interest you will pay. Your loan will likely be charged compound interest as you pay it off. Compound interest paid increases with the loan duration, the interest rate, and the compounding frequency (how often the compound interest is calculated each year). When you have the amount financed, you can use online interest calculators to determine how much interest you will pay on loans with different loan terms. A longer, higher-interest loan will end up costing you much more money in the long run than a shorter-term, low-interest loan.

For more information, see how to calculate interest payments.

3. Calculate loan payments. If you know how much you need to borrower (your loan amount), you can use this information to check for loan rates online. Check loan aggregator sites to find interest rates for the type and size of loan that you need. Then, input this information into an online loan calculator to figure out what your monthly payments might be. The Financial Industry Regulatory Authority (FINRA) provides a good calculator at http://apps.finra.org/Calcs/1/Loan.

4. Assess your ability to afford a purchase. Once you have an idea of the monthly loan payments, you can use this information to figure out how much you can afford to take out in a loan. Assess your ability to afford the loan by starting with your monthly after-tax income. Then, subtract any existing debt payments (mortgage, auto, etc.), monthly expenses like utilities and food, and savings or contributions to an emergency fund. The amount left is money that you can afford to pay towards a new loan's monthly payment.

Most financial planners suggest limiting house payments plus taxes and insurance to 25 to 28 percent of take-home income.

For example, if your household net income is $7,000 per month, your total outlay for housing should be no more than $1,960 per month.

5. Determine mortgage APR. Your actual mortgage annual percentage rate (APR) is calculated using your amount financed, rather than the loan amount. That is, your actual APR will be higher than the interest rate listed on your loan. To calculate your actual APR, find your monthly payment by using your stated interest rate, loan term, and loan amount and entering them into a loan calculator. Then, record your monthly payment and find a loan calculator that allows you to input your monthly payment, loan duration, and loan amount and receive an interest rate as the output. The output will be your actual APR.

A good calculator for this purpose can be found at http://www.thecalculatorsite.com/finance/calculators/interest-rate-calculator.php.



Question : Gomez family has just purchased a $2,574.54 microcomputer. They made a down payment of $574.54. Through the store's installemnt plan, they have agreed to pay $121.00 per month for the next 18 months. What is the amount financed?

Answer : The amount financed is the portion of the purchase price paid for by the installment plan. In this case, it is the $2,574.54 (purchase price) - $574.54 (the down payment), which is $2,000. The amount to be financed does not include the interest paid during the plan, which will be $178.

Question : Selling Price: $258,900. Loan term: 30 months on 5.25% interest rate. Down payment: $64,7325. What will be the amount to be financed?

Answer : You will be financing the selling price plus any fees, minus the down payment.



Tips.

When shopping for real estate, be sure that your price range reflects your planned amount financed. You may be able to afford more or less, depending upon your savings and the amount of a down payment.

Warnings.

The purchase agreement used by many car dealerships is notoriously complicated and confusing. Be certain that you understand every line item in the agreement before signing it when buying a new or used vehicle.

February 10, 2020

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 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

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 10, 2019

how to analyze your current finances

How to Analyze Your Current Finances.

Before you can improve your financial health, you need to analyze your current finances. Keep track of your expenses for a month and look at where you are spending the most. Use extra money to pay down debts, build an emergency fund, and save for your retirement. Although saving might seem difficult, it’s actually quite easy once you find out where your money is going.

Part 1 Tracking Your Spending.

1. Record your spending. Record all purchases that you make in a month. Write down the amount spent, the day, and the time. Some of the more popular methods include:

Create a spreadsheet. Remember to enter every purchase or expense. You should probably hold onto receipts so that you don’t forget how much you spent during the day.

Keep a notebook. This is a lower-tech option, but it is convenient. Carry your notebook around with you and record purchases as soon as you make them.

Use checks. This is an old-fashioned option, but you can easily track your expenses when your monthly bank statement arrives.

Use an app. Many apps are on the market that help track your spending on your smartphone. The most popular include Mint.com and Wesabe.com.

2. Add up your fixed expenses. Your fixed expenses don’t change month to month. Common fixed expenses include the following: Rent or mortgage, Insurance, Car payment, Utilities, Debt repayment.

3. Look closer at your discretionary spending. Your discretionary spending is any spending that isn’t fixed. Instead, it goes up and down each month. Pay attention to what you are spending money on. Break out the amounts spent on the following: Groceries, Eating out, Gas, Clothes, Hobbies/entertainment.

4. Pay attention to when you spend the most. Look at the days and times when you make most of your discretionary purchases. Do you buy impulsively immediately after work? Do you spend too much money on the weekends?

You might need to change your routine, depending on when you spend. For example, instead of pulling into the mall on your way home from work, you can change your route so that you don’t pass the mall.

If you’re a weekend spender, you can try to fill your time with other hobbies, such as exercise or visiting friends.

5. Compare your spending to the 50-20-30 rule. According to this rule, your monthly expenses should shake out this way: 50% should go to essentials, such as food, rent, and transportation. 20% should go to saving and debt reduction, and 30% should go for discretionary spending.

The 50-20-30 rule probably won’t work for many people. For example, your fixed expenses like rent might eat up more than 50% of your budget. If you have debts, then you might need to spend more than 20% to pay them down. Nevertheless, the 50-20-30 rule can help you identify where you are falling short. It also gives you something to work towards. If necessary, reduce your debt load by refinancing or paying down debts.

Part 2 Looking Closer at Your Debts.

1. Draw up a list of your debts. Go through your paperwork and find information on your debts, then draw up a list including the following: Name of the account, Total current balance, Monthly payment, Interest rate.

2. Pull a copy of your credit report. You might not remember all of your debts, so you should go through your credit report to make sure you haven’t forgotten anything. In the U.S., you are entitled to one free credit report annually from each of the three national credit reporting agencies. Don’t order the report from each agency. Instead, order them all by calling 1-877-322-8228.

You can also visit annualcreditreport.com. Provide your name, date of birth, address, and Social Security Number.

3. Check if you can reduce your debt load. Depending on your situation, you might be able to lower the overall amount you pay on your debts. Although this might not lower your monthly payments, you will ultimately save money in the long-term. Consider your options:

You might be able to refinance a 30-year mortgage into a 15-year mortgage. This will probably increase your monthly payments, but you can save big on interest.

Call up your credit card companies and ask for a better interest rate. This will lower your monthly payment and your overall debt.

Consolidate debt. For example, you can transfer credit card debts to a balance transfer credit card, or you can take out a lower-interest personal loan to pay off debts.

4. Find ways to reduce your monthly debt payment. In a cash crunch, you’ll need to reduce how much you pay each month, even if you end up paying more over the long-term. You can lower your monthly debt payments in the following ways:

You might be able to stretch out the length of the loan. For example, you might refinance a car loan and stretch out the repayment period to six years.

If you have student loans, you can ask for deferment or forbearance. These options temporarily suspend your payments, though interest will continue to accrue with forbearance. When you get back on your feet, you can begin making payments.

Debt consolidation can also reduce your monthly payments, depending on the interest rate and repayment period.

5. Pay off your debts. You need to pay back your debts, preferably sooner rather than later. Some of the more popular approaches to debt reduction include the following:

Debt avalanche. You pay the minimum on all debts except the one with the highest interest rate, to which you dedicate all extra money. Once that debt is paid off, you commit all resources to the debt with the next highest interest rate.

Debt snowball. With this method, you pay the minimum on all debts except the smallest one. You devote all available money to this debt until it is paid off, then you focus on the remaining debt that is the smallest. This method can give you momentum as you see your smallest debts disappear.

Debt snowflake. You look for ways to save money every day and make multiple payments each month to your debts. You can combine the debt snowflake method with either the avalanche or snowball method.

Part 3 Reducing Your Expenses.

1. Set a savings goal. Ideally, you should save 15-25% of your monthly paycheck. This means that if you bring home $2,000 a month, you should save between $300 and $500. That might not be a realistic goal right now, depending on your expenses.

If you can’t save 15%, then work on ways to reduce your discretionary spending. Every little bit helps, and there are many ways to save every day.

2. Reduce your spending on food. Stop eating out and instead cook at home. Buy a cheap cook book and have fun making new recipes. Remember to buy groceries in bulk for extra savings.

Clipping coupons will help reduce the amount you spend each week. Find coupons in your local newspaper or in the circular at the grocery store.

Use popular apps such as Checkout 51, Grocery IQ, and Coupons.com.

3. Find cheap entertainment substitutes. Everyone needs to unwind a little bit. However, you can usually find a cheaper substitute for your favorite activity:

Instead of paying for a gym membership, exercise outdoors. Join a jogging or walking group, or do pushups or sit-ups in the park.

Get your library card and check out books and DVDs instead of paying for them.

Instead of joining friends for happy hour, host a potluck at your house. Ask all guests to bring a dish or a bottle of wine.

4. Cut your electricity use. Install LED lightbulbs, which are four times as energy efficient as regular lightbulbs, and remember to unplug electrical devices when you aren’t using them.

You might also weatherize and insulate your home for increased savings. Obtain a home energy audit and apply for any local government programs. An energy audit can reduce your energy expenses by 5-30%.

5. Reduce your fixed expenses. These can be the hardest to reduce because they often require that you make big lifestyle changes. However, consider whether you can make any of the following changes, especially if you are living beyond your means:

Move in with friends or family. If you can’t afford your rent or home, then you might need to crash at someone’s place, at least temporarily. This can save a lot of money.

Take public transportation. Sell your car and pocket the money. You’ll also save on insurance and gas.

Get cheaper insurance. You can lower your auto or homeowners insurance by shopping around using an online aggregator. When you find a cheaper option, call up your current insurer and ask them to match it. If they won’t, you can switch.

6. Freeze your credit cards. Reduce the temptation to spend by freezing your cards in ice and carrying only cash on you. If you’re afraid of carrying cash, get a secured credit card or reloadable debit card.

Part 4 Saving for the Future.

1. Build a cash cushion. If your car broke down or you lost your job, could you continue to pay the bills? Build a cash cushion by saving six months’ worth of expenses. Start small, by putting aside whatever extra money you can spare.

Don’t let debt repayment get in the way. Most financial experts recommend that you build up at least a small emergency fund at first—say, three months. Then you can tackle your credit card debt.

Ideally, you can do both at the same time—contribute some money to your emergency fund and some extra to paying debts down quickly.

2. Contact Human Resources about retirement plans. You might be surprised that your employer offers a retirement plan. Call up HR and ask. Also check whether or not they will match any of your contributions.

For example, some employers might match up to 4% of your base salary. This means you contribute 4% and they contribute 4%. If you only contribute 3%, then they will match that.

3. Research IRAs. If your employer doesn’t offer a retirement plan, don’t worry! You have plenty of options to choose from. The two most common are Individual Retirement Accounts (IRAs) and Roth IRAs. You can open an account with many online brokers. Choose which IRA works for you:

IRA. With a traditional IRA, your contributions are tax-free. This is a good choice if you anticipate being in a lower income tax bracket when you retire.

Roth IRA. The big advantage of a Roth IRA is that your withdrawals will be tax free. However, you pay taxes on your contributions. This is a good option if you anticipate being in a higher income tax bracket when you retire.

January 27, 2020

How to Analyze Your Current Finances

How to Analyze Your Current Finances.

Before you can improve your financial health, you need to analyze your current finances. Keep track of your expenses for a month and look at where you are spending the most. Use extra money to pay down debts, build an emergency fund, and save for your retirement. Although saving might seem difficult, it’s actually quite easy once you find out where your money is going.

Part 1 Tracking Your Spending.

1. Record your spending. Record all purchases that you make in a month. Write down the amount spent, the day, and the time. Some of the more popular methods include:

Create a spreadsheet. Remember to enter every purchase or expense. You should probably hold onto receipts so that you don’t forget how much you spent during the day.

Keep a notebook. This is a lower-tech option, but it is convenient. Carry your notebook around with you and record purchases as soon as you make them.

Use checks. This is an old-fashioned option, but you can easily track your expenses when your monthly bank statement arrives.

Use an app. Many apps are on the market that help track your spending on your smartphone. The most popular include Mint.com and Wesabe.com.

2. Add up your fixed expenses. Your fixed expenses don’t change month to month. Common fixed expenses include the following: Rent or mortgage, Insurance, Car payment, Utilities, Debt repayment.

3. Look closer at your discretionary spending. Your discretionary spending is any spending that isn’t fixed. Instead, it goes up and down each month. Pay attention to what you are spending money on. Break out the amounts spent on the following: Groceries, Eating out, Gas, Clothes, Hobbies/entertainment.

4. Pay attention to when you spend the most. Look at the days and times when you make most of your discretionary purchases. Do you buy impulsively immediately after work? Do you spend too much money on the weekends?

You might need to change your routine, depending on when you spend. For example, instead of pulling into the mall on your way home from work, you can change your route so that you don’t pass the mall.

If you’re a weekend spender, you can try to fill your time with other hobbies, such as exercise or visiting friends.

5. Compare your spending to the 50-20-30 rule. According to this rule, your monthly expenses should shake out this way: 50% should go to essentials, such as food, rent, and transportation. 20% should go to saving and debt reduction, and 30% should go for discretionary spending.

The 50-20-30 rule probably won’t work for many people. For example, your fixed expenses like rent might eat up more than 50% of your budget. If you have debts, then you might need to spend more than 20% to pay them down. Nevertheless, the 50-20-30 rule can help you identify where you are falling short. It also gives you something to work towards. If necessary, reduce your debt load by refinancing or paying down debts.

Part 2 Looking Closer at Your Debts.

1. Draw up a list of your debts. Go through your paperwork and find information on your debts, then draw up a list including the following: Name of the account, Total current balance, Monthly payment, Interest rate.

2. Pull a copy of your credit report. You might not remember all of your debts, so you should go through your credit report to make sure you haven’t forgotten anything. In the U.S., you are entitled to one free credit report annually from each of the three national credit reporting agencies. Don’t order the report from each agency. Instead, order them all by calling 1-877-322-8228.

You can also visit annualcreditreport.com. Provide your name, date of birth, address, and Social Security Number.

3. Check if you can reduce your debt load. Depending on your situation, you might be able to lower the overall amount you pay on your debts. Although this might not lower your monthly payments, you will ultimately save money in the long-term. Consider your options:

You might be able to refinance a 30-year mortgage into a 15-year mortgage. This will probably increase your monthly payments, but you can save big on interest.

Call up your credit card companies and ask for a better interest rate. This will lower your monthly payment and your overall debt.

Consolidate debt. For example, you can transfer credit card debts to a balance transfer credit card, or you can take out a lower-interest personal loan to pay off debts.

4. Find ways to reduce your monthly debt payment. In a cash crunch, you’ll need to reduce how much you pay each month, even if you end up paying more over the long-term. You can lower your monthly debt payments in the following ways:

You might be able to stretch out the length of the loan. For example, you might refinance a car loan and stretch out the repayment period to six years.

If you have student loans, you can ask for deferment or forbearance. These options temporarily suspend your payments, though interest will continue to accrue with forbearance. When you get back on your feet, you can begin making payments.

Debt consolidation can also reduce your monthly payments, depending on the interest rate and repayment period.

5. Pay off your debts. You need to pay back your debts, preferably sooner rather than later. Some of the more popular approaches to debt reduction include the following:

Debt avalanche. You pay the minimum on all debts except the one with the highest interest rate, to which you dedicate all extra money. Once that debt is paid off, you commit all resources to the debt with the next highest interest rate.

Debt snowball. With this method, you pay the minimum on all debts except the smallest one. You devote all available money to this debt until it is paid off, then you focus on the remaining debt that is the smallest. This method can give you momentum as you see your smallest debts disappear.

Debt snowflake. You look for ways to save money every day and make multiple payments each month to your debts. You can combine the debt snowflake method with either the avalanche or snowball method.

Part 3 Reducing Your Expenses.

1. Set a savings goal. Ideally, you should save 15-25% of your monthly paycheck. This means that if you bring home $2,000 a month, you should save between $300 and $500. That might not be a realistic goal right now, depending on your expenses.

If you can’t save 15%, then work on ways to reduce your discretionary spending. Every little bit helps, and there are many ways to save every day.

2. Reduce your spending on food. Stop eating out and instead cook at home. Buy a cheap cook book and have fun making new recipes. Remember to buy groceries in bulk for extra savings.

Clipping coupons will help reduce the amount you spend each week. Find coupons in your local newspaper or in the circular at the grocery store.

Use popular apps such as Checkout 51, Grocery IQ, and Coupons.com.

3. Find cheap entertainment substitutes. Everyone needs to unwind a little bit. However, you can usually find a cheaper substitute for your favorite activity:

Instead of paying for a gym membership, exercise outdoors. Join a jogging or walking group, or do pushups or sit-ups in the park.

Get your library card and check out books and DVDs instead of paying for them.

Instead of joining friends for happy hour, host a potluck at your house. Ask all guests to bring a dish or a bottle of wine.

4. Cut your electricity use. Install LED lightbulbs, which are four times as energy efficient as regular lightbulbs, and remember to unplug electrical devices when you aren’t using them.

You might also weatherize and insulate your home for increased savings. Obtain a home energy audit and apply for any local government programs. An energy audit can reduce your energy expenses by 5-30%.

5. Reduce your fixed expenses. These can be the hardest to reduce because they often require that you make big lifestyle changes. However, consider whether you can make any of the following changes, especially if you are living beyond your means:

Move in with friends or family. If you can’t afford your rent or home, then you might need to crash at someone’s place, at least temporarily. This can save a lot of money.

Take public transportation. Sell your car and pocket the money. You’ll also save on insurance and gas.

Get cheaper insurance. You can lower your auto or homeowners insurance by shopping around using an online aggregator. When you find a cheaper option, call up your current insurer and ask them to match it. If they won’t, you can switch.

6. Freeze your credit cards. Reduce the temptation to spend by freezing your cards in ice and carrying only cash on you. If you’re afraid of carrying cash, get a secured credit card or reloadable debit card.

Part 4 Saving for the Future.

1. Build a cash cushion. If your car broke down or you lost your job, could you continue to pay the bills? Build a cash cushion by saving six months’ worth of expenses. Start small, by putting aside whatever extra money you can spare.

Don’t let debt repayment get in the way. Most financial experts recommend that you build up at least a small emergency fund at first—say, three months. Then you can tackle your credit card debt.

Ideally, you can do both at the same time—contribute some money to your emergency fund and some extra to paying debts down quickly.

2. Contact Human Resources about retirement plans. You might be surprised that your employer offers a retirement plan. Call up HR and ask. Also check whether or not they will match any of your contributions.

For example, some employers might match up to 4% of your base salary. This means you contribute 4% and they contribute 4%. If you only contribute 3%, then they will match that.

3. Research IRAs. If your employer doesn’t offer a retirement plan, don’t worry! You have plenty of options to choose from. The two most common are Individual Retirement Accounts (IRAs) and Roth IRAs. You can open an account with many online brokers. Choose which IRA works for you:

IRA. With a traditional IRA, your contributions are tax-free. This is a good choice if you anticipate being in a lower income tax bracket when you retire.

Roth IRA. The big advantage of a Roth IRA is that your withdrawals will be tax free. However, you pay taxes on your contributions. This is a good option if you anticipate being in a higher income tax bracket when you retire.

January 27, 2020

how to split expenses as a couple

How to Split Expenses As a Couple.

Splitting expenses as a couple is an important aspect of having a stable relationship, especially if you’re living together. There are several ways to split expenses. One way is to split everything right down the middle, so each person pays half. The other way is for each person to pay for what they can afford. The final way is for one person to pay all or most of the expenses. If one of you works little or not at all, that person should make up the difference by contributing energy toward domestic tasks. Finally, ensure you’re covering yourself by keeping separate bank accounts and not cosigning loans with your partner.



Method 1 Choosing the Right Method.

1. Determine what expenses qualify as shared. Sometimes it is easy to identify a shared expense. For instance, heating, water, and electricity are house-wide expenses and you will both, presumably, enjoy their use in approximately equal amounts. But it might be harder to justify sharing other expenses. If you have TV service at your home, for instance, but only one of you watches TV, it makes little sense to split that particular expense.

Talk to your partner about which expenditures they believe should be considered shared and which should be considered individual expenses.

2. Split expenses evenly. By splitting every expense evenly, you and your partner have a form of equality in the relationship. This is probably the most logical way to split expenses for couples who have equal or roughly equal incomes.

There are many ways to split expenses 50/50. You might choose to split each expense as it comes in. Alternately, you might reconcile receipts at the end of each month and pay your partner whatever is “owed.” Talk to your partner about which method works best for you.

You don’t need to split everything perfectly evenly. Creating a spreadsheet to track expenses, or otherwise accounting for every penny spent between you can reduce your relationship to a purely economic exchange that takes the romance out of it. Even if you split household bills, it’s still okay to treat your significant other to dinner or a date when you go out.

For instance, you might take turns paying for dinner. Even if your dinners don’t total the exact same amount each time you go out to eat, over time, you’ll each probably end paying about the same amount. This qualifies as a form of splitting costs evenly.

3. Split your expenses according to income. This expense-splitting technique calls for the person with the higher income paying for a larger share of the household expenses. In other words, equality is achieved through each person in the relationship paying expenses according to their ability.

For example, suppose you earn $3,000 per month and your partner earns $2,000 each month. In this case, you should pay for 60% of the expenses, since your income is 60% of the total household income (the figure you get when you combine the incomes of you and your partner).

Talk carefully with your partner to make sure that there are no hidden issues before going forward with this method. In some cases, your partner may feel as though they are contributing too much or too little if this method is used.

4. Share expenses unevenly. In this method, one person will pay for the majority of household expenses. This is the natural choice to make when one person in the relationship has way more income than the other person. However, if both you and your partner make a lot of money, either of you could choose to take on an expense-splitting arrangement like this.

A fair arrangement doesn’t necessarily need to divide all expenses perfectly. For instance, one of you could take the internet bill while the other takes the power bill. Divide things up according to whichever scheme suits your situation.

5. Be willing to trade time and money. If you work and your partner doesn’t or if your partner works but you do not, there are other ways you can come to a fair arrangement by thinking about the work (as well as the money) it takes to run a household. Domestic work – cleaning, cooking, and doing the laundry – is crucial to keeping a household going. It makes little sense for one person to both complete all these tasks and also provide financial stability for you as a couple.

Think about splitting the total amount of work that each of you do as a couple rather than thinking of splitting expenses along purely financial lines.



Method 2 Splitting Food Expenses.

1. Figure out your food budget. Your food budget is the total you spend on food over a given period. To get an accurate picture of how much you spend on food, track your expenses over a certain period of time. Tracking over a month is a good unit of time, since depending on how much you and your partner eat, you might not spend much on food.

Use a shared spreadsheet in Google Doc or another program to track your expenditures. Your document should indicate each item you bought and how much it cost.

Alternatively, try a low-tech route like writing your grocery and dining-out expenses on a piece of lined paper.

Keep your receipts while tracking your food budget.

2. Analyze the budget. Once you’ve figured out your food budget, evaluate the information with your partner. Are you spending too much, too little, or just the right amount? Look for areas where you can cut expenses.

For instance, instead of spending so much on junk food and snacks, try to find healthy alternatives like fruit or veggies and hummus.

Instead of eating out so much, try eating at home more often. Make cooking together a couple's activity.

Eliminate or reduce your alcohol consumption for more savings.

3. Decide how to split the food expenditures. You can use an income-based method to choose how to split the food expenses, or split the food expenses according to consumption patterns. Whatever method you choose, ensure you and your partner agree on how much money you should be spending on food, and ensure you both set aside money each month for your grocery budget.

Let go of small differences in food consumption. Even if your partner eats more than you, constantly analyzing how much money each person owes for food can put a strain on the relationship.



Method 3 Being Smart About Shared Finances.

1. Plan for emergencies. Both you and your partner should have money saved in the event that one or both of you needs to pay for surgery, a new vehicle, or another large expense. Try to set aside at least 25% of your monthly income for savings.

You should have at least six months’ worth of income saved to cover periods of potential unemployment.

Be sure to set beneficiaries on your retirement and insurance plans, too.

If you separate from your partner, don’t forget to change your beneficiary list.

2. Have regular financial checkups. Every month or two, you and your partner should have a conversation about where you’re both at financially. Are you still both increasing your savings? Do you have enough saved to cover an emergency? Are you both still comfortable with the way expenses are being shared? Talk to your partner about these and other related issues.

Make budgeting and financial planning an activity you do together. This can be more successful or even exciting if you are both working towards a common goal, such as a vacation or purchasing a home.

Always be honest about your finances. If you are struggling financially, you should admit to your partner that you’re having money problems. That way they can help you out by either loaning you money, helping you find another job, or taking other action that can help.

Encourage your partner to be honest with you about their spending habits and their happiness with your current financial arrangement. If your partner lies about money matters, you should seriously consider ending the relationship.

Don’t let your partner push you into a purchase you can’t really afford. For instance, if you can’t afford a new car but your partner really wants you to have one, stand firm and insist that you will not make such a purchase. If they love you, they will respect your decision.

3. Do not move in with your significant other for financial reasons. Living with someone else and sharing expenses does save money, but if you make the decision to shack up based on the potential economic benefit, your relationship will be on an unstable foundation. Only move in together if you’re truly in love with the person and ready to be in close proximity to them night and day. This will make splitting finances just one part of your relationship, and not its entire basis.

4. Avoid borrowing money. Not only is it annoying for your partner, but it might make them suspicious of your financial health and question your intentions. It’s okay to borrow money in an emergency situation, but don’t make a regular habit of it.

If your partner regularly asks to borrow money, you should inquire as to why they constantly need money. They may have lost their job or have unpaid debts you don’t know about.

5. Avoid sharing debts. Cosigning a loan for your partner is never a good idea. The last thing you want to do is end up saddled with debt that you did not personally incur. Only make a large investment with your partner like a house or car if you are in a stable, long-term relationship.

You should ask your partner about any debts or liabilities that they may hold. Be honest about your own debt as well. Keeping these secret can ruin a relationship when the debt is discovered by the other partner.

Always put both your names on the lease, mortgage, or loan. This will allow you some degree of protection in the event you and your partner separate.

For mortgages, consult a real-estate attorney to help you figure out the best way to negotiate your local real estate laws as they relate to your relationship. A married couple has different options for taking out a home loan than an unmarried couple.

For auto loans, too, you (and your partner) should talk to a financial officer at your local bank or credit union. There are many variables that could impact whether you and your partner decide to take out an individual loan or cosign the loan. Seek advice relevant to your living situation in order to get the lowest interest rates and avoid shared debt.

6. Do not share assets. Assets are valuable possessions or investments. Common assets include bank accounts as well as big-ticket items. Typical material assets include houses, cars, and boats. These items should never be purchased using both your names. Otherwise, you might end up wrangling over ownership in the event you separate.

Bank accounts, likewise, should never be shared between you and your partner. These accounts can be a source of tension should one partner decide to use the money for themselves.

If you want to set up a shared account with your partner – for instance, an account either of you can use to pay bills – keep it completely separate from your personal account. Put a small amount of money in it each month along with your partner, and use it only to pay the bills you intended it for.

February 25, 2020