The Benefits of a Budget

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Budgeting is an essential part to taking control of one’s financial life.  You would be surprised to know that nearly two out of every three Americans do not budget their income.

With today’s technology, it is now easier than ever to track your income and spending.  Personally, I use Google Sheets to budget.  I have the ability to access my budget on any computer with internet access along with my smartphone.  Another great way to budget is through Mint.com.  Signing up is free, and they have an app so you can update your budget on the go.

Now that you can see just how easy it is to start your budget, I will quickly lay out why you want to budget and the benefits.

  1. You know how much you make:  Ask someone how much take home income they have in a given month, you would be surprised the number of people who can’t give you a specific dollar amount.  Knowing how much you make is vital to determining how much you can save and spend.
  2. Plan Purchases:  Saving up for a vacation?  By budgeting you will be able to determine how much you need to set aside each month so you and your family can enjoy a getaway.
  3. Eliminating Debt:  This can have a two fold benefit.  Firstly, if you know how much you make, then you know how much you are able to spend, thus you can avoid spending more than you make.  Secondly, budgeting can help you set aside income every month to tackle debt, be it student loans, a car note, etc.
  4. Enjoying your money:  Budgeting allows you to feel confident about your spending habits.  It allows you to plan for purchases and should limit financial stress on your life by worry about how you are going to pay for something.

This is not a comprehensive list of the benefits, but a few of the major ones.  If you are curious of the benefits you can receive from budgeting then give it a shot if you haven’t already.

 

Budget Smart, Invest Wise

Video Series: Paying Down Debt

Many of us struggle with our finances, especially our debt.  Today’s video talks about a specific method one can use to not only limit your debt, but also a proactive approach to tackling your balance.

Whether your debt is from credit cards, student loans, a car payment or a home, debt is a financial black hole that sooner or later you WILL have to dig yourself out of.  Check out today’s video and find the best way to manage and limit your own debt.

Budget Smart, Invest Wise

Establishing Good Credit

Growing up I was told by my parents, “With good credit you can afford anything”.  That was then, and this is now.  We all saw what happened with the housing bubble and what will soon probably happen with student loans.  Credit is important, but not meant to purchase things above your means.

Having good credit is important; however, using that credit isn’t always wise.  I saw an info commercial the other day for a product that cost $250.  They were offering people 12 months interest free financing.  If you have to finance $250 for a 12-month period then you already have money issues and shouldn’t be buying it in the first place.

A friend of mine had an old Ford Expedition with a couple hundred thousand miles on it.  He bought it for around two grand, drove it for 12 months, and then it broke down.  Either he didn’t have another two grand lying around to purchase another piece of junk, or he wanted something a little more reliable.  Either way he decided to purchase a used one for around ten grand this time.  He didn’t have enough money to purchase the car, so he needed financing for the purchase.  Problem was, he had no credit.  He was offered an interest rate of 13% for a car loan that was over 36 months.  An absolute ridiculous rate.  He ended up getting his mother to cosign on the loan and got it for 1.9%, very good and reasonable.

Moral of the story… You never know when you need credit.  It is important to have it established for that rare chance that you do need it.  Young people are notorious for abusing credit cards.  They spend and spend, and I can only assume they are disillusioned that they never have to pay.

Those individuals who have a good mind set around money should consider establishing credit in one way or another.  Establishing credit by signing up for a credit card is fairly easy.  Proceed with caution.  I would only recommend that someone get a credit card if he or she has income (don’t be a college student without a part-time job at the very least).  If you don’t have any credit then start with a well-known card such as through Capital One or Chase.  Charge a tank of gas on the card every month.  Circle the date when the amount will be due every month and pay off the balance.

Showing responsibility early on when it comes to credit cards will not only keep you away from high-interest debt, but it will also allow you to avoid a 13% or higher auto loan if and when you might need it.

Budget Smart, Invest Wise 

Investing VS. Paying Down Debt

There is a psychological battle that many of us go through when it comes to our finances.  If you have debt, you might wonder whether it is best to pay it off or use the money and begin building a nest egg for retirement.

Every person’s situation is different, and the psychological role that debt can have on someone is unique to every situation.  At times you might feel trapped and bogged down by your student loan debt, car payment or even a mortgage.  The debt that is supposedly “good” seems to constantly weight on your mind.  For those of us that face this predicament, it is important to find the right balance when determining what debt to pay off, how much to pay off and how much to save.  I will provide some insight to help you decide the right balance for you.

Credit card debt/ high interest debt:  You should always focus on paying off ANY high interest debt you may have.  This may include interest that is accruing from unpaid credit cards or any other loan.  Credit cards can carry interest rates of 20 to upwards of 30%.  You will be hard pressed to find investment returns better than the interest you will be paying on high interest debt.

Do not feel rushed to pay off student loan debt: We are told constantly about the all-time highs of student loan debt and how the younger generation cannot buy houses or cars nor do much of anything until they get student debt paid off.  This is true to an extent, but think about this… most student loan debt carries an interest rate of 6.8% or a little less.  Now, compare that with returns of the S&P 500 that has returned at least 11% four of the past 5 years.  Moreover, when it comes to tax time, you are only able to deduct up to $2500 of student loan interest.

Time not timing is everything: Some people get in the mindset of “Well I must pay off all of my debt before I start investing”.  As I stated previously, everyone has a different mentality when it comes to debt.  Nevertheless, the longer you put off contributing to a Roth IRA or maxing out an employer-sponsored 401k, the less time your money has to grow with compound interest.  Let us use a quick example, say you had $50,000 and you put it into an index fund that returns 8% a year, after 30 years that original amount would turn into $503,000.  However, with just five more years, a total of 35, that same $50,000 would now be worth $739,000.  Do not delay your retirement.

At the end of the day, tackling one’s debt and investing is all about having an actionable plan.  Create a plan, with a budget and stick to it.  It takes time to pay off debts similar to the many years required for your retirement portfolio to grow.  Patience and diligence will allow you to reach your financial dreams and live the life you truly desire.

Budget Smart, Invest Wise

The Student Loan Mistake to Avoid

With many fall graduates moving forward with their future lives after college it is now time to get your financial future off to the right start.

If you have a job already then great, step 1 is learning how to budget your salary.  Find an example budget on the “Your Monthly Budget” page on the blog.

If you have debt, then tackle it and don’t get into further debt.  This means don’t go out and purchase a new car or max out credit cards.  Your first paycheck is often times the biggest one you have seen to date, so that is why it is vital to create a budget.

Student loans often come with a deferment period of 6 months after you graduate.  This is basically a way for the loan company to say: “Enjoy getting your finances in order while we charge you interest that accrues on a daily basis”.  I made the mistake of not making a loan payment during my 6 month deferment period, and it ended up costing me hundreds if not thousands of extra dollars.  Paying off student loans and debt in general is essential in beginning one’s finances.  Don’t wait for the deferment period to pass.

The benefits of beginning to make student loan payments during the deferment period are enormous… Save money on interest, and paying off student loans faster!  Learn from my mistake and save yourself time and money.

Remember…

Budget Smart, Invest Wise