Where does all your money go? The truth is usually not that mysterious. You can discover it with a little discipline on your part—along with the help of a budget. Many people spend their money in small increments without realizing how it all adds up. By helping you track your income and expenses, a budget can help you gain control of your personal finances.
Creating and maintaining a budget is often more successful if it is a family affair. All adult family members should be involved in the process. Since children affect and are affected by the budget, they should be included as well. When they see that the family’s income is not unlimited it can help them understand why everything they want is not always theirs for the asking.
Each family requires a personalized budget tailored to its own particular needs. Here are some of the basic steps to follow:
To start, tally all your sources of income and spending for a few weeks or months. The easy way to do this is to get a receipt for all expenditures over $1.00. You can also refer to credit card statements, receipts, and check stubs.
Set up different categories for your expenditures. The two basic types of expenses are: 1) fixed—those over which you have no control, such as mortgage or rent, insurance, and utilities; and 2) discretionary—those over which you do have control, such as clothes, movies, sports events, and dining out.
When you begin to see how much money is coming in and how much is going out, it is time to set priorities. Is your objective to buy a house or a new car? Or, to save for your child’s college education or your retirement? Perhaps your top priority is to get out of debt.
Now that you have a handle on your current income and expenses and have established some priorities, you are ready to prepare a budget. Remember to keep it simple. The less complicated, the easier it will be to maintain. For instance, to estimate expenses such as tax bills or insurance premiums, simply calculate the annual expense and divide by 12. The budget process should give you a better sense of where you need to cut expenses. It may take several passes before you whittle them down to bring them in line with your income and your financial objectives.
Get in the habit of reviewing your budget at least monthly. A weekly review is even better. A budget must be consistently maintained in order to work.
Also, review your budget at the end of each year. By totaling what you spent and comparing it to what you had budgeted, you will see areas to work on for the coming year.
Once you have prepared a budget, there are still some important things to remember. First, don’t forget to set aside emergency savings in case of an unforeseen problem, such as a job loss, or an unexpected major expense. The general rule of thumb is that an emergency savings fund should cover three to six months’ worth of living expenses. To work best, savings should be set aside on a regular weekly or monthly basis. And second, keep a close watch on your credit card spending. Don’t let your credit cards run away with you. Due to the ease of using credit cards, many people end up buying things they don’t really need and that may end up costing them even more in finance charges if they don’t pay the bill on time.
Many families are always wondering where their money went. By making a budget part of your family’s financial routine, you could be well on your way to solving the all too familiar “Case of the Missing Money.”
Roth accounts are a popular as a way for people to save for retirement and potentially receive tax-free income in retirement. The idea behind a Roth account is simple: you make contributions with after-tax dollars, and then when you withdraw the money in retirement, it is tax-free. This is in contrast to traditional retirement accounts, such as a traditional IRA or 401(k), where you make contributions with pre-tax dollars and then pay taxes on withdrawals in retirement.
There are a number of factors to consider when deciding whether a Roth account is right for you. Firstly, it is important to understand the tax implications of a Roth account. With a Roth account, you make contributions with after-tax dollars, meaning that you do not receive an immediate tax deduction for your contributions like you would with a traditional retirement account. However, the money grows tax-free in the account, and when you withdraw the money in retirement, it is not taxed. This can be a significant advantage for people who expect to be in a higher tax bracket in retirement than they are currently.
Another factor to consider is the timeline for your retirement savings. With a Roth account, you are essentially paying taxes now in exchange for the promise of tax-free income in retirement. This is why it is often said that Roth accounts are best for younger people who have a long time horizon for their retirement savings.
The longer you have until retirement, the more time your money has to grow tax-free, potentially resulting in a larger tax-free payout in retirement.
It is also important to consider your current financial situation when deciding whether a Roth account is right for you. If you are currently in a high tax bracket, making contributions to a Roth account can help reduce your taxable income, potentially lowering your tax bill. However, if you are currently in a low tax bracket, making contributions to a Roth account may not have as significant of an impact on your tax bill.
Another benefit to consider is the flexibility of a Roth account. Unlike traditional retirement accounts, Roth accounts do not have required minimum distributions (RMDs), meaning that you are not required to start taking money out of the account at a certain age. This can be a significant advantage for people who want to have the flexibility to access their retirement savings as needed, without incurring taxes or penalties.
It is also important to consider the potential for future tax law changes when deciding whether a Roth account is right for you. While the tax-free nature of Roth accounts is currently a significant advantage, there is always the potential for future changes to tax laws that could affect the tax-free status of Roth accounts. While it is impossible to predict what future tax laws will be, it is important to be aware of the potential risks when making decisions about your retirement savings.
Finally, it is important to consider the impact of Roth contributions on your overall retirement savings strategy. For many people, a combination of traditional and Roth retirement accounts can be a good way to balance the tax implications of their retirement savings.
For example, you may choose to make contributions to a traditional retirement account in order to reduce your taxable income now, and then switch to making contributions to a Roth account later in life when you expect to be in a higher tax bracket.
There are a number of factors to consider when deciding whether a Roth account is right for you. While the tax-free nature of Roth accounts can be a significant advantage, it is important to carefully consider
By taking the time to consider these factors and working with a financial advisor, you can make informed decisions about your retirement savings and potentially reap the benefits of a Roth.
Each time you start a new job, your employer will give you a Form W-4 to complete that determines the amount of Federal income tax that is withheld from each paycheck. While many people prefer to have too much tax taken out so they can look forward to a refund in the spring, overpaying your taxes means you are allowing the IRS to hold onto your money.
Conversely, underpaying your taxes can result in a big tax bill in April, and possibly penalties from the IRS for underpayment. To avoid these problems, strive to match the amount withheld as closely as possible to your actual tax liability, adjusting your rates and allowances as your status changes.
Form W-4 asks you to specify whether you want your taxes withheld at the single or married rate, how many withholding allowances you wish to claim, and whether you want an additional amount withheld from each paycheck. Claiming more allowances lowers the amount of taxes withheld, while claiming fewer increases the amount taken at each pay period.
Using the worksheets that accompany Form W-4 or the withholding calculator on the IRS website can help you determine how many allowances you are entitled to claim.
If you have income from two jobs, the IRS recommends that you complete only one set of Form W-4 worksheets or online calculations, and that you then split your allowances between the Forms W-4 for each job. Alternatively, you can claim all your allowances with one employer and none with the other. However, you cannot claim the same allowances with more than one employer at the same time.
If you are married filing jointly and both you and your spouse are employed, calculate your withholding allowances using your combined family income, adjustments, deductions, exemptions, and credits – again, using just one set of worksheets or one set of calculations. While you and your spouse can divide your total allowances at your discretion, your family cannot claim an allowance twice.
If, however, you and your spouse expect to file separate returns, you should each calculate your allowances using separate worksheets based on your individual income, adjustments, and deductions.
When an event occurs in your life that affects your tax liability, adjust your Form W-4 to reflect the change. You can alter your withholding as frequently as you like by filling out a new form and submitting it to your employer.
Events that may require you to recalculate the withholding amount include getting married or divorced, having a baby, and buying a house. You may also consider adjusting your withholding if your spouse starts or stops working; if you or your spouse takes on a second job; or if you have new income from non-wage sources, such as an inheritance, unemployment compensation, retirement plan distributions, alimony, dividends, capital gains, interest, or gambling winnings.
Changing your withholding is particularly important if an event occurs that lowers the number of allowances you are entitled to claim, or if your income rises dramatically. In addition to the situations mentioned above, there are a number of other, less obvious events that could lead to a decrease in the number of allowances claimed.
For example, if you have been claiming an allowance for a dependent who is a qualifying relative or child, but you no longer expect to provide more than half of the dependent’s support for the year, resubmit your W-4. Similarly, if you have been claiming allowances for your anticipated deductions, but you now find they will be lower than originally expected, a change in your withholding may be necessary.
Even if you do not realize until later in the year that you have been underpaying your taxes and may be liable for interest and penalties, it is not too late to adjust your W-4. Simply calculate the additional amount you expect to owe, and use the form to instruct your employer to withhold the extra amount over the remainder of your paychecks for the year. To correct any future discrepancies, file a new Form W-4 in January that accurately reflects your changed tax situation.
In addition, consider adjusting your withholding if you have received a large refund and anticipate no changes in your tax liability for the coming year. Rather than overpaying the IRS over the course of the year, deposit the money in an interest-earning account, use the additional income to pay off credit card debt, or increase your retirement plan contributions.
For more information on withholding and to review your individual circumstances, consult your financial professional.
Investment advice is offered through Integrated Partners, a registered investment adviser doing business as Strong Valley Wealth & Pension. This information on the website has not been approved or verified by the United State Securities and Exchange Commission or by any state securities authority. Registration as an Investment Adviser does not imply a certain level of skill or training. Strong Valley Wealth & Pension, LLC offers securities through M.S. Howells & Co. Member FINRA/SIPC. M.S. Howells is not affiliated with Strong Valley Wealth & Pension. Not all products and services referenced on this site are available in every state and through every representative or advisor. Check the background of the firm or investment professional on BROKER CHECK or ADVISER CHECK.
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