A key financial decision people struggle to make is how to allocate savings for multiple financial goals. Do you save for several goals at the same time or fund them one-by-one in a series of steps? Basically, there are two ways to approach financial goal-setting:
Concurrently: Saving for two or more financial goals at the same time.
Sequentially: Saving for one financial goal at a time in a series of steps.
Each method has its pros and cons. Here’s how to decide which method is best for you.
Sequential goal-setting
Pros
You can focus intensely on one goal at a time and feel a sense of completion when each goal is achieved. It’s also simpler to set up and manage single-goal savings than plans for multiple goals. You only need to set up and manage one account.
Cons
Compound interest is not retroactive. If it takes up to a decade to get around to long-term savings goals (e.g., funding a retirement savings plan), that’s time that interest is not earned.
Concurrent goal-setting
Pros
Compound interest is not delayed on savings for goals that come later in life. The earlier money is set aside, the longer it can grow. Based on the Rule of 72, you can double a sum of money in nine years with an 8 percent average return. The earliest years of savings toward long-term goals are the most powerful ones.
Cons
Funding multiple financial goals is more complex than single-tasking. Income needs to be earmarked separately for each goal and often placed in different accounts. In addition, it will probably take longer to complete any one goal because savings is being placed in multiple locations.
Research findings
Working with Wise Bread to recruit respondents, I conducted a study of financial goal-setting decisions with four colleagues that was recently published in the Journal of Personal Finance. The target audience was young adults with 69 percent of the sample under age 45. Four key financial decisions were explored: financial goals, homeownership, retirement planning, and student loans.
Results indicated that many respondents were sequencing financial priorities, instead of funding them simultaneously, and delaying homeownership and retirement savings. Three-word phrases like “once I have…,", “after I [action],” and “as soon as…,” were noted frequently, indicating a hesitancy to fund certain financial goals until achieving others.
The top three financial goals reported by 1,538 respondents were saving for something, buying something, and reducing debt. About a third (32 percent) of the sample had outstanding student loan balances at the time of data collection and student loan debt had a major impact on respondents’ financial decisions. About three-quarters of the sample said loan debt affected both housing choices and retirement savings.
Actionable steps
Based on the findings from the study mentioned above, here are five ways to make better financial decisions.
1. Consider concurrent financial planning
Rethink the practice of completing financial goals one at a time. Concurrent goal-setting will maximize the awesome power of compound interest and prevent the frequently-reported survey result of having the completion date for one goal determine the start date to save for others.
2. Increase positive financial actions
Do more of anything positive that you’re already doing to better your personal finances. For example, if you’re saving 3 percent of your income in a SEP-IRA (if self-employed) or 401(k) or 403(b) employer retirement savings plan, decide to increase savings to 4 percent or 5 percent.
3. Decrease negative financial habits
Decide to stop (or at least reduce) costly actions that are counterproductive to building financial security. Everyone has their own culprits. Key criteria for consideration are potential cost savings, health impacts, and personal enjoyment.
4. Save something for retirement
Almost 40 percent of the respondents were saving nothing for retirement, which is sobering. The actions that people take (or do not take) today affect their future selves. Any savings is better than no savings and even modest amounts like $100 a month add up over time.
5. Run some financial calculations
Use an online calculator to set financial goals and make plans to achieve them. Planning increases people’s sense of control over their finances and motivation to save. Useful tools are available from FINRA and Practical Money Skills.
What’s the best way to save money for financial goals? It depends. In the end, the most important thing is that you’re taking positive action. Weigh the pros and cons of concurrent and sequential goal-setting strategies and personal preferences, and follow a regular savings strategy that works for you. Every small step matters!
Have you ever sat down to go over your budget only to find out that youâve outrageously overspent on food? Local, organic, artisan goods and trendy new restaurant outings with friends make it easy to do. With food being the second highest household expense behind mortgage or rent, our food choices have a huge impact on our budget. Using this monthly budget calculator can also help guide how to budget for food.Â
You may be surprised to find out that the most nutrient-dense foods are often the most budget-friendly. Itâs not only possible, but fun and easy to eat nourishing, delicious food while still sticking to your budget. Here are 11 ways to help you learn how to budget groceries.
1. Track Current Spending
Before you figure out what you should be spending on food, itâs important to figure out what you are spending on food. Keep grocery store receipts to get a realistic picture of your current spending habits. If you feel inclined, create a spreadsheet to break down your spending by category, including beverages, produce, etc. Once youâve done this, you can get an idea of where to trim down spending.
2. Allocate a Percentage of Your Income
How much each household spends on food varies based on income level and how many people need to be fed. Consider using a grocery calculator if youâre not sure where to start. While people spent about 30 percent of their income on food in 1950, this percentage has dropped to 9â12 today. Consider allocating 10 percent of your income to food as a starting point, and increase from there if necessary.
3. Avoid Eating Out
This is the least fun tip, we promise. Eating out is a quick and easy way to ruin your food budget. If youâre actively dating or enjoy going out to eat with friends, be sure to factor restaurants into your food budget â and strictly adhere to your limit. Coffee drinkers, consider making your favorite concoctions at home.
4. Plan Your Meals
Itâs much easier to stick to a budget when you have a plan. Plus, having a purpose for each grocery item you buy will ensure nothing goes to waste or just sits in your pantry unused. Donât be afraid of simple salads or meatless Mondays. Not every meal has to be a gourmet, grandiose experience.
5. Keep a Fridge Grocery List
Keep a magnetized grocery list on your fridge so that you can replace items as needed. This ensures youâre buying food you know youâll eat because youâre already used to buying it. Sticking to a list in the grocery store is an effective way to keep yourself accountable and not spend money on processed or pricey items â thereâs no need to take a stroll down the candy aisle if itâs not on the list.
6. Eat Before You Go to the Store
If your mother gave you this advice growing up, she was onto something: according to a survey, shoppers spend an average of 64 percent more when hungry. Sticking to a budget is all about eliminating temptations, so plan to eat beforehand to eliminate tantalizing foods that will cause you to go over-budget.
7. Be Careful with Coupons
50 percent off ketchup is a great deal â unless you donât need ketchup. Beware of coupons that claim youâll âsaveâ money. If the item isnât on your list, youâre not saving at all, but rather spending on something you donât truly need. This discretion is key to saving money at the grocery store.
8. Embrace the Bulk Section
Not only is the bulk section of your grocery store great for cheap, filling staples, but itâs also the perfect way to discover new foods and bring variety into your diet. Take the time to compare the price of buying pre-packaged goods versus bulk â itâs almost always cheaper to buy in bulk, plus eliminating unnecessary packaging is good for the planet.
Bonus: a diet rich in unprocessed, whole plant foods provides virtually every nutrient, ensuring optimal health and keeping you from spending an excess amount on healthcare costs.
9. Bring Lunch to Work
Picture this: youâre trying to stick to a strict food budget, and one day at work you realize itâs lunchtime and youâre hungry. But alas, you forgot to pack a lunch. All the meal planning and smart shopping in the world wonât solve the work-lunch-dilemma. Brown-bagging your lunch is key to ensuring your food budget is successful. Plus, it can be fun! Think mason jar salads and Thai curry bowls.
10. Love Your Leftovers
Would you ever consider throwing $640 cash into the trash? This is what the average American household does every year â only instead of cash, itâs $640 worth of food thatâs wasted. With millions of undernourished people around the globe, throwing away food not only hurts our budget but is a waste of the worldâs resources. Tossing food is no joke. Eat your leftovers.
11. Freeze Foods That Are Going Bad
To avoid wasting food, freeze things that look like theyâre about to go bad. Fruit thatâs past its prime can be frozen and used in smoothies. Make double batches of soups, sauces, and baked goods so youâll always have an alternative to ordering takeout when you donât feel like cooking.
Sticking to a food budget takes planning and discipline. While it may not seem fun at first, youâll likely find that you enjoy cooking and trying a variety of new foods you wouldnât have thought to use before. Being resourceful and cooking healthfully is a skill that will benefit your wallet and waistline for years to come.
Sources: Turbo | Fool | Forbes | Medical Daily | GO Banking Rates | Value Penguin
The post How to Budget Groceries: 11 Easy Tips appeared first on MintLife Blog.
Financial Eduation is important for everybody regardless of their demographic, and yet it is frequently overlooked by both the young and those who are just trying to get get by.
Tiffany Aliche is passionate about financial planning, and shares that passion, as well as a lifetime of information and practice, on her blog, The Budgetnista.
Tiffany took a moment to tell us about The Budgetnista, how anyone can benefit from sound financial education, and how that education can enrich your life.
Can you briefly describe The Budgetnista for people who aren’t familiar with the site? How did you get started? What differentiates you from the other financial blogs out there?
The Budgetnista is an award-winning financial education firm established in 2008. We specialize in the delivery of financial literacy through seminars, workshops, curricula and trainings. The Budgetnista has been a brand ambassador and spokesperson for a number of organizations, and has served as the personal finance education expert for City National Bank.
I’m happy to say that I’m quickly becoming America’s favorite financial educator. I authored the #1 Amazon bestseller, The One Week Budget and created the LIVE RICHER Challenge.
My love for financial education began at at home. I grew up in a financially-literate household, receiving weekly financial lessons from my CFO father. These lessons paired with my fun personality helped me create a fun, financial blog that resonates with thousands of women.
Who is your regular audience? What are some specific challenges they face, and how do they inform the things that you write about?
The Budgetnista’s audience is women aged 25-45. Their biggest financial issues are debt management, credit, and budgeting. When writing my blog, I focus on offering step-by-step guidance for these specific financial issues. In addition to women needing assistance, they also need encouragement. I try to not only be a source of information, but a source of inspiration as well.
What are some of the financial services The Budgetnista offers? Who is likely to utilize your services?
The financial services offered by The Budgetnista are keynotes, workshops and seminars on the following personal finance topics: money mindset, budgeting, savings, debt and credit. Many colleges, non-profits, and corporate entities utilize these services.
Each year, The Budgetnista also offers the LIVE RICHER Challenge; a FREE, online financial challenge created by The Budgetnista to help 10,000 women achieve seven specific financial goals in 36 days.
Your motto is “Live richer. To create a measurable lifestyle shift, through financial education.” First of all, can you briefly define financial education, and relate why it is so important? Secondly, how much of a noticeable shift has there been in your own lifestyle since you implemented this education?
Financial education through The Budgetnista provides participants with the tools they need to make sound financial decisions. It is essential because it grants people the power of choice, not just with their finances, but in other aspects of their lives as well.
In my own life, I’ve seen the power of financial education first hand. After a devastating job loss during the recession, I was able to create a business (The Budgetnista) and design the life I always dreamed of.
In the long version of your bio, you’ve written, “By beginning to educate yourself, you’ve taken the first step towards financial empowerment.” How does that information translate into daily life? If this is the first step, what’s the next?
Education is the first step on your financial journey. The next step is to take action. Once you know how to manage your money – budget, save, reduce debt, and fix credit – you can use these skills to navigate your daily life.
One of the goals of The Budgetnista is to give someone a clearer understanding of how to more skillfully manage their money. What are a few basic tips people can use to get started?
Here are The Budgetnista’s top 3 tips to get started on managing your money.
3) Open a Bills Account: This is a FREE checking account (if possible), where you allocate your bill money each month. Separating your funds will help you to avoid “accidentally” spending money designated for bills.
2) Give and get an allowance: I bet you never thought you’d get one again. After creating your budget, decide which items you can pay for with cash each month and add the amounts up; then divide the total by four. That’s how much your new weekly allowance is. If you take weekly cash allowances, it will help to curb your spending. Also, give yourself a CASH allowance when shopping and leave the cards at home. This way when the cash is done, so are you.
1) Automate: By taking out the “flawed” human element (aka you), you’re more likely to stick to your budget. I’ve automated EVERYTHING; payments, bills, saving, investing, even giving to charity.
You recently wrote a blog post about how to start planning for retirement now. First of all, why is this important? Secondly, does it seem like this is something that young adults are neglecting?
Retirement is critical for anyone who wants to maintain their lifestyle after they stop working. Many young adults neglect this because there is a disconnect between their present self and their future self.
You also recently wrote about a budget trip to Jamaica you get to take. What are some fun things that you’ve gotten to do simply by getting your finances in order?
My favorite thing to do, as a result of getting my finances in order, is travel. In the past few years, I’ve been to 16 different countries. Learning to master my money has given me the freedom to actively design and live my life.
You’ve talked about how to make a budget for people who don’t have a regular paycheck. What were some of the basics of that article, and do you feel this is a reflection of the changing economy we’re living in, and if so, how?
Budgeting on an irregular income can be difficult. Here are some tricks to help you.
Calculate your Financial Baseline: Your financial baseline is how much your life costs you each month without the bells and whistles.
Be Like the Squirrel: Squirrels are super-smart savers. When acorns are plentiful, they work their hardest and gather as many as possible. Squirrel away your money when times are good, and live off of your stash when things aren’t.
Pay Yourself: Once you identify how much you spend each month, pay it to yourself from your business/savings account. Your clients/income provider should “pay” your savings account, then you pay yourself a regular income from the money that sits in that account.
Live by Percentages: Those that receive a regular paycheck can live by exact amounts; but for those of us with irregular incomes, we have to live by percentages. Allocate a percentage of your income to different categories: bills, savings, investing, spending, etc.
Separate to See: The best way to gauge how close you are to achieving your financial goals is to house your money in different bank accounts.
Systemize: Automate everything: transfers, bills, saving, giving and investing.
You’ve also offered some travel tips for traveling on a budget. What are some ways people can save while they’re traveling? How possible is it to have fun on the cheap?
My top 3 Budgetnista travel tips are:
Be flexible: Sometimes travel deals spring up on sites. The more flexible you are about your travel destination and timeframe, the more likely you’ll be able to take advantage of those deals.
The right sites: My favorite deal sites are: theflightdeal.com, jetradar.com, europeandestinations.com and airfarwatchdog.com
When to book: The best day to book a domestic flight is Tuesday at 3pm (this is when the sales hit). The cheapest day to fly domestically is Wednesday.
Financial education is not a one-off event; it is an ongoing process that requires practice to perfect. For more education and inspiration, like The Budgetnista on Facebook , connect on LinkedIn, follow her on Twitter, and subscribe to The Budgetnista YouTube Channel.
The post Expert Interview with Tiffany Aliche of The Budgetnista on Financial Planning appeared first on MintLife Blog.
Could logging in to your computer from a deluxe treehouse off the coast of Belize be the future of work? Maybe. For many, the word freelance means flexibility, meaningful tasks and better work-life balance. Who doesn’t want to create their own hours, love what they do and work from wherever they want? Freelancing can provide all of thatâbut that freedom can vanish quickly if you don’t handle your expenses correctly.
“A lot of the time, you don’t know about these expenses until you are in the trenches,” says freelance copywriter Alyssa Goulet, “and that can wreak havoc on your financial situation.”
Nearly 57 million people in the U.S. freelanced, or were self-employed, in 2019, according to Upwork, a global freelancing platform. Freelancing is also increasingly becoming a long-term career choice, with the percentage of freelancers who freelance full-time increasing from 17 percent in 2014 to 28 percent in 2019, according to Upwork. But for all its virtues, the cost of being freelance can carry some serious sticker shock.
“There are many hats you have to wear and expenses you have to take on, but for that you’re gaining a lot of opportunity and flexibility in your life.”
Most people who freelance for the first time don’t realize that everythingâfrom taxes to office supplies to setting up retirement plansâis on them. So, before you can sustain yourself through self-employment, you need to answer a very important question: “Are you financially ready to freelance?”
What you’ll find is that budgeting as a freelancer can be entirely manageable if you plan for the following key costs. Let’s start with one of the most perplexingâtaxes:
1. Taxes: New rules when working on your own
First things first: Don’t try to be a hero. When determining how to budget as a freelancer and how to manage your taxes as a freelancer, you’ll want to consult with a financial adviser or tax professional for guidance. A tax expert can help you figure out what makes sense for your personal and business situation.
For instance, just like a regular employee, you will owe federal income taxes, as well as Social Security and Medicare taxes. When you’re employed at a regular job, you and your employer each pay half of these taxes from your income, according to the IRS. But when you’re self-employed (earning more than $400 a year in net income), you’re expected to file and pay these expenses yourself, the IRS says. And if you think you will owe more than $1,000 in taxes for a given year, you may need to file estimated quarterly taxes, the IRS also says.
That can feel like a heavy hit when you’re not used to planning for these costs. “If you’ve been on a salary, you don’t think about taxes really. You think about the take-home pay. With freelance, everything is take-home pay,” says Susan Lee, CFP®, tax preparer and founder of FreelanceTaxation.com.
When you’re starting to budget as a freelancer and determining how often you will need to file, Lee recommends doing a “dummy return,” which is an estimation of your self-employment income and expenses for the year. You can come up with this number by looking at past assignments, industry standards and future projections for your work, which freelancer Goulet finds valuable.
“Since I don’t have a salary or a fixed number of hours worked per month, I determine the tax bracket I’m most likely to fall into by taking my projected monthly income and multiplying it by 12,” Goulet says. “If I experience a big income jump because of a new contract, I redo that calculation.”
After you estimate your income, learning how to budget as a freelancer means working to determine how much to set aside for your tax payments. Lee, for example, recommends saving about 25 percent of your income for paying your income tax and self-employment tax (which funds your Medicare and Social Security). But once you subtract your business expenses from your freelance income, you may not have to pay that entire amount, according to Lee. Deductible expenses can include the mileage you use to get from one appointment to another, office supplies and maintenance and fees for a coworking space, according to Lee. The income left over will be your taxable income.
Pro Tip:
To set aside the taxes you will need to pay, adjust your estimates often and always round up. “Let’s say in one month a freelancer determines she would owe $1,400 in tax. I’d put away $1,500,” Goulet says.
2. Business expenses: Get a handle on two big areas
The truth is, the cost of being freelance varies from person to person. Some freelancers are happy to work from their kitchen tables, while others need a dedicated workspace. Your freelance costs also change as you add new tools to your business arsenal. Here are two categories you’ll always need to account for when budgeting as a freelancer:
Your workspace
Joining a coworking space gets you out of the house and allows you to establish the camaraderie you may miss when you work alone. When you’re calculating the cost of being freelance, note that coworking spaces may charge membership dues ranging from $20 for a day pass to hundreds of dollars a month for a dedicated desk or private office. While coworking spaces are all the rage, you can still rent a traditional office for several hundred dollars a month or more, but this fee usually doesn’t include community aspects or other membership perks.
If you want to avoid office rent or dues as costs of being freelance but don’t want the kitchen table to pull double-duty as your workspace, you might convert another room in your home into an office. But you’ll still need to outfit the space with all of your work essentials. Freelance copywriter and content strategist Amy Hardison retrofitted part of her house into a simple office. “I got a standing desk, a keyboard, one of those adjustable stands for my computer and a squishy mat to stand on so my feet don’t hurt,” Hardison says.
Pro Tip:
Start with the absolute necessities. When Hardison first launched her freelance career, she purchased a laptop for $299. She worked out of a coworking space and used its office supplies before creating her own workspace at home.
Digital tools
There are a range of digital tools, including business and accounting software, that can help with the majority of your business functions. A big benefit is the time they can save you that is better spent marketing to clients or producing great work.
The software can also help you avoid financial lapses as you’re managing the costs of being freelance. Hardison’s freelance business had ramped up to a point where a manual process was costing her money, so using an invoicing software became a no-brainer. “I was sending people attached document invoices for a while and keeping track of them in a spreadsheet,” Hardison says. “And then I lost a few of them and I just thought, ‘Oh, my God, I can’t be losing things. This is my income!’”
Digital business and software tools can help manage scheduling, web hosting, accounting, audio/video conference and other functions. When you’re determining how to budget as a freelancer, note that the costs for these services depend largely on your needs. For instance, several invoicing platforms offer options for as low as $9 per month, though the cost increases the more clients you add to your account. Accounting services also scale up based on the features you want and how many clients you’re tracking, but you can find reputable platforms for as little as $5 a month.
Pro Tip:
When you sign up for a service, start with the “freemium” version, in which the first tier of service is always free, Hardison says. Once you have enough clients to warrant the expense, upgrade to the paid level with the lowest cost. Gradually adding services will keep your expenses proportionate to your income.
3. Health insurance: Harnessing an inevitable cost
Budgeting for healthcare costs can be one of the biggest hurdles to self-employment and successfully learning how to budget as a freelancer. In the first half of the 2020 open enrollment period, the average monthly premium under the Affordable Care Act (ACA) for those who do not receive federal subsidiesâor a reduced premium based on incomeâwas $456 for individuals and $1,134 for families, according to eHealth, a private online marketplace for health insurance.
“Buying insurance is really protecting against that catastrophic event that is not likely to happen. But if it does, it could throw everything else in your plan into a complete tailspin,” says Stephen Gunter, CFP®, at Bridgeworth Financial.
A good place to start when budgeting as a freelancer is knowing what healthcare costs you should budget for. Your premiumâwhich is how much you pay each month to have your insuranceâis a key cost. Note that the plans with the lowest premiums aren’t always the most affordable. For instance, if you choose a high-deductible policy you may pay less in premiums, but if you have a claim, you may pay more at the time you or your covered family member’s health situation arises.
When you are budgeting as a freelancer, the ACA healthcare marketplace is one place to look for a plan. Here are a few other options:
Spouse or domestic partner’s plan: If your spouse or domestic partner has health insurance through his/her employer, you may be able to get coverage under their plan.
COBRA: If you recently left your full-time job for self-employment, you may be able to convert your employer’s group plan into an individual COBRA plan. Note that this type of plan comes with a high expense and coverage limit of 18 months.
Organizations for freelancers: Search online for organizations that promote the interests of independent workers. Depending on your specific situation, you may find options for health insurance plans that fit your needs.
Pro Tip:
Speak with an insurance adviser who can help you figure out which plans are best for your health needs and your budget. An adviser may be willing to do a free consultation, allowing you to gather important information before making a financial commitment.
4. Retirement savings: Learn to “set it and forget it”
Part of learning how to budget as a freelancer is thinking long term, which includes saving for retirement. That may seem daunting when you’re wrangling new business expenses, but Gunter says saving for the future is a big part of budgeting as a freelancer.
“It’s kind of the miracle of compound interest. The sooner we can get it invested, the sooner we can get it saving,” Gunter says.
He suggests going into autopilot and setting aside whatever you would have contributed to an employer’s 401(k) plan. One way to do this might be setting up an automatic transfer to your savings or retirement account. “So, if you would have put in 3 percent [of your income] each month, commit to saving that 3 percent on your own,” Gunter says. The Discover IRA Certificate of Deposit (IRA CD) could be a good fit for helping you enjoy guaranteed returns in retirement by contributing after-tax (Roth IRA CD) or pre-tax (traditional IRA CD) dollars from your income now.
Pro Tip:
Prioritize retirement savings every month, not just when you feel flush. “Saying, ‘I’ll save whatever is left over’ isn’t a savings plan, because whatever is left over at the end of the month is usually zero,” Gunter says.
5. Continually update your rates
One of the best things you can do for yourself in learning how to budget as a freelancer is build your costs into what you charge. “As I’ve discovered more business expenses, I definitely take those into account as I’m determining what my rates are,” Goulet says. She notes that freelancers sometimes feel guilty for building business costs into their rates, especially when they’re worried about the fees they charge to begin with. But working the costs of being freelance into your rates is essential to building a thriving freelance career. You should annually evaluate the rates you charge.
Because your expenses will change over time, it’s wise to do quarterly and yearly check-ins to assess your income and costs and see if there are processes you can automate to save time and money.
“A lot of the time, you don’t know about these expenses until you are in the trenches, and that can wreak havoc on your financial situation.”
Have confidence in your freelance career
Accounting for the various costs of being freelance makes for a more successful and sustainable freelance career. It also helps ensure that those who are self-employed achieve financial stability in their personal lives and their businesses.
“There are many hats you have to wear and expenses you have to take on,” Goulet says. “But for that, you’re gaining a lot of opportunity and flexibility in your life.”
The post Everything You Need to Know About Budgeting As a Freelancer appeared first on Discover Bank – Banking Topics Blog.
You just learned of the passing of a loved one. During this stressful and emotionally taxing time, you also find out that you’re receiving an inheritance. While you’re grateful for the unexpected windfall, knowing what to do with an inheritance can bring its own share of stress.
While the amounts vary greatly, the Federal Reserve Board’s Survey of Consumer Finances reports that an average of roughly 1.7 million households receive an inheritance each year. First words of wisdomâresist the urge to spend it all at once. According to a study funded by the Bureau of Labor Statistics, one-third of people who receive an inheritance spend all of itâand even dip into other savingsâin the first two years.
Not me, you say? Still, you might be asking, “What should I do with my inheritance money?” Follow these four steps to help you make smart decisions with your newfound wealth:
1. Take time to grieve your loss
Deciding what to do with an inheritance can bring with it mixed emotions: a sense of reprieve for this unexpected financial gain and sadness for the loss of a loved one, says Robert Pagliarini, certified financial planner and president of Pacifica Wealth Advisors.
During this time, you might feel confused, upset and overwhelmed. âA large inheritance that pushes you out of your financial comfort zone can create anxiety about how to best manage the money,” Pagliarini says. As an inheritor, Pagliarini adds that you may feel the need to be extra careful with the funds; even though you know it is your money, it could feel borrowed.
The last thing you want to do when deciding what to do with an inheritance is make financial decisions under an emotional haze. Avoid making any drastic moves right away, such as quitting your job or selling your home. Some experts suggest giving yourself a six-month buffer before using any of your inheritance, using the time instead to develop a financial plan. While you are thinking about things to do with an inheritance, you can park any funds in a high-yield savings account or certificate of deposit.
âA large inheritance that pushes you out of your financial comfort zone can create anxiety about how to best manage the money.â
2. Know what you’re inheriting
Before you determine the things to do with an inheritance, you need to know what you’re getting. Certified financial planner and wealth manager Alex Caswell says how you use your inheritance will largely depend on its source. Typically, Caswell says an inheritance will come in the form of assets from one of three places:
Real estate, such as a house or property. As Caswell explains, if you receive assets from real estate, you will transfer them into your name. As the inheritor, you can choose what to do with the assetsâtypically sell, rent or live in them.
A trust account, a legal arrangement through which funds are held by a third party (the trustee) for the benefit of another party (the beneficiary), which may be an individual or a group. The creator of the trust is known as a grantor. âIf someone inherits assets through a trust, the trust documents will stipulate how these assets will be distributed and who ultimately decides how they are to be invested,” Caswell says. In some cases, the assets get distributed outright to you; in other instances, the trust stays intact and you get paid in installments.
A retirement account, such as an IRA, Roth IRA or 401(k). These accounts can be distributed in one lump sum, however, there may be requirements related to the amount of a distribution and the cadence of distributions.
When considering things to do with an inheritance, know that inherited assets can be designated as Transfer on Death (TOD) or beneficiary deeds (in the case of real estate), which means the assets can be transferred to beneficiaries without the often lengthy probate process. An individual may also bequeath cash or valuables, like jewelry or family heirlooms, as well as life insurance or stock certificates.
Caswell says if your inheritance comes in the form of investment assets, such as stocks or mutual funds, you’ll want to think of them as part of your own financial picture. âAll too often, we see individuals end up treating inherited assets as a living extension of their passed relative,” Caswell says. Consider how the investments can be used to support your financial goals when thinking about things to do when you get an inheritance.
An average of roughly 1.7 million households receive an inheritance each year.
3. Plan what to do with your financial gain
Just like doing your household budgeting, it’s important to “assign” your inheritance to specific purposes or goals, says Pacifica Wealth Advisors’ Pagliarini. Depending on your financial situation, the simple concepts of save, spend and give may be a good place to start when deciding on things to do when you get an inheritance:
SAVE:
Bolster your emergency fund: You should have at least three to six months of living expenses saved up to avoid unexpected financial shocks, such as job loss, car repairs or medical expenses. If you don’t and you’re deciding what things to do with an inheritance, consider parking some cash in this bucket.
Save for big goals: Now could be a good time to boost your long-term savings goals and pay it forward. Things to do when you get an inheritance could include putting money toward a child’s college fund or getting your retirement savings on track.
SPEND:
Tackle debt: If you’re evaluating what to do with an inheritance, high-interest debt is something you could consider paying off. Spending on debt repayment can help you save on hefty interest charges.
Reduce or pay off your mortgage: Getting closer to paying off your homeâor paying it off entirelyâcan also save you in interest and significantly lower your monthly expenses. Allocating cash here is a win-win.
Enjoy a little bit of it: It’s okay to use a portion of your inheritance on something you enjoy or find rewarding. Planning a vacation, investing in more education or paying for a big purchase could be good moves.
GIVE:
Donate funds to charity: Thinking about your loved one’s causes or your own can continue legacy goals and provide tax benefits.
When deciding what to do with an inheritance, taxes will need to be considered. “It is extremely important to be aware of all tax ramifications of any decision around inherited assets,” Caswell says. You could be required to pay a capital gains tax if you sell the gift (like property) that was passed down to you, for example. Also, depending on where you live, your inherited money could be taxed. In addition to federal estate taxes, several U.S. states impose an inheritance tax and/or an estate tax.
Since every situation is unique and tax laws can change, when considering things to do with an inheritance, consult a financial advisor or tax professional for guidance.
Make your windfall count
Receiving an inheritance has the potential to change your financial picture for good. When thinking about the things to do when you get an inheritance, be sure to give yourself ample time to grieve and to understand all of your options. Don’t be afraid to lean on the experts to get up to speed on any tax and legal implications you need to consider.
Planning can go a long way toward making the right decisions concerning your newfound wealth. Being responsible with your inheritance not only helps ensure your financial future, but will also honor your loved one’s legacy.
The post 4 Smart Things to Do When You Get an Inheritance appeared first on Discover Bank – Banking Topics Blog.
Months (and months) of grading papers, bringing work home on the weekends, staying on-point for all those young minds you’ve been charged with educating and finally… summer is here! It’s time to put your feet up and relax for a well-earned break from your awesome, and often intense, teaching career. But wait. How do teachers budget with no paycheck during the summer?
The summer paycheck gap doesn’t need to be a cause of stress for educators. You just need to put a plan in place to cover your finances for the months that school is out of session. You can follow these guidelines to create a summer budgeting plan that works for you:
Spread your income over 12 months
Bobby Hoyt, a former teacher and personal finance blogger at Millennial Money Man, says the beginning of the school year is always a “crazy time” for teachers. Your best bet to cover the summer paycheck gap is to have a budget in place well in advance of the bell on the first day of school.
To start, check to see if your school offers a year-round payment option. This would allow you to opt-in prior to the beginning of the school year to have your paychecks spread out over 12 months instead of the 10 or so months that you are working. “That way you’ll have a consistent paycheck no matter what time of the year it is,” says Kristin Larsen, personal finance blogger at Believe in a Budget. Even though your monthly pay will be lower with year-round paychecks, it could be easier to create a financial plan and manage the summer paycheck gap with the predictable cash flow.
If your school doesn’t offer this type of program or if you prefer to collect your standard paychecks and spread them out to accommodate summer, you can create your own 12-month paycheck plan to manage the summer paycheck gap. First, divide your annual income by the amount of months you receive paychecks. If you earn $57,000 a year and work for 10 months, for example, you’ll arrive at $5,700. Next, divide your annual income by 12 months, which in this example, would be $4,750. Finally, calculate the difference between those numbers. In this case, it’s $950. This is how much you would need to set aside from your monthly income to provide for two months of the same pay during the summer. You’re essentially putting money aside so you can give yourself a paycheck during your time off.
“Then, you’ll want to sit down and create a budget and find where you need to cut back and where you can still do the things you enjoy,” Hoyt says.
See if your school offers a year-round payment option. This would allow you to opt-in prior to the beginning of the school year to have your paychecks spread out over 12 months instead of the 10 or so months that you are working.
Calculate your standard expenses and summer extras
If you’re a teacher living with no paycheck during the summer, Hoyt suggests figuring out how much money you’ll need in the summer months to cover your standard living expenses. Think housing, utilities, groceries and transportation. The stuff you can’t live without. If you don’t have a baseline for your essential expenses, keep track of what you spend for at least three months, or sort through old credit card transactions and bank account activity by month. This should help you get a clearer idea of the minimum amount needed to cover your bills and and basic living costs. A summer budget tip for teachers is to use your highest expense month to forecast your summer costs so you don’t have to stress about coming up short, Larsen says.
Another summer budget tip for teachers is to anticipate discretionary seasonal expenses. Let’s face itâthere’s a lot of fun to be had over the summer, and the cost of extra activities and travel can really add up. Quickly. Luxury vacation or the summer festival circuit, anyone? Estimate how much you’ll need for your summer extras, and add those to the living expenses mentioned above. If any of your summer expenses recur annuallyâlike a standing trip with family or friendsâuse what you’ve spent in past years to arrive at how much you’ll need this time.
Whether you receive summer income from a year-round payment program or set aside money monthly to combat the summer paycheck gap, there’s a chance that your total summer expenses may exceed your summer paychecks. Read on for more summer budget tips for teachers that can help you plan for this difference.
Stash summer expenses in a separate account
If you’re stashing money away monthly to avoid the summer paycheck gap, creating a separate summer fund to contribute to throughout the year can be an effective summer budget tip for teachers. You could hold the portion of your paycheck you have set aside for summer in this fund, and look for other creative ways to add savings to the account. Bonus: If you put your summer paychecks and additional summer savings in a separate account, it may be easier to avoid the temptation to withdrawal for other expenses during the school year.
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Consider parking your summer funds in a high-yield online savings account so you can earn interest while you work your way through the school year. If you plan ahead and won’t need to withdraw your funds for a specific amount of time (say 12 months), you could earn even more interest with a certificate of deposit.
Create a financial cushion
In addition to the money accumulating in your fund for the summer paycheck gap, it’s important to also have an emergency fund, Hoyt says. An emergency fund is just thatâa fund that is set aside strictly for emergencies, like car repairs or medical bills you didn’t anticipate. “It’s always wise to have an emergency fund, but especially if you have gaps in income,” adds Larsen, from Believe in a Budget.
While experts typically recommend saving at least three to six months of living expenses in your emergency fund, you can start small and add as your budget allows. Any cash set aside in an emergency fund will be helpful if an unexpected bill or expense comes your way, especially if it’s during the summer paycheck gap.
Consider a side hustle
If you think your summer paychecks and extra savings are going to fall a little short of your summer expenses, “consider a summer side hustle to pay for the extras that can come with warmer weather,” Larsen says. With no paycheck during the summer, a side hustle can be a good way to funnel more cash into your summer fund account.
According to Hoytâwho actually started his website as a side hustle when he was a band directorâmany teachers can use their skill set for side hustles related to their profession. For example, teachers can offer private lessons or tutoring within their areas of expertise. Teachers can also pursue unrelated side hustles, like flipping items in online marketplaces to bring in more money in anticipation of no paycheck during the summer.
A side hustle may also be a perfect opportunity to explore a new venture, especially when there’s no paycheck during the summer. Hoyt says a side hustle can even provide a route to a new career path. “The skills that teachers pick up throughout their careerâdealing with people, managing a high workload, having high standards for excellenceâtend to translate extremely well into entrepreneurialism,” Hoyt says.
Make it a summer to enjoy
Teaching has its challenges, but it also comes with the major perk of having some of the best months of the year off. Planning ahead and implementing these summer budget tips for teachers will help make sure that these hard-earned months of vacation are truly an enriching time.
The post Teachers: How to Survive the Summer Paycheck Gap appeared first on Discover Bank – Banking Topics Blog.
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Budgeting Calculators
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Value of Reducing or Foregoing Expenses. Small changes in your daily routine can add up to big budget savings. Find out how much.
How Much Does Inflation Impact my Standard of Living? How much will you need in 5, 10 or 30 years to maintain your standard of living?
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Maybe you want to lose those stubborn 10 pounds, score a big promotion or run your first marathon. Whatever your priority, it all starts with setting a goal.
Financial priorities are no different. Whether you want to save for your child’s college education or get yourself out of debt, budgeting to help reach your financial goals allows you to determine what’s most important to you, make a plan to attain those goals and hold yourself accountable for success.
Still, when it comes to managing your money, knowing how to set financial goals and sticking to them can feel like opposite sides of the same coin. You might even find yourself asking, “How do I create a simple budget to reach my financial goals?” If you follow these three steps, you could be crossing the finish line in record time:
1. Pick a day to get started
Sometimes the hardest part of tackling a new project is simply getting started, especially if your to-do list feels like it’s never ending. There’s always tomorrow, or the day after that… right? To create a simple budget to help you reach your financial goals, pick a day and time to get started. Consider picking a time when you do your best thinking, are most focused and least likely to get interrupted. Maybe it’s Sunday morning over breakfast and coffee before kicking off a day of chores or on a weeknight after the kids go to bed.
Once you’ve landed on the best time to sit down and create a simple budget, add it to the calendar and schedule reminders on your computer or phone to hold yourself accountable.
2. Create a simple budget, however complex your finances
Chances are your finances are pretty complicated, with lots of moving parts. Things seem to be moving along nicely with your regular expenses like rent, groceries, transportation and entertainment… and then your carburetor goes kaput in your car and you must replace it right away. Or that toothache has become unbearable and requires a root canalâand you’ll have to cover some of the expense out of pocket. Just when you’re finally making a dent in paying down your debt and getting your finances on track, life throws you some curveballs. But that doesn’t mean you can’t create a simple budget.
One of the easiest ways to create a simple budget and stay on track is to follow the 50-20-30 rule:
50 percent of your income should address your needs, such as housing, utilities, healthcare and transportation;
20 percent should be put toward your financial goals, like building your savings and paying off debt;
30 percent should cover your wants or discretionary expenses, like shopping, entertainment and dining out.
Managing your finances with the 50-20-30 is a good first step when you’re first learning how to create a budget, but trying to deal with multiple financial goals within that 20 percent bucket can be overwhelming. When it comes to budgeting to help reach your financial goals, certified financial planner Jim White suggests taking your financial goals one step at a time.
“Make a simple plan to tackle debtâor maybe just one debtâthen when that goal is accomplished, work on a simple plan for the next debt,” White suggests. “A bunch of small victories goes a long way to changing your financial discipline and gives you a boost to keep moving forward,” White adds.
Similar to how you picked a day to begin the budgeting process, make a habit out of managing your finances by picking one day of the week and checking in with yourself at a scheduled time. After about two months, budgeting to help reach your financial goals can become habit forming. “When you focus on your goals on the same day every week, you are creating a habit, and a pattern, to follow,” says Karen Ford, financial coach and motivational speaker.
Budgeting to help reach your financial goals becomes even more effective when you’re reviewing your priorities every seven days and making adjustments to your spending and saving as needed.
“Make a simple plan to tackle debtâor maybe just one debtâthen when that goal is accomplished, work on a simple plan for the next debt. A bunch of small victories goes a long way to changing your financial discipline and gives you a boost to keep moving forward.”
3. Automate your financial plan
Now that you know how to set financial goalsâwhether it’s paying down debt, saving up for a car or putting money away for retirementâwhat’s next? Time to get moving! One way to do that is to automate your finances. By setting up automatic bill pay and account transfers, it will be easier to stick to your plan for paying monthly expenses and contributing to savings.
When it comes to paying your bills and learning how to set financial goals, consider automating the bills that you pay regularly, especially those that fall within the 50 percent budget category that covers your living essentials. To gain momentum with your savings progress, set up automatic transfers from your checking account to your savings account for the amount you wish to save each month. If your financial goal is retirement, you could even set up automatic transfers to an individual retirement account (IRA) so you’re consistently making progress. You could also arrange to have a portion of your paycheck automatically go into savingsâbefore you even have time to miss it.
By making automatic contributions to your savings accounts, you are “subscribing to the idea of paying yourself first,” says Riley Adams, CPA and blogger for Young and the Invested, a professional’s guide to financial independence. “By doing this, it removes the temptation to spend and takes any lack of discipline out of the picture,” Adams says.
Keep in mind that any time you automate your finances as part of creating a simple budget, you should monitor your accounts regularly. Check in to make sure your automated settings are up to date, that you always have the funds available in your accounts to cover your expenses and transfers and that your savings are growing according to your plan.
How to set financial goals in 3 steps
Once you find time to focus on your finances, create a simple budget and automate your payments and transfers, budgeting to help reach your financial goals is one habit that is sure to stick. By following these three rules and keeping yourself on track, you’ll be ready to build a solid foundation for your financial future.
The post How to Set Financial Goalsâand Crush Them appeared first on Discover Bank – Banking Topics Blog.
Financial Eduation is important for everybody regardless of their demographic, and yet it is frequently overlooked by both the young and those who are just trying to get get by.
