You have heard experts advising you to create a budget to help take care of finances. That means observing the 50/30/20 rule – no more than 50% of your salary on rent and bills, 30% on supplementary expenses, and 20% on savings.
In as much as that is excellent advice, it’s also financial basics. It does not explain what needs doing in terms of tackling short and long-term financial goals. Here are five comprehensive ways of taking care of personal finances.
There’s no telling when a financial emergency will strike. It might be something as mundane as unexpected car expenses, or more serious like losing your job, so saving for such eventualities is a great idea.
As pointed out earlier, experts suggest saving at least 20% of your paycheck to avoid dipping into debt whenever an emergency occurs. They suggest saving as much as three to six months’ worth of expenses as a financial safety net.
It will take some financial discipline and sacrifices, as a 2019 CareerBuilder survey found, 78% of American workers live from paycheck to paycheck, supported by billionaire Mark Cuba, who says that you have to give up a few things (suggesting that whatever you can save, save as much as you can).
Alternatively, some Americans have found joy in acquiring debt instruments such as liquid funds to place the emergency fund savings. As the name suggests, liquid funds are highly liquid, meaning you can even withdraw after seven days. They have better returns than standard savings accounts while offering little interest and credit risk.
Saving and investing are not synonymous; one can exist without the other. Savings refer to setting money aside while investing is purchasing assets intending to get higher returns. Investments may include bonds, stocks, and mutual funds.
For stocks, people like Warren Buffet have had great success by studying the stock market for securities with low prices relative to their intrinsic value, and then purchasing and holding the stock for a while until its value rises. That is one strategy among hundreds, but it requires someone to be an active participant in the stock market. Alternatively, people have enriched their knowledge by reading up newsletters for stock investors or researching reputable financial websites such as Bloomberg.
For people who do not have the time for such analysis, seeking the help of Robo-advisors has been a good alternative for them. Robo-advisors consider an applicant’s paycheck, occupation, age, and financial goals to map a workable plan for investing in stocks.
Mutual funds are another investment alternative to stocks. Some Americans have found Hybrid Funds and PSU Debt Funds viable for mid-term investments, while others swear by Multi-Cap funds and Large Cap Funds for long-term investments. In a bid to reap the benefits of passive forms of investments, some people have gone for index funds, which invest in low-risk stock indices at lower costs.
Investing in one’s education has worked for some people. Rising education costs put off many people, but as the joke goes, if you think education is expensive, try ignorance. Experts say college-educated people earn $30,000 more than the average high school diploma holder.
3. Financial protection
Although it seems like a crucial topic, very few institutions will teach people about managing their personal finances. Therefore, individuals should take the time to educate their children on the value of wise spending, saving, and investing.
It is also important to consider insurances to protect both people and assets. People take out health and life insurances to cover their entire family, homeowners take insurances to protect the house, and auto insurance coverage for property damage and bodily injury liability because of car accidents. Other types of cover include disability and long-term care insurance.
Read the fine print on the insurance policies to ensure you get full coverage. Homeowner insurance does not typically cover water damage. Therefore, such policyholders have purchased separate insurance for that. Similarly, life insurance holders have gone for policies providing death benefits covering their kid’s entire education. Another smart way of tackling financial protection is writing a will or power of attorney.
4. Tax planning
It may be surprising, that plenty of people leave thousands of dollars by not maximizing on tax breaks and savings. Because of a complicated tax code, it takes a bit of tax planning to get the best out of the existing tax regime.
This requires you to track all the expenditures and save receipts that are eligible for tax credits. Office supply stores have handy tax organizers that can help you classify expenses under set categories.
People who have taken advantage of this system have sorted out expenses based on tax deductions or tax credits. Sometimes, they would choose one over the other when both apply, as that choice offers better returns.
Tax credits reduce the amount of tax owed, while tax deductions decrease the sum of income the taxman will use to tax you. In short, a $500 tax credit will offer more savings than a $500 tax deduction. If you can maximize tax savings, that can free up funds for investments, reducing debts, or funding asset purchases such as a house.
5. Retirement planning
Following the earlier point about savings, you will have noted that experts recommend saving up to six months’ worth for emergency purposes. So, what happens after you meet that goal? Channel that money towards retirement.
Since experts estimate that you will need about 80% of your current salary to sail through retirement smoothly, you will have to find a way to grow the current 20% savings towards retirement.
The younger you start, the better it is for long-term growth through compounding interest. If you have a tax-advantaged plan such as 401(k), 403(b), or an individual retirement account (IRA), that will count towards reducing income tax.
If an employer offers 401(k) or 403(b) and matches contributions, savvy planners have contributed as much money as possible, as no doing so is missing out on easy money. Other tactics include waiting as long as possible before asking to receive social security benefits, and converting term life insurance into permanent coverage.
If you are ready to give the first step and empower yourself with the management of your personal finances, don’t hesitate to contact us or meet our team. at Piedmont Avenue Consulting Inc. we partner with local expert bookkeepers and accountants and provide bookkeeping services to our clients to ensure the greatest success for our clients.