Personal Finance

Spending Within Your Means

Spending within your means may sound like a simple rule to follow, but many Americans spend more than they save, which can result in debt. The good news is that it’s completely avoidable, and it’s reversible over time. With a little planning, tracking and adjusting your spending, you can live happily within your means.

For a stronger financial future, here are a few tactics to start living within your means and building better spending habits.

Create a budget.
Making a budget simply means examining your income and expenditures in order to determine exactly how much money you have coming in and where you’re spending it. Once you’ve got a clear understanding of your current budget – what income you’re receiving and what expenses you’re responsible for – take a closer look and find places where you can spend less. Not sure where to begin? Get started with this Budgeting calculator.

Identify wants versus needs.
An effective way to streamline a budget is to identify your discretionary spending (wants) versus your essential spending (needs). Recognizing the difference between wants and needs can help you better understand what spending is necessary and what categories you could save in. The first step is to analyze your spending and cut back on nonessential purchases. It can make a significant difference in your annual budget by freeing up funds to be saved or used elsewhere. You may find you save hundreds of dollars a month by reducing entertainment costs or frivolous purchases. The idea isn’t to stop enjoying your life, but to understand costs and prioritize expenses for a healthier savings account.

Tackle your debt.
Many Americans owe money in the form of a student loan, a credit card or medical or consumer debt. It can take many years to pay off debt, but it’s important to live within your means and manage your debt load. Take the time to identify which of your loans have the highest interest rates and start paying them off first.

Consider professional counseling.
If you are struggling and can’t get your spending under control, consider seeking qualified financial counseling. Organizations like the National Foundation for Credit Counseling® offer free financial education and counseling services to help Americans cultivate responsible personal finance habits. Or consider finding a free, certified financial counselor through the Association for Financial Counseling and Planning Education (AFCPE), a nonprofit organization that aims to improve financial education for both financial counselors and clients. AFCPE’s online search tool can help you find the right advisor for your needs.


Building an Emergency Fund

As much as we prepare for life’s events, the unexpected can happen. Your pet might need a costly treatment. Your car could break down and require expensive repairs. You could damage your smartphone and have to replace it. Any one of these unplanned expenses could impact your budget by hundreds or thousands of dollars. A recent study found that 63 percent of Americans lack the savings to pay for a $500 to $1,000 emergency. This means almost two-thirds of Americans would need to cut spending or incur debt to cover emergencies – decisions that could create even more financial stress. Would you have the money to cover these financial curveballs? That’s where an emergency fund comes in.Building an Emergency Fund

There’s no need to dwell on the what-ifs, but saving for them is important; if you don’t have an emergency fund, the consequences could be financially devastating.

What Is an Emergency Fund?
An emergency fund is money that you have saved to help you cover unexpected costs that come with everyday life. This could be a medical emergency or home repair. Many of these costs cannot be predicted, but nearly everyone will face these kinds of expenses throughout their lives. That’s why having an emergency fund is always worthwhile, because you won’t be caught off guard without the means to resolve the financial situation. Experts say it’s smart to build and maintain an emergency fund with three to six months’ worth of living expenses.

How Do You Start an Emergency Fund?
Start by setting a monthly savings goal and set up the funds for automatic transfer to a savings account. That way, you will be saving money without even thinking about it. You will want to take a close look at your finances to ensure that you are not saving so much money that you can’t pay for other everyday costs, or so little that your savings won’t cover a potential emergency.

Where Should You Keep an Emergency Fund?
Savings accounts are the safest place to keep your emergency fund so that you won’t be tempted to dip into it. Emergency funds should be kept fairly liquid so you’ll be able to access them quickly if an unexpected expense comes up. If you need to use your emergency savings, you’ll be glad they’re available.

How Much Should You Save?
The size of an emergency fund will probably change as your financial situation does, so it’s important to revisit your budget and make sure you’re covered. For some, this might mean a couple of large transfers into an account. For others, building an emergency fund could be a longer process and might require smaller deposits each month. The key to building an emergency fund is to set money aside every month, no matter how small the amount.


Growing Your Money

Saving money doesn’t always have to be hard work. Effortlessly increase your funds by depositing money in a savings account from each paycheck or monetary gift you receive. In exchange for opening an account and giving the financial institution money, your savings will be increased by a certain percentage every year. This percentage is called interest. The longer you leave your savings untouched, the more your money will grow.

There are a variety of methods to help you grow your money. Compound interest, the Rule of 72 and attention to detail when reviewing financial institution documents are just a few ways you can easily increase your savings. Don’t lose your hard-earned interest to penalties and financial institution fees. Read the fine print before opening an account and be mindful of fees, charges, penalties, interest limits and variable interest rates. By understanding how interest and savings accounts work, you will be more confident when making decisions about how to manage your money.

Compound Interest
Interest can build your wealth for you. For example, if you deposit $100 in a savings account that offers 6 percent interest, by the end of the year your savings will have grown to $106. Compound interest can enhance these savings even more by earning interest on interest. With compound interest, the $106 you have after the first year would earn 6 percent again the next year: $6.36, or a 36-cent increase. Add that to the total, and you would have $112.36. If you leave your money in a 6 percent interest account for 40 years, you’ll have $1,028, over ten times the original amount.

The Rule of 72
Want to double your money? Use the “Rule of 72” mathematical formula to find out how long it will take to grow your money. First, divide 72 by your account’s fixed annual interest rate. For example, if your rate is 6 percent, divide 72 by 6. At that rate, it will take 12 years to double your savings. When you think about your financial goals, the Rule of 72 can make a positive impact on your savings over time by helping you make informed decisions.

5 Tips for Saving
1. Make savings a priority. Each time you’re paid, put a portion of it toward savings. Saving money is a good habit no matter how much or how little you put away each month.

2. Automate your savings. Most financial institutions allow you to automatically transfer funds online or via mobile apps from checking to savings accounts.

3. Find money to save. Keep track of everything you spend for a week – you’ll be surprised where the money goes. Adjust your spending habits a little and suddenly, you’re saving.

4. Keep the change. Some supermarkets have machines that count your coins and give you cash in exchange for a small fee. Gather up your spare change, pour it into the kiosk and see how much your coins add up to. Instead of spending it right away, consider diverting your newfound funds to savings.

5. Cancel extra costs. Check to see if you have any old subscriptions that you’re not using anymore – whether it’s to a gym, magazine, or streaming service that you no longer use. Many services that you may no longer want could cost you hundreds of dollars per year.


Choosing Savings Options

What are you saving for? An annual summer holiday, an education fund for your children or a longer-term goal like retirement? In order to choose how you want to save your money, you will first need to determine your financial goals. The first step is to set a clear savings goal. Having this end goal in sight will help you when it comes to setting aside a specific amount every month or year in order to reach that milestone. Whatever your goal, the amount you set aside to get started does not have to be large. To jump-start your savings, consider automating your accounts to transfer the budgeted amount to your savings each month.

Once you’ve set your financial goals, it’s time to start saving. Choosing the right savings method is dependent on a few factors: how much money you hope to save, how accessible you need the funds to be and when you’ll want to withdraw them. It can be daunting to evaluate the complex options available, but if you learn more about each saving vehicle it will be easier to get started.

Savings Accounts
There are many categories of savings accounts to choose from. You can use one savings account or multiple ones to organize your money for various purposes. Many people don’t limit their savings to just one kind of account, but use different accounts based on when they’ll want to withdraw funds and what they want to use them for. Here are a few different savings accounts to fit particular needs.

  • Basic bank savings accounts offer the lowest interest rates, usually less than 1 percent. They come with few restrictions on access to your money, and they don’t usually have required minimum balances. These accounts associated with brick-and-mortar banks also can be accessed online.
  • Money market accounts are high-yield accounts that pay interest based on the current market rates. They are likely to require a higher minimum balance than a basic bank savings account.
  • Online savings accounts are typically similar to basic bank savings accounts, but they offer higher interest rates because they operate online and don’t involve the overhead that standard banks have.
  • Credit unions are like banks, but they’re owned by their members and may offer higher interest on savings.
  • Automatic savings plans are options you can set up for your savings account. You can choose to automatically transfer a set amount from your checking account to your savings account every month.

Certificate of Deposit (CD)
If you don’t mind leaving your money alone for a longer period of time, from several months to years, consider taking out a certificate of deposit (CD). These often yield the highest interest of any savings option offered by banks. Unlike with regular bank accounts, if you want to withdraw money, you may face a steep penalty. Fortunately, CDs come with no risk and no fees. There are several types of CDs to choose from:

  • Traditional CDs are the most popular type of CDs, in which you deposit an amount of money at a fixed interest rate for a predetermined amount of time, with the option to withdraw the funds after the term has elapsed.
  • Bump-Up CDs provide the option to “bump up” your rate for the remainder of your CD term, following an initial lower rate of interest.
  • Brokered CDs are generally priced higher and are purchased through a brokerage firm or sales representative rather than through a bank.
  • Jumbo CDs have much higher minimum balance requirements (usually $100,000), but are low risk and provide higher returns than traditional CDs.
  • Liquid CDs can be withdrawn without a penalty, but may come with a required minimum balance and a limit on the number of withdrawals permitted.
  • Callable CDs have higher rates and are long-term, as long as 10 to 15 years, but also higher risk: financial institutions can “call” back the account if interest rates drop, forcing investors to find a new place for their funds.
  • Variable Rate CDs offer variable interest rates that change based on an interest-rate index, resulting in either higher or lower rates than fixed-rate CDs.
  • Zero-Coupon CDs are usually long-term investments that are bought at a discount but do not pay interest.

To learn more about certificates of deposit, visit the Securities and Exchange Commission website.

Retirement Account Savings
One of the most valuable ways to save is through retirement accounts. Not only are these low risk, they’re crucial to a comfortable retirement. And remember: the earlier you start saving, the more your savings will grow. There are a few retirement savings options to consider:

  • 401(k) Plans are retirement savings accounts sponsored by your employer. You contribute your money before income taxes are deducted, which lowers your taxable income. Many employers will match your contributions, further increasing your retirement fund.
  • Individual Retirement Accounts (IRA) are personal savings accounts that enable you to put money aside annually. You can also receive tax breaks for these funds.
  • Annuities are investment agreements in which payments to insurance companies are invested for you. The annuities are then paid back on a future date or series of dates. Withdrawals are taxed but fortunately, there are no annual contribution limits.
  • Health Savings Accounts (HSA) are similar to traditional IRA accounts in that the contributions are tax deductible, but they are specifically for health care spending, including doctor visits, prescription medications, dental and eye care and other health-related costs.

How to Purposefully and Successfully Transition to a Single Income

Many parents face the same difficult question when raising a child. Should one of you stay at home while the other works? It’s not a question to take lightly. The decision can have emotional and financial consequences and may have a long-term impact on the stay-at-home parent’s career opportunities. It’s also a question that doesn’t have a single correct answer.

Your upbringing, personality, career and the family’s financial situation can all play into your decision. Your opinion could also differ from your partner’s and may change over time. Perhaps you both worked after having your first child and now that there will be two or more children it makes more sense for one of you to stay at home.

Whatever your impetus, if you decide to switch from two incomes to one it will undoubtedly be challenging. Purposefully approaching and planning for the change could help you succeed.

Get a general sense of the numbers. Understandably, you’re likely juggling a lot of priorities at the moment. However, now more than ever, having a clear picture of your family’s finances can be important. Thinking about both short-term and long-term scenarios will help you understand the effect of moving to one income and give you numbers to back up your assumptions.

For this task, you don’t need to track every single penny or dollar you make and spend (although detailed tracking helps manage your finances and budgeting software and apps can make it relatively easy to do so if you want). Try to get an approximate sense of your household’s cash flow and the non-essential expenses you could cut if need be.

The good news is that saving on daycare (over $25,000 annually in some states according to Childcare Aware of America) and work-related expenses, such as transportation and meals, can help offset the lost income.

However, you’ll also need to budget for new child-related expenses. Some families downsize their home, sell a vehicle or eat out less often to make their one-income vision a reality.

Take baby steps before the baby arrives. For those who are just thinking about starting a family or are currently pregnant, acting as if you only have one income while both of you continue to work can help give you a leg up.

For example, the second income could go towards an emergency fund that can help you weather a setback after making the transition. You can also use the money to pay down high-interest debt, which can free up some cash flow by lowering your interest payments.

Discuss your new family roles. Having a stay-at-home parent can be as much of an emotional decision as it is a financial one. If you haven’t already, set aside time to discuss how you view each other’s roles in the family. There may be new expectations for responsibilities inside and outside the home.

Bringing finances back into the picture, discuss how you’ll divide the family budget. Will every purchase be a mutual decision? Or, perhaps you’ll both have a personal allowance that you can spend how you please and there’ll be a household account for shared expenses.

Plan for the future. Now may also be a good time to discuss your expectations for the future. When and if a stay-at-home parent plans to return to the workplace for example. And if it makes sense for them to work or go back to school part-time while also taking care of the home.

Much like the big decision, there isn’t a single correct answer to questions about family roles or the future and no one can answer these questions for you. Talk over the options together and realize that you need to try out several ideas before you find the arrangement that works best for your relationship and growing family.

Bottom line: Take a deep breath and embrace the upcoming changes. Switching to a single income can be challenging, but so is having two incomes and a newborn. Planning ahead and working together towards a common goal and vision for your family can help ensure a successful transition. uickly stack up if you’re not careful. Luckily, there are many ways to save money on tickets, transportation and food and still have a memorable experience.

This article is intended to provide general information and should not be considered health, legal, tax or financial advice. It’s always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.