SHORT TERM – Where does that paycheck go?

“A journey of a thousand miles begins with a single step.” Lao Tzu

Even the longest journey must begin where you stand. Today I will show you how to get a good idea of where you stand. After that, you can take your first step with more wisdom. Along the journey, you will learn more efficient ways to travel because even the most experienced traveler learns many things along the way. When you get to a destination, you will realize that there are other places you want to go. Life is like a journey, and you are about to plan your trip.

“All things are difficult before they are easy.” Dr Thomas Fuller

Where You Stand Now or

The two budgets that you need know

Shortcut: Know enough about budgets? Fill out the Monthly Budget or create your own. Of course, you do need to know about both budgets before we move on…

A budget is as simple or detailed as you want it to be. Most people think they only have one, but there are really two.

The first budget I made was on a small piece of paper and looked like the one below. It was simple and it balanced. Of course, it wasn’t very accurate. I hadn’t included my clothes, bank fees, school supplies, emergency money, doctor or dentist. It was easy to get the rent and bus fare right each month, but if I forgot my lunch at home (or, if I didn’t feel like making it) then things went askew pretty easily.

I very quickly found out that I had 2 budgets. There was the planned budget I thought I had (above) and then there was the actual, real life budget that seemed to just “happen”.

Keep this in mind when you write down your budget. It’s not an excuse to avoid making a budget; but it is a reminder to stay on top of your money and create that “rainy day fund” for those unpredictable or forgotten extras.

The “Planning Budget” – as easy as 1 2 3

1. Write down your income: salary, pension, allowance, etc. If you are self-employed, you will have to estimate based on last year or your financial forecast. Follow this link to use the budget form I use.

2. Make a list of all the expenses you have each month. If you only pay for something annually like insurance or every one in a while like clothing, you will need to average it out to a monthly expense.

3. Rack your brain for all those one time, small, big, emergency, vacation, strange, bonus, treats that made their way into your wallet last year. Add them to your budget.

The “Real Life Budget” as easy as 1 2 3 4 5 6……

1. Keep all your receipts for a month (or more) and write down anything you spend money on. Add these amounts up.

Yes, you’re right: the “Real Life Budget” keeps changing. But at least you are more aware of how things can go off the beaten path. Every journey has its surprises.

MEDIUM TERM – The Important In-Between

Some time in the next few years, you will want or need something that your monthly paycheck won’t cover. You have a choice:

1. Borrow the money

2. Save your money

If you borrow money, you will pay interest for the privilege. If you save your money, the interest you earn will help you get to your goal faster.

If you are one of the rare few who are using choice #2, feel free to skip to the list of medium term savings you should be considering.  For the rest of us, debt is our method, and sometimes our madness.

Still with me? Debt …

Common Medium term expenses to prepare for:

A down payment for a home (mortgage)

Car purchase

Emergency fund

Vacation

Having a baby – saving for extra expenses or time off work

How will you invest your money?

In a separate savings account

In a Non-Registered account

LONG TERM – Do you want to work forever?

The average person will live close to 85 years. If you retire at age 65, that means that you need to save enough money to last a minimum of 20 years.

Imagine saving half (yes 50%) of your income right now. Now imagine doing that for 20 years to reach your goal. “But wait!” you say, “what happened to the 10% savings that I hear from many places?” Now that you think about it, 10% sounds much better than 50% doesn’t it?

My mom went back to work after my parents separated. In her late 40’s, she met with a financial planner to save for retirement. The planner told her that she needed to put away a few hundred dollars a month. My mom was shocked. She was barely scraping by on what she made. The meeting scared her and she didn’t see the planner again. She worked diligently, kept costs down and got rid of her credit cards so she wouldn’t accumulate debt. She worked for a few years at a small company, which was eventually taken over by a larger company that had a pension plan. For over a decade, she worked and her pension plan grew. But a dozen years in a good plan wasn’t enough to create a retirement in luxury.

So how much money do you put aside for your retirement? Some people suggest 10% as a good amount but is that enough (or too much) for you? Find out what you need for your situation, your family and your goals by doing a financial plan. Remember to look at short, medium and long-term goals. You need some money now, some for big purchases like cars, houses, and other big costs along the road to retirement. This is about looking at the big picture.

Educate yourself about basic terminology such as diversification and the different types of investment products. Learn how your risk tolerance and investment style will affect the growth of your portfolio. Who can you go to for advice: Certified Financial Planner, Financial Advisor, Broker and other professionals.

INSURANCE

Insurance is one thing you buy, hoping you never need it.   You may need money in an emergency or for a problem but this can take time to accumulate. Insurance provides protection for yourself and your family in case of a disaster. The cost is low compared to the payout if you need it.

We all buy car insurance so why do some people hesitate to buy life of disability insurance? We think it won’t happen to us, but it does happen so please look into it. Life Insurance and Disability or Critical Illness Insurance should be on everyone’s list of budget considerations. You do need to find out what is right for your situation, but most people ignore it or procrastinate until it’s too late. Make sure you look into this.

Make sure you have property insurance for your belongings, car insurance or liability insurance where it applies to you.

ESTATE PLANNING and YOUR *LEGACY

You need a will. Why? I have strong feelings about this because I’ve been there when someone said, “Where’s the Will?” and no one knew.

If you are immortal, please stop reading here. Ok, you’re mortal, read on. And I’m pretty sure you don’t intend to leave your hard earned money to the tax department. You want to give your money to people you love or a cause you love.

And speaking of people you love, think about how it would feel, looking down at them from your place in the sky and someone says, “I guess we need the Will. Does anyone know where it is?”

People don’t need more hardship during a difficult time. I’ve been there. I felt the feelings of loss when my dad died and the last thing I needed was to spend weeks searching for the will that never was.

Estate planning ensures that the assets in your estate will be distributed to your beneficiaries according to your wishes in a timely, orderly and tax-efficient manner. A valid will and an up-to-date estate plan can reduce fees, reduce or defer taxes and decrease the time and potential problems of settling your estate. Who will distribute your assets or choose the guardian of your children? A person you choose, or the courts?

TAX PLANNING

Ah Taxes – I still remember the joy of my very first refund of over $800. The next year I practically ran to get my taxes prepared. But lo and behold, I only got $30!  And there was a fee to pay for my taxes to be prepared! I didn’t understand. I was still the same person. I still made a pitiful amount of money.  Fast forward a few years when I decided to take a tax course. I was surprised at how illogical the tax system was. It wasn’t based on common sense at all…it was based on a set of rules, a lot of rules. Today, after preparing hundreds of tax returns over the years, I am seldom shocked, but I talk to many people who are.

Take the time to learn the basic information about your personal taxes. Each person is unique, so learn the deductions you are receiving and any others that you could potentially have. Learn how a basic tax return is calculated. Learn what tax bracket you are in and the difference between your average and marginal tax brackets. Having information about tax will help you pay only the amount that you are required and no more. Many people pay extra tax simply because they do not understand their own tax situation.