Managing your financial health is like other habits. It’s learned, takes practice to stick, and you’ll see results over time. Good financial health habits start at any age.
How to make a budget
Several websites offer spreadsheets that can be downloaded, or you can start with a pencil and paper to work out your budget. These five Money Fit steps are similar to information on other websites.
1. Identify financial goals. Is it to avoid having debts or to repay loans? Do you need to save money for college, a vacation, a special purchase, or other important items? It’s never too early to save for retirement. Having goals will help you stay focused.
2. Record expenses. The expenses you have monthly, such as rent or mortgage; cellphone; races; car, home and health insurance; utilities, streaming or applications. If you pay the bill quarterly, you still want to accrue the amount needed monthly. Next, include items that are variable, such as gifts, car maintenance, or seasonal items like clothing and school supplies. Record expenses that are “needs.” Entertainment, dining and shopping. Review your credit card and bank statements to make sure you include all expenses.
Stores made it easy to pay with a credit or debit card. And that can make it difficult to track your spending. Use receipts to record expenses so you know if it was a “need” or a “want”.
3. Record your winnings. This is your net salary after taxes and other deductions.
4. Subtract your expenses from your income. The result will direct you to the next step.
5. Review, adjust and plan. Review expenses. Are there any items you forgot to save? Expenses that can be reduced? Can you increase your income? Rework your budget.
Once you have your budget, use your spreadsheet regularly to see if you’re on track or if you need to adjust. Monitor your account balance carefully to avoid costly overdraft fees. Pay your credit card balances monthly to avoid fees and high interest rates.
Also include savings
Pay yourself first. If there is a program for automatic transfers to a savings account through your employer, use it. It is easier to save with this help. If there isn’t, get into the habit of putting a specific amount into savings each time you get paid – small amounts will add up. Savings of three to six months in expenses is recommended by financial health sites. Several articles suggest saving 15% of your income. Savings are used for your short-term and retirement goals. If your employer offers a retirement savings plan, join.
The Consumer Financial Protection Bureau’s website has a section on savings, including videos and online training. It also has resources for talking to kids about saving.
• Save for emergencies such as car repairs or medical bills; Although it is difficult to recover from an emergency, the savings will help.
• If you receive a tax refund, save some or all of it.
• Open a bank or credit union account; know the fees charged and interest paid.
• If you reduce an expense, commit to saving that money.
What is compound interest?
Although the interest rates paid for savings accounts are low, it is still an easy way to save and have access to it when needed. Compound interest is the interest you earn on interest. For example, if you have $100 in an account that earns 1% interest. After one year, you will have $101. You then earn interest on $101. Although slow growing, it’s better than a piggy bank on your dresser. In this time of low interest rates, beware of high interest rate offers.
Similar principles apply to loan repayment. When taking out a loan, be sure to ask about how interest is calculated. Ask them how they will handle payments above the regularly scheduled amount. Will additional installments be applied to the principal, allowing you to repay the loan more quickly?
What is a 529 package?
According to the United States Securities and Exchange Commission, a 529 plan is a tax-advantaged savings plan designed to encourage saving for future education expenses. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
New Mexico’s 529 Education Savings Plan is called The Education Plan®. This savings plan allows your income to grow without federal tax, and the money you withdraw is also free from federal tax, as long as it is used to pay for eligible educational expenses. There are 100% state income tax deductible contributions for NM taxpayers. Anyone can open and contribute to a 529 account for anyone else, including family and friends.
Your bank or credit union may offer classes on financial health. Take advantage of the service and grow your wealth.