Three Top FAQS about Budgeting and Personal Finance

Question #1: What Makes Saving so Important?
Cash flow is the fuel of household finance. It there isn’t enough cash flow then the household can’t make optimal financial decisions. This frequently means paying higher interest rates, settling for a smaller home, and not having funds for investment opportunities or emergencies.
Life styles can significantly vary for households that have the same amount of income. Some households spend to maintain or increase their standard of living. Other households save for the future. Most households don’t have a problem spending money. However, saving money is usually more difficult. Reasons for difficulties in saving money include:
1. Not having enough resources Living close to the minimum standard of living.
2. Lack of a structure for saving: Not using a budget and staying within the saving guidelines.
3. Personal philosophy: Living for today and believing that tomorrow with take care of itself.
4. Unrealistic expectations: Believing that future earnings will rapidly increase to cover today’s spending.

One way to get motivated to save is to look at the benefits of saving. A quick summary is as follows:
1. Even out household cash flow: Many occupations experience fluctuations in income. Self-employed individuals may have delays at the beginning of contracts. Additionally, client payments can be scheduled for 30 to 60 days after the work has been performed.
2. Home purchases: Saving for the down payment on a primary or secondary home.
3. Capital expenditures: Saving for large household expenses. Examples include new automobiles, major appliances, and home repairs, home improvements or home maintenance.
4. Investment planning: Saving to take advantage of investment opportunities.
5. Education planning: Saving for the college education of your children.
6. Leaving an inheritance for the children: Many people want to leave money for their children.
7. Uncertain times: Saving to cover the loss of income due to illness or disability.
8. Better tomorrow: Saving to fend off inflation when retired and living on a fixed income.
9. Financial independence: Saving to be financially secure.

Question #2: How Do I Stop Spending Leaks?
If I said that knowing yourself is the best way to stay on budget and save money you would probably laugh. However, it is absolutely true. Knowing your “spending triggers” is the best way to avoid situations where you are likely to overspend. In other words, knowing what makes you happy will make saving money easier. Many purchases are made due to unhappiness, depression or boredom. For both men and women, finding and purchasing just the right item, especially if it is discounted or on sale, will lift their spirits and bring a smile to their faces.

Unfortunately, this is often a short-lived experience. The credit card bill arrives and the amount due is higher than the amount in your budget. Over time, this may make it difficult to pay fixed but irregular costs such as quarterly utility bills and semi-annual taxes. The following are other triggers for overspending. It is likely that at one time or another each of us has overspent due to:
1. Competing and impressing others: Giving the best gift or needing to be the best dressed.
2. Celebrating: Overspending to celebrate a birthday or anniversary, or spending more than normal because you feel elated.
3. Having your credit card or money in your pocket: Spending more or treating others because you have the cash or credit on your person.
4. Overworking and feeling fatigued: You just can’t cook tonight so you dine-out, hire someone to clean the house or complete other tasks that you normally do yourself.

Bottom line, the more you know about yourself and your “spending personality” the easier it will be to stay within your spending plan. Taking the time to know your “spending triggers” and getting a grip on your financial situation will allow you to make better financial decisions. Ultimately, this will assist you in spending less than you earn.

Question #3: How can I Save More Money?
Individuals find it easier to save when they have a savings structure and a financial goal in mind. These financial goals can be short-term, long-term, or for any period of time. An example of a short-term goal is saving for next year’s vacation. An example of a long-term goal is saving for your child’s education. Different goals have different completion dates and should be placed in separate savings “buckets”.

The “bucket system” of saving is often a very effective behavioral finance approach to saving. Each buck has its own completion date. Don’t feel limited by the number of buckets you need for your financial planning. You can have as many buckets as you require. Most households need at least three buckets:
• The retirement bucket
• The college fund bucket
• The down payment for a house bucket

Exploring Difference Saving Methods
Each buck can be a different type of savings account. The best type of savings vehicle depends on your future plans for your savings. The following are four examples saving methods as defined by InvestorWords (www.investorwords.com):
1. Savings account: A deposit account at a bank or a savings and loan which pays interest but cannot be withdrawn by check writing.
2. Checking account: An account which allows the holder to write checks against deposited funds. Checking accounts which pay interest are sometimes referred to as negotiable order of withdrawal (NOW) accounts. The interest rate often depends on how large the balance in the account is and most charge a monthly service fee if the balance falls below a preset level.
3. Money market account: A savings account which shares some of the characteristics of a money market fund. Like other savings accounts, money market accounts are insured by the Federal government. Money market accounts offer many of the same services as checking accounts although transactions may be somewhat more limited. These accounts are usually managed by banks or brokerages, and can be a convenient place to store money that is to be used for upcoming investments or has been received from the sale of recent investments. They are very safe and highly liquid investments, but offer a lower interest rate than most other investments.
4. Certificate of deposit account (CD account): A CD is a short-or medium term, interest bearing, FDIC insured debt instrument offered by banks and savings and loans. CDs offer higher rates of return than most comparable investments, in exchange for tying up invested money for the duration of the certificate’s maturity. Money removed before maturity is subject to a penalty. CDs are low risk, low return investments, and are also known as “time deposits”, because the account holder has agreed to keep the money in the account for a specified amount of time, anywhere from three months to six years.

Ideally you should set up your”spending account” and your “savings buckets accounts” at the same bank or savings and loan. This way you can link your spend account to your savings bucket accounts. On pay day, if possible have automatic deposits that credit your spend and savings accounts. In other words, your income goes into your spend account and your saving buckets accounts by default. This makes savings much easier and reduces the temptation to skip saving for a pay period.

What Types of Savings Accounts are best for Which Savings Buckets?
If you don’t plan on using your savings for a particular fund for many years, how you save will be very important. Deciding on the right savings method for each savings bucket is critical to your success. The following are a few ideas about which types of saving methods are best for different types of financial goals.
1. Short and long term goals. Savings accounts are great places to park your emergency money due to their easy access. Savings accounts are excellent for short-term goals (the funds will be used within the year) and long-term goals (the funds will be used in ten or more years).
2. Short and long term goals with a $2,000 minimum balance: Interest bearing NOW accounts frequently have a minimum balance requirement, offer ATM cards, and online bill payment. The interest rate on the balance in the account is often higher than the savings account rate.
3. Medium-term and long-term goals: Money market insured accounts usually offer higher interest rates than savings accounts. In general, the larger the account’s balance, the higher the interest rate. Money market accounts are good savings methods for medium-term or intermediate financial goals that are achieved in two to ten years. Money market accounts are also a good choice for long-term financial goals (that are frequently considered a buy and hold strategies) of ten or more years.
4. Timed goals: Certificates of deposit are ideal savings methods if you exactly when you need your funds. For example, your education fund will be used when your child is 18 year-old. Therefore you know exactly how long you will be using your Education Fund Savings Bucket. Generally, CDs or “timed deposits” are for three months to six years. The longer the time period, the higher the interest rate.

About ksindell

Kathleen Sindell, Ph.D. is the author of numerous academic, popular, and professional finance articles, Web sites, proposals, and books. This includes the bestselling reference book, "Investing Online for Dummies, Eds 1-5" (listed for two consecutive years on the Wall Street Journal's Bestselling Business Book List). Her most recent book "Social Security: Maximize your Benefits" has been listed in Amazon's Top 100 Bestselling Retirement Planning Books. It is important to note that "Social Security: Maximize Your Benefits, 2nd Edition" was just released. Sindell has an in-depth understanding of the financial services industry and has held Series 7, 63, and 65 licenses. Dr. Sindell is regularly tapped as a financial services expert on ABC World News, The Nightly Business Report, and at popular online and print outlets. Kathleen Sindell, Ph.D. is a member of the Board of Directors for the Financial Planning Association, National Capital Area (FPA NCA), is on the Editorial Advisory Panel of the Journal of Financial Planning, and is Co-Chair of the Metro Washington Financial Planning Day. Sindell is a Course Chair II, CFP Program Academic Officer, and adjunct full-professor at the University of Maryland, UMUC, School of Undergraduate Studies. Contact Information: ksindell@kathleensindell.com or 703-299-1700
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