Solutions to Make Better Decisions with Your Taxes and Money

Setting and Sticking to Your Financial Limits

Setting and Sticking to Your Financial Limits - TaxACT Blog

Guidelines are helpful tools, but generic personal finance advice can ultimately end up hurting your wallet.

Your budgeting strategy needs to be tailored to your specific money goals.

Tips like 50/30/20 can help get you started, but what if you live in an expensive city like New York or San Francisco and 50% of your monthly budget goes to housing alone?

This is why it’s important to create your own limits.

How to Create Your Own Financial Limits

  1. How much are you making?
    Grab a pen and piece of paper. Now, write down the monthly income that hits your checking account.
  2. Answer three questions about your income:
    Have you already paid taxes on it?
    Has a retirement contribution been deducted from it?
    Have you allocated a percentage of it to savings?
  3. Determine your next step.

Setting and Sticking to Your Financial Limits - TaxACT Blog

If you answered yes to all three:

Congrats an automating savings before the money hits your checking account. You’re ahead of the pack.

The next step is to deduct your set monthly expenses from your monthly income. Set expenses often include: rent or mortgage payment, cell phone bill, utilities, transit costs (estimate gas payments), insurance, and any debt payments.

If you answered yes to questions one and two but not three:

Deduct your set expenses from your monthly income. Set expenses often include: rent or mortgage payment, cell phone bill, utilities, transit costs (estimate gas payments), insurance, and any debt payments.

After you’ve subtracted your set expenses, you can clearly determine how much you can afford to save each month.

Set a percentage and then immediately start contributing that amount into savings from each paycheck.

Let’s say you have $1,500 in your account after set expenses and taxes. You can easily get by on $1,000 each month, so you get in the habit of putting $500 (about 33%) into savings.

If you answered yes to question one but not two or three:

Does your employer offer a 401(k) or 403(b) retirement plan with a match? If yes, get in touch with HR tomorrow and set up a contribution that’s at least enough to get the company match.

If not, start saving money each month to fund an IRA for your retirement. In 2015, you can contribute up to $5,500 depending on your income levels. That’s $458 per month if you want to fully fund your IRA.

Deduct your set expenses from your monthly income.

Set expenses often include: rent or mortgage payment, cell phone bill, utilities, transit costs (estimate gas payments), insurance, and any debt payments.

The remaining amount can be used to put towards savings and pay for food, entertainment, and other financial goals.

Set an amount you want to save each month – on top of your IRA contributions – to create an emergency fund or savings cushion.

Immediately put this amount into a savings account when money hits your checking account or better yet, set it up so it’s automatically deferred from your paycheck into savings.

If you’ve answered no to all three questions:

Don’t waste time trying to outwit Uncle Sam. The IRS will come for you, so whatever happens, make sure you have enough saved to pay taxes.

You can calculate how much you’ll owe in taxes with this tool.

Set a percentage of your monthly income to go towards taxes, so you know you’ll have enough saved. Then deduct your monthly set expenses, such as rent or mortgage payment, cell phone bill, utilities, transit costs (estimate gas payments), insurance, and any debt payments.

Once you’ve saved enough for tax and to keep a roof over your head, put money each month into an IRA contribution for retirement or set up a 401(k) deduction with your employer.

Then, set the amount you can afford to save each month. That emergency fund is important – especially if you won’t have a tax refund to pad your savings account.

Regardless to what you answered to all three questions:

The remaining amount can be used to buy food, spend on entertainment, and put towards financial goals.

You can get aggressive with savings or debt payment goals or take a portion of your monthly spend and allocate it elsewhere.

Divide the number by four and see how much you have to spend per week. You can just stay tuned into your finances and spend without a strict budget as long as you don’t exceed your monthly allocation.

Determine the budgeting method that works best for you and keeps you out of debt.

Sticking to Those Limits

Creating a weekly spending limit can help you stick to budgets better than looking at a 30-day period of time and trying not to overspend.

Credit cards do make it easy to not only overspend, but forget about how much was spent before the bill comes in.

In order to combat this issue you can take one of two paths: cash diet or pay off your credit cards during the month.

Cash diets are a way of sticking to strict limits. You determine how much you can afford to spend each week and take that amount out in cash.

Then only spend in cash instead of using a card. If you have to use a credit card, then remove that amount of cash from your wallet and set it aside to use next week.

Carrying cash may not appeal to some, in which case it’s important to pay off your credit cards as you go during the month.

Pick a day of the week to log on to your credit card portals and pay them all down. This way your bank account will accurately reflect the amount of money you actual have to spend.

There are numerous ways to budget money, but if you tailor a plan specific to your income and

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About Erin Lowry

Erin is the founder of BrokeMillennial.com, where she uses sarcasm and humor to explain basic financial concepts to her fellow millennials. Erin lives and works in New York City. She's developed quite the knack for finding deals and free events. Connect with Erin on Twitter, Facebook and Google+.

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