THE ART OF SAVVY BUDGETING.
IN OUR JANUARY ISSUE, BLACK ENTERPRISE BEGAN ONE OF its most ambitious projects to help you get your finances in shape: the Black Wealth Initiative. We introduced the Declaration of Financial Empowerment, which we affectionately call DOFE, comprising BE's 10 commandments for building wealth.
In previous months, we've delved into DOFE principles one through four: save and invest, 10% to 15% of your after-tax income; be a proactive and informed investor: be a disciplined and knowledgeable consumer: and measure your personal wealth by net worth. not income.
This month, we introduce DOFE principle No. 5: to engage in sound budget, credit and tax management practices. And this rule can he thought of-as the foundation for all the other DOFE principles.
Financial planners, investment advisors and tax specialists say establishing a sound strategy that accounts for your everyday spending, credit and tax management practices is a cornerstone for building wealth and should keep you from sabotaging your investments.
Often, people will visit a planner or accountant looking for advice and say they have no money at all to revest, But a careful examination of where your money is really going--from that weekly excursion to the record shop to buy $100 worth of the latest CDs to that tax deduction you aren't taking--can be an eye-opening first step toward establishing a realistic spending plan.
* Put it on paper. The first step to creating a budget is simple: put down on paper what you're spending your money on. That sounds easy, but it takes discipline and honesty--in other words, don't omit anything, no matter how small, To get: started, use our sample Consumer Budget Planner form in this article to balance your books. Track your spending for at least 30 days to six months to get true handle on where your hard-earned dollars are going.
If you prefer using your computer, there are several software programs tailored for personal budgeting rise, like Intuit's Quicken or Microsoft Money.
"When we see new clients, we're very adamant about this. Do it in pencil and paper," says Dennis Kroener, a CPA and personal financial specialist with Pitt, Ryan & Linnear in Chicago, "Most people don't do t, hat pencil-and-paper exercise and they guess what they're spending their money on."
Kroener says when clients see all their expenditures, they can figure out just how much discretionary income they really have. And some expenses fall into the "Do I really need this?" category, he says, like that $3 cup of gourmet coffee you buy every morning.
* Cut unnecessary expenses. "Once you see [what you're spending] in black and white, you can figure out what you can cut. I call it going on a money diet," says Gail Perry-Mason, first vice president of investments with First of Michigan, a division of Fahnestock, a brokerage firm in Detroit.
Eliminating wasteful spending, impulse buying and finding cheaper alternatives is crucial, Perry-Mason says. Are you spending more than $100 every week at your dry cleaners? Find one that gives you a discount for regular service. Are you taking videos back to the store a day or two late? Get them back on time and stop paying late fees; it's money down the drain.
* Pay yourself first. This is advice we've touted for years, but it's important if you want to have money to put away for investments.
"Set aside $50 to $100 a month, and do that before you pay any of your other bills," says George Stewart, a CPA in private practice in Seattle. If you pay your bills first, "typically you don't have anything left over" to put aside, he warns. Set up direct deposit so that money goes straight from your paycheck into your 401(k) plan or your individual retirement account (IRA).
* Develop a long-range financial plan. There are four objectives you should be trying to achieve to execute an effective lifelong financial plan, says Stewart, and you should work on them all simultaneously. (1) Try to accumulate three to six months' worth of living expenses; (2) buy a house; (3) start an investment fund; and (4) max out your 401(k) or other retirement plan.
* Be a creative discounter. Perry-Mason also recommends finding ways to enjoy entertainment like going to the movies or concerts by getting a discount. She suggests serving as an usher at a concert to get in at a reduced price.
Another money-saving tip: sell your old clothes. "I clean out my closet once a year and sell my old clothes" to consignment shops, stores that buy and sell used clothing, she says.
* Making sure you have good credit. Yes, there are positive aspects to using credit cards. Having good credit and benefiting from some of the advantages of using credit cards are important keys to staying out of debt.
* Pay your bills on time all the time. To avoid going into hock, keep your debt slate clean. "The best thing people can do [to maintain good credit] is to pay their bills on time and pay them early," says Steve Rhode, president and cofounder of Debt Counselors, a debt-counseling service based in Rockville, Maryland.
Rhode notes that with companies shortening their grace periods, it makes more sense than ever for consumers to pay all their bills in a timely fashion.
* Use credit cards wisely. Experts point out that consumers use credit cards the wrong way, running up big balances they're unable to pay off quickly. That harms your ability to build wealth, not to mention the damage it does to your credit history. "You should have three cards, at maximum. Those are the only cards you need," says Luther Gatling, president and co-founder of Budget and Credit Counseling Services (BUCCS) in New York City. He recommends you have three different types of cards: one you pay back in 30 days, a revolving card and a debit card.
There are several warning signs that indicate you're not using your credit cards properly. If you're only able to pay the monthly minimum, if you have to borrow from family and friends to make payments or if you have to take cash advances from your credit card to pay your other monthly bills, you're in trouble.
Also, although credit cards tend to carry high interest rates, you can shop around for better terms. Go to www.bankrate .com, a leading resource on banking products, and research the terms of cards across the country.
* Hire a tax advisor. Getting the most out of managing your taxes--and not letting taxes get the most out of your paycheck--is crucial, tax advisors say. Experts highly recommend hiring a tax advisor to help you determine what deductions you're entitled to.
"The first thing is plan for taxes in advance throughout the year," says Leon Walker, CPA and partner in Bert Smith & Co., an accounting and management consulting firm in Washington, D.C. For example, consult your accountant about whether you can deduct the costs of certain professional trips and adjust how much you're contributing to your retirement plan.
* Maximize your 401(k) contribution. Among accountants, this piece of advice is unanimous. A 401(k) is a defined-contribution retirement plan offered by for-profit corporations; similar types include a 403(b), established for employees of not-for-profit organizations. By setting aside this money, you wind up paying less in taxes to the government. And if your employer provides matching contributions, it's like getting free money for your retirement.
"If you're eligible to participate in your company's 401(k) plan, you should participate in it to the maximum amount you can afford," says Walker. If you've taken a new job, you should ensure all rollovers from 401(k)s are invested in a new plan prior to 60 days, he adds, and that all rollovers are paid directly to the new 401(k). Don't accept a check for the amount accumulated in your old company's defined-contribution plan; you could wind up paying taxes and an early withdrawal penalty on the amount.
* Adjust your withholding tax every year. Another key to efficient tax management is adjusting your withholding tax every year. If the government takes out too little in taxes from your paycheck, you'll wind up paying more to the IRS come April 15; too much, and you're depriving yourself of capital you could be putting into investments. If you declare "0" dependents on your W-4, for example, in some instances you could be paying far more than your fair share.
* Take all your allowable deductions. Keeping close tabs on the deductibility of all your expenses will put more money in your pocket and less in the government's, tax advisors say.
Of course, everyone's situation is different, but generally people can take deductions on items like medical bills and interest on student loans. Some expenses, like the cost of subscriptions to investment magazines like this publication, can be deductible--if you can prove you used the information to research your investments.
"It's really a matter of record-keeping and structuring things so you take advantage of all the things you do," throughout the year, says Stewart. He suggests that if you pay tithes to your neighborhood church, keep track of those donations. "Consider writing checks so you can have a record of that."
Stewart says another deduction people overlook is how you pay fees on your retirement plans. If you pay by check, it's a deduction; if you let the plan administrator take the fees out of your account, you're losing the deduction and reducing the amount of money compounding interest in your plan, he says.
Here's a short list of some other deductions and adjustments you might be able to take to reduce your tax liability:
* Mileage, if you use your car for traveling to and from nonprofit charities.
* Job-search costs, such as travel expenses incurred by interviewing for a new position in another city.
* If you pay more than 50% of a parent's medical needs, you can claim them as a dependent.
* Making sure that if your kids worked a summer job, you don't claim them as dependents on this year's tax return if they've claimed themselves on their own returns.
* Making quarterly tax payments if you're self-employed to avoid penalties and interest for underpayments and late payments.
* Medical expenses because of disability, such as a special bathroom if you're disabled or a humidifier if you're asthmatic.
The key to long-term wealth is spending less than you make and not living beyond your income. Keep that advice foremost as you not only plan your budget but stick with it as well.
CONSUMER BUDGET PLANNER
Most consumers would like to get control of their finances, but may think that budgeting is too cumbersome, or simply don't know where to start. Budgeting does take time in the beginning, but once you have a good handle on how you spend your money, budgeting becomes almost second nature. Here are some hints in setting up and sticking to a budget:
* Using the Budget Planner, review your bills over the past six months and put them into the budget categories.
* Figure out the average monthly expenses in these categories.
* For expenses that are paid periodically or annually (such as insurance), divide by 12 to get the amount you must set aside each month to meet those payments.
* For variable expenses, check your last six months of check payments in those categories to estimate your usual monthly expense for each. Then multiply by 12 to arrive at the annual figures.
* Once you have listed monthly and yearly expenses in all of the categories of your spending, figure out your total income per month and per year.
* Subtract your monthly and yearly expenses from your income. If you find that the remainder is a negative number, you need to go back to some of the spending areas under your control to see where you can cut back.
* Your work doesn't stop here. As your bills come in, keep track of your actual expenses in each category and adjust the budgeted figures, if necessary.
Budgeting requires self-control and discipline to reach your goals--it can become a habit that will take you to greater financial security.
REGULAR EXPENSES MONTHLY YEARLY Rent or Mortgage Payment Insurance Homeowner's or Renter's Auto Life Medical Utilities Electricity Gas Water/Sewer Heating Fuel Other Telephone Home Mobile/Call/Pager Cable TV/Internet/E-mail Taxes Real Estate Income Tax Credit Payments Auto Loan Home Equity Loan Student Loan(s) Credit Cards Child Care Alimony/Child Support Tuition/School Expenses Savings & Investments Pocket Money/Allowances TOTAL REGULAR EXPENSES VARIABLE EXPENSES MONTHLY YEARLY Food & Beverage Groceries Eating Out Wines/Alcoholic Beverages Auto Repair/Maintenance Gasoline & Oil Taxes & Fees Transportation/Parking Medical/Dental Prescription Drags/Medicine Home Repair/Maintenance Household Goods/Furnishings Clothing Purchases Dry Cleaning/Repair Vacations Personal Care Health & Fitness Hair Care Cosmetics/Toiletries Pet Care/Veterinary Newspapers/Books Gifts Charitable Contributions Entertainment Other TOTAL VARIABLE EXPENSES INCOME Salary/Commissions Pensions/Social Security Dividends/Interest Alimony/Child Support TOTAL INCOME TOTAL EXPENSES BALANCE
SOURCE: Federal Consumer Information Center; www.Pueblo.GSA.gov
For more information on DOFE, go to www.blackenterprise, com to get a complete list of all 10 principles or call 877-WEALTHY to get your free Wealth-Building Kit.
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|Date:||May 1, 2000|
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