Let’s face it: Nothing in life ever goes exactly as planned. And that goes double for money matters. How many times has this happened to you? Just when you think you finally have some breathing room in your budget, an unexpected expense comes along and wipes it out.

One way to prepare for the unexpected is through budgeting. In technical terms, budgeting is the systematic allocation of one’s limited resources (income and liquid assets) toward a potentially unlimited number of needs and wants (expenses). To put it simply, budgeting is merely balancing your outgo versus your income.

Unfortunately, the word “budget” -sort of like “diet” or “economize” — has negative connotations. Although sometimes tedious and difficult to stick with, smart budgeting can help you better control how your income is being spent – leaving you with more money to invest or put away for those inevitable rainy days. A budget is a financial plan for spending; not a bookkeeping chore of keeping track of every penny.

The Budgeting Process

Budgeting is essentially a management process that follows these steps:

1. Establishing your goals.
2. Estimating your monthly household income.
3. Estimating your monthly expenses.
4. Balancing the budget.
5. Putting your plan into action.
6. Adjusting the budget as necessary.

Step One: Establishing Your Goals

First, review your family situation (marital status, dependents, family additions or departures). This review will set the table for establishing your short-, intermediate-, and long-term goals. Short-term goals may be purchasing a new car, taking a vacation or building a new home theater. Intermediate-term goals might include changing careers, sending a child or children to college, or saving for a house downpayment. Longer-range goals include accumulating a retirement portfolio, buying a vacation home, and leaving a financial legacy to your heirs. Each of these takes money – and planning, including budgeting.

Step Two: Estimate Your Income

Whether your household income is regular, such as a paycheck every two weeks, or irregular, such as that received by a farmer or other person in business for him or herself, helps determine how a budget is established and followed. Whether expenses are regular or irregular also makes a difference in the budget.

Add together all your income sources including take-home pay, interest, dividends, bonuses, pensions, alimony and child support, etc. If you’re self-employed, determine just how much you have available for living expenses by examining personal and family goals, business goals, and living and business expenses. If your income fluctuates, underestimate your income and overestimate expenses. Avoid relying heavily on bonuses or overtime pay

Step Three: Estimate Your Expenses

Your expenses will likely fall into four categories: 1) fixed expenses, such as rent or mortgage, car payment, utilities, telephone, cable, and the like; 2) periodic expenses such as annual homeowners insurance, car insurance and maintenance; 3) flexible expenses including food and clothing, entertainment, travel, and other leisure activities; and 4) emergency expenses such as car accidents, home repairs, medical expenses, and so on.

Are you planning a major change during the coming year such as a move, changing jobs, buying a house, getting married, having a child, entering the job market or buying a new roomful of furniture? Be sure to account for these changes, because every major life event affects your budget.

Step Four: Balance Your Budget

Subtract fixed expenses, including an amount for investing and saving, from your expected income. Then, subtract the total amount of flexible expenses from what is left of income. If you need to cut back on your expenses, start first with the flexible expenses, then move to irregular expenses, and finally, to fixed expenses. If you have a surplus after subtracting expenses from income, consider adding more to your goal-related savings and investing.

Step Five: Put Your Plan into Action

This is probably the most difficult part of using a budget. Keep records of actual spending and compare them with your budget plan at the end of the month. By keeping records, you can better understand exactly where your money goes each month, discover if you’ve over- or underestimated certain expenses, and identify areas you might be able to cut back (like those daily $3 gourmet coffee drinks!).

Step Six: Adjust Your Budget

Adjust budget plan figures if necessary, based on the recordkeeping in Step 5. It may take several months of adjusting and re-adjusting before your plan works smoothly.

The real payoff of working with a budget plan and keeping records will come when you use your past year’s budget and records to plan for the future. Budget records can help you pinpoint spending leaks or spot potential trouble before it occurs.

Financial planning means something different to everyone. For some, it’s about getting by month to month on their paycheck, for others it’s about watching how their stock portfolio performs each day.

Unfortunately, few of us feel completely prepared to meet our ongoing financial obligations and objectives. Worries about money have become one of the greatest anxieties of our day – witness the dramatic rise in financial-related publications, radio and television shows, and websites.

Because each person’s situation, lifestyle, and goals are so different, there is no single turnkey solution for successful money management. However, we can identify several steps that successful people take in pursuing their financial goals. We call these steps “Life Cycle Planning” because each step can be tied to the attainment of certain life-defining events that almost everyone goes through.

Development of Human Capital

Human capital refers a person’s ability to turn their skills and abilities into a livelihood. The development of these skills and abilities helps us maximize our income potential in a competitive marketplace.

In our early years, usually between age 18 and 25, we set ourselves on a course that largely defines our human capital potential. Each of us makes an investment in human capital, whether we realize it or not. For some this is an investment of time, gaining experience and skills on the job. For others it is an investment in trade school or college.

It should also be noted that, although our greatest focus on human capital development generally takes place in our early years, this is an investment we should continue to make and assess throughout our working careers. Your ability to earn income, now and in the future, is the most valuable asset you own.

Expense Management and Budgeting

Once your “human capital” investment begins to pay dividends in the way of regular income, you must begin to develop and apply management skills to your newfound earnings.

Without managing your expenses, your wants and needs will invariably outpace your ability to earn. By implementing some form of budgeting, you can begin to set your sights on saving and meeting your longer-term financial objectives.

A beginning budget can be as simple as setting aside a predetermined percentage of your earnings each month for saving, spending what is left until it is gone, then spending nothing more until next month. A more sophisticated budget takes into account irregular and flexible expenses, emergency expenditures, establishment of a “rainy day” fund, as well as saving and investing.

People often overlook the time value of money. Economists know full well that a dollar received today is worth more than a dollar received a year from now. Why? Because that dollar could be invested, saved, or used to purchase an asset such as real estate that will appreciate in value. What’s more, inflation slowly but steadily erodes the purchasing power of your money, rendering tomorrow’s dollar less valuable than today’s.

The relationship between time and money provides the foundation for virtually every financial decision you will make. Whether you are saving money for a future event or considering a loan to pay for a current financial need, you will be greatly affected by the time value of money. The following are some tips for making the most of your dollars, today and tomorrow.

Time Value Tips

Whether you are saving for retirement or a down payment on a home, college funding or dependant care needs, you will be greatly affected by these simple time value tips.

Time Value Tip #1: The longer you have to prepare, the less your objectives will cost. Assuming you are able to invest your savings and earn a positive return, you will always be better off saving for your goals in advance. Not only will your savings earn interest, but the interest you earn will also begin to earn interest. This is called “compounding” and was referred to by Albert Einstein as the “the most powerful force in the universe.” (No one knows whether he was serious or joking.)

Time Value Tip #2: The higher the rate of return you are able to secure on your savings, the faster your money will grow. Generally, the amount of risk you are willing to take on your investments will determine your long-term rate of return. The longer you have to save for your goals, the more risk you should take on your investments, and the greater rate of return you should expect.

Time Value Tip #3: It’s almost always better to postpone paying taxes on your investment proceeds. When you have the choice, you should usually choose to delay paying taxes on investment proceeds as long as possible. That’s because as long as you retain all your investment’s growth, instead of losing some to taxes, you can continue to earn more interest on that growth. Once you pay the taxes, you will never earn interest on those lost funds again. One way to postpone the payment of taxes is to invest in qualified retirement plans, such as IRAs and 401(k) accounts. Another tactic is to invest in annuities, which also allow your money to grow tax-free until withdrawn.

Time Value Tip #4: Factor inflation into your long-term plans. When preparing for long-term financial objectives, you must factor inflation into your plan. Over the last 20 years, inflation has averaged about 4% per year. At that rate, in 20 years a salary of $50,000 will buy what only $22,100 does in today’s dollars – that’s less than half. Looked at another way, that $30,000 luxury car you’ve had your eye on will cost you a whopping $67,872 just two decades from now!

The cost of some financial objectives will grow even faster than this — college costs, for example, have increased by some 8% annually on average. Planning for such cost increases will ensure that your asset accumulation level is sufficient to meet your objectives.

What’s the best time to start preparing for a sound financial future? Twenty years ago, goes the old joke. Failing that, the second-best time is today. Why not start now by contacting us?

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice.  Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Past performance is no guarantee of future results. Diversification does not ensure against loss. Source: Financial Visions, Inc.

If you’re like many Americans, your home probably represents your biggest investment. But the current tax treatment of capital gains from the sale of personal residences is favorable – gains of up to $250,000 for singles and $500,000 for married couples are generally tax-free, provided you have occupied the property for at least 2 years and it is your primary residence. So depending on your circumstances, moving up to a larger home or one in a better school district, or trading down to a smaller dwelling and realizing gains for your retirement, certainly can be appealing.

Once you have decided to try to sell your home, the next big decision you will face is whether you want to sell it yourself of go through a real estate broker. A broker usually charges 5-6% of the selling price for his or her services. However, realtors often earn their commission (and then some) by knowing the local market, helping you determine a reasonable selling price, and saving you a lot of time and hassles, not to mention the risk and liability that come with selling your home yourself.

In selecting a broker, invite several realtors to tell you what they would deem to be a fair selling price, explain their commissions and fees, and present a marketing plan. They’ll probably do this for free in return for the chance to win your business. You will also want to ask about their past experience in the area.

Nearly 90% of all home sales are through agents and brokers. But if the market is a “sellers market” – that is, homes are selling quickly and at or above asking price – and your home is in stellar condition, perhaps you might want to try selling it yourself. There are a number of resources on the Internet designed to help you do just that.

Does My House Need Fixing Up Before Listing?

It doesn’t hurt to do minor repairs and cosmetic touch-ups prior to showing your home to potential buyers. We hear a lot about “curb appeal” — how a house appears from the street. Is it attractive enough for a buyer to even want to come in and look? If there are major repair problems, you may have to lower your price in the end. Maybe what you think is important to do to fix up the house will not appeal to potential buyer – they’d rather do it the updating to suit their own taste.

Most real estate and interior design experts will tell you that two of the best “bang for your buck” upgrades are new carpet and a fresh coat of paint. Select neutral colors that will appeal to the maximum number of buyers. Odors from pets, smoking, and unconventional foods should be eliminated as much as possible, or masked by baking cookies or putting a few drops of vanilla into a hot sauce pan for a moment or two. Reduce clutter and consider moving some items into your garage or storage to make the home appear larger. And above all, keep it clean – especially during those times when you know prospective buyers will or may be visiting.

How Much Should You Charge?

This is a more complex question than it appears at first glance. In this situation, you and the buyer are at odds – you want the highest price possible, they want to pay as little as possible. But listing your house for more than it’s really worth can backfire. You’ll attract fewer buyers to begin with, as your house may be above the top end of their budget, and you may turn away buyers with the resources to purchase your home. Once that initial flush of interest wanes – since realtors and home seekers usually flock to a new listing early – you’ll be left with fewer and fewer people who may buy your home.

By definition, the value of any asset is whatever someone is willing to pay for it. A buyer and seller generally find it easier to reach an agreement upon when both parties have access to all the relevant facts. With homes, there are several ways to arrive at a “starting point” from which to begin this process.

A good first step is to see what similar houses in similar locations in your community have sold for in the recent past, known as “comparable sales” or “comps.” A good local real estate agent should have ample information about recent sales in your area. Don’t be overly impressed by the asking price of comparable homes, which may be inflated or unrealistic; instead, look to actual sales prices as your best guides.

You may also want to enlist the help of a professional home appraiser. For a cost generally between $300 and $500, an appraiser will prepare a detailed evaluation of the estimated value of your home. Then, in conjunction with your agent, arrive at a price low enough to entice a high number of buyers but high enough to meet your goals. In a market where homes are selling briskly, don’t worry too much about pricing your home too low – such a tactic could actually result in multiple offers and may even trigger a bidding war for your home!

Personal financial statements are the roadmap that guides us from where we are today, to where we want to be tomorrow. They also provide fixed points of reference from which we can measure our progress over time.

What are Personal Financial Statements?

There are two basic personal financial statements that everyone should prepare, or have a financial advisor prepare, at least once each year: the cash flow statement and the balance sheet.

This process is a critical first step in financial planning. Tracking your financial position and progress gives you a great feeling of control – you know where you are going financially. It helps you to make smarter decisions about financial matters.

The Cash Flow Statement

Simply put, “cash flow” is a measure of the money coming in and going out each month. A cash flow statement is an ongoing financial document that tracks your sources of income, your uses of income, and the difference between the two (surplus funds which can be invested towards future financial objectives or saved for a rainy day.)

If you keep a budget, you are, in essence, keeping a running cash flow statement. By tracking your cash flow on a monthly basis, you’ll be better prepared to meet your financial needs:

• Short-term expenses – your day-to-day expenses and standard of living items such as food, transportation, childcare, rent or mortgage, utilities, telephone, cable, etc.
• Recurring expenses – periodic payments for items such as periodic insurance premiums, tax payments, medical and dental expenses, etc.
• Financial emergencies – an emergency fund of between three and six months salary that provides cash for emergencies instead of using debt.
• Intermediate- and long-term goals – systematic planning and saving that helps you meet pursue your financial objectives.

Balance Sheet

Your balance sheet is a snapshot of your personal net worth.

Estimating Your Net Worth

The best financial decisions are made with the benefit of time, thoughtful consideration, and trusted professional advice. As tax time approaches, take the time to prepare for sound long-term financial decisions and minimize expenses, taxes, and the headache of organizing your finances at the last minute.

Organize Your Tax Records Early

In preparing for this year’s tax filing, begin to organize tax records including year-end investment statements, capital gains and losses from asset sales, transaction records from real estate transactions, interest and dividend records for the year (1099s), payroll and withholding statements (W-2s), records corresponding with deductible expenses such as property taxes and insurance, business income and expense records, etc. Some of these will not come until January or February of the following year.

Review Your Insurance Coverages

At least once each year, gather your insurance records together and review the adequacy of your insurance policies. Be sure to evaluate all coverages, including life insurance, disability income insurance, homeowners insurance, auto insurance, liability insurance, renters insurance, long-term-care insurance, etc.

Store Your Documents Safely

All your hard-to-replace legal and financial documents should be stored in a safe and fireproof location. Consider renting a safe-deposit box at your local bank or credit union, or purchase a fireproof lockbox from your local office supplies outlet. Documents you should store include wills, trusts, powers of attorney, titles of ownership (your home, cars, etc.), Social Security cards, birth certificates, photographic negatives, list of personal possessions, and so forth.

Review Your Estate Plan

Does your will still fairly reflect your personal wishes for the distribution of your assets? Have the personal or financial circumstances or your beneficiaries significantly changed over the past year? Have you considered a gifting program to move assets from your estate to those you wish to enrich? Have you reviewed your estate plan in light of changing estate tax laws or changes in your personal financial position?

Prepare to Reduce Your Income Tax Liability

Consider estimating your federal and state income tax liabilities periodically to ensure proper withholding levels and quarterly estimated tax payments. This will prove especially important if you sell significant assets during the year or experience large swings in your income level. Consider maximizing your deductible expenses and savings such as qualified retirement plans, charitable giving, deductible expenses, etc. Be careful to meet all IRS dates and deadlines for withholdings and filings.

Review and Improve Your Balance Sheet

The one true path to financial independence over the long term is increasing your long-term saving and decreasing your debt. If you are not maximizing your tax-deductible employer sponsored retirement plans and your individual tax-advantaged saving plans, evaluate your monthly cash flows with an eye toward increasing your monthly saving. The other side of your balance sheet, the liabilities side, is equally important in maintaining a healthy personal financial position. Every effort should be made to eliminate completely the need for short-term debt (credit cards and debit balances) and to efficiently manage your long-term debt (mortgages).

Simplify Your Financial Holdings

Simplifying your financial holdings can eliminate much of the drudgery of financial recordkeeping. If you have credit cards you don’t use, cancel them and eliminate the extra statements. Consider consolidating your credit lines to the greatest extent possible. Review your investment holdings for non-performing assets or redundant accounts and consolidate your investments.

To Sum Up…

Although you may be able to think of more exciting ways to spend your time, organizing your financial records and planning your financial future will pay huge dividends in the long run. Do what you can on your own and seek professional advice from a trusted advisor where additional planning needs to be done.