Accounts payable are the bills and other debts that the business needs to pay. As a matter of fact, the only thing that a business pays that is not considered accounts payable is payroll. Everything else falls under the category, making it a critical aspect of your business.
“The accuracy and completeness of a company’s financial statements are dependent on the accounts payable process,” said Harold Averkamp, founder and author of accounting advice website Accounting Coach. “The efficiency and effectiveness of the accounts payable process will also affect the company’s cash position, credit rating and relationship with its suppliers.”
Implementing a dependable accounts payable system will produce accurate financial information you need to plan for both the short and long term. Here’s what you need to know about keeping up with your business debts.
Tracking accounts payable
Accounts payable, sometimes abbreviated as A/P, are tracked monthly for many small businesses, but as the business grows, it is better to make it a weekly task to take advantage of early payment discounts and resolve any credits due to inventory returns. It is handy to keep a record of accounts payable in case there are any payment disputes, to remind the business of current or outstanding invoices, or as proof of spending at tax time. These records can be kept manually or with accounting software.
Working with accounts payable requires a great attention to detail. Each invoice needs to be verified for accuracy, billing date and payment date, and then entered correctly in the general ledger or accounting software. Based on our research, here are some general tips to set up your accounts payable and help the process run smoothly:
Work from the original invoice whenever possible. Some invoices are sent electronically — print once and then file the email away to minimize confusion.
Use the same entering system every time. Each vendor has their own system of invoicing but assigning the invoice number in your system should be consistent. Determine the method, such as using leading zeros, and stick to it.
Enter every invoice individually. This includes multiple monthly invoices from the same supplier. In the event of a dispute, you will want to be able to track it down in your system easily.
Get invoice approval from the appropriate person before entering it. The person approving the invoice should be different than the one entering it. If you are a sole proprietor and do your own bookwork, this may not be possible, but still have a clear process for approval and entry. Keep solid records to support each one.
Look for early payment discounts to save money. It can add up by the end of the year. Some vendors offer a small percentage off the invoice if you pay it within a specified time frame from the invoice date, such as within ten days. If you typically only work with accounts payable once a month, consider a system in which you identify early payment discount opportunities when the invoice is received and pay those separately from the monthly pile.
Cash flow is important to a small business. A solid system of monitoring and paying accounts payable gives you a clear picture of your expenditures against your revenue, enabling better business decisions.
Can you name a Fortune 500 company that doesn’t have a budget? Don’t spend too much time thinking about it – there aren’t any. Successful businesses around the world have one thing in common: They budget their money. And they do it because it works.
But although making money and making a budget appear to go hand-in-hand, a 2013 Gallup poll found that only one in three Americans prepared a detailed written or computerized household budget. Things may be improving somewhat: A Bankrate.com survey in 2015 found a much higher number said they budgeted (36% on paper and 26% on a computer or smartphone app). On the other hand, another 18% didn’t budget and a matching number answered yes to keeping the information “all in your head.”
If you’re one of the non-budgeters (or sketchy budgeters) we’ll show you how to get a better idea of how you spend your money by putting together – and sticking to – a personal budget.
Get Over the Terminology
Part of America’s aversion to budgeting may be rooted in language. The word “budget” – much like the word “diet” – has negative connotations. Budgets and diets are viewed as restrictive reminders of things we cannot have. This is linguistic nonsense. A budget and a diet are both tools. If the tools are used properly, they lead to a desired outcome. Nobody dislikes the word “shovel”, even though the use of the shovel requires effort. People use a shovel to dig a hole. They use a diet to develop a healthy body, and they use a budget to develop a fiscally responsible lifestyle. If it makes you feel better about the process, drop the word “budget” and call it a “spending plan”. Instead of viewing the plan as restrictive, think about the things it allows you to buy. After all, a budget is nothing more than a plan for how you will spend your money.
Start with Your Bills
Many people complain that they can’t create a budget because they don’t know exactly how much money they will earn in a given week. While it is true that workers earning an hourly wage or working on commission might not get the exact same dollar figure in each paycheck, the amount that you earn has much less to do with the basics of budgeting than the amount you spend. Instead of focusing on whether you earn enough each month, focus on your monthly spending. The question is simple: where does your money go?
Regardless of how much you earn or when you earn it, everybody has fixed expenses, such as the following:
Mortgage payments or rent
Transportation (car payment, gasoline, train or bus pass, etc.)
If your recurring expenses don’t add up to the amount of your monthly income (and one would hope that they don’t), your next step should be to save the receipts from every purchase that you make next month and use them as the basis for creating additional categories or adjusting the numbers in the existing categories.
Beyond the Basics
Once you have the fixed expenses covered, it’s time to plan for the variables, such as the following:
These items are listed as variables for two reasons. The first reason is that these expenses vary from month to month. The second is that if you don’t have the money to cover these expenses, the expenses can be reduced or eliminated without too much difficulty. For example, if you’re out of money, the entertainment budget takes a hit and you stay home on Friday night, or you don’t buy those new shoes that you’ve been considering. Part of taking control of your money is learning how to exercise some discipline in your spending habits.
Look at Your Income
Now it’s time to take the theoretical aspects of budgeting and apply them to your life. Take a look at your monthly income. How much are you bringing in on your worst month? Compare that number to the amount that you are spending. Ideally, the income is larger than the output. If so, it’s time for a personal savings plan. In other words, don’t spend everything you earn – save some for yourself. If you are spending more than you are earning, it’s time to review your spending habits. When the expenditures are larger than the income, you have two choices: increase your income or cut the expenses.
Strategies to increase your income include getting a new higher paying job, getting a second job or finding a roommate to help you with expenses. Strategies to cut your expenses include eliminating impulse buys, which are a major expense for most people, and cutting out planned, but unnecessary, expenses. Keep in mind that simply cutting out that $3.00 cappuccino every morning can save you around $90 a month. The concept is really quite simple – if it’s not in your spending plan, don’t buy it.
SEE: Top 7 Most Common Financial Mistakes
Create Your Spending Plan
Nearly everyone wishes for more money at some point. That said, all but the wealthiest among us are essentially living on a fixed income. In other words, you bring in a certain amount of money each month, and when it’s gone, it’s gone. Accepting that reality is the key to living a happier, wealthier life. Keep in mind that your creditors don’t work for free, so spending money that you don’t actually have is also incredibly expensive. Fortunately, getting your finances on track isn’t that difficult, and while there are spreadsheets and software programs designed to make the budgeting process faster and easier, all you really need is a piece of paper, a pencil and the desire to live within (or even below) your means.
As a general rule, you should also plan to set aside enough money to cover at least three months’ worth of your expenses in case of an emergency. Once that money is put away, you won’t need to rely on your credit cards should you lose your job or experience unforeseen expenses. Like every other recurring item in your budget, the emergency fund is something you fund one month at a time until you reach your goal.
The thought of being hit with a major negative event that could affect your finances, like a job loss, illness or car accident, can keep anyone awake at night. But the prospect of something expensive, and beyond your control, happening becomes less threatening if you’re properly prepared. This article will describe 10 steps you can take to minimize the impact of a personal financial crisis.
TUTORIAL: Budgeting Basics
1. Maximize Your Liquid Savings
Cash accounts like checking, savings and money market accounts, as well as certificates of deposit (CD) and short-term government investments, will help you the most in a crisis. You’ll want to turn to these resources first, because their value doesn’t fluctuate with market conditions (unlike stocks, index funds, exchange traded funds (ETFs) and other financial instruments you might have invested in). This means you can take your money out at any time without incurring a financial loss. Also, unlike retirement accounts, you won’t face early withdrawal penalties or incur tax penalties when you withdraw your money – one exception is CDs, which usually require you to forfeit some of the interest you’ve earned if you close them early.
Don’t invest in stocks or other higher-risk investments until you have several months’ worth of cash in liquid accounts. How many months’ worth of cash do you need? It depends on your financial obligations and your risk tolerance. If you have a major obligation, like a mortgage or a child’s ongoing tuition payments, you might want to have more months’ worth of expenses saved up than if you’re single and renting an apartment. A three-month expense cushion is considered a bare minimum, but some folks like to keep six months or even up to two years’ worth of expenses in liquid savings to guard against a long bout of unemployment.
2. Make a Budget
If you don’t know exactly how much money you have coming in and going out each month, you won’t know how much money you need for your emergency fund. And if you aren’t keeping a budget, you also have no idea whether you’re currently living below your means or overextending yourself. A budget is not a parent – it can’t and won’t force you to change your behavior – but it is a useful tool that can help you decide if you’re happy with where your money is going and with where you stand financially.
3. Prepare to Minimize Your Monthly Bills
You might not have to do it now, but be ready to start cutting out anything that is not a necessity. If you can quickly get your recurring monthly expenses as low as they can be, you’ll have less difficulty paying your bills when money is tight. Start by looking at your budget and see where you might currently be wasting money. For example, are you paying a monthly fee for your checking account? Explore how to switch to a bank that offers free checking. Are you paying $40 a month for a landline you never use? Learn how you might cancel it, or switch to a lower rate emergency-only plan if you needed to. You might find ways you can start cutting your costs now just to save money.
For example, are you in the habit of letting the heater or air conditioner run when you’re not home, or leaving lights on in rooms you aren’t using? You may be able to trim your utility bills. Now might also be a good time to shop around for lower insurance rates and find out if you can cancel certain types of insurance (like car insurance) in the event of an emergency. Some insurance companies might give you extension, so look for the steps involved and be prepared.
4. Closely Manage Your Bills
There’s no reason to waste any money on late fees or finance charges, yet families do it all the time. During a crisis of a job loss, you should be extra studious in this area. Simply being organized can save you a lot of money when it comes to your monthly bills – one late credit card payment per month could set you back $300 over the course of a year. Or worse, get your card canceled in a time when you might need it as a last resort.
Set a date twice a month to review all your accounts so you don’t miss any due dates. Schedule electronic payments or mail checks so your payment arrives several days before it is due. This way, if a delay occurs, your payment will probably still arrive on time. If you’re having trouble keeping track of all your accounts, start compiling a list. When your list is complete, you can use it to make sure you’re on top of all your accounts and to see if there are any accounts you can combine or close. (Involuntary unemployment credit card insurance may help if you’re laid off, but it may just help your credit card company, check out Insuring A Credit Card Against Job Loss.)
5. Take Stock of Your Non-Cash Assets and Maximize Their Value
Being prepared might include identifying all of your options. Do you have frequent flyer miles you can use if you need to travel? Do you have extra food in your house that you can plan meals around to lower your grocery bills? Do you have any gift cards you can put toward fun and entertainment, or that you can sell for cash? Do you have rewards from a credit card that you can convert to gift cards? All of these assets can help you lower your monthly expenses, but only if you know what you have and use it wisely. Knowing what you have can also prevent you from buying things you don’t need.
6. Pay Down Your Credit Card Debt
If you have credit card debt, the interest charges you’re paying every month probably take up a significant portion of your monthly budget. If you make it a point to pay down your credit card debt, you will reduce your monthly financial obligations and put yourself in a position to start building a nest egg, or be able to build one more quickly. Getting rid of interest payments frees you to put your money toward more important things.
7. Get a Better Credit Card Deal
If you’re currently carrying a balance, it could really help you to transfer that balance to another card with a lower rate. Paying less interest means you can pay off your total debt faster and/or gain some breathing room in your monthly budget. Just make sure that the savings from the lower interest rate are greater than the balance transfer fee. If you’re transferring your balance to a new card with a low introductory APR, aim to pay off your balance during the introductory period, before your rate goes up.
8. Look for Ways to Earn Extra Cash
Everyone has something they can do to earn extra money, whether it’s selling possessions you no longer use online or in a garage sale, babysitting, chasing credit card and bank account opening bonuses, freelancing or even getting a second job. The money you earn from these activities may seem insignificant compared to what you earn at your primary job, but even small amounts of money can add up to something meaningful over time. Besides, many of these activities have side benefits – you might end up with a less cluttered house or discover that you enjoy your side job enough to make it your career.
9. Check Your Insurance Coverage
In step three, we recommended shopping around for lower insurance rates. If you’re carrying too much insurance or if you could be getting the exact same coverage from another provider for the same price, these are obvious changes you can make to lower your monthly bills. That being said, having excellent insurance coverage can prevent one crisis from piling on top of another. It’s also worth making sure that you have the coverage you really need, and not just a bare minimum. This applies to policies you already have as well as to policies you may need to purchase. A disability insurance policy can be indispensable if you sustain a significant illness or injury that prevents you from working, and an umbrella policy can provide coverage where your other policies fall short.
10. Keep Up with Routine Maintenance
If you keep the components of your car, home and physical health in top condition, you can catch and problems while they’re small, and avoid expensive repairs and medical bills later. It’s cheaper to have a cavity filled than to get a root canal, easier to replace a couple of pieces of wood than to have your house tented for termites and better to eat healthy and exercise than end up needing expensive treatments for diabetes or heart disease. You might think that you don’t have the time or money to deal with these things on a regular basis, but they can create much larger disruptions of your time and your finances if you ignore them.
When it comes to benefits packages, both employees and employers know that one size does not fit all. What is right for a younger, entry-level worker might not make sense for an empty nester with seniority. A flexible benefits package based on employees’ unique situations and income levels is essential to retaining top talent.
As open enrollment approaches, employees will be hitting the exchanges once more to select their health care packages and other benefits for the coming year. Here’s a look at how some employers are using private exchanges to give employees more options, as well as to better manage benefits-related expenses.
What is a private benefits exchange?
Private exchanges are essentially marketplaces where employees can shop online for health insurance and other benefits, including dental, vision and life insurance. Employers first access the private exchange and choose from a variety of carriers the benefits they want to offer, as well as set their specified contribution levels for each offered product. Employees then access the exchange to peruse the products offered by their employer and select the ones that suit their lifestyles and financial needs.
“Think of these exchanges as a store, and each of the types of benefits are aisles,” Steven A. Nyce, director of the Willis Towers Watson Research and Innovation Center, told Business News Daily. “As an employer, you ‘own’ the store and have the ability to decide what products you want to include. So, say, one aisle is medical, [an employee] would have a number of products to choose from in that aisle.”
Depending on what products the employer has selected to offer, employees have their pick of the entire “store.” Those employees who need pet insurance can select it, while those who desire supplemental medical coverage, such as hospital indemnity, are able to as well. The aim is to give customizable control to the individual who is selecting the plan while also stabilizing costs to the employer.
“By facilitating a shift to a defined contribution … private exchanges offer the potential for cost stability to employers, while giving greater choice to employees, albeit with greater financial risk as well,” a 2014 report issued by The Kaiser Foundation reads. “Because the employer defines up front the amount paid to the employee, employers have greater control over how much they spend on health benefits.”
Health benefit costs are a huge consideration for employers. According to a 2015 report by the Centers for Medicare and Medicaid Services, health care spending grew by $102 billion between 2012 and 2013. The rapidly increasing costs of health care in the U.S., coupled with employer obligations under the Affordable Care Act (ACA), means keeping health benefits expenses stable is a growing challenge.
How are employees using private benefits exchanges?
To better understand the emerging private exchange marketplace, the Private Exchange Research Council (PERC) partnered with private exchange Liazon to see how consumers were operating within that exchange, and found that employers are offering more products over time and employees are purchasing more as well.
The PERC report found that, on average, employers offer 14 products on their customized exchanges. Medical, dental and vision plans are the most commonly offered by employers: The average company’s benefits package on Liazon includes six medical plans, three dental products and four vision packages from which to choose. Many companies also offer life insurance, legal plans, identity protection, disability benefits and pet insurance.
From 2013 through 2015, employees on average increased the number of products they purchased for their individualized plan from 3.6 to 4.4. A number of factors could be responsible, Nyce said, from the growth of the exchanges to more comfortability among those who have participated in the exchanges for several years.
“We’re seeing an expansion of benefits and a blurring of the lines traditionally seen between retirement and health care, life insurance and disability,” Nyce said. “Those were traditionally in their own silos, but we’re seeing them come together now in a more holistic approach. It provides employees with a unique experience, and they can use [these benefits options] as a platform to grow to a broader set of benefits in the future.”
Accounting is vital to a strong company, keeping track of the business’s finances and its continued profitability. Without accounting, a business owner would not know what money was coming in or going out, or how to plan for the future. The actions taken by accounting professionals — from bookkeepers to certified public accountants (CPAs) — make it possible to monitor the company’s financial status and provide reports and projections that affect the organization’s decisions.
What do accountants do?
The American Accounting Association defines accounting as “the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.” This is often done by logging a business’s accounts payable, accounts receivable and other financial transactions, typically using accounting software.
While bookkeepers tend to focus on the details, recording transactions in an efficient and organized manner, they may or may not see the overall picture like accountants do, said CPA Stan Snyder.
“Accountants use the work done by bookkeepers to produce and analyze financial reports,” Snyder said. “Although accounting follows the same principles and rules as bookkeeping, an accountant can design a system that will capture all of the details necessary to satisfy the needs of the business — managerial, financial reporting, projection, analysis and tax reporting.”
One part of accounting focuses on presenting the company’s financial information in the required ways to those outside of the company. In order to present this information in a format everyone can understand, accountants follow a set of guidelines. In the United States, most accountants abide by the Generally Accepted Accounting Principles. There are different sets of accounting standards for companies that operate overseas, as well as for local and state government entities.
CPA Harold Averkamp said accounts also provide a company’s internal management team with the information it needs to keep the business financially healthy. Some of the information will originate from the recorded transactions, while some will consist of estimates and projections based on various assumptions, he said.
To come up with a company’s status and projections, accountants rely on various formulas. Accounting ratios help uncover conditions and trends that are difficult to find by inspecting individual components that make up the ratio. Accounting ratios are divided into five main categories:
Liquidity ratios measure the liquid assets of the company versus its liabilities.
Profitability ratios measure the organization’s ability to turn a profit after paying expenses.
Leverage ratios measure total debt versus total assets, and gauge equity.
Turnover ratios measure efficiency by comparing the cost of goods sold over a period of time against the amount of inventory that was on hand during that same time.
Market-value ratios measure the company’s economic status compared with others in the industry.
Many accountants within the industry choose to become CPAs, a title they achieve by passing an exam and getting work experience. According to the Pennsylvania Institute of Certified Public Accountants, CPAs audit financial statements of public and private companies; serve as consultants in many areas, including tax, accounting and financial planning; and are well-respected strategic business advisors and decision-makers. Their roles range from accountants to controllers and from chief financial officers of Fortune 500 companies to advisors for small neighborhood businesses.
According to the University of North Carolina at Wilmington’s Career Center, there are countless other jobs that require accounting proficiency, including auditor, financial investment analyst, claims adjustor, loan administrator, tax lawyer, underwriter and stockbroker.
Now that you’re in your 30s, your career is a bit more established and your personal life may be more complex if marriage and kids have entered the picture. You (hopefully) are no longer living paycheck-to-paycheck, but aren’t sure what to do with your extra cash. When you have kids, debt, and your retirement to fund, where is the best place to put your money to work? Someone keeps calling you about buying an annuity or whole life insurance policy. Should you listen to what they have to say?
As a general rule, it’s good to put 50% of your paycheck toward your necessities (including all types of insurance), 30% toward your wants (like cable, dining out, and travel) and 20% toward savings (including paying down debt). (For related reading, see: The Financial Advice You Need in Your 20s.)
You may be able to contribute to all the items listed below. However, if you have to prioritize where to invest your limited resources, review my comments on each item then decide what works best for you.
Life Insurance – If someone is depending on your salary (i.e. kids, elderly parents, or spouse), consider buying term life insurance. It’s relatively cheap and you’re less likely to have health issues now that may prevent you from being insurable later. If you have kids, this is a must. At a minimum, have enough coverage to pay their expenses until age 18. Whole life policies or annuities tend to combine life insurance with investing and charge a high fee to do so. Instead, just buy term life insurance and invest the rest of your money on your own.
Disability Insurance – What would you do if you could no longer work? Could your spouse cover all the household expenses? Could someone else step in to help? If not, consider buying long-term disability insurance. It’s better to get some coverage outside of work, but if you can only get some through work that’s better than nothing. The reason it’s better to have coverage outside of work is if you develop a medical condition that makes it impossible to get insurance, then you leave your company, you will no longer be covered.
Other Insurance – Try to bundle your car/renters/homeowners/umbrella insurance at one company to take advantage of reduced rates. Also, if you get married be sure to pass that information along to your insurance agent for possible lower premiums.
Saving for a down payment on a house – This could be part of your “savings” but I’d rather you categorize it as a “want.” Cut back on some of your non-essential expenses to work toward your worthwhile goal of homeownership. Consider opening a separate savings account called something like “My First House” and have a certain amount of each paycheck automatically deposited into it. I recommend a savings account over an investment account because it has no chance of declining in value.
401(k) with company match – This is a no-brainer. Free money is free money. Contribute to your 401(k) at least up to the point you get your company match. Some companies give you an option to automatically increase your contribution each year. If your company offers this then sign up. You probably won’t notice any change to your paycheck, but it’ll have a huge impact on the size of your account on the day you retire.
Pay off high-interest credit card debt – After contributing enough to your company retirement plan to get that free money, focus the rest of your savings allocation on paying off your debt as quickly as possible. Pay the minimum each month for all your cards except for the one that charges the highest interest rate. For that one, pay off as much as you can afford each month. Once that one is paid off, focus on paying off the card with the next highest rate. Continue this strategy until all credit cards are paid off.
Student loan debt – Although I’m listing it here, this shouldn’t necessarily be your next highest priority. If you’ve got a low-interest loan it might make sense to make your monthly payments but not pay it off early. However, if you have a high-interest student loan pay it off as soon as possible. Remember, student loan debt is one of the few debts not forgiven when filing for bankruptcy. (A Note on Debt: The only new debt you should accumulate is a mortgage. Yes, this includes buying a car. If you don’t have the funds to buy a new car without a loan, it’s probably a car you can’t afford.)
Roth IRA – Contributing now, while you’re likely in a lower tax bracket than you will be later in your career, allows you to grow your investments tax-free for a very long time. The longer you hold your Roth, the longer the power of compounding works in your favor. Also, as you get older you may make too much money to be allowed to contribute to a Roth.
401(k) with no company match – If you’ve contributed as much as you can to your Roth IRA, then by all means continue to contribute to your company’s 401(k) until you reach your yearly contribution limit ($18,000 in 2016 for those under 50). It’s still a good deal since the taxes are deferred until you take the money out in retirement.
529 College Savings Plans for your kids’ college – Yes, this should be your lowest priority. Although it’s great if you have enough money to fund your kids’ college education, it has to take a back seat to funding your retirement. Your kids can get a loan to pay for college, but you can’t get a loan to pay for retirement.
Obviously, this is not a complete list of financial issues every 30-something faces, but they are some of the bigger ones that many people in this age bracket face.
Thinking about moving into your first apartment? The transition may be getting harder: According to Census data, 39% of single women and 46% of single men between the ages of 20-29 were living at home in 2005, up from 36% of women and 42% of men in 2000.
It\’s a small increase, but a 2007 study by the Pew Charitable Trusts suggests that as a group, young people earn considerably less than their parents did at the same age, after adjusting for inflation. In other words, for those who have just secured their first jobs and want to make the move to independence, it might not be a picnic.
Can You Afford to Move?
Although you may feel ready to get out on your own, make sure your finances are in order before you take the leap. Take a look at some rental listings in the areas in which you are interested in living and get an idea of how much you\’ll have to pay to live there.
You may be unsure of how to determine how much rent you can afford, but U.S. Housing Department guidelines suggest that you shouldn\’t pay more than 25-30% of your gross salary for rent. In other words, if you make $30,000 per year, you should look for apartments that cost about $750. If this isn\’t realistic in your area, you may have to get a roommate to share the cost.
Next, you\’ll have to consider your other monthly expenses and whether you\’ll be able to pay those bills as well. Do some accounting to determine how your finances will balance out with the added expense of living in your own place. Start with your monthly take-home pay, add any other income you might receive and subtract your other expenses from this number.
If you are already making payments on a car, credit card or student loan, be sure to include these amounts in your expenses list. Gas for your car (or a bus pass), insurance (rental and vehicle), cell phone bills and an estimate of the amount you usually spend on personal items should also be included.
Ask your parents or other people you know to help you come up with estimates on how much your new expenses, like your utilities, telephone and cable bills, and groceries will cost. They might also alert you to additional expenses that you weren\’t aware of.
Learn to Budget
What if your expenses turn out to be higher than your income? This is where things get interesting. In short, you\’ll have to get out your calculator and make a budget. Relying on your credit card to cover this shortfall is a no-no and is often a dangerous path to major debt down the road. (To learn more, read Get Your Budget In Fighting Shape.)
Take a look at your budget. Is there anything in there you could live without or pay less for? Usually, the answer is “yes”, and if you look critically at how you spend your money, you will likely be able to trim your expenses so that they match up with your income, or, better yet, so that you have some money left over each month to save in case of an emergency.
Also consider that you\’ll have to have some savings (or some help) to begin with, as most apartments will make you pay your first and last months\’ rent up front, along with a security deposit. There will also be fees for hooking up your up utilities to consider, along with moving expenses and the cost of any items you\’ll need once you move in. Laundry is also often an additional expense.
Finally, you should consider renters\’ insurance. Some rental properties will even make you purchase it as part of the lease agreement. Rental insurance is affordable and it can cover damage (such as in a fire) and theft to your belongings. It will also protect you from liability if you cause the damage yourself. Don\’t leave it out of the equation – it might be worth the investment!
Find a Place You Can Call Home
Once you have set some parameters in terms of what you can afford, it\’s time to start looking for a place to move into. Start by searching internet sites, classified ads and by visiting the neighborhoods where you might like to live.
Although you\’ll definitely want to find a place that fits your budget, make sure it\’s in a neighborhood you like, are familiar with and feel safe in – what looks like a bargain can turn out to be a nightmare if you feel uncomfortable there, live too far away from your friends and family or have to make a very long commute to your job.
Looking at the Lease
Whether you decide to rent month-to-month or sign a year-long lease, be sure to read what you are agreeing to carefully. The lease should detail how much rent you must pay, when it is due, how long you can occupy the apartment or house and who is responsible for utilities (some leases include them). It will also include rules about pets, roommates and whether you can paint or do improvements. Make sure that you get your lease in writing and that you keep a copy for your records once it is signed. If you\’re unsure about anything in the lease, ask the landlord. If you get an answer you can\’t live with – or you don\’t get one at all – you should probably keep looking.
The Big Move
Once you\’ve signed your lease and have a move-in date, it\’s time to start working on a list of what you\’ll need in your new place. One way to do this is to make a list of what you use regularly for a few days, including kitchen utensils, office supplies and personal items. If you won\’t be taking these items with you, you may have to shop for your own.
Keep in mind that your first apartment will not have all of the amenities you may be used to and, if you can\’t afford to buy them all for yourself right away, you\’ll probably have to be resourceful and make use of what you do have.
Similarly, if your budget it tight, you may not be able to have new furniture right away.
If you don\’t have any furniture of your own, start asking family and friends if they have bits and pieces you can buy, have or borrow. You can do the same for any other items you need.
You should also stock up on basic items for your pantry such as pasta, rice, canned goods and frozen foods. Keeping your kitchen well stocked with things you like, know how to cook and are easy to prepare may prevent you from going out to eat, which will help you stay within your new budget.
If you\’ve done everything right, your utilities should be hooked up, your bags packed and your bills paid. Determine what day you will be moving into your new place and decide how you\’ll get your things there. If possible, recruit friends and family to help you move, rather than hiring a mover.
Do you think budgets are a concept only for penny pinchers? If you have a high salary, you may not see the necessity of tracking every dollar you spend. But creating an effective budget can still be highly beneficial to your wallet—no matter how big or small.
Wealthy people are anomalies compared to most of the world. Unlike most of us, they have plenty of savings and no debt. A budget will help keep things that way. Remember this universal truth: the earlier you start budgeting and saving, the harder your money will work for you. Frivolous shopping purchases, regular restaurants visits, and frequently giving to family and friends all add up quickly.
I’m not saying you shouldn’t indulge in these things from time to time, but being mindful of your spending habits allows you to save and invest a larger chunk of your paycheck each month. That way, instead of your money mysteriously disappearing, it will multiply. (For more, see: How to Budget and Spend to Maximize Your Happiness.)
“Planning and controlling consumption are key factors underlying wealth accumulation,” wrote Thomas Stanley and William Danko in The Millionaire Next Door. “Operating a household without a budget is akin to operating a business without a plan, without goals, and without direction.” (For related reading, see: Top 3 Secrets to Financial Planning.)
If You’re Spending Less, You Can Invest More
By maintaining an effective budget, you’ll know exactly how much money you’re saving, and in turn, you can give your savings a chance to work for you. Maintaining a monthly budget and investing for the future will also provide you with a sense of security. As you probably already know, there are considerable tax advantages to putting extra funds in your 401(k) retirement account, IRA, or health savings account (HSA). There many other investment opportunities available, from guaranteed products like annuities and CDs, to different mutual fund or stock portfolios.
Your extra savings from budgeting could also be used to buy real estate or invest in other business ventures. Obviously, these options come with different levels of risk and should be carefully assessed before taking the plunge. But once you create a budget, you’ll see there is a myriad of things you can do with your extra funds.
With this in mind, let’s examine the best way to create a monthly budget so you can ensure your money is always working in your favor.
Getting Started On a Budget
Creating an effective budget can accomplish another beautiful thing: it will cause you to pay attention to the things on which you are spending your hard-earned money. By focusing on your individual expenditures each week or month with a budget calculator or budget planner, you’ll probably make better decisions about how you spend, save and invest. With all this in mind, here are some basic steps to follow:
Track your expenses. Go through your bank statements and write out every bill and monthly expense. You may have to average some of them, but that’s okay. This includes all your utility bills, your mortgage, car payment, home, car, and life insurance, child support, child care, student loans, cell phone, gym membership, credit card payments, prescriptions and other outstanding loan payments. It’s best to write these out in a budget planner spreadsheet so you can have everything in front of you.
Record other expenses you encounter throughout the year (excluding monthly expenses) and divide by 12. This includes things like property taxes, car repairs and oil changes, vet bills, glasses or contacts, tax preparation fees, medical expenses, charitable giving, vacation expenses and also camps and lessons for your children if you have them. Dividing the total amount you spend on these items annually by 12 will give you an average of what you need to set aside per month.
Add up how much you spend in various categories per month. Go through your bank statement again and write out approximately how much you spend each month on essentials. These include groceries, gas, clothing. Don’t forget extras like restaurants, parking fees, hair salon fees, gifts, traveling and entertainment. Analyze these amounts. Are you happy with how much you’re spending in each area? If not, set a budget or limit of what you believe is reasonable and attainable.
Record your total monthly income after taxes and subtract all of the above expenses. How does your bank account look now? Are you spending more than you make or is there a considerable amount left over to save? If not, it’s time to make some adjustments in your budget planner in order to create a more sensible plan.
Stay on track. After you create your budget, start regularly tracking your expenses and checking your bank account to see if you’re staying on track. This is the hardest part. You can either do this with your own spreadsheet or use a website that does it for you like Mint.com. Once you enter your credit and/or debit card information, Mint tracks all of your expenses in various categories and sends you alerts if you have overspent in certain areas.
The 50/30/20 Rule and Emergency Fund
First, I recommend creating an easy-access emergency fund savings account that contains at least six months of your monthly income. Next, I would implement the 50/30/20 rule—reserving 50% of your income for essentials like housing and food, 30% for lifestyle choices, and 20% toward financial priorities such as debt payments, retirement contributions, and savings.
As you get more comfortable with your monthly spending habits, this 50/30/20 ratio will change, eventually skewing toward saving more. Please remember, budgeting is often very trial-and-error. You may need to adjust it on a monthly basis until you get in a groove.
At some point in time, you’ve likely made the decision to put aside excuses and start making sincere efforts to improve your financial situation. You probably made some form of budget for your monthly expenses and set some ambitious savings target, only to find the perfect excuse to spend outside your budget and/or pilfer your savings. Sometimes the reason for cheating on your budget is legitimate – emergencies happen – but a truly effective budget accounts for crises.
Even if your budgeting has not gone to plan, there is still plenty of time to get things back on track. Here are our top tips for effective budgeting and saving.
First, you need to determine whether your budget was realistic to begin with. Have you fallen down because it was unachievable, or are you simply spending more than you should be? Many people set a budget and savings plan without fully evaluating their current finances. If you have not met your saving objectives, then this is the exercise to go through, as it sets the record straight and lays the foundation for all your financial planning.
Gather every financial statement you can. This includes bank statements, investment accounts, recent utility bills and any information regarding a source of income or expense. Next, record all of your sources of income. This could be from employment, rent or shares. Record the total take-home pay as a monthly amount.
Create a list of all your monthly expenses. This may include your mortgage payment or rent, car payments, auto insurance, groceries, utilities, entertainment and dry cleaning. Use your bank statements to ensure that these figures are accurate. You then need to break this down into two columns – fixed and variable. Some expenses are the same each month and are essential spending to maintain your way of living. Then list your variable expenses. These expenses will change from month to month.
Finally, you need to total your monthly income and monthly expenses. I hope that your income is greater than your expenses, so you have the potential to save. This means you can look at what you are doing with this excess – if the money is not going into savings, then what are you spending it on? If your income is less than your expenses, then you need to make urgent cutbacks to avoid growing debt.
Once you have examined your fixed expenses, it is time to look at your other expenditures. Are these areas where quick cutbacks be made? Whether you are budgeting to stop yourself from getting into debt or budgeting to put money into savings, cutbacks are the way to free up funds. For example, are you spending all of your disposable income on meals out? Your bank statements and credit card bills will show you where the areas of overspending are. Once you have identified these areas, you can take steps to curb your overspending.
Many people who fail to reach their savings goals are impulse buyers. In order to become an effective saver, you will need to address this behavior. Impulse buys eat into disposable income and can often mean wasted money. Never act on impulse when making purchases. If you see something you want, avoid buying it right away. Take a day to decide on the purchase. If the cost is significant, search for discount sites that may sell it for less money. Become.com and Pricegrabber.com are two sites that can help you hunt out a cheaper deal online.
Several months have passed by and your budgeting has slipped with time. To ensure that you stay updated for the rest of the year, keep daily logs of what you spend so you get a true picture of your spending habits. This will allow you to see if you are slipping into bad habits. If you do see a pattern – take action. Do not let months pass without addressing the issue.
If All Else Fails
We all use our plastic all the time. This makes it very tricky to get a feel for what you are spending. A way to combat this is to turn to cash. Every Sunday, take out your allotted spending money for the week, work out what your daily allowance is and remember that if you over/under spend one day, it will either give you more or less money later in the week. This is an effective way to understand your finances better.
The closest many people get to budgeting is depositing their paychecks into their checking accounts and buying everything with an ATM card until the money’s gone.
While there are certain advantages to this method, such as not incurring credit card debt, there are also major disadvantages, such as not quite knowing where all that money is going and not contributing enough to your savings because there’s never anything left over.
Even though budgeting is a wonderful tool for managing your finances, many people think it’s not for them. The logic they use, however, is often flawed. Below is a list of 10 budget myths that stop people from saving as much as they could – and should. Do any of these budgeting myths apply to you?
I Don’t Need to Budget
The truth is, almost everyone, even those with large paychecks and plenty of money in the bank, can benefit from budgeting. Keeping track of your monthly income and expenses allows you to make sure your hard-earned money is being put to its highest and best purpose. For example, if you knew how much money you were spending on restaurant meals every month, you might decide that you’d rather be putting that money toward something else, like a nicer vacation.
I’m Not Good at Math so I Can’t Manage My Money
Thanks to budgeting software, you don’t have to be good at math, you simply have to be able to follow instructions. Many of these programs are free and can be safely downloaded without fear of viruses or spyware from CNET’s download.com. If you know how to use spreadsheet software, you can even make your own budget. It’s as simple as creating one column for your income, another column for your expenses and keeping a running tab on the difference between the two.
My Job is Secure
No one’s job is truly secure. If you work for a corporation, downsizing or losing your job is always a looming possibility. If you work for a small company, these concerns may not apply, but if the owner died suddenly, the company might die with the owner. You should always be prepared for a job loss by having at least three months’ worth of living expenses in the bank. It’s a lot easier to accumulate this money if you know how much money you’re bringing in and laying out each month.
Government-Sponsored Unemployment Pay Will Tide Me Over
Unemployment benefits are not a sure thing. Let’s say a bad situation at work leaves you with no choice but to quit your job. Because you weren’t laid off, leaving your job will be considered voluntary and it’s very unlikely you’ll receive any benefits. It won’t help if you decide to remedy this problem by getting yourself fired, as those who are let go for bad behavior are also very unlikely to receive unemployment assistance. On top of that, getting fired will make it harder for you to get a new job.
It Won’t Happen to Me
We all think that unexpected high bills and tragedies won’t happen to us. With the number of things that can possibly go wrong in life, hoping for the best is the most logical emotional survival tactic. However, you might lose your job, be in a car accident, get cancer or need to help a friend or family member who falls on hard times. It’s best to be prepared and hope that you’ll get to use the money for something fun one day instead.
I Don’t Want to Deprive Myself
Budgeting is not synonymous with spending as little money as possible or making yourself feel guilty about every purchase. The crux of budgeting is to make sure you’re able to save a little each month, ideally at least 10% of your income, or at the very least, to make sure that you aren’t spending more than you earn. Unless you’re on a very tight budget (and we all are sometimes), you’ll still be able to buy baseball tickets and go out to eat. Tracking your expenses doesn’t change the amount of money you have available to spend every month, it just tells you where that money is going.
I Don’t Want Anything Big so I Don’t Need to Save
This one is tricky. If you don’t have any major savings goals to buy a house, a new car or to save enough money to quit your day job and take a stab at starting your own business, it’s hard to drum up the motivation to stash away extra cash each month. However, your situation and your attitudes are likely to change over time. Perhaps you don’t want to save up for a house because you live in New York City and expect that renting will be the most affordable option for the rest of your life. But in five years, you might be sick of the Big Apple and decide to move to rural Vermont. Suddenly, buying a home becomes more affordable and you might wish you had five years’ worth of savings in the bank for a down payment.
As another example, many people thought home ownership would be forever out of reach when the housing bubble was pushing prices ever higher, so they gave up on the idea of owning a home. After the bubble burst and prices sank, however, those who previously couldn’t even afford condos sometimes had the income to afford houses. Even FHA loans require a down payment, though, so those who saved their extra money when prices were high put themselves in a great position to buy when prices dropped.
Any Money I Save Would Just be Used for Education
Yes, the catch-22 of student financial aid is that the more money you have, the less financial aid you’ll be eligible for. That’s enough to make anyone wonder if it isn’t better to just spend it all and have nothing in the bank in order to qualify for the maximum amount of grants and loans.
When you apply for federal student aid such as the Stafford Loan, Perkins Loan or Pell Grant, you will fill out the Free Application for Federal Student Aid (FAFSA). Whether you are an adult student going back to school or the parent of a student headed to college, this form does not require you to report the value of your primary residence (if you own a home) or the value of your retirement accounts. This means that if you want to save money without compromising your financial aid eligibility, you can do so by using your savings to buy a house, prepay your mortgage or contribute more money to your retirement accounts. The savings you put into these assets can still be accessed in the event of an emergency, but you won’t be penalized for them. Paying down credit card debt and auto loans can also serve as a form of saving that won’t detract from your financial aid eligibility. Just think of all that interest you won’t have to pay when your balances go down or are even paid off completely.
Another issue is that even if you employ all the legal strategies available to you to maximize your financial aid eligibility, you still won’t always qualify for as much aid as you need, so it’s not a bad idea to have your own source of funds to make up for any shortfall in the aid you’re offered.
While being debt-free is unusual and commendable, it won’t pay your bills in an emergency. A zero balance is better than a negative balance, but that zero can quickly become negative if you don’t have a safety net.
I Always Get a Raise or Tax Refund
It’s never a good idea to count on unpredictable sources of income. Your company may not have enough money to give you a raise, or as much of a raise as you’d hoped for, even if you’ve earned it. The same is true of bonus money. Tax refunds are more reliable, but this depends in part on how good you are at calculating your own tax liability. Some people know how to figure to the penny how much of a refund they will get (or how much they will owe) as well as how to adjust this figure through changes in payroll withholding throughout the year. Others find W-4 forms, 1040s and tax tables incomprehensible and April is always a surprise. You might be expecting a $1,000 refund only to find that you’re getting $300 – or worse, that you owe.
If you’re still not convinced that budgeting is for you, here’s a way to protect yourself from your own spending habits. Set up an automatic transfer from your checking account to a savings account you won’t see (i.e., a savings account at a different bank from your checking account) that is scheduled to happen right after you get paid. If you are saving for retirement, you may have the option of contributing a regular, set amount to a 401(k) or other retirement savings plan. This way, you’ll always pay yourself first, you’ll always have enough money for the transfer and you’ll always pay yourself the same predetermined amount that you know will help you meet your goals. If you don’t think you have the discipline for budgeting, this is your best bet.
However, a better solution is to make this automatic contribution in conjunction with starting a budgeting spreadsheet or using budgeting software. This way, you won’t run into any unpleasant surprises, like your checking account balance reaching zero when your car insurance is due and you don’t get paid for another week.
If you don’t earn much and you can barely pay your bills, the idea of saving money might seem laughable. When you only have $5 left at the end of the month, why even bother to try saving? Because everyone has to start somewhere, and if you work at it, your financial situation is likely to improve over time. Saving money is worth the effort. It gives you peace of mind, it gives you options, and the more you save, the easier it becomes to accumulate additional savings.
Peace of Mind
Who hasn’t lain awake at 3:00 a.m. wondering how they were going to afford something they needed? If money is really tight, you might be wondering how you’re going to pay the rent next week. If you’re a little further up the financial ladder, you might worried about how many months you could pay the bills for if you lost your job. Later in life, the money thoughts that keep you up at night might center around paying for your kids to go to college or having enough money to retire. (Get help with college savings by reading Stop Procrastinating! Enroll In A College Savings Plan.)
As you accumulate savings, your financial worries should diminish, as long as you’re living within your means and not always looking for new things to worry about. If you already have next month’s rent taken care of by the first week of the current month, if you know you can get by without work for three to six months, if you have savings accounts for your children’s education and your own retirement that you’re regularly funding, you’ll sleep better at night. The reduced stress from having money in the bank frees up your energy for more enjoyable thoughts and activities.
The more money you have saved, the more you control your own destiny. If your job has you on the verge of a nervous breakdown, you can quit even if you don’t have a new job lined up yet and take time off to restore your sanity before you look for new employment. If you’re tired of living in an unsafe neighborhood, you can move to a safer area because you’ll have enough for a deposit on a better apartment or a down payment on a nicer home.
If you get sick and need expensive healthcare that your insurance doesn’t cover, you’ll have a way to pay for it even though you can’t work while you’re getting treatment. And knowing that you have options because of the money you’ve socked away can give you even more peace of mind.
No, money doesn’t solve every problem. It you are laid off, it might take as long as two years to find a new job. Some illnesses won’t go away no matter how many procedures you can afford, and random crime can happen even in a supposedly secure gated community. But with more money in the bank to deal with issues like these, you give yourself better odds of coming out on top.
Money Working for You
Most of us put in hundreds of hours of work each year to earn most of our money. But when you have savings and stash your funds in the right places, your money starts to work for you. Over time, you’ll need to work less and less as your money works more and more, and eventually, you might be able to stop working altogether.
What does it mean to have your money working for you? When you’re first starting to save, you’ll want to put your money somewhere safe, where you can access it right away for unforeseen expenses. That means an online savings account, where you might earn 1% interest annually and not even keep up with inflation, which tends to run around 2% to 3% per year. You’ll even have to pay taxes on your meager 1% earnings. Anything is better than earning 0%, though, or not having savings and going into credit card debt, which will cost you 10% to 30% in interest per year.
Once you’ve saved three to six months’ worth of expenses in your emergency fund, you can start saving money in a tax-advantaged retirement account. That’s where the magic starts to happen. These accounts, such as a Roth IRA or 401(k), allow you to invest in the stock market. If you do it right, you’ll earn about 8% per year on average over the long run. You won’t pay any taxes on those investment gains along the way, which will help your money grow even faster. With a Roth IRA, you contribute after-tax dollars, and everything that’s in the account after that is yours to keep. With a 401(k), you get to contribute before-tax dollars, giving you more money to invest up front; you’ll pay taxes when you withdraw the money in retirement. (If you’re not sure whether it’s better to pay taxes now or later, you can hedge your bets and contribute to both your employer-sponsored retirement plan and a Roth IRA.) The third choice, a traditional IRA, allows you to contribute before-tax dollars as you do with a 401(k).
If you have a high income and low expenses, you might accumulate enough to retire in 10 years. For most people, it takes closer to 40 years. But at some point, if you save and invest regularly, you should be able to live off the income generated by your investments – the saved money that’s working for you. The earlier you start, the more time a small amount of money has to grow large through the miracle of compounding.