Those of us who have been parents for any length of time are well aware of the costs involved in raising a family. It almost seems as if 10 minutes after you’ve experienced the miracle of birth, the handshakes turn into hands outstretched: doctor bills, trumpet lessons, sports teams, field trips, groceries — the list goes on and on for the better part of the next two decades. And that’s without addressing the veritable ‘Sword of Damocles’ expenses awaiting you once they graduate high school: College. If you have any hair left by the time they reach this point, you won’t for much longer.
The good news is that you don’t need to be a certified financial planner to navigate your way through this process. What you do need is a way to manage your cash flow consistently. You need a more profitable you.
Start By Figuring Out Your Budget
Don’t be intimidated by this process, as you can do it easily, even to the point of simply using pencil and paper if you’re old-school. If you’re a wage earner, income is generally highly predictable, and as for expenses, a simple matter of going through your bank statements over a six-month period and averaging them out to a monthly total should do the trick.
Important: Unless you pay off your cards in full every month, count any purchases made on credit cards or lines of credit as part of your overall expenses.
If your average income is greater than your average expenses, you are running a profitable household. If not, you are accumulating debt to finance your expenses, which is generally unacceptable, unless it’s for very short periods of time only.
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Become Profitable or Improve Your Profitability
Just as a business would do, make the necessary adjustments to turn an upside down budget into a profitable one. Almost everyone has line items they can limit or eliminate if they have the discipline to do so. Examples include a cheaper cable package (we all know we don’t really watch most of those channels anyway), fewer dinners out and less beer. It’s not that you have to get rid of everything you enjoy. Rather, strategically cut back things you know are pushing you beyond your means, to the point where income and expenses are in now in balance.
That won’t be enough to save for the future, though. According to Bankrate.com, 28% of Americans have no savings, and only 43% have enough to cover three months’ worth of expenses. So, it’s important to make sure you adjust your budget so that you have some money to put aside for a rainy day.
It’s very important that you develop good financial habits as early as possible. One of the best ways to start is by not only saving money but by also dividing it into short, intermediate and long-term vehicles.
A good goal is saving 10% of your take-home income, split between the three following approaches.
- Short-term savings vehicles are typically highly liquid, such as passbook savings and money market accounts. Granted, they yield almost no investment income, but they are readily accessible when you need the money for extraordinary expenses.
- Intermediate-term savings are investments, such as mutual funds and certificates of deposit. Given that they are less liquid than passbook savings, they earn higher returns. These balances are more likely to rise over time, both from returns as well as from the greater difficulty in accessing the funds.
- Long-term savings are not very liquid, but generate the highest returns. Examples include Individual Retirement Accounts (IRAs) and 401k accounts; employers traditionally offer 401ks. You can access these accounts, but is highly inadvisable due to the exorbitant cost in doing so.
Many employers offer matching contributions within 401k plans, so an excellent strategy is to put as much into that account as possible to receive the maximum benefit. Beyond that, the amount to put into short and intermediate savings is a judgment call. Expect to use short-term savings relatively frequently to even out the occasional extraordinary costs we all face now and again, and utilize medium-term vehicles more sparingly, preferably for bigger-ticket items.Decoded Pregnancy
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