Getty ImagesBy Holly JohnsonIf you do prepare a household budget, a recent Gallup poll showed you're in the minority. In fact, only one in three adults polled last year admitted to creating a detailed budget to track their expenses. The poll, which was based on a random sample of 1,012 adults ages 18 and older, also found that only 30 percent of adults take the time to create a long-term financial plan with investment and savings goals. And the other two-thirds of folks? Well, they're just winging it.
Unfortun! ately, our lack of financial planning is starting to show. According to a recent report from the Federal Reserve Bank of New York, non-housing household debt rose 3.3 percent to $2.94 trillion in the last quarter of 2013, with $11 billion of the surge attributed to credit card balances alone. Ouch. But, with so few Americans creating a budget, it's easy to see how things have gotten out of hand. This is simply what happens when two-thirds of adults fail to create a budget and opt to "see what happens" instead.
If you have never taken the time to create a household budget, the good news is that it's never too late to start. There's a reason why the saying, "it's better late than never," has stood the test of time. It's because it's true. Whether you're starting your career or nearing retirement, a budget might be just what you need to get your finances on track.
Still not convinced? Oh, you definitely need a budget. Here's why:
1. You don't know wha! t you're spending. If you're not using a budget, chan! ces are you have no idea what you're spending. This could be disastrous in categories where you tend to overdo it, such as groceries or entertainment. If you want to get in touch with the reality of your situation, start by tracking your spending for an entire month, tallying up each expense in categories such as groceries, gas, entertainment, utilities, clothing, etc. You might be surprised by what you find.
2. You don't know what you're saving. If you don't know what you're spending, you probably have no idea how much you're saving. Sure, you might be socking away 5 or 10 percent in your 401(k), but will that be enough for retirement? If you don't create a budget and track your spending, you may never know how much you could be saving.
3. You aren't realizing your potential. If you're overspending on XYZ, and don't have a clear picture of your savings, you aren't living up to your potential. Think about it. Imagine you start tracking your spending and find a way to cut 20 percent. Not bad, eh? Add that 20 percent to your savings, and watch the money pile up quickly. Of course, if you don't track your spending or create a budget, that will probably never happen.
4. You're wasting time. When do you want to retire? If you haven't thought about it, it's probably time to start. Now. People always talk about the power of compound interest for good reason. Basically, the earlier you start saving and investing, the more time your money has to grow. If you wait too long and forgo years of interest and earnings, you'll just need to save more toward the end of your career.
5. You're not living the life you want. When you fail to create a budget, you fail to c! reate a plan for your life. You fail to allocate money to your priorities, and you leave your financial future up in the air. On the other hand, creating a budget allows you to assign a dollar figure to the things that matter most, whether that's retirement savings, travel or other goals. Without a budget, you're not only wasting your potential, but you're wasting money that could be spent on the things you really treasure.
The bottom line: If you've never created a budget, it's not too late to get on board. Start tracking your spending and income, and create a plan that works for you. Prioritize the things that matter most in your life, and quit wasting money on the things that don't matter at all. And remember, don't see your monthly budget as a prison cell. If used correctly, it can actually set you free.
Holly Johnson is the founder of personal finance website, Club Thrifty, which provides tips for frugal living, budgeting, and more. Holly also writes ab! out frugality and travel at Get Rich Slowly, Frugal Travel Guy! , and her other website, Travel Blue Book.
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Interest rates are low, but that's no excuse to accept 0.01 percent interest rates on your savings. Just a little shopping can find you many FDIC-insured savings accounts paying as much as 1 percent in interest, usually with no fees and easy availability to your money through electronic funds transfers. Compared to the near-zero rates that uninsured money-market mutual funds and other alternatives pay, high-interest savings accounts are a much safer way to save.
1. Letting your savings earn virtually no interest. -
Banks still try to get customers to pay more for less, with one recent threat to charge fees for basic deposit accounts if the Federal Reserve cuts interest rates further. But many online banks not only offer fee-free options on their checking and savings accounts but also pay interest, and many have extensive fee-free ATM networks or reimbursement arrangements. If your bank follows through on threats to raise fees, taking your business elsewhere is your best move.
2. Paying big fees to banks for simple accounts. -
Bankrate reports that the average credit card charges around 16 percent in interest. That's a guaranteed money-maker for the banks that issue cards, but a big loser for those who carry balances on their cards. With many cards offering promotional interest rates as low as 0 percent, using them to get rid of high-interest cards is a no-brainer move and can help you pay your debt down faster.
3. Hanging onto high-interest credit cards. -
Mistakes on your credit history can keep you from getting a loan that you want to buy your next home or car, but they can also have consequences you'd never imagine. Increasingly, insurance companies, apartment rental agents, and even prospective employers order copies of your credit report to see if you're financially responsible. Be sure to take advantage of your free credit check at the government's annualcreditreport.com website to make sure the three big credit-rating agencies have everything right before mistakes come back to bite you.
4. Letting credit report errors cost you money. -
Payday loans have gotten more tightly regulated recently, but banks and other financial institutions still offer ways to let you get quicker access at your cash -- for a hefty fee. Resorting to short-term money fixes can land you in even more problematic situations down the road, because those solutions often create debt spirals from which it's hard to emerge unscathed. Set up an emergency fund instead and be prepared in advance for the money woes that life throws your way.
5. Being impatient to get at your cash. -
Interest rates have risen during the last half of 2013, with a typical 30-year mortgage carrying a 4.5 percent interest rate. But many homeowners still carry higher-interest mortgages from before the financial crisis. Now that home prices have risen, you might be able to refinance for the first time, and many homeowners have used lower rates to cut hundreds from their mortgage payment or shift to a shorter-term 15-year mortgage to pay off their debt faster.
6. Paying too much for your mortgage. -
Too many people never update their insurance coverage to deal with changes in their coverage needs, whether it comes from changes in family status for life insurance, health conditions for health-care or long-term care insurance, or even what types of property you own for homeowners' insurance. Don't wait for disaster to strike; check with your insurer or agent to see if your current coverage meets your needs.
7. Having the wrong insurance. -
In the past, investors had to pay hundreds or even thousands of dollars just to make a simple stock purchase. Now, though, the rise of discount brokers, low-fee index funds and exchange-traded funds, and freely available investment news and advice have made it silly to spend large amounts to get access to the financial markets. If you're still paying your broker too much to invest, look into alternatives that can help you avoid cutting serious money out of your retirement nest egg.
8. Getting charged too much to invest. -
Everyone likes a tax break, and one of the best ones for you to use involves making contributions to a tax-favored retirement account. By putting money in an IRA or 401(k), you can reduce your current taxable income and save on your taxes while also preparing for the future. With 401(k)s, your employer might even chip in a bit on your behalf. Even when times are tough, finding even small amounts to save can put time on your side and make a big difference down the road.
9. Skimping on your retirement savings. -
Many investors found out the hard way this year that bonds aren't as safe as they thought, with some major bond funds posting double-digit percentage losses in 2013. Despite those losses, bonds still carry substantial risk in 2014, with many calling for imminent interest-rate hikes that would erode their value further. Even now, bond rates are so low that they don't compensate you much for their risk.
10. Betting too big on bonds. -
In contrast to bonds, stocks have soared in 2013. That has some investors finally piling into the market for the first time since 2008 and 2009, while others remain shell-shocked from the massive losses they incurred back then during the financial crisis. Even with the Dow Jones Industrials (^DJI) and other major market benchmarks near all-time record highs, it makes sense to have some stock exposure in your portfolio. Just don't go overboard in the false belief that gains of 20 percent and 30 percent will happen every year.
11. Betting too big -- or too small -- on stocks. -
If you pay full price for just about anything these days, you're paying too much. The rise of deep-discount stores has led to falling prices at stores and shopping malls. Moreover, online tools like coupon sites, daily-deal offers, discounted gift cards, and cash-back credit-card deals can cut your costs as well. With all these tools, you won't find many situations in which you have no chance of getting a bargain on the items you want.
12. Paying more than you have to when you go shopping. -
In the past, many young adults focused on getting into as strong a college as they could, figuring that their degree would pay them enough to make up for the costs they incurred. With college graduates facing a more challenging job environment than ever, smart students are thinking about college costs before they make a decision on a school. By maximizing financial aid and looking at lower-tuition schools with nearly as strong educational quality, you can avoid creating a big debt hole that you'll struggle with for years into the future.
13. Ignoring the financial aspects of college education. -
If you don't have a will, a power of attorney for financial and health-care matters, and an advance directive to tell medical professionals whether you want certain life-preserving measures taken if something happens to you, then you're putting your family at risk. Many people don't have even these basic estate-planning documents, but getting them in place is easier and less expensive than most believe. Get your affairs taken care of in 2014 and save your loved ones some big future hassles.
14. Not planning for worst-case scenarios. -
Resolving to be more financially astute and to avoid common mistakes will help you get your finances in order more quickly. These tips should give you more money to help you meet all your financial goals.
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Source : http://www.dailyfinance.com/2014/04/12/five-reasons-you-need-household-budget/
