Partners in BALANCE
Five Easy Ways to Cut Monthly Expenses
Ever notice how your monthly expenses always seem to equal whatever salary you’re making, even after you get raises? The phenomenon is called “lifestyle creep” and it can keep you from reaching all kinds of financial goals, from paying down debt, to saving for retirement. One way to get lifestyle creep under control is to have any future raises you get direct deposited into savings – like a 401.k account through your employer, or an Individual Retirement Account (IRA). But here are five things you can do right now to cut your monthly expenses.
1. Make a Budget
The first step toward cutting expenses is to make a budget, so you know exactly where your money is going. Start with major categories, like rent or mortgage, utilities, transportation, meals, clothing, and entertainment. Then break it down even further to ferret out items that are ripe for reducing. Many people, for example, are surprised to learn just how much they pay for pricey lattes and snacks from restaurants and vendors that would cost a fraction of that amount if they were made at home or purchased at a grocery store.
2. Lower Your Mortgage Payment
The biggest monthly expense for many people is their home mortgage. If you haven’t examined that loan since you bought your home years ago, it’s quite possible that you could save a lot of money – both now and over the life the loan – if you refinance at a lower interest rate. To know whether refinancing makes sense, you’ll need to add what you’ll spend on closing costs into the calculation of your new monthly payment.
3. Get an Insurance Checkup
If you have a car, you absolutely must have car insurance. But it pays to shop around periodically to make sure you’re getting the best deal. If you have a decent emergency fund on hand in case of an accident, one way to lower your premiums is to increase your deductible. Also be sure to examine your policy for “extras” you may not need. For example, you could be paying for roadside assistance both through your insurance policy and through AAA.
4. Examine Your Auto-Payments
Putting your regular bills on auto-payment can be a really smart way to protect your credit rating by ensuring you’re never late with a payment. However, if auto-pay causes you to keep paying for items or services you don’t really need or use, it’s no bargain. A few common culprits include unused gym memberships, subscriptions to magazines that aren’t read, and cable or satellite TV plans that include loads of premium channels that are rarely watched.
5. Cut the Cord
If you’ve already ditched your land line, good for you! If not, doing so is one of the quickest and most pain-free ways to trim your expenses. Most all of us have our cell phones with us all the time anyway, and if you really like the feel of a traditional phone in your hand, a VOIP (Voice Over Internet Protocol) plan that provides phone service over the Internet is a lot cheaper than traditional land line service.
Spring Cleaning for Your Finances
The freshness of spring motivates a lot of people to throw open the windows and doors, and do a thorough spring cleaning. It’s a great way to take stock of what you have, organize it so everything’s more accessible, and ditch the clutter that’s keeping you from enjoying your space. While you’re at it, why not dive into a bit of spring cleaning for your finances, too?
Check Your Tax Withholding
You just filed your income taxes. If you got a big tax refund, that’s the good news and the bad news: good that you didn’t have to write a check to the IRS, and bad because a big refund means you overpaid. Basically, you’ve been shorting your take home pay to give the government an interest-free loan. So, examine the personal allowances you claimed on the W-4 form you completed for your employer. If you’re consistently getting big tax refunds, it’s likely you’re claiming too many allowances and, thus, having more money than necessary withheld from your paycheck.
Review Insurance Policies
You want to make sure that you have the right types and amounts of coverage. For example, you may have purchased a home or gained other assets since you first took out your auto policy. If so, it may be wise to increase your liability coverage. It may cost you more in the short-term, but you’ll be glad you had proper coverage if you need to make a claim. On the flip side, if you have auto and home policies with different companies, you may be paying too much. Oftentimes, you can save by bundling both auto and home insurance policies with the same company.
Evaluate Your Credit Cards
If you’re carrying credit card balances, you’re throwing away money, so make a strategy to pay off that debt. Lots of credit card issuers want your business, and periodically run balance transfer promotions that let you consolidate your balances onto one card that carries a super-low rate for a fixed period of time – sometimes as low as 0%, with no balance transfer fee. If you’re able to do this, be sure to pay off the debt before the interest rate goes back up to the regular rate. And remember, don’t close those old credit card accounts, because that could ding your credit score. Instead, once you’re free of credit card debt, use all of your cards periodically to keep them active, and discipline yourself to pay off all your balances each month.
Consolidate Retirement Accounts
If you’ve been fortunate to work for companies that offer 401.k retirement plans, you may have accumulated several accounts that are sprinkled among various employer-sponsored plans. While diversifying your investments is always a good idea, it’s easier to manage them if they’re consolidated in one place. You have a couple of options. Your current employer may allow you to rollover other accounts into your current 401.k, but only do that if your current plan offers low fees and solid investment choices. You can also roll over those old 401.k accounts into an Individual Retirement Account (IRA), where you have a broad range of low-cost investment options. Just be sure you do a direct rollover, so you don’t incur any tax penalties.
Renting vs. Buying a Home
With the home prices stabilizing and even rising in some cities, many people are wondering if now might be the right time to take the plunge into homeownership. Real estate conditions and individual personal financial situations vary dramatically, so there’s no simple yes or no answer. But here are some issues to consider that can help you decide whether buying or renting is best for you:
Can You Afford It?
Today’s low mortgage interest rates can make homeownership look very affordable, but remember that the monthly payment is just the beginning. You’ll also need to budget for property taxes, as well as homeowner’s insurance. Typically, if you put down less than 20% on a property, your lender will also require you to pay for private mortgage insurance (PMI) which protects the lender in case you default. And, if you buy a condominium or a home in planned community with shared amenities, you’ll also have homeowners’ association (HOA) dues and assessments.
A rule of thumb is that these costs, altogether, should comprise no more than 30% of your monthly income. On the plus side, there are some major tax deductions available to homeowners, which can help to offset your costs. And, if home values go up, as they typically do in the long-term, your home could develop into a sizeable retirement nest egg. If you pay off your mortgage before you retire, there is also the peace of mind of having very low housing costs when you are no longer receiving a regular paycheck.
How Long Will You Stay in Place?
One of the biggest risks to buying is that you’ll want or need to move, and be unable to sell your home without taking a loss. Part of that relates to the unpredictability of the housing market – no one can know for sure what a property will be worth in the future – and part has to do with the upfront costs of buying, such as closing costs.
Because of these issues, many experts say you shouldn’t even consider buying unless you expect to stay in the home at least five or more years, enabling you to build up some equity. Of course, if you expect to stay in place for a long time, and have fairly stable income and an affordable mortgage, fluctuations in the housing market will be less concerning to you.
What About Maintenance?
Do you love working in the garden, or taking on do-it-yourself projects? Then that fixer-upper you have your eye on could be a great opportunity to gain sweat equity, and enjoy the house of your dreams! If you get a headache just thinking about those sorts of things, though, you may be happier renting, where you can turn over such chores to a landlord, and move out when the place no longer suits your needs.
With a home, it’s also important to have an emergency fund to cover maintenance and repair costs that are not covered by insurance. A condominium or townhouse may be a good compromise for people who want a home of their own, but don’t want to be completely responsible for all property maintenance.
The 411 on 401(k)s
As pension-style retirement plans have fallen by the wayside, the 401(k) plan has become the go-to option for many companies looking to help employees save for retirement. The 401(k) enables workers to set money aside, and not pay taxes on it or its earnings, until they retire and begin withdrawing funds from the account. Here are some key things you need to know about these tax-advantaged accounts.
One of the best things about tax-deferred retirement accounts like the 401(k) is that you make contributions pre-tax, so in addition to saving for the future, you’re reducing your income taxes right now. But there are limits, set by the IRS, to how much you can put away each year. For 2016, the limit is $18,000; however, if you’re 50 or older, you can set aside up to $6,000 more per year in “catch up” contributions.
If your company automatically enrolls employees in their 401(k), the default contribution amount probably won’t be anything close to the maximum, but you can probably elect to contribute more. If contributing the maximum is not doable right now, one smart strategy is to funnel any future salary increases into your 401(k) until you reach the maximum contribution.
As part of their employee benefit package, many companies will match employee contributions to a 401(k) up to a certain percentage. For example, say you make $50,000 a year and your company matches up to 3% of your salary. When you contribute 3% (that’s $1,500) to the 401(k), the employer match of that amount boosts your annual investment to $3,000. If your employer offers matching funds, be sure to contribute at least as much as you need to get the full match. Otherwise, you’re leaving money on the table.
Any money that you contribute to your 401(k) is completely owned by you, from the start. Though your investments may go up or down, you still own it when you leave your employer. Some companies, though, impose “vesting” requirements on the matching funds they contribute to your account. They may, for example, require you to stay employed for a set amount of time before you’re entitled to (or “vested” in) the funds they contribute to your account. So, if you leave your job before fulfilling your employer’s vesting requirements, you may receive only a portion (or none) of the matching funds.
Most 401(k) plans have several options for investing your retirement savings and some may even offer the services of a financial advisor to help you choose the right mix for your age and investment goals. As a general rule, though, the younger you are, the more risks you can take because you have more time for make up for potential losses. As you get closer to retirement, you’ll probably want to shift toward more conservative investments. Whatever your age, though, it’s important to be diversified – which is just a fancy way of saying “don’t keep all your eggs in one basket.”