Budgeting, Tips

5 Reasons a Budget Will Help You.

According to a 2013 Gallup Poll, only 1 in 3 Americans prepare a detailed written or computerized budget. It further states that most of the people preparing budgets have a college degree or make more than $75,000 a year. People with lower income need to budget even more.

Some people say, I track all of my money in Mint so I don’t need to set a budget. While apps are great to track your expenses, you need to make sure that you set reasonable limits for yourself and stick to them.

My goal is not to have all of your debt paid off in a small amount of time. I just want to get you started on the path toward financial freedom. I consider financial freedom as good debt management, a secure savings and emergency fund.

  1. Financial freedom comes as you aren’t living paycheck-to-paycheck and you know where all of your money is going before you receive it. If your expenses are exceeding your income even by a little each month, you will never have financial freedom.
  2. Evaluating each month. Each month, you should be looking at your expenses. If one area continues to exceed your budget, do you want to increase that budget and decrease another area? Or is there a way you can decrease the expenses in that area? Either option works fine, but you can’t keep exceeding expenses and expect to get out of your old cycle.
  3. Large, irregular expenses. You always know which areas you can adjust. When Christmas is coming or a birthday, generally you need to lessen some expenses in another area to get ready. If you follow a budget, it is easy to see where you can adjust.
  4. Emergencies. We all have emergencies come up. We’ve been trying to save for a new furnace for over a year. But, little things keep breaking around the house, too. So, we are always grateful for our emergency fund. When something happens, if we don’t have enough money to cover it, we can usually figure out a way to make up for it in the next month or two because we follow our budget.
  5. Retirement. It is always important to be saving for retirement. Many strict budget programs don’t want you to save for retirement until all of your debt is paid off. Three main reasons not to do that:
    1. Time value of money. Yes, you are likely paying more in interest than you can receive as a return on investment. However, the sooner you start saving for your retirement the more money you will have. Even if you start small, and try to increase as you go along, your money will grow.
    2. Taxes. Saving for retirement can have tax savings now or in the future. If you wait and try to put away too much each year after your debt is paid off, you could lose some tax benefit due to the caps on contributions yearly.
    3. Employer Matching. Many companies offer employer matching on 401(k) plans. This is like free money. So, not utilizing this matching program every year and in every paycheck is like giving money back to the company.

Budgeting and planning gives you the financial freedom later in life. But, it can also be helpful in many areas right now. As stated above, I don’t usually worry too much when things come up. Money doesn’t keep me up at night because I know exactly where my money goes and that I have enough whenever something comes up.

Tips

Personal and Business Expenses

When you own a business, expenses can quickly add up. Businesses should try to keep personal and business expenses separate. Sometimes, that proves difficult for small businesses. So, if you do keep expenses together, keep all business receipts. Then, make a notation or category for business expenses so you can easily find those at tax time. 

“Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated for a profit.” IRS Pub 535

Expenses should be ordinary and necessary. Ordinary means common and acceptable in your industry. The expense should also be appropriate and helpful. It is easy to find examples of expenses that the taxpayer disagreed with the IRS as to ordinary and necessary. 

For example, the IRS closely watches cell phone usage. You can only claim the business portion of expenses. So, you must calculate the portion of business usage because you likely use it for both.

“Generally, you cannot deduct personal, living, or family expenses.” IRS Pub 535

You should be careful to save receipts from large retailers, i.e. Costco, Amazon. In an audit the IRS will generally want proof that these expenses are for business purposes. 

Some additional expenses that can be tricky include:

  • Business Use of Home. If you use part of your home for business, you may be able to deduct expenses. The area of your home must be used regularly and exclusively for business. Calculate the percentage of your home used for business and then you can deduct this portion of mortgage interest, insurance, utilities, repairs, and depreciation. 
  • Business use of your car. If you use your car for both personal and business purposes, you must divide expenses based on actual mileage. Look at my post on this subject for more information.
  • Interest. If you borrow money and use part of the money for personal and part for business, figure out a percentage for each and only deduct the business portion of the interest you paid.

Always be careful when claiming expenses that they are for business purposes. In the weeks to come, I will add more information to help you complete most of your own accounting.