If you get paid every two weeks, you’ve probably noticed extra money coming your way certain months. Maybe you even thought your company’s payroll made a mistake! But it’s no mistake. You get two magical months like this a year: when you suddenly have a third paycheck andâthe best part isâyour monthly bills stay the same. Yes, it’s appropriate to jump for joyâprovided you have a plan for that extra income.
Why does this happen in the first place? If you’re paid biweekly, you get 26 paychecks throughout the 52-week year. That means two months out of the year, you end up getting three paychecks instead of your regular two.
Those two extra paychecks can go a long way. But without a plan in mind, they can also disappear. Fast. The first budgeting trick to saving two paychecks is to find out when they will hit your account. Grab a calendar and write down your paydays for every month in a given year and highlight the two extras. Maybe even put calendar reminders in your phone so you can track when the additional funds will hit your account. The extra paychecks will fall on different days every year, so tracking them in advance is key.
Samuel Deane, a founding partner of New York City-based wealth management firm Deane Financial, says there isn’t one correct way to budget with an extra paycheck, but that it should depend on your personal situation and financial goals. You could decide to give yourself some extra room in your budget throughout the year, for example, or use the extra money for something specific.
How can I budget for an extra paycheck? Consider these 5 budgeting hacks if you’re paid biweekly:
1. Pay down (mainly) high-interest debt
Once you’re done jumping for joy at the realization of the third paycheck, consider how your budget with an extra paycheck could help you pay down debt. “The first thing I usually tell my clients is to get rid of high-rate debt, which is usually credit card debt,” Deane says.
Before paying off debt with your new budget with an extra paycheck, make a list of all of your debts organized by balance and annual percentage rate (APR). Paying off the debt with the highest APR could save you the most money because you’re paying the most to carry a balance. Paying down a few low-APR, low-balance debts can also help you gain momentum and bring other financial benefits. For instance, if you owe close to your credit limit on a credit card, the high credit utilizationâor card balance to credit limit ratioâcould negatively impact your credit score.
If your budget with an extra paycheck includes debt repayment, you’ll start to owe less and have less interest accruing each month, freeing up even more cash from subsequent paychecks.
“The first thing I usually tell my clients is to get rid of high-rate debt, which is usually credit card debt.”
2. Build an emergency fund
Paying down debt isn’t the only way to budget with an extra paycheck. “Taking a look at whether you have a sufficient emergency fund is pretty important,” says Dan Stous, director of financial planning at Flagstone Financial Management.
An emergency fund of three to six months of your regular expenses can help you weather financial setbacks, such as a lost job or medical emergency, without having to take on new debt. Keeping these funds separate from your regular checking and savings accounts can help you keep them earmarked for the unexpected (and reduce the temptation to dip into them for non-emergency expenses). Places to keep your emergency fund include a high-yield savings account, certificate of deposit or money market account.
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If creating an emergency fund or adding to an existing one is on your to-do list, a budgeting trick to save two paychecks is to automatically transfer your extra paychecks into your emergency fund account.
3. Save for a big goal
If you want to save for a goal like a new car or home, or contribute to tax-advantaged retirement accounts, contributing two full paychecks out of 26 can be a good start. “If a client is debt-free and doing well, they might be able to focus on other goals,” Deane says. If you’ve got a financial goal in mind, a budgeting hack if you’re paid biweekly is to transfer your two extra paychecks from your checking account to a savings or retirement account right away.
If you have a 401(k) through an employer and already contribute enough to get your maximum annual match, Deane says you may want to consider a Roth IRA. A Roth IRA is for retirement, but it also allows first-time homebuyers who have held their account for at least five years to withdraw up to $10,000 to buy a home, Deane says. Your budget with an extra paycheck could then go to either major goal.
Even loftier, “you could put aside money to start a business,” Deane says. If you plan on starting a business someday you could put away the paychecks annually and let those savings build as start-up capital.
4. Get ahead on bills
If you already have an emergency fund, are currently debt-free and are making good progress on your savings goals, try this budgeting hack if you’re paid biweekly and get a third paycheck: Pay certain monthly bills ahead of time.
“If you have the ability to prepay some of your bills, it can ease anxiety in the coming months,” Deane says.
Before using this budgeting hack if you’re paid biweekly, check with your providers to confirm that you will not be met with a prepayment penalty, and get up to speed on any prepayment limitations. Some providers may even offer a discount or incentive if you pay something like a car insurance bill all at once. You could also explore whether or not prepaying your bills makes sense for utilities, your cellphone or rent.
If you’re looking for budgeting hacks if you’re paid biweekly, consider that managing money isn’t only about dollars and cents. Emotions often play an important part in personal finance, and they’re often the root cause of people’s decisions. Accepting this fact could be an important part of successfully managing your money.
“From an emotional and behavioral standpoint, people should reward themselves for being responsible,” Stous says. “Basically, treat yourself.”
Perhaps you need a vacation from the daily grind, want to enrich or educate yourself or your family or simply want to get a date night at your favorite restaurant on the calendar. A budgeting trick to save two paychecks could be supplemented with some spending on yourself.
“If you have an extra paycheck and a debt reduction goal, then maybe you apply the whole thing toward that goal. On the other hand, maybe you have a goal to retire in 10 years and you’re off track. Then, it’d be wise to put that money, or at least a portion of it, toward that goal.”
There’s no one-size-fits-all budgeting trick to save two paychecks
When you’re deciding how to budget with an extra paycheck, you might find yourself going back and forth between options.
“If you have an extra paycheck and a debt-reduction goal, then maybe you apply the whole thing toward that goal,” Stous says. “On the other hand, maybe you have a goal to retire in 10 years and you’re off track. Then, it’d be wise to put that money, or at least a portion of it, toward that goal.”
Even though budgeting solutions are not the same for everyone, being disciplined and proactive about the savings opportunity of a third paycheck can help you form a strong foundation for your financial future.
The post The Magical Third Paycheck: 5 Budgeting Hacks If You’re Paid Biweekly appeared first on Discover Bank – Banking Topics Blog.
Before the coronavirus reached the U.S., unemployment was low and few could have anticipated a global pandemic. However, as the pandemic and ensuing recession took hold, a record-breaking number of people filed for unemployment benefits to stay financially afloat.
âCOVID-19 led to an incredible number of American workers being without work,â says Julia Simon-Mishel, an unemployment compensation attorney. âAnd itâs caused a huge need for individuals to file for unemployment insurance.â
Unemployment insurance, or unemployment benefits, can offer an essential lifeline. But if youâve never accessed these benefits before, you may have questions about how they work. You might also be asking: What do I do when my unemployment benefits run out and Iâm still unemployed?
This article1 offers tips about what you need to know about filing an unemployment claim. It also addresses the following questions:
How do you prepare for the end of unemployment benefits?
Can your unemployment benefits be extended?
What can you do when unemployment runs out?
Can you refile for unemployment after it runs out?
If youâre just getting ready to file or need a refresher on the basics of unemployment benefits, read on to have your questions answered.
If youâre already collecting benefits and want to know what happens once you reach the end of the benefit period, skip ahead to âSteps to take before your unemployment benefits run out.â
Common questions about unemployment benefits
Experiencing a job loss is challenging no matter what. Keep in mind that youâre not alone, and remember that unemployment benefits were created to help you.
While theyâre designed to provide financial relief, unemployment benefits are not always easy to navigate. Hereâs what you need to know to understand how unemployment benefits work:
What are unemployment benefits?
Unemployment insurance provides people who have lost their job with temporary income while they search for and land another job. The amount provided and time period the benefits last may vary by state. Generally, most states offer up to half of a personâs previous wages in unemployment benefits for 26 weeks or until you land another full-time job, whichever comes first. Requirements and eligibility may vary, so be sure to check your stateâs unemployment agency for guidance.
How do you apply for unemployment benefits?
Depending on where you live, claims may be filed in person, by phone or online. Check your state governmentâs website for details.
Who can file an unemployment claim?
This also may vary from state to state, but eligibility typically requires that you lost your job or were furloughed through no fault of your own, in addition to meeting work and wage requirements. During the coronavirus pandemic, the government loosened restrictions, extending unemployment benefits to gig workers and the self-employed.
When should you apply for unemployment benefits?
Short answer: As soon as possible after you lose your job. âIf you are someone who has had steady W2 work, itâs important that you file for unemployment the moment you lose work,â Simon-Mishel says. The longer you wait to file, the longer youâre likely to wait to get paid.
When do you receive unemployment benefits?
Generally, if you are eligible, you can expect to receive your first benefit check two to three weeks after you file your claim. Of course, this may differ based on your state or if thereâs a surge of people filing claims.
2020 enhancements to unemployment benefits for freelance and contract workers
In early 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. In addition to other benefits, the CARES Act created a new program called Pandemic Unemployment Assistance. This program provides unemployment benefits to independent contractors and other workers who were typically ineligible. That means that if you donât have steady W2 incomeâfor instance, freelance and contract workers, those who file 1099s, farmers and the self-employedâyou still may qualify for unemployment benefits.
âThat program is a retroactive payout,â Simon-Mishel says. âIf youâre just finding out about that program several months after losing your job, you should be able to file and get benefits going back to when you lost work.â
Because legislation affecting unemployment benefits continues to evolve, itâs important that you keep an eye out for any additional stimulus programs that can extend unemployment benefits. Be sure to regularly check your stateâs unemployment insurance program page for updates.
“Itâs really important to keep on top of all the information out there right now and be aware of what benefits are available to you.”
Steps to take before your unemployment benefits run out
In a perfect world, your job leads would become offers long before you reached the end of your unemployment benefits. But in reality, thatâs not always the case.
If youâre still unemployed but havenât yet exhausted your benefits and extensions, you may want to prepare for the end of your unemployment benefits as early as possible so you donât become financially overwhelmed. Here are four tips to help you get through this time:
Talk to service providers
Reaching out to your utility service providers like your gas, electric or water company is one of the first steps John Schmoll, creator of personal finance blog Frugal Rules, suggests taking if youâre preparing for the end of unemployment benefits.
âA lot of times, either out of shame or just not knowing, people donât contact service providers and let them know what their situation is,â Schmoll says. â[Contact them to] see what programs they have in place to help you reduce your spending, and basically save as much of that as possible to help stretch your budget even further.â
To help prepare for the end of your unemployment benefits, a few months before your benefits end, Schmoll suggests cutting back spending as much as possible, focusing only on necessities.
âIf you can try and save something out of the benefits that youâre receiving while youâre receiving themâit doesnât matter if itâs $10 or $20âthatâs going to help provide some cushion,â Schmoll says. Keep those funds in a separate account if you can, so youâre not tempted to spend them. That way youâre more prepared in case of an emergency.
If you hunkered down during your period of unemployment and were able to save, try to resist the urge to splurge on things that arenât necessary.
âThere might be temptation to overspend, but curtail that and focus on true necessities,â Schmoll says. âThat way when [or if] you receive an extension on your benefits, you now have that extra money saved.â
If you find that your savings and benefits arenât covering your expenses, and youâre reaching a point where you no longer qualify for benefits, look into other new benefit programs or features designed to help during times of crisis.
For example, there are programs across the country to assist people with rent or mortgages, Simon-Mishel says. Those programs are generally designed to keep those facing financial hardship from losing their home or apartment. You may need to show that you are within the programsâ income limits to qualify, or demonstrate that your rent is more than 30 percent of your income. These programs vary widely at the state and even city level, so check your local government website to see what might be available to you.
As you prepare for the end of your unemployment benefits, explore which government benefits or government agency may be best suited for your needs.
Keep up with the news
During economic downturns, government programs and funds often change to keep up with evolving demand.
âItâs really important to keep on top of all the information out there right now and be aware of what benefits are available to you,â says Simon-Mishel. âYou should closely pay attention to the social media of your state unemployment agency and local news about other extension programs that might be added and that you might be eligible for.â
Options for extending your unemployment benefits
If youâre currently receiving benefits, but theyâll be ending soon, youâre likely wondering what to do when your unemployment runs out and asking if your unemployment benefits can be extended. Start by confirming when you first filed your claim because that will determine your benefit end date.
If youâre wondering, âCan you refile for unemployment after it runs out?â the answer is yes, but youâll have to wait until your current âbenefit yearâ expires. Note that a benefit year is 12 months from when you file a claim. If you filed at the beginning of June, for example, you generally can’t file again until the beginning of the following June.
You may get 26 weeks of unemployment benefits, depending on your stateâs rules at the time. Most states extended the payout period to 39 weeks in the wake of the COVID-19 crisis. Check your stateâs website for the particulars on what to do when your unemployment runs out.
If your claim is still active but youâll be in need of additional financial relief after your unemployment benefits run out, here are your options:
File for an unemployment extension
During extraordinary economic times, such as the coronavirus pandemic, the federal government may use legislation like the CARES Act to offer people more benefits for a longer period of time, helping many people concerned about whether unemployment benefits can be extended.
For example, in 2020, for most workers who exhaust, or receive all of, their unemployment benefits, a 13-week extension should automatically kick in, Simon-Mishel says. This would bring you up to 39 weeks total. However, if more than a year has passed since you originally filed and you need the extension, you will likely need to file a short application provided by the government. Details vary by state.
As youâre determining what to do when your unemployment runs out, reach out to your unemployment office. Itâs important to do this before your benefits expire so you can avoid a missed payment. You can also confirm youâre eligible and that you can refile for unemployment after it runs out.
Ask about the Extended Benefits program in your state
Can unemployment benefits be extended beyond that? In periods of high unemployment, you may qualify for a second extension, depending on your state.
âAfter those [first] 13 weeks, many states have added a new program called Extended Benefits that can provide another 13 to 20 weeks of unemployment when a state is experiencing high unemployment,â Simon-Mishel adds. This means you may be able to receive a total of up to 59 weeks of unemployment benefits, including extensions. The total number of weeks of unemployment you may receive varies based on your state and the economic climate.
Itâs hard enough keeping up with everything as you prepare for the end of unemployment benefits, so donât worry if you donât have your stateâs benefits program memorized. Visit your stateâs unemployment insurance program page to learn more about what benefits are available to you.
Beyond unemployment benefits
While life and your finances may seem rocky now, know that youâre not alone. Remember that there are resources available to help support you, and try to take things one day at a time, Schmoll says.
âRealize that at some point your current situation will improve.â
If you find that your benefits arenât covering all of your expenses, now may be the time to dip into your cash reserve. Explore these tips to determine when itâs time to use your emergency fund.
1 This article is not legal advice and should not be construed as such. Eligibility for unemployment benefits may be impacted by variations in state programs, changes in programs, and your circumstances. If you have questions, you should consider consulting with your legal counsel, at your expense, or seek free assistance from your local legal aid organization.
Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.
The post How to Prepare for the End of Your Unemployment Benefits appeared first on Discover Bank – Banking Topics Blog.
Maybe you want to lose those stubborn 10 pounds, score a big promotion or run your first marathon. Whatever your priority, it all starts with setting a goal.
Financial priorities are no different. Whether you want to save for your child’s college education or get yourself out of debt, budgeting to help reach your financial goals allows you to determine what’s most important to you, make a plan to attain those goals and hold yourself accountable for success.
Still, when it comes to managing your money, knowing how to set financial goals and sticking to them can feel like opposite sides of the same coin. You might even find yourself asking, “How do I create a simple budget to reach my financial goals?” If you follow these three steps, you could be crossing the finish line in record time:
1. Pick a day to get started
Sometimes the hardest part of tackling a new project is simply getting started, especially if your to-do list feels like it’s never ending. There’s always tomorrow, or the day after that… right? To create a simple budget to help you reach your financial goals, pick a day and time to get started. Consider picking a time when you do your best thinking, are most focused and least likely to get interrupted. Maybe it’s Sunday morning over breakfast and coffee before kicking off a day of chores or on a weeknight after the kids go to bed.
Once you’ve landed on the best time to sit down and create a simple budget, add it to the calendar and schedule reminders on your computer or phone to hold yourself accountable.
2. Create a simple budget, however complex your finances
Chances are your finances are pretty complicated, with lots of moving parts. Things seem to be moving along nicely with your regular expenses like rent, groceries, transportation and entertainment… and then your carburetor goes kaput in your car and you must replace it right away. Or that toothache has become unbearable and requires a root canalâand you’ll have to cover some of the expense out of pocket. Just when you’re finally making a dent in paying down your debt and getting your finances on track, life throws you some curveballs. But that doesn’t mean you can’t create a simple budget.
One of the easiest ways to create a simple budget and stay on track is to follow the 50-20-30 rule:
50 percent of your income should address your needs, such as housing, utilities, healthcare and transportation;
20 percent should be put toward your financial goals, like building your savings and paying off debt;
30 percent should cover your wants or discretionary expenses, like shopping, entertainment and dining out.
Managing your finances with the 50-20-30 is a good first step when you’re first learning how to create a budget, but trying to deal with multiple financial goals within that 20 percent bucket can be overwhelming. When it comes to budgeting to help reach your financial goals, certified financial planner Jim White suggests taking your financial goals one step at a time.
“Make a simple plan to tackle debtâor maybe just one debtâthen when that goal is accomplished, work on a simple plan for the next debt,” White suggests. “A bunch of small victories goes a long way to changing your financial discipline and gives you a boost to keep moving forward,” White adds.
Similar to how you picked a day to begin the budgeting process, make a habit out of managing your finances by picking one day of the week and checking in with yourself at a scheduled time. After about two months, budgeting to help reach your financial goals can become habit forming. “When you focus on your goals on the same day every week, you are creating a habit, and a pattern, to follow,” says Karen Ford, financial coach and motivational speaker.
Budgeting to help reach your financial goals becomes even more effective when you’re reviewing your priorities every seven days and making adjustments to your spending and saving as needed.
“Make a simple plan to tackle debtâor maybe just one debtâthen when that goal is accomplished, work on a simple plan for the next debt. A bunch of small victories goes a long way to changing your financial discipline and gives you a boost to keep moving forward.”
3. Automate your financial plan
Now that you know how to set financial goalsâwhether it’s paying down debt, saving up for a car or putting money away for retirementâwhat’s next? Time to get moving! One way to do that is to automate your finances. By setting up automatic bill pay and account transfers, it will be easier to stick to your plan for paying monthly expenses and contributing to savings.
When it comes to paying your bills and learning how to set financial goals, consider automating the bills that you pay regularly, especially those that fall within the 50 percent budget category that covers your living essentials. To gain momentum with your savings progress, set up automatic transfers from your checking account to your savings account for the amount you wish to save each month. If your financial goal is retirement, you could even set up automatic transfers to an individual retirement account (IRA) so you’re consistently making progress. You could also arrange to have a portion of your paycheck automatically go into savingsâbefore you even have time to miss it.
By making automatic contributions to your savings accounts, you are “subscribing to the idea of paying yourself first,” says Riley Adams, CPA and blogger for Young and the Invested, a professional’s guide to financial independence. “By doing this, it removes the temptation to spend and takes any lack of discipline out of the picture,” Adams says.
Keep in mind that any time you automate your finances as part of creating a simple budget, you should monitor your accounts regularly. Check in to make sure your automated settings are up to date, that you always have the funds available in your accounts to cover your expenses and transfers and that your savings are growing according to your plan.
How to set financial goals in 3 steps
Once you find time to focus on your finances, create a simple budget and automate your payments and transfers, budgeting to help reach your financial goals is one habit that is sure to stick. By following these three rules and keeping yourself on track, you’ll be ready to build a solid foundation for your financial future.
The post How to Set Financial Goalsâand Crush Them appeared first on Discover Bank – Banking Topics Blog.
If youâve got savings goals on your mind, then you know they come in all sizes and time horizons.
As you consider all of your options for hitting those goalsâfrom savings accounts to stocks and bonds to stuffing your cash under the mattressâcertificates of deposit stand out among the pack thanks to their competitive rates and safety.
âThe reason that people are really drawn to CDs is that you can get a higher return than you would get in either a traditional checking account or traditional savings account,â says Kimberly Palmer, personal finance expert at NerdWallet.
Steady returns, in fact, are among the top benefits of CDs. Plus, Palmer adds that CDs are usually FDIC-insured, typically up to $250,000 for each depositor (or the maximum allowed by law).
With all those benefits in mind, you might still be wondering if a CD is the right fit for your savings strategy. So, what is a certificate of deposit and how does it work?
What is a certificate of deposit?
A certificate of deposit provides a guaranteed rate of return (the interest rate) on your money as long as you agree not to withdraw the funds you deposited (the principal) until after a specified amount of time (the term).
âItâs best for someone who doesnât need their money immediately,â Palmer says. âIn exchange for that longer period of time where your money is inaccessible, you earn a higher return.â
How does a certificate of deposit work?
Before you can start using certificates of deposit to keep your savings growing at a fixed rate, it helps to know how CDs work. Itâs time to familiarize yourself with this one-of-a-kind savings product.
âThe reason that people are really drawn to CDs is that you can get a higher return than you would get in either a traditional checking account or traditional savings account.â
CD minimum deposit
While you can find savings accounts with no minimum deposit requirement, most banks require a minimum deposit to open a certificate of deposit. As you learn how certificates of deposit work, note that minimum deposits can vary depending on the financial institution, but at Discover itâs $2,500.
CD terms
Once you open a CD, your money grows until it matures at the end of its term. Discover CD terms start at three months, and the longest term available is 10 years.
CD rates
In addition to getting a higher rate than you can on many savings accounts, CD rates are fixed, which means thereâs no risk of the rate going down during the term. (Keep in mind they canât go up, either.) Generally, the longer the CD term, the higher the interest rate you can lock in for your money.
CD early withdrawal penalty
Understanding CD early withdrawal penalties is key to answering the âHow does a certificate of deposit work?â question.
You can typically find competitive rates for CDs because your financial institution is counting on having that money for the full term. For that reason, if you pull out any money in your CD before the term ends, you could be hit with a penalty.
The early withdrawal penalty often depends on the length of the CDâs term, and itâs a good idea to check with your bank to understand its specific withdrawal penalties.
Got the gist of what a certificate of deposit is? Now itâs time to put this account to work toward your unique savings goals.
How can you use CDs in your own savings strategy?
Because CDs are offered across a wide range of terms, you have the opportunity to get creative with how you take advantage of them. Whether your savings goals are big or small, long- or short-term, thereâs a CD savings strategy that will work for you.
Using CDs for short-term goals (less than three years)
âCDs are good for short-term or near-term liquidity needs,â says Philip Gibson, an associate professor of finance.
Letâs say you want to have money ready to spend on an engagement ring a year from now. Putting that money into the stock market could be risky, because if there were a market dip, youâd be out of luckâand you wouldnât be the only one disappointed!
Instead, Gibson says, you can put that money into a 12-month CD and ensure that it will be there a year from now.
How does a certificate of deposit work out to be a better short-term option than cash, you ask? Money within a CD will have grown thanks to the competitive interest rate. Cash, Gibson points out, typically loses value over time due to inflation.
However, CDs arenât ideal for storing cash that you might need at a momentâs notice. Remember: If you pull out your money from a CD before the end of its term, you could be on the hook for an early withdrawal penalty. If quick access is a priority, youâd be better off using a checking account or savings account.
Using CDs for medium-term goals (3-5 years)
CDs can be an effective way to save for medium-term goals, but you need to choose your CD term wisely.
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âYou want to make sure the CD term you choose matches the time horizon of your goal,â Palmer says.
For example, if youâll need that money for a down payment on a home in three years, it would make sense to put your money into a CD with a three-year term. A three-year CD would likely give you a higher return than a one- or two-year CD, and your money will be accessible when you are ready to buy a house.
Palmer adds that because money in CDs is only accessible after they mature at the end of their terms, youâll want to make sure you have three to six months of emergency savings available for unexpected short-term needs before opening a CD with a three- to five-year term.
Using CDs for longer-term goals and retirement
The longer your time horizon for your goals, the more time you have to take advantage of the power of compounding in a CD. Plus, given how certificates of deposit work, longer terms usually have higher interest rates.
If youâre looking even further ahead to retirement, you can open an IRA CD. IRA CDs give you the same reliable growth of regular CDs with the tax advantages of IRAs.
Using a CD ladder to support multiple goals
While the above examples show how CDs work to save for specific financial goals, there is a way to use CDs to continually grow your savings as you reach multiple savings goals with varying time horizons. At the same time, with this strategy you can:
Keep your funds liquid.
Take advantage of interest rates if they go up.
Lock in the higher CD rates associated with longer terms.
Itâs called a CD ladder, and Palmer says this CD strategy is growing in popularity among savvy savers.
With a CD ladder, you donât try to guess exactly when youâll need your funds to be available. Instead, you open multiple CDs with varying maturity dates.
âYou might have one CD that matures in six months, one that matures in a year and then another in 18 months,â Palmer says. âThat means that the terms keep coming due, and you continually have access to your money.â
Every time a new CD matures, you have the option of putting that money toward something you have been saving for, such as a house.
If you arenât ready to use that money when a CD matures, then you simply open a new CD with a longer term than any CDs you currently have. That new CD is added to the âladder,â and your money grows at longer-term rates as older CDs approach maturity.
Once you get into a groove with a CD ladder, you can enjoy all the benefits of CDs without worrying about finding a single CD that perfectly matches up with your financial goals.
Ready to get started with a CD?
Now that you have a handle on what a certificate of deposit is and how CDs can work for you, itâs time to get your savings plan started.
Learn how a Discover Certificate of Deposit can help you reach your savings goals, with flexible terms from three months to 10 years.
Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.
The post This is How CDs Workâand How You Can Use Them to Grow Your Savings appeared first on Discover Bank – Banking Topics Blog.
If you have an irregular income, you know how great the good times feelâand how difficult the lean times can be. While you can’t always control when you get paid or the size of each paycheck if you’re a freelancer, contractor or work in the gig economy, you can take control of your money by creating a budget that will help you manage these financial extremes.
Antowoine Winters, a financial planner and principal at Next Steps Financial Planning, LLC, says creating a budget with a variable income can require big-picture thinking. You may need to spend time testing out different methods when you first start budgeting, but, âif done correctly, it can really empower you to control your life,” Winters says.
How do you budget on an irregular income? Consider these four strategies to help you budget with a variable income and gain financial confidence:
1. Determine your average income and expenses
If you want to start budgeting on a fluctuating income, you need to know how much money you have coming in and how much you’re spending.
Of course, that’s the basis for any budget. But it can be particularly important if you’re trying to budget on an irregular income because you may have especially high- or low-income periods. You want to start tracking as soon as possible to build up accurate data on your average income and expenses.
For example, once you have six months’ worth of income and expenses documented, you can divide the total by six to determine your average income and expenses by month.
Many financial apps and websites can help with the tracking, including ones that can connect to your online bank and credit card accounts and automatically pull in your transactions. You may even be able to pull in previous months’ or years’ worth of data, which you can use to calculate your averages.
If you’re budgeting on a fluctuating income and apps aren’t your thing, you can use a spreadsheet or even a pen and notebook to track your cash flow. However, without automated tracking, it can be difficult to consistently keep your information up to date.
2. Try a zero-sum budget
“There are several strategies you can use to budget with an irregular income, but one of the easiest ones is the zero-sum budget,” says Holly Johnson. As a full-time freelance writer, she’s been budgeting with a variable income for over seven years and is the coauthor of the book Zero Down Your Debt.
With a zero-sum budget, your income and expenses should even out so there’s nothing left over at the end of the month. The trick is to treat your savings goals as expenses. For example, your “expenses” may include saving for an emergency, vacation or homeownership.
“There are several strategies you can use to budget with an irregular income, but one of the easiest ones is the zero-sum budget.”
Johnson says if you’re budgeting on a fluctuating income, you can adopt the zero-sum budget by creating a “salary” for yourself. Consider your average monthly expenses (shameless plug for tip 1) and use that number as your baseline.
For example, if your monthly household bills, groceries, business expenses, savings goals and other necessities add up to $4,000, that’s your salary for the month. During months when you make over $4,000, put the extra money into a separate savings account. During months when you make less than $4,000, draw from that account to bring your salary up to $4,000.
“We call this fund the ‘boom and bust’ fund,” Johnson says. “By building up an adequate amount of savings, you will create a situation where you can pay yourself the salary you need each month.”
3. Separate your saving and spending money
Physically separating your savings from your everyday spending money may be especially important when you’re creating a budget on an irregular income. You may be tempted to pull funds from your savings goals during low-income months, and stashing your savings in a separate, high-yield savings account can force you to pause and think twice before dipping in.
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An easy way to put this tip into action when creating a budget with a variable income is to have all of your income deposited into one account, then disburse it into separate savings and spending accounts. “Transfer a set amount on the first of every month to a bill-paying account and a set amount to a spending account,” Winters, the financial planner, says.
“The bill pay account is used to pay for all of the regular expenses, like rent, insurance, car payments, student loans, etc.,” Winters says. These bills generally stay the same each month. The spending account can be used for your variable expenses, such as groceries and gas.
When considering your savings accounts, Winters also suggests funding a retirement account, such as an Individual Retirement Account (IRA).
If you’re budgeting on a fluctuating income as a contract worker or freelancer, you may also want to set money aside for taxes because the income and payroll taxes you’ll owe aren’t automatically taken out of your paychecks.
4. Build up your emergency fund
“The best way to weather low-income periods is to prepare with an adequate emergency fund,” freelancer Johnson says. An emergency fund is money you set aside for necessary expenses during an emergency, such as a medical issue or broken-down vehicle.
Generally, you’ll want to save up enough money to cover three to six months of your regular expenses. Once you build your fund, you can put extra savings toward other financial goals.
When you’re budgeting on a fluctuating income, having the emergency fund can help you feel more at ease knowing that you’ll be able to pay your necessary bills if the unexpected happens or when you’re stuck in a low-income period for longer than anticipated.
A budget can make living with a variable income easier
It can be challenging to budget on an irregular income, especially when you’re first starting. You might have to cut back on expenses for several months to start building up your savings and try multiple budgeting methods before finding the one that works best for you.
“Budgeting requires a mindset change regardless of which type of budget you try,” Johnson explains.
“The best way to weather low-income periods is to prepare with an adequate emergency fund.”
However, once in place, a budget on an irregular income can also help free you from worrying about the boom-and-bust cycle that many variable-income workers deal with throughout the year.
The goal is to get to the point where you can budget with a variable income and don’t have to worry about when you’ll get paid next because you set your budget based on your averages, planned ahead during the high times and have savings ready for your low times.
The post 4 Tricks for Budgeting on a Fluctuating Income appeared first on Discover Bank – Banking Topics Blog.
Love it or hate it, many Americans are spending more time at home. The coronavirus pandemic not only accelerated the work-from-home trend to warp speed, but it also shuttered schools and summer camps, scratched travel plans and canceled brunch and dinner reservations across the country.
Jen Dawson, a certified financial planner and managing director in Chicago, found that the uncertainty and stay-at-home lifestyle created by the pandemic prompted her clients to look at their financial situations in a new light.
âI think it just gives opportunities for people and families to reflect,â Dawson says. ââWhat do we want out of life? What do we want from our money?â Those conversations are really valuable.â
As Dawsonâs clients reflect on their goals, they (and many others) are also wondering, âHow should I adjust my household budget if weâre spending more time at home?â
How to optimize your budget for the stay-at-home economy in 4 steps
Ellen Rogin, a former wealth advisor and now a speaker, author and entrepreneur, notes that people across the country were affected by the pandemic in very different ways. While many workers were able to keep their jobs as they transitioned to working from home, many were not.
âThere are people who have lost their jobs and are being forced to make difficult decisions,â Rogin says. âAnd there are people who are still employed and earning the same income they did before, who have more options as they decide how they’re spending their money now.â
Even if youâve been spared serious financial challenges, you should still consider updating or creating a household budget or spending plan. This will allow you to determine how to save more money in the stay-at-home economy.
Rogin and Dawson encourage you to use this opportunity to ensure youâre at least staying on track to meet your savings goalsâand at best, shortening your savings timelines. Itâs also a chance to make sure that your spending habits, which have likely changed as youâve spent more time at home, are maximizing your happiness.
Below, we break down insights from Rogin and Dawson into four actionable steps you can take to save money in quarantine while living the best life possible. It all starts with taking an objective look at how your spending habits changed as you transitioned to a more domestic lifestyle.
Read on to see how to save more money in the stay-at-home economy by creating a new household budget:
1. Compare your spending trends before and during quarantine
As you set about creating a household budget for an at-home lifestyle and determining how to save more money in the stay-at-home economy, start by reviewing your spending.
âMost people donât really know how much money theyâre spending, whether times are good or bad. But it can really make you feel calmer to know what it takes to run your lifestyle.â
Dawson encourages you to refer to your debit and credit card statements to analyze the differences between your spending before staying home became the norm, and after. âYou can compare it and contrast and have observations and discussions around what changed,â she says. âWhat do you like that you want to keep going, and what do you not like about it?”
All you need, Dawson says, is a spreadsheet to total up your major expenses, such as housing, utilities, transportation, food and dining, travel, shopping and entertainment. Then, subtract the sum of those costs from the money you earned (aka income) over the same timeframe.
Do this exercise for three months of spending before quarantine and then again for three months of spending during quarantine. Youâll be able to compare the data to see whether you have more or less disposable income as a member of the stay-at-home economy.
Rogin notes that it can be a little scary to examine your finances like this, but thereâs no reason to feel anxious.
âMost people donât really know how much money theyâre spending, whether times are good or bad,â she says. âBut it can really make you feel calmer to know what it takes to run your lifestyle.â
If you see that your disposable income decreased while in quarantine (or that you no longer have disposable income at all), then youâll need to find ways to cut back on spending if you want to keep your savings goals on track. If your extra cash increased and youâre actually saving more money in quarantine, then you can start to consider how you might hit some or all of your savings goals more quickly.
Either way, you still have work to do as you consider how to save more money in the stay-at-home economy. Rather than focusing on external factors that are out of your control, Rogin and Dawson recommend that, as a next step, you ask yourself what matters most to you.
2. Ask yourself how your spending habits impact your happiness
Rogin considers the distanced, more remote way of life as a chance to reflect on whatâs really important in order to create your household budget. One example she points to is how many people have been cooking at home far more often than they once did.
âMaybe youâre spending more on groceries, but thatâs less than you were spending on eating outâand you enjoy it,â she says. âYouâre spending more time with your family. Youâre eating more healthily. So it gives you the opportunity to really assess your budget in a different way.â
Another example is travel. Rogin says that some people have told her that they really miss it, but others have been surprised to find how happy they are to pump the brakes on their jet-setting ways. In addition to saving money in quarantine from reimbursed travel and no more expensive trips, itâs allowed them to slow down and enjoy their time at home with family.
For her part, Rogin found that she wore the same two pairs of shoes during quarantine because theyâre comfortable, and no one can see them when sheâs video conferencing during work. As a result, Rogin cut this expense from her stay-at-home budget.
Whether youâre facing a cash shortage or surplus from more time spent at home, Rogin says that extending this line of thinking into a âvalues-based spending planâ for the stay-at-home economy will allow you to direct your money to what matters most to you, while diverting funds away from what doesnât.
Once you add up the expenses that are no longer necessary in your stay-at-home budget, itâs time to put that money to work.
Tip: When looking at quarantine spending, donât get too granular
Dawson underscores that evaluating spending patterns can be an emotional exercise. If youâre reviewing your finances with a family member, partner or spouse, try to resist the urge to nitpick every purchase. The trends should be easy enough to spot from a birdâs-eye view.
3. Put your stay-at-home savings toward your financial goals
Dawson and Rogin recommend having a plan when youâre trying to figure out how to save more money in the stay-at-home economy. That plan should include what youâre saving for, as well as where youâll keep the funds as they add up.
Rogin recommends framing your financial goals from a positive angle. For example, when you create a household budget, instead of focusing on cutting spending, you can set a goal for how much extra money you want to save.
If you have children or live with a partner or spouse, Dawson notes that this goal-oriented approach can help get them involved. The objective might be to start an emergency fund to ride out unexpected headwinds. Or, the focus could be on saving up for a big vacation to look forward to when travel restrictions ease.
When deciding where to keep your savings, a standard checking account wonât allow your money to grow like a high-yield online savings account will. Rather than pooling the money youâve saved in quarantine into one account, Dawson suggests opening multiple savings accounts, one for each of your savings goals.
âBe really clear about what each savings account is for,â she says. âThen youâre more likely to fund it.â
Of course, luxury savings goals like a vacation should not take priority over your long-term savings goals, such as retirement or college funds.
4. When saving money in quarantine, remember to support those in need if you can
If you are saving money in quarantine, Rogin suggests considering all the benefits of earmarking extra cash for philanthropic causes. It could go directly to the local small businesses you love that are hurting for revenue. Or it could go to any number of nonprofit organizations that are doing good in the world.
âSo many people are in need now,â Rogin says. âThere are so many beautiful ways that can help you feel like youâre making a difference for people by reallocating some of that money towards causes and people that you want to support.â
How will you start saving money in quarantine?
The stay-at home lifestyle may not have been in your plans, but you have the opportunity to gain control of your finances inside your home by creating a household budget that works for you in this new reality.
When you analyze, assess and optimize your spending and consider how to save money in quarantine, youâll be in as strong a financial position as possible when life gets back to normal.
If youâve been fortunate enough to save money in quarantine, consider starting or adding to your emergency fund. Not sure where to store your savings? Check out the four best places to keep your emergency fund.
Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.
The post How to Save More Money in the Stay-at-Home Economy by Focusing on What Matters Most appeared first on Discover Bank – Banking Topics Blog.
You probably donât need us to tell you that the earlier you start saving for retirement, the better. But letâs face it: For a lot of people, the problem isnât that they donât understand how compounding works. They start saving late because their paychecks will only stretch so far.
Whether youâre in your 20s or your golden years are fast-approaching, saving and investing whatever you can will help make your retirement more comfortable. Weâll discuss how to save for retirement during each decade, along with the hurdles you may face at different stages of life.
How Much Should You Save for Retirement?
A good rule of thumb is to save between 10% and 20% of pre-tax income for retirement. But the truth is, the actual amount you need to save for retirement depends on a lot of factors, including:
Your age. If you get a late start, youâll need to save more.
Whether your employer matches contributions. The 10% to 20% guideline includes your employerâs match. So if your employer matches your contributions dollar-for-dollar, you may be able to get away with less.
How aggressively you invest. Taking more risk usually leads to larger returns, but your losses will be steeper if the stock market tanks.
How long you plan to spend in retirement. Itâs impossible to predict how long youâll be able to work or how long youâll live. But if you plan to retire early or people in your family often live into their mid-90s, youâll want to save more.
How to Save for Retirement at Every Age
Now that youâre ready to start saving, hereâs a decade-by-decade breakdown of savings strategies and how to make your retirement a priority.
Saving for Retirement in Your 20s
A dollar invested in your 20s is worth more than a dollar invested in your 30s or 40s. The problem: When youâre living on an entry-level salary, you just donât have that many dollars to invest, particularly if you have student loan debt.
Prioritize Your 401(k) Match
If your company offers a 401(k) plan, a 403(b) plan or any retirement account with matching contributions, contribute enough to get the full match â unless of course you wouldnât be able to pay bills as a result. The stock market delivers annual returns of about 8% on average. But if your employer gives you a 50% match, youâre getting a 50% return on your contribution before your money is even invested. Thatâs free money no investor would ever pass up.
Pay off High-Interest Debt
After getting that employer match, focus on tackling any high-interest debt. Those 8% average annual stock market returns pale in comparison to the average 16% interest rate for people who have credit card debt. In a typical year, youâd expect a $100 investment could earn you $8. Put that $100 toward your balance? Youâre guaranteed to save $16.
Take More Risks
Look, weâre not telling you to throw your money into risky investments like bitcoin or the penny stock your cousin wonât shut up about. But when you start investing, youâll probably answer some questions to assess your risk tolerance. Take on as much risk as you can mentally handle, which means youâll invest mostly in stocks with a small percentage in bonds. Donât worry too much about a stock market crash. Missing out on growth is a bigger concern right now.
Build Your Emergency Fund
Building an emergency fund that could cover your expenses for three to six months is a great way to safeguard your retirement savings. That way you wonât need to tap your growing nest egg in a cash crunch. This isnât money you should have invested, though. Keep it in a high-yield savings account, a money market account or a certificate of deposit (CD).
Tame Lifestyle Inflation
We want you to enjoy those much-deserved raises ahead of you â but keep lifestyle inflation in check. Donât spend every dollar each time your paycheck gets higher. Commit to investing a certain percentage of each raise and then use the rest as you please.
Saving for Retirement in Your 30s
If youâre just starting to save in your 30s, the picture isnât too dire. You still have about three decades left until retirement, but itâs essential not to delay any further. Saving may be a challenge now, though, if youâve added kids and homeownership to the mix.
Invest in an IRA
Opening a Roth IRA is a great way to supplement your savings if youâve only been investing in your 401(k) thus far. A Roth IRA is a solid bet because youâll get tax-free money in retirement.
In both 2020 and 2021, you can contribute up to $6,000, or $7,000 if youâre over 50. The deadline to contribute isnât until tax day for any given year, so you can still make 2020 contributions until April 15, 2021. If you earn too much to fund a Roth IRA, or you want the tax break now (even though it means paying taxes in retirement), you can contribute to a traditional IRA.
Your investment options with a 401(k) are limited. But with an IRA, you can invest in whatever stocks, bonds, mutual funds or exchange-traded funds (ETFs) you choose.
Pro Tip
If you or your spouse isnât working but you can afford to save for retirement, consider a spousal IRA. Itâs a regular IRA, but the working spouse funds it for the non-earning spouse.Â
Avoid Mixing Retirement Money With Other Savings
Youâre allowed to take a 401(k) loan for a home purchase. The Roth IRA rules give you the flexibility to use your investment money for a first-time home purchase or college tuition. Youâre also allowed to withdraw your contributions whenever you want. Wait, though. That doesnât mean you should.
The obvious drawback is that youâre taking money out of the market before itâs had time to compound. But thereâs another downside. Itâs hard to figure out if youâre on track for your retirement goals when your Roth IRA is doing double duty as a college savings account or down payment fund.
Start a 529 Plan While Your Kids Are Young
Saving for your own future takes higher priority than saving for your kidsâ college. But if your retirement funds are in shipshape, opening a 529 plan to save for your childrenâs education is a smart move. Not only will you keep the money separate from your nest egg, but by planning for their education early, youâll avoid having to tap your savings for their needs later on.
Keep Investing When the Stock Market Crashes
The stock market has a major meltdown like the March 2020 COVID-19 crash about once a decade. But when a crash happens in your 30s, itâs often the first time you have enough invested to see your net worth take a hit. Donât let panic take over. No cashing out. Commit to dollar-cost averaging and keep investing as usual, even when youâre terrified.
Saving for Retirement in Your 40s
If youâre in your 40s and started saving early, you may have a healthy nest egg by now. But if youâre behind on your retirement goals, now is the time to ramp things up. You still have plenty of time to save, but youâve missed out on those early years of compounding.
Continue Taking Enough Risk
You may feel like you can afford less investment risk in your 40s, but you still realistically have another two decades left until retirement. Your money still has â and needs â plenty of time to grow. Stay invested mostly in stocks, even if itâs more unnerving than ever when you see the stock market tank.
Put Your Retirement Above Your Kidsâ College Fund
You can only afford to pay for your kidsâ college if youâre on track for retirement. Talk to your kids early on about what you can afford, as well their options for avoiding massive student loan debt, including attending a cheaper school, getting financial aid, and working while going to school. Your options for funding your retirement are much more limited.
Keep Your Mortgage
Mortgage rates are historically low â well below 3% as of December 2020. Your potential returns are much higher for investing, so youâre better off putting extra money into your retirement accounts. If you havenât already done so, consider refinancing your mortgage to get the lowest rate.
Invest Even More
Now is the time to invest even more if you can afford to. Keep getting that full employer 401(k) match. Beyond that, try to max out your IRA contributions. If you have extra money to invest on top of that, consider allocating more to your 401(k). Or you could invest in a taxable brokerage account if you want more flexibility on how to invest.
Meet With a Financial Adviser
Youâre about halfway through your working years when youâre in your 40s. Now is a good time to meet with a financial adviser. If you canât afford one, a financial counselor is typically less expensive. Theyâll focus on fundamentals like budgeting and paying off debt, rather than giving investment advice.
Saving for Retirement in Your 50s
By your 50s, those retirement years that once seemed like they were an eternity away are getting closer. Maybe thatâs an exciting prospect â or perhaps it fills you with dread. Whether you want to keep working forever or retirement canât come soon enough, now is the perfect time to start setting goals for when you want to retire and what you want your retirement to look like.
Review Your Asset Allocation
In your 50s, you may want to start shifting more into safe assets, like bonds or CDs. Your money has less time to recover from a stock market crash. Be careful, though. You still want to be invested in stocks so you can earn returns that will keep your money growing. With interest rates likely to stay low through 2023, bonds and CDs probably wonât earn enough to keep pace with inflation.
Take Advantage of Catch-up Contributions
If youâre behind on retirement savings, give your funds a boost using catch-up contributions. In 2020 and 2021, you can contribute:
$1,000 extra to a Roth or traditional IRA (or split the money between the two) once youâre 50
$6,500 extra to your 401(k) once youâre 50
$1,000 extra to a health savings account (HSA) once youâre 55.
Work More if Youâre Behind
Your window for catching up on retirement savings is getting smaller now. So if youâre behind, consider your options for earning extra money to put into your nest egg. You could take on a side hustle, take on freelance work or work overtime if thatâs a possibility to bring in extra cash. Even if you intend to work for another decade or two, many people are forced to retire earlier than they planned. Itâs essential that you earn as much as possible while you can.
Pay off Your Remaining Debt
Since your 50s is often when you start shifting away from high-growth mode and into safer investments, now is a good time to use extra money to pay off lower-interest debt, including your mortgage. Retirement will be much more relaxing if you can enjoy it debt-free.
FROM THE RETIREMENT FORUM
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Saving for Retirement in Your 60s
Hooray, youâve made it! Hopefully your retirement goals are looking attainable by now after working for decades to get here. But you still have some big decisions to make. Someone in their 60s in 2021 could easily spend another two to three decades in retirement. Your challenge now is to make that hard-earned money last as long as possible.
Make a Retirement Budget
Start planning your retirement budget at least a couple years before you actually retire. Financial planners generally recommend replacing about 70% to 80% of your pre-retirement income. Common income sources for seniors include:
Social Security benefits. Monthly benefits replace about 40% of pre-retirement income for the average senior.
Retirement account withdrawals. Money you take out from your retirement accounts, like your 401(k) and IRA.
Defined-benefit pensions. These are increasingly rare in the private sector, but still somewhat common for those retiring from a career in public service.
Annuities. Though controversial in the personal finance world, an annuity could make sense if youâre worried about outliving your savings.
Other investment income. Some seniors supplement their retirement and Social Security income with earnings from real estate investments or dividend stocks, for example.
Part-time work. A part-time job can help you delay dipping into your retirement savings account, giving your money more time to grow.
You can plan on some expenses going away. You wonât be paying payroll taxes or making retirement contributions, for example, and maybe your mortgage will be paid off. But you generally donât want to plan for any budget cuts that are too drastic.
Even though some of your expenses will decrease, health care costs eat up a large chunk of senior income, even once youâre eligible for Medicare coverage â and they usually increase much faster than inflation.
Develop Your Social Security Strategy
You can take your Social Security benefits as early as 62 or as late as age 70. But the earlier you take benefits, the lower your monthly benefits will be. If your retirement funds are lacking, delaying as long as you can is usually the best solution. Taking your benefit at 70 vs. 62 will result in monthly checks that are about 76% higher. However, if you have significant health problems, taking benefits earlier may pay off.
Pro Tip
Use Social Securityâs Retirement Estimator to estimate what your monthly benefit will be.
Figure Out How Much You Can Afford to Withdraw
Once youâve made your retirement budget and estimated how much Social Security youâll receive, you can estimate how much youâll be able to safely withdraw from your retirement accounts. A common retirement planning guideline is the 4% rule: You withdraw no more than 4% of your retirement savings in the first year, then adjust the amount for inflation.
If you have a Roth IRA, you can let that money grow as long as you want and then enjoy it tax-free. But youâll have to take required minimum distributions, or RMDs, beginning at age 72 if you have a 401(k) or a traditional IRA. These are mandatory distributions based on your life expectancy. The penalties for not taking them are stiff: Youâll owe the IRS 50% of the amount you were supposed to withdraw.
Keep Investing While Youâre Working
Avoid taking money out of your retirement accounts while youâre still working. Once youâre over age 59 ½, you wonât pay an early withdrawal penalty, but you want to avoid touching your retirement funds for as long as possible.
Instead, continue to invest in your retirement plans as long as youâre still earning money. But do so cautiously. Keep money out of the stock market if youâll need it in the next five years or so, since your money doesnât have much time to recover from a stock market crash in your 60s.
A Final Thought: Make Your Retirement About You
Whether youâre still working or youâre already enjoying your golden years, this part is essential: You need to prioritize you. That means your retirement savings goals need to come before bailing out family members, or paying for college for your children and grandchildren. After all, no one else is going to come to the rescue if you get to retirement with no savings.
If youâre like most people, youâll work for decades to get to retirement. The earlier you start planning for it, the more stress-free it will be.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to DearPenny@thepennyhoarder.com.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
Prepping for a new baby’s arrival might kick your nesting instinct into high gear, as you make sure everything is just right before the big day. One thing to add to your new-baby to-do list is figuring out how to financially prepare for maternity leave if you’ll be taking time away from work.
Lauren Mochizuki, a nurse and budgeting expert at personal finance blog Casa Mochi, took time off from work for the births of both her children. Because she had only partial paid leave each time, she says a budget was critical in making sure money wasn’t a source of stress.
“The purpose of budgeting for maternity leave is to have enough money saved to replace your income for your desired leave time,” Mochizuki says.
But the question “How do I budget for maternity leave?” is a big one. One thing’s for sureâthe answer will be different for everyone, since not everyone’s leave or financial situation is the same. What matters most is taking action early to get a grip on your finances while there’s still time to plan.
Before you get caught up in the new-baby glow, here’s what you need to do to financially prepare for maternity leave:
1. Estimate how long you’ll need your maternity budget to last
To financially prepare for maternity leave, you need to know how long you plan to be away from work without pay.
The Family and Medical Leave Act (FMLA) allows eligible employees up to 12 weeks of job-protected, unpaid leave from work per year for certain family and medical reasons, including for the birth of a child. Some employers may also offer a period of paid leave for new parents.
When estimating how long you’ll need your maternity budget to last, Mochizuki says to consider how much unpaid leave you plan to take based on your personal needs and budget. For example, you could find you’re not able to take the full period offered by FMLA after reviewing your expenses (more on that below) and how much you have in savings.
Even if your employer does offer paid maternity leave, you may decide to extend your time at home by supplementing your paid leave with unpaid time off, Mochizuki says.
Keep in mind that despite all of your budgeting for maternity leave, your health and the health of your baby may also influence how much unpaid time off you take and how long your maternity leave budget needs to stretch.
As you’re financially preparing for maternity leave, make sure your spouse or partner is also considering what benefits may be available to them through their employer. Together you should know what benefits are available for maternity or paternity leave, either paid or unpaid, and how to apply for them as you jointly navigate the budgeting for maternity leave process. You can then decide how to coordinate the amount of time each of you should take and when that leave should begin.
Contact your HR department to learn about your company’s maternity leave policy, how to apply for leave and whether there are any conditions you need to meet to qualify for leave. Ask if you’re able to leverage sick days, vacation days or short-term disability for paid maternity leave.
2. Babyproof your budget
When budgeting for maternity leave, make sure you review your current monthly budget to assess how budgeting for a new baby fits in.
In Mochizuki’s case, she and her husband added a category to save for maternity leave within their existing budget for household expenses (e.g., mortgage, utilities, groceries).
“We treated it as another emergency fund, meaning we had a goal of how much we wanted to save and we kept working and saving until we reached that goal,” Mochizuki says.
As you financially prepare for maternity leave, consider the following questions:
What new expenses need to be added to your budget? Diapers, for instance, can cost a family around $900 per year, according to the National Diaper Bank Network. You may also be spending money on formula, bottles, wipes, clothes and toys for your new one, all of which can increase your monthly budget. And don’t forget the cost of any new products or items that mom will need along the way. Running the numbers with a first-year baby costs calculator can help you accurately estimate your new expenses and help with financial planning for new parents.
Will any of your current spending be reduced while you’re on leave? As you think about the new expenses you’ll need to add when budgeting for maternity leave, don’t forget the ones you may be able to nix. For example, your budget may dip when it comes to commuting costs if you’re not driving or using public transit to get to work every day. If you have room in your budget for meals out or entertainment expenses, those may naturally be cut if you’re eating at home more often and taking it easy with the little one.
3. Tighten up the budgetâthen tighten some more
Once you’ve evaluated your budget, consider whether you can streamline it further as you financially prepare for maternity leave. This can help ease any loss of income associated with taking time off or counter the new expenses you’ve added to your maternity leave budget.
Becky Beach, founder of Mom Beach, a personal finance blog for moms, says that to make her maternity leave budget workâwhich included three months of unpaid leaveâshe and her husband got serious about reducing unnecessary expenses.
Cut existing costs
As you budget for maternity leave, go through your existing budget by each spending category.
“The best tip is to cut costs on things you don’t need, like subscriptions, movie streaming services, new clothes, eating out, date nights, etc.,” Beach says. “That money should be earmarked for your new baby’s food, clothes and diapers.”
Cutting out those discretionary “wants” is an obvious choice, but look more closely at other ways you could save. For example, could you negotiate a better deal on your car insurance or homeowner’s insurance? Can you better plan and prep for meals to save money on food costs? How about reducing your internet service package or refinancing your debt?
Find ways to earn
Something else to consider as you budget for maternity leave is how you could add income back into your budget if all or part of your leave is unpaid and you want to try and close some of the income gap. For example, before your maternity leave starts, you could turn selling unwanted household items into a side hustle you can do while working full time to bring in some extra cash and declutter before baby arrives.
Reduce new costs
As you save for maternity leave, also think about how you could reduce expenses associated with welcoming a new baby. Rather than buying brand-new furniture or clothing, for example, you could buy those things gently used from consignment shops, friends or relatives and online marketplaces. If someone is planning to throw a baby shower on your behalf, you could create a specific wish list of items you’d prefer to receive as gifts in order to offset costs.
4. Set a savings goal and give every dollar a purpose
When Beach and her husband saved for maternity leave, they set out to save $20,000 prior to their baby’s birth. They cut their spending, used coupons and lived frugally to make it happen.
In Beach’s case, they chose $20,000 since that’s what she would have earned over her three-month maternity leave, had she been working. You might use a similar guideline to choose a savings goal. If you’re receiving paid leave, you may strive to save enough to cover your new expenses.
As you make your plan to save for maternity leave, make sure to account for your loss of income and the new expenses in your maternity leave budget. Don’t forget to factor in any savings you already have set aside and plan to use to help you financially prepare for maternity leave.
Once you’ve come up with your savings target, consider dividing your maternity savings into different buckets, or categories, to help ensure the funds last as long as you need them to. This could also make it harder to overspend in any one category.
For instance, when saving for maternity leave, you may leverage buckets like:
“The purpose of budgeting for maternity leave is to have enough money saved to replace your income for your desired leave time.”
Budgeting for maternity leaveâand beyond
Once maternity leave ends, your budget will evolve again as your income changes and new baby-related expenses are introduced. As you prepare to go back to work, review your budget again and factor in any new costs. For example, in-home childcare or daycare may be something you have to account for, along with ongoing healthcare costs for new-baby checkups.
Then, schedule a regular date going forward to review your budget and expenses as your baby grows. You can do this once at the beginning or end of the month or every payday. Take a look at your income and expenses to see what has increased or decreased and what adjustments, if any, you need to make to keep your budget running smoothly.
Budgeting for maternity leave takes a little time and planning, but it’s well worth the effort. Knowing that your finances are in order lets you relax and enjoy making memoriesâinstead of stressing over money.
The post What You Need to Know About Budgeting for Maternity Leave appeared first on Discover Bank – Banking Topics Blog.
Could logging in to your computer from a deluxe treehouse off the coast of Belize be the future of work? Maybe. For many, the word freelance means flexibility, meaningful tasks and better work-life balance. Who doesn’t want to create their own hours, love what they do and work from wherever they want? Freelancing can provide all of thatâbut that freedom can vanish quickly if you don’t handle your expenses correctly.
“A lot of the time, you don’t know about these expenses until you are in the trenches,” says freelance copywriter Alyssa Goulet, “and that can wreak havoc on your financial situation.”
Nearly 57 million people in the U.S. freelanced, or were self-employed, in 2019, according to Upwork, a global freelancing platform. Freelancing is also increasingly becoming a long-term career choice, with the percentage of freelancers who freelance full-time increasing from 17 percent in 2014 to 28 percent in 2019, according to Upwork. But for all its virtues, the cost of being freelance can carry some serious sticker shock.
“There are many hats you have to wear and expenses you have to take on, but for that you’re gaining a lot of opportunity and flexibility in your life.”
Most people who freelance for the first time don’t realize that everythingâfrom taxes to office supplies to setting up retirement plansâis on them. So, before you can sustain yourself through self-employment, you need to answer a very important question: “Are you financially ready to freelance?”
What you’ll find is that budgeting as a freelancer can be entirely manageable if you plan for the following key costs. Let’s start with one of the most perplexingâtaxes:
1. Taxes: New rules when working on your own
First things first: Don’t try to be a hero. When determining how to budget as a freelancer and how to manage your taxes as a freelancer, you’ll want to consult with a financial adviser or tax professional for guidance. A tax expert can help you figure out what makes sense for your personal and business situation.
For instance, just like a regular employee, you will owe federal income taxes, as well as Social Security and Medicare taxes. When you’re employed at a regular job, you and your employer each pay half of these taxes from your income, according to the IRS. But when you’re self-employed (earning more than $400 a year in net income), you’re expected to file and pay these expenses yourself, the IRS says. And if you think you will owe more than $1,000 in taxes for a given year, you may need to file estimated quarterly taxes, the IRS also says.
That can feel like a heavy hit when you’re not used to planning for these costs. “If you’ve been on a salary, you don’t think about taxes really. You think about the take-home pay. With freelance, everything is take-home pay,” says Susan Lee, CFP®, tax preparer and founder of FreelanceTaxation.com.
When you’re starting to budget as a freelancer and determining how often you will need to file, Lee recommends doing a “dummy return,” which is an estimation of your self-employment income and expenses for the year. You can come up with this number by looking at past assignments, industry standards and future projections for your work, which freelancer Goulet finds valuable.
“Since I don’t have a salary or a fixed number of hours worked per month, I determine the tax bracket I’m most likely to fall into by taking my projected monthly income and multiplying it by 12,” Goulet says. “If I experience a big income jump because of a new contract, I redo that calculation.”
After you estimate your income, learning how to budget as a freelancer means working to determine how much to set aside for your tax payments. Lee, for example, recommends saving about 25 percent of your income for paying your income tax and self-employment tax (which funds your Medicare and Social Security). But once you subtract your business expenses from your freelance income, you may not have to pay that entire amount, according to Lee. Deductible expenses can include the mileage you use to get from one appointment to another, office supplies and maintenance and fees for a coworking space, according to Lee. The income left over will be your taxable income.
Pro Tip:
To set aside the taxes you will need to pay, adjust your estimates often and always round up. “Let’s say in one month a freelancer determines she would owe $1,400 in tax. I’d put away $1,500,” Goulet says.
2. Business expenses: Get a handle on two big areas
The truth is, the cost of being freelance varies from person to person. Some freelancers are happy to work from their kitchen tables, while others need a dedicated workspace. Your freelance costs also change as you add new tools to your business arsenal. Here are two categories you’ll always need to account for when budgeting as a freelancer:
Your workspace
Joining a coworking space gets you out of the house and allows you to establish the camaraderie you may miss when you work alone. When you’re calculating the cost of being freelance, note that coworking spaces may charge membership dues ranging from $20 for a day pass to hundreds of dollars a month for a dedicated desk or private office. While coworking spaces are all the rage, you can still rent a traditional office for several hundred dollars a month or more, but this fee usually doesn’t include community aspects or other membership perks.
If you want to avoid office rent or dues as costs of being freelance but don’t want the kitchen table to pull double-duty as your workspace, you might convert another room in your home into an office. But you’ll still need to outfit the space with all of your work essentials. Freelance copywriter and content strategist Amy Hardison retrofitted part of her house into a simple office. “I got a standing desk, a keyboard, one of those adjustable stands for my computer and a squishy mat to stand on so my feet don’t hurt,” Hardison says.
Pro Tip:
Start with the absolute necessities. When Hardison first launched her freelance career, she purchased a laptop for $299. She worked out of a coworking space and used its office supplies before creating her own workspace at home.
Digital tools
There are a range of digital tools, including business and accounting software, that can help with the majority of your business functions. A big benefit is the time they can save you that is better spent marketing to clients or producing great work.
The software can also help you avoid financial lapses as you’re managing the costs of being freelance. Hardison’s freelance business had ramped up to a point where a manual process was costing her money, so using an invoicing software became a no-brainer. “I was sending people attached document invoices for a while and keeping track of them in a spreadsheet,” Hardison says. “And then I lost a few of them and I just thought, ‘Oh, my God, I can’t be losing things. This is my income!’”
Digital business and software tools can help manage scheduling, web hosting, accounting, audio/video conference and other functions. When you’re determining how to budget as a freelancer, note that the costs for these services depend largely on your needs. For instance, several invoicing platforms offer options for as low as $9 per month, though the cost increases the more clients you add to your account. Accounting services also scale up based on the features you want and how many clients you’re tracking, but you can find reputable platforms for as little as $5 a month.
Pro Tip:
When you sign up for a service, start with the “freemium” version, in which the first tier of service is always free, Hardison says. Once you have enough clients to warrant the expense, upgrade to the paid level with the lowest cost. Gradually adding services will keep your expenses proportionate to your income.
3. Health insurance: Harnessing an inevitable cost
Budgeting for healthcare costs can be one of the biggest hurdles to self-employment and successfully learning how to budget as a freelancer. In the first half of the 2020 open enrollment period, the average monthly premium under the Affordable Care Act (ACA) for those who do not receive federal subsidiesâor a reduced premium based on incomeâwas $456 for individuals and $1,134 for families, according to eHealth, a private online marketplace for health insurance.
“Buying insurance is really protecting against that catastrophic event that is not likely to happen. But if it does, it could throw everything else in your plan into a complete tailspin,” says Stephen Gunter, CFP®, at Bridgeworth Financial.
A good place to start when budgeting as a freelancer is knowing what healthcare costs you should budget for. Your premiumâwhich is how much you pay each month to have your insuranceâis a key cost. Note that the plans with the lowest premiums aren’t always the most affordable. For instance, if you choose a high-deductible policy you may pay less in premiums, but if you have a claim, you may pay more at the time you or your covered family member’s health situation arises.
When you are budgeting as a freelancer, the ACA healthcare marketplace is one place to look for a plan. Here are a few other options:
Spouse or domestic partner’s plan: If your spouse or domestic partner has health insurance through his/her employer, you may be able to get coverage under their plan.
COBRA: If you recently left your full-time job for self-employment, you may be able to convert your employer’s group plan into an individual COBRA plan. Note that this type of plan comes with a high expense and coverage limit of 18 months.
Organizations for freelancers: Search online for organizations that promote the interests of independent workers. Depending on your specific situation, you may find options for health insurance plans that fit your needs.
Pro Tip:
Speak with an insurance adviser who can help you figure out which plans are best for your health needs and your budget. An adviser may be willing to do a free consultation, allowing you to gather important information before making a financial commitment.
4. Retirement savings: Learn to “set it and forget it”
Part of learning how to budget as a freelancer is thinking long term, which includes saving for retirement. That may seem daunting when you’re wrangling new business expenses, but Gunter says saving for the future is a big part of budgeting as a freelancer.
“It’s kind of the miracle of compound interest. The sooner we can get it invested, the sooner we can get it saving,” Gunter says.
He suggests going into autopilot and setting aside whatever you would have contributed to an employer’s 401(k) plan. One way to do this might be setting up an automatic transfer to your savings or retirement account. “So, if you would have put in 3 percent [of your income] each month, commit to saving that 3 percent on your own,” Gunter says. The Discover IRA Certificate of Deposit (IRA CD) could be a good fit for helping you enjoy guaranteed returns in retirement by contributing after-tax (Roth IRA CD) or pre-tax (traditional IRA CD) dollars from your income now.
Pro Tip:
Prioritize retirement savings every month, not just when you feel flush. “Saying, ‘I’ll save whatever is left over’ isn’t a savings plan, because whatever is left over at the end of the month is usually zero,” Gunter says.
5. Continually update your rates
One of the best things you can do for yourself in learning how to budget as a freelancer is build your costs into what you charge. “As I’ve discovered more business expenses, I definitely take those into account as I’m determining what my rates are,” Goulet says. She notes that freelancers sometimes feel guilty for building business costs into their rates, especially when they’re worried about the fees they charge to begin with. But working the costs of being freelance into your rates is essential to building a thriving freelance career. You should annually evaluate the rates you charge.
Because your expenses will change over time, it’s wise to do quarterly and yearly check-ins to assess your income and costs and see if there are processes you can automate to save time and money.
“A lot of the time, you don’t know about these expenses until you are in the trenches, and that can wreak havoc on your financial situation.”
Have confidence in your freelance career
Accounting for the various costs of being freelance makes for a more successful and sustainable freelance career. It also helps ensure that those who are self-employed achieve financial stability in their personal lives and their businesses.
“There are many hats you have to wear and expenses you have to take on,” Goulet says. “But for that, you’re gaining a lot of opportunity and flexibility in your life.”
The post Everything You Need to Know About Budgeting As a Freelancer appeared first on Discover Bank – Banking Topics Blog.
