One of the greatest threats to our financial futures is debt. When your debt to income ratio leans heavily on the side of debt, it's debilitating and makes day to day living unbearable.
Don't Wait All Year for a Refund
It feels like a lifetime waiting for the next paycheck. You do all the things you're supposed to do with it...pay the bills, restocking the house with food, buying things the kids need and have been waiting on for a while, but you're still cannot pay all the bills this time around. You will need the next paycheck to make up the difference and even then it still won't be enough. Next month it starts all over again, but you can't seem to catch up, much less get ahead. You're running a race as fast as you can, but there's no finish line.
The only time you're able to catch up or even get ahead is at the end of the year when tax season arrives. You look forward to that big tax return and you feel like it's worth it. The problem is that you have to wait an entire year to get that refund and finally get the chance to catch up. You really don't have to wait that long.
Whenever you start a new job, they always have you fill out a few forms like W2 and W4, among others. What is the W4 form? The W4 form determines how much money they withhold from your paycheck. They call this allowances. You tell your employer how much to withhold based on your current circumstances. Depending on how you fill out the form, you can have either too much or too little taxes withheld. If you have too much taxes withheld, you won't get a large paycheck, but you may have a relatively large refund at the end of the year. Alternately, if you have too little withheld, you will have more in your paycheck, and a smaller refund.
My preference is the latter. The government is not a bank, but like a bank they will keep your money and invest it. You don't have your money to spend or invest during the year. The ideal scenario is breaking even. At the end of the year, the government doesn't owe you anything and you don't owe them anything. To make sure you're maximizing your income during the year, use the IRS website's withholding calculator to figure out the ideal number of allowances and submit a new W4 form to your employer.
2. Do your own taxes
There will always be people who will try to take advantage of your ignorance. Companies such as H&R Block will charge you upwards of $200 for each form and sometimes, a percentage or your refund. While it's more convenient and you want to take any changes missing tax break opportunities, you should be able to keep 100% of your refund or at the very least pay a small preparation fee.
I learned to do my taxes while I was in high school and I was working for a car dealership as a cashier. I never pay to do my taxes, except for the online apps which I highly recommend. One salesman would come into the office to make copies of his tax return forms. One evening, he showed me how to fill out the forms and explained the differences between the forms. As a teenager at my first job, I had no problem making sense of the 1040EZ. I did my taxes every year after that and even started doing it for friends.
Today, I no longer use the paper forms, which you can pick up for free at your local library. I have been using Turbo Tax for years. I love the automation of it all. You really need not do anything but confirm and deny changes from the previous years. You don't even need your W2 because they pull in your tax information directly from the IRS website. The fees I paid years ago was very reasonable and have never needed to have them take it out of my refund, which is an option. I pay a nominal fee, wait and the refund is in my bank account in two weeks.
Another option is free! The IRS website has a list of free tax preparation income based offers.
3. Do Reduce your monthly expenses
Do you know your debt to income ratio? Even if you're not in the market for a house or trying to get a loan, it's important that your debt to income ratio is within the manageable range. According to consumerfinance.gov, your debt to income ratio should not exceed 43%. This is the highest percentage your debt to income ratio can be before in order to quality for a home loan, if you're in the market for one.
How do you calculate your debt to income ratio?
Add up all your expenses and divide it by your gross monthly income. Your gross is the amount you have before they subtract taxes and other deductions. For example. If your gross monthly income is $2800 and your total expenses are $1500. Then your debt to income ratio is 54%. This isn't ideal. You only have two options: increase your income or reduce your expenses. The former is normally my choice, but it's possible to break even by of increasing our spending when our income increases. We must learn to reduce our spending first, so that when our income increases we can resist the urge to overspend.
Some ways of reducing your monthly expenses are: cutting cable or the extra phone line; cancelling monthly subscriptions for premium channels and other subscriptions; make larger installment payments such as paying every 3 or 6 months can reduce your monthly payments; taking advantage of automatic withdrawals to further reduce monthly payments.
4. Do Create a Budget
When you hear the word 'Budget', it sounds a little old-fashioned. As old-fashioned as it is, it never went out of style. If you will run your house like a business, a budget is not only a necessity, it's a requirement.
A budget helps me manage my money by allowing me to visualize my priorities, plan for the future and gives me a control over my destiny.
Setting up a budget doesn't require a lot of technical skills but knowing basic math helps. You can start by jotting down your monthly expenses on a piece of paper and keeping a record of your spending the old-fashioned way. If you're technically inclined, you create one in a spreadsheet and let Excel do the calculating for you.
created with Microsoft Excel. If you don't have a licensed copy of Excel installed on your copy. Sign up for a free web version that includes a lite version of the Microsoft Office suite.
5. Don't Buy Cheap Things
Living within your means is not the same thing as being cheap. Being cheap doesn't mean that you're living within your means. While it's true that we assign a value to things based on popularity and need, we instinctively know when something is a bargain and when it's not.
If you're a single mother with limited funds, you cannot afford to be cheap. While the dollar store can be a lifesaver when you're in a pinch, but it shouldn't be your weekly stop when shopping for household items. You may think paying a dollar for body lotion or home décor is a deal, but it's not, when the top ingredient is mineral oil or the decorative item is plastic.
When you're spending your hard-earned dollars, the goal is to buy quality things that are not only good for you, but will last.
I would characterize cheap things as those items which are mass produced. The items didn't require a lot of human labor, only machines and the materials cheap and easy to produce. I stopped going to the dollar store to buy school supplies for my kids and opted to buy at Target. I buy things that are more personal to their tastes and I get a better shopping experience. I still use the dollar store when they need stuff for school projects. I can pick up card boards, glue, scissors and other stuff that I know they will need to for a one-time project, and not need to use repeatedly.
6. Don't Sign up for a House Phone
People still use house phones? If so, why? When I bought my second home 12 years ago, I thought about connecting a house phone, then changed my mind. My dad and I argued every day about this in the beginning. He still has a house phone and so does my aunt, but they both have cell phones. Is it just the force of habit or do they enjoy paying that unnecessary bills? What they're paying for is unsolicited advertising. I hear them complain about telemarketers calling them non-stop and in spite of blocking numbers; the calls are relentless.
I wondered at first if I could really get along without it, but then I realized that I didn't need it at all. The same thing goes for cable. I could never imagine paying north of $100 for cable each month even with bundled services.
7. Don't do payday loans
Many years ago, I worked in a call center and received a call from someone asking to speak with one of my co-workers. I figured it must relate to work and they're following up on a previous conversation. That wasn't the case. They were trying to track down my co-worker to recoup money for a payday loan. I could hear the cracking in my co-worker's voice as they tried to explain their lag in making timely payments.
Payday loans fall in the category of predatory lending. It's easy to get the loan as long as you have a job that pays you consistently, but the interest rates are exorbitant ranging between 200-250% depending on the terms. It's close to impossible to pay this back. I can't think of a single emergency that would necessitate this loan, unless you had no intention of paying it back. A family member or a good friend (proceed with caution) is a safer bet, and they probably won't charge you interest.
These types of loans are not meant to be helpful. Their purpose is to profit off of your desperation and lack of ability to plan or take decisive action in your finances.
8. Don't bother with credit cards
Credit cards are not meant for everyone, just like a buying a house, a new car and college. Unless you're running a business, you don't need a credit card.
Why do we need credit in the first place? We need it because the things we want or need to purchase is out of range. Since we don't have all the money now, we borrow it intending to pay it off later. Buy it now, worry about it later. The problem with this method is that there is no guarantee you'll be able to pay for it later. Life happens. When you're certain that nothing will go wrong, something goes wrong and you need emergency funds. It's costing you more to pay for it later than to pay the full cash amount today. Why would you want to pay more?
Credit cards do more harm than good because they set you up to fail. Accepting free money doesn't increase your income, it increases your debt. If you didn't have the money to pay for the item in the first place, then how are you expected to pay it back?
Removing credit cards from your life forces you to use the money you already have to pay for the items up front. It enables you to prioritize you spending and delay gratification. You have no choice but to think about whether you really need that item or can live without it for a little while.
9. Don't eat out regularly
Eating out is a luxury that we too often regard as a necessity. It's understandable that we're often stretched so thin, we're forced to take shortcuts. We just want to make it through the day. The problem is that each day is a replica of the day before and when we continue on this trend; it creates more problems.
One reason eating out regularly is bad is because it's not good for your health. Foods prepared outside are the home are usually not healthy, but made for taste. You may end up getting more than you bargained for and the cost is your health.
Another reason eating out regularly is bad for you is because it's expensive. You're paying for the convenience of not having to cook yourself. The cost of family meals at a fast-food joint these days can be up to $30-$40 and that's just for one day! Can you imagine spending this amount of money several times a week?
Cooking your own food guarantees that you know exactly what's going in the pot which minimizes health risks. You're able to buy more, cook more, and save some for another day. Who doesn't like leftovers? Finally, you can save more of your money and have more adventures with your children that they will remember for a lifetime.
10. Do Pay Yourself First
You are number one. It never occurred to me that I should count me as a bill payment. When allocating your paycheck, be number one on the list. This is the first step in building your savings, emergency or investment fund. You're probably already doing this with the help of your employer. When you signed up for 401K, the payroll takes this out before they deduct taxes. You don't even realize that it's missing and you're able to make due on what's left over.
Living paycheck to paycheck is the antithesis of security. Treating yourself to more stuff immediately after receiving your paycheck is not the same as paying yourself, it's the same as giving your money away.
The benefits of paying yourself first are: allowing you to build an emergency fund; save towards investing your future and systematically build security.