During inflationary periods, it is harder to balance your income with the rising cost of housing, food, fuel, health care and insurance. One of the biggest tools to fight raising costs is creating a budget and measuring it throughout the year. Here are some suggestions to help create a budget that actually works.
Keep it simple. It’s not necessary to have 50 different expense categories to classify your transactions. Having a simple budget makes it more likely that you stick with it over the long term. So take a look at your bank account and identify the big things. Revenue is pretty straight forward. Expenses are more difficult, so identify the main categories and get a monthly read on them.
Create annually, but manage monthly. See the full year budget as a destination, and your monthly financials as a journey to that destination. That way if you have a bump in the road, you will see other pathways to get to where you want to be at the end of the year. When you are done here, you should have a monthly budget, with full year goals.
Remember to budget for savings. If everything is working well, you have enough money left over at the end of the month to build your net worth. So consider adding a percent of your income in your budget for saving and investing. This will help you build your net worth over time and help fund for emergencies.
Account for taxes. Paying your tax bill may be one of your biggest expenses every year. Schedule several tax planning sessions throughout the year to figure out how much you should be saving every month to pay your federal, state and local tax bills. Then put this dollar amount in your monthly budget.
Remember to have fun. Having a budget doesn’t mean you can’t spend money. It simply means that you’re intentional about it by planning your spending before it happens and ensure it is not out of hand.
Financial experts are bracing for more interest rate hikes by the Federal Reserve over the remainder of 2023. Any interest rate revision – either increasing or decreasing – can cause a ripple effect throughout the economy. Accordingly, the Federal Reserve’s actions will probably exert at least a moderate influence over financial choices you may make at home and in your business in 2023.
Here are several ways that you could be affected by interest rates that are continuing to trend upward.
Savings and debt
As a consumer, you stand to gain from rising interest rates because you’ll likely earn a better return on your deposits. Over the last ten years, placing your money in a certificate of deposit or passbook savings account has been hardly more profitable than stuffing it under a mattress. On the other hand, the cost of borrowing money will likely increase. As a result, mortgages, car loans, and credit cards will demand higher interest rates. That’s not a big deal if you’re already locked into low-interest fixed-rate loans. But if you have a variable rate loan or carry balances on your credit cards, you may find your monthly payments starting to increase.
Investments
On the investment front, market volatility may continue because rate increases are not completely predictable. Market sectors will likely exhibit varied responses to changes in interest rates. Those sectors that are less dependent on discretionary income may be less affected – after all, you need to buy gas, clothes, and groceries regardless of changes in interest rates.
As you adjust your financial plan, you might only need to make minor changes. Staying the course with a well-diversified retirement portfolio is still a prudent strategy. However, you may want to review your investment allocations.
Your Business
Rising interest rates can also affect your business. If your company’s balance sheet has variable-rate debt, rising interest rates can affect your bottom line and possibly your plans for growth. As the cost of borrowing increases, taking out loans for new equipment or financing expansion with credit may become less desirable.
Please call if you have questions about deciding on the most beneficial response to potential future changes in interest rates.
During tax season, there are a number of areas that generate questions. Here are five of the most common and their answers. But like most things, there can be exceptions, so if in doubt always ask for help.
Are my miles earned on my credit card taxable? Taxation of any extras you earn with a credit card – including miles, discounts, even cash back – are not taxable if you had to pay to get them. Other rewards that you receive, for example a reward for signing up for a card or for referring a new cardholder, are considered taxable income per the IRS.
Does my employer contribution count towards the 401(k) limit? Your employer’s matching contributions do not count toward your maximum contribution limit, which for this year is $22,500. If you’re 50 or older, you can sock away an additional $7,500 (for a total of $30,000) this year.
What happens to loans from my retirement account if I change jobs? When you switch jobs, you must pay back any loans borrowed from your employer-sponsored retirement account within a short amount of time. If the loan isn’t paid back, the outstanding balance is considered a distribution that is subject to income taxes and an early withdrawal penalty.
Do I really need to report gifts given to people? Yes, but only if you give more than $17,000 ($34,000 if married) in 2023 to any one person. It must be reported to the IRS on a gift tax return. That’s because the IRS keeps track of gifts you’re allowed to make over the course of your lifetime, which in 2023 is $12,920,000 ($25,840,000 if married). Only after reaching this lifetime dollar amount will you need to actually make a gift tax payment.
Do I have to report a loss? You may think the IRS isn’t interested in losses you incur, such as when you sell a stock at a loss or if your business loses money. The reality is that you should always report losses on your tax return because you can use them to offset income under certain conditions. In addition, most losses can be carried forward to future years to offset income.
Have your own question? Reach out. The answer could surprise you.
Summertime is often the best time of the year to spend time with family and plan something fun. With the kids out of school, plenty of vacation time accrued at work and a fully funded travel budget, you may even be able to book a getaway somewhere tropical, historic or particularly appealing to your family’s interests and tastes.
But there are summer spending traps to be aware of — both on vacation and at home. If you want to get through the summer season without breaking the bank, watch out for these sneaky, yet prevalent expenses that can spiral easily when everyone is home together.
Managing summer-time grocery bills. The average consumer spends an annual sum of $5,259 on food at home and $3,030 on dining out at last count, according to the Bureau of Labor Statistics, but those numbers can easily surge when kids don’t have school lunch and can snack the day away at home. To manage the increase in your grocery bill, create a meal plan that covers most lunches and dinners during summer months. Use the plan to shop sales at your local grocery store and do your best to avoid eating out due to convenience — even on those days when you’re running kids between different activities.
Outrageous utilities. Having everyone at home, or at least home more often, can also cause summer utility bills to climb to new heights. This is especially true if you live in areas of the country where it’s especially hot, and skipping air conditioning is out of the question. To keep costs down, consider investing in a programmable thermostat that automatically adjusts temperatures down when everyone is away from home and overnight.
Creeping costs for airfare. Bureau of Labor Statistics data shows the cost of domestic airfare increased 14.1% from 2021 to 2022. To fight these prices or avoid them completely, consider traveling closer to home (and even driving to your destination). Consider booking airfare with a discount airline or redeeming travel rewards to help defray costs.
Other travel expenses. Also look for additional ways to save on your upcoming summer trip, whether you plan to book a hotel stay, you already booked a cruise or you’re considering an old-fashioned summer road trip with the family. To save some cash, try eating in and avoiding restaurants when possible, shopping around online to find the lowest prices for hotels and resorts, and even using a travel agent to find the best last-minute travel deals.
Hidden costs for activities. Finally, remember that your kids’ sports and activities don’t have to break the budget this summer. Instead of hitting your favorite fast-food restaurants between practices and games, pack a cooler in the car with drinks, sandwiches and snacks. Also map out routes that let you run errands while you’re out and about so you can save both time and gas money.
Summer is often full of surprises, but you shouldn’t let the coming months drain your bank account.
Most financial experts suggest keeping three to six months’ worth of household expenses in savings to help in case of emergency. But with record inflation, that task just got a lot harder to accomplish as virtually every safe place to put your emergency funds will not provide interest rates that keep pace with inflation. But that does not mean you cannot increase the rate of return on these funds.
Here are some ideas to reduce the impact of inflation on your emergency funds.
Actively monitor your savings account rate. An interest rate hike by the Federal Reserve may not instantly change the rate on your current savings account, but it could lead to a higher rate for other accounts offered by your current bank or other banks.
What you need to know: If your bank is slow to raise your savings rate, be willing to monitor and shift funds to a bank that does. Just make sure the funds are still FDIC insured and are kept at a reputable bank.
Take a look at Series I Savings Bonds. Series I Savings bonds are issued and backed by the U.S. government and feature two interest rate components: a fixed rate and an inflation rate. The fixed rate is set when the bond is issued and never changes during the life of the bond. The inflation rate resets semi-annually based on the Consumer Price Index.
What you need to know: You must hold an I bond for at least 12 months before redeeming it. And although you can redeem it after one year, you’ll have to pay a penalty worth the interest of the previous three months if you redeem the bond within five years. And remember, you must be prepared to pay the penalty if you need the funds for an emergency.
Creative use of Roth IRA funds in an emergency. Roth IRAs are funded with after-tax dollars. Because of this, early removal of the initial contribution is tax and penalty free. If you dip into the earnings, however, you will not only be subject to income tax, but also may be subject to a 10% early withdrawal penalty.
What you need to know: Use of a Roth IRA is often a creative way to fund your emergency account while achieving higher returns with conservative investment choices, but it is not for the faint of heart. If you get this one wrong, it could cost you in taxes, penalties and lost fund value in a bear market. Prior to removing funds from any IRA, it makes sense to conduct a tax planning session.
Higher rates are out there, you just need to be aware and willing to actively manage your emergency funds to ensure you are attacking the risk of inflation.
As a busy working parent, you may be on the lookout for activities that are available for your kids this summer. There may be a solution that’s also a tax break: Summer camp!
Using the Child and Dependent Care Credit, you can be reimbursed for part of the cost of enrolling your child in a day camp.
Am I eligible?
You, and your spouse if you are married, must both be working.
Your child must be under age 13, your legal dependent, and live in your residence for more than half the year.
Tip: If your spouse doesn’t work but is either a full-time student, or is disabled and incapable of self-care, you can still qualify for the credit.
How much can I save?
For 2023, you can claim a maximum credit of $1,050 on up to $3,000 in expenses for one child, or $2,100 on up to $6,000 in expenses for two or more children.
What kind of camps?
The only rule is: no overnight camps.
The credit is designed to help working people care for their kids during the work day, so summer camps where kids stay overnight aren’t eligible for this credit.
Other than that, it doesn’t matter what kind of camp: soccer camp, chess camp, summer school or even day care. All of these are eligible expenses for this credit.
Other ways to use this credit
While summer day camp costs are a common way to use this credit, any cost to provide care for your children while you are working may be eligible.
For example, you can use this credit to pay a qualified day care center, a housekeeper or a babysitter to take care of your child while you are working. You can even pay a relative to care for your child and claim the credit for that expense, as long as the relative isn’t your dependent, minor child or spouse.
This is just one of many possible tax breaks related to children and dependents. Please call if you have questions about this credit, or if you’d like to discuss any other tax savings ideas.
