A budget can help you spend less and save more. People who follow a budget tend to spend less because they are more aware of their money habits, and are more likely to save their money for things that matter, instead of spending money on impulse buys. Budgets encourage you to set financial goals, which provide great motivation to make better financial decisions.
Through careful budgeting - making sure that your expenses are less than your income - you may find yourself with surplus money. It is important to consider whether you should invest this extra money or use it to pay down debt. One way to decide is to compare your existing interest costs (how much money are you paying in interest to service a debt) with potential interest earned (what you could be earning through a low-risk investment). In general, if you can come out ahead by paying off the debt, do that first. For example, you may have a credit card balance on which you are paying 18% interest. You could pay this off or put the money in a CD that earns 0.5% interest. In this situation, you would be better off paying off the credit card balance, and then saving up for a future investment. Alternatively, say you secured a 0% loan for your car. It may not make sense to pay off this loan (since you are paying nothing to service it) and instead put the money to work.
If you decide to put your money to work, there are a variety of investments from which to choose. Here are a few types of investments that you may want to consider:
Low-risk investments include certificates of deposit (CDs), money market accounts and certain bonds. Because there is very little risk (if any) involved in these investments, they generally have small potential returns. These may be an ideal choice for the risk-averse investor, or if you are looking for a "safe" place to park your money for a limited amount of time.
Planning to never retire does not count as a retirement plan. Even if you want to keep working and have no intentions of ever giving up your job, you may unexpectedly be forced into retirement. In short, you need to have a plan. The biggest impact you can have on your retirement savings is to start early, because then your money has time to grow. Einstein called compound interest "the greatest mathematical discovery of all time." With good reason. If you start with a little bit of money, it can grow to a substantial amount by retirement because of the power of compounding.
Retirement savings include IRAs (Roth and traditional) and employer sponsored plans such as 401(k). You may be able to make regular monthly contributions to a retirement savings plan, making it easy to grow your nest egg.
Health Savings Account
With healthcare costs rising, there has been a growing interest in health savings accounts (HSAs). An HAS is an account that allows you to save for qualified medical expenses in conjunction with a high-deductible health plan (HDHP). You can contribute up to a specified limit each year, and the contribution is tax deductible and grows tax-fee. The HSA is a separate account, so even if you switch jobs or health insurance plans, the funds in the HSA are yours to keep and use for qualified medical expenses.
Have kids? It's not too early to start saving for college. One method for saving for college is a 529 plan: a tax-advantaged plan that allows families to save for future college expenses. These are typically state-sponsored investment plans, and each state has different requirements and benefits, including tax advantages. Every state has at least one 529 plan, and you do not have to be a resident of the state to invest in its plan. In fact, you could live in Florida, invest in a New York plan and send your child to college in North Carolina.
Willing to take on more risk? There are dozens of ways that you can invest money with the expectation of higher (but certainly not guaranteed) returns. Investments include stocks, mutual funds, exchange-traded funds (ETFs), foreign exchange, futures, options and the list goes on and on.
If you are new to investing, or just not sure what your options are, you may want to invest in a consultation with a qualified financial planner who will be able to offer appropriate suggestions for short-term and long-term investments. You can also fight out about the different tax treatments of various investments, which is an important consideration in any investment strategy.
Budgeting for Investments
If you know at the beginning of the year that you will have some money each month to devote to investments, you can make small investments each month, one large investment at some point during the year, or a combination of both. For example, you may make a single ETF purchase in the beginning of the year, and contribute to your health savings account every month. Or you may decide to wait until you are preparing your taxes to determine how much money to contribute to your IRA. Regardless of your approach, it is important to make decisions - and put them in your budget - so the money doesn't get eaten by some other spending.
RetirementIf you establish these money-saving habits and patiently allow your wealth to build, you will be taking some huge steps forward in making your financial future more secure.
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