FREQUENTLY ASKED QUESTIONS ON BUDGETING
Budgeting is a good practice in personal finance, but doing so may be tricky - or confusing. Despite its negative connotations, this will clear an individual’s financial picture. This article will reveal some of the most commonly asked questions on budgeting.
Question No. 1: How much money must I allocate for my investments?
Age, available income, and liquidity needs are some of the factors to consider for investments.
Age. An individual’s age not only determines the asset allocation, but also the amount of money to be allocated for future goals such as acquiring a house or retirement. Younger ones have higher asset allocations than older ones.
Available income. This must not come from monthly/annual expenses, and emergency fund. The money should be something that can be saved or spent on toys. The disposable income will set the fun one can have now and plan for later.
Liquidity Needs. It pertains to the speed of converting these assets into cash. The liquidity level is tantamount to the kind of interest rates an individual will receive or how fast a person can access his own money. The amount of personal liquidity depends on the person, and must be decided before investing.
There is no specific amount one must set aside for saving or investing. Although a 5% target is desirable, 10% of the net income is ideal. Again, this money should not come from expenses or the cushion account. And, one must begin investing after putting up their emergency fund.
Question No. 2: How much should I set aside for debts?
There are specific repayment schedules when it comes to certain debts, including car financing. But rolling debt instruments such as credit cards can be repaid based on the person’s paying capacity. It is better to pay the credit cards off first, then begin allocating some money for taxable investment accounts. Most credit cards place 5% to 30% interest annually, which may cloud the average investor’s earning expectations from his investments. Rule of thumb: Do not allocate money to taxable investment accounts if there is a prevailing credit card balances. This is to avoid saving on increasing interest costs.
Certain fixed-period loans allow overpayment, some not. To know if paying it off is a good choice, review the interest rate being placed. If a person has an existing credit card debt, this may be more expensive than an auto loan for instance. Nevertheless, repay the credit card debt first.
In some cases, creditors offer various payment options, either the monthly payment can be increased or adjusted to suit one’s budget. An individual can ensure he won’t incur prepayment penalties for retiring a specific debt prematurely as these might negate any savings he gets on interest costs. A person may also consider getting a consolidation loan to settle all other debts to come up with reasonable monthly payment. As such, he must stop using credit cards or from obtaining new loans until after paying this consolidation loan.
Question No. 3: Is it okay to overpay on my mortgage?
Mortgage is often the cheapest source of debt an individual can have, unless it is a subprime one. First and foremost, settle all of the higher debts before even considering overpaying the loans. Again, for the nth time, any money considered for overpayment should not come from expenses or emergency fund. While it is feasible to earn more on investment than saving in mortgage interest, this would expose the person to the escalated risk of market fluctuations. Many individuals prefer paying huge amounts of money for their biggest source of debt than smaller ones, which is good. In other words, it is perfectly fine to overpay the mortgage if you have an emergency fund.
Question No. 4: How must I maintain and update my budget?
To keep the budget relevant to one’s financial life, review account statements periodically and look at the exact amount of each expense. These figures should be compared to the projected amount in the budget. Make adjustments if necessary. However, a person may add one-time expenses that may be added in the annual budget such as car maintenance. But there are certain instances a person cannot seem to fit everything in their budget, or overshoot their budget. But this is easy to fix. Aside from the emergency fund, set aside a specific amount of money for miscellaneous expenses. Remember, do not be too tight on budgeting by leaving a little room for fun or you won’t be able to stick to your budget.
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