Budgeting for the real world — quick tips and advice
If you have recently graduated from high school or college and are on your way into the workforce, you've got a lot of important decisions to make — including figuring out your health benefits options — to keep you feeling and looking your best. allaboutthebenefits.com gives you the information you need to make better health benefits choices.
Nothing is more stressful than worrying about how to make ends meet. But don't worry — a little budgeting can help you get the most from that hard-earned paycheck. This is not your mother or father nagging you — try these tips and you may be surprised at the amount of cash you can save!
Write it down
Keep track of the money you spend each month, from your cell phone bill to groceries to weekend spending money. This will help you see where you're spending the most money, what expenses are required (rent and gas, for example) and where you can cut back (beer and beauty supplies, as tough as it may be) in order to afford health benefits.
Pay up
Pay your bills in full as they come in. Don't let your credit card balance get out of hand. Only charge what you can pay off in full at the end of the month to avoid interest charges and debt. If you can swing it, buy only what you can pay for in cash.
Spend smart
Consider opening a Flexible Spending Account (FSA) if one is offered by your employer. FSAs allow you to set aside tax-free funds each month to pay for health-care expenses like co-payments at the doctor's office and aspirin at the drug store. The benefit? Since you don't have to worry about taxes, you make the most of your dollar and have more to put toward health-related costs. Click on A Package Deal in the Health Benefits Essentials to learn more about FSAs.
Get to know Uncle Sam
Determining your income tax withholding is often a particularly confusing decision especially if you've never had a full-time job. If you've never had to worry about taxes before, chances are you'll need to become familiar with the system now. The form you'll be asked to fill out when you start a job is called a W-4. Here's a quick break down of your W-4 options:
- You have a choice to claim between zero and four.
- If you're single, you can claim yourself as a dependent, so you could choose either 0 or 1. By choosing 1, less money will be withheld from your paycheck each month but you might owe more money when it comes tax time in April.
- If you claim 0, more money is withheld from your paycheck but you might not owe as much in April or you may get a refund.
- After choosing the number of dependents, you can also adjust your withholdings.
Save for now and later
Start a savings account, even if you can only put in $10 each month. Every little bit helps, and you'll be surprised by how quickly it adds up. And try not to touch it - even if that pair of sunglasses is calling your name. Rather than eating lunch out every day at the corner sandwich shop, bring your own lunch from home. You get the meal you want and save cash at the same time! Instead of buying that $3 latte every morning, try making your coffee at home. Or order a tall rather than a grande at your local coffee shop. Believe it or not, these little tricks add up to save you hundreds of dollars each year.
Retirement may be the farthest thing from your mind right now, but if you start saving while you're young, you could have a million - or two - in the bank when the day comes. A 401(k) is a savings plan offered by many employers that allows you to automatically invest part of your paycheck in various investment options (fixed income, mutual funds and perhaps company stock). Your contributions come out of your paycheck before taxes, and interest grows without being taxed until you withdraw your money in retirement. Some employers partially match your contributions, say, 50 cents for every dollar you invest, up to a certain percentage of your salary. Check to see if your company matches its employees' contributions right off the bat or if they require that you're with the company for a certain amount of time - which could be anywhere from six months to three years before they'll match it.
Let's put this into perspective. If at age 25 you start socking away $200 a month in a 401(k) that earns an average 10 percent annually — by the time you turn 65, you will have about $1.3 million saved. If your employer offers a $0.50 match for every dollar you contribute, your stash grows to nearly $2 million.
Of course, there are a few rules:
- If you withdraw the money while you are employed before age 59½, you'll be taxed heavily. So if you change jobs, roll your funds over into your new employer's 401(k) plan or into an IRA rather than withdrawing everything.
- Most employers limit the amount you can contribute to your 401(k) — usually up to 15 percent of your annual salary.
- The IRS won't allow you to set aside more than $15,000 a year (in 2006).
- If 401(k) isn't offered by your employer, consider a self-directed retirement plan or open a traditional or Roth IRA at your local bank or mutual fund company.
