Unless you're Mackenzie Bezos or ex-husband Jeff, chances are you budget your money. You know how much of your monthly income you want to spend on groceries, rent, and leisure, and maybe you even put a portion of each paycheck in savings. But what about budgeting for a specific goal? Is it a short term or long term goal? What are the best tools for both?
Identify Your Financial Goals
Your first step should be identifying the kind of financial goal you're trying to reach. Some examples of short term goals are things like: payments toward rent, insurance or student loans, expensive personal items (new car, new fur coat etc.), travel, a wedding or other event, and home repairs/remodels. These goals are more immediate expenses that you will pay in a matter of months and often require a set amount of money up front. In contrast, long term goals are less likely to have a set amount and more likely to be things that you'd like to continue to expand indefinitely, such as retirement funds or college funds. (Of course, things like paying off a loan or a house are a combination of long and short term goals, since a single loan payment falls under short term goals, while paying off the entirety of a loan is more likely to be a long term goal).
Prioritize Your Financial Goals
The next step is prioritizing your goals. As Nerd Wallet puts it, "Work your goals around your usual expenses, focusing on needs like food and shelter first. Emergency and retirement funds are also high priority; contribute to these funds and pay off debt next. Then you can decide how to allocate the rest of your money toward your wants and other savings goals." Essentially, if you only have a small amount of leftover money each month, you shouldn't put it all towards buying a boat if you have student loans to pay off.
How to Create Your Budget
First, if you don't already have one, budget your necessary monthly expenses as precisely as possible. These necessary expenses include paying for food, living expenses, transportation, and recreation. Try to work out how much you spend on these things in an average month, and then consider if there are any areas you could cut down without great personal cost, such as eating out one less time a week. Once you have this basic budget established, create a timeline for your short and long term goals. To do this, you can use this 50/30/20 budget calculator to determine where exactly your money should go.
After you have a plan laid out, all that's left is actually sticking to the budget you created for yourself, and then you can watch your goals get closer and closer to fruition!
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When you take out a loan for a car, charge something to your credit card, or get a personal line of credit, there is going to be an interest rate that applies to your loan.
A lot of different factors go into what you will be charged, including your own personal credit score. But even those with flawless credit still see a minimum charge that they can't get around. That all goes back to the Federal Funds Rate.
One thing consumers rarely realize is that all of our banks are lending money to each other every night. Banks are legally required to maintain a certain percentage of their deposits in non-interest-bearing accounts at the Federal Reserve to ensure they have enough money to cover any withdrawals that may unexpectedly come up. However, deposits can fluctuate and it's very common for some banks to exceed the requirement on certain days while some fall short. In cases like this, banks actually lend each other money to ensure they meet the minimum balance. It's a bit hard to imagine these multibillion-dollar financial institutions needing to borrow money to tide them over for a bit, but it happens every single night at the Federal Reserve. It's also a nice deal for those with balances above the reserve balance requirement to earn a bit of money with cash that would normally just be sitting there.
The Federal Reserve
The exact interest rate the banks will charge each other is a matter of negotiation between them, but the Federal Open Market Committee (FOMC) (the arm of the Federal Reserve that sets monetary policy) meets eight times a year to set a target rate. They evaluate a multitude of economic indicators including unemployment, inflation, and consumer confidence to decide the best rate to keep the country in business. The weighted average of all interest rates across these interbank loans is the effective federal funds rate.
This rate has a huge impact on the economy overall as well as your personal finances. The federal funds rate is essentially the cheapest money available to a bank and that feeds into all of the other loans they make. Banks will add a slight upcharge to the rate set by the Fed to determine what is the lowest interest that they will announce for their most creditworthy customers, also known as the prime rate. If you have a variable interest rate loan (very common with credit cards and some student loans), it's likely that the interest rate you pay is a set percentage on top of that prime rate that your lender is paying. That's why in times of low interest rates (it was set at 0% during the Great Recession), a lot of borrowers should go for fixed interest rate loans that won't increase. However, if the federal funds rate was relatively high (it went up to 20% in the early 1980's), a variable interest rate loan may be a better decision as you would be charged less interest should the rate drop without the need to refinance.
The federal funds rate also has a major impact on your investment portfolio. The stock market reacts very strongly to any changes in interest rates from the Federal Reserve, as a lower rate makes it cheaper for companies to borrow and reinvest while a higher rate may restrict capital and slow short-term growth. If you have a significant portion of your investments in equities, a small change in the federal funds rate can have a large impact on your net worth.
Whether you're leaving a job involuntarily, departing for something new, or just want to prepare for the unknown, it is smart to understand all your options regarding your 401k.
Frugal gifting often gets a bad reputation. However, this shopping method does not make you cheap — it makes you practical. Frugal gifts often avoid waste and overspending and can be just as meaningful (if not more so) as any other present.
With the National Retail Federation predicting each consumer this holiday season to spend upwards of $1,000 on holiday gifts amidst an economic recession —this year might be the perfect time to reconsider your spending budget. We've formulated the ultimate list of frugal gift-giving ideas to get you started.