For many of us, personal financial planning is pretty difficult. Life is fully demands – bills, work, family obligations – and it’s easy to spend money recklessly without foresight. Some people require the services of a professional personal financial planner.
In this post, we’ll be discussing various ways you can manage your finances in a mature and efficient way, as well as ways you can maximize your after-tax income.
Managing Your Finances
The first thing you want to do is develop a budget. This will create the central foundation on which all subsequent financial decisions are based. It also allows you to hone in on certain spending habits that are draining your bank account, and gives you the ability to separate your needs from your wants.
Create a fund just for emergencies
This is one of the best moves you can make for having peace of mind. No one plans an emergency, but we can create financial plans that will prepare us for them if they do arise. Ideally, your emergency fund should be able to cover your living expenses for three to six months.
Obviously, this isn’t something you can put together in a single night. It takes time, setting aside a certain amount of your income for this specific fund. It should be opened up in a separate savings accounts, one in which you can simply add money and not access it unless there’s an emergency.
This is one of the most difficult aspects of personal financial planning – not spending your money on unnecessary stuff. Not that life should be without its indulgences, but it’s so easy to think you’re just spending a bit here and there, until you look at your bank statement and see just how much you’ve spent in a week, or a month. All of that going out to eat, getting drive-through coffee, beer and wine, and other frivolous spending habits can majorly impact your finances.
One thing you can do is calculate a percentage of your monthly income and dedicate it specifically to these spending habits. Having a clear upper limit on this kind of spending will help you be more economical and mitigate reckless spending.
Pay off your debts as fast as possible
That isn’t to say spend recklessly in this regard. It simply means dedicate as much money as you can towards paying off your debts. “As fast as possible” might be a matter of months or years. Either way, make this a priority – don’t put it off. The longer you go without paying, the worse your debt becomes.
Remember – not all debt is bad debt
Take your mortgage for example – this often comes with various tax benefits, and helps support an investment that will grow in value. That said, you want to keep bad debt out of your life as much as possible. This includes credit card debt, which comes with painfully high interest rates and zero benefits.
Figure out your credit score
Credit companies will give you a credit report free of charge on an annual basis. Once you’ve established your credit score, work on building it. A better credit score comes with easier access to loans. These loans will also come with lower interest rates.
Maximizing After-tax Income
There are plenty of areas in which sound financial planning intersects with sound tax planning. You can construct a plan that will help you get the best of both worlds. This is contingent on your ability to take advantage of all deductions, deferrals, and credits.
Tax planning should be a year-round endeavor. Here are some strategies:
- Invest your tax refund – Don’t just spend it frivolously. One place you can direct this money is into an IRA, even if it’s just a percentage of your tax refund. Many investors will do this and then claim the deductions the following year. This is a simple, small step that will result in plenty of long-term benefit.
- Reorganize your investments – If you have investments that are being taxed, move them into a tax-deferred accounts (an IRA or a Roth IRA).
- Benefit from your losses – That means keeping a portfolio balanced by cutting out failing or slow-growing investments, and then replacing them with better ones. You can also get a tax deduction for various losses, and you can use that to make up for taxes owed on various assets that have boosted in value.
Maintain and organize all of your tax records
When it comes to sound financial planning for maximizing after-tax income, you want to have all of the right documentation, and to keep it as organized as possible. Not only will this help prevent any penalties or fines, it will also keep you prepared if you ever face a tax audit for any reason.
Keeping the proper documentation will make the process of analyzing and calculating the taxes that you owe as easy and smooth as possible. It will also allow you to better report all tax deductible expenses.
In your tax documents, you should be including statements from:
- Fund managers
- Anyone providing financial information
Make sure you get the most from your tax deductions
Your tax deductions are subtracted from your overall taxable income, which gives you your total tax bill. The first step is to keep a record of all deductible expenses – especially receipts. Keep a record of the gas mileage you use on business endeavors, any medical bills that can be deducted, and any charitable spending.
Many people end up trying to deduct expenditures that can’t be deducted, and miss the ones that can. Instead of trying to write off certain personal expenses as business expenses, be sure to write off the following:
- Odd or unusual business expenses – Here’s an example: say you own a junkyard, and you are buying food for stray cats because you want them to stick around and kill rats, mice, or other pests. You can write that food off.
- Health insurance premiums – If a medical expense exceeds 7.5% of your adjusted gross income, you may be able to deduct it.
- Charitable contributions – You can write off charities that are out of pocket. Examples of this would be ingredients for food used for non-profit organizations. You can also write off the cost of supplies for various fundraisers.
Report all taxable income
While the IRS understands that people can make mistakes when it comes to tax deductions, and is often willing to help you take steps to resolve the issue, failure to report your taxable income is a serious problem. This is of course the one step that absolutely can’t be ignored. Reporting your taxable income to the IRS will prevent penalties, fines, and other major problems in the future.