It’s all too easy to spend money. It takes practice and discipline to develop a personal financial plan that will not only help you save money for bills and personal expenses but get you the most out of your tax situation as well.
In this post, we’ll be discussing ways you can develop a sound personal financial plan that’s best for your income, as well as tax preparation to help you get the most out of your taxes.
Personal Financial Planning
All of your financial decisions should be based on a well-defined budget. This is the first principle when it comes to spending money. Budgeting will help you save money, and it will also reveal where frivolous spending habits are draining your money. Sound budgeting will also help you separate your wants from your needs.
Save Money (Especially for Emergencies)
Money goes quick. However, that same principle applies when it comes to saving money. On the one hand, you can spend money on simple pleasures without really thinking about it, only to find that throughout the week those little expenditures have added up to hundreds of dollars. On the other hand, you can put some money into a savings account here and there, and in a matter of weeks or months, be just as surprised by how much you’ve saved up.
Having money saved up is an incredibly liberating thing. It gives you a sense of freedom and security. If an emergency occurs, you’ll be glad to know you have money saved up for just such an occasion.
A good goal to set is to have enough money that, in case of an emergency, your living expenses will be taken care of for at least three to six months. As stated above, this isn’t something that’s going to manifest overnight. It takes time and patience, putting a little bit of money into a savings account when you can. Over time, those little sacrifices will be repaid with great peace of mind.
This is often the most difficult part. Little expenses add up quickly. You need to get in the habit of monitoring how much you’re spending, and what you’re spending it on. We all need our little indulgences. But they need to be kept under control. Frivolously spending your money on restaurant food, drive-through coffee, alcohol, and tobacco is going to drain your bank account quicker than you might think.
One way of solving this problem is to set aside a monthly allowance for yourself that you can spend on these types of things. When you set a clear upper limit for yourself, it will be easier to have self-control, rather than waking up on a Saturday morning only to find you’ve spent upwards of $150 dollars while you were out with your friends the night before.
If You Have Debt, Pay It
This should be one of your top priorities. That’s not to say you need to spend more than you can on this project. It means you need to dedicate as much of your funds as possible to pay off your debt. Not only will this free you up mentally and financially, but it will also help you avoid paying fees for failing to pay what is owed from you. The longer you wait, the worse it’s going to get.
Remember That Debt Isn’t Necessarily a Bad Thing
Case in point: your mortgage. A mortgage usually comes with tax benefits. This is an investment that can grow in value. So, what’s bad debt? An example would be credit card debt. This usually involves high interest rates and comes with no benefits.
Determine Your Credit Score
You can get your own personal credit score free of charge, annually. The ideal is high credit, no credit whatsoever is okay, but bad credit is undesirable. With high credit, you will be able to get loans much easier. Not only that, but the interest rates on these loans will also be lower.
Getting The Most Out Of Your Taxes
Yes, we all have to pay taxes. Try not paying them and see what happens (actually, don’t). The good news is there are plenty of ways to maximize your after-tax income. You should be taking full advantage of:
Tax planning intersects with personal financial planning in many ways. You should be utilizing the following strategies:
- Investing your tax refund: Too many people regard their tax refund as a chance to spend money on recreational things. They spend their money frivolously, when in fact they could be directing this money into an IRA (you can even simply direct a percentage of your tax refund into an IRA and reap many rewards). Investors will often do this and later claim the deductions when they file their taxes the next year. This is a simple thing you can do that will yield major benefits down the road.
- Restructuring your investments: You can move taxed investments into a tax-deferred account. Examples of this would be an IRA or a Roth IRA.
- Turning losses into gains: It sounds complicated, but it’s actually quite simple. You can keep a balanced portfolio by means of cutting out investments that are failing or even slow-growing, and then replacing them with better investments. Tax deductions for losses in this regard are also possible. This can help make up for taxes owed on different assets, especially those that have increased in value.
The Importance of Keeping Your Tax Records Organized
Having all of the right documents at your disposal is crucial when it comes to maximizing your after-tax income. You should also keep these documents organized. This will help keep fines and penalties at bay, as well as prepare you in the unfortunate event of a tax audit.
Calculating and analyzing your owed-taxes will be far easier when they are correctly documented. Reporting your deductible expenses will also be much easier. Don’t wait until the last minute to gather up your deductible expenses. This will most likely cost you money, as it is incredibly difficult to calculate all of your deductibles in the last minute.
Include statements in your tax documents from:
- Fund managers
- And anyone who provides you with financial information
Things You Can Include In Your Tax Deductions
You can subtract a surprisingly large amount of money from your taxable income. As stated above, you should be keeping a record of all of your deductible expenses, which include:
- Unusual business expenses (For example, if you own a junkyard, you have an incentive to keep cats around because they kill rats and other pests. For this, you need cat food. You can deduct this cat food from your overall taxable income. This same principle applies in many situations.)
- Health insurance premiums
- Charitable contributions
All of the above strategies will be easier with a personal CPA. A competent CPA will is worth the cost, and will help you achieve more financial success in the long run.