I would like to take this opportunity to toot my own horn for a moment. I got a promotion and a raise! Yay! More money, more to do. Good times.
The question of what to do with a raise is often discussed in the personal finance world. People can save more, they can raise their standard of living, they can do some combination of the two. The answer for some is difficult. While we all know that we should keep living just like we are and save our raise, we are not always that good.
I am a big fan of the percent contribution method of dealing with a raise. If you make $40,000 per year and put 10% into retirement savings, you should stick with, at least, a 10% contribution if you get a raise to $45,000. That way, your retirement contributions increase with your raise. This is in contrast of putting in a fixed dollar amount, $4,000 per year at 10%, before and after the raise, because it would decrease to 8.8%.
Optimally, though, it might be even better to increase your contribution by a percent. If you can get by living comfortably at $36,000 per year after retirement contributions before the raise, you can certainly continue to do so after the raise. Why not split the difference? Increase your contribution by half of your raise if you can, or something higher that what you are doing now. It is easier to keep living the way you are today than to try to increase your contribution and adjust down later.
This time around, I am going to keep my retirement contributions the same by percentage, and will use the extra income to pay down student loans faster. Hopefully I can put my next raise 50% to a house purchase fund and 50% to retirement.
That’s just my two cents. What have you done with raises in the past? Do you just keep it, keep contribution percentage the same and keep the difference, or raise your contribution? Please say in the comments.
I always tell you all about what I spend my money on, but I have never shown you my budget. This includes my car loan and school loan payments (that I overpay by a whole lot every month). What do your budgets look like? Do any of you have budgets that are very different?
This is a screen shot of my budget from Mint.com.
You all know that my favorite part of the personal finance arsenal is Mint, a banking aggregation site that helps with budgeting and transaction history.
Thrive has popped up as Mint’s number one competition. The site offers what Mint does with a different emphasis. While Mint focuses on the budget, Thrive focuses on goals and advice. Wesabe, another Mint alternative, gives advice in the form of community support. Thrive acts as a free professional financial adviser.
Check it out at JustThrive.com.
Update: I have written a new post on this, Mint.com vs. Thrive Comparison. The new post gives an in depth look at Thrive and a full comparison of both sites.
When you start a new job you are given an option for the number of tax deductions you want to take. For each deduction (also called exemption), less taxes are taken from your paycheck automatically.
You are generally given one deduction for each dependant plus others depending on other factors.
MSN Money Central has a great article on this.
Here is the big question: How many should you take? If you take zero, higher taxes are going to be taken from your weekly/bi-weekly/monthly paycheck. Because of this, you are more likely to receive a refund at tax time in April. If you take extra deductions, you pay less out of each paycheck, but there is a higher chance you will owe at the end of the year.
The benefit of taking more deductions is that you don’t have to worry about the big payment at the end of the year. If you are a paycheck to paycheck person (which I hope none of my readers are), this is difficult as you will owe a lump sum at the end of the year. This is the right choice for some people.
I take 1 deduction, which is the closest to my actual taxes. I am a single adult, so that is what makes sense for me. In an average year, my total taxes should be roughly equal to what is taken out. I will not get a big refund or I will not owe a whole lot. This is just easiest for me and what is generally recommended for most people.
Another option is to take a whole bunch of deductions. If you take too many, you get a penalty. By taking extra deductions you are paying very little in taxes out of your paycheck, but will owe a whole lot at the end. The benefit of this method is that you are keeping your full paycheck until the end of the year. By taking fewer deductions, you are essentially giving the government an interest free loan, as you do not owe the money until April. If you can save up to make the big payment at the end of the year, this is a good option. You can invest the money in some way that will pay you interest before you write the check to Uncle Sam.
It is up to you to decide which option is best. You can also talk to a tax professional to decide. I like paying what I owe as the year goes. I don’t count on a rebate and I don’t expect to make a big payment. It just works best for me. What do you do? Let us know in the comments.
You do not need a budget to get by unless you are a compulsive spender. That said, I like to have a budget. You do not need a budget because you are already investing automatically. As long as you don’t touch that, you are fine for the future. Living paycheck to paycheck means that you are spending more than you can afford and you need to spend less, not necessarily earn more.
I use finance site Mint.com for my budgeting needs. I started my first budget when gas prices started rising. I decided that I was going to cap my gas spending, and my budget grew from there. Here is my first budget:
My first budget was simple. $120 per month for gas. That would be about a tank a week at the time. I also set a budget of $0 for bank fees. Mint would send a warning e-mail if that ever went above zero.
Over time, my budget developed. Here is my budget for October:
Now it is your turn. Since you are already on Mint, it will be easy to setup a budget. Just click on the “+Add Budget” button to set your first budget amount. My budget is a living financial tool that changes from month to month with my needs. Since I set my budget, I follow it. The leftovers go into my savings.
I keep telling you how you should invest, stop spending, and do more for yourself financially. I can not justify doing so without doing so myself. I want you all to see how I am doing it today.
That is my breakdown. You might note that I did not include a budget for my living, fun, and other savings. That is for next time. I did want you to see, however, that I do put 10% into investments first. The trick to automating your investing is that you can live on what is left. If you are feeling a crunch, make a lifestyle adjustment.
A very rich man once told me that the trick to being happy is living below your means. This multi-multi-multi millionaire drove the same Toyota Corolla he bought in the 1980s over twenty years later.
Now that you have seen how I do it, it is time to do it yourself.
