BY: Laurie Horton, CPA |Assistant Vice President/Financial Planning-Argent Trust Oklahoma-Tulsa
& Myles Linhares|Financial Planning Analyst-Argent Trust Oklahoma-Tulsa
Financial literacy is critical in successfully meeting long-term financial goals. People often ask questions regarding financial planning as it relates to their future. One of the first questions is, “How do I start?”
A budget is an excellent place to start, yet many people have never completed one. It’s a great way to organize a spending plan and establish your priorities. A budget is a snapshot of your financial values. In today’s world, many people automate their bill payments. It’s an easy way to set up monthly payments and forget about it. It’s also an easy way for finances to get out of control, especially concerning debt. Start by setting time aside for yourself and/or your spouse or significant other to review your finances. Have all available sources of income and expenses such as pay stubs, bank, investment, and credit card statements. Create a list of everything you bring in and spend over a year. Expenses may differ monthly; some occur only once or twice a year. Once the list is completed, you may be surprised and want to change your spending habits. Keep a list of planned expenses and use that list for ongoing tracking compared to actual expenses.
Recognizing debt and cash flow is essential. It is not an attempt to be the next Dave Ramsey and tell you that all debt is bad. Debt can be good. However, if a large chunk of your income is paying the minimum on your cars, boat, and home loans, that can be a slippery slope and difficult to overcome. Even if you accelerate payments, paying off the debt could still take several years.
Prioritize saving. Where is the best place to save money? Don’t let “the best place” hinder you. Saving money anywhere is always better than not saving at all. Here is a list of where to prioritize and invest your savings, along with a brief explanation.
- Bank Savings Account– hold at least three months of expenses for an emergency.
- Health Savings Account (HSA)-only available if enrolled in an eligible high-deductible healthcare plan. HSAs provide triple tax savings. Contributions are tax-deductible. The account is pre-tax, not taxed on earnings, and allows tax-free withdrawals for qualified medical expenses.
- Your Workplace Retirement Plan– While working, save through your workplace plan, such as 401K, 403B, simple IRA, or other type of plan. These plans may offer pre-tax and Roth contributions. Pre-tax contributions lower your adjusted gross income and save income taxation until later, ideally when your marginal tax rate is lower. If your employer matches, contribute at least up to the percentage match. Workplace plans usually allow higher contributions than other options. Contribute annually and retire with dignity.
- IRAs-Anyone with earned income can contribute to an IRA via deductible or non-deductible contributions. IRAs are tax-deferred accounts that can receive your workplace plan after retirement.
- Roth IRAs- These are like IRAs, but contributions are always non-deductible. Roth earnings are never taxed, and distributions are not required. Income limits apply. If you’re a high-income earner, the backdoor contribution method may be a favorable option.
- Taxable Investment Accounts- This post-tax option allows you to save more money without income restrictions or contribution limits. You will be responsible for capital gains on these accounts.
In summary, using a budget will help you stay ahead financially without being a Wall Street guru. Once you understand how to maintain a budget, you can focus on the best places to save your money and let your dollars work efficiently for you. Financial literacy and utilizing these concepts will help you maximize your financial future.
