I hate budgeting. It forces me to look at my money, realize that I don?t have any, and then limit my spending. (Post-grad life is a blast so far.) But for all of the complaining I do about it off the page, budgeting is one of the most important financial management things I do.
Why should you create a budget?
Running out of money is a lot worse than sitting down and planning out your spending. It lets you figure out how much your lifestyle costs and how much it would cost to change it. Budgets keep you organized and making one doesn?t have to be a headache. It?s as easy as asking yourself three questions:
How much money do you make?
How much money do you get to keep?
How much money can you spend on stuff you want?
How much money do you make?
This is a pretty easy question to start out with. You probably get a paycheck or maybe you?re still getting some help from home (I sure am, no judgement here). It?s an important starting point because it sets up the boundaries of your budget. It also determines how much you pay in taxes. Since a chunk of your money will go to paying taxes, you need to know how much money you make after taxes.
Don?t make the mistake of thinking you get to spend $50,000 because you made $50,000. Get a rough idea of the percentage of your gross income you will owe the government, start socking it away and don’t touch it. You might even consider opening a special savings account to dump this tax money into. This way, you aren’t caught with your pants down when March rolls around.
Don?t make the mistake of thinking you get to spend $50,000 because you made $50,000.
How much money do you get to keep?
Now that you?ve paid your taxes, you know what your disposable income is. However, there are other things you have to spend money on too. You probably also want to do things like eat food and live in a house, so you?ll have to pay for those, too. Figure out what you absolutely have to pay for after taxes:? rent, utilities, insurance, food, transportation, student loan payments, etc.
Knowing how much money you must spend on essentials will also help you figure out how much it costs to live the way that you want to live. This lets you plan your present and your future all at once. It also gives you an inside view on any expenses that you might be able to lower or cut out altogether.
Knowing how much money you must spend on essentials will also help you figure out how much it costs to live the way that you want to live.
How much money can you spend on stuff you want?
Now that you?ve paid your taxes and bought your food, you can look at what your discretionary income. Discretionary income is money that’s fair game for spending. Whether it?s a nice dinner or a trip to Barnes and Noble (my treat to myself), this is the pool of money that will pay for it.
Keep in mind that you don’t have to spend all of it if just because you have it left over. Whatever disposable income you have leftover can be put into an emergency savings fund, used to pay off credit card debt, attack your student loan balance, or invested. This will give you even more wiggle room for future budgeting cycles.?Remember, the goal of budgeting is to make sure you don’t run out of money, today or tomorrow.
It is. But you don?t have to look at your whole year all at once. You can look at one month at a time and go week by week to understand how much you spend. If your spending is consistent, then you can just multiply one month by 12 to see what your full year will look like. For example, if you know you spend $1,600 per month, then you’ll spend around $19,200 during the year.
Breaking everything down by shorter time frames makes everything much more manageable. Once you set up a system that works for you, it just takes a bit of maintenance to keep it going. You’re much better off knowing where you stand each month than flying blind with your wallet in your hand, hoping you make it till next pay day.
You’re much better off knowing where you stand each month than flying blind with your wallet in your hand, hoping you make it till next pay day.
So how do you make the budget?
Now that you can break your money down into three categories, how do you actually create a budget? There are plenty of free apps available on the App Store or Google Play that will automatically track your spending and help you create a budget from there. Do a bit of research and pick the free app that appeals to you. Your bank probably also has some sort of tool that helps with budgeting too. My bank has an online dashboard that shows me how much I spend compared to how much a deposit into my account, so I can keep an eye on it that way.
My personal favorite tool is Microsoft Excel. Using a spreadsheet, I can see where my money comes from, where it goes, and how it can grow over time. If I make $60,000 a year instead of $50,000, my spreadsheet will tell me how much money I will have to spend. There are templates available, but if you know how to use Excel, you can prepare a bunch of different scenarios with your money. This also allows you flexibility as your financial needs change in the future.
Your Budget Can Make a Difference, Too
Just because you’re on a budget doesn’t mean that you can’t make a difference with your money.?While you’re saving and planning your money, you can also use your money to invest in companies with positive social and environmental impacts. Budgeting doesn’t have to prevent you from creating positive change with your dollars. If you can incorporate sustainable investing into your budgeting practices, you can grow your money while doing good for the planet and people.
However you decide to budget your money, you should strongly consider doing it. It will give you a clear picture of how much your lifestyle costs today, how much your desired lifestyle will cost tomorrow, and set you up for success as you continue managing your finances. Budgeting is tedious, but it?s worth it to understand how you can get the most out of your money. And if you are just stating out, like me, don’t worry about feeling like you don’t know what you are doing. We will have to budget the rest of our lives. Might as well get started now.
Tax time is just around the corner. One of the smartest moves you can make before April 17th to reduce your tax bill is to open a socially responsible traditional IRA. In one update you’ll reduce your tax bill, save for retirement and make impact investments that address global challenges, all while generating returns. Why a traditional IRA? It gives you tax advantages now vs later.
*Don’t withdraw money before age 59? because you’ll be taxed on the gains and you’ll pay?a 10% penalty. There are exceptions.
**Roth IRA qualified distributions are tax-free if the account is at least 5 years old and the distributions are either taken at age 59?, upon death, upon disability or as a first homebuyer up to $10,000. Nonqualified distributions of accumulated income are taxed at ordinary rates. Same early withdrawal penalties apply.
Here are three easy steps you can implement today to reduce your 2017 tax bill.
1. Open a Traditional IRA
When you contribute to traditional IRA, your contributions are pre-tax. This means that you can deduct the amount of your contribution from your income, thereby reducing your tax bill now. You won?t pay taxes on your savings and earnings until you withdraw the money in retirement.
2. Allocate your contributions to 2017
If you open a traditional IRA before April 17th, allocate those contributions to 2017. This means you can deduct up to $5,500 off of your adjusted gross income before your tax is calculated ($6,500 if you are over 50). These contributions will decrease the amount of income you are taxed on for 2017 and, therefore, reduce your tax bill.
3. Even better, invest for a better world
Two of our favorite socially responsible investment platforms both offer traditional IRAs.?Aspiration Bank and Swell Investing have traditional IRAs that enable you to save for your future, save money on your taxes and save the planet.
The Aspiration Redwood Fund is a fossil fuel-free mutual fund that uses Environmental, Social and Governance (ESG) criteria to invest in sustainable businesses.
ESG investing excludes companies that harm the environment (e.g. oil & gas, tobacco, firearms). Top of pyramid: Impact Investing looks for companies with specific and measurable goals (e.g. renewable energy and zero waste).
Lets you invest in sustainable companies. These are based on ESG (Environmental, Social and Governance) factors.?
Only requires $100 to start
Has no account or custodial fees, (which can normally be an average of $25 to $50 each year)
Allows you to pay Aspiration whatever you think is fair
Caps 3rd party fees at .5%
Swell’s IRA uses SMAs (Separately Managed Accounts) for investors to create a customized impact portfolio of companies, across a variety of themes. These socially responsible portfolios are all based on Swell?s rigorous criteria for performance and impact.
What we like about Swell: you?legally own the companies listed in their portfolio. By comparison, investments in mutual funds and ETFs are actually investments in an organization which, in turn, owns the securities in the fund.
Swell investors can choose from 6 different themes today. Cool feature: you get to exclude up to 3 companies if you don’t want them in your final portfolio: ?
Green Technology?- Think electric cars and LED lights.
Renewable Energy?- Think wind turbines and solar panels.
Zero Waste? – Think recycling and repurposing.
Clean Water? – Think water filters and pipe repairs.
Disease Eradication? – Think immunizations and research.
Healthy Living?- Think nutritious foods and health centers.
Invest for a Better World without Giving Up Returns
You might be wondering: will investing for good mean that I’ll have to give up returns? The answer is no. You don’t have to give up profit for purpose or value for values. There are multiple studies showing that investing for a better world performs just as well (if not better) than regular index investing. Here’s a chart showing the MSCI KLD Index (a long standing socially responsible index) vs the S&P 500.
If you’re already covered by an employer?s retirement plan, the ability to deduct your IRA contributions on your tax return depends on your income. Here are some guidelines for 2017.
A. If you are covered by your employer?s retirement plan
If you’re covered by an employer’s retirement plan, such as a 401K, check out the adjusted gross income ranges by your filing status in the table below.?Is your adjusted gross income less than the lower income amount in the range below?? If so, you can deduct the full amount of your traditional IRA contributions.
Is your adjusted gross income more than the higher income amount in the range below?? If so, you can?t deduct any traditional IRA contributions.?If your adjusted gross income is within the lower and higher income range, you can take a partial deduction.
B. If you are not covered by your employer?s retirement plan
If you’re not covered by an employer’s retirement plan, you can take the full IRA deduction unless your spouse is covered by a retirement plan.
Tax Filing Status
2017 Tax Year
Married Filing Jointly (spouse has no employer retirement plan)
Married Filing Jointly (spouse has employer retirement plan)
Married Filing Separately (spouse has employer retirement plan)
Final Tips for a Traditional IRA
Make sure to allocate your IRA contribution to the year 2017 if you want to reduce your 2017 tax bill.
If you already have an IRA, the total amount you can contribute to multiple IRAs can?t exceed the annual limit. For example, if you’ve already stashed away $2,500 for the year in one IRA, you can only contribute $3,000 to any additional IRAs. (If you are over 50, the limit increases to $6,500 total.)
You must be under the age of 70 ?.
You must receive taxable compensation such as:
Wages, salaries, and tips
A non-working spouse can fund an IRA up to the limits as long as the working spouse makes enough taxable compensation to fund both accounts – $11,000 if under 50 yrs of age or $13,000 if over 50.
Your earnings for the year must cover your IRA contributions. For example, if you only make $4,500, you can only contribute up to $4,500 to your IRA.
You must start withdrawing money from your IRA at age 70 ?.
Save for your future. Save money on your taxes. Save the planet.
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If you?re making money with a side gig, I have bad news and good news for you. The bad news: You have to pay taxes on that extra cash. The good news: With some creative (and legal) accounting, you might be able to turn that side gig income into a tax cut? or at least seriously reduce any tax you might owe on it.
Two tax options for side gig income
Whether you do odd jobs for TaskRabbit, clean up as an Airbnb host, drive for Lyft, or offer freelance services, any cash you pick up gets added to your taxable income. But where and how you report that side money can make a serious difference in the taxes you owe on it.
The IRS?s first choice: Just include it as another line item as ?other income.? That way, there?s nothing to think about, and you pay tax on the full amount.
A better choice for you: Treat your side gig like a business? because it is one. And that means you can deduct all of your ?ordinary and necessary? business expenses ? and put a serious dent in your tax bill.
Depending on the type of side gig(s) you have, you?ll work with either Schedule C (this cover most gigs) or Schedule E (for renting out space). Either way, it pays to keep track of any expenses you rack up in your pursuit of extra income.
Schedule C when you?re the business
Most side gigs fall into Schedule C territory, the form for reporting ?Profit or Loss from a Business.?
Any company you work for has to send you a Form 1099-MISC if you earn at least $600 during the year. If you earn less than that, or don?t get the form for some other reason, you still have to report the income? the IRS fines, penalties, and interest can be pretty steep if you don?t.
Side note: Having more income may not be great for your tax bill, but it is good when you?re trying to rent an apartment or apply for a loan.
Now come the deductible expenses ? pretty much anything you paid for to keep the gig going, attract more customers, or offer better service.? You?ll want to deduct every possible penny to shrink that income down for tax purposes. Your expenses have to make business sense for the type of gig you?re doing (like sheet music for a guitar instructor). Here are some examples of common expenses you might not realize you can take:
Home office deduction (the square-foot method is super easy)
Mileage (for driving to meet customers and other business outings)
Deprecation expense (for any equipment you use)
Education (like webinars and e-books)
If you?ve made at least $400 after deducting every expense you can think of, you?ll also complete IRS Schedule SE for self-employment tax (tax apps and programs usually do this automatically).
If you ended up shelling out more for expenses than you brought in, that business loss offsets the rest of your taxable income, lowering this year?s tax bite.
Special tips for Lyft and Uber Drivers
When you drive for a ride-sharing service, you may get two different types of 1099s (IRS forms that report payments) for your work.
A 1099-K covers any payments for driving you got directly from customers.
Form 1099-MISC reports any non-driving income, including things like referral bonuses.
Here?s the tricky part about your 1099-K: The main dollar amount on this form, found in Box 1a, is the total customer payment ? not just the payment you actually got. So you?ll need to include the ride-sharing service?s commissions and fees in with your deductible expenses.
You may also have expenses that other side gigs don?t, such as:
Bottled water and snacks (for customers)
Smartphone charges (unless you have a separate phone for this, you can only deduct the business portion)
When it comes to your driving expenses (like gas, repairs, and insurance), you?ll probably make out better using the standard mileage deduction, which is 53.5 cents a mile for 2017. Make sure to keep a mileage log that tracks all of your professional driving, including miles you drove for rides that were cancelled or trips to meet up with inspectors, just in case the IRS asks for proof.
The 14-day rule: If you live in the space you?re renting ? like many Airbnb hosts do ? you only have to report your rental income if you that space is rented for 15 days or more during the year. If you only rented it for 14 days, that?s totally tax-free money.
Any expenses directly tied to your rental income are 100% deductible. Those include things like
Airbnb (or HomeAway or VRBO) fees
Decorating the rental area
Guest towels and linens
Indirect expenses like mortgage interest, property taxes, and utilities have to be allocated between the guest-time and you-time in the house (or by area if you rent out a room or section of your home).
If you made a lot of money on your side gig and you?re not sure what you can deduct from that income, consider talking to a CPA ? at least the first year that you?re in business.
Professionals know about deductions that you may not, and they?ll be right by your side if the IRS decides to call you in for an audit.
Plus, every penny you pay the tax pro is a fully deductible business expense. That, along with how much more she can lower your tax bill, makes it an expense that pays for itself.
Michele Cagan is a CPA, author, and financial mentor. With more than 20 years of experience, she offers unique insights into personal financial planning, from breaking out of debt and minimizing taxes to maximizing income and building wealth. Michele has written numerous articles and books about personal finance, investing, and accounting, including The Infographic Guide to Personal Finance,Investing 101, Stock Market 101, and Financial Words You Should Know. In addition to her financial know-how, Michele has a not-so-secret love of painting, Star Wars, and chocolate. She lives in Maryland with her son, dogs, cats, and koi. Get more financial guidance from Michele by visiting SingleMomCPA.com.