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How To Get Ahead With Money Part 3

Financial planning and investing in your future is a challenge when you’re barely getting by in the present. But that’s when it’s most important to carefully plan your finances! In the third installment of Prosper’s How To Get Ahead With Money series, we cover financial planning and investments, future proofing your investments, and making money work for you.

Financial Planning: Saving For The Future When You Can Barely Afford The Present

Financial planning and budgeting can help you make the most of your current income and financial situation and become financially empowered. Even if you’re barely getting by, the first step is to make a budget and get your finances in order. This lowers your financial stress by giving you a roadmap and helping avoid those end-of-month shortages where you’re struggling to get to the next check. It also helps you identify places you can cut your spending and free up funds to save for the future.

Woman engages in financial planning activities

The first step is building a budget. You can consult a financial planning professional to assist with this, but there are many methods out there of building your own budget. No budgeting method is one-size-fits-all; it’s important to find one that fits your needs and financial personality. One popular method is establishing a budget binder. Let’s look at how to build your own budget binder and get your monthly budget in order.

Zero-based Budgeting

Zero-based budgeting is a simple system in which you allocate all of your income to budget categories with no money left over. If your take home pay is $4,000 per month, you budget all $4,000 per month to your expenses, spending money, and savings or investment goals. This allows you to ensure all money is accounted for and you’re covering all your expenses.

How Does It Work?

There are five easy steps.

  • List out your income: List all income, including your work, side hustles, investment income, alimony or child support, etc. If you have variable income (such as tips or sales commissions) and you’re planning ahead, it’s ok to estimate and enter the correct amounts once you know them.
  • List your expenses: Calculate your typical spending each month by tabulating your bank and credit card statements. It may be useful to look at 3–4 months’ worth of spending and use the average, since spending can vary.
  • Create categories: Make categories for all the different types of expenses and goals you have. This includes your savings and investment goals. Typical categories may include:
    • Rent/mortgage payments
    • Utilities
    • Groceries
    • Gas or public transit costs
    • Car loan payments
    • Insurance
    • Medical expenses
    • Pet expenses
    • Dining out
    • Subscriptions (Netflix/apps/etc.)
    • Student loan payments
    • Haircuts
    • Clothes
    • Entertainment
    • Vacation fund
    • Emergency fund
    • Savings account
    • Investments
    • You can create categories for anything, so long as it works for you.
  • Allocate your money: Once you’ve created categories that cover everything you spend money on, allocate your income to each category. If you still have mandatory items like rent/mortgage or utilities that aren’t covered, you’ll likely need to cut back elsewhere to make sure you’ve covered your most critical needs. If you still have money left after allocating your income into categories, you can route that money into savings, investments, extra debt payments, or entertainment.
  • Track your expenses: Continue to track your expenses and make adjustments as needed. You’ll always have things you forget to budget for or that come up unexpectedly, but zero-based budgeting works so well because of its flexibility.

The Budget Binder

A budget binder is a visible, customizable budget tool which you can customize to fit your needs. It also gives you a place to organize your financial paperwork and keep it all in one place.

You can collect your budgeting sheets for each month, pay stubs, bills, and have them all visible in one place. You can note future bill dates and pay dates and plan for months when your paychecks may not align as well with your bills as you’d like.

If you’re crafty, you can even decorate your binder and make it fun! One of the big stumbling blocks with financial planning is that many people find it intimidating; making a fun and welcoming budget binder can encourage you to actually use it.

The budget binder can also help with goal setting and keeping. Research from the Dominican University in California shows individuals are 42% more likely to achieve their goals if they write them down. By writing down your budget and financial goals and placing them in your budget binder, you’ll see them when working on your budgets. That immediate reminder makes it easier to align your budgeting and short-term financial decisions with your goals.

Common Budget Binder Sections

  • Debt payoff tracking: Clearing debt is an important goal for many people, and a budget binder is an excellent place to track that. Visually oriented people can even include sheets you can color in as a visual way to track your progress.
  • Expense tracking: It’s hard to remember all the little things we spend money on each month, but sitting down each month and tracking where your money went can help you optimize your spending and budgeting, and your budget binder keeps that tracking together to help you recognize trends.

There are many websites where you can download printable tracking sheets and documents for your budget binder, so you can customize it to meet your needs. Try it!

Setting Savings and Investment as a Budget Item

If you’re barely getting by, it’s easy to put aside retirement savings and investments as something to do later. But the right time to begin investing in your future is today! Compound interest has a snowball effect; the earlier you begin putting funds to work for your retirement, the larger your nest egg will be.

Consider establishing savings and investment as a category in your budgeting, just like your other expenses. Make it a priority, even if you have to cut back on other expenses. Investing in your future shouldn’t be something you do only when you have a windfall or big check; get in the habit of doing it every time you get paid, even if it’s only a few dollars.

Future-Proof Your Finances

Financial planning and empowerment are all about preparing yourself for the future. The world is constantly changing and evolving, and while money doesn’t buy happiness, it makes it easier to adapt to changes and live a comfortable life.

Here’s how to future-proof your finances.

  • Put your money to work for you: Investing now means more income sources and resources later. The earlier you begin investing money for retirement, the more years you have to earn compound interest. In many cases, retirement investing is tax-free; consult with a financial advisor to learn how best to take advantage of programs such as Individual Retirement Accounts (IRAs) and other retirement saving incentives.
  • Build a rainy-day fund: Strive to build up 3–6 months’ worth of pay accessible for emergencies. It’s important to put your money to work for you, but work with a financial advisor to make sure you have money available when and if you need it. You can also accomplish this through access to lower-interest loans. If your available funds are invested and earning money for you; it may make sense to take out a loan, such as a personal loan or Home Equity Line of Credit (HELOC), to cover unexpected emergencies or expenses while letting your savings continue to earn passive income for you.
  • Develop multiple income streams: Even if you have a rainy-day fund, what happens if you’re laid off or can’t work anymore? Multiple income streams can not only help your financial security and empowerment, they can insulate you from layoffs or other career issues. Whether you establish a side hustle, invest in a local business, or simply make smart investments, passive income can help you reach financial empowerment.

Low Interest Rates — Make Them Work For You

When interest rates are low, opportunities to solidify your financial health abound! Interest rates fluctuate over time, and low rates give you the opportunity to access funds at reasonable rates. This gives you many options to make good financial planning decisions:

  • Debt consolidation: If you have higher-interest outstanding debt, take advantage of a low-interest HELOC, personal loan, or credit card balance transfer rates to consolidate your debt. A lower interest rate means more of your payment will go to principal, allowing you to pay down debt faster if you keep making the same payments.
  • Investment homes: Low mortgage rates not only makes homeownership a possibility for more people, it allows ordinary people more opportunities to invest in real estate, which historically have been a stable and profitable investment. You can then rent out your investment property or make improvements hoping to sell it for a higher sum.
  • Home improvements: If you own your own home, rates on home equity loans, HELOCs, and personal loans give you the opportunity to make home improvements that will improve the value of your investment.

Education — Future Proofing Your Career

Another great use of low interest rates is future-proofing your career by pursuing additional education, training, or certifications.

Going back to school can be expensive, but it can be a significant investment in your future. A more marketable career, or even one that brings you more satisfaction, can be well worth the investment. Student loans can defray educational costs, but when interest rates are low, it may make sense to use personal loans, HELOCs, or other loan options to get by while you finish school and set course on a new career path.

Diversified Financial Planning — Investing In Your Future

We’ve talked about how important it is to invest and put your money to work for you, but how should you invest?

First off, seek advice from a financial advisor. Financial planning is dependent on your unique circumstances and a certified financial professional will know how to tailor their advice to your needs, plus they’ll be more aware of the tax laws and investment laws for your locality. Here are some general tips for getting started.

A diversified strategy is often a great way to provide multiple revenue streams, plus it helps insulate you from putting all your eggs in one basket and getting hurt by a poor investment. For example, you might max out your 401k contributions and IRA in mutual funds, and then diversify by investing in a local business or in peer-to-peer lending as well.

Peer-to-peer lending platforms allow you to invest in other people that are working to become financially empowered. Prosper, for example, allows individual investors to fund loans to other individuals and receive interest on the loan. With a solid historical return, Prosper peer-to-peer loans provide an outstanding opportunity for ordinary people to diversify their investment portfolio, and give you the ability to balance your portfolio by expected risk and return levels. And nothing beats the satisfaction of helping others reach financial empowerment.

A mutual fund provides a diversified mix of stocks and bonds for individual investors, but investing in local businesses, peer-to-peer lending, and other investment opportunities gives you a way to actively manage your passive income streams and build a stronger portfolio overall.

Planning For The End Of Life

One thing many Americans fail to consider in their financial planning is a plan for the end. 50–60% of Americans do not have a will or estate plan, which could create major complications for their families or beneficiaries if they pass away unexpectedly. Many people cite building wealth for their family as a reason to pursue financial empowerment, but if you have an unexpected accident without a will or estate plan in place, all your financial planning could be at risk.

Prosper’s end-of-life documents guide can help you build out your financial plans for not only your lifetime, but beyond as well. When building out your budget binder, consider using our guide to put together another binder with all the documents your family would need if an unexpected accident were to occur. It’s the best way to ensure all the work you’ve done to build financial stability for yourself and those you love doesn’t go to waste.

Financial Planning For Empowerment

So much of financial empowerment is about the peace of mind that comes from knowing you have the resources and tools to handle everything that comes your way. Smart investing and budgeting gives you that empowerment and peace-of-mind.

Making smart decisions today opens up your choices down the road. Even if things are tight right now, budgeting carefully and making wise choices can help get you to a better, more-stable place. You can begin investing in your future today, even if money is tight. We’re here to help!

How to Get Ahead With Money Part 1
How to Get Ahead With Money Part 2

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