Financial Literacy 2007 - Budgeting
smart spending
Make a budget for saving

College funds. For any responsibility on the children's future college expenses that she may incur, consider opening 529 college savings accounts for each of the kids. 529 plans allow for tax-free withdrawals to pay for higher education costs. Plans are offered through all 50 states and the District of Columbia. You are free to invest in the plan of any state, but some states offer residents the ability to deduct contributions from state income taxes. The State of Pennsylvania offers 529 plans through Upromise Investments and The Vanguard Group that have low minimum investments and modest expenses, plus the contributions are deductible from Pennsylvania state income tax. Lauren will retain control of the money, with each child listed as a beneficiary. This is a real selling point to parents as it eliminates any worry that their children could one day spend the money on cars and clothes, instead of college.

Since this is the first year that Lauren will be filing under single tax status, it is worthwhile to consult a tax professional well in advance of the April tax filing deadline. This is also another reason for an adequately funded emergency savings account as any liability for taxes, should one be incurred, would come from this account.

Now what?

Lauren will follow these suggestions as best she can. We will check back with her in six months to check her progress toward her financial goals. Good luck, Lauren. You can do it!

The plan in 4 steps
1) Establish a realistic monthly budget.
  • Keep track of all expenses for a month to set budget.
  • Stay focused on daily spending. Track it all.
Tools: Use this work sheet to create a budget.
2) Build an adequate emergency savings account.
  • Stop the extra payment against the mortgage.
  • Add the $100 from mortgage to savings account monthly.
  • Continue to contribute $150 to savings each month.
  • Keep this fund in a high-yielding savings or money market account
  • Follow this plan of stashing $250 monthly for six months.
Tip: Pros and cons of paying extra on a mortgage
3) Build up retirement savings in the most tax-advantaged ways.
  • Continue to contribute to employer-sponsored retirement plan, maximizing the employer match.
  • Once emergency fund is adequate, open a Roth IRA.
  • Contribute half of regularly scheduled savings ($125) to Roth monthly.
  • Put other half of savings into the emergency fund.
Tip: Tax advantages of IRAs
4) Consider college savings plans.
  • Investigate opportunities for creating 529 accounts for each son.
Tip: Ins and outs of investing in 529s

This report was prepared by Bankrate Senior Financial Analyst, Greg McBride, CFA.
What's your experience with budgeting? Are you struggling? Successful? Share your story.

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