How Not to Be Afraid of Your Bank Account: The Importance of Budgeting for Your Future
While getting on top of your finances can be terrifying, all hope is not lost. The importance of a budget is something we can’t avoid. Recent events have shown us the value of financial longevity. Even when it seems too daunting, the tightest of bank accounts can be stretched with a great budget. Avoiding opening our mail doesn’t make bills disappear. By meeting our finances head on, and creating a plan, we can take charge of our finances and find a more peaceful mindset. While it may seem completely overwhelming, we all have to start somewhere. It is never too late to create new and better habits.
As the founder of the Big E-Z Bookkeeping Co., I have developed a number of accounting software tools, taught bookkeeping in local schools and colleges, and have done bookkeeping for many individuals and businesses. I can see bad patterns and also how to fix them. I would like to share some financial pain points and offer solutions.
Anticipation
An emergency fund should be separate from your anticipated expenses, such as new tires for winter or holiday gifts. If you don’t have the ability to pay an unanticipated $1,000 bill, you are not alone. In a poll from bankrate.com, nearly 60% of Americans are unable to find those funds in a savings account. Planning ahead is a key part of a budget. Taking the time weekly to go over your finances can help save you from a headache in a few months. Planning out all your needs, from tires to groceries, is the first step. You can create a spreadsheet of your own, purchase a finance journal, or find a program that suits you. While many people believe the key to a good budget is simply more money, that is not a viable solution for everybody. Living within your means may seem like a challenge but can be easier than you think. Being honest with what you can afford, while making space for your anticipated expenses, will start you on the journey to financial peace of mind.Avoiding Bank Fees
Overdraft fees have risen in recent years. In 2000, overdraft fees averaged around $20 in the US. According to the survey from bankrate.com, fees have now reached an average of $33. Banks will take home nearly 30 billion in overdraft fees in 2020, up from 11 billion in 2019. Checking your bank account frequently and making sure everything is accurate and up to date will help you avoid these expensive fees. Remember when you spend money on a tip or other charges that can take a few days to make it to your account. Banks can also waive a fee or two for you, if you are polite, especially if it only happens once a year, but that is not a long-term solution for these annoying, repetitive fees. With a tight budget, $35 can make all the difference towards a tank of gas or some groceries in the fridge. Sticking to the budget and staying on top of your finances will protect you from overdraft fees.Accounting Records
Keeping organized records is very important for your financial well-being, in both the short and long term. Not only will these records keep you safe from fraud or mistakes of any kind, but come tax time, records are necessary. Organized receipts and finances protect you against audits. Big E-Z offers a receipt organizer to help you keep your records neat. Small businesses and nonprofits are particularly vulnerable. While approximately 1 in 220 (<0.5%) people are audited in the US, that figure rises to 1 in 100 (1%) with small businesses. While this can be daunting, there are many ways to protect yourself. Electronic filing, watching your deductions, and keeping clear records are among the top ways to avoid auditing. According to e-file, the IRS’ electronic filing system website, “The error rate for a paper return is 21%. However, the e-filed returns generate an error rate of just one half of one percent.” In other words: A paper return is more than 40 times more likely to contain errors than an electronically filed return. Audits can be pricey with both the IRS fees and the cost of hiring a tax firm to dig you out of a hole. Avoiding this with a solid budget and plan can save you from a nightmare of a situation in the future.Financial Debt
One of the hardest things to face within a budget is our debt. Americans have a staggering amount of debt. While the student loan debt is nearly epidemic, we have lots of credit card debt as well. The total household debt in the 3rd quarter of 2020 was $14.35 trillion. The average debt varies by generation, but we still see that most Americans are not debt free. Median Credit Debt by Generation in 2020| Generation Z (18-23) | $1,963 |
| Millennials (24-39) | $4,322 |
| Generation X (40-55) | $7,115 |
| Baby Boomers (56-74) | $6,043 |
| Silent Generation (75+) | $3,117 |
Table from Experian – Article, State of Credit Cards
While credit cards seem like a great way to shop more, it is not wise to treat these cards as free money. Credit cards can be useful in a true emergency. In fact, 16% of Americans would use a credit card for a $1,000 emergency scenario (same bank rate study as above). Your credit score affects many facets of your life. From getting a cell phone to refinancing your house, your credit score is an important factor to watch. Your score can even affect your employment. While they can’t see your actual score, an employer may see certain aspects of your credit report. When we budget, it is important to plan ahead to chip away at our debt so we can make it disappear over time and then hopefully keep it gone. Source: Student Loan Hero – Article Surprising Ways Your Credit Score Affects Your Everyday Life