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PHASE TWO: “Show me the money.”

1) Income & Outgo.

Tracking and managing your expenses is crucial to financial readiness, and using a budget to do so is a smart move. Learn the definitions of income and outgo below and know how much you are contributing to each category.

Income: Your earnings from your job and interest from your savings accounts are your income. These earnings are subject to income taxes and governmental withholdings depending on the amount of income and regularity of pay (monthly, weekly, etc) as well as your dependency status. Outgo: Anything you spend your income on is outgo, or expenses.

Examples of outgo include:

  • Home expenses: Rent, mortgage, homeowners/renters insurance, property taxes, home repairs/maintenance/improvements
  • Utilities: Electricity, Gas, Telephone & Internet, Water & Sewer
  • Food: Groceries, eating out
  • Family obligations: Child support, alimony, day care, babysitting
  • Health and medical: Insurance, doctor’s office/Rx copays, fitness memberships
  • Transportation: Car payments, gasoline, auto insurance, car repair and maintenance, public transportation costs
  • Debt payments: Credit cards, student loans, other loans
  • Entertainment & Recreation: Cable TV, videos, movies, hobbies, subscriptions and club dues, vacation expenses
  • Investments/Savings: 401K or IRA, Stocks, Bonds, Mutual Funds, College Funds, Savings, Emergency Fund
  • Miscellaneous: Toiletries, clothing, household products, gifts, donations, haircuts, and others

2) Budgeting & Debt Management.

A budget is a document that projects future income and expenses, and may be prepared simply using paper and pencil, or on computer using a spreadsheet program like Excel, or with common financial software. Using the definitions above as a guide, list all sources of monthly income and all required fixed expenses like rent/mortgage, utilities, phone; and other possible and variable expenses.

Compare the sum you earn with the sum you spend – are they equal? Is there extra money left over? Or are you coming up short? You may discover you have sufficient funds left over to put towards paying off a credit card. Or, if you’re coming up short, you may need to taper back your non-essential expenses. Either way, try to avoid spending more than you earn!

3) Building Savings

For future investments or needs, set aside a portion of your income in an interest bearing account to build your savings. Decide what portion or percentage of your income will be dedicated to saving: some suggest having 6-12 months of income in savings in case of job loss or other catastrophic event. Some advocate a split of 10/10/80%, with 10% going to savings, 10% to charity, and 80% for everyday expenses. Whatever method you choose, choose to save!

4) Safeguarding your money

When putting your money in a financial institution, make sure your money is safe. You may wish to buy insurance to safeguard your money against bank closures and other dangers to your accounts:

The Federal Deposit Insurance Corporation (FDIC): Since the FDIC was established in 1933, no depositor has ever lost a single penny of FDIC-insured funds. The FDIC is an independent agency of the United States government that protects the funds depositors place in banks and savings associations. FDIC insurance is backed by the full faith and credit of the United States government.

  • Coverage includes: All deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit.
  • Coverage does not include: Other financial products and services that banks may offer, such as stocks, bonds, mutual fund shares, life insurance policies, annuities or securities
  • The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.

Securities Investor Protection Corporation (SIPC): Just as the FDIC insures bank accounts, SIPC insures brokerage accounts up to $500,000 per account, including up to $100,000 in cash. Additional funds may be secured beyond the $500,000 once the liquidation cost of the brokerage is taken into account.

Note, however, that this insures your account against the possibility that your brokerage may go under, causing stocks and securities to go missing from your account. Seeing stocks and securities disappear is not a sign your stocks are losing value.

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