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June 2, 2022

Chapter 01: What Is a Budget & How to Create One

Save more, spend smarter, and make your money go further

Creating a budget can offer you peace of mind and give you more confidence in managing your finances. A budget can help make you more aware of how you spend your money, and the places where you may be spending too much, so you can figure out how much to save.

So, what is a budget?

A budget is essentially a summary of how much money you bring in and how much money you spend on a monthly basis. The idea of creating a budget might be intimidating, but it actually doesn’t have to be all that complicated. You just have to calculate the amount of money you make and compare it to your expected expenses. A basic budget is one of the most important things you need to take charge of your money—and help achieve more of your financial dreams.

In this series, we’ll be answering important questions like “What does budget mean?”, “Why is Budgeting important?”, and more. This is the first chapter of our budgeting series, and we will go over the basics of what budgeting is and how to create one. To learn more about budgeting, continue reading, or use the links below to jump to a section of your choice.

Intro to Budgeting: What is a Budget?

So before we get into any more details about budgeting and how to create one, let’s first answer the question of: What is the meaning of budget?

A budget is a financial outline designed to measure and guide your income and expenditures for a certain period of time, such as one month, a quarter, or a year. With an understanding of the budget basics, you can track the amount you’re making compared to what you’re spending and saving.

Why do I want a budget? Consumer.gov says making a budget can help you determine your spending plan and in turn, show you where you should limit your spending and what you can afford to spend more money on.

There are many ways you can maintain a budget — with a spreadsheet, paper and pen, or through a budgeting app.

Whether you’re new to managing your own finances, never learned how to budget, or are tired of living paycheck to paycheck, this post is for you. In our Budgeting 101 guide, we’ll go over some budgeting basics, show you how to create a budget, teach you how to avoid common budget-related mishaps, and ultimately, give you a budget calculator and some budgeting tips to create a budget that’s efficient and functional for your lifestyle.

Who Needs to Use a Budget?

Any person who wants to take control of their finances and feel more financially secure could benefit from a budget. A budget isn’t just for people who want to cut back their expenses and save money. A budget can be for anyone! Even if you’re comfortable with your income and your expenses, you can still benefit from being aware of how and where you spend your money.

A budget is especially beneficial for people who need to save money for various reasons, like if you need to budget for your wedding or save for a down payment on a house. Having a budget can also be helpful for people whose income is unpredictable or who are going through a career change and need to be more aware of their finances.

To make a financial plan, you need to have a budget. A financial plan is a great way to organize your financial situation and figure out your goals and how you can achieve them. Without a budget, there’s no way to find out how much money you’re saving vs spending, which is imperative in achieving your personal and financial goals.

Everyone’s budget will look different, but generally speaking, a budget will include your various living expenses, like how much you spend on rent, groceries, transportation, healthcare costs, and loans.

You might overlook some things when it comes to your expenses, but having a budget can really help you hone in on how you spend your money. Your living expenses can easily add up, so it might be helpful to do things like calculate your monthly grocery budget so that you can figure out exactly how much you have to spend.

Living expenses will also differ for every person depending on where they live, but you can use a cost of living calculator to help figure out if it’s possible to maintain your current standard of living based on your income.

Why Is Budgeting Important?

There are countless reasons why having a budget is important and how it can positively impact your finances, such as:

It Helps You Control Your Spending

Without a budget, you would have no idea if you were spending beyond your means. A budget will help you control your spending by making you more aware of how much you spend on a daily basis in comparison to how much you’re bringing in. It also might be a good idea to try a more minimalist lifestyle so you can cut back on unnecessary costs.

It Helps You Figure Out Your Long-Term Goals

We all have different long-term goals that we want to achieve, and creating a budget can help you achieve them. For instance, if one of your goals is to retire by 50, a budget can help you figure out how much you need to save for retirement each month. There are various tricks to help you save so that you can feel like your long-term goals are actually attainable.

It Can Make You Feel More Financially Secure:

There’s nothing worse than feeling overwhelmed with your finances. Fortunately, having a budget can make you feel more confident and secure in your financial health, so you’re always prepared for any unexpected expenses.

It Can Help You Get Out of Debt

There are a lot of different things that can put you in debt: credit cards, medical bills, college loans, unpaid taxes, the list goes on. Being in debt is terrifying, but one way you can get out of debt is by budgeting. Budgeting can help you save part of your paycheck so you can put that towards paying off your debt.

It Keeps You Organized

It’s easy to get disorganized when it comes to your finances, but having a budget can help you manage and organize your monthly bills, debt payments, and other expenses.

It Helps You Save Money

One of the main benefits of budgeting is that it helps you save money. Rather than living pay-to-paycheck, budgeting helps you stay ahead of the curve so you can save money for the present and future. You can also increase your income streams at home and make even more money to put towards savings.

How to Create a Budget: 5 Actionable Steps

To plan your budget, you’ll need a few key pieces of information. With these basic components, you’ll have a foundation for your budget that you can tweak as the months go by and as your financial circumstances change. To get you a step closer to your financial goals, let’s go over how to create a budget step-by-step.

1. Calculate your monthly income after taxes

An accurate monthly income is the cornerstone of a successful budget. Without figuring out how much money you actually have in your wallet, it’s pretty hard to allocate funds towards saving, spending, and settling outstanding debts. But calculating your monthly income takes a little bit more effort than glazing over your monthly paychecks.

To find out how much you’re actually earning, you’ll need to do a little bit of simple math—don’t worry, we’ll walk you through the entire way.

Calculating your monthly income as a salaried employee

One of the benefits of being a salaried employee is knowing exactly what to expect on your paycheck—month in and month out—and this pay structure will serve as an added perk when you’re building a monthly budget. To calculate your pre-tax monthly income as a salaried employee, all you need to do is divide your annual salary by 12.

Let’s look at an example:

Laura is a salaried employee who makes $60,000 a year. To calculate her pre-tax monthly income, she would divide $60,000 by 12, which equals $5,000 gross monthly pay.

Now that you have your gross monthly income figured out, you’ll need to deduct taxes and other expenses that may dock your pay—such as medical benefits and contributions to an employer-sponsored retirement plan. We’ll show you how to estimate this number in just a moment, but first we’ll go over how hourly employees can calculate monthly income.

Calculating your monthly income as an hourly employee

If you’re an hourly employee, your monthly income isn’t always as consistent as you might like it to be, but with the proper budgeting technique you can definitely nail down a budget that maximizes your monthly income and gets you closer to meeting your greater financial goals. Here’s how to figure your monthly income as an hourly employee:

Let’s take a look at an example:

Keith is an hourly employee who makes $15 an hour working 40 hours per week, making his gross weekly income $600. Keith multiplies this number by 50 to reflect the weeks he plans to work throughout the year (minus his two-week vacation). Then, he divides by 12 and estimates that his gross monthly pay is $2,500.

Remember, this number does not factor in the deductions that may impact his take-home pay, so now he’ll have to subtract these from his gross monthly income to get an accurate picture to build his monthly budget.

Subtract taxes and other deductions from your gross monthly income. If you’re unsure of where to find this information, one place you can look is your employer-provided pay stub. You’ll be able to see how much is deducted by checking the net pay that’s deposited to your checking account.

To get the most accurate picture of your monthly take-home pay, you’ll need to subtract taxes and other deductions from your income.

Federal Taxes: To find out your federal tax liability each month, refer back to your annual gross income that you calculated before. Then, compare your income to the federal income tax rates to find out what percentage of your income will go toward your federal income taxes. Once you’ve found this number, divide by twelve to estimate your monthly tax liabilities.
State Taxes: Calculating your state income taxes is essentially the same as finding your federal tax liability, but this time, you’ll need to refer to your state’s income tax rates. Multiply your annual income by your tax rate, then divide by twelve to see how much you’ll owe in taxes each month.
Social Security and Medicare Taxes: According to the IRS, the federal withholding rates for FICA are:
-6.2% for Social Security
-1.45% for Medicare
Misc: Depending on your financial situation, you may have other deductions to consider when calculating your monthly take-home pay. Use previous paychecks to help you determine how much money will be withheld to account for 401k contributions, benefits, etc.

2. Identify fixed and variable expenses

Once you have a clear picture of how much money you’re actually working with each month, it’s time to figure out how you’re spending it…or how you should be spending it. There are two main types of expenditures you need to account for as you build your budget: fixed and variable expenses. The difference between the two is that fixed expenses tend to cost you the same amount each month while variable expenses…vary.

You can look for payments toward your living expenses on your monthly bank statements and credit cards.

Fixed expenses

Your fixed expenses like rent payment, groceries, transportation, and health care costs are likely to absorb a large chunk of your budget, which makes them all the more important to track as the months go by.

To determine how much of your budget is going towards fixed expenses, start by creating a list of your regular expenditures. Here’s a list of common fixed expenses to help you get started:

Rent
Mortgage
Car payments
Student loans

Once you’ve built a complete list, calculate a monthly estimate for each one, so you know how much of your income should be dedicated to it. If you’re not sure how much something costs, review previous bills and credit card statements to see what you’ve spent in the past.

Variable expenses

Whether you belong to a gym, go on a weekly date, or make a purchase on a shopping app, make sure you account for these costs in your budget. As opposed to fixed expenses that stick to relatively the same cost each month, these miscellaneous items may change month over month.

Some examples of variable budget expenses include:

Entertainment
Groceries
Dining out
Gas
Clothing
Dating
Ride-sharing
Utilities

Determining how much you spend on variable living expenses each month can be tricky since it may be rarely consistent, but it’s important to get a close estimate so that you can determine whether you can maintain the same spending habits or if you need to cut back in certain areas. Use your monthly bank statements to help you estimate your variable expenses, and in turn, set limits for each category.

How to factor expenses into your budget

If you’re using one of our free budgeting templates, simply input the values of these fixed expenses into your budgeting spreadsheet to help plan out your financial strategy each month. In the Mint app, you can connect your bank account to easily identify recurring expenses, or enter in your own budget for fixed expenditures.

3. Set savings and debt payoff goals

As you saw in step two, if you have student loans and credit card balances, you’ll want to attribute part of your monthly budget to paying them off. Each month, allocate a certain amount to these monthly payments. The sooner you pay off debts, the less interest you’ll pay overall, and the closer you are to meeting your greater financial goals.

When creating a personal budget, include these types of debts into your planning:

If you’re all caught up on your bills and want to stow away funds for retirement or save up for a new car, it’s helpful to establish concrete goals, then break them down into achievable bite-size chunks. Having trouble coming up with realistic, meaningful financial goals? Take a look at these short-term and long-term examples:

Short-term financial goals

Long-term financial goals

Establish a retirement budget to build a retirement account
Pay off your mortgage or student loans
Start your own business

If you’re using the Mint app, you can set up custom goals for your savings in the budgeting section. Simply add a budget, define a dollar amount, and monitor your progress.

4. Record your spending

You know that feeling when you’re checking out at the grocery store, the cashier announces your total, you swipe your card, and by the time you’re loading your grocery bags into your car, you realize you didn’t even register the total amount you paid. It’s a concerning, out-of-body experience—but we’ve all been there.

This is why tracking your spending is so important. It’s easy to become complacent about the amount of money you’re spending and end up with revolving debt ruling your finances. Depending on the budgeting method you choose—budgeting app, pen and paper, or online budgeting tool—you can pick a way to record your spending that best suits your lifestyle.

Here are a few tips to make expense tracking easier and more efficient:

Ditch the Cash: Stick to card payments if you have trouble keeping tabs on how much money you spend each month. This way, you can refer to your online bank statements to easily monitor your spending.
Check Yourself Before You Wreck Yourself: Make it a point to analyze your spending habits on a weekly basis. Collect any receipts or statements you have and check to see if you’re on budget or if you need to reel in your spending for the rest of your budgeting cycle. Budgeting will help monitor your spending so you are able to keep living within your means.
Go Old-School: If you’d rather skip the technology and take a more tactile approach to budgeting, a pen and a checking book will do just fine. Just be sure to make a habit of recording your expenses as soon as you’ve swiped your card.
Try the New-School Way: If you can’t be bothered to whip out a pen and paper each time you check out at the register, automated expense tracking might be a better alternative. Using the Mint app, you can connect your bank account to effortlessly record your spending and monitor transaction trends.

5. Track your budgeting progress, review, and revise

Creating a basic budget is a huge financial victory. It helps you ensure you can cover your expenses and reach for exciting milestones, like buying a house or paying off your student loans. As you continue to budget, make adjustments as you see fit. Your income, expenses or lifestyle might change, and it’s important to ensure your budget keeps working for you and your future.

Set up a budget schedule and make it a point to review your budget on a regular basis—each week, every month, or at least every quarter to see if any major changes, or milestones have taken place. Not only will this help you recognize and celebrate your successes, but it will also encourage you to reevaluate and tailor your strategy as needed.

Budgeting Breakdown for Beginners

Now that you know how to make a budget, it’s time to discuss best practices and budgeting basics to ensure your budget works for your money and your lifestyle.

How to Choose the Budgeting Style That Works for You

Here’s the thing about budgeting. There’s not really a one-size-fits-all approach that works for every individual. Depending on your spending habits, financial goals, lifestyle, and your relationship with money in general, one budgeting tactic might make more sense for you than another. Let’s take a look at a few budgeting methods you can try.

Starting simple with your bank statements

One easy way to start budgeting is to take your previous month’s bank statements and create a budget using the deposits as your monthly income and categorize all the withdrawals on the bank statement for:

Living expenses
Food
Auto
Housing
Health
Other expenses

Then you can see what last month’s budget looks like to be able to make adjustments to this month’s spending. This allows you to better accomplish your life goals and ensure you’re placing money where it needs to be in order to make progress.

Keep tabs on transactions with the envelope method

The envelope system is a simple budgeting approach that involves spending with cash instead of plastic.

If you budget $100 for eating at restaurants, put that amount into an envelope. When the money’s gone, you have to wait until next month to eat out again.

If you budget $200 for groceries</span id=”anc6″>, put $200 in a “grocery” envelope. If you’re at the checkout line and the total comes to $203, you’ll need to put something back.

The envelope method helps you be more strict with your budget. The pockets of cash are a visual and tangible reminder of how much money you’re dedicating to each area of your life.

Follow the 50/30/20 rule

Financial experts recommend the 50/30/20 guideline as a basic financial strategy, especially for young professionals. You can also use the new 50/30/20 budget calculator to help create your new budget.

The rule says that you should allocate a 50%, 30%, and 20% of your income to the following categories:

Essentials: 50%
-Rent/Mortgage
-Utilities
-Debt payments
-Bills
-Groceries
Personal Expenses: 30%
-Entertainment
-Dining out
-Date night
-Shopping for non-essential items
Savings: 20%
–Emergency savings
-Retirement account
-Travel fund
–Rainy day fund

50/30/20 Calculator

50/30/20 Budget Calculator

Here’s how much you have for:

Essentials$0.00

Wants$0.00

Savings$0.00

Consider a zero-based budget

With the zero-based budgeting technique, each month begins and ends with zero dollars. When you build out your zero-based budget, every dollar has a purpose. Let’s take a look at a sample budget using the zero-based method. If you make $3,500 every month, attribute each dollar to an expense. You might put $1,750 toward living expenses, $700 toward paying off debt, and $1,050 toward personal expenses like going to the movies or saving for vacation. At the end of the month, your balance is zero, because every dollar is accounted for.

Keep in mind, the zero-base doesn’t mean you’re spending every dollar that you earn, but rather, that each one is allocated to a different category—savings account included!

Selecting a Budgeting Tool That Suits Your Lifestyle

As we mentioned before, the one-size-fits-all methodology is a no-go when it comes to personal budgeting. Your financial situation is completely unique to you whether we’re talking about your income, expenses, or your financial goals, so it only makes sense to tailor your budgeting strategy to your individual preferences.

Here are a few tips to help you find a budgeting tool that makes sense for you:

Read reviews, or ask around: Although money can be considered a taboo topic, that doesn’t mean you need to tip-toe around budgeting techniques in your relationship or with your friends. You probably trust their opinions more than anyone else, after all. See which tools they use and ask what they like and don’t like about their current budgeting method.
Test it out: Before buying into any paid budgeting subscriptions, give the free trial a go. This way, you’ll be able to familiarize yourself with the features and decide if it’s a tool you’d continue using.
Consider compatibility: If you’d like to automate your expense tracking, make sure that the budgeting tool you want to use can be integrated with your bank and credit card issuers.
Use a template or tool tailored to your needs: Depending on your financial circumstances, you may need a simple budget, or one that’s specific to your income and expenses. Or perhaps you’ll need additional functionality like investment capability or the ability to make peer-to-peer transactions. According to a recent survey, 85% of people use either banking apps or online banking platforms.

As you select a budgeting tool, consider how you’ll use it and how the tool fits into your lifestyle and financial goals. Our budget templates include the following categories:

Common Budgeting Obstacles and Mistakes

Before you set sail on your journey towards better budgeting, it’s time to talk about some of the obstacles you may encounter on your way. Like most things in life (or the sea in this case), budgeting isn’t always clear-cut—there can be aspects that are difficult or ambiguous. Factoring in random, one-time expenses or calculating a part-time gig can complicate your budget, but trust us, your voyage can (and must) continue! Here are a few tips to ensure you have the most accurate budget—no matter the circumstance.

1. Estimating irregular income

If you’re a freelancer or work a side hustle, you likely have an irregular income that can be hard to predict. In these cases, it’s best to estimate a conservative (low) amount, so you don’t overspend. Review the past 3-6 months of income and watch for any patterns. Can you find an approximate hourly rate or weekly rate for what you bring in? If you’re new to a job, like being a waitress, ask a coworker how much they typically make in tips to help you forecast your monthly tip outs. Above all, do your best to create an income estimate—knowing you can tweak it along the way.

2. Paying for emergency expenses

Unfortunately, accidents and unexpected bills happen to everyone. From car troubles to job loss and medical expenses, emergencies can be expensive and having a backup emergency budget can help cut down expenses. An unexpected bill can throw off our budget, and set you back. If an incident does occur, try to factor the expense into your budget while paying your other bills. For instance, you may want to cut back on dining out for the month, or pick up an extra shift to help you cover a bill. If you can, build an emergency fund into your budget to safeguard your finances against future unexpected situations.

3. Forgetting one-time expenses

Items like annual memberships, vacations, and gifts for family and friends are often forgotten when creating budgets. If you can, set aside a small amount of cash every month for these extra expenses. You can estimate the expected cost for the year and account for them in your monthly budget. For example, if you typically spend $300 on Christmas gifts, set aside an extra $25 every month to account for these added expenditures. By the time December comes, you’ll have the cash available to spend on gifts.

How Often Should You Review Your Budget?

So now that you’ve learned how to actually create a budget, you’re probably wondering: How often should I review my budget?

It’s ultimately up to you, but you should aim to review your budget at least once every few months. Some people even prefer to do it each week or new month, so that they can ensure they’re always on top of their expenses.

You may want to consider checking in quarterly and doing annual budget reviews so you can see if you’re on track for your long-term financial goals. Budgeting isn’t just something you do one month and then never again. Budgeting is a long-term process, so it’s crucial to regularly review your budget to make sure you’re living within your means and not overspending.

A budget tracking template is a good way to keep your finances organized so you can create a reviewing system that works for you.

Key Takeaways: Budgeting 101

Creating a budget is really as simple as following these five steps:
- Calculating your take-home pay
- Estimating your expenses
- Setting savings and debt payoff goals
- Recording your spending
- Tracking your progress
To find the right budgeting method and tools for you, consider compatibility, ask around, and try out different options
Avoid budgeting pitfalls by preparing for unexpected circumstances and tailoring your budgeting strategy as needed

Bottom Line: Budgeting Can Help You Take Control of Your Finances

So, now that you have a better idea of what a budget is and how to create one, you can answer the question: What is your budget?

Every person’s budget will look different, and creating a budget that works for you may take some time. So for help with your budgeting journey, you should continue reading this series which will cover budgeting tools, tips for managing your budget, and more. And once you have a good understanding of what a budget is, you can move on to the next chapter in the series, which covers what to include in a budget.

Sign up for Mint to help you stick to your budget and goals Let the Mint app do the heavy lifting for you. It can calculate your income, total your spending by category, and help you conquer your savings goals. Tracking expenses with the app is simple and accessible—no matter where you are.

Save more, spend smarter, and make your money go further

Mint is passionate about helping you to achieve financial goals through education and with powerful tools, personalized insights, and much more. More from Mint

Source: mint.intuit.com

May 31, 2022

Do You Realize the Power of HSAs? Probably Not!

Health savings accounts (HSAs) have grown in popularity since the COVID-19 pandemic caused millions of Americans to worry about getting sick. A recent industry report from Devenir reveals that the number of new HSA accounts increased by 8% last year, and this trend is only expected to continue. By the end of 2024, there will likely be more than 38 million HSAs, with assets topping $150 billion. It’s easy to understand why HSAs have increased in demand throughout the pandemic, since they are a great solution to help cover unexpected medical costs — like an unplanned hospital stay.

But HSAs are more powerful than most people realize. For example, Voya research reveals that only 2% of individuals are aware of the key attributes of HSAs.(1) With employers increasingly offering high-deductible health plans with an HSA option to their employees, chances are you already have an HSA or perhaps are considering opening one. Whether you are a pro when it comes to HSAs or just using one for the first time, we all can find value to reviewing ways that we can realize the full potential of these powerful savings, spending and investing vehicles.

Read these 10 tips to help maximize the benefits of your HSA.

Tip #1: If you switch jobs, your HSA comes with you

The pandemic-era trend known as the “Great Resignation” has led to a record number of people voluntarily quitting their jobs as many are changing course for a variety of reasons — increased compensation, greater flexibility or better workplace benefits, to name a few. In fact, a record 4.5 million Americans quit their jobs in March, according to the U.S. Department of Labor. Therefore, if you fall into this category and are considering switching jobs, there’s no need to worry about losing any of the hard-earned dollars you contributed to your HSA. If you leave your job (for whatever reason), your HSA comes with you — since you, not your employer, own the account.

Tip #2: You can change your HSA contributions at any time

Typically, when most people think about their workplace benefits, they may have “flashbacks” to their employer’s open enrollment period. For many, open enrollment can be a stressful time, having to consider all of your needs and making the right choices for workplace benefits for the following year. Interestingly, Voya research reveals that the majority of American workers (72%) indicated they would rather service their car, visit the dentist or prepare for tax season instead of reviewing their workplace benefit options.

Now, while you do need to enroll in an HSA during open enrollment, deciding how much to contribute from each paycheck is not something you need to stress over. What do I mean? While most employers will usually offer digital tools or calculators to help you estimate your health-related expenses for the upcoming year, at the end of the day, it’s still just an educated guess. A great feature of HSAs is that you can change how much you contribute at any time during the year. You don’t need a qualifying event — like getting married or switching jobs — to make changes, which is a typical requirement for most other workplace benefits. That’s a big relief and one less thing to worry about during open enrollment.

Tip #3: HSAs offer triple tax advantages

Perhaps the biggest benefit of an HSA is the triple tax advantages it offers: 1) contributions are pre-tax and reduce your taxable income; 2) your HSA contributions and any earnings grow tax-free; and 3) when used to pay for eligible medical expenses, HSA withdrawals are tax-free.

HSA contribution amounts are capped each year by the IRS. For 2022, the HSA contribution limits are $3,650 for individuals and $7,300 for family coverage. Individuals who are 55 or older are also eligible to make an additional $1,000 catch-up contribution. To help adjust for rising inflation, the IRS recently announced that it was boosting HSA contribution limits in 2023 — with the HSA contribution limit increasing to $3,850 for individuals and $7,750 for family coverage.

Tip #4: Your HSA dollars are not ‘use it or lose it’

It’s not uncommon for people to confuse HSAs with their cousin, flexible spending accounts, or FSAs. While their names might sound similar, the rules that govern these accounts are quite different. One of the biggest drawbacks surrounding FSAs is the “use it or lose it” rule. In most cases, you must spend all the tax-free funds you put aside in an FSA before the end of each plan year, or risk losing the money.

People often mistakenly think the same rule applies to HSAs. However, unlike an FSA, your HSA balance carries over each year, which can add up over time.

Tip #5: HSAs can double as emergency health care savings

The ripple effect of the pandemic shined a spotlight on a troubling reality: Most working families are not financially prepared to cover an emergency. Industry research shows that roughly 4 in 10 Americans would struggle to cover a $400 emergency expense. Faced with a short-term, unexpected need — such as a trip to the hospital — many people often dip into their retirement savings. In fact, Voya’s own customer data reveals that employees without adequate emergency savings are three times more likely to take a loan from their retirement plan.(2)

Fortunately, the dollars in your HSA can double as an emergency savings account. All HSA withdrawals used to pay for qualified medical expenses (even if unplanned) are tax free. Plus, you can choose to cover a medical bill out of pocket and then be reimbursed tax-free for that expense in the future. This strategy is another way HSAs can serve as a potential emergency savings vehicle for eligible health-related expenses. Just make sure to hold on to your receipts to verify all distributions.

Tip #6: HSA funds can be an investment opportunity

Once you reach a certain threshold in your account, your HSA funds can be invested. These investment options are similar to line-ups available in typical workplace retirement accounts, like a 401(k). And you don’t need a large HSA balance to begin investing the funds. In many instances, you only need an HSA balance of $1,000 or more. However, this threshold varies by HSA plan, so check with your employer.

Unless you plan to use your HSA money for planned expenses in the near future, investing can give your money an opportunity to grow over time. For example, if you invested the 2022 HSA individual contribution limit of $3,650 in your account every year for 10 years and didn’t use any of the funds, and your account earned an overall 6% of interest each year over that time period, you would end up with about $51,000. While you would have contributed $36,500 yourself, the remaining $14,500 would come from investment earnings.

Like with any investment, it’s important to remember there is always risk. That being said, HSAs can serve as an important vehicle to help grow your future savings over the long term. Plus, with inflation at a 40-year record high, investing your HSA dollars is another option to potentially protect the value of your hard-earned money and make it work harder for you in the future.

Tip #7: Your employer can help grow your HSA

To encourage participation in high-deductible health plans with an HSA, it’s not uncommon for employers to offer incentives or matching contributions. For example, some will offer their employees $100 just for enrolling in an HSA. Plus, they may offer additional contributions throughout the year as the employee visits their doctor for an annual check-up, completes a biometrics screening or participates in other financial wellness programs, for example.

It’s not required that employers offer incentives or matching contributions to help supplement their employees’ HSA funds, so make sure to check with your HR team. But if available, taking advantage of potential “free money on the table” is a smart way to help grow your HSA.

Tip #8: No required minimum distributions for HSAs

A required minimum distribution, or RMD, is an IRS-mandated amount of money that a retiree must withdraw each year from a traditional IRA or an employer-sponsored retirement account, like a 401(k). Recently, this topic has generated headlines, with lawmakers in the House overwhelming passing The Securing a Strong Retirement Act of 2022, or “SECURE 2.0.” In addition to other provisions aimed at helping American workers save for retirement, the bill proposes increasing the age to 75 when a retiree must withdraw RMDs.

While this is certainly good news, considering the current RMD age is 72 (and that was only recently increased), HSAs do not require minimum distributions — another benefit of this powerful savings vehicle. Therefore, retirees can use their HSA funds to help supplement their future retirement savings and withdraw their money when they need it. Plus, if their HSA funds are invested, it has the potential to keep growing well into their retirement years.

Tip #9: Use your HSA dollars how you want in retirement

When you reach retirement age at 65, HSA funds can be used for non-medical expenses without being assessed a 20% penalty. Therefore, you can use your HSA to pay for general living expenses — like housing, food or travel, for example. However, the distributions will be taxed like any normal distribution from a retirement account, like an IRA or 401(k). But, if you decide to spend your HSA dollars on qualifying medical expenses, you will still enjoy tax-free distributions.

The good news is that you now have greater flexibility to spend your money how you want in retirement.

Tip #10: HSAs can outlive their owners

When it comes to estate planning, taxes are something all of us should carefully consider to help ensure as much of our life savings goes to the people we love versus the IRS. Fortunately, HSAs can be transferred to spouses without any tax implications. Your spouse can also continue using the HSA funds for qualifying medical expenses and will receive the same tax-advantaged treatment.

1) Based on findings from an online survey conducted by Voya, in partnership with Russell Research, among 315 U.S. Consumers currently enrolled in an employer-sponsored health plan fielded from Sept. 2 – Sept. 6, 2020

2) Voya Financial internal data (Oct. 2020)

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

CEO, Health Solutions, Voya Financial

Rob Grubka is chief executive officer of Health Solutions for Voya Financial. In this role, he is responsible for product development and management, distribution and the end-to-end customer experience for Voya’s stop loss, group life, disability and supplemental health insurance solutions, as well as health savings and spending accounts, offered to U.S. businesses and covering more than 6.6 million individuals through the workplace.

Source: kiplinger.com

May 31, 2022

Divorce Financial Planner Tips When Preparing for Divorce

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Preparing for a Divorce: Personal Finance Tips from the Pros

It’s hard to think in a practical, financial frame of mind when you’re in the midst of the emotional storm of a divorce. All the things that have to be taken care of during a split add what feels like another full-time job to your schedule, and the stress can really take a personal toll. But regardless of the reasons for the divorce or the immediate fallout, each party must consider personal finance decisions several times in the divorce process. Here is what financial professionals say about personal finance health during the divorce process.

You Can Safely Forget Financial Advice from Friends and Coworkers

Once people discover you’re going through a divorce, they will inundate you with advice. Divorce is such a common, overwhelming life event that people tend to overshare about what they went through, and mostly what this does is make the speaker feel better about his or her situation.

However, you should only take legal and financial advice from your lawyer and a financial professional, because no one has been through your exact situation. Your friends and coworkers may have good intentions, but following their advice can be disastrous, according to Certified Financial Planner (CFP) Jeff Landers. If you don’t know where to start with your personal finances, ask your lawyer if he or she can recommend a financial planner, particularly one with experience in financial planning surrounding divorce.

Tackle the Administrative Work

Here is a basic list of the things to do to secure your personal finance picture when you’re divorcing. Some of these things can be done right away, while others have to wait until the divorce is final. Do what you can now rather than trying to do it all once the dust settles:

•Close joint credit accounts.
•Remove your spouse’s name from bank accounts, credit cards, and employer records.
•Change your status and relevant information (like marital status and address) on tax records, post office records, professional licenses, property titles, utility bills, and health insurance.
•Open a new bank account and credit card account in your name.
•Disinherit your spouse from your will, trust, medical directive, living will, and power of attorney.
•Change beneficiaries on your pension, 401K, IRA, and life insurance policies.
•Use a personal finance app to track child support, alimony, medical expenses, and other expenses related to the divorce.
•Establish sound credit in your name if you have not done so.

Going forward, Landers tells Huffington Post, “You’ll need to address both short-term (day-to-day expenses, monthly utilities, mortgage, car payments, etc.) and long-term (college tuition, retirement, travel) financial needs.”

Understand Your Role in Your Marriage’s Finances

Robert Pagliarini, CFP, President of Pacifica Wealth Advisors, differentiates between the “out spouse” and the “in spouse” in an article for CBS News. The “out spouse” is the one who has not been involved in managing bills, investments, insurance, or budgeting. This spouse is the one who doesn’t have a relationship with the family CPA, financial advisor or attorney. The “in spouse” is the one who has the experience and relationships to make the post-divorce financial transition without starting from scratch. Naturally, whether you are the “out spouse” or the “in spouse” determines how you secure your personal finance future. Pagliarini also recommends working with a Certified Financial Planner: “Work with a financial advisor before the divorce is finalized so you can make sure you are not only getting your fair share, but that you don’t get stuck with illiquid assets while your ex gets the cash.”

For Those Over Age 50

If you are divorcing in middle age or later, you may not have worries about child custody, but your financial situation is almost always more complex than it was in your twenties and thirties. Howard Hook, CPA, CFP, of EKS Associates tells Financial Advisor, “Although each divorce has its own unique set of circumstances, the single most universal issue affecting couples is time, or specifically, a lack of it.” Older divorcing spouses may have to return to the workforce or work more hours than expected for personal finance stability.

Additionally, divorcing people over age 50 have fewer years to get back on track after the typical financial setbacks of divorce before hitting retirement age. Financial advisors with experience helping older adults going through divorce can help these people create a plan to minimize disruption to personal finance and life goals.

Personal finance is never simple, and divorce makes it significantly more complicated. While anyone going through a divorce will be bombarded with advice from well-meaning friends, the true source of help for getting through a divorce with the best possible financial situation is a financial planner, preferably one with experience helping people who are dealing with divorce. It’s easy to let emotions take over and neglect personal finances during a divorce, but keeping a clear head and relying on the advice of professionals will help ensure your best possible financial future.

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Source: mint.intuit.com

May 29, 2022

How to File a Renters Insurance Claim (Process for Payouts on a Loss)

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Additional Resources

You knew your building’s plumbing was old, but you thought you’d be out of there before anything terrible happened to it.

An inch of water (and counting) and several panicked calls to your property manager later, you admit you thought wrong. Now, you’re left with the massive, thankless job of replacing numerous possessions, including your mattress, bookcase, and computer, ruined by the burst water pipe in your bedroom ceiling.

It’s a good thing you have renters insurance — because you’re about to put your insurance company’s promises to the test.

How to File a Renters Insurance Claim

Renters insurance covers property losses of the sort caused by a burst pipe in your apartment ceiling — or any other peril mentioned in your renters insurance policy. It’s known as personal property coverage.

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Usually, it also covers medical and liability claims arising from mishaps in your rental unit. For example, it would cover the party guest who slips on your slick kitchen floor and breaks their ankle or the delivery person who tumbles down your rental house’s icy front steps and suffers a concussion.

The claims-filing process is similar for both types of claims, but you’ll notice some differences in the order of operations.

Filing a Claim for Property Loss or Damage

Depending on the circumstances, a renters insurance claim for property loss or damage begins with a police report or a call to the property manager. You must then document the damage — comprehensively.

Don’t throw anything away or clean up until you’ve completed all these steps. If you erase evidence before the insurance company has fully investigated, you could jeopardize your claim. That said, if the property owner needs to make basic repairs to ensure the property remains habitable or not repairing the damage would make it worse, it’s OK to do what’s necessary.

1. File a Police Report (if Applicable)

If your possessions are damaged in the course of a potential violation of law, call the police and file a report.

“Potential violation of law” could mean any of the following:

Vandalism
Burglary
Suspicious fire
Theft by a guest

More ambiguous incidents, like a fuel explosion inside or outside your building, warrant a police report too. Incidents like a burst pipe or rough weather don’t require a police report.

The police report is vital because it backs up the story you’ll tell the insurance company. It’s an impartial record of the incident — and the extent of the damage — taken by a respected third party.

When dealing with the police, get the name and badge number of every officer and investigator you speak with, even if they don’t visit your apartment in person. Ensure they take copious photos of the damage, and request a copy of the report when it’s done.

2. Contact Your Property Manager

Next, contact the owner or property manager and let them know what happened. If you live in a multiunit building and the incident affected more units than just yours, they might already know, but call them anyway.

The owner or manager probably won’t help you file your renters insurance claim, but they need to know about the incident because they might need to file an insurance claim of their own. Regardless, they’ll want to assess the condition of your unit or the building itself. Be sure to document any lingering hazards, such as:

Broken windows
Damaged doors or locks
Exposed pipes or wiring
Suspected gas leaks
Nonfunctioning utilities (such as the power being out or the water being off)

If you feel uncomfortable remaining in your unit due to safety concerns or simply can’t stay there, tell the property manager right away. Your renters insurance policy might cover temporary relocation costs, such as staying in a hotel for a week or two while your unit undergoes repairs.

3. Contact the Insurance Company

Your next call goes to your renters insurance company or to your insurance agent if you need their help to file the claim.

You might be able to file straightforward claims through your insurance company’s website. Look for a File a Claim button or tab on the homepage. But it’s not a bad idea to call the company or your agent directly if you have questions about the process, aren’t sure your policy covers the incident, or want to figure out whether it’s worth it to file a smaller claim.

4. Document the Damage or Loss

If you filed a police report, the investigators assigned to your case will take photos and make notes of the damage. But you shouldn’t rely on their report to be the sole record of the incident.

So once you’ve made your initial calls, take the time to document what happened meticulously. Take photos and videos of the scene as you found it. Take photos of individual items that sustained damage. Create a list of damaged, destroyed, or stolen goods with the price paid for each and an estimate of the current replacement value. Make copies of receipts or invoices for any expenses incurred due to the incident, including replacements for damaged or stolen possessions and bills for temporary lodging if your apartment is uninhabitable.

If you’ve previously taken a home inventory, include it in your documentation. A home inventory helps back up your claim and could make it easier for the insurance company to reimburse you quickly. Not having one doesn’t mean the insurance company will deny your claim, but it does increase the chances of an insurance adjuster visiting the premises.

5. Submit the Claim

You’re now ready to submit your claim. Visit your insurance company’s website to download or fill out the required forms and upload photos, videos, notes, and the police report to support your claim.

If you’re having trouble finding the required forms or submitting your information electronically, contact your insurance company or your insurance agent. Your agent might offer to file the claim on your behalf, though you must be available to answer the insurance company’s questions.

Be sure to file your claim before any deadline imposed by your insurance company. This deadline could come as little as 48 hours after the incident. If more information comes to light or you incur additional expenses after you file, you can update your claim.

6. Prepare for the Investigation & Claims Adjuster Visit

If your claim is fairly small and straightforward, the insurance company might take you at your word and accept your claim without much trouble. In this case, you can start cleaning up your place and move on to the next step — reviewing your settlement offer.

If your claim’s value is higher, the circumstances are murky, or you haven’t provided enough documentation to support your claim, your insurance company could investigate further. Wait to throw out damaged possessions or clean up your space until you hear back.

If your insurer wants to investigate further, expect a call and possibly a visit from a claims adjuster. This person’s job is to verify your story and determine how much compensation you actually deserve for the loss.

If they visit the property, they’ll take pictures of the damage and make notes for their own report. Be prepared to point out less obvious evidence of damages or losses, and have your home inventory handy to corroborate your claims.

The claims adjuster might also want to talk to others involved in or who have knowledge of the incident. That could include your roommates, houseguests, and the property owner or manager. It could also include the police investigator who wrote up your report.

7. Review the Settlement Offer

If the insurance company accepts your claim, you’ll receive a settlement offer.

It’s a formal payout offer for the amount the insurance company is willing to pay to settle your claim after subtracting your policy deductible. It could be about what you thought the damage or loss was worth — less the deductible — or significantly less, depending on how the insurance company values the claim.

A lot depends on whether the insurance company uses replacement value or actual value when calculating your total personal property claim value. Replacement cost pegs the value of lost or damaged items at what it actually costs to buy new replacements for them. In contrast, actual value (or actual cash value) takes depreciation into account. The difference can be stark: A three-year-old TV with a replacement value of $500 might have an actual cash value of just $100 or $150.

If your policy has a maximum coverage amount for certain types of personal belongings claims and your place sustained a lot of damage or became uninhabitable for months, you could find your total payout capped at an amount much lower than what you deserve.

In either case, it’s your responsibility to review the settlement offer and determine whether it’s acceptable to you. If you’re not sure, ask your insurance agent.

Filing a Claim for Personal Liability and Medical Payments

Renters insurance covers more than your personal possessions. It also protects you from costly liability issues arising from mishaps in your rented home. Without it, you could be on the hook for houseguests’ medical bills, among other injury-related expenses.

Filing a personal liability or medical expenses claim with your rental insurance company is a bit different from filing a property damage claim. To get it done, follow these steps in order.

1. Document the Damage

First, take copious photos and videos of the scene of the incident as soon as you can. For example, if a guest at a party you hosted fell through a railing on your second-floor unit’s balcony, you’d want to take photos of the damaged railing and the area where they hit the ground.

Next, create a record of the incident as you remember it. If no video record exists, a written record will have to suffice. Describe where you were when it occurred, how you became aware of it, and the sequence of events that followed.

2. Give Your Insurance Information to the Injured Person

You won’t be filing this claim yourself — the injured person will. To do that, they need your insurance information: company name, your name, and policy number.

It’s their responsibility to reach out to you about this, either directly or through a lawyer. However, you should do everything in your power to help them file the claim, including giving them your insurance agent’s contact information or helping them navigate your insurance company’s online claims forms.

3. The Injured Person Submits the Claim

When they’re ready to file, the injured person submits their claim to your insurance company. They’ll provide hospital bills, physical therapy bills, receipts for medical equipment like crutches or wheelchairs — any costs arising from their injury.

Don’t worry about submitting your photos, videos, and notes on the incident at this time. But do hold onto them until the injured party settles the claim, as your insurance company may want to review them.

4. Prepare for the Investigation & Claims Adjuster Visit

Be available to answer any questions from your insurance company during the investigation, and don’t be surprised if they send a claims adjuster to assess the scene of the incident. If you haven’t already done so, the claims adjuster visit is a good time to share your own documentation.

5. The Injured Person Reviews the Settlement Offer

After completing its investigation, the insurance company sends the injured person a settlement offer for review. If they accept, the insurance company reimburses them and closes the claim.

For medical-only claims, your insurance company typically covers the portion of the injured person’s medical bills not covered by their own health insurance.

For personal liability claims, where the injured person sues you for damages, your insurance company covers the amount of the judgment and the injured person’s legal fees if you lose. If you win, your policy might cover your legal fees, but you won’t owe anything to the injured person.

Remember that reimbursement kicks in only after you hit your policy deductible. If the claim is worth $10,000 and your liability deductible is $1,000, the insurer covers $9,000 and you pay $1,000 out of pocket.

Likewise, every renters insurance policy has a personal liability and medical expense coverage limit. If the victim’s injuries are severe, you could blow through this limit. Umbrella insurance provides an additional layer of liability protection — typically starting at $1 million — in such cases.

Renters Insurance Claim FAQs

Filing a renters insurance claim can be confusing and stressful. These are some of the most common questions that come up during the process.

How Long Does the Renters Insurance Claims Process Take?

It depends on the type of claim, the claim value, and what caused the damage or injury.

The insurance company can usually resolve simple, lower-value renters insurance claims within a business day. You file the claim online and upload supporting documentation, and the insurance company gets back to you with a settlement offer within hours.

More complicated claims can take days or weeks to resolve. You might need to provide more documentation, including receipts for expenses incurred days or weeks after the event. If the claim involves significant damage to your unit, you’ll likely need to wait for a claims adjuster to visit and write a report about what happened too.

Does Renters Insurance Cover Temporary Living Expenses?

Some renters insurance policies do cover additional living expenses if you’re forced to move out of your unit temporarily. Usually, the policy caps this coverage at a specific amount of money or number of days.

Check your policy for details about this type of coverage. If you don’t have it and think you need it, ask your insurance company or insurance agent to price it out for you. Temporary living expense coverage will increase your premium, but you’ll be glad you have it if you have to move out of a damaged apartment.

Will Filing a Renters Claim Affect My Insurance Rate?

Probably. How much is a more interesting question.

Generally, liability, fire, and theft claims increase premiums more than medical claims. Don’t be surprised if your premium jumps by 20% or more after a fire or theft claim. Medical bill-only claims should still increase your premium, but by a more reasonable rate — typically under 20%, depending on your insurer.

What Happens if the Insurance Company Denies My Claim?

It depends on why the insurance company denied your claim.

Sometimes, there’s not much you can do about a denied claim. If your policy specifically excludes the type of incident or expense, your insurer has every right to deny the claim. Even if your policy covers the claim type under normal circumstances, a smaller claim might fail to hit your deductible.

That said, if your claim is truly legitimate and the insurance company denies it anyway, whether due to suspected fraud or a differing interpretation of your policy’s terms, you can appeal. It’s a time-consuming process that requires you to submit additional documentation, but it’ll pay off if the insurer reverses its decision.

If the company denies your appeal, you can hire an insurance attorney to press your case. They’re well-versed in insurance legalese and can craft arguments you wouldn’t even know to make. In the worst case, they can take your insurer to court.

Final Word

Filing a renters insurance claim could be easier than you think. The best renters insurance companies generally have online or app-based claims processes that let you submit and get approval for uncomplicated claims without ever meeting face-to-face with a claims adjuster.

Even if you have to welcome a claims adjuster into your apartment, it’s not the end of the world. If you’ve filed a police report, documented the damage or injuries, and kept good records of your expenses, your chances of getting a legitimate claim approved are quite good.

Sure, the process takes some time. But that’s a reasonable price to pay for avoiding a big hit to your bottom line.

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Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he’s not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.

Source: moneycrashers.com

May 27, 2022

HSAs Make Health Care More Affordable

A health savings account is a tax-advantaged account designed to help cover out-of-pocket health care expenses. If you’re the account holder, your spouse and dependents may also use the HSA, even if they’re not covered by your medical plan. In 2022, you can contribute up to $3,650 if you have individual health insurance or up to $7,300 for family coverage. If you’ll be 55 or older at the end of the year, you can put in an extra $1,000 in “catch up” contributions.

More than 80% of large employers currently offer an HSA to their employees, according to a recent survey by benefits consultant Willis Towers Watson, but not everyone is eligible to contribute to an HSA. In order to participate, your health insurance plan must offer a high-deductible plan. Typically, the monthly premiums for a high-deductible plan are lower, but you’ll pay more out of pocket before insurance coverage kicks in. For 2022, the health plan must have a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage.

The health plan must also have a limit on out-of-pocket medical expenses that you are required to pay. Out-of-pocket expenses include deductibles, co-payments and other amounts, but they do not include premiums. For 2022, the out-of-pocket limit for self-only coverage is $7,050; it’s $14,100 for family coverage. According to the IRS, only deductibles and expenses for services within the health plan’s network should be used to determine whether the limit applies.

The Benefits

The tax advantages of HSAs are threefold: You can contribute to them on a pretax basis, your savings will grow over time tax-free, and withdrawals are tax-free as long as they are used to cover qualified medical expenses.

HSAs also offer a lot of flexibility. Unlike a flexible spending account for health care, an HSA is not a “use it or lose it” account—the funds won’t disappear if you don’t use them by the end of the year. In fact, you’ll get a bigger benefit from an HSA if you use other cash to pay for current out-of-pocket medical bills and allow the funds in the account to grow. Many HSA plans allow you to invest all or a portion of your contributions in mutual funds, and that offers the potential for more long-term growth than you’ll get if you put all of your contributions in a money market fund or savings account. One strategy is to invest enough money in a low-risk account to cover your current year’s health insurance deductible and invest the rest in mutual funds for longer-term expenses.

Typically, account holders who contribute to HSAs through payroll deductions make regular, fixed contributions throughout the year. However, you’re allowed to change contribution amounts as long as they don’t exceed the maximum contribution limits. This flexibility distinguishes HSAs from flexible spending accounts and health insurance policies, which require you to experience an IRS qualifying event, such as getting married or divorced, in order to make a change during the plan year.

HSAs provide you with an unlimited amount of time after you pay for medical expenses to reimburse yourself. If you’re paying medical expenses with cash rather than tapping the account, hold on to the receipts, because you can reimburse those expenses with funds from your HSA at any time—even years after you’ve incurred the expense. In the interim, your funds will grow, tax-free.

Hidden Features

“HSAs help prepare for future health and wealth needs,” says Patricia Graves, knowledge adviser for the Society for Human Resource Management (SHRM). This is particularly true for retirees. You can’t contribute to an HSA once you sign up for Medicare (at least according to current law; there is legislation pending in Congress that may change that). But after you sign up for Medicare, you can still use the funds tax-free for medical expenses. (After age 65, you can withdraw money for nonmedical expenses without having to pay a 20% penalty, but you will pay taxes on those withdrawals.) Ideally, you should use the money for health care costs, which can be significant in retirement. And the list of eligible expenses is long. Along with deductibles, co-pays and other medical costs that aren’t covered by insurance, you can use the money for vision care, dental costs and hearing aids. HSA dollars can also pay a portion of long-term-care insurance premiums at various limits, depending on the age of the account holder.

HSAs can also help cover the cost of travel essential for medical care. Should you have to travel out of your state for a specific medical procedure, for example, you could use funds from your HSA to cover the cost of a flight or train, or to pay for gas, parking fees and tolls if you drive.

The Coronavirus Aid, Relief and Economic Security (CARES) Act enacted in 2020 in response to the pandemic expanded the types of HSA-eligible expenses, and these changes are permanent. Over-the-counter drugs purchased on January 1, 2020, or later are now HSA-eligible without a prescription. Those include pain relievers, cough suppressants, antihistamines and other drugs that treat issues from heartburn to acne. The law also added feminine-hygiene products to the list of expenses that are eligible for HSA funds.

Selecting a Plan

Some companies encourage employees to sign up for high-deductible plans by offering matching HSA contributions. The average employer contribution was $867 in 2021, according to Devenir, an HSA consulting firm. Not all employers offer HSAs, but as long as you sign up for a high-deductible plan, you can open one on your own with a financial institution that provides HSAs. You may also choose to shop around if your employer’s plan comes with high fees or mediocre investment options. (You can compare plans at HSAsearch.com.) But you may sacrifice some perks if you choose that path, says Rich Ward, managing director and head of health solutions at TIAA, an HSA provider. Using an HSA outside your employer’s offering may mean forgoing the convenience of having pretax contributions deducted from your paycheck, he says. In addition, you may not be eligible for matching contributions if you opt for an HSA that’s not offered by your employer.

If you have an HSA through an employer-sponsored plan and lose your job, the account is yours to keep, and you can still use the funds anytime, tax-free, for qualified medical expenses. Although health insurance premiums are typically not considered qualified medical expenses, there’s an exception if you use withdrawals to pay premiums for COBRA coverage (which lets you continue employer-based insurance for up to 18 months after you leave your job) or to pay for other health insurance premiums if you’re collecting unemployment benefits.

New Limits

Because of recent increases in the cost of living, HSA contribution limits will rise significantly for 2023. The annual contribution limit for self-only coverage will increase from $3,650 to $3,850, and if you have family coverage, the limit will jump from $7,300 to $7,750. Catch-up contributions for account holders who are 55 or older will be $1,000, the same as in 2022.

Source: kiplinger.com

May 27, 2022

Benefits of Health Savings Accounts

A health savings account, or HSA, is a tax-advantaged account that can be used to pay for qualified medical expenses including copays, coinsurance, and deductibles. By using pre-tax money to save for these expenses, an HSA may be used to help lower overall medical costs. (You may hear some people refer to it as HSA health insurance, but it’s actually separate from your insurance policy.)

What’s more, HSAs can also be a savings vehicle for retirement that allows you to put away money for later while lowering your taxable income in the near term.

To learn more about HSAs, read on and learn:

• The meaning of an HSA

• HSA benefits

• Who’s eligible for an HSA

• How much an HSA costs

How Can an HSA Benefit You?

HSA benefits can help make some aspects of healthcare more affordable. An HSA (meaning a health savings account) is a tool designed to reduce healthcare costs for people who have a High Deductible Health Plan (HDHP). In fact, you must have an HDHP to open an HSA.

If you’re enrolled in an HDHP, it means you likely pay a lower monthly premium but have a high deductible. As a result, you typically end up paying for more of your own health care costs before your insurance plan kicks in to pick up the bill. Combining an HDHP with an HSA may help reduce the higher costs of health care that can come with this type of health insurance plan.

Yearly HSA contributions can be up to $3,650 for individuals, or up to $7,300 for families, in 2022. Persons 55 or older by the end of the tax year have the option to make an additional contribution of $1,000 per year, which is known as a catch-up contribution. HSA contributions can be made by the qualified individual, their employer, or anyone else who wants to contribute, including friends and relatives.

Contributions are made with pre-tax money and can grow tax-free inside the HSA account. Some accounts allow money to be invested in mutual funds or even stocks. Withdrawals made to cover qualified medical expenses may not be taxed. And because money in the account is pre-tax — Uncle Sam never took a bite out of it — qualified medical expenses can essentially be paid for at a slight discount. And by contributing pre-tax dollars to an HSA, you are decreasing your taxable income and potentially moving into a lower tax bracket.

How Can You Use an HSA?

The money you contribute to your HSA can be used on an array of healthcare expenses that aren’t paid by your insurance. Rather than dipping into your checking or savings account, you can use an HSA to pay for qualified medical expenses. The IRS provides a long list of these expenses, including:

• Copays, deductibles, and coinsurance

• Dental care

• Eye exams, contacts, and eyeglasses

• Lab fees

• X-rays

• Psychiatric care

• Prescription drugs

But there are also a number of unqualified expenses as well. These costs include:

• Cosmetic surgery

• Teeth whitening

• Health club dues

• Nonprescription drugs

• Nutritional supplements

How Can an HSA Benefit You?

You may wonder if an HSA is worthwhile. Depending on your situation and your healthcare expenses, it may be a good use of your funds. To help you decide whether or not to start a health savings account, here are some important HSA benefits to consider.

Triple Tax Advantages

Putting money into an HSA lowers taxable income. The money contributed by a qualified individual to the account is pre-tax money, so it will be excluded from gross income, which is the money on which income taxes are paid. This is the case even if an employer contributes to an employee’s account on their behalf. So if you earn $50,000 a year and max out your HSA contribution, you will only be taxed on $46,350. Contributions made with after-tax funds are tax-deductible on the current year’s tax return.

There are other considerable tax advantages that come with HSAs. Contributions can earn interest, or returns on investments, and grow tax-free. This tax-free growth is comparable to a traditional or Roth IRA. However, HSAs have a significant tax advantage over these accounts.

Here’s another angle on these HSA benefits: Not only are contributions made with pre-tax money, but withdrawals that are made to pay for qualified medical expenses aren’t subject to tax at all. Compare that to say, Roth accounts where contributions are taxed on their way into the account, or traditional IRAs where withdrawals are taxed.

It’s Investable

As money builds in an HSA, you can save it for future healthcare costs. The funds can be invested in ways that are similar to other workplace retirement accounts. They can be put into bonds, fixed income securities, active and passive equity, and other options. You could potentially be investing money in this way for decades prior to retirement.

Using an HSA for retirement might also be a good way to prepare for the healthcare expenses as you age. In fact, healthcare may be one of the biggest retirement expenses. According to some estimates, a 65-year-old couple will need more than $387,000 to cover healthcare costs over the rest of their lives. An HSA could be a good way to stash some cash to put towards those charges.

If you were to become chronically ill or need help with the tasks of daily living as you age, you might need long-term care at home or in a nursing facility. Medicare does not cover long-term care, but long-term care insurance premiums are qualified expenses and can be paid with HSA funds. Saving in an HSA before these potential costs arise may offset overall spending on healthcare expenses later in life.

The Money Is Yours and Stays That Way

Another advantage of HSAs is that contributions roll over from year to year. In comparison, flexible spending account (FSA) funds, which also allow pre-tax contributions to save for qualified healthcare expenses, must be spent in the same calendar year they were contributed, or you risk losing the funds. HSAs don’t follow this same use-it-or-lose-it rule. Funds contributed from year to year are available the next year. There is no time limit or expiration date saying you must spend the money by a certain year. What’s more, your HSA funds follow you even if you change jobs and insurance providers. It can be very reassuring to know those funds won’t vanish.

Who’s Eligible for an HSA?

If you are covered by a HDHP, you are probably eligible to open an HSA. For 2022, the IRS defines high deductible plans as any plan with a deductible of $1,400 or more for individuals and $2,800 or more for families. What’s more, your yearly out-of-pocket expenses can’t exceed $7,050 ($14,100 for families). These limits do not apply for out-of-network expenses.

Here’s one eligibility situation to be aware of: Once you enroll in Medicare, you can no longer contribute to an HSA, since Medicare is not an HDHP. If you have an HSA, those funds are still yours, but you can’t continue adding to the account.

Who Can Open and Contribute to an HSA

You may open and contribute to an HSA if you enrolled in a High Deductible Health Plan, or HDHP. The IRS defines this as having a deductible of at least $1,400 for an individual and $2,800 for a family.

What if I Already Have an HSA?

If you already have a healthcare savings account, you may continue to contribute to it as long as you have that plan and are not enrolled in Medicare, which is not an HDHP. Even if you no longer have an HSA-eligible insurance plan, that money is yours to spend on healthcare expenses, invest, or transfer.

Choosing between Two Different HSAs

Not all HSAs are identical. If you open an HSA or already own an HSA, you will have to make a key decision (this is especially true if you are using a healthcare savings account to build up money to use when you retire). The choice is: Do you want to manage the fund yourself, or would you like a financial professional to manage your portfolio and guide your growth? There is no right answer; it’s all about your personal taste and money style. But keep it in mind, and know that there are choices available. You can open an HSA at a number of different financial and other institutions, with or without account management.

How Much Does It Cost?

If you decide that a healthcare savings account is right for you, don’t be surprised if you are hit with fees when you open one. Some of these accounts may charge you every month to maintain the account, especially if a professional is advising you on investments. These fees may be as low as $3 or $5 a month, but could be higher. You may also be assessed a percentage of the account’s value, with that fee rising as your account’s value increases. It’s important to read the fine print on any account agreement to make sure you know the ground rules.

On the other hand, some HSAs involve no fees at all. Usually, these will involve more hands-on management by the account holder versus a financial professional.

Common Fees Charged by an HSA

As mentioned above, some HSA providers charge a monthly fee for account maintenance. These fees are typically no more than a few dollars a month. But even a $5 monthly fee adds up to $60 over the course of a year, which could be more than the cost of a co-pay for an annual check-up with a physician. So be aware that fees might take a significant bite out of potential savings.

Also note that if you withdraw funds from your account for something other than a covered medical expense before you turn 65, you could be hit with fees. These withdrawals will be subject to income taxes and a 20% penalty.

Do HSAs Give You More Options?

Many people first encounter HSAs when they are offered the opportunity to enroll at work. However, even in this situation, you have choices. You may open an account with any HSA provider, as long as you qualify on the basis of having a HDHP. So in that way, you have options regarding which account you choose and how much you save in it.

Beyond that, as outlined above, there are dozens of qualifying expenses for which you may use HSA funds. Perhaps it’s lab tests that weren’t fully covered by insurance or contact lens or counseling services. It’s up to you how to allocate the funds in your account.

HSAs are Different from FSAs

HSAs, as described above, are healthcare savings accounts for individuals who have a High Deductible Health Plan. Another financial vehicle with a similar-sounding name are FSAs, or Flexible Spending Accounts. An FSA is a fund you can put money into and then use for certain out-of-pocket healthcare expenses. You don’t pay taxes on these funds. Two big differences vs. HSAs to be aware of:

• To open an FSA, you don’t need to be enrolled in an HDHP. This is only a qualification for HSAs.

• The money put in an FSA account, if not used up by the end of the year, is typically forfeited. However, there may be a brief grace period during which you can use it, or your employer might let you carry over several hundred dollars. With an HSA, however, once you put money in the account, it’s yours, period.

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The Takeaway

Health savings accounts, or HSAs, offer a way for people with High Deductible Health Plans to set funds aside to help with healthcare expenses. The money set aside is in pre-tax dollars, and it brings other tax advantages. What’s more, funds in these HSAs can roll over, year after year, and can be used as a retirement vehicle. For those who qualify, it can be a valuable tool for paying medical expenses and enhancing financial health, today and tomorrow.

Looking for a bank that can help you boost your financial life? Take a closer look at SoFi. Open our linked Checking and Savings accounts with direct deposit, and see how your money can earn more, faster. SoFi pays a stellar 1.25% APY, 41 times the national average for checking accounts. And we let you keep more of that interest rather than eating away at it with fees. SoFi doesn’t charge monthly, minimum-balance, or overdraft fees.

Get ready to save for tomorrow with SoFi.

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Source: sofi.com

May 27, 2022

What Is a Health Reimbursement Arrangement (HRA) and How Is It Used?

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Whether you work for a large employer or a small business, health reimbursement arrangements (HRAs) provide a tax-free way to cover medical costs.

An HRA essentially gives you a stipend to reimburse you for health care costs like insurance premiums, copays, prescriptions, and over-the-counter drugs, relieving some financial pressure, making them one of the most critical benefits employees seek.

This guide details everything you need to know about health reimbursement arrangements, including how HRA plans work, how they’re different from health savings accounts and flexible spending accounts, and what you can do with the funds.

What Is a Health Reimbursement Arrangement (HRA)?

Health reimbursement arrangements, sometimes called health reimbursement accounts, are employer-funded accounts that help employees and their covered dependents pay for out-of-pocket health care expenses. HRAs work in tandem with your employer-sponsored health insurance plan to reimburse things like your copays, deductibles, or prescription medication.

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An HRA plan is a valuable tool to pay for medical costs not covered by your health plan. It reimburses you with tax-free money provided by the employer as an employee benefit.

How an HRA Works

Imagine you have a sick child who needs prescription medication. The copay for the brand-name drug (with no generic available) gives you sticker shock. Suddenly, high out-of-pocket bills overwhelm your monthly budget, forcing you to make some financial adjustments.

Fortunately, you submit a reimbursement request on your HRA and receive a check for the amount you spent at the pharmacy.

Employers set up HRA programs to provide extra funds for qualified medical costs you, your spouse, or your dependents incur. Employers are the sole source of HRA funds; employees cannot contribute to their HRA.

Every year, the participating employer determines how much they will contribute to your HRA. The IRS requires that every employee have access to the same amount of HRA funds. Fortunately, unused account balances roll over to the following year.

Types of HRAs

There are three types of health reimbursement arrangements. Which type you have access to depends on your employer’s circumstances.

Qualified Small Employer HRA (QSEHRA)

Small businesses employing fewer than 50 full-time workers can set up a qualified small-employer health reimbursement arrangement, also known as a small-business HRA.

These businesses are exempt from providing employer-sponsored health insurance. So employees must get their insurance through the national or a state marketplace if their employer doesn’t offer one.

Funds in your small-business HRA can subsidize health insurance premiums or refund medical expenses you pay out of pocket.

The IRS limits how much your employer can contribute to a small-business HRA. The amount changes with every tax year. For example, in 2022, the IRS capped employers’ contributions to $5,450 for self-only employees and $11,050 for employees with a family.

Individual Coverage HRA (ICHRA)

Some employers don’t offer employee health insurance but are willing to provide a stipend to cover the premiums. The individual coverage HRA helps employees pay for health insurance if their employer has no employee health care plan.

Since January 2020, individual coverage HRAs have created a new way for small employers to distribute tax-free money for health insurance. As a result, you can use your HRA funds to buy health insurance coverage through the HealthCare.gov or state marketplace or directly from a private insurer. Previously, rules prohibited employees from using HRA funds to pay for individual health insurance premiums.

If you’re 65 or older, you can use the individual HRA balance to cover Medicare Part A, Part B, and Part C (Medicare Advantage) premiums. If you are still working and on Medicare, your employer may require Medicare coverage verification each time you request reimbursement from the individual coverage HRA.

Group Coverage HRA (GCHRA)

High-deductible health plans (HDHPs) offer more significant savings to employers since the premiums are typically lower than traditional group health insurance plans. However, employees must pay medical bills in full until they meet the deductible, which is several thousand dollars.

So some employers offer a group coverage HRA in conjunction with HDHPs. Since HDHPs can have higher out-of-pocket expenses, the group coverage HRA helps close the gap between the high deductible and the employee’s medical needs.

HRA vs. HSA vs. FSA

In addition to HRAs, there are two other programs that complement health insurance plans: health savings accounts (HSAs) and flexible spending accounts (FSAs). Typically, they all work on a reimbursement basis, but some employers offer debit cards for direct access to funds.

HSAs are unique because the account goes with you after leaving an employer but can only work with HDHPs. Although it requires cash contributions, you control the money and can invest the HSA balance in stocks, bonds, and mutual funds.

FSAs are similar to HRAs. However, they’re known for use-it-or-lose-it rules (they don’t roll over each year), and employees can contribute through salary reduction.

HRAs, HSAs, and FSAs have some important differences that could affect which one’s right for you. Those include:

Who funds it
How much money can be added annually (individuals; families)
Whether the employee pays taxes
What type of health plans it works with
Whether you can use it to pay health insurance premiums
Whether unused funds roll over each year
What happens to the funds when you leave the employer (portability)

Comparing the differences between HRAs, HSAs, and FSAs, you can see that there are pros and cons to each. So if you have access to more than one and can only fund one, consider the benefits and drawbacks carefully before deciding.

	HRA	HSA	FSA
Funding Source	Employer	Employer or worker	Employer or worker
Annual Cap (2022)	Unlimited on most	$3,650; $7,300	$2,850
Employee Taxes	No	No	No
Plan Type	Any	HDHP	Any
Premium Coverage	Yes	No	Not usually
Rollover	Yes	Yes	Sometimes
Portable	No	Yes	No

Advantages & Disadvantages of HRAs

An HRA is a powerful tool to manage health care costs. Essentially, HRAs are free money for employees with great flexibility in how you choose to spend it. Plus, employers also win because they can deduct 100% of requested reimbursements from their taxes.

But there are advantages and disadvantages you should consider carefully.

Advantages

HRAs have plenty of advantages for employers, such as their tax-deductible status. But HRAs have robust benefits for employees too.

Contributions Are Not Taxable as Employee Income. Employees don’t pay income taxes on the amount their employer provides in an HRA, lowering their taxable income.
Withdrawals Are Tax-Free. Employees pay no income taxes when making withdrawals for qualified medical expenses.
The Balance Rolls Over Annually. Your HRA balance doesn’t expire, allowing you to use the rest in later years. So if your health was good last year, but you experience a new illness this year, your HRA surplus helps pay for unexpected doctor’s appointments, treatments, or hospitalization.
You Can Use HRA Money for Many Things. HRAs have the most comprehensive list of qualified medical expenses. That includes (but isn’t limited to) medical bills and dental and vision expenses.

Disadvantages

Although HRAs are a boon to employee health care protection, they have limitations too.

You Must Have Health Insurance to Use the HRA. If you opt out of buying health insurance coverage, you’re not eligible to use an HRA.
Your Plan Determines Qualified Medical Expenses. Your company’s HRA plan may cover things that other companies’ plans don’t. Check with your HRA administrator for a list.
You Lose HRA Funds if You Leave the Employer. If you separate from the employer, you lose all funds in your HRA account. So if you’re planning a change, exhaust your HRA funds before departing.
Your Employer Determines the Contribution Amount. Some employers opt for lower-cost group plans that force the employee to shoulder more financial responsibility. If the HRA contribution amount is low, the health care program may not offer the employee much protection.
Employees Cannot Contribute to their HRA. Unfortunately, you cannot contribute part of your paycheck to your own HRA. Only HSAs and FSAs permit employee funding.

Health Reimbursement Arrangement FAQs

HRAs are great supplements to health insurance, but you probably have more questions. These answers will clear things up.

What Health Care Expenses Do HRAs Cover?

HRAs cover various costs not usually covered by health insurance, like:

Routine doctor’s visits and copays
Medical bills, including hospital stays
Deductibles and coinsurance amounts
Hospital copays and expenses
Prescription medication
Over-the-counter medicine
Vision care (exams, glasses, contacts, and corrective surgery)
Diabetic supplies (testing kits and blood glucose monitors)

These are just a few of the circumstances HRAs can cover. Some plans also include:

Monthly premium payments toward health, vision, and long-term care insurance
Acupuncture and chiropractic treatments
Dental treatments and orthodontics (not premiums)
Speech therapy
Mental health care, such as talk therapy and alcoholic and drug addiction treatment
Weight loss programs
Service animal acquisition, care, and training

Since covered items vary among companies, check with your employer for more details about qualified medical expenses.

What Health Care Expenses Do HRAs Not Cover?

Essentially, HRAs only cover expenses directly related to treating a medical condition.

For example, HRAs will not reimburse you for gym memberships, child care, cosmetic procedures, marriage counseling, feminine hygiene products, and funeral expenses.

What Happens to Unused HRA Funds at the End of the Year?

Fortunately, HRAs roll over funds from one year to the next if you don’t use them. So healthy people can save HRA funds for a catastrophic health emergency.

However, if you change companies, your HRA balance returns to your employer.

Can I Get an HRA if I Don’t Have Health Insurance?

No, you must have health insurance to get an HRA. Either enroll in the employer’s group health insurance plan or a marketplace policy to be eligible for HRA benefits.

Can I Cash Out an HRA?

No, you must use all HRA funds for qualified medical expenses. You can only access the HRA funds by submitting a reimbursement request to your HRA plan. If you leave your employer, they retain your HRA balance.

What Happens to an HRA When I Leave a Job?

Because your employer paid for 100% of your HRA contributions, the money stays with them if you leave your job. Find a way to use up the HRA balance if you plan to change employers.

Final Word

A health reimbursement arrangement is basically free money your employer gives you to spend on medical fees. The HRA funds are tax-free for you and tax-deductible for them.

HSAs are straightforward to use with your health insurance plan. For example, suppose you visit the doctor, then receive a $100 invoice two weeks later. You would pay the bill, submit your payment to your HRA program, and they would reimburse you for $100.

Another critical point is that the detailed list of covered expenses depends on your employer. Still, HRAs have the most generous reimbursement list of the three types of health accounts.

Alyce Meserve writes about personal finance, retirement, insurance, travel, making money, credit cards, and more. When she’s not sharing personal finance strategies, you can find her on a cruise or writing about one, hanging out with her American Eskimo Dog, Casper, taking a road trip, and playing video games. Reach her on Instagram @alyce.meserve.

Source: moneycrashers.com

May 26, 2022

Dear Penny, Iâm 23 years old…

Dear Penny,

I’m 23 years old and make a $55,000 salary. Each year I can make upward of a 20% bonus, and I’ve always gotten it. I started investing in a Roth IRA last year and have managed to stay on track to max it out each year.

I have a decent emergency fund of three months’ expenses. My company doesn’t offer a 401(k) match, so I haven’t contributed to it at all. I’m worried I won’t have enough saved for retirement. Any advice?

-J.

Dear J.,

Relax. If you’re already maxing out your Roth IRA at 23, I think you’re on track to become a very wealthy retiree.

Financial planners often recommend saving between 15% to 20% of pre-tax income for retirement. The maximum Roth IRA contribution for someone under 50 is $6,000 in 2022. That means you’re falling a tad short of that recommendation, particularly when you factor in your bonus. Of course, the fact that you’re making Roth contributions — which are made with after-tax dollars but offer unlimited tax-free growth — makes the calculus a bit more complicated.

But I’m not too worried about the exact percentage you’re saving. In your 20s, simply finding any money in your budget to invest can be extraordinarily difficult. That’s unfortunate, because a dollar invested in your 20s will go so much further than a dollar invested in your 40s or 50s, thanks to the power of compounding.

The habits you’re building right now are just as important as the amount you’re saving for retirement. If you can make investing a regular part of your monthly budget, you’ll build yourself a substantial nest egg. Living below your means and avoiding lifestyle inflation, i.e., the tendency to develop fancier tastes as your income rises, are also key. Make it a goal right now to allocate at least a bigger portion of future raises toward investing.

You have several options for investing more right now if that’s a high priority. But there are a few things to consider first.

If you have high-interest debt, like credit cards or a private student loan, tackle that before you invest more money. The interest you’re paying is probably more than what you could expect to earn from the stock market in a typical year.

Since around 20% of your annual income comes in the form of a bonus, consider boosting your savings a bit. You say you’ve always gotten a bonus, but that may not always be the case. Plus, with fears of a recession looming, it’s wise to build your savings beyond the three-month emergency fund minimum. A bigger emergency fund protects the retirement money you’ve managed to save. By having a healthy amount stashed away in a bank, you reduce the risk that you’ll need to raid your retirement accounts in a pinch.

If you still want to invest more, making unmatched 401(k) contributions is probably the easiest way to do so. You won’t get free money out of your employer, of course. But you’ll still get some generous tax breaks. If you opt for a traditional 401(k) through your employer, your contributions will reduce your taxable income, or you can get tax-free withdrawals in retirement if you go with a Roth option. If you earn money from freelance or contract work, you could also look into opening a self-employed retirement plan for yourself.

Another option would be to max out contributions to a health savings account (HSA), provided that you’re eligible. Of course an HSA is first and foremost for medical expenses. But you can also invest that money if you don’t need it. That money can grow the same way it would in an IRA or 401(k). If you wait until age 65, you can withdraw the money for any purpose without penalty, though you’d still owe taxes on the withdrawals.

You’re still early in your career, so you probably have many jobs ahead of you. Next time you’re on the hunt for a job, you may want to make a 401(k) match a high priority and then contribute at least enough to get your company’s full match.

Maxing out your Roth IRA at 23 is a huge accomplishment. I have no doubt that you’ll be able to find ways to save even more over time.

Just don’t get so focused on retirement that you ignore your short- and medium-term goals. For most people, retirement is the ultimate financial milestone. But there are a lot of things you’ll want to accomplish in the next 40 years or so, as well. Saving for a down payment if you want to buy a home or go on a vacation are also important goals. You don’t need to put every extra cent into a retirement account. Because you’ve started saving early, you have the luxury to prioritize other goals.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].

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Source: thepennyhoarder.com

May 18, 2022

Is Inflation Eating Your Budget? 13 Ways to Stretch Your Money

Follow these 13 actionable tips to stretch your money!

Whether you own or rent, there’s no doubt your budget has been feeling the effects of recent inflation. And while you’re powerless to improve the current economic changes, that doesn’t mean you can’t take action to combat higher prices. High inflation decreases your purchasing power, forcing you to spend more and get less in return. As a result, higher prices make it difficult to save money and reach your financial goals. Perhaps you’re not ready to take drastic measures like moving to a smaller apartment or taking public transportation. Instead, start with minor changes that will stretch your money so you get more bang for your buck.

1. Set financial goals

Goal setting is an important — yet often overlooked — step when trying to make progress with your finances. Don’t worry if it feels premature based on your current affairs. Setting goals and executing a plan to achieve them is powerful.

Keeping a specific goal in mind makes you more intentional with your working, saving and spending. In addition, focusing on your financial goals will give you the necessary clarity to make sound money decisions and the motivation to push forward.

2. Live on a budget

Getting good at making your money go further requires a certain level of financial awareness. Once your paycheck hits your bank account, do you have a plan for how you’ll spend your money, or do you go with the flow?

Having a plan is crucial, and a budget is a spending plan. The act of creating a budget is simply making a plan for how you’ll spend your money. Learning to live on a budget means you consistently create a spending plan and take steps to stick to that plan throughout the budget period.

Budgeting is a marathon

The first step to successful budgeting is to expect a learning curve. Becoming a budgeting master is a valuable skill that takes time to develop. So, commit to pushing through the tough months even when it feels like you’re doing it all wrong.

Budget your way

A quick Google search on “how to budget” will display many budgeting types and options — don’t get overwhelmed. As your budgeting prowess grows, you’ll begin to learn what methods do and do not work for you.

Approach budgeting as one-size-fits-some rather than one-size-fits-all. There are many different ways to budget. And, when used consistently, each of them will move you closer to reaching your goals. You may realize you prefer to manage your money with digital tools or use a budget binder to organize a more traditional paper budget.

Humans have a pesky habit of overcomplicating things, but budgeting doesn’t require anything elaborate or complicated. If you’ve tried percentage-based budgeting and it was an epic fail, there are simpler options to help you stretch your money further.

We’ve discovered that many folks gain more control over their finances when they manage their money using a zero-based (or zero-sum) budget.

In its simplest form, a zero-based budget looks like INCOME – EXPENSES = 0.

Assign every dollar of your income to carry out a specific financial “job.” Each dollar must serve a purpose, and it’s up to you to decide whether that purpose — spend, save, invest or give. Once you’ve given each of your dollars their assignments and your total income minus your total expenses equals zero, you have implemented a proper zero-based budget.

3. Track your spending

If you often wonder where your money went, it’s time to track your spending. While you may have a general idea of where your money goes each month, how clear are you on the specifics? For example, do you know how much money you actually spent on groceries, fuel and dining out last month?

Get clear on exactly how much you’re spending in each budget category. Having a better grasp on your spending is especially important when deciding how much rent or car payment you can afford each month.

Grab your phone or a notebook and add an entry each time you spend money. Exclude fixed expenses as you’ll be tracking those in your actual budget. Instead, focus on logging your Target trips, grocery runs and coffee pitstops.

Track your spending for a solid month, if possible. If you can’t swing a month, aim for at least two full weeks. At the end of your tracking period, enter your spending data on a spreadsheet or grab a few highlighters to color-code your spending.

Total each category to see exactly how much you’ve spent and compare it to your budget. The information you’ll gather from this exercise is invaluable and helpful when you want to stretch your money in a more balanced way. Your total spend numbers will point to where most of your spending is.

Your spending should reflect your values and priorities. If you discover this is not the case for you, what adjustments you need to make will be clear.

4. Avoid overspending

Overspending can creep up on you. What may feel like $10 swipes of your card a few times a week can quickly amount to high credit card balances or going over budget.

Consider these simple changes to reduce overall spending:

Order groceries online to avoid impulse purchases
Reduce online shopping frequency (e.g., order from Amazon only once per month)
Keep a running “wishlist” of items you want or need. When you come across a great deal, check your list — if the thing is on your list, buy it. If it’s not, move on.
Unsubscribe from retail emails that tempt you to spend
Add a personal spending category to your budget. Allocating a specific amount of money to spend in any way you see fit, guilt-free.

It’s not about money

Overspending is often misleading. The reality is overspending is rarely about the actual spending and is almost always caused by an emotional trigger. Therefore, the key to curbing overspending is identifying your trigger(s) and avoiding it (them).

Think back to the last time you felt shame or guilt for overspending. Then, go deeper to understand the underlying emotion that drove your spending? Were you tired? Did you have a bad day at work? Did you fight with your partner?

Retail therapy may feel helpful because we get a boost of adrenaline when we spend. However, you only perpetuate the problem when you avoid dealing with the emotions driving your spending habits. Instead, pay attention to exactly how you’re feeling the next time you experience the urge to spend money.

Once you’ve identified your spending triggers, create a plan to avoid them and break your pattern of overspending.

5. Negotiate your bills

A great way to stretch your dollar is to negotiate your bills each year. You’ll be shocked by how many of your service providers are willing to lower your rates with a simple request.

Review your monthly expenses and make a list of providers to contact. You can call the company or use their live chat feature if they have one. Explain to the representative that you want to reduce your monthly payment and inquire about their best deal. Expect a few “nos” and many a “yes,” especially if you’re kind and polite when requesting a discount.

This strategy is perfect for saving money on your:

Utility bills
Cell phone bill
Cable bill
Car insurance bill
Credit card and bank fees
Other insurance premiums
Rent

Regarding medical expenses, your best bet is to contact the billing department and offer to pay them a percentage of the total balance. Often, the provider is willing to accept a fraction of the amount owed to settle the account.

6. Pay off debt

Debt payments, especially those with high-interest rates, can eat up your income quickly. Creating a debt payoff plan will give you a road map to paying off your debt and keeping the money you previously sent to your debtors each month.

In addition, if you have a good payment history, contact your credit card servicers and request a lower interest rate. Refinancing is also an excellent option for securing a lower mortgage payment or reducing your minimum payment on personal loans or federal student loans.

Avoid future debt

As you work to get out of debt, it’s good practice to avoid taking on future debts. Trading old debt for new debt is counterproductive and will keep you stuck in a perpetual debt cycle.

7. Plan ahead

Planning into the next quarter, or even an entire year, can help you maximize your savings. In addition, saving a full three to six months of living expenses as an emergency fund will prepare you for any emergencies you experience.

Maintaining an emergency fund will protect your finances against increased expenses in the future, possible sickness, accidents or loss of income.

Forecast your upcoming expenses for the next 6-12 months and determine which you can begin saving for now. Items, such as Christmas gifts, birthdays, tuition, vacations, annual bills, etc., are all expenses you can save for, using sinking funds.

Save a small amount each month (or paycheck) until you save enough money to cover the expenses in full. Keep your sinking funds in a separate savings account to avoid accidental spending.

8. Try a savings challenge to stretch your money

Challenges and competitions are very motivating. And when otherwise unpleasant activities feel like a game, even adults can find enjoyment. Get started with a simple challenge, such as saving each five-dollar bill you receive or tossing your loose change into a jar for a predetermined time.

Are you competitive by nature? Ask some close friends or family members to join you. You’ll all benefit from holding each other accountable and boosting the competition factor.

9. Plan your meals

More than any other suggestion on this list, meal planning has the potential to stretch your money further. You’ve likely noticed your grocery bill increasing month after month. Plan out your meals and use that plan to create a shopping list.

Making a mental note of meals you’re hungry for while grocery shopping does not constitute meal planning. More often than not, heading to the grocery store without an intentional plan will cause you to go over budget.

Food waste accounts for 30-40 percent of the food supply in the United States (as of 2021). Shopping for groceries without planning often leads to a fridge full of unused fresh fruit and produce at the end of the week. If your food budget is $1,000 per month, that means $300-$400 of that budget will probably be wasted, if you’re not planning.

10. Stretch your money by ditching your cable

One of the easiest ways to maximize your money is to cancel your cable service. Today, 56 percent of U.S. homes no longer rely on cable or satellite boxes for content.

We’re fortunate to have the unique opportunity to stop paying for dozens of channels we don’t watch and customize our viewing experience. In addition, the number of available streaming services has exploded in recent years, with live sports and bundles finally being an option without cable packages.

Have an attachment to traditional cable and refuse to go without it? Keep your subscription but use tip No. 5 to negotiate a better deal.

11. Get a programmable thermostat

Unfortunately, energy costs are on the rise, too. Depending on your location, you’ll experience increased costs throughout the summer months (even if you’re trying to stretch your money). However, an Energy Star Certified programmable thermostat can cut your utility costs by up to 8 percent per year (around $50/year).

Not only will a programmable thermostat save you money but buying a “smart” model that works with Amazon’s Alexa or Google’s Home systems will also offer the convenience of allowing you to control the temperature with your voice.

Double your savings

Some programmable thermostats can cost upwards of $200, but more affordable options are available. In addition, many natural gas and electricity providers offer rebates for switching to a programmable thermostat.

In some instances, the rebate amount may even exceed the thermostat price. Contact your providers before purchasing your thermostat to determine which models qualify for rebates in your area.

12. Use an app

Looking for more convenient ways to stretch your money? There’s an app for that! Using mobile apps to save money or earn cashback on purchases are easy ways to combat higher prices.

Apps are available to save money on groceries, household items and even fuel. Other apps offer cashback when shopping online and in-store with your favorite retailers. There are even apps that will reward you for exercising.

Keep in mind that using cashback apps won’t make you rich. But using them consistently will help you save money on your everyday purchases, plus earn cashback rewards you can redeem for gift cards or cash.

13. Get a side hustle

There’s no doubt that cutting costs and saving money is a solid strategy to help stretch your money. But, focusing on increasing your income at the same time will boost your finances into overdrive. Plus, finding new, creative ways to earn small amounts of money in your free time will diversify your income and put you on the fast track to reaching your financial goals.

Monetize your passion

Here’s the good news: we live in an era where you can make money in countless unique, exciting ways. You no longer have to work overtime at a job you hate to make your rent payments each month.

People are turning their passions into full-time incomes from side hustles, such as pet-sitting, baking and even posting on social media. Brainstorm a list of your favorite hobbies and different ideas to monetize them.

The bottom line

Rest assured, if you’re feeling increased financial pressure, you’re not alone. Understand that maintaining financial stability in these uncertain economic times is still possible. Lowering your expenses and making a margin in your budget will allow you to spend your money on the things that matter most.

Source: rent.com

May 17, 2022

What Is the Principal Amount of a Loan?

A personal loan can be a helpful financial tool when someone needs to borrow money to pay for things like home repairs, a wedding, or medical expenses, for example. The principal amount of a loan refers to how much money is borrowed and has to be paid back, aside from interest.

Keep reading for more insight into what the principal of a loan is and how it affects repayment.

Loan Principal Meaning

What is the principal of a loan? When someone takes out a loan, they are borrowing an amount of money, which is called “principal.” The principal on a loan represents the amount of money they borrowed and agreed to pay back. The interest on the loan is what they’ll pay in exchange for borrowing that money.

Does a Personal Loan Have a Principal Amount?

Yes, personal loans do come with a principal amount. Whenever a borrower makes a personal loan payment, the loan’s principal decreases incrementally until it is fully paid off.

Recommended: What Is a Personal Loan?

Loan Principal vs Loan Interest

The loan principal is different from interest. The principal represents the amount of money that was borrowed and must be paid back. The lender will charge interest in exchange for lending the borrower money. Payments made by the borrower are applied to both the principal and interest.

Along with the interest rate, a lender may also disclose the annual percentage rate (APR) charged on the loan, which includes any fees the lender might charge, such as an origination fee, and the interest. As the borrower makes more payments and makes progress paying off their loan principal amount, less of their payments will go towards interest and more will apply to the principal balance. This principal is referred to as amortization.

Recommended: What Is the Average Interest Rate on a Personal Loan?

Loan Principal and Taxes

Personal loans aren’t considered to be a form of income so the amount borrowed is not subject to taxes like investment earnings or wages are. The borrower won’t be required to report a personal loan on their income tax return, no matter who lent the money to them (bank, credit card, peer-to-peer lender, etc.).

Recommended: What Are the Common Uses for Personal Loans?

Loan Principal Repayment Penalties

As tempting as it can be to pay off a loan as quickly as possible to save money on interest payments, some lenders charge borrowers a prepayment penalty if they pay their personal loan off early. Not all charge a prepayment penalty. When shopping for a personal loan, it’s important to inquire about extra fees like this to have a true idea of what borrowing that money may cost.

The borrower’s personal loan agreement will state if they will need to pay a prepayment penalty for paying off their loan early. If a borrower finds that they are subject to a prepayment penalty, it can help to calculate if paying that fee would cost less than continuing to pay interest for the personal loan’s originally planned term.

How Can You Pay Down the Loan Principal Faster?

It’s understandable why some borrowers may want to pay down their loan principal faster than originally planned as it can save the borrower money on interest and lighten their monthly budget. Here are a few ways borrowers can pay down their loan principal faster.

Interest Payments

When a borrower pays down the principal on a loan, they reduce how much interest they need to pay. That means that each month as they make a new payment they reduce their principal and the interest they’ll owe in the future. As previously noted, paying down the principal faster can help the borrower pay less interest. Personal loan lenders allow borrowers to make extra payments or to make a larger monthly payment than planned. When doing this, it’s important that borrowers confirm that their extra payments are going towards the principal balance and not the interest. That way, their extra payments work towards paying down the principal and lowering the amount of interest they owe.

Shorten Loan Term

Refinancing a loan and choosing a shorter loan time can also make it easier to pay down a personal loan faster. Not to mention, if the borrower has a better credit score than when they applied for the original personal loan, they may be able to qualify for a lower interest rate which can make it easier to pay down their debt faster. Having a shorter loan term typically increases the monthly payment amount but can result in paying less interest over the life of the loan and paying off the debt faster.

Cheaper Payments

Refinancing to a new loan with a lower interest rate may reduce monthly loan payments, depending on the term of the new loan. With lower monthly scheduled payments, they may opt to pay extra toward the principal and possibly pay the loan in full before the end of the term.

Other Important Information on the Personal Loan Agreement

A personal loan agreement includes a lot of helpful information about the loan, such as the principal amount and how long the borrower has to pay their debt. The more information the borrower has about the loan, the more strategically they can plan to pay it off. Here’s a closer look at the information typically included in a personal loan agreement.

Loan Amount

An important thing to note on a personal loan agreement is the total amount the borrower is responsible for repaying.

Loan Maturity Date

A personal loan’s maturity date is the day the final loan payment is due.

Loan Interest Rates

The loan’s interest rate and APR should be listed on the personal loan agreement.

Monthly Loan Payments

The monthly loan payment amount will be listed on the personal loan agreement. Knowing how much they need to pay each month can make it easier for the borrower to budget accordingly.

The Takeaway

Understanding how a personal loan works can make it easier to pay one-off. To recap — What is the principal amount of a loan? The principal on a loan is the amount the consumer borrowed and needs to pay back.

Consumers looking for a personal loan may want to consider a SoFi Personal Loan. With competitive interest rates and a wide range of loan amounts available to qualified borrowers, there may be a personal loan option that works for your financial needs.

Learn more about SoFi Personal Loans today

FAQ

What is the principal balance of a loan?

The principal balance of a loan is the amount originally borrowed that the borrower agrees to pay back.

Does the principal of the loan change?

The original loan principal does not change. The principal amount included in each monthly payment will change as the amortization period progresses. On an amortized loan, less principal than interest is paid in each monthly payment at the beginning of the loan and incrementally increases over the life of the loan.

How does loan principal work?

The loan principal represents the amount borrowed. Usually, this is done in monthly payments until the loan principal is fully repaid.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC), and by SoFi Lending Corp. NMLS #1121636 , a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law (License # 6054612) and by other states. For additional product-specific legal and licensing information, see SoFi.com/legal.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Photo credit: iStock/cagkansayin
SOPL0322006

Source: sofi.com

Intro to Budgeting: What is a Budget?

Who Needs to Use a Budget?

Why Is Budgeting Important?

It Helps You Control Your Spending

It Helps You Figure Out Your Long-Term Goals

It Can Make You Feel More Financially Secure:

It Can Help You Get Out of Debt

It Keeps You Organized

It Helps You Save Money

How to Create a Budget: 5 Actionable Steps

1. Calculate your monthly income after taxes

Calculating your monthly income as a salaried employee

Calculating your monthly income as an hourly employee

Subtract taxes and other deductions from your gross monthly income. If you’re unsure of where to find this information, one place you can look is your employer-provided pay stub. You’ll be able to see how much is deducted by checking the net pay that’s deposited to your checking account.

2. Identify fixed and variable expenses

Fixed expenses

Variable expenses

How to factor expenses into your budget

3. Set savings and debt payoff goals

Short-term financial goals

Long-term financial goals

4. Record your spending

5. Track your budgeting progress, review, and revise

Budgeting Breakdown for Beginners

How to Choose the Budgeting Style That Works for You

Starting simple with your bank statements

Keep tabs on transactions with the envelope method

Follow the 50/30/20 rule

50/30/20 Calculator

Consider a zero-based budget

Selecting a Budgeting Tool That Suits Your Lifestyle

Common Budgeting Obstacles and Mistakes

1. Estimating irregular income

2. Paying for emergency expenses

3. Forgetting one-time expenses

How Often Should You Review Your Budget?

Key Takeaways: Budgeting 101

Bottom Line: Budgeting Can Help You Take Control of Your Finances

Browse Related Articles

Tip #1: If you switch jobs, your HSA comes with you

Tip #2: You can change your HSA contributions at any time

Tip #3: HSAs offer triple tax advantages

Tip #4: Your HSA dollars are not ‘use it or lose it’

Tip #5: HSAs can double as emergency health care savings

Tip #6: HSA funds can be an investment opportunity

Tip #7: Your employer can help grow your HSA

Tip #8: No required minimum distributions for HSAs

Tip #9: Use your HSA dollars how you want in retirement

Tip #10: HSAs can outlive their owners

Browse Related Articles

Additional Resources

How to File a Renters Insurance Claim

Filing a Claim for Property Loss or Damage

1. File a Police Report (if Applicable)

2. Contact Your Property Manager

3. Contact the Insurance Company

4. Document the Damage or Loss

5. Submit the Claim

6. Prepare for the Investigation & Claims Adjuster Visit

7. Review the Settlement Offer

Filing a Claim for Personal Liability and Medical Payments

1. Document the Damage

2. Give Your Insurance Information to the Injured Person

3. The Injured Person Submits the Claim

4. Prepare for the Investigation & Claims Adjuster Visit

5. The Injured Person Reviews the Settlement Offer

Renters Insurance Claim FAQs

How Long Does the Renters Insurance Claims Process Take?

Does Renters Insurance Cover Temporary Living Expenses?

Will Filing a Renters Claim Affect My Insurance Rate?

What Happens if the Insurance Company Denies My Claim?

Final Word

The Benefits

Hidden Features

Selecting a Plan

New Limits

How Can an HSA Benefit You?

How Can You Use an HSA?

How Can an HSA Benefit You?

Triple Tax Advantages