Track your spending.
Identify money for saving and investing.
- Prepare for unforeseen expenses by saving in an emergency fund.
- Save for major purchases rather than using credit.

Creating Your Budget

Use the Budget Work Sheet to record the amounts you plan to spend for the month. Financial planning professionals recommend saving at least 10 percent to 15 percent of monthly net income.
Monitor your spending. Keep written records of your purchases and payments, and record the amounts you actually spent for the month.
Add every dollar you spend for a month and keep track of what you buy. You may be surprised how much you spend and on what things.
Gather pay stubs and other income statements, check registers, bank statements, credit card statements or bills and receipts.
Total your monthly net income and subtract your monthly expenses to determine your net cash flow.
Review your plan at least once each month. Compare your planned and actual expenditures. How well did you do for the month? Did you have extra money (net cash flow), or did you borrow money by using a credit card? Look for areas that require special attention and reduce or eliminate expenses as needed.
Adjust your plan. Modify expenses to reach your financial goals.

Control Credit Card Spending

Do not let credit card balances accumulate. Stay well beneath your credit limit, and make it a rule to spend no more than you can repay in full each month.

The following example shows how expensive credit card debt can become when you spend more than you can repay within 30 days. If you spend $3,000 using a credit card and pay only the monthly minimum due, it will take almost 22 years and cost $4,115 in interest to totally pay the original $3,000 balance.

Credit Card Debt Multiplier

$3,000 Balance Interest Rate Time To Pay Off Total Interest Total Cost

Pay Minimum
(2.5% of balance) 18%

11% 21 yrs. 11 mos.

14 yrs. 9 mos. $4,115

$1,606 $7,115

$4,606

Pay $100/mo. 18%

11% 3 yrs. 5 mos.

3 yrs. $1,015

$ 524 $4,015

$3,524

How Much Debt Is Too Much?

Financial planning professionals recommend keeping your personal debt-to-income ratio at or below 20%. Use the formula below to calculate your debt-to-income ratio.

Debt-To-Income Ratio

Total Monthly Debt Payments (excluding mortgage or rent)
÷
Monthly Net Income
=
Debt-To-Income Ratio

Example:

If your total monthly debt payments (excluding mortgage or rent) equal $400 and your monthly net income is $2,000, your debt-to-income ratio equals 20%.

$400 ÷ $2,000 = .20 or 20%

Eliminate Debt

If your debt-to-income ratio is too high as a result of credit card spending, college loans or other borrowing, develop a plan for eliminating debt.

Avoid using credit which could potentially increase your total amount of debt.
Eliminate credit-card balances. Start with the card having the highest interest rate, and pay as much as you can until the balance is zero. Continue until all balances are zero.
Limit the amount you borrow for discretionary purchases, such as furniture or vacation travel. If your vehicle loan does not charge prepayment penalties, consider making extra payments until you own the vehicle.
Make extra payments on student loans as soon as consumer debt is eliminated.
Take advantage of free and low-cost credit advice from sources such as the National Foundation for Credit Counseling at www.nfcc.org.

Monitor Your Credit Report

As you practice good financial habits, you will want to make sure your credit report and score reflect your efforts. It is very important to review your credit report and score at least annually. Check your credit report for accuracy and for inquiries, newly opened accounts and other changes that may indicate fraudulent activity.

Checking Your Credit Report

Visit www.annualcreditreport.com or call (877) 322-8228 to request free copies of your credit report from each of the major credit reporting agencies. Because information can vary from one report to another, check each report.
Correct missing, out-of-date or incorrect information, however minor.
Close unused accounts that are listed as open on your report.
Pay close attention to credit inquiries from companies with whom you do not do business, check for accounts you have not opened and watch for unauthorized activity on existing accounts. These could be signs of fraudulent activity.
Consider using an online credit monitoring service, which alerts you to changes in your credit report or score. Often, a change means simply that you need to adjust your credit usage. Sometimes, it means you have been a victim of identity theft. Either way, take action immediately. A poor credit history could cost you thousands in increased payments and lead to the denial of credit.

For more information on credit reports and scoring, visit the Federal Trade Commission Web site at www.ftc.gov/bcp/menus/consumer/credit/reports.shtm.

Save And Invest

Saving and investing are essential for financial security. To make saving a regular part of your life:

Think of saving as a bill you have to pay. It should not be optional.
Pay yourself first. Authorize your bank to automatically transfer a portion of your pay to an interest-bearing savings or money market account as soon as it is deposited so you do not miss the money.
Dedicate at least 10 percent to 15 percent of your net income to saving and investing. If you cannot afford this amount, you should save and invest as much as you can.
Build an emergency fund of 3 to 6 months of basic living expenses — enough to manage a crisis without borrowing money.
- The fund should be low-risk and liquid, which means the money is available whenever you need it.
- An interest-bearing savings or money market account may be ideal.
Increase savings contributions when you can. When you receive a raise, bonus or cost-of-living adjustment, consider adding some or all of the additional earnings to your savings.

Begin Early And Invest Regularly

The sooner you begin investing for retirement, the more your money will be able to grow and compound. Starting early can make a big difference in your ability to reach your retirement goals. Consider the following example.

Investor 1	Investor 2
Began investing at age 28 Continued to invest until age 70 Invested $100 each month Total invested $50,400 10% average rate of return At age 70, Investor 1 had $780,883	Began investing at age 22 Continued to invest until age 70 Invested $100 each month Total invested $58,800 10% average rate of return At age 70, Investor 2 had $1,580,147
These examples assume a 10 percent average rate of return, do not include federal income tax on earnings and are not adjusted for inflation.

Invest For The Long Term

Earning compound interest can produce a substantial return on your investment — when it has time to accumulate. Even if you have only a small amount to invest, starting early and investing regularly over time offers the best results.

Investing Over Time* (until age 70)
Age	Amount Invested Annually**	Annual Compound Rate	Amount Contributed	Amount Earned	Amount Accumulated By Age 70
20	$5,000	8%	$250,000	$3,082,867	$3,332,867
30	$5,000	8%	$200,000	$1,307,528	$1,507,528
40	$5,000	8%	$150,000	$ 512,043	$ 662,043

* This example is for illustrative purposes only. It does not represent the performance of a particular savings instrument. It is not adjusted for inflation.
** Lump sum contribution at the beginning of each year. Note: In 2009, the maximum contribution for Traditional and Roth IRA is $5,000 annually.

Invest Wisely

Learn all you can about investing for retirement. Visit Web sites, read books and publications and even take community classes. The United States Securities and Exchange Commission Web site, www.sec.gov/investor/pubs/begininvest.htm, is a good place to start.

Monitor Investment Accounts

Review your investment accounts at least annually and each time you experience a major life event, such as college graduation, marriage, divorce, birth, adoption, job change or death. Adjust your investments as needed to make sure they match your goals, risk tolerance and timeframe.

Next: Set Retirement Goals

Updated Thursday, January 07, 2010

HELPFUL FORMS & LISTS

Budget Work Sheet