Financial Makeover: Family Budget
Nov. 24 -- — Q U E S T I O N: My wife and I have no concept of money. I bring home just under $1,500 every two weeks, and we struggle to make ends meet. We have a child, and I'd like to ensure that he will have something for college. I am at a loss as to where to go or turn to improve our situation. We constantly have late bills and disconnection notices. My wife and I have been married for a year and a half and we never have extra spending money to do things that I would like us to do — like vacations. Please help.
— Todd
A N S W E R:
You have to look at the glass as half full instead of half empty. With the $54,000 you make you should be able to develop a comfortable life. The challenge is to live within your means and not above your means. A budget is in order. What this will do is keep your worry level down and put your priorities in order.
Budgeting Basics
Know what you earn. Know where you spend it. Separate essential from nonessentialexpenses. Identify the difference between what youearn and what you spend. Create a budget toget your spending in line with your earnings. Change your spending habits to reflectyour goals.
You need an emergency fund. I recommend that you have six months ofexpenses set aside in case you are disabled or laid off. You don't need to create an emergency fund all at once or panic if you don't have one in place. But you should designate an account that will serve as an emergency fund and begin to put money in it. Even if you only budget $10 per month, it's a good way to start.
It appears that you have a priority of your child's education. That is good. The time to begin that effort is now while you are young. There are at least two excellent programs to assist you in your goal. Let me explain them to you.
Prepaid Tuition and College Savings Plans
These plans are generally offered by the states (although a consortium of colleges now also offers a prepaid plan). Named for the section of the Internal Revenue Code that governs them, 529 plans come in two varieties — prepaid qualified tuition plans and college savings plans. Both types of plans allow annual taxes on account earnings to be deferred. At least until 2010, earnings withdrawn from the account are also free of taxes if they're used to pay for qualified education expenses. (Congress will have to pass additional legislation for the tax-free benefits of 529 plans to extend beyond 2010.) The prepaid tuition plans offer protection against future tuition increases.
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