How's your financial literacy?
Are you controlling your finances, or are they controlling you? That’s the question — at least for today.
And since April is Financial Literacy Month, we asked financial expert Karl Frunz, who teaches our popular class Assembling Your Finances, to share three simple — and often overlooked — ways that will help you take control of your bank account.
Tip #1: Manage your federal tax withholding
Did you know that more than 100 million tax payers in the US receive substantial returns of their own money from the IRS each year? This is due, in large part, to over payment of withholding — i.e. the deposits toward your anticipated federal tax that are automatically deducted from your paycheck.
In 2014, the average refund — due simply to miscalculated contributions — was over $2,800. That’s nearly $3,000 each year that tax payers are ‘saving’ with the U.S. government — without the benefit of interest!
If you receive a large refund year after year, you’re likely over-contributing — and it’s time to reassess how much of your own money and financial control is being adversely impacted by the number of exemptions you claim.
Simply put, the lower the number of exemptions you claim on your W4, the more money that’s being deducted from your paycheck.
If your overall income and finances remain relatively the same year after year, it’s time to explore how increasing your number of exemptions by 1 or 2 will:
- Keep more of your money immediately in your control
- Decrease the funds you put essentially into hibernation until filing your return
Want to see how changing your number of exemptions will affect your net income? Try this paycheck calculator.
It’s important to ensure that you don’t under-contribute, because that would result in you using this year’s income to pay last year’s tax. Consider making small adjustments and gauging the change, and expanding your financial literacy by seeking good counsel.
Tip #2: Cut — but don't cut out — your spending
Traditional money management advice (which often feels like nagging!) says that you can radically change your finances, ‘. . . if you just stop spending money on . . .’ something you most likely consider to be a joy, a pleasure or a privilege that you’ve worked hard to have. This could be anything from dining out to regular personal services like a massage or having your hair done to engaging in a personal hobby like skiing or building model planes.
But psychology tells us that radical change — going ‘cold turkey’ and cutting something out completely — almost never works. In fact, it usually just suppresses a desire that, once reactivated, comes back stronger than before.
So if you want to save some money, don’t completely cut out something that you love. Instead, try this process.
- Pick a discretionary expense such as dining out
- For one month, don’t change how often you usually dine out
- Track exactly what you spend on dining out for the month — keep all your receipts or record them in your money management software
- At the end of the month, tally up how much you’ve spent; this will allow you to answer this question:
- ‘How much less could I spend on dining out and still feel ___________?’ (Fill in the blank with happy, satisfied, empowered, fulfilled — whatever is important to you.)
Let’s say that you spent $414 last month on dining out and you think you can still be happy if you spent $375 per month on dining out. Your answer to this question will give you two positives:
- Control and validation over your own spending: On the first of the month, put $375 into an envelope (that you keep with you) labeled, ‘Dining out.’ As you travel through the month, having that money set-aside will help you keep to your commitment and provide you with a tangible, real monitor of whether tonight’s the night you get take-out or eat what’s already at home.
- The value of the difference: In this example, $414 – $375 = $39, or $468 over the course of a year. By merely exerting control — making a decision — over your own spending, you will have created the option to use and/or spend the difference in another way — such as adding to your savings or paying down debt.
Financial literacy is rooted in knowing how much money you spend, what you spend it on and, ultimately, which goals you want to achieve with it. After you go through this process for one of your discretionary budgets, try it with others and see where you can make your money work better for you.
Tip #3: Maximize your spending power
In general, there are three ways to change your financial baseline:
- Increase Your Income: This is the most difficult
- Control Your Spending: This requires a lot of discipline
- Expand the Value of Your Spending: This factor is often forgotten
Fortunately, a collaboration between business and media channels (such as newspapers, radio stations and websites) empowers you to double your buying power on things such as dining, personal services and entertainment. This enables you to get more for your money when it comes to discretionary spending.
A few of the companies that offer some great values include:
It’s also worth checking out any rewards programs that may be offered by your bank, credit union or credit card companies. Financial literacy involves being a savvy consumer, and knowing how you can stretch your dollar further.
Just remember that, like all good things in life, make sure to read the fine print!
So how's your financial literacy now?
These three tips are simple ways that help you control your finances, and not the other way around. But there are a ton of other ways to do so!
What are some ways that you keep your finances in check? Please share them with us in the comments below.