KNS Financial

Personal Finance From a Biblical Perspective

How to Create a Budget – Setting Goals

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The main reason why we create a budget is to meet various financial goals. As we have seen thus far, creating a budget calls for us to carefully track our income and expenses in an organized way. Doing this will allow us to either change our spending habits or increase our income appropriately in order to meet our goals.

So, what are some common, SMART goals that people set when creating a budget?

Get out of debt

Becoming free from debt is probably the most frequently cited reason why people desire to create and live on a budget. Contrary to popular belief, all debt is bad and it hinders you from having financial freedom. So, getting out of debt should be your number one financial goal – provided that you at least have a cushion in your checking account.

By monitoring your spending and setting limits, you can easily make cuts and adjustments in order to funnel more of your money into debt repayment. Having a budget will allow you to see the impact of every dollar of your spending – especially because we tend to underestimate our expenses when we don’t have a budget. This site from the UK has some great budgeting advice.

Build an emergency fund

Although there are a few financial advisors who don’t see the need of an emergency fund, most agree that it is an essential part of a healthy financial profile. An emergency fund is exactly what it sounds like – money that you have set aside strictly for emergencies.

These “emergencies” can range from needing a new furnace, having to replace the engine on two cars within a month, or a serious medical bill that your insurance will not pay, to covering your living expenses if you lose your job. Wanting a new pair of shoes should not make this list!

Now, the amount of this fund will differ depending on your circumstances, but a rule that I like to follow is that once you are out of debt you should be able to cover one year of living expenses with the amount in this fund.

If you have children, an older house, a car (or cars) that constantly need repairs, or you are barely getting by on two incomes, you may want to increase this amount. This is also true for those who have unsteady or infrequent incomes – such as artists, musicians, salesmen, etc.

If creating or building up an emergency fund is your goal, having a budget is essential.

Save for a large expense

Many people employ budgets to help them save up for a large expense. If you have plans to purchase a car, house, boat, or even go back to school, it is imperative for you to set up a budget.

A budget will allow you to divert funds into a separate account in order to save for these purchases. If you attempt to do this without a budget, you run the risk of putting your account into an overdraft (because you are not keeping track on your monthly expenses), or being inconsistent with your saving efforts.

Put money aside for retirement

There are many ways that you can save for retirement. They range from IRAs, 401k’s, 401k alternatives, 403b’s, and stuffing money in your mattress (okay, scratch that one). Most of these options would allow for automatic transfers from your checking account, or even direct deductions from your paycheck.

Building retirement savings into your budget is the only way to ensure that you will not be a Wal-Mart greeter, during your sunset years…

Grandpa Chow
photo credit: michaelmolenda

Identify areas for giving

One of the best things about creating a budget is that it can help you identify areas of frivolous spending. Evaluating your expenses will allow you to plug up the holes in your budget, and free up that additional money for something much more important.

Many of us desire to be able to give money to church and other charitable organizations, but we have a hard time finding the money to do so.

Creating a budget will allow us to eliminate waste so we can support our priorities. So, if you desire to give, create a budget!

Save for a child’s education

This is another very popular and noble goal. However, it can be made difficult without a budget in place!

Saving money for college usually doesn’t get the same priority level as some of the other items mentioned above, but it is still important. The great thing is that if you set aside a small amount of money early and consistently, you can still be successful.

Needless to say, a budget is essential for doing this. Starting with $25/month when you first learn of your new “bundle of joy” and increasing this amount when able, can pay off big down the road. Of course, to squeeze even more out of your finances, you need a budget!

Turn everyday spending into college savings.

The point of this list is to suggest a few goals that you can plan for with your budget. I’m sure that you can think of many things to add to it, but this is a good place to start!

What are some of your financial goals? Do you use a budget to ensure progress?



photo credit: Mr.Tea

Using Tax Credits to Help Offset Education Costs

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The current economic conditions in have put many Americans in a tough position. On the one hand, it is a fact that difficult times usually lead to an increase in the number of people pursuing degrees – or looking to gain various certifications. However, in a recession colleges and universities are often scrambling to find sources of revenue due to a reduction in donor support as well as State budget appropriations.  Also, since the government is usually strapped for cash, they are not able to increase support for students (through grants, loans, and federal work-study programs). All of these factors make it extremely difficult for parents and students alike to pay for higher education.

Thankfully, the IRS provides various ways for taxpayers to offset education costs. Here are five listed below taken directly from the IRS website:

  1. The American Opportunity Credit This credit can help parents and students pay part of the cost of the first four years of college. The American Recovery and Reinvestment Act modifies the existing Hope Credit for tax years 2009 and 2010, making it available to a broader range of taxpayers. Eligible taxpayers may qualify for the maximum annual credit of $2,500 per student. Generally, 40 percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
  2. The Hope Credit The credit can help students and parents pay part of the cost of the first two years of college. This credit generally applies to 2008 and earlier tax years. However, for tax year 2009 a special expanded Hope Credit of up to $3,600 may be claimed for a student attending college in a Midwestern disaster area as long as you do not claim an American Opportunity Tax Credit for any other student in 2009.
  3. The Lifetime Learning Credit This credit can help pay for undergraduate, graduate and professional degree courses – including courses to improve job skills – regardless of the number of years in the program.  Eligible taxpayers may qualify for up to $2,000 – $4,000 if a student in a Midwestern disaster area – per tax return.
  4. Enhanced benefits for 529 college savings plans Certain computer technology purchases are now added to the list of college expenses that can be paid for by a qualified tuition program, commonly referred to as a 529 plan.  For 2009 and 2010, the law expands the definition of qualified higher education expenses to include expenses for computer technology and equipment or Internet access and related services.
  5. Tuition and fees deduction Students and their parents may be able to deduct qualified college tuition and related expenses of up to $4,000. This deduction is an adjustment to income, which means the deduction will reduce the amount of your income subject to tax. The Tuition and Fees Deduction may be beneficial to you if you do not qualify for the American opportunity, Hope, or lifetime learning credits.

There are other factors to consider when deciding between these options:

  • Note that you are not allowed to claim any of the credits if you claim a tuition and fees deduction for the same student in the same year.
  • Also, a taxpayer cannot claim the American Opportunity and the Hope and Lifetime Learning Credits for the same student in the same year.
  • The credit may be claimed by the parent or the student, but not by both.
  • If the student is being claimed as a dependent cannot claim the credit.

For more information, see Publication 970, Tax Benefits for Education

The IRS has also prepared a short video to help explain your options.

For more information on taxes click here.

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Understanding Tax Credits for Higher Education Expenses

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The American Opportunity Credit (part of the American Recovery and Reinvestment Act) allows more parents and students to qualify for a tax credit for college expenses.

To this end, the IRS has developed a brief fact sheet to assist you in completing your 2009 tax return. Here are a few highlights:

  • The American Opportunity Credit can be claimed for expenses paid for any of the first four years of post-secondary education.
  • The credit is worth up to $2,500 and is based on a percentage of the cost of qualified tuition and related expenses paid during the taxable year for each eligible student. This is a $700 increase from the Hope Credit.
  • The term “qualified tuition and related expenses” has been expanded to include expenditures for required course materials. For this purpose, the term “course materials” means books, supplies and equipment required for a course of study.
  • Taxpayers will receive a tax credit based on 100 percent of the first $2,000 of tuition, fees and course materials paid during the taxable year, plus 25 percent of the next $2,000 of tuition, fees and course materials paid during the taxable year.
  • Forty percent of the credit is refundable, so even those who owe no tax can get up to $1,000 of the credit for each eligible student as cash back.
  • To be eligible for the full credit, your modified adjusted gross income must be $80,000 or less — $160,000 or less for joint filers.
  • The credit is claimed using Form 8863, Education Credits, (American Opportunity, Hope, and Lifetime Learning Credits), and is attached to Form 1040 or 1040A.

For more information regarding this tax credit, visit the IRS information center here: http://bit.ly/4pkkEl

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