Budgeting Tips for Young People

Budgeting in general aims to help people enjoy their financial freedom without losing sight of the importance of savings. A few mistakes may have the impact of ruining a perfectly good credit report and may make it difficult for them to avail loans and procure insurance. It is imperative to have a good budget in place since one should always be aware of the income and the anticipated expenses, so that he/she may be able to handle unforeseen expenditure without getting into debt.

Know the Difference Between Gross and Net Income

It is impossible to prepare a good budget unless one knows the difference between gross and net income. The gross income for a consumer is the total personal income that includes the following items:

• Wages, salary, tips, ordinary dividends
• Taxable interest, capital gains (losses), taxable amount of pensions and annuities
• Business income, alimony received, unemployment compensation received
• Rental income from real estate
• Taxable amount of IRA distributions income from royalties, trusts, taxable refunds, and taxable amount of Social Security benefits

Although the list may seem daunting, a working knowledge of the aforementioned items will go a long way in helping one prepare a suitable one. Some of these may not even apply to young people who have not started investing. Again, as far as budgeting is concerned, the items like alimony and unemployment compensation are not applicable. However, it is good to have an understanding of all the items that come under the purview of gross income.

The following items are deducted from gross income to arrive at Adjusted Gross Income (AGI) or Net Income:

• IRA contributions, 50 percent of self-employment tax, and moving expenses
• Interest paid on student loans
• Contributions for health insurance made by the self-employed
• Penalties for early withdrawal of savings
• Alimony payments
• Contributions to Simplified Employee Pension plan and SIMPLE IRA, contributions to other qualified retirement plans and deductions for MSA ( Archer Medical Savings Accounts), etc.

Know How Taxes are Calculated

Tax bracket for the consumer is calculated using the AGI. The adjusted gross income is also calculated to determine the qualifying credits and allowable contribution limits for tax-deferred retirement accounts. Income tax is computed by subtracting itemized deductions from adjusted gross income (net income).

Use Credit Cards Wisely

This is one of the most effective options; one should not run up a huge tab, just because it is possible to carry over the remaining balance to the ensuing month. This practice will result in people eventually getting trapped in the cycle of debt.

Avail Mortgage/Car Loans Sensibly

Although buying a home and a car is necessary for every couple, it is not recommended to overspend on the same. It is believed that a consumer should not spend more than 33 percent and 11 percent of the gross monthly income on home mortgage and car loan payments respectively. Had people focused on spending within their budget, the subprime crisis could have been averted.

Invest

As the consumer's income grows, it becomes possible for him/her to invest in the stock market and fixed income securities. This is advisable since good investments result in the growth of finances. This, in turn, can help people to live a comfortable life and enjoy the present without having to fear the dearth of funds in the days to come.

Thus, these are some tips that may prove to be useful for those who are unsure about income, the computation of taxes, and savings and investment, and are in a dilemma when it comes to the best course of action for the future.