Investing triggers many emotions

To be comfortable saving for retirement and spending savings in retirement, your investments must satisfy both your financial and emotional needs. When your investments are lucrative, but you and your investments are not emotionally compatible, you will either get rid of them and look for something new and possibly more incompatible or stew in your misery. Yet it is difficult to even know what your needs are in this relationship. You are subject to great cultural pressure today to own U.S. stocks, especially the latest fad stocks. It is not just that everybody at the office claims to own them and is checking the results online all day. There are whole institutions devoted to this: CNBC, The Nightly Business News, The Wall Street Journal, a thousand Web sites, and chat rooms. The pressure to own stocks so you can converse about them is high. But are you happy with them? Is anybody happy with them? How many of your colleagues have stopped to ask what their emotional needs are in their investment relationships? Do they act like they know what their emotional needs are? Let’s return to the question that started this chapter and look at the emotional dilemma apart from the financial. What emotions are triggered by having to choose between retirement savings and vacations? Do you find yourself feeling guilty when you go to Hawaii instead of putting the money in an IRA? Or do you get depressed when you cannot go to Hawaii because all your extra savings are tied up in IRAs and other retirement plans?

How to Evaluate Whether Changes in the Budget Are Necessary?

If there are large variances, or your surplus/deficit is not what you would like, you need to analyze your budget. Examine the variances and study where the amounts spent are greater than the budgeted amounts.For example, if your actual utility bills are consistently greater than the amounts budgeted, then you need to either reduce your utility usage, if possible, or increase the amount budgeted for this item.When you increase planned spending, you will need to find items where you can make corresponding cuts to compensate for the increases. If you don’t, the amounts set aside for personal goals or savings will be reduced. There are certain expenditures over which you have some degree of control. These are your variable expenditures, such as entertainment and miscellaneous expenses. Entertainment and food are the most common areas of overspending, particularly when they involve eating out at restaurants. By contrast, fixed expenditures such as rent, mortgage payments, taxes, and insurance premiums cannot be easily trimmed without undue consequences. Deficit spending may be more difficult to remedy when you have already reduced many of your unnecessary and variable expenditures. It then becomes more difficult to cut essential spending items. If spending still exceeds income after revising spending amounts, you need to reevaluate your entire budget. Perhaps you have created too tight a straitjacket for yourself.Revise your goals and set aside amounts to attain them before allocating the rest of your income to your expenditures. You may need to prioritize your expenditures to see which are necessary and which can wait.
The purpose of a budget is to help you plan the use of your resources so that you can fund your goals and set aside more of your money to savings. Following your budget will help you achieve what you want most from your resources.

How to Record Actual Income and Expenditures for the Period Budgeted?

Actual amounts earned and spent are not always the same as those projected. By recording the actual amounts and comparing them with the budgeted amounts, you can immediately see the differences, called variances. Spending more than a budgeted amount for one item can be offset by spending less than the budgeted amount for another item.
Similarly, if actual income exceeds actual expenditures, there is a surplus, which means additional cash. The opposite is a deficit, which means that cash will have to be withdrawn from cash savings or other assets in order to pay for the deficit spending.

How to Determine Whether There Is a Surplus or a Deficit?

If budgeted amounts for income exceed expenditures, there is a surplus. Expenditures and the amounts needed to fund personal goals added together equal the total expected expenditures. It is a good idea to incorporate goals into a budget so that monthly or periodic income is set aside to address them. When projected income exceeds projected expenditures, there will be additional amounts of cash, which can then be added to savings/investment plans or used to pay down liabilities.
When projected expenditures exceed projected income, there is a deficit. This means additional amounts will have to be withdrawn from savings/ investment plans to pay for these additional expenditures. In such a case, it may be necessary to review projected expenditures and reduce some of them, or look for ways to increase projected income.

Determine Your Financial Goals

In order to set aside money for your financial future, you need to estimate the expenditures that go toward your savings and investments. Financial goals vary from person to person over time. Some financial goals are:
• Saving for an emergency fund
• Increasing savings and investments
• Buying a new car
• Paying off a loan
• Buying a house
• Buying a larger house
• Saving to fund children’s education
• Providing retirement income
• Saving for annual vacations
Some of these are short-term goals while others are longer term. It is often easier to concentrate on the short-term goals and neglect longerterm goals. By assigning priorities to each of the goals and quantifying their cost, you can determine the amount of savings needed to fund them.

Determine Your Expected Expenditures

The second step is to estimate all expenditures during the period of the budget. Certain expenditures such as rent, mortgage, and auto loan payments are fixed in amount and do not vary from month to month, whereas other expenditures such as food, clothing, and utilities do vary in amount from month to month. Anticipating these variable expenditures with accuracy may be difficult. The purpose of budgeting is not to put you in a straitjacket in which you cannot maneuver. On the contrary, its purpose is to provide you with flexibility in your financial planning so you can achieve your financial goals.

How to Estimate Your Future Income?

Estimated income includes all anticipated receipts of money, such as future salary, estimated profits (or losses, which are deductions from income) from a business, bonuses, commissions, interest, dividends, rent, gains, tax refunds, loans, and other sources of income.
Wages, salary, and/or partnership/corporate income should be included net of payroll taxes. Payroll tax deductions can be shown in the income section or the expenditure section. Mr. X is expecting a 5 percent increase in salary for the coming year and Mrs. X expects her business income to be $36,000 for the coming year. The expected gross income for Mr. X is shown, along with the deductions withheld to give his net monthly income. Payroll tax withholdings are the amounts deducted by an employer from employees’ paychecks to pay their taxes. The amount of income earned and the number of exemptions filed by the employee on Form W-4 determines how much is withheld for federal income taxes. Self-employed workers receive income that is not subjected to payroll tax withholdings. This does not mean that they do not have to pay taxes on this income. The tax laws require such taxpayers to estimate their tax liability and pay it in quarterly installments by April 15, June 15, September 15, and January 15 for the tax year. The amount of these payments depends on a person’s total income from all sources, deductions, exemptions, and credits, which determine taxable income.
Mrs. X estimates that her monthly gross budgeted income will be $3,000.
Mrs. X would have to make quarterly estimated tax payments to the U.S. Treasury
on this business income and, depending on the requirements of the state
in which she lives, to the state as well. Income from sales commissions may be difficult to estimate, as they may
be irregular or seasonal. Being conservative by underestimating budgeted income may be prudent in order to avoid overspending and, consequently, having to dip into cash accounts.