Top budgeting questions answered!

Budgeting has negative connotations, but it can do wonders for your overall financial picture and it takes very little effort to create and maintain a budget. Think of a budget as simply a tool for organizing cash flows. You are, in essence, a CEO on a smaller scale who is taking steps to ensure your company's (or family's) cash flow is monitored each month. In this article, we'll cover five of the most commonly asked questions with regards to budgeting, and show you how it really is possible to save money, pay off debt   and still enjoy life.

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1. How much should I set aside for investments?
When deciding how much you should put aside to save or invest, there are many factors to consider, including your age, disposable income and liquidity needs.

• Your age will help determine not only your asset allocation (younger investors should have higher equity allocations than older ones) but also how much money should be put toward future goals like buying a home or retirement. For example, because younger individuals have lower wages, investors in their 20s or 30s can generally afford to put away smaller amounts than an investor in their 50s with little retirement assets. (For age-specific information, see Retirement Savings Tips For 18- To 24-Year-Olds,  Tips For 25- To 34-Year-Olds,  Tips For 35- To 44-Year-Olds , Tips For 45- To 54-Year-Olds ,  Tips For 55- To 64-Year-Olds and Tips For 65-Year-Olds And Over.)
  
  
• Disposable income is independent of all your costs that need to be paid out in order to survive. You can spend it on toys or stash it away in savings. The amount of disposable income you have will
  
  determine how much fun you can have now, and how much fun you can plan for later in life. (Keep reading about this in Increase Your Disposable Income.)
  
  
• Liquidity means how fast you can convert your assets to cash. Your level of liquidity will generally determine what kind of interest rates you will receive or how fast you will be able to access your own money. If you were to place your money in accounts that will tax you for taking money out, or will only let you take money out after a large length of time, then you would have a very illiquid financial stance. The amount of personal liquidity that you maintain is up to you, and should be decided before you begin to invest.
  

Some good ways to begin saving for your future include employer-sponsored retirement accounts  (e.g. 401(k)s) that allow you to use pre-tax dollars to fund your account. Many employers even offer to match up to a certain percentage of your annual income. If possible, you should always look to pay into these accounts the maximum that is matched by the company. The employer match is basically free money, and the ability to fund with pre-tax income earns you a free return even before considering any investment returns.

Once an employer-sponsored plan has been maximized, any extra money that you can afford to put toward investments should go into fully funding an individual retirement account(IRA) for the current year. Retirement accounts for you or a spouse provide tax-free appreciation of your invested assets, a crucial component of long-term growth found in these key retirement funds. (To learn more about saving for retirement, see Invest On A Shoestring Budget, Retirement Planning Basics , and Weave Your Own Retirement Safety Net.)

While there is no magic dollar amount that defines how much should be saved or invested, 10% of your net income is a desirable target (but starting at 5% is still admirable). It is essential that any money set aside for investing should be free and clear of any monthly or annual expenses. It should also only be considered if you have a "cushion account" of emergency funds  that can be accessed quickly, such as in a savings account or Treasury bill . (To find out more about these emergency funds, check out Build Yourself An Emergency Fund and Are You Living Too Close To The Edge?)

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2. How much should I allocate to debts like credit cards or car loans?
Some of our debt, such as car financing, comes with specific repayment schedules, but rolling debt instruments like credit cards can generally be paid off according to one's personal ability to pay. The ruling maxim here is this - don't allocate money to taxable investment accounts if you have existing credit card

 balances. Most credit cards charge between 5% and 30% interest annually, which sometimes outpaces what the average investor can expect to earn from stocks, bonds or funds. It's much better to pay the credit cards off first and then begin budgeting some money for taxable investment accounts. Doing so will allow you to save on escalating interest expenses. (To read more about credit cards, see Understanding Credit Card Interest, Expert Tips For Cutting Credit Card Debt and Take Control Of Your Credit Cards.)

Some fixed-period loans will allow for overpayment, while others will not. You should evaluate the interest rate being paid to determine if paying a fixed debt off early is the right path. If you have existing credit card debt, chances are that this is costing you more in interest than an auto loan for example. In this case, you should still target paying off the credit card debt first.

Some creditors will give you different payment options if you simply contact them by mail or by phone. You may find that you can have your monthly payment increased (as long as you can afford to!) or otherwise adjusted to fit your budget. You'll also want to make sure there are no prepayment penalties for retiring a specific debt early, as these could negate any savings you get on interest costs. If you have too many cards, or don't know which to pay off first, consider getting a consolidation loan  to pay off all your other cards and debts and make one manageable payment each month. If you go this consolidation route remember, it is a must that you stop using your credit cards or stop yourself from attaining new loans until after you've paid off this consolidation loan. (For more on consolidation, see Different Needs, Different Loans and Digging Out Of Personal Debt .)

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