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Build Up Financial Fitness With Smart Budget Strategies

Twenty dollar bills are shown in this photo, Aug. 23, 2017.

Photo by Erik Anderson

Above: Twenty dollar bills are shown in this photo, Aug. 23, 2017.

Paying off debt is a common New Year’s resolution. However, achieving this can be tricky for many people. KPBS Evening Edition anchor Ebone Monet spoke to Steven Fox, a certified financial planner and founder of NextGen Financial Planning in San Diego.

Q: What's the best approach for developing a family budget?

A: This is highly dependent on your individual situation, and what your opportunities and priorities are. As a basic starting point, though, many people like to follow the 50/30/20 approach as a rule of thumb. This means that 50% of your income goes towards needs (housing, groceries, utilities, transportation, etc), 30% goes towards discretionary spending (cell phone, travel, eating out, gifts, other "wants"), and 20% goes towards financial goals (savings, investments, extra debt payments). This is a good starting point for people because it's simple, flexible and relatively easy to stick with.

There will also be big regional differences that may alter these proportions. Housing, in particular, is expensive here in San Diego, so you may need to reduce discretionary spending to allow for higher housing costs.

Q. How can couples calculate the added cost of expanding their families?

A: Many parents-to-be look at the costs of diapers, clothing, toys, nursery furniture and other baby necessities, and do what they can to minimize those costs by seeking hand-me-downs or shopping for deals. The biggest mistake I see couples making here is underestimating much bigger costs that aren't quite as obvious such as the impact of missed work during pregnancy and parental leave, medical bills related to the pregnancy and delivery, housing, or saving for education. Look at the bigger picture, and understand that things may cost much more than you realize.

The Department of Agriculture publishes an annual report estimating the cost of raising a child, and the most recent estimate was around $233,000 for most families.

Q: What is the simplest way to determine tax withholdings?

A: Withholding is often misunderstood. It's simply pre-paying your taxes. When you complete your tax return, you determine the actual amount owed for the year. If you get a refund then you paid too much throughout the year, and if you owe then you didn't pay enough throughout the year. You end up paying exactly the same amount in taxes regardless, unless your withholding is far too low and you become subject to underpayment penalties. So if your withholding is too high, you're effectively giving the government an interest-free loan until you file.

The correct way to set withholding is to follow the instructions on the form W-4 you submit to your employer. This works well if you and your spouse are regular W2 employees and you won't have any major changes to your tax situation throughout the year, but some people may need to make adjustments. The IRS website has a good calculator, and there are many other free websites that can help you estimate your tax liability. An accountant or financial planner should also be able to help you estimate. Try to match your withholding to your actual tax liability as closely as you can, so that you can avoid either paying penalties or having the government hold too much of your money until you file.

If you are self-employed or a business owner, be sure to send in your quarterly estimated tax payments since you won't have automatic withholding.

Q: Is it ever okay to borrow from your 401(k)?

A: Only if absolutely necessary! It should not be done to cover optional expenses like home improvements or travel. Only for true emergencies when you don't have access to cheaper or less risky options. You're setting yourself back because you have to repay that money or risk it being reclassified as a taxable withdrawal (with additional penalties if you're under 59 1/2). You also take the risk that you'll have to repay that money immediately if you are fired or decide to leave your employer.

Q: Finally, what are you top tips for financial fitness?

A: Be proactive and intentional with spending, and spend in accordance with the values that are most important to you. Don't waste your money on things that don't add to your quality of life.

If you don't think you have a lot of fat to trim from your expenses, focus instead on increasing the income side of the equation. Negotiate with your boss for a raise, switch to another company that pays better, pursue additional training or certifications, change career fields, or start a side business. Most people drastically underestimate how much income they can earn, but in the modern world we actually have quite a bit of control over it.

San Diego Financial Adviser offers top tips for financial fitness in 2018.

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