Budgeting for the New Year

Budgeting for the New Year

Written by Nathan Woolard

When it comes to mapping out your personal finances, the most important rule is simply that you need a budget.  There are many factors to consider when establishing your spending limits, and it can be difficult to decide where to begin.  No need to worry!  Just follow these tips to get your budget rolling:

·         Track your spending habits.  You can’t create a realistic budget without first understanding your current spending habits.  Keep track of your spending for a month to get a clear idea of where you can reasonably set your limits.

·         Add up your income.  Before you can start laying out a budget, you need to know just how much money you have coming in every month.  Add up your income from all sources, including wage income, business income, investments, alimony and/or child support, and any other side gigs.  However, don’t forget to also subtract anything that reduces your monthly income, such as taxes and business expenses.

·         Adjust your budget each month.  When factoring your monthly expenses, don’t forget to account for irregular expenses and other special occasions.  Every month is different, so consider holidays, birthdays, vacations, property taxes, and annual appointments like car inspections and medical exams when setting your budget.  You’ll have a lot more fun buying gifts and celebrating with family if you’ve made sure to account for that extra spending ahead of time!

·         Keep a buffer in your budget.  While you can plan for special occasions and irregular expenses beforehand, you may also find yourself facing some truly unexpected bills from time to time.  Set aside a small amount in your monthly budget to help cover surprise costs or emergencies.

·         Decide what kind of budget you want.  There’s more than one type of budget.  One popular model is the “zero-based budget,” a restrictive approach which aims to make income minus expenses equal to zero.  In other words, every dollar has a specific job in this budget, all being assigned to different spending categories or being put into savings.  Another notable model is the “50-30-20 budget,” a more flexible approach in which 50% of income is reserved for necessities, 30% is allowed for personal wants, and 20% is put into savings.  Consider your own spending and saving habits to decide exactly what model works best for you.

·         Do your budget together.  If you’re living with a partner or spouse, then setting your budget is a team effort!  Sit down monthly and talk over your visions for your future to help figure out the best way to plan your finances.  And even if you’re single, it doesn’t hurt to find a friend to help you stick to your budget goals!

·         Hold yourself accountable.  Setting your budget is one thing, but the real challenge comes in holding yourself to it.  Devise a method to be sure you keep your plan from unraveling.  Put your bills on autopay and automate transfers to your retirement and savings accounts so that you don’t have the chance to spend your money before it’s been put in its proper place.  You may also find it helpful to employ the envelope system:  physically put cash in envelopes labeled for each category of your budget, and limit yourself to this cash for all purchases in each category.

Keeping yourself on track will take effort, but be proud of yourself for making your plan and do your best to stick to it!  Give yourself some time and accept the occasional early slip-up.  It’s easy to set unrealistic expectations and it will probably take a few months before everything starts falling into place, but that’s all part of the learning process.  Recognize what you do wrong, congratulate yourself on what you do right, and soon enough you’ll find a comfortable position from which you can maintain your budget.