New year, new budget.
That should be your January mantra. The sooner you construct a functioning budget for the year, the sooner you’ll be on your way towards achieving your goals for the year ahead.
If you had a budget last year that's great! We're going to blow it up. We can learn a lot from what happened last year, but it’s a mistake to ever presume that things will stay exactly the same. The key to creating an accurate annual budget is to understand and incorporate trends from past years into your current year's projections.
Step 1) Revise your income.
By now you’ve gotten at least one paycheck this year. Even if your salary hasn’t changed, your deductions probably did. Minor changes in how you’re taxed and how much you pay for things like health insurance generally go into effect on the 1st of the year, so compare your new paychecks to last year’s and then you can make a more accurate determination of how much income you’ll have to work with this year.
Step 2) Complete your income taxes.
You’ve obviously got time to do this, but there are a lot of benefits of filing your return as soon as possible, and one of the most important is being able to fold that information into your annual budget. So take care of that now and you’ll know exactly how much you owe or, hopefully, how much of a refund is coming your way.
Step 3) Consider your goals for the year.
Do you have a savings goal? A debt reduction goal? Something large you plan to purchase or spend money on? Take the time to decide what you want to accomplish with your money this year and put those goals in order of importance. Next, create a list of what you need to reach those goals. And be concrete – if your goal is to pay off debt, figure out exactly how much money you’ll need to make that happen.
Step 4) Review your spending trends for periodic and variable expenses.
Variables expenses are regular expenses that won’t be exactly the same every month (food, gas, electricity). They’ll be relatively consistent with a few dips and spikes. Periodic expenses are semi-regular expenses that vary from year-to-year, like gift giving, car maintenance, and home repair.
Your projections for the year won’t be entirely accurate for any of these categories, but you can be close if you track trends over time. For something like car maintenance, look at the last three years. If you’ve got an aging car, chances are good those costs have been steadily increasing each year, so plan to spend more this year than you did last year. For variable expenses like electricity or heating oil, take into consideration how costs shift from season-to-season and when you’ll have to spend more on those items.
It might sound like a lot of work, but by just making a simple comparison of bills over the years you’ll have a better understanding of when you’ll need more budgeting flexibility, which saves you from being caught short during leaner months.
Step 5) Analyze expenses against need and usage.
This is pretty straightforward. A lot of the time we keep paying for things out of habit without asking ourselves if we need them or even use them. Never go the gym? Don’t renew your membership. Paying on a timeshare you’ve never used? Now’s the time to work on getting free of that commitment. Just take a look at what you spend and ask yourself, “Does this make sense?” Is your cable bill out of control? Threaten to cancel and see if they can make you a better offer. At the very least research your options. Habit, and our unwillingness to shop around, ends up costing us hugely every year.
Step 6) Create a budget that accounts for your goals.
Don’t start from a “basic” budget and then try to cram your goals in there somehow. Start with your “dream” budget and work backwards. When you create an initial budget that doesn’t include your goals you’re already telling yourself that your goals are secondary. Don’t worry if your first pass is completely out of balance – that’s what revision is for.
Step 7) Revise, revise, revise.
Now that you’ve got your messy dream budget you can work backwards and start trimming. Or better – consider ways to bulk up the income side of the ledger. Weigh your goals against what it will take to get there and the reward for doing so. Is losing your weekends to a part-time job worth being debt-free in two years? That’s for you to decide. The important thing is that you protect your goals as best you can. Some will perish, certainly, but the more you can do to keep your goals alive the more motivation you’ll have to stay on track all year round.
And remember – your budget is fluid and revision is a year-round affair. Hopefully, by doing the work up front, things will come together as you planned it, but the unexpected is just that – unexpected. So be sure to update and revise your budget as the year unfolds.
The year ahead is an unwritten book. Some of the details are out of your control, but you can write the outline today. So take a little time to figure out where the hero of your story is headed this year and how they plan to get there. As the months roll past and your goals appear on the horizon you’ll be glad you did. And as always if you need help creating a functional budget our certified counselors are here to provide assistance and offer solutions.