Create a Budget You'll Stick With in the New Year
Steps to Prepare Your Budget for the New Year
Start the New Year on the right financial foot. Budgets are a great tool to help keep you on track to reach your financial goals and the beginning of the year is the perfect opportunity to implement a new or tweaked budgeting strategy that suits your current lifestyle. Here are some steps to create your best budget and start off 2017 with financial confidence.
1. Define Your Income
First, you’ll want to look over the past year’s bank statements to find your total gross income (before any taxes or savings) from all revenue streams.
This is a good way to give purpose to every dollar in your budget.
Take a few minutes to think through anything that may have changed your income this year such as getting a raise or switching jobs. Be sure to also include income from any part-time positions or side jobs in this step as well.
2. List and Reconsider Your Expenses
Write down all of your reoccurring monthly financial obligations with their dollar amounts such as mortgage or rent, car payment, Netflix subscription, student loans or gym membership. Then move on to more fluid expenses like food, entertainment, utilities, and gas. Include insurance, dental bills, haircuts and shopping on this list as well. Now look at this list and consider getting rid of what you don’t need. For example, if you find that you tend to only watch TV on streaming services like Netflix and Hulu, should you still be paying for the cable? Cutting out this expense could help you save a little extra for the long term.
3. Find the Difference
Subtract your monthly gross income from your monthly expenses. Are you spending more than you’re earning each month? Do you have enough cash flow left for taxes and savings? If you’re looking at a negative number, remember it’s never too late to change bad habits. Instead of focusing on what you’ve done wrong, focus on what you can do to improve.
4. Create Your Realistic Budget
Now that you’ve laid out where your money is coming from, where it’s going and what you need to do to improve spending and savings habits, you’re ready to put together your budget. If you need to alter your expenses, figure out what you can afford to remove or lower in order to reach your financial goals. You may even consider finding ways to increase your income like a part-time job or hobby you can use to make money. Write out a realistic budget next to your current spending habits so you are able to easily see the changes you need to make and hold yourself accountable by setting a resolution with completion dates.
So now that you have a budget, here's how to stick with it.
5. Spend at Least One Hour Per Month on Financial Planning
No matter how good your budget looks on paper, it’s worthless unless executed on a consistent basis. That takes discipline. Rather than giving up completely when an unexpected expense (such as car maintenance) throws off your budget, make sure you've set at least an hour aside each month to review and revise your plan in case of any surprise expense. During this time, you'll want to plan out how you'll adapt your budget based on the circumstances while still being consistent with your savings.
You may also want to consider setting a daily spending limit (DSL) to help keep you on track throughout the month. Your DSL will be calculated on your monthly income after taxes, and after you have set aside the savings necessary to meet your long-term goals. That net amount needs to cover the rest of your monthly wants and needs. Setting a DSL makes it easier for you to spot when you have overspent and allows you a chance to compensate for that overspending. If today’s trip to the grocery store went over-budget, tomorrow’s planned trip to the movies might need to be canceled. If a flat tire unexpectedly needs to be replaced on a Friday, you and your spouse might be packing a lunch for the next week.
We all have areas in our lives that can be improved with a little bit of planning for the year ahead.
Now that you have a strategy for your budget you’re well on your way to getting in better fiscal shape in 2017. Happy New Year!
Matt Reiner is the CEO of Wela, a digital financial advisory service.