The end of the year is the perfect time to assess your finances and develop a workable budget for the next 12 months. By taking a snapshot of where you are and where you want to be financially in the new year, you’ll not only be able to plan for the year ahead, but also for the future.
Budgeting doesn’t have to be scary or time consuming. Here are five steps that you can take today to make 2013 an even better financial year than 2012:
1. Schedule an information gathering session. Pull out those bank statements, investment account balances, credit card balances, recurring bills and any other information that has to do with either expenses or income. If you don’t have the paper versions of these documents visit your bank or credit card company online to view your current and past statements.
2. Review the information and come up with a monthly spending average. If you’re not expecting any “big” changes to your financial picture (such as an inheritance, a home purchase, etc.) in 2013, use the information from No. 1 to come up with a monthly average estimate of money in and money out. Factor in all sources of income (including salary, child support, alimony, self-employment income, etc.) and all monthly, quarterly and annual bills (like the rent or mortgage, which are examples of your “fixed” expenses). You can use a simple spreadsheet or a mobile application like Mint, MyBudget for iPhone or MoneyWise to record and track this information.
3. List all other expenses. Here’s where you’ll look at how much money you spend on haircuts, gas or fuel, auto repair, groceries, entertainment and restaurant meals (these are your “variable” expenses) during the course of a month. Again, it will help to average out 2012’s numbers, if you have them handy, to come up with a typical monthly expenditure. Be sure to add these expenses to your spreadsheet or other recording mechanism.
4. Combine fixed and variable expenses and compare them to your income, then follow one of these two paths:
If there’s more money coming in than going out, you are in good shape to start saving, contributing more to your retirement account (or opening that new one you’ve been talking about), paying down your credit card or loan debt or taking other steps to plan for your financial future. Having the information in front of you will also help pinpoint areas where you may be able to either earn more or save more (by cancelling unnecessary services, for example).
If you’re in the red every month it’s time to carefully assess your income and expenses and do what you can to boost the former and/or reduce the latter. Carefully assess where you are overspending and explore new ways to add to your weekly or monthly income levels. Here’s a hint: variable expenses like haircuts, entertainment and restaurant meals will be the easiest to cut.
5. Review your 2013 budget every month. It’s easy to get off track with budgeting and fall back into the same patterns. You can avoid this challenge by reviewing your budget at the end of every month and adjusting accordingly. If, for example, you get a raise in 2013 or if you find that your fixed expenses are higher than you initially targeted, be sure that your budget reflects those changes.
Budgeting doesn’t end at developing a plan for the year ahead and storing it in your desk drawer. It’s easy to get off track and fall back into your old financial habits, particularly when an unexpected expense arises. You can stay on your budget by figuring out a set amount of money to save every month and using direct deposit to sock it away; carrying only as much cash as you need for the week ahead (and considering it your only discretionary funding); and saving your receipts (to create accountability for yourself). You’ll be more likely to stick to your budget when you can see how much you’re spending on what.
This article has been prepared for informational purposes only. The accuracy and completeness of this information is not guaranteed and is subject to change. Since each individual’s financial situation is unique, you need to review your financial objectives to determine which approaches might work best for you.
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(Photo: Star Tribune/MCT /Landov)