With a new year comes new goals. It’s a great time to take control of your finances. Here are eight budgeting moves to make for 2018.
January is a time when we’re naturally trying to re-set some things. You might take some time this month to look at different life goals. While you’re in the process, don’t forget to think about budgeting.
Now is the perfect time to evaluate your finances and fine-tune your approach so that you can reach your financial goals. Here are eight moves you should make right now to start the year off right.
1. Review last year’s annual expenditures
Getting a big picture overview of your last year’s expenses can be helpful. You can do this in a couple of ways:
- Download all your bank transactions for the past year. This can get complicated if you use multiple debit and credit cards. But if you generally stick with one account, it’s easier. Then, group your transactions by broad category. Don’t get too much into the weeds, or this will take approximately forever. This gives you a big picture overview of where your money has gone over the course of the year.
- The other option is to use your current budgeting software. If you’re using a program like Mint or YNAB, you can get a historical overview of your spending with the category assignments you’ve used throughout the year.
Breaking down your spending into large categories like this can help you see where your money has gone on a large scale. This lets you know if you’re on track with your spending or if you need to make some major adjustments. For instance, if you’re spending a huge percentage of your income on dining out, maybe it’s time to re-prioritize for 2018.
2. Re-set periodic expenses
It can be hard to budget for periodic expenses like insurance, vacations, holiday gifts, and car repairs. Pull a list of these expenses into a separate report or spreadsheet. Then, figure out what you spent, in total, on each one.
Budgeting for irregular expenses isn’t difficult. But you do need to go through the steps in the process. It looks like this:
- Calculate the annual cost. Use last year’s numbers as a starting point, but then try to estimate for any changes in the coming year.
- Divide by 12.
- Add the result to your monthly budget. You can set that money aside in a short-term savings account to be used for the specified expense when the time comes.
You may already be budgeting for the expenses in this category that you expect annually. This could include your bi-annual car insurance payment or a specific home maintenance project you do every year–like having your furnace tuned. But when it comes to discretionary expenses, such as your annual family vacation or Christmas spending, take some time to think about these expenses.
Are you happy with what you spent last year? Do you want to cut back on that spending or do you anticipate needing to spend more this year? Either way, take this into account when you’re re-doing your budgeting for annual and periodic expenses.
3. Re-evaluate 401k contributions
By now you’ve likely been through your year-end review at work for 2017, if you have a traditional job. If that review gave you a raise, even a small increase, consider making an increase in your 401k contributions, if you aren’t already maxing that account out. Even a small increase can make a huge difference over time.
4. Plan for an IRA contribution
A lot of people make a lump sum IRA contribution, but it’s a good idea to plan if you’re not able to make a big deposit. Divide your planned IRA contribution by 12, then set up an automatic monthly contribution from your checking account to your IRA account. If you start in January, your IRA will be fully funded by the end of the year with no lump sum required.
If you need to open an IRA, here are some of the best IRA options.
5. Plan for your HSA contribution
If you have a high deductible health insurance plan combined with an HSA you should plan now how you’re going to fund it. You can use the same formula that I use for an IRA. Just take the amount of the HSA and divide it by 12, then begin making monthly contributions to fund it. The great part about an HSA is that you can use it throughout the year, but you don’t lose the funds. So try to put at least as much in this account as you’re likely to spend on medical expenses this year. And then fund the account beyond that if possible.
Again, having last year’s spending numbers in hand can be helpful here. If you’re not sure how much you spent on medical care in 2017, just look over those numbers. Then you can see the minimum amount you should contribute to your HSA.
6. Conduct a spending audit
This is the ideal time of year to go through the “One-N-Done” method of cutting back on your spending. Basically instead of trying to nickel and dime your way to wealth, you figure out where you can save month after month. Go through each of your monthly bills and decide whether you really need a product or service. Do you use that gym membership? How often do you watch shows on Netflix, and could you do something different with that down time? Even if it’s only a few bucks a month, by the end of the year, that could spell serious savings.
Once you’ve figured out any bills you can eliminate, then go through your bills to figure out which ones you might be able to reduce. If it’s been a while since you’ve shopped around for insurance–life insurance, homeowners insurance, car insurance, etc.–you may be able to save there. You should shop for car and home insurance about once a year just to be sure you’re getting the best possible rates. You may even be able to negotiate with your internet provider, cable provider, and cell phone provider to get lower rates on these services.
In all, finding ways to save on monthly expenses is the easiest way to save big money over the course of a year. It’ll take some time now, but could pay off big in the long run.
7. Re-evaluate your plan to get out of debt
Take stock of where you are when it comes to paying off debt. Are you making progress towards this goal? Could you make progress more quickly by changing the order in which you pay off debts? Could you boost the amount of money you put towards debt? Or could you save on interest by refinancing your debt to a lower rate?
This is where you determine if you’re on track to payoff your debt. Can you refinance the debt into a lower rate loan? Are you paying off the right debts–paying them off in the right order? Should you increase or decrease the amount of extra money you are putting toward your debt?
Deciding what order to pay off your debts is important. If you have a big interest rate differential, paying off the higher interest rate first could save you thousands over time. You can check out different options for paying down your debt with our debt snowball vs. debt avalanche calculator.
Once you’ve figured out how to pay off your debt, be sure you’re meeting your goals each month. Make a spreadsheet or chart to keep track of your debt so you can stay motivated to meet your goals.
8. Compare your net worth from the prior year
If you want one indicator of an effective budget, it’s this: an increasing net worth. An increasing net worth shows that you’re spending less than you make, paying off debt, and saving more money. This is why I recommend tracking your net worth at least once a year.
Net worth is simply what you own, less what you owe. It can be a positive or negative number. It reflects the sum total of all of your financial decisions during the course of the past year, which is why it’s so important that you track it.
Comparing your net worth from one year to the next is the best way to know if you’re moving in the right direction. If you aren’t happy with where your net worth is going, this is the time to make changes. You need to get net worth tracking into operation, and you can check out Personal Capital’s free tool for this purpose.
Those are my eight suggestions for the new year, and they’re a way for you to make decisions that can help you to make financial progress in the year ahead. By making the important financial moves in January, you won’t have worry about it later in the year.
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