A budget is the road map that connects your income with all the things vying for your money. Without a realistic budget, those financial goals would just be dreams.
Maybe you’re starting a budget for the first time or maybe last year was rough and you’re looking to do better. Either way, now is the perfect time to evaluate your finances and fine-tune your approach so that you can reach your financial goals.
If you’re ready to take charge of your budget this year, here are eight moves you should make right now to start strong.
1. Make Specific Budgeting Goals
To make real progress towards your goals you need a budget. But many people make the mistake of trying to make a budget without having clearly defined goals in which to budget for. They have a vague new year’s resolution to save money but no incentive to follow through.
Before you make an outline for your budget, figure out what you’re budgeting for. Write down some specific and measurable goals. Where do you want to be financially this time next year? What do you want to accomplish and what things do you want to cut out of your life?
The SMART goal template is a simple way to make goals that you budget for.
- Specific: What is the amount you need to save or which debt would you like to pay off?
- Measurable: Use a chart or tracker to measure your progress.
- Attainable: Aim for the stars but keep one foot firmly planted in reality.
- Relevant: What impact will accomplishing this goal have on your personal and professional life?
- Timebound: Set your goal for the year or break it up into quarterly goals.
Make sure you’re flexible with your goals. Over the next 12 months things will surely come up that’ll throw off your plans and you’ll have to roll with the punches. If you’re prepared for changes in advance they can feel more like minor inconveniences than total derailments.
2. Review Last Year’s Month-to-Month Spending
Once you’ve established a few goals for 2020, review your spending from last year and determine how much you need to change to hit your goal. You might be surprised at the number. You can do this in a few ways:
Download all your bank transactions manually. Extend the view of your transactions to the entire year and download them as .csv files. If you generally stick with one account this will be easy. If you use multiple debit and credit cards combine all your .csv files into one Google Sheet.
Then, group your transactions by broad category. Don’t get too much into the weeds, or this will take approximately forever. This is meant to give you a big-picture overview of where your money has gone over the course of the year.
Use 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 just by connecting your online banking accounts.
If you’re not happy with what you see, make a plan for spending better this year. Don’t be vague here either. Clearly record what you were spending each month and write ideas for how you’re going to lower that number this year.
For example, if you spent $150 on gas station snacks every month, plan to buy snacks at the grocery store to keep on hand to eliminate that temptation. Don’t try to overhaul your spending, choose a category or two each month to work on.
3. Make Sinking Funds for 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 from your annual spending into a separate report or spreadsheet. Then, figure out what you spent in total on each one.
Based on your annual spending you can create sinking funds for each category so you’re prepared for these expenses. A sinking fund is a savings account formed by saving money for the purpose of spending it on specific things. A sinking fund essentially saves you from “sinking” when a large payment is due.
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.
To calculate how many and how much you need to be saving in your sinking funds each month you’ll follow three simple steps:
- Calculate the annual cost of your periodic expenses. Use last year’s numbers as a starting point, but then try to estimate for any changes that might come in the new year.
- Divide by 12 or account for bills that you need to pay sooner and divide by however many months you have to save.
- Add the result to your monthly budget.
The best place to set money aside is in a high-yield savings account separate from where you do your day-to-day banking. Then you won’t mistake it for spendable cash later in the year.
4. Re-Evaluate 401(k) or 403(b) Contributions
Look at what you have saved for retirement and the investment performance of your 401(k) to determine if you need to increase your 401(k) contributions. The 401(k) contribution limit increased in 2020 to $19,500 for workers under age 50 and $26,000 for those 50 and over.
Your company’s 401(k) is a natural and financially advantageous place to start saving for retirement. Contributions are automatically withdrawn from your paycheck, making them easier to stay consistent with, and tax-deferred, meaning you don’t pay taxes on them until you withdraw them.
Contributions are also typically matched so you’ll want to contribute at least enough to get your company’s full match.
If your year-end review at work resulted in a raise, even a small increase, consider making an increase in your 401k contributions. Even a small increase can make a huge difference over time.
5. Plan Your IRA Contributions
Your Individual Retirement Account, IRA, is a retirement account you open separate from your employer and while there’s no match, it’s a lifesaver if your employer’s plan has only a few investment options or high fees.
IRA contribution limits are currently set at $6,000 if you’re under age 50 or $7,000 for those 50 and over. Divide your planned IRA contribution by 12, then set up an automatic monthly contribution from your checking account to your IRA account. You have until Tax Day of the following year to make contributions for the previous year.
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. 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.
6. Plan Your HSA Contributions
If you have a high deductible health insurance plan combined with a Health Savings Account, HSA, you should plan now how much you’re going to fund it. An HSA is a savings account for qualified medical expenses that stays with you from year-to-year and job-to-job.
Contributions to your HSA are pre-tax and after a minimum threshold, usually $2,000, are invested like your 401(k) or HSA. At a minimum, you should save the amount of your deductible and preferable the amount you predict you’ll use for medical expenses in the new year.
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, just look over those numbers. Then you can see the minimum amount you should contribute to your HSA.
Lively HSA is a great place to begin looking into an HSA. Lively allows you to save or invest with your HSA and there’s no cost to open an account or any monthly fees. See how Lively compares to competitors in our list of Best HSA Accounts.
7. Re-Evaluate Your Debt Payoff Plan
Paying off debt is a financial goal everyone should have. Lowering your credit utilization increases your credit score and the less debt you have, the more money you save on interest. Take stock of where you’re at in paying down your debt and how you may be able to do better in the new year. Ask yourself questions like:
- Could I make progress more quickly by changing the order in which I’m paying off debts?
- How can I boost the amount of money I put towards debt every month?
- Could I save on interest by refinancing my debt to a lower rate?
Compare different options for paying down debt by plugging your numbers into a debt snowball vs. debt avalanche calculator or looking up refinancing rates.
Once you’ve figured out how to pay off your debt, be sure you’re meeting your goals each month by continuing to keep track of your monthly spending. And stay motivated to accomplish your goals by tracking your debt payoff in a spreadsheet or chart that’s easy to see every day.
8. Compare Your Net Worth From Last Year
If you want one indicator of an effective budget, it’s this: an increase in your net worth.
Net worth is simply what you own–your retirement investment, home equity, cash, etc.–minus what you owe–your debt, mortgage, credit card balance, etc. It reflects the sum total of all of your financial decisions. Personal Capital’s free tool lets you plug all your financial accounts in and instantly calculates your net worth for you.
Comparing your net worth from one year to the next is the best way to know if you’re moving in the right direction. It can prove you’re on the right track or be a sobering reminder to get back on budget.
If you aren’t happy with where your net worth is going, this is the time to make changes.
By making important financial moves in January, you can worry less about your money for the rest of the year. And you’ll ensure you’re on the right track every new year to come.