I’m excited to be working with my fierce friend, Peggy Doviak, and to her share some wisdom on strategies and tasks for financial planning – particularly creating a budget – to set us up for success next year.
Peggy is the author of 52 Weeks to Prosperity along with other guest blogs posts you can find on my site like paying for college, advice about prosperity vs. money, setting financial goals, saving for retirement and curbing your holiday spending. She has a wealth of advice and we’re all better served by having a professional like Peggy in our corner!
Budgets, the Big Bad
Many people create New Year’s resolutions around their finances. Often, their goals are a little murky—they say they want to be “better with money” or “get control of their cash flow.” Unfortunately, these vague resolutions are problematic because there is no way to measure accomplishment. A more specific focus would be easier to achieve, so let’s look at some strategies.
When people say they want to be better with their money, often they are talking about controlling their spending. One of the best strategies for managing cash flow is creating a budget. As a result, a specific New Year’s resolution might be to create a budget and follow it. However, this process often frightens people. They see budgets as judgmental, controlling what they can spend. That’s the wrong way to look at it.
You are creating your budget. You’re the one who gets to set the categories and determine the dollar amounts. If the framework needs an adjustment, you’re the one who makes it. You control the budget, not the other way around. Now, you have the power, and something that previously appeared frightening hopefully becomes a puzzle or a challenge. Here are some strategies to help you create a successful budget.
Gain an Understanding of your Current Spending
The first thing when creating a budget is that is must be based on your current spending. Before you can decide how much money to assign to each category, you need to understand your bills. To help with this, I want you to track your purchases for a month. Every. Single. Item. I know you will remember to include your rent or mortgage, but what about that drive-through dinner on your way home from soccer practice? If you lose receipts, take a picture of them with your phone as soon as you complete the purchase. Additionally, if you go to superstores, analyze your purchases. That way, you can divide your expenses by groceries, household, and discretionary items.
Everyone needs to track their spending—spouses, partners, kids, parents. If they live under the roof and are part of the home economic system, they need to track their spending. Remember, this isn’t the time for criticism or judgment. You just need to know where the money is going.
At the end of the month, or as you are going along, categorize the items. These classifications will likely be what you use as you go about creating a budget. Here are some examples.
- Retirement Savings
- Emergency Fund Savings
- Car Payments
- Household Costs
- Cell Phone
- Gym Membership
- Cable/Subscription Entertainment
- Yard Service/House Cleaning
- Eating Out
Rinse and Repeat, if Needed!
At the end of the month, study the spending breakdown. Are you surprised where the money is going? If you are like most people, you would tell me that this particular month is extraordinary. Maybe you had several birthdays to celebrate and didn’t cook as much as you usually do. In any case, you spent much more than average.
If that’s what happened, then complete the exercise for a second 30 days, even a third if you think it doesn’t represent your normal spending. At the end of the time, you will probably be surprised at how much you spend on food. You may also be horrified when you add up all your subscriptions. However, your main questions are do you have enough income to cover your expenses? Are you putting money into savings? Are you funding your retirement?
If the answer to all of these questions is “yes,” then your budget is easy. Simply assign the correct amount to each column, and you’re finished. However, if the answer is “no,” then it’s decision time.
Adapting to your Financial Needs
Where do you want to make cuts? Remember that this isn’t a financial crash diet. It’s a long-term lifestyle change. You can’t eliminate all shopping and keep your budget. You can’t vow to never to eat out again. However, you can avoid the expensive stores and bistros, at least most of the time. Although some of your expenses are static, others can be adjusted. And sometimes, what we think is a fixed cost can be tweaked. You could eliminate a video subscription or mow your own lawn. More granularly, thermostats can be raised or lowered, lunches can be packed, and cell phones don’t need unlimited minutes. Remember, you should create a spending plan that works for you. When you choose what to adjust, you keep the power. This mindset makes you much more likely to follow your plan.
Additionally, remember to budget for special events. Although the holidays are behind us, many of the bills we incurred last month are just now coming due. Look at the cost honestly. Did you spend more than you can afford? If so, do you know why? Maybe you ran out of time. Perhaps you couldn’t find the perfect gift. Maybe you were spending money to compensate for something else going wrong. Now that the emotions are behind you, decide if you spent what you can afford. Build that amount into your budget now.
Alternatively, if you can save for holiday expenses in six months, begin in July. That gives you the first half of the year to save for your summer vacation. Start planning now! The earlier you make reservations, the less you are likely to pay. Of course, read the fine print to be sure you don’t incur penalties if your plans should change. Planning your vacation for an extended period of time is also good for your mental health. According to psychologists, we get as much pleasure from anticipating a trip as we actually do while traveling. After we return, our memories don’t appear to provide as much satisfaction. So, plan your vacation now and look forward to it for months.
Starting Fresh in the New Year
Failing to budget seems odd when we compare it to the rest of our financial behaviors. You wouldn’t want to buy a product if you didn’t know what it cost. And yet, often we purchase whatever we want, hoping there’s enough money. We don’t see our income as a maximum price tag. Even if we know we don’t have the cash, sometimes we buy it anyway and put it on a credit card. This is your year to change that behavior by creating a budget and controlling it to keep your finances on track. Start now, while you’re enthusiastic, and you will have a more prosperous 2020!
Meet Peggy Doviak
CERTIFIED FINANCIAL PLANNERTM practitioner, Peggy Doviak, knows how stressful money can be. Her fifteen years as a financial planner and a national speaker to both financial professionals and consumers have convinced her that most people fear their money. That’s why she wrote 52 Weeks to Prosperity – Ask Peggy Doviak: What Your Accountant, Banker, Broker & Financial Adviser Might Not Tell You. In it, she addresses 52 financial planning topics to enable individuals to become comfortable with the vocabulary and issues of their financial lives, so they can participate in the planning process with a professional. Learn more about Peggy on her website, www.peggydoviak.com.
Looking for more tips on goal-making and planning? Check out my post on SMART Goals!