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On Your Way to a Better Budget

Managing your financial life

It is never too late to set financial goals. You’ll love the peace of mind that comes when you’re the one in control of your money. And when you take it step-by-step, financial success is much more likely.

Here are 10 easy steps you can follow to get started.

1. Get your paperwork (and online items) ship-shape

Who can manage anything amidst a mountain of paper, whether it’s accumulated junk mail, bills or unopened financial statements? January is a great time to get old papers sorted, shredded, and recycled.

Make three piles: shred, take action now, and file for the future. A tax pile might be part of the plan as well. It’s also a good time (if you haven’t already) to sign up for eStatements and eBills – and switch to cloud storage to eliminate clutter. It’s also a good time to organize and pare down your online files.

2. Review what happened last year

If you prepared a budget last year, how well did you do? Did you spend more than you planned? Was there a month or category that went awry with unexpected expenses? Or did you reach your goals? As you craft a clear picture, adjust your figures accordingly for the new year.

If you didn’t have a budget, then establishing one should be a priority. Without a budget, it’s difficult to see what you’re spending, saving, and earning – and to accurately set goals. Try using an online tool or an Excel or Google spreadsheet to help.

3. Face the truth about what you spend

Like dieting, it takes work, determination, and a bit of honesty with yourself. While managing your money may not be the most stirring experience, it is worth the effort; and knowing you’ve gained the upper hand with your finances is an awesome feeling.

If you haven’t followed a budget before, start by tracking everything you spend for an entire month. Group expenses into categories, such as housing, living needs, utilities, food, taxes, and savings. Realize some costs you can control, like groceries and entertainment, and others you cannot, such as taxes and gas prices.

If you’re spending too much, work on the items you can control. Continue to track expenses by category.

4. Find ways to cut back

Now that you’re observing your money, do you notice any patterns? For example, are you spending more than you should on incidentals at the gas station or dollar store? Giving in to impulse buys for the kids? Or eating too many lunches out? These are the things you have control of and can say no to.

To save, try preplanning your meals and grocery trips or going generic on certain items. Clip coupons. Forego the specialty coffee. Instead of a movie night out, make it a movie at home.

You can be certain that everyone has their vices or binge buys, and it’s perfectly okay to treat yourself occasionally. The key is being aware of your weaknesses and knowing when to allow the extras into your budget. Consider establishing a small savings account (with automatic deposits) to use as your personal reward.

5. Set attainable goals

Once you have a clearer picture of your finances, it’s time to map your goals. Keep them attainable, and don’t try to change too much too soon. Trying to accomplish all of your goals at once can lead to disappointment, and you’re more likely to abandon your game plan. Remember, even achieving small goals can be a lift to your psyche. Be realistic and follow the lead of the experts.

When it comes to distributing your gross income by category, use the following guidelines:

  • 30 percent: Housing and debt (mortgage/rent, credit cards, auto loans, student loans, etc.)
  • 26 percent: Living expenses (food, clothing, utilities, transportation, medical, entertainment)
  • 25 percent: Taxes (federal, state, local, and property; FICA and Medicare)
  • 15 percent: Savings and retirement (401(k), stocks, mutual funds, college savings, etc.)
  • 4 percent: Insurance (life, health, disability, auto, homeowners, etc.)

6. Take stock of your emergency fund

Don’t have one? Start one straightaway!

Having a safety net for emergencies is essential. It makes you less dependent on credit cards when emergencies do arise – like an unexpected car repair or a trip to the ER. Experts advise saving three to six months’ of your salary for the unpredictable things.

If you’re unsure where to start, try using direct deposit to aside a small amount each pay period. Make sure to keep the funds separate from checking. If building a six-month nest egg seems completely out of reach, save what you can. Whatever you do, don’t ignore it. Even a single month of savings is better than none, and it’s something you can build on.

7. Pay off debt

Calculate your debt ratio at the beginning of the year (monthly gross income / monthly debt payments = debt ratio). Ideally, it should be 36 percent or less. If it’s higher, set a goal to reduce your debt over the next 12 months. You can also try ranking your debts in order – either by the amount owed or category to see where you stand.

Reduce your “bad debt” first, including:

  • Credit card payments
  • Personal or payday lender loans
  • Higher-interest loans
  • Keep goals manageable. Remember, slow and steady wins the race.

8. Save for the bigger picture

Putting money aside for retirement is another step towards financial peace of mind. Consider too that you may need to accumulate up to 20 times of your desired annual income to live comfortably. Obviously, the younger you start saving, the better off you’ll be. If your employer offers a 401(k), start contributing what you can right away, or at the very least, contribute the amount your employer matches.

IRAs can also help you to save for retirement.

With a traditional IRA, contributions are made pre-tax, reducing the amount of your taxable income. Education IRAs (sometimes called Coverdell Education Savings Accounts) are designed to help you save for higher education expenses, and Roth IRAs provide the opportunity for tax-free asset growth and tax-free withdrawals. (See your tax advisor for details.)

9. Find ways to earn more

Many individuals are finding new and inventive ways to supplement their income, whether it’s tapping into a hobby, passion or part-time job, even selling goods on eBay or Etsy. Don’t discount these non-traditional revenue streams; you, too, may find yourself in the entrepreneurial spirit.

Bottom line: when you boost the amount of money coming in, you create options and flexibility in how you choose to spend and save.

10. Make adjustments as you go

Knowing where you stand with your budget helps you to make sound money decisions daily. If you find your budget isn’t working, don’t wait until next year to make adjustments. Tweak as you go along. Having the ability to realign goals is just as important as setting and tracking them, and will help you to achieve greater financial success.

Bottomline

It is never too late to take the steps to achieve your financial goals. For more information to help you manage your finances, contact a United Financial Planning Advisor today.