For many people, a new year means making a new set of resolutions. If you’ve never set up a budget or if your family’s budgeting efforts have been backsliding during the pandemic, 2022 is the year to get your finances back on track.
Budgeting Basics
A new year is the perfect time to hit the reset button on your finances, adjusting your priorities, anticipating your expenses, and planning where to allocate your money before you spend it. Budgeting may seem about as much fun as getting a tooth pulled, but it pays off in the long run. You can draft your budget in a document, spreadsheet, or app — or go old school and use a pen, paper, and calculator.
Creating a budget is a bit time consuming, but it isn’t difficult. On the most basic level, you just add up your monthly income and your monthly expenses. Making this calculation ensures that you’re not spending more than you’re making and helps you plan what to do with the amount that’s left over each month. But there’s also a deeper purpose to budgeting. It helps you align your spending with your financial goals. By tracking exactly where your money is going, you can decide whether you’re using it wisely or need to make some changes.
Creating a Budget
The first step in the budgeting process is to make a list of all the money that comes in each month. These funds may include paychecks, child support, rental income, or investment income.
The next step is to list your monthly expenses. This list will include essential expenses, such as mortgage or rent, utilities, food, transportation, and loan payments. It will also include nonessential expenses, such as dining out, vacations, and entertainment.
To get an accurate accounting of your average monthly expenses, you’ll need to look at your bills, banking and credit card statements, and cash receipts over the past few months. You may find expenses that you don’t recall — a birthday gift, a special anniversary dinner, a home repair — so you’ll need to incorporate these types of outlays into your budget. You also may not pay some bills, such as car or house insurance, each month, so you’ll need to include these expenses on a per-month basis.
Once you’ve calculated your income and expenses, you’ll have a better sense of your finances. If you’re barely making ends meet, you may want to consider finding ways to increase your income or reduce your expenses, perhaps taking on a side gig or eating out less often. Even if your budget shows that you have plenty of excess funds, you may be able to identify nonessential expenses that you want to cut back so that you can use the funds for more important purposes.
Optimizing the Use of Your Money
Once you have your spending aligned with your income, the next step is to plan how to use the extra funds each month. It’s a good idea to direct the money toward goals because most of us can find plenty of nonessential things to spend money on. It’s crucial to build up savings for emergencies — such as unforeseen health expenses, a job loss, or a home repair bill — as well as for future major purchases, such as a home or a new car. It’s also important to start setting aside money for retirement, even if your job includes a pension, 401(k), or other retirement plan.
Sticking to Your Budget
Once you have your budget in place, the goal is to stick to it. By keeping tabs on your expenses, you’ll be better able to achieve your financial goals. It’s also a good idea to review your budget periodically — perhaps every three months — so that you can make adjustments that take into account increased income or unplanned expenses.
Sticking to a budget is important because it helps you take control of your finances. It helps you be prepared for emergencies, plan for retirement, and have money for fun splurges. Most of all, it eases everyday stress because you don’t have to worry so much about whether you’ll have enough money to pay your bills or unexpected expenses.
To help you take control of your finances and simplify your life, we’ve developed the First United Personal Finance Tool. It gives you access to all of your financial accounts, provides insights into your spending, and enables you to create a custom budget to manage your money. If you need additional information on how to use the tool or guidance on budgeting, you can always speak with one of our advisors at a Community Office near you. They’ll be happy to provide any assistance you need.