Guest post by Philip Taylor, owner of PT Money: Personal Finance.
Have you made your new year's financial resolutions? Many people pledge to do better with their finances around this time of year, but they just don't know where to start. A good place to start, I think, is by creating a budget. A budget will give you an idea of where you stand financially, and it will give you a specific plan going forward. Budgeting isn't hard once you know how. Be sure to visit the how to make a budget page to get started. Once you know the basics, use some of these additional tips to make the most of your budgeting efforts.
Consider Building a Yearly Budget First
A yearly budget, as apposed to a monthly budget, does two things. First, it allows you to see your entire financial picture for the year and put it up against your annual salary. By doing this you should be able to gain confidence in your ability to live within your means and even have money left over. Secondly, a yearly budget allows you to break down annual expenses into monthly budget items. For instance, if you pay your car insurance only once a year, you can take that total premium and break it up into monthly chunks. You can then start saving that amount each month towards your annual expense.
Include as Much as Possible
The closer you get to a "zero-based" budget, where every incoming dollar has a designated place to be spent or saved, the more control you will be able to assert over your finances. You should strive to include all of your spending: fixed and variable, essentials and discretionary. You should also strive to include saving in your budget. The more you include, the better your budget will reflect the realities of your life.
Budget for Emergencies
Emergency financial situations can and will happen at some point. It's best to be prepared for these unexpected moments. Create an emergency fund to seperately stash this growing fund of rainy day money. How much you should budget for this depends on your particular situation. For example, if you are the sole bread-winner of your household, then the loss of your income (i.e. you were terminated, or you got sick for an extended period) would likely have a large impact on your family's finances. You might want to budget more for emergencies than the recommended six months of expenses.
Schedule a Periodic Review as a Team
To keep yourself accountable and to help you stick with the budgeting process, be sure to schedule some time down the road to review your spending against your budget. Doing this with your spouse will help to ensure you are both on the same page and continuously moving towards the same goal. If adjustments are needed, use this time to make them. Don't forget to schedule your next review.
Use the Budget to Help Identify Overpriced Items
Creating a budget will allow you to become aware of what you are spending your money on. What your budget doesn't immediately tell you though is whether the price you are paying is a good price. Go through your personal budget spreadsheet and ask yourself two questions:
- Is there a way to eliminate this expense altogether, and
- if not, can I find a way to spend less on this either through a less expensive provider or by seeking a discount.
Once you identify where costs can be reduced, make plans to make it happen (e.g. call to negotiate with providers, clip coupons, etc.).
Consider Automatic Payments and Saving
Finally, once you have a budget in place and are rocking along with the plan, consider creating automated payments for your recurring bills, as well as automatic recurring savings contributions. Doing so will help to ensure you don't miss payments and it will also keep you on track with your bigger savings goals.