Eight Financial and Budgeting Tips for the New Year
Step 1: Set Realistic Goals
Everyone has different spending habits and impulses. For a budget to be successful, you will have to evaluate your own strengths and weaknesses. Creating a budget does not necessarily mean becoming a Scrooge-like penny pincher. Budgets are designed to create sustainable ways of leading better lives. If you need to pay off debt slower than others, do so. But once you make your plan, stick to it.
Step 2: Examine Past Fixed Expenses
Write down your fixed expenses. What are your average payments for utilities, insurance, cable/internet/phone, mortgage, or rent? What other monthly charges are you accruing? This is always a good starting point. If you are startled by some of the numbers, explore alternatives such as energy saving methods and different phone or cable options. Eliminate some of your “nice-to-have” monthly bills like your newspaper subscription, On-Star, or HBO. Often times, we get stuck on following a certain path though easy money-saving changes are available.
Step 3: Examine Past Variable Expenses
Variable expenses include the things likely to change from month to month. How much do you spend on eating out, shopping, coffee, etc? This is a prime area to make cuts as by nature, variable expenses can be reduced with some dedication. Also, figure out the yearly costs on your daily habits. That $2 daily coffee is $730 dollars a year, yikes!
Step 4: Be Careful with Cash
When reviewing past spending and evaluating future budgets, make sure to include items you paid for in cash that isn’t included on your monthly debit and credit card bill. People can easily forget about cash outflow and in turn cause serious budget burdens.
Step 5: Watch Out for Unexpected Expenses
Examining previous spending, you may accurately add up your fixed income and usual variable expenses correctly. But make sure to account for the weekend trip for your cousin’s wedding, car maintenance, and other emergency expenses which may occur only occasionally. If you don’t consider these costs, an unexpected bill could send your budget spiraling out of control.
Step 6: Making the Right Payments
Lots of people think that budgeting is about paying off all debt until nothing is owed. Though this is one approach, making smart payments, exploring re-financing options, and investing could reduce the burden much quicker. First, pay off any high interest debt. Start with the highest interest credit cards and work your way down. In the case of loans and mortgages explore possibilities for refinancing. It’s probably been years since first signing your mortgage or student loan. If banks are offering better rates now, take advantage.
Step 7: So You’ve Paid off your Immediate Debt— Now What?
Once you’ve paid off immediate debt, it’s time to start saving and investing. At first, build up a safe and liquid portfolio of savings. This means investing funds into areas where money can be reached quickly with minimal possibility of loss even in a worst case scenario. Good places to start would be savings accounts and U.S. government treasury bills. These may not earn a ton of interest, but investing conservatively in safe liquid assets also helps with Step 5. You never know when an unplanned expense may occur. After building a cushion of savings and extremely safe investments, then you can begin to explore the deeper waters of mutual funds and then eventually moving to individual stocks on the market.
Step 8: Re-evaluate your Position
As you start becoming more comfortable with your budget, see if you can make any more trimmings. Financial discipline is a work in progress. The more you save the better you will get. Also, keep your eye out for new deals in all the steps. Now that you’ve stabilized your budget, can you acquire lower interest rates on a mortgage or credit card? Maybe transportation costs or rents have changed. By always looking for alternatives and adjusting to change, a budget can survive for the long haul.