Even though exercise and diet remain the top two New Year’s resolutions that most Americans have, the next few days might provide you with some opportunity to visit your overall 2014 spending plan. It can be a painful process sometimes building out a spending plan (or budget) as your self-reflection may often reveal ugly spots that you just don’t want to see. The first and most important step toward a financially successful 2014 is to get a reality check around where your dollars and cents were actually spent in 2013. Here are my six tips on how to organize and set up a household budget. This is the bedrock of what has created a successful personal financial plan for my household for many years.
- Gather The Last 12 Months Of Fixed Expenses– Fixed expenses are generally expenses that do not change much over the course of the year. An example of this would be your rent or mortgage. Most of your fixed expenses were likely drawn from your bank account. Since many people use on line bill pay, it shouldn’t be difficult to see what your monthly costs were for mortgage, car payment, electric, gas, etc. Even though items like gas and electric will vary depending on season, average the number out for now so you can gain a grip on the overall yearly expense.
- Gather The Last 12 Months Of Flexible Expenses– Flexible expenses are also known as discretionary expenses. For most families this is the dreaded ‘black hole’ of spending. You should pull out the yearly statement of your American Express, Visa, or whatever other credit or debit card you do most of your damage with during the year. This is a harder set of expenses to organize because you’ll have to actually run through each month to categorize eating out, clothing, birthday gifts, travel, etc. It is really important because you’ll be blown away on how much you spent in some of these areas.
- Gather The 12 Months Of What You Paid In Taxes– Note, that I didn’t ask you whether or not you got a refund or you owed money. Most people can tell you that number, but they cannot tell you what they paid in Federal Tax, State Tax, Social Security Tax, Real Estate Tax, City Tax, and Medicare Tax. Here’s a question: How can you possibly lower your income tax bill if you don’t know what you paid last year?
- Assess Your 2014 Income Potential– I recognize that you can never be 100% sure if you will be fired or exactly how your business will perform, but you need to take an estimate of where your income will be in 2014. Business owners call this top line revenue. Between salary, overtime, commissions, bonuses, and stock awards (option cash in), what will your household revenue be in 2014.
- Assess What You Need To Save- A high quality financial plan should give you the best direction of what you need to squirrel away to achieve your overall financial goals. It is important to implement the pay yourself first rule and figure out what you will save off the top. How much to put in the 401(k)? How much to add to the 529 plans? How much extra to pay on debt or the mortgage each month? This number must be known before you really delve into creating an overall household spending plan.
- Create A Spreadsheet To Look At What Will Stay And Where You Can Cut- Once you know what you can save and what strategies will mitigate taxes, then comes the difficult part of having an honest family conversation (or an honest one with yourself) about your priorities on where to spend your remaining cash flow. Will organic food stay or go? Do you have to stay at the Ritz or will the Marriott work out just fine? Is it going to be $1,500 for your children’s birthday party or just $500? How much to set aside for holiday shopping? Are there potential big expenses like a home improvement or a down payment on a new car you will need? Just by taking some time to go through this, you’ll have a much stronger plan about how to marshal your resources during 2014.
Even though I’ve been doing this a professional for almost 23 years and helped many people through the budgeting process, it is one of the more difficult personal finance topics for most families. There is a balance between saving and spending, and by all means you should have some fun and enjoy the fruits of your labor. Budgeting doesn’t have to be a painful process. It can actually be one of the most empowering exercises while doing a personal financial plan, because once you have all of the information at your fingertips you too can run your family finances just like a successful business. E-mail me at [email protected] if you want a copy of the budget sheet I’ve used for many years making smart money moves of my own!
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