Who’s Ready to Say Goodbye to 2020? Ring in the New Year With These 3 Budgeting Resolutions
About the author: Lamar Watson, CFP®, is a Fee-Only Financial Advisor in the Washington, D.C. area, that works with clients virtually across the country. Lamar's work with his clients focuses on budgeting, employee benefits, paying down debt, buying their first home, and investing. Lamar is the Founder of Dream Financial Planning, a virtual financial planning firm specifically designed to help young professionals and minorities take control of their finances and fulfill their dreams. Feel free to schedule a complimentary consultation to learn how we use The DREAM Financial Planning Process ™ to help our clients achieve their goals.
It’s time for the new year, a new budget and a brighter future for you and your family. 2020 has been full of unprecedented events that may have left you feeling financially unstable, but you can make 2021 the year you finally take control of your financial life. Use these resolutions to create a realistic budget that will let you pay down your debts and give you the opportunity to put something away, while not forcing you to be too disciplined in order to make it happen.
Resolution #1: Gather The Facts
Before you do anything else, you need to know how much money is coming in and how much is going out each month. If your income has changed due to COVID, you should take a step back to gather information.
For people who receive a regular paycheck, estimating the amount of money coming in is as simple as calculating your post-tax income. But for anyone whose income varies throughout the year, things can get much more complicated, especially during a pandemic. A relatively safe way to budget with an irregular income is to use the lowest-earning month from the previous year as a baseline for creating a budget. A less secure, but probably more realistic way to budget, would be dividing the last year's income by 12 and using that number as your monthly budgeting baseline.
Once you determine the amount of money you’ll likely have coming in, you need to know what you are spending on a monthly basis. Track your spending for as many months as possible to create your average monthly expenses. Separate this average monthly expenses into two categories: needs and wants. Needs are bills you have to pay, like housing, food, insurance, basic utilities, minimum loan repayments and transportation. Everything else is a want, like entertainment, eating out and shopping.
#2: Have a Budget Plan
Without a good plan, you won't meet your financial goals.
There are lots of different ways to set up a budget, but the most important thing is that it works for your situation, and you can stick to it. Try using a spreadsheet, downloading an app or creating a handwritten budget to get started. Based on your tracked spending, you can determine how much you should spend on needs and wants each month. Don’t forget to budget for savings too. For example, you could put 10 percent of your monthly income into your savings account.
During a time of economic uncertainty, you will also want to keep an emergency fund, or a financial cushion, in your budget so that you can be prepared for unexpected events or loss of income.
#3: Adjust Your Spending Habits
A budget only works if you are willing to change your spending habits.
Our needs and wants can vary each month, so you have to be flexible with your budget. For many people, cutting down on spending is a painful experience. But there are ways to make it a little less uncomfortable.
Control Impulse Purchasing
While you are still at home, make a list of items you will purchase and don't give in to temptations at the store. If you see something which you really want in the store, write it down to buy on your next visit. It is amazing how many 'must-buy' items lose their attractiveness after a few days.
Use a Credit Card, But Pretend It’s Cash
The advice used to be that you should always use cash when you shop, but cashback and other incentives from credit cards makes using them a great deal - if you can avoid interest charges. When possible, avoid spending more money than you have in your “want” budget for the month.
Avoid the “Little Luxuries”
Small expenses can really add up. Limit your visits to the coffee shop and start bringing your lunch to work. It won't be long before you notice substantially more money in your pocket - without a whole lot of sacrifice.
Remember that budgeting is an ongoing process. You will need to revisit your budget plan from time to time to make sure that you are staying on track. Try out these budgeting resolutions in 2021 to get back on track towards your financial goals, especially if you are feeling overwhelmed by the uncertainty of the coronavirus pandemic.
Dream Financial Planning Process ™
Whether you're managing student loan debt, starting a business, or considering buying your first home, the DREAM Financial Planning Process™ is tailored to the unique needs of busy professionals in their 30s and 40s. This process focuses more on short-term goals while you grow and evolve in your personal and professional life. If you're looking for guidance on Financial Planning, optimizing employee benefits, budgeting, student loans, and managing your 401k or investments we can help.
With uncertainty surrounding the economic stability of our country, it's okay to have fears and anxieties surrounding your own savings and investments. The most productive course of action from here is to reach out to Dream Financial Planning (or whoever your trusted advisor might be) and discuss your options. It's easy to have knee-jerk reactions when it feels like the bottom is falling out, but it is imperative to make decisions using research-backed data and a level head. If you'd like a Complimentary Review and risk assessment of your investment portfolio feel free to send me an e-mail.
On the first Thursday of every month, I send out a monthly newsletter with tips and tricks to help you manage your finances. In the November Newsletter, I discuss year-end goals, open enrollment, and the best way to manage your 401k.