Prosper in 2024: Steps to creating your personal budget for the New Year.

Are you planning something big this new year? Taking a trip? Making a major purchase? Pursuing investments? For most of us, achieving those goals requires creating a budget and sticking to it – eyes on the prize, right? So, let’s talk about how to create a successful budget for the year ahead and the benefits of sticking with it, even when it becomes a challenge (it often does).

An effective budget explains three things: where you are, where you’re going, and how you’re going to get there. Ideally, that means your annual budget includes setting aside funds to invest in your future. We’ll come back to that. For now, let’s get started with the two essential requirements for every successful budget– income and expenditures. The key to planning ahead successfully is knowing exactly what you can and cannot do, which is defined by your income and expenses.

Have a calculator handy and write this information down or enter it in a spreadsheet:

• What is your current net income from all sources?
• What are your monthly, quarterly, and annual expenses?
  List these in two categories – fixed (rent, utilities, insurance) and variable (entertainment, dining out, etc.). Be sure to include monthly and annual subscriptions or expenses (tax preparation, property taxes, inspections, web domains, etc.)
• List your outstanding debts (credit cards, loans) and their interest rates.
  The rates are important because you need to prioritize paying off the debts that cost the most money to service.

Thoroughness counts here because not knowing the total picture of your income and expenses can derail your budget as easily as an unexpected expense, like a trip to the emergency room or a major car repair.

Subtract your total expenses from your total income — what’s left is “disposable” income, to be saved or spent as you wish.

Time out. Before planning or splurging on something big, let’s go back to the basics for a moment.

Consider short and long-term goals. Define short-term goals as what you want to achieve in the next year (e.g. saving for a vacation, establishing an emergency fund). Long-term goals are bigger milestones, such as buying a house or saving for a comfortable retirement. Be realistic in defining your goals – make them achievable so this becomes a step toward success.

Step 1. Income allocation. Assign specific amounts to cover these necessities:

• Living expenses (housing, utilities, food, getting to and from work)
• Savings
• Debt repayment
• Discretionary spending

Step 2. After identifying living expenses, prioritize savings. Building an emergency fund that can provide you with three to six months’ worth of living expenses will  help you maintain your budget and give you a sense of security and well-being (a high-interest savings account like Lafayette Federal’s Preferred Savings will help that money grow faster). Next, it is essential to contribute regularly to retirement accounts (like a 401(k) or IRA) and take full advantage of employer matches. For most people, this is the surest way of creating a secure source of retirement funds or a down payment for a home. The longer you participate in these plans the more financially secure you’ll be. Just do it. Prioritizing savings over paying off debt may seem counterintuitive, but it is the right choice for improving your financial health and peace of mind.

Step 3. Manage your debt and prioritize paying off debts with higher interest rates to minimize your payments. This will help to ensure you’re on the fastest path to lessening your debt load.

Step 4. Track your spending. Use a budgeting tool or app to track exactly where your money goes. This helps you stay on track and enables you to correct and adjust your budget as needed. Remember, the more you know exactly how you’re spending your money, the easier it is to manage your budget.

Step 5. Review your budget and make adjustments regularly. Did you get a raise? A new pet? Are you still watching that streaming service as much as you used to? Working from home more often? Assess your budget at the end of each month. Compare your actual spending to your planned budget and adjust if necessary. Keep your budget as precise as possible but remember life can be dynamic:  Leave room in your discretionary budget to accommodate changes in income, expenses, or financial goals.

Step 6. Be realistic and seek additional help if you need it. Sticking to a budget can be a struggle for numerous reasons. Consider consulting a financial advisor for personalized advice and guidance, or take advantage of financial literacy resources, including books, podcasts, and online resources to enhance your financial knowledge. There are also groups on social media that can be informative, but be cautious about taking anyone’s advice on investments or budgeting strategies.

Now that you know how to go about creating a budget, let’s talk about one important aspect of budgeting that doesn’t get enough attention: they reduce stress in multiple ways:

1. A budget gives you financial clarity and control, including:

Visibility — knowing where your money is going brings a sense of control and reduces the anxiety of uncertainty.

Empowerment — taking charge of your finances can make you feel more confident and empowered.

2. Having a budget minimizes financial surprises by:

Providing emergency preparedness — having an emergency fund and planning for unexpected expenses can lessen the stress of sudden financial shocks.

Avoiding debt accumulation — by planning expenses in advance, you’re less likely to rely on credit cards or loans to cover unexpected costs.

3. Improved decision-making through:

Prioritization — budgeting helps you prioritize expenses based on importance, ensuring essential needs are met first.

Reduced impulse spending — when you have a budget, you’re less likely to overspend on unnecessary items or impulse buys.

4. Make progress toward goals:

Sense of Achievement — meeting savings or debt reduction goals brings a sense of accomplishment and reduces worry about the future.

Visualization — tracking progress toward financial goals can motivate and reduce stress by visualizing the improvements.

5. Better relationships through:

Reduced conflict — discussing and agreeing on a budget with family or a partner can reduce conflicts related to money matters.

Collaboration — working together on a budget fosters teamwork and shared responsibility.

6. Long-term financial security by providing:

Peace of Mind — having a plan for savings, retirement, and long-term goals reduces stress about the future.

TAKEAWAY TIPS:

• Be Realistic: Set achievable goals and budgets.
• Account for unforeseen expenses: leave room for unexpected costs in your budget.
• Cut unnecessary expenses: trim discretionary spending where possible.

Remember, a budget is a flexible tool. It’s essential to adapt it to your evolving needs and circumstances throughout the year. Done right, a budget should alleviate stress, not add to it.