As we’ve entered the new year, many people start to set New Year’s resolutions. It is also a perfect time to check how you did financially last year and to plan a budget for the new year. There are many good reasons why you need to make a budget, such as identifying and reaching your financial goals and prioritizing your spending. You would want to keep your finances on track and make sure you have enough savings.
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Your budget is a plan on where your money goes based on estimated income and spending. It is usually done on a monthly basis. You may also want to roughly map out your spending for the next quarter, half-year or even the whole year, especially if you expect unusual spending such as a home renovation or traveling abroad.
To make a budget that works and that you can actually stick to is not easy. To increase your odds of success in forming a habit of following a budget (just as following a diet plan), first of all, you need to follow a so-called “SMART” principle to set up your financial goal. “SMART” is specific, measurable, attainable, realistic, and time-oriented.
Specific: Understand your specific financial goal. In other words, what you want to do with the savings, considering both short-term goals (e.g., buying a new car) and long-term goals (e.g., retire by 55). Having a budget sheet is just a tool, not the goal. Saving money for the purpose of saving money is quite unattractive and will not last long.
Measurable: Your budget plan should allow you to understand how close you are to your financial goals. If you plan to save at least $500 a month, your plan budget should help you plan your spending in each major category to ensure that there will be at least that amount of savings available in that month. Then you try to stick to the amount you’ve budgeted and tracked your actual spending in those categories. Compare the expected amount with the actual amount; you will be able to measure whether you overspend or underspend.
Achievable: A budget is only successful when it is achievable. At the end of each month, examine your budget plan and the actual spending for that month, so you can have some ideas on whether a plan is achievable or not. If you can easily achieve your goal of saving $500 without much effort, maybe you can set the goal a little higher for the next month, say $700. On the other hand, if you find the original goal seems to be beyond your reach, you need to revisit the goal and the budget plan to make relevant adjustments.
Realistic: You may have heard some people spend $50 or even less a week for groceries for a family of four (or even more). That is great, but to be honest, it may not be realistic for you right away. To set a realistic budget requires you to think thoroughly whether you have the time and resources to make it happen.
If you want to cut your weekly grocery spending by $30, do you know what items you want to be cut from your shopping list or what strategies you would use to spend less (e.g., use more coupons, buy a store-brand instead of a national brand)? Having a goal without a plan of action is just a wish. Start with an amount that sounds reasonable (although not very exciting) to you. You may not save a significant amount of money immediately, but you also won’t be stressed out.
Time-oriented: Your financial goals need a timeline. Each goal needs to be completed within a specific time frame. You can break down the big goals into achievable small steps that gradually get to where you want to be.
Making a budget is just the first step. To sustain and improve it, you need planning and perseverance. As Bum Philips said, “The only discipline that lasts is self-discipline.” Work as a family; shared financial goals could motivate family members to work together to achieve them. If you have kids, let them help with budgeting. You can also use a free personal finance app, such as Personal Capital, to help you make a budget and monitor savings and spending.
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New Year is a great time to change. Follow the momentum and do what’s best for you and your family!
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