At the turn of another year, it’s time to ask yourself, “How did I do on my savings goals?”
Creating a budget is just one piece of the pie. In order to successfully understand and manage your finances, the next step is to review your annual spending habits to see how well you stuck to your plan – or how far you’ve strayed – and make any changes needed.
If you’ve been keeping track of your expenses, good for you! If you haven’t, this is a perfect opportunity to start the groundwork for next year.
Budgeting Throughout the Year
Your budget is the path to a successful savings plan, and it can help you meet your financial goals. Do you want to lower your debt? Make a down payment on a house? Save up for a comfortable retirement? Establishing a clear budget goal can help you do just that.
To start setting up your savings plan, figure out your net income – not your gross income, since you’re not taking all of that home anyway. Your net income is what you bring home after expenses like taxes, health insurance and your 401(k) contribution. Then you get to measure out all your other expenses.
Fixed expenses are expenses like rent, mortgage, insurance, car payments, debt, groceries and the like. Variable expenses are expenses like vacations, entertainment, dining out and other costs that vary from month to month.
You can also split your budget into the 50/20/30 rule, which divides 50% into essentials (mostly fixed expenses), 20% into savings and 30% into non-essential spending (mostly variable expenses). Non-essential spending is easier to trim from your budget.
Sticking to It
Sticking to your budget is about balancing your wants against your needs, so you should try to cut down on impulse spending. Make compromises, but don’t live like a monk either. If you start to feel deprived, it can increase the chances of abandoning your budget altogether – and you don’t want to do that! Pad your budget with a little bit of fluff to allow for the occasional reward or indulgence. Saving money isn’t supposed to make you feel miserable. It’s supposed to put you in control of your financial life.
A great way to start budgeting is simply to track what you’re already spending money on. Bank account statements can help you track your spending, but you can also write down your expenses, or track them using a budgeting app. Many people even use Microsoft Excel sheets to log the way their money moves. Having this record of your spending habits and needs can be very helpful when you’re looking back on your budget at the end of the year. It’s not only how you hoped to spend your money – it’s a record of how you actually spent it.
Budgeting and Debt
You should do your best to get rid of debt, but it’s easier said than done. Things like credit card debt, student loans and other overdue payments can pile up fast. That’s why it can sometimes be helpful to pay off your debt before building your savings. Since debt can build up in interest, getting rid of your debt as soon as possible can help you to save more money in the long run.
Meeting Your Goals
What are your financial goals? Are you thinking about your budget in the long term or the short term? Short term goals can be things like paying off loans, a new car, a vacation, a rainy day fund or home improvements. Long-term goals can consist of building a college fund for a loved one, buying a house or saving up for retirement. You can save for multiple reasons at once, but you need to have an idea of what your goals look like so that you can properly plan for them.
Tools, budgeting calendars and financial plans can also help you meet your goals. There is a plethora of financial apps out there, for instance – from apps that can help you track your spending to apps that can store away all your spare change. Banks and company’s like AAA offer savings products with added benefits like high yields designed to help you grow and effectively manage your assets. You don’t have to do everything on your own – there’s probably a tool or program out there that can help you.
Budget vs. Spending
At the end of the year, after you’ve made your budget and tracked all of your spending, you can finally look back on how well you met your annual savings goals. Compare and contrast how you did versus how you expected to do.
Evaluating your spending habits across different times of year can provide a clearer picture of the habits you need to change (or even hang onto). The difference between your annual spending and your annual budget can provide a accurate depiction of your financial habits.
Add up your total expenses to see what your lifestyle costs you. Evaluate where you are spending the most, as well as the areas in which you went over your budget. Then you can adjust your budget or lifestyle accordingly. Maybe you need to allocate a larger budget for these items, or maybe you need to minimize the amount you’re spending on them. Let’s say you spend too much money on entertainment. You could decide that it’s important to you to go to live events and make concessions elsewhere, or you could choose different, less expensive events to spend your money on.
Revisiting and evaluating your budget will help you figure out your weak points and build a stronger budget for the following year.
Looking for more ways to give your savings a boost? Learn how AAA Financial Services can help.