Budgeting for the New Year

At the beginning of each year, thousands of people in the United States start setting resolutions – and a lot of them are related to their personal finances.

At the beginning of each year, thousands of people in the United States start setting resolutions – and a lot of them are related to their personal finances.

This is great! Knowing that your financial life is out of whack is the first step to recovery. Even if things aren’t upside down yet, it’s good that you’re checking in and working toward a more positive place.

Resolutions Don’t Last

Unfortunately, many people will give up on their resolutions, and they slowly start to fizzle as the year goes on. In fact, studies have shown that up to 80% of all New Year’s resolutions fail by February. That’s crazy!

The problem is that many resolutions are too general. They’re broad, positive goals that don’t have an action plan to back them up. Taking a step away from personal finance resolutions for a second, let’s look at another commonly abandoned resolution: getting in shape.

Getting (and staying) healthy through regular exercise and healthy eating isn’t hard. But the discipline to stay committed to a long-term plan, to power through plateaus, and to try new routines or recipes to keep you on track – now, that’s difficult. When people make a New Year’s resolution to stay healthy, they often don’t think about the short-term and long-term actions it will require. They get tired, burnt out, and they quit.

The same thing happens with personal finance goals.

Create an Action Plan and Follow Through

If your New Year’s resolution is to whip your finances into shape, you need a plan with clearly defined, reasonably attainable goals. Personally, I recommend starting with a budget.

Getting a budget in place is an ideal first step when working toward getting your financial life together. It helps you to evaluate your expenses (and in what categories you’re overspending), and your income to debt ratio. It also helps you set up a plan that helps you work toward financial goals – like paying down debt or building up savings.

I firmly believe that budgeting is the foundation of a good financial plan. It doesn’t matter how much money you make, how much debt you’re in, or what your existing spending habits look like. Everyone has to begin somewhere, and a budget helps you to build the framework you need to start off on the right foot.

Building a Budget

It’s important to recognize that everybody’s situation is different. Your financial life is unique to you – and your budget will reflect that. However, I still recommend using a basic budgeting framework that I call the 10/20/30/40 budget. It looks like this:

10% Giving

20% Savings

30% Debt Repayment

40% Everything Else

All of these percentages are calculated using your after-tax income.

I like this system because it’s simple. And part of being able to stick to a budgeting plan is keeping it simple – it gives you less room to make errors in your spending. Let’s look at the different percentage categories in a bit more detail.

Why Give?

Giving is a foundation in all budgeting I help my clients with. I do this for a few reasons:

  • You’re likely better off financially thank you think. Giving back can help you remember how fortunate you actually are (and it helps to reduce the “I’m broke and doing poorly” mentality that leads to bad money habits and rushed decisions).
  • Spending 10% of your after-tax income on donations to a cause you’re passionate about will leave you feeling more fulfilled.
  • I’m a believer in “you reap what you sow.” Put positive financial intention out into the world and it will come back to you.

Why Save?

Saving is a building block for long-lasting wealth and goal achievement. Whether you want to help put your kids through college, buy a house, or travel across Eastern Europe – saving can help get you there.

The big question is how much to save, and where you should be saving. I believe in a multi-level savings approach that covers your expenses in case of an emergency, and still helps you save for long-term success (read: retirement). Learn more about my specific savings strategy here.

Why Pay Down Debt?

It’s not a secret that debt is bad. It makes you feel cruddy, you constantly lose your hard-earned money when you put it toward paying down debt, and you’re probably overwhelmed by the feeling that being in debt is forcing you into more debt as you continue your financial journey.

Contributing 30% of your after-tax income toward debt repayment is intended to stop this negative cycle in it’s tracks. By prioritizing repayment, you’re setting yourself up for long-term financial success, freeing up cashflow to better reach your goals, and getting one step closer to living the life you want. I’ve created a handy debt hitlist plan here for you to check out – feel free to reach out if you have any questions when setting it up.

Everything Else?

While I believe you should monitor your spending and always make sure the essentials (you know – food, water, shelter) are covered, I don’t believe in micromanaging the rest of your budget. If you round everything down to the last cent, you’re more likely to burn out on your budget plan and resort to old (bad) habits.

Instead, I recommend that my clients spend the rest of their after-tax income with intention. When you spend intentionally, you prioritize your wants, evaluate whether spending will have a positive impact on your life, and ultimately force yourself to make healthier money decisions.

Are You Ready?

In the end, having a budget is intended to get you to a point where all (or most) of your financial decisions are healthy, are making a positive impact on your life, and are consistently adding value to your days.

Of course, everyone’s going to make mistakes occasionally. But that’s no reason for your financial planning resolution to fizzle by February. Just like you’d hire a personal trainer or a nutritionist to help you reach a physical fitness goal, a CERTIFIED FINANCIAL PLANNER™ practitioner can help you reach your financial fitness goals.

I’d love to talk to you about how I can help. To schedule a quick call – go here. There’s no sales pitch, no obligation – just conversation.

Best of luck, and Happy New Year!