2022 Is Quickly Approaching: 3 Budgeting Resolutions for the New Year
It is time for the new year, a new budget, and a brighter future for you and your family. Make 2022 the year you finally take control of your financial life. Use these tips to create a realistic budget which will let you pay down your debts and allow you to put something away while not forcing you to live like an ascetic to make it happen.
Gather the Facts
Before you do anything else, you need to know how much money is coming in and going out each month.
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. 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 coming in, you need to know what you are spending on a monthly basis. Average the total amount of the money you spent monthly over as 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.
Determine a Budget
Without a good plan, you won't make 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. One method to budget is the 50/20/30 plan. According to this budgeting method, half of a person's income should go towards needs, a fifth can go towards savings and additional loan repayments over the minimum, while the remaining 30 percent is for everything else.
The 50/20/30 plan isn't for everyone. While easy to remember, the rule is restrictive. When it comes to expenses, one size does not fit all. For example, people living in cities like Toronto or Vancouver may need more than half their income for rent alone. If you freelance or run your own business, your income might be too irregular for such a hard and fast rule. And what happens when you have high student loan debt or a low-paying job?
Adjust Your Spending Habits
A budget only works if you are willing to change your spending habits.
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 you 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 is cash. The advice used to be that you should always use cash when you shop, but cashback and other credit card incentives make using them a great deal. But never spend more money than you have in your 'want' budget for the month. Consider asking your credit card company for a lower limit to dissuade you from making larger purchases.
- Avoid the 'little luxuries.' Small expenses can add up. Stop visiting your local coffee shop every morning for a latte and start bringing your lunch to work, and it won't be long before you notice substantially more money in your pocket without sacrificing a lot.
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. Sometimes it can even seem overwhelming. That is when a professional money manager can help. Money managers can design an in-depth budget to get you back on track towards your financial goals.
Please consult financial, legal, or tax professionals for information specific to your situation. The information and material presented are general, may have changed since the published date shown, and should not be considered financial advice. LetsPlan.ca is published in Canada exclusively for residents of Canadian jurisdictions where our products and services may be legally offered. The services offered within this site are available exclusively through our Canadian advisors. While we often provide original content, Twenty Over Ten initially provided the subject matter for this post. It has since been edited, reviewed and approved by our Privacy and Compliance Officer. Advisors may only conduct business with residents of the province(s) in which they are licensed and registered.