It’s Time to Hit the Budget Reset Button!

January 21, 2020

The start of the new year is one of our favorite times of the year. With the jam-packed holidays and end-of-year deadlines behind us, January signals a time to reset and refresh. This time gives us space to consider what we really want for the coming year and beyond. This is a time to set goals. 

We can think of our financial goals as an extension of our larger life goals. Perhaps you’re planning to return to school in 2020. Maybe you’ve been thinking about starting your own business. To achieve our goals, we need a well thought out financial plan that helps us get there.

Every good financial plan begins with a budget — a model of our spending and income. While the word “budget” is often associated with restriction and mind-numbing spreadsheets, a budget actually provides great freedom. By analyzing our income, spending, and how these variables align with our goals, we gain the power to take control of our finances.

Here are a few steps to help you reset your budget so you can hit the ground running in 2020.

Look forward: identify your financial goals

Start with the fun part — the part where you get to dream big. Ask yourself what you want to achieve in the next year. How do you hope this will serve you in the next several years?

You could be looking to make a big change, like buying a home or changing careers. What would it cost to make a change like this? 

Say you want to move abroad. In addition to estimating typical travel costs, you may need to consider factors like:

  • Relocation costs
  • Cost of living in your destination(s)
  • Tax implications, if you intend to work abroad

Whatever your goals, give them some time and thought. Talk to people you know, do some research online, and, when in doubt, talk to a financial advisor.

Once you have a decent cost estimate, create a rough timeline for achieving this goal. How much will you have to save each month to achieve this goal on time? On first glance, does this monthly savings goal look achievable? 

If the answer is no, tweak your timeline. If the answer is yes, set that number aside. In any case, don’t worry too much about nailing down the perfect number. You may need to tweak it again after you take a look at your cash flow.

Look backward: understand your cash flow

Creating a plan for the future requires looking to the past. To grasp how your income and spending habits stack up, you’ll want to take the following steps:

  1. Gather up your statements from the past year
  2. Record all of your income
  3. List your monthly expenses (include savings contributions or any taxes owed in this category)
  4. Break down expenses into fixed expenses (consistent costs like insurance and utilities) and variable expenses (fluctuating costs like dining out and gas)
  5. Compare your expenses and income

The more detailed your cash flow table, the better. Pay special attention to where you’re spending the most. 

Put it all together: tweak the budget to meet your financial goals

Return to the monthly savings value you generated for your future financial goal. Add this to the “expenses” section of your budget. What are you left with? Does your income exceed your expenses? Or do you need to make an adjustment to your budget? 

If your expenses exceed your income, you can begin looking at variable expenses to find areas to cut. Variable expenses often overlap with “non-essential” expenses, like dining out or travel expenses.  

If you find some low-hanging fruit to snip in your spending, that’s great. If you’ve done all you can, and you don’t see other areas of the budget to shave down, don’t be discouraged. You can return to your original estimate timeline for achieving your financial goal and adjust. When you extend the timeline for your goal, the amount you will need to save each month will decrease accordingly. 

By making a realistic plan, you’ll increase the likelihood that you will stick to your budget and accomplish your goals. 

It’s time to take the reins.

This is the year to make your finances work for you, rather than the other way around. We want to help you make that happen.

Singer Wealth Management