Start the New Year right by creating a budget

FRIDAY, JAN. 11: At some point in your life you will most likely come to grips with the fact that you need a way to budget your expenses and also save for your future.

If you don’t, there will be times that you’ll run out of money or you will be late with a payment, or maybe you will just come to the realization that you are not getting anywhere financially.

A budget is a systematic method of allocating financial, physical, and human resources to achieve strategic goals. People develop budgets in order to monitor progress toward their goals and also help control spending. 

Budgeting your finances creates accountability with your money and organizes your life around your needs and your wants. 

It defines your choices and shows historically what they have been.

An article I read at www.bankrate.com provided seven tips for building a successful budget, which I thought was really good advice:

1. Track spending for a month.
2. Put savings on autopilot.
3. Prioritize spending.
4. Use cash for daily spending.
5. Tackle credit card debt.
6. Build emergency savings account.
7. Always live within your means.

We are now in 2013 and the holiday cheer has died down.

It’s time to take a big breath and get back to the “financial grindstone” and create a budget for 2013. Now you can get all fancy and find software to help you or just simply use an Excel spreadsheet; either way the purpose is to create it.

Before creating a budget identify your goals whether it is saving for a holiday next year, paying off your credit card debt or starting an emergency fund. 

When you have a goal, it’s easier to stick to a budget.

Once you identify your goal, you need to work out how much it will cost, when you want to achieve it and how you will put money aside to achieve it.

Here are some examples of goals:

Short-term
(Zero to three years)

• Pay off debt
• Save for a car
• Save for a wedding
• Save for a baby
• Save for a deposit to buy a home

Medium-term
(Three to 10 years)

• Save for home renovations
• Save for your children’s education
• Save to pay a lump sum off your mortgage three to 10 years

Long-term
(10 years and over)

• Save for retirement
• Pay off your mortgage early

Step by step process of creating a budgeting:

1. Gather every financial statement
2. Record all your income sources
3. Create a list of monthly expenses
4. Separate the expenses into two categories: fixed and variable
5. Total your monthly income
6. Total all your monthly expenses (for annual / semi-annual calculate the monthly equivalent)
7. Adjust your monthly expenses to allow for monthly savings and emergency savings
8. Review and track your budget monthly

If you find your expenses are higher than your income you need to look at your variable expenses to find areas to reduce. These expenses are typically more lifestyle expenses like entertainment or vacations; you will need to reduce those costs until they fall within the lines of the overall budget. You should NEVER go into debt for your lifestyle expenses. Remember if you can’t afford it, then don’t do it.

What will happen when you focus on your budget?

1. You will turn your spending around by changing your habits.
2. You will direct your surplus money into investments.
3. You will realize your goals sooner as you have created a plan to get there.

Carla Seely is a senior wealth manager at AFL Investments. She may be reached at 294-5712.