New Year’s Resolution: Budget Edition

Unsurprisingly, one of the top financial resolutions made each year is to save more and manage spending. And you probably guessed it, but perhaps the most effective way to do so is through setting and maintaining a budget.

If your New Year’s resolution includes whipping your finances into shape, here are some tried and true steps to make a budget (and stick to it).

1. Calculate Your Approximate Net Income

First, you’ll want to determine your total monthly income stream – after taxes and any automatic employer deductions such as health insurance or automatic retirement contributions.

If you have a consistent annual salary, simply divide that by 12 to calculate monthly income. If you are paid hourly or have an inconsistent rate of pay, one of the easiest ways to calculate an average monthly income is to add all your pay stubs from the previous year and then divide that by 12.

Don’t forget to include additional household income in your calculations, if applicable, such as spousal net income or freelance/contract work.

2. Track Your Spending

The next step is to outline your recurring monthly expenses. These include utilities, rent or mortgage payments, your car loan, subscription services like Netflix, and anything else that you pay on a regular schedule.

After calculating these costs, track your variable expenses that can change each month. This includes groceries, entertainment and shopping. This is often the area of greatest savings opportunity since these are often expenses that you can cut back on over time, unlike fixed bills.

You might opt to break down your expenses even further, differentiating between wants and needs. As an example, if your job requires drive time every day, gas would be constituted as a need. On the other hand, a monthly music or streaming subscription is likely a want. Distinguishing between the two is important when you’re determining how to allocate and reallocate spending.

Pro tip: Bank and credit card statements can be helpful in tracking spending as they often show an itemized spending breakdown. OMB’s innovative online banking platform and mobile app even has a spending wheel which displays the amounts spent per category in a color-coded chart, making it simple and easy to see the areas you spend the most at-a-glance.

3. Set Goals

A pillar of successful budgeting is to set specific and measurable goals. These can be short-term goals like a family vacation, long-term goals such as reducing your monthly spending by 20% or a combination of the two.

It’s important to be realistic with your goals to ensure you stick with them. Saving for a trip may only take six months, whereas paying off a mortgage can take decades. Keeping realistic timelines in mind will help encourage you to keep working at the goals you’ve set.

The beauty of a budget is that it’s completely customizable and unique to you, your goals and your current financial state.

4. Plan, Plan, Plan

Now it’s time to put everything together! Examine where your money is going versus where you want it to go and determine reasonable areas you can cut back. If you’re happy with your current spending habits and want to maintain them, that’s fine, too – just plan for it.

Determine how much money you need to make sure your fixed monthly expenses and bills are always covered, and how much you'd like to put away for other goals with what’s left over. For retirement, saving 10 - 15% of your pre-tax income is ideal, and be sure to take advantage of matching employer contributions. It’s never too late to start saving for retirement, but the sooner you start, the sooner the magic of compound interest can begin.

The key is telling your money where to go as opposed to mindless spending and wondering where it goes. Budgeting in a way that allows for discretionary expenses is actually an important step. Being too rigid with your spending can actually backfire and cause you to get discouraged or even abandon your budgeting plan altogether. For a basic and widely accepted monthly savings breakdown, consider the 50/30/20 plan.

5. Accountability and Implementation

Once you’ve developed a plan you’re comfortable with, it’s time to write it down. This can mean jotting it out on a piece of paper, making a spreadsheet or plugging the numbers into one of the numerous reputable budgeting apps available.

Taking the time to write (or type) your budget plan out can help you keep your goals top-of-mind, as well as help keep you accountable to the spending limits you’ve set for yourself.

6. Review It

The final step in creating a budget is to regularly review it. As a general rule, reevaluating annually or semi-annually is typically a good time frame.

Remember that staying consistent does not mean your budget has to be inflexible – you can adjust your spending and saving habits as needed to stay realistic for your household, income changes, goals and life stage.

Going into a new year can be both daunting and relieving. If you’ve been struggling to make a budget and stick to it, try these simple steps. The upcoming year – and your bank account – will thank you.

OMB and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decision.