With each new year comes New Year’s resolutions. Some of us plan to lose weight, while others promise to spend more time with their kids. And then there are those who resolve to get a better grip on just where all of their money goes
If you want to save money, you have to know how your family currently spends it and then make cuts in the right places. In other words, to tame the family dollar, you must create a basic budget.
Look Back to Get Started
Before you build a budget for the new year, you have to look back at your actual expenditures over the past year. This may be easier than you think. The new year means the start of tax season and 2001 financial statements will be arriving in your mailbox from mortgage companies as well as from any company to which you paid interest. Many credit-card companies will send you an account of your 2001 purchases and some will even itemize them by type. Combine that with your checking account registers, tax statements, and W-2s, and you may have all you need to set up your 2002 family budget.
A second way of understanding your spending patterns is to track your actual spending for three months. This may be a bit more tedious than using existing paperwork, but it will give you a clearer picture of how you actually spend your money. You will need information from at least three months because many bills – such as insurance, property taxes, excise taxes or car registrations – are paid annually, biannually or quarterly.
One drawback of the first method is that your ATM cash withdrawals represent mystery purchases that will have to be grouped under "miscellaneous." Tracking your spending habits, on the other hand, will give you categories to put that money in, which is helpful even if they are as narrowly defined as haircuts or snacks.
Actual Cash Flow vs. Dream Budget
Once you have found out where your family’s money goes, you may be in for a real shock. You may find that the payments on a new car would cost you less than maintaining an old one. Your food expenses may be astronomical – restaurant dining often adds up to twice what you thought it might be – and you may find that your largest spending category is "miscellaneous."
Don’t panic. Now that you have this information, you can begin to set spending limits. Sit down and set up your dream budget. This process involves going back and forth between your current spending and your savings objectives, using your newly created budget categories and line items, and realistically finding areas where you can make cuts.
Create Categories and Line Items
The next step is to create categories and line items based on the spending trends that have emerged. Basic categories may include "home," "entertainment," "medical expenses" and "transportation." Within each of these categories you may have subcategories: "Home" may include "mortgage payments," "repairs and improvements," "furniture" and "insurance."
Some line items will impose themselves (mortgage, automobile and tuition payments, for example) but others are more flexible. Some people may choose to be very specific and create line items such as "kids’ entertainment," "restaurant dining" and "babysitters," while others might lump these together into "family entertainment."
Your budget is your own creation and can be tailored to your personality. If you are a person who likes to analyze the fine points, then a more detailed budget is for you. If you’re the "big-picture" type, then establish a budget with more general categories. But be aware that details will give you a firmer grip on just where all that money goes.
Cut Variable Costs
Every budget will have both fixed and variable costs. Fixed budget items are your rent or mortgage, car payments, property taxes, insurance premiums and other items that will remain stable for the next year.
Variable costs fluctuate each month. These include food, restaurant dining, entertainment, clothing, home repair and the like. Variable costs are where you can begin to make some significant changes toward saving money. Setting a goal of an overall 10 percent decrease in your variable costs is reasonable yet motivating.
The percentage of your income that you need to spend in each of your budget categories will vary from region to region, but also depends on your family’s priorities. Financial advisors suggest, for example, that housing and utility costs should be somewhere between 25 percent and 40 percent of your gross income.
Whatever your financial goals, using a budget to limit and track your expenses will help you get results that give you the strength to stay the course. The new year looks fiscally brighter already.