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With the New Year just around the corner, it is the time of year that everyone is making resolutions. Personal finance is one of the most popular areas of focus for those looking to improve themselves in the coming year. Specifically, keeping the household budget in balance and hopefully having some left over to put aside for savings.
Unlike the federal government, individuals cannot just endlessly print money to cover shortfalls in their budget. If we spend money we do not have, the end result is insolvency. So with that in mind, the goal for the New Year should be to organize our finances in a way that prepares us for financial emergencies and keeps us from going further into debt.
Here are five tips for budgeting better in the New Year:
Be Realistic about Your Finances: The primary reason many people are hesitant to set up a household budget is they do not really want to know what their true financial picture looks like. They would rather go along putting purchases on the plastic, paying the monthly minimums and watching their credit card balances increase each month. But sooner or later, these credit cards will reach their limits, bringing about a forced reality check. It is better to get a handle on things before they reach that point. So the first step is to sit down and analyze every dollar of income you have and every fixed expense you have. Once you do this, you will know what you really have available for discretionary spending.
Create an Emergency Fund: Emergencies happen in every family now and then. This is why most financial advisors recommend having money set aside in a separate savings account strictly for this purpose. And no, Christmas presents are not an emergency. This money should be designated for real emergencies such as car breakdowns, unexpected medical bills or losing your job. The ultimate goal should be to have at least six months of income in your emergency fund. But for starters, try to put aside $1000 as quickly as possible so you have something set aside.
Set Limits for Each Household Category:
Once you have a good grasp of your income and expenses, you need to construct a real budget that designates a percentage of your income to each category. Here is an example:
- 10% to Charity
- 10% to Savings
- 30% to Mortgage/Rent, Insurance, Taxes, Utilities, Etc.
- 10% to Debt Reduction (extra payments toward auto loans, credit cards, etc.)
- 40% to Food, Clothing, Entertainment, Vacations, etc. (This can be broken down further if desired)
With your budget in place, you know how much you are allowed to spend in each category. This gives you the freedom to spend without guilt because you know that all your monthly expenditures are accounted for.
Do your Due Diligence on all Your Purchases: With the Internet, there are numerous ways to save money on major and minor purchases. One simple tactic is to scan the barcode of any item you are shopping for into your smartphone and it will bring up an online price comparison for the product. Shopping on eBay and Craigslist is another way to find items that are gently used that you can save on. Always check the “Free” section of Craigslist for things people are giving away that you may need or want.
Finally, consider reducing money drains such as eating out and the $5 cup of coffee. If you need to have the coffee, you can usually find the same thing (though not dressed up as nicely) at your local gas station.
Save Money on Personal Taxes: The typical middle class household will pay 20% to 30% (or more) of what they earn in federal, state and local income taxes alone. This is an area you must get a handle on. Some ways to reduce your tax burden include:
- Giving more money (or goods) to charity.
- Contributing more to your IRA/401K.
- Starting a home business can open the door to numerous potential tax deductions.
Every family’s tax situation is different. The best way to find the best tax strategies for your household is to speak with your local accounting firm so you know for sure you are not leaving any tax money on the table.