New Year’s resolutions come and go, but we want your financial success to remain! Losing weight and creating a budget are two of the most common New Year’s goals. While we can’t drive you to the gym, we hope some financial tips can help make your budget the fittest it’s ever been in 2017.
January is the perfect time to sit down and revisit your financial goals. Let’s take a quick look back at 2016 and ask yourself some questions:
- Do you have less debt and/or more savings than 12 months ago?
- Did you meet any financial milestones during the year?
- Did you spend less than you earned?
- What could you have done better?
The answers to these questions will give you a jumping off point for your 2017 goals. Here are some tips on budgeting and planning for the new year:
Have a plan for any unexpected income.
When you have a windfall — a bonus, gift, or extra cash for extra work — use the rule of thirds to determine how to use it: • One third for the past. Use one third to pay down debt you owe. • One third for the future. Put a second third immediately into some sort of savings or investment. • One third for the present. Use the final third to make a home or personal improvement or purchase you want. If you follow this rule, you’ll see your debt shrink and your savings grow, and you won’t feel deprived.
Keep a slush fund handy.
Something — be it a car repair, an emergency root canal, or a job layoff — always comes up to throw you off your monthly budget. To keep these incidents from running you into debt, you need to have an emergency stash in an easily accessible account, preferably a money market account (they earn a little more interest than regular savings accounts).
How much is enough?
Easy. Track all of your spending for a month (including everything from your mortgage payment to lunch at the deli), and multiply that monthly total by three. That three-month operating budget is a scary number, eh? Well, this is the minimum you should have on hand in case the roof caves in (literally or figuratively) and you need some dough to get you through the rough spots. Don’t worry if this money isn’t accruing the big interest; it’s there for emergencies.
Concerned about how much you’re spending, how much you should be saving, and how much house you can afford? Use these equations to determine how financially healthy you are:
- The price of your home should not be more than 2.5 times your annual gross household income.
- Your total monthly debt payments (including mortgage, student loans, car, and credit card payments) should not be more than 35 percent of your monthly gross income.
- To retire comfortably, your nest egg should be about 20 times what you want your annual income to be. If you anticipate needing about $75,000 a year to live on when you retire, you’ll need to save a nest egg of about $1.5 million. Of course, this will vary if you retire early or continue to work longer than usual.
Since budgeting can require some guesswork, you’ll need to remain flexible in planning it. Your budget will guide you through spending decisions through the year but be ready to veer off the path a bit at any given time due to unexpected expenses. Take it easy on yourself if you get off track. Use this time to regroup, revisit your goals, and devise a new plan if needed. Lastly, don’t forget to take some time to appreciate the progress you have made.