How to create – and stick to – a budget this year

The New Year is a great time to create a new budget. Budgeting can help you stay on track with your spending, savings, and other financial goals, but it only really works if you set a budget that you can realistically stick to.

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Here are expert-approved tips for creating your 2022 budget and how to follow it.

Make your budget as complete as possible

“A budget includes sources of income and a list of all expenses – both fixed and flexible,” said Sasha Grabenstetter, AFC, financial planning education consultant at Electronic money advisor. “Fixed expenses, such as a mortgage or car payment, are the same amount every month, and flexible expenses change from month to month. [These] include groceries, gasoline, child care expenses or entertainment. It’s also important to consider the occasional expense that may only happen once or twice a year, as it can throw your budget out of balance if you don’t prepare for it.

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You should also include the accounts you want to save on.

“There should be a row for each applicable savings account type, such as emergency funds, new home / car deposit, unrelated business taxes, travel / vacation, IRA contributions, and investments, ”said Sallie Mullins Thompson, Principal and Director. member at Sallie Mullins Thompson, CPA SARL.

Once you have defined the items that should be on your budget, determine how much should be allocated to each line item. Grabenstetter recommends using the “retrospective method” to determine how much you should realistically spend.

“The retrospective method assesses spending habits from the previous three months and helps forecast for the future,” she said. “For example, someone who’s spent an average of $ 400 a month on groceries in the past three months should consider budgeting that same amount next month. ”

On the flip side, if you think you’re overspending in certain categories or falling short of your savings goals, you might want to set new limits for yourself in 2022.

“Another method of budgeting follows a rule of thumb,” Grabenstetter said. “EMoney’s financial planning group recommends the 50/15/5 rule. According to the rule, 50% of take-home pay is used for essential expenses, 15% of pre-tax income – including employer contributions – is saved for retirement, and 5% of take-home pay is used for short-term savings. The remaining income (30%) can be saved or used for discretionary spending. This method can help show individuals what they should be striving to spend, but in the end, it may not work for every person or every household. Ultimately, a budget should either be balanced at zero or have additional income. A financial professional is a good resource to help people determine the budget that is right for them.

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Tips to stay within your budget

Once you’ve established your budget, the best way to stick to it is to actually use it. Track your spending and savings and regularly review your behaviors.

“Budgeting doesn’t have to be tedious,” Grabenstetter said. “By tracking actual spending over weeks or months to see how much you’re spending, you can gauge where adjustments are needed. Checking your budget every week, whether alone or with your spouse, can help you stick to it throughout the year.

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You may also want to involve the whole family so that it becomes a team effort.

“When making group decisions among many family members, like where to spend a family vacation, an iteration of the 5-3-1 method can be very effective,” said Eric Thompson, director and wealth advisor at Wealth management round table. “Parents can offer family members five choices of activities or places to travel that fit within budget parameters. From there, another group of family members choose three of the options they would like the most. Finally, an appointed decision-maker can make the final choice among the three remaining options. This process of elimination can ensure that budgets are maintained, while giving all family members the opportunity to participate in the decision-making process.

Using budgeting tools can also be helpful.

“Be as simple as possible – find a financial tool that does the job for you,” said Hussein Ahmed, Founder and CEO of Oxygen. “Do your research and find a tool that meets all of your needs, from budgeting to savings. “

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As you track your spending and savings, take some time to celebrate the small wins. It can help you stay motivated to stick to your budget plan.

“Consider including gratitude in the practice of tracking your daily income and expenses,” said Hiram Arnaud, a financial representative of Strategies for Wealth and Guardian Life in New York. “Keep a daily record of even small financial accomplishments and successes. “

Another way to stay within your budget is to automate it.

“Once your budget is set, automate it as much as possible,” said Jay Zigmont, PhD, CFP, founder of Live, learn, plan in Mississippi. “If you know your ‘musts’ – those things that keep you safe or have to pay off – you can set up a separate account for them and have part of your paycheck (which is the budget) deposited into the account. . Then you can have the payments automatically withdrawn from the same account. The bonus of automation is that if you don’t have the money in your “normal” account, you are less likely to spend it. Plus, your “musts” reflect things on your credit report, so automation will increase your credit score. “

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