A new year is upon us and although 2020 was full of unprecedented events, now that vaccinations have begun, we can hopefully see the light at the end of the tunnel . Make 2021 the year you finally take control of your financial life. Use these six resolutions to get your finances organized. Setting a few goals can be easier than you think.
Resolution #1: Gather the Facts
Before you do anything else, you need to know how much money is coming in and how much is going out each month. If your income has changed due to COVID, you should take a step back to gather information.
Once you determine the amount of money you will likely have coming in, you need to know what you are spending. Track your spending and separate your expenses into two categories: needs and wants. Needs are bills you must pay, like housing, food, insurance, basic utilities, minimum loan repayments and transportation. Everything else is a want, such as vacations, entertainment, eating out and shopping.
A monthly budget is the beginning of gaining better control of your finances and the more detailed, the better. It will help you realize what you spend each month, and direct your focus on areas where you can improve. This will allow you to set new goals with the extra money you may have found when sticking to your budget.
#2: Adjust Your Spending Habits
A budget only works if you are willing to change your spending habits. Our needs and wants can vary each month, so you must be flexible with your budget. For many people, cutting down on spending is a painful experience. But there are ways to make it a little less uncomfortable.
Control Impulse Purchasing
Before you go shopping, make a list of items you will purchase and don't give in to temptations at the store or online. If you see something you really want, write it down to buy on your next visit. It is amazing how many 'must-buy' items lose their attractiveness after a few days.
Avoid the “Little Luxuries”
If you take the time to evaluate your budget, odds are you can find some excess that you can easily trim off without feeling the pinch. Especially now as the pandemic restrictions loosen, it is critical to stay within budget, even though we may be tempted to splurge.
Start looking at spending on items such as clothing, groceries, and entertainment and see if smart shopping can help free up some extra money each month. Next, look at your utility bills and find ways that can reduce them. Start with your non-essentials such as cable and phone. Do you really need the extra movie channels and data? When was the last time you shopped around to price compare? Finally, discipline yourself to follow good energy saving tips to reduce the overall cost of your energy bills.
Small expenses can really add up. It won't be long before you notice substantially more money in your pocket - without a whole lot of sacrifice. Remember debt is one of the primary factors that can hold you back from financial success.
#3: Use a Credit Card, But Pretend Its Cash
Odds are the holidays have increased your credit card bills. Don't let that debt soar any higher with accruing interest. Start with your highest interest rate card and set a larger payment in your budget to begin lessening that total. Once it is paid off, use that same payment to start tackling your next high-interest debt and so on. A critical thing to remember is that when paying only your minimum payment, it will take you ten plus years and a significant amount of interest to pay off your card. Always pay more than the minimum if you are looking to pay off debt. Keep your credit card balance far from the limits, be sure to make payments on time, and monitor your score for negative marks1.
#4: Make an Emergency Fund a Priority
During a time of economic uncertainty, you will also want to keep an emergency fund, or a financial cushion, in your budget so that you can be prepared for unexpected events or loss of income. Medical costs, major vehicle repairs, job layoffs, or house maintenance can quickly derail a budget. You should make sure that you have a fund set up specifically to handle these unforeseen expenses, so you do not have to alter your monthly budget to accommodate.
A good rule of thumb for an emergency fund is to start with a month's income plus $1,000. Once this goal is achieved, you should keep saving until you have between six to twelve months of expenses. Add an amount each month in your budget to add to your emergency fund and if you need to use it for an emergency during the year, you will need to replenish it.
#5: Prioritize Retirement Savings
Saving for retirement2 is something often put on the back burner until it is too late. It is essential to realize that the sooner you begin saving for retirement, the more time it will have to grow and the better return you will have on your investment. If you are paying down your debt, try to contribute to your 401k the amount that your company will match up to or at least 10%. If you do not have to tackle much debt, consider paying in as much as you can.
#6: Create a Long-Term Financial Plan
Goals can be more difficult to set if you are having difficulty envisioning the rewards that will come with financial stability. Consider any long-term financial goals you may have such as buying a new house, a car or retirement3. Draft a plan that includes savings, investing, and other ways to build the wealth you need to achieve these goals. You can start with smaller goals, so they seem less daunting. Having a plan in place will help you stay on track and guide your financial decisions.
Try out these budgeting resolutions in 2021 and take control of your finances, especially if you are feeling overwhelmed by the uncertainty of the coronavirus pandemic. Remember that budgeting is an ongoing process. You will need to revisit your budget plan from time to time to make sure that you are staying on track.
This content is developed from sources believed to be providing accurate information and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.