A new year, a new chance to start afresh. For many this means establishing a budget.
But if the pandemic has taught us anything, it’s that even the best plans can be upended. Your old budgeting habits may no longer make sense in the COVID-19 era.
So what should you do to ensure a financially successful 2021? We reached out to budgeting experts who shared their top tips for creating this year’s budget.
To be realistic
There is often a lot of pressure in the New Year to set lofty goals and achieve them perfectly. But budgeting is not about perfection; it is a plan for your money that should change and adapt to your life.
“Don’t just create a budget – create a realistic budget,” said blogger Kumiko Love, alias The economical mom. “Your budget should be based on what you actually spend, not what you want to spend.”
Love explained that you need a clear foundation for where you start and where you want to go. Be honest when setting budget categories and goals.
“By doing this, you will set yourself up for success early on,” she says.
Change the method
It’s okay to branch out and try new ways of budgeting until you find something that sticks.
“If you’ve tried a certain method of budgeting in the past and failed, it doesn’t mean you’re a failure,” Love said. “It means your process has failed you.”
Make 2021 the year you try something new. For example, Love is a fan of the paycheck budget, which schedules your spending when you get paid rather than an entire month.
Calculate your monthly income
Once you are ready to sit down and work out your budget, the first step is to figure out how much money you have to take in. And in light of the pandemic, that number may be very different from past years.
“Many households experienced a fluctuation in their monthly income during the pandemic, due to stimulus payments and / or layoffs,” said Lauren Maxwell, deputy vice president of Trustco Bank.
You will want to factor in unemployment benefits, stimulus payments, business grants and other relief when accounting for your income, as well as regular paychecks. However, it is also important to note when these income streams will dry up and to account for fluctuations in income later in the year.
Identify essential expenses
You also need to figure out your essential expenses, such as housing, insurance, utilities, food, transportation, health care, debt repayment, and child care. These types of expenses can be reduced if necessary, but they cannot be eliminated from your budget.
Maxwell said there are several factors related to the pandemic that you will need to take into account when adding up these expenses.
For example, if you had a deferred mortgage or student loan, you will need to put that payment back into your budget. If you have suspended your 401 (k) contributions to free up cash flow, this is a critical item to include in your post-pandemic budget. What if you dive into your emergency fund, you’ll need to include a line item in your budget to replenish it. Experts now suggest saving more than the previously recommended three to six months of spending, given the unpredictability of the job market.
Recognize new spending models
Once you’ve subtracted your essential expenses from your income, the money that’s left is available for discretionary spending. This part of your budget has probably changed a lot over the past year.
“For many of us, our spending has changed completely because of the pandemic. So it’s worth checking out our new spending models first, ”said Kimberly Palmer, personal finance expert at Nerdwallet.
For example, she says, you might be spending less on restaurants and travel, but a lot more on areas like streaming services and groceries. It’s a good idea to watch how your spending has changed over the past 10 months of the pandemic so that you can adjust your discretionary spending budget accordingly.
Plan your major expenses
Not all expenses are incurred at the same time each month. It might sound a little intimidating, but you should set aside time to review the year ahead and identify any major one-time expenses you will need to budget for, according to Colleen McCreary, director of human resources and financial lawyer. for Credit Karma.
Maybe you have an insurance premium due in the middle of the year. Maybe there are a few major birthdays that you want to set aside a gift budget for. Who knows, maybe 2021 is the year you can go on vacation again.
“Taking a few minutes to sort out larger purchases than you plan on… can help you set a realistic budget,” McCreary said. And consider setting up a sinking fund to help you stay organized.
Follow the 50/20/30 rule
Don’t spend too much effort trying to break each budget item down to the exact dollar, as expenses are rarely that consistent from month to month. Being too granular will likely cause frustration
“I often find clients struggle to stay on budget because what they’ve created takes too long,” said Lauren Anastasio, Certified Financial Planner at SoFi.
To keep budget categories as high as possible, she recommends using the 50/20/30 rule. This means that 50% of your monthly income is allocated to fixed expenses, 20% to savings and debt repayment, and 30% to discretionary expenses.
Automate as much as possible
Consistently saving money and paying your bills on time can be difficult, especially when money is tight. That’s why you should take the faulty human element out of the equation, said Tiffany Aliche, better known as The Budgetnista.
“Automate them as much as you can: payments, bills, savings, investments, and even charitable donations,” she said. “You are more likely to stay on budget when a system is in place.”
Give your money a home
If you keep all of your funds in one bank account, it can be difficult to keep enough of a buffer to ensure that all of your bills are paid. Aliche recommends opening a separate checking account where you keep the portion of your budget to pay bills.
“Segregating your funds will help you avoid accidentally spending money on bills,” she said. You should also have a separate savings account, and even sub-savings accounts for different purposes.
It’s important to have goals for your money, but don’t worry about getting complete financial freedom right away.
“Setting a micro goal can help you structure your budget more easily,” said Colleen McCreary, director of human resources and finance advocate. Credit Karma.
So if your goal is to pay off your debt, you can set smaller goals to help you get there. For example, commit to adding $ 25 to your minimum payment, or completing one freelance project per quarter and using the income to make an additional payment.
“You might be pleasantly surprised to see how your relationship with your money changes once you work towards something that seems more achievable,” she said.
Check in with yourself
Creating your budget shouldn’t be an exercise to be defined and forgotten. Make sure to allow time to check your progress and make any necessary changes.
“Make sure you regularly keep track of it somewhere, so when you’re ready to check in, you have a physical record of your progress to help hold yourself accountable,” McCreary said. It could be anything from a pencil and notebook to a spreadsheet or a budgeting app.