Every year around this time, millions of households file their federal tax returns. For many, the process involves digging through shoeboxes or manila folders full of receipts; gathering mortgage, retirement, and investment account statements; and relying on computer software to take advantage of every tax break the code permits. It seems a shame not to maximize those efforts.
Tax preparation may be the only time of year where households gather all their financial information in one place, making it a perfect time to take a critical look at how much money is coming in and where it’s all going. In other words, give the household budget a checkup and make your money stretch further.
Budgeting is the cornerstone of a financial plan. In today’s fast-paced world, it’s easy to spend a dollar here and two dollars there, leaving us questioning how our money is gone by the end of the month. Without a strong budget, we leave ourselves open to human error. Here are six steps to gaining more control over your finances.
Start by dividing expenses into useful categories. Some possibilities: home, auto, food, household, debt, clothes, pets, entertainment, and charity. Don’t forget savings and investments. It also may be helpful to create subcategories. Housing, for example, can be divided into mortgage, taxes, insurance, utilities, and maintenance.
Be careful with cash. Cash purchases don’t show up on any monthly statement, which makes them more difficult to track. An idea for cash would be to create cash “envelopes,” and once the money is gone, that’s the end until next payday.
Follow the Money
Go through all the receipts and statements gathered to prepare taxes and get a better understanding of where the money went last year. Be as specific as possible, and don’t forget to account for the cost of a latte on the way to the office each day.
Understanding where your money went will give you a better idea of how to budget. Controlling your money is key because if you don’t control it, it will control you.
Knowing how much you spent in each budget category can provide a useful template for projecting expenses moving forward. Go through your budget, category by category. Are expenses likely to rise in the coming year? If so, by how much? The results of this projection will form the basis of a budget for the coming year.
When you budget forward, it pays to be conservative in your estimates because it is easier to overestimate and have money left over than try to raise more cash. As you do this more often, you can narrow in on certain numbers.
Determine Expected Income
Add together all sources of income, making sure to use net income. For those of you who are salaried, this step can be straightforward. However, for those of you who are freelancers, the best idea would be to take the average of your last several years.
As with projecting your expenses forward, be conservative because it is easier to over budget than under budget.
Do the Math
It’s time for the moment of truth. Subtract projected expenses from expected income. If expenses exceed income, it may be necessary to consider changes. Prioritize categories and look to reduce those with the lowest importance until the budget is balanced.
Eating out and coffee are some of the most popular expenses. By just cutting out those two, you may be surprised to find that you can save a large sum of money. Also, do your grocery shopping with a list and a firm budget, ensuring you will not go crazy in spending.
Stick to It
If it’s not in the budget, don’t spend it. If it’s an emergency, make adjustments elsewhere. Dedication and consistency are crucial for a budget to work.
Tax time can provide an excellent opportunity to give your household budget a thorough checkup. Taking control of your money will allow you to put more of your money to work, allowing you to reach your financial goals.