The new year is a great time to create a new budget. Budgeting can keep you on track with your spending, saving and other financial goals — but it only really works if you make a budget you can realistically stick to.
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Here are expert-approved tips for creating your 2022 budget — and how to actually keep up with it.
Make Your Budget as Thorough 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 eMoney Advisor. “Fixed expenses — such as a mortgage or car payment — are the same dollar amount each month, and flexible expenses change month to month. [These] include groceries, gas, daycare expenses or entertainment. It’s also important to account for occasional expenses that might occur only once or twice a year, because they can make your budget out of balance if you do not prepare for them.”
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You should also include accounts you would like to contribute savings to.
“There should be a line item for each applicable type of savings account, such as emergency funds, new home/car deposit, business taxes not being withheld, travel/vacations, IRA contributions and investments,” said Sallie Mullins Thompson, principal and managing member at Sallie Mullins Thompson, CPA PLLC.
Once you’ve established what items should be on your budget, figure out how much should be allotted to each line item. Grabenstetter recommends using the “lookback method” to determine how much you should realistically dedicate.
“The lookback method evaluates spending habits from the previous three months and helps make predictions moving forward,” she said. “For example, a person who averages $400 per month on groceries over the past three months should consider budgeting that same amount the next month.”
On the other hand, if you feel you are overspending in certain categories or not meeting savings goals, you may want to establish new limits for yourself in 2022.
“Another budgeting method is following a rule of thumb,” Grabenstetter said. “The financial planning group at eMoney recommends the 50/15/5 rule. According to the rule, 50% of take-home pay is allocated to 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 expenses. This method can help show individuals what they should strive to spend, but ultimately, it may not work for every person or household. In …….