5 Steps to Building Your 2018 Budget

As you’re closing one year and resolving to make the next one even better – in whatever way you have in mind – remember that your financial plan has to be ready for the new year, too. You need to go over what you did with your money in 2017 and consider what expenses you’ll face in 2018. In short, you need a budget.

“While [budgeting’s] not necessarily anyone’s favorite part of the financial planning process, it’s a really important part because that’s where you can uncover opportunities or problems,” says Chantel Bonneau, a financial advisor with Northwestern Mutual. “And it really gives us the data to take action from there.”

Here are five steps to build your budget for the new year.

1. Review the past year. Looking at your cash flow from 2017 will give you a good idea of what you can expect in 2018. Dig into the details as deep as you can, going over your bank account and credit card statements from throughout the year to see where all your money went.

Sound like a lot of work? You can get some digital assistance. “Some great budgeting tools are out there,” says Rachel Rabinovich, financial planner at Society of Grownups, a financial planning firm focused on educating people on money matters. “These apps use charts and graphs to show you exactly where you’ve spent your money.”

She recommends financial apps Mint and Dollarbird. You can also see what tools your banks and credit card issuers provide. They’d only allow you to track the money you keep with those particular accounts, but if you use just one debit or credit card for most of your spending, that might be all you need.

Also don’t discount the power of pen and paper – or an Excel spreadsheet. Manually tracking your spending can give you a good opportunity to closely study your spending habits. “It can help people really grasp what they’ve spent,” Rabinovich says.

2. Predict the future. Next consider what new expenses you may need to add to your budget. For example, if you have one (or nine) weddings you plan to attend in 2018, you can price out what you’ll need to save for those parties now.

You also want to think about the irregular bills that pop up at random, such as insurance payments and taxes. And don’t forget special events, including birthdays, anniversaries and the holidays.

Bonneau suggests using one of two strategies to tackle such costs. You can put a price tag on the expense and save up for it bit by bit each month. You can also add another 10 percent to your spending plan for “miscellaneous budget needs,” she says. So if you typically plan to spend $4,000 per month, add another $400 per month for these kinds of extras.

 

3. Know your goals. Beyond covering your current bills, you need to think about financing your future. This may include short-term goals, such as taking a nice vacation this summer or buying a car, or long-term goals, such as purchasing a home or retiring. Figure out how much you’ll need to achieve each goal and work that savings into your budget.

Rabinovich recommends setting aside funds for each goal in its own savings account. Alternatively, she suggests using a system such as online bank Simple’s checking account, which allows you to create separate virtual envelopes for your various stashes of cash. So within the one account, you can label your savings for, say, emergencies, travel, car buying, holiday shopping, etc. “Naming them helps you to stay mindful about not tapping into them for other needs,” Rabinovich says.

4. Adjust as necessary. With all the numbers laid out, you can really see whether your cash flow is heading where you want it to go. You might find that your expenses outweigh your income – a big no-no for good financial health. Or that you spend more than you’d like on discretionary items while coming up short on savings.

If that’s the case, spot where you can afford to nip and tuck your spending habits. Financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland, notes that people’s eating habits often offer a good place to save. She suggests committing to brown-bagging your lunch at least one day a week, more if possible.

And if you have children, she encourages you to include them in tackling the budget. If there’s something they want to buy, or a camp or class they’d like to join, make a plan with them to get it. Having your family act as a team can help keep your money plans on track, as well as teach your kids good habits from an early age. “Get them involved,” she says. “You want them to be part of the solution.”

Bonneau advises you to “try and find at least one recurring payment that you can cancel.” It might be a subscription to a magazine you don’t get to look at all the time, a meal kit you might be tiring of or a streaming service you don’t often use. The cost for each might seem minimal, but “all of those little dollars add up,” she says.

Whatever small space you can find in your budget to make more room for savings is worthwhile. “The amount doesn’t really matter,” Cheng says. “The most important thing is you start saving.”

5. Make room for change. This new year brings with it some new challenges. Congress is currently working out tax reform details, and talk of health care reform persists. Either issue could cost you, so you should stay aware of how each unfolds. “You need to make sure you’re really clear on what changes are going to impact you,” Bonneau says.

But remain calm. “It’s hard to know what will really be written into law,” Rabinovich says. “Just don’t panic, and don’t make any drastic moves yet.” She suggests meeting with a tax professional to help you navigate the situation.

Whatever changes come in the new year, you and your budget should be ready. “Know that there’s always flux, whether through the government, your job or just your life,” Bonneau says. “It’s important to slow down – the beginning of the year is a great time to do that – and really think through what’s coming up in this next year that you need to budget for.”

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