Money is a leading source of household stress. Feeling a lack of control over one’s finances can make the present seem chaotic and the future uncertain. The first step in taking control of your financial situation is to create a household budget. It clarifies what resources you have coming in, where they are going, and how you can better manage them. The financial planning professionals at Boelman Shaw Capital Partners in Des Moines share the following tips to help you start the new year right by taking this first essential step toward a sound financial future.
Understand your resources.
If your only income is a regular paycheck, this step is simple. Many of us, however, have resources coming in from a variety of places, and some sources may generate a varying amount of income over the year. Do your best to get an idea of the average amount you have coming in each month from all sources. If you have seasonal income or income that fluctuates, tally what you have brought in over the past year and calculate a monthly average. Remember to deduct any income that you will not continue to receive and add new income that you reasonably anticipate in the coming year. Count income from all sources, including employment, rentals, investments, Social Security, pension, spousal support, or child support. Do not include gifts or bonuses unless you are certain to receive them.
Understand your spending.
Now that you know how much money you are working with, you will want to get a clear picture of where it goes each month. Start with your regular bills:
- Rent or mortgage payments
- Car payments
- Other loan payments
- Insurance premiums
- Credit card payments
Then add in your other monthly expenditures. Debit cards, online banking, and personal accounting software have made this easier than ever. If you use a debit card for most of your spending, you can look at your bank statement or account history to determine how much you are spending at the grocery store, at restaurants, the home improvement store, or anywhere you shop. Itemize what you spend on things such as:
- Home maintenance
- Auto maintenance
- Other commuting costs
- Child care
- Household items
- Educational expenses
- Dining out
- Hair and beauty services
- Uninsured medical costs
- Gift purchases
Separate the essential from the nonessential.
Once you have before you a breakdown of what your money is buying each month, you can separate necessary from discretionary spending. This is a quick way to find areas in which you can reasonably cut spending. Bear in mind, however, that some costs that are essential, such as groceries, clothing, gas, and child care, may be flexible. Small changes in your daily choices can affect the amount you dedicate to these kinds of expenses.
Calculate the difference between your income and expenditures, and make appropriate adjustments.
Compare your average monthly income to your expenses. If your expenses exceed your income, make whatever immediate adjustments you can to either increase your income or get your spending under control. If your income exceeds your spending, you have room to save. Be sure to have money set aside in an emergency fund, which most financial experts advise should be sufficient to cover six months of expenses. Also consider setting up a retirement account if you do not already have one in place or, if you do have a retirement fund, look at increasing your monthly contributions. You may also want to create an investment portfolio or set up other kinds of savings accounts, such as a 529 plan for your child’s educational expenses.
Take the first step in financial planning with a sound household budget, then come to Boelman Shaw in Des Moines to develop your plan further. We provide professional tax services as well as financial planning, so we can get a more comprehensive picture of your finances and give you more knowledgeable and complete advice than other financial planning professionals, integrating your savings, investments, and tax planning into one financial strategy.
Material discussed herein is meant for general illustration and/or informational purposes only. Because individual situations will vary, the information shared here should be used in conjunction with individual professional advice.