It’s Time to Make Your Year-end Financial Review

2020 Newsletters, Budget

Amid the financial chaos caused by the pandemic this year, it is more important than ever to review your finances and budget and be prepared for a potentially rocky 2021. Establishing and following a budget is by far the most important thing you can do to live within your means, grow your savings for emergencies, education, and recreation; and reduce or eliminate your reliance on credit cards and loans.

Government agencies and businesses rely heavily on their budgets as a measure of success, and they are reviewed regularly to make sure that financial goals are being met. Living within a household budget and having money left over each month (positive cash flow) demonstrates that you and your family are successful. If you come up short each month (negative cash flow), it’s a strong signal you need to sharpen your focus on reviewing and sticking to your budget. Far too many families live paycheck to paycheck without any plan, but it doesn’t have to be that way.

There is an enormous psychological lift given to those who think through their financial needs and establish a budget to get where they want to go. You’ll feel more confident. You’ll be able to enjoy the time you spend with family and friends. You’ll feel like the things you’ve always wanted to do or have are within reach. A budget doesn’t mean you have to stop doing the things you like to do either. It might for a little while, but as you manage your money better, you will find you actually have more money available to do the things you want.

Here are the 10 basics for managing a successful budget:

1. Record everything you spend. Admittedly tracking spending is the worst part of managing a budget, but it’s also the most necessary. Many people get a big surprise when they track what they actually spend each month. For instance, if you buy a $1.50 soft drink in the company cafeteria or vending machine each day, it seems like an insignificant amount and after all, you deserve it. Of course, you deserve it, but are soft drinks what you really want to spend $390 a year on? Isn’t there something else you would much rather treat yourself to with that money?

Carry a small notebook with you in which you can write down everything you spend on a daily basis. Trying to remember everything you spend will not give you an accurate record. Too many things will be forgotten. Having a notebook with you will help make sure that every tip you leave or stop you make at the convenience store or vending machine gets recorded. You’ll need to add these daily expenses to the major monthly expenses you have like your house payment or rent, groceries, etc.

Some people find it difficult to be completely honest about their spending. It is not uncommon to find one spouse in denial regarding the amount of spending he or she does. Finding a real resolution of your spending or outflow cannot happen unless all household members are willing to take responsibility for what they contribute to household expenses. Here is a convenient tracking forms you can use.

2. Use budget forms to review your spending and plan for upcoming bills. There are many excellent digital and print budget forms available help you get a grip on your finances. You can find the FFEF Personal Financial Statement and Monthly Budget Form on our partner web site at accesseducation.org. The most important point is to find something that works best for you.

When preparing a budget you want to use your Net Income – or the amount you take home after automatic deductions like state and federal income taxes, health insurance, 401K and garnishments. This is different from your Gross Income which is the total you make before these deductions.

Next, you’ll want to add up the Net Income from every check you make in a month and that will give you your Monthly Net Pay. If you make the same amount every week then this will be easy. If your paycheck varies, you’ll need to track your Monthly Net Pay for a few months to find out what your average monthly take home pay is. Once you have a general idea of your income, you can then start to subtract your bills or deductions.

It’s important to include all of your monthly expenses from the large ones like rent/mortgage to how much you spend on impulse items. Don’t forget to pay yourself and add some savings into your plan as well.

3. Pay your bills on time. To help with this, figure out which pay period falls before the bill is due and schedule that bill to be paid in that pay period. It doesn’t matter if you are paid weekly, bi-weekly or monthly, this format for paying bills will get them paid on time – or even a few weeks early. Don’t wait until the last minute.

If budgeting for quarterly expenses is tough you can also change some bills to pay monthly instead of twice a year, such as car insurance, or even making two payments a month or more on your credit card and mortgage payments. For purchases like groceries and gas, consider taking out the exact amount of cash you have allotted for those items in your budget and stick to what you have available.

4. Watch the balance in your bank account. You should know roughly how much money you have available in your checking and savings accounts at all times. That will help you not only make better purchasing decisions, but will help you avoid overdraft fees.

5. Don’t put off making critical decisions. Nothing works well if it’s left until the last minute. There is additional physical and emotional stress as well as a higher probability of complications. It’s important to know what expenses are coming up in the near future and make a plan for that. Building an emergency fund, planning for higher education, vacations, and remodelling can be included in these long-term plans.

One of the greatest benefits of a budget is not financial but emotional. There is an enormous psychological lift experienced by those who think through their financial needs and establish a course for getting where they want to go.

6. Involve family members. One of the greatest benefits of a budget is not financial but emotional. There is an enormous psychological lift experienced by those who think through their financial needs and establish a course for getting where they want to go. This will require meeting with all household members to evaluate your progress and make any necessary modifications to your budget.

Each person affected by the household budget must be able to see the benefit and possibility of saving for large purchases together and be willing to sacrifice to make it work. Your budget will become the basic guideline for all the financial activities of your family, and you will experience a real sense of accomplishment among family members as you work together to make your lifestyle the one you have planned for.

7. Include something you like to do in your budget as a reward. It may seem counterintuitive, but occasionally spending money on something that’s not strictly a necessity can help keep you on track and keep you from resenting the sacrifices that need to be made to meet your monthly budget. You should plan to reward yourself for meeting financial goals and not giving into temptation on impulse buys. Just remember not to blow the whole budget on your ‘treat’.

One of the most significant benefits of enrolling in the FFEF debt management program is that you can ask for the help of your FFEF counselor in creating your own personal budget.

8. Ask for help. Money will not manage itself. There must be accountability, control, and commitment – and sometimes you need help to get the ball rolling. One of the most significant benefits of enrolling in the FFEF debt management program is that you can ask for the help of your FFEF counselor in creating your own personal budget. You have the satisfaction of knowing that your relationship with your creditors is being handled by experts. You no longer have the stress of harassing phone calls and unpaid bills. This is all possible because you made the choice to get help with your debt management so you could improve your financial situation. With a workable budget in place, you are on your way to a happy, debt-free life.

9. Continually evaluate your budget and repeat the cycle until the budget works. Regular evaluation of your budget will help you determine if it is working. Once you’ve established what your income and expenses are, you want to get them to match your budget as close as you can. Most of the time, they won’t match exactly because not everything can be predicted exactly. The point of having a budget is that your income and outflow don’t differ too much. Your budget should be reviewed at least monthly for best results.

By monitoring what happens as you and your family pass through each monthly budget period, you will be in a better position to make the necessary adjustments so you can stay on target, see problem areas, and create a long-term picture for meeting your financial goals.

10. Do a year-end review. At the end of the year review all of your expenses from the previous year and evaluate your debt, savings and investments. Reviewing your monthly tracking shows you which months are high-stress months and which are easily manageable, light months. This gives you a guideline for knowing which months are better for taking on additional expenses, paying down debt, or investing.

Other end-of-year things to consider

In addition to your review, consider additional tax breaks you can take before December 31, like maximizing your retirement account donations and using any left-over money in your flexible health spending account (FSA). Collect donation receipts and other tax write-off paperwork so you’re ready for tax preparation. Rebalance your investments, double check your life insurance and estate plan, and just for fun, figure out your Net Worth for the year.

Managing money is like managing anything else. There must be accountability, control, and commitment. Money will not manage itself. Once the commitment is made, someone must take the responsibility to get the ball rolling.

We know this has been a trying year for everyone and Family Financial Education Foundation and our counselors wish you safety and financial success in the coming year. If you would like to find out more about our services to help you manage your debt create a budget, or find your way to a brighter financial future, please give us a call! 877-789-4172