A Smarter Way to Budget

Fall brings Halloween and before you know it the gift-buying craziness of the holidays. They drive investments, cash flow and credit card bills right from your mind. This time of year, before the rush, is perfect to refine your annual budget, and here’s why.

Budgeting problems are twofold:

  • You use a budget template that doesn’t reflect your lifestyle or how you look at money, or
  • You once prepared a budget, locked it in a drawer or a Quicken file and never looked at, updated or revised again.

Maybe both. Here are suggestions to start you on a real budget:

Budget by season, not by month. Many budget templates require you fill in line items with monthly or annual amounts. Probably few of your costs run the same month to month.  For example, in the Northeast your heating oil heating bill tops the list for at least five months, followed by the electric bill once the air conditioning goes on.

Rather than following a budget with the same monthly amount for either of these expenses, make sure you set aside enough cash for those months of varying weather – and expenses.

Determine your seasonal needs. What do you do in the fall (back-to-school clothes, supplies, pay-to-play sports); winter (skiing, huddling around the heater, Caribbean
trip); spring (landscaping, spring break); and summer (pool, family vacation, kids’ camps).

Worry only about what you can control. Your budget starts at the net cash at your disposal, what you control and what determines how much you spend. Aside from taxes and other withholdings from your paycheck, you control contributions to your 401(k), expenditures for your health-care premiums and other outlays. Budget for these so you know how much you contribute for retirement or how much your medical costs rise.

Prioritize your detailed line items. For example, house, kids, cars, trips.

List everything to do with the house: mortgage, insurance, utilities, repairs, taxes and all other expenses. Look at all your costs for living in that house – helpful if you ever decide to move or buy a second home. Under “kids,” list weekly allowances, lunch costs, transportation, diapers or savings for college.

When done, you know exactly how much it costs to live in your house, raise your children,
drive your cars and take your vacations. You also know which seasons constitute your big spending seasons.

Don’t beat yourself up if you blow the budget on a few things. Make sure you understand why you blew the budget. Where’d the money go? A one-time expense likely to never reoccur yet worthy of an emergency slush fund.

Over time with the seasonal budget, you start to know when finances get off kilter. Take the seasonal approach reviewing your budget and actual amounts. Were oil prices higher than you budgeted for this winter? You still have time to adjust your spring or summer plans to compensate.

Budgeting helps when it mirrors your spending. Monitor your spending season by season and get a better handle on your expenses.

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Lea Ann Knight is a CFP at Garrison/Knight Financial Planning LLC in Bedford, Mass. She blogs at http://financiallyfitafter40.com.

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