How To Create a Budget — and Stick To It — This Year
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 the end, a budget should either balance to zero or have extra income left over. A financial professional is a good resource to help people determine the budget that works for them.”
Tips for Sticking to Your Budget
Once you’ve established your budget, the best way to stick to it is to actually use it. Track your spending and saving and look back on your behaviors on a regular basis.
“Budgeting doesn’t have to be tedious,” Grabenstetter said. “By tracking actual expenses over weeks or months to see how much you’re spending, you can evaluate where adjustments are needed. Checking in on your budget weekly, whether by yourself or with a spouse, can help you stick to it throughout the year.”
You may also want to get the whole family involved so that it becomes a team effort.
“When making group decisions amongst many family members, such as where to have a family vacation, an iteration of the 5-3-1 method can be very effective,” said Eric Thompson, director and wealth advisor at Round Table Wealth Management. “Parents can offer family members five choices of activities or travel locations that fit within budgetary parameters. From there, a different set of family members chooses three of those options they would enjoy the most. Finally, an appointed decision-maker gets to make the final choice from the remaining three options. This process of elimination can ensure budgets are maintained, yet give optionality and empowerment to all family members in the decision-making process.”
Using budgeting tools can also be helpful.
“Keep it as easy as possible — find a financial tool that does the work for you,” said Hussein Ahmed, founder and CEO at Oxygen. “Do your research, and find a tool that suits all your needs from budgeting to saving.”
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As you track your spending and saving, take the time to celebrate the small wins. This can help keep you motivated to stick to your budgeting plan.
“Consider including gratitude in the practice of keeping track of your daily income and expenses,” said Hiram Arnaud, a financial representative with Strategies for Wealth and Guardian Life in New York. “Keep a daily record of financial achievements and successes, however small.”
Another way to stick to your budget is to automate it.
“Once you have your budget set, automate as much of it as possible,” said Jay Zigmont, PhD, CFP, founder of Live, Learn, Plan in Mississippi. “If you know your ‘musts’ — those things that keep a roof over your head or you are required to pay — you can set up a separate account for them and have part of your paycheck (that matches the budget) deposited into the account. Then you can have the payments automatically drafted out of the same account. The bonus of automation is that if you don’t have the money in your ‘normal’ account, you are less likely to spend it. Also, your ‘musts’ reflect the things that are on your credit report, so automation will allow your credit score to rise.”
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