With the new year starting, it’s a time of reflection and setting goals. Take this time to evaluate your current monthly budget to take a closer look at your income and expenses, especially if your planning to pay for college. It sounds simple (and it is) but according to a Debt.com survey 30% of households don’t maintain a budget. Let’s break down the way to create or evaluate your monthly budget.
Add up Your Income
For some, this is really easy - it means just looking at your latest paystub. For others, you need to gather documents on interest income, pensions, child support, average bonuses, rental property income, and other sources. If you have an income source where the taxes are not automatically deducted, remember to calculate that amount as an expense.
Make a List of All Your Expenses
This takes a bit more effort. Track down these expenses by reviewing your checking account transactions and credit card or debit card statements. Don’t forget to consider items you typically pay with cash like your daily cup of coffee or the weekly gift in the church collections basket. If amounts fluctuate like a utility bill, consider averaging out the amount for the last three months.
In general, remember to include expenses from each major category like housing, food, transportation, health, child care, personal expenses (laundry, clothing, etc.), and debt payments. Although the average expense may be monthly, don’t forget items that may be once a year like insurance premium or quarterly like tax payments. Also, plan for the occasional splurges for dinners out, trips to the beach, and concert tickets.
There are some great resources to help you with this list. The Federal Trade Commision has the “Make a Budget” PDF that can be easily downloaded. If you use Microsoft Excel, you may be able to use their Family Budget Planner Template. Plus, there are some free and low cost personal budgeting software like PocketSmith that lets you manage your budget and forecast your finances to get clarity over your money. For those software charging a fee, most have a trial period so you can determine whether or not you want to use a budget planning and tracking tool.
Write Down Your Financial Goals
Make certain you include contributions to financial goals like retirement, college savings, emergency fund accumulation, accelerating the repayment of debt, and other financial goals in your budget. If you don’t have specific goals, take this time to make them. Also, check what the experts say if you want a rule of thumb about how much to save in a particular category. For instance, CNN Money reports that you save 10% to 15% of your income for retirement. The Lumina Foundation recommends the Rule of 10 that is 10% of their discretionary income should be saved for 10 years for college costs.
Find Areas to Improve
Once you can see all your income, expenses, and review your goals, it’s a great time to consider where you can improve. Are you able to save if you change internet providers? Can you cut down your cup of coffee from your local barista to twice a week instead of daily? Can you sign up time-of-use (TOU) plan with your local electric utility company to lower your electric bills by waiting for the cheapest time of day to use electricity? Talk as a family about how you can strategize to lower some expenses so you can save more for long term goals.
Once you evaluate or set up a budget, make certain you review it. Decide what frequency works for you. If you are really into it, check it weekly or monthly. For others, quick quarterly check ins are more doable.When you are reviewing your budget, decide if you are hitting your goals. If not, then make adjustments.
Colleen MacDonald Krumwiede is a financial aid and paying for college expert with over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education. She guides go-to-market strategy and product development at Quatromoney to transform the way families afford college.