Many people are reconsidering their budget to prevent holiday overspending over the next few months. If you are one of these people, good for you – but why stop there? This is a great time to look further ahead and tackle your 2020 budget.
Lay out your calendar, spreadsheet, or whatever method you use and let’s get to work on next year's budget. Here are some helpful hints to consider as you dive in.
- Anticipate Changes – If you have any large changes that you can reasonably anticipate, like a college tuition bill or a new mortgage, incorporate it into your plans as early as possible – even if you do not know what the value will be. Waiting until you know the exact value may not leave you enough time to adjust other expenses.
Don't forget to incorporate positive changes as well – for example, any anticipated raises or the effects of the new tax laws.
- Make Conservative Estimates – When you don't know the future value of something, make conservative estimates. Shift expenses a bit toward the high side, and income a bit toward the low side. This goes against human nature, but conservative estimates give you a cushion in case things do not go as planned.
Assume that regular expenses such as groceries, utilities, and gasoline will continue to rise. Currently, a 2% rise will account for inflation in most daily expenses, but gasoline and utilities should have a higher anticipated rise because they are so difficult to predict in advance (for both price and usage).
- Review Previous Results – The year has not ended yet, but by now, you should have a pretty good idea of what goals you are going to meet this year and which ones will fall short. You will know if you need to reduce your spending, increase your savings, cut your debt, or adjust in some other fashion.
This also refers to your means of tracking and allocating your budget. Are you having trouble determining whether you met your financial goals? Do you have to rip up your budget every month and start over? Consider shaking up your budgeting method. "Force yourself to keep track of your expenses," advises Bankrate.com Chief Financial Analyst Greg McBride. "Calibrate the amount you're bringing in on your net income with what's going out the door.
"This is really your score card to tell you whether or not you're living within your means," McBride says, adding that it is also the way to maximize savings. For example, if you are constantly falling short of a savings goal, try using the "bucket" approach. Allocate segments of your income to individual buckets with one for savings, one for necessary monthly expenses like mortgages/rent and one for discretionary income, and then fund the monthly expense and savings buckets before the discretionary bucket.
- Set New Goals – Revise your goals based on your review and proposed changes. For example, you may decide to accelerate your savings to meet a down payment goal for a home, assuming that interest rates are going to rise again next year (a pretty reasonable bet, we think). MoneyTips is happy to help you get free mortgage and refinance quotes from top lenders.
- Check Your Credit Score and Credit Report – Your credit score affects the interest rates you qualify for on credit cards, mortgages, and other types of loans. A bad score can wreck your budget, preventing you from getting credit and increasing the amount of interest you have to pay every month. Identity thieves can ruin your credit score by creating new accounts in your name and racking up unpaid bills, so it is essential to check your credit report and look for any errors or signs of fraud. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
- Adjust Your Budget Accordingly – With your new goals and assumptions in hand, adjust your budget to handle next year's situation. A monthly budget works best for many people but choose whatever time frame works best for you.
Should you proceed on to 2021? Probably not. You don't know enough details to budget that far into the future. However, what you should do is take into account longer-term expenses, purchases and income changes in this year's budget. For example, if you know you need to save more to meet a college tuition goal in 2021, you cannot start early enough.
Congratulations for getting ahead of the game and working out next year's budget ahead of time. You have won half the battle already. Stick to the fiscal discipline of your budget throughout the year, and you will win the other half.
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