This challenge is designed to help you get ready to set up a new budget for the new year that will help you reach your financial goals. When you first start budgeting, you may not think a lot about expenses that come once or twice a year. Some of these expenses are small enough that you can squeeze them into your budget for the month and just cut back on your spending. Others can really hurt you if you are not prepared for them. The challenge this weekend is to come up with an annual budget that includes these items. You can also break down your budget so that you can see how much you spend on each category during the year.
1. List All of Your Annual Expenses
Take the time to list all of your annual expenses on a piece of paper or in your smart phone. These should include things like your auto insurance, your automobile taxes, your property taxes (fi they are not included in your mortgage payment), and any gift giving that you do throughout the year. Then determine how much you pay on each item during the year. You can divide this number by twelve and then set up those categories as sinking funds for your budget.
2. Looking at Your Annual Budget
It is always a good idea to review your spending for the past year as you prepare to plan your budget for the next one. If you are using software to track your spending and monitor your accounts, then you can simply go to reports. If you click on budget reports, you should find a report that will let you see the spending across categories over the year. You can select the dates you want the reports for and then review them. This is a great way to see where the majority of your money is going throughout the year. The numbers may prove enough to motivate you to reduce spending in a category or to increase it in the case of saving.
3. Determine Areas You Want to Change
This is also a great time to choose a few areas where you want to reduce the amount that you spend over the year. You may decide to focus on reducing the amount you spend on eating out each month. The month, between now and the new year, will give you a chance to research new strategies you can use to save money on the categories that you choose. You may want to find an online group that will give you advice or check out some financial books on getting out of debt or handling your money differently. It is easier to make lasting changes if you put a solid plan into place and set up a system that will help you be successful. Planning now will help you do that.
4. Determine Your Net Worth
An additional exercise you may want to complete this weekend is to determine your net worth. Your financial software may do this for you, if you have entered all of your information in it. But if it does not, you simply add up all of your assets and subtract all of your debts from it. It is possible to have a negative net worth. If you do not like your number, you can make a goal to change this over the next year. I may take a while to see a significant change, especially if you have a large amount of debt. However, the effort you make now will pay off.
You can also look at your debt to income ratio. This number lets you know how you are doing each month, and is one thing that banks look at when you deciding to lend you money. They look at your monthly payments compared to your income. If you are renting, it is a good idea to include that number in the amount. Divide the amount of your monthly payments by your monthly income. The goal is have that number below three .3. If it gets higher than that then you are in danger of defaulting on a loan, and you have stretched yourself too thin. You can make goals to bring down this number.