It always happens right after the New Year.
Friends sport fresh haircuts, your boss rolls in in a new outfit, and your spin class is more crowded than it’s been in six months.
It makes sense. After all, ’tis the season for new beginnings, and there’s no better time to see what in your life requires a makeover.
Especially when that makeover means finding spare money you didn’t know you had! Today our goal is to help you find more room for the things you want in your life, and to see where you’re just throwing money away.
As part of our 12 Days of LearnVest, we enlisted Certified Financial Planner™ David Blaylock to explain the seven steps to help free up more this year.
1. See Where You Stand
For some people, a “budget” conjures up intimidating visions of spreadsheets and scattered receipts. But, trust us, it doesn’t have to be that way. Instead, think fun, think color-coded … think a budget automated for you.
After all, the first thing you may need is a bird’s eye view of your money so you know how much is coming in and how much is going out. (You’d be amazed how many people don’t know how much they bring home in their paycheck.)
2. Know Your 50/20/30 Numbers
Great, a budget, you say. But how do I know if I’m overspending, or where to cut back? Simple: Divvy up your take-home pay according to the 50/20/30 principle. You can do this easily in the Money Center under the budget tab.
You’ll be able to see how much of your paycheck should be allotted toward your essential expenses (like rent), fun lifestyle expenses (like vacations or spa treatments), and priority goals like saving or paying down debt. Knowing how much you have to work with within those parameters can serve as the framework for other major money decisions for the year.
“It’s just a quick way to check on your budget,” Blaylock says. “So many people ask me if spending, say, $700 a month eating out is too much. Well, it isn’t too much if you are under [the 30 percent limit of] the 50/20/30 rule. It’s a quick and easy rule of thumb.”
3. Identify Your Spending Triggers
Next, you should assess what you spent your money on last year, by category. If you’ve set up your Money Center, you can look at your historical spending according to the expense folders you have labeled. Many credit card providers will also let you download a yearly summary of your purchases by category.
Prepare to be surprised: Did you think you only averaged $100 a month on new work outfits—but saw that those seasonal sales actually added up to twice that amount? Or that your fitness bill was pretty hefty itself, once you added yoga and spin classes to your gym membership?
Now is the time to become aware of what your spending triggers are, because that will factor into creating a budget you can live with—and stick to. “The start of a new year is a good time to look at spending habits,” Blaylock says. “Things like cable, eating out, and shopping could be preventing you from saving.”
“The start of a new year is a good time to look at spending habits. Things like cable, eating out, and shopping could be preventing you from saving.”
4. Figure Out Where to Cut the Fat
Speaking of that cable bill, do you really have to watch that episode of Mad Men the day it airs, or are you comfortable with saving a Don Draper marathon on Netflix for a rainy day?
If cutting the cord frees up an extra $100 bucks that you could put toward the summer family reunion trip, your TV habit may be worth the sacrifice. Likewise, if you spend $75 on haircuts six times a year, but think you can manage just four trips to the salon, that’s $150 you can put toward the new car you need by year’s end.
And even though the assumption may be that it’s often easier to cut from the fun parts of your life, the truth is, there are probably steps you can take around the house that can cut from your utility bills—an energy audit is a good place to start.
5. Save Your New ‘Spare Money’
Hunting for hidden savings won’t help you if you don’t funnel your newfound funds into investment or savings accounts. Lots of folks “may cut out the lattes, but they’ll increase their budget somewhere else. The key is not only cutting back, but also having a plan for what to do with that leftover money,” Blaylock says. For instance, if reducing your daily trips to the coffee shop yields you a giant-screen TV rather than a badly needed emergency fund, you’re probably putting your basic security at risk.
Your best bet is making sure that money never hits your wallet. For instance, if $50 a month is what you will save by biking to work once a week, “Figure out a way to send $50 every paycheck to a savings account,” Blaylock says. “You’ll be amazed at how quickly you can amass an impressive pile of cash through this ‘set it and forget it’ technique.”
The same goes for credit card payments automatically deducted from your bank account at the same time every month. You probably won’t miss the money, and your card balance will shrink faster than you realize.
6. Evaluate: Are This Year’s Goals Realistic?
Perhaps you’re planning a fall wedding, or you have dreams of going freelance by year’s end. Just be careful of over aiming, Blaylock warns. “If you set a goal that is too large and fail [to achieve it], it’s a psychological blow. It’s harder for us to get back up and keep going,” he explains.
A better strategy? If you have an estimate on how much you think your larger goal will cost, divide that cost by 12 and see just how much you’d have to stash away every month. That will give you a reality check.
“If you are currently saving $100 a month, and you decide you want to save $10,000 a month, that’s probably a dumb goal,” Blaylock says. “But if you want to stretch yourself, save $500 a month instead.” Then you can determine whether you’ll have to downsize your dream vacation—or maybe just put it off for a few more months.
7. Allow Yourself Some Slip-ups
Ultimately, your new goals and refreshed budget are providing you with rules to live by, not die by. So don’t beat yourself up if you splurge one month on dinners out or a well-deserved weekend getaway. “It’s not about perfection, it’s about progress,” Blaylock says.
Don’t be discouraged if an unexpected expense knocks your goals off track for a month or two. Get refocused, and take it one day at a time. “Nobody expects you to make all the right financial decisions 100 percent of the time,” he adds. “But ideally you do things better than you did the year before.”