Consider new financial goals when revising a financial plan
Your finances could change in an instant. Be prepared for monetary shifts, which can range from switching to a higher-paying job to making new car payments after your old vehicle breaks down. Make sure to update your household's financial roadmap each year, or more frequently, to keep pace.*
According to a U.S. Bureau of Labor Statistics study released this past February, U.S. households spent an average $51,100 in annual expenditures in 2013. It revealed consumer units – defined as households, financially independent individuals or two or more persons making joint purchase decisions - put more money toward housing in 2013 compared to the previous three years. They were also more likely to pay higher amounts for utilities and transportation. With the average household recording upward trends in certain expenses, it's important to ensure budgets reflect your financial goals and spending accurately.
Four ways to revise your budget each year:
1. Keep spending categories in the budget current.
When updating your budget, categorize your expenses. Remember that the amounts may need to be updated from time to time. For example, your rent may have been increased. This should be reflected in the housing category of the budget. It’s common to forget to update expenses. This can damage a budget to the degree where the numbers could become unreliable. One way to keep this from happening is to check your numbers on a regular basis.
Break down each expenditure, and make a note of any costs that are incorrect.
These categories may include, according to the bureau:
- Housing
- Utilities
- Clothing
- Transportation
- Insurance
- Health care
- Entertainment
- Food and drinks
- Education
- Retirement
2. Update income and expenses
Review any modifications in pay that are not included in your budget. If you added a new job or took on more freelance work to pay for household expenses, include these sources of money to the calculations. You should also modify the financial plan based on which spending categories were flagged in the previous step.
After straightening out your funds and expenses, determine how much disposable income is left to put toward savings and other goals. For instance, an old salary may have listed $50,000 and expenditures reached $40,000. After a promotion, total compensation may reach $60,000 and household costs could rise to $45,000. The money left is now $15,000 this year compared to $10,000 last year.
Take note of changes in income when updating a household budget.
3. Cut unnecessary spending
To lower expenditures and have more funds, look for other spending categories that could benefit from cuts. Spending less money on food outside of the home, such as at restaurants, could reduce expenditures further. Depending on the reliability of public transportation in the area, you could also trade your car in and take the bus or train.
4. Include new savings goals
With a new job, stage of life or location, you might also have a different financial goal. Ensure you include short-term or long-term objectives, like going on vacation. A survey by financial services firm Ally Financial revealed one-third of consumers do not save money for the future. For long-term updates like renovations, you could divide total estimated expenses by 12 to save more funds each month.
Other savings goals to contemplate include:
Save for a down payment
Reduce student loan debt
Purchase a new car
Pay for home improvements
Start a business
When looking more closely at a budget, make sure to take into account any major lifestyle changes that occur, whether moving, having children or getting a new job.
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