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Learn from your past budgeting mistakes in the new year

by on January 12, 2017 10:44 AM

Retail stores make 20 to 30 percent of their revenue in the last five weeks of the year. What did that mean for your December budget? Odds are, you did not save all year to cover the December expenditures, and the holidays wrecked any attempt at budgeting.
Approximately one-third of adults do save for the holidays. But, an alarmingly equal number of adults wind up dipping into their emergency or even retirement savings to purchase presents or deck the halls, according to a survey by investment firm T. Rowe Price. If this sounds familiar, make this New Year's the one where you transform your spending habits. Your December 2017 self will thank you.
RESISTING TEMPTATION, OR FIRST THINGS FIRST
People tend to forget about sporadic expenses or the distant future until it's too late. But taking the right steps now will make a big difference in your financial future, whether the focus is on next December or on
fifteen 15 years from now.
Resorting to the holiday-buying mindset versus budgeting or saving is common during the end of the year. As reported by Fortune, a T. Rowe Price survey showed that 30 percent of parents who do not put aside money regularly for retirement still save for the holidays. Furthermore, 28 percent of parents who prioritize saving for holiday gifts do not save for college for their children.
You don’t have to give up big, one-time purchases or small luxuries to save. The initial steps involve creating a budget and developing a greater awareness of things that trigger your overspending or undersaving patterns. It can by tempting to satisfy the teens now with the latest hot gaming system or a television several inches wider than the previous one, but are those items really in the budget? If not, the holidays may not be the best time to acquire them - especially since just about anything can be saved for if you have the appropriate budget and stick to it.
CREATING A LONG-TERM SAVINGS MINDSET
Making sure that your financial picture is better next year requires two elements: improving budgeting for the
new year and putting a priority on saving for long-term items, such as your future retirement. Both elements require a look back at your spending habits.
Take a look at your spending both routine expenditures and discretionary ones for the last three months of the year. This helps you tally your holiday spending and identify other one-time purchases. Set up separate columns for your regular monthly expenditures, seasonal spending such as holiday gifts, and other unusual expenses.
Then, take a look at your current investments, for retirement and other long-term goals. A "risk stress test" can help determine if you are on track or would be easily derailed by an economic downturn. Using various models, a financial stress test analyzes various scenarios, such as an increase in interest rates, and their potential impact.
Both of these "research" efforts enable you to set a budget that helps you prepare for next December and years down the road.
BUCKETING AND BUDGETING
Making a budget is a New Year's resolution that many people set. However, they often stray from it when they need to spend on an unexpected car repair, wedding or major medical expense.
To start your budget, use the findings from allocating the last three months on the spreadsheet. Break out fixed or required costs for the year, such as insurance, housing, car payment and other regular expenditures. Don't forget things that are required but not monthly, like property taxes or yearly checkups. Also, be sure to include minimum payments on loans or credit cards as non-optional items.
Saving is the one item people often forget to put on the mandatory expense list. However, some money should be budgeted monthly for retirement savings as well as emergency funds.
In a separate column, list anything that is optional, such as holiday spending and travel. These are the items that are nice to do, but are truly discretionary.
Food and clothing are two areas that various experts put in either bucket. Yes, some food and clothes are mandatory expenditures. But, the money spent in these two categories should have minimums, with larger amounts viewed as discretionary. The idea is to really hone in on the necessities, which in your budget may not include frequenting expensive restaurants.
Next, take a look at your income to determine how much extra money you have after monthly expenses are covered. Factor in any bonuses or variables in your income level to determine how much can be allocated to additional savings as well as the discretionary items, like gift giving. It is best to split this money into two buckets: short-term savings and long-term investment accounts. This helps you stay away from that worst of financial options: touching retirement funds when you're in a pinch.
Staying within a budget is not easy, even when you're doing everything right. To boost your chance of success, keep track of your spending each month and review your progress throughout the year. This helps you avoid surprises when those unplanned expenses arise, and will make sure you're prepared when next fall's onslaught of advertisements and holiday displays begins.
Ash Toumayants is the founder of Strong Tower Associates, a financial planning firm located in State College.

 

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