The beginning of a new year is a great time to assess or reassess your household budget – the amount you spend to keep the lights on, the family fed and everything else humming along. If you don’t already have a spending plan in place, now is the time to set up some strategies to help guide you to a more financially sound future.
Most of us are not immune to the impact of decades-high inflation. More of our paychecks (and perhaps savings) were spent on food, gas, housing, and utilities in the past 12 months. Even with extra money flowing out on necessities, there are ways to become more conscious of spending habits moving forward.
Follow these steps to review what worked last year and consider strategies aimed to help you become more intentional with your finances in the year ahead.
Look at Last Year
As a way to check in on your budget – or to start fresh – you’ll need to gather your financial records from 2022, including checking account statements, credit card bills, and other annual expenses such as property taxes and insurance. (This is also great prep for the tax season ahead.) If your expenses were more than your earnings last year, it’s time to look for places to save in the new year. If you had more income than expenses, leaving you with a surplus, even better. Now you have an idea of how much you can commit to savings.
Follow the Money
Whether you live within your means or somewhere in between, the best way to tackle future finances is to do two things:
- Review your last few months of spending.
- Track every penny you spend for at least a week. (Tracking spending for month is better, but seven days is a solid start.)
Doing this gives you a clearer picture of actual spending habits in real-time. Through my decades of experience working with individuals and families on their budgets, this discovery stage is often where people uncover expenses that didn’t really register with them before.
As you evaluate how to improve this year’s household budget, look at your income. Did it go up or down in 2022?
- If you were among the lucky folks who received a pay increase, congratulations. That can go a long way in helping shore up expenses or build on an emergency cushion.
- If your income took a cut because of a job loss, furlough or other reduction in self-employment earning, it’s time to eliminate the non-essentials (maybe cut your streaming services back to one or two) so you can afford to cover the mortgage with some breathing room.
With record-high inflation, it’s hard to imagine anyone saw a dip in expenses unless they experienced a milestone such as paying off a mortgage or auto loan. Either way, knowing where you stand financially makes the year ahead smoother, financially speaking.
What to Change This Year
Grab a pen and paper or open a spreadsheet on your computer and plot out your anticipated expenses for the year ahead. Compare that to your current take home pay and any other funds you receive on a regular basis such as income from a side hustle or rental property. If your expenses are more than you bring in, it’s time to take a look at where you can trim.
Which Expenses to Cut First
Research shows one of the biggest drains on a budget is take-out food and restaurant meals. The average American family spends about $2,375 a year on dining and takeout purchases, according to a recent Bureau of Labor Statistics Consumer Expenditure Survey. While going cold-turkey on take-out may feel impossible, start small by having more meals at home for just a week. Then, compare your spending on the seven days you ate at home – which should be less – as a way to build momentum for skipping restaurants on the regular.
With reporting by Casandra Andrews