Budget for 2010: 4 Moves to Achieve your Financial Goals
By Mike
I think it is important to review your personal finances at least once a year. At the beginning of each year, I sit down at my kitchen table and talk about finance with my wife. We update our balance sheet to determine our net worth, we look at our previous year’s balance sheet to see how it went and make sure that we have increased our net worth year over year. In order to make it grow, you can only change to 2 things:
#1 Increase the worth of your assets
#2 Decrease the amount of debt
Then, it’s only a matter of priorities to know if you should use money from your budget to buy assets (a house, condo, investments or to create a company) or improve existing assets (do home renovations, review your investment allocation, invest in your own company).
You can also decide to pay off debt. While going through your budget, you can move money from one expense category towards one of your debts and apply the snowballing effect to become debt free faster.
But before playing around with your budget, you must know if you have followed it throughout last year. So here are the 4 moves I make when looking at my budget for 2010:
#1 Review my budget
I actually log all my expenses in Microsoft Money in order to track them and see if I was able to stay within my budget constraints. From my personal experience, I have learned that setting a budget on excel with my thoughts on how much I spend per month vs cross referencing my “real” expenses on a monthly basis is worlds apart. Unfortunately, I am spending a lot more money on dining out than I thought I was”¦ And I have a tendency to spend more for my children on less useful stuff than I would like to (sometimes the sparkle in their eyes distracts me from my budget!). While I really like Microsoft Money, some of you might prefer other software to track your expenses and create your budget. Here are a few resources:
#2 Establish my Budget Priorities for 2010
Depending where you are in your financial life, you might decide to improve your retirement savings plan contributions or pay down your debt. In order to establish if I should press on the accelerator to increase my assets or hit the brakes to reduce my debts, I ask myself 2 questions:
A) Do I make more money by investing in my assets than what I save by paying down my debts?
Since my mortgage rate is pretty low, I have decided to keep my payment as is and invest more money in my online company and the stock market. While I am paying 1.125% (this is a major advantage to work for my bank”¦) on my mortgage, I am fairly confident in my ability to invest and make a better yield over the long run. I would actually determine a 6% interest rate as a deal breaker in my decision. If I have any of my debt on credit cards, I would either start paying it off as fast as I can or use a 0% transfer balance credit card in the meantime if I have a great investment opportunities. So if you have high interest debts, you should prioritize paying them off before allocating more resources to improve assets in your budget.
B) Do I have important debts that could prevent me from doing other projects (creating assets)?
If you are looking to buy a house or contracting a loan to invest in a project, you might want to get rid of your other debts first. Sometimes, credit card balances or lines of credit can increase your total debt service ratio (debt payments divided by income) and banks won’t allow you more credit for other projects. While I don’t have any outstanding debt on my credit cards, I owe my parents $31,000 (that is due in November 2010). This is why I will organize my budget in order to allocate more money towards paying this debt off. I certainly don’t want to go on vacation or renovate my house before paying my parents back!
#3 Review your budget tool
Once you have looked at your budget to see if you are on track with your lifestyle and what you thought you were spending and that you have selected your budget priorities, it is time to make sure that you are using the right budget tool. Your budget can be as simple as an Excel spreadsheet or you can use online software to help you manage your expenses. Here are qualities a good budget must have:
– being flexible
– being simple and user friendly
– offering the possibility to break down your expenses
I have listed a few resources for you to try:
– My homemade Excel Budget spread sheet (simple and user friendly)
– Mint (free)
– You Need a Budget (fees)
#4 Pay Yourself First
This is probably the most important part of your budget for 2010: apply your budget and pay yourself first. No matter what your budget priority is for 2010, you must put this on the very first line of your budget and try to maximize the amount allocated to it. Most of the time, this is where people fail. They do a nice budget, review it and setup their priorities. But then, you must be able to sacrifice a few expenses and stick to your budget.
So this year I have made my 2010 budget priorities:
#1 Pay back the loan from my parents
#2 Invest in my online company
#3 Renovate my living room
What about you?
I would be curious to know what are your 2010 budget priorities?
Author: Mike.
Image source: image8.com, net_efekt, James Cridland, fotographix.ca, Mathieu B.
January 5th, 2010 at 9:14 am
These are nice guidelines you have shared. This year I will be focusing on saving and hunting for the most practical investment to which I will take a risk. :-)
January 5th, 2010 at 12:27 pm
These steps all sound good but the “pay yourself first” is one of those proverbs not based on truth or reality…like the “god helps those who help themselves..” sure sounds nice…not biblical though.
I am a business owner self employed for over 30 years now. The “pay yourself first” is a myth. Try telling that to your utility company when they threaten to shut off the electric or water….or tell that to the internal revenue people when they come with chains and a lock (yes that happened to me once!) and they want their money or else no more business. There are months, sometimes years where you make zero dollars. Paying yourself first means someone else DOESN’T get paid. It real simple.
And then you say to prioritize and pay yourself first over someone you borrowed money from? Ahhh, nice try, but if you think I will sit and wait for my money while my son, daughter, friend puts money to the side for retirement while I “wait” for my money is nonsense thinking.
Lousy advice people
Sincerely
Mr Thomas Nelson
Crown Point, IN
January 5th, 2010 at 12:32 pm
@ Thomas,
#1 I do not see the “pay yourself” method as an absolute and egoist principle. I see it more like “consider yourself as one of your creditor”. I certainly to not advocate to pay yourself first and not pay your utility bills. Thank for chance of making this clarification.
#2 I think that if you make the priorities, paying down your debts faster to your relatives should be at the top of your list as I did with mine. In 2010, if there is one thing I want to achieve in my budget, this will be paying back my parents. I certainly don’t want to spend money (or invest in my retirement) while I owe them money. This will be a great disrespect.
January 5th, 2010 at 1:06 pm
I like and have started using the pay yourself first mentality. By setting up automatic transfers I have the ability to pay myself first right away after each paycheck so I don’t have to worry about it or miss the money.
January 5th, 2010 at 1:30 pm
Switching to a pay yourself first mindset has allowed me to make significant financial progress in just two years. I paid off my car a year early, more than doubled my retirement savings, established an emergency fund and increased my mortgage payment by 25%. All because I started paying myself first.
Once I started paying myself first, I had to give up shopping for fun; I use to spend a lot of money on books but now instead of buying I go to the library – I didn’t think I’d be able to stick to this but it’s been a year now since I bought a book (use to be 5-10 a month) and I don’t miss it at all – weird how that works! Then shortly after I started to pay myself first, I wanted a raise…so in order to pay myself more I had to give up other things – I don’t have a cell phone, I don’t have internet at home and I don’t eat out. All these ‘don’ts’ are truly small sacrifices that mean I am debt free except for my mortgage and it will be gone in 7 years (or less) and I am on the path to having a secure retirement in 20 years or so. I am not leading a life of deprivation, I just redefined my priorities and gave up some things in order to have financial security and I am loving it. Pay yourself first will work for you if you are willing to work for it!
January 5th, 2010 at 1:30 pm
My budget goal is to spend less than I make. Since buying a home we have yet to get all the numbers right…we’re getting better month by month.
January 5th, 2010 at 2:52 pm
1) Pay off loan from mom
2) Save up for trip to Thailand in July/August
3) Establish a 3 month emergency fund
January 5th, 2010 at 2:54 pm
@Laura,
How much time to you want to spend in Thailand? that is sooo cool!!!
January 17th, 2011 at 8:30 am
I read this article last year and implemented some of your suggestions and they worked! This year like ‘Jody’ I’m not going to buy books but go to the library and see if I can pay down home mortgage more this year. Thanks for the useful tips!