Budget for 2010: 4 Moves to Achieve your Financial Goals
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?