This was originally published on Monday, January 5, 2015, in the Pacific Daily News. Click here to subscribe to the PDN.
Question: My New Year’s resolution is to improve my finances this year, but I just don’t know where to start. I feel overwhelmed and frustrated. Do you have any ideas that can help?
Answer: There is a lot to consider when you are planning your personal finances. The new year is always a great time to start making changes. Take advantage of the New Year’s tradition of making resolutions. Many make resolutions to lose weight, stop smoking or to go back to school. Resolutions aren’t only for personal physical changes, but also can be made for your personal finances. After all, resolutions are goals.
Before you make any goals, you need to know where you stand. Research your past spending trends and create a budget. A budget is a spending plan that will help you meet your goals. Start by calculating your monthly income. Your income should include your wages, tips, child support, alimony and any other money that you expect to receive.
Next, determine your monthly expenses. Expenses are usually broken down into fixed or variable expenses.
Fixed expenses are those that do not change and remain the same. Such as rent/mortgage, insurance (car, home, health), loans (student, car, personal) and some utilities. Some of your fixed expenses may be paid bimonthly, quarterly, biannual or even annually. These include income taxes, car registration or real estate taxes. Although you do not pay these monthly, you still need to include them into your monthly budget. Take the yearly total of the expense and divide it by 12. This will be the average monthly expense.
Your variable expenses occur regularly but fluctuate month to month. Variable expenses include utilities, food, gas, clothing, entertainment and hobbies. Because they vary, estimate their yearly total from last year and divide it by 12. The more expenses you list, the more accurate your budget will be.
Take the total of your expenses and subtract it from your income. The total will either be a surplus or deficit. Does this number accurately portray what you are left with at the end of the month? If it doesn’t, you will need to go back and review your budget until it truly reflects your monthly spending. If there is some money left over, you can use it to pay down debt, contribute it to a retirement or emergency fund, or just simply save it. If your budget breaks even or is negative, review where you can cut back on an expense.
It is important to be honest when creating your budget; it is the only way you know where improvement is needed.
People are shocked to see that it is the little expenses that add up. Many people have no idea how much they spend on eating out for lunch every day until they multiply the cost of a lunch by five (work days), then multiply that by four (weeks in a month). They then quickly see that it adds up. The same goes for your daily coffee, soda, bottled water or cigarettes.
The spending plan you created can also be used to predict different outcomes.
Try recalculating your budget by cutting back in areas that really are not needed or increase your income from the raise you are expecting.
Use these projected budgets to help you decide what areas you want to improve and what financial goals you want to achieve.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com and read past columns at the Money Matters blog at http://www.moneymattersguam.wordpress.com.