Did the Holiday Season Break Your Budget?

According to a classic, festive song, "it's the most wonderful time of the year." But the holiday season certainly isn’t the most wonderful time for your bank account.

Many of us have to start the New Year with a financial headache that lasts longer than a seasonal hangover. And lots of us add making better money management decisions to our New Year's resolutions.

It's easy to see why.Every year, an estimated 60% of Americans spend either everything or more than they earn. That figure has barely changed in the last 10 years or so.

And according to research for the annual America Saves Week campaign (February 26 to March 3 in 2018 -- see https://americasavesweek.org/ for more), people with a money plan are nearly twice as likely to spend less than they earn and save the difference than those without a plan

Sometimes though, it seems like it's just too tough of a job to commit to getting finances under better control. But it isn't. With the help of a computer (or just a calculator), it's fairly straightforward to set yourself a budget for the year ahead.

And, when you do that, you'll be in a much better position for handling your holiday season finances next time around.

It all boils down to how much you earn and how much you spend, and how you get them into a sort of balance. If your spending is higher than your income, you've got problems -- but there are ways to solve this.

Let's take a closer look.

How to Create a Personal or Family Budget

Creating a budget is a serious task, not a set of numbers you jot down on the back of an envelope during breakfast.

You can use a good old-fashioned pad and pen, computer software (like a spreadsheet or a budgeting program such as Quicken), online budgeting sites like Mint.com or downloadable and printable budget sheets (do a Google search for these -- they're often free).

Then follow these steps to make sure you do it properly and create a meaningful plan:

• Gather together all the main documents covering your earnings, your spending and the amounts of money you owe -- pay checks, utility bills, loan documents etc.
  
  
• Identify a particular, important goal for the coming year -- for example balancing your books, paying off a debt, buying a new car or saving more.
  
  
• Make a list of your after-tax income -- wages, interest earned and so on -- and your expenditure, using receipts and bills.
  
  
• Split your spending list into two parts: the things you choose to spend on but don’t have to, like restaurant meals and vacations -- this is your discretionary spend -- and the items you absolutely have to pay, like a mortgage, car payments and utilities.
  
  
• A few things fall in the middle, like food -- you absolutely have to buy some but you can choose what and how much. The same goes for clothing. Put it in your non-discretionary list for now. Food should be around 10% to 15% of your total expenditure.
  
  
• Don’t sweat the small stuff -- things that cost less than $100 a year. Instead, add about 5% to your total spending to cover these.
  
  
• Add another 5% to 10% to cover increases in bills and unexpected expenses.
  
  
• But do sweat the big stuff. Do you plan to make any major home or equipment purchases this year? Put it in your spending list.
  
  
• Now compare your income versus total expenditure.
  
  
• If you're earning more than you're spending, you're good. Plan to use any surplus to pay off debts and increase your savings. Adding to your discretionary spend comes last, with home improvements being the most important. Write down your decisions and timetable for these.
  
  
• If your numbers are just about balanced, it may be worth looking for spending cuts (see below) so you can set more aside for your savings.

If, unfortunately, the numbers are the other way around, and your planned expenditure is greater than your income:

• Try to close the gap by cutting back on discretionary spend. The whole family should be involved in this process since they're all affected. You may have to make some tough decisions because you need to balance that budget.
  
  
• Look for other ways of saving -- for example, can you reduce power usage to cut utility bills or use public transport or car-sharing to reduce travel expenses?
  
  
• Look for other ways of saving money, such as using online price comparisons for everything you buy from groceries to planned big ticket items, shopping for cheaper phone plans and switching to online TV subscriptions.
  
  
• And consider ways of generating more income, anything from yard-sales and online auctions to taking on an extra job. Be realistic in your estimates of how much you can raise this way.
  
  
• If you're still struggling to make ends meet, you may need professional advice. A good starting point for free or low-cost, confidential support is the National Foundation for Credit Counseling ( www.nfcc.org).
  
  
• Now you need to divide up your annual budget into monthly lists simply by dividing the year's income and expenditure by 12. It won’t be perfect because some items are only earned or paid for annually or quarterly but it will give a fairly good picture of your targets for each month. You can make your numbers more accurate if you get your utility companies to bill you the same amount each month, based on your overall annual usage.
  
  
• Use your monthly budget to see how well you're doing in meeting your targets. If you're way off course, make some changes

One More Important Thing

Where does insurance fit into this process? You might think it's discretionary spending but often it isn't. You must have car insurance and, if you have a mortgage, your lender will insist you have homeowners insurance.

But there's more to it than that. The purpose of creating a budget is to give yourself some peace of mind and certainty over how things will pan out for you financially over the coming year. You don’t have that if you don’t have insurance protection.

But it may be possible to make savings on your annual premiums. Ask your agent for a review. If you’re not an Aldrich Taylor Insurance customer (we already keep clients' coverage under regular review) we'd be happy to look at your current policies for savings opportunities.

In the meanwhile, good luck with your new-found budgeting commitment. In an unpredictable world, it should give you a degree of security and a well-deserved sense of control. Stick with it!