2022 was a year of financial struggles for many. The pandemic, inflation, and the beginning of a recession not only made our lives more expensive and took away many jobs, but also made us worry about the future. When will prices for gasoline, electricity, gas and food finally go down again? And when will the economy recover from these crises?
With so many unanswered questions, many of us are yearning for a better overview of our spending so we can manage better next year. BudgetBakers has therefore put together some key tips to help you embark on a healthy, economical journey to financial well-being in 2023.
Why You Need a Budget
Most people need some way of seeing where their money is going each month. A budget can help you be more in control of your finances and make it easy to save money for future goals.
Budgeting is for everyone. No matter what your current financial situation is, it helps you prepare for big investments as well as paying off debt, and set your spending priorities. Also, long-term budgets help you keep track of irregular paychecks.
Create a budget if
- You have debt
- You want to change your spending habits
- Your paychecks are inconsistent
- You have big financial goals
How to Budget in 2023
Before we explain what budgeting exactly is and how you can make the most of it, let’s start with an example.
If you have a net income of, say $3,000 a month, you’re probably wondering how you can pay for housing, food, insurance, health care, debt repayment and entertainment without running out of money. That’s a lot to cover with a limited amount.
Financial advisors therefore like to give this advice: Divide your income among needs, wants, savings and debt repayment. But how do you put it into practice? The answer is to make a budget.
What Is a Budget?
A budget, according to Investopedia‘s financial experts, is an estimate of revenues and expenses over a specified future period that is periodically re-evaluated. What sounds very complex and theoretical at first, can actually be a great help in keeping track and control of your finances.
Budgeting is the process of creating a plan for how you will allocate your income and expenses over a certain period of time, typically a month. The purpose of budgeting is to help you manage your financial resources effectively and make sure that you have enough money to cover your expenses, save for the future, and reach your financial goals.
Setting up budgets isn’t magic, but it means more financial freedom and a life with a lot less stress. Simply create a budget for all planned expenses, especially for large purchases such as new furniture or technical equipment, or events such as vacations, a sabbatical, birthdays, weddings or Christmas parties, or a new baby.
The Budgeting Process
It doesn’t take much to become a true budgeting expert. In fact, it’s just a matter of following a few simple steps to determine your actual available money, track and cut your spending, and achieve financial goals.
Generally speaking, you can divide your expenses into three categories: needs, wants, and savings/debt repayment. About half of your monthly income should be spent on needs such as rent, utilities, food, fuel, etc. About one third of your overall budget is for wants and entertainment such as a new TV or computer, eating out, going to the movies or concerts, or traveling. Make sure to keep 20% of your money for savings or debt repayment.
Know Your Income
Start the new year by checking your paychecks since that’s the amount you’ll get. If you have automatic deductions for a pension plan, savings, health and life insurance, add those back in to get an accurate picture of all your expenses. If you have other types of income, for example from side jobs, deduct anything that reduces your income, such as business expenses.
Focusing on your total salary instead of your net income could lead to overspending because you think you have more money available than you actually do. If you’re a freelancer, contractor or self-employed, it’s even more important to keep detailed records of your contracts and salaries to better manage irregular income.
Personal budgeting apps like Wallet by BudgetBakers are simple but effective tools to enter all your incomes. With the help of bank synchronization, you can see all incoming and outgoing money at a glance allowing you to plan for the future.
Track Your Expenses
Once you know how much money you have coming in, the next step is to figure out where it’s going. By tracking and categorizing your expenses with the help of a budgeting app, you can determine what you spend the most money on and where it’s easiest to save.
Here you’ll see fixed and variable expenses. Fixed expenses are your regular monthly bills such as rent or mortgage, utilities and car payments. Your variable expenses may change from month to month, such as groceries, gas and entertainment. This is an area where you might find opportunities to cut back.
A budgeting app takes care of many other categorizations for you – even automatically. This way you can see exactly which areas of your life you spend money on and where it is worth saving.
Set up Goals
Now make a list of your short- and long-term financial goals. Short-term goals are usually accomplished in a period of about a few months to three years. They might include things like setting up an emergency fund or paying off credit card debt.
Long-term goals, such as saving for retirement or your children’s education, can take decades to achieve. Knowing these goals can help motivate you to stay within your spending limit. For example, it may be easier to cut back on spending if you know you’re saving for a vacation.
Use your personal budgeting app to quickly and easily set and stick to realistic goals based on your income.
Adjust Your Spending
Now that you’ve documented your income and expenses, you can make any necessary adjustments so that you don’t overspend and have money left over for your goals.
The first section where you might want to make savings is your “wants”. For example, can you skip movie night and watch a movie at home instead? Or cook at home more often instead of going to a restaurant or ordering food? On closer inspection, a “need” may just be a “want that you have a hard time doing without.”
If you’re still not satisfied with your reduced expenses, you should adjust your fixed expenses. For example, could you save more by looking for a cheaper rate for car or home insurance?
Remember that even small savings can add up to a lot of money. You’ll be surprised how much extra money you accumulate by making one small adjustment after another.
Review Your Budget
It’s important to regularly review and update your budget to make sure it reflects your current financial situation and goals. By keeping track of your spending and adjusting your budget as needed, you can make sure that you are staying on track financially and working towards your financial goals.
Note that there are a few things that are out of your control, such as a salary increase, an increase in utilities, or reaching a goal and wanting to plan anew.
Whatever the reason, make it a habit to review your budget regularly by following the steps above.
The Bottom Line
- Reflect on your spending over the past year
Take some time to review your 2022 expenses. First, track recurring expenses, such as the utility costs of your apartment or house. Secondly, look at all major purchases and consider what cuts they have made in your budget. Did you have to sacrifice other important things because of these purchases? How useful were they in retrospect? Ask yourself what big purchases you want to make in 2023 and whether they are in line with your budget.
- Make Lists
Save money by making lists for groceries, clothes, gifts, etc. This way, you can spend consciously and according to your priorities, and ring in the new year with as little extra spendings as possible.
- Set up Budgets
Create budgets for the year 2023. Planning a move? An expensive vacation? A wedding? Don’t leave large expenses to chance, but coordinate them as early as possible. Budgets help you get an overview of all costs and stay within your planned spending limit.
- Celebrate wins
Budgeting should simplify your life and give you the feeling of having full control over your finances. So last but not least, look back at 2022 and appreciate what you’ve accomplished that year. Did you pay off any debts? Increased your savings? Donated more to charity? Rejoice in what you’ve achieved and let the positive energy take you into 2023!