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This is Day 18 of the 30 Days to a Debt Free Christmas Challenge
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Great long term perspective today – How Budgeting Can Keep You From Debt in 2016
Can you believe this year is almost over? Hopefully, you had a great year with lots of memorable moments.
The end of the year is a great time for reflection… Think about the past ten months… Think about all of the fun you still have remaining in November and December… Think about what the new year will bring in January…
Now imagine it is January 15th and you just received your credit card statement. You open it to find a lot of reminders at how much fun you had during the Christmas season. Ugh.
We have all had the experience of starting the new year with debt. If you are trying to start the year on a positive note, this is not the first thing you want to see.
A better way to start the new year is to plan for it in advance with a written plan.
If you have never done this before, this is what is called a budget. Or in this case a Christmas budget.
Today we will revisit your Christmas budget again. It is a good reminder mid-month.
What is a Budget again?
A budget is a written plan of what you expect your income and expenses to be for the year. Businesses, non-profits, colleges and other organizations set a budget for themselves, so why shouldn’t you.
Budgeting typically gets a groan out of people because it requires that they think about their financial situation and plan it out. For some people, this can be depressing. They would rather ignore their financial woes hoping that the problem will go away. While ignorance may be bliss, it does not fix the problem.
Setting a budget for yourself will help you identify the problems in your financial life and set a plan to fix them.
Budgets are an essential tool for your financial success.
How can I create a Christmas budget?
A “Christmas budget” is similar to a normal budget, but this one would be specifically tailored to one goal: to have a debt-free Christmas.
There is no one way to create a budget. You could create a simple one or a complex one. What you create will depend on what your needs are.
Each person’s situation is different, and thus their needs are different.
In the case of a Christmas budget, your goal is to be debt-free after Christmas. If you want to do this correctly, you will have to take the process of creating an annual budget and create one for just 1-2 months.
I walked into Home Depot in mid-October to find a Christmas display immediately as I walked in. Each year Christmas shopping begins earlier than the last. I’m sure you have experienced this as well. If you want to save yourself from being a slave to debt in January, make sure you start your Christmas budget today.
Here is what you need to create your Christmas budget.
Step 1: Find a template for your Christmas budget
The first thing you need to do is find a format that works for you. Microsoft Excel has a few good templates for personal budgets. Most budgeting tools are set up on an annual basis. Don’t worry about that, you can limit your use of it for just 1-2 months. Just make sure you find a format and style that works for you. If you are not comfortable with the format, you may not stick to it.
I would recommend the first time you put a budget together, use an existing template. You can always modify it later based on your needs. Sign up to get my free budgeting pack below and you will get a template for you to start your budget.
Step 2: Review last year’s income
Next look at last year’s income for November and December. Income is essentially money that is coming into your bank account from work or investments. What were your sources of income for November and December of 2014? Put each source on a separate line of your spreadsheet. If you only have one source, then you will only need to use one line.
Do you expect to receive the same sources of income in November and December of this current year? If so, then enter them into your Christmas budget. Break down your expected income into the 2 months you expect to receive the funds. Estimate your income for each month as best you can.
Do you get bonuses or make commissions? If you receive bonuses or commissions, this part may be difficult, but make a best guess effort. Enter them into the month they are expected to be paid to you.
Step 3: Review last year’s Christmas Expenses
Now you should repeat step 2, but this time do it for your expenses. Expenses are money flowing out of your checking account or credit card each month. For most people this step will take a bit more work. While this might take a little effort the first time, in subsequent years it gets much easier.
Many budget templates will give you examples of categories that you might want to consider like travel, gas, food, electricity, rent, etc. You can use these or make your own. How much did you spend on gifts last year? If you don’t know, this would be a good time to find out.
Ideally, this first year you should try to go for more detail rather than less. As an added benefit of going through this process, you will understand your spending patterns very well for the Christmas season.
After you add each line of expenses, enter what you spent last year in each. Then when you are finished, adjust them for what you expect to be different for 2015.
If you are looking to budget for the Christmas season, make sure you add a line for holiday gifts. Many budgeting tools don’t have Christmas gifts as a normal expense.
Step 4: Analyze your Christmas Budget
Now that you have your expected income and expenses for this year's Christmas season, check what the net savings number is each month. Take the income and then subtract the expenses, the result is the net savings. Are you making more money than you expect to spend? Are you ending up with less than you earn? Now is the time to make adjustments.
If you are making more than you spend each year, then add additional money to your savings in your budget, or use it to pay down debt. If you are spending more than you earn, then you should find ways to spend less. If you budget correctly, your net savings should be close to zero because everything is assigned to a category.
What happens if you are over-spending with this new Christmas Budget?
Now consider how important each item is in your budget. For example, let’s say you need additional money to pay for your holiday gifts. If you have money allocated towards saving for retirement or your children’s college fund, you should ask yourself, what is more important in the short term? Can you retirement or college savings plan survive a month with a smaller amount or no contributions?
There is no correct answer to this. You would have to prioritize your short term and long term goals to determine what is more important. If you cannot find extra funds to survive Christmas debt free, then you will have to find other places to pay for the extra expenses. This may mean include getting a second job or a side job for this period of time.
Step 5: Tracking Your Christmas Budget
A budget is a plan. It is not meant to be perfect. While many people can control their expenses to some degree, income is harder to predict for people who are not on a salary. Do your best to be accurate, but realize this is not meant to be perfect.
You should also make it a habit to update your budget each month to reflect what has happened compared to what you planned. If the numbers are different than the budgeted amount, then show how much more or less they were from your plan. Don’t change your numbers, just show how far off you were. It is very common, even in large corporations, to be over or under budget. Just show where it deviated from your plan and next year you can make adjustments to the next year’s budget.
The goal of the budget is to balance out your income and expenses with a net savings of zero.
This does not mean that you should spend as much as you earn. It means that all your income is accounted for in some way. If you have extra income, then it should go to savings. If you have a deficit of money at the end of the month, then you should either find ways to earn more money or reduce spending on certain discretionary items.
Maybe this means to reduce the number of nights you eat out, or reduce the number of cups of coffee you buy at coffee shops, or maybe you can reduce your spending at holiday parties with friends. There are many fun and some less fun ways to reduce your spending. If you really want to be debt free, you will find a way to balance your Christmas budget.
One positive side-effect of doing a Christmas Budget is that you will find that it makes your life easier. It may even reduce some of the holiday stress of not knowing your financial situation.
This year you should give yourself the gift of Christmas budgeting and enjoy your holidays.
Read more from Kirk Chisholm at Innovative Advisory Group.
Kirk Chisholm is a Wealth Manager and Principal at Innovative Advisory Group (IAG), an independent Registered Investment Advisor. His roles at IAG are co-chair of the Investment Committee and Head of the Traditional Investment Risk Management Group. His background and areas of focus are portfolio management and investment analysis in both the traditional and non-traditional investment markets. Kirk has an extensive understanding of the regulatory and financial considerations involved with investing alternative investments in self-directed IRAs and 401ks. He received a BA degree in Economics from Trinity College in Hartford, CT. For more information on Kirk or Innovative Advisory Group you can visit http://www.innovativewealth.com
Disclaimer: This article is intended solely for informational purposes only, and in no manner intended to solicit any product or service. The opinions in this article are exclusively of the author(s) and may or may not reflect all those who are employed, either directly or indirectly or affiliated with Innovative Advisory Group, LLC. IAG is not affiliated with any technology tool provider mentioned in this article, and does not receive any benefits directly or indirectly from mentioning them in this article.