The Budgeting Process Summary:
The beginning of the New Year is the perfect time to budget for this upcoming year. To start planning your budget, begin by calculating the after-tax income of your yearly salary. After-tax income is calculated by subtracting the amount you receive after automatic deductions for a 401(K), health insurance, and life insurance from your yearly salary. Next, choose a budgeting plan based on your after-tax income. Start with essentials, by covering all fixed bills and living needs. However, it is also important to factor in other non-essential lifestyle expenses. Keep in mind having to allocate money for your emergency savings and retirement accounts. Once you factor in your monthly expenses from last year, you will be able to track your spending for the New Year. An easy tip is to automate your savings. This will allow minimal effort on your part while still allocating your money for specific purposes.
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Start an Emergency Fund:
The general recommendation is to have 3 – 6 months of livings expenses saved up. When starting an emergency fund, aim to save $1,000 and build from there. This will be enough to cover small emergencies and repairs in the meantime.
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Employer 401(K) match:
Make sure you get your “free money” from your employer. If your employer offers to match your entire contribution, ensure you are contributing enough to grab the maximum amount from your employer. This is beneficial because of tax-breaks and the compound interest you can earn from the extra money contributed. Getting your employer to match your 401(K) will help you add to your long-term savings.
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Bad Debt:
If you have any “toxic debt” (such as high interest credit card debt and personal loans) it is imperative to pay off this debt as soon as possible. Toxic debt carries high interest rates which can result in paying two or three times more than what you actually borrowed. It is important to monitor these debts before paying off debt with lower interest rates.
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Retirement savings:
After toxic debt is paid off, the next goal is to plan for retirement. The standard rule is to aim to save 15% of gross income. To start planning for retirement, a Roth IRA account allows for saving with the addition of tax free growth. To be able to contribute to a Roth IRA, single tax filers must have a modified adjusted gross income (MAGI) of less than $161,000, or under $240,000 if you’re filing jointly. If you max out your Roth contribution of $7,000, you can contribute whatever is remaining to your 401(K) if you have one. The contribution limit for 401(K)’s are much larger with 2024 limit being increased to $23,000.
Budget Management:
Throughout the budgeting process, your income, expenses, and priorities may change over time. Lifestyle changes can influence your budget. This may require you to actively plan your budget, so you can better prepare for your current and future expenses.
