In 2018, resolve to start the new year with a balanced budget.
The holiday season brings plenty of joy -- and often -- added expenses. But seeing your spending spike in December doesn’t have to be painful if you’ve taken steps to budget properly throughout the year.
“Understanding where your money goes each month is something everyone, regardless of income level, needs to do,” says Bank of St. Francisville Chief Financial Officer and Executive Vice President, Jim Chaffin. “Once you get in the habit of budgeting, it becomes second nature. Because you’ve planned for surges in spending during the holidays, or other times of the year, you have extra cash on hand to absorb it.”
Here are a few tips for smart budgeting to help you start the new year off right.
Think in threes
Jim suggests classifying your spending in three categories: needs, wants and savings/debt reduction. Needs are essential expenses, like rent or a mortgage, utilities and food. They should comprise 50% to 55% of your budget. About 25% to 30% of your budget should be made up of wants, or non-essential expenses such as dining out and entertainment. The remaining 20% or so of your budget should go to savings or debt reduction, including retirement, building an emergency fund or paying down student loans.
Save for a down payment
If you’re renting with the intention of becoming a homeowner one day, save as much as you can for a down payment, says Jim. The benchmark figure for a down payment on a single family home is 20%. Having an adequate down payment is a must for securing a mortgage with a favorable rate.
Manage your mortgage
Your home will be one of your greatest investment strategies, but your monthly mortgage shouldn’t eat up a disproportionate amount of your budget, Jim advises. The amount of your house note should not exceed 40% of your gross income.
One of the biggest mistakes people make is giving in to overspending, says Jim. Don’t overindulge, and don’t allow your credit card spending to outpace your ability to pay it off at the end of the month.
Establish an emergency fund
Put away as much cash as you can in an emergency fund. Ideally, you should save enough to cover three months of expenses. Emergency funds are intended to ease your burden if you have unforeseen home or car repairs, medical expenses or endure the sudden loss of a job.
Plan for seasonal spikes
Family trips, summer vacations and Christmas are all occasions when you know spending will intensify. Plan for these surges by setting aside cash to help pay for them. Christmas Clubs, like the one offered at Bank of St. Francisville, allows you to save a certain amount each month in a no-fee account that earns interest. A few weeks before Christmas, the bank cuts you a check to help offset your seasonal spending.