9 Tips for Better Budgeting in 2021

2020 was definitely filled with many ups and downs, but as we go into 2021 we feel as if it is important to reflect back on the financial positives and negatives throughout the year and work to build a better plan for 2021. The team at AO Wealth Advisory would love to help you along your financial journey. Here are 9 suggested tips to follow  that could lead to a better budget in the new year.

1. Collect and Write Down Your Assets and Liabilities

Assets are anything that has value (What you Own). This includes your checking account, savings, IRA’s, vehicles, stocks, bonds, annuities, and home equity.

Liabilities are your debts (What you Owe). This includes student loans, mortgage, car loans, personal loans, credit card balances, etc.

By writing down what you owe and what you own, you may be able to better organize where you are currently at. Rounding out total is also okay.   This is an exercise to get an better understanding not something that has to look like it came from an accountant.  This is also a good way to work through and see what you have spent your money on. 

2.  Calculate Your Net Worth.

Calculating your net worth may seem like a complicated process, but it is really not.  All you have to do is subtract your total liabilities from your assets (Assets - Total liabilities = Net Worth).

This can be done on paper, or even put into excel where you can enter a formula to do it for you.

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3. Create A Monthly Budget

To create a personal monthly budget you should understand your monthly cash flow. Your cash flow can be better understood as your income versus expenses. 

By listing all your income you receive in a month you may have a better idea how much you have to work with. Now take all of your expenses and write them down. Start with your fixed expenses like rent, mortgage, insurance, student loan payments, cell phone bill, internet, gym, etc. Once you have all of these written down you should start to look at and write down all your variable expenses. These expenses change month to month, and can include utilities, groceries, gas, and fun money. 

It also helps to look back at months in the past to gauge on average how much you are spending every month. This helps to get a clear picture of your monthly cash flow so you can better build a budget for the future.

4. Calculate your Overall Cash Flow

This is also a simple equation. To calculate your monthly cash flow you want to take your income and subtract your expenses (Income - Expenses = Monthly Cash Flow). To put this in a simpler way, your cash flow is basically your money in and out each month.

By calculating your cash flow every month you are able to always have a checkpoint to see how your finances are throughout the month. This is also a great tool to see if you are moving in the right direction. (See item 8 for the tools)

5. Look at Your Credit Scores and Reports

Once you have a hold of your credit scores you are one step closer to organizing your personal finance. You can use companies like Credit Karma to provide you with a free credit score or go to Annual Credit Report.  These sites will give you the information on what is being reported in your credit report.  

Your credit score can be important when it comes to getting the best loan rates. If you have a good credit score it could potentially save you hundreds of thousands of dollars over time. Your credit score is similar to an insurance policy to lenders.  But a good score alone does not show you are building wealth.  That is reflected better by your Networth.  

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6. Evaluate Your Personal Finance

Now that you have your net worth, cash flow, credit reports, and credit scores it is time to start evaluating. It is one thing to have the information, but understanding it is a different story.

Net Worth:  Your goal with your net worth should always be in the positive.  This means you have more assets than liabilities. 

Cash Flow: Your cash flow should also always be positive. This means that your income is greater than your expenses each month. By tracking each month, you will be able to see in what areas you are overspending, and then you will be able to make a change.

Savings (liquid asset): It is important to make sure you have an emergency fund in case you get caught in an unpredictable circumstance. Car repairs, home repairs, and surgeries are all things you should account for in your emergency fund. You should try to keep 3 month of living expenses in your emergency fund at all times, and try to aim to save up enough for 6 months.

Credit Report: Make sure to go through your credit reports thoroughly. It is important to understand what is being reported and why. Errors can happen, and you want to make sure you can catch them so they can be corrected.

Credit Score: Make sure you know where your credit score falls, and work to improve it if necessary.

7. Create Monthly and Yearly Budgets

Now that you have done all the work you should know exactly where you stand. Now is to start planning where you want to be.

A budget is a plan for your money so you don’t overspend. It is all up to you to follow your budget and start moving in the right direction. It is important to plan ahead for different times of the year like Christmas where you will be spending more. By planning ahead you won’t get off track and overspend during those months.

If you follow your budget closely, at the end of the year you can look back and see what worked with your budget, and what didn’t. You then can alter it and plan ahead for the next year.

8. Use Smart Technology for Reassurance

It is 2021, and it’s time to embrace the technology that can help you manage a budget. Some of our favorites include ynab.com, mint.com, and even this downloadable spreadsheet from our very own Eric Williams on his blog, Words of Williams.  YNAB, short for you need a budget, is a paid annual subscription that can help you monitor your budgets.  Mint, on the other hand, is a free resource that is very similar.  We do like to mention that by using Mint, you will also receive offers marketed to you.  And finally, if you’re more of an offline type budgeter, the budget spreadsheet from Words of Williams is an excellent resource.

If you are a current client of AO Wealth Advisory, you can also log into your financial snapshot using our client portal.  Plug in access to your accounts, check on those “what if” models and contact us with questions at any time.  As your dedicated team of financial advisors, we are here to help take a load off of managing your assets.

9. Finally, Relax About Finances

Nobody is perfect, make sure to take a deep breath every once in a while throughout your financial journey. Managing finances can be stressful, and it is important to realize you are human and learning as you are going. 

It is also important to step back and recharge so you don’t get burnt out during your financial journey.

No matter how long the journey takes, it is important to realize that you are making a change for the better. If you have any questions, or need help along the way, make sure to contact us here at AO Wealth Advisory, we would be happy to be of assistance to you.

Advisory services offered through A.O. Wealth Advisory, LLC, a registered investment adviser.