This year, 40% of Americans said they do not make financial resolutions for the new year and 68% said they do not have written financial plans at any point in the year, according to research from BMO Financial Group.
However, setting a budget goes a long way in managing your personal finances.
“Many people spend time doing a New Year’s resolution,” said Kamila Elliott, a certified financial planner at Collective Wealth Partners. She explained that people often focus on achieving their personal goals “but an annual budget allows you to focus on your financial goals and understanding what you want to accomplish financially in the year.”
The first step is to figure out your income.
“Knowing your income is extremely important because you know exactly how much you have to deploy,” explained Elliott. “So typically for my clients, we get their pay stubs and look at their net play.”
Net pay refers to your gross pay minus taxes, withholdings and deductions such as Social Security, Medicare and employee benefits such as your health plan.
“I look at it on a monthly basis,” said Elliott, who is also a member of CNBC’s Financial Advisor Council.
“I typically take someone’s biweekly paycheck times 26 and then divide it by 12 or if you are getting paid bimonthly, which is 24 pay periods divided by 12,” she said.
The second step is to calculate your expenses. They can often be split into two types: fixed and variable.
“Fixed expenses are things like your rent, your mortgage, your car payment, things that you know exactly what it will be and how you can plan for it accordingly,” Elliott said.
“Variable expenses can be tricky since some of them you can control and some you can’t,” she added.
“How much are you spending on groceries? How much do you spend on eating out or clothing? Averaging them out will help you get a really good view of what that looks like for you on a monthly basis,” she explained.
The final step is setting a goal.
The budget parameter that many experts recommend is the 50-30-20 budget, where 50% of your take-home pay goes to your needs, 30% to your wants and 20% to savings for your financial future.
Watch the video to find out more about how to set an annual budget for the New Year.