Budgeting Basics: Track income and expenses and consider savings options

The new year is a perfect time to reassess finances and put new practices in place. One of these should be creating and sticking to a budget.

Budgeting is necessary for many reasons, including managing monthly expenses and keeping up with bills, as well as building long-term wealth and savings for retirement.

Unfortunately, many do not know how or simply do not budget their finances consistently. Here are some tips on getting started or getting back on track.

1. Figure out your monthly income.

Your net income — the money you receive after taxes and other deductions — can be found on your pay stub or bank statement if you use direct deposit.

2. Estimate your monthly expenses.

A spreadsheet can help with this, and many options can be found online.

Add your most important expenses first, like mortgage/rent, utilities, vehicle, credit cards and groceries. Next, add other expenses.

Using a spreadsheet to list expenses can help visualize where your money is going and make issues easier to identify and anticipate. There are also apps available to track finances.

3. Pick a budget plan.

One popular method is the 50/30/20 rule. Using this method, 50% of your monthly income is directed toward things you need, like housing, utilities and groceries. Next, 30% is spent on things you enjoy, like restaurants, entertainment and travel. The remaining 20% is directed to savings and investments, and that money should be transferred automatically each month to ensure it is used for that purpose.

4. Anticipate emergencies.

Saving for emergencies — like a car repair, appliance repair or job loss — can help avoid relying on credit cards. Experts recommend saving three to six months of expenses for this safety net, but the amount may differ depending on individual circumstances.

5. Look ahead.

While experts recommend saving at least 10% of income each month for retirement, that isn’t possible for everyone. But through compound interest, saving even a small amount each paycheck can grow your money.

For example, consider a savings account or mutual fund that earns 5% interest and starts with a $100 deposit. If just $15 is contributed to the fund every month over 20 years, the owner will contribute $3,700, but the fund will be worth more than $6,200.

There are a variety of long-term savings options available that can be considered with a financial advisor, including 401(k) and IRA accounts. A health savings account or HSA may also be an option through your employee benefit plan.