The new year brings a new chance to make your money work for you

Something powerful often happens when you begin keeping track of how much you earn and spend week after week and month after month. Maybe it’s because you gain a better understanding of exactly how much money you have coming in and going out. That awareness can – and often does – lead to better spending and savings habits.

And when you begin saving regularly and placing the cash in a separate savings or money market account, something else happens. You begin to feel a sense of control over your money that may not have been there before. Watching your savings increase can also begin to offer peace of mind; that means you won’t have to turn to credit cards and ultimately more debt the next time an emergency comes up. It’s a liberating first step to financial freedom everyone should experience.

Here are tips for creating a budget (also known as a spending plan) you can stick to in the new year:

Assess your earnings

First, ask yourself how much you’re bringing in each month, how much goes out – and when you spend the money, where it’s going. What you’re bringing in each month should include your take-home pay, and any other sources of income you may have. Do you run an Etsy shop on the side? Have rental properties? Sell vintage toys? Add it all up. If that amount changes from month to month, come up with the yearly average so you’ll know exactly how much you’re working with.

Track your expenses

Then, take the time to understand exactly what you’re spending money on. This is often the most crucial step to climbing out of debt. And, it also will help you find money you can save for the future. To do this, review recent credit card statements to see what you spent your money on, and then track your spending for the next month. And by track your spending, we mean every time you take out your debit card, or a credit card or use Venmo or Paypal or Apple Pay – whether it’s for $4 or $40 – jot it down. Keep a running list on the notes app on your phone to track everything from your child’s guitar lessons to take-out lunches.

Start out simple
When it comes to making a budget, or monthly spending plan, it can be broken down like this:

  • 35% Housing – This includes your rent or mortgage, the cost of insurance for your home or apartment, taxes, utilities and other maintenance costs.
  • 15% Transportation — You’ll want to count your car payment, if you have one, and also rides via Uber or taxi, plus parking costs and car insurance premiums.
  • 15% Other Debt Repayment — This will include credit card payments, student loan payments and any other debts you owe including personal or home equity loans. Remember it’s best to make more than the minimum payment on credit card bills if possible.
  • 15% Long-term savings — This is where you pay yourself. You’ll want to stash this money away in a separate account to use as an emergency cushion, as well as the retirement account you should be contributing to at work or on your own.
  • 20% Everything else — Food, entertainment, clothes, streaming services, memberships, travel and anything that doesn’t fit into the other categories.
Make it work for you

The great thing about creating a spending plan is that it can be as flexible as you need it to be. Which means you can borrow from one category to help pay for another. Maybe your car is paid off and you live close to work, but you have a large amount of credit card debt. You can use some of the money someone else might spend on a car payment to help pay down the credit card bill.

However, there’s one category where you can’t fudge the numbers. You should never borrow from savings before you retire. That means if after your other fixed expenses, your living expenses could be cut down – you know where to start to build the cushion. If necessary, take on side work or eat out less or even clip coupons to balance everything out, and put the extra money into a savings account.

This article by Jean Chatzky (with reporting by Casandra Andrews) originally appeared on SavvyMoney blog, and is used by permission.

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