Creating a budget for 2022 should be a top priority as 2021 draws to a close. A budget proposal is crucial to managing your expenses and reducing stress and anxiety around money. Without a budget, it’s impossible to track where your money is going and if you’re actually spending more than what you’re earning.

Step 1: Reviewing Your 2021 Budget

Before you start with your budget proposal for 2022, it’s important to first review how you did in 2021. This will help you make smarter financial decisions going into the next year.

A thorough year-end budget review will give you a better idea of what you did through the year that helped improve your financial situation. It will also help you understand what you’re doing wrong that may be hampering your progress. Maybe you’re inadvertently spending more than you think you are? Those daily Starbucks lattes, eating out, and weekend movies can add up quickly. Reviewing your 2021 budget provides a window for you to see where you can cut unnecessary expenses and put that extra money towards paying down your debt or saving for the future.

Any small steps that you take towards saving money will help you get out of debt sooner rather than later and allow you to start building your nest egg. All this saved money can go towards a home mortgage, be invested to meet your long-term goals, or saved for early retirement.

Step 2: Calculate Your Available Income

Available income is your “˜take-home’ or “˜net income’, which is income that’s available to use after taxes. A large chunk of what you earn goes towards state and federal taxes every month, so listing your pre-tax income can skew your budget planning for 2022.

In addition to money coming in from your regular paycheck from your steady job, if you have a side hustle that brings in regular, consistent income, you can add that to your “available income.” Avoid including overtime or bonuses in your total available income number if you aren’t sure that you can count on that money coming in regularly.

Step 3: Calculate Your Expenses

Under expenses, you’ll want to list anything you spend money on.

List your major expenses that remain the same from one month to the next as Category I. These expenses are non-negotiable. You absolutely must make space in your budget to meet these payments. Missing a payment can have serious repercussions.

Category I expenses that remain the same every month include:

  • Rent or mortgage payments
  • Student loan repayments
  • Auto loan repayments
  • Health, home, and car insurance
  • Utility payments – these may fluctuate a little every month but not by much

List all other expenses as Category II. These are expenses that will vary significantly from one month to the next depending on your spending habits.

Category II expenses that vary from month to month include:

  • Groceries
  • Gas
  • Clothes
  • Entertainment – eating out, movies

Don’t worry if you haven’t kept a record of everything you’ve spent through the year. Your credit card statements will have a record of every transaction you’ve made using the card, and your monthly bank statements will have a record of all your internet banking transactions.

It may take some time to go through all of the statements but it’s important that you do it so you know where your money is going.

Step 4: Evaluate Your Progress

Now that you’ve tracked your income and expenses for the year, it’s time to check your financial progress and create your budget for 2022.

Did your income outweigh your expenses? If it did, you’re on the right track. If it didn’t you’ll need to figure out where you can cut costs. Go through your Category II expenses again. Are you buying more clothes and shoes than you really need? Are you getting takeout meals several times a week?

Think about how and where you can cut back. Making time at least once a week to cook for the week can save on those frequent takeaways. Canceling your cable subscription if you rarely watch TV can add to your savings. Go through each item on your list and see where you can save.

2022 Budget Plan Recap

To recap, a budget is essentially a spending plan. It is a way to keep track of how much money you earn and where it needs to go.

One of the most effective budgeting strategies is to first allocate every dollar you earn to a specific expense. Check how much you have left over. You can then decide how to use the extra money.

  • Make a note of your total monthly income.
  • Prioritize paying off all mandatory expenses – rent or mortgage, loan repayments, insurance, credit cards, and utilities.
  • Check how much money you have left over and think about how you’re going to use it.

The best way to use your leftover money is putting towards paying off your debts (or if your debts are already paid off, save!). You can do this by refinancing your loans with higher monthly payments. You’ll clear your loans earlier and save a lot by way of accrued interest too.

If your expenses outweigh your income, you’ll need to explore ways to reduce your spending to avoid getting further into debt. If you can’t think of any expenses that you can cut back on, consider refinancing your loans to lower the monthly payments. This will help free up cash that you can use to cover other necessary expenses. Do not choose this option without giving it some serious though. When you lower your monthly payments, you’ll take longer to clear your debt and you’ll pay more by way of accrued interest too. Think of this as a last resort if you can’t find any other way to free up cash and balance your budget.

If you are ready to get your budget in order, check out our Financial Planner Tool today.