How To Reset Your Personal Budget For The New Year

I personally believe that having a budget is important for financial success. A good budget helps you not only see the dollars that are coming in but also the dollars that are going out. Since I started budgeting I’ve found that it gives me a clear picture of what I can and can’t afford daily and also where I can cut back or spend more.

Related read: How To Create Your Household Budget

 What I didn't realize is I should be reviewing my budget at the start of each year and resetting my budget

• Based on learnings and trends from the previous year
• To account for life changes I may have experienced
• To account for large purchases I plan to make in the new year

(I am not a financial expert. All information is based on my own personal experience and research. This information is not meant to be financial advice and is just for educational purposes. This post includes some affiliate links. Should you click an affiliate link and make a purchase I may receive a small commission at no extra cost to you.)

Budgets aren't made to be static or one-and-done. They are meant to guide your finances and should be fluid. Meaning they change based on your financial situation. Getting a new job, moving, wanting to buy a house or a car, and getting closer to retirement all impact you financially. Including your budget.

When a few life changes happened to me like paying off my car loan, buying a house, and starting to invest with a financial advisor I didn't take those things fully into account with my budget. That basically made my budget useless and I strayed from using it as my financial guide. I refuse to let that happen again which is why when a new year is beginning I take a fresh look at my personal budget to see what should be adjusted. Here are the three things I do to reset my budget each year.

Related read: How To Build Up Your Emergency Savings This Year

1. Review the previous year for trends

Looking at my spending and savings trends from the previous year is an important first step for me. The reason is I want to see if there are certain areas where I would consistently over or understand and by how much. Where was my money being spent over the last 12 months? Was more of it going towards food, housing, entertainment, or something else?

I take that info and use it to create the framework for my new budget. I've found that some years I can remove some categories or items from my budget or I need to create new categories.

2. Update income and earnings

Our income can change from year to year, it can either decrease because of a pay cut or it can go up due to a raise or money coming in from a side hustle. Either way, it's important to make sure you're basing your budget on your current income. Otherwise, you could be overspending if your income decreases or missing out on some additional saving and investing opportunities if your income increases.

When I've received raises I've made sure it's accounted for in the budget not just as income but I also designated which categories I will assign that raise to.

3. Update spending and saving categories

The ultimate goal here is to make sure I’m not spending more than I’m making so I’m able to save money each month. Using the trend information I gathered from the previous year I'm able to

• Create new categories needed for areas where I’m now spending money or for additional income
• Remove categories where I’m no longer spending money or for income streams that are no longer valid
• Consolidate categories for things that may now be bundled together or shouldn’t have been separated in the first place

I’ll also dive into each of the categories to see if my budgeted amounts make sense. I don’t want to budget too much or too little as that could throw off my whole budget.

Related read: 10 Easy Ways To Save Money On Groceries

4. Set goals

Once I work through my budget I’ll be able to see how much I can save each month and set quarterly goals. This will help me know how much money I have to set aside money for future large purchases and perhaps increase my retirement investing.

If I find I'm not going to be able to reach my goals I then reexamine what I'm spending and see if there are areas I can cut back to make those goals a reality.

How I manage my budget

I use an online budgeting tool called Every Dollar which makes my whole budgeting process so much easier. I'm able to easily add and remove categories, rename categories, update amounts, track expenses, and income, plus copy my budget over to each new month.

You can find out more about Every Dollar and other budgeting apps available in my post 5 Great Apps For Managing Your Budget.