Tax Time Is the Best Time to Review Your Budget

Tax Time Is the Best Time to Review Your Budget

January 24, 2019
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Have you ever thought about how much time you spend with your financial records in anticipation of tax preparation? For many people, the process involves hours digging through receipts and collecting statements for mortgage, retirement, and investment accounts. This may be the only time of the year that you have all this financial information in one place. Why not take advantage of that effort to review your household budget?

Tax preparation provides the perfect opportunity to take a critical look at how much money is coming in and where it’s all going. You may discover that your budget needs a tune-up. In looking through my Online Resources, I found a recommended process for doing so.

Six-Step Process For Tax Time Budget Review

  1. Create Some Categories. 

Start by dividing expenses into useful categories. Some possibilities: home, auto, food, household, debt, clothes, pets, entertainment, and charity. Don’t forget savings and investments. It also may be helpful to create subcategories. Housing, for example, can be divided into mortgage, taxes, insurance, utilities, and maintenance.

  1. Follow the Money. 

Go through all the receipts and statements gathered to prepare taxes and get a better understanding of where the money went last year. Track everything. Be as specific as possible; and don’t forget to account for the cost of a latte on the way to the office each day.

  1. Project Expenses Forward. 

Knowing how much was spent in each budget category can provide a useful template for projecting expenses moving forward. Go through category by category. Are expenses likely to rise in the coming year? If so, by how much? The results of this projection will form the basis of a budget for the current year.

  1. Determine Expected Income. 

Add together all sources of income. Make sure to use net income.

  1. Do the Math. 

It’s time for the moment of truth. Subtract projected expenses from expected income. If expenses exceed income, it may be necessary to consider changes. Prioritize categories and look to reduce those with the lowest importance until the budget is balanced.

  1. Stick to It. 

If it’s not in the budget, don’t spend it. If it’s an emergency, make adjustments elsewhere. If you can stick to a smart budget, you will be able to save and invest in your financial future.

Tax time can provide an excellent opportunity to give your household budget a thorough review. And taking control of your money could enable you to put more of it to work pursuing your financial goals. A financial advisor will help you develop a personal financial plan that is compatible with your budget, your current situation, and your financial goals.

Have questions? Are you looking for an independent financial advisor in DCGet in touch today.

Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.