How to Budget for Tax Season
A few hacks for making tax season a little less mind-numbingly painful
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Our financial advisor Anna Yen tells you everything you need to know about budgeting.
Budgeting might mean making some changes, though it doesn’t have to spell moving to your mom’s basement and eating only ramen while you save every last penny.
Yes, you’ll probably have to limit what you buy and save some. But what many discover after they start budgeting is freedom – from panicking over late bills and paying for flat tires.
If you’re ready to secure your financial freedom, here’s how to start.
A budget is simply a plan for your finances that considers your long-term goals. Budgeting involves recording your income and expenses to track your progress toward those goals.
You can rely on an app like Cleo to do the actual math. But if you want to know what goes on behind the scenes, here are the basics.
The first step is calculating your take-home income, which is the money after taxes and work-sponsored insurance and retirement contributions. Using this value ensures you don’t budget for money that doesn’t hit your bank account. (Alternatively, you can consider all your income and budget for taxes and other deductions.)
Consider income from all sources, including:
· Your paycheck
· Any freelance or gig work
· Social Security
· Investment accounts
· Child support/alimony
Note that if you have irregular income, it’s wise to average your monthly take-home over the last 3-6 months for a better view.
Next, it’s time to figure out where your money goes in an average month. Your recent bank and credit card statements can help you track down and sort your expenses.
Start by dividing your spending into three categories:
· Fixed expenses like your rent, insurance premiums, and car payment remain the same each month
· Variable expenses like groceries, transportation, and credit card payments fluctuate each month
· Irregular or long-term expenses like semi-annual insurance premiums, home maintenance, and household cleaners
You can also break down each expense into two more categories: needs (groceries) vs. wants (weekly takeout).
Now it’s time to subtract your total monthly expenses from your total income. If you get a negative number, then you’re spending more than you make. But a positive number means there’s wiggle room to spare!
The next step is defining your short- and long-term financial goals so you can build them into your budget. Short-term goals may include building an emergency fund or getting out of debt in 1-3 years. Long-term goals like saving for a house or retirement can take years or decades.
Remember that the amount you want to save may not be feasible now. But by prioritizing some savings in your budget, you’ll make sure it actually happens!
Now that you’ve figured out your income, spending, and desired savings goals, it’s time to make it all fit!
If you’re already in the black, you may not need to cut out much. (Though we certainly won’t stop you from saving even more.)
But if you’re constantly going into debt or need larger savings to meet your goals, it’s time to slash and burn.
Start by cutting or reducing your non-essentials like dining out or rotating streaming subscriptions. You can also switch to cheaper “needs” by moving insurance companies, downsizing your car, or transferring debt to a lower-interest option.
This is where everything comes together. Now that you’ve determined your income and wrangled your expenses, it’s time to track it all. Put the numbers into your favorite app or spreadsheet and review it at least quarterly, if not monthly. Making frequent updates keeps your budgeting goals fresh and allows you to adjust for life’s curveballs.
Excel is a common spreadsheet tool you can use to build your budget.
To start budgeting in Excel, label the columns you need. After income, you’ll want to name expenses by subject (i.e., food or utilities) or individual expenses (groceries, take-out, electricity, etc.) Be sure to use Excel’s formulas to automatically tally your totals.
If that sounds like a project you’d want to run away from, we don’t blame you. That’s why we’ve made something better: Cleo, the app that helps you stress less about money.
Aside from our budgeting tools, we can help you build credit and access cash. And when you’re in need of encouragement, we can hype you up – or roast you with some tough love.
Okay – now we know how to budget in general. But life isn’t just about “general” advice; it’s important to tailor advice to fit your own situation.
That’s why we’ve gathered some tips to adjust your budget in four common scenarios.
It’s a big ask to make your bills and save when you live paycheck-to-paycheck. Making a few budgeting (and lifestyle) choices can stretch those dollars:
· Prioritize shelter (including utilities), food, and transportation
· Switch to store-name goods, a cheaper vehicle, or a cheaper apartment
· Thrift shop for your clothes and furniture (second-hand)
· Avoid high-interest traps like payday loans
· Repay your debts as quickly as possible
· Split “extra” funds between debts and savings to prevent future debts
· Stash cash in a high-yield savings account to maximize your earnings
And when you get a raise, splurge a little – but don’t lose sight of your money goals.
College students often have unusual financial situations. To muscle through your college years financially unscathed, try the following tips:
· Consider all sources of income, including your job, family contributions, grants, scholarships, and student loans
· Price in irregular essentials like tuition, books, and room and board
· Go for used textbooks when possible
· Budget for “extra” supplies like your laptop and science goggles
· Return excess loan funds (if possible)
· Try meal planning and in-dorm coffee
· Use student perks like discounts, free transportation, and club pizza night
Don’t forget to allocate some “fun money” so you don’t blow your budget throwing your first party.
Budgeting for a house is about more than saving – it’s about preparing for a long-term expense. Before you make this big purchase:
· Decide if you want to buy in cash or take out a mortgage
· Determine your savings ability and house budget ahead of time
· Try not to take out a mortgage that’s more than 28-30% of your gross (pre-tax) income
· Pay down other debts ahead of time
· Try to save for future monthly mortgage bills ahead of time as a buffer
· Dedicate a savings account for closing costs, repairs, and renovations
· Aim for a 20% down payment – or prepare to pay mortgage insurance
Weddings can be lavish affairs – but they don’t have to be extravagant to be special. The following budget tips can help you prep and save:
· Set your maximum budget (including family contributions) ahead of time based on your timeline and savings capacity
· Separate essentials and priorities (venue, catering, photos) from your nice-to-haves (a $10,000 dress and 500 guests)
· Research common industry practices and price points to guide your expectation
· Switch to a cheaper venue, caterer, style, or even dress to trim your budget
Once you have your final numbers together, you can finalize your budget and start saving.
There’s no one trick that makes a budget stick. But you can take a lot of tiny steps to reach your goals, like:
· Tracking your progress using a budgeting tool like Cleo
· Automating your savings to pay yourself first every payday
· Revisit your budget at least quarterly to readjust your numbers and keep your goals fresh
· Research and sleep on large purchases to limit impulse buying
· Refuse to use credit cards unless absolutely necessary (or for small purchases you pay off immediately)
· Try a simple budgeting method like the 50/30/20 or envelope-based budgets
· Don’t cut out the fun stuff entirely – relax once in a while
· Plan meals ahead of time to minimize impulse take-out
· Track your income and expenses as they occur – or link your accounts to your budgeting system to track your progress automatically
But most importantly, understand that your budget is a “living” document. It will change as your life does – and that’s a good thing.
For many, making the budget is the fun part…or at least the easy part. The hard part is turning those math skills into real, life results – and trust us, you’ll be tempted to slip up. (Especially when a lazy night begs for takeout.)
But difficult doesn’t mean impossible. And once you’ve found your financial rhythm, you won’t know how you lived your life without sticking to a budget that ends up giving you more financial freedom.
If you need a little help, Cleo’s got your back.
Enjoy this post? Give it a share or send it along to a friend. You never know, it could make a big difference.
Big love. Cleo 💙
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