Every year, without fail, someone says, “This year, I’m really going to get serious about my money! I’m going to develop a budget; track everything; pay off my credit cards, and invest in my 401(k). I’m going to get so good at this, Warren Buffett will be jealous!” And of course, every year, without fail, someone gives up that resolution by Feb. 1 — right after the holiday credit card bill comes in.

New Year’s resolutions are hard to keep because we look at it as all or nothing. “If I fail at my budget by February, I’m doomed.” That’s not reality. Controlling your finances, reducing your debt, and becoming a better investor takes time, patience, and a little bit of grace when poor decisions are made.

The goal isn’t to have the perfect budget down to the penny—the goal should be to be in a better position than you are now. It all starts with how much you spend. Look at your year-end paycheck and what you brought home this year. Add other income sources if you have any. Generally, if your tax withholding is close to your tax liability, your take-home pay is your annual after-tax spending.

Net worth is a good place to start. Simply list out all assets and liabilities to come up with a personal net worth that helps you create goals for the year. Maybe your goal is to reduce your debt by 20% or increase net worth by 7%. These will look different depending on your situation.

Interested in increasing your net worth? Go back to your year-end paycheck and look at your benefits. Have you been contributing to the tax-advantaged retirement plans offered by your employer? The IRS increased the 2020 annual contribution limit for defined contribution plans, like a 401(k) or 403(b), to $19,500, up $500 from 2019. The “catch-up” contribution for those age 50 and older also increased by $500 to $6,500. It’s okay if you’re not contributing up to these limits — every bit of savings helps, especially when you’re younger. Make sure you are at least contributing enough to receive the full company match, as not doing so is leaving free money on the table.

Want to reduce your debt? Start a budget to understand where your money goes. You don’t need fancy software or complicated spreadsheets. A budget can be achieved in a few steps. Add up your monthly take-home pay. Next, pay yourself first. If your goal is to pay off debt, subtract extra payments you pay toward student loans, credit cards, and other debt payments. If your goal is to increase net worth, subtract contributions to your after-tax savings, emergency fund contributions, college savings, etc.

Next, subtract monthly fixed costs like mortgage or rent, car payment, and utilities. Make sure to include costs like Netflix, and gym or club dues. Including these “discretionary” costs here makes living within a budget possible. Now add together non-monthly expenses like quarterly taxes, yearly registration fees, annual premiums, school tuition, and travel. Divide by 12 and subtract that number from your monthly budget. As an added measure, you can deposit that money into a separate account so that you have the funds available when they’re needed.

What is left is your flexible spending for the expenses that fluctuate, like eating out, groceries, entertainment, and clothing. If you’re spending more than what you have left, you’ll have to figure out where you can cut back to make sure you aren’t going into further debt.

Creating a budget and allocating expenses like this can be better than categorizing your life into “discretionary” and “non-discretionary.” Sometimes your Disney+ subscription is needed. Also, don’t be afraid to adjust your budget as your goals shift. After all, as your life changes, so should your budget.

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William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta’s longest running, most respected financial talk radio show “Money Talks” airing Saturdays at 10 a.m. on AM 920 The Answer. Mr. Lako is a Certified Financial Planner™ professional.

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