How To Create A Budget That Works For 2021

Because your pre-pandemic plan is probably no longer useful.

A new year, a new chance to start fresh. For many, that means laying out a budget.

But if the pandemic has taught us anything, it’s that even the best laid plans can be turned upside down. Your old budgeting habits may no longer make sense in the COVID-19 era.

So what should you do to ensure a financially successful 2021? We reached out to budgeting experts who shared their best tips for creating this year’s budget.

Be Realistic

There’s often a lot of pressure in the new year to set lofty goals and achieve them perfectly. But budgeting isn’t about perfection; it’s a plan for your money that should change and adapt to your life.

“Don’t just create a budget ― create a realistic budget,” said blogger Kumiko Love, aka The Budget Mom. “Your budget should be created based on what you are actually spending, not what you want to spend.”

Love explained that you need a clear foundation so you know where you are starting and where you want to go. Be honest when setting budget categories and goals.

“By doing this, you will set yourself up to succeed in the beginning,” she said.

Switch Up Your Method

It’s OK to branch out and try new budgeting methods until you find something that sticks.

“If you have tried a certain budgeting method in the past and failed, that does not mean you are a failure,” Love said. “It means your process failed you.”

Make 2021 the year you try something new. For example, Love is a fan of the paycheck budget, which plans your spending around when you get paid rather than a whole month.

Tally Your Monthly Income

Once you’re ready to sit down and craft your budget, the first step is to figure out how much money you have coming in. And in light of the pandemic, that number may be much different than in years past.

“Many households experienced a fluctuation of their monthly income during the pandemic, due to stimulus payments and/or layoffs,” said Lauren Maxwell, assistant vice president at Trustco Bank.

You’ll want to consider any unemployment benefits, stimulus payments, business grants and other relief when tallying your income, along with regular paychecks. However, it’s also important to note when those income streams will dry up and account for income fluctuations later in the year.

Identify Essential Expenses

You also need to figure out your essential expenses, such as housing, insurance, utilities, food, transportation, health care, debt payments and child care. These types of expenses can be cut down if needed, but they can’t be eliminated from your budget.

Maxwell said there are several pandemic-related factors you’ll need to consider when adding up these expenses.

For example, if you had a mortgage or student loan placed in deferment, you’ll need to add that payment back into your budget. If you paused your 401(k) contributions to free up cash flow, this is a vital item to include in your post-pandemic budget. And if you dipped into your emergency fund, you’ll need to include a line item in your budget to build it back up. Experts now suggest saving beyond the previously recommended three to six months’ worth of expenses, given the unpredictability of the job market.

Setting aside some time to make a budget and account for your essential expenses is important in the new year, especially given how uncertain many people's finances are due to the pandemic.
Rowan Jordan via Getty Images
Setting aside some time to make a budget and account for your essential expenses is important in the new year, especially given how uncertain many people's finances are due to the pandemic.

Recognize New Spending Patterns

Once you’ve subtracted your essential expenses from your income, the money that’s left over is available for discretionary spending. This part of your budget has probably changed a lot in the past year.

“For many of us, our spending completely changed as a result of the pandemic, so it’s helpful to first check on our new spending patterns,” said Kimberly Palmer, personal finance expert at NerdWallet.

For example, she said, you might be spending less on restaurants and travel, but much more in areas such as streaming services and groceries. It’s a good idea to look at how your spending has changed over the last 10 months of the pandemic so you can adjust your discretionary spending budget accordingly.

Plan For Big-Ticket Expenses

Not all expenses come along conveniently at the same time every month. It may seem a little daunting, but you should set aside time to review the upcoming year and identify all of the one-off major expenses you’ll need to account for in your budget, according to Colleen McCreary, chief people officer and financial advocate for Credit Karma.

Maybe you have an insurance premium due mid-year. Perhaps there are a couple of major birthdays you want to set aside a gift budget for. Who knows, maybe 2021 is the year you can go on vacation again.

“Taking a few minutes to sort out any bigger purchases you anticipate ... can help you set a realistic budget,” McCreary said. And consider setting up a sinking fund to help you stay organized.

Follow The 50/20/30 Rule

Don’t spend too much effort trying to break each budget line item down to the exact dollar, because spending is rarely that consistent from one month to the next. Getting too granular will likely just cause frustration

“I often find clients struggle with staying on top of their budget because what they’ve created is too time-consuming,” said Lauren Anastasio, a certified financial planner at SoFi.

To keep budget categories as high-level as possible, she recommends using the 50/20/30 rule. This means that 50% of your monthly income is allocated toward fixed expenses, 20% toward savings and debt payoff, and 30% toward discretionary spending.

Automate As Much As Possible

Consistently saving money and paying bills on time can be tough, especially when money is tight. That’s why you should take the flawed human element out of the equation, said Tiffany Aliche, better known as The Budgetnista.

“Automate these as much as you can: payments, bills, saving, investing, even giving to charity,” she said. “You’re more likely to stick to your budget when there’s a system in place.”

Give Your Money A Home

If you keep all of your funds in one bank account, it can be difficult to maintain enough of a buffer to ensure all your bills are paid. Aliche recommends opening a separate checking account where you keep the portion of your budget for paying bills.

“Separating your funds will help you to avoid accidentally spending money designated for bills,” she said. You should also have a separate savings account, and even sub-savings accounts for different goals.

Set Micro Goals

It’s important to have goals for your money, but don’t worry about achieving complete financial freedom immediately.

“Setting a micro goal may make it easier for you to structure your budget,” said Colleen McCreary, chief people officer and financial advocate for Credit Karma.

So if your goal is to pay off your debt, you can set smaller goals to help you get there. For example, commit to adding $25 to your minimum payment, or to completing one freelance project per quarter and using the income to make an extra payment.

“You may be pleasantly surprised at how your relationship with your money changes once you’re working toward something that seems more attainable,” she said.

Check In With Yourself

Creating your budget should not be a set-it-and-forget-it exercise. Make sure to schedule time to check in on your progress and make changes as needed.

“Make sure you’re regularly keeping track somewhere, so when you’re ready to check in on yourself, you have a physical track record of your progress to help you hold yourself accountable,” McCreary said. That could be anything from a pencil and notebook to a spreadsheet or budgeting app.

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