Planning to Spend Less Money This Year

I don't believe in New Year's resolutions. Any day of the year is a great day to resolve to do something better than before. But January is a great time to review how last year's income and spending compared to last year's budget. If you haven't defined a budget, the beginning of a new year is a great time to use last year's numbers as a starting point for this year's budget.

With housing and the investment markets in the toilet, just about everyone is thinking about tightening their belts. Looking for categories where the budgeted amount is less than the actual is one way to identify the easiest places to cut costs. For categories where the actuals overran the budget, a cost-cutting plan, or in extreme cases, an intervention might be in order to reduce spending this year.

Here's what I do to review last year's spending and get ready to try again:

1. Run a budget versus actual report. Sometime in January, I run a Quicken Budget report (Reports-->Spending-->Budget). The menu entry says Budget, but the command creates a report that compares your budgeted numbers to actuals, as you can see in the screenshot. Change the Date range box to Last Year.

2. Look for underbudget categories. I scan the Difference column for positive numbers (black like the value for the Fun categories in the middle of the screenshot). These represent categories where I spent less than I budgeted. Yippee! I make a list of these categories and the smaller budgeted number I want to shoot for in the current year. Sometimes, spending less than the budget is just luck. For example, the car didn't require its typical amount of service or last year included a prize of $500 worth of free gas. Don't adjust the budgeted numbers when chances are good that the values will go back up this year.

3. Look for overbudget categories. Next, I scan the Difference column for negative numbers (red like Garbage and Telephone near the bottom of the screenshot). I spent more than I budgeted in these categories.

There are three options for these categories. Increasing the budgeted number is easy, but that might unbalance the budget. I make a list of the categories where I want to restrain myself in the future. For example, if my long distance phone bills are the culprit, I could research a lower-cost option like Skype or turn to e-mail. Or I could carry a list that says "No more clothes, dining out, bottles of wine" or the vice of the moment, so I remind myself before I spend the money.

The third option is to do nothing. For example, the Home Repair category in the screenshot missed by a long shot. But it's hard to ignore a leaky hot water heater or a roof that needs replacing. The budgeted number might be just fine. An emergency savings account is the perfect solution for these unexpected expenses. In Quicken, a budget includes options for transferring amounts regularly into savings.

4. Go back and identify other categories to cut back. Back in step 2, the easy cuts are categories where spending is less than the budget. But some of these categories could be targets for further cutting. For example, Dining came in under budget in the screenshot example. But, I might consider cutting back on dining out even more to try to save more money for emergencies.