Top5 Tips to Setting a Budget You Can Live With

By AnnaMaria Andriotis,

LIKE MANY NEW YEAR'S resolutions, sticking to a budget is extremely difficult. In fact, even just a few weeks into the new year, you can easily find yourself going off-course. That's why it's important to be realistic about the expenses you expect to incur.

Ideally, you should begin the year with an annual budget -- consider this the master plan -- and then, as the year progresses, draw up a budget for each month before the previous one ends, says Judy Lawrence, author of "The Budget Kit." That way, you can revisit certain expenses and revise accordingly. To help you put together your budget for 2008, here are some things that you should definitely consider:

1. Keep Track of Your Regular Expenses

If you're the one paying the bills each month, this is probably the easiest part of your budget to put together. Take note of all your regular monthly expenses, including fixed payments for, say, your car and mortgage (or rent), and your fixed (but sometimes variable) costs, such as gas, cable and phone bills. Then jot down your seasonal, biannual and annual expenses. For example, if your car needs a tune-up at least once a year, factor that cost into your annual budget.

Once you're done, you should have a good sense of what you're day-to-day living costs you. While there's no set formula that proves whether or not you're spending too much of your monthly income on these expenses, you can typically expect home payments, including your mortgage, utilities, taxes and maintenance costs to consume up to 35% of one month's salary, says Lawrence. And transportation costs including car payments, insurance and maintenance don't normally surpass 24% of one month's pay. Obviously, these percentages will vary based on your location and marital status, among other things, she says. Click here for more on how to track your spending.

2. Prepare for Rising Energy Prices

For the 2007-2008 winter season, the average household is projected to spend $1,955 on heating oil, a 33% increase from the previous winter, according to the Department of Energy (DOE). Homes with natural gas are expected to pay $865, a 6% increase.

Rather than getting hit by a monstrous bill, re-adjust your budget with a few simple steps. If you live in a state with cold winters, ask your oil or gas suppliers if you can sign up for a set pay rate for the entire year. That way, rather than receiving exorbitant bills in the wintertime, you'll pay a set amount each month, says Antoine Smith, information specialist at the DOE. Keep in mind that once you sign up, the rate won't change even if there's a mild winter.

You can also keep costs down by winterizing your home. "Little things like insulating your doors and windows can save you a couple hundred dollars a month," says Jason Rich, author of "Make Your Paycheck Last." Click here for more on how to cut your winter energy bills.

Gasoline retail prices are also projected to rise to an average $3.15 per gallon from $2.62 in 2006, according to the latest DOE annual data. Before you fill up, check web sites like and Mapquest, for gas stations with the lowest prices. You can also increase you car's fuel efficiency with some basic maintenance, like a tune-up and checking your tire pressure, says Rich. For more tips, click here.

3. Eliminate Credit-Card Debt

The average household with at least one credit card carries $9,616 in credit-card debt, according to If you have credit-card debt, it's time to start paring down the lifestyle and focusing on paying it off. First, remove as many entertainment and other unnecessary expenses from your budget as you can, and then put all of that money toward paying off your debt. Otherwise, no matter how well you plan your budget, you'll always end up overspending on the high interest rates and fees that accompany your credit cards, says Rich. Click here for more ways to tackle debt.

4. Build an Emergency Fund

Unexpected emergencies, like temporary unemployment and medical expenses, can blindside you financially. Rather than depending on an interest-charging credit card or loan to help weather such storms, try to save as much as you can when your finances are stable so that you'll have a cash reserve when you need it.

In order for this fund to serve its purpose, it should have three to six months' worth of your take-home pay, says Lawrence. That may sound like a lot, but even if you're on a tight budget, you should try to contribute to your emergency fund as often as possible, ideally each month. Set up an automatic contribution to your bank account from your paycheck, for, say, $50, during each pay period. That way, you pay yourself first without even realizing that you're left with less money for day-to-day expenses, says Elaine Morgillo, a certified financial planner with offices in North Andover, Mass., and York, Maine.

To help your fund grow, put it in a high-yield savings account where it accrues interest and where you can access your cash within 24 hours of requesting it, says Morgillo. If you use an online account, make sure it's FDIC-insured. Online banks such as HSBC Direct and Emigrant Direct have an annual percentage yield of 4.25% and 4.65%, respectively -- some of the highest rates out there.

If you still have extra cash after contributing to your emergency fund, deposit it in your 401(k) -- and make sure you're taking full advantage of your company match -- or your IRA. Click here for more on 401(k)s and click here for more on IRAs.

5. Estimating Your Tax Bill

Before you finalize your budget for the year, schedule an appointment with your accountant to get a rough estimate of your tax bill. Because of last year's volatile markets, you're likely to get hit with capital-gains taxes if your holdings include mutual funds in brokerage accounts that had high returns in 2007, says Theodore Lanzaro, certified public accountant and managing partner at Shelton, Conn.-based Lanzaro CPA. This is especially the case if you invested in the energy sector and foreign markets, such as China, India, Russia or Brazil, he says. Click here for more on capital-gains taxes.

Your accountant can also keep you abreast of the developments surrounding the alternative minimum tax (AMT). As of press time, President Bush is expected to sign a bill into law that will spare more than 20 million middle-class taxpayers from the AMT. Who will get hit with this tax? That depends mainly on whether you itemize deductions for state and local taxes, your number of personal exemptions, and if you exercise any incentive stock options. Although it's difficult to pin down a starting salary that's affected by this tax, it's unlikely the AMT will hit single taxpayers with income under $75,000 and married people filing jointly that make less than $150,000. Click here for more on the AMT.

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