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Planning your financial future

5 Steps to help you turn tax time into budget time

This five-step process could help you understand how to budget better, especially during annual tax time.

For many Americans, tax time is an annual gathering. Not the family or high school reunion type, but a gathering of receipts and information that includes things like W-2s, mortgage interest, bank and investment statements, as well as other necessary documents to complete income tax returns in time to meet that all-important tax deadline.

And while it's certainly not as fun as a high school reunion, tax preparation can be the ideal time to give your budget a much needed checkup. Why? Because it's very likely this is that one time of the year when most of your important financial information is gathered together in one place, garnering your full and undivided attention. This allows you to evaluate your household earnings, as well as your expenses over the past year so that you can see where your hard-earned money is going, and learn how to budget better. In turn, you can make choices that can help you save more for things such as retirement and educational expenses. Ready to get started?

The following is an easy five-step process that can help you turn tax time into budget time:

Step 1: Create basic categories

Divide up both your expenses and assets into basic categories. For example, expenses might include categories such as housing, food, clothing, and auto. Then do the same for your assets by creating categories for things like investment and savings accounts. When that's done, look through each basic category to see where you can create any subcategories. For example, under investment accounts, you might want to create a subcategory of different types of retirement accounts (Roths, Traditional IRAs, pension plans, etc.).

Step 2: Identify the money trail

In step one, the process of creating categories and subcategories allows you to easily locate, review, and evaluate your expenses. Take the information in each subcategory and create a list, noting in detail where your money went. This list serves as a paper money trail that you can use, not only to better project expenses for the coming year, but to make smarter budgeting choices.

Step 3: Total up your income

Use your net income information to add up exactly how much money was earned during the past year. Don't forget to include all applicable sources of income, such as child support or Social Security benefits (if applicable).

Step 4: Crunch the numbers

Take your total expenses from step one and subtract them from your total income in step three. Do you have more going out than coming in? If so, it's time to make some choices.

Step 5: Build a better budget

If the results in step four weren't as rosy as expected, go back to your expense categories and see where you can make some changes. Don't get discouraged if you find that you can only cut a few dollars out of some categories. Remember, every dollar counts! Then, create a new budget for the new year based on these figures and take control of your finances!

These are just some basic steps on how to take advantage of pooling together your financial information at tax time to create a better budget. For more information on household budgeting, visit the Protective Learning Center.



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All Learning Center articles are general summaries that can be used when considering your financial future at various life stages. The information presented is for educational purposes and is meant to supplement other information specific to your situation. It is not intended as investment advice and does not necessarily represent the opinion of Protective Life or its subsidiaries.

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