It’s the beginning of the year, which means it’s the perfect time to sit down and redo your budget. Plan out your basic expenses, budget for savings and big purchases, and start yourself on the path to a financially sound year.

Reassess Your Taxes and Income
If you adjusted your retirement or flexible spending account contributions, received a raise, bought a house, had a child, or did anything else to change your finances, then you probably need to readjust your tax withholding and budget for the difference in income. Start by using the IRS withholding calculator, which has been updated for 2010. Enter your income, expected contributions, deductions, and credits. It will tell you exactly how many allowances to claim to arrive at as low a refund or payment due as possible. It’s the best way to maximize your income without getting walloped by a big tax bill. If you need to make a change, file a new W-4 with your employer. You can complete the form and print it right from the IRS site.

Reassess Your Expenses
Now update (or list for the first time) all of your monthly, semi-monthly, and annual expenses. For the irregular or annual expenses, divide the amount due by 12 to figure out how much you need to save for the next year to cover the payment. List the due dates and payment amounts in your budget. Calculate the difference between your income and your expenses. If you don’t have a positive balance, you’re spending too much. If you do have a positive balance, put the extra into savings or invest it.

Plan for Major Expenses
Is this the year you buy a new couch, a new car, or take a vacation? Check your savings to make sure you’ve got what you need to cover it. If you don’t, calculate what you need to save each month and add it to your budget as an expense so you won’t be caught short when the day comes.

Budget for Savings
If you’re not already serious about saving, it’s time to make it a line item on your budget. We usually transfer our money into savings after the second pay period of the month. We like to keep the money in our checking account during the first period as a buffer in case we have a paycheck error (as happened twice last year.) With the money in the account, we know our mortgage payment and bills will clear without us having to transfer money back from savings.

Set Your Goals
If you haven’t already set your financial goals for the year, set a couple of reasonable goals (increase your emergency fund by 20%, for example), and a couple of stretch goals (double your emergency fund). Now figure out the dollar amount necessary for each goal, divide by 12, and add it to your budget as a monthly expense.

Put It In Motion
If you know you won’t remember to transfer the money to savings every month, make it an automatic withdrawal. If you like to move money around, set up the accounts now so you can transfer funds in a flash. Each month, update your budget with that month’s irregular or annual bills and make sure you’re still on track. If you had to spend a little extra on an emergency, deduct it from your goals before you decide to carry it as debt.

Once you get into the habit of using a budget and saving money, it gets much easier every month. Try it for just this month to get 2010 off to a good start.

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