WHILE THERE’S NEVER A bad time to make a financial fresh start, it makes sense to rethink how you’re managing your money at the start of a new year.

“It’s a really good time to start a budget, because all your big numbers are coming in,” says Jon Brodsky, U.S. CEO of Finder, a comparison website for financial services and products. W-2 and 1099 tax forms compile income information while year-end summaries from credit card issuers such as Chase and Discover make it easy to review annual spending patterns.

However, creating a budget is only one part of how to manage money better, and if you start there, you’ll miss a few critical steps. These include mapping out your current finances and prioritizing your spending needs.

Here are seven steps to take to manage your money properly:

Understand Your Current Financial Situation

Before you can start managing your money better, you need to know how much of it you have. “I don’t think you can move forward without knowing where you are,” says David Curry, a certified financial planner and principal and co-founder of East Paces Group, an investment advisory firm in Atlanta. He recommends people start with a comprehensive financial plan which can inventory your cash flow, income, savings, investments and more.

While a financial planner can create a formal financial plan for you, there is no need to hire someone to get started. The most basic step to understanding your current financial situation is to sit down and record all your regular monthly income and expenses, says Wendy Terrill, a retirement planning consultant and the founder and CEO of financial planning firm Assurance & Guarantee in Graham, North Carolina. “A lot of people are surprised when they put pen to paper,” she says.

If needed, save receipts for a month to determine where money is spent beyond major bills like rent, utilities and debt payments. For some people, it can be a wake-up call to realize how much is being spent on items such as groceries or dining out.

Set Personal Priorities and Finance Goals

“I think it’s all about having goals,” says Timothy McGrath, a certified financial planner and managing partner with Riverpoint Wealth Management in Chicago. Defining what you’d like to achieve with your money can make the process of creating a viable budget much easier. 

Create and Stick to a Budget

Writing a budget designating how your income will be spent each month isn’t necessarily hard for many people. Following it, though, can be a challenge. “That right there is the hardest part,” Terrill says. People may not have the self-discipline to limit impulse purchases, or they may feel too restricted by having to plan their spending in advance.

However, the reward for sticking to a budget is having cash available to spend on those items most important to you. What’s more, it will be easier to follow a budget that is written with your priorities and goals in mind.

If you discover there isn’t enough money to pay for everything you’d like, look for ways to whittle down expenses. While eliminating small, recurring purchases such as duplicative streaming services or takeout coffee is often suggested, Brodsky encourages people to think big. For example, “If you rent and your lease is up, move somewhere cheaper,” he says. As long as it doesn’t dramatically change your quality of life, making significant changes like this will have the most profound impact on your finances.

Establish an Emergency Fund

Part of how to manage money better is to have cash set aside for unexpected events such as a lost job, illness or broken car. “Everyone needs an emergency pot (of money) for three to six months of expenses,” McGrath says.

The best way to create this fund is to include savings in your budget. How much you save can depend on how much extra money you have available, but Terrill recommends putting aside at least 10% of your income into emergency savings each month.

At some point, you may want to retire, and that will be hard to do without a retirement fund. Social Security benefits only replace approximately 40% of your income, and many employers no longer offer pensions.

Workplace retirement plans such as 401(k) accounts can be a good place to save for retirement, since contributions are automatically deducted from payroll. Plus, many employers will match a portion of their workers’ contributions, further boosting retirement savings. There are tax incentives for these accounts as well. Contributions to a traditional 401(k) are tax-deductible, while Roth 401(k) accounts are funded with after-tax dollars but earnings withdrawn in retirement are tax-free.

For those who don’t have access to a 401(k) or other employer-sponsored retirement plan, an IRA offers similar tax benefits. In 2020, total contributions to IRAs can’t exceed $6,000 for workers younger than age 50 or $7,000 for those age 50 or older. According to Terrill, you should try to save 10% to 20% of your income for retirement.

Regardless of which retirement account is used, don’t make the mistake of selecting investments based on emotions. “Don’t let fear and greed dictate your investment decisions,” Curry says. Speak to a financial professional if you need help creating an investment strategy that matches your needs and goals.

Pay Off Debt

Having debt can get in the way of meeting financial goals. “I don’t want my clients to carry any debt except a mortgage,” McGrath says.

Since most debt accrues interest, becoming debt-free can be a long process if you are only making minimum payments. In some cases, it may help to consolidate high interest credit cards into a lower interest loan or line of credit. “You’re going to pay it off quicker, and you’re going to pay less,” Terrill says.

However, debt consolidation only works if you commit to living within your means going forward. Otherwise, you could end up with both a debt consolidation loan and a new credit card balance. If you do get a loan, choose one with the shortest term possible. “I never recommend going beyond three years because it (seems) like forever,” Brodsky says.

Those with credit scores below 680 may not be eligible for debt consolidation loans or balance transfers, according to Brodsky. In those cases, the best strategy is to concentrate any extra money in the budget on one debt, and once that is paid off, roll its payment into another debt.

Managing your money successfully is an ongoing process. “A lot of times, clients think they are doing a good job but how do you judge?” McGrath says.

It helps to schedule regular times throughout the year to evaluate your financial situation. McGrath says people should always know their income, savings, spending and net worth. Beyond those four numbers, use these check-ins to determine what progress has been made toward financial goals and whether any budget items need to be adjusted for the future.