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What treatment does your budget need to get well?
After looking at your finances from last year, you likely have several areas in your budget that need an overhaul. I found the same thing after conducting our first annual financial checkup.
However, a financial checkup isn’t only about looking back on your previous year to see how you did. That’s just the crucial first step.
For an annual checkup to work, you need to take your victories and defeats from last year and learn from them. Figure out how you can apply that to your new year’s budget to make it better and make yourself better at sticking to your financial plan.
If you missed the first post in this series, Your Annual Financial Checkup: Diagnosing Your Budget Illnesses, read it here. You need to discover what’s making your budget sick before you can nurse it back to health.
Set Goals for the New Year
After you’ve diagnosed your budget illnesses, you may not be feeling very confident about your financial situation. That’s why you’re going to start on a positive note as you begin revamping your budget by setting your goals for the new year.
Achieving the goals you’re about to set is your potential reward for getting your finances back under control.
This step is my favorite part of the entire annual checkup process! You get to dream of everything you want to do and accomplish in the new year. It can be anything; the possibilities are endless.
Do you want to save for your first rental property? Put it on the list. You want to travel abroad or take a Disney vacation? Write that down too. What about paying off a massive chunk of debt or saving cash to buy a car and avoid an auto loan? Anything goes because they are your dreams.
However, I think it’s important here not to let your imagination get too much ahead of you. It would help if you made your goals realistic, but nothing says you can’t push yourself a little.
So write out saving and investing goals, goals for new projects you want to tackle, and fun goals like travel or installing the swimming pool you’ve been thinking about for years.
-Saving and Investing Goals (i.e purchasing rental property, increasing 401K contribution)
-Goals for New Projects (i.e. home improvements, starting a side hustle)
-Goals for Your Wants (travel, costly amenities like a new car or swimming pool)
Make Your Goals SMART
Make sure your goals for the new year are smart! SMART is an acronym dictating how to set goals in a way that makes them easier to follow through. This method can help you turn your goals from dreams into reality.
If you use the SMART Goals method, your goals will be specific, measurable, attainable, relevant, and timely.
Define your goals. (Create goals that are clear, not vague.)
Vague goal: I want to save for a vacation.
Clear goal: I want to save $2,000 by July for a vacation.
Track the progress of your goals. (You must be able to track your progress as you achieve the goal.)
Immeasurable goal: I want more money in my Emergency Fund.
Measurable goal: I will save $200/month for five months until I have $1000 more in my Emergency Fund.
Goals must be able to be reached. (Don’t set unrealistic goals for yourself. This will lead to you becoming discouraged and giving up on your goals.)
Unattainable goal: My net income is $5,000/month. I want to save $50,000 for a down payment on my first rental property in 6 months.
Attainable goal: My net income is $5,000/month. Since I know I can live off half that, I will save $50,000 for a down payment on my first rental property in 20 months.
Make sure the goal is important. (It should line up with your other goals and will add value to your life.)
Irrelevant goal: I make $50,000 annually and want to pay off $20,000 in student debt as well as buy a new sports car this year. (Not only does the new car not line up with your goal to pay down debt, but it probably isn’t attainable either.)
Relevant goal: I make $50,000 annually and want to pay off $20,000 in student debt. As a reward, I want to take a weekend vacation when the debt is gone.
Set a realistic target date to accomplish your goal. (Set the target date for larger overarching goals towards the end of the new year. For smaller goals, stagger your target dates and set different goals to be completed at different months in the year.)
Untimely goal: I need to replace my refrigerator ($800) and save to buy a used car with cash ($7,000) sometime this year.
Timely goal: I will save $160/month and replace my refrigerator by May. I will save $584/month and buy a used car with cash by December of this year.
Put New Systems in Place
Improve Your Problem Areas
What You’ll Need:
– The master list ranking all areas of your budget in which you feel you need to improve
Since you've already identified your problem areas, now it's time to discover the reasons behind those overspending habits and get creative putting a system in place to improve them.
Pull out your master list that ranks all the areas of your budget in which you feel you need to improve. The category at the top of your list should be the area that needs attention first because you went over budget most often. By making changes to your worst problem areas first, you’re going to see an immediate improvement in your new year’s budget.
However, before you can put systems in place to make changes, you must find your reason for overspending in each category.
Let’s say your worst problem area is the Dining Out category in your budget. Think about what caused you to spend so much at restaurants.
Do you work late, leaving little time to fix meals when you get home? Maybe you always seem to have no food in your fridge. You’re hungry now. You don’t want to buy ingredients and cook before you can eat, so you order take-out instead. What about social obligations? Are your friends always inviting you to go out for dinner?
Based on the root cause of your overspending, design a system to help you avoid those bad habits.
If you don’t have much time to cook after work, use a meal planning app that caters to people who want a quick home-cooked meal. (Related article: Mealime App Review: Simple Recipes and Meal Planner)
You never seem to have food on hand? Schedule a set day to make your weekly grocery run, or have a designated time to meal prep. If friends are asking you out to eat multiple times a week, limit yourself to only going once or start a precedent of cooking together at each other’s houses instead.
Go down your list of problem areas and do these two things for each category: discover your reason and design a system for change.
Adjust for Changing Expenses
What You’ll Need:
-Last year’s budget
After creating systems to improve your problem areas, it’s essential also to adjust your new year’s budget for changing expenses.
You certainly can keep the same budget you set for yourself last year – the same categories, same dollar amounts, same goals. However, your life has most likely changed since then. Maybe only a few things are different. However, you could’ve had many significant life events occur, and now your budget doesn’t accurately reflect your current expenses.
Our lives are ever-evolving, and our budgets need to change with us. Evaluate your categories and dollar amounts from your previous year’s budget. Make changes accordingly to suit your current financial situation.
Consider your present circumstances as you create your new year’s budget. Ask yourself: “Is the budgeted amount for my category too high or too low?” and “What categories do I need to add or delete?”
Make Room for New Goals and Protect Them
What You’ll Need:
-Your list of new goals for the year
-The categories that derailed your past goals due to unusually high expenses during certain months
Now you need to make room for all those new annual goals you just created.
An essential part of a SMART goal is the M, “measurable,” and the T, “timely.” These are the two components you’ll need to incorporate into your budget to actualize your new goals.
Tracking your progress isn’t just about watching a number increase as you save for a down payment or a new kitchen appliance. It’s about assigning a specific dollar amount in your budget to be set aside for each of your goals. The amount of money you need and how quickly you’d like to achieve those goals will determine how much you should allocate each month.
Making room in your budget for new goals does nothing if you don’t protect them. These tend to be the first things to fall by the wayside when an unusual increase in expenses comes your way.
Take what you've learned from what derailed last year's goals and protect your new ones.
Did your dishwasher break, and you had to buy another? Life happens. Something is always breaking; it seems. If emergencies like this keep setting you back, your emergency fund needs to be more significant to help you cope with such events.
Were there any large bills you didn’t properly prepare for last year that took a big bite out of your monthly budget when it came due? Take the time now to identify all your annual or biannual bills. Set a small amount aside each month, so you aren’t as affected when it comes time to pay them. A $700 annual bill isn’t as detrimental when you saved $58 a month for it.
Did you consistently spend too much in all of your problem areas, sending your goals off track one swipe at a time? If this is you, carefully follow your new system for breaking your bad spending habits. Review your monthly expenses more often to keep small purchases from multiplying and amounting to a sizeable annual total at the end of the year.
If you identified what’s making your budget sick, are you working to nurse your budget back to health? It will take time and consistent, intentional action on your part to keep improving, but you can do it.
I challenge you this week to review your finances from last year. You’ll probably be surprised by some of the things your annual financial checkup reveals about you. I know I was.
You learn a lot about your spending and savings goals when you see the big picture of just how much money came and left your hands throughout the year. Don’t let that knowledge go to waste. Use the diagnosis from your checkup to create a better budget, better habits, and a better plan to save.