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It’s that time of year again; the time when you’re starting fresh. You just began your New Year’s resolutions, filled with all the possibilities that this year holds. No matter what your resolutions are, I bet the result you’re hoping for is a happier, healthier you.
So what better time to make sure that your finances are healthy as well?
Do you feel like you’ve been working hard to stick to your budget all year, but can’t see much progress in your goals? If you’re anything like me, the month-to-month review of your budget is useful, but come December, you aren’t going to remember the details from six months prior.
To see how we do our monthly budget reports, visit our Financial Progress Reports.
Well, back up and take a broader look at your finances to see how the past year went for you as a whole. Just like you may go to the doctor for an annual checkup, give your finances a comprehensive wellness exam of their own.
It makes a difference when you look at the big picture of your year. You can see where you might have failed with your budget or how those small monthly savings goals added up after twelve months.
An annual financial checkup is something we just started implementing this year with our finances. Although we’ve been looking at our budget monthly, this first yearly checkup has brought a lot of things to light!
In this post, I’m going to take you through the system we used to perform our first ever annual financial checkup.
Evaluate Your Performance in 4 Easy Steps
STEP 1: Run a Budget Report of Your Income and Expenses
The first step in figuring out your financial wellness is to run a budget report of your income and expenses for the past year.
If you use budgeting software, there is most likely a way to create this. I, personally, use Quicken because it’s the program I learned to budget with, and it does everything I need. However, there are many popular programs and websites like Mint, Personal Capital, and You Need a Budget (YNAB).
Mint and Personal Capital are both free to use and great for beginners if you want to start getting your feet wet with a budgeting website. YNAB has a free 34-day trial, which you can access here, and after that, it’s only $11.99/month.
I recommend creating a report of all your household cash flow by itemized categories for the past year. This will allow you to see all paychecks and income sources, every line item you spent in each budget category, and the total spending in each category for the year.
But what if you like to write out your budget or your software won’t let you make the kind of report I’m talking about? That doesn’t mean you can’t finish evaluating your performance in the next steps. However, you’ll have to do the math yourself rather than a budget report doing it for you.
Now get ready, because you’re about to get up close and personal with this report…
STEP 2: Calculate Your Average Spending in Each Category
Next, you need to calculate your average spending in each of your budgeted categories.
This step helps you focus on what you typically spent and ignores the outlier months where you might have had a lot more expenses than usual in a particular part of your budget.
Sometimes life happens; emergencies come up. Unexpected circumstances can drastically affect your budget during a specific month. For example, say you spent a month packing and moving to a new city. I bet with your pots and pans in a box somewhere you likely overspent on Dining Out. However, you rarely got take-out the rest of the year.
By looking at your average monthly expenses, you get a more accurate picture of your typical month-to-month expenditures. These category averages can reveal a lot about your habitual monthly spending.
You might see there are some categories where your average spending was more than your budgeted amount. Take note of those categories. Write them down or highlight them in your report, whatever works for you. Just make sure you remember which ones, because you’ll be coming back to them later.
-The categories where your average spending exceeded the budgeted amount
STEP 3: Determine Your Budgeted vs. Actual Spending Each Month
After calculating your average category spending, it’s time to take a look at your exact amounts each month and compare them to what you budgeted.
Although this is very similar to Step 2, it has a different purpose in helping you evaluate your performance. While Step 2 enables you to see what you generally spent in a month on certain things, Step 3 helps you see changing month-to-month spending trends.
Noting how your monthly expenses changed throughout the year is necessary since individual costs can fluctuate. Electric bills go up in the summer when you run your air conditioner more often. Gasoline expenses increase if you got a new job that’s further from where you live.
From this monthly category play-by-play, write down how many months you went over budget in your overspending categories. We’ll revisit these later in your financial checkup…
Also, consider which months were the outliers where your spending was unusually high and which categories had these increased expenses. Determine what caused the increase during those months. Was it a one-time emergency expense? Or did you have a month where you ignored your budget and let your spending massively get away from you?
-How many months you went over budget in your overspending categories
-The categories that predictably fluctuated throughout the year (i.e. an increased electric bill during the summer)
-Any permanent increase or decrease in the regular cost of a budgeted category
-Which months were the outliers where your spending was unusually high
-What caused the increase in particular categories during outlier months (i.e. a one-time emergency, possible recurring event)
STEP 4: Review Your Total Income and Spending
The last step in evaluating your performance is to review your total income and spending for the past year.
Let’s start with determining your net gain or loss for the year.
First, look at your total income. It might surprise you to see this number if your paycheck feels so little week after week. However, you can’t ignore that larger total when it’s staring at you. Whether you earned more or less than you expected, it can be enlightening to see how much money came into your hands last year.
Now check what your total expenses were. How much money has come and gone from your hands?
Write down your net gain/loss:
Total Income - Total Expenses = Net gain/loss
Next, you need to take a look at your total spending for each category in your budget. This was the part of our annual financial checkup that surprised me the most. It’s amazing how quickly small purchases can add up to considerable amounts.
Go through your report and determine if you can afford to spend X number of dollars per year on each category. For instance, two hundred dollars for Dining Out a month may not feel worth it when you see that adds up to $2,400/year. On the other hand, maybe you enjoy going out to restaurants, and it’s not something you want to cut back on. In that case, keep the $200/month in your budget if you can afford it.
Were there any areas of your budget where your totals were much more than you expected? Write down all these categories in which you need to decrease your total spending so you can revisit them later.
This step is all about looking at the big picture of your budget. It’s where you should evaluate if you’re spending too much on things that don’t add value to your life.
Overspending stings a little if you exceed your budget a small amount each month. However, when you see the larger number of annual spending, it may be the wake-up call you needed.
-Your total net gain or loss (total annual income – total annual expenses)
-All the categories in which you need to decrease your total spending
Recognize Your Shortcomings
Identify Your Problem Spending Areas
What You’ll Need:
-From Step 2: categories where your average spending exceeded the budgeted amount
-From Step 3: how many months you went over budget in your overspending categories
-From Step 4: categories in which you need to decrease your total spending
What were the categories that stood out when you calculated your average expenses or identified a consistent discrepancy between budgeted vs. actual spending? What about when you saw your annual totals?
You may only have a few, or you may have more than you’d like to admit. No matter how many problem areas you found, you’re going to have to tackle them all, but don’t get discouraged.
The hardest part about personal finance isn’t necessarily the know-how. It’s the struggle to continue a disciplined behavior. That’s why you need to identify your problem areas. So you can put systems in place later in your annual financial checkup to stop that bad habit.
To identify your problem areas, create a list of all the categories where your average spending exceeded your budget and in which you need to decrease your total expenditures. This is your master list of all the areas of your budget in which you feel you need to improve.
Rank your problem areas from greatest to least based on how many months you went over budget in your overspending categories. Prioritizing your list will help you focus on making changes to the areas of your budget that will have the most impact.
What Derailed Your Goals?
What You’ll Need:
-From Step 3: the outlier months where your spending was unusually high
-From Step 3: cause of the increase in particular categories during outlier months (i.e. a one-time emergency, possible recurring event)
What were the major hurdles you encountered this past year that kept you from achieving the goals you set out for yourself?
Maybe in your case, it was a lack of control when it came to the problem areas you just identified. That cash you had intended to set aside fell through the cracks a little each month when you spent it on increasing your lifestyle rather than your goals.
However, you might find another possible contributor to your unmet goals when you examine the outlier months where your spending was unusually high and the categories involved. When you have a part of your budget that is eating up more money in a particular month, it’s tempting to stop saving for your goals “just this once” to help cover those expenses.
This problem can worsen when “just one month” turns into two or three, or you stop your goal savings altogether. Even if you do keep saving after that month is over, just one month could put you short of achieving your desired goal.
Identify the reason behind your unusual increase during those months. Was it an unexpected event like a hospitalization or a totaled car? Did you have an impending large bill for which you didn’t prepare?
Maybe, you didn’t have any outlier months, or they weren’t the main thing that sent you off track. It was repeatedly spending small amounts in your problem areas.
Identify what caused you to leave your past goals behind.
Whatever derailed you, make a plan to keep it from throwing you off again this year. Don't let it hold you back from achieving your dreams.
So how long has it been since your finances have had an annual checkup? Hopefully, you’ve been following the steps, and you already diagnosed your budget illnesses.
If you dominated your budget this past year or did way better than you expected, then great job! Take a victory lap and find some way to celebrate. It’s challenging to stay disciplined, but you’re crushing it as you take steps to set yourself up financially.
If you’re feeling overwhelmed or guilty after your diagnosis, stop right there! I get it. I stress out a lot more than I should about money and my budget.
However, the fact is: no one is perfect. You’re going to make mistakes. You’re going to fail at your budget sometimes. That doesn’t mean you aren’t good at budgeting and should give up.
The point of your budget diagnosis is to discover the treatment you need to make yourself and your budget better. Next week’s post Your Annual Financial Checkup: Nursing Your Budget Back to Health is going to help you do just that!
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