Year-end Review
One of the best parts of the anticipation of a new year is that feeling we get of having a clean slate. There’s interesting research exploring the idea of a “fresh start”, the idea that with a new day, new week, new month, new year, we have a chance to start over. It doesn’t matter what happened in the past; we have hope that the coming time will be even better. If you like reading research papers, I have linked it here.
If working on your finances is one of the areas where you want to improve in this coming year, now is a great time to get your fresh start, and conducting a year-end review is a great place to begin. A year-end review is an opportunity to think about what went well over this last year, what could have gone better, what goals (financial or that might require money) you have for the coming year, and the plan you want to make to achieve those goals.
Grab your computer, a cup of hot coffee (or maybe a cocktail), and set aside some time going through the following prompts.
Review your spending for the year
Take the time during your year-end review and go through your expenses for the year. This will give you clarity on where you have been spending. If you don’t already track your expenses, don’t fret. Start by reviewing your expenses for the past three months. I get it – this is going to feel like a lot. I know you can do this really challenging work. Go through each of your spending methods (i.e. credit card statements, debit card statements, Venmo, your checking account, PayPal, etc.) and record each transaction. Don’t rely on spending trackers like Mint to do this for you – the real growth comes from what you learn about your spending behavior. I have created a spending log template to help you do this work.
If you don’t already track your spending, I encourage you to begin tracking regularly this coming year. Creating a budget doesn’t matter if you don’t know you’re sticking to it. When I first started tracking my expenses, I would look back at my bank statements at the end of the month and see dozens of purchases from various places and have no idea what most of the purchases were. Once I started tracking my expenses regularly, it became a quick process and was the most fundamental change I made to take control of my finances. You work hard to earn money, so it’s important to know where it is going.
I review my spending logs to see where we spent money and whether the budget needs any adjustments. I also use these spending logs to see if we spent money in a place that didn’t bring us joy or enhance our lives. If we spent money on things that we could have avoided or that didn’t enhance our lives, we can adjust the budget and spend that money elsewhere.
One of the more obvious things you might find is that you have subscriptions or services that you don’t use or don’t get enough value out of. This is a great time to check in on those, cancel them if you don’t really want them, and again, allocate that money elsewhere.
2. Review your income
I like to review our income and make sure we are maximizing it. Are there unnecessary deductions from paychecks? Are there certain deductions we could be taking advantage of (401(k), HSAs, FSAs, etc.) and that would help us with taxes? Do we want to be earning more income, and if so, how do we make that happen?
3. Review your assets and liabilities
Your assets are defined as anything that you own that has monetary value. Houses, cars, retirement investments, brokerage accounts, cash – these are all assets. Liabilities are what you owe. Liabilities are commonly mortgage debt, car debt, student loan debt. During your year-end review, write down all your assets and all your liabilities. I like to focus in on the liabilities side and think about how to remove liabilities. The goal for me is to have no liabilities. When I first started reviewing our finances, I found that when we removed liabilities, we opened tremendous opportunities and choice in our life. The fewer (and ideally, none) liabilities you have, the more freedom you create in your life. Get a clear idea on what your liabilities are and how they impact your financial picture.
4. Decide where you want to go
Now, for the fun! I love to project finances into the future. I have spreadsheets that look years ahead and break down our big financial goals into more achievable goals. This gives us a timeline to achieve them. When we were paying off debt, I made a spreadsheet that showed how quickly we could pay off our debt based on the amount of payments we were making. I wanted to see the timeline and it helped me stay accountable, and even more so, excited! Every time we had the chance to pay extra towards our debt, our timeline became shorter.
The projections are less about the numbers and more about where I want to be – financially, emotionally, physically. Money is a tool that can help us achieve our goals.
When defining your direction for the coming year, be really specific. For example, if a goal is to pay off debt, write down exactly which debt, the amount, and by when you want to pay it. If you plan to pay off multiple debts, create an order by which you will pay them off. If your goal is to save for a house down payment, wedding, a car, a vacation, or some other big expense, write down the exact goal and by when you want to achieve it. Break each goal into achievable monthly goals. Once you have the monthly goal, you can look to your budget to see where to make changes to achieve those goals.
Reflect on what really matters to you. Are there things that are in your budget but that aren’t getting you to where you want to be? I believe that we can have anything we want, we just can’t have everything we want. Our task is to determine what it is we really want.
Before setting any new resolutions, do a year-end review to get clear on what the big picture looks like. It might take a little time to do, but it will be worth it as you step into the new year with clarity.