The year is coming to a close. There were good times and bad times. Money earned and money spent. Before we say goodbye to this year, however, let’s take a moment to look back in order to help us put together an accurate, functional budget for the year ahead.
Review your goals for the year
What did you want out of this year? Did you have a savings goal? A debt-related goal? Were you working to improve your credit score?
Before putting together next year’s budget, it’s important to understand what you wanted from this year and whether or not you ultimately reached those goals. If you didn’t reach your goals, why? And if you did reach them, were you satisfied?
You should come away from your review with a good idea of what goals you’ll set for next year, and what changes you may need to take with your approach to those goals.
Review your unexpected setbacks
Budgets are about preparing for the expected and putting yourself in position to survive the unexpected. So what unexpected things happened this past year and how did you cope with them?
Did your setbacks cause you to gain additional debt? Were you able to cover them with funds in your emergency savings account or were your financial goals derailed as a result?
If unexpected events set you way off course, you should consider building more safeguards into your next budget. That means either putting a focus on building your emergency savings or creating a more flexible budget that includes room for the unexpected.
Consider your strengths as a budgeter
One reason your last budget may not have survived to the end of the year is that it didn’t really reflect your strengths and abilities as a budgeter and planner. There is no one “correct” way to create and maintain a budget. You should feel free to experiment and find the budgeting philosophy that works best for you.
If you’re detail-oriented, try making a highly detailed, month-by-month budget with a lot of small, specific categories. If you prefer operating in the big picture, subtract your fixed living expenses and give yourself a loose monthly spending limit.
The only trait that makes a budget “good” is that it helps you control your spending and reach your financial goals. If your old budgeting techniques haven’t been getting you the results you want, then this is the year to try something new.
Review your spending trends
Most of your spending is going to be different from month to month, purchase to purchase. This can make it difficult to take big picture findings (“Boy, we spent a lot on electricity this year”) and apply them to specific changes for the year ahead.
What can sometimes be more helpful is to track your spending trends throughout the year. Where spending in certain categories spiked, you should ask yourself why. If you find that you spent a noticeable amount more on food during the summer, for instance, that may be because your grocery shopping habits changed, or you were more likely to dine out rather than cook something at home.
Rather than saying “I need to spend less this year” you can focus on changing specific habits. When you get away from generalizations and create small, actionable goals, it’s much easier to create and manage positive financial change throughout the year.
Create the budget you need, not the budget you want
Aspirational budgets that slice expense categories in half and funnel huge, bi-weekly deposits into your savings account are a nice idea, but if you shoot for the budgeting Moon before you’re truly equipped to get there, you’re almost definitely going to find yourself lost in space, drifting further and further away from your target.
Big goals are good, but try to be realistic. Ground yourself in the reality of how you behaved this year before you decide how you’d like to behave next year.
Once you’ve taken all of these steps you should be left with a budget that reflects both where you’ve been and where you’d like to be. After that, all that’s left is to follow that budget to the best of your abilities. Good luck!