Move Forward By Looking Back

Happy New Year!

The new year is an interesting time. We are simultaneously looking back at the year that was and anticipating what the new year will bring. We know very little has changed from the night before but we embrace the idea that January 1^st begins as a clean slate and we can make changes to our lifestyles that will make it better than the year before.

As I look back on Year One of Indie Financial Planning, I realize that I need to spend more time sharing my thoughts and ideas with you here. So, as 2017 is just beginning, I have a few ideas to help you jump start any resolutions you may have to get your financial life in order.

As you begin to write up your 2017 resolutions, look back at the past year to help motivate yourself and establish reasonable goals. For instance, if you resolved to read a book a week in 2016 but only managed to get through a few “think pieces” posted on Facebook, you should consider what stopped you from reading more. Maybe things were so busy at the beginning of the year that time and energy were lacking. After you missed your goal for a couple weeks, you decided it wasn’t going to happen. Or, maybe you started reading a book and it just didn’t click with you (even though lots of friends said it was great) so you put it down and didn’t pick up another for a while. When you are looking at a new resolution, perhaps saying 1 book a month makes more sense. Or, perhaps, you should embrace the idea that you prefer James Ellroy or Stephen King novels to “Dark Money: The Hidden History of the Billionaires Behind the Rise of the Radical Right” despite what the New York Times Book Review said. Accepting time limitations or your personal interests rather than what people say you should do will help you succeed. Maybe, after you get through a book or two by March, you will start finding ways to make more time or find different genres that interest you.

Looking back at your financial year can also help you develop good habits in the new year. Did you want to do something in 2016 but had to postpone or downsize the event due to a lack of funds? How can you use this to help you in 2017?

• Set Specific Goals: If you want to take a trip to the Grand Canyon with the family, do a little research to see how much it would cost. Be realistic about your expenses. Open a savings account specifically for that goal. Figure out how much you will need to save each month and work towards that. Ideally, set up an automatic transfer timed to match your pay schedule. Moving the cash out of your checking account before you can spend it on something else means you will miss it less. Having a dedicated account allows you to see your progress as you move towards it each month. Seeing some progress is a motivator to keep working towards your goal.

• Review your cash flow: Set aside some time to review your bank and credit card statements from the past year. If you use budgeting software, it’s even easier. Break down your spending into three categories or “Buckets”:
  • Static: Expenses that are consistent and regular such as your rent/mortgage, insurance, cell phone bill, utilities, student loan payments, internet, Netflix, etc. These should be things which you have committed to paying every month or at a regular interval.
  • Savings: Do you make regular deposits to a savings or investment account, a child’s education fund or retirement fund?
  • Dynamic: These are less predictable expenses which will probably vary week to week or month to month such as groceries, clothing, nights out, or some flowers for the garden. This will be your most flexible area of spending. If you do not currently make regular savings deposits, you might be able to do so if you adjust how many coffees you buy each week.

After you have a list of your expenses, look at your monthly take home pay (after taxes and any other expenses have come out). What is the difference between your pay and your Static and Savings Buckets? This is what you have left for the Dynamic bucket. Can you give yourself a consistent weekly or monthly amount to fund your Dynamic Bucket that will leave you extra for savings? Looking at your expenses this way and trying to shape your spending moving forward will be easier than trying to adjust after the fact.

• Adjust your paycheck withholding: Do you regularly get a sizeable tax refund? If you adjust your withholdings, you can get more money to put in the bank now instead of getting it in April. If you anticipate this change, you can channel that extra cash directly to where it will do the most good (like that account you opened for the trip the Grand Canyon). Or, when you adjust your tax withholdings, you can send those extra dollars into your employer plan. This will additionally reduce your taxes due.

• Emergency Fund: When you are deciding where you should stash any extra funds you have earmarked for savings, don’t overlook the importance of an Emergency Fund. Having 3 to 6 months of expenses (which you can now accurately predict because you reviewed last year’s expenses, right?) set aside for an unexpected event may help keep you on track for reaching your more interesting goals. Protecting your savings is important. Once you have built up some savings for an emergency fund, you can focus all your savings efforts on fun things like travel or a nice pair of shoes!

Making resolutions is a natural response to a new year. While you are getting ready to dust off your gym shoes, take a little time to review the basics of your financial situation and set yourself up for a more secure financial year in 2017. If you need a little extra help getting a start on your budgeting and planning, you know where to find me!