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How to Perform an End-of-Year Review of Your Finances

Posted by Daniel Azzoli on December 25, 2020
man and woman sitting on yellow couch in front of Christmas tree laughing while confetti falls

Do you drive a car? Then you’re probably familiar with the concept of an annual tune-up. This visit with your mechanic gives you a chance to repair issues with your vehicle so it’s roadworthy for another year.

As diagnostic tests go, a financial check-up isn’t all too different from the one your mechanic performs. It’s a chance to look over the past 12 months of earning, spending, and saving to see if you’re on the right track.

If you live paycheck to paycheck, rely on cash loans, or suffer from buyer’s remorse after an extra-festive holiday, you might already know the answer to this question.

But that’s all the more reason to check in with your finances.

Here at the end of the year and at the start of a new one, a check-up helps you figure out what you need to do to achieve your short and long term financial goals. With the holiday shopping season in our rear-view mirrors, we at MoneyKey think it’s the perfect time to set our sights on the road ahead.

Let’s look under the hood of your finances to see what needs fixing for your 2021 to be the most successful year yet.

1. Set Short and Long Term Financial Goals

Before delving into the nuts and bolts of your finances, you need to know what you want out of this exercise.

In other words, what are your short and long term financial goals?

Some common examples of short term financial goals may include:

  • Starting or building on an emergency fund
  • Paying off an installment loan or a line of credit
  • Saving up for a beach-side vacation or a new smartphone

Some common examples of long term financial goals may include:

  • Buying a vehicle or a home
  • Paying off a mortgage or student loans
  • Saving for retirement

While some people may want to save more money or retire by a certain age, there’s no rule saying you have to want the same things.

At this stage of your financial check-up, your goals may be changing careers or starting an investment portfolio. That’s okay. All that matters is you’re thinking about the future.

Imagine Your Goals as a Physical Destination

When you have a new place to be, what do you do? Before jumping into your car, you probably type the address into your GPS or track your route on a map.

It helps you understand the step-by-step directions you’ll need to take. It may also give you a good idea of what to expect along the way, so you can estimate how long your journey will take. 

Taking the same logical approach to your finances helps you set more realistic goals. But instead of punching an address into Google maps, you’ll want to ask this search engine another question.

For example, if you plan on establishing an emergency fund, you may need to research what it is, how much you need in it, and what your contributions may look like. This kind of information helps you find out what you need to achieve your objective.

2. Make a Budget

Now that you’ve gained some perspective, it’s time to zero in on the nitty-gritty of your finances.

There’s no better tool than a budget to help you with this. The budgeting process puts your cash flow under a microscope, so you can track every dollar coming in and going out of your hands.

Paying close attention to your income and expenses will help you answer two critical questions:

  1. Do you spend more than you make?
  2. Are your spending habits in line with your goals?

Find out What You Earn

Generally, you can break down a budget into two essential parts: your income and your expenses.

Your income forms the limits of your spending plan, so you need to know how much you’re bringing in each year.

If you earn a salary, this is a simple step. But if your income fluctuates throughout the year, you may have to add up past paystubs to find out.

However you earn your money, make sure you look at your net annual income and not your gross annual income.

Your gross annual income is what you earn before taxes. Using this figure will make you think you have more money to spend, as it will look different from your take-home pay after taxes. At the end of the day, your net income is a more accurate representation of your earnings.

Have you changed career streams or started a side hustle? Make sure you take into account any changes to your circumstances that may alter your income significantly.

Get to Know Your Spending History

In 2020, how much money did you spend? Better yet, how did you spend it?

While you might be able to pinpoint the big things in your life — i.e., your rent or car payments — most people struggle to itemize every single purchase they make over a year.

It’s easy to lose track of what you spent on things like highway tolls, the office gift, and fancy lattes. But once you do, you may have no idea you’re spending more than you earn until it’s too late.

Luckily, figuring this out is relatively simple. All it takes is a bit of time to delve into the last 12 months’ worth of account statements.

As you take inventory, organize each expense into broader categories.

Not sure what your categories should look like? Check out the table below for examples.

Spending Category

Expenses

Housing

Rent and/or mortgage payments, HOI premiums, property taxes, utility bills

Car

Lease payments, auto loans, maintenance and repairs, insurance, gas, parking, highway tolls

Food

Groceries, takeout, vending machine snacks

Entertainment

Drinks out, virtual comedy shows, video games

 

Of course, your categories — and the expenses listed in them — may look different than those listed above. Personal finances are just that: personal. So use as many categories as you need.

Just make sure you keep a running tally to see how much money you spend in each category. While doing that, make note of which expenses are needs and which ones are wants. This division will help you in the next step!

man with beard smiling in front of ocean on an overcast day

Readjust Your Budget

Don’t worry if this look at your spending reveals you spend more than you make. Mistakes happen; it’s how you recover from them that counts.

If you miss a turn halfway through your road trip, you would double back and correct your mistake.

The same goes for your budget. If your end-of-year review shows you’ve made a mistake, adjust your spending plan to get back on track.

Do this by looking at your expenses and seeing which ones you can realistically cap.

You don’t necessarily have to cut out everything fun from your budget. This is a common misconception we explain when we debunk these household budgeting myths. You’ll just want to cut enough so that paying bills on time is a cinch — as is socking away cash for your short and long term financial goals.

Not sure where to start?

Target your wants and any of the categories you flagged earlier. By cutting these out, you may free up more cash to go towards savings.

Although it may be hard saying goodbye to weekly movie tickets or drinks with friends, these financial wants tend to be easier to remove from your budget than needs like housing and car costs. It’s easier to say no to a night out than it is to move to a cheaper neighborhood, after all.

That being said, any changes you do make to your housing or auto expenses may have a bigger impact on your savings simply because these bills take up more of your paycheck. It may just take more planning and potentially more money to do it.

Once you cut the expenses you can reasonably live without, compare it to your income.

Have you come under? If not, keep cutting until you do. Any cash you manage to save during this budgeting process should go towards your short and long term financial goals.

3. Think about Your Career

Talk of slashing expenses is all well and good when you’re splurging on unnecessary things. But this part of the budgeting process may not help if you already run a tight ship.

If you can’t reduce your expenses, look to the other side of the equation. You’ll want to boost your income.

It won’t be easy but earning more is still possible. Here are some ideas that may help you bring home the bacon:

  • Start working a part-time job or a side hustle
  • Speak with your employer about a potential raise or a promotion
  • Network within your community to see who’s hiring
  • Check out job postings to see if you can apply for a better paying job

If all else fails, find out what you need to do to make a change. Is there a free online class you can take to bump up your skills? Maybe you could look into a volunteer position that may help you add specialized skills to your résumé.

person writing on notepad with pencil in right hand on table next to phone and laptop

4. Check in with Your Credit Report and Credit Score

Your credit report is your financial measuring stick. It tells you a lot about your financial health.

Generally, a high score and a file packed with a positive credit history indicate you’re a responsible borrower who can mange their accounts. As a result, many lenders may offer you loans, and you could unlock more affordable rates and terms depending on the lender.

But as your score falls and your report begins to show negative history, your abilities as a borrower are called into question. It suggests you might not be paying your bills on time and are struggling to handle your debts.

Neither looks good to potential future lenders. Depending on just how low your score gets, some lenders may deny your application outright.

Luckily, the same can’t be said of all lenders. In an emergency, there are online installment loan lenders who may look beyond your subprime credit when reviewing your application.

Checking in with your report will let you know where you stand. This may help you decide if you need to do more research into online payday loans for an emergency expense, or you can wait to make changes to positively impact your score and unlock greater borrowing options.

Your check-in may also help you catch any errors or inaccuracies that may be impacting your credit unfairly.

To check your credit report, go to AnnualCreditReport.com[1]. Here you’ll receive one free report per year from each of the major credit agencies – Equifax, Experian, and TransUnion.

When reviewing your report, here’s what to look for:

  • Contact information: You want to make sure your name, address, and Social Security Number are correct.

 

  • Account information: Check here to ensure your balances and payment histories are accurate. Missing information or duplicate accounts may have an impact on your score.

 

  • Unexpected additions: Keep your eyes peeled for unauthorized credit checks and new accounts opened under your name. This may be a sign your identity has been stolen.

What if You Find an Error?

If you spot something fishy on your report, get in touch with the agency that shows the error right away. You may also want to contact the company that holds the affected account. They’ll let you know the next step to disputing an error.

What if Your Score is Low?

When it comes to your finances, learning that you have a low credit score isn’t the best news you can receive. But it’s not the end of the world either.

Your score is a dynamic number that changes. Some ways you may change your score for the better include, but are not limited to, paying your bills on time and reducing the balances of your credit cards and lines of credit. This, along with waiting until bad information falls off your credit report, may have an impact on your score.

In the meantime, look to see if you can qualify for an online loan that may be more suitable for your situation.

5. Review Your Insurance Policies

Insurances come in all shapes and sizes, from home and car to life and critical illnesses. An annual review of your policies will make sure you have what you need to be covered properly.

Keep in mind any major life changes that happened in 2020, or the ones that will happen in 2021. Getting married, having children, or falling ill may drastically impact your priorities.  

You may also want to research the going rate for your status and needs. Shop around to find out if you can reduce your premiums on car and other insurances without sacrificing coverage.

blank yellow post-it note underneath scrabble tiles spelling to do on blue background

How Will You Check in with Your Finances?

There’s a lot of steps to unpack in this guide, no matter what your goals are for 2021. And with each step requiring time and concentration, your end of year check-up may take longer to complete than you think.

The good news is you don’t have to do it all in one sitting. Choose what works best for your schedule, even if that means reviewing your insurance policies over several evenings and waiting to tally your budget on a weekend when you have more free time.

What’s important is you check every task off this list. Each of these steps plays an important role in your financial health in the new year. Together, they’ll help you make sure you’re ready for all that 2021 brings you.

And if the new year brings unwanted surprises in the form of unexpected auto repairs or medical expenses, get in touch to learn more about your options. 

Good luck and Happy New Year!

 


 

[1] https://www.annualcreditreport.com/index.action

 

Disclaimer: This article provides general information only and does not constitute financial, legal or other professional advice. For full details, see MoneyKey's Terms of Use.

Posted in: Financial Tips

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