Welcoming a new year means different things depending on who you ask. For us, it signifies another opportunity to do some reflection and diligent preparation.
Dannie just accepted a full-time position in the tech field last week. She felt like she wasn’t really being challenged enough lately and honestly, she missed those consistent direct deposits 😂! I know she enjoyed creating her own schedule but she is skilled enough to make waaay more money in a traditional job (it’s a fully remote position so she’ll still have some flexibility built in).
With her new job starting in January and the raises and promotion coming my way in 2019, we’ll be able to reignite our financial journey and begin working towards FI/RE (financial independence/retiring early).
A lot of people have asked us what we do to prepare financially for each new year so we wanted to share our process:
1. Figure out your total income earned in the CURRENT year
We track our individual incomes in our budgeting spreadsheet each month so we can easily calculate this number. If you haven’t been tracking your income anywhere, you can also use your W2s (if they’re already available), add up all of your paystubs or log into your bank account and add up all of your direct deposits.
2. Calculate total expenses paid in the CURRENT year
Again, we use our budgeting spreadsheet for tracking this information. We can see the exact amount we spent on any individual category throughout the year as well as the total amounts for certain categories (fixed expenses, variable expenses, savings, etc.).
3. Estimate NEXT YEAR’S income
To start planning your finances for the new year, you’ll use the income you calculated in step one (total & monthly averages) to project what you’ll potentially make in the following year.
Take that number and add any additional pay you expect to receive:
- Pay Raises
- Bonuses
- Commissions
- Overtime
- Additional jobs/side-hustles
This should give you an idea of what to expect in the new year. Any significant increases will help you decide how you’ll accomplish any financial goals you may have.
Planning it out in advance helps you make smart decisions about how you’ll allocate your money going forward. That way, you won’t find yourself increasing your spending to match your increased income.
4. Estimate NEXT YEAR’S expenses by using the CURRENT year’s expenses as a guide
Use your expenses from the current year to estimate your expenses for the following year. Most things will probably stay the same but this is a good opportunity to figure out if any changes need to be made.
Will you be moving and paying a different amount for rent and utilities?
Did you spend way less on groceries during the year than you budgeted for?
This is the time to make necessary adjustments to see what might work in the new year.
5. Make a plan for your savings goals (vacations, special events, holidays)
We make some type of list with our goals for the following year for two reasons:
- It helps keep us motivated and gives a way to hold ourselves accountable
- We enjoy the feeling of crossing things off of our lists when they’re done 🤷🏽♂️
You need to incorporate a certain amount of intentionality for your savings goals. Instead of letting things sneak up and surprise you, plan for them in advance.
Want to take a vacation? SAVE FOR IT.
Want to go to special conferences and events during the year? SAVE FOR THEM.
Whatever it is, create some type of line item in your budget and save money towards that goal each month until you’re done.
The rule of thumb to remember is:
The earlier you start…the BETTER!
6. Fill out your January budgeting spreadsheet
You should have noticed that we are huge fans of budgeting spreadsheets. If you don’t already have one, you NEED to get one. We like them because they give you a way of clearly making a plan for your money.
Not only that, but they also serve as documentation you can refer back to for years to come. (We still have spreadsheets going all the way back to 2014!)
Put all of the numbers you’ve calculated during this process into your budgeting spreadsheet and see if there are any further changes to be made. Tweak it until you’re satisfied and then…
7. Step into the New Year with confidence!!!
Once you reach this step, you’re ready to bring in the new year with a renewed sense of confidence because you know your money will be on point!
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We’ve been going through this process over the years and I can honestly say that it has been crucial for our financial success so far. Doing things this way has helped us escape the paycheck to paycheck cycle and also helped us become debt free.
I sincerely hope that this helps you prepare financially for the new year as well!
$tay Wealthy Friends,
— DJ