Last week, I mentioned that now would be a good time to take care of any financial task you needed to do before the end of the year. One of these tasks was creating reasonable financial goals for next year. We’ve done that for the last few years, and it’s helped us have a general road map when it came to our family’s money.
One way we’ve been able to create and reach these financial goals is by first examining what went on during the previous year. This process involves looking at our monthly expenses, looking at our retirement accounts, and discussing some of our long term goals. We look at what went well, what didn’t go as planned, and how we could improve.
Reviewing monthly cash flow
Examining monthly income
I’m surprised at how many people view monthly income as a fixed number. If you’re willing to work hard and be creative with your time and effort it doesn’t have to be that way. Remember, you can only cut costs so much, you have much more room and control with increasing your income.
Here are some ideas:
- Argue your case for a raise – Don’t just go to your boss and demand a raise, even if you’ve done the work to deserve one. Instead, create a compelling case of why it’s a good investment for the company money to an extremely productive employee (you) with proper compensation. Be prepared to back up your case with hard numbers and facts. Have you’ve gone above and beyond to help your department exceed goals? Have you demonstrated your leadership skills?
- Start another income stream – Do you have a talent or skill that can earn you some extra money on the side? While many people are afraid of becoming full-blown entrepreneurs, they can still help themselves financially by thinking like one and diversifying their income.
- Clean the clutter and earn cash – If you have junk at home that’s in good condition, you really should look into selling some of it off and getting at least some of your money back. You could use that money for some of your family’s financial goals and you’ll clear some space in your house.
We also look at trends with windfalls, bonuses, and raises. While our policy is not to include them when planning our monthly budget, it gives us an opportunity to review if we spent them wisely or not.
Optimizing monthly expenses
Here’s where we spend time analyzing and brainstorming. As we were doing our monthly reviews, we keep a record of our spending habits to see if there is something we could improve upon for the next year. For 2010, here are some of our biggest expenses that we could optimize better.
- Food and dining – For 2010, 14% of our spending went under this category. The bulk of it (70%) was for groceries. The remainder was for eating out at a restaurant. Cutting back on some of our eating out expenses is a goal, but we’re also looking at improving our culinary skills. If there is a dish we really enjoy, we’ll use sites like CopyKat to see if they have the recipe on there. If so, we’ll try to learn it. We’re also hoping to have more potlucks at our home next year,which provides the social benefits of a night on the town without the added cost.
- Travel – We love traveling, and we also know that planning ahead a bit more will help us stretch our travel budget. We’ll be a bit more aggressive with our Priceline bidding and we’ll spend some time in travel discussion forums to get more tips on how to maximize our rewards.
- Electronics – We got a new video game console this year and have picked up several games to play on it. Looking forward, we’ll try to wait out new releases and grab more pre-owned games for it to save some cash.
I also find that looking at our expenses helps us sort out what’s important to us and what isn’t. Simplifying our lives removes some unnecessary expenses and frees up money for us to spend what we love.
Adjusting retirement accounts
If you haven’t done so already, checking your retirement balances and contributions is an important end-of-the-year financial task. If you received a year-end bonus, you may want to go ahead put some of it into your retirement to max out your contributions for the year. Likewise, if you’ve received a raise, can you increase your regular contributions?
We also like to review our portfolios’ performances to see if we need to adjust the funds we invest in. Over the course of the year, certain funds in your portfolio may outperform others. Over time, this can cause your asset allocation to shift a bit from the your targeted mix.
Asset allocation is vital because it helps you to control your expected risk/return levels. If things get out of whack, you could be taking on far more risk than you think. Don’t know your own portfolio’s asset allocation? Try out MorningStar’s X-Ray tool – you can sign up for free.
Long-term goal progress review
Last, but certainly not least, we look at some of the progress (or lack of) for our financial goals. What are some of our long term goals that we’re looking at right now?
- Car replacement fund – We want to avoid having car payments again while having a reliable car. This past year we bought another car when my husband’s car was wrecked. It was great to grab something that we could use and that was within our budget. We’re now saving up to replace my current vehicle.
- Freedom fund – We would like to have some money set aside in this account so both of us have the freedom to work scale back and/or work from home if necessary.
While we have some other goals that we want to reach, these are two areas where we could do better in terms of contributions. What are some of your future goals that you’ve trying to reach? How hard or easy was it to get started? What has been your progress this year on it?
Your thoughts on year-end financial reviews
Do you do a year-end financial review? If you’re part of a couple, is this a joint exercise? What have been the hardest parts? Any tips for making it easier? Has doing a year-end review helped you reach your financial goals?