This time of the year is a great time to sit down and look at your finances. I like to set aside a few hours and look at my last year’s budget, expenses and savings and then forecast my next year’s finances / goals. I get it that some people would rather pull out their fingernails than do this, so, if you’re one of those people, grab a beer or a glass of wine to make this more bearable!
Here are 9 things to do to get your finances in order for 2019.
1. Determine Your Last Year’s Expenses
Go back and look at your expenses from the past year.
a. Determine your monthly, recurring fixed expenses (i.e. mortgage, home insurance and any other expense that must be paid each month). Now, extrapolate that out over the entire year. That number is the minimum amount you need to cover your yearly, mandatory living expenses.
b. Then, determine your variable expenses (entertainment, vacation, dining out, etc.). These expenses aren’t fixed, and can be brought down if you want to spend less in the upcoming year. This step can be eye opening as it will show you how much you may have been spending on useless items in the past year. Use that as motivation to cut that spending!!
c. Add together your fixed and variable expenses and you’ve now got how much it cost you to live last year as your baseline.
2. Find Expenses to Lower / Cut
Looking at your expenses from the last year, do you have any recurring expenses that make you cringe each month? For me, it was paying for cable. I hated paying that bill every month since I barely watched any TV (aside from sports), so I canceled it. It felt great, and now I save and invest the money I used to throw away each month on cable.
At the beginning of last year, Ms. OYP and I looked at our previous year’s expenses and got mad at how much we had been spending on both of us having vehicles. Double the maintenance, double the insurance, etc. (I even had a small car loan to pay off which drove me crazy). So, we sold both of our cars and paid cash for a used vehicle which suited our purposes. We work close together, so we car pool to work and walk/run or bike whenever we can. It’s saved us a lot of money over this past year and we haven’t once missed not having a second vehicle.
The recurring expense that now bothers me is the bill for my security system. Luckily, I can do something about this expense, so I plan to call my security system provider and try to cut that expense down shortly. I may even just cancel it, depending on how the conversation goes with my provider.
Is there anything that you continue to pay for that you can live without? Consider getting rid of that expense. It doesn’t have to be a big expense. Even a small, everyday expense can add up over time. For example, if you buy a $5 coffee each work day, try cutting back to twice a week or just stop buying coffee and brew your own at home. If you stop completely, you’ve just freed up $25 / week, which is $100 / month. This may sound inconsequential, but it adds up over time.
Go through your monthly expenses and see if there’s anything you can cancel or trim down. Then, save that extra money or use it to pay down debt.
3. Add Happiness / Value to Your Life
I recognize that I talked about cutting expenses above. However, don’t get too crazy cutting things from your life – you still have to live!
I’ve found that exercise is key for my mental health and happiness. Is there a yoga class you want to go to? A gym membership you want to get? If you’ve been putting off those types of expenses just to save money, I say go ahead and spend the money if it adds happiness or value to your life.
Pro Tip: Just make sure you actually go to the gym if you pay the money for a membership!
4. Invest in Yourself
Invest in yourself through self-education. If there’s a topic that interests you, go ahead and spend some money on books to learn more.
I LOVE (emphasis by Ms. OYP) reading about personal finance, so I find it easy to devour finance blogs, podcasts and books. By doing so, I have learned so much and have taken control of my finances to ensure a healthy financial future. Even if you’re not a personal finance nerd like me, take the time to read and learn so that you can get a better handle on your finances. Your future self will thank you.
A Few of My Favourite Personal Finance / Investing Books are:
A few of my favourite personal finance / investing blogs / websites are:
And, a few (ok, a lot) of my favourite personal finance / investing podcasts are:
5. Commit to Paying Down Debt
There’s amazing freedom in not having any debt. It means that every dollar you earn can be saved, invested or spent how you like. Some debt is inevitable – like a mortgage – but strive to pay off all consumer debt as soon as you can.
Two popular schools of thought are:
- Pay off your smallest debt first, then move on to your next smallest and so on. The thinking is that you will gain confidence with each small amount you pay off and your debt load won’t seem so insurmountable.
- Pay off your highest interest debt first. The thinking is that you want to get rid of high interest debt early so that less money is wasted on interest payments.
Both are valid options. Whichever you choose (or if you have another method you decide to implement), just get started and pay that debt off as soon as you can.
Actionable Tip: After law school and a luxury vehicle, Ms. OYP (“Owning Your Profession”) got serious about paying off her debt and just wanted $1.00 to her name. Here is her story and the 19 things she did to pay off $98,500 in 3.5 years.
6. Set a Saving Goal
Come up with an amount that you’d like to save in the upcoming year. Or, come up with a saving percentage goal (i.e. save a certain percent of your net pay for the upcoming year).
Make sure your goal is reasonable and achievable. Then set up automatic contributions to come out of each paycheck to your savings / investment accounts. Don’t wait to invest whatever is left over from your paycheck after spending on your needs and wants. Chances are if there’s money left in your account, you’ll find a way to spend it and not save.
Figure out your expenses (which you will have done in step 1 above) and then save / invest the difference each paycheck (I’m a big believer in investing and you can read my reasons here). Financial Samurai says “if your savings rate doesn’t hurt, you are not saving enough” (the quote comes from a great article, which I encourage you to read here.) I agree. You should set aside a big enough chunk of each paycheck (be it 10%, 20%, or even 50% or higher) so that you feel that you cannot afford any extraneous, unnecessary purchases. This will ensure you waste less of your money on frivolous purchases and you will naturally begin to declutter your life.
I’m at a point where I save and invest at least 50% of each paycheck, and I always feel short on cash towards the end of each pay period (it hurts a la Financial Samurai’s advice) because my money is automatically ushered off into my savings and investment accounts where I don’t touch it. It’s a great way for me to trick myself into thinking I can’t afford anything extra. This may sound crazy, but it enables me to save a large amount for my future, which will compound over the years. This chunk of money will continue to grow larger and will eventually be big enough to cover my expenses from the passive income created from the growth of my investments and the dividends.
When I have a large expense coming up, such as a vacation (which I will have budgeted for), I simply divert some of my savings into an account set aside for vacation. It’s still saving, but for a different cause than just saving to save – saving money and living lean shouldn’t consume you, vacations are important, so make sure to budget and save for them!
Even if you’re already stretched very thin, try to find ways to start saving / investing. No amount is too small. Once you get started, you may find it addictive and easier to find ways to save more. A great way to start investing is by using the Mylo app. You just download it and then link it to your accounts / credit cards and it will automatically round up each purchase you make with those accounts / credit cards and invest the difference. For example, if you spend $1.50 on something, it will round up your purchase to $2.00 and take the $0.50 difference and invest it. After a while, those small amounts add up. One caveat is that Mylo charges $1 per month, so until you have enough invested to generate $1 per month in interest, it’ll cost you. Here’s a link to sign up for Mylo. Full disclosure, I get a kickback for each person that signs up using this link.
7. Make a Budget
You’ll now know your last year’s expenses and you may have found some variable expenses to cut. So, commit to cutting those expenses. You may have also found something that you want to add to your life (like a gym membership), so factor that into your budget. Don’t forget to budget for surprise expenses in case something unplanned happens. And, make sure to also factor in your debt repayment and saving amounts into your budget.
Actionable Tip: Now, make your budget for the upcoming year and stick to it.
8. Track Your Net Worth
Write down your net worth as of the beginning of the year. Your net worth is the difference between your assets (what you own) and liabilities (what you owe). So, add up all of your accounts (chequing, savings, investments) and any property you own and then subtract any debts you have. This will give you your net worth. A great way to keep track of this is to use the Mint app. You simply put in all of your financial information, and it will give you your net worth and keep track of all of your income and expenses. It’s a great tool to help keep you on track.
Once you have your net worth, you can use that as your baseline to determine how well you’re doing from month to month and year to year.
9. Keep Yourself Accountable
Look at your finances each month to make sure you’re on track with your goals. If you’ve met or exceeded your goals for the month, reward yourself in some way – like your favourite chocolate bar or six pack. If you don’t meet your goals, don’t be discouraged, focus on making sure you meet them moving forward.