Step 1: Look Back – Evaluate 2021

Whether you use bookkeeping software (Quicken, etc.), budgeting sites (Mvelopes, Mint, YNAB, etc.) or paper bank and credit card statements, the first step involves looking in the rear-view mirror to see what happened the previous year. What was your total income for the year? How much were your expenses? Did you have a spending plan for 2019? If so, how did your plan compare to your ACTUAL results? Before moving on to 2022, you have to know what happened in 2021.

Step 2: Look Ahead – What changes do I see in 2022?

Spending plans are always changing because the variables that impact them are always changing. You’ve seen from Step 1 where your income came from and where you spent money. Step 2 involves seeing if that will be similar in 2022 or if there are changes you need to account for. Will your income change? Did you get a raise at work? Did you lose a stream of income you need to adjust for? Were there any one-time expenses you won’t encounter this year (i.e. the birth of a child in 2019, milestone anniversary trip, etc.)? Are there any NEW one-time expenses you’ll face this year (vehicle replacement, moving to a new house, home repairs, etc.)? Will any of your reoccurring expenses change (i.e. utility bill increase, rent/mortgage increase, insurance premium increase, etc.)?

You don’t know how 2020 will shape up, but you have to at least put a draft spending plan in order so you don’t get caught unprepared.     

“By failing to prepare, you are preparing to fail.” Benjamin Franklin

Step 3: Adjust – Make it Balance

Now that you’ve penciled in the income you expect and the expenses you need to plan for in 2022, it’s critical that we get these items to balance. The goal of any successful spending plan is to create positive cash flow margin. Cash flow margin is a key ingredient to helping you make progress towards meeting longer-term financial goals (retirement planning, education planning, charitable giving, debt reduction, etc.). 

This is where some of the hardest (but most impactful) work takes place. If your expenses are more than your income, in its simplest form that means you need to find a way to do three things: decrease expenses, increase income, or perhaps even both.

Decrease Expenses – paying for that monthly Netflix membership you rarely use? Still paying for the gym membership (you’ve yet to use) that you bought 11 months ago? Maybe your dining out expenses seem abnormally large?. Replace a dine-out meal (or two) a week with a meal at home. Cancel any unused or unnecessary memberships. There are many ways to trim expenses. Get creative and be realistic around what expenses you really use or need. Try to come at it with an open, objective mindset.

Increase Income – maybe you’ve cut expenses as best you can and the plan still isn’t balancing. Can you work to get overtime pay? Do you have a talent or skillset other people can benefit from that you can do on the side (teach piano, tutor kids, woodworking, dog-walking, etc.)? Are there things around the house that you can sell? There are many ways to generate a little extra income. Again… be creative.

Step 4: Don’t Do It Alone – Talk it Over

This step can easily be overlooked which can greatly diminish the effectiveness of a good spending plan. This step can also take many forms. 

First, in your family. If you’re married, the spending plan needs to be mutually agreed upon to be the most impactful. Both parties need to understand what the goals are and where the limits are being set. Whereas you might think this could feel enslaving to be “limited” to a spending plan, it should work to be quite the opposite and produce a feeling of freedom and unity with both sides understanding what’s at stake and where you want to head. If you have kids (probably 10 or older), bring them into the conversation so they know what the plan is for 2022. This can take some of the pressure off those last-minute expense requests for camp, concerts, costly birthday party experiences, etc. 

Second, tell someone else. Whether you or your spouse have a tendency to overspend or not, there is great benefit in bringing in a third party to aid with your accountability. Many of my clients have asked me to function as their “spending coach” where I can periodically check in on their spending plan results. If you don’t work with a financial planner, tell a trusted friend or neighbor who can lovingly check in with you 3-4 times a year on your progress. 

“Accountability is the glue that bonds commitments to results” – Will Craig

Remember…

Step 1: Look Back

Step 2: Look Ahead

Step 3: Adjust

Step 4: Don’t Do It Alone

Start the year afresh with a new plan, tell someone about it, and don’t be afraid to adjust it as things change (which they will) throughout the year.