Get on the right path with a year-end review.
The end of the year is a perfect time to take a look at your financial situation, figure out where you stand, and consider areas where you need to improve.
It’s easy to lose track of your weekly or monthly spending habits when you’re busy working, taking care of yourself, and doing other things. New year financial planning can help you overcome financial challenges and put you on the path to success.
At First Bank we want you to succeed, which is why we recommend that everyone perform a year-end review to help you get on the right path.
Reflect on the Past Year
The new year is the perfect chance to take a close look at your finances and set new goals. Taking the time to examine your income and expenses at this time can help you keep your budget plan in mind throughout the year.
Analyze Income and Expenses
If you’ve never prepared an annual budget, your income and expenses for the past year are a good starting point. Many people don’t think twice about their everyday spending while they’re living in the moment.
Taking a close look at the entire year gives you a chance to see how even small expenditures can add up over time and affect your financial future.
A financial review might seem like a huge undertaking, so start by breaking your expenses down into different categories such as housing costs, food, entertainment, and transportation.
You should also take a look at all of your debts such as mortgages, credit cards, and how much interest you’ve had to pay for all of them during the year. As you’re doing this, try to think of ways you can save money in the new year.
Complimentary Budgeting Tools
First Bank offers complimentary tools to help you create a budget and analyze your finances, including our Home Budget calculator, as well as many other financial calculators for various needs.
We also offer Money Manager, embedded in First Bank Mobile and Online Banking, which provides a complete financial picture with a holistic view of financial assets, liabilities and budgets, and more. You can sync your First Bank accounts, plus external ones, set goals, track progress, and more.
Review Your Financial Goals
Assessing your financial goals at the start of the year can help you look for any patterns in your spending habits over the previous year and consider new goals such as reducing debt and cutting back on spending.
For those who perform a budget review every year, take a look at your performance for the past year to see how close you were to meeting your targets.
For any areas where you met or exceeded your goals, that’s great. You might consider ways you can do even better in the future.
You’re bound to miss some targets and budget limits every year, but it’s important to consider why it happened. Did you overspend in some areas because things were more expensive than you expected, or did you happen to splurge on entertainment or luxury items?
Figuring out your strengths and weaknesses when it comes to budgeting is an important step to improving your financial performance in the coming year.
Evaluate Your Savings, Investments, and Debts
Taking a close look at your financial goals is about much more than income and expenses, you’ll also need to consider your savings and investments, to see where you stand and how they’re performing.
Part of the reason for reviewing your finances every year is to look for ways you can set some money aside to build an emergency fund, a retirement fund, or to save up for a major purchase.
Set up an Emergency Fund
It’s hard to get through a year without at least a few unexpected expenses, which is why setting up an emergency fund is so important. Having to borrow money from family or friends can put a strain on relations, and putting unexpected expenses on a credit card will result in expensive interest payments. An emergency fund can help you avoid this.
Your emergency fund should be money that you can readily access whenever you need it, such as an interest-bearing savings account, where the bank pays you to keep your money in a safe place. You might also consider a money market account or a certificate of deposit (CD) where you can earn more interest.
Ready to open that account? Open a First Bank checking, savings, money market or CD it in minutes, wherever you are.
Take a Look at Your Retirement Funds
Even if retirement seems a long way off, the more you save ahead of time the more you can benefit from compound interest and let your investment grow by increasing amounts each year.
If you have a 401(k) plan from your employer, anything you contribute to your retirement is done on a pre-tax basis so you don’t have to pay income taxes on your contributions.
If your employer matches your contributions by any amount, it’s a good idea for you to contribute enough to get that full benefit. Think of your employer’s contributions as free money that you want to make the most of.
Many First Bank clients use individual retirement accounts such as IRAs and Roth IRAs.
Consolidate Your Debts
Take a close look at any debts you have and how much it’s costing you in terms of interest payments. If you own your home and it has increased in value, you might be able to consolidate your debts with a home equity line of credit (HELOC) or refinancing your mortgage and use some of the increase in equity to pay off your other debts.
If you don’t own your own home, you might be able to consolidate your higher interest debts by taking out a personal loan at a lower interest rate.
Set New Financial Goals
Putting together a budget for the first time, or drafting a new one for the coming year, can seem like a daunting task. Breaking your objectives down into longer and shorter-term goals can make them seem more achievable and give you something to aim for.
Short-term goals would be something that you can accomplish within a year or less. These could be things like saving up for a vacation, building an emergency fund, saving for a major purchase, paying off a credit card or reducing its balance by a certain amount.
If you want to focus on eliminating or reducing debt, there are two common approaches. Some people focus on paying off their smallest balances first before moving on to larger ones. Others might focus on whichever debt has the highest interest rate, such as a credit card.
By remaining focused in accomplishing your shorter-term goals, you can build momentum and keep yourself motivated to accomplish your longer-term goals.
Longer-term goals are things like saving for retirement, buying a home, or investing in a college fund.
Use the SMART Goals Framework
The SMART method is a time-tested approach to setting goals. It means your goals should be specific, measurable, achievable, relevant, and time-bound:
Specific
A vague goal of “reducing debt” or “saving more” won’t cut it. Your financial goals should be specific and answer the questions of who, what, where, when, and why?
A vague goal of “reducing debt” or “saving more” won’t cut it. Your financial goals should be specific and answer the questions of who, what, where, when, and why?
Measurable
You’ll need to quantify your objectives so you can keep track of them and assess your progress. A goal of setting up an emergency fund is too vague. Aim for something like setting a certain amount of funds aside, or transferring a percentage of every paycheck into a savings account.
You’ll need to quantify your objectives so you can keep track of them and assess your progress. A goal of setting up an emergency fund is too vague. Aim for something like setting a certain amount of funds aside, or transferring a percentage of every paycheck into a savings account.
Achievable
Consider all of your available monetary resources and any obstacles or constraints. You might not be able to save up for a down payment on a house in one year, or pay off an entire mortgage, but you could set aside or pay off a particular amount each month.
Consider all of your available monetary resources and any obstacles or constraints. You might not be able to save up for a down payment on a house in one year, or pay off an entire mortgage, but you could set aside or pay off a particular amount each month.
Relevant
Your financial goals should be something that matters to you, aligns with your overall objectives and values, and would improve your financial situation.
Your financial goals should be something that matters to you, aligns with your overall objectives and values, and would improve your financial situation.
Time-bound
Both your longer-term and your shorter-term goals should have a deadline to create a sense of urgency and keep you focused on achieving them.
Both your longer-term and your shorter-term goals should have a deadline to create a sense of urgency and keep you focused on achieving them.
Budgeting for the New Year
Once you’ve completed your budget review and are ready to set some new budgeting goals for the new year and beyond, it’s time to sit down and put together a budget.
Figure out Your Income
The most obvious place to start is to figure out your after-tax income, or the money you’ll have left over after paying your federal and any state or local income taxes.
This task is pretty easy if you receive a regular paycheck. Your employer deducts payroll and Social Security taxes from your pay.
Your 401(k) deductions don’t apply to your income taxes, but any other employer deductions, such as for health and life insurance, are counted as part of your income tax liability.
You should also account for any additional funds you have coming in. This may include side gigs, property rentals, and profits from any investments you’re going to sell.
Choose a Budgeting Method
You’ll need to find a budgeting method that works for you. It should be a way for you to take ownership of your finances, think about the decisions you make and how they affect you and your financial health. By putting together a budget, you might identify ways of spending less and saving more money.
The traditional budgeting method, used by many individuals and families, starts by analyzing your income and expenses from the previous year and adjusting for each category.
Some of your expenses are unavoidable, like rent and mortgage payments, insurance, utilities, and food although you do have some flexibility even among these items.
For example, you obviously need to eat, but you might try spending more at the grocery store rather than having food delivered and eating at restaurants. You might cut back on more expensive food items or switch to less expensive brands.
The point of analyzing your previous budget and putting together a new one every year is to get an idea of how you might change your spending and saving habits to improve your finances.
Some people use the “envelope method” for their budgets, where they put certain amounts of cash from every paycheck into different envelopes for a different purpose such as rent, utilities, etc. You could use a digital version of this using a budgeting app or online tools.
Zero-based budgeting is a technique used in the business world, although it might be useful for personal budgeting as well. With this technique, all your expense categories for the coming year start at zero.
They obviously won’t remain there, but the point is to sit down and think about each budget category, whether you really need to spend money on a particular item and if there’s a way to spend less.
Track Your Progress
The whole point of doing a year-end review of your finances and planning for the future is to have a series of goals in mind. It’s a good idea to check your progress throughout the year, perhaps once a month as you’re paying your bills.
Tracking your progress can help you keep your budget and goals in mind throughout the year, so you’re more likely to achieve them.
Tracking your progress can help you keep your budget and goals in mind throughout the year, so you’re more likely to achieve them.
Try Automating Your Savings
If you use direct deposit for your paychecks, your employer might let you to designate more than one account to transfer your funds to.
For example, you might have most of your paycheck transferred into your checking account while having a certain percentage deposited into a savings or money market account.
Automating your savings is a convenient way to meet your savings goals and make sure you stay on track.
We’re Here to Help
Doing a year-end financial review might seem like a daunting task, even for those who’ve done this before. By taking a close look at your financial path over the past year, you can chart a new course to financial success.
If you need advice, would like to set up an account or ask about a loan, please contact us to schedule an appointment, start a chat in your First Bank Mobile App or Online Banking, or stop by one of our 12 locations in Southeast Illinois and Southwest Indiana.
