The holidays are my favorite time of year. Getting to spend time with friends and family, time off to rest and of course lots of delicious food! The holidays also mean the end of a year and looking forward to a fresh new start to do all those things we kept telling ourselves we should.
Last year in review
The new year means I get to look back at our last year’s budget and see how our spending compares to our initial budget prediction. So many things change between January and December, so it is always fun to see how far we’ve come, how close our estimates were and how much money we managed to save along the way.
When doing this yearly retrospective, you really get to see where you are spending your money and where you can put your efforts to save for next year. In my case, I succeeded in reducing my spending at restaurants and trying to stay out of the stores to prevent impulse clothes purchases. I did, however, go over budget on shoes and also I splurged on a new bike, which was not budgeted.
Looking back at the monthly expenses during the year also allows you to see how different utilities or costs increase during the year. For example, my cellphone bill increased by 6$/month part-way through the year; this may be something to look into further to see if I can find a cheaper plan for the next year.
It is also interesting to look back and compare your total yearly spending to your after-tax income to see what percentage of your salary you are able to save each year. This amount will be different for everyone depending on your situation, but you should aim to save at least 20% of your take home income. Also, necessities (food, rent, utilities, insurance, etc.) should remain below 50% of your take home salary.
New year – New Budget
Once you’ve learnt from your last year’s budget, it’s time to start fresh and make a new budget for the new year. If this is your first year budgeting, you will find some tips on my earlier post about How to Start Saving.
I typically start from my actual spending in each category for the last year. For example, I spent 485$ last year on shoes, that comes out to an average of 40$/month. Looking at my initial budget, I had planned for 25$/month for shoes & boots. I will then need to decide if I want to increase my budget or if I will keep it as is because the shoes I bought this year will carry me over to next year or if I will make an effort to spend less on shoes to stay within budget. Looking ahead, I know I will need a new pair of running shoes and perhaps a new pair of winter boots next year. Those two pairs of shoes should be under 250$ and so a budget of 300$ for the year should be feasible. I will stick with 25$/month for the upcoming year.
If your budget was relatively accurate, you will find that very few categories will change from one year to the next. In some cases, where I came in much under budget, I will reduce the new budget to keep myself striving to be more frugal.
The next step is to think about the year ahead and any big or special plans you have. Any trips or renovations or big expenses (maybe a new bike!?!). You can now add these items into the budget with the best estimate you can make to see how feasible these things are and how your money will be split.
Now that you have a rough budget, it’s time to look at the total spending (if you stick to your budget) and how it compares to your (current) take home salary. You do not want to be budgeting for a future raise, etc. You will need to ensure that you can save at least 20% of your take home salary if you stick to the budget. If you cannot, then you will need to reduce spending in some categories (cheaper cell phone plan, less clothes or restaurants, cheaper vacation, etc.).
Once you have decided how you will be spending your money, your budget becomes your road-map and helps you make choices to stick to your goals all year long!
Make this year a year where you will achieve your saving goals, whether it is to pay down a big chunk of your mortgage, max out your RRSP, save for a big trip or just reduce your spending and improve the percentage of your salary that you save! I will help you on your journey this year and we will see that with the spirit of saving we can live in frugal luxury!
How did you do, compared to your budget last year? What is your money resolution?Share this post!