I love the beginning of the new year. There’s just something about turning the calendar over that revitalizes me. To me, the new year symbolizes a fresh start. Even if the previous year was tough, there’s always hope that things will be better next year. Every December, I outline my goals for the next year in various areas of my life. One of the areas I focus on, and will especially be focusing on in the upcoming year, is my finances. Unfortunately, towards the end of 2016, I fell off track and had to drain my emergency fund as well as acquire new debt by purchasing a new (to me) car. So, where do I even begin with setting my financial goals for next year? Below are some tips on how you can prioritize your financial goals for the upcoming year.
Assess your situation.
Take an honest look at your finances over the past year. In what areas did you excel and in what areas did you come up short? In this step, I look strictly at the “big picture.”
Set a budget for the upcoming year.
This step is key, because without budgeting you can’t meet your goals. I look at my budget spreadsheets from the entire previous year and determine in what areas I overspent and under-spent. If I’ve overspent in a particular area continuously, I ask myself how I can reduce my expenses in that area, and if that is not possible, I adjust my budget to account for the increased expense. I also look at my calendar and make notes on events that will require a budget adjustment, such as buying birthday or holiday presents or traveling. Of course part of the key of budgeting is being flexible, but preparing in advance for adjustments (when possible) is incredibly helpful!
Look at the “baby steps.”
Although I don’t always agree with everything Dave Ramsey teaches, I think his baby steps are a great guideline on setting financial priorities.
Do you have a mini-emergency fund of $1,000-$2,500? If not, make it a goal to fund your mini-emergency fund this year. Having a mini-emergency fund was critical when I had car issues because it prevented me from charging car repairs on my credit card.
If you’ve already established your mini-emergency fund, then take a look at all debts you owe and make it a goal to pay off debt in the upcoming year. I personally use the debt snowball method, which is lining up your debts from the smallest amount to the largest amount and paying off the smallest amount first, regardless of interest rate. It’s very motivating as you pay off a debt!
Once you’ve paid off all debt (minus your mortgage), fully fund your emergency fund. At a minimum you should save 3-6 months of expenses in your emergency fund, but I personally prefer to save 9-12 months.
Then, begin planning for retirement. Determine when you would like to retire and the amount of money you will need to live comfortably in your retirement.
Determine how much money you can put toward your goal each month.
I budget using a zero-based budget, which means every dollar gets a purpose. So, at the beginning of the year, I determine an average amount per month that I can put towards my goal. If you’re in the emergency fund or debt payoff stages, you may want to put extra penny towards that goal, while if you’re funding retirement you may want to put 10%-15% of your paycheck towards it.