A new year is upon us, and with it, a sense of optimism that this will be “the year” that what we are hoping for will come true. Often people begin the year wishing that it will be a better year for them financially also. Many of us are buckling down dutifully to chip away at Christmas overspending, to get it behind us before summer holidays hit. We look forward to more wiggle room in the months ahead.
I hate to put a damper on New Year enthusiasm, but like the golden-oldie song says, wishin’ and hopin’ is not going to make it happen. It’s time for a reality check. For 99% of us, this year will closely resemble last year financially-speaking. The truth is that, short of a promotion, lottery win, inheritance or other unexpected windfall, our best shot at a better financial year is to better manage our current income and expenses. That requires planning.
Simply speaking, we need to pay better attention to when the money comes in and when the money goes out. This awareness allows us to see what income we have and be more intentional about where it goes. Or, when the money isn’t coming in as much, and the money still needs to go out, we can plan how we’re going to handle that. Very few people know specifically what their income is and where it is going. To have a better financial year, we have to change that.
I want to state off the bat that this is not an article about detailed financial planning. (I am not a licensed financial advisor, accountant, or other financial professional). What follows are the steps I personally take each January to look ahead at my financial year. Following these steps will increase awareness of your finances at a high level, which later allows you to focus in on the finer points.
So, where to begin? Grab your calendar and a pen (or electronic device if that is your style), and follow these simple steps to start off the year on a better financial foot. If you are the one in the home who handles the finances, please invite your spouse to do this with you. You both need to know where your money is going!
Step One: Find Out When Your Income is Coming In
- Plot out your entire year of pay dates on the calendar, for both you and your spouse (if you have one). Your pay cheque is likely your biggest source of income, and knowing when your next income is coming is an essential planning tool. We have lost something in our electronic society. I am just old enough to remember getting a paper pay cheque on payday. It was a big deal! You had to go out of your way to stop at the bank and deposit it before you could spend any of it. Nowadays, our paydays come and go, and we barely even notice because the money is automatically deposited and often spent before we see it. Payday is a major financial event, and we need to treat it that way. (If you think I’m exaggerating, just try missing one!) .
- Identify your other regular sources of income, such as government benefit payments or annual bonuses. Find out when they are due, and write them down on the calendar. Government websites typically post their scheduled payment dates 6 to 12 months in advance, which you can reference at anytime. If the exact payment date or amount is unknown, it is still a good idea to note which month the payout usually occurs. *These are not guaranteed payments, so don’t spend them in advance! The purpose of this step is to pay attention to when extra money may come in, so if it does, it isn’t automatically absorbed into your regular spending.
- Now, note any income anomalies. For example, my husband works a rotating shift as part of an averaging agreement – two short weeks, one long week. His bi-weekly income fluctuates, but generally averages out to 40 hours per week. However, a few times a year the pay cycle hits where his two short weeks make up the cheque. This impacts our available cash flow, and I need to plan ahead for that. So I note “small cheque” against those paydates so I can be aware and think ahead. For other people, such as teachers or people doing seasonal work, there are months with substantially less income (or none at all). If this applies in your situation, look ahead and mark on the calendar when the drop in income is going to occur. This is important information so you can plan for the drop ahead of time. Lastly, if you are paid every two weeks, there will be two months each year where you will receive an extra cheque. Often a good portion of those extra cheques are already earmarked (i.e. for biweekly mortgage payments). But if you can, plan now to carve out some of the money to be put to good use.
Step Two: Find Out When Your Major Expenses are Due
Now is the time to look at expenses. I am not talking about expenses that are part of your regular monthly budget. (I will talk about that in a future post). I am talking about larger, irregular expenses that have a tendency to sneak up and cause a cash crunch if they are not planned for in advance. You will define “larger” for you, but for me, I use a rough guideline of more than $100.
- House and car insurance premiums
- Property tax payments
- Quarterly utility bills
- Remittances (i.e. income tax payments for the self-employed)
- Renewals of various types – driver’s license, passport, computer anti-virus
- Vacation costs – including deposits that may be due at specific intervals
- Significant birthdays and anniversaries (kids’ birthday party costs are a killer!)
- Tuition payments
- Children’s sports registration fees
- Investment contributions
- Planned special donations
- Major shopping, such as back-to-school and Christmas
Plot these expenses on your calendar for the month they are expected to occur. If you like, write the expected cost down now, or go back and do that later. Right now, the goal is to see when big cash outlays will occur in your financial year.
Step Three: Look at What the Information Tells You
Now, pat yourself on the back for doing something really good for your financial well-being. (Doesn’t that feel good?) Then take a step back, and look at what all of this information combined is telling you. Seeing the data in context is vital to planning for a better financial year. How? Let’s say I am a teacher with no income in the summer, and my annual property tax bill is due mid-July. That is a problem. How am I going to solve it?… By planning ahead. Or, perhaps my annual bonus is scheduled to be paid out during the same month that my son’s hockey registration is due. I can plan ahead now to earmark those funds before I get too excited about spending money on a new couch.
This can all be a little overwhelming if you’ve never done this kind of planning before. If you see gaps, don’t panic. Be glad you are aware of it, because you have now given yourself time to plan ahead to handle it. Maybe you need to work overtime, or maybe you need to get busy on reducing your expenses. With planning, you get to choose.
Financial health often boils down to simple awareness and discipline in the everyday things. People with small to average incomes can achieve surprisingly big things by paying careful attention to their income and outgo. By paying better attention to the timing of your income and expenses, you can make better financial decisions, avoid going into debt unnecessarily, and be better able to weather financial storms.
Your turn: What do you do to set yourself up for a good financial year?