Why do you use your rear view mirror?
You use a rear view mirror to see how far you have come, detours you took, the pitfalls you just avoided, and to watch for any potential accidents. It’s the same with your money.
In order to have a clear picture as to where you need to go with your finances in the coming year and what you need to change, you need to first look in the rear view mirror at the previous year.
I really do want to see you win with your money!
You don’t need to stay in the same financial spot you have been in and it is entirely possible to change the direction you are going with money. One way to set up a good foundation is to review this past year, both the mistakes you have made and the successes you have had.
There are several ways to use the rear view mirror when looking at your finances.
Take a look back at how far you have come on your financial journey and the progress you have made. What goals were you able to accomplish or are in the midst of obtaining over the past year?
Often we don’t look back at the starting point and see the headway we have made. This is a mistake because in the mundane daily work to get to the goal, there is a tendency to forget why you are working so hard. Discouragement sets in and you feel as though you will never make it. You don’t realize how much you have been able to actually progress.
Recently, I have discovered how powerful making your money goals visual and tracking your progress can be. There is increased motivation to continue striving towards the objective and a willingness to do what it takes to get there. Since I started tracking my progress in building up my savings, I have been able to save over $16,000 for school tuition and other goals.
You can see the completed milestones you have passed on this journey and how far you have come. Go ahead and pat yourself on the back.
However, a growing hope that you can reach the finish line with this goal is the best thing which comes from looking in the rear view mirror at what you have already accomplished.
How to review the year to plan a powerful #budget!
Another reason to review the previous year, is to see the detours you made.
What situations derailed your budget? What financial emergencies did you have this year? Where did you overspend consistently? Were there times you had to play catch-up after big expense?
Out of all these detours, which ones could have been avoided with careful planning? Are there any situations which are likely to come up again next year?
True emergencies cannot be predicted, however, you can change your mindset to expect that eventually an emergency will come and to prepare as best you can with the proper insurance and building up an emergency fund.
However, the small ’emergencies’ which come up on a frequent basis and cause your budget to go off the tracks, are the ones which you can prevent from becoming a problem in the future.
Most ‘small emergencies’ are expenses or events you did not adequately prepare for or expect and when they show up, you do not have the money on hand so it becomes a scramble to find the money in a short amount of time.
A couple prime culprits are annual expenses, such as insurance premiums or Christmas, and frequent bills, like car repairs. You know you will have to pay for both, but often don’t put money aside each month into savings so you can easily pay the bill when it comes due.
Another sneaky emergency is the random purchases you make, because it’s only a few dollars. No matter how hard I try to write down a zero based budget, every month there are some additional things which are bought. I need to start adding in a line item for miscellaneous purchases so at least those won’t cause me to overspend.
Sub savings accounts either at your bank or on paper are so helpful! I can easily see at a glance how much money there is saved up for car repairs or for school.
Good intentions alone without a plan lies the groundwork for overspending on a monthly basis on things you don’t need. You want to be able to put money towards debt or savings each month, knowing you make more than enough to pay for your bills with some extra money.
However, when you don’t detail out a plan for where every bit of your income is to go and don’t track your spending, you will arrive at the end of the month with nothing left over except frustration. You have no idea how all that extra money disappeared or where it went.
These are some of the detours which cause you to go around in circles or even make a few steps backwards throughout the year. It is important to analyze why they happened and what you can do in order to prepare for a similar situation which will come up in the future.
Good intentions alone, without a plan, lead to overspending.
You can also see pitfalls which you were able to avoid, by reviewing the year. These are situations which could have been disastrous for your budget, but you had a plan so those times ended up being more of an inconvenience instead.
Smart money habits you have been doing are also ways you avoided a pitfall throughout the year. Remembering where you have handled money well in the past will help you continue to keep the same successful habits in the future.
A few examples to get you thinking
- Knowing a large expense is coming in the next couple of months and putting aside cash ahead of time is a way to avoid a money pitfall.
- Curbing impulse purchases by choosing to think about it overnight can help save your monthly budget, ensuring there is enough money for all the regular expenses.
- Were you able to trim expenses giving you more wiggle room?
- Did you put off taking on any more debt by using your debit card or cash instead of a credit card?
- Or were you able to pay off some debt thus eliminating racking up more interest?
- Anytime you can plan ahead, save or do something smart with your money, you are avoiding potential pitfalls.
How were you smart about handling your finances in the past year?
Potential money accidents are expensive situations which either happened to someone close to you or something which barely missed hitting you.
Did your friend get laid off without any savings? Or did a vacation follow someone home and they had to spend several months paying off their credit card?
You don’t need to make every financial mistake yourself and can learn a lot from what others have to go through.
How can you learn from these situations to either prepare ahead of time or to avoid going through them altogether?
This exercise is not designed for you to become fearful of everything bad which could happen, but rather consider additional ways you can prepare for financial hardships which you may not have thought of yourself.
So as you start thinking about your finances for the coming year and the goals you want to accomplish, take some time to look in the rear view mirror. Analyze both the good and the bad money decisions you made, as well as how far you have come with your progress.
Want more? See the other posts in this Successful Budget Series, How to use the power of focus for best money results and Plan a better budget by looking to the future.