Let’s close the year!

It’s the end of the year and a great time to reflect on the past year and look ahead to the new year. Irrespective of whether or not you are someone who likes to set goals and review them, the end of the year is a good time to ask yourself how you did and what you would like the coming year to look like. If you are into making new year resolutions, then this is a great opportunity to decide which ones to focus on. In particular, it is good to reflect on your financial picture. So, today I want to talk about some things to consider while doing these financial reflections. Note: this is purely financial and for sure, end of year reflections should include non-financial items too (probably much more important than your financial reflections) but are outside the scope of this blog.

What did last year look like?

Did you track your income and expenses? Your net worth? Read the article on ‘If you can measure it, you can improve it’ to know what this looks like. If you have been measuring all or some of it, you can look back and see how you did. I am a bit of a geek on this so while I use online tools like Mint, I also have a spreadsheet I have set up over the years where I track this month over month. So let’s begin with some of the key financial reflections:

1. How did your expenses stack up?. At the time of writing this article in Dec 2021, I am keenly aware that 2020 being an unusual year of the pandemic and inflation in 2021 being at a 40 year high, this past year has seen higher expenses. On top of that, we had some ‘special’ expenses because we moved to a new house. What categories of expenses went up? This kind of reflection may or may not mean anything. Sometimes, its just an acceptance of what happened. Sometimes it may be a revelation and might trigger you to action. Whatever it is, its good to look at this.
2. What happened to income? Did your income go up? Did it go down? Did you diversify your sources of income? Get a holistic picture here – its actually like your tax form – you want to know how much your W2 income was, interest, dividends, capital gains – whatever you had. Take some time to tally all this up. 
3. How much did you save? This is where the rubber meets the road. Ultimately, whichever direction your expenses and income went, you need to understand how much you saved. If you have been tracking it, did your savings go up year over year? Or did it go down? One thing to note – look at your savings including what you saved in your retirement accounts like 401Ks. 
4. What happened to your Net worth? Did your net worth increase, decrease or stay flat? Paying off debts, acquiring more debt, saving and investing more or less money will all have impacts on this. 
5. Did you end up giving? – did you have goals around giving away to charity? How did you do there?

Think of all of this as your financial report card. If all of the above feels too overwhelming, don’t worry. As I always say, start small. Focus on one thing and see how you did. It does not have to be perfect. If you learnt even one new thing from this reflection, then I would say you achieved something. 

What do you want your next year to look like?

I always like to begin with the end in mind. So I prefer looking many years out and then working backward. But I recognize not everyone can do that. So to keep it simple, think about next year. Its the same set of questions we looked at in the prior section, but asked differently. You can ask yourself if you need to change any behaviors or take new actions. So at the expense of being redundant, I am going to go through them in a different way.

1. Expenses – try to create a budget for the next year. This is extremely hard if you do not have a good baseline. Do you know special things coming up next year you need to budget for? The intent is to see if this means you need to be cutting or increasing expenses in certain buckets. Don’t go crazy and try to budget every single item – keep it broader so you can have some flexibility. 
2. Income – Most of my readers, myself included, earn the majority of their income through W2 income. While this is not a bad thing, it should be a goal for everyone to diversify their sources of income. It’s not easy to do and takes a while. But start small. This involves a reflection on whether you want to do this by starting a side gig, making other investments that yield income and so on. 
3. Debts – Use the framework I described in the article “Do I payoff debt or invest” to make that decision. Do you wish to pay off any debts or reduce the debt in a substantial manner in your new year? On the other hand, you may be planning to acquire more debt for something. Debt is not always bad as I talk about in my article ‘Is debt a bad thing?”
4. Giving- do you want to give more or less or the same to charity next year? Or none at all? Do you want your giving to be more focused on certain causes?

Ultimately, your Net Worth will change based on the above decisions and the above are items that can be measured in actual hard numbers. But what about some others that are not measurable? Don’t forget about them. Let’s examine a few of those:

1. Do you want to invest in yourself? I talk about this in the article ‘The ultimate investment for growing your wealth. Building up your financial literacy is probably the best investment you can make. Of course, you have to follow it up with action. In the coming year, do you want to focus on learning something new?
2. Do you want to spend your time engaging in more charitable causes? I don’t mean giving your money here but giving your time. Over the last couple of years, I have personally felt more satisfaction doing this by volunteering for one of our local non-profits. 
3. Do you want to get your estate plan in order? An asset protection plan? I talk about this in the 2 part article series – ‘What does a comprehensive financial plan look like?’

The above list is not meant to be exhaustive but merely to get you thinking about a few things.

Concluding comments

I want to conclude with a few words of advice. 

• As you do this reflection, my request to you is to be kind to yourself – don’t beat yourself up and make this an unpleasant exercise. If anything, this needs to be something that motivates you to do better. 
• In fact, use this as a time of celebration. If the past year was a great year, celebrate your wins. If the past year was a tough year, celebrate the fact that you got through it and came away wiser. 
• Don’t let perfect get in the way of progress. Do something – it does not matter how small. Through the power of compounding, small incremental improvements will compound to have a bigger impact eventually. 
• Finally, be optimistic about the future. In financial terms, your past is sunk costs. You get to make decisions today based on the future expectations. So don’t dwell on your history (good or bad) but simply look ahead and be optimistic. 

I want to thank all of you for reading. This article caps my first full year of writing this blog. I have written 35 different posts across 30 articles this past year and I am extremely grateful to all my readers for reading and giving me encouragement and feedback. I hope I was able to impart some knowledge to at least some of you. I look forward to the coming year and writing as many, if not more articles and would welcome feedback on topics you wish to read about.

I wish you all luck on your financial journey and a Happy New Year!

Disclaimer: I am not a financial advisor and all the information in my articles are from my personal experience and are for informational and educational purposes only. Please consult with a financial advisor or CPA for professional advice.