Like many other people, we have regular monthly and annual budgets by which we abide. We also track our expenses throughout the year to gauge our spending. However, just because expenses have been at a certain level throughout the year or even previous years, it doesn’t mean that we necessarily assume they’ll remain the same moving forward. Things can change quickly at times when it comes to all sorts of various financial situations such as living location, type of living environment, size of family, job and career situation, health and medical costs, and more.
Therefore, we do a spending “reset” each year to ensure that we’re on the right financial path before we get too far along.
Reviewing last year’s budget and final totals
At the start of each year, I finalize our previous year’s budget and review the overall numbers. This allows me to see what our total expenses were, what our estimated expenses were, how close we came to these estimates, what unexpected costs (or savings) were realized, where high and low cost months were and why, and compare overall costs to overall income to see whether we made or lost ground in our efforts to grow assets.
Adjusting for the new year
Once I’ve analyzed last year’s numbers, I can harness the data I’ve gleaned from those numbers and use them in making adjustments for the upcoming year. This allows me to make changes in our budget forecast based upon not just one prior year’s information, but since we track this information every year, over multiple years to help smooth out the hills, valleys, and hiccups that occur throughout a single year. Things like relocating, buying a new vehicle, buying a home, having a child, major home repairs and the likes can skew a year’s financial data, but over time, we can get a better average of overall costs and cost inflation.
Forecasting for the following year, but…
With such information in hand, I typically forecast our budget out by several years. This is helpful since it allows me to better plan for major purchases and determine where income needs to be as well as where we might find cost savings over time. However, I’m realistic when doing this.
I realize that things related to medical costs, home repairs, growing children, career changes, and similar items will come into play and may make my multi-year forecasts irrelevant or even obsolete. Therefore, while my budget forecast helps with long-term planning when it comes to larger purchases and our overall financial pictures, I tend to take it with a grain of salt since as a family of four our costs are constantly changing and evolving each and every year.