The end of the year is the perfect time to reflect on all you’ve experienced over the last twelve months. What was your favorite moment with family and friends? What was your biggest accomplishment or learning? Did you improve your personal finances in any way? Use these insights to plan for what’s coming next.
Reviewing your annual spending is a great way to stay on top of your finances and track the progress you’ve made toward your long-term goals. It’s also an opportunity to reassess your goals (and the ways you’ll meet them) before the new year.
Looking for a place to start? We’ve got you! Here is a handy guide to walk you through a basic spending review process.
Gather Your Financial Records
The first step to reviewing your spending is to gather all the transaction records you can. You’ve got a head start if you used a budgeting tool, spreadsheet, or app over the last year. Like if you used your Milli Spending card, you have insights about your purchases by dollar amount and category in your Milli app.
If not, gather your bank and/or credit card statements. If you don’t have every transaction recorded, it may take some time to go through the records.
Don’t forget to factor in cash purchases, monetary gifts you gave, and debt repayments. Debt repayment may not be exactly the same as your other spending, but if it’s a part of your financial picture, it’s worth factoring in during this review process.
Next, you’ll categorize how you spent your money, so you can reflect on the bigger financial picture.
If you’re following a basic budgeting model, you may be dividing your spending into fewer, streamlined categories – essentials, non-essentials, debt repayments. This is a good way to do a pulse check on if your spending aligns with general recommendations of where to allocate your income to spending and savings, such as a 50%-30%-20% model.
If you’re following a more detailed budgeting system or are looking to get more granular insights on your spending, break down the spending categories into things like housing, utilities, transportation, food, entertainment, pet needs, apparel, technology, and other unique categories that fit your lifestyle.
Your next step depends on if you created/used a budget or spending plan or not.
Comparing spending to your budget
If you set a budget in the past year, you’ll want to compare your budgeted spending to what you actually spent. See which categories you spent right at the budget, which you went over, or any that you came in under budget. If you used a budget in past years, you could take your analysis deeper by comparing how your spending in the most recent year compared to previous years – either overall, or by a specific category if you want to dig in really deep. (Good on you!)
Reviewing spending without a budget
If you did not set a budget for yourself during the past year, you’ll get insights about your spending by looking at the big picture. Consider how your spending aligned with your income, and how it compares with the amount you saved over the past year. Look at recurring purchases such as from the same stores and restaurants.
You can get granular and look at all transactions or do more of a spot check. The goal is to come away with an understanding of how you spent your money, ideally so you can inform a realistic budget for next year.
Track Spending by Month
Another valuable way to look at your spending is by time period, such as month. Some common recurring expenses are typically the same amount from month to month, like housing, or a car payment. However, taking the time to track even recurring expenses by month can help you keep track of price increases for any subscription services – they can sneak up on you!
For expenses that fluctuate or recreational spending, reviewing your spending by month can reveal opportunities where you have some control to make changes. For example, maybe you see your spending go up in the summer because you’re enjoying outdoor activities when the weather is nice, or if the power bill goes up in the winter when you turn the heat on. It’s okay if your spending isn’t exactly the same from month to month! The key thing is that by understanding ebbs and flows in your spending, you can allocate your budget accordingly to cover seasonal needs or wants.
Now it’s time to reflect on your spending. Consider your responses and reactions to the following prompts:
- What was your top spending category?
- Is your top spending category the same as prior years, or different?
- Are there any purchases that stand out, such as large, or unexpected purchases?
- Are there are patterns that stand out, such as frequent small purchases or from the same retailer?
- Did you have purchases driven by emotional spending or aspirational spending?
- Are you surprised about coming in at, over, or under budget for any categories?
- Did you have certain months that you spent more or less, or was your spending fairly consistent?
- Did spikes in spending relate to life events you experienced?
As you comb through your spending, note any unexpected expenses, like medical bills or car repairs. Do not feel guilty if you didn’t stick to your budget as well as you’d hoped, especially if you faced some life changes or unexpected expenses that may have interfered with your plans.
Remember, inflation was also a significant factor in 2022 and 2023 and likely caused several expenses in your budget to increase from prior years. The Bureau of Labor Statistics showcases the changes in the Consumer Price Index broken down by category. Food at home in particular saw large increases, so that might be the culprit if your grocery bill jumped. That is, unless you suddenly began having filet mignon for dinner every night this year – that you can’t explain away with inflation.
Taking a comprehensive look at your finances will help you spot areas for improvement and changes you can make moving into the new year. Take it as a learning opportunity, not a judgment. Once you’ve finished your budget-to-spend comparison, look back at your notes and look for any patterns. Frequent overspending could signal the need to reevaluate how much you budget for a category, while frequent underspending could be an opportunity to add to your savings. You can apply these insights to next year’s budget.
Looking to prepare for unexpected expenses next year? As a starting point, add up your list of unexpected expenses and divide by twelve to estimate how much you need to put aside each month to cover the unknown. Of course, next year will have different unknown things come up that likely won’t cost exactly the same, but this should more accurately reflect the scenarios that may arise from your unique lifestyle.
Reviewing your finances at the end of the year is a healthy habit to cultivate. It can help you build or refine your budget for next year in support of your short-term financial planning. Over the years, repeating this exercise will help you build a long-term look at your finances and continuously hone your financial planning skills! Spend smarter today. Save more for tomorrow.
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