how far have you come? end of year evaluation
Success is sometimes best measured by spoonfuls. As we struggle with the changes in our lives, sometimes we are unaware of our accomplishments. Victories need to be celebrated, no matter how small the gain. It is critical that we look back from where we were days, weeks, months and years before so that we are aware of our achievements. Rosemarie Rossetti, Ph.D.
Hard to believe that 2010 is nearly over. The days and months have passed by so quickly. I started this newsletter series with the above quote and I thought it would be fitting to also end with it. Now is the time to look back over the weeks and months of 2010 and evaluate the progress you’ve made towards your financial goals, to change the things that are no longer working for you and to celebrate the achievements of the past year.
To evaluate the progress you have made towards your financial goals over the last 12 months, you will need two things:
- the goals that you set at the beginning of the year
- your budget that you made at the beginning of the year and/or a few financial balances as described below
1. Did you achieved your 2010 financial goals?
The first step in this newsletter series on money management way back in January was to write down your financial goals for 2010. It is important to actually write down specific goals and plan how you are going to achieve them. A study tracking the 1954 Harvard University graduating class over several decades found that those who had written down specific goals were much more successful than those who did not. If you wrote a list of goals, dig them out and have a look. Spend a few moments thinking about the past year, its successes, its tough spots.
How did your year go? Did you achieve what you set out to? Have you made progress towards achieving your goals?
Success is achieving your goals in life. But even if you haven’t achieved what you wanted to, taking steps in the right direction is better than doing nothing at all.
2. Your finances – now and then
To really understand your financial progress and how you faired at meeting your financial goals, a little bit of analysis is needed. This is the fun part, where we get to analyse numbers…no I’m not kidding, it’s fun, trust me.
What you need:
- Budget and expense tracker if you have been using one
- Balances of credit cards, loans, savings accounts, investments, superannuation etc at both 1 Jan 2010 and 31 Dec 2010.
- Statement of net worth
Your income and expenditure
I realise that the very word ‘budget’ sends the willies up people. I don’t understand it because I love budgeting, but I’m aware that you may not share my passion and as such haven’t been tracking your expenses over the past year. If you haven’t, skip this paragraph. If you have been tracking your income and expenses then here are some questions to ask your budget.
- Is your cash flow positive or negative? Why? Is it negative because you have been paying extra off your debt or because you have been spending more than you earn?
- What exactly have you been spending your money on? Why?
- Is there anything about your spending that surprises you?
- If one of your goals was to reduce your spending in a certain category, look at your spending over the year. Have you been able to reduce your spending on that category?
- Compare your actual income and expenditure to what you predicted.
- How much are you spending and on what? What is the proportion of each expense compared to the whole? You can work this out easily in excel with some cool graphs (see below).
- Can you reduce your spending in any of your spending categories next year? How?
Your debt levels
To analyse your debt you will need the opening balances of each debt as of 1 Jan 2010 and the closing balances as of 31 Dec 2010.
Look at the amount of debt that you had at the beginning of the year and compare it to how much you have now. Compare your overall debt level and individual debts. Do you have more or less debt than at the beginning of the year? If you are deeper in debt, is it for a good reason or are you unsure where you spent the money?
Joe wrote down his debt levels and repayment plan at the beginning of the year. He automated the repayments, so this is the first time he’s coming back to that plan to see how far he has reduced his debt.
Credit card 1 has been completely paid off, which is something Joe can celebrate. He can now either apply the $121 repayment to another debt to pay it off sooner, or use it to build his savings. Joe has also reduced his store card by 41% which means he should easily be able to pay it off by the end of next year. The only debt that has increased is Credit Card 2. Overall, Joe has reduced is debt by 16%.
To do these calculations yourself, deduct the debt balance at 31 Dec from the balance at 1 Jan to find out how much you have reduced your debt by:
ie. Store card: $2,000 – $1,177 = $823.
To work out the percentage by which you have decreased (or increased) your debt, divide the ‘debt reduced by’ amount by the January balance and times by 100:
ie. Store card: $823 / 2,000 x 100 = 41%
If your debt levels have increased, consider for a moment why. Is it because you have purchased a new house, or a new car, or you had an emergency that needed to be paid for on credit? Or is it because you have been spending more than you earn on consumer goods?
What were your savings goals at the beginning of the year? Did you reach them? Are you getting close? The next step in evaluating your financial achievements over the last year is to look at increases in your savings.
Mary had several savings goals including building an emergency fund, saving for a holiday, a new car and a house deposit. She wrote down her goal amount, but decided that she probably wouldn’t be able to achieve her goals this year. Although Mary has broken up her savings into specific categories on paper, she only has one high interest savings account, the balance on the bank statement reading $23,000 at the end of December.
Overall, Mary has saved an extra $4,700 for the year, an increase of 26%.
The calculations for this are as follows: to find out how much your savings have increased (or decreased) by deduct the 1 Jan balance from the Dec 31 balance:
ie. Emergency Fund: $1,200 – $500 = $700
To work out the percentage by which your savings have increased divide the ‘savings increased by’ amount by 1 Jan balance and times by 100:
ie. Emergency Fund: $700 / $500 x 100 = 140%
And of course, to work out how much you have left to save before reaching your goal, deduct the 31 Dec balance from the goal amount:
ie. Emergency Fund: $1,500 – $1,200 = $300.
Your net worth
Your net worth reflects your financial health. While your budget shows your income and expenses, your net worth will show you what you do with the money leftover (if any) after everyday expenses have been met.
Below is Peter and Sue’s net worth for 2010. Peter and Sue can be happy that they have increased their savings and their investments. They have also reduced their liabilities by 6% overall which has meant that their net worth has increased by $15,530.Apart from working out the changes to your net worth, you can further analyse your net worth by working out the current ratio. Your current ratio shows how many times your assets can cover your liabilities if you were in a position where you had to sell everything to pay off your debts. The higher your current ratio, the more you have left over in your pocket once your debts are paid off. A 1:1 current ratio would mean you could cover your debts, but would have nothing left over afterwards. Your current ratio is a measure of your financial stability. It can show how well you will be able to ride the highs and lows of financially unstable periods.
To calculate your current ratio, divide your total assets by your total liabilities:
ie. $291,400 / $182,960 = 1.6:1
In Peter and Sue’s case, they can cover their debts 1.6 times over. Their current ratio has increased from 1.48:1 in January.
Liquidity refers to assets that are cash or can be easily and quickly converted to cash. In Peter and Sue’s case, their liquid assets include:
- cash at bank
- high interest savings
- managed fund
Your liquid ratio is similar to your current ratio, but it is considered a more rigorous test of financial position because it doesn’t involve things like your house, the value of which can be hard to determine (and it can also take a long time to turn into cash). The liquid ratio only looks at liquid assets and short term debts. Peter and Sue’s short term debts include:
- car loan
- credit cards
The liquid ration reveals how many times your liquid assets can cover your short term debts.
To calculate your liquid ratio, divide your liquid assets by your short term debts:
ie. $29,900 / $4,960 = 6.02:1
Peter and Sue can cover their short term debts 6 times over. Their liquid ratio has increased from 3.96:1 in January. If the bank demanded that they pay their credit cards off today and the car loan, they would easily be able to do so and have plenty of cash left over. In fact, in order to reduce the interest paid to the bank, that may well be a good idea for Peter and Sue in 2011.
3. Positive habits
We progress through our daily life with a series of habits and rituals. Some of these habits serve us and some hinder us. The key is to recognise those habits that don’t serve us and replace them with positive habits that do.
The same applies when it comes to meeting your financial goals. What habits further your goals and what habits prevent you from reaching your financial goals? In the first newsletter for the year, I posed this question and challenged you to turn your spending habits into saving habits.
How did you go?
Maybe you stopped using your credit card. Maybe you rationed your phone use. Or started taking your lunch to work. Or used the dryer less. All of these changes (and many more) are positive steps towards reaching your financial goals.
If you have been tracking your spending, your budget will reflect whether you have turned spending habits into saving habits. As you replace your old habits with new ones, expenses will decrease or be replace with others and you will be able to track your progress via your budget.
Congratulations on the progress you have made throughout the year. Even if you didn’t quite reach your goals, any progress is a step forward and you are that much closer to your goal.
Now is the time to celebrate your achievements and to take some time out to think about the your goals for 2011.
If you’ve arrived at this page via a search engine, your missing out on the complete Step by Step Guide From Money Blues to Savings Success. This article is part of the Frugal and Thriving Newsletter. To read the rest of this newsletter and find out more, you can sign up for the free newsletter here.