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A financial projection (or forecast) is typically a term used in business and refers to the future outcome of a company.
The financial projection of a business usually includes revenue, expenses, budgets, and so forth.
However, we can also create a projection for our personal finances!
You can create a forecast for the next quarter, year, or longer which will help you get an idea of how much debt you can pay off, how much you can save by a specific date, when you can expect to buy a home, and much more.
Here is how you can do that:
Set financial goals
If you aren’t clear on your financial goals, then you won’t be able to determine how you want to handle your money.
It’s also important to get very clear on those goals and write them down.
If you need some ideas, check out these Money Goal Ideas for 2021.
Create a budget/Track spending
If you already budget, great. You’ll be able to use an average of those numbers.
If you don’t, you will now start budgeting! First, you’re going to need to add up your spending and where the money went from at least the last 3 months.
Otherwise, you’re just going to be guessing here and it won’t be an accurate projection.
If this is new to you, check out my video on how to create a budget.
Once you’ve created an average budget for you (budgets should change monthly), you’ll be able to determine Your Income – Your Expenses.
If Your Income – Your Expenses = a positive number, great. You can work with this number for now and work on increasing it in time.
If Your Income – Your Expenses = a negative number, you need to address this first. You are living paycheck to paycheck and you want to end that cycle as soon as possible. You can continue down this list, but it will look a little different for you. I also suggest you read, How To Stop Living Paycheck to Paycheck.
Layout your year
On a sheet of paper or on a spread sheet, list all the months of the year across the top. Let’s call this your ‘Year At a Glance.’
To the best of your ability, record the events/happenings in each month along with how much you expect them to cost. This includes birthdays, holidays, travel, car registration/maintenance, renewals, etc.
It will look something like this:
With this, you can add up the totals in each category and use this information in your financial plan.
Determine how to allocate your money and create a timeline
With the information you have determined, you can create a plan for your money and a timeline for each plan.
Let’s say on average Your Income – Your Expenses = $300. With that $300 every month you will determine how to allocate it. It can all go to one of the above until you reach your desired number, or it can go to multiple.
Your emergency fund should be first priority and you want to plan on getting it up to a number you feel comfortable with.
Considering 2020, many people prefer to have a higher EF, but every situation is different.
I think sinking funds are amazing and something that everyone should have. They are extremely helpful and the longer you have them, the better it gets.
From your ‘Year at a Glance’ layout, you can decide which sinking funds would be most beneficial to you and how much you would need to contribute to them each month before the money is needed.
For example, if you pay your dental insurance premium in one lump sum every December for a total of $540. You’ll need to contribute at least $45 every month (for 12 months) to that sinking fund.
Whatever you decide on, you now need to add it to your budget and adjust.
If you have debt, your minimum payments should already be included in your budget line items. If your goal is to pay down your debt, you can put your leftover money to the loan(s) you prefer.
Based on that number, you can determine how many months/years it would take you to pay down your debt. *Don’t forget to account for interest!
If you want to pay down your debt by a specific date, you can also determine how much would be required to meet then timeline. You’ll then see if you need to work on lowering your expenses and increase your income and by how much.
If you’re ready to invest, first look at what your employer offers. If they offer a match, I suggest you start there and include that as a line item in your budget (and/or adjust your income).
Otherwise, you can look into investing into your Roth IRA or brokerage account.
The Roth IRA contribution limit (in 2021) is $6,000. Do you want to reach that? You would need to contribute $500 per month. How can you make that happen?
Buy a home/Get married/Open a shop
These other big goals involve money as well. If you want to achieve them by a certain time, all of this information still applies.
These things may not be a part of your 1-year projection, but they may be your long-term goals and you can start preparing for those now too!
Break your goals down further
Setting a financial goal is one thing, but you can’t just expect things to fall into place.
There is a lot that goes behind each of your financial goals and they can be broken down further. When you break your goals down, you are more likely to achieve them.
For example, if your goal is to pay down $20,000 of debt this year:
- That’s also at least $1,667 a month
- $385 a week
- or $55 a day
If you want to buy a house:
- Save up a 20% down payment (how much is that each month?)
- Get approved for a loan (steps to do that?)
- Find an agent (gets recs, read reviews)
- Determine the city you want to live in (pros/cons list)
- Research x, y, and z
Which leads us to the next step.
Determine what needs to change
Unless you’re setting easy, unchallenging goals…you’ll need to make some changes to your money decisions.
If the projection you have laid out isn’t the outcome you want, what needs to change?
I’m sure you have options:
- Move somewhere cheaper/get a roommate
- Sell stuff you don’t need
- Sell your car
- Adjust some line items in your budget (lower them and/or remove them completely)
- Increase your income (second job? side hustle? new job?)
- Focus on paying off your debt with the highest minimum payment (to free up that money)
- Negotiate your interest rates (call credit card companies to ask and/or refinance other loans)
At the end of 2019 I decided I would do a No Spend Year for 2020.
Why? Because I had spent over $5,000 in the ‘miscellaneous’ category of my budget and I wanted to pay off more debt and save.
In 2020 I ended up paying off $20,000 of debt, a $4,000 emergency fund, and hundreds in sinking funds.
I determined what needed to change and I changed it!
Adjust as necessary
As you make these changes, you’ll start to realize you have more wiggle room with your money.
That $300 leftover at the end of the month turns into $500. How does that affect your finances?
A few months after that it turns into $1,000. Then before you know it you have a fully funded emergency fund, you’re debt free, you invest 20% of your income, you have $20K saved so far for a home, and so on.
You can keep on adjusting and you can continue to improve your finances.
Without creating this financial outlook, it can be hard to determine the changes you need to make.
Get clear on where you currently stand and challenge yourself to go after those goals.
This exercise can be powerful and life changing.