As 2021 draws to a close, it’s a good idea to review your budget for the year. It may not sound like the most fun way to end the year, but the time spent reviewing your budget can reap rich rewards going forward. When 2022 comes round, you’ll be able to start the year with a solid plan to improve your finances.

Before diving into the review process, here’s a look at the benefits of reviewing your budget.

Why Review Your Budget For 2021? A Look at the Benefits

The biggest benefit of reviewing your budget for 2021 is that it helps you make more informed financial decisions for 2022. Think of your end-of-the-year budget review as an annual financial health checkup. The results of the review will tell you what you need to do more of to improve your financial health and what setbacks to watch out for.

First of all, your review will tell you if you’ve made progress on your financial goals through the year or whether you’re back where you started. You may feel like you’ve made pretty good progress during the year. But have you really? There’s no way to actually know for sure unless you review your budget. Maybe you missed a loan or credit card payment that derailed your progress. Or those emergency vehicle repairs may have made a huge dent in your savings. Small things add up over the year.

A budget review gives you a wholistic picture of your finances and shows if you have accomplished what you hoped to.

How To Review Your Budget For 2021

Reviewing your budget is a two-step process.

Step 1: Get a broad overview of your finances.

These are some things you’ll need to do to get started:

1. Calculate your total income earned over the year. If you have a side hustle in addition to your main income stream, add both earnings.
2. Calculate how much debt you’ve managed to pay down. This includes student loans, mortgage and vehicle loans.
3. Calculate your net worth. To do this, simply add up all your assets and subtract your total debt. If your total debt is more than your assets, your net worth will be negative. As you pay down the debt every year, you’ll find your net worth slowly increasing until it crosses over the zero mark and becomes positive.
4. Add up your expenses for the year. This includes your rent or mortgage repayment, utilities, groceries, transportation and other incidentals for twelve months.
5. Calculate how much you’ve managed to save during the year.
6. Check your credit report and credit score. You’re legally entitled to request a free copy of your credit report once a year. Now’s a good time to put in that request and check your credit report and your credit score.

Step 2: Ask yourself these questions:

1. Is my net worth higher than it was in 2020? If it isn’t, what can I do to increase it in 2021?
2. Am I on track with paying off my debts? Have I made all payments on time or did I miss any? Do I still have any old payments outstanding?
3. Can I afford to increase my monthly payments and clear my debt faster?
4. Is my credit report correct and complete?
5. Has my credit score improved from last year?
6. What did I spend my money on?
7. Am I happy with my year in review?
8. What are market interest rates? Are they lower or higher than the start of the year? Are rates on an upward or downward trend?

Your answers to these questions will make it easier to identify what you did right during the year and what mistakes you may have made. This will help you set a better financial plan for 2022.

Setting A Budget For 2022

This is where the rubber meets the road. Now you can use the information gleaned during your review to set your budget for 2022.

Your 2022 budget should address all of these issues:

#1- Consider adding another income stream or explore other opportunities to increase your net worth faster in 2022. This could offer several benefits especially in terms of a lower debt-to-income ratio, which can give your credit score a big boost.

#2- Did you make all your loan payments on time in 2021? If you did, great. Keep doing what you’ve been doing.

#3- Did you miss any loan repayments? Did you forget the deadline or did you not have enough money to clear the payment? If remembering deadlines is a problem, it’s worth taking the time to set up autopay. Not only will your payments go out on time but you’ll also get a rate discount, which will help you save on interest. If you missed a payment because you couldn’t afford it, you need to look for ways to increase your income to make the payments affordable. Alternatively, you could consider refinancing and lowering the monthly payments in 2022.

#3- If you managed to save money regularly every month in 2021, consider increasing your loan payments in 2022. This helps you clear your loan earlier. You’ll also save a substantial amount in accrued interest over the shorter loan term. Even better if you can increase your monthly income. That will free up more cash that you can put towards the monthly loan repayments.

#4- If you spotted any inaccurate or incomplete entries in your report, file a dispute and get the errors corrected as they could be damaging your credit score.

#5- If your credit score has improved, consider refinancing your loans. Your higher credit score will qualify you for a lower interest rate, saving you a significant amount in accrued interest.

#6- Take a closer look at what you spent your money on during the year and identify areas where you can cut down your expenses. The more money you free up, the more you can put towards clearing your debt faster. The relief you’ll feel when you’re debt-free is unparalleled.

Reviewing your budget for 2021 doesn’t have to ruin your Holidays. If you start now, you’ll have ample time to complete the review and also decide on a plan of action for 2022.