This one is more for the nerds than the free spirits. Let’s face it. The nerd inside of us loves to project our financial futures. We whip out those budgeting spreadsheets and plug in the numbers into our custom-made formulas. Mostly it’s just for fun, but it can be very beneficial to see which direction we’re heading in life. Every few months I check my family’s financial course and with some financial projections and then adjust as needed. This is the process I go through when I project our future – and so far it’s been reasonably accurate!
First Steps: Gather The Data
It’s time for a scavenger hunt. Before you start crunching numbers, you’ll need several tools and pieces of data in order to get started. Some of these will be easy to find, others might take some time. If you’re missing one of these elements, your projections won’t be as accurate. Don’t skimp on these items!
Gather the following:
- A computer. Good news! You’re looking at it!
- At least 6-months of records showing your income and expenses. A year’s worth is preferred. If you’ve been keeping a regular budget, you’ll most likely find this information. If not, turn to your bank records – your online bank account is a great place to look!
- A calculator. Of course you could use your computer’s software-based calculator, but I recommend a separate push-button calculator for fast entry.
- A word processing document and spreadsheet application. I’m on a Mac, so naturally my favorite applications are “Pages” and “Numbers,” but Microsoft Word and Excel will do just fine.
- Your spouse! If you have one, you’ll need yours right beside you.
After you have these items, you’re all set! It’s time to sit down and get started. Let’s begin.
The Way I Project Into The Future
Let’s be perfectly clear about the purpose behind projecting into the future. It’s not to show off your mad number-crunching skills, and it’s certainly not something to count on more than God’s plan for your life. The only purpose for projecting your financial future is to get a glimpse of where you’ll probably end up if you continue on your current financial path. With that being said, let’s take a look at the variables that come into play when projecting your future.
- Change in income or expenses. If you think that a new job or major expense is coming your way, make sure to mark it on your financial timeline. It can help to create a spreadsheet with the months of the year along a left-hand column and type any events along that timeline that you expect would change your calculations.
- Goal transitioning. When you’re on a financial plan, you’ll have several points at which you change how you’ll spend your money. For example, one of your first goals might be to pay off debt. After that, you’ll transition to building your emergency fund. When you make this transition, where you have money saved will change. Write these variables in your spreadsheet.
- Unknowns. To have a conservative estimate of the future, you’ll want to account for unknown expenses. This could be emergency spending or a drop in income. Project a 5 to 10% productivity loss due to unknowns.
Now that you understand some of the variables that come into play, you’ll be able to start projecting into the future using averages. Here’s how:
- Average out your income over the past 6 months to a year. Write that down.
- Average out your expenses over the past 6 months to a year. Write that down as well.
- Find the difference between those two averages and write that down. This number will be how much money you can have dedicated to each of your financial goals such as getting out of debt, building your emergency fund, paying for college, or getting braces for the young ones! You got the idea.
- Ask yourself where you’ll be next month, the month after that, and so on. Adjust as needed to based on your future variables.
I find that the farther I try and predict my financial future the worse the prediction. After all, we really don’t know what the future holds. But it is important to try and see where we’re going in life. Once you’ve projected where you’ll be in 1 year, 5 years, or more, ask yourself if you like where you see yourself at that point in time. If you don’t like what you see, what actions can you take today to change the direction of your life?
So I ask you . . . do you like what you see? How are your financial projections? Let us know in the comments below!