How to Forecast Your Finances

By Douglas Matus

Most financial planning reflects on the past to help with the present: you set a budget based on previous spending, and use it to manage your daily cash flow. To take the long view with finances can seem difficult, since it’s impossible to predict fluctuations in your employment, the economy, or personal circumstances.

We all plan for our future finances, though, whether we realize it or not. Goals to buy a house, retire comfortably, or save for a vacation all require foresight. If you’ve ever wanted to have a clearer picture of your financial reality, you should create a personal finance forecast. Before you peer into the crystal ball, however, you’ll need to do some groundwork.

Reasons to Forecast

Budgets can help you account for regular expenses, like bills and groceries. A financial forecast, on the other hand, lets you create a truly comprehensive view of your finances through the inclusion of non-recurring expenditures.

The effort to put together a forecast brings rich rewards, as it allows you to make plans to a startlingly level of exactness. With a well-constructed forecast, you will never again struggle to pay property or income taxes, or worry about cash around the holidays.

Prioritize Goals

Before you can build a forecast, you should establish your financial goals.

“Look at your financial progress over the last year and set your financial goals for the next 365 days,” says Mike Terrio, an investment advisor and certified retirement planning counselor. “Writing down goals makes them more concrete and easier to plan for throughout the year.”

Financial goals, whether home ownership, debt repayment, or annual bills like taxes, become the driving force behind any overall plan. For the purposes of your forecast, you’ll want to establish short term goals to accomplish in the next year, 2-5 year mid-term goals, and long-term goals that will take 5 years or more.

Set a Monthly Budget

Without a monthly budget, it’s impossible to forecast your finances. Budgets allow us to understand how much we need to cover basic necessities such as rent, utilities and debt payments. You can also get an idea of how much you need to cover typical expenditures like groceries.

“To create any financial plan, you must first find out where your money is going,” says Oraynab Jwayyed of Business Interludes, LLC. “This can be accomplished by managing your spending over a set period. Remember to include wiggle room for the unexpected.”

To get started, subtract the amount of your total monthly bills from your income. Next, review your bank statements to get an idea of what you spend each month for food, entertainment and transportation.

If you find yourself with almost nothing left over, you’ll want to reevaluate how you spend your money. A benchmark of 10 percent of your income put aside for savings indicates overall financial health, and provide funds to structure your plans moving forward.

Visualize Your Future

Armed with this information, you’re ready to create a long-term financial forecast. Tools like let you track your money and organize spending into categories. This information helps determine your actual monthly cash flow, or the amount of incoming and outgoing money you have to work with. If you feel as if your income is set, then your outgoing funds provide you the means to plan.

To create a forecast, you’ll need to maintain either a spreadsheet or use an automated tool like PocketSmith. PocketSmith keeps track of your expenditures and income across a calendar, and generates graphs to plot your finances. Whether you use PocketSmith or create your own method, visually tracking your expenditures enables you to save and set annual goals.

“It’s easier to save for things when you visualize your finances and put a plan to paper,” says Mike Terrio. “You can then ask yourself questions: When do you want to retire? How often do you want to travel? What about that dream house?”

With adequate planning and a financial forecast, you can find a way to satisfactorily answer any of these questions. Where there’s a will, there’s a way; and with firm and clear goals, your financial forecast should reveal clear skies ahead.

Written on May 5, 2016

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