We all know how important it is for everyone to have an annual physical checkup. The goal is to ensure you are free of health problems and to address issues that might exist before they become larger issues. This information is crucial for our health and well-being. As you are well aware, the current economic situation has created an environment where many have been forced to think that their financial plan, not them, has contracted a terminal financial illness. Small problems, that can be overlooked when the economy is performing well, can become troublesome and more apparent during harder times. What can you do? Take some time to perform your financial checkup, detect potential financial problems, and identify opportunities to improve. The end-of-the-year is an excellent time to perform this “check-up” of your progress toward financial success.
An annual financial check-up takes only three steps to complete.
Step 1: Check Your Income and Expense Statement (Your Budget)
We all know that income and expenses are the major categories in a budget statement. Many, however, do not have a clue about where they are spending their money. If you’re one of these, this provides a great opportunity for you to take action to control your spending. There are many published recommendations of how people, on average, spend their money. If you’re average, follow one of these publications. Otherwise, if you’re like most of us and not average, make it a goal to begin the New Year with a better understanding of your sources of income and expenses. For income sources that can be realistically enhanced, enhance them. For expenditures that can be realistically reduced, reduce them – except for savings. The first item in your budget should be your savings for your future, as well as an emergency fund. Pay yourself first and try to save at least ten percent of your income. If this requires you to eat more meatloaf and less porterhouse, eat more meatloaf. Controlling your spending and seeing your opportunities grow is an incredible reward for making these “sacrifices”.
Step 2: Check Your Balance Sheet, or Net Worth Statement
A balance sheet outlines what assets a household owns and what liabilities (debts) it owes. We all know that the greater your liabilities, everything else constant, the less healthy your finances. Knowing this, if you can move toward fewer liabilities, your household financial health will improve. While we cannot control the returns on some of our investment accounts, we can control our decision to borrow and spend money. So, take control of what you can control. A simple trick is to first pay down loans with high interest rates. A helpful tool is PowerPay, freeware from Utah State University (https://powerpay.org/).
To help you make progress, I’ve attached a net worth statement in Excel that I have used for years – without my personal information on it – that allows the user to list the value of each of asset categories and each loan to calculate a net worth. There is also a column where I have listed a guess of possible returns for each category, to provide estimates of a household’s net worth at different points in the future. Then, in the following year, compare last year’s estimate of your future net worth to what it is, in order to see if you’re ahead or behind in the “finance game”. No doubt, this year will be a disappointment but, trust me; you will be positively surprised in many years. (Note: You can enter your own estimates of returns, and add rows for additional assets, loans, etc. just like any Excel file.)
Step 3: Check Your Assets
Take your assets and calculate the proportion of your assets in different asset categories: Small, mid, and large capitalized companies, value versus growth, bonds versus stocks, real estate versus financial, international versus domestic investments, risky assets versus less risky assets – whatever categorization is appropriate to help you. There are software programs on the internet that can help with this but I am unaware of any freeware. Regardless, you should have a better understanding of where your investments are invested and judge if the allocations are appropriate for the time-frames and magnitudes of your financial goals.
Importantly, the old adage, “don’t put all your eggs in one basket” is a maxim that points out the importance of diversification to your portfolio’s performance. Moreover, overtime, the diversification of your portfolio will change as deposits, gains, and losses change the actual weights from your desired weights. Importantly, diversification can increase your return on your investments, while decreasing the risk of your investments.
As we approach the end of the year, perform this simple three-step financial check-up. Your financial success requires you to be financially healthy. Lower your debts, add to your assets, reduce your expenditures, and take control of what you can control. Then, when the economy is back to her robust self – and she will be – the results of the habits you learn during this “teachable moment” in history will exceed your expectations. That is my promise to you, if you take this opportunity to give the gift of financial health to yourself.