The end of the year is a great time to perform an annual financial checkup! Just like doctors recommend getting an annual physical or well-being checkup, we recommend looking at your finances to ensure progress has been made over the past year.
We previously discussed strategies to review as we approach year-end in our blog post: Year-End Financial Tips. Check this out if you have not seen what types of strategies you may want to implement before the new year!
Make Your Financial Resolutions Count
About 30% of Americans made some sort of resolution for the new year, so why not make one for your finances? This could be a great opportunity to identify progress that was made in the past year, but also set goals for the upcoming year that you want to reach. Setting a goal is a way to hold yourself accountable and may increase the likelihood of actually obtaining it. Your goal could be anything from earning more or spending less, growing your net worth, or creating a savings plan for a big purchase in the upcoming year.
There are many types of financial goals you could aim for, but these are the select few we will cover in this blog. While we really enjoy spreadsheets and logging this data to calculate the year-over-year changes, we realize not everyone is that analytical. So, however you prefer to perform your checkup is fine as long as you are doing it one way or another!
Increase Your Net Cash Flow
First, one goal that everyone should aim for is to increase your net cash flow. For purposes of this blog, net cash flow is the amount of money your bring in minus the amount of money you spend. The remaining amount is your net cash flow, and these funds could be used to save, invest, or even pay down debt. The first part of the equation is your income amount – so during this checkup, we want to see if you were able to increase your income at all during the previous year.
Did you get promoted, receive a raise, or maybe start earning money through a side hustle? The second half of the equation is your spending habits. Were you able to stay within your outlined budget for the year? If not, what steps could be taken to ensure you are more in tuned with your budget for the upcoming year? Monitoring your net cash flow is one way to ensure you are not spending more than you are earning.
Track and Grow Your Net Worth
Next, one of our favorite goals to review with clients is the tracking of net worth. We discussed how to calculate net worth in our previous blog, How to Calculate and Understand Net Worth, but it is your assets minus your liabilities. It is the things you own minus the money you owe. The items to review for this checkup would be your savings accounts, investment accounts, real estate, and your outstanding debts. Were you able to set aside savings throughout the year?
Did your investments or real estate appreciate in value during the year? Or maybe you decided to pay down some debt items instead of saving/investing your excess cash flow. All of these could be ways to see your net worth grow from year to year. Tracking your net worth can help ensure you are able to afford long-term goals such as retirement.
Plan for Big Purchases
Lastly, it is important to identify any large purchases that might be occurring in the new year and to create a plan to save for those goals. Are you planning some international travel? Buying a new car? Or maybe saving for a down payment on a new home? These are all big-ticket items that require a savings plan to achieve.
You should identify when this expense will occur to see how long you must save. Then, you can calculate how much you need to save per month to hit that goal or possibly need to delay the goal if you need more time. For example, if you are going to spend $10,000 on an Italy trip in November, then you have 10 months, so you need to save $1,000 per month to hit that goal. $10,000 will not appear overnight, so we believe it is best to set a savings strategy if you want to see the Roman Colosseum! Creating savings plans is an efficient way to help you achieve short-term spending goals.
Why Perform an Annual Financial Checkup?
- Just like doctors recommend getting an annual physical or wellbeing checkup, we recommend looking at your finances to ensure progress has been made over the past year.
- Monitoring your net cash flow is one way to ensure you are not spending more than you are earning.
- Tracking your net worth can help ensure you are able to afford long-term goals such as retirement.
- Creating savings plans is an efficient way to help you achieve short-term spending goals.
Speak With a Trusted Advisor
If you have any questions about your investment portfolio, retirement planning, tax strategies, our 401(k) recommendation service, or other general questions, please give our office a call at (586) 226-2100. Please feel free to forward this commentary to a friend, family member, or co-worker. If you have had any changes to your income, job, family, health insurance, risk tolerance, or your overall financial situation, please give us a call so we can discuss it.
We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.
Sincerely,
Zachary A. Bachner, CFP®
with contributions from Robert Wink,Kenneth Wink and James Wink
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