A 5-step process to get your financial house in order.
January is a great time of year to review your personal finances. In this essay, I’m going to give you my 5-step process for an Annual Review.
Here are the outcomes you can expect from your Annual Review:
- An updated Net Worth Statement listing all of your assets and liabilities.
- An understanding of how your investments are allocated and an awareness of any investments that are not aligned with your goals.
- You will know your savings rate. If it’s not where it needs to be I will show you how to adjust it to make progress.
- You will be assured that your will, trust, and other estate documents say what you want these documents to say.
- You will have confidence that your IRA and life insurance beneficiaries are correct.
Unfortunately, most people know they should give their finances some attention, but never get around to it.
Most people are overwhelmed by the process.
Being a CERTIFIED FINANCIAL PLANNER™ for the past 19 years, I have seen 4 big reasons people struggle to make actionable progress.
- Reason #1 – They don’t like money topics, and therefore don’t know where to start.
- Reason #2 – Their finances are a mess. They have accounts everywhere and haven’t simplified their finances.
- Reason #3 – They procrastinate estate planning decisions and never update their will or trust because their family situations are complicated.
- Reason #4 – They assume their investments are working for them, but they aren’t really sure who they can trust to give them objective guidance.
The good news is, it doesn’t have to be this way! Conducting an Annual Review is a simple 5-step process that you can do own your own or with the help of a fiduciary financial advisor.
Here’s how, step by step:
Step 1: Update your Net Worth Statement
The first step is critical to knowing where you currently stand.
- Do you know exactly how much money you have saved for retirement?
- How about your kids’ college education?
- Do you know the value of your business?
- Or, how much you owe on your mortgage?
- Speaking of your mortgage, this is also a good time to check your interest rate. Should you refinance?
- Don’t forget about that new cryptocurrency account you set up at Coinbase!
The process of updating your Net Worth Statement will bring clarity to your finances and will most likely show you what areas need some attention. This is a great opportunity to ask yourself how you can simplify things this year!
Step 2: Review your asset allocation.
So many people let their investments sit for years without evaluating their asset allocation. This can become dangerous if you have some big winners that you let go forever. Will these positions always be winners? Maybe. Maybe not.
This is a good time to look at your portfolio and review how much you have in cash, stocks, and bonds. I’ve seen many people unintentionally let their cash balance build up much higher than they ever needed and miss out on some good opportunities in the market.
Don’t forget to review your individual positions for any concentration risk. If you’ve owned some of the big winners you may want to trim these positions if they are in a retirement account.
What if the winners are in a taxable account? Well, don’t overlook that fact before taking action as you may want to hedge the position rather than sell it.
Finally, you want to determine if there’s anything missing from your portfolio. Where do you see the world going? Are you capturing the big trends with your investments?
Step 3: Review your Savings Rate.
If you are not yet retired, still working, and in accumulation mode, then this is a critical step. Take a look at the amount you saved (added to your investments) over the past year. Divide that amount by your income. This is your Savings Rate. You should know this number. You should also know how much you need to be saving to achieve your retirement goal. A financial advisor can help you with this.
If your Savings Rate isn’t yet where you want it to be, I have found a great way to make progress is to save half of your raises. Since it’s a new year, you may have had a compensation increase recently. Adjust your automatic savings by adding half of your raise to it. Feel free to enjoy the other half or use it for other goals!
Step 4: Review your estate documents.
Here are the documents you want to review:
1/ Will – This document states what you wish to happen to your assets and minor children when you die.
- Who will inherit your assets? Is that still in line with your intentions?
- Who will be the guardian of your children if you and their other parent both die? Do you need to make any changes?
2/ General Power of Attorney – This document gives someone else the power to act on your behalf with financial matters in the event you are unable to. Do you remember who you named? Is this still the best person?
3/ Healthcare Power of Attorney and/or Living Will – These documents are critical in the event you can’t make your own healthcare decisions. Your Healthcare Power of Attorney names individuals you want making those decisions for you. Your Living Will communicates your wishes for end of life medical care. Once again, it’s important to review these documents to be sure they list the right people and say what you want them to say.
4/ Trust – Not everyone needs a trust, but if you have one it’s important to review this document too. Essentially, your trust provides a way to control what happens to your assets beyond your lifetime. Reasons for having a trust can change over time, so it’s important to review any trust documents to make sure the trust is still aligned with your goals. Equally important is making sure you are still comfortable with the future trustees of your trust. It’s not uncommon to make a change to who the trustee(s) will be.
Step 5: Review all beneficiary designations.
The final step in your Annual Review is to verify that the beneficiary designation on all of your assets are correct. You will want to look at retirement accounts, IRAs, life insurance policies, and any accounts with a Transfer On Death registration.
Common errors here are:
- Only naming a primary beneficiary (usually a spouse) and not a contingent beneficiary.
- Not naming your trust when that was the intention.
- Forgetting to change a beneficiary designation after a divorce, marriage, or death of a loved one.
- Setting up a new account and forgetting to name any beneficiaries at all.
If you discover any accounts that need to be updated do it right away!
Schedule your Annual Review for every January.
I have found the best time to do an Annual Review is in January. There’s just something about the 12/31/YYYY date on the calendar that I find motivates people to take action. As we finish another chapter in life and turn the page to the next it’s the perfect time to take a step back and look at the bigger story.
Make it automatic by setting a recurring reminder in your phone or task management system.
Do an Annual Review once a year, and I assure you it will help you stay on track financially and make progress towards your goals!