December is the time of year where most people shift from the hustle and bustle to slowing down and taking a much-needed break for the holidays. Outside of shopping for holiday gifts, which can be stressful, most people take the time to rest and enjoy their friends and families.
When things start to slow down, it is also a prime opportunity to reflect, organize, and prepare without the rush of competing priorities for your time.
Taking the time to reflect on last year is a beneficial exercise to position yourself for expansion and acceleration in the new year. This time will provide insight and revelation into what has been accomplished and growth opportunities for the new year.
As you reflect on this year’s events, reflecting on your financial goals and performance is one of the many important areas to dedicate time to review. Money is a non-biased barometer of how you stewarded your resources this past year.
Why You Should do a Financial Review Before The New Year
If building wealth and being a good steward of your resources is one of your financial goals, then conducting an annual year-end financial review is a critical activity to position you for success in the new year. Getting in position is key.
One of my favorite quotes is “When Preparation Meets Opportunity = Success”. You must prepare yourself for the opportunities that are coming your way. The people who can best respond to an opportunity are the ones that are ready, not the ones trying to get ready. So, if you want to be in position, you must assess where you are now and plan ahead.
Take this time to reflect, assess and direct your money.
“When Preparation Meets Opportunity = Success”
Ground Rules for Your Financial Review
Before starting the financial review, commit to honesty and transparency. In addition to honesty, you must drop the guilt and shame. At this point, the numbers are the numbers.
The difference happens, when you decide what to do about it and then execute. The beautiful thing about each new day is that you have an opportunity to change course, create better habits, and make better decisions. This should be the focus of your financial review. Review your performance and commit to a better, stronger new year.
It is all possible.
You also want to dedicate time for this financial review. This is not just a quick five-minute check-in on the mint app. You want to set aside time in a quiet location to assess and reflect on the behaviors and events that contributed to your current results. If you have a significant other, then include them in the assessment and discuss the current state together.
This exercise is appropriate for everyone whether you feel you are doing great with your money or there is room for improvement.
What You Will Need
To complete your review, you will need the following:
List of recommended documents
- Transaction History from Banks/Credit Cards
- Either from an app such as Mint or Personal Capital
- Latest Investment Statements
- Insurance Coverage Statements with Beneficiaries
- Life Insurance
- Car
- Any other insurance coverage such as umbrella
Dedicated time and space to think and reflect
Journal/notepad or google doc to capture your reflections
How To Evaluate
Celebrate Your Wins
When you start the review, highlight your wins first.
Start by recognizing and celebrating the activities that moved you closer to your goals this past year. No matter how big or small, they all count. Some examples can include following a spending plan this year, increasing your 401K contributions by 1%, or purchasing your first stock. One habit win could be learning to say no when the activity does not align with your financial goals. Another example is leaving Target with ONLY the items on your list. (This is for me.:)) To some that may seem like nothing, but to others that is winning!!
Recognize your wins and pat yourself on the back. Continue to encourage yourself along this journey.
For the things that went well, commit to doing those things if they align with your financial strategy for the new year.
Recognize Growth Opportunities
After you celebrate your wins, look at areas that you can improve. For example, did you develop a habit of creating a spending plan, but would lose track of your expenses? Were you constantly caught off guard by expenses that should not be a surprise? Did you spend impulsively on things you didn’t plan for or didn’t need? Identify those trigger areas and create boundaries around yourself until you can control the urge. Write down those areas that you need to improve in.
Identify Patterns and Trends
When you have your transaction history look for any patterns or anomalies in the data. For example, do you notice that you tend to spend most of your money the first few days after you get paid?
Are you saving but then transferring the money out of your savings account?
Were there certain months that are higher spending than others?
Is your savings and/or investment account increasing or decreasing?
Identify what those patterns are and if they are moving you closer or further away from your goals. Reflect on why you are doing these things and create boundaries on habits that are not moving you forward.
Areas To Evaluate
During your assessment, here are a few areas that you should evaluate and have a good understanding of before you create your financial goals for the new year.
Current Net Worth
Net worth is the value of your assets (items owned that appreciate) minus liabilities (things owed). The difference between these two values is your net worth.
Assets include items such as cash, bonds, real estate owned, investment accounts such as 401Ks, and Individual Retirement Accounts (IRAs).
Liabilities include items that you owe and need to pay back such as revolving debt, such as credit cards or payment plans, car loans, student loans, and tax debt.
If you have the data from last year, compare your net worth from the previous year to see if you are making progress.
Regardless of your current position, you want to plan to increase this every year.
Credit Profile
Having a strong credit profile positions you to receive the best interest rates for purchases in the future rather than hoping and praying that you are approved. When your credit is strong, lenders seek you out and offer you the best terms to have you as a customer. It is a very different conversation when you walk in knowing getting approved is not an issue. You can think clearly and be in a better position to negotiate because you have options.
I’m not advocating to seek out debt, but if used responsibly, it can be a tool to accelerate your wealth.
Regardless of whether you plan to leverage debt or not, you want to have a strong credit profile so that you are positioned to get the best terms should you ever need it. For example, if you plan to purchase a house soon, it’s best to have a strong profile.
Remember to stay ready so you don’t have to get ready.
When assessing your credit profile, review two areas: your credit report and credit score. Check your credit report to ensure that everything that is reported is correct and that there are no erroneous charges on your report. You can view your credit report free by going to www.annualcreditreport.com
Next, look at your credit score. Is it trending up or did it take a hit this year? What are the reasons for your score change? You should seek a credit score of 750 or higher to get the best interest rate for any major purchases in the future.
Check out this article for Credit Tips
Financial Goals
Now that you understand your net worth and where you stand financially, consider how this measures up to your short and long-term financial goals.
Did you meet your savings and investing goals? Did you automatically contribute to your retirement or investment accounts to meet your goals?
If you met some of them but not all, find out what worked for the goals that you did meet. For example, were you able to meet your savings goals because it was automatically deducted from your paycheck into a separate bank outside of your primary bank?
If this worked for you, then keep doing it and if possible, apply the same technique to the other areas you need to improve in.
Giving Contribution
Giving is an important factor when building wealth. It may seem counter-intuitive to those trying to accumulate wealth, but giving is the first part of the sowing and reaping principle. Many people want to reap a harvest, but fail to plant the seeds first. Remember when you hold tightly to what you have, you also do not make room to receive what is to come.
Assessing your giving contributions during your assessment is important for a couple of reasons. If you are struggling with money and you have not given much, then it may be a part of why your money is stagnating. I know it can be a difficult concept to receive, but don’t knock it until you try it.
Another reason you want to assess your giving is that you have time to increase your charitable donations to deduct on your taxes.
This is also a good opportunity to see how much you gave this year and determine a goal for next year.
Insurance Review
Having the appropriate level of insurance to protect yourself and your assets is not a popular topic when people talk about money, but it can significantly reduce or mitigate the impact of a financial loss if something were to happen. Insurance is an area that is too often overlooked until you need it. What could have been a financial blow now becomes a minor inconvenience.
So first, if you do not have it, take the time to research options and get it. If you do have insurance, now is the time to evaluate if it is the right level of coverage for you and your family based on your lifestyle and assets owned.
You also want to confirm that your beneficiaries are correct on your life insurance and financial accounts; to include banking and investment accounts.
Income
One area that many people forget to plan for and assess is your annual income. Most assume that their sole source of income must come from their employer. For many, this is the case, but it does not have to be. Do not get me wrong, having an opportunity to earn income to provide for your family is a blessing, especially during our current time, so if your main income comes from your employer, maximize your income whether that be through a promotion or performance bonuses.
If your employment income is your major income driver, now is the time to think about how can you create different streams of income using the gifts and talents you already have. This is especially important if your income decreased this year.
Creating additional income does not always require you to go back to school and accumulate a ton of debt. Think about ways to serve others to help them solve their problems and charge for the solution. One way that I do this is through investing in real estate and applying the buy-and-hold method. Learn more about it here.
Conclusion
Will this take some time to do? Yes.
Is it worth it? Absolutely.
Next Steps – Get organized first with all your documents saved in one place and then return to the assessment with a fresh set of eyes, a positive attitude and then execute. This assessment will be the building block you need to make informed goals for the new year and develop the right habits to be a good steward of your resources.
That’s getting your Finances On Point.