For most, New Year's Eve is a time to gather with friends and toast to new beginnings. For those in the financial sector, it is the best time to reflect on the fiscal year that was, and prepare for the year to come. While I am sure the last thing on your mind is financial planning while sweeping away the confetti and noise makers, why not use this time of year to reassess your financial planning goals and objectives? Below is a list of the most important steps one should take to help monitor your progress and assure your portfolio is in line with your objectives and goals.
* Take your financial picture: You've taken your family portrait for your holiday cards, and now is a great time to take your ""financial picture." This simply means updating your personal balance sheet and calculating your net worth. Another year behind you can mean a substantial change to your personal bottom line. On the positive side, not only have you paid another year of principal and interest on your home or automobile notes, but you should have another year of savings in your 401(k) or Individual Retirement Account. Also, by re-calculating your net worth, this will allow you to monitor any increases to consumer debt (i.e. credit card) or other unwanted debt. I always recommend taking your "financial picture" in coordination with updating your budget in case there is a need to reallocate funds to help eliminate any of the newly discovered consumer debt heading into the New Year.
* Reconfigure your budget: There is no better time to set your budget for the upcoming year than after a year has just ended. Take the time to review the prior year's income and expenses and categorize them to help you quickly gauge where you may be spending too much. This may seem like a daunting task, but there are some great software options out there that will automatically do this for you. Some good examples are Quicken, Quickbooks, and Mint.com. Clients are always amazed by how much money they spend in certain areas once it is totaled and sitting in front of them.
* Compare "actual" to "assumed": When retirement planning, most financial planning professionals will use a hypothetical illustration of what your portfolio would look like using various assumptions from now until retirement however long or short the time horizon. Since no one can predict the future, past performance is almost always used. Now that you are one year closer to retirement, this is a great time to compare where your actual portfolio balance is in comparison to the hypothetical illustration. As you get closer to "the date," actual performance of the portfolio is going to have a large impact on not only whether that goal will be met, but in the case of underperformance, if an increase in retirement savings is required. The sooner you catch these things, the better and more realistic your chance of reaching your goal becomes.
* Reassess your risk exposures: January is a great time to look back over the previous year and review any new exposures you might have to unwanted risk. This is done by assessing whether any event or events occurred during the year that would leave you overly exposed or under insured. The most common events that increase risk exposure are: getting married, buying a home, having a child, receiving a raise or taking a new job offer. Any of these life changes would require you to ask yourself, "If something were to happen to me today, would my love ones and I be covered?" The most common tools used for risk management are: health insurance, life insurance, disability income insurance, homeowners insurance or an umbrella policy.
* Rebalance portfolio positions: With the S&P 500 (the most widely accepted measure for market performance) up over 13 percent for the year, allocations to your various holdings could have fallen out of line from your initial or desired asset allocation. By rebalancing, you capitalize on the classic "buy low and sell high" mentality since you will essentially be buying your "losers" and selling your "winners."
* Schedule your annual review with your advisor: If for nothing more than to update the information mentioned above, you should meet with your financial advisor at least once a year. By informing your advisor of any changes, you will allow them to adjust your current financial plan and make your retirement goal even more realistic.
An effective financial planner will advice their client to use the month of January as a time to hit the "reset" button and look at the New Year as chance to catch up if necessary or get ahead if the opportunity is there. With your updated budget and personal balance sheet, this gives you a chance to see where you currently sit and look for any shortfalls that might exist. Use the New Year to start chipping away at any shortfalls or to start knocking out any new unwanted debt. People always say that financial planning is too hard or too complex, and unfortunately the majority of them don't do it. The key to having success in planning for your financial future is to first get a plan, and second, update your financial information at least annually so you can track your progress and make any necessary adjustments before it's too late.
Kyle McCann is a principal in Prutzman Wealth Management in Reno. Contact him at 775-996-5672 or Kyle@prutzmanwm.com.
