Getting Your Financial House in OrderSubmitted by AssetGrade, LLC. on January 14th, 2019
Submitted by Pat Cote on January 14, 2019
Many of us have New Year’s resolutions, as Susan talks about in her Financial Fitness article. Once you have addressed the key elements of financial fitness, the next step is to get or keep your financial house in order.
The first step is to know your finances. What do you have and what do you make/spend? You can put in many hours and make a very detailed spreadsheet if you are so inclined. We find about 1% of people actually want that level of detail. For the rest of us, a top-down, simple approach works fine and is a lot easier to maintain.
To calculate what you have, pull together a list of your assets and add them up – this will include your 401(k), brokerage accounts, IRAs, etc. It will also include any outstanding debts – credit cards, loans, mortgage(s), etc.
To calculate what you make/spend, one of the easiest techniques it to look at what is going on in your primary bank account (this works if you have your paychecks deposited there, as well as pay bills from that account). Start with your net pay, then subtract out what is left over at the end of each month. For example, if $10,000 of net pay is deposited in your account each month and you have about $1,000 left at the end of the month, that tells you that your monthly expenses are running around $9,000. Since these amounts can fluctuate from month to month, take a look at the last six months and take the average of what is left in the bank account each month. This will give you your estimated monthly savings.
The second step is to know where you are going, which means having a financial plan in place – that means different things to different people. For some, it means a detailed, comprehensive financial plan that can be 80+ pages. The reality is that most folks do not need that level of detail.
Most folks only need a simple plan to make sure they have the basics covered. Many plans start with goals, specifically what people are trying to achieve with their money. The goals are usually some combination of retirement, college for their kids, extras like a vacation home and leaving assets for loved ones or charity. The plans would then map out how to achieve your financial goals, laying out the savings/investment plan and the asset allocation (e.g., % stocks vs. % bonds) that makes sense.
The third step to get your financial house in order is to execute your financial plan. In other words, to make sure steps #1 and #2 above are aligned by lining up your assets, liabilities, income and expenses with your goals. The biggest part of the execution is often to get the appropriate asset allocation in place across all of your assets.
It is important to stay on top of the execution of your financial plan by revisiting your information on a regular basis, generally at least once per year. In addition, your plan should be reviewed for needed updates any time there are significant life events: weddings/divorces, births, deaths/inheritances, job changes, etc.
The key take-away is that it does not have to be a heroic effort to get your financial house in order. Making sure a few key steps are taken, as outlined above, can make a big difference to your finances and to your peace of mind!