Start the New Year with a Financial Check-Up

Jan 2012

The beginning of a new year is a great time to begin to improve your financial wellbeing, and the first step in that process is to conduct a personal financial examination. Often, people review their financial plan only when something bad happens. However, if you are really interested in improving your overall financial condition you need to plan before something happens.
In conducting your personal financial examination the following items should be considered:
1. Review your short and long-term financial goals. What are your goals? Have your goals changed since your last checkup? Are these goals realistic?
2. Build an emergency savings fund. The fund should have enough money to pay up to 3-6 months of living expenses if your income is disrupted due to illness or job loss.
3. Have there been any personal changes since the time of your last review. If you got married (or divorced) you will want to make sure your estate planning documents are amended accordingly and make sure your beneficiary designation on 401k, 403b and IRAs reflect your wishes.
If you had a child it is very important to make sure you have a will (and maybe a trust). The most important decision a parent can make is the selection of a guardian for your children in the event of death. This is accomplished by having an up-to-date estate plan.
4. Do you have enough insurance to protect you in the event of a loss or disability? Do you need life insurance or long term disability insurance? Are you paying for insurance that you no longer need? For most people the reason to acquire life insurance is to replace income in the event of death. Once you retire your income is normally set so there is nothing to protect so you may no longer need life insurance.
It is also a good idea to review the cost of your policies. Too often people renew their insurance policies and fail to check if there are less expensive or better alternatives available. Periodically shopping around policies is a good way to assure yourself of not overpaying for your insurance and to make sure the policy you have is current for your particular situation.
5. Paying off credit card interest and other high cost interest is essential. Credit card interest is not tax deductible so the real cost you pay to maintain credit card balances is actually higher than the interest you pay. Paying off credit card debt is also a great way of making a guaranteed return on your money. With savings rates at zero and one year CD’s paying approximately 1%, paying off credit card debt is the equivalent of obtaining a significantly higher return (at least 12% or more in most cases). There is no investment I know that pays as high a guaranteed return.
6. Review your investments not only for performance but for risk tolerance. As part of your financial checkup you should make sure your allocation between stocks and bonds is right for you and that the portfolio is consistent with your risk tolerance. Most people lack a comprehensive plan for their investments. What they own is a collection of investment vehicles that lack a strategy. What is needed is a broad based diversified portfolio that will further your investment goals and minimize risk.
Along with an appropriate allocation between stocks and bonds it is very important to rebalance your portfolio at least annually. Rebalancing your portfolio at least annually is also a great way of buying low and selling high. For example, assume that your target allocation is 60% stocks and 40% bonds. If the performance of the market changes the allocation so that stocks are worth 70% of your portfolio then you should reduce your holdings in stocks by 10% and increase your allocation to bonds by the same amount. Rebalancing on a regular basis will prevent your portfolio from becoming overly aggressive or overly conservative.
7. Maximize your retirement savings. Participating in a 401k plan or other retirement account (IRA, 403b) is a smart and simple way to increase your net worth. In many cases employers match a portion of employee’s contributions. Failing to contribute means you are passing up free money. If you are contributing try to contribute the maximum permitted to these accounts
8. Check your credit report. It is also a good idea to get a free copy of your credit report (available at and make sure all of the information on it is accurate.
For many people, scheduling an annual physical with their doctor is something they build into their calendar every January. Adding a financial “physical” to your new year’s To Do list is another way to ensure your well-being in 2012.


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