You’ve crossed off your holiday to-dos, rang in the new year and now it’s time for a fresh start, right? If you’re ready to get fit with your finances, we’ve laid out a six-week action plan to help get you started.
Week 1 – Take Stock of Your Finances
Act like a business owner! Create your personal balance sheet and budget. After all, it’s hard to know whether you’ve made improvements if you don’t know where you’re starting from. Here’s an example of how your balance sheet may be structured:
Balance Sheet: Assets (what you own) – Loans (what you owe) = Your Net Worth
Budget: For a simple way to find out what you’re spending, try this math exercise:
Total Income – Savings/Investments – Charitable Donations – Federal/State/Property Taxes = What You’re Spending
This exercise will give you a head start on your 2018 tax returns, as you’ll need some of this information when you’re ready to file. In addition, a budgeting app and/or credit cards that track and categorize your spending may provide helpful insights about where your money is going.
Week 2 – Monitor Your Credit
Request a free credit report from AnnualCreditReport.com. I recommend avoiding other sites that offer “free” credit reports; they usually try to get you to sign up for something else.
Be sure to review your credit report in detail for any discrepancies. And remember, keeping tabs on your credit isn’t a once-and-done type of practice. Set a reminder to request a new report every 120 days from a different agency (the three primary agencies are Equifax, TransUnion and Experian).
Additionally, do you carry any credit card balances that you don’t pay off every month? If so, you should consider researching whether you could transfer to a card with a lower interest rate and set up a plan to start paying it off.
Week 3 – Review Your Insurance Policies
Three weeks into your action plan, take some time to review your insurance policies. There are a few specific guidelines you should follow when evaluating each type of coverage:
Auto & Home/Renters: Request a quote from a competitor for your property casualty insurance to see if you can save money. You should also ask the company to review the coverage limits to see if any updates are in order.
Life Insurance: Review your current policy; do you still need it? Do you possibly need more coverage? Let family members know where to find information about your policy (or policies), should something happen to you.
Disability or Long-Term Care Insurance: The review guidelines for these types of policies generally differ, depending on your age:
– 20s to Mid-50s: Review any existing disability insurance coverage and evaluate whether it’s sufficient. For instance, under your current policy, would you be able to continue your lifestyle if you had a long-term injury or illness that prevented you from working?
– Late 50s or 60s: It’s time for you to start thinking about purchasing long-term care insurance. We’ve all heard how expensive long-term care can be so insuring against this risk makes sense to consider.
Week 4 – Review Your Savings
You’re half-way there! During week four, take a look at your savings:
Emergency Fund: Do you have “rainy-day savings” in place? Aim to have three to six months’ worth of your fixed expenses held in a safe, accessible account (i.e., savings account, money market account, etc.).
Retirement Savings: Are you saving 13 percent to 15 percent of your income? If not, increase your savings, even if it’s in small, gradual increments.
College Savings (if applicable): If this is a goal for you and your family, there are many good college savings calculators available that can help estimate future costs and how much you’ll need to save. But first make sure you have an emergency fund and are on track for retirement!
Savings for Other Goals: If you’re on track for all of the above and want to save up for something fun — cabin, boat, dream vacation — congratulations, and go for it! Just be sure to use investments that are appropriate for your time horizon.
Week 5 – Review Your Investments
Speaking of investments, now is the time to take a look at your portfolio. To start, review your current asset allocation and ask yourself the following questions:
How much do I have in stocks, bonds and cash?
Is this mix appropriate for my investment time horizon and risk tolerance?
If not, is it time to make a change?
Look at the stocks and bonds that make up your portfolio. Within those asset classes, how diversified is your portfolio? Do you have substantial funds tied up in any one stock or in a handful of stocks? If so, you can reduce your risk by spreading your investments into a broader range of stocks.
Moreover, do you have exposure to large- and small-company stocks? Are you exposed to growth- and value-style stocks? How about U.S. and international stocks? We suggest having exposure to all areas of the stock market to capture opportunities when they arise and reduce overall risk.
Similarly, are your bonds diversified (i.e., do you have any exposure to high-yield and/or non-U.S. bonds)? If you add some exposure to these areas, you could boost your return potential.
Week 6 – Review Your Estate Plan
You’re almost finished with your action plan! Wrap up your six-week financial makeover by taking a look at your estate plan. Do you have a:
Beneficiary? Review the beneficiaries named for all of your retirement, investment and bank accounts. Are they up-to-date? Remember that the individuals listed as beneficiaries on your accounts will override whatever your will may say!
Financial Power of Attorney, Healthcare Directive or Healthcare Power of Attorney? Read this piece for a full breakdown of the purpose and importance of these estate planning documents.
Simple Will or Revocable Trust? This is critical if you have minor children as you’ll want to name a preferred guardian to look after them, should something happen to you.
You may want or need to consult professionals for guidance on one or more of these areas. Enlist an experienced, credentialed advisor who can help provide objective advice to suit your unique situation. Additionally, if you’d like more in-depth information on any given topic, search our OneBite blog for more resources; many of these individual subjects have been covered by our authors in the past.
Most importantly, cheers if you succeed in accomplishing all of these steps over the next six weeks — you’ll deserve another big celebration!