With 2020 behind us, it’s time to look forward to a new year. I use this opportunity every year to review our finances. I go through a seven step checklist to make sure our financial affairs are in order. It’s easy to do and doesn’t take much time.
Here are the seven steps.
1. Update Your Net Worth Statement
The very first thing I do at the end of every year is update our net worth statement. A net worth statement represents a snapshot of your finances, listing everything that you own (assets) and everything that you owe (liabilities). The difference is your net worth (assuming the difference is positive!).
A net worth statement reflects every single financial decision you’ve ever made in your entire life. I know that sounds overly dramatic, but it’s true. And it’s the most important financial document to track. It’s important to compare where you are now not only with goals you’ve set for the future, but also with where you’ve come from in the past. Seeing the progress you’ve made over the years can help motivate you to reach your goals.
We track on our net worth statement cash and those assets that go up in value over time. So we include all of our investments, both in taxable accounts and retirement accounts, our health spending account, all of our bank accounts and our home. We don’t include things that overtime depreciate, such as a car. For liabilities, we keep track of all of our debt.
There are plenty of ways to track your net worth. I’ve used Personal Capital for years. It’s a free financial dashboard, and frankly, the best tool to track not just your net worth, but your entire financial picture. I also update a spreadsheet that I’ve kept going back about 13. However you track your net worth, the start of a new year is good time to update it.
2. Review Your Spending in 2020
The second thing we do is simply review how we spent our money in the past year. We use Personal Capital, as noted above, which categorizes our spending for us. There are, however, plenty of good alternatives. Whatever tool you use, it’s important to review your spending over an entire year. It may reveal patterns that you miss when looking at a monthly budget.
I evaluate three things with our spending. The first is simply to review where our money went. We ask questions such as—
- Did we spend our money in ways consistent with our goals?
- Did we overspend in some categories, or perhaps underspend in others?
- Do we want to make any adjustments in the new year?
The second thing I look at is whether there were any periodic or unexpected expenses in the past year that we weren’t prepared for. Sometimes that can happen for reasons beyond your control. In 2020 that was the case for a lot of people. Either way, I take a hard look at these expenses and ask how we could have planned better.
The third thing I look at is all of the subscription services that we’ve signed up for. The number of these services seem to grow every year no matter how hard I try to limit them. These services range from streaming video to credit monitoring to news outlets. Once a year, I like to list out all subscriptions and confirm that we still want each service. If not, we cancel it.
3. Rebalance Your Investment Portfolio
The start of a new year is a great time to rebalance your portfolio. Particularly after the wild ride we had in 2020, it’s likely that many portfolios have drifted substantially from the planned asset allocation. The tool I use is a free investment tracking spreadsheet that uses Google Sheets.
It uses Google finance functions to keep mutual fund, ETFs and stock prices updated. You can enter your planned asset allocation, and the spreadsheet will track how far your investments have drifted from the plan.
4. Check Your Investment Expenses
Quick, what is the expense ratio of every mutual fund you own? Or what is the weighted average cost of all of the funds in your portfolio? If you don’t know the answer to these questions, it’s worth taking a few minutes to find out. The free spreadsheet noted above pulls in this data automatically. Morningstar’s free portfolio tracker is another good option.
However you do it, use this time to make sure you aren’t paying more than you should for your investments.
5. Check Your Retirement Contributions
The start of a new year is also a perfect time to reevaluate your retirement contributions. If you aren’t taking full advantage of an employer match, consider increasing your contributions. Even if the increase is small, at least you’re making progress in the right direction.
6. Plan Your Charitable Contributions for 2021
We also use this time to plan our charitable contributions. We use a donor advised fund at Vanguard. As a result, we plan both our contributions to that fund and distributions to the charities we support. One thing we like to do is make distributions in August. We’ve heard from some charities that the summer months are the hardest financially because most people don’t give during this time.
7. Simplify Your Finances
Finally, now is a good time to simplify your finances. Countless retirement accounts, HSAs, bank accounts and financial apps can make managing our finances more difficult. I’m embarrassed to admit that I use several budgeting apps alone. While part of that is because I write about personal finance, it can become overwhelming.
So create a list of all the accounts, apps and tools you have. Then go down the list one by one to determine if you really need each one. Consolidate investment accounts where it makes sense. Remove any apps you didn’t use last year. And in the process, streamline how you manage your money. It just may remove some of the stress money can sometimes create.