Normally, as we end one year and welcome a new one, we focus on parties, great food and time off. The COVID economy has certainly challenged how we celebrate and pay for things. As such, never has there been more need for a logical and disciplined financial roadmap.
Focusing on a few major issues can make significant progress in improving your financial picture.
First, assess where you are. Compile a net worth statement in a realistic manner. The net worth statement should be a simple list of all your assets and your liabilities.
Prepare a second list with only liquid assets—but all your liabilities. This is reality. Often we fool ourselves regarding the liquidity and the value of illiquid assets. You will not know what a piece of land, a lake house, car, boat or other illiquid asset is truly worth until you try to sell it.
Secondly, make goals for your liquid assets and put them in writing. How much do you want to increase your liquid assets and how much are you going to pay down your liabilities?
If you carry credit card balances, make a plan to pay them off…and keep them at zero. Determine what it takes to get there by setting aside a bit each month or paycheck. If you try to do it all at once, it will never happen.
Your assets are there to serve you. Having a nice cushion of cash and securities offers flexibility. Recognizing this, it is your life to lead. Do not pattern your life after your neighbor or a social media influencer. Behind closed doors, reality is far different than what is apparent by shiny cars, a big house or exotic trips. Focus on improving your financial stability as opposed to having a big show.
Prioritize saving goals at the top of your budget. If you respect “saving/investing” as the most important bill to pay, you will do it. If savings is an after-thought, then most likely something else will gobble up those assets and you’ll make no progress.
Determine how much you need in emergency funds. If you have appropriate insurance for home, auto and health, then six months of living expenses in cash is usually sufficient. However, if you are a worrier, or work in a cyclical industry like the oil field, maybe you bump that figure to nine or twelve months of living expenses.
Get it in writing. There is a constant parade of hucksters waiting to take your money for the latest “get rich quick” scam. Take your time and ask lots of questions. If it sounds too good to be true, it usually is. Rarely is there a need for fast decisions. Request full disclosure of fees and conflicts of interest. If they won’t put it in writing, don’t do it.
Map out what is necessary to fully fund your 401(k), IRA or other retirement plans. Contribute enough to receive your employers full match. If you have a non-employed spouse at home, you can still fund an IRA for them too. If you make too much to contribute directly to a Roth, consider converting part of your traditional IRA to a Roth.
Check beneficiary designations on bank, brokerage or life insurance accounts. An account with a beneficiary designation will supersede the language in your will. As such, they need to be properly coordinated and reviewed annually.
Sit down with your insurance agent to review liability coverage. It is relatively easy to make money in our society. However, you stand at risk for losing your hard earned assets if you don’t have properly structured catastrophic risk management in place.
Map out your Instruction Manual for Life. If you are dead or incapacitated tomorrow, will your loved ones know who to call, what assets you have or what your wishes are? If not, write it out and let loved ones know where you keep this document.
Stock market assets will be bumpy—it is a virtual certainty. Be realistic about your ability to handle volatility. Invest in volatile assets based upon where you want to be in ten or more years. That means don’t try to time the market and jump in and out every week.
These are relatively simple ideas that can quickly add value and stability to your family’s finances in the New Year.
Dave Sather is a Certified Financial Planner™ and CEO of Sather Financial Group, a fee-only investment management and strategic planning firm.