NEW YEAR CAN PROVIDE MOTIVATION TO REVIEW, ORGANIZE FINANCES
We have all heard about the boiling frog syndrome. This anecdote describes a frog and how it can be slowly boiled alive. The premise is that if you place a frog in boiling water it will jump out. But if you put a frog in cold water and slowly increase the temperature it will not perceive the danger until it is too late.
This story is generally how many people find themselves in undesirable financial circumstances. Slowly, over many years they ignore their finances or put off decisions because they don't know what to do or just continue to do what they have always done without periodically stopping to look at where they are. Then, one day they find out they're cooked.
January is not only the beginning of a new year, but it is also an ideal time to look at your finances to see how you did last year and to do some planning for the future. It is a time to measure your financial progress and a time to make sure your future goals are going to be met. A few minutes spent reviewing financial matters now can save you unwanted headaches, sleepless nights and catch problems before they become serious. Here are some things to consider during your review.
Change.Has anything changed since you last reviewed your finances? Did you change jobs, lose your job, get a raise, get married, have a child, consider retiring early, inherit money or have any other event that is going to affect you? You need to evaluate these life changes and how they impact your finances and make the necessary adjustments.
Net Worth.The measure of progress for meeting financial goals is your net worth statement. Your assets minus your liabilities (debt) equal your net worth. Your net worth should generally go up every year until you retire. If you are stalled or your net worth is going down year after year you have a serious problem. Either you have too much debt, too little savings or both. This applies to every income level whether you make $20,000 a year or $1 million or more a year.
Review Investments.Most investors don't review their investments at all. Some investors just look at the bottom line on their statements. If the stock market is up and their bottom line is up they figure they are doing well. The vast majority of investors have no idea how they are doing compared to the indices their investments are trying to beat and no idea of the total return of all of their investments together. Some investors just look at the literature they get from brokers and mutual fund companies to determine how they are doing. Not a good idea. In addition to performance you need to look at the cost, risk, diversification and tax efficiency of your investments. Left unchecked your investments can stray off course very easily.
Review Risk.In this case we are talking about different ways to transfer the large risks you have to someone else, usually an insurance company. Look at your life insurance. Do you have enough or too much? If someone depends on you for income you need term life insurance to replace your income if you die. You also need health insurance to cover the cost of huge medical bills. If you have Medicare those big bills are covered but do you need a supplement? If you aren't covered by Medicare do you have adequate private or employer provided health insurance? Are you old enough to consider long term care insurance and do you need it? Do you have enough home and auto insurance? Could you lower your premiums by increasing deductibles? Do you need umbrella liability insurance?
Estate Plan.If you were to die do you have a current will or other document that will tell those left behind how you want your assets distributed? Is it current or does it need to be changed and updated? One of the most common mistakes people make is not keeping their beneficiary designations up to date. Insurance, retirement plans and IRA's pass to your heirs according to what beneficiaries you name - not the people designated in your will. Also, you may have beneficiaries on CD's, savings bonds or investment accounts. Many times you forget to update these names as the years go by or just forget who you named. It's a good idea to check to see who you named and that the beneficiary designations are correct.
Bill Oldfather is a fee-only financial planner and investment advisor. Oldfather Financial Services is an SEC Registered Investment Advisor based in Kearney NE. Email to [email protected]