Hello 2021, we have been, not so patiently, waiting for you!
Like many of you, I like to use the first month of the year to organize the various areas of my life to promote a fresh start for the new year. It won’t come as a surprise that my personal finances are one of first areas I tackle and organize at the beginning of the year. As I am going through this process, I thought I’d share the steps I take to get my financial household in order and prepare for the year ahead.
1. Inventory Accounts
The first thing I did this year was take a snapshot of all our financial accounts and their current balances. This process included logging into each account website and making note of the current balances in my net worth tracker spreadsheet. These included company 401(k)s, IRAs, H.S.A.s, taxable accounts, high yield savings and checking accounts. This year there is a new financial asset to track and that is the value of our home. On the flip side, I also made note of all our debts which included for the first time a mortgage and zero student loans.
This is a very important first step and should not be skipped. The information pulled will make it much easier to accomplish the next few steps, the other bonus is that it will also highlight personal finance issues that need to be addressed. For me personally, it reminded me that I need to consolidate my H.S.A accounts. For others, it may highlight debts that need to be addressed or an overflowing checking account that could be better optimized.
2. Create a Net Worth Statement
A net worth statement is a snapshot of a person’s total assets, taking into consideration any liabilities outstanding. To determine your personal net worth, follow the steps below:
- Total All Assets
- Total All Liabilities
- Subtract Total Liabilities from Total Assets
- Solve for Net Worth
I recommend using Excel or Google Sheets to create your very own net worth statement. If you need a refresher, I encourage you to check out my previous post on net worth.
What’s your total net worth? Is this number positive, negative? Where is the majority of your wealth, is it in investments, property or something different? Did it grow from last year? If so, how much? These are some questions to ask yourself and spend some time answering and noting in your workbook.
3. Set a Money Date
Whether you are single or in a relationship, be intentional in setting a time with yourself or your person to have a money date. Put a date on your calendar and keep it. During these money dates, I like to cover the following topics:
- Update Account Balances in Net Worth Tracker
- Review Credit Card Transactions
- Review Monthly Spending & Savings
- Level of Funding for Sinking Funds
- Progress towards Financial Goals
I could create a whole post on what specifically to discuss for each topic but what I’ve learned is that each topic I listed above can take on different meanings from person to person and start a unique dialog and who am I to take that away from you all? What I will do is provide an agenda I’ve used in the past to facilitate conversation during money dates. This one is specifically crafted for the start of a new year.
4. Define Financial Goals
If the money date generates open and constructive conversation, the natural outcome should be the generation of financial goals. At this stage in the game they may be very broad goals like pay off $10k of student loans in 2021 or save $50k for a home down payment and that is perfectly okay. In this post, I talk about the differences between goal planning and goal setting. The money date should kick off the goal planning process that will later go through the SMART goal setting process as outlined in this post.
5. Tackle Actionable Items
The last step is to begin to take action to accomplish the goals identified above. There are far too many potential actionable items to list without knowing the results of your money date so I will just list some of the more common results in no particular order:
- Open Roth IRA
- Open High Yield Savings Account
- Increase 401(k) Deferral %
- Open H.S.A.
- Open Taxable Account
- Open 529 College Savings Account
- Re-name Sinking Fund Account
- Set-up Monthly Deposits into (Account Type Here)
I hope this serves as a checklist to help you get your personal finance organized this year. Any questions, concerns or hang-ups, don’t hesitate to reach out.