Contents and Quick Links
- 1 Purpose of a personal financial review
- 2 Establish a method to track your finances
- 3 Set spending limits
- 4 Review all debt and write a debt payoff plan
- 5 Automate your finances
- 6 Review progress made on financial goals
- 7 Calculate your net worth
- 8 Calculate your savings rate
- 9 Create an ICE Binder
- 10 Review life insurance policy/policies
- 11 Review retirement account(s)
- 12 Review money mistakes
- 13 Set new financial goals
- 14 Recap
- 15 Action steps
Purpose of a personal financial review
How can you tell if you’ve made financial progress this year? If you’ve made more money or paid down some debt over the last few months, you probably feel pretty great about making financial headway.
But exactly how much progress have you made? Enough to feel super motivated to keep at it? That would be awesome.
Or maybe you feel like you’ve made progress but, actually, you also bought everything off the internet on Cyber Monday and now you’re back to where you started.
The purpose of conducting a thorough review of your personal finances is to check whether you’ve made progress of your financial goals. As you review how your year went you can uncover exactly how much debt you’ve managed to pay down, how much money you have saved, and how much income you earned.
No more speculating.
All-in-all, a year-end personal financial review will reveal how much progress you’ve made and what you need to focus on in the New Year to make even more progress on your goals.
After reading this article you’ll be able to comb through your finances, armed with a checklist and clear plan to uncover just how your year-in-spending went and what you can do over the next year to not only go after, but finally crush your financial goals.
Establish a method to track your finances
You’ve heard about tracking your spending. But do you actually do it?
If the answer it no, today is the day to come up with a method to start doing this. As in, actually do it. On the daily.
Trust me, your bank account, and your financial goals, will thank you.
If you don’t trust me yet, that’s okay. Check out How to Track Your Personal Finances.
Set spending limits
Otherwise known as establishing a budget. But honestly, what is a budget anyway? It’s a way to put a spending limit on the various expenses you have throughout the month and the year.
So if the term budget makes you cringe and want to run away and not think about money anymore, think of it instead as just setting a cap on how much you can spend within specific expense categories.
Note: I didn’t say “set a limit to how much you can spend.” This doesn’t help you! This vague notion of how much money you are “allowed” to spend doesn’t guide you to make the right decisions at the grocery store. But, understanding how much money you can allocate on specific things, will help you understand what to buy and what to hold off on.
So once you track your expenses for a month or three, review how you spend your money. Then decide what a reasonable amount to set aside will be for each of your spending categories.
Visit The Beginner’s Guide to Creating a Budget you can Stick to to learn more about this step.
Review all debt and write a debt payoff plan
You’ll have no idea what kind of progress you’re making if you aren’t intentional about your debt paydown.
Now’s the time to get intentional.
Make a list of all your debts and the interest rate for each one. Then list them in order of largest interest rate to lowest. This is called the avalanche method of paying off debt.
Every single month you will pay the minimum balance of all your debts. Then, with money you have leftover, apply all of that to the debt with the largest interest rate. This way you will pay off this debt first.
Once a debt is paid off you can apply more money to the debt with the next largest interest rate. All in all, debt gets paid down and you save money by paying less interest overall.
There is another way to go about this and I recommend it only if you struggle with motivation and need some quick wins.
Re-list all your debts but this time place them in order of smallest amount owed to largest. This is the snowball method of paying down debt. Again, pay the minimum on all balances, then apply what you have left to the smallest debt. Once that is paid off, you get to celebrate, then apply even more to the next in line.
SImilar to a snowball rolling down a hill, it will gain momentum as it goes and you will be able to apply the largest amount of money towards your larger debts once you pay off the smaller ones.
While more rewarding, your largest may very well be the one with the highest interest rate, which means you’re paying more money in the long run.
Read How to Payoff Debt – Like a Boss to learn more.
Automate your finances
Essentially all your spending and saving can and should be automated. The more you have to think about it, the easier it is to let emotion rule your actions.
Do yourself a favor now and just remove all emotions from your personal finances. Set your savings on autopilot so you don’t have to be tempted to buy the latest smartphone when it comes out. If you don’t have money left in your banking account, you won’t be tempted to go spend it.
The goal here is to feel like you are living paycheck-to-paycheck. That’s because all your extra money has a job. Some gets funneled off to your retirement accounts, some to all your bills (which are also automated), some to your savings account, more to paying down your debts, and some automatically goes to your favorite charity.
Every dollar has a purpose and that purpose can be fulfilled if it, and only if, the process is automated!
Learn more at 10 Tips, Tricks and Tools to Automate Your Savings
Review progress made on financial goals
Did you set any financial goals for the year? Maybe you wanted to save for a family trip, payoff a credit card in full, or just add some padding to your emergency savings account.
Whatever you hoped to accomplish, it’s time to review how you did.
If you didn’t set any goals for the year, now is a great time to think about some goals you can set this time around.
Calculate your net worth
If you haven’t yet calculated your net worth, now is the time to do it. Simply add up all your assets, subtract your debts and you have your overall net worth.
This number is important because you can now track your progress. If you have a lot of debt, you may have a negative net worth. As you pay that down, you will see that number climbing closer and closer to zero, which means soon you will cross that line into the positive.
If you are saving for retirement and have a goal of saving 25 times your annual expenses (from the 4% rule), you can track your net worth as you get closer and closer to that number.
Even better, if you know where you were last year, you can now compare your numbers and see how much progress, or over spending, you have made over the year.
Visit How to Calculate Your Net Worth (and why you need to!) to learn more about this step.
Calculate your savings rate
The next thing to do during your end-of-year financial checkup is to calculate just how much money you are saving. This is called your savings rate.
Your savings rate is important because it ties in directly with how much you need to save for an emergency fund and your retirement.
First off, your savings rate is how much save as a percentage of how much you earn. How much you save depends on how much spend every month. The equation looks like this:
You can increase your savings rate in two ways:
- Earn more (increase your income)
- Spend less (decrease your expenses)
The higher your savings rate, the sooner you will pay off debt, save up your emergency fund, achieve your financial goals, and retire.
Visit How to Calculate Your Savings Rate (and why you need to!) to learn more about this step.
Create an ICE Binder
An In-Case-of-Emergency Binder is so very important yet so often overlooked. Your ICE Binder holds essential information including:
- Medical information
- Banking and accounting information
- Household contacts
- Childcare and pet care details
- Online accounts and passwords
- Insurance policy documentation and details
- Investment accounts
It can seem overwhelming and time consuming to think of these details, let alone consider what life would be like if disaster struck and you lost a loved one.
I can speak firsthand to the consequences of skipping this step. And I can say that it’s not worth it. Give yourself and your family the gift of peace-of-mind and gather this information, discuss what would happen in the event of job loss or death within the family, and have a plan in place.
You can also read more about my personal story (Losing my Husband and Financial Security to an Unexpected Death).
Review life insurance policy/policies
First off, if you don’t have life insurance, be sure you have a very good justification for this. If you are single and no one depends on you, I can understand why you wouldn’t need it. Or, if you are financially independent and any dependents are already well covered financially, then you also don’t need life insurance.
But if your partner or your children/dependents rely upon your income for their current quality of life, you need life insurance.
I speak from hard experience. I was a stay-at-home mom with a 3 ½ year old when my husband suddenly passed away. We had discussed the importance of him having a life insurance policy, but he never got around to it.
I was left with no savings, no income, no career, a toddler, no where I could afford to live and no time to grieve.
If you do have life insurance, review your policy and ensure that it still meets your family’s current needs. Does it cover all the expenses that you currently have? Are there additional expenses, like college, that need to be factored in?
For example, if you set up the policy before having children, you need to ensure that should anything happen to you or your partner, the policy would cover all expenses for a reasonable period of time, now including day care expenses and college in the future.
For more info, read The Beginner’s Guide to Understanding the Different Forms of Life Insurance Policies, as well as Why You Need a Family Emergency Binder.
Review retirement account(s)
This is the step that everyone wants to ignore. But keep in mind, this account is your future income and you want to have a greater interest than simply trusting whatever investment company your employer set up for you.
As you review your account, go through the following steps:
Check how much your employer matches contributions
Ensure that you are automatically contributing enough to maximize all employer matching. For example, if your employer matches 4%, make sure you are contributing 4% of every single paycheck to your 401(k). Your employer with then also contribute the same amount, bringing that up to an 8% contribution. That’s free money and instantly brings your savings rate up by 4%!
Check what investment plan you have. Common options are target date funds, where you set a desired retirement date and the investment firm selects an asset allocation (blend of stocks vs. bonds), to match how conservative or aggressive and risk tolerant you should be. The longer you have to save, the less aggressive you need to be and therefore the greater the percentage of bonds that you invest in.
Check the management fees and expense ratio for your investment plan. If it is less than 0.1% fees, you’re good. If it is above this, see what other options are available to you. Both Fidelity and Vanguard have index funds with fees less 0.03%. It isn’t uncommon to discover that you’re paying fees around 1%, which costs you a lot of retirement funds over the years.
Decide how conservative or aggressive you want to be with your investments and determine your stock/bond ratio. The more stock you have, the greater the volatility, however, the greater to overall growth. The more bonds you own, the less volatile, but also the less earning potential as well.
Rebalance your portfolio based on the ratio you want.
Learn more at 11 Quick & Easy Steps to Maximize Your Retirement Savings as well as The Ins & Outs of Retirement Plan Options.
Review money mistakes
Now is the time to review your overall spending and all big ticket purchases you made this year. Ask yourself the following questions:
- Did this purchase help me make financial progress this year?
- Did this purchase bring joy and fulfillment to my life? Was it worth it?
- Are you still happy with the purchase you made?
- Was there something you would do differently if you could?
Keep these thoughts in mind as you go through the next year. Before you make a new purchase, run through the questions again. Make sure that decisions to alter your budget and your financial plan ultimately bring joy to your life or help you achieve your overall finanical goals.
Set new financial goals
As you think about what you want to accomplish over the next year, keep in mind where you are now, which you’ve learned over the last few steps, and where you want to go. For a goal to achievable, it needs to follow the xyz format. Your goal will:
Take you from point X to point Y by time, Z
Examples of financial goals:
- Save an additional $100 every month, or a total of $12,000 for the year, by the end of the year.
- Pay off my Visa credit card bill ($900) by June 1st.
- Open a new ROTH IRA and deposit $5,000 towards my retirement by April 1st.
- Go through this entire checklist by January 15th.
- Ask for a raise or change jobs to increase income by $20,000/year.
Whatever your goal may be, keep it front and center in your life. It’s so easy to get settled back into day-to-day life and stuck in our usual spending habits. Keeping your goals in mind will keep you motivated to make progress.
Once you make progress, you’ll want to continue making changes and making financial headway and progress.
These steps are a guide to step you through exactly how to review your financial year. This helps you organize your finances. You can easily create your own end of year financial checklist to keep you on task and ensure you don’t miss anything.
Once you complete these steps you will be in great shape to achieve your financial goals and live with the peace of mind that financial security brings.
Set up your own end of year financial checklist:
- Establish a method to track your finances
- Set spending limits (budget)
- Review all debt and create your payoff plan
- Automate your finances
- Review progress made on financial goals
- Calculate your net worth
- Calculate your savings rate
- Create an ICE Binder
- Review your life insurance policy
- Review retirement accounts
- Uncover money mistakes
- Set financial goals