Your Financial Road Map

Are you making progress toward your financial goals? Are your finances in order? Are you prepared for a financial emergency? If you’re not sure, take time to thoroughly assess your finances so you have a road map for your financial life:

Assess your financial situation.

Evaluating where you currently stand financially will help you determine how much progress you are making toward your financial goals. There are several items to consider:

Your net worth — Prepare a net worth statement, which lists your assets and liabilities with the difference representing your net worth. Prepared at least annually, it can help you assess how much financial progress you are making. Ideally, your net worth should be growing by several percentage points over inflation.

Your spending — Next, prepare a cash-flow statement, detailing your income and expenditures for the past year. Are you happy with the way you spent your income? You may be surprised by the amount spent on non-essential items like dining out, entertainment, clothing, and vacations. This awareness may be enough to change your spending patterns. But more likely, you will need to prepare a budget to help guide your future spending.

Your debt — Debt can be a serious impediment to achieving your financial goals. To assess how burdensome your debt is, divide your monthly debt payment, excluding your mortgage, by your monthly net income. This debt ratio should not exceed 10% to 15% of your net income, with many lenders viewing 20% as the maximum. If you are in the upper limits or a uncomfortable with your debt level, take active steps to reduce your debt or at least lower the interest rates on it.

Increase your savings.

Calculate how much you are saving as a percentage of your income. Is it enough to fund your future financial goals? If not, go back to your spending analysis and look for ways to reduce expenditures. That may mean reassessing your lifestyle choices. Commit to saving more  immediately and then take steps to make that commitment a reality.

Rebalance your investments.

At least annually, thoroughly analyze your investment portfolio:

Review each investment in your portfolio, ensuring that it is still appropriate for your situation.

Calculate what percentage of your total portfolio each asset type represents; compare this allocation to your target allocation and decide if changes are needed.

Compare the performance of each component of your portfolio to an appropriate benchmark to identify investments that may need to be changed or monitored more closely

Finally, calculate your overall rate of return and compare it to the return you estimated when setting up your investment program.

If your actual return is less than your targeted return, you may need to increase the amount you are saving, invest in alternatives with higher return potential, or settle for less money in the future.

Prepare for financial emergencies.

To make sure you and your family are protected in case of an emergency, set up:

A reserve fund covering several
months’ of living expenses.
The exact amount you’ll need depends on your age, health, job outlook, and borrowing capacity.

Insurance to cover catastrophes.
At a minimum, review your coverage for life, medical, homeowners, auto, disability income, and personal liability insurance. Over time, your insurance needs are likely to change, so you may find yourself with too much or too little insurance.

Review your estate plan.

Take a fresh look at your estate planning documents and review them every couple of years. Even if the increased exemption amounts mean your estate won’t be subject to estate taxes, there are still reasons to plan your estate.

You probably still need a will to provide for the distribution of your estate and name guardians for minor children. You should also consider a durable power of attorney, which designates someone to control your financial affairs if you  become incapacitated, as well as a healthcare proxy, which delegates healthcare decisions to someone else when you are unable to make them.

If you’d like help evaluating your finances, please call.