A Guide to Mastering Your Year-End Financial Review
As 2023 is nearing its end, now is as good a time as any to take stock of your financial health. One of the best ways to do this is to check in on your financial plan/goals to conduct a personal financial year in review. What plans were you able to execute successfully? Where did you falter? Did your net worth increase? Which investments performed well? What do you want to do differently next year? Most importantly, how does it all tie into your master plan for the future? Doing this review also allows you to strategically dissect the broader financial landscape and understand its impact on your finances, including returns on investments, emerging trends, and identifying opportunities in the coming year. On the journey to financial freedom, lessons reveal themselves when we pause periodically to examine moves made, opportunities taken, and targets missed. Here are some essential areas to assess while conducting a meaningful personal financial year in review.
Evaluate income streams and spending: Evaluating your income streams is a fundamental component of conducting a comprehensive financial review. Understanding the composition of your income is crucial as it provides clarity on your financial capacity, by allowing you to take stock of your primary income, such as your salary, but also factoring in bonuses and any additional income sources. Knowing the amount of money flowing into your personal coffers is great; however, an examination of outflows is equally important. By scrutinising bank and credit card statements, this should help you to identify areas where consistent overspending occurs, allowing you to reallocate resources in alignment with your financial priorities. It may also mean that you will need to unearth additional sources of income in the new year.
Spending and debt management: Simultaneously, assessing progress in reducing outstanding debts ensures that you are actively working towards financial freedom. Reviewing interest rates and exploring opportunities to refinance or consolidate debts contributes to lowering overall interest costs, freeing up resources for other financial goals. However, if your debt increased because you made a significant investment that will generate income or made one of your financial goals a reality — for example, you purchased a home or a rental property — I dare to say Congratulations!
Investment portfolio review: We saw how quickly the world changed when the pandemic began; so, too, can your life situation. Ensure your financial strategy still aligns with you and where you want to go. Remember, as your life changes, your investments and financial portfolio might need another review and some modifications. Have your financial goals changed since the start of the year? Did you welcome a little one or get married? Will your current portfolio still help you to achieve your goals if your circumstances have changed? If not, consider a strategic rebalancing of your portfolio to ensure that your asset allocation aligns with your risk tolerance and financial goals. Assessing the overall diversification of your investments is equally vital, as it helps spread risk and optimise returns. This proactive approach not only safeguards against potential market fluctuations but also ensures that your investment strategy remains dynamic and responsive to the ever-changing financial landscape. Integrating a thorough portfolio review into your financial year-end activities should empower you to make informed decisions that foster resilience, growth, and alignment with your overarching financial objectives.
Retirement and estate planning: Reviewing the status of your retirement and estate plans as part of an annual financial year review should be a must for everyone. Assess whether you are on track to meet your retirement goals and consider increasing contributions, if possible. A key point to note especially for those who contribute to an individual retirement plan is to look to adjust your retirement contribution based on changes to your income. Furthermore, by scrutinising your retirement savings, you can identify any gaps and, if necessary, strategically increase contributions to catch up. Simultaneously, the review of estate planning documents, such as updating your will and designating a guardian for your child(ren), is paramount for safeguarding the financial future of your loved ones. Aligning these documents with your current circumstances and wishes guarantees that your assets are distributed according to your preferences. By integrating retirement and estate planning into your financial year in review, you not only secure your financial well-being but also establish a solid foundation for the future, offering peace of mind for both you and your family.
Insurance coverage: Be prepared for the unexpected — many things change as we get older and potentially encounter health issues. Insurance stands as the primary safeguard for your wealth during times of distress or unforeseen circumstances; therefore, a review of your insurance plans is a must at this time. This annual evaluation offers an opportunity to scrutinise your health, property, and life insurance policies comprehensively. Further, ensuring that coverage aligns precisely with your current needs is paramount; it guarantees that you are adequately protected against potential risks and challenges. Additionally, considering adjustments to optimise premiums allows you to strike a balance between robust coverage and cost-effectiveness. Finally, confirm that beneficiaries are up to date to ensure that the people you want to cover are in fact protected and your money goes to who you want to benefit.
Performing annual financial reviews is an intentional, comprehensive effort that will help you understand your current financial state and develop insight into any changes or adjustments you may need to make. It is typical to leave this type of retrospection for the start of the new year. However, opting to do a review now might just put you in a position to make better spending decisions during the holidays.