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Seize the Day: A Financial Resolution that Makes a Difference

by Darren L. Zagarola, CFP®, CPA, PFS
January 27, 2016

The family has long since left. The unwanted gifts have been returned. The decorations are put away. By now, we’ve remembered to write “2016” on our checks. 

Any time you turn the calendar is a time for hope, a time to implement resolutions that will help your dreams take root. Carpe Diem! Seize the day! In light of the New Year, here are some financial planning resolutions that should help you take control of your finances and seize the day.

Step #1 - Understand your finances.

The most important part of a financial plan is to understand where you are now. This plan will provide a direction for the future. But you can’t determine your destination if you don’t know where you’re starting from. So ask yourself: What is my current financial position? To answer that question, prepare a spreadsheet listing all of your assets and liabilities. This is called a Balance Sheet. The balance sheet includes a listing of your assets, such as bank, brokerage, and retirement accounts (IRA, Roth IRA, 401(k), 403(b), etc.); as well as cars, homes, and any other items of value. It also includes your liabilities, including your mortgage, credit card debt, student loan debt, or any other loans outstanding. The difference between your assets and liabilities is your net worth.

Step #2 - Understand your net cash flow.

Net cash flow is the difference between cash inflows and cash outflows. It’s as easy as that. People try to make it seem harder than it is because it’s not fun reviewing past spending decisions. Money received during the year is your cash inflow, which could include salary, bonus, pension, social security, dividends and interest. Cash outflows are how much you are spending to maintain your lifestyle (discretionary and nondiscretionary). This includes mortgage, taxes, insurance, home-related costs and general entertainment, travel, and vacation. Review your monthly credit card and bank statements to see where money was spent. You should note expenses which are expected to be recurring vs. one-time or unusual items. 

Understanding your cash inflows and outflows is the basis for preparing a budget. There are several on-line sites to assist you in this process, including mint.com and youneedabudget.com. These on-line tools are important when you are handling your finances on your own. Not having a budget is like setting sail on a boat with no navigational charts to guide you through the rough waters.

Step #3 - Create a savings plan.

Depending upon whether it is positive or negative, your net cash flow represents how much you can currently save or how much you need from your investment portfolio to cover your needs. Assuming you have a positive net cash flow (cash inflows exceed cash outflows), calculate the monthly amount you would like to save. This amount should automatically be put into a bank, brokerage or retirement account. Automating the deposit ensures the savings happen and the financial goal has a better chance of being met. You should have a savings target for retirement plans, as well as for shorter-term needs outside of your retirement account. You first priority is to build your emergency fund. The second is to start saving for your retirement. Don’t put college education savings before your retirement savings – loans are available for college; but it is hard to borrow for retirement.

Step #4 - Rebalance your investment portfolio.

The beginning of the year provides an excellent opportunity to rebalance your investment portfolio. When you established the portfolio, you did so with a long-term goal and strategy that called for a specific percentage of the assets to be invested in equities versus fixed income. As the year progresses, the value of your individual investments will vary. We recommend rebalancing to your original goal on at least an annual basis. This will automatically cause you to sell certain investments that have grown and purchase assets that are at a value. It’s also a great time to review whether any individual assets need to be replaced. Remember, the asset classes that perform well one year do not necessarily perform well the next year. 

Step #5 - Password protection and credit monitoring.

The New Year is a great time to change your important passwords. Passwords should be more than 8 characters and include a combination of letters, numbers, and symbols. The longer the password, the better the security protection. One trick is to consider a sentence that is easy to remember. Also, a password manager, which stores your passwords for the websites that you use, keeps your passwords in an encrypted vault. This allows you to have more secure and diverse passwords since you won’t have to memorize them all.

Monitoring your credit is equally important. Having good credit can save you money on borrowing, insurance and other areas of your financial life. You are entitled to annual free credit reports from the three main credit bureaus. Request a free credit report every four months in order to monitor your credit throughout the year. Another option is a credit monitoring system. Some online systems watch your credit and scan the internet for unauthorized use of your personal information. Other systems strictly monitor your credit report at the credit bureaus and alert you to changes. While no one has yet found a completely fail-safe way to prevent identity theft, keeping an eye on your ever-changing credit report is essential to preserving your good credit history.

Step #6 - Purge unneeded personal files.

This is also a time to examine personal files and records and shred unneeded documents. You should maintain information such as your prior tax returns, any supporting documents related to those tax returns, and trade confirmations for your investments for at least seven years. You don’t need to maintain old monthly bank statements, credit card statements that have already been paid, or other bills unless they support an item you have listed on your income tax return. Shred all documents that have your personal information, such as social security numbers, account numbers, birth dates, etc.

Step #7 - Meet with your advisor.

You should meet with your advisor at least once per year to review your current goals and objectives. Remember, your advisor is a member of your team. If they understand the current situation as well as your goals, they should be able to outline the options you have to get you there.

It has been said: A goal without a plan is simply a wish. So set goals and resolutions that are realistic and manageable; and be sure to have a follow-up plan in place. Following the steps outlined here will maximize your chances of success, relieving stress and increasing your personal satisfaction.