The great thing about the Financial Samurai community is that most of you are intelligent, hard working, non-delusional people who are willing to put in effort for reward. We could take the easy route and just focus on being super frugal to achieve our financial goals. But I think it’s far more interesting to see if we can grow our net worth to the max!
The new year checklist is primarily targeted to those who want or have the freedom to choose their own path. Everybody says they want financial freedom, but only a minority of people are willing to do the things necessary to make throwing away their alarm clock a reality.
I do and have done every single item on this checklist. Will you? With the stock market getting slaughtered in the new year, it’s now more important than ever to get your finances in order.
NEW YEAR / YEAR-END FINANCIAL CHECKLIST
1) Create a pie chart of your income streams. Go to a spreadsheet, create your list of income streams with the various amounts for the year, and hit that pie chart wizard. Does one slice still dominate (50%+)? If so, you should come up with a game plan to reduce the percentage under 50% by GROWING other income streams so that the overall income flow is greater. No income stream lasts forever.
2) Compare year over year growth rates. Once you’ve listed out and totaled all your income streams, compare each line item with the prior year’s figures. Figure out where you’ve been slacking in order to optimize. Also make some realistic forecasts on which line items will fade away. Always be trying to build new streams of income.
3) Focus on your ideal income for maximum happiness. Once you’ve analyzed your income streams, ask yourself whether you’re happy with what you’ve got. Does the effort you’ve put in to create this income stream match the reward. So long as your income streams are growing, then sooner or later you will get to your ideal income. Research shows that $75,000 a year in income is ideal for most of the country. My research concludes that $200,000 – $250,000/person is ideal for the most expensive parts of the country / world.
4) Review your investment portfolio(s). Make sure that your investment portfolio composition aligns with your risk tolerance. Positions can easily shift over the year, and I recommend everybody rebalance twice a year on average. You can easily run your portfolios through Personal Capital’s Investment Checkup tool to see where you might be overweight certain assets. Link up your portfolio(s), click Advisor Tools on the top, and then Investment Checkup to get some recommendations based on your profile.
Below is my latest snapshot. Decide whether you like your current allocation, like their recommended target allocation based on your input of who you are as an investor, and make changes, if any.
5) Review your net worth composition. Your investment portfolio(s) should only be one component of your net worth. Don’t be like most Americans who either have 80%+ of their net worth in stocks or 80%+ of their net worth in real estate. If a downturn comes, you will also be slaughtered like most Americans were during the housing crisis. Check out the Recommended Net Worth Composition By Age for some great charts on what to shoot for.
6) Review and then raise your savings rate. If the amount you are saving each month doesn’t hurt, then you aren’t saving enough. Add up what you’ve saved/invested so far and divide by your YTD gross income. Whatever the percentage I’m sure you can still save more. Look to raise your savings rate by 10% the next year until 50% or until you can’t take it anymore, whichever comes first. Capital One 360 has an online savings account offering 0.75% or more. Go with an online bank for higher rates.
7) Check to see if your retirement is on track. After you complete an investment checkup, you might as well do a retirement health checkup with Personal Capital’s Retirement Planner under the Advisor Tools section as well. They use your real inputted data to run a Monte Carlo algorithm to estimate whether you will have the desired cash flow to cover all your expenses during your retirement years. Other calculators let you fudge your numbers, which leads to output that can’t be as trusted. Feel free to adjust your expenses as you see fit e.g. $50,000 a year in college expenses starting in 2028.
8) Take inventory of all the stuff you’ve bought. This list should not only include clothes, shoes, and toys, but also nonessential spending such as bathroom remodels, international trips, meals where you spent more than $100/person, and so forth. You want to add up and visualize how much you’ve actually spent on things you don’t really need and adjust your spending accordingly.
9) Analyze and reduce your debt. If used properly, debt can supercharge your net worth. If used inappropriately, debt will cause other people to pay for your mistakes. Always compare your debt interest rate to the risk-free rate of return. If your debt costs no more than 100% the risk-free rate of return, you’re in the OK zone so long as you can manage the payments. It’s imperative you pay down all consumer/credit card debt because credit card interest rates average 7X+ the risk-free rate. Never carry revolving credit card debt! Paying down student loans or your mortgage depends on your income, write-off ability, interest rate, and amount. See: Pay Down Debt Or Invest? Implement FS-DAIR and Do You Have The Right Asset-to-Liability Ratio For A Comfortable Retirement?
10) Review all your insurance policies. One unfortunate incident could take your financial empire down. It’s important to call and review every single one of your insurance policies: auto, home, life, and umbrella. They are more confusing than you think! Make sure there is no lapse in coverage. Also make sure you are insuring for exactly what you want. Chances are high that you are not. Check out: How Much Life Insurance Do I Really Need?
11) Make sure your credit report is clean. The Federal Trade Commission estimates that 5% of credit reports have errors. That’s bad if you are looking to rent an apartment, apply for credit, apply for a new job, or buy a home. I had an $8 late electric payment on a rental that crushed my credit score by 100+ points for two years and I had no idea. The utility bill was supposed to be paid by my renters and the utility company never contacted me. The credit problem almost derailed my mortgage refinance. You can check your Experian credit score here.
12) Review who or what you neglected. There needs to be a minimum amount of balance in your quest for financial freedom. Working 80 hours a week, never taking a vacation, and forsaking date night with your significant other doesn’t sound very good. Take stock of who or what you neglected. Make it a priority in the new year to address what you discovered.
Bonus: Identify non-A players from your life and eliminate. One of the best ways to get ahead is to surround yourself with A players. They can be A players in terms of attitude, personality, work ethic, knowledge, or intelligence. The people who are dragging you down must go! And if the people who are dragging you down are people you care about, then you must clearly tell them what is bothering you about them and come up with a solution to fix the situation. Don’t let things fester!
FINANCIAL FREEDOM IS AN INEVITABILITY
My favorite Chinese saying is, “If the direction is correct, sooner or later you will get there.” Just knowing that you will eventually succeed is strong enough to make people succeed. Over the years, I’ve worked with dozens of people who just needed some guidance. Once they came up with a game plan, they blew away their own expectations!