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!
Did you know that most people give up on their resolutions by Feb 1? Sad! 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’ve done every single item on this checklist. I suggest you do the same given the stock market is at a record high, interest rates have moved up, bonds have sold off, the real estate market on the high end is finally cooling, and we have a new political regime in the White House after eight years of Obama.
NEW YEAR 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. 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 an example of an investment checkup 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. Make sure you max out your 401k and/or IRA plan. Then try to increase your savings rate by another 10% this year. A 50% savings rate is the magic threshold where you’ll really start to see big changes in your finances. If you can’t get there, work on a side-hustle to make more!
7) 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.
8) 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
9) 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. The umbrella policy is particularly important to update if you’ve seen your net worth increase tremendously due to the bull market. Make sure there is no lapse in coverage. Also, it’s better to round up how much you need. Check out: How Much Life Insurance Do I Really Need?
10) 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 or see if one of your banks or credit card statements has your score.
11) 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 over the past 12 months and make them a priority. Always ask yourself your WHY so you don’t get too far off track. Related: The Unhealthy Desire For Prestige Is Ruining Your Life
12) Check to see if your retirement is on track. After you complete an investment checkup, do a retirement health checkup with Personal Capital’s Retirement Planner under the Advisor Tools section. 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.
The Retirement Planner step is the culmination of all your financial efforts so far. Make sure you realize how far you have to go so you can take steps to get there.
13) Make sure your will and estate planning is in order. If your will hasn’t been updated in 10 years, you may want to take a look. Your favorite child or niece might have turned out to be an ungrateful dud. If you don’t have a will, then take time to at least write out some simple instructions on how to access your accounts and who gets what. If you’re fortunate enough to amass over $11M as a couple or $5.49M as a single, then you better figure out your estate planning lest you want the government to take 50% of it away when you pass!
Bonus! Get rid of the non-A players in your life. For once and for all, stop associating with people who try to get you down. Wish them all the best and bid them farewell. There’s no changing the mindset of pessimistic people who feel the world owes them something.
FINANCIAL FREEDOM IS AN INEVITABILITY
My favorite Chinese proverb is, “If the direction is correct, sooner or later you will get there.” Once you come up with a game plan and regularly check in on your progress. you will blow away your own expectations!