This step-by-step guide empowers you to take action by building a complete financial portfolio. This means that not only do you own diversified investments across different asset classes, but you also have fully-funded retirement accounts, own your home, are debt-free, have a six-month emergency cash reserve, and you invest in yourself. Ensuring that each of these areas is optimized will set you up for financial success.
1. Review Your Spending in 2020
There are plenty of good alternatives to review and check the spending patterns. Whatever tool you use, it’s important to review your spending over an entire year. It may reveal patterns that you miss when looking at a monthly budget.
The first thing is to review where our money went.
- Did we spend our money in ways consistent with our goals?
- Did we overspend in some categories, or perhaps underspend in others?
- Do we want to make any adjustments in the new year?
The second thing is whether there were any periodic or unexpected expenses in the past year that we weren’t prepared for. Sometimes that can happen for reasons beyond your control. In 2020 that was the case for a lot of people.
The third thing to look at is all of the subscription services that we’ve signed up for. The number of these services seems to grow every year. These services range from streaming video to credit monitoring to news outlets. Once a year, list out all subscriptions and confirm that we still want each service. If not, then cancel it.
2. Update Your Net Worth Statement
The very first thing to do at the end of every year is to update our net worth statement. A net worth statement represents a snapshot of your finances, listing everything that you own (assets) and everything that you owe (liabilities). The difference is your net worth (assuming the difference is positive!).
A net worth statement reflects every single financial decision you’ve ever made in your entire life. And it’s the most important financial document to track. It’s important to compare where you are now not only with goals you’ve set for the future but also with where you’ve come from in the past. Seeing the progress, you’ve made over the years can help motivate you to reach your goals.
We can track our net worth statement cash and those assets that go up in value over time. So we include all of our investments, all of our bank accounts and our home. We don’t include things that overtime depreciate, such as a car. For liabilities, we keep track of all of our debt.
3. Rebalance Your Investment Portfolio
The start of a new year is a great time to rebalance your portfolio. Particularly after the wild ride, we had in 2020, it’s likely that many portfolios have drifted substantially from the planned asset allocation.
Rebalancing may not necessarily mean that we have to divert the funds to multiple investment alternatives blindly. Just to give an example, if you are already invested in plain vanilla investments like PPF etc., it is time to jump into some action. You may want to invest in mutual funds or stocks to take leverage of the risk factor and gain an edge over the earnings.
4. Check Your Investment Expenses
What is the expense ratio of every mutual fund you own? Or what is the weighted average cost of all of the funds in your portfolio? If you don’t know the answer to these questions, it’s worth taking a few minutes to find out.
However, you do it, use this time to make sure you aren’t paying more than you should for your investments. Sometimes, it may so happen that administration cost for maintenance and operation would take away a huge chunk of your earnings. The expense ratio is a great perimeter to observe this gap in the case of mutual funds.
5. Check Your Retirement Contributions
The start of a new year is also a perfect time to reevaluate your retirement contributions. If you aren’t taking full advantage of an employer match, consider increasing your contributions. Even if the increase is small, at least you’re making progress in the right direction.
6. Simplify Your Finances
Finally, now is a good time to simplify your finances. Countless retirement accounts, bank accounts and financial apps can make managing our finances more difficult. So, create a list of all the accounts, apps and tools you have. Then go down the list one by one to determine if you really need each one. Consolidate investment accounts where it makes sense. Remove any apps you didn’t use last year. And in the process, streamline how you manage your money. It just may remove some of the stress money can sometimes create.
Portfolio management is not a day’s work. It is a disciplined and planned approach to handle the funds that you have to optimal and appropriate use. Always keep in mind as to what they say, “If you don’t make your money while you sleep then you will need to work till you die.”
The easiest way to make the money work while you sleep is to automate the investments and exercise full control over the finances. The pointers above may guide you to pave the way towards a better financial future with an optimal portfolio in the year 2021. Be tuned to read more such interesting articles. Till then, Happy Investing!