The best way to start and end a year is with clarity.
Lisa sat in her favorite chair. Outside the window, winter had spread its mantle of snow over the trees and on the old wooden bird feeder. She was grateful for her hot cup of tea and for the security she had now reconfirmed.
But it wasn’t always this way. After Larry died in 2016, she tried to fight through the grief to hear what lawyers, accountants and advisors were saying. So many wanted to help. But nothing made much sense. Not even the words they were using. RMDs and RBDs. Rollovers. Conversions. A widow’s tax. Tax creep. MAGI. Larry had handled all that.
But now, with an advisor who “spoke her language,” she finally felt in control of it all. And, as sad as the holidays were each year, they were also when Lisa got to run her own financials. And take a victory lap for how well she was doing.
The best way to start and end a year is with clarity. You may look at various statements each month, and check that you’re staying within the guidelines you set for yourself. And you may work with your investment advisor to make the most of your money.
But updating your balance sheet and net worth is what pulls it all together. That lets you measure your personal results year-over-year.
And it’s not complicated to do.
Very much like a business, you want to know what you own and what you owe. Whether you use an Excel spreadsheet or one of the many online apps, the process is the same.
You will gather all relevant documents, ideally as of Dec. 31, if possible. Some online apps connect to brokerage accounts, IRAs, 401(k)s and the like, so information-gathering is easier.
Your Personal Balance Sheet
You’ll be building your list of assets, along with their values (or estimated resale values). For example:
• Cash (in banks, CDs or money market accounts)
• All investments (individual securities, mutual funds or retirement accounts)
• Residences and/or investment property
• Personal property (jewelry, electronics or household items)
• Other assets
You’ll also need your list of liabilities, such as the balances on:
• Credit cards
• Mortgages and equity loans
• Car loans
• Student loans
• Other personal loans
Your Personal Net Worth
First, you total each list. Then, your net worth is simply the difference between your assets and your liabilities: what you own minus what you owe.
In your younger years, when you are just starting to save and invest, you may take on a large mortgage. If so, your net worth may be negative. But your net worth will turn positive as your assets grow, and your liabilities decrease.
Calculating your net worth at least once (if not twice) a year is like getting your report card at school. (You did the work, and now you see the results.) But here we’re not talking about school; we’re talking about your financial security and your life.
Four Reasons To Do Year-End Reviews
It’s simply good practice to take measure of your finances regularly. But there are even more reasons to do year-end reviews.
Reason #1 – Review what happened in your year: It’s easy to get wrapped up in our day-to-day and not take time to go back over all the year’s events. And we’re not only talking about financial events – non-financial events can have an impact on finances, too. Look at challenges, major life decisions and life-changing breakthroughs, whether tough or joyous. And don’t forget relationships. Most of all, are there any loose ends to tie up that will make next year even better?
Reason #2 – Revisit any lessons learned: Life is a teacher, whether we like it or not. As you review what happened last year, what lessons did you learn? It may have come from some adversity you faced and overcame. Or it could have come from a gift that appeared when you least expected it. When a lesson results in a mindset shift, it goes from “lesson” to “transformation.” And that’s where our growth comes from.
Reason #3 – Reset your focus: Weeks and months have a way of melting into a steady stream of forgotten details. By stopping to take stock with a year-end review, you can breathe and look at what’s important to you. What are your most important goals? Are you on track to meet them? Did your dreams get lost in the shuffle? By acknowledging them, you can give them the focus they deserve. And that you deserve.
Reason #4 – Launch your year with winning energy: Technology – and all things digital – has multiplied the speed-of-life. Everything happens so fast: Alexa handles many tasks. A Facebook conversation co-opts coffee with friends. Smartphones do what countless people did for us in the past. To win in that environment, you want to be well-grounded and confident of where you’re headed, both personally and financially. And you want to have time left over to hug your loved ones. And to celebrate your achievements as they happen.
As Peter Drucker said, “If you can’t measure it, you can’t improve it.” This year commit to starting and ending a year with clarity. You’ll be glad you did at this time next year.
Wishing you and your family a healthy, happy and prosperous holiday season.