It is the start of a new year! As such, my annual financial planning is underway. If you’re like me, you have taken on the task of mapping out your annual financial plan. Undoubtedly, this short-term planning is crucial for long-term financial health.
What is an Annual Financial Plan?
Annual financial planning is a checkpoint along the lifelong financial journey. This occurs at the beginning of every year. At this time, a review into the value of all assets is considered. Also, a thorough review of all liabilities is important. Especially, student loans, credit card accounts, and other high interest personal debts.
After the current situation is assessed, financial goals are set for the following year. The idea is to make sure you’ve looked at all potential issues. This will assist in a solid financial plan for the year. For example, reducing a high credit card balance should be in the annual financial plan.
The personal financial plan allows you to assess your investments. Particularly, if you are closer to retirement you may consider lowering or adjusting your portfolio to mitigate risk. Additionally, it is a time to evaluate frivolous spending.
Previous Year Financial Check-Up
This is a opportunity to see how much growth occurred from the previous year. Particularly, using specific metrics can assist. For this reason, I review my net worth and investment rates. It is important to see each asset’s value. Each year a financial goal should be established for your assets and liabilities. In addition, each specific goal will be held accountable at the end of the year. To better illustrate, an example is shown below.
Annual Financial Check-Up
Additionally, your credit score should be reviewed. There are numerous ways to review this without negatively impacting it. For instance, most credit card apps provide access to your credit report for free. An individual’s debt-to-income ratio is important to review. Especially, if someone invests in real estate.
Next, I will cover how I do my annual financial goals.
Setting the Annual Financial Goals
Setting goals for the year is important. Undoubtedly, your short-term goals for the year should be based upon the path of the long-term ones. Paying off high-interest debt should be goal. The best way to slow growth is through credit card debt. Once goals are established, base the monthly budget around them. If a goal is to reduce taxes, find a way to lower your adjusted gross income (AGI).
Some other good goals to consider:
Create a 6-9 month emergency fund
Pay off credit cards
Max out retirement accounts
Get life insurance
Purchase real estate
Pay off car loan
Max out health savings account (HSA)
Contribute to 529 plans
Lowering food costs
Change internet or cable providers
Review Retirement Accounts
Some retirement account managers will restructure or remove funds. Subsequently, your manager may move your money into another fund. It is important to stay abreast with where your money is. Additionally, funds may increase expenses. Taking the time to thoroughly review your investments can save you in the long run. Nothing is more terrifying than hearing the stories of individuals who thought their money was being put to work, but instead it was sitting in a money market account for 30 years. Ouch!
Oh my god.
Clearly, no one wants to be in that position. When doing annual financial planning consider the following:
Evaluate expense ratios
Rollover old employer’s 401(k) accounts
Convert traditional IRA’s to Roth IRA’s
Increase your contributions by 1% annually
Rebalance your portfolio
Check year to date return & compare
Evaluate Income Streams When Planning
When your 9 to 5 is the only source of income, consider alternative income streams to start. Figure out what else you could build wealth in. Obviously, this will help increase your net worth. Side hustles are a good source of income, and can even be utilized to fund investments. Use this time to write down what skills you can monetize. Conversely, you can gain knowledge that will help you increase your worth that can later be monetized. Consider the following in your planning:
Rental property investments
Real estate crowd funding
Invest in dividend stocks
Acquire short-term rentals
Food delivery services
Part-time job (time permitting)
Without a doubt, this year taught us all that health is not guaranteed. Ensure you have all of your important documents in place. Consider a health-care proxy and power of attorney for any healthcare decisions. Get with an attorney to make a last will and testament. Especially, if you have children. Even if you have appointed someone to control your estate, things could have changed. Everyone’s situations are fluid. An individual may not longer be an appropriate appointee.
Failing to plan is planning to fail. Indeed, this is especially true for personal finance. Annual financial planning provides an opportunity to do a check-in on the previous years performance. Using metrics to evaluate growth is important. Net worth can be assessed for year-over-year growth. This will allow you to visually see the magic of compound growth!
Secondly, it provides an opportunity to set short-term goals to strive for the long-term ones. Evaluating, assessing, and planning the yearly budget is based around the financial goals you want to achieve. For example, eliminating high-interest credit card debt can exponentially increase an individuals net worth. Everyone has a different goal they would like to achieve. Setting a plan to tackle the goal is achieved during an annual financial plan.
Thirdly, it is a reminder to thoroughly evaluate your retirement account. As funds change, so do their expenses. Reviewing each investment’s costs is important. You do not want to be the individual who has their money in a money market fund for 30 years. Maybe you changed employers, and as such you want to rollover your account. There are numerous reasons to thoroughly assess your accounts.
Lastly, the financial plan reminders you to assess your appointee. As life changes, so does a persons competency. An individual you once considered fit, may no longer be.
Annual financial planning is immensely valuable. It is a designated time to evaluate your short-term and long-term finances. What are you trying to achieve in 2021?