Every year around the end of December, we get inundated with media and advice about New Year’s resolutions. And many of us do set goals around the New Year as we aspire to do everything from eat better and lose weight to earn more money or finally start investing in the year ahead.
Personally, I get a jump on my goal-setting in December because I want to start the new year running, not taking a week or two to get my priorities straight. But I’ve also learned over the last couple years that once a year is not nearly enough to set and review your goals, especially financial ones.
Of course, this is why personal finance experts drone on and on about budgets – something you set, review, and revise every month. But if you’re like me, you resolve to watch your budget every week and then slowly trail off because it’s boring and simply takes too much time.
Now don’t get me wrong, I review my finances at least every week – checking bank balances, spending, and investments — but I don’t get hung up in the details and I’m not spending time asking the big questions. That’s the kind of thing I do at the end of the year and about once a quarter in a quarterly financial checkup. (And yes, this is what it looks like. Even for a guy who blogs about money for a living, keeping track of all of my own finances gets stressful!)
The quarterly financial checkup
It’s no coincidence businesses use quarters (the end of Mar. June, Sept., and Dec.) to chart goals and report earnings; three months is a good amount of time to evaluate financial performance. A quarter is long enough to see if your financial plan is working but not so long that you’re royally screwed if it’s not.
Although I’ve been diligent about reviewing and adjusting my own finances every three months, it did get harder after getting married simply because Lauren and I need to gather all of our financial info and then find a few hours to go over it. Especially now with kids, that can be tricky. I’ll admit, we’ve missed a few.
But if regular checkups are important for one, they’re even more so for two. You have to make sure you’re aware of each other’s priorities and goals and know where you collectively stand. This is less of an issue if you have joint accounts and are both checking in on things every week or so, but the joint quarterly financial checkup becomes imperative if you have separate accounts.
So here let’s go through the list of everything I cover in my own financial reviews, and how you can do the same.
1. Net worth – assets and liabilities
Your net worth is your financial bottom line: How much money do you have after you subtract money you owe?
I start here because it’s the most pure indicator of how things are going since I last checked. In general, if we’ve been spending less than we earn and saving an appropriate amount, our net worth will go up quarter over quarter. The exception is once you start investing, if your investments do poorly for several months in a row, your losses could offset savings.
Calculating net worth is easy with a simple spreadsheet like this one: Simply create rows for the balance of every bank account and investment you own as well as one for the market value of your home if you own one. Add it up. These are your assets.
Then create rows for every debt you owe (credit cards, student loans, the mortgage, taxes, etc.). Add these up and you get your liabilities.
Subtract your liabilities from your assets and you get your net worth. It may be a negative number (as mine was for most of my twenties), that’s OK. You just want to make sure it’s moving in the right direction.
2. Cash flow – your spending and earning
Next it’s time to pull out that budget if you have one, or your bank and credit card statements if you don’t. If you’re a detail person, categorize and total your earning and spending. If not, you can still get a general sense of how much you earned and spent for the last three months.
This is the time to look for red flags. Although I don’t look at my spending by category every week or even every month, I do it during these quarterly reviews and the results are always eye-opening.
Like with net worth, I look for trends.
- Are we spending a ton more in one area?
- Was that because of one big purchase or is our spending bulging a little bit in a category like eating out?
- Most importantly, did you spend less than you earned this quarter?
That should show in your net worth as well, but sometimes your net worth will increase just because of investment gains and debts that decrease with your regular payments.
Don’t neglect the earning side of this, either. This is a good chance to tally up how much you earned over the last three months. Focus on streams of income you can control quickly, like commissions or income from freelancing or a side gig. Can you earn even more this coming quarter?
Like most MU30 readers, I don’t have a financial advisor yet, so I do this part on my own. If you do work with an advisor, now’s the time to sit down with yours for a quarterly review of your portfolio.
Here’s what I do for my investment review:
Compare quarterly contributions to my current goal for the year. If I need to add more, I cut a check and mail it in.
Examine my asset allocation and rebalance. Over any given three months, I’ll buy new investments and my existing ones will go up and down in value. Usually, this means my overall portfolio shifts from my desired asset allocation of 70 percent stocks, 20 percent bonds and 10 percent alternatives (as well as my desired mix of international-to-domestic stocks, sectors, etc.)
I used to do this more-or-less manually, but a couple of new tools are making this infinitely easier. There’s Personal Capital, which I’ve written about before, but the one I’m trying at the moment is JemStep.
JemStep runs an analysis on all of your investment holdings (including your 401k if you have one), helps you determine your desired risk profile and asset allocation, and then provides buy and sell recommendations to help you achieve optimize your portfolio for allocation, cost, and tax-efficiency.
At the end of the review, JemStep simply gives you a to-do list: Sell X shares of this fund and buy X shares of this fund (or a similar one – you can select form a list of recommendations).
JemStep is free for investment portfolios less than $25,000. It’s free to try for larger portfolios, too, but to get their recommendations you have to pay a month fee of between $18-$70 based on your asset level. That works out to up to $720 a year for someone with a $500k portfolio, but that’s still much cheaper than working with an investment manager who charges 1 percent of your assets under management each year.
4. Credit and debt
Part of my quarterly review is to pull a recent copy of my credit report and score.
At annualcreditreport.com you can get a copy of each of your three credit reports once a year (Equifax, TransUnion, and Experian), so I usually pull one a quarter and then skip a quarter – I don’t pay for credit monitoring to get more frequent reports, but you can if you’re actively monitoring a problem.
I also login to CreditKarma to get my updated credit score just to know where I stand. With my biggest credit purchase – a house — behind us at the moment, we shouldn’t need credit again soon, but it’s important to make sure the info is accurate and nobody’s ripping off my identity!
Along with checking our credit we review our debts – at this point just the mortgage. When I was actively paying off credit card debt I would review my progress and whether it made sense to reprioritize my payments.
Finally, I review our credit cards to make sure they’re meeting our needs. This might be the time to cancel a card that we don’t need, call an existing creditor and ask for a credit limit increase, or even apply for a new credit card to take advantage of a rewards structure that will earn us more cash back on our everyday purchases.
This is also time to review your insurance coverage. Do you have enough? Could you save money by switching carriers? Are their kinds of insurance you need but don’t yet have?
Once a year or so it’s a good idea to grab a few auto insurance quotes (they’re free) and compare them to what you’re currently paying. Car insurance is one of those things where every company prices it differently and (as the ads tell you) switching carriers can often result in saving hundreds of dollars a year.
Just make sure you’re comparing apples to apples, the quotes should have the same coverage limits and deductible amount.
- Do you need life insurance? The answer is yes if you have recently had a baby or you have a spouse who depends on your income.
- Do you have enough life insurance? Life insurance should cover your surviving family’s expenses for the rest of the years they would be dependent on your income.
As you become more financially independent, it’s also worth considering long-term disability insurance and, if you’re older, long-term care insurance.
Finally, it’s time to set and review your financial goals. If you’ve made it this far, I’ll share a bit about my own goals and progress at the moment.
I keep a simple spreadsheet with three columns: goal, due date, and progress. I keep short-term goals at the top followed by long-term goals. I’ll simply add a row for new goals that come up during my review and check my progress on existing goals.
I like to always make sure I have some goals for the upcoming year (both practical and fun) and long-term, big picture goals.
Right now I have a few “fun” goals. Our home has an outdated and poorly designed kitchen that we’d like to improve upon as early as next year. We’re also going to a wedding in Austin next summer and (hopefully) might be able to sneak away for another trip sometime in the next year. Those are on the list.
Finally, I’ve always wanted a big ol’ manly pickup truck with room for the family and whatever I’m hauling for this weekend’s to-do projects.
These are all wants for sure, so if our finances change they’ll take the backseat to retirement savings, college savings, and chipping away at the mortgage.
For big picture goals, I have a dream of having $2 million in retirement savings by the time I’m 50. If met, that would provide a world of options – to retire early if I wanted or to continue working and retire even more comfortably later. Of course, I’ll have to save a lot (and the market will have to do well enough) for that to happen. Still, it’s a good target to keep me motivated but it’s not something I think about every day, hence the importance of refocusing during these reviews.
Paying off our mortgage early is a secondary goal. We have a low 3.65 percent rate, which I hope will be less than the average return on my investments. If I have money left over after meeting my investing goals, however, I’ll begin to pay this down early simply because all of this saving is about one thing – financial freedom – and not owing on your home is a big part of that.
So that’s how I do quarterly financial checkups. Honestly, they’ve been a huge help in staying focused on what’s important and making sure nothing falls through the cracks. I’d love to hear if you have any systems for keeping on top of your finances (or if you think I missed anything in this outline).