For many people, the end of the year provides a time for them to reflect on the past year, as well as an opportunity for them to prioritize what they would like to accomplish in the upcoming year and even years further. One of the items we would recommend you consider prioritizing in 2020 is to organize your financial affairs. By organizing this portion of your life, you will have a better understanding of your current financial position. You can then begin to set goals and effectively plan on how you will go about achieving these goals. Some people get intimidated by their personal finances, choosing to ignore them, hoping it will all work itself out. Don’t avoid this part of your life, address it and seek help when needed. As you review and organize, consider following the steps below:
Step 1 - Develop a Net Worth Statement (Personal Balance Sheet): In order to get to where you want to be, you must know where you are currently. In order to know where you are currently, you must be conscious of your current financial situation. This is why we recommend writing out a Net Worth statement to give you a current snapshot of where you are financially. This will give you a starting point for planning your future.
As a reminder: What You Own (Minus) What You Owe = Your Net Worth
Why: As stated above, if you have a desire to achieve a set of financial goals, you should have a thorough understanding of your current financial situation. How else will you know if you are capable of achieving these goals if you don’t understand where you start? A Net Worth statement states where you are starting from and over time gives you the ability to track your progress.
How: Start by using a Net Worth statement we provide to clients, here. This document provides an outline you can use to list the major things or investments you own and everyone you owe.
Examples of What You Own: Investment Accounts, Bank Accounts, Real Estate, Cars, Jewelry, Private Businesses, etc.
Examples of What You Owe: Credit Card debt, mortgages, student loans, other debts you may have.
Step 2 - Develop a Cash Flow Statement: After understanding your current financial position via the Net Worth statement, it is beneficial to understand what you need to do to achieve your goals. In order to understand how you will achieve these goals, you have to have a good understanding of what you are capable of saving each year. Therefore, it is helpful to have an understanding of your personal cash flow. In other words, what do you make every year and what do you spend every year.
Why: By creating a personal cash flow statement, not only are you organizing your cash inflows and outflows, but you are also able to review where your money is really being spent. This review, helps you decide where you can potentially trim or expand certain expenses going forward. By knowing your personal cash flow, you can determine how much you should be able to save. In understanding how much you can save, you have the ability to determine how long it would take for you to achieve your goals. Start with the goal you have set and divide this by how much you can save, this then should produce an estimated timeline that you can use for your planning.
How: As a starting point, use the following cash flow statement, here, where you can list all of your income and expenses. You don’t necessarily need to nickel and dime your expenses at first, just get a general idea and fine tune it later. This sheet can also be used for forecasting future income and expenses.
Step 3 - Goal Setting: Once you know where you stand financially and have an understanding of what you’re capable of then you know what you can achieve. Consider setting personal and/or professional goals. In addition, try setting goals that have varying timelines, like 1-2 years, 5-10 years, or even further.
In order to complete the above steps, you will need to sort through a number of documents and accounts. Consider taking the time to actually review these documents, update them, organize them, and make sure they are all in a safe place. In addition, we recommend making a list of where all of your accounts are and how someone would go about finding them in the event that something happens to you. Be sure a trusted source knows how to handle your affairs should something occur.
The beginning of the New Year is a great time to get your financial affairs organized. By organizing your financial life, you should have a full understanding of your past and present, but most importantly, you can have a better idea about your future. Everyone can improve some portion of their financial life, you are not the only one who needs help. The above steps are simply suggestions, consider organizing your financial affairs anyway you choose. Please let us know if you have any questions concerning the contents of our article.
Crescent Sterling would like to wish you and your family a happy and safe holiday!