Are you planning on a miracle or planning for success in 2012?
What is it about the approaching new year that has many people thinking about their money situation? Is it the fact that one of the biggest New Year’s resolutions we often make to ourselves has to do with our personal money habits? Because the new year offers us a chance to wipe the slate clean and get a fresh start? Or is it just because everywhere you look, someone is writing about money?
Whatever the reason, 2012 is the year that people, especially baby boomers, are going to need a financial advisor that’s independent and objective to help them assess where they stand financially and offer guidance on what they need to do to reach their financial life goals. Given the intense uncertainty of the times we’re currently living through, hoping for a miracle is not a viable or practical solution.
As you contemplate your financial options for next year, focus your attention on these financial indicators that help take a pulse of your current financial picture. If you’ve never taken a good hard look at your money, now’s the time to summon the courage and go for it.
1. Net-Worth
Generally speaking, what you own less what you owe is your net-worth. It goes without saying, this number has nothing to do with your self-worth, but it has everything to do with whether your retirement years will offer you a ‘garden view’ or an ‘ocean view’ when that time comes. Benchmark this number on January 1st and set realistic financial goals for where you want your net-worth to be this time next year.
2. Knowing How Much You Spend and Where It’s Going
As any fan of the seminal book on transforming your relationship with money and achieving financial independence -Your Money or Your Life knows well, one of the most important steps in getting a handle on your money is tracking the money that comes into and out of your life. Whether that means carrying a wonky little notebook around and tracking all of your spending for a few months (I did that) or using a money management software program like Quicken or Mint, it doesn’t matter what method you prefer, what matters is knowing where your money is going. By design, this method is meant to help you make conscious spending decisions. Shine a light on your spending.
3. Your Personal Financial Roadmap
Here’s where the rubber hits the road. In order to arrive at your destination as hoped for, you need a financial plan that details the strategy on how that’s going to happen, specifically, how much money you need to have accumulated by the time you’re ready to stop working for money. Before you can determine your ‘number’, you need to do some soul searching and if a couple, making sure you both are on the same page. If you need some guidance on how to get started, please check out my wife Pat’s superb book: Year Ahead, Year in Review; A Couples Guide to Dream Big, Plan Smart & Live Well.
4. Asset Allocation
Asset allocation refers to how much of your investments are in bonds, stocks, cash, REIT’s, commodities, foreign currencies, etc. And over the long run, studies conducted at Vanguard and elsewhere confirm that your asset allocation has more impact on your investment returns than individual decisions about which securities to buy or sell. At a minimum, make sure you know the amount of money you have allocated to stocks and bonds and the risk you’re taking otherwise you’re flying blind.
5. Annual Return on Investment
The return on your retirement and non-retirement investments is a number most people pay scant attention to. Yet when it comes to praying for a miracle to occur, this is where most investors, especially men, tend to delude themselves.
One of the easiest ways to screw up your future retirement plans is to assume unrealistic returns on your investments. As all my investment management and financial planning clients know all too well, when designing a comprehensive financial plan, playing it very conservatively with your expected future returns is not just smart and sensible, it’s provides you peace of mind. On the other hand, assuming the stock market will reward your portfolio with above average returns over the long run and making your financial freedom hostage to the stock market is a sure recipe for disaster.
In January, when all your investment statements arrive, benchmark your 2011 return. Given the crummy year we’ve had in the stock market to date, you may need some holiday cheer to tally up the returns. As you plan ahead, be realistic and play it safe.
Image credit: John-Morgan