ANNUAL FINANCIAL REVIEWS TO ORGANIZE YOUR FINANCES & STAY ON TRACK
It is that time of the year – time to take stock of your finances, time to do an annual financial review. Now is the time of the year to prepare and file your tax returns. The time to review your money goals and performance.
March is the month where money and finances take center-stage. You scramble to collect the information and the returns you require to prepare your tax returns.
This is also the time you go over the financial decisions you have made during the year, take some time to think about them, regret a few, and hope to do better next year.
Evaluating your financial progress can be overwhelming and stressful. However, having a definite plan can make your financial review exercise easier, more organized, and ultimately more fruitful.
Here are some things you can do this time of the year as a part of your annual financial review:
#1. Put Your Money To Work
Check how much of your money has been sitting idle in your checking account during the past year.
It is good to have a small buffer in your account to manage your cash flows. But having money sitting there without a plan is a wasted opportunity. The money in your checking account is not earning you anything.
So as a first step, figure out how much money you want sitting in your account in case a bill hits early or your income gets delayed.
Remember, this cash buffer is different from your emergency fund, to be used to manage your cash flow better.
It is important to have a plan for the excess cash in your account. Whether you transfer it to a savings account or a money market account or use it to pay off your debt, it is important to make that money work for you.
Don’t let your money sit idle while you wait for an opportunity or the right time.
#2. Do an Annual Portfolio Review
This is when you review what is working for you and what is not. Have some of your investments done better than others?
This exercise is more than just calculating your net worth. You calculate your net worth by putting down the current value of all your assets and liabilities. This can be done each month.
A portfolio review goes beyond putting down numbers. You check to see what assets have given you good returns and which ones haven’t performed quite as well.
This review will help you plan your next steps and see what you need to do in order to achieve your goals.
#3. Review Your Financial Goals
A good review also means aligning your assets and investments according to your long-term financial goals. Are you saving money to buy a house? Is retirement saving your goal? How have these goals changed from the previous year?
A financial adviser can help you pick the instruments according to your goals.
#4. Make Corrections As You Do Your Annual Financial Review
One important benefit of taking stock of your wealth and reviewing your portfolio is that it allows you to look back at some of the mistakes you might have made.
Did haste force you to make a wrong decision? How can you avoid that in the future?
It is better to focus on the portfolio as a whole rather than looking at every single investment decision you made. If you have made progress at the portfolio level, then you don’t need to sweat about every little detail.
Another thing is to avoid mistaking activity for progress. There is no need to be constantly buying, selling or making transactions. Keeping it simple and easy helps you to notice trends and take action as required.
#5. Review Liquidity Requirements
Look into the coming year (or two) and see if you have any large expenses coming up. Will you need to make a down payment for a house or have to spend for a wedding?
It is risky to assume that you will be able to liquidate your investments when you need the liquidity. Market may take a downswing, wiping off your profits. You will not want to or be able to sell at those levels.
Plan ahead. Sell your investments and transfer the money to relatively safer assets like savings accounts or money market accounts.
#6. Review Your Spending Patterns
It is a good habit to review your expenses once a year. Look for categories where spending has increased without a reasonable explanation. Are there any habits that are no longer affordable.
Review all bills being automatically debited from your accounts. See if there are any subscriptions that you can do without.
#7. Catch Up with Administrative Tasks as a Part of Your Annual Financial Review
As you review your finances, take stock of any administrative tasks you need to do. Are your receipts filed? Is your address and contact information up to date across all your accounts and investments?
These are little tasks that we keep postponing until we are facing a crisis. And then we do not know what to do.
Have you designated a beneficiary for all your accounts who will inherit the money in that account in the event of your death? Do you need to prepare a will?
Devoting a little time to these crucial tasks once a year can save a lot of heartburn later on.
#8. File Your Income Tax Returns
Finally, make sure that you file your tax returns on time each year. You can use a paid preparer to complete and submit your tax return. However, you will need to gather and organize the information that he will ask you for in order to prepare your tax return. So make sure your returns, receipts and records are in order.
Following these steps as a part of your annual financial review should help you organize your finances, stay focused on your financial goals and keep your financial health in check.
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