Financial Planning for The New Year
As we head into the new year, everyone is looking both behind and ahead to learn from the past and plan for the future. We’re all filled with vigor at the idea of a new start, a clean slate, and are planning all manner of changes and goals, from fitness to personal growth, and your finances should not be exempt from consideration. Chances are, you’ve already given your financial position some thought with regard for how to plan the upcoming year, and it’s never too early to either form or re-evaluate your financial plan for the future.
Most of the time on this blog, we discuss the finer points of real estate investment. However, most of the principles we apply are the same that any individual should use when investing in any other capacity – or, in this particular case, in their future. Real estate is just one path among many to the ultimate goal of advancing one’s own financial position, so for the next few weeks we’re going to spend a bit of time talking about how you, as both a consumer and an investor, can set reasonable financial goals and employ smart decision-making to reach them.
The first step to any financial plan, be it for a household, an individual, or a business, is to determine, be aware of, and make friends with your current financial situation. This requires an honest appraisal of where you are at the moment, fiscally speaking, because it will determine how to go about reaching your goals – which we’ll talk about in a minute. First things first, though: get out a pen and paper, because you’ll want to make a list of your current assets and liabilities. Like balancing your household budget, the process is pretty simple. Assets would include cash or cash equivalents such as checking and savings accounts, personal property, equity in a home (or several, if you’re a real estate investor like us!) or car, and invested assets such as stocks, bonds, or pensions. On the flip side, loans (student, car, home, etc) and current bills/expenses constitute liabilities. You’ll want to calculate your net worth by subtracting your liabilities from your assets, and the resulting figure is the foundation upon which you’ll begin constructing your financial plan.
Once you know your net worth, begin an organized process for your budgeting if you haven’t done so already. We can’t stress this enough: be organized and thorough! We suggest creating a filing system for your tax returns, bank account statements, insurance policy information, contracts, receipts, wills, deeds, titles, bills, investment plan statements, retirement account statements, pay stubs, employee benefits statements, mortgages and any other type of financially relevant document. Finally, even though you’re probably doing this already, track your monthly income and expenditures – preferably over the course of several months – to get an accurate model of what they are on average month-to-month, and this includes things like emergencies and unplanned expenses. This also gives you a hard mathematical insight into how you spend your money on a monthly or quarterly basis, and it’s important to keep in mind that these habits have, in some form or another, led to your current net worth. If you want to change that number, your spending habits and bills are a great place to start.
These steps, however, don’t mean as much if you don’t have a defined set of goals. Your goals should be both specific and time-based. For example, if you want to save for retirement, then your goal should have both a final desired sum and a set of steps to reach it. In that particular case, reaching your goal may mean an IRA or a mutual fund to which you contribute a certain amount per month, and you may stipulate that the fund is to grow more conservative in its investments on your behalf as you reach retirement age. Again, be specific about the desired outcome, because that will help you ascertain the steps you need to take along the way to reach it. We’ll talk about this more in a minute, but making your goals time-specific is the way to make them reasonable. You should have long-term and short-term goals, and frequently short-term goals are the stepping stones to reaching the long-term goals. Like we said earlier, be organized! Just as you meticulously file your financial documents and bills, you should also be equally methodical in setting your goals and the smaller goals that serve to help you reach them over the long run.
Also, don’t just set goals; set SMART ones! The SMART system is a way of making attainable goals and setting yourself up to take the steps to accomplish them. Your goals should be Specific, Measurable, Attainable, Realistic, and Time-based, and all of these things ensure that you’ll have an easier time reaching them. For example, let’s say you want to make a million dollars. Well, that’s measurable and attainable (trust us, it’s not a crazy goal!), but it’s lacking in specificity and timing if you stop there, which makes it less realistic. If you were to say that you wanted to make a million dollars over the next fifteen years by maintaining a certain profit margin on each property you bought and sold, using the leverage of currently owned assets to purchase more and more valuable properties – the price of which gives you the necessary resources to reach one million dollars within that profit margin over that amount of time – then you would have a SMART goal.
Finally, it’s crucial to ascertain why you want the wealth you do. The reason itself isn’t nearly as important as the actual implementation of the wealth you want. Are you saving for retirement while preparing for education for your children? Are you an independent contractor looking for a mutual fund without the benefit of an employer-based IRA? Are you saving up for travel, a career change, or a business endeavor? If, for example, you want financial security while you pursue a career change, you’ll need resources to sustain yourself through the effort and job search and/or education, so such a financial plan would be radically different from a plan to retire at a specific age with a specific amount of wealth. Knowing the requirements of your overall goal – of which resources are one – goes a long way to helping you be specific with your plan to reach it.
Have a safe and Happy New Year’s from all of us at Get It Right Solutions LLC, and be sure to keep up with us in the coming weeks as we explore common sense financial solutions and advice that you can benefit from as we come into the new year.
– Get It Right Solutions LLC