A great way to begin the new year is by reviewing your personal financial plan. It’s a good feeling to begin another year with financial goals ready to push forward.
Using currently known variables, you can predict future cash needs for major life transitions, such as retirement. I’ve identified three quick steps to easily complete before 2016 begins.
Revisit your risk profile to consider how much or how little risk you’re ready to take with your money. All investments involve risk, but how you divide your investment money among asset types (stocks, bonds, short-term reserves) is important for developing your best “sleep well at night” risk level.
Matching three risk factors with your personality will help you invest long-term with best results. Commonly used risk profile surveys are found with a Google search, or your own brokerage version will help gauge your risk level.
Time horizon: This is the length of time you have in years to meet financial goals and make up losses that occur. Longer horizons allow for higher risk and time to regain losses. How long can you steadily invest before you’ll need to take income?
Cash requirements: If cash is needed to meet day-to-day expenses, you have the shortest of time horizon, and assets used will be low-risk but lower-return. Short of a major calamity, can you invest without pulling money for current expenses for more than five years?
Emotional Factors: Your emotional tolerance to risk will decide the makeup of your portfolio. As a subjective element, this factor is not difficult to calculate. We all know how we react to market ups and downs. Reflecting this in your portfolio allocation is vital to successful wealth building.
Based upon your risk profile check-up, you may need to rebalance your investments:
- sell assets no longer fitting your profile and investment goals
- add assets that better match investment needs and goals
- simply enjoy the fact that your current portfolio still matches your risk profile
Cash Needs Analysis
Estimating how much cash you’ll need for a large personal loss and determining cash availability falls pretty much within the insured loss area, such as car, home, business, and life. The reason we carry insurance is for unanticipated life events that take a lot of cash, and it keeps us from tapping long-term investments.
Examine current coverage levels for this step. Keep your cash needs chart short and not too detailed. Check three primary areas for cash needs and cash available.
Review personal liability insurances
- Auto, homeowners, small business, umbrella liability, et cetera.
- Have your needs changed enough to increase, decrease or drop coverage?
- Are insurance deductibles acceptable?
- Can you meet a deductible with cash or would you have to use a credit card?
Review life insurance
- Whether term or permanent life, the purpose is to supply immediate cash when death occurs.
- Life insurance death benefits are income replacement, even if covering a stay-at-home spouse or partner. A non-working spouse or partner brings tremendous value into a home that is hard to monetize.
- For example, a person earning $100,000 annually will add a million dollars to the home over 10 years, not considering increases in wages.
- Coverage amount requirements are usually greater than we think.
- Don’t forget to make allowances for current expenditures that will no longer be continued.
- Examples could be: one less car payment, lower budget allowance in food, clothing, personal expenses, et cetera.
- Consider cash received from Social Security, 401K, separate savings accounts, and other sources.
- The goal is to realize that major losses impact families beyond personal finances. A major loss changes family dynamics, and the immediate need will be having the time necessary for family decision-making, readjustment and future direction.
Debt always looms in our culture, and it’s another reason we can’t seem to keep long-term financial goals on track. Begin each new year assessing your debt burden.
Debt is a double whammy of interest cost stacked on more interest cost.
- The first interest cost begin when you buy using debt.
- The second interest cost is the interest you’ll pay for incurring debt.
- If debt in your life is revolving credit (charge cards), you’re often dealing with never-ending payoff if not managed properly.
- Interest paid on debt compounds faster than income received compounds in an investment portfolio.
Finally, you can complete this check-up in about three hours. Each step is an important part to make sure future cash needs are met. Consult personal financial professionals, and keep your future on course for success. It’ll be a great start to 2016 and give you a sleep well at night financial plan.