A FINANCIAL RESET

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The past year was a financial gut check for many folks. It was a volatile year in the stock market. The economy as a whole provided significant headwinds too.

The stock market was noticeably choppy, mostly on a downward trend throughout the year. The S&P 500 fell 19.44% over the past year.

Companies made pessimistic earnings forecasts. There was record inflation, cryptocurrency fraud, and a number of other newsworthy events. We will all remember something from 2022!

The beginning of the new year brings new opportunities in nearly all areas of life. Everyone appreciates the chance to start fresh. Now that the calendar has flipped to 2023, it’s a good time to reset different aspects within your financial life.

The new year offers an excellent chance to take time and assess your current financial situation. There are probably several areas of your financial life that have gone untouched or unmanaged for a period of time.

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1… DETERMINE YOUR NET WORTH

At the start of a new year, you will have access to all of the data from the prior year. The full picture of your financial life is available to you.

Because of this, all the pieces are in place to track your net worth or other big picture financial metrics.

For simplicity’s sake, the net worth formula looks like this:

WHAT YOU OWN - WHAT YOU OWE = NET WORTH or ASSETS - LIABILITIES = NET WORTH

You will place any checking/savings accounts, investment accounts, or estimated equity in a business/real estate assets in the “Own” category. Any debts will fall into the “Owe” category.

Once you have summed up these two categories, it is a simple calculation to determine your net worth. Actually seeing how your wealth grows from one year to the next can be hugely motivational and is a great piece of information to know as you head into the next year.

2… COMPILE AND REVIEW TAX DOCUMENTS

If pulling together statements or documentation were optional, nobody would do it. Even when it is a necessary step in the tax filing process, many people will still unnecessarily delay or avoid doing so altogether.

Your tax return is an essential component of your financial life. Without accurate and up-to-date information, your CPA will have difficulty correctly filing your return. If your financial advisor does not have the full picture of your financial life, it will be nearly impossible to implement any tax strategy to lower your lifetime taxes.

Many of the documents will start to arrive by mail or email in the early days of the new year. Any time you see an important document come through, set it aside or save it in a certain place.

This simple act of organization will save you countless hours as the tax deadline quickly approaches.

3… INCREASE 401K CONTRIBUTION RATE

You may have had the opportunity to reset the contribution rate for your employer sponsored retirement plan during the open enrollment period last year. Hopefully you took advantage of the opportunity to increase your savings rate then.

Unfortunately, it is easy to be distracted by all of the other decisions during the open enrollment period. At the beginning of the new year, your savings/contribution rate can be your sole focus.

Once this rate is set, it is easier to remain committed to your savings goals. One simple decision made at one point in time could increase the dollar amount of your total contributions significantly. Even an extra percentage point or two could be hugely impactful.

Chances are excellent that you will hardly even notice the difference. Bumping up your contribution rate is an easy way to reset and start the year off on the right track.

4… TRANSFER EXCESS SAVINGS TO A RETIREMENT/INVESTMENT ACCOUNT

Instead of transferring assets directly to a retirement account, many people accumulate excess funds in a simple savings account.

This isn’t inherently bad. The decision to hold cash instead of funneling it into the market can be a wise investment strategy.

There is a chance that you are holding too much cash though. There will not be a set percentage of your net worth or a specific amount of cash that is “too much.” Your cash allocation will be specific to your personality and actual financial needs.

If you realize that your cash balance has grown quite large, the beginning of the new year is a great time to assess whether it would make sense to transfer and invest any excess funds.

5… TAKE A SPENDING FAST

At The Wealth Span, we rarely recommend cutting your spending level at the overall expense of your overall satisfaction. Money is a fuel and resource for life, and it should be used to maximize your fulfillment and joy.

Because of this stance about spending, there will never be a recommendation to ruthlessly cut your budget or eliminate gratifying expenses.

At the beginning of the new year, “a spending fast” could be a great way to refresh your palate by removing splurge or extravagant expenses for a short period of time. A few weeks or even a month could revitalize your financial life.

6… INSPECT YOUR CASH FLOW SITUATION

Over time, your cash flow becomes the focus of your financial life. As you enter retirement or work-optional mode, there are few things more important than the cash that comes in and goes out.

It is never too early to start compiling the data required to determine your monthly or annual cash flow. This does not necessarily mean that you need to create a budget.

If you track your expenses using an app and notate how much after-tax income you earn each month, you are well on your way to understanding your cash flow situation. Many banks provide a somewhat accurate estimate of your monthly cash flow in their apps or online portal.

If you are years from retirement, tracking your cash flow is about establishing good habits and a process around this activity. If you are actually close to retirement or currently in it, cash flow becomes the basis of your entire financial life.

7… UPDATE BENEFICIARIES

You probably haven’t thought about the beneficiaries for your investment accounts, insurance policies, and other financial assets for quite some time. Nobody wants to regularly review beneficiaries, but it is a hugely important element of your financial life.

Several things could have happened since you initially established beneficiaries.

Perhaps you designated a beneficiary when the account/policy originated and have completely forgotten who the beneficiary might be. You can check and confirm the beneficiary is correct.

If your life circumstances or wishes have changed, it may make sense to update/modify your beneficiaries. This process should be relatively easy but can provide a huge ROI to you both personally and financially.

8… HIRE A FINANCIAL ADVISOR

A financial advisor serves several purposes.

1/ Provides accountability and support in completing these activities and more.

Procrastination and uncertainty are wealth killers.

It isn’t easy to stay committed to a plan or always follow-through on certain action items. A financial advisor can help provide the motivation and accountability to ensure you are staying on the right track.

You probably have questions about what you should do or the specific steps you can take. Nobody has the answer to every question, but a financial advisor can sort through the details and provide advice specific to you. The advisor can provide an increased level of certainty that you are on the right path.

2/ Reduces the time and stress associated with managing your financial life.

Many people do not have the time or bandwidth to effectively manage their finances. When this happens, there can be a lot of pent up stress and worry.

You probably want to create a financial plan and take a firm hold of your financial life but don’t have the time to do so. A financial advisor can use their process/tools to develop and implement a plan specifically tailored to you or your family’s financial goals.

When you know that everything is in place, it provides peace of mind. as they can take the burden of financial planning off of the individual or family and help them achieve their financial goals with minimal stress.

9… GET ON THE SAME PAGE WITH YOUR SPOUSE

Being on the same page financially with your spouse is valuable. Several things happen simultaneously when each spouse is working toward a combined goal.

Not only are you more likely to succeed but accomplishing any goal set will be more meaningful (and potentially more impactful) when completed alongside your spouse.

The beginning of the year is a great time to set goals and establish new routines. When you do this alongside your spouse, the process of planning and preparing for the future is more enjoyable and rewarding.

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TL;DR

The beginning of the new year is a chance to start fresh or reset different aspects of life. It is a crucial time to get off on the right foot financially.

You may not complete each and every item on the list but finalizing any of these steps can be a great accomplishment in the new year.

Regardless of your stage in the wealth building journey, there is something you can “reset” or achieve to position yourself better for the future.

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What other items could you accomplish at the beginning of this year to reset your financial life?

Share your thoughts with a friend-turned-accountability-partner and tell them to subscribe to The Wealth Span!