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When was your last financial check-up?
Most people give one of two answers:
- I’m always checking on my finances. This answer usually comes from people living paycheck-to-paycheck. They have to live in constant fear of bank overdrafts or missing payments, so they’re watching their bank balance on a near daily basis. I’m exhausted just thinking about the level of vigilance required to live on the edge like that!
- I’ve never done a financial check-up. This usually comes from people with an automated savings and investing plan. They set up all their accounts and automated transfers to those accounts years ago, so the accounts pretty much run themselves. And these people rarely even think about them. That’s more our style, but we still need to check on the money machine once in a while to make sure everything’s still cool.
In our experience, the happiest way to manage your finances is to automate your saving and investing, then run a clean and simple check-up annually. Really, just once a year? Yep! People who check on their automated finances too often tend to overreact to natural market fluctuations. That just leads to stress and unnecessary portfolio adjustments. So once a year it is!
How To Run Your Financial Check-Up
1. Check Your Credit Score
The first step in your check-up should always be to check your credit score. Why? 1) You want to make sure you’re not a credit fraud victim. This check gives you a chance to review your credit report for any suspicious activity and raise the red flag. And 2) you want to check for any errors. Hate to say it, but errors on credit reports are not uncommon. A creditor may have accidentally recorded late pays or missed payments on your report. You can use this opportunity to correct any errors and keep your credit score up where it rightfully should be.
There are three nationwide credit reporting companies: Equifax, Experian, and TransUnion, and your score might be slightly different on each of them. Sure, you could request your report from each company, but there are online services like Credit Karma that will let you pull all three at once.
2. Check for Unclaimed Money
Have you ever checked your state treasurer’s office to see if you have unclaimed money (also called unclaimed property)? It’s a lot more common than you would think. You might have overpaid taxes or have escrow payments waiting to be refunded to you, and if you don’t claim it within a certain time frame, your state is entitled to it. Los Angeles Times reported in 2015 that California gains $400,000,000 per year in unclaimed property. Yeah, $400 MILLION per year just in California.
The good news is it’s pretty simple to claim your money once you know what to look for and how to do it. Just google your state treasurer’s unclaimed property (like “California Treasurer unclaimed property”), and you’ll be able to find their website. Smaller states might just have quarterly PDF reports listing names and amounts, but most states have a database search, so you can type in your name and some basic personal info to see if they have anything for you. If they do, there’ll be a link to a form you can complete to claim your money. You might also need to provide a copy of your ID to prove it’s you making the claim.
You probably won’t have any big money sitting there, but it just takes a few minutes to check. Time well spent!
3. Tweak Your Budget
Budgets take a little work and a fair bit of time, so we’re big fans of recycling budgets instead of creating a new one each month. Your income is usually generally the same month-to-month, and so are your expenses, aside from some big infrequent costs, like weddings and babies, and seasonal changes, like holiday spending and utility usage when the weather gets stupid.
But once a year, we deep dive in our budget to see what’s really changing. Your college grocery budget of Ramen and Little Caesars will be very different from your early-30’s Trader Joe’s grocery budget, which will be very different from your early-40’s Whole Foods grocery budget.
So an annual review of your budgeted spending and your actual spending gives you a chance to make any necessary changes to your budget going forward.
Of course, you’ll also need a brand new budget for big life events like moving or family changes. Your utility budget in Las Vegas isn’t exactly comparable to your utility budget in San Diego. And if you add a mouth to feed, your old grocery budget is out the window. New life, new budget!
4. See how much money is going toward your debt and savings and tweak as needed.
Here’s a simple budget-surplus-allocation summary:
- Once you draft your budget, you’ll know exactly how much money you need to cover your monthly expenses. Of course your income should way-exceed your expenses, and that difference is called your budget surplus.
- You can use that surplus to 1) pay down debt faster, 2) save in your emergency fund, 3) invest in your retirement fund, 4) invest in your dream fund, or 5) any combination of the above.
- Your first priority is to build an emergency fund equal to at least 1-3 months’ expenses.
- Paying down high-interest debt is also high-priority because it’s needlessly costing you a ton of money.
- Retirement is a medium-high priority because you want to start as early in life as possible to take advantage of the magic of compound interest.
- Paying down your remaining debt and adding to your dream savings are icing on the cake.
Seriously, sign up for the 5-Day Financial Fix Challenge if you want more info on this or want to see some sample budget surplus allocations. This is all covered on Day 2 of the Challenge.
But back to your check-up.
You want to make sure your allocations are still in-line with your goals. If you have six months’ of expenses saved in your emergency fund, you’re done with that! You’re going to want to cancel your emergency savings auto-transfers and do something more constructive with that money, like divide it between paying off debt even faster and increasing your retirement savings contributions.
So check the amounts of money currently going toward your debt payments, emergency savings, retirement savings, and dream savings.
Ideally, you’re working toward (that’s working toward; you’re probably not here yet):
- An emergency fund with enough money to cover 3-6 months’ expenses
- All high and moderate-interest debts completely paid off (debts with an interest rate over 5%)
- A maxed out retirement account (contributions of $18,000/year for 401(k)’s and $5,500/year for IRAs)
- At least 10% of each paycheck invested in your dream fund.
Make any tweaks you need to to move you closer to these ideal savings and investments.
5. Check the performance of your investments
The first question we always get is, “Shouldn’t we check the performance of our investments way more than once a year?” The short answer is “no”.
The longer answer is, “only if you really know what you’re doing and truly want to be actively involved in portfolio management.”
Here’s the problem with checking your investment performance too often: the market constantly fluctuates, and it’s human nature to want to change things up when they aren’t meeting our expectations.
This calls for graphs!
Ok, check out the five-day performance of my MGK fund:
According to the 5-day review, my investment is losing money! It’s really tempting to want to cash out and cut my losses before things get worse. But if you look at the 1-year performance, it tells a very different story:
Check it out, our fund is way up from this time last year! Good thing we didn’t panic and sell it off!
Actually these example graphs are super mild. See that drop in November, 2016 of the 1-year performance graph? That was the election. The election freaked people out, and when people are scared, the market drops. But then life gets back to normal-ish, and the markets rebound.
So if you were the investor watching all your stock prices go down in November, it would be really tempting to cash out and hide your money in the mattress. But if you’re on the annual check-up plan, you save yourself a ton of stress and poor financial decisions. Resist the temptation to always watch your investments!
When you’re checking on your investment performance, you’re not just looking at whether the ticker line is going up or down. You want to compare the dividend yield (which is like the growth percentage) of your investment with the dividend yield of other investments in the same category (like foreign stock index funds, for example).
If other investments in the same category are consistently performing better than yours, you may want to consider trading in your investments for those higher-performing investments. But watch out for commissions and fees. Transactions like buying and selling investments usually incur a commission or service fee, so make sure you factor those costs into your decision. If your investment is only slightly under-performing, it might not be worth the fees to make a change.
Document Your Financial Vitals
The most fun part of the financial check-up is watching your financial vitals improve over time! Again, if you’ve done the 5-Day Financial Fix Challenge, you’ve seen The Official Totally-Free, Super-Awesome 5-Day Financial Fix Challenge Workbook (catchy, right?). The Workbook has fields for all your investment account balances, values of other assets, and debt balances. And it calculates your net worth. So you can document all your starting vitals and compare them to your annual financial check-up numbers.
It is awesome to watch your debt fall and your assets and net worth grow. Once/year is the perfect frequency for checking on these numbers because, let’s face it, financial makeovers don’t happen overnight. They result from small financial improvements every paycheck. And when you see the results of 12 months’ worth of small improvements, you’ll be amazed.
Last Step
All you have to do now is set a reminder on your calendar for next year’s financial check-up. Enjoy your year!
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Any to-do’s you’d like to add to the financial check-up list?
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