Don't Forget About Your Annual Financial Checkup - Retire by 40 (2024)

Can you believe it is December already? The year is almost over and Christmas music is in the air. Now is the perfect time to go over your finances before it gets really busy for Christmas and New Year.

It is important to go over your finances at least once per year. Actually, I like to do it once per month, but that’s probably too often for most families. But you can’t just ignore it either. Many American households are having a tough time this year due to inflation and increasing debt. It’s harder to check on your finances when the numbers are bad. Ignoring it won’t help the situation, though. You have to face the problem and try to fix it. Your finances should be improving as you grow older. If you keep sliding backward, then you’re doing it wrong. Although, it’s okay to have a bad year occasionally. This year has been tough on everyone. The long-term trend should be growth and prosperity, though.

Here is what I do for our annual financial checkup.

Figure out Your Net Worth

The first step toward improving your finance is to see exactly ­­­where you are. Fortunately, this is relatively easy for most people. Y­­­­ou just need to figure out your household net worth. Net worth is simply how much money you’d have if you sell off everything and pay off all your debt. Many families have a negative net worth (the Federal Reserve estimates that 15% of US households have a negative net worth), but knowing where to start is essential.

So what should go in your net worth? Basically, everything in your name and all your debts. Here is a simple Excel net worth spreadsheet to get you started. This can get complicated very quickly as you accumulate more assets. My spreadsheet has a line item for each stock we own and I update these at least once per month. You will need to modify the spreadsheet to suit your needs. Alternatively, you could sign up with Personal Capital and review your net worth anytime you’d like. The site will aggregate all your assets and debts and give you a quick snapshot of your finances. They also have many great tools to help investors analyze their portfolios and plan for retirement.

Personally, I use both Personal Capital and a manual spreadsheet. I’m probably in the minority, but I love updating our net worth spreadsheet every month. It gives me a sense of accomplishment and keeps me up to date on our investments. Too much automation makes me feel disconnected from our finances.

Annual Financial Checkup

Figuring out your net worth is just the first step in your annual financial checkup. Now we need to dive in and see how we can improve our finances next year.

Cash Flow

Hopefully, your net worth is increasing and your finances are improving every year. If that’s not the case, then your cash flow is not working well. You are spending more than you make. In this case, you need to start tracking your income and expenses every month. This will help you identify the problem. Then you can fix it. Some people might need to reduce expenses and others may need to improve their income. It is okay for your net worth to take a step back occasionally, but it should continue to increase as you get older.

Here is our net worth since 2006. We had some setbacks, but our net worth is on the right trajectory. Your net worth should look like this as well.

2022 was a tough year for us. Stocks and bonds both lost a lot of value. Our net worth took a big step back (about 2 years), but our cash flow is still solid. I’m confident our net worth will recover and reach a new high in one to two years.

Debts

Next, let’s look at debts. Debts are obviously bad, but sometime you can’t avoid them. Most of us can’t buy a house with cash and many students have to borrow money to pay for college. The reason why debt will drag down your finances is the interest. The more debt you have, the more interest you will pay every month.

The worst debts are high-interest credit card debts and payday loans. If you have those high-interest debts, you should pay them off ASAP. Credit cards are very convenient, but you should pay the bill in full every month. Paying the minimum will only enrich the banks.

At the RB40 household, we are doing relatively well with debt. The only debts we have is the mortgages of our duplex. In 2022, our debts only decreased by $6,000. It will be many years until the mortgages are paid off, but that’s okay. Personally, I think mortgages are acceptable debts. The rates are quite low so we don’t prioritize paying them off. I’m glad that we don’t have any other debt, though.

Minimize Taxes

Benjamin Franklin said nothing can be certain, except death and taxes. It’s true that we all have to pay Uncle Sam, but we still can try to minimize our taxes as much as we can. There are many ways to do this, but we need to do it soon.

• Maximize your 401(k) contributions. Personally, I think investing in your 401(k) is the easiest way to build your net worth. The contributions are automatically taken out of your paychecks so you don’t miss them. If you max out your 401(k) every year, you will be a millionaire before you know it. For 2022, the 401(k) contributions limit is $20,500 for those under 50. The amount will increase by $2,000 for 2023. You should try to max out your contributions if you can. Get ready to increase it for 2023!
• Maximize your Roth IRA contributions. For 2022, the Roth IRA contribution limit is $6,000 for those under 50. I love our Roth IRAs because we won’t have to pay any tax on the capital gains in these accounts. Let me repeat that – no tax on capital gains! This is one of the only investments you can make that you won’t have to pay taxes on. In 2023, the contribution limit will increase to $6,500. So get ready for that. If you don’t know much about the account, here is a tutorial on how you can start contributing to a Roth IRA.
• Tax loss harvesting. 2022 was a terrible year for the stock market. You can sell some investments to get the capital loss deduction.
• Reset your cost basis. This one is a bit complicated. It’s a strategy to lock in some profit. Basically, some of us are in the 15% tax bracket and don’t have to pay taxes on capital gains. If you’re in this position, then you can sell some stocks and purchase them back right away. There will be paper gains, but you won’t have to pay any tax on them. The cost basis will reset to the new price and your future taxes will be lower. The easiest way to figure this out is to do your taxes early. Once you’re done, add a hypothetical sale and see if your tax liability increases. Most working families probably can’t take advantage of this because they have too much income. Some early retirees might be able to, though.
• Give to charities. You can deduct charitable contributions and reduce your taxes. December is the perfect time to give.
• Contribute to a health saving account. Contributions to your HSA can be excluded from your gross income. This will lower your taxes.

These are just some of the ways to decrease your tax bill. I hate doing taxes as much as the next person, but I love saving money. Why pay more taxes now if you can defer or reduce them? Contributing to your retirement accounts is probably the easiest way to reduce your tax liability and grow your net worth. So take a look at your taxes and finish 2022 strong.

Review Your Investments

This is an easy one if you have a good financial planner. Give them a call and review your investments if you haven’t talked to them in a while. This will give them a chance to go through your investments in detail and determine if they are still compatible with your goals.

(For beginners, here is how to design your asset allocation.)

If you’re a DIY investor like me, then it is more work, but more fun as well. It’s time to check your asset allocation! The stock market didn’t do well this year. Surprisingly, bonds performed badly too. Normally, bonds tend to do better when the stock market underperforms. However, the Fed raised the interest so much and this drove the bond funds down. There were a lot of moving pieces in 2022 and your asset allocation might have shifted away from your target. This is where Personal Capital really shines. It is a lot easier to visualize your asset allocation there than to figure it out on the spreadsheet.

As you can see, I’m a bit overweight on stocks. I should have taken some profit last year and put it in real estate crowdfunding. Hindsight is 20/20. I’m sure stock will come back at some point so I’ll just have to be smarter next time. Take some profit and diversify when the stock market is doing well.

If you don’t like Personal Capital, then you can do it manually on your own spreadsheet, too. A good page to use is Morningstar’s Instant X-Ray. You can get the allocation for each fund and input it in your spreadsheet manually. I haven’t done this in a while and my spreadsheet is a bit out of date. I’ll need to spend some quality time with it over the Christmas break and update the percentages for each fund.

Lastly, if you haven’t updated your target asset allocation for 5+ years, you probably should evaluate it. Most investors get more conservative as they get older so you may need to adjust your target accordingly.

Real Estate Investment

Real estate investments are much easier. You shouldn’t need to change much on an annual basis. The main thing is to evaluate the expenses and see if you need to raise the rent. In 2022, our property tax, utility, insurance, and maintenance expenses all increased. We’re raising the rent a bit to compensate for these changes. Luckily, the rental market in Portland is pretty tight so our tenants didn’t complain much.

Setting Financial Goals

Okay, now that we know where we stand, it is time to set some financial goals. December is the perfect time for this because the New Year is just around the corner. We can all start fresh! Setting goals is very important because they will give you something to work toward. Financial goals are ideal because they are measurable. You can see my 2022 goals for some examples.

• FI ratio > 110%. This means keeping our passive income above our expenses.
• Sell the rental condo and reinvest in real estate crowdfunding.
• Travel for 6 months.

I’m looking forward to setting some new goals and improving our finances in 2023. You don’t even need to complete every item on your list. I grade my goals on an academic curve. I’ll be happy with mostly As and Bs. Unfortunately, 2022 was a bad year for my goals as well. I have several Fs… Anyway, just working on these goals will put us ahead of the households that ignore their finances.

Did you have your annual financial checkup? I know it can be a bit tedious if you haven’t done it before, but ignoring it won’t help. Get it done before 2023!

If you haven’t tried Personal Capital yet, I highly recommend them. Sign up with Personal Capital to keep track of your investments and gain access to free tools such as their great retirement planning calculator and 401(k) fee analyzer. This is an affiliate link and any commission received will go toward helping Mrs. RB40 retire early.

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