The Five-Step Financial Checkup

Written By
Paul Tracy
Updated January 16, 2021

In any business enterprise, it’s the boss’s job to set goals, formulate a strategy to meet those goals, and delegate responsibility to the right people to carry out that strategy. But the boss can’t sit back concentrating on his or her thumb-twiddling skills in hopes that the people who hold responsibility to carry out specific parts of the strategy will get things done on time and in the right way. Instead, the boss needs to check up on those folks periodically, keeping tabs on what progress they make, what problems they encounter, and what solutions they find.

The boss, in other words, has to know that no plan stands much chance of bearing fruit without a regular checkup.

Your financial plan needs regular checkups, too. You’re the boss when it comes to your plan, and it’s your job to set goals, formulate a strategic plan to meet them, and delegate responsibility for carrying out your plan by “hiring” the right people – for example, an insurance agent, a banker, money managers to handle your investments, and so on.

It’s also your job to keep an eye on these folks with regular checkups so that you, like the boss in our original example, will see your plan bear fruit.

You have five areas to cover during your financial checkup – your personal circumstances, your financial health, your investment portfolio, and your insurance package.

Your personal circumstances come first. What has changed in your life over the last year? Have you married? Divorced? Had a baby? Bought a new house? Changed jobs? Gotten sick? What impact have these changes had on you? On those close to you? What changes do expect to see in the coming year, with what impact?

A close inspection of your financial health is also important, starting with your budget – the keystone of any successful financial plan. Do you stick to your budget? Do you save regularly? How much credit card and other short-term debt do you carry? How much long-term debt do you have, including your mortgage, your car loan, and so on? Are you paying too much in taxes? Is your will up to date? Your estate plan, if any?

The next step is to gauge the performance of your financial plan. Looking back, where were you a year ago? What progress have you made since then toward the goals of your financial plan? What rates of return did you realize on your portfolio, including savings accounts, stock and bond holdings, mutual funds, and other holdings?

Looking forward, you must also investigate the mix of investments in your portfolio. Given the ups and down of the financial markets, the good bet is that your own mix has changed in the last year, even without your knowledge. If so, does the current mix reflect your appetite for risk? Your circumstances? Your sense of the economy? Your hopes for the future? Most important, are the returns on the assets in the current mix likely to meet the goals of your financial plan?

It can be fun to monitor your investment portfolio, but changes in your personal circumstances dictate that you keep tabs on your insurance coverage, too. Do your coverages adequately cover the risks you face? Do you own enough life insurance, for example, to maintain your family’s lifestyle if you don’t make it home one day? Would your disability insurance keep body and soul together if you couldn’t work? Would your homeowner package give you enough money to replace your home in the event of a fire?

If you’re young and in the early years of your financial plan, you’re probably pursuing long-term goals – say, saving for college costs for your children 15 years down the road, or for your own retirement in 30 years – and you’ve structured your investment portfolio accordingly, with holdings in the stocks of companies with good prospects for long-term growth. You’ve made a bet, in other words, that the investments you hold will increase in value over the long term, and you don’t worry much about the daily ups and downs of the markets. If that works for you, an annual checkup is all you need.

But what if you’ve got children due to leave for college starting in two years? You’re not investing exclusively for the long term; indeed, you probably hold instruments that will begin throwing off cash when your children matriculate – for example, annuities, certificates of deposit, maybe some “laddered” bonds that will mature during the years your children are off at school.

Given your near-term obligations, you need a semi-annual checkup, maybe even a quarterly checkup once you start paying college bills, just to make sure that your investments remain properly positioned to throw off cash without damage to your long-term goals.

For similar reasons, you should start getting semi-annual or quarterly checkups as you near retirement age, if only to reassure yourself that you won’t run out of money before your time on earth is up. Cash is king for many retirees, and as you plan for your own golden years, the temptation is to move your capital away from equities into bonds, CDs and similar near-cash investments to meet your cash needs and provide a margin of safety.

But keep two things in mind. First, inflation remains a threat, and it can eat away at the lifestyle of anyone on a fixed income. Second, folks who retire at age 65 may well have 25 years of life ahead, and for such people, portfolios containing no long-term equity holdings whatsoever aren’t necessarily the best idea. Indeed, it can be a mistake to base your investment philosophy on fear that the ups and downs of the equity markets will strip you of capital you can’t replace, since 25 years is long-term in investment terms.

put another way, these days retbearement isn’t a short-term deal. To be sure, as you enter retirement, give yourself to a semi-annual and maybe even a quarterly financial checkup. If it shows you’re doing fine, it’s cause to celebrate. If the opposite, the checkup can clarify the problem, and remember that once you define a problem, you’re halfway to fixing it. Remember, too, that in all likelihood, you’ve plenty of time for the fix to work.

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