Why January is the best time to plot financial wins

Many people may be happy that 2022 is over. A rebounding pandemic economy produced consequences many of us were not expecting.

Inflation and gas prices reached historic highs. The stock and bond markets experienced unsettling levels of volatility. Russia attacked Ukraine, starting a war with global implications. The Federal Reserve raised its benchmark interest rate seven times.

And now, concerns of a looming recession.

While we cannot control the national economy, we can manage our personal finances. January is an ideal month to spend time reviewing finances and planning for the New Year. While reviewing your finances, take some time to think about the following:

— how inflation has changed your monthly cash flow;

— how poor market performance has impacted your investments; and

— how higher interest rates are affecting your finances.

What is your net worth?

Whether your net worth is high or low, you should understand where you are so that you know how to proceed. Without understanding where you currently stand, financially, how can you appropriately plan for your future?

Calculating your net worth sounds complicated, but for most people, it is not. Make a list of your assets (what you own). Then, subtract the liabilities (what you owe) from the assets to determine your net worth. If you have never calculated your net worth, use this year’s statement of net worth as a benchmark going forward. Every January, compare your statement of net worth to those of prior years.

Is your net worth growing or decreasing? Try to understand why it has changed. Are you saving more, or has your debt increased?

Monthly cashflow

Do you know how you are spending your money? Most people know the amounts they are paying for their mortgage and car payments, but fewer pay attention to the amounts they spend on food, subscriptions, or online purchases, especially if they are using a credit card to pay for the purchases.

Budgeting will help you understand where your money is going. Track all expenses for a minimum of 30 days or, better yet, the entire year. First, write down your monthly expenses, then add up all additional spending. After you have tracked your expenses for a month, think about the following:

— Where can you reduce your spending? If your income has decreased and you have a monthly shortfall, closely examine which expenses you can eliminate or minimize.

— Are you using credit cards monthly because you are short on cash? If so, are you using a credit card with the lowest interest rate? Do not avoid looking at the statement to understand your rate and your options. This is called the ostrich effect, and it almost never works to your benefit.

— How can you eliminate outstanding debt?

— Are you maximizing your annual contribution and employer match in your retirement plan?

— How much will you need to have saved to maintain your standard of living in retirement?

— Are you saving enough to meet your goals?

Big-ticket items

Are you planning on moving, purchasing a car, replacing your roof, or paying for college tuition in the future? Do you know how much this expense will cost, and have you thought about how you will pay for it?

If the money is not readily available in your savings account, inquire about interest rates, pencil out your timeline, break the expense down to a monthly cost, and plug the expense into your budget. Prior to incurring any additional expense, determine if you can afford the purchase.

To avoid accumulating unwanted debt, consider what changes you can make to your spending now that will help you save for your goals.

The unexpected

As we were reminded during the pandemic, life can change unexpectedly and fast. Are you prepared to the best of your ability for a job loss, illness, disability, natural disaster, or lawsuit? Insurance and savings can help protect you against unforeseen events.

— Do you have an emergency fund with at least six months (or more) of expenses in a savings or money market account?

— Are you adequately insured to meet your risk?

— Do you have a disaster plan in place and supplies readily available if an unexpected natural disaster occurs?

Consider storing inventories and important documents on a portable hard drive. It is also a good idea to retain copies of birth certificates, passports, wills, trust documents, records of home improvements, and insurance policies in a small, secure evacuation box that you can grab in a hurry in case you need to evacuate immediately. The fireproof, waterproof, and lockable kind of evacuation box is best.

Protect your estate

Without proper beneficiary designations, a trust, a will, and other basic documents, the fate of your assets and children under 18 years old may be decided by attorneys and tax agencies. Probate fees, taxes, and attorneys’ fees can erode your estate and delay the distribution of your assets when your heirs may need them the most. If your estate planning documents are not in place or need to be updated, schedule a meeting with an attorney who specializes in estate planning.

While watching or reading the news can make us feel like the world is out of control, one arena where we can exercise control is our personal finances. We can control the decisions we make to create a good financial future.

Take some time in January to access your current financial snapshot and plan for the year. Be focused and methodical in managing your finances throughout 2023. While we cannot control the world around us, having a plan in place and understanding your finances can provide reassurance that you will be okay.

Teri Parker is a vice president for CAPTRUST Financial Advisors. She has practiced in the field of financial planning and investment management since 2000. Reach her via email at Teri.parker@captrustadvisors.com.

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