New Year’s Resolution! Take Stock of Your Finances
By Greer Gibson Bacon, CFP®
January is a great time to take stock of your finances. One way you can do this is constructing a Statement of Financial Position, as of December 31st. Very simply, it’s a snapshot of your assets, liabilities and net worth on a particular date, classified by their purpose in your financial plan.
Assets are what you own.
Cash assets are liquid assets, like checking, savings and money market accounts. Since they earn a low rate of return, they’re best limited to operating, emergency and major expense reserves.
Invested and retirement assets, like stocks and bonds or IRAs, are held to meet long-term goals. Invested assets are acquired using “after-tax” dollars and not subject to required minimum distributions (RMDs). By contrast, retirement assets are acquired using “pre-tax” dollars and subject to RMDs.
Use assets support your lifestyle, like your car and home. Although they contribute to net worth, they won’t help you meet long-term goals unless you plan to sell them.
Liabilities are what you owe.
Consumer liabilities, like credit card and installment debt, are incurred to buy goods and services that lose value. Since interest rates are often high and interest paid isn’t tax-deductible, it’s an expensive way to buy. It’s bad debt.
Non-consumer liabilities, like student loans and home mortgages, are incurred to acquire assets that produce income or appreciate in value. Depending on various factors, some or all interest paid on such liabilities may be tax-deductible. It’s acceptable debt.
Your net worth equals your assets minus your liabilities.
Your net worth may be positive or negative, depending on your stage in life and saving habits. But, your financial plan should be designed to maximize it for the long haul. This means accumulating assets for major goals, like retirement. Also, it may mean preserving them for heirs or systematically depleting them.
Reviewing your financial position
Once you’ve constructed your Statement of Financial Position, look for ways you can improve it. Here are a few ideas. If you don’t have an emergency cash reserve (The Message, May 2016), start one. If it’s not enough, plump it up. Too much cash? Add to invested and retirement assets or pay down consumer debt. If you’re getting close to retirement, most of your assets should be invested and retirement assets. If yours aren’t, boost your long-term savings. Too much consumer debt? Start paying it off by tackling your highest rate debt first.
If this is the first time you’ve constructed your Statement of Financial Position, view it as your baseline measurement. Then, update it annually to track your progress (or lack thereof) toward important financial goals. This will tell you if the actions you’re taking are helping or hindering your cause.
If you need help, seek the advice of an experienced professional. Individuals holding the Certified Financial Planner™ (CFP®) or Chartered Financial Consultant® (ChFC®) professional designations may be good choices. Find out more about these designations by visiting the FINRA Professional Designations database at finra.org/investors/professional-designations
This article first appeared in the February 2017 Spokane County Medical Society Magazine. The information referenced in the article is current as of date of publication.