Is Your Financial Plan on Track?

April 15, 2013

Are you making progress in your financial life or are you simply trying to keep the train on the tracks when it comes to managing your personal finances? We track the financial well-being of employees in the workplace on a quarterly basis and it is obvious that not everyone out there feels that their financial life is on track. In our 2012 Year in Review research report, retirement preparedness remains a significant concern with only 17% of employees knowing their on target to reach their retirement income goals. Financial stress also remains a potential problem with 82% of the employees participating in the workplace Financial Wellness Assessment reporting some degree of financial stress. 

While it is interesting to understand the financial trends and check the pulse of the average American worker, it is more relevant to understand the trends within your own personal finances.  Sometimes the most empowering aspect of managing your money is the simple awareness of where you stand and the ability to identify trends in real time. So, what are some simple and effective ways to track and identify the progress you are making in your own financial life?

Here are some important trends to pay attention to with your personal finances along with the overall trends from the 2012 Year in Review report:

Does my spending match my values, goals, and priorities? We reported that 86% of employees were able to pay their bills on time. The most difficult thing about budgeting is actually following through with tracking your money and then spending/saving/paying off debt with an actual plan. Since almost everyone understands the importance of budgeting and managing your cash flow, the hard part is determining what to look for when reviewing your spending and saving habits.  If you only focus on figuring out where your money is going, you may be missing the opportunity to delve into more pressing financial concerns such as figuring out if you are saving enough or managing credit wisely.

Action item:  Use an online budgeting system like Mint or an Expense Tracker to figure out your spending, saving, and giving trends.

Trends to look for:  Start with the most obvious — are you living within your means (i.e., income is greater than expenses)?  But don’t stop there. Many people assume since they are NOT living paycheck to paycheck that a budget isn’t necessary. This isn’t the case. In fact, a budget helps maximize the use of financial resources and provides reassurance that your spending is aligned with your financial goals, values, and vision for the future.

Other important trends to look for include — Are you saving at least 10-15% into a retirement plan and able to fund your emergency savings?  Has your spending in lifestyle expense categories such as travel, dining out and entertainment exceeded your planned amounts? Are there any potential problem spending areas that need to be adjusted? By “paying yourself first” you are prioritizing saving and/or paying off debt.

How are my investments performing? Just 33% reported they are confident their investments are allocated appropriately. During up or down markets, checking your retirement account or brokerage statements can be an emotional experience. So how often should you check your investments and what is the best way to measure success? Many financial planners recommend reviewing your accounts on a regular basis – at least annually (although quarterly is more generally recommended).  The problem is that most people don’t always do this and for those that do, it is difficult to figure out what they should be looking at as many people simply focus on their overall account balance.

The average investor has multiple accounts scattered across different custodians. You may have a 401(k) with your present employer, a rollover IRA from the previous one, a Roth IRA, and even regular brokerage accounts that hold stocks, bonds, mutual funds, REITS, or alternative investments. Regardless of where your accounts are located, it is always important to look at all of these types of investment accounts together as a total portfolio.

Action item:  Reviewing your tolerance for risk is an essential part of every investment plan. It is also advisable to have a written game plan to guide current and future investments. Financial planners refer to this as an Investment Policy Statement. Consider this a valuable roadmap to investment success that should always change as your life goals change.

Whatever your risk tolerance may be, always compare your total investment portfolio to the appropriate benchmark. Most investors only pay attention to the performance of headline grabbing index information such as the Dow Jones Industrial Average or the S&P 500. While this provides useful market information regarding large cap stock performance (typically including companies valued at $10 billion or more), most financial planners agree that a properly diversified portfolio should include asset classes other than just large cap stocks. Some examples of benchmarks for other major asset classes include the following:

If you are working with a financial planner, you may already be getting performance reviews from your advisor. For the do-it-yourself crowd, most online brokerage firms offer portfolio tracking software that allows you to import outside portfolio holdings for a consolidated view.

Trends to look for:   Assessing the performance of your portfolio takes some time and effort but is a key to being successful as an investor. Determining whether your portfolio is up or down is never enough. Take a look at all of your investments at least once a year and look for the key trends. Is your portfolio consistently tracking your customized benchmark? Has over or under-performance in a particular asset class shifted your portfolio? Portfolio re-balancing is typically recommended on at least an annual basis. Finally, does any individual holding make up 15% or more of your overall portfolio?  These are all valuable questions to ask as you review your portfolio and investment trends.

Is my net worth trending in a positive direction? 40% are not comfortable with the amount of non-mortgage debt they have. The wealth building process takes time and patience. Calculating your net worth provides an objective measure of your overall financial health. The net worth statement allows you to check up on the status of all of your financial accounts to determine your net worth (everything you own minus everything you owe).

The number by itself is actually rather meaningless. One of our financial planners who took one too many psychology courses in grad school often says that “net worth does not equal worth.” However, when it comes to tracking the progress of our financial lives a net worth analysis provides a simple tool to analyze personal trends. It can also prove to be an incredible motivator. This goes hand in hand with budgeting but some basic awareness goes a long way to create momentum with planned spending, savings, and debt reduction strategies.

Action item:  Complete a net worth statement that estimates the value of your personal assets and liabilities. Not sure about the value of your home or automobile? Check out Zillow or Kelley Blue Book for an estimated value.

If you are trying to aggressively pay down debt and want to see immediate results, you may want to initially check your net worth on a month-to-month basis. Otherwise, semi-annual or annual reviews should be sufficient. You can even take your analysis a step farther and calculate your debt to income ratio.

Trends to look for:  How does your net worth compare to your previous net worth statement?  Is your debt/income ratio at least below 36% (or ideally 30% or less)? Is your emergency savings fund still intact and do you have at least 3-6 months of basic living expenses in an account separate from your regular checking account? Is your debt load increasing or decreasing? These are all important things to consider as we work to pass our own financial stress tests.

Has my credit score improved over the past 12 months?  48% check their credit score on a regular basis.  Checking your credit score on a regular basis is similar to going to the doctor for an annual checkup. It’s always a good idea and everyone should do it.

I’ve mentioned before that credit scores are not the “be all end all” of your financial situation – but your credit score can help you lower the cost of borrowing money.  Credit scores over 760 typically help you qualify for more competitive interest rates for a mortgage.  A higher credit score could save you thousands of dollars if you are in the market for a new home or refinancing. It is also important to note that routinely checking your credit report can help identify potential risks related to identify theft.

Action item:  You can get a free copy of your credit report from all three credit reporting bureaus at www.annualcreditreport.com.  You should look over each report carefully to make sure there is no unauthorized activity. You can also get a free copy of your credit score along with other potentially useful tools to track and monitor your score at sites like creditkarma.com, quizzle.com, and creditsesame.com.

Trends to look for:  Is your credit score improving? Has anything new appeared on your report that is inaccurate or doesn’t belong?

Whether it’s taking a look at your budget, investments, debt or credit situation, the most important thing you can do is identify the direction in which your financial plan is trending. If you are still dealing with some debt issues or working to catch up on your retirement savings it is always helpful to track your progress as you move forward.