Financial New Year’s Resolutions

As the calendar flips and we all continue to write “2013” on checks and documents, it’s time for all of us to make those New Year’s Resolutions for 2014.  The good news is that I won’t ask you to join a gym, eat more fish or buy an elliptical machine that will sit in the basement and serve as a convenient place to hang drying clothes.  The bad news I am going to suggest you do a little legwork and some simple calculations.  But overall, I think completing my checklist of financial New Year’s resolutions will be much more profitable and if nothing else, will provide families with clarity and maybe even some peace-of-mind.  And compared to P90X, my resolutions are relatively painless.

Track Your Spending:  As noted in my blog ( I believe having a solid understanding of your annual expenditures it is a critical cornerstone to a family’s financial plan and is a key portion of my planning engagements with families. To do that, one must track at least one month of spending (and multiply by 12) or even better, a full year of tracking spending. Why is this so important?  Because by tracking and knowing how much you are spending, you can now start to make informed decisions on a multitude of financial factors.  These include, the amount your family needs in liquid savings (for emergencies), what funds are available for retirement savings and just how much of your hard earned money you are throwing away on low-priority expenditures.  In addition, knowing how much you “need” to live on today can also provide a reasonable measuring stick for how much you will need in retirement.

Rebalance the Portfolio:  What’s been called “the only free lunch on Wall Street”, taking the time to rebalance your portfolio can be one of the most profitable, if not psychologically challenging, practice families can undertake.  Last year (2013) provides a great example of the need to rebalance as the stock market (as captured by the Vanguard Total Stock Market ETF – Ticker: VTI) logged a total return of about 33% while bonds in general declined about 2% (using Vanguard’s Total Bond Market Index – Ticker: VBMFX). If a family started with a plain-vanilla 60% equities / 40% bonds portfolio mix on 1/1/2013, that performance gap would now yield a portfolio mix of around 67% equities / 33% bonds by 12/31/13 and will need to be adjusted.  The reason rebalancing is profitable over the long term is that by default, selling your winning asset classes and buying your losing asset classes is in effect, buying low and selling high.  Of course, this practice should be done within the context of a broader and updated risk-adjusted investment policy for the family.  The problem for most people is that this practice is psychologically challenging in that we all suffer from “recentcy bias”, which is our minds’ pre-disposition to think what has done so well in the recent past (2013) will continue to do well in the future (2014).  Clearly, historical data proves otherwise, as asset classes tend to revert to their means, which provides the value in rebalancing.

Calculate Investment Costs:  As noted in my prior blog (, calculating your investment costs can be both vexing but ultimately eye-opening. However, I think it is possible for people to get a general idea of what they are paying for in investment fees but keep in mind, these metrics usually address costs to invest only (i.e. “portfolio management) and usually does not include the holistic approach, which I believe to be more valuable.  So for someone to calculate a rough estimate, you need to assemble all the statements from your various accounts and do a little math.   (As an aside: I am happy to do this for new clients to illustrate how we can save money on investment expenses).  Once you have your statements, you’ll want to look up the “ticker” of each mutual fund you are invested in, then multiply your balance in the fund it by the annual expense ratio.  For instance, if you have $50,000 invested in the Invesco European Growth Fund Class C (Ticker: AEDCX, randomly selected) you would find its annual expense ratio (gross and net as of 4/30/2013) is 2.23%.  This means if your balance is around $50,000 in that fund each year you would be paying $1,115 during the year for the privilege of owning this mutual fund.

Run through this exercise for each of the funds you are invested in and you’ll find expenses add up quickly.   In fact, I wouldn’t be surprised if you were to find you are paying about 1.5% of all your accounts each year because someone recommended or you picked those funds.  If you are using a financial advisor, it may be simpler to sit down with him or her and simply ask the direct question:  “How much am I paying for investment advice each year?” and note the reaction.

Check Your Insurance Coverage:  As we all know, life changes throughout the year for better or worse.  Unfortunately, our insurance policies don’t dynamically update with our financial situation.  For this reason, I believe it is critical that families re-evaluate their life and property/casualty insurance needs once per year.  (Disclaimer:  I am not a licensed insurance agent, nor do I sell any kind of insurance products)  In general, families should think about any major changes in their lives (new mortgage, new job, divorce, new baby, new “empty nest”) and determine if their life insurance coverage is still appropriate or now either too high or too low.  Similarly, a family should think about changes to their home, auto and “inventory” of personal property to ensure adequate coverage.  The sweet-spot here is to achieve a “goldilocks” level of coverage.  Not too much coverage, which means you are paying too high of premiums, nor too little coverage, which exposes you to large liabilities.  In short, insurance is a critical piece to families’ financial well-being and needs to be coordinated into the broader financial plan.  In addition, I think it is prudent to discuss at a high-level, insurance needs with resource that is not incented to sell you more insurance. This is why I ensure the insurance integration is part of my engagement with clients. After our discussion, my clients and I would then engage a licensed insurance agent to provide additional detail and formal recommendations and pricing.   (Another Disclaimer:  I receive no referral fees or commissions from any insurance agents or companies in order to maintain my conflict-free pledge to clients).

Check Your Estate Plan:  Similar to the dynamics around insurance, changes in your life can also require changes to your estate planning documents.  (Yet Another Disclaimer:  I’m not an attorney and I am not offering legal advice).  Again, events such as births, deaths, divorce, new business, inheritances, etc. are all reasons to double check and update your estate planning documents.   Documents such as wills, powers of attorney, trusts, health care power of attorney, living wills, etc. all need to be checked to ensure the named parties, the terms and conditions and many other items are up-to-date.  Even more basic:  families should double check their beneficiary designations on their various accounts (401k, IRA, brokerage, checking / savings) to ensure the beneficiaries and the allocations are still appropriate.  Again, I am not an attorney but I can work with families to at least walk through the basics to as a starting point in determining if these plans are appropriate, accurate and aligned with the broader financial plan.  Much like insurance, estate planning is a critical piece to families’ financial plans. Knowing this, I coordinate and facilitate this aspect of the planning process with my clients and a licensed attorney who can prepare and update documents and provide legal advice (Final Disclosure:  I receive no referral fees or commissions from any attorneys in order to maintain my conflict-free pledge to clients).

To wrap up: families’ financial lives are not static and need maintenance to properly function.  While these practices can be tedious, I believe the long-term pay-off from annually tackling these tasks becomes most apparent when a significant and inevitable life event is automatically handled and accounted for by an up-to-date financial plan.  In addition, an underappreciated pay-off also comes much more quickly.  This is the immediate peace-of-mind that comes with knowing the proper plan is in place and those “what ifs” are reduced.

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