As we close out each year we do a year-end review session. Here’s how I prepare for it.
Read through our Family Financial Policy Statement
To remember what financial goals and decision-making processes we have agreed on.
Calculate Savings Rate
Some items on the statement have specific targets. It’s a great idea to incorporate targets into your Financial Policy statement. For us, an important one is our annual Savings Rate. Here’s how to calculate it:
- Gather statements on all investment accounts. Such as 401k, IRA, Roth IRA and after-tax brokerage.
- Review final paystub(s)of the year for total Employee and Employer contributions. Review 4th quarter IRA and brokerage statements for total contributions.
- Add the contributions and divide by your gross annual income from your last paystub(s).
If you’re married, I recommend combining this, but you can do it individually. This percentage is your annual savings rate. Compare it to the savings rate goal from your Financial Policy Statement. From ours:
“Maintain a 20% savings rate (including employer match) and increase this by at least 1% per year through my 40s.”
Did we achieve this for 2021? No, we came up a couple percentage points short this year.
Why start here?
Your Savings Rate is something you can control. We can’t control annual market results, but we can control our savings behavior. It’s easy to set your contribution and work your spending around it.
Is Your Money Working for You? calculation
Next, we do our normal quarterly net worth review with a twist. Each year we calculate how hard Our Money Worked for Us? It is one of the most motivating calculations in personal finance. To calculate it you need 3 numbers. You already have them if you’re completing a Net Worth statement.
- Start of year total investment balance (across all investment accounts)
- Contribution amount monthly (if you lump sum invest throughout the year, it’s ok total and divide by 12)
- End of year total investment balance
With this information you can see how hard your money worked for you last year. The goal is for your portfolio to reach a tipping point. Where investment gains exceed contributions as fast as possible. To build this critical mass requires time and regular contributions.
Download the Money Working for You? calculator
Why do this Calculation?
Encourage you to either continue your savings rate (if meeting your goal) or motivate you to step it up. And if you plan to increase contributions, the timing is great to make that change now:
- New Year’s resolutions –people make all sorts of changes for the new year. Automation makes this change simple, no need to get up early and drag into the gym. A few clicks and you’re done.
- Annual compensation reviews – these generally occur in the first quarter of the year. If you receive a pay increase, raise your savings rate, rather than monthly spending.
- Income tax returns – Approximately 70% of Americans receive a tax refund Will you get a tax refund or owe the IRS? 32% of Americans don’t know (cnbc.com). If that’s you:
- invest some of the refund
- decrease your withholding and redirect it to retirement contributions for future years
Next, I review other items on our Financial Policy Statement as checkpoints. Here are a few examples from our statement:
- Keep at least 70% of our portfolio in either S&P 500 or Total Stock Market index funds even during more conservative retirement years. (Core and satellite investment approach)
- If electing to do single stock selection, cap at 5% of total portfolio
- If investing a lump-sum of less than 50k – deploy it without delay. If greater than 50k – we may elect to dollar cost average over no more than 6 months.
- We will not have combined car payments of greater than $250 at any time.
- We will not borrow for our kid’s vehicles.
- We will not use credit to fund vacations, recreational toys, furniture or appliances
The review is a good reminder and gives us immediately actionable items if we need to course correct.
Spending plan for the new year
Now that we’ve answered the big question: how did we do on our savings percentage goal? And found motivation to continue our path by seeing How Our Money worked for us last year. We finish with a discussion of major spending decisions for the new year. This is a great time to discuss things like:
- Travel plans
- Home improvements
- Vehicle or other major expense plans
After you’ve reviewed your Financial Policy Statement, you’re prepared for this discussion. And to ensure your spending plans align with your policy statement. In our case it prevents us from borrowing money for a second vehicle if we still owe on one. Or borrowing money for new furniture or appliances. Or dumping 20% of our assets into Bitcoin. I recommend a year-end review session whether you’re single or married. If you’re married:
- Keep your partner in mind to make this an enjoyable experience
- If you’re the financial planner, plan this session. Do the homework:
- update your Net Worth Statement
- calculate your annual Savings Rate
- complete the Money Working for You? calculation
- Schedule the session. Pick a time that works for you both. Allow at least an hour or two.
- Choose a relaxing location that’s good for conversation. Go out for a nice meal or order one in before/after/during the session.
- Reduce distractions so you can both focus. Celebrate your accomplishments, refine goals and gain resolve to pursue those goals together.
Cheers! And Happy New Year!
