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The Best Interest ยป Conducting a Year-End Financial Review and Setting 2024 Goals

Conducting a Year-End Financial Review and Setting 2024 Goals

You made it! The sun is setting on 2023 and dawning on 2024. Among other personal reviews, the changing of years is the perfect time to refocus on your finances. Let’s spend a few minutes discussing:

  • Conducting a year-end financial review
  • Setting goals for next year
body of water during golden hour

Conducting a Year-End Financial Review

We want our year-end financial review to do two important things:

  1. Provide clear, actionable data on our previous year’s finances.
  2. But without requiring days’ worth of time to conduct.

So we’re going to focus the review in 7 major areas:

  • Spending (including Unexpected Expenses)
  • Income
  • Saving
  • Net Worth
  • Investing, Allocation, Etc.
  • Insurance and Estate Planning
  • Progress on Previous Goals

Spending

Spending is the most time-consuming part of the review. But you can’t skimp here! A poor understanding of household spending is one of the deadliest sins of personal finance. It’s all too easy to assume your spending is under control when it’s not. That poor assumption is the difference between financial health and financial decay.

So – what exactly should you be measuring?

  • Total dollars spent. Personally, I like measuring monthly.
  • Categories you spent on. Think groceries or housing or debt repayment. If you’re curious, I shared my personal budget categories here. You should be able to identify if you spent $4000 on groceries…or $8000!
  • Unexpected expenses. How do you handle unexpected expenses and/or items not covered by your basic monthly budget? This answer is highly correlated to financial success/failure. Ask yourself:
    • Did your emergency fund do its job this year? Is it in a healthy place right now?
    • Did you stick to your budget? Or did you allow the allure of “shiny objects” to pull your purse strings in a regrettable way?
products in a shopping cart beside a black friday sale signage on beige background

Income

What was your household income for the year? How did it change from last year? And how do you expect it to change in the year ahead? Most importantly, how does your income compare to your spending? aka how’s your cashflow?

Saving

How much did you contribute to (or withdraw from) your savings accounts this year? The same for your Roth IRA, your 401(k), or any other savings/long-term investing accounts.

Note: this should only focus on your contributions, not whether the investments in your accounts went up or down.

Net Worth

Update your net worth, tracking all of your assets and debts. How did your net worth change over the year? Personally, this is something Kelly and I have started doing monthly. It gives us a high-level understanding of our household’s financial health.

Net worth does include whether your investment accounts have gone up or down. After all, investing is one of the reasons we’re all here on The Best Interest! ๐Ÿ™‚

But I urge you to not let investments/Net Worth fool you during a year-end review! For example, most of us would have seen our net worth decrease in 2022, as it was a bad investing year. The opposite is true in 2023 – the S&P 500 is up 25% year-to-date!

If we measure on Net Worth alone, the poor investment returns in 2022 could “wash away” our other good financial habits. Similarly, the great investment returns in 2023 could “sweep under the rug” our bad habits.

close up photo of ledger s list

Investing: Allocation, Performance Etc.

The year-end review is a great time to look at all of your investing accounts. 401(k), IRAs, taxable accounts, etc.

First, review your allocation and rebalance as necessary.

“Allocation” is the percentage of stocks, bonds, alternatives, etc. that comprise your portfolio. As different assets perform differently throughout the year, our portfolio allocations drift from their “target allocation.” The act of “rebalancing” is the process of making trades in your accounts to return to that pre-defined “target allocation.”

You should also review your performance.

Are your accounts up? Or down? By how much? The main reason for tracking performance is to understand if your accounts are on-pace with the underlying “benchmarks.”

For example, let’s take a retiree with a 50% stock, 50% bond portfolio. We can look at some basic indicies and see that so far this year:

  • The S&P 500 (stocks) is up 25%
  • The bond AGG index is up 2.5%

So, roughly speaking, I’d expect this retiree’s portfolio to be up ~13-14%. If their performance is drastically different than ~13-14% (up or down!), I’d want to understand why. Some reasonable reasons could be:

  • Their stocks investments are more value-heavy (the Dow Jones is only up ~13% this year) or growth-heavy (the NASDAQ is up ~46% this year)
  • They own individual stocks instead of owning indexes.
  • They own individual bonds, not funds.

At the end of the day, this is an exercise in asking, “Does my investment performance match my expectations? If not, why not?”

gray and black laptop computer

Insurance, Estate Planning, Etc.

Death isn’t a fun subject. I won’t need to beat it to dea…hmmm..

Nevertheless, you should check annually to make sure:

Progress on Previous Goals

It’s time to check in on last year’s goals. Did you accomplish what you’d hoped in 2023?

If not, why not? The curiosity to ask “why” is the best way to grow.

Setting Goals for 2024 (and Beyond)

Now it’s time to look ahead. What are some of the smartest financial goals you can set for yourself?

brown train railway between green trees at daytime

Saving

Savings goals take many forms. As your finances improve, your savings goals will evolve.

Perhaps the most basic is saving for an emergency fund. You should have money set aside in your bank account simply to act as a safety net should life get hard.

Retirement saving is another common set of goals. For example, my “basic” retirement savings goals are ensuring I get my employer match on my 401(k), and then maxing out my Roth IRA contributions for the year.

And then there’s “saving for an X” goals. A new house, your first car, a trip to Thailand. When you hope to have large outlays of money, it makes sense to create a savings goal for yourself. Some people call these “sinking funds.”

a black piggy bank in the middle of coins

Reduce/Control Spending

As I wrote earlier, “A poor understanding of household spending is one of the deadliest sins of personal finance.” Controling your spending is a wonderful goal. But it’s easier said than done.

To be successful here, you must measure. You need data. You’ve got to understand how much you’re spending today and set a realistic, measureable goal for reduction.

How to do that “measuring?” I love the budgeting app YNAB. I’m also a fan of simple spreadsheets, if that’s more your style. If you’re looking for something to do today, I’d start by downloading your past 3-6 months of credit card statements and/or bank account statements. What do your transactions look like? How much are you spending? And where?

black calculator near ballpoint pen on white printed paper

Increase Income

What can you do to increase your income this year?

Personally, I’m not a fan of recommendations like “find a new side hustle” or “get a second job.” The point isn’t to work ourselves to the bone in pursuit of money.

Instead, I’d focus on questions like, “How can I be more efficient?” or “How can I secure a raise at work?” or, especially in the modern economy, “Will a job/career change lead me to higher income?”

Even a minor pay bump, when magnified by decades, makes a huge difference.

Pay Off Debt

Debt reduction is another common goal, but I recommend caution here. Make sure you separate the math of debt reduction from the psychology of it.

The math says that interest rates matter. Low interest debt (~5% or lower) isn’t that bad, and doesn’t need to be paid off quickly. High interest debts (~8% or more) should be highly-prioritized. Credit cards, for example, with 20%+ interest rates are a five-alarm fire for your finances. The mid-level debts (6-7%) are a coin flip.

But the psychology of debt payoff is highly personal. Some people can’t stand debt, and having a 2% car loan keeps them awake at night. If this is you, I encourage you to priorize your sleep and pay down that low-interest debt! But just know that, mathematically, it’s not optimal.

It’s ok. Personal finance is a mix of numbers and psychology. We’re not automatons, and sometimes our brains trump what the numbers tell us.

The numbers: currently, risk-free savings accounts are paying 4.5% – 5%. Why use $1000 to pay off a 2% loan when you could instead earn 5% interest?

person holding debit card

Invest More…

Investing is the flywheel of wealth creation. Put your army of dollars to work creating more dollars. Annual investing goals make sense. Most of my work is focused on investing. I won’t go too deep here. But I’m 100% behind investing early and often.

Put Together a Financial Plan

A financial plan is a bridge between your comprehensive financial ecosystem and your personal values and desired outcomes. The process of financial planning makes you realize, “It’s more than money. It’s about your life.

A good financial plan is more than that bridge, though. Using another transportation metpahor, a financial plan is a lighthouse in the financial fog. It provides vital direction and (in rough terms) distance to where you need to go.

Considering the number of people who think, “I have no idea where my finances are…” …I’d say putting together a financial plan is a wonderful goal for 2024.

seashore with lighthouse

Go Get Your Goals!

Happy New Year! I hope you had a great 2023 and kickoff 2024 with verve.

I’d love to hear from you if finances are part of your 2024 goals! Drop a Comment or shoot me an email: [email protected].

Thank you for reading! If you enjoyed this article, join 7500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.

-Jesse

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