Importance of a Year-End Financial Review and How to Do One?

If you want to be good at your finances, you must ask certain questions to yourself from time to time. Where am I spending too much? Where can I make some savings? Is my investment plan aligned with my long-term goals? Like you do a yearly health checkup, a check of your finances is something everyone should be doing. 30 minutes of your time in a year can save you a lot of money in the future. And the thing is, you don't need a financial advisor to do this. Everyone can do this. And if you need some support, I'm here to help. So let's get started.

Evaluate your current situation

Tracking down and documenting your income and expenses is the basic foundation of a financial review. I would highly recommend using an expense tracker. I personally track my expenses in my note-taking tool, Notion, with a template, which you can download for free from my website.

You can find the link in the description below. If you regularly do this, an annual check would be like a piece of cake. But if not, go through your bank and credit card statements to get an idea of your monthly spending.

It is very important to know where your money goes. And when we make most of our purchases with credit cards, it may feel like infinite money at that moment. So taking a moment to reflect on your spending will help you too.

Get your budget in shape.

Budgets are for those who want to achieve their financial goals.

And if you don't already have one, the new year is a perfect time to start. And for those smart enough to keep a budget, annual fine-tuning can help. A good place to start is by comparing your budget to your spending. Think about your goals for next year and see what limits you have to increase and what expenses you can cut short. But whatever you do, keep it realistic. Just don't set a 10$ monthly limit for takeaways and then order once a week.

Find the low-hanging fruits.

When I did this annual review last year, I found that I was paying for a newsletter subscription, which I wasn't even using. For you, it could be some other subscription or a membership. If you weren't using Netflix much last year, it would be a good time to cancel the subscription or move to a lower tier. Another place where you can save some money is by terminating your internet and mobile contracts and then calling the company to negotiate for a lower rate. 4/5 times you will get a better offer.

Review your insurance needs

A similar money drainer is your insurance policies. Everyone loves insurance, and we probably have one to cover every situation. So It's important to reevaluate your insurance policies regularly to ensure you're not paying too much for them. Examine your existing policies to see whether you could change coverage based on changes in your life situation. You could also shop around for new policies and save hundreds of dollars.

Pay Down Your Credit Cards

Americans owe more than $887 billion on their credit cards.

This is more than the yearly GDP of 175 Countries. And the strange thing is, according to a survey conducted by U.S News and World Report, one in five Americans has no idea if they have credit card debt. Credit Card debts are the worst because of the highest interest rates. So you have to keep them in check before you even think of investing your money.

So gather all the information you can about your credit cards, remaining balances, their due dates, and interest rates, and start paying them off. You could use the avalanche method of paying off debt. Start with the cards with the highest interest and then gradually move toward the low ones.

2022 was a pretty rough year for the stock market. There is a good chance that the sectors that did the best in 2021 may not have had a similar performance this year. Rebalancing is simply adjusting the value of assets in your portfolio back to their intended allocation. For example, at the beginning of the year, you may have gone with the 80-20 rule and invested 80% of your portfolio in stocks and 20% in bonds. And with time, the value of your assets may have shifted to 60% stocks and 40% bonds.

A good rule to remember is that whenever any of your investments fluctuates by more than 10%, it's time to do a rebalance. Our portfolio should always reflect investment goals appropriate for our current life stage. And when you make the tweaks, remember to keep long-term growth in mind than short-term performance.

And here is a useful tip. If there are any money-losing positions and/or investments in your portfolio, then you can consider selling them for a tax loss. And then you can write off those losses on your taxes against any current or future gains. This tactic is known as tax loss harvesting.

Review Your Credit Report

You are eligible for a free credit report from the major credit bureaus each year. In Germany, where I live, this is done by an agency called Schufa. Credit scores are so important that they affect everything from the loan amounts you can take, how much interest you'll have to pay, or even finding rental apartments. Think of it as a scorecard for your ability to manage credit. The reports show every inquiry and every outstanding debt. So, checking your credit report could be a good way to pinpoint financial fraud early.

Disclaimer: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. It is important to do your own analysis before making any investment.