Personal Financial Review – 5 Point Checklist For 2019
A new year brings with it new beginnings and in financial planning terms, it can serve as a trigger to take stock and review. While it is easy to understand why a review is necessary, what is not so apparent is the “what”. What are the items to be reviewed? Are they always the same through good and bad economic times? Should the review items remain the same through different life stages?
As a financial planner, one of my priorities in the beginning of the year is to plan out what to review with clients based on the “big picture” and fine tune the review agenda to the individual’s personal unique needs and situation.
If getting your finances reviewed is one of your 2019 resolutions, here is a 5 point checklist to help you get started:
1. Savings – How long can they last?
Over the past year, you may have made new financial commitments and they can reduce the amount of liquidity we have. A healthy financial plan needs to have a good amount of liquidity at all times for unforeseen events. You can do a quick review by taking the amount of ready cash (e.g. bank savings, fixed deposits…etc) divided by your monthly expenses.
For example, if you have savings of $100,000 and your monthly expense is $5,000, your savings can last you 20 months without having to sell any investments or assets. This is known as “Basic Liquidity Ratio” in personal financial planning.
It is not advisable to have a Basic Liquidity ratio to be less than 6 months thus if your liquid savings is less than 6 months, it should trigger a need to start saving to fill up the bank accounts.
2. Loans and Liabilities – Can you save money by restructuring or refinancing your loans?
If you have loans and liabilities such as mortgages or car loans, there are 2 things you will need to review. This first is the interest that you are paying on the loans and explore if there are possibilities where you can refinance and enjoy savings by paying a lower interest rate. This is especially important with the current rising interest rate trends. Secondly, you may be able to save money by paying off the loan completely, especially when you are close to retirement age.
Do note that paying off the loan too early may cause liquidity risk (i.e. leaving you with too little cash savings) so this decision should be considered carefully, perhaps with the help of a financial planner.
3. Investments Portfolio – Are you taking the right amount of risk?
The investment markets never stay stagnant and your portfolio may have changed with the ups and downs of the markets over the past year. This may cause your current investment portfolio mix to differ from the initial setup and you may be taking much more risk that you can accept.
There are 3 steps to reviewing this – the first is to update your own risk tolerance by going through a risk assessment exercise (usually in the form of a questionnaire). Next, is to update your overall investments portfolio in total. Finally, it is to compare if the current make up of your investment portfolio fits in with your risk tolerance.
The most important thing about this review is to ensure that should there be a major unexpected market correction in the coming year, you have invested in a way that you can continue to sleep well (at least reasonably well!).
4. Insurance Protection – Is it up to date in terms of amount and comprehensiveness?
Insurance is to provide a peace of mind by transferring financial risks away to an insurance company who can absorb such risks better than us individuals. Changes/Adjustments to our insurance may be required via a review and update to the amount of coverage when we take on new financial commitments. Furthermore, there are also new insurance products that can cover conditions that’s previously not covered so a review is necessary to ensure that your current insurance coverage is comprehensive enough.
5. Legal Documents – Are your financial affairs in order?
The correct setting up of legal documents such as Wills and Lasting Power of Attorneys can have a major impact on your financial well-being during times of crisis. As things change, these documents may need to reviewed and updated. For example, there could be new assets that needs to be included and planned for.
The review should be done firstly by clarifying your personal wishes and preferences and then getting the help of a professional to assist and advice on the implementation.
Reminder: What you don’t know matters
If you are not completely confident of being able to review your own finances competently, do not hesitate to seek help from a professional. Sometimes, we don’t know what we don’t know and these potential blind spots can have a major impact to your overall financial health and wellness.
As in all journeys, the first step is the most important and I hope these 5 points can be a helpful nudge to get you started.
Good luck and make the financial journey and enjoyable one!
Article by Lee Meng, FChFP