July Cashflow update: Completing your three month financial checklist
Every quarter I sit down and complete a personal financial statement (PFS). As of June 30, 2014, my PFS will show all my assets, all my liabilities and the resulting total net worth. I use an Excel spreadsheet, so each quarter has its own tab. I compare each quarter’s results with the last quarters’ results to see if my net worth increased. Yes, it is good if the number is larger quarter over quarter.
But what should you really glean from your PFS?
Here are five key take-aways from your PFS:
Did I overspend this quarter?
If your net worth decreased quarter over quarter and it wasn’t due to an emergency or down-turn in the stock/bond markets, then you may have overspent during the quarter. Take the time to know why.
Paula Cashflow tip: It’s important to sit down every three months and review your finances. Overspending can be reigned in sooner rather than later.
What is the balance in my emergency fund? If you are in the accumulation phase of building this fund up, then did you meet your target? If you have already established the fund, then you should ask yourself: Did I tap into this fund during the quarter? If so, then for what purpose? Unplanned car repairs. Unplanned healthcare costs. The key word here is “unplanned” and “emergency”.
Paula Cashflow tip: Super-charge your emergency fund. The days of 3-6 months of living expenses for an emergency fund ARE OVER! Shoot for 6-9 months and then 12 months, after you hit the nine month figure. Include funds for your auto/home insurance deductibles in addition to monthly living expenses. What other costs should you include to supercharge your emergency fund?
What is my overall debt picture? How does this quarter compare to last quarter? Did you spend more or less? If you do not pay off your credit cards in full each month, this could be an indicator that you are living ABOVE your means. If you do pay them off in full each month: Congratulations!! Still, you should compare the balance this quarter to last quarter to smell test your spending patterns. As for mortgage debt, this exercise should reveal a reduction in mortgage debt.
Paula Cashflow tip: Reserve credit card usage for non-discretionary spending, i.e. groceries, gas, budget line items, or large dollar purchases whereby the credit card provides insurance or buyer protection. Keep your mortgage amortization schedule handy so you can make additional principal payments when your cash position is favorable for the quarter.
How did my investments fair?This will include your 401k, IRAs, taxable accounts, etc. When you combine the results of this spreadsheet with information gleaned from 401k statements, etc. you can review your asset allocation mix. For example, if your target asset allocation mix is 50/50 (this means 50% stocks and 50% bonds and cash), what do your results reveal? With the current rising stock market, are you in need of rebalancing your portfolio?
Paula Cashflow tip: Rebalancing your portfolio is relevant for all investors at all levels and can be done each quarter and at least semi-annually.
Am I on target to achieve my goals? This should include evaluating short-, medium- and long-term goals. The first three exercises above should set you up nicely for answering this one.
Paula Cashflow tip: Use the spreadsheet to include notes about what goals are short-, medium- or long-term goals. For example, a short-term goal could be a super-charged emergency fund. This fund can serve to create financial security during turbulent job market times, something most of all will never forget from the financial crisis days.
I’ve been doing this exercise since early 2002, so I know you can do it. My competitive spirit compels me to stick to my goals as I create financial freedom. It’s now time to stop writing, because I realized that my 6/30/14 tab is blank. Get to work on your PFS. See you in financial freedom land real soon.
Because it’s about life and how you live it.
In the spirit of financial well-being,