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  • Writer's pictureJeran Van Alfen, CFP®

Taking an Annual Financial Inventory

Taking a personal financial inventory at least once per year is an important process to measure your financial progress and help you stay on track with your financial plan. At the beginning of the year, it is usually a good time to check in on your finances and set some expectations for the year ahead. In this post, we will discuss some steps that make this process simple and easy to complete.

“Taking inventory” is usually a term that we associate with businesses. In fact, as investors we use inventory as a way to understand the health of a company and how the company is being managed. This evaluation uses quantitative (mathematical) processes and also qualitative (feeling) processes to get an idea of how companies are doing. Just like a well-run business, our personal finances can benefit from a good financial inventory.

Here are 3 key areas that should be evaluated as part of your annual financial inventory:

Net Worth

Each year I recommend calculating your net worth. This exercise is more than just coming up with a number. Your net worth shows important details about how you can use your money. Simply, your net worth is your total assets minus your total liabilities. During your inventory, we recommend these steps to review your net worth:

  • Make a detailed list of each asset and asset value. (An asset is something that you own. Ex: your house)

  • Make a detailed list of each debt and its current balance. (Ex: your mortgage)

  • Review each asset and ask a few questions. What purpose does this asset have in your financial plan? Does the asset generate current income or future income? Did the asset grow in value? Did growth meet your needs? How easily will this asset convert to cash when you need it? Do you have enough access to capital?

  • Review each debt and ask a few questions. Are you making progress paying the balance down? Is the interest rate acceptable in current markets? How much debt is tied to assets that aren’t growing or providing income?

The last important item with your net worth is to think about who needs to know this information. Often your financial inventory is part of your estate planning. There is typically a schedule of your assets included in your trust. Does this update need to be added to your estate plan or shared with important beneficiaries?

Cash Flow

Cash flow is measured by what money flows into your accounts less what money flows out of your accounts. Just like your net worth, cash flow is important to help us determine how much money we have to work with to pay for goals. Here are some steps to take when reviewing cash flow:

  • Determine your annual gross income. Make sure to include earned and non-earned income. You want to get an idea of everything that flowed in.

  • Determine your annual total expenses.

  • Ask some important questions. Are you running a cash flow surplus or shortfall? What changes do you expect in income or expenses? Was most of your spending on items that were important to you? Are there changes that you can make to increase your surplus or spend on your priorities?

Setting Goals

Now that you have taken your inventory, it’s time to translate this information into action. As you review the past year’s finances, how does it make you feel? Specifically, what were your wins? What did you do well? What about things that you can improve? I recommend writing these feelings and observations down. Now, you can release those feelings and focus your energy on looking ahead. What progress can you make in the next 12 months? Here is how I recommend setting your financial goals:

  1. Write down your “why”. Why is this goal important to you? Why is it going to make a difference for you or your family? What is your motivation?

  2. Set goals that are achievable. Based on your inventory, you should have a good idea of what you can expect over the next 12 months. While there are many things that are out of our control, you have a basic idea of what you have to work with. I recommend setting goals that you can achieve. This doesn’t mean that you shouldn’t push yourself. You can definitely set a “stretch” goal. However, if your goal is so far out of reach, it may be difficult to maintain your motivation.

  3. Set goals that are measurable. Often annual goals can be big. Each goal should have some value to measure, and I recommend breaking these measurements down into the smallest part. What can you measure monthly or weekly to get there?

  4. Write it down. If you don’t write it down, it probably won’t happen. I recommend writing down your motivation, your goal, and what you will track so that you can review your progress during your next inventory.

I hope these strategies help get your year off to a great start!

If you need a good tool to track your finances try the Centered Financial Dashboard. This is our complimentary personal financial website that allows you to track all of your finances in one place. You also get an app to track your budget, net worth, and investment allocations. Sign up for your dashboard here: Centered Financial Dashboard Signup

Centered Financial, LLC is a registered investment adviser offering advisory services in the State of California, Utah, Texas and in other jurisdictions where exempted. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques, strategies, or investments discussed are suitable for all investors or will yield positive outcomes. To determine which strategies or investment(s) may be appropriate for you, consult your financial adviser prior to investing. Any discussion of strategies related to tax or legal planning is general and is not intended as tax or legal advice. Please consult appropriate tax and legal professionals for recommendations pertaining to your specific situation.

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