Winter has come to an end, and spring cleaning season is here. Along with updating your wardrobe and cleaning out your garage, it’s also a good time to dust off your financial plan.
1. Pare down.
Most people are hoarding investments, sticking as much as they can into their accounts without knowing what they’re buying and if it overlaps with what they already have. Just like spring is the time to start getting rid of all that household clutter, you should do the same with your investment strategy.
First, evaluate what you own, where you hold it, and how you use it. Then, refer to both your short- and long-term financial goals — the allocations and the investments that you hold to accomplish each could look remarkably different. Maybe you’re building your emergency fund and saving up for a home renovation, but also need to consider how you’ll maintain a certain lifestyle in retirement in 30 years. If your investments are not helping you accomplish your goals, it’s time to kick them to the curb.
As an example, I once met with an investor who was proud of the fact that he had close to 45 different mutual funds, until I helped him discover that two-thirds of them were large-company stock funds and a quarter of them were from the same company. He mistakenly thought that having a high volume of investments meant he was practicing diversification, but it’s like he owned a toolbox with 45 screwdrivers and no other tools — not the best strategy.
2. Check the fit.
In the same way that you might go through your warmer-weather wardrobe and try on old clothes each spring, you need to try on your current allocation and make sure it still fits. Begin by reviewing your savings and total financial picture — this might include debt, investments, workplace plan savings, college savings for your kids, your Social Security strategies, health care savings plans and more. Does the long-term plan you built last year still fit?
I’ve met with new investors who have been using the same plan for up to 10 years! Just because it worked in the past doesn’t mean it still will this year. This can never be a set-it-on-the-shelf-and-forget-about-it sort of planning situation.
Determine the least amount of risk you must take on to reach your goals. From there, optimize your investments to achieve them. Oftentimes clients are convinced that they must be an aggressive investor if they want to successfully retire, but it may be possible to be a moderate investor and still have an incredibly high probability of success.
3. Embrace the new.
While everything in nature looks new in the springtime, the same concept should apply to your investing approach. Chances are you can increase your savings rate for 2018. Ideally you should aim to max out your 401(k) savings rate or at least contribute enough to take full advantage of the company match that is offered by your employer. But if that’s not doable, it is often a good rule of thumb to try to save 10% of your gross income.
One of my clients began saving just 4% of her income but promised herself that she’d continue to increase her savings by 1 percentage point each year, and it’s been exciting to see how proud she is when we review her accounts each year and see how much she’s accumulated with this approach. Even if you only save 1% for now and try to bump it up another percentage point each year — just start somewhere. The idea is to save as much as you can, for as long as you can.
These three steps are a great place to start. However, just as there is not a single style or size T-shirt, there is not one magical investment or off-the-shelf plan that makes sense for everyone. Depending on your current lifestyle and ability to save, your investments, trading strategies, tax-optimization strategies and longer-term retirement plans are going to be unique to your personal situation. As your life gets more complex and your financial needs change, you may benefit from professional help from an adviser.
The only way to take control of your own finances is to take action — there’s no one else who can do it for you. Follow these three steps to successfully clean up your financial picture this spring.
Source: https://www.kiplinger.com
Image Credit: Getty Images
Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa works with small business owners and entrepreneurs to assist them with financial management and creating organized systems and procedures. She specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.
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