How And When To Create A Financial Checklist

    Checking your financial situation at the end of the year is better than doing it at the beginning of the year. Why? Because you are less likely to massage your shortcomings with optimism about all the things you will change in the coming year, as you would if you were looking at your financial situation at the beginning of a new year. It needs to be a review of the previous year, and not a plan for the coming year. This is important if the planning exercise is to be meaningful and not just an acknowledgement of mistakes made, that you will likely repeat in the coming year unless a framework is put in place to avoid them. As with health-checks, prevention is better than cure, and it is better to understand how your personal finances stack up with a financial health-check before you encounter financial difficulties or shortfalls (e.g for funding targets, like university fees, or retirement).

    1) Make a list of assets and liabilities

    Start with bank accounts and cash balances, moving on to insurance policies (corporate and personal), then pension/retirement accounts (corporate and personal), investment accounts and real estate (being aware that real estate purchased with a loan is debt, equal to the sum of the outstanding mortgage, and an asset, to the extent of the mortgage already paid down). From there you should make a list of your outstanding debts and liabilities; credit card balances, loans and mortgages. To add a further level of detail to these lists, you could list your annual salary, plus any contingent bonuses in a second asset column, and any fixed expenses (e.g. rent, school fees, cost of living, travel cost etc.) in a second liabilities column. How does it look so far?

    2) Establish financial goals and priorities

    It is said that ‘if you don’t know where you’re going, then all roads lead there’ and this could not be more true when managing your own money. First and foremost, look to pay off high-interest debt. This will usually be credit-cards and personal loans. The rates of interest are likely higher than you could receive with principal-guaranteed investments so paying them off first is the best investment available. As for real estate loans, you should consider the rate of return that you are receiving in your investments Vs. the APR (annual payback rate) on your mortgage, and pick the one with the higher rate. For those living in Japan where interest rates on bank loans are among the lowest in the world, there are potentially some attractive ways to introduce leverage into your investments. After you have addressed your debts, you should look to establish three savings accounts to make budgeting for spending easy, and then move on to consider your long term goals. These will commonly be (for those who are not already homeowners) accumulating funds for a house down-payment, education fee planning and retirement planning. There may also be some personal targets in there to fund other things, like a world-travel fund or the cost of starting a family. You should first separate them by time-frame, i.e in 10 years time, in 25 years time etc, and then in terms of priority. Many people with children will feel inclined to place education planning at the top of the list, and underestimate the importance of retirement planning because it seems so far away- despite the fact that failure to accumulate sufficient reserves to pay for university can be remedied (in a worst case scenario) with a loan, whereas failure to make necessary provisions for the decades of living expenses after the conclusion of a career cannot be remedied with a bank loan, and at best will mean being financially dependent on your children- a severe role reversal. The key is finding a balance, ensuring that there are enough eggs in each basket, come the end of the journey.

    3) Quantify your financial goals

    Now that you know what you want, it is time to work out how much it will cost and what it will take for you to make it a reality. For short-term goals like deposit-funding, calculations are quite simple, but for long-term targets you should take inflation into consideration, along with historic long-term average rates of growth to get an accurate picture of how much you should save and invest to reach your target safely. Working out how much you need to save for retirement or how to save for education fees is quick and easy given the wealth of calculators online, but you should consider talking to a financial adviser if you want simulations that take into consideration things like the ability to reduce your income tax, the Japanese tax of foreign people in Japan or the complications involved if you are a US taxpayer living in Japan. For you to make successful investments, you must first have robust financial plans.

    4) Review your investment and protection plans

    Take the opportunity to work out if you have enough life insurance cover, and look to set up expat-focused short-term life insurance policies to match any time-specific liabilities, e.g. financial dependents, children and mortgages. Once your liabilities are covered you can move onto your retirement accounts, monthly investment plans and brokerage accounts. Aim to re-balance your portfolio once annually to combat portfolio-drift and check in with your financial planner to ensure that your allocations are appropriate to meet your investment objectives, and that you are not losing out on growth due to volatility drag. Look to top up your investments with excess cash deposits sitting around in the bank and adjust your target projections accordingly.

     

    5) Make targets for the coming year

    Do not fall into the trap of making targets that are a massive improvement on your (bad) financial behavior of the past year. It is unlikely that you will be able to meet them; you’ll feel worse as a result and likely wont make any sustained improvements. Instead, look to make very small, seemingly pointless changes, that you are sure that you can stick to. For example look to reign in spending, eating out no more than twice a week, restricting yourself to only travelling internationally twice a year, or giving up the daily morning Starbucks. In varying degrees these behaviors will free up capital that, if directed towards your savings and investments, will create drastic improvements in your projections, and the likelihood of you being financially successful. The pay-off for this way of thinking (and there is always a pay-off) is that as the years progress, you will be required to abstain from less and less of the behaviors that you enjoy, as your investments expand and get closer and closer to your funding targets- ultimately allowing you to live your life free of all financial restrictions whatsoever, and never having to worry about money again (we’d still recommend you check once annually though…).

     

     

    [ Sources ]

    – Behavioural Finance: Insights Into Irrational Minds and Markets, James Montier

    – Art of Money Getting: Easyread Super Large 24pt Edition, P. T. Barnum

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