How to Do Your Year-End Financial Review

There is a concept in aviation known as falling behind the plane. Falling behind the plane refers to the moment the pilot is overwhelmed, and so much is happening with the plane and in the cockpit that he is confused and does not know what to do.

Ideally, you want your pilot to be ahead of the plane where he is in full control.

Likewise, you are the pilot of your life and your finances. You want to be ahead of your finances instead of playing catch up with your finances.

One way that pilots ensure they are always in control is to prepare for the fight. They review the plane they will be flying and the route. They consider the weather and all other variables and even decide on alternate ways of handling the challenges they foresee.

It is advisable to do the same for your finances. Hence, a year-end review is advisable. You can look at what has worked and has not yet, then derive how you will approach the upcoming year to ensure you are in control and not just reacting to what life throws at you.

Here is how you approach a year-end review.

Budget Analysis

You have had an entire year of earning and spending. This is the time to reflect and analyse the correlation between your earnings and expense.

Ideally, you want growth. You want to have enough to spend, save, and invest so that tomorrow, you are financially future-proofed than you are today.

Whether you had an already set out budget plan throughout the year or did not, it is worth analyzing how you transacted. 

Start with an analysis of how much money you make per month. If you are employed, the money you make is straightforward, that is, if you do not have any additional income. If you are in business, you must calculate your profit and how much you took out from the business. If you are a freelancer or do not have a stable job, you must track how clients pay you.

Once you make money, you must understand that you cannot spend it all. There are taxes to factor in. The taxes are automatically deducted for those employed, but for any other income, it is your responsibility to remit the taxes. 

You can use what remains once you factor in and set aside the taxes. This is your net income. 

When it comes to expenses, it depends on how much you are making. You might be making less money than your lifestyle requires, and this spending will lead you to debt to cover the deficit. You might just be breaking even, making you feel like you are in a cartwheel, always running and getting nowhere. You can make more than your lifestyle requires, allowing you to save some of your income, which then can go into investments.

The idea is to make more than we spend in a month. 

Analysing your budget is just comparing your net income and expenses. If you find that you are either just breaking even or under-earning, it is high time you start employing other strategies to make more.

This is the perfect time to analyse your budget as it will inform your new year goals.

Investment Performance

There are different types of investment. On a larger scale, you can look into the investments as long-term investments and short-term investments.

You want to hold short-term investments for a year or two. Within this short time, you should have made your money and profit. Long-term investments, however, are investments you will hold for longer.

You can also look at investments in terms of asset investments and cash flow investments. If you invest by starting a business, you are in the cash flow business. Your investment must generate cash flow to sustain and grow it. However, if you invest in an asset, you are looking to make your money from the rise in value of the asset. A good example is investing in land.

Since the year is ending, it is high time you evaluate your investments and see how they are performing and whether they fit into your goals going into the new year.

Depending on your goals, you will need different modes of investment. If you want to increase your income to support your lifestyle today, you are looking into a cash flow type of investment. Dividends can also be part of your cash flow play. Despite being paid periodically, you get to earn as opposed to other stocks, where you only make money when you sell.

Cash flow investments are also great in helping you achieve your short-term goals.

On the other hand, if you are looking into future-proofing yourself more than ten years from today, you might be looking into an asset play. This can include your retirement plan. Your asset play can include financial assets such as stocks or physical assets such as real estate.

The long-term play focuses on value creation as opposed to liquidity.

As you move into this upcoming year, analyse the investments you made this year and understand what game plan you have. You do not have to choose one or the other. You can divide your portfolio into both short-term and long-term investments. But you must be clear which is which. And depending on your goals for next year, make the necessary adjustments.

Debt Reduction

Debt is a reality that is embedded into our financial system. It is good for those who use it wisely, but it can only be beneficial if you are wise.

One of the cardinal financial mistakes people make when it comes to debt is taking consumer debt. The rule of thumb is to live below your means. If you find yourself taking consumer debt, you are overshooting your means. 

Ideally, debt should be invested in an asset that generates more value than the amount invested plus the interest paid on the debt. If your interest payment of a debt facility is 12%, you should invest in something that makes more than a 12% return. The higher, the better.

Bad debt can lead to a vicious cycle where you just work to service your debts and nothing more, and that is what you want to streamline with this end-year review.

Look into how much debt you have accrued within the year. Classify it into investment debt and consumer debt. If you have high consumer debt, you should prioritize paying that off in your next financial plan. If you have investment debt, how much is that earning you?

Understand also the debt obligations you must adhere to and how much you make. You might have overcommitted if you use more than 50% of your income to service debt. Hence, you must relook at that and adjust accordingly as you strategise for the coming year.

Savings

Savings is where you start taking charge of your financial position. With savings, you buy yourself a piece of the future where you do not have to worry about making money to survive.

The more you save, the more secure you are. That being said, savings do not work alone. You have to invest wisely to buffer yourself against economic catastrophes such as inflation and also for an opportunity to participate on the upside of how much your money can earn you. 

We save for two reasons: to ensure we have the money to take care of any situation that might arise, hence an emergency fund. And to escape the cycle of work and be comfortable with retirement.

Emergency Fund

An emergency fund grants you the peace of mind that you can address any unforeseeable situations if they arise. With that peace of mind, you can focus on earning more money, reinforcing your future security.

Ideally, you should have an emergency fund worth three to six months of living expenses. The more, the better. Emergency fund money should also be liquid and easy to access.

As you do your end-of-year review, how long can you maintain the same lifestyle without earning a single shilling? This will help you understand better where you stand financially.

Retirement plan

Although we do not like to admit it, old age is fast approaching. We only have a short window where we need to make enough to live off of and save for the days when we do not have the energy to work.

Hence, a retirement plan should be part of your financial review. If you have one already, how is it growing, and if not, how do you ensure you have one in place?

Tips on how to set a financial plan for the upcoming year

• Assess Your Current Financial Situation - Review your income, expenses, assets, and debts and identify where to cut back, make more, and optimise.
• Define Your Financial Goals - Clearly outline short-term and long-term financial goals. Prioritize goals like saving for emergencies, paying off debt, and investing for the future.
• Create a Budget - Develop a realistic budget that aligns with your goals. Allocate a portion of your income to savings and investments.
• Emergency Fund - Set aside funds for unexpected expenses. Aim for at least 3-6 months' living expenses in your emergency fund.
• Debt Management - Prioritize paying off high-interest debts.
• Savings and Investments - Establish a savings plan for short-term goals and invest for long-term goals; consider retirement accounts, stocks, bonds, or mutual funds.
• Retirement Planning - Contribute to retirement accounts and take advantage of employer-sponsored retirement plans.

Wrapping Up

It is time to take stock of the year. As you review other facets of your life, it is paramount that you assess how you have been doing financially throughout the year. Doing a comprehensive review will help you plan better for the coming year.