Let's go through a new year checklist for financially wise people. If you want to build wealth, then you need to be methodical in your financial decisions.
The great thing about the Financial Samurai community is that most of you are intelligent, hard working, non-delusional people who are willing to put in effort for reward.
We could take the easy route and just focus on being super frugal to achieve our financial goals. But I think it's far more interesting to see if we can grow our net worth to the max!
Did you know that most people give up on their resolutions by Feb 1? Sad! The new year checklist is primarily targeted to those who want or have the freedom to choose their own path. Everybody says they want financial freedom, but only a minority of people are willing to do the things necessary to make throwing away their alarm clock a reality.
I've done every single item on this checklist. I suggest you do the same given the stock market is in a precarious situation, interest rates are high, a recession could be on the horizon, and we might have new politicians in office.
NEW YEAR FINANCIAL CHECKLIST
Here are the best items on the new year checklist to help you build more wealth and achieve financial freedom sooner.
1) Create a pie chart of your income streams.
Go to a spreadsheet, create your list of income streams with the various amounts for the year, and hit that pie chart wizard. Does one slice still dominate (50%+)? If so, you should come up with a game plan to reduce the percentage under 50% by GROWING other income streams so that the overall income flow is greater. No income stream lasts forever.
2) Compare year over year growth rates.
Once you've listed out and totaled all your income streams, compare each line item with the prior year's figures. Figure out where you've been slacking in order to optimize. Also make some realistic forecasts on which line items will fade away. Always be trying to build new streams of income.
Everybody should have a target net worth and target net worth growth rate on their new year checklist.
3) Focus on your ideal income for maximum happiness.
Once you've analyzed your income streams, ask yourself whether you're happy with what you've got. Does the effort you've put in to create this income stream match the reward. Research shows that $75,000 a year in income is ideal for most of the country. My research concludes that $200,000 – $250,000/person is ideal for the most expensive parts of the country / world.
The ideal income generally follows the tax code where you don't pay more than a 24% marginal federal income tax rate.
4) Review your investment portfolio(s).
Make sure that your investment portfolio composition aligns with your risk tolerance. Positions can easily shift over the year, and I recommend everybody rebalance twice a year on average.
You can easily run your portfolios through Empower's Investment Checkup tool to see where you might be overweight certain assets. Link up your portfolio(s), click Advisor Tools on the top, and then Investment Checkup to get some recommendations based on your profile.
Below is an example of an investment checkup snapshot. Decide whether you like your current allocation, like their recommended target allocation based on your input of who you are as an investor, and make changes, if any.
Everybody should come up with an investment thesis for all their investments. If their investments are no longer aligned with their investment thesis, then changes need to be made.
5) Review your net worth composition.
As part of the new year checklist, you need to review your entire net worth. Your investment portfolio(s) should only be one component of your net worth.
Don't be like most Americans who either have 80%+ of their net worth in stocks or 80%+ of their net worth in real estate. If a downturn comes, you will also be slaughtered like most Americans were during the housing crisis. Check out the Recommended Net Worth Composition By Age for some great charts on what to shoot for.
6) Review and then raise your saving rate.
If the amount you are saving each month doesn't hurt, then you aren't saving enough. Add up what you've saved/invested so far and divide by your YTD gross income. Whatever the percentage I'm sure you can still save more. Ideally, shoot to save at least 20%, and up to 50% of your after-tax income each year.
Make sure you max out your 401k and/or IRA plan. Then try to increase your savings rate by another 10% this year. A 50% savings rate is the magic threshold where you'll really start to see big changes in your finances. If you can't get there, work on a side-hustle to make more! With interest rates so high now, it's easier to save more in a money market fund or buy Treasury bonds.
7) Take inventory of all the stuff you've bought.
As part of your new year checklist, you need to take stock of what you've bought. This list should not only include clothes, shoes, and toys, but also nonessential spending such as bathroom remodels, international trips, meals where you spent more than $100/person, and so forth.
You want to add up and visualize how much you've actually spent on things you don't really need and adjust your spending accordingly. Then you can either sell the items, donate them, or throw them away.
8) Analyze and reduce your debt.
If used properly, debt can supercharge your net worth. If used inappropriately, debt will cause other people to pay for your mistakes. Always compare your debt interest rate to the risk-free rate of return. If your debt costs no more than 100% the risk-free rate of return, you're in the OK zone so long as you can manage the payments.
It's imperative you pay down all consumer/credit card debt because credit card interest rates are averaging close to 20% a year! Never carry revolving credit card debt! Paying down student loans or your mortgage depends on your income, write-off ability, interest rate, and amount.
See: Pay Down Debt Or Invest? Implement FS-DAIR
9) Review all your insurance policies.
One unfortunate incident could take your financial empire down. It's important to call and review every single one of your insurance policies: auto, home, life, and umbrella.
The umbrella policy is particularly important to update if you've seen your net worth increase tremendously due to the bull market. Make sure there is no lapse in coverage. Also, it's better to round up how much you need.
During the pandemic, my wife and I got matching 20-year term life insurance policies through Policygenius. After we locked down the policies, we felt a tremendous amount of relief. With a four year old and a six year old, we now don't have any worries.
If you have debt and dependents, please get term life insurance. Life insurance is an act of love and kindness.
Check out: How Much Life Insurance Do I Really Need?
10) Make sure your credit report is clean.
The Federal Trade Commission estimates that 5% of credit reports have errors. That's bad if you are looking to rent an apartment, apply for credit, apply for a new job, or buy a home. I had an $8 late electric payment on a rental that crushed my credit score by 100+ points for two years and I had no idea.
The utility bill was supposed to be paid by my renters and the utility company never contacted me. The credit problem almost derailed my mortgage refinance. You can check your Experian credit score here or see if one of your banks or credit card statements has your score.
11) Review who or what you neglected.
There needs to be a minimum amount of balance in your quest for financial freedom. Working 80 hours a week, never taking a vacation, and forsaking date night with your significant other doesn't sound very good. Take stock of who or what you neglected over the past 12 months and make them a priority. Always ask yourself your WHY so you don't get too far off track.
Related: The Unhealthy Desire For Prestige Is Ruining Your Life
12) Check to see if your retirement is on track.
After you complete an investment checkup, do a retirement health checkup with Empower's Retirement Planner under the Advisor Tools section. They use your real inputted data to run a Monte Carlo algorithm to estimate whether you will have the desired cash flow to cover all your expenses during your retirement years.
Other calculators let you fudge your numbers, which leads to output that can't be as trusted. Feel free to adjust your expenses as you see fit e.g. $50,000 a year in college expenses starting in 2028.
The Retirement Planner step is the culmination of all your financial efforts so far. Make sure you realize how far you have to go so you can take steps to get there.
13) Make sure your will and estate planning is in order.
If your will hasn't been updated in 10 years, you may want to take a look. Your favorite child or niece might have turned out to be an ungrateful dud. If you don't have a will, then take time to at least write out some simple instructions on how to access your accounts and who gets what.
If you're fortunate enough to amass over the estate tax threshold, then you better figure out your estate planning if you don't want the government to take 50% of it away when you pass! Please visit an estate planning lawyer to help you work out your succession plans.
Bonus! Get rid of the non-A players in your life.
For your final new year checklist item, get rid of toxic people. For once and for all, stop associating with people who try to get you down. Wish them all the best and bid them farewell. There's no changing the mindset of pessimistic people who feel the world owes them something.
FINANCIAL FREEDOM IS AN INEVITABILITY
My favorite Chinese proverb is, “If the direction is correct, sooner or later you will get there.” Once you come up with a game plan and regularly check in on your progress. You will blow away your own expectations!
Follow my new year checklist and you will dramatically increase your chances of achieving financial freedom in your lifetime.
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I’ve been reading your work for quite some time but have never left a comment or posed a question. I’m a big fan of your writing style, humor, and content.
I’ve recently moved into an S&T role at a large IB. Reading this article made me think of job security for some reason. If you’ve got a minute, I’m curious about your opinion on the best IB jobs that balance job security and compensation.
I’m sure internal audit or compliance is safer than a credit trader in a down turn, but the compensation is so much larger that the on time would pay for the off time. What’s your take?
Ah, Sales and Trading. It’s all about eat what you kill in this department. Therefore, my vice to you is to be so good they can’t fire you. I have the same worry when I started out and that’s what my mentor said.
If I’m top three with some good accounts and if I’ve got the direct line to the portfolio manager, how can never fire me? Do the same thing.
“get rid of the non- A players” LMAO
“If the amount you are saving each month doesn’t hurt, then you aren’t saving enough.”
What a wonderful quote. I recently re-evaluated how much I have been saving. In 2016, it was about 40% of my after tax (and 401k contributions) income. I haven’t been hurting at all. With my goal of retiring as early as possible, it is time to increase that savings rate. After some calculations, looks like I will be increasing my savings rate by 15% for 2017.
I started using Personal Capital in 2016, and find it to be a great resource. I have been tracking my income/expense in spreadsheet for many years, but this adds a little something extra to that.
Right now, I have one income stream (full time job) that dominates my income. I am working on additional income streams so I can reduce reliance on just one piece of the pie.
Thanks for these great tips!
Awesome Danielle to find that extra 15% in savings for 2017. You will NOT regret the decision years from now!
Wow Sam, you are on fire!! Your blogposts of the last couple of days are gems. Each and everyone of them.
This one in particular has been a wake up call. Specifically the first point on sources of income. I really need to make work of this in 2017. All my income comes from my day job. And i recently took a hit in income as I transitioned jobs ( and industry of employment). So the extra will be more than welcome.
Hi Steven,
Definitely expand your income sources. Create an INCOME ARMY if you will! Eventually, there will be an inflection point where your army will make enough for you to transition. That is an amazing time.
Related: Achieve Financial Freedom One Income Slice At A Time
Great list and reminders! We are checking into an umbrella policy this week. We zero-base budget which takes care of #7, but I want to see that info in a pie chart so thanks for the idea!
Great tips for the new year, Sam. I use Quickbooks for tracking my income and expenses and it automatically does the first two items in your list (I love pie charts!) But I think my favorite sentence from this whole post is, “Your favorite child or niece might have turned out to be an ungrateful dud.” Haha! We recently updated our wills right before moving into our new house and currently have our beneficiaries as our parents. However, we know that in a few years, we’ll have to change that to a niece or nephew. But we’re waiting to see “how they turn out.” Then we’ll choose. ;)
This is a great list, the note to examine insurance policies is of particular importance to me, along with making sure all my beneficiary information is correct. I haven’t done a great job of protecting myself from a worst case scenario, not fun to thing about, but essential none the less.
Great recap of financial to-dos for 2017. I especially like the bonus… we might focus on the numbers, but it’s important to keep in mind who surrounds and supports you. Happy New Year!
I love it!
Sam, regarding #8 – paying off debt that is above the risk free rate. When you say evaluate the debt one has at 100% of the risk-free rate you mean any debt with an interest rate that is 2x the risk-free rate, right?
There’s no bank offering loans at the risk-free rate…because they wouldn’t make any money doing so. Hoping I’m asking a silly question. Thanks!
Nice list.
Sam, what percentage of your overall liquid net worth do you (should you) have that can be used to eliminate any mortgage debt if the need arises? I’d imagine that we’d want as small a percentage as possible, but for more beginner real estate investors the money is in immediate cash flow. We may not have the ability to pay off any mortgages immediately without taking a severe hit in our net worth or reserve.
It’s a great checklist there, Sam. I especially like the idea of the income stream pie chart. You never know when one source of income might disappear overnight. ANY income stream can be gone tomorrow, regardless of active, passive, or portfolio origins. A great series of videos to watch on YouTube that illustrates this so clearly is Game Theory’s videos explaining how YouTube works and why once popular channels (such as PewDiePie) are seeing HUGE drops in traffic and income lately. No income is safe, so you’re right that no income stream should make up more than half your earnings.
Happy New Year! I hope 2017 finds you well.
Sincerely,
ARB–Angry Retail Banker
Trust me, park your money Someplace where you’re getting interest (even if it’s in a pathetic bank account), be super frugal, and in no time at all you’ll be financially independent. In time you’ll consider it a badge of honor to live below your means, because you’ll realize that you’re Better than your fellow man who thrives on Wasted money thrust into gaining Attention.
And a word of wisdom is not to become greedy And don’t make foolish mistakes like chasing after millions. Allow millions to Slowly accumulate in your own account by themselves over the course of time.
Great checklist. A few things on there that I haven’t thought of yet so thank for the reminders! I certainly need to look into my insurance policies this year to make sure they’re all up to par on the rental properties. Both areas were hit by pretty big natural disasters this year(fire in one and flood in the other) but luckily I came out with properties unharmed in both locations luckily.
Thanks for the list Sam. Reviewing my insurance has been on my to do list for a few months now. I haven’t done that for 3 years now. Time to go out and check rates!
I’m also working to diversify my after-tax portfolio by investing in real estate through crowd sourcing and investing in P2P Lending. I have a plan mapped out to grow both of those significantly in 2017.
Nice list. I will do most of these in January. A pie chart for passive income source is a great idea. I’m going track our passive income a lot more closely in 2017 to see where we can improve.
Yeap, we all have to just keep moving in the right direction.
Good luck in 2017!
Great list Sam. I usually do one additional thing. I review wills, insured property lists, and other such documents to ensure they are still current. Happy new year.
Excellent post! Tracking your progress is certainly key in my opinion. Also making checklists helps you stay on track and know what needs to get done and when it needs to get done by. Most millionaires use checklists and so should everyone else.
Awesome list. We go through these exercises throughout the year. I really like the bonus item. It’s something I’ve been doing for a while and it’s rewarding me beautifully: Eliminate the negative people, that don’t add any value to our happiness, out of our lives.
Excellent list Sam. I especially like the bonus one… keep a close circle of A-players – they will raise your standards! Insurance is another often overlooked necessity once you’ve got a lot of skin the game.
It is hard once you have reached a substantial NW to rely on savings as a tool to increase NW. You work hard to save $10K in a month, and see your NW go down by $30K in a day. I am not completely sold on this save hard rule esp. for 40+ folks.
I get what you mean, if a person has a million net worth, saving 10k is small increase in net worth. But if you continue to save while the NW has gone down by 30k in a day, maybe when the market rebounds the increase would be 50k… Also if you don’t want you NW fluctuating so much maybe should be investing in less risky investments IMO. Good Luck
My wife and I have an annual “summit meeting” on or soon after New Years Day where we do a lot of your suggestions. We also agree on major expenses for the upcoming year–home renos, significant travel, other major purchases. This puts us on the same page for the year and really helps avoid conflict–or at least confines it mostly to the summit meeting! Wine helps too. :)
Simple wisdom is always the best when it comes to finance. Great list Samurai
Great list and I especially love the quote at the end. Sometimes simply making the decision to drastically improve your finances will start producing results.
I would say that when it comes to personal finance, old wisdom is the most respectable:
“Let every man divide his money into three parts, and invest a third in land, a third in business, and let him keep a third in reserve” //The Talmud 1200BC-500AD