By Nursyahirah Mohd Ghazali
Having a successful mid-year review of your personal finances is essential. What are the key steps for a good review?
Every new year gives us the motivation to start a new beginning. It is the period where we are more motivated than ever to change and achieve our desired goals.
As the year progresses, we get drowned with our daily activities, routines, busy-ness that it’s easy to have all the goals slip off our mind. Thus, oftentimes we are stuck with the same goals every year due to unaccomplished new year resolution. Even worse, we let our finances taking charge of our financial goals instead of the other way around.
One of the ways to ensure you stick on your goals and working towards achieving them is by having a mid-year review of your finances to know where you stand on the path towards achieving your goals.
Here are 4 tips on how to have an effective review.
Tip #1. Housekeeping your finances
Cash flow is the ‘blood line’ of our finances; thus, it is crucial to ensure that it is always in positive and healthy state. Always keep in check the inflow and outflow of your finances. A lot of people get stuck preparing a budget that is far from realistic. It may seem easy to create a budget, but the real pain is to stick with it. As a result of this, people get caught up spending as they wish without the need to track their expenses, that they usually cannot identify where their money goes or worse if that leads them into incurring bad debts instead.
Therefore, it is important to have a periodic review of your budget and ensure it is realistic to your situation. This is the time to look back on your credit card statements, bank statements and receipts, and identify what have you spent on in the first half of the year. You may notice that your spending varies every month where there will be months that you may spend more on certain things like get-back-to-school items for your kids, car maintenance, festivities, celebrations, and others. Analyse your spending patterns so it helps you to gauge your expenses for the next half of the year. This enables you to plan ahead so you can avoid getting stuck in bad cash flow position.
In addition to that, this is also a good time for you to organize and update your financial record. This can include keeping a good filing system consisting relevant receipts for future tax filing, updating your asset list and financial products, and getting rid of receipt stacks of tax submission for years of assessment (YA) that are past seven years.
Tip #2. Adjusting as needed
In this current economic state, in the new norm, there may be sudden changes in life. Job loss, pay cuts, income reduction and facing the possibility of being laid off, to name a few. On top of that, the way we operate our job may also be different than before. For instance, we may be required to work from home remotely more than ever before, thus this causes some of our expenses to change, so do our spending pattern.
Split your expenses into three categories, which are fixed expenses, variable expenses, and discretionary expenses.
Your fixed expenses such as loan installments may be reduced due to the recent OPR cut announced by Bank Negara Malaysia (BNM). To be certain, check with your respective bank that offers the loan. If you opted for moratorium, this may have saved you from paying the installments during the last 3 months and you will continue enjoying this just for another 3 months.
Your variable expenses are very likely to change during this period. Some items be more than the other and vice versa. There may be less needs to spend for fuel or petrol but more needs for electricity and internet connectivity.
As for discretionary expenses; these are expenses that you can live without. For example, entertainment-related costs such as travel, outdoor activities, and gym subscription.
Having your expenses split into categories will ease you to adjust accordingly to your current circumstances. Say you have just lost your job, in such case, it is prudent to reduce your discretionary expenses, to ensure your emergency funding can sustain you longer before you land yourself a job. Thus, it is important to have a review on your cash flow so you can adjust according to your current situation and prioritize the things that are more important.
Tip #3. Keep track of your progress
Every one of us has financial goals to achieve. Now that you have done a systematic record-keeping of your finances, the next step is to determine the gap between your current state and the state you aspire to be; the goal you want to achieve. Are you (and your assets) progressing as expected? Are you far behind from your goal? Is it still realistic to keep the goal with the progress? If it still is, how are you going to close the gap? If it is not, when is the soonest you can you achieve it? These are just some of the questions that you may want to ask yourself when tracking your progress. This way, you can keep yourself in check and ensure you are on your way to achieve your goal.
So, what if you are off-track, and progressing way behind of what you have expected?
The purpose of having the review, is to help us to be in constant vigilance and keep us aware of what has caused us to be side-tracked. It is okay if you are way behind, what more important is to acknowledge your challenges and find ways to address them. If it need be, it may also be wise to revise your goals, so they are more attainable. By doing this, you won’t get bogged down by over-ambitious goals that paralyzes you and leaves you to inaction.
Tip #4. Schedule a mid-year review with a licensed financial planner
After you have identified your gap and laying out your strategy on how to achieve your goals, do schedule a review with a licensed financial planner to seek for second opinion. By doing so, it empowers you to take active role in your finances. Having a mid-year review by your own can be a bit daunting particularly if are stuck with your planning and get swamped with financial documents that you are unfamiliar with. A licensed financial planner can assist you with putting your financial house in order, identifying your current financial state for you and helping you to map out the road to achieving your goals. The road map includes strategies to ensure your financial state stays strong and resilient, strategies to close the gap between your current state and where you want to be, and also strategies to ensure you have better certainty in attaining your desired goal regardless the economic climate.
Not just that, it is always beneficial to have investment performance review with an independent licensed financial planner. They look at your existing asset holding with bird-eye view and help you identify a suitable asset allocation for you in order to optimize and maximize return. At the same time, they can also help you managing your investment actively.
Carrying out a review of your finances yourself can be a tedious work. However, once it is in place and the review is done periodically, it will soon become rewarding. Having stated that, it is not necessarily that you must walk your journey alone; it is perfectly okay to have a financial planner to be there with you in your road to reach your goals.
What are other key tips for a successful personal finances review? Share with us in the comments section below.