Want to get a better handle on your finances? The first step in improving your finances is knowing where you stand. And what better time than the New Year to start afresh! Every January, I compile four financial reports for our household and you may find them interesting and instructive as well.
Income versus Expenses
It’s Personal Finance 101: Spend less than you earn. But how are you actually doing? If you track your finances using software like Microsoft Money, Quicken, Gnu Cash or even trusty old Excel, this part is easy. You simply have to generate the report for Income and Spending for 2008.
If you don’t track your expenses, perhaps you may want to consider doing so in 2009. If you think that this is a boring chore that will suck up time that you’d rather spend doing something more pleasurable, it doesn’t have to be. Most banks and credit card companies allow you to download your monthly statements in a variety of file formats from their website.
Net worth Statement
Is your overall financial situation showing improvement over the years? How does your total household debt compare to your equity? If you track your net worth, you’ll have a clear picture of where you stand and how you are doing over time.
While I still track our net worth, I find it much less useful these days because the bulk of our assets are in stocks and a bad year in equities (and 2008 wasn’t a very good year!) can easily mean negative growth. Still, I find value in writing down all the different accounts we have and how much they are worth as of January. If nothing else, a copy of your net worth statement could form an important part of your estate planning documents.
Portfolio Allocation
How does your current portfolio allocation compare with your targets? If you didn’t rebalance last year, you likely have a much larger portion of your portfolio in fixed income than your target allocation calls for. You can choose to rebalance or channel new contributions to equities over the next year. Being aware of your current asset allocation will also help you avoid chasing “hot” assets by reminding you that you already have enough in that asset class.
I track our portfolio using Microsoft Money and simply export the current holdings to an Excel spreadsheet and use some simple scripts to compute the current portfolio allocation.
Portfolio Expenses
As a percentage of your portfolio, how much do you pay in mutual fund fees, account fees, trading commissions etc.? Studies have shown that expenses are a significant determinant of portfolio returns. — the more you spend on your portfolio, the less your returns are likely to be. The vast majority of our portfolio is in ETFs with rock-bottom expenses but we still have trading expenses to account for. With Microsoft Money, it is easy to see how much your trading commissions are costing you. Export the Investment Transactions report into Excel and add up the commissions’ column. For instance, I found that trading commissions costs (mostly buying) cost us 20 basis points last year.
