If you’re working with a financial advisor, you’re probably accustomed to meeting with them in-person or via video conference at least once per year. This financial check-up is similar to your annual physical, in that it helps you assess where you are now, how much progress you’ve made over the past 12 months, and the direction you’re headed in.
Here are 5 tips for getting the most from your next annual financial check-up.
1. Paint a vivid, detailed description of your financial goals.
Communication is key, so express your financial and life goals concretely and as vividly as possible. Clearly state your vision for the future. If you say, “Here’s exactly what I want my life to look like from a financial standpoint in 7 years,” who could accuse you of being vague or “wishy-washy,” as I like to call it.
Broad statements like “I want to leave money to my kids” just cry out for elaboration. In this case, be specific about how much money you want to leave the kids, what your motivations are, and how you hope to do it. Do you want to restrict access to the inheritance? Is there a need to protect one or more of your kids from impulse spending? Think of all the possibilities—everything that can go right and wrong—and use that to round out your description of the goal.
Here’s the bottom line: If you want a better chance of reaching a financial goal, envision it. Or better yet, sense what it will feel like.
2. Find the sweet spot in your time horizon.
Clients often wonder whether it’s more effective think in terms of short-term or long-term goals, but I find most people are better off using a time horizon somewhere in the middle.
Focusing solely on the short-term makes it easy to lose sight of the long-term impact of your actions. Conversely, twenty-year goals can lead to lack of discipline. For example, this week’s mistakes may not seem to matter because you have so much time to fix them.
Five to seven years seems to me like an ideal timeframe for two reasons. What you do today will matter yet it’s far enough away that you can build out from there. It’s definitely a sweet spot in planning that many clients overlook.
If you think first about seven-year goals, then your short-term objectives will be pretty obvious. Doing the reverse makes the exercise much harder and less productive.
3. Be prepared to make minor adjustments.
An annual check-up can provide the perfect opportunity to tweak your financial plan in respond to changes in your personal life or in the world around you. In fact, looking at your plan in twelve month intervals can be ideal for modifying your journey with gentle movements or minor adjustments and avoiding the need for major or dramatic action later on.
Massive changes can jeopardize the success of plans that are well conceived and properly built. I’ve heard clients say their former advisor threw out their entire plan every few years and rebuilt it from scratch. In my opinion, extreme measures like this are rarely needed. A smart financial plan should be adaptable and accommodating, so there’s no need to cast the entire thing aside when modifications or small tweaks are possible.
The year-long interval between check-ups has another benefit too: it can limit the opportunity for abrupt and undisciplined reactions to short-term events. In general, I’ve found the more reactive investors are, the greater their chances of getting hurt. I like to see clients adjust or tweak their direction as needed with the goal of keeping their ride relatively steady and even.
4. Look for more ways to transfer risk.
A financial check-up isn’t complete without a review of insurance protection. Consider whether you have adequate homeowners, auto, life and disability insurance. If you’re young, protecting your future earning power is critical and may require buying disability income protection over and above what your employer offers.
If you’ve been working for years and have accumulated assets, consider buying excess liability or umbrella coverage. This insurance is over and above your primary coverage, so it’s relatively inexpensive yet extremely valuable in our litigious society. One lawsuit can wipe out a lifetime of your savings. And remember, you can be the target of a suit if you’re the parent of teenagers or young adults with few assets of their own.
5. Be patient and persevere.
Achieving financial goals is usually the result of consistent small steps rather than massive leaps. It generally pays to be patient, disciplined, and consistent in your approach to managing your finances. Slow and steady usually wins the race, so why not adjust your expectations accordingly.