Creating a Financial Snapshot

Many people are reflecting on their accomplishments and mistakes this time of year. I like to use this time as an opportunity to review our finances and create a snapshot of where we stand. It helps us to see what we need to improve on and what goals to set for the upcoming year.

Cash flow

I start with cash flow because you need to make sure that you’re not spending more than you earn. finances are not sinking you more and more into debt. Grab a budget spreadsheet and input all your income and expense numbers. If your expenses are higher than expected, looks for areas where you can cut back.

For example, instead of going out to see a movie every weekend, try visiting museums and art galleries on free nights, visiting local and national parks, or seeing if there are any free concerts and festivals. If you’re still intent on seeing movies, consider signing up for Netflix or Blockbuster.

If you’re looking for ways to increase your income, consider starting a second job or building an alternative income stream based on a hobby or other passion. It doesn’t have to make you full time money in order to improve your bottom line.

Emergency savings

I’ve learned from personal experience that the only way to lessen the pain of an emergency is to prepare for it. Cars break down, jobs get lost, and appliances stop working at the absolute most inconvenient time.

Make sure you’re comfortable with amount of emergency savings that you have. If not, then start building it up. By putting it in a high yield savings account, you’ll have easy access to it and earn a bit of interest at the same time.

Outstanding debts

It might help to separate this category into high interest consumer debt such as credit cards and low interest and/or tax advantaged debt like student loans or your home mortgage. Attack the high interest debts first, as they can get out of control if put them off too long.

The easiest way for me to pay off my credit cards has been automating my credit card payments. Try to pay the minimum on all but one of your debts. Put the rest of your debt reduction money into either your debt with the highest interest rate. If you’re not comfortable with that approach, try attacking the lowest balance first.

Retirement accounts

If you have retirement accounts, make sure that your asset allocation isn’t out of whack. If they are, then you should rebalance them. You may also want to review your fees and expenses to see if you can save some money.

If your job offers a 401(k) retirement plan and you haven’t already joined, you should enroll. Many companies offer a match on a percentage of your contribution, and failing to take advantage of this free money can be a costly mistake.

You can also get started by opening a Traditional or Roth IRA through your favorite brokerage or mutual fund family.

Your thoughts

How does your financial snapshot look? Is it better or worse than a year ago? What are you planning on doing in 2010 to improve things?