Whether it is reflecting on our work goals or personal life, the end of the year is the perfect time for taking stock. And as you look back, don’t omit your finances from the list of things to reassess.
According to a Time Money report, 1 out of every 3 Americans has no retirement savings. Facts like this underscore the need to include financial housekeeping on our year-end reflection list.
Here is a list of areas to take a closer look at that will help you prepare for the year ahead.
Prepare for financial emergencies.
Emergencies can create a sinkhole in your best laid financial plans–that is, if you are not prepared. The best way to safeguard yourself from some of the painful events of life? Prepare in advance for them. Do you have an emergency fund that will help you weather getting laid off from work? Or what about emergency travel funds if you must attend the funeral of a loved one? And then there are health bills if you or someone in your family gets sick.
Budgeting for life emergencies can help to soften their blow. Experts advise that your rainy-day fund should cover living expenses for 3 to 6 months. So, calculate how much housing, food, utilities, and personal expenses you have per month. Then start saving so that you have an emergency fund.
While you are at it, take stock of where you stand in your emergency preparedness. And not only financially, but in all areas that matter. For example, do you know how to handle a car accident? It goes beyond having space in your budget for car repairs. You should also have a car accident attorney saved to your list of emergency numbers.
Make sure your insurance is up to date and covers the right things.
Do you find yourself believing that the bad things in life won’t happen to you? Car accidents, being laid off from work… Do you view these things as events that happen to others? And not something that would strike close to home?
This type of thinking comes under the umbrella of “optimism bias.” Optimism bias refers to a way of perceiving the world that is common across all cultures and countries. This bias is defined by believing that tomorrow will bring a better day. According to scientists who have studied this bias, it showcases how human beings are hardwired to hope. And has proved an effective survival mechanism for us as a species.
Where this thinking can hinder and even harm is when we fail to protect ourselves because we believe common calamities will not befall us.
How do you self-correct for optimism bias when it comes to financial planning? Take the advice of financial planners everywhere. Buy insurance to protect yourself from that rainy day that will come, no matter how sunny it might be today. It’s fine to hope for better things, but it’s smart to prepare for the worse.
Evaluate your financial goals and be ready to course-correct.
Do you know the amount you will need in your savings account in order to live out your retirement days without worry? What about the cost of your children’s college education? Or the car upgrades you need? Or the down payment on your first or second house?
Having clear financial goals is the first step in translating your vision of the future into reality. Write out a list of all the financial goals that you can think of. Make it an ongoing list, as you might not think of everything that should be there in one go. After you have had enough time to get as many goals as you can think of on your list, reorder it by priority. Not all financial goals are equal. And certain goals should take precedence over others. If you know what the nonessentials are, it will be easier for you to budget and allot when times are lean.
But setting goals is only the first half of the equation. The second half is having a plan to get you there and course-correcting if you see yourself straying from the plan.
Throughout the year, take time to stop and evaluate the progress you are making toward your financial goals. Consider what behaviors could be sabotaging your success. And what actions could generate more income for you or bring you closer to reaching your goals.