Requirements of Financial Success

When you go to your doctor for your annual check-up, your height, weight and vital signs are checked. You’re asked how you feel, if you have any pressing problems and that information is entered in your chart. Then the doctor reviews your record, notes changes from the previous year, gives you some more tests and discusses your physical condition with you. Every year, the same process is repeated.

Since we know that our physical health is vitally important, we undergo comprehensive medical examinations each year. We also give our doctor enough information to provide a good picture of our overall condition. However, when it comes to our financial health, few of us are nearly as diligent. Most of us don’t keep good financial records, make budgets or monitor our overall financial health.

Not keeping good financial records, checking your accounts, knowing your net worth and budgeting is financial malpractice. It can easily get your into deep financial trouble. By not keeping track of your finances, you can miss obvious danger signs, irregularities or dormant symptoms that recently sprang to life. They can damage your financial well-being and be expensive to fix.

Think of financial recordkeeping and review as preventative medicine — necessary steps you should take to stay financially fit.

As the 2008 financial crisis deepened and the stock market nose-dived, millions of people didn’t open their financial statements. Deliberately, they buried their heads in the sand because they were afraid to face how much they lost — so they chose not to look. They decided that ignorance was bliss, which it seldom is. As a result, they didn’t learn the extent of their losses and many didn’t spot places where they could have acted to reverse or reduce the pain.

Most people shy away from financial recordkeeping. They don’t like to balance their checkbooks and the idea of comparing their checkbook registers against their bank statements horrifies them. Some are just undisciplined, others don’t care. Many are afraid that they will make mistakes. For years, they have told themselves that they were never good at math — so they grew up hating and avoiding it. They think that keeping and checking any financial information is an onerous chore to be avoided at all costs.

Ironically, financial recordkeeping isn’t hard; but it takes a little time, organization, and attention. When you regularly monitor your finances, you feel proud of yourself and become more interested and engaged. You also become more disciplined. You always feel better when you’re in control of the car.

As you get more involved in keeping track of your finances, it becomes easier and something you might even enjoy. When you see improvement, it motivates you and makes you more engaged. When you place money in an account each month, you look forward to seeing statements that show how much your balance has grown.

If you regularly monitor your accounts, it gives you more control over your finances. You can make quick adjustments, such as cutting your losses or seizing potentially profitable opportunities, that often have narrow windows during which you can act.

Engage in your finances, play a leading role in managing your money. Instead of being a bystander and accepting whatever comes down, get actively involved in charting your financial future.

Start by finding a place to keep all your records and receipts, a spot that’s convenient and easy for you to access. It can be a file, folder, drawer or an old shoebox. Then get into the habit of putting your receipts there each day. Placing everything in one location will help you be more organized and disciplined. And when you need anything, you’ll know exactly where to go.

1. Monthly reviews

Each month, review all your financial records: bills and financial statements, 401(k) plans. It probably will take less than an hour. Couples should conduct reviews together.

When you conduct your monthly review:

• Examine every bill and statement line by line

• Compare the amount of each charge with your receipt to make sure it is accurate

• Question whether each of your expenditures was necessary

• Ask if any expenditure was too expensive and whether you could get it for less

• Check your interest rates, lines of credit amounts and the balances available to you

• Note when each bill must be paid

Monitor your investments to check know how well each of your investments is performing. Make sure your strategy is working and you’re properly diversified, and compare how your investments are doing in comparison with the market in general.

When you review your investments, ask yourself:

• How did I do with this investment last month?

• What was the rate of return?

• Could I have made more if my money was invested elsewhere?

• If so, how much?

Few people monitor and make adjustments in their 401(k) plans. Many don’t remember how they invested that money and don’t keep track of how it’s performing. As a result, they don’t make the necessary adjustments when they should.

2. Net-worth statements

Each year, prepare a net-worth statement that tells you how much you own and how much you owe.

Your net-worth statement is your scorecard, your financial report card. It breaks down all your assets and liabilities and tells you the total amount of money you’re worth. If you were to sell everything you own and pay off all your debt, your net-worth statement would tell you exactly how much money you have.

Your net-worth statement is the most important document that you should complete each year. If you want to build wealth, you want your net worth to increase each year. That means you’re saving more money, paying down debt, your investments are growing, or all 3.

3. Income and expense statements

Each year, we also need to prepare an income and expense statement, which is a budget. To many, “budget” is a dirty word. To others it’s their battle plan to prosperity because it tells them exactly what they can spend. An income and expense statement lists the amounts of money we received from all sources and how and where we spent it. Most people have no idea where their money goes. They live on the fly, just keep writing checks and doling it out.

In your income and budget statement, keep track of everything you spend. How much you pay for your mortgage, rent, car payments, utilities, food, vacation, clothing, and dining. Circle any spending that was wasteful. Don’t forget about money spent on vices such as smoking, drinking, gambling and drugs … and be honest about it.

Fine-tune your budget as your conditions change. For instance, when you make more money or decide to save for a home, your kids’ educations, or a piano. Review your budget. See where your money could be better spent and then adjust your budget accordingly.

Regularly check to see if you’re staying on budget and if you’ve strayed, decide how you can get back on course. In the beginning, check whether you’re staying on budget every couple of weeks and, after a while, do it once every month or 2. After a while, you will know if you’re on track without having to look at your budget.

When you create your budget, don’t be overly restrictive. Leave enough money to enjoy life. Keep enough for entertainment, to travel, and go out to eat, but don’t splurge. Be responsible and find the right balance. You don’t want to live a horrible life now in the hope of having a great life later, which you may never get to live. Also avoid the opposite.

Preparation is key

Prepare for the present and the future at the same time. Create balance in your life. Understand that along the line, you may have to make some sacrifices, but have faith that they will be well worth it. Conduct your monthly financial review when you pay your bills. At that time, you’re focused on your expenses and how much they’re costing you. You’re also more engaged in your finances so it will be natural to also check your investments and other finances to get an overall picture of your financial situation.

When you prepare your net-worth statement, also prepare your budget. It will be easier to create a budget after you’ve seen how your wealth has grown and you should have all of the information needed at hand.

Good recordkeeping and review will help to ensure your financial success.