Analyzing Debts and Reviewing Goals

The end of the year is the perfect time to take a quick financial inventory - a look at how the last 12 months have gone and whether your position has changed for better or worse.

Have you accumulated more debt or reduced your debt load? Are you distinguishing between "good" and "bad" debt? Has your net worth gone up or down? Are you achieving your goals? Are you sure you've set the right goals to achieve?

Let's examine these questions in detail and discuss some steps you can take to make next year's inventory a happy one.

Analyzing Your Debt

As part of an annual review, ensuring everything is accurate is a good practice. You can take this step by requesting a copy of your credit report (ideally, a copy from each of the three major credit reporting agencies) from the free AnnualCreditReport.com website and reviewing your debt history with a fine-tooth comb. Mistakes happen, so you must verify that your credit history is correct.

Now that you have a comprehensive list of what you owe, it's time to look at the nature of your debt - whether it's categorized as "good" or "bad." The distinction is simple: good debt has some utility while bad debt doesn't. For example, student loans are debt, yet they're also a passport to increased lifetime earnings. High-interest credit card debt, however, has little to no benefit.

If you have trouble with debt, your annual tuneup is a great time to make a plan to bring your debt levels under control. Generally, it would help if you focused on paying off bad debt first, as good debt often comes with more generous terms and lower rates. While it's almost always good to aggressively pay down your debts, you must avoid pursuing debt reduction so vigorously that you place yourself in a financially precarious position. Always ensure you have enough money to cover your expenses and enough savings to weather a disruption in your income.

While you're at it, consider a quick calculation to determine your net worth. Add up all your assets, then subtract your total liabilities from that figure to calculate your net worth. Assets include your residence, furnishings, stocks, bonds, cash savings, retirement plan value, and other items that can be quickly sold. Typical liabilities include a home mortgage, credit card debt, and other loans. This calculation sets a benchmark so you can objectively chart your progress over the next year.

Are You Reaching Your Goals?

Setting well-defined, manageable, and measurable goals is essential to successfully managing your finances. Take a minute to evaluate how closely you've adhered to your goals over the last year. Suppose the answer is "not very." Use this financial tuneup to re-engineer your goal-setting process. Start by breaking your larger financial goals into smaller, easy-to-accomplish daily tasks - the first few should take no longer than a few minutes.

By taking this step, you develop a self-reinforcing routine - something that's critical when fighting the urge to procrastinate. By setting yourself up for some easy, early successes, your goals will begin to seem well within reach - and your finances will reap the reward.

The Takeaway

An accurate snapshot of your finances is a key part of any financial tuneup. You can create an informed list of goals by evaluating and analyzing your overall financial health. Remember to ensure your goals are precisely defined, realistic, manageable, and measurable.