≡ Menu

Don’t Forget About Your Annual Financial Checkup


Don't forget about your annual Financial checkupCan you believe there is less than 3 weeks left in 2016? The year is ending quickly and the holiday season is upon us. Now is the perfect time to go over your finances before it gets really busy during Christmas and New Year. Actually, we won’t be very busy this year because we’re staying home and celebrating the holidays by ourselves. We already took time off in November to visit Thailand and Mrs. RB40 can’t take any more vacation days. We’ll just Skype with our families and catch up that way. However, I’m sure most of you will have a very busy holiday so it is good to do your annual financial checkup now and get it out of the way.

Everyone knows it is important to go over your finances at least once per year, but a lot of people just ignore it. This is probably due to the fact that many households have abysmal finances. It can be depressing to look at your growing debt or insignificant savings. Ignoring it won’t help the situation, though. You have to face the problem and try to fix it. Your finances should be improving each year. If you keep sliding backward, then you are doing it wrong. Even if you’re doing well financially, it is still important to do an annual checkup. Chances are you could do even better if you go over your finances at least once per year.

Figure out Your Net Worth

The first step toward improving your finance is to see exactly ­­­where you are. Fortunately, this is relatively easy for most people. Y­­­­ou just need to figure out your household net worth. Net worth is simply how much money you’d have if you sell off everything and pay off all your debt. Many families have negative net worth (the Federal Reserve estimates that 15% of US households have negative net worth), but knowing where to start is essential. It is more important to work on improving your situation than dwelling on how you will get there.

So what should go in your net worth? Basically, everything in your name and all your debts. Here is a simple Excel net worth spreadsheet to get you started. This can get complicated very quickly as you accumulate more assets, though. My spreadsheet has a line item for each stock we own and I update these at least once per month. You will need to modify the spreadsheet to suit your needs. Alternatively, you could sign up with Personal Capital and you can review of your net worth anytime you’d like. The site will aggregate all your assets and debts and give you a quick snapshot of your finances. They also have many great tools to help investors analyze their portfolio.

Personally, I use both Personal Capital and a manual spreadsheet. I’m probably in the minority, but I love updating our net worth spreadsheet every month. It gives me a sense of accomplishment and keeps me up to date on our investments. Too much automation makes me feel disconnected from our finances.

Annual Financial Checkup

Figuring out your net worth is just the first step in your annual financial checkup. Now we need to dive in and see how we can improve our finances next year.

Cash Flow

Hopefully, your net worth is increasing and your finances are improving every year. If that’s not the case, then your cash flow is not working. You are probably spending more than you make and aren’t saving enough. In this case, you need to keep track of your income and expenses every month. This will help you identify the problem and then you need to address it. Some people might need to reduce expenses and others may need to work on improving their income. It is okay for your net worth to take a step back occasionally, but it should continue to improve as you get older.

Here is our net worth since 2006. We had some setbacks, but our net worth is on the right trajectory. Your net worth should look like this as well.


Next, let’s look at debts. Debts are obviously bad, but sometime you can’t avoid them. Most of us can’t buy a house with cash and many students have to borrow money to pay for college. The reason why debt will drag down your finances is because you’ll have to pay interest on those debts. The more debt you have, the more interest you will pay every month.

The worst debts are the high interest credit card debts and payday loans. If you have those high interest debts, you should make it a priority to pay them off ASAP. Credit cards are very convenient, but you should pay the bill in full every month and avoid those high interest charges.

At the RB40 household, we are doing relatively well with debt. The only debts we have are the mortgages on our primary residence and our rental duplex. In 2016, our debts only decreased by $10,000. It will be many years until the mortgages are paid off, but that’s okay. Personally, I think mortgages are acceptable debts. The rates are quite low so we don’t prioritize paying them off. I’m glad that we don’t have any other debt, though.

We may consolidate at some point and move into our rental. That will reduce our debt by a huge amount.

Minimize Taxes

Benjamin Franklin said nothing can be certain, except death and taxes. It’s true that we all have to pay Uncle Sam, but we still can try to minimize our taxes as much as we can. There are many ways to do this and December is cutting it very close.

  • Maximize your 401(k) contributions. Personally, I think investing in your 401(k) is the easiest way to build your net worth. The contributions are automatically taken out of your paychecks so you don’t miss them. If you max out your 401(k) every year, you will be a millionaire before you know it. For 2016, the 401(k) contributions limit is $18,000 for those under 50. The amount will remain the same in 2017 so if you already contribute the max, then you don’t need to change a thing. If you’re not contributing $18,000 per year, then you’re paying too much tax and you should increase your contributions every year until you are contributing the max.
  • Maximize your Roth IRA contributions. For 2016 and 2017, the Roth IRA contribution limit is $5,500 for those under 50. I love our Roth IRAs because we won’t have to pay any tax on the capital gains in these accounts. Let me repeat that – no tax on capital gains! This is one of the only few investments you can make that you won’t have to pay taxes on. We just contributed the $5,500 each and we’re set for 2016. If you don’t know much about the account, here is a tutorial on how you can start contributing to a Roth IRA.
  • Tax loss harvesting. 2016 was another good year in the stock market, but there is bound to be some losses in your portfolio. One way to reduce your taxes is to sell those investments at a loss. You can use the amount to offset your gains or taxable income.
  • Reset your cost basis. This one is a bit complicated. Basically, some of us are in the 15% tax bracket and don’t have to pay taxes on capital gains. If you’re in this position, then you can sell some stocks and purchase them back right away. There will be paper gains, but you won’t have to pay any tax on them. The cost basis will reset to the new price and your future taxes will be lower. The easiest way to figure this out is to do your taxes early. Once you’re done, add a hypothetical sale and see if your tax liability increases. Most working families probably can’t take advantage of this because they have too much income. Some early retirees might be able to, though.
  • Give to charities. You can deduct charitable contributions and reduce your taxes. December is the perfect time to give.
  • Contribute to a health saving account. Contributions to your HSA can be excluded from your gross income. This will lower your taxes.

These are just some of the ways to decrease your tax bill. I hate doing taxes as much as the next person, but I love paying less. Why pay more taxes now if you can defer or reduce them permanently? Contributing to your retirement accounts is the probably the easiest way to reduce your tax liability and grow your net worth. So take a look at your taxes and finish 2016 strong.

Review Your Investments

This is an easy one if you have a good financial planner. Give them a call and review your investments if you haven’t talked to them in a while. This will give them a chance to go through your investments in detail and determine if they are still compatible with your goals.

(For beginners, here is how to design your asset allocation.)

If you’re a DIY investor like me, then it is more work, but more fun as well. It’s time to check your asset allocation! The stock market did well in 2016, but bond funds didn’t do so well. Small caps and emerging markets had a great year, but REITs pulled back recently. There were a lot of moving pieces in 2016 and your asset allocation might have shifted away from your target. This is where Personal Capital really shines. It is a lot easier to see your asset allocation there than to figure it out on the spreadsheet.

If you don’t like Personal Capital, then you can do it manually on your own spreadsheet, too. A good page to use is the Morningstar’s Instant X-Ray. You can get the allocation for each fund and input it in your spreadsheet manually. I haven’t done this in a while and my spreadsheet is a bit out of date. I’ll need to spend some quality time with it over the Christmas break and update the percentages for each fund.

Overall, our asset allocation looks okay. We have a bit too much in US stocks and probably need to shift some to bonds. We are also holding a bit too much cash. I’ll need to move some cash into our dividend portfolio in 2017.

Lastly, if you haven’t updated your target asset allocation for 5+ years, you probably should reevaluate it. Most investors get more conservative as they get older so you may need to adjust your target accordingly.

Real Estate Investment

Real estate investments are much easier. You shouldn’t need to change much an annual basis. The main thing is to evaluate the expenses and see if you need to raise rent. In 2016, our property tax, utility, insurance, and maintenance expenses all increased. We’re raising the rent a bit to compensate for these changes. Luckily, the rental market in Portland is pretty tight so our tenants didn’t complain much.

Setting Financial Goals

Okay, now that we know where we stand, it is time to set some financial goals. December is the perfect time for this because the New Year is just around the corner where we can all start fresh. Setting goals is very important because they will give you something to work toward. Financial goals are ideal because they are measureable. You can see my 2016 goals for some examples.

  • Save at least $50,000 in our tax-advantaged accounts
  • Increase dividend to $11,500 in 2016
  • Surpass $50,000 in RB40Jr’s higher education account.

I’m looking forward to setting some new financial goals and improving our finances even more in 2017. You don’t even need to complete every item on your list. Our dividends won’t surpass $11,500 this year, but we’re most of the way there. Just working on these goals will put us ahead of many households who ignore their finances.

Did you have your annual financial checkup? I know it can be a bit tedious if you haven’t done it before, but ignoring it won’t help. Get it done before 2017!

If you haven’t tried Personal Capital yet, I highly recommend them. Sign up with Personal Capital to keep track of your investments and gain access to free tools such as their great retirement planning calculator and 401(k) fee analyzer. This is an affiliate link and any commission received will go toward helping Mrs. RB40 retire early.

Image credit pixabay.com

The following two tabs change content below.
Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, he hated the corporate BS. He left his engineering career behind to become a stay-at-home dad/blogger at 38. At Retire by 40, Joe focuses on financial independence, early retirement, investing, saving, and passive income.

For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.

Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
Get update via email:
Sign up to receive new articles via email
We hate spam just as much as you
{ 43 comments… add one }
  • Mr. Tako @ Mr. Tako Escapes December 12, 2016, 1:03 am

    Love the concept of the annual financial checkup Joe! Great idea.

    I do a regular monthly financial check-up already, but I definitely do more of a deep dive at year end.

    One thing I need to be better at is my financial goals. I set a couple this year and failed miserably at both! That said, I’m entirely please with what our finances did in 2016.

    We’re up *a lot* this year, but I’m nervous about it. I can’t help but believe it’s just the market over valuing assets. Earnings barely improved for most of my holdings, and yet the stock prices are WAY up.

    • retirebyforty December 12, 2016, 9:13 am

      That’s the thing about setting financial goals. Even if you fail miserably, you’ll still be better off than a lot of people. Great job in 2016! We’re up too, but probably not as much as you. I think we’ll just have to brace for a volatile next few years. If the market crash, we’ll be prepared psychologically… Keep investing, though.

  • Ernie Zelinski December 12, 2016, 1:47 am

    I do a quick financial check up at the end of the year although nothing near as detailed a you do. The thing that I have a somewhat difficult time figuring out is my net worth, particularly from my intellectual property. Recently, Kelly Keene, a friend and financial advisor, posted a chart on Facebook that looked something like this;


    $100 $24,000
    $200 $48,000
    $300 $72,000
    $400 $120,000
    $1,000 $240,000
    $2,000 $480,000
    $3,000 $720,000
    $5,000 $1,200,000
    $10,000 $2,400,000

    It looks like my average pretax income from my intellectual property for 2014, 2015, and 2016 will be around $20,000 a month for those three years. According to the chart, I would need $4,800,000 sitting in a bank at 5% to generate this income. Of course, today it’s hard getting even 2.5% from a daily interest bank account. For 2.5% I would need $9,600,000 sitting in the bank.

    Of course, my intellectual property is not worth anything near this. From what I gather, when selling a small business, the business will be valued at 2.5 to 3 times the annual income. Even so, I doubt anyone will pay 2.5 to 3 times the annual income of $240,000 that I generate from my intellectual property.

    So, I tend to ignore the value of my intellectual property when calculating my net worth. Nonetheless, I still like what Kelly Keene’s chart signifies. In one or more of my books I wrote that my creativity has to be worth at least $10 million if put to proper use. Well, having intellectual property generated by my creativity that is the equivalent of having $9.6 million in the bank is pretty close.

    • retirebyforty December 12, 2016, 9:16 am

      You’re doing so well. Having the equivalent of $9.6 million in the bank is fantastic!
      I agree about residual income and the value of IP. I don’t think anyone would pay 3x my online income for this site.

  • FIREin' London December 12, 2016, 2:02 am

    Hi RB40,

    You are spot on that a yearly review is a must for everyone! Like Mr. Tako above, I carry out a monthly check and push myself to make sure the net worth goes up each month (a challenge when some months the markets fall) – but use the yearly review as a good way to take a step back and check on life and a slightly bigger picture!

    Unlike most people it seems, I do this at the end of the UK tax year, so I can maximise my retirement contributions (and so gain tax relief) and setup the next years plan!

    • retirebyforty December 12, 2016, 9:18 am

      Wow, that’s very rigorous. It’d be awesome if our net worth increases every month. That won’t happen, though. We have too much investment in the stock market and our active income is just a small portion of the gains now. When is the end of the UK tax year? Our tax year is the end of the calendar year for the most part.

      • FIREin' London December 15, 2016, 12:49 am

        Hi RB40,

        It is – and I dont always succeed to increase my networth each month – as the stock market is volatile but it is great to push me to try and find a little extra cash if I can see I will be down – obviously some of the big drops I can’t do anything about!

        UK tax year ends on the 5th April (don’t ask!) so the Christmas break is a good time to see how I am tracking for the year end, but then it makes for a busy March and April – the plus side is it means that I then get my tax return submitted within a month or two of the year end which means I get a tax rebate faster!

  • Kate @ Cashville Skyline December 12, 2016, 4:02 am

    Great recap, Joe! I love the idea of getting started on this now. The time between Christmas and New Year’s Eve is always a blur. I actually sold my stocks a couple days ago. As much as I’ve enjoyed the dividend income, I don’t want follow any kind of stock picking investment strategy going forward. Instead, I’m just sticking with index funds. Looking forward to maxing out my Roth IRA and HSA at the beginning of January!

    • retirebyforty December 12, 2016, 9:19 am

      Index fund is a great way to go. The majority of our investments are in Vanguard funds. The only individual stocks we have are in our dividend portfolio. Good job maxing our your Roth IRA early in the year. I waited too long this year and the price went up quite a bit. 🙁

  • The Green Swan December 12, 2016, 4:05 am

    Tis the season for my annual financial checkup as well. I extend it a bit further to include reassessing life insurance coverage and updating the Will too in order to make sure everything is in line. Thanks for the reminder, Joe!

    • retirebyforty December 12, 2016, 9:20 am

      I was planning to add insurance and estate planning too, but I ran out of time. Those are great things to check at the end of the year.

  • Roadrunner December 12, 2016, 4:24 am

    This is a very useful overview, definitely on my to do list. It’s just a shame that we don’t have anything like Personal Capital in the Netherlands. Things seem like so much easier to manage like that…

    • retirebyforty December 12, 2016, 9:21 am

      Personal Capital is very useful, but I rely more on my spreadsheet. I know it is more accurate. However, it is a lot more work and tend to get put off… 🙂

  • Go Finance Yourself! December 12, 2016, 5:04 am

    Nice list! I’ve been going through my old rollover IRA accounts to see where I can reduce fees. They were set up several years ago, and have been performing well (almost 12% annual return since ’09). Because of this, I haven’t really scrutinized the investments like I should have. There is one fund that has been lagging performance wise and has the highest fees as well. I’m going to be getting out of it into a cheaper fund with better performance. It was long overdue, but getting to the end of the year motivated me to get it done!

    • retirebyforty December 12, 2016, 9:22 am

      Great idea! You need get rid of that high fee/low performance fund. That’s a double whammy! Don’t put it off.

  • Jay @ ITF December 12, 2016, 5:04 am

    Thanks for the excellent update. And congratulations on the great progress you’re making this year in terms of growing your net worth and achieving your own financial goals.

    The visual asset allocation tool from Personal Capital looks awesome as well – thanks for mentioning that tool I will have to check it out! 🙂

    • retirebyforty December 12, 2016, 9:24 am

      Thank you! We’ve done quite well this year and I hope 2017 can be half as good. Personal Capital is a great tool for investors. If you don’t have it, you really should check it out.

  • Josh @ Biglaw Investor December 12, 2016, 5:07 am

    That’s awesome that you have $50,000 in tax advantaged account space. It’s fascinating to me how different people end up with different amounts. You’d think this would be uniform, but it can vary widely from the single person who only has a 401(k) + Roth IRA to the married business owners who works two jobs and can contribute over $100K. If you have access, you definitely have to take advantage.

    • retirebyforty December 12, 2016, 9:26 am

      The more you make, the more the tax-advantaged accounts will help you. It’s amazing how much tax you can defer if you have a business.

  • Apathy Ends December 12, 2016, 5:24 am

    The yearly review is coming up for us! 2016 will definitely be the best year we have ever had financially. Significant debt drop and a. If boost to our investment accounts (a stock market run never hurts either!)

    • retirebyforty December 12, 2016, 9:26 am

      Congratulations! It sounds like you’re doing very well on both sides. You just need to keep it going. 🙂

  • Mike H. December 12, 2016, 7:23 am

    I keep pretty close track of my finances throughout the year – I bet a lot of people here do too – but an annual checkup is a great way to get the big picture. It’s also a great idea to graph your net worth/401k balance, because if you’re close to the beginning of your journey (like me), the first hints of that compounding interest in your chart is an amazing thing to see.

    I’m not sure about anyone else, but I’ve had trouble with Personal Capital classifying some of my investments incorrectly, and also not being able to pick up exactly what cash flow comes from dividends. Since I use Motif, it’s very annoying to have to reclassify 20-100 dividend transactions every month…

    • retirebyforty December 12, 2016, 9:32 am

      I think you’re right about our readers. I’m sure most of us keep a close watch on our finances. A lot of things still get put off, though. My spreadsheet needs a lot of updates. Tracking your net worth is very encouraging when you’re just starting out. You’ll see huge percentage gains.
      We have our brokerage account at Vanguard and Personal Capital is able to classify the dividend income correctly as investment income. I guess it got confuse with Motif.

  • freebird December 12, 2016, 7:28 am

    Interesting point about resetting cost basis on taxable holdings, I’ve never been in the position of having tax-free capital gains, so it makes perfect sense to use it up when you can.

    I was figuring on Rothifying my 401k and traditional IRA during the (shrinking) pool of years until the RMD deadline. And I’m pretty sure this ‘income’ will push me out of the tax-free cap gains bracket.

    So I guess my question is if you have to choose one or the other which would you prefer?

    • retirebyforty December 12, 2016, 9:35 am

      Resetting the cost basis is a very cool idea, but it’s hard to implement. You need to do tax in December instead of March. Nobody wants to do tax early. The tax documents aren’t here yet either. I’ll just use our 2015 tax as a template and give it some head rooms.
      If you have to choose one or the other which would you prefer? I’d probably go with Roth. Maybe just go up to $50k/year so you don’t pay too much tax. You need some deductions, but you probably won’t have much after retirement in your situation. single with not much debt.

      • freebird December 13, 2016, 8:24 am

        I thought about this some more and I think you’re right– Rothifying is probably a better use of tax-free income. I think this depends on outcomes, if Roth converted stocks go up after conversion, then it’s a ‘gift that keeps on giving’ as they say, while your cost basis reset will need to be reset again (and again one hopes!). If stocks stay flat then it’s either/or because it’s a one-shot. But if stocks drop, you might be better off with the bump in basis– even though you don’t have capital gains to offset, at least you get the $3000 writeoff on earned income (which you may end up having to take because of the bad market conditions).

        Getting the right amount to Rothify will be interesting. 50k/yr would leave me with a pretty high tax rate at RMD time, so I’m probably better off going over this, especially if tax rates go up in the future. But unless stocks rise quite a bit over the remaining time until RMD, it may not be worth Rothifying the whole thing. More research I guess…

  • Mrs. Picky Pincher December 12, 2016, 7:39 am

    Thanks for the points about minimizing your tax burden! We bought a house and had income increases this year, so I’m really not sure what to expect come April. Oy.

    Mr. Picky Pincher and I have a “State of the Union” sort of meeting about our finances every few weeks or so, but a full-on strategy refresh like this could be just what we need. We’re tackling $65,000 of student loan debt in 18 months, so it’ll be crucial to balance other financial aspects while paying off that debt, too.

    • retirebyforty December 12, 2016, 9:37 am

      You should do an estimate by plugging some numbers into your 2015 tax software. It will give you a good idea of what to expect. It’s no fun doing taxes…
      Good luck with your student loan! It’s going to be a tough slog, but it’ll be great once that’s paid off.

  • Howie December 12, 2016, 8:44 am

    Hey Mr. RB40!

    Thanks for the great post and reminder. Do you have a more detailed listing of your allocation? I’m especially curious about your alternatives breakdown.


  • Mike Drak December 12, 2016, 10:28 am

    Every year between Christmas and New Years I look forward to doing my annual review. I review last years goals and results. I check to make sure my FI is being maintained and that there is no slippage. I work on my top ten list, fun things that I want to accomplish in the near term, like taking a trip to Kenya with the family and riding in a hot air balloon over the wild game parks. Getting in shape maybe doing an Iron Man when I turn 65 in three years, writing that new books to help kids learn about FI etc. My top ten list is about things that I look forward to that will enhance my well being, and give me an opportunity to give back in some way. Life post FI sure is a wonderful thing, the key is not to waste it!

    • retirebyforty December 13, 2016, 9:26 am

      I’m looking forward to wrapping up the year as well. 2016 was a very nice year and I hope next year will be half as good. 🙂 I’m going to do my 2017 goals soon.

  • Fiscally Free December 12, 2016, 11:43 am

    Good advice!
    We are having a crazy end of the year but I definitely need to do a financial checkup. I’m also looking forward to tax season because we have a big refund coming due to our solar installation.

    • retirebyforty December 13, 2016, 9:27 am

      That’s great! I’d love a big fat refund, but I don’t think that’s going to happen this year.

  • Felipe December 12, 2016, 2:46 pm

    I always set a net worth goal for end of the year, and I’m 8% over that goal I set a year ago. Stocks and real estate, which both seem overvalued so I’m not thinking of that excess as being here to stay. I’m worried now assessed cap gains from mutual funds will push me into the next tax bracket. I may be out of losses to use to offset the gains. Time to pay the piper. Thanks for the good reminder for us to be looking at this.

    • retirebyforty December 13, 2016, 9:32 am

      Oh wow, 8% over. That’s awesome, congratulations! A lot of people would be happy with just 8%. 🙂
      I think 2017 will still be good, but we’ll see a big correction in the next few years for sure. Good luck.

  • Max Your Freedom December 13, 2016, 6:19 pm

    Our net worth is up 10% this year, unfortunately that’s largely due to all the money we continue to save by keeping our expenses low and bringing in a decent income. I’ve stayed away from the market recently which means our money is not working for us, hopefully I can get past the psychological barrier of record highs going into the new year. I certainly don’t want to keep increasing our net worth by slaving away at a day job forever!

    • retirebyforty December 15, 2016, 8:00 am

      10% is really great! It’s hard to predict the stock market. It seems high now, but it could keep going higher. I’m a bit scared, but we still have most of our money in the market. Time in the market is key. It’s probably best to average in a little at a time.
      Oh, if you’re just starting out. Don’t worry too much about ROI. It’s all about your saving rate in the first 10 years.

  • [email protected] December 14, 2016, 2:45 am

    I do my calculations quarterly, so I’m looking forward to the end of the quarter so I can see how Q4 went. I use Excel, I’m a bit of a spreadsheet nerd. I check to see how we’ve progressed against our mortgage payoff and college savings goals, how everything else has performed over the year, and whether I need to do any rebalancing.

    • retirebyforty December 15, 2016, 8:02 am

      I’m looking forward to do the 2016 wrap up too. We did pretty well this year and it’d be nice to see the numbers.

  • Michele Cooper December 14, 2016, 10:09 pm

    Great advice RB40 !!
    I make a budget and review it monthly. So that I have a clear idea how much I have actually spent and how much I have saved. I also do an annual debt summary to check my progress in getting out of debt.

    As ‘ The Green Swan ‘ said reviewing the insurance and Will at the end of year are a great way to meet your financial goals.

  • Freedom 40 Guy December 25, 2016, 8:49 am

    Great reminders and looks like you’re doing great on your journey towards FI! I really need to look into officially starting a business in order to take advantage of additional tax advantages. Right now the Mrs. And I are maxing out everything available to us, but that is well shy of 50k…

  • Swan January 9, 2017, 3:11 am

    Hi Joe,
    I love your articles. Please write a long article about real estate investment detailing the basics of being a landlord – where to advertise for your rental property, how to find, screen and select tenants, how to do a credit check on a credit application, check for criminal records, property management, alarms and other things that should be installed, how to get paid on time by check or debit from bank account, and how to kick out bad tenants.

Leave a Comment