The end of the year is a good time to review your financial plan and celebrate your achievements. Sure, this 2022 has been challenging with high inflation and poor investment returns. But those things are largely out of your hands. Instead, it can be far more constructive to focus on what you can control: How much did you save, did you pay down debt, did you get a raise or promotion at work and did you increase your overall net worth?
While many tend to obsess over property values and stock market returns, it can be easy to forget about the progress you made contributing to your retirement savings, making regular mortgage or other debt payments and the impact that a raise will have on your ability to save for the future.
By measuring your financial wins and identifying where you may have fallen short, you'll be in a better position to set realistic and achievable goals for the new year.
As the year winds down, here's a quick end of year financial checklist to help you take stock of your finances and set yourself up for success next year.
1. What is your savings rate?
Here's a simple way to determine your savings rate: Add up your savings contributions for the year (retirement savings, emergency fund savings, high yield savings accounts) and then divide it by your income.
Let's take the example of Ricky, who earned $90,000 this year. He managed to save $5,000 for retirement and added another $3,000 to his emergency fund. The $8,000 in total savings divided by $90,000 of income gives him a savings rate of 8.89%.
There are alternative ways to calculate your savings rate. For instance, you may use net income instead of gross income. You may also consider extra debt payments as a form of savings. The point is to use the same method consistently over time so you can measure your progress.
It's up to you to determine whether your savings rate met your goals—but by tracking the amount you have a benchmark to strive to hit (or beat) next year. A good rule is to strive to save at least 10% of your income for the future. What that looks like depends on your goals, current financial state and age and stage of life.
Younger people tend to have many competing financial priorities and a longer time frame to save for retirement, so they may opt to set aside more cash savings for short-term needs.
Once you're more established in your career, your attention may turn towards maximizing retirement plans, particularly if your savings contributions will attract an employer-matching contribution.
With that in mind, you should aim to increase your savings rate each year. In Ricky's case, he might target a 10% savings rate next year. That's an extra $1,000 that can go towards his savings goals.
2. Did you save for emergencies?
Another good rule to follow is to build an emergency fund of three to six months' worth of expenses. Having this type of financial cushion can protect you in the event of prolonged unemployment or unplanned spending shocks.
That said, it can take some time to fully fund your emergency savings, and it doesn't have to be tackled all at once, at the expense of other goals. Start with $1,000 and then work your way up to one month of expenses. That alone can alleviate financial stress caused by short-term overspending (or loss of income) and prevent you from dipping into high interest credit.
Going back to Ricky's example, he added $3,000 to his emergency savings this year, and let's say this is on top of the $4,500 he had already saved in this account. He now has a total of $7,500 saved in his emergency fund.
Ricky spends, on average, $4,500 per month and wants to build an emergency fund equal to three months' worth of expenses. He wants to reach this goal in two years. That means Ricky will need to set aside another $3,000 next year, and $3,000 the following year to hit his target of $13,500.
Finally, make sure your emergency savings are held in a high yield savings account. That way, the money is accessible in case of emergency (obviously), but it's also earning interest and not just sitting in your checking account (or under your mattress).
3. Did you pay off debt?
Reducing your debt increases your net worth. Some debt is reasonable and even unavoidable for most of us, such as student loans and mortgage payments. Other debts, like high interest consumer debt, should be tackled as quickly as possible.
High interest rate debt can hold you back from making progress elsewhere with your finances. If you can imagine arranging your financial goals in order of priority, the goal with the highest interest rate (or expected return) usually floats to the top of the list. Indeed, paying down credit card debt at 18% interest should likely be prioritized over lower interest rate debt or even lower interest savings and investment opportunities.
For instance, let's say you were able to pay off a $1,000 credit card balance earlier in the year. You also made regular mortgage payments, taking a $200,000 balance down to $192,000.
READ MORE: 5 Tips to Help Reduce Your Debt
4. Did your income increase?
What often gets lost in a year of stubbornly high inflation and moody markets is the fact that wages, in general, have also increased.
If your income increased this year due to higher cost of living adjustments, a promotion or from changing careers, it's a good time to assess the impact on your cash flow. If you're unsure about the going rate of pay for your line of work, check out a site like GlassDoor.com where you can find salary information for your role (at your organization and its competitors).
Perhaps a bump in pay will allow you to increase your savings rate goal without making any spending cuts or lifestyle adjustments. If so, great! Increase your automatic savings contributions now so you can meet your goal of saving at least 10% of your income next year.
There's power in automation. Behavioral economists Richard Thaler and Shlomo Benartzi pioneered the Save More Tomorrow program that asks employees to commit now to saving more in the future. Their savings rates are linked to future pay increases, so they save more while their take-home pay never increases.
Their research found that the Save More Tomorrow program increased employee savings rates from 3.5% to 13.6%. The program is so successful that it is now offered by more than 50% of the large retirement plans in the U.S. as well as a number of plans in Australia and the U.K. It's estimated that the Save More Tomorrow program has helped more than 15 million Americans significantly boost their savings rate.
5. What is your net worth?
Tracking your net worth helps keep tabs on your progress and make sure you keep the needle moving forward so we can achieve our financial goals.
Your net worth consists of our total assets minus total liabilities. You make progress when you add to your savings and when you pay down debt. Your net worth increases even more if your savings and investments earn a rate of return, or if your property value increases.
In contrast, net worth decreases if you take on new debt, or if your investments and/or property values decrease.
Again, you want to keep moving forward by growing your net worth. But to do that, you also need to understand which factors are within your control and which factors are outside of your control.
For example, let's say you added $8,000 to your savings and you paid down $9,000 in debt. You're up $17,000! But your retirement portfolio of $100,000 is down 10% for the year (-$10,000), and the value of your $300,000 home hasn't changed. That means you've increased your overall net worth by $7,000.
That may not feel like a lot, but you did make progress. More importantly, you have some benchmarks for this year that you can measure against when you set your goals for next year.
Final word
Setting and prioritizing financial goals is a great way to make meaningful progress over time. The end of the year is a great time to evaluate your progress, take note of any shortcomings, and celebrate your wins. It also gives you a starting point for setting your goals next year. After all, that's where the gains are made—by making small improvements over time.
Increasing your savings rate, paying down debt and boosting your income are three fantastic ways to accelerate your goals and build wealth for the future. There are ways to always do better. Now's the time to start.
Riverstones Vista Capital has plenty of ways to help you save and build your financial future. Visit the Money Matters Blog for more ideas and tips.
Rob Engen is a leading personal finance expert in Canada and the co-founder of Boomer & Echo, an award-winning personal finance blog. He is a fee-only financial advisor who helps clients at different ages and stages get their finances on track and prepare for retirement. He's also regularly quoted or featured in top financial media, such as The Globe & Mail, MoneySense, The Financial Post, CBC, and Global News. Robb lives in Lethbridge, Alberta and is the married father of two young girls who keep him very busy.