Let’s start a new “tradition.” (Humor me. I was trained as an anthropologist. We anthropologists love rituals.) Let’s call it a Hot Flash Financial Tradition.
What is this tradition? First it, is a ritual that occurs around new years. How do you do it? Every year, you revise your List of Assets to reflect the December 31, 2012 balances. After you have the year end balances, you add up the total. Then do the really smart, Hot Flash Financial thing– Celebrate what you did right. And use your new List of Assets to make some decisions to improve your financial security next year.
If you have not developed your own personal List of Assets, create your first one today. (Go to the Tools Tab and select List of Assets.) You take the same steps as someone who has a List of Assets.
Here are the steps you can use to follow the ritual. Go on-line to access every one of your retirement accounts, as well as investment and savings accounts. If you already created your list of assets, add a column and mark it December 31, 2012. Input the dollar values for the last day of the year for every one of your account balances. Then add the dollar values all up to get a Total. Now, do what comes naturally. Find out if your retirement account balances are higher than last year.
The next part of the Hot Flash Financial Tradition is crucial: figure out what you did right! Also figure out what needs to be improved.
What you did right:
- If you added more money to your retirement accounts, the total should be higher.
- If you were invested in stocks (or stock mutual funds) your balances may be as much as 10% -13% higher. (The S & P 500 booked a 13% increase over last year, 2012. If you invested a portion of your portfolio in Bonds, you may not be as high. But you got stability or less crazy fluctuations in your account values. Why? you reduced your risk by investing in bonds. Reducing risk has a cost. But it also has a strong plus–it allows you to sleep better at night.)
This is the most fun of this ritual. Pat yourself on the back and celebrate what you did right!!!!!
If you added money to your retirement account, but the increase did not meet your expectations, figure out why.
What you could improve in the future:
- Did you add enough money to your retirement account to make the total budge?
- Are there other reasons for the shortfall in your expectations about your retirement account balances, and your overall Hot Flash Stash of Cash?
- Did you decide to save for the future, but you deposited that money into a savings account instead of your retirement investment account(s)? A savings account probably gave you about 1% return in 2012 By contrast, the stock market gave about 10%-13% in the same year. Did you make the right decision, saving in a savings account rather than a retirement account? What will you do in the next 12 months? Invest in your retirement account or in a savings account?
- Savings accounts are nice. They reduce the risk that you will lose the money you deposited. But remember there is a “risk-return” trade off. If you take on more risk–investing in the stock market, you are likely to get more return. (In this case, the return in 2012 [and most years] would have been positive, although the market did move up and down a lot during the year. While the dollar amounts fluctuated, over the long term, in this case a year, you were ahead.) If you take less risk–investing in a savings account–you are likely to get a lower return. Lower risk is often correlated (as we say in the biz) with lower return.
Your handy- dandy List of Assets becomes a really important reference point. It also enables you, no actually empowers you to make some important decisions and improve your financial security. Your decisions can increase the number of things you do that are right over the next few years. So you can celebrate more.
After celebrating, take a closer look at your List of Assets to figure out what you can do to increase your own, personal financial security in the coming 12 months.
Since we can’t shut up, we will suggest you do 2 things.
- Increase the amount of money you deposit in your retirement account. Increase it by 1%. And, if you can, work toward increasing your contributions, over the next year or 2 or 3, to deposit the maximum legally allowed.
- Decide if you are comfortable with a bit more risk. If so, invest a greater portion of your retirement savings in the stock and bond markets, for the long term. If not, stick with savings accounts.
Make this Hot Flash Financial tradition, your tradition every first week in January. That way, you have more control. You have the knowledge of what you have done well. And you can take the steps you need to take to improve your financial security over the long term.