5 Ways to Know If You’ve Had a Good Financial Year

By Brad Thomason, CPA

 

Wow.  December again.  Has it been a good year for you?  Put your year up against these 5 questions for some insight

  1.  Did you spend less than you earned?  Yep, this one is kiddie stuff.  But it also happens to be about the most basic building blocks of wealth creation.  My alma mater had the worst football season this past year that it’s had in 50 years.  This part of the country, that’s a pretty big deal.  They failed in part because they had a lot of trouble with blocking.  Also had some problems tackling.  Never underestimate the power of the basics.
  2. Did you leave your winnings alone so they could compound?  The secret to geometrical monetary growth is that this period’s earnings have to hang around long enough to become next period’s investment capital.  If you don’t make money, or you make it and spend it, that can’t happen.  The curving line is what makes it the “8th wonder of the world.”  You mathematically can’t get to the compounding machinery if there’s nothing left to compound.
  3. Did you earn your long-term target rate?  Notice I didn’t ask if you beat the market.  That doesn’t matter.  What matters is whether or not you got the rate you needed to make your projections become reality.  Which, by the way, pre-supposes you actually have such projections…  If you don’t have those projections, you know what you need to do first, right?  And once you have them, you can turn your attention to determining if your current basket of holdings has a hope in heck of actually earning you what you need.
  4. Did you reduce your risk exposure on capital you can’t afford to lose?  Some people have such an easy time earning money that they don’t care if they have to earn the same dollar several times before it actually sticks in their savings.  You also find the occasional person who is prepared to admit that earning that buck the first time was hard enough, and they’d just as soon not have to do it again.  Seems keeping the one they already have instead of trying to figure out how to replace it is what they prefer.  If you aren’t real excited about having to earn the same savings dollar a second or third time, if you have managed to sock away what you are going to need to live on and don’t want to lose it trying to earn extra (that by definition you don’t need… no matter how cool it would be to have), does your portfolio’s exposure to risk reflect that sentiment?
  5. Did you spend your financial attention span on things that matter?  Years ago, before cell phones and VOIP, there was a great shift in what people paid for long distance rates.  Do you remember that?  All those calling plans?  People would invest dozens or hundreds of hours in trying to find a way to save 3 cents a minute on their long distance calls.  Well we don’t have that problem anymore.  But we have rewards programs.  And airline points.  And daily e-coupons blasted right to your   (insert device here)      .  Is that what you are paying attention to?  It’s been my experience that everyone has a limited amount of attention span that they are likely to devote to financial matters during a given period of time.  Some decisions you make will change the arc of your financial life.  Some won’t.  Are you spending your financial attention span on stuff that matters?

Wishing you and your family positive holiday wishes, whether that be a Merry Christmas, a Happy Hanukkah, or something else.  Thanks for reading our blogs this year.  See you again in 2013.

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